[DOCID: f:h1eh.txt]
108th CONGRESS

  1st Session

                                H. R. 1

_______________________________________________________________________

                                 AN ACT

   To amend title XVIII of the Social Security Act to provide for a 
  voluntary program for prescription drug coverage under the Medicare 
   Program, to modernize the Medicare Program, to amend the Internal 
 Revenue Code of 1986 to allow a deduction to individuals for amounts 
  contributed to health savings security accounts and health savings 
 accounts, to provide for the disposition of unused health benefits in 
   cafeteria plans and flexible spending arrangements, and for other 
                               purposes.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
108th CONGRESS
  1st Session
                                 H. R. 1

_______________________________________________________________________

                                 AN ACT


 
   To amend title XVIII of the Social Security Act to provide for a 
  voluntary program for prescription drug coverage under the Medicare 
   Program, to modernize the Medicare Program, to amend the Internal 
 Revenue Code of 1986 to allow a deduction to individuals for amounts 
  contributed to health savings security accounts and health savings 
 accounts, to provide for the disposition of unused health benefits in 
   cafeteria plans and flexible spending arrangements, and for other 
                               purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLES.

    (a) Division A.--Division A of this Act may be cited as the 
``Medicare Prescription Drug and Modernization Act of 2003''.
    (b) Division B.--Division B of this Act may be cited as the 
``Health Savings and Affordability Act of 2003''.

SEC. 2. ORGANIZATION OF ACT INTO DIVISIONS; AMENDMENTS TO SOCIAL 
              SECURITY ACT; REFERENCES TO BIPA AND SECRETARY; TABLE OF 
              CONTENTS.

    (a) Divisions.--This Act is organized into two divisions as 
follows:
             (1) Division A--Medicare Prescription Drug and 
        Modernization Act of 2003.
             (2) Division B--Health Savings and Affordability Act of 
        2003.
    (b) Amendments to Social Security Act.--Except as otherwise 
specifically provided, whenever in division A of this Act an amendment 
is expressed in terms of an amendment to or repeal of a section or 
other provision, the reference shall be considered to be made to that 
section or other provision of the Social Security Act.
    (c) BIPA; Secretary.--In division A of this Act:
            (1) BIPA.--The term ``BIPA'' means the Medicare, Medicaid, 
        and SCHIP Benefits Improvement and Protection Act of 2000, as 
        enacted into law by section 1(a)(6) of Public Law 106-554.
            (2) Secretary.--The term ``Secretary'' means the Secretary 
        of Health and Human Services.
    (d) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short titles.
Sec. 2. Organization of Act into divisions; amendments to Social 
                            Security Act; references to BIPA and 
                            Secretary; table of contents.
  DIVISION A--MEDICARE PRESCRIPTION DRUG AND MODERNIZATION ACT OF 2003

              TITLE I--MEDICARE PRESCRIPTION DRUG BENEFIT

Sec. 101. Establishment of a medicare prescription drug benefit.
Sec. 102. Offering of qualified prescription drug coverage under 
                            Medicare Advantage and enhanced fee-for-
                            service (EFFS) program.
Sec. 103. Medicaid amendments.
Sec. 104. Medigap transition.
Sec. 105. Medicare prescription drug discount card and assistance 
                            program.
Sec. 106. Disclosure of return information for purposes of carrying out 
                            medicare catastrophic prescription drug 
                            program.
Sec. 107. State Pharmaceutical Assistance Transition Commission.
Sec. 108. Additional requirements for annual financial report and 
                            oversight on medicare program, including 
                            prescription drug spending.
  TITLE II--MEDICARE ENHANCED FEE-FOR-SERVICE AND MEDICARE ADVANTAGE 
                     PROGRAMS; MEDICARE COMPETITION

Sec. 200. Medicare modernization and revitalization.
         Subtitle A--Medicare Enhanced Fee-for-Service Program

Sec. 201. Establishment of enhanced fee-for-service (EFFS) program 
                            under medicare.
                 Subtitle B--Medicare Advantage Program

                  Chapter 1--Implementation Of Program

Sec. 211. Implementation of medicare advantage program.
Sec. 212. Medicare advantage improvements.
            Chapter 2--Implementation Of Competition Program

Sec. 221. Competition program beginning in 2006.
                     Chapter 3--Additional Reforms

Sec. 231. Making permanent change in medicare advantage reporting 
                            deadlines and annual, coordinated election 
                            period.
Sec. 232. Avoiding duplicative State regulation.
Sec. 233. Specialized medicare advantage plans for special needs 
                            beneficiaries.
Sec. 234. Medicare MSAs.
Sec. 235. Extension of reasonable cost contracts.
Sec. 236. Extension of municipal health service demonstration projects.
Sec. 237. Study of performance-based payment systems.
       Subtitle C--Application of FEHBP-Style Competitive Reforms

Sec. 241. Application of FEHBP-style competitive reform beginning in 
                            2010.
             TITLE III--COMBATTING WASTE, FRAUD, AND ABUSE

Sec. 301. Medicare secondary payor (MSP) provisions.
Sec. 302. Competitive acquisition of certain items and services.
Sec. 303. Competitive acquisition of covered outpatient drugs and 
                            biologicals.
Sec. 304. Demonstration project for use of recovery audit contractors.
                TITLE IV--RURAL HEALTH CARE IMPROVEMENTS

Sec. 401. Enhanced disproportionate share hospital (DSH) treatment for 
                            rural hospitals and urban hospitals with 
                            fewer than 100 beds.
Sec. 402. Immediate establishment of uniform standardized amount in 
                            rural and small urban areas.
Sec. 403. Establishment of essential rural hospital classification.
Sec. 404. More frequent update in weights used in hospital market 
                            basket.
Sec. 405. Improvements to critical access hospital program.
Sec. 406. Redistribution of unused resident positions.
Sec. 407. Two-year extension of hold harmless provisions for small 
                            rural hospitals and sole community 
                            hospitals under prospective payment system 
                            for hospital outpatient department 
                            services.
Sec. 408. Exclusion of certain rural health clinic and federally 
                            qualified health center services from the 
                            prospective payment system for skilled 
                            nursing facilities.
Sec. 409. Recognition of attending nurse practitioners as attending 
                            physicians to serve hospice patients.
Sec. 410. Improvement in payments to retain emergency capacity for 
                            ambulance services in rural areas.
Sec. 411. Two-year increase for home health services furnished in a 
                            rural area.
Sec. 412. Providing safe harbor for certain collaborative efforts that 
                            benefit medically underserved populations.
Sec. 413. GAO study of geographic differences in payments for 
                            physicians' services.
Sec. 414. Treatment of missing cost reporting periods for sole 
                            community hospitals.
Sec. 415. Extension of telemedicine demonstration project.
Sec. 416. Adjustment to the medicare inpatient hospital PPS wage index 
                            to revise the labor-related share of such 
                            index.
Sec. 417. Medicare incentive payment program improvements for physician 
                            scarcity.
Sec. 418. Rural hospice demonstration project.
                 TITLE V--PROVISIONS RELATING TO PART A

                Subtitle A--Inpatient Hospital Services

Sec. 501. Revision of acute care hospital payment updates.
Sec. 502. Recognition of new medical technologies under inpatient 
                            hospital PPS.
Sec. 503. Increase in Federal rate for hospitals in Puerto Rico.
Sec. 504. Wage index adjustment reclassification reform .
Sec. 505. MedPAC report on specialty hospitals.
                      Subtitle B--Other Provisions

Sec. 511. Payment for covered skilled nursing facility services.
Sec. 512. Coverage of hospice consultation services.
Sec. 513. Correction of Trust Fund holdings.
                TITLE VI--PROVISIONS RELATING TO PART B

                    Subtitle A--Physicians' Services

Sec. 601. Revision of updates for physicians' services.
Sec. 602. Studies on access to physicians' services.
Sec. 603. MedPAC report on payment for physicians' services.
Sec. 604. Inclusion of podiatrists and dentists under private 
                            contracting authority.
Sec. 605. Establishment of floor on work geographic adjustment.
                    Subtitle B--Preventive Services

Sec. 611. Coverage of an initial preventive physical examination.
Sec. 612. Coverage of cholesterol and blood lipid screening.
Sec. 613. Waiver of deductible for colorectal cancer screening tests.
Sec. 614. Improved payment for certain mammography services.
                       Subtitle C--Other Services

Sec. 621. Hospital outpatient department (HOPD) payment reform.
Sec. 622. Payment for ambulance services.
Sec. 623. Renal dialysis services.
Sec. 624. One-year moratorium on therapy caps; provisions relating to 
                            reports.
Sec. 625. Adjustment to payments for services furnished in ambulatory 
                            surgical centers.
Sec. 626. Payment for certain shoes and inserts under the fee schedule 
                            for orthotics and prosthetics.
Sec. 627. Waiver of part B late enrollment penalty for certain military 
                            retirees; special enrollment period.
Sec. 628. Part B deductible.
Sec. 629. Extension of coverage of intravenous immune globulin (IVIG) 
                            for the treatment of primary immune 
                            deficiency diseases in the home.
Sec. 630. Medicare coverage of diabetes laboratory diagnostic tests.
Sec. 631. Demonstration project for coverage of certain prescription 
                            drugs and biologics.
            TITLE VII--PROVISIONS RELATING TO PARTS A AND B

                    Subtitle A--Home Health Services

Sec. 701. Update in home health services.
Sec. 702. Establishment of reduced copayment for a home health service 
                            episode of care for certain beneficiaries.
Sec. 703. MedPAC study on medicare margins of home health agencies.
Sec. 704. Demonstration project to clarify the definition of homebound.
             Subtitle B--Direct Graduate Medical Education

Sec. 711. Extension of update limitation on high cost programs.
                  Subtitle C--Chronic Care Improvement

Sec. 721. Voluntary chronic care improvement under traditional fee-for-
                            service.
Sec. 722. Chronic care improvement under medicare advantage and 
                            enhanced fee-for-service programs.
Sec. 723. Institute of Medicine report.
Sec. 724. MedPAC report.
                      Subtitle D--Other Provisions

Sec. 731. Modifications to medicare payment advisory commission 
                            (MedPAC).
Sec. 732. Demonstration project for medical adult day care services.
Sec. 733. Improvements in national and local coverage determination 
                            process to respond to changes in 
                            technology.
Sec. 734. Treatment of certain physician pathology services.
Sec. 735. Clinical investigation of medicare pancreatic islet cell 
                            transplants.
Sec. 736. Demonstration project for consumer-directed chronic 
                            outpatient services.
              TITLE VIII--MEDICARE BENEFITS ADMINISTRATION

Sec. 801. Establishment of Medicare Benefits Administration.
         TITLE IX--REGULATORY REDUCTION AND CONTRACTING REFORM

                     Subtitle A--Regulatory Reform

Sec. 901. Construction; definition of supplier.
Sec. 902. Issuance of regulations.
Sec. 903. Compliance with changes in regulations and policies.
Sec. 904. Reports and studies relating to regulatory reform.
                     Subtitle B--Contracting Reform

Sec. 911. Increased flexibility in medicare administration.
Sec. 912. Requirements for information security for medicare 
                            administrative contractors.
                   Subtitle C--Education and Outreach

Sec. 921. Provider education and technical assistance.
Sec. 922. Small provider technical assistance demonstration program.
Sec. 923. Medicare Provider Ombudsman; Medicare Beneficiary Ombudsman.
Sec. 924. Beneficiary outreach demonstration program.
Sec. 925. Inclusion of additional information in notices to 
                            beneficiaries about skilled nursing 
                            facility benefits.
Sec. 926. Information on medicare-certified skilled nursing facilities 
                            in hospital discharge plans.
                    Subtitle D--Appeals and Recovery

Sec. 931. Transfer of responsibility for medicare appeals.
Sec. 932. Process for expedited access to review.
Sec. 933. Revisions to medicare appeals process.
Sec. 934. Prepayment review.
Sec. 935. Recovery of overpayments.
Sec. 936. Provider enrollment process; right of appeal.
Sec. 937. Process for correction of minor errors and omissions without 
                            pursuing appeals process.
Sec. 938. Prior determination process for certain items and services; 
                            advance beneficiary notices.
                  Subtitle V--Miscellaneous Provisions

Sec. 941. Policy development regarding evaluation and management (E & 
                            M) documentation guidelines.
Sec. 942. Improvement in oversight of technology and coverage.
Sec. 943. Treatment of hospitals for certain services under medicare 
                            secondary payor (MSP) provisions.
Sec. 944. EMTALA improvements.
Sec. 945. Emergency Medical Treatment and Active Labor Act (EMTALA) 
                            technical advisory group.
Sec. 946. Authorizing use of arrangements to provide core hospice 
                            services in certain circumstances.
Sec. 947. Application of OSHA bloodborne pathogens standard to certain 
                            hospitals.
Sec. 948. BIPA-related technical amendments and corrections.
Sec. 949. Conforming authority to waive a program exclusion.
Sec. 950. Treatment of certain dental claims.
Sec. 951. Furnishing hospitals with information to compute dsh formula.
Sec. 952. Revisions to reassignment provisions.
Sec. 953. Other provisions.
Sec. 954. Temporary suspension of OASIS requirement for collection of 
                            data on non-medicare and non-medicaid 
                            patients.
                           TITLE X--MEDICAID

Sec. 1001. Medicaid disproportionate share hospital (DSH) payments.
Sec. 1002. Clarification of inclusion of inpatient drug prices charged 
                            to certain public hospitals in the best 
                            price exemptions for the medicaid drug 
                            rebate program.
             TITLE XI--ACCESS TO AFFORDABLE PHARMACEUTICALS

            Subtitle A--Access to Affordable Pharmaceuticals

Sec. 1101. 30-month stay-of-effectiveness period.
Sec. 1102. Forfeiture of 180-day exclusivity period.
Sec. 1103. Bioavailability and bioequivalence.
Sec. 1104. Conforming amendments.
              Subtitle B--Federal Trade Commission Review

Sec. 1111. Definitions.
Sec. 1112. Notification of agreements.
Sec. 1113. Filing deadlines.
Sec. 1114. Disclosure exemption.
Sec. 1115. Enforcement.
Sec. 1116. Rulemaking.
Sec. 1117. Savings clause.
Sec. 1118. Effective date.
             Subtitle C--Importation of Prescription Drugs

Sec. 1121. Importation of prescription drugs.
        DIVISION B--HEALTH SAVINGS AND AFFORDABILITY ACT OF 2003

TITLE XII--HEALTH SAVINGS SECURITY ACCOUNTS AND HEALTH SAVINGS ACCOUNTS

Sec. 1201. Short title.
Sec. 1202. Health savings security accounts and health savings 
                            accounts.
Sec. 1203. Disposition of unused health benefits in cafeteria plans and 
                            flexible spending arrangements.
Sec. 1204. Exception to information reporting requirements related to 
                            certain health arrangements.

  DIVISION A--MEDICARE PRESCRIPTION DRUG AND MODERNIZATION ACT OF 2003

              TITLE I--MEDICARE PRESCRIPTION DRUG BENEFIT

SEC. 101. ESTABLISHMENT OF A MEDICARE PRESCRIPTION DRUG BENEFIT.

    (a) In General.--Title XVIII is amended--
            (1) by redesignating part D as part F; and
            (2) by inserting after part C the following new part:

         ``Part D--Voluntary Prescription Drug Benefit Program

``SEC. 1860D-1. BENEFITS; ELIGIBILITY; ENROLLMENT; AND COVERAGE PERIOD.

    ``(a) Provision of Qualified Prescription Drug Coverage Through 
Enrollment in Plans.--Subject to the succeeding provisions of this 
part, each individual who is entitled to benefits under part A or is 
enrolled under part B is entitled to obtain qualified prescription drug 
coverage (described in section 1860D-2(a)) as follows:
            ``(1) Medicare-related plans.--
                    ``(A) Medicare advantage.--If the individual is 
                eligible to enroll in a Medicare Advantage plan that 
                provides qualified prescription drug coverage under 
                section 1851(j), the individual may enroll in such plan 
                and obtain coverage through such plan.
                    ``(B) EFFS plans.--If the individual is eligible to 
                enroll in an EFFS plan that provides qualified 
                prescription drug coverage under part E under section 
                1860E-2(d), the individual may enroll in such plan and 
                obtain coverage through such plan.
                    ``(C) MA-EFFS plan; MA-EFFS Rx plan.--For purposes 
                of this part, the term `MA-EFFS plan' means a Medicare 
                Advantage plan under part C and an EFFS plan under part 
                E and the term `MA-EFFS Rx plan' means a MA-EFFS plan 
                insofar as such plan provides qualified prescription 
                drug coverage.
            ``(2) Prescription drug plan.--If the individual is not 
        enrolled in a MA-EFFS plan, the individual may enroll under 
        this part in a prescription drug plan (as defined in section 
        1860D-10(a)(5)).
Such individuals shall have a choice of such plans under section 1860D-
5(d).
    ``(b) General Election Procedures.--
            ``(1) In general.--An individual eligible to make an 
        election under subsection (a) may elect to enroll in a 
        prescription drug plan under this part, or elect the option of 
        qualified prescription drug coverage under a MA-EFFS Rx plan 
        under part C or part E, and to change such election only in 
        such manner and form as may be prescribed by regulations of the 
        Administrator of the Medicare Benefits Administration 
        (appointed under section 1809(b)) (in this part referred to as 
        the `Medicare Benefits Administrator') and only during an 
        election period prescribed in or under this subsection.
            ``(2) Election periods.--
                    ``(A) In general.--Except as provided in this 
                paragraph, the election periods under this subsection 
                shall be the same as the coverage election periods 
                under the Medicare Advantage and EFFS programs under 
                section 1851(e), including--
                            ``(i) annual coordinated election periods; 
                        and
                            ``(ii) special election periods.
                In applying the last sentence of section 1851(e)(4) 
                (relating to discontinuance of an election during the 
                first year of eligibility) under this subparagraph, in 
                the case of an election described in such section in 
                which the individual had elected or is provided 
                qualified prescription drug coverage at the time of 
                such first enrollment, the individual shall be 
                permitted to enroll in a prescription drug plan under 
                this part at the time of the election of coverage under 
                the original fee-for-service plan.
                    ``(B) Initial election periods.--
                            ``(i) Individuals currently covered.--In 
                        the case of an individual who is entitled to 
                        benefits under part A or enrolled under part B 
                        as of October 1, 2005, there shall be an 
                        initial election period of 6 months beginning 
                        on that date.
                            ``(ii) Individual covered in future.--In 
                        the case of an individual who is first entitled 
                        to benefits under part A or enrolled under part 
                        B after such date, there shall be an initial 
                        election period which is the same as the 
                        initial enrollment period under section 
                        1837(d).
                    ``(C) Additional special election periods.--The 
                Administrator shall establish special election 
                periods--
                            ``(i) in cases of individuals who have and 
                        involuntarily lose prescription drug coverage 
                        described in subsection (c)(2)(C);
                            ``(ii) in cases described in section 
                        1837(h) (relating to errors in enrollment), in 
                        the same manner as such section applies to part 
                        B;
                            ``(iii) in the case of an individual who 
                        meets such exceptional conditions (including 
                        conditions provided under section 
                        1851(e)(4)(D)) as the Administrator may 
                        provide; and
                            ``(iv) in cases of individuals (as 
                        determined by the Administrator) who become 
                        eligible for prescription drug assistance under 
                        title XIX under section 1935(d).
            ``(3) Information on plans.--Information described in 
        section 1860D-3(b)(1) on prescription drug plans and MA-EFFS Rx 
        plans shall be made available during election periods.
            ``(4) Additional information.--In order to promote the 
        efficient marketing of prescription drug plans and MA-EFFS 
        plans, the Administrator may provide information to the 
        sponsors and organizations offering such plans about 
        individuals eligible to enroll in such plans.
    ``(c) Guaranteed Issue; Community Rating; and Nondiscrimination.--
            ``(1) Guaranteed issue.--
                    ``(A) In general.--An eligible individual who is 
                eligible to elect qualified prescription drug coverage 
                under a prescription drug plan or MA-EFFS Rx plan at a 
                time during which elections are accepted under this 
                part with respect to the plan shall not be denied 
                enrollment based on any health status-related factor 
                (described in section 2702(a)(1) of the Public Health 
                Service Act) or any other factor.
                    ``(B) Medicare advantage limitations permitted.--
                The provisions of paragraphs (2) and (3) (other than 
                subparagraph (C)(i), relating to default enrollment) of 
                section 1851(g) (relating to priority and limitation on 
                termination of election) shall apply to PDP sponsors 
                under this subsection.
            ``(2) Community-rated premium.--
                    ``(A) In general.--In the case of an individual who 
                enrolls under a prescription drug plan or in a MA-EFFS 
                Rx plan during the individual's initial enrollment 
                period under this part or maintains (as determined 
                under subparagraph (C)) continuous prescription drug 
                coverage since the date the individual first qualifies 
                to elect prescription drug coverage under this part, a 
                PDP sponsor or entity offering a prescription drug plan 
                or MA-EFFS Rx plan and in which the individual is 
                enrolled may not deny, limit, or condition the coverage 
                or provision of covered prescription drug benefits or 
                vary or increase the premium under the plan based on 
                any health status-related factor described in section 
                2702(a)(1) of the Public Health Service Act or any 
                other factor.
                    ``(B) Late enrollment penalty.--In the case of an 
                individual who does not maintain such continuous 
                prescription drug coverage (as described in 
                subparagraph (C)), a PDP sponsor or an entity offering 
                a MA-EFFS Rx plan may (notwithstanding any provision in 
                this title) adjust the premium otherwise applicable 
                with respect to qualified prescription drug coverage in 
                a manner that reflects additional actuarial risk 
                involved. Such a risk shall be established through an 
                appropriate actuarial opinion of the type described in 
                subparagraphs (A) through (C) of section 2103(c)(4). 
                The Administrator shall provide a mechanism for 
                assisting such sponsors and entities in identifying 
                eligible individuals who have (or have not) maintained 
                such continuous prescription drug coverage.
                    ``(C) Continuous prescription drug coverage.--An 
                individual is considered for purposes of this part to 
                be maintaining continuous prescription drug coverage on 
                and after the date the individual first qualifies to 
                elect prescription drug coverage under this part if the 
                individual establishes that as of such date the 
                individual is covered under any of the following 
                prescription drug coverage and before the date that is 
                the last day of the 63-day period that begins on the 
                date of termination of the particular prescription drug 
                coverage involved (regardless of whether the individual 
                subsequently obtains any of the following prescription 
                drug coverage):
                            ``(i) Coverage under prescription drug plan 
                        or ma-effs rx plan.--Qualified prescription 
                        drug coverage under a prescription drug plan or 
                        under a MA-EFFS Rx plan.
                            ``(ii) Medicaid prescription drug 
                        coverage.--Prescription drug coverage under a 
                        medicaid plan under title XIX, including 
                        through the Program of All-inclusive Care for 
                        the Elderly (PACE) under section 1934, or 
                        through a demonstration project under part C 
                        that demonstrates the application of capitation 
                        payment rates for frail elderly medicare 
                        beneficiaries through the use of an 
                        interdisciplinary team and through the 
                        provision of primary care services to such 
                        beneficiaries by means of such a team at the 
                        nursing facility involved.
                            ``(iii) Prescription drug coverage under 
                        group health plan.--Any outpatient prescription 
                        drug coverage under a group health plan, 
                        including a health benefits plan under the 
                        Federal Employees Health Benefit Plan under 
                        chapter 89 of title 5, United States Code, and 
                        a qualified retiree prescription drug plan as 
                        defined in section 1860D-8(f)(1), but only if 
                        (subject to subparagraph (E)(ii)) the coverage 
                        provides benefits at least equivalent to the 
                        benefits under a qualified prescription drug 
                        plan.
                            ``(iv) Prescription drug coverage under 
                        certain medigap policies.--Coverage under a 
                        medicare supplemental policy under section 1882 
                        that provides benefits for prescription drugs 
                        (whether or not such coverage conforms to the 
                        standards for packages of benefits under 
                        section 1882(p)(1)), but only if the policy was 
                        in effect on January 1, 2006, and if (subject 
                        to subparagraph (E)(ii)) the coverage provides 
                        benefits at least equivalent to the benefits 
                        under a qualified prescription drug plan.
                            ``(v) State pharmaceutical assistance 
                        program.--Coverage of prescription drugs under 
                        a State pharmaceutical assistance program, but 
                        only if (subject to subparagraph (E)(ii)) the 
                        coverage provides benefits at least equivalent 
                        to the benefits under a qualified prescription 
                        drug plan.
                            ``(vi) Veterans' coverage of prescription 
                        drugs.--Coverage of prescription drugs for 
                        veterans under chapter 17 of title 38, United 
                        States Code, but only if (subject to 
                        subparagraph (E)(ii)) the coverage provides 
                        benefits at least equivalent to the benefits 
                        under a qualified prescription drug plan.
                    ``(D) Certification.--For purposes of carrying out 
                this paragraph, the certifications of the type 
                described in sections 2701(e) of the Public Health 
                Service Act and in section 9801(e) of the Internal 
                Revenue Code shall also include a statement for the 
                period of coverage of whether the individual involved 
                had prescription drug coverage described in 
                subparagraph (C).
                    ``(E) Disclosure.--
                            ``(i) In general.--Each entity that offers 
                        coverage of the type described in clause (iii), 
                        (iv), (v), or (vi) of subparagraph (C) shall 
                        provide for disclosure, consistent with 
                        standards established by the Administrator, of 
                        whether such coverage provides benefits at 
                        least equivalent to the benefits under a 
                        qualified prescription drug plan.
                            ``(ii) Waiver of limitations.--An 
                        individual may apply to the Administrator to 
                        waive the requirement that coverage of such 
                        type provide benefits at least equivalent to 
                        the benefits under a qualified prescription 
                        drug plan, if the individual establishes that 
                        the individual was not adequately informed that 
                        such coverage did not provide such level of 
                        benefits.
                    ``(F) Construction.--Nothing in this section shall 
                be construed as preventing the disenrollment of an 
                individual from a prescription drug plan or a MA-EFFS 
                Rx plan based on the termination of an election 
                described in section 1851(g)(3), including for non-
                payment of premiums or for other reasons specified in 
                subsection (d)(3), which takes into account a grace 
                period described in section 1851(g)(3)(B)(i).
            ``(3) Nondiscrimination.--A PDP sponsor that offers a 
        prescription drug plan in an area designated under section 
        1860D-4(b)(5) shall make such plan available to all eligible 
        individuals residing in the area without regard to their health 
        or economic status or their place of residence within the area.
    ``(d) Effective Date of Elections.--
            ``(1) In general.--Except as provided in this section, the 
        Administrator shall provide that elections under subsection (b) 
        take effect at the same time as the Administrator provides that 
        similar elections under section 1851(e) take effect under 
        section 1851(f).
            ``(2) No election effective before 2006.--In no case shall 
        any election take effect before January 1, 2006.
            ``(3) Termination.--The Administrator shall provide for the 
        termination of an election in the case of--
                    ``(A) termination of coverage under both part A and 
                part B; and
                    ``(B) termination of elections described in section 
                1851(g)(3) (including failure to pay required 
                premiums).

``SEC. 1860D-2. REQUIREMENTS FOR QUALIFIED PRESCRIPTION DRUG COVERAGE.

    ``(a) Requirements.--
            ``(1) In general.--For purposes of this part and part C and 
        part E, the term `qualified prescription drug coverage' means 
        either of the following:
                    ``(A) Standard coverage with access to negotiated 
                prices.--Standard coverage (as defined in subsection 
                (b)) and access to negotiated prices under subsection 
                (d).
                    ``(B) Actuarially equivalent coverage with access 
                to negotiated prices.--Coverage of covered outpatient 
                drugs which meets the alternative coverage requirements 
                of subsection (c) and access to negotiated prices under 
                subsection (d), but only if it is approved by the 
                Administrator, as provided under subsection (c).
            ``(2) Permitting additional outpatient prescription drug 
        coverage.--
                    ``(A) In general.--Subject to subparagraph (B), 
                nothing in this part shall be construed as preventing 
                qualified prescription drug coverage from including 
                coverage of covered outpatient drugs that exceeds the 
                coverage required under paragraph (1), but any such 
                additional coverage shall be limited to coverage of 
                covered outpatient drugs.
                    ``(B) Disapproval authority.--The Administrator 
                shall review the offering of qualified prescription 
                drug coverage under this part or part C or E. If the 
                Administrator finds, in the case of a qualified 
                prescription drug coverage under a prescription drug 
                plan or a MA-EFFS Rx plan, that the organization or 
                sponsor offering the coverage is engaged in activities 
                intended to discourage enrollment of classes of 
                eligible medicare beneficiaries obtaining coverage 
                through the plan on the basis of their higher 
                likelihood of utilizing prescription drug coverage, the 
                Administrator may terminate the contract with the 
                sponsor or organization under this part or part C or E.
            ``(3) Application of secondary payor provisions.--The 
        provisions of section 1852(a)(4) shall apply under this part in 
        the same manner as they apply under part C.
    ``(b) Standard Coverage.--For purposes of this part, the `standard 
coverage' is coverage of covered outpatient drugs (as defined in 
subsection (f)) that meets the following requirements:
            ``(1) Deductible.--The coverage has an annual deductible--
                    ``(A) for 2006, that is equal to $250; or
                    ``(B) for a subsequent year, that is equal to the 
                amount specified under this paragraph for the previous 
                year increased by the percentage specified in paragraph 
                (5) for the year involved.
        Any amount determined under subparagraph (B) that is not a 
        multiple of $10 shall be rounded to the nearest multiple of 
        $10.
            ``(2) 80:20 benefit structure.--
                    ``(A) 20 percent coinsurance.--The coverage has 
                cost-sharing (for costs above the annual deductible 
                specified in paragraph (1) and up to the initial 
                coverage limit under paragraph (3)) that is--
                            ``(i) equal to 20 percent; or
                            ``(ii) is actuarially equivalent (using 
                        processes established under subsection (e)) to 
                        an average expected payment of 20 percent of 
                        such costs.
                    ``(B) Use of tiers.--Nothing in this part shall be 
                construed as preventing a PDP sponsor from applying 
                tiered copayments, so long as such tiered copayments 
                are consistent with subparagraph (A).
            ``(3) Initial coverage limit.--Subject to paragraph (4), 
        the coverage has an initial coverage limit on the maximum costs 
        that may be recognized for payment purposes--
                    ``(A) for 2006, that is equal to $2,000; or
                    ``(B) for a subsequent year, that is equal to the 
                amount specified in this paragraph for the previous 
                year, increased by the annual percentage increase 
                described in paragraph (5) for the year involved.
        Any amount determined under subparagraph (B) that is not a 
        multiple of $25 shall be rounded to the nearest multiple of 
        $25.
            ``(4) Catastrophic protection.--
                    ``(A) In general.--Notwithstanding paragraph (3), 
                the coverage provides benefits with no cost-sharing 
                after the individual has incurred costs (as described 
                in subparagraph (C)) for covered outpatient drugs in a 
                year equal to the annual out-of-pocket threshold 
                specified in subparagraph (B).
                    ``(B) Annual out-of-pocket threshold.--
                            ``(i) In general.--For purposes of this 
                        part, the `annual out-of-pocket threshold' 
                        specified in this subparagraph is equal to 
                        $3,500 (subject to adjustment under clause (ii) 
                        and subparagraph (D)).
                            ``(ii) Inflation increase.--For a year 
                        after 2006, the dollar amount specified in 
                        clause (i) shall be increased by the annual 
                        percentage increase described in paragraph (5) 
                        for the year involved. Any amount determined 
                        under the previous sentence that is not a 
                        multiple of $100 shall be rounded to the 
                        nearest multiple of $100.
                    ``(C) Application.--In applying subparagraph (A)--
                            ``(i) incurred costs shall only include 
                        costs incurred for the annual deductible 
                        (described in paragraph (1)), cost-sharing 
                        (described in paragraph (2)), and amounts for 
                        which benefits are not provided because of the 
                        application of the initial coverage limit 
                        described in paragraph (3); and
                            ``(ii) such costs shall be treated as 
                        incurred only if they are paid by the 
                        individual (or by another individual, such as a 
                        family member, on behalf of the individual), 
                        under section 1860D-7, under title XIX, or 
                        under a State pharmaceutical assistance program 
                        and the individual (or other individual) is not 
                        reimbursed through insurance or otherwise, a 
                        group health plan, or other third-party payment 
                        arrangement (other than under such title or 
                        such program) for such costs.
                    ``(D) Adjustment of annual out-of-pocket 
                thresholds.--
                            ``(i) In general.--Subject to clause (vii), 
                        for each enrollee in a prescription drug plan 
                        or in a MA-EFFS Rx plan whose adjusted gross 
                        income exceeds the income threshold as defined 
                        in clause (ii) for a year, the annual out-of-
                        pocket threshold otherwise determined under 
                        subparagraph (B) for such year shall be 
                        increased by an amount equal to the percentage 
                        specified in clause (iii), multiplied by the 
                        lesser of--
                                    ``(I) the amount of such excess; or
                                    ``(II) the amount by which the 
                                income threshold limit exceeds the 
                                income threshold.
                        Any amount determined under the previous 
                        sentence that is not a multiple of $100 shall 
                        be rounded to the nearest multiple of $100.
                            ``(ii) Income threshold.--For purposes of 
                        clause (i)--
                                    ``(I) In general.--Subject to 
                                subclause (II), the term `income 
                                threshold' means $60,000 and the term 
                                `income threshold limit' means 
                                $200,000.
                                    ``(II) Income inflation 
                                adjustment.--In the case of a year 
                                beginning after 2006, each of the 
                                dollar amounts in subclause (I) shall 
                                be increased by an amount equal to such 
                                dollar amount multiplied by the cost-
                                of-living adjustment determined under 
                                section 1(f)(3) of the Internal Revenue 
                                Code of 1986 for such year, determined 
                                by substituting `calendar year 2005' 
                                for `calendar year 1992'. If any amount 
                                increased under the previous sentence 
                                is not a multiple of $100, such amount 
                                shall be rounded to the nearest 
                                multiple of $100.
                            ``(iii) Percentage.--The percentage 
                        specified in this clause for a year is a 
                        fraction (expressed as a percentage) equal to--
                                    ``(I) the annual out-of-pocket 
                                threshold for a year under subparagraph 
                                (B) (determined without regard to this 
                                subparagraph), divided by
                                    ``(II) the income threshold under 
                                clause (ii) for that year.
                        If any percentage determined under the previous 
                        sentence that is not a multiple of \1/10\th of 
                        1 percentage point, such percentage shall be 
                        rounded to the nearest multiple of \1/10\th of 
                        1 percentage point.
                            ``(iv) Use of most recent return 
                        information.--For purposes of clause (i) for an 
                        enrollee for a year, except as provided in 
                        clause (v), the adjusted gross income of an 
                        individual shall be based on the most recent 
                        information disclosed to the Secretary under 
                        section 6109(l)(19) of the Internal Revenue 
                        Code of 1986 before the beginning of that year.
                            ``(v) Individual election to present most 
                        recent information regarding income.--The 
                        Secretary shall provide, in coordination with 
                        the Secretary of the Treasury, a procedure 
                        under which, for purposes of applying this 
                        subparagraph for a calendar year, instead of 
                        using the information described in clause (iv), 
                        an enrollee may elect to use more recent 
                        information, including information with respect 
                        to a taxable year ending in such calendar year. 
                        Such process shall--
                                    ``(I) require the enrollee to 
                                provide the Secretary with a copy of 
                                the relevant portion of the more recent 
                                return to be used under this clause;
                                    ``(II) provide for the Medicare 
                                Beneficiary Ombudsman (under section 
                                1810) offering assistance to such 
                                enrollees in presenting such 
                                information and the toll-free number 
                                under such section being a point of 
                                contact for beneficiaries to inquire as 
                                to how to present such information;
                                    ``(III) provide for the 
                                verification of the information in such 
                                return by the Secretary of the Treasury 
                                under section 6103(l)(19) of the 
                                Internal Revenue Code of 1986; and
                                    ``(IV) provide for the payment by 
                                the Secretary (in a manner specified by 
                                the Secretary) to the enrollee of an 
                                amount equal to the excess of the 
                                benefit payments that would have been 
                                payable under the plan if the more 
                                recent return information were used, 
                                over the benefit payments that were 
                                made under the plan.
                        In the case of a payment under subclause (III) 
                        for an enrollee under a prescription drug plan, 
                        the PDP sponsor of the plan shall pay to the 
                        Secretary the amount so paid, less the 
                        applicable reinsurance amount that would have 
                        applied under section 1860D-8(c)(1)(B) if such 
                        payment had been treated as an allowable cost 
                        under such section. Such plan payment shall be 
                        deposited in the Treasury to the credit of the 
                        Medicare Prescription Drug Account in the 
                        Federal Supplementary Medical Insurance Trust 
                        Fund (under section 1841).
                            ``(vi) Dissemination of information on 
                        process.--The Secretary shall provide, through 
                        the annual medicare handbook under section 
                        1804(a), for a general description of the 
                        adjustment of annual out-of-pocket thresholds 
                        provided under this subparagraph, including the 
                        process for adjustment based upon more recent 
                        information and the confidentiality provisions 
                        of subparagraph (F), and shall provide for 
                        dissemination of a table for each year that 
                        sets forth the amount of the adjustment that is 
                        made under clause (i) based on the amount of an 
                        enrollee's adjusted gross income.
                            ``(vii) Enrollee opt-out.--The Secretary 
                        shall provide a procedure whereby, if an 
                        enrollee elects to have the maximum annual out-
                        of-pocket threshold applied under this 
                        subparagraph for a year, the Secretary shall 
                        not request any information regarding the 
                        enrollee under subparagraph (E) for that year.
                    ``(E) Requesting information on enrollees.--
                            ``(i) In general.--The Secretary shall, 
                        periodically as required to carry out 
                        subparagraph (D), transmit to the Secretary of 
                        the Treasury a list of the names and TINs of 
                        enrollees in prescription drug plans (or in MA-
                        EFFS Rx plans) and request that such Secretary 
                        disclose to the Secretary information under 
                        subparagraph (A) of section 6103(l)(19) of the 
                        Internal Revenue Code of 1986 with respect to 
                        those enrollees for a specified taxable year 
                        for application in a particular calendar year.
                            ``(ii) Disclosure to plan sponsors.--In the 
                        case of a specified taxpayer (as defined in 
                        section 6103(l)(19)(B) of the Internal Revenue 
                        Code of 1986) who is enrolled in a prescription 
                        drug plan or in an MA-EFFS Rx plan or an 
                        individual who makes an election under 
                        subparagraph (D)(vii), the Secretary shall 
                        disclose to the entity that offers the plan the 
                        annual out-of-pocket threshold applicable to 
                        such individual under subparagraph (D).
                    ``(F) Maintaining confidentiality of information.--
                            ``(i) In general.--The amount of any 
                        increase in an annual out-of-pocket threshold 
                        under subparagraph (D) may not be disclosed by 
                        the Secretary except to a PDP sponsor or entity 
                        that offers a MA-EFFS Rx plan to the extent 
                        necessary to carry out this part.
                            ``(ii) Criminal and civil penalties for 
                        unauthorized disclosure.--A person who makes an 
                        unauthorized disclosure of information 
                        disclosed under section 6103(l)(19) of the 
                        Internal Revenue Code of 1986 (including 
                        disclosure of any increase in an annual out-of-
                        pocket threshold under subparagraph (D)) shall 
                        be subject to penalty to the extent provided 
                        under--
                                    ``(I) section 7213 of such Code 
                                (relating to criminal penalty for 
                                unauthorized disclosure of 
                                information);
                                    ``(II) section 7213A of such Code 
                                (relating to criminal penalty for 
                                unauthorized inspection of returns or 
                                return information);
                                    ``(III) section 7431 of such Code 
                                (relating to civil damages for 
                                unauthorized inspection or disclosure 
                                of returns and return information);
                                    ``(IV) any other provision of the 
                                Internal Revenue Code of 1986; or
                                    ``(V) any other provision of law.
                            ``(iii) Application of additional civil 
                        monetary penalty for unauthorized 
                        disclosures.--In addition to any penalty 
                        otherwise provided under law, any person who 
                        makes an unauthorized disclosure of such 
                        information shall be subject to a civil 
                        monetary penalty of not to exceed $10,000 for 
                        each such unauthorized disclosure. The 
                        provisions of section 1128A (other than 
                        subsections (a) and (b)) shall apply to civil 
                        money penalties under this subparagraph in the 
                        same manner as they apply to a penalty or 
                        proceeding under section 1128A(a).
                    ``(G) Information regarding third-party 
                reimbursement.--In order to ensure compliance with the 
                requirements of subparagraph (C)(ii), the Administrator 
                is authorized to establish procedures, in coordination 
                with the Secretary of Treasury and the Secretary of 
                Labor, for determining whether costs for individuals 
                are being reimbursed through insurance or otherwise, a 
                group health plan, or other third-party payment 
                arrangement, and for alerting the sponsors and 
                organization that offer the plans in which such 
                individuals are enrolled about such reimbursement 
                arrangements. A PDP sponsor or Medicare Advantage or 
                EFFS organization may also periodically ask individuals 
                enrolled in a prescription drug plan or MA-EFFS Rx plan 
                offered by the sponsor or organization whether the 
                individuals have or expect to receive such third-party 
                reimbursement. A material misrepresentation of the 
                information described in the preceding sentence by an 
                individual (as defined in standards set by the 
                Administrator and determined through a process 
                established by the Administrator) shall constitute 
                grounds for termination of enrollment under section 
                1860D-1(d)(3).
            ``(5) Annual percentage increase.--For purposes of this 
        part, the annual percentage increase specified in this 
        paragraph for a year is equal to the annual percentage increase 
        in average per capita aggregate expenditures for covered 
        outpatient drugs in the United States for medicare 
        beneficiaries, as determined by the Administrator for the 12-
        month period ending in July of the previous year.
    ``(c) Alternative Coverage Requirements.--A prescription drug plan 
or MA-EFFS Rx plan may provide a different prescription drug benefit 
design from the standard coverage described in subsection (b) so long 
as the Administrator determines (based on an actuarial analysis 
approved by the Administrator) that the following requirements are met 
and the plan applies for, and receives, the approval of the 
Administrator for such benefit design:
            ``(1) Assuring at least actuarially equivalent coverage.--
                    ``(A) Assuring equivalent value of total 
                coverage.--The actuarial value of the total coverage 
                (as determined under subsection (e)) is at least equal 
                to the actuarial value (as so determined) of standard 
                coverage.
                    ``(B) Assuring equivalent unsubsidized value of 
                coverage.--The unsubsidized value of the coverage is at 
                least equal to the unsubsidized value of standard 
                coverage. For purposes of this subparagraph, the 
                unsubsidized value of coverage is the amount by which 
                the actuarial value of the coverage (as determined 
                under subsection (e)) exceeds the actuarial value of 
                the subsidy payments under section 1860D-8 with respect 
                to such coverage.
                    ``(C) Assuring standard payment for costs at 
                initial coverage limit.--The coverage is designed, 
                based upon an actuarially representative pattern of 
                utilization (as determined under subsection (e)), to 
                provide for the payment, with respect to costs incurred 
                that are equal to the initial coverage limit under 
                subsection (b)(3), of an amount equal to at least the 
                product of--
                            ``(i) the amount by which the initial 
                        coverage limit described in subsection (b)(3) 
                        exceeds the deductible described in subsection 
                        (b)(1); and
                            ``(ii) 100 percent minus the cost-sharing 
                        percentage specified in subsection 
                        (b)(2)(A)(i).
            ``(2) Catastrophic protection.--The coverage provides for 
        beneficiaries the catastrophic protection described in 
        subsection (b)(4).
    ``(d) Access to Negotiated Prices.--
            ``(1) In general.--Under qualified prescription drug 
        coverage offered by a PDP sponsor or an entity offering a MA-
        EFFS Rx plan, the sponsor or entity shall provide beneficiaries 
        with access to negotiated prices (including applicable 
        discounts) used for payment for covered outpatient drugs, 
        regardless of the fact that no benefits may be payable under 
        the coverage with respect to such drugs because of the 
        application of cost-sharing or an initial coverage limit 
        (described in subsection (b)(3)). Insofar as a State elects to 
        provide medical assistance under title XIX to a beneficiary 
        enrolled under such title and under a prescription drug plan or 
        MA-EFFS Rx plan for a drug based on the prices negotiated by a 
        prescription drug plan or MA-EFFS Rx plan under this part, the 
        requirements of section 1927 shall not apply to such drugs. The 
        prices negotiated by a prescription drug plan under this part, 
        by a MA-EFFS Rx plan with respect to covered outpatient drugs, 
        or by a qualified retiree prescription drug plan (as defined in 
        section 1860D-8(f)(1)) with respect to such drugs on behalf of 
        individuals entitled to benefits under part A or enrolled under 
        part B, shall (notwithstanding any other provision of law) not 
        be taken into account for the purposes of establishing the best 
        price under section 1927(c)(1)(C).
            ``(2) Disclosure.--The PDP sponsor or entity offering a MA-
        EFFS Rx plan shall disclose to the Administrator (in a manner 
        specified by the Administrator) the extent to which discounts 
        or rebates or other remuneration or price concessions made 
        available to the sponsor or organization by a manufacturer are 
        passed through to enrollees through pharmacies and other 
        dispensers or otherwise. The provisions of section 
        1927(b)(3)(D) shall apply to information disclosed to the 
        Administrator under this paragraph in the same manner as such 
        provisions apply to information disclosed under such section.
            ``(3) Audits and reports.--To protect against fraud and 
        abuse and to ensure proper disclosures and accounting under 
        this part, in addition to any protections against fraud and 
        abuse provided under section 1860D-4(b)(3)(C), the 
        Administrator may periodically audit the financial statements 
        and records of PDP sponsor or entities offering a MA-EFFS Rx 
        plan.
    ``(e) Actuarial Valuation; Determination of Annual Percentage 
Increases.--
            ``(1) Processes.--For purposes of this section, the 
        Administrator shall establish processes and methods--
                    ``(A) for determining the actuarial valuation of 
                prescription drug coverage, including--
                            ``(i) an actuarial valuation of standard 
                        coverage and of the reinsurance subsidy 
                        payments under section 1860D-8;
                            ``(ii) the use of generally accepted 
                        actuarial principles and methodologies; and
                            ``(iii) applying the same methodology for 
                        determinations of alternative coverage under 
                        subsection (c) as is used with respect to 
                        determinations of standard coverage under 
                        subsection (b); and
                    ``(B) for determining annual percentage increases 
                described in subsection (b)(5).
        Such methods for determining actuarial valuation shall take 
        into account effects of alternative coverage on drug 
        utilization.
            ``(2) Use of outside actuaries.--Under the processes under 
        paragraph (1)(A), PDP sponsors and entities offering MA-EFFS Rx 
        plans may use actuarial opinions certified by independent, 
        qualified actuaries to establish actuarial values, but the 
        Administrator shall determine whether such actuarial values 
        meet the requirements under subsection (c)(1).
    ``(f) Covered Outpatient Drugs Defined.--
            ``(1) In general.--Except as provided in this subsection, 
        for purposes of this part, the term `covered outpatient drug' 
        means--
                    ``(A) a drug that may be dispensed only upon a 
                prescription and that is described in subparagraph 
                (A)(i) or (A)(ii) of section 1927(k)(2); or
                    ``(B) a biological product described in clauses (i) 
                through (iii) of subparagraph (B) of such section or 
                insulin described in subparagraph (C) of such section 
                and medical supplies associated with the injection of 
                insulin (as defined in regulations of the Secretary),
        and such term includes a vaccine licensed under section 351 of 
        the Public Health Service Act and any use of a covered 
        outpatient drug for a medically accepted indication (as defined 
        in section 1927(k)(6)).
            ``(2) Exclusions.--
                    ``(A) In general.--Such term does not include drugs 
                or classes of drugs, or their medical uses, which may 
                be excluded from coverage or otherwise restricted under 
                section 1927(d)(2), other than subparagraph (E) thereof 
                (relating to smoking cessation agents), or under 
                section 1927(d)(3).
                    ``(B) Avoidance of duplicate coverage.--A drug 
                prescribed for an individual that would otherwise be a 
                covered outpatient drug under this part shall not be so 
                considered if payment for such drug is available under 
                part A or B for an individual entitled to benefits 
                under part A and enrolled under part B.
            ``(3) Application of formulary restrictions.--A drug 
        prescribed for an individual that would otherwise be a covered 
        outpatient drug under this part shall not be so considered 
        under a plan if the plan excludes the drug under a formulary 
        and such exclusion is not successfully appealed under section 
        1860D-3(f)(2).
            ``(4) Application of general exclusion provisions.--A 
        prescription drug plan or MA-EFFS Rx plan may exclude from 
        qualified prescription drug coverage any covered outpatient 
        drug--
                    ``(A) for which payment would not be made if 
                section 1862(a) applied to part D; or
                    ``(B) which are not prescribed in accordance with 
                the plan or this part.
        Such exclusions are determinations subject to reconsideration 
        and appeal pursuant to section 1860D-3(f).

``SEC. 1860D-3. BENEFICIARY PROTECTIONS FOR QUALIFIED PRESCRIPTION DRUG 
              COVERAGE.

    ``(a) Guaranteed Issue, Community-Rated Premiums, Access to 
Negotiated Prices, and Nondiscrimination.--For provisions requiring 
guaranteed issue, community-rated premiums, access to negotiated 
prices, and nondiscrimination, see sections 1860D-1(c)(1), 1860D-
1(c)(2), 1860D-2(d), and 1860D-6(b), respectively.
    ``(b) Dissemination of Information.--
            ``(1) General information.--A PDP sponsor shall disclose, 
        in a clear, accurate, and standardized form to each enrollee 
        with a prescription drug plan offered by the sponsor under this 
        part at the time of enrollment and at least annually 
        thereafter, the information described in section 1852(c)(1) 
        relating to such plan. Such information includes the following:
                    ``(A) Access to specific covered outpatient drugs, 
                including access through pharmacy networks.
                    ``(B) How any formulary used by the sponsor 
                functions, including the drugs included in the 
                formulary.
                    ``(C) Co-payments and deductible requirements, 
                including the identification of the tiered or other co-
                payment level applicable to each drug (or class of 
                drugs).
                    ``(D) Grievance and appeals procedures.
        Such information shall also be made available upon request to 
        prospective enrollees.
            ``(2) Disclosure upon request of general coverage, 
        utilization, and grievance information.--Upon request of an 
        individual eligible to enroll under a prescription drug plan, 
        the PDP sponsor shall provide the information described in 
        section 1852(c)(2) (other than subparagraph (D)) to such 
        individual.
            ``(3) Response to beneficiary questions.--Each PDP sponsor 
        offering a prescription drug plan shall have a mechanism for 
        providing specific information to enrollees upon request. The 
        sponsor shall make available on a timely basis, through an 
        Internet website and in writing upon request, information on 
        specific changes in its formulary.
            ``(4) Claims information.--Each PDP sponsor offering a 
        prescription drug plan must furnish to each enrollee in a form 
        easily understandable to such enrollees an explanation of 
        benefits (in accordance with section 1806(a) or in a comparable 
        manner) and a notice of the benefits in relation to initial 
        coverage limit and the annual out-of-pocket threshold 
        applicable to such enrollee for the current year, whenever 
        prescription drug benefits are provided under this part (except 
        that such notice need not be provided more often than monthly).
    ``(c) Access to Covered Benefits.--
            ``(1) Assuring pharmacy access.--
                    ``(A) Participation of any willing pharmacy.--A PDP 
                sponsor and an entity offering a MA-EFFS Rx plan shall 
                permit the participation of any pharmacy that meets 
                terms and conditions that the plan has established.
                    ``(B) Discounts allowed for network pharmacies.--A 
                prescription drug plan and a MA-EFFS Rx plan may, 
                notwithstanding subparagraph (A), reduce coinsurance or 
                copayments for its enrolled beneficiaries below the 
                level otherwise provided for covered outpatient drugs 
                dispensed through in-network pharmacies, but in no case 
                shall such a reduction result in an increase in 
                payments made by the Administrator under section 1860D-
                8 to a plan.
                    ``(C) Convenient access for network pharmacies.--
                The PDP sponsor of the prescription drug plan and the 
                entity offering a MA-EFFS Rx plan shall secure the 
                participation in its network of a sufficient number of 
                pharmacies that dispense (other than by mail order) 
                drugs directly to patients to ensure convenient access 
                (consistent with rules of the Administrator). The 
                Administrator shall establish convenient access rules 
                under this subparagraph that are no less favorable to 
                enrollees than the rules for convenient access to 
                pharmacies of the Secretary of Defense established as 
                of June 1, 2003, for purposes of the TRICARE Retail 
                Pharmacy (TRRx) program. Such rules shall include 
                adequate emergency access for enrolled beneficiaries.
                    ``(D) Level playing field.--Such a sponsor shall 
                permit enrollees to receive benefits (which may include 
                a 90-day supply of drugs or biologicals) through a 
                community pharmacy, rather than through mail order, 
                with any differential in charge paid by such enrollees.
                    ``(E)  Not required to accept insurance risk.--The 
                terms and conditions under subparagraph (A) may not 
                require participating pharmacies to accept insurance 
                risk as a condition of participation.
            ``(2) Use of standardized technology.--
                    ``(A) In general.--The PDP sponsor of a 
                prescription drug plan and an entity offering a MA-EFFS 
                Rx plan shall issue (and reissue, as appropriate) such 
                a card (or other technology) that may be used by an 
                enrollee to assure access to negotiated prices under 
                section 1860D-2(d) for the purchase of prescription 
                drugs for which coverage is not otherwise provided 
                under the plan.
                    ``(B) Standards.--
                            ``(i) Development.--The Administrator shall 
                        provide for the development or utilization of 
                        uniform standards relating to a standardized 
                        format for the card or other technology 
                        referred to in subparagraph (A). Such standards 
                        shall be compatible with standards established 
                        under part C of title XI.
                            ``(ii) Application of advisory task 
                        force.--The advisory task force established 
                        under subsection (d)(3)(B)(ii) shall provide 
                        recommendations to the Administrator under such 
                        subsection regarding the standards developed 
                        under clause (i).
            ``(3) Requirements on development and application of 
        formularies.--If a PDP sponsor of a prescription drug plan or 
        an entity offering a MA-EFFS Rx plan uses a formulary, the 
        following requirements must be met:
                    ``(A) Pharmacy and therapeutic (p&t) committee.--
                The sponsor or entity must establish a pharmacy and 
                therapeutic committee that develops and reviews the 
                formulary. Such committee shall include at least one 
                practicing physician and at least one practicing 
                pharmacist independent and free of conflict with 
                respect to the committee both with expertise in the 
                care of elderly or disabled persons and a majority of 
                its members shall consist of individuals who are 
                practicing physicians or practicing pharmacists (or 
                both).
                    ``(B) Formulary development.--In developing and 
                reviewing the formulary, the committee shall--
                            ``(i) base clinical decisions on the 
                        strength of scientific evidence and standards 
                        of practice, including assessing peer-reviewed 
                        medical literature, such as randomized clinical 
                        trials, pharmacoeconomic studies, outcomes 
                        research data, and on such other information as 
                        the committee determines to be appropriate; and
                            ``(ii) shall take into account whether 
                        including in the formulary particular covered 
                        outpatient drugs has therapeutic advantages in 
                        terms of safety and efficacy.
                    ``(C) Inclusion of drugs in all therapeutic 
                categories.--The formulary must include drugs within 
                each therapeutic category and class of covered 
                outpatient drugs (although not necessarily for all 
                drugs within such categories and classes). In 
                establishing such classes, the committee shall take 
                into account the standards published in the United 
                States Pharmacopeia-Drug Information. The committee 
                shall make available to the enrollees under the plan 
                through the Internet or otherwise the bases for the 
                exclusion of coverage of any drug from the formulary.
                    ``(D) Provider and patient education.--The 
                committee shall establish policies and procedures to 
                educate and inform health care providers and enrollees 
                concerning the formulary.
                    ``(E) Notice before removing drug from formulary 
                for changing preferred or tier status of drug.--Any 
                removal of a covered outpatient drug from a formulary 
                and any change in the preferred or tier cost-sharing 
                status of such a drug shall take effect only after 
                appropriate notice is made available to beneficiaries 
                and physicians.
                    ``(F) Periodic evaluation of protocols.--In 
                connection with the formulary, a prescription drug plan 
                shall provide for the periodic evaluation and analysis 
                of treatment protocols and procedures.
                    ``(G) Grievances and appeals relating to 
                application of formularies.--For provisions relating to 
                grievances and appeals of coverage, see subsections (e) 
                and (f).
    ``(d) Cost and Utilization Management; Quality Assurance; 
Medication Therapy Management Program.--
            ``(1) In general.--The PDP sponsor or entity offering a MA-
        EFFS Rx plan shall have in place, directly or through 
        appropriate arrangements, with respect to covered outpatient 
        drugs--
                    ``(A) an effective cost and drug utilization 
                management program, including medically appropriate 
                incentives to use generic drugs and therapeutic 
                interchange, when appropriate;
                    ``(B) quality assurance measures and systems to 
                reduce medical errors and adverse drug interactions, 
                including side-effects, and improve medication use, 
                including a medication therapy management program 
                described in paragraph (2) and for years beginning with 
                2007, an electronic prescription program described in 
                paragraph (3); and
                    ``(C) a program to control fraud, abuse, and waste.
        Nothing in this section shall be construed as impairing a PDP 
        sponsor or entity from utilizing cost management tools 
        (including differential payments) under all methods of 
        operation.
            ``(2) Medication therapy management program.--
                    ``(A) In general.--A medication therapy management 
                program described in this paragraph is a program of 
                drug therapy management and medication administration 
                that may be furnished by a pharmacy provider and that 
                is designed to assure, with respect to beneficiaries at 
                risk for potential medication problems, such as 
                beneficiaries with complex or chronic diseases (such as 
                diabetes, asthma, hypertension, and congestive heart 
                failure) or multiple prescriptions, that covered 
                outpatient drugs under the prescription drug plan are 
                appropriately used to optimize therapeutic outcomes 
                through improved medication use and reduce the risk of 
                adverse events, including adverse drug interactions. 
                Such programs may distinguish between services in 
                ambulatory and institutional settings.
                    ``(B) Elements.--Such program may include--
                            ``(i) enhanced beneficiary understanding to 
                        promote the appropriate use of medications by 
                        beneficiaries and to reduce the risk of 
                        potential adverse events associated with 
                        medications, through beneficiary education, 
                        counseling, case management, disease state 
                        management programs, and other appropriate 
                        means;
                            ``(ii) increased beneficiary adherence with 
                        prescription medication regimens through 
                        medication refill reminders, special packaging, 
                        and other compliance programs and other 
                        appropriate means; and
                            ``(iii) detection of patterns of overuse 
                        and underuse of prescription drugs.
                    ``(C) Development of program in cooperation with 
                licensed pharmacists.--The program shall be developed 
                in cooperation with licensed and practicing pharmacists 
                and physicians.
                    ``(D) Considerations in pharmacy fees.--The PDP 
                sponsor of a prescription drug program and an entity 
                offering a MA-EFFS Rx plan shall take into account, in 
                establishing fees for pharmacists and others providing 
                services under the medication therapy management 
                program, the resources and time used in implementing 
                the program. Each such sponsor or entity shall disclose 
                to the Administrator upon request the amount of any 
                such management or dispensing fees and such fees shall 
                be confidential in the same manner as provided under 
                section 1927(b)(3)(D) for information disclosed under 
                section 1927(b)(3)(A).
            ``(3) Electronic prescription program.--
                    ``(A) In general.--An electronic prescription drug 
                program described in this paragraph is a program that 
                includes at least the following components, consistent 
                with uniform standards established under subparagraph 
                (B):
                            ``(i) Electronic transmittal of 
                        prescriptions.--Prescriptions must be written 
                        and transmitted electronically (other than by 
                        facsimile), except in emergency cases and other 
                        exceptional circumstances recognized by the 
                        Administrator.
                            ``(ii) Provision of information to 
                        prescribing health care professional.--The 
                        program provides for the electronic transmittal 
                        to the prescribing health care professional of 
                        information that includes--
                                    ``(I) information (to the extent 
                                available and feasible) on the drug or 
                                drugs being prescribed for that patient 
                                and other information relating to the 
                                medical history or condition of the 
                                patient that may be relevant to the 
                                appropriate prescription for that 
                                patient;
                                    ``(II) cost-effective alternatives 
                                (if any) for the use of the drug 
                                prescribed; and
                                    ``(III) information on the drugs 
                                included in the applicable formulary.
                        To the extent feasible, such program shall 
                        permit the prescribing health care professional 
                        to provide (and be provided) related 
                        information on an interactive, real-time basis.
                    ``(B) Standards.--
                            ``(i) Development.--The Administrator shall 
                        provide for the development of uniform 
                        standards relating to the electronic 
                        prescription drug program described in 
                        subparagraph (A). Such standards shall be 
                        compatible with standards established under 
                        part C of title XI.
                            ``(ii) Advisory task force.--In developing 
                        such standards and the standards described in 
                        subsection (c)(2)(B)(i) the Administrator shall 
                        establish a task force that includes 
                        representatives of physicians, hospitals, 
                        pharmacies, beneficiaries, pharmacy benefit 
                        managers, individuals with expertise in 
                        information technology, and pharmacy benefit 
                        experts of the Departments of Veterans Affairs 
                        and Defense and other appropriate Federal 
                        agencies to provide recommendations to the 
                        Administrator on such standards, including 
                        recommendations relating to the following:
                                    ``(I) The range of available 
                                computerized prescribing software and 
                                hardware and their costs to develop and 
                                implement.
                                    ``(II) The extent to which such 
                                standards and systems reduce medication 
                                errors and can be readily implemented 
                                by physicians, pharmacies, and 
                                hospitals.
                                    ``(III) Efforts to develop uniform 
                                standards and a common software 
                                platform for the secure electronic 
                                communication of medication history, 
                                eligibility, benefit, and prescription 
                                information.
                                    ``(IV) Efforts to develop and 
                                promote universal connectivity and 
                                interoperability for the secure 
                                electronic exchange of such 
                                information.
                                    ``(V) The cost of implementing such 
                                systems in the range of hospital and 
                                physician office settings and 
                                pharmacies, including hardware, 
                                software, and training costs.
                                    ``(VI) Implementation issues as 
                                they relate to part C of title XI, and 
                                current Federal and State prescribing 
                                laws and regulations and their impact 
                                on implementation of computerized 
                                prescribing.
                            ``(iii) Deadlines.--
                                    ``(I) The Administrator shall 
                                constitute the task force under clause 
                                (ii) by not later than April 1, 2004.
                                    ``(II) Such task force shall submit 
                                recommendations to Administrator by not 
                                later than January 1, 2005.
                                    ``(III) The Administrator shall 
                                provide for the development and 
                                promulgation, by not later than January 
                                1, 2006, of national standards relating 
                                to the electronic prescription drug 
                                program described in clause (ii). Such 
                                standards shall be issued by a 
                                standards organization accredited by 
                                the American National Standards 
                                Institute (ANSI) and shall be 
                                compatible with standards established 
                                under part C of title XI.
            ``(4) Treatment of accreditation.--Section 1852(e)(4) 
        (relating to treatment of accreditation) shall apply to 
        prescription drug plans under this part with respect to the 
        following requirements, in the same manner as they apply to 
        plans under part C with respect to the requirements described 
        in a clause of section 1852(e)(4)(B):
                    ``(A) Paragraph (1) (including quality assurance), 
                including medication therapy management program under 
                paragraph (2).
                    ``(B) Subsection (c)(1) (relating to access to 
                covered benefits).
                    ``(C) Subsection (g) (relating to confidentiality 
                and accuracy of enrollee records).
            ``(5) Public disclosure of pharmaceutical prices for 
        equivalent drugs.--Each PDP sponsor and each entity offering a 
        MA-EFFS Rx plan shall provide that each pharmacy or other 
        dispenser that arranges for the dispensing of a covered 
        outpatient drug shall inform the beneficiary at the time of 
        purchase of the drug of any differential between the price of 
        the prescribed drug to the enrollee and the price of the lowest 
        cost available generic drug covered under the plan that is 
        therapeutically equivalent and bioequivalent.
    ``(e) Grievance Mechanism, Coverage Determinations, and 
Reconsiderations.--
            ``(1) In general.--Each PDP sponsor shall provide 
        meaningful procedures for hearing and resolving grievances 
        between the organization (including any entity or individual 
        through which the sponsor provides covered benefits) and 
        enrollees with prescription drug plans of the sponsor under 
        this part in accordance with section 1852(f).
            ``(2) Application of coverage determination and 
        reconsideration provisions.--A PDP sponsor shall meet the 
        requirements of paragraphs (1) through (3) of section 1852(g) 
        with respect to covered benefits under the prescription drug 
        plan it offers under this part in the same manner as such 
        requirements apply to an organization with respect to benefits 
        it offers under a plan under part C.
            ``(3) Request for review of tiered formulary 
        determinations.--In the case of a prescription drug plan 
        offered by a PDP sponsor or a MA-EFFS Rx plan that provides for 
        tiered cost-sharing for drugs included within a formulary and 
        provides lower cost-sharing for preferred drugs included within 
        the formulary, an individual who is enrolled in the plan may 
        request coverage of a nonpreferred drug under the terms 
        applicable for preferred drugs if the prescribing physician 
        determines that the preferred drug for treatment of the same 
        condition either would not be as effective for the individual 
        or would have adverse effects for the individual or both.
    ``(f) Appeals.--
            ``(1) In general.--Subject to paragraph (2), a PDP sponsor 
        shall meet the requirements of paragraphs (4) and (5) of 
        section 1852(g) with respect to drugs (including a 
        determination related to the application of tiered cost-sharing 
        described in subsection (e)(3)) in the same manner as such 
        requirements apply to an organization with respect to benefits 
        it offers under a plan under part C.
            ``(2) Formulary determinations.--An individual who is 
        enrolled in a prescription drug plan offered by a PDP sponsor 
        or in a MA-EFFS Rx plan may appeal to obtain coverage for a 
        covered outpatient drug that is not on a formulary of the 
        sponsor or entity offering the plan if the prescribing 
        physician determines that the formulary drug for treatment of 
        the same condition either would not be as effective for the 
        individual or would have adverse effects for the individual or 
        both.
    ``(g) Confidentiality and Accuracy of Enrollee Records.--A PDP 
sponsor that offers a prescription drug plan shall meet the 
requirements of section 1852(h) with respect to enrollees under the 
plan in the same manner as such requirements apply to an organization 
with respect to enrollees under part C. A PDP sponsor shall be treated 
as a business associate for purposes of the provisions of subpart E of 
part 164 of title 45, Code of Federal Regulations, adopted pursuant to 
the authority of the Secretary under section 264(c) of the Health 
Insurance Portability and Accountability Act of 1996 (42 U.S. C. 1320d-
2 note).

``SEC. 1860D-4. REQUIREMENTS FOR AND CONTRACTS WITH PRESCRIPTION DRUG 
              PLAN (PDP) SPONSORS.

    ``(a) General Requirements.--Each PDP sponsor of a prescription 
drug plan shall meet the following requirements:
            ``(1) Licensure.--Subject to subsection (c), the sponsor is 
        organized and licensed under State law as a risk-bearing entity 
        eligible to offer health insurance or health benefits coverage 
        in each State in which it offers a prescription drug plan.
            ``(2) Assumption of financial risk for unsubsidized 
        coverage.--
                    ``(A) In general.--Subject to subparagraph (B) and 
                section 1860D-5(d)(2), the entity assumes full 
                financial risk on a prospective basis for qualified 
                prescription drug coverage that it offers under a 
                prescription drug plan and that is not covered under 
                section 1860D-8.
                    ``(B) Reinsurance permitted.--The entity may obtain 
                insurance or make other arrangements for the cost of 
                coverage provided to any enrollee.
            ``(3) Solvency for unlicensed sponsors.--In the case of a 
        sponsor that is not described in paragraph (1), the sponsor 
        shall meet solvency standards established by the Administrator 
        under subsection (d).
    ``(b) Contract Requirements.--
            ``(1) In general.--The Administrator shall not permit the 
        election under section 1860D-1 of a prescription drug plan 
        offered by a PDP sponsor under this part, and the sponsor shall 
        not be eligible for payments under section 1860D-7 or 1860D-8, 
        unless the Administrator has entered into a contract under this 
        subsection with the sponsor with respect to the offering of 
        such plan. Such a contract with a sponsor may cover more than 
        one prescription drug plan. Such contract shall provide that 
        the sponsor agrees to comply with the applicable requirements 
        and standards of this part and the terms and conditions of 
        payment as provided for in this part.
            ``(2) Negotiation regarding terms and conditions.--The 
        Administrator shall have the same authority to negotiate the 
        terms and conditions of prescription drug plans under this part 
        as the Director of the Office of Personnel Management has with 
        respect to health benefits plans under chapter 89 of title 5, 
        United States Code. In negotiating the terms and conditions 
        regarding premiums for which information is submitted under 
        section 1860D-6(a)(2), the Administrator shall take into 
        account the subsidy payments under section 1860D-8.
            ``(3) Incorporation of certain medicare advantage contract 
        requirements.--The following provisions of section 1857 shall 
        apply, subject to subsection (c)(5), to contracts under this 
        section in the same manner as they apply to contracts under 
        section 1857(a):
                    ``(A) Minimum enrollment.--Paragraphs (1) and (3) 
                of section 1857(b), except that the requirement of such 
                paragraph (1) shall be waived during the first contract 
                year with respect to an organization in a region.
                    ``(B) Contract period and effectiveness.--
                Paragraphs (1) through (3) and (5) of section 1857(c).
                    ``(C) Protections against fraud and beneficiary 
                protections.--Section 1857(d).
                    ``(D) Additional contract terms.--Section 1857(e); 
                except that in applying section 1857(e)(2) under this 
                part--
                            ``(i) such section shall be applied 
                        separately to costs relating to this part (from 
                        costs under part C and part E);
                            ``(ii) in no case shall the amount of the 
                        fee established under this subparagraph for a 
                        plan exceed 20 percent of the maximum amount of 
                        the fee that may be established under 
                        subparagraph (B) of such section; and
                            ``(iii) no fees shall be applied under this 
                        subparagraph with respect to MA-EFFS Rx plans.
                    ``(E) Intermediate sanctions.--Section 1857(g).
                    ``(F) Procedures for termination.--Section 1857(h).
            ``(4) Rules of application for intermediate sanctions.--In 
        applying paragraph (3)(E)--
                    ``(A) the reference in section 1857(g)(1)(B) to 
                section 1854 is deemed a reference to this part; and
                    ``(B) the reference in section 1857(g)(1)(F) to 
                section 1852(k)(2)(A)(ii) shall not be applied.
            ``(5) Service area requirement.--For purposes of this part, 
        the Administrator shall designate at least 10 areas covering 
        the entire United States and to the extent practicable shall be 
        consistent with EFFS regions established under section 1860E-
        1(a)(2).
    ``(c) Waiver of Certain Requirements to Expand Choice.--
            ``(1) In general.--In the case of an entity that seeks to 
        offer a prescription drug plan in a State, the Administrator 
        shall waive the requirement of subsection (a)(1) that the 
        entity be licensed in that State if the Administrator 
        determines, based on the application and other evidence 
        presented to the Administrator, that any of the grounds for 
        approval of the application described in paragraph (2) have 
        been met.
            ``(2) Grounds for approval.--The grounds for approval under 
        this paragraph are the grounds for approval described in 
        subparagraph (B), (C), and (D) of section 1855(a)(2), and also 
        include the application by a State of any grounds other than 
        those required under Federal law.
            ``(3) Application of waiver procedures.--With respect to an 
        application for a waiver (or a waiver granted) under this 
        subsection, the provisions of subparagraphs (E), (F), and (G) 
        of section 1855(a)(2) shall apply.
            ``(4) Licensure does not substitute for or constitute 
        certification.--The fact that an entity is licensed in 
        accordance with subsection (a)(1) does not deem the entity to 
        meet other requirements imposed under this part for a PDP 
        sponsor.
            ``(5) References to certain provisions.--For purposes of 
        this subsection, in applying provisions of section 1855(a)(2) 
        under this subsection to prescription drug plans and PDP 
        sponsors--
                    ``(A) any reference to a waiver application under 
                section 1855 shall be treated as a reference to a 
                waiver application under paragraph (1); and
                    ``(B) any reference to solvency standards shall be 
                treated as a reference to solvency standards 
                established under subsection (d).
    ``(d) Solvency Standards for Non-Licensed Sponsors.--
            ``(1) Establishment.--The Administrator shall establish, by 
        not later than October 1, 2004, financial solvency and capital 
        adequacy standards that an entity that does not meet the 
        requirements of subsection (a)(1) must meet to qualify as a PDP 
        sponsor under this part.
            ``(2) Compliance with standards.--Each PDP sponsor that is 
        not licensed by a State under subsection (a)(1) and for which a 
        waiver application has been approved under subsection (c) shall 
        meet solvency and capital adequacy standards established under 
        paragraph (1). The Administrator shall establish certification 
        procedures for such PDP sponsors with respect to such solvency 
        standards in the manner described in section 1855(c)(2).
    ``(e) Relation to State Laws.--
            ``(1) In general.--The standards established under this 
        part shall supersede any State law or regulation (other than 
        State licensing laws or State laws relating to plan solvency, 
        except as provided in subsection (d)) with respect to 
        prescription drug plans which are offered by PDP sponsors under 
        this part.
            ``(2) Prohibition of state imposition of premium taxes.--No 
        State may impose a premium tax or similar tax with respect to 
        premiums paid to PDP sponsors for prescription drug plans under 
        this part, or with respect to any payments made to such a 
        sponsor by the Administrator under this part.

``SEC. 1860D-5. PROCESS FOR BENEFICIARIES TO SELECT QUALIFIED 
              PRESCRIPTION DRUG COVERAGE.

    ``(a) In General.--The Administrator shall establish a process for 
the selection of the prescription drug plan or MA-EFFS Rx plan through 
which eligible individuals elect qualified prescription drug coverage 
under this part.
    ``(b) Elements.--Such process shall include the following:
            ``(1) Annual, coordinated election periods, in which such 
        individuals can change the qualifying plans through which they 
        obtain coverage, in accordance with section 1860D-1(b)(2).
            ``(2) Active dissemination of information to promote an 
        informed selection among qualifying plans based upon price, 
        quality, and other features, in the manner described in (and in 
        coordination with) section 1851(d), including the provision of 
        annual comparative information, maintenance of a toll-free 
        hotline, and the use of non-Federal entities.
            ``(3) Coordination of elections through filing with the 
        entity offering a MA-EFFS Rx plan or a PDP sponsor, in the 
        manner described in (and in coordination with) section 
        1851(c)(2).
            ``(4) Informing each enrollee before the beginning of each 
        year of the annual out-of-pocket threshold applicable to the 
        enrollee for that year under section 1860D-2(b)(4) at such 
        time.
    ``(c) MA-EFFS Rx Enrollee May Only Obtain Benefits Through the 
Plan.--An individual who is enrolled under a MA-EFFS Rx plan may only 
elect to receive qualified prescription drug coverage under this part 
through such plan.
    ``(d) Assuring Access to a Choice of Qualified Prescription Drug 
Coverage.--
            ``(1) Choice of at least two plans in each area.--
                    ``(A) In general.--The Administrator shall assure 
                that each individual who is entitled to benefits under 
                part A or enrolled under part B and who is residing in 
                an area in the United States has available, consistent 
                with subparagraph (B), a choice of enrollment in at 
                least two qualifying plans (as defined in paragraph 
                (5)) in the area in which the individual resides, at 
                least one of which is a prescription drug plan.
                    ``(B) Requirement for different plan sponsors.--The 
                requirement in subparagraph (A) is not satisfied with 
                respect to an area if only one PDP sponsor or one 
                entity that offers a MA-EFFS Rx plan offers all the 
                qualifying plans in the area.
            ``(2) Guaranteeing access to coverage.--In order to assure 
        access under paragraph (1) and consistent with paragraph (3), 
        the Administrator may provide partial underwriting of risk for 
        a PDP sponsor to expand the service area under an existing 
        prescription drug plan to adjoining or additional areas or to 
        establish such a plan (including offering such a plan on a 
        regional or nationwide basis), but only so long as (and to the 
        extent) necessary to assure the access guaranteed under 
        paragraph (1).
            ``(3) Limitation on authority.--In exercising authority 
        under this subsection, the Administrator--
                    ``(A) shall not provide for the full underwriting 
                of financial risk for any PDP sponsor; and
                    ``(B) shall seek to maximize the assumption of 
                financial risk by PDP sponsors or entities offering a 
                MA-EFFS Rx plan.
            ``(4) Reports.--The Administrator shall, in each annual 
        report to Congress under section 1809(f), include information 
        on the exercise of authority under this subsection. The 
        Administrator also shall include such recommendations as may be 
        appropriate to minimize the exercise of such authority, 
        including minimizing the assumption of financial risk.
            ``(5) Qualifying plan defined.--For purposes of this 
        subsection, the term `qualifying plan' means a prescription 
        drug plan or a MA-EFFS Rx plan.

``SEC. 1860D-6. SUBMISSION OF BIDS AND PREMIUMS.

    ``(a) Submission of Bids, Premiums, and Related Information.--
            ``(1) In general.--Each PDP sponsor shall submit to the 
        Administrator the information described in paragraph (2) in the 
        same manner as information is submitted by an organization 
        under section 1854(a)(1).
            ``(2) Information submitted.--The information described in 
        this paragraph is the following:
                    ``(A) Coverage provided.--Information on the 
                qualified prescription drug coverage to be provided.
                    ``(B) Actuarial value.--Information on the 
                actuarial value of the coverage.
                    ``(C) Bid and premium.--Information on the bid and 
                the premium for the coverage, including an actuarial 
                certification of--
                            ``(i) the actuarial basis for such bid and 
                        premium;
                            ``(ii) the portion of such bid and premium 
                        attributable to benefits in excess of standard 
                        coverage;
                            ``(iii) the reduction in such bid resulting 
                        from the reinsurance subsidy payments provided 
                        under section 1860D-8(a)(2); and
                            ``(iv) the reduction in such premium 
                        resulting from the direct and reinsurance 
                        subsidy payments provided under section 1860D-
                        8.
                    ``(D) Additional information.--Such other 
                information as the Administrator may require to carry 
                out this part.
            ``(3) Review of information; negotiation and approval of 
        premiums.--
                    ``(A) In general.--Subject to subparagraph (B), the 
                Administrator shall review the information filed under 
                paragraph (2) for the purpose of conducting 
                negotiations under section 1860D-4(b)(2) (relating to 
                using OPM-like authority under the FEHBP). The 
                Administrator, using the information provided 
                (including the actuarial certification under paragraph 
                (2)(C)) shall approve the premium submitted under this 
                subsection only if the premium accurately reflects both 
                (i) the actuarial value of the benefits provided, and 
                (ii) the 73 percent average subsidy provided under 
                section 1860D-8 for the standard benefit. The 
                Administrator shall apply actuarial principles to 
                approval of a premium under this part in a manner 
                similar to the manner in which those principles are 
                applied in establishing the monthly part B premium 
                under section 1839.
                    ``(B) Exception.--In the case of a plan described 
                in section 1851(a)(2)(C), the provisions of 
                subparagraph (A) shall not apply and the provisions of 
                paragraph (5)(B) of section 1854(a), prohibiting the 
                review, approval, or disapproval of amounts described 
                in such paragraph, shall apply to the negotiation and 
                rejection of the monthly bid amounts and proportion 
                referred to in subparagraph (A).
    ``(b) Uniform Bid and Premium.--
            ``(1) In general.--The bid and premium for a prescription 
        drug plan under this section may not vary among enrollees in 
        the plan in the same service area.
            ``(2) Construction.--Nothing in paragraph (1) shall be 
        construed as preventing the imposition of a late enrollment 
        penalty under section 1860D-1(c)(2)(B).
    ``(c) Collection.--
            ``(1) Beneficiary's option of payment through withholding 
        from social security payment or use of electronic funds 
        transfer mechanism.--In accordance with regulations, a PDP 
        sponsor shall permit each enrollee, at the enrollee's option, 
        to make payment of premiums under this part to the sponsor 
        through withholding from benefit payments in the manner 
        provided under section 1840 with respect to monthly premiums 
        under section 1839 or through an electronic funds transfer 
        mechanism (such as automatic charges of an account at a 
        financial institution or a credit or debit card account) or 
        otherwise. All premium payments that are withheld under this 
        paragraph shall be credited to the Medicare Prescription Drug 
        Trust Fund and shall be paid to the PDP sponsor involved.
            ``(2) Offsetting.--Reductions in premiums for coverage 
        under parts A and B as a result of a selection of a MA-EFFS Rx 
        plan may be used to reduce the premium otherwise imposed under 
        paragraph (1).
    ``(d) Acceptance of Reference Premium Amount as Full Premium for 
Subsidized Low-Income Individuals if No Standard (or Equivalent) 
Coverage in an Area.--
            ``(1) In general.--If there is no standard prescription 
        drug coverage (as defined in paragraph (2)) offered in an area, 
        in the case of an individual who is eligible for a premium 
        subsidy under section 1860D-7 and resides in the area, the PDP 
        sponsor of any prescription drug plan offered in the area (and 
        any entity offering a MA-EFFS Rx plan in the area) shall accept 
        the reference premium amount (under paragraph (3)) as payment 
        in full for the premium charge for qualified prescription drug 
        coverage.
            ``(2) Standard prescription drug coverage defined.--For 
        purposes of this subsection, the term `standard prescription 
        drug coverage' means qualified prescription drug coverage that 
        is standard coverage or that has an actuarial value equivalent 
        to the actuarial value for standard coverage.
            ``(3) Reference premium amount defined.--For purposes of 
        this subsection, the term `reference premium amount' means, 
        with respect to qualified prescription drug coverage offered 
        under--
                    ``(A) a prescription drug plan that--
                            ``(i) provides standard coverage (or 
                        alternative prescription drug coverage the 
                        actuarial value is equivalent to that of 
                        standard coverage), the plan's PDP premium; or
                            ``(ii) provides alternative prescription 
                        drug coverage the actuarial value of which is 
                        greater than that of standard coverage, the 
                        plan's PDP premium multiplied by the ratio of 
                        (I) the actuarial value of standard coverage, 
                        to (II) the actuarial value of the alternative 
                        coverage;
                    ``(B) an EFFS plan, the EFFS monthly prescription 
                drug beneficiary premium (as defined in section 1860E-
                4(a)(3)(B)); or
                    ``(C) a Medicare Advantage, the Medicare Advantage 
                monthly prescription drug beneficiary premium (as 
                defined in section 1854(b)(2)(B)).
        For purposes of subparagraph (A), the term `PDP premium' means, 
        with respect to a prescription drug plan, the premium amount 
        for enrollment under the plan under this part (determined 
        without regard to any low-income subsidy under section 1860D-7 
        or any late enrollment penalty under section 1860D-1(c)(2)(B)).

``SEC. 1860D-7. PREMIUM AND COST-SHARING SUBSIDIES FOR LOW-INCOME 
              INDIVIDUALS.

    ``(a) Income-Related Subsidies for Individuals With Income Below 
150 Percent of Federal Poverty Level.--
            ``(1) Full premium subsidy and reduction of cost-sharing 
        for individuals with income below 135 percent of federal 
        poverty level.--In the case of a subsidy eligible individual 
        (as defined in paragraph (4)) who is determined to have income 
        that does not exceed 135 percent of the Federal poverty level, 
        the individual is entitled under this section--
                    ``(A) to an income-related premium subsidy equal to 
                100 percent of the amount described in subsection 
                (b)(1); and
                    ``(B) subject to subsection (c), to the 
                substitution for the beneficiary cost-sharing described 
                in paragraphs (1) and (2) of section 1860D-2(b) (up to 
                the initial coverage limit specified in paragraph (3) 
                of such section) of amounts that do not exceed $2 for a 
                multiple source or generic drug (as described in 
                section 1927(k)(7)(A)) and $5 for a non-preferred drug.
            ``(2) Sliding scale premium subsidy for individuals with 
        income above 135, but below 150 percent, of federal poverty 
        level.--In the case of a subsidy eligible individual who is 
        determined to have income that exceeds 135 percent, but does 
        not exceed 150 percent, of the Federal poverty level, the 
        individual is entitled under this section to an income-related 
        premium subsidy determined on a linear sliding scale ranging 
        from 100 percent of the amount described in subsection (b)(1) 
        for individuals with incomes at 135 percent of such level to 0 
        percent of such amount for individuals with incomes at 150 
        percent of such level.
            ``(3) Construction.--Nothing in this section shall be 
        construed as preventing a PDP sponsor or entity offering a MA-
        EFFS Rx plan from reducing to 0 the cost-sharing otherwise 
        applicable to generic drugs.
            ``(4) Determination of eligibility.--
                    ``(A) Subsidy eligible individual defined.--For 
                purposes of this section, subject to subparagraph (D), 
                the term `subsidy eligible individual' means an 
                individual who--
                            ``(i) is eligible to elect, and has 
                        elected, to obtain qualified prescription drug 
                        coverage under this part;
                            ``(ii) has income below 150 percent of the 
                        Federal poverty line; and
                            ``(iii) meets the resources requirement 
                        described in subparagraph (D).
                    ``(B) Determinations.--The determination of whether 
                an individual residing in a State is a subsidy eligible 
                individual and the amount of such individual's income 
                shall be determined under the State medicaid plan for 
                the State under section 1935(a) or by the Social 
                Security Administration. In the case of a State that 
                does not operate such a medicaid plan (either under 
                title XIX or under a statewide waiver granted under 
                section 1115), such determination shall be made under 
                arrangements made by the Administrator. There are 
                authorized to be appropriated to the Social Security 
                Administration such sums as may be necessary for the 
                determination of eligibility under this subparagraph.
                    ``(C) Income determinations.--For purposes of 
                applying this section--
                            ``(i) income shall be determined in the 
                        manner described in section 1905(p)(1)(B); and
                            ``(ii) the term `Federal poverty line' 
                        means the official poverty line (as defined by 
                        the Office of Management and Budget, and 
                        revised annually in accordance with section 
                        673(2) of the Omnibus Budget Reconciliation Act 
                        of 1981) applicable to a family of the size 
                        involved.
                    ``(D) Resource standard applied to be based on 
                three times ssi resource standard.--The resource 
                requirement of this subparagraph is that an 
                individual's resources (as determined under section 
                1613 for purposes of the supplemental security income 
                program) do not exceed--
                            ``(i) for 2006 three times the maximum 
                        amount of resources that an individual may have 
                        and obtain benefits under that program; and
                            ``(ii) for a subsequent year the resource 
                        limitation established under this clause for 
                        the previous year increased by the annual 
                        percentage increase in the consumer price index 
                        (all items; U.S. city average) as of September 
                        of such previous year.
                Any resource limitation established under clause (ii) 
                that is not a multiple of $10 shall be rounded to the 
                nearest multiple of $10.
                    ``(E) Treatment of territorial residents.--In the 
                case of an individual who is not a resident of the 50 
                States or the District of Columbia, the individual is 
                not eligible to be a subsidy eligible individual but 
                may be eligible for financial assistance with 
                prescription drug expenses under section 1935(e).
                    ``(F) Treatment of conforming medigap policies.--
                For purposes of this section, the term `qualified 
                prescription drug coverage' includes a medicare 
                supplemental policy described in section 1860D-8(b)(4).
            ``(5) Indexing dollar amounts.--
                    ``(A) For 2007.--The dollar amounts applied under 
                paragraphs (1)(B) for 2007 shall be the dollar amounts 
                specified in such paragraph increased by the annual 
                percentage increase described in section 1860D-2(b)(5) 
                for 2007.
                    ``(B) For subsequent years.--The dollar amounts 
                applied under paragraph (1)(B) for a year after 2007 
                shall be the amounts (under this paragraph) applied 
                under paragraph (1)(B) for the preceding year increased 
                by the annual percentage increase described in section 
                1860D-2(b)(5) (relating to growth in medicare 
                prescription drug costs per beneficiary) for the year 
                involved.
    ``(b) Premium Subsidy Amount.--
            ``(1) In general.--The premium subsidy amount described in 
        this subsection for an individual residing in an area is the 
        benchmark premium amount (as defined in paragraph (2)) for 
        qualified prescription drug coverage offered by the 
        prescription drug plan or the MA-EFFS Rx plan in which the 
        individual is enrolled.
            ``(2) Benchmark premium amount defined.--For purposes of 
        this subsection, the term `benchmark premium amount' means, 
        with respect to qualified prescription drug coverage offered 
        under--
                    ``(A) a prescription drug plan that--
                            ``(i) provides standard coverage (or 
                        alternative prescription drug coverage the 
                        actuarial value of which is equivalent to that 
                        of standard coverage), the premium amount for 
                        enrollment under the plan under this part 
                        (determined without regard to any subsidy under 
                        this section or any late enrollment penalty 
                        under section 1860D-1(c)(2)(B)); or
                            ``(ii) provides alternative prescription 
                        drug coverage the actuarial value of which is 
                        greater than that of standard coverage, the 
                        premium amount described in clause (i) 
                        multiplied by the ratio of (I) the actuarial 
                        value of standard coverage, to (II) the 
                        actuarial value of the alternative coverage; or
                    ``(B) a MA-EFFS Rx plan, the portion of the premium 
                amount that is attributable to statutory drug benefits 
                (described in section 1853(a)(1)(A)(ii)(II)).
    ``(c) Rules in Applying Cost-Sharing Subsidies.--
            ``(1) In general.--In applying subsection (a)(1)(B), 
        nothing in this part shall be construed as preventing a plan or 
        provider from waiving or reducing the amount of cost-sharing 
        otherwise applicable.
            ``(2) Limitation on charges.--In the case of an individual 
        receiving cost-sharing subsidies under subsection (a)(1)(B), 
        the PDP sponsor or entity offering a MA-EFFS Rx plan may not 
        charge more than $5 per prescription.
            ``(3) Application of indexing rules.--The provisions of 
        subsection (a)(5) shall apply to the dollar amount specified in 
        paragraph (2) in the same manner as they apply to the dollar 
        amounts specified in subsections (a)(1)(B).
    ``(d) Administration of Subsidy Program.--The Administrator shall 
provide a process whereby, in the case of an individual who is 
determined to be a subsidy eligible individual and who is enrolled in 
prescription drug plan or is enrolled in a MA-EFFS Rx plan--
            ``(1) the Administrator provides for a notification of the 
        PDP sponsor or the entity offering the MA-EFFS Rx plan involved 
        that the individual is eligible for a subsidy and the amount of 
        the subsidy under subsection (a);
            ``(2) the sponsor or entity involved reduces the premiums 
        or cost-sharing otherwise imposed by the amount of the 
        applicable subsidy and submits to the Administrator information 
        on the amount of such reduction; and
            ``(3) the Administrator periodically and on a timely basis 
        reimburses the sponsor or entity for the amount of such 
        reductions.
The reimbursement under paragraph (3) with respect to cost-sharing 
subsidies may be computed on a capitated basis, taking into account the 
actuarial value of the subsidies and with appropriate adjustments to 
reflect differences in the risks actually involved.
    ``(e) Relation to Medicaid Program.--
            ``(1) In general.--For provisions providing for eligibility 
        determinations, and additional financing, under the medicaid 
        program, see section 1935.
            ``(2) Medicaid providing wrap around benefits.--The 
        coverage provided under this part is primary payor to benefits 
        for prescribed drugs provided under the medicaid program under 
        title XIX consistent with section 1935(d)(1).
            ``(3) Coordination.--The Administrator shall develop and 
        implement a plan for the coordination of prescription drug 
        benefits under this part with the benefits provided under the 
        medicaid program under title XIX, with particular attention to 
        insuring coordination of payments and prevention of fraud and 
        abuse. In developing and implementing such plan, the 
        Administrator shall involve the Secretary, the States, the data 
        processing industry, pharmacists, and pharmaceutical 
        manufacturers, and other experts.

``SEC. 1860D-8. SUBSIDIES FOR ALL MEDICARE BENEFICIARIES FOR QUALIFIED 
              PRESCRIPTION DRUG COVERAGE.

    ``(a) Subsidy Payment.--In order to reduce premium levels 
applicable to qualified prescription drug coverage for all medicare 
beneficiaries consistent with an overall subsidy level of 73 percent, 
to reduce adverse selection among prescription drug plans and MA-EFFS 
Rx plans, and to promote the participation of PDP sponsors under this 
part, the Administrator shall provide in accordance with this section 
for payment to a qualifying entity (as defined in subsection (b)) of 
the following subsidies:
            ``(1) Direct subsidy.--In the case of an enrollee enrolled 
        for a month in a prescription drug plan or a MA-EFFS Rx plan, a 
        direct subsidy equal to 43 percent of the national average 
        monthly bid amount (computed under subsection (g)) for that 
        month.
            ``(2) Subsidy through reinsurance.--In the case of an 
        enrollee enrolled for a month in a prescription drug plan or a 
        MA-EFFS Rx plan, the reinsurance payment amount (as defined in 
        subsection (c)), which in the aggregate is 30 percent of the 
        total payments made by qualifying entities for standard 
        coverage under the respective plan, for excess costs incurred 
        in providing qualified prescription drug coverage--
                    ``(A) for enrollees with a prescription drug plan 
                under this part; and
                    ``(B) for enrollees with a MA-EFFS Rx plan.
            ``(3) Employer and union flexibility.--In the case of an 
        individual who is a participant or beneficiary in a qualified 
        retiree prescription drug plan (as defined in subsection 
        (f)(1)) and who is not enrolled in a prescription drug plan or 
        in a MA-EFFS Rx plan, the special subsidy payments under 
        subsection (f)(3).
This section constitutes budget authority in advance of appropriations 
Acts and represents the obligation of the Administrator to provide for 
the payment of amounts provided under this section.
    ``(b) Qualifying Entity Defined.--For purposes of this section, the 
term `qualifying entity' means any of the following that has entered 
into an agreement with the Administrator to provide the Administrator 
with such information as may be required to carry out this section:
            ``(1) A PDP sponsor offering a prescription drug plan under 
        this part.
            ``(2) An entity that offers a MA-EFFS Rx plan.
            ``(3) The sponsor of a qualified retiree prescription drug 
        plan (as defined in subsection (f)).
    ``(c) Reinsurance Payment Amount.--
            ``(1) In general.--Subject to subsection (d)(1)(B) and 
        paragraph (4), the reinsurance payment amount under this 
        subsection for a qualifying covered individual (as defined in 
        paragraph (5)) for a coverage year (as defined in subsection 
        (h)(2)) is equal to the sum of the following:
                    ``(A) Reinsurance between initial reinsurance 
                threshold and the initial coverage limit.--For the 
                portion of the individual's gross covered prescription 
                drug costs (as defined in paragraph (3)) for the year 
                that exceeds the initial reinsurance threshold 
                specified in paragraph (4), but does not exceed the 
                initial coverage limit specified in section 1860D-
                2(b)(3), an amount equal to 20 percent of the allowable 
                costs (as defined in paragraph (2)) attributable to 
                such gross covered prescription drug costs.
                    ``(B) Reinsurance above annual out-of-pocket 
                threshold.--For the portion of the individual's gross 
                covered prescription drug costs for the year that 
                exceeds the annual out-of-pocket threshold specified in 
                1860D-2(b)(4)(B), an amount equal to 80 percent of the 
                allowable costs attributable to such gross covered 
                prescription drug costs.
            ``(2) Allowable costs.--For purposes of this section, the 
        term `allowable costs' means, with respect to gross covered 
        prescription drug costs under a plan described in subsection 
        (b) offered by a qualifying entity, the part of such costs that 
        are actually paid (net of discounts, chargebacks, and average 
        percentage rebates) under the plan, but in no case more than 
        the part of such costs that would have been paid under the plan 
        if the prescription drug coverage under the plan were standard 
        coverage.
            ``(3) Gross covered prescription drug costs.--For purposes 
        of this section, the term `gross covered prescription drug 
        costs' means, with respect to an enrollee with a qualifying 
        entity under a plan described in subsection (b) during a 
        coverage year, the costs incurred under the plan (including 
        costs attributable to administrative costs) for covered 
        prescription drugs dispensed during the year, including costs 
        relating to the deductible, whether paid by the enrollee or 
        under the plan, regardless of whether the coverage under the 
        plan exceeds standard coverage and regardless of when the 
        payment for such drugs is made.
            ``(4) Initial reinsurance threshold.--The initial 
        reinsurance threshold specified in this paragraph--
                    ``(A) for 2006, is equal to $1,000; or
                    ``(B) for a subsequent year, is equal to the 
                payment threshold specified in this paragraph for the 
                previous year, increased by the annual percentage 
                increase described in section 1860D-2(b)(5) for the 
                year involved.
        Any amount determined under subparagraph (B) that is not a 
        multiple of $10 shall be rounded to the nearest multiple of 
        $10.
            ``(5) Qualifying covered individual defined.--For purposes 
        of this subsection, the term `qualifying covered individual' 
        means an individual who--
                    ``(A) is enrolled with a prescription drug plan 
                under this part; or
                    ``(B) is enrolled with a MA-EFFS Rx plan.
    ``(d) Adjustment of Payments.--
            ``(1) Adjustment of reinsurance payments to assure 30 
        percent level of subsidy through reinsurance.--
                    ``(A) Estimation of payments.--The Administrator 
                shall estimate--
                            ``(i) the total payments to be made 
                        (without regard to this subsection) during a 
                        year under subsections (a)(2) and (c); and
                            ``(ii) the total payments to be made by 
                        qualifying entities for standard coverage under 
                        plans described in subsection (b) during the 
                        year.
                    ``(B) Adjustment.--The Administrator shall 
                proportionally adjust the payments made under 
                subsections (a)(2) and (c) for a coverage year in such 
                manner so that the total of the payments made under 
                such subsections for the year is equal to 30 percent of 
                the total payments described in subparagraph (A)(ii).
            ``(2) Risk adjustment for direct subsidies.--To the extent 
        the Administrator determines it appropriate to avoid risk 
        selection, the payments made for direct subsidies under 
        subsection (a)(1) are subject to adjustment based upon risk 
        factors specified by the Administrator. Any such risk 
        adjustment shall be designed in a manner as to not result in a 
        change in the aggregate payments made under such subsection.
    ``(e) Payment Methods.--
            ``(1) In general.--Payments under this section shall be 
        based on such a method as the Administrator determines. The 
        Administrator may establish a payment method by which interim 
        payments of amounts under this section are made during a year 
        based on the Administrator's best estimate of amounts that will 
        be payable after obtaining all of the information.
            ``(2) Source of payments.--Payments under this section 
        shall be made from the Medicare Prescription Drug Trust Fund.
    ``(f) Rules Relating to Qualified Retiree Prescription Drug Plan.--
            ``(1) Definition.--For purposes of this section, the term 
        `qualified retiree prescription drug plan' means employment-
        based retiree health coverage (as defined in paragraph (4)(A)) 
        if, with respect to an individual who is a participant or 
        beneficiary under such coverage and is eligible to be enrolled 
        in a prescription drug plan or a MA-EFFS Rx plan under this 
        part, the following requirements are met:
                    ``(A) Actuarial equivalence to standard coverage.--
                The Administrator determines (based on an actuarial 
                analysis approved by the Administrator) that coverage 
                provides at least the same actuarial value as standard 
                coverage. Such determination may be made on an annual 
                basis.
                    ``(B) Audits.--The sponsor (or the administrator, 
                if designated by the sponsor) and the plan shall 
                maintain, and afford the Administrator access to, such 
                records as the Administrator may require for purposes 
                of audits and other oversight activities necessary to 
                ensure the adequacy of prescription drug coverage and 
                the accuracy of payments made.
                    ``(C) Provision of certification of prescription 
                drug coverage.--The sponsor of the plan shall provide 
                for issuance of certifications of the type described in 
                section 1860D-1(c)(2)(D).
            ``(2) Limitation on benefit eligibility.--No payment shall 
        be provided under this section with respect to a participant or 
        beneficiary in a qualified retiree prescription drug plan 
        unless the individual is--
                    ``(A) is covered under the plan; and
                    ``(B) is eligible to obtain qualified prescription 
                drug coverage under section 1860D-1 but did not elect 
                such coverage under this part (either through a 
                prescription drug plan or through a MA-EFFS Rx plan).
            ``(3) Employer and union special subsidy amounts.--
                    ``(A) In general.--For purposes of subsection (a), 
                the special subsidy payment amount under this paragraph 
                for a qualifying covered retiree(as defined in 
                paragraph (6)) for a coverage year (as defined in 
                subsection (h)) enrolled in a qualifying entity 
                described in subsection (b)(3) under a qualified 
                retiree prescription drug plan is, for the portion of 
                the individual's gross covered prescription drug costs 
                for the year that exceeds the deductible amount 
                specified in subparagraph (B), an amount equal to, 
                subject to subparagraph (D), 28 percent of the 
                allowable costs attributable to such gross covered 
                prescription drug costs, but only to the extent such 
                costs exceed the deductible under subparagraph (B) and 
                do not exceed the cost limit under such subparagraph in 
                the case of any such individual for the plan year.
                    ``(B) Deductible and cost limit applicable.--
                Subject to subparagraph (C)--
                            ``(i) the deductible under this 
                        subparagraph is equal to $250 for plan years 
                        that end in 2006; and
                            ``(ii) the cost limit under this 
                        subparagraph is equal to $5,000 for plan years 
                        that end in 2006.
                    ``(C) Indexing.--The deductible and cost limit 
                amounts specified in subparagraphs (B) for a plan year 
                that ends after 2006 shall be adjusted in the same 
                manner as the annual deductible under section 1860D-
                2(b)(1) is annually adjusted under such section.
            ``(4) Related definitions.--As used in this section:
                    ``(A) Employment-based retiree health coverage.--
                The term `employment-based retiree health coverage' 
                means health insurance or other coverage of health care 
                costs for individuals eligible to enroll in a 
                prescription drug plan or MA-EFFS Rx plan under this 
                part (or for such individuals and their spouses and 
                dependents) under a group health plan (including such a 
                plan that is established or maintained under or 
                pursuant to one or more collective bargaining 
                agreements or that is offered under chapter 89 of title 
                5, United States Code) based on their status as retired 
                participants in such plan.
                    ``(B) Qualifying covered retiree.--The term 
                `qualifying covered retiree' means an individual who is 
                eligible to obtain qualified prescription drug coverage 
                under section 1860D-1 but did not elect such coverage 
                under this part (either through a prescription drug 
                plan or through a MA-EFFS Rx plan) but is covered under 
                a qualified retiree prescription drug plan.
                    ``(C) Sponsor.--The term `sponsor' means a plan 
                sponsor, as defined in section 3(16)(B) of the Employee 
                Retirement Income Security Act of 1974.
            ``(5) Construction.--Nothing in this subsection shall be 
        construed as--
                    ``(A) precluding an individual who is covered under 
                employment-based retiree health coverage from enrolling 
                in a prescription drug plan or in a MA-EFFS plan;
                    ``(B) precluding such employment-based retiree 
                health coverage or an employer or other person from 
                paying all or any portion of any premium required for 
                coverage under such a prescription drug plan or MA-EFFS 
                plan on behalf of such an individual; or
                    ``(C) preventing such employment-based retiree 
                health coverage from providing coverage for retirees--
                            ``(i) who are covered under a qualified 
                        retiree prescription plan that is better than 
                        standard coverage; or
                            ``(ii) who are not covered under a 
                        qualified retiree prescription plan but who are 
                        enrolled in a prescription drug plan or a MA-
                        EFFS Rx plan, that is supplemental to the 
                        benefits provided under such prescription drug 
                        plan or MA-EFFS Rx plan, except that any such 
                        supplemental coverage (not including payment of 
                        any premium referred to in subparagraph (B)) 
                        shall be treated as primary coverage to which 
                        section 1862(b)(2)(A)(i) is deemed to apply.
    ``(g) Computation of National Average Monthly Bid Amount.--
            ``(1) In general.--For each year (beginning with 2006) the 
        Administrator shall compute a national average monthly bid 
        amount equal to the average of the benchmark bid amounts for 
        each prescription drug plan and for each MA-EFFS Rx plan (as 
        computed under paragraph (2), but excluding plans described in 
        section 1851(a)(2)(C))) adjusted under paragraph (4) to take 
        into account reinsurance payments.
            ``(2) Benchmark bid amount defined.--For purposes of this 
        subsection, the term `benchmark bid amount' means, with respect 
        to qualified prescription drug coverage offered under--
                    ``(A) a prescription drug plan that--
                            ``(i) provides standard coverage (or 
                        alternative prescription drug coverage the 
                        actuarial value of which is equivalent to that 
                        of standard coverage), the PDP bid; or
                            ``(ii) provides alternative prescription 
                        drug coverage the actuarial value of which is 
                        greater than that of standard coverage, the PDP 
                        bid multiplied by the ratio of (I) the 
                        actuarial value of standard coverage, to (II) 
                        the actuarial value of the alternative 
                        coverage; or
                    ``(B) a MA-EFFS Rx plan, the portion of the bid 
                amount that is attributable to statutory drug benefits 
                (described in section 1853(a)(1)(A)(ii)(II)).
        For purposes of subparagraph (A), the term `PDP bid' means, 
        with respect to a prescription drug plan, the bid amount for 
        enrollment under the plan under this part (determined without 
        regard to any low-income subsidy under section 1860D-7 or any 
        late enrollment penalty under section 1860D-1(c)(2)(B)).
            ``(3) Weighted average.--
                    ``(A) In general.--The monthly national average 
                monthly bid amount computed under paragraph (1) shall 
                be a weighted average, with the weight for each plan 
                being equal to the average number of beneficiaries 
                enrolled under such plan in the previous year.
                    ``(B) Special rule for 2006.--For purposes of 
                applying this subsection for 2006, the Administrator 
                shall establish procedures for determining the weighted 
                average under subparagraph (A) for 2005.
            ``(4) Adjustment to add back in value of reinsurance 
        subsidies.--The adjustment under this paragraph, to take into 
        account reinsurance payments under subsection (c) making up 30 
        percent of total payments, is such an adjustment as will make 
        the national average monthly bid amount represent represent 100 
        percent, instead of representing 70 percent, of average 
        payments under this part.
    ``(h) Coverage Year Defined.--For purposes of this section, the 
term `coverage year' means a calendar year in which covered outpatient 
drugs are dispensed if a claim for payment is made under the plan for 
such drugs, regardless of when the claim is paid.

``SEC. 1860D-9. MEDICARE PRESCRIPTION DRUG TRUST FUND.

    ``(a) In General.--There is created on the books of the Treasury of 
the United States a trust fund to be known as the `Medicare 
Prescription Drug Trust Fund' (in this section referred to as the 
`Trust Fund'). The Trust Fund shall consist of such gifts and bequests 
as may be made as provided in section 201(i)(1), and such amounts as 
may be deposited in, or appropriated to, such fund as provided in this 
part. Except as otherwise provided in this section, the provisions of 
subsections (b) through (i) of section 1841 shall apply to the Trust 
Fund in the same manner as they apply to the Federal Supplementary 
Medical Insurance Trust Fund under such section.
    ``(b) Payments From Trust Fund.--
            ``(1) In general.--The Managing Trustee shall pay from time 
        to time from the Trust Fund such amounts as the Administrator 
        certifies are necessary to make--
                    ``(A) payments under section 1860D-7 (relating to 
                low-income subsidy payments);
                    ``(B) payments under section 1860D-8 (relating to 
                subsidy payments); and
                    ``(C) payments with respect to administrative 
                expenses under this part in accordance with section 
                201(g).
            ``(2) Transfers to medicaid account for increased 
        administrative costs.--The Managing Trustee shall transfer from 
        time to time from the Trust Fund to the Grants to States for 
        Medicaid account amounts the Administrator certifies are 
        attributable to increases in payment resulting from the 
        application of a higher Federal matching percentage under 
        section 1935(b).
    ``(c) Deposits Into Trust Fund.--
            ``(1) Low-income transfer.--There is hereby transferred to 
        the Trust Fund, from amounts appropriated for Grants to States 
        for Medicaid, amounts equivalent to the aggregate amount of the 
        reductions in payments under section 1903(a)(1) attributable to 
        the application of section 1935(c).
            ``(2) Appropriations to cover government contributions.--
        There are authorized to be appropriated from time to time, out 
        of any moneys in the Treasury not otherwise appropriated, to 
        the Trust Fund, an amount equivalent to the amount of payments 
        made from the Trust Fund under subsection (b), reduced by the 
        amount transferred to the Trust Fund under paragraph (1).
    ``(d) Relation to Solvency Requirements.--Any provision of law that 
relates to the solvency of the Trust Fund under this part shall take 
into account the Trust Fund and amounts receivable by, or payable from, 
the Trust Fund.

``SEC. 1860D-10. DEFINITIONS; APPLICATION TO MEDICARE ADVANTAGE AND 
              EFFS PROGRAMS; TREATMENT OF REFERENCES TO PROVISIONS IN 
              PART C.

    ``(a) Definitions.--For purposes of this part:
            ``(1) Covered outpatient drugs.--The term `covered 
        outpatient drugs' is defined in section 1860D-2(f).
            ``(2) Initial coverage limit.--The term `initial coverage 
        limit' means such limit as established under section 1860D-
        2(b)(3), or, in the case of coverage that is not standard 
        coverage, the comparable limit (if any) established under the 
        coverage.
            ``(3) Medicare prescription drug trust fund.--The term 
        `Medicare Prescription Drug Trust Fund' means the Trust Fund 
        created under section 1860D-9(a).
            ``(4) PDP sponsor.--The term `PDP sponsor' means an entity 
        that is certified under this part as meeting the requirements 
        and standards of this part for such a sponsor.
            ``(5) Prescription drug plan.--The term `prescription drug 
        plan' means health benefits coverage that--
                    ``(A) is offered under a policy, contract, or plan 
                by a PDP sponsor pursuant to, and in accordance with, a 
                contract between the Administrator and the sponsor 
                under section 1860D-4(b);
                    ``(B) provides qualified prescription drug 
                coverage; and
                    ``(C) meets the applicable requirements of the 
                section 1860D-3 for a prescription drug plan.
            ``(6) Qualified prescription drug coverage.--The term 
        `qualified prescription drug coverage' is defined in section 
        1860D-2(a).
            ``(7) Standard coverage.--The term `standard coverage' is 
        defined in section 1860D-2(b).
            ``(8) Insurance risk.--The term `insurance risk' means, 
        with respect to a participating pharmacy, risk of the type 
        commonly assumed only by insurers licensed by a State and does 
        not include payment variations designed to reflect performance-
        based measures of activities within the control of the 
        pharmacy, such as formulary compliance and generic drug 
        substitution.
    ``(b) Offer of Qualified Prescription Drug Coverage Under Medicare 
Advantage and EFFS Programs.--
            ``(1) As part of medicare advantage plan.--Medicare 
        Advantage organizations are required to offer Medicare 
        Advantage plans that include qualified prescription drug 
        coverage under part C pursuant to section 1851(j).
            ``(2) As part of effs plan.--EFFS organizations are 
        required to offer EFFS plans that include qualified 
        prescription drug coverage under part E pursuant to section 
        1860E-2(d).
    ``(c) Application of Part C Provisions Under this Part.--For 
purposes of applying provisions of part C under this part with respect 
to a prescription drug plan and a PDP sponsor, unless otherwise 
provided in this part such provisions shall be applied as if--
            ``(1) any reference to a Medicare Advantage or other plan 
        included a reference to a prescription drug plan;
            ``(2) any reference to a provider-sponsored organization 
        included a reference to a PDP sponsor;
            ``(3) any reference to a contract under section 1857 
        included a reference to a contract under section 1860D-4(b); 
        and
            ``(4) any reference to part C included a reference to this 
        part.
    ``(d) Report on Pharmacy Services Provided to Long-Term Care 
Facility Patients.--
            ``(1) Review.--Within 6 months after the date of the 
        enactment of this section, the Secretary shall review the 
        current standards of practice for pharmacy services provided to 
        patients in nursing facilities and other long-term care 
        facilities.
            ``(2) Evaluations and recommendations.--Specifically in the 
        review under paragraph (1), the Secretary shall--
                    ``(A) assess the current standards of practice, 
                clinical services, and other service requirements 
                generally utilized for pharmacy services in the long-
                term care setting;
                    ``(B) evaluate the impact of those standards with 
                respect to patient safety, reduction of medication 
                errors and quality of care; and
                    ``(C) recommend (in the Secretary's report under 
                paragraph (3)) necessary actions and appropriate 
                reimbursement to ensure the provision of prescription 
                drugs to medicare beneficiaries residing in nursing 
                facilities and other long-term care facilities in a 
                manner consistent with existing patient safety and 
                quality of care standards under applicable State and 
                Federal laws.
            ``(3) Report.--The Secretary shall submit a report to the 
        Congress on the Secretary's findings and recommendations under 
        this subsection, including a detailed description of the 
        Secretary's plans to implement this part in a manner consistent 
        with applicable State and Federal laws designed to protect the 
        safety and quality of care of patients of nursing facilities 
        and other long-term care facilities.''.
    (b) Additional Conforming Changes.--
            (1) Conforming references to previous part d.--Any 
        reference in law (in effect before the date of the enactment of 
        this Act) to part D of title XVIII of the Social Security Act 
        is deemed a reference to part F of such title (as in effect 
        after such date).
            (2) Conforming amendment permitting waiver of cost-
        sharing.--Section 1128B(b)(3) (42 U.S.C. 1320a-7b(b)(3)) is 
        amended--
                    (A) by striking ``and'' at the end of subparagraph 
                (E);
                    (B) by striking the period at the end of 
                subparagraph (F) and inserting ``; and''; and
                    (C) by adding at the end the following new 
                subparagraph:
            ``(G) the waiver or reduction of any cost-sharing imposed 
        under part D of title XVIII.''.
            (3) Submission of legislative proposal.--Not later than 6 
        months after the date of the enactment of this Act, the 
        Secretary of Health and Human Services shall submit to the 
        appropriate committees of Congress a legislative proposal 
        providing for such technical and conforming amendments in the 
        law as are required by the provisions of this subtitle.
    (c) Study on Transitioning Part B Prescription Drug Coverage.--Not 
later than January 1, 2005, the Medicare Benefits Administrator shall 
submit a report to Congress that makes recommendations regarding 
methods for providing benefits under part D of title XVIII of the 
Social Security Act for outpatient prescription drugs for which 
benefits are provided under part B of such title.

SEC. 102. OFFERING OF QUALIFIED PRESCRIPTION DRUG COVERAGE UNDER 
              MEDICARE ADVANTAGE AND ENHANCED FEE-FOR-SERVICE (EFFS) 
              PROGRAM.

    (a) Medicare Advantage.--Section 1851 (42 U.S.C. 1395w-21) is 
amended by adding at the end the following new subsection:
    ``(j) Availability of Prescription Drug Benefits and Subsidies.--
            ``(1) Offering of qualified prescription drug coverage.--A 
        Medicare Advantage organization on and after January 1, 2006--
                    ``(A) may not offer a Medicare Advantage plan 
                described in section 1851(a)(2)(A) in an area unless 
                either that plan (or another Medicare Advantage plan 
                offered by the organization in that area) includes 
                qualified prescription drug coverage; and
                    ``(B) may not offer the prescription drug coverage 
                (other than that required under parts A and B) to an 
                enrollee under a Medicare Advantage plan, unless such 
                drug coverage is at least qualified prescription drug 
                coverage and unless the requirements of this subsection 
                with respect to such coverage are met.
            ``(2) Requirement for election of part d coverage to obtain 
        qualified prescription drug coverage.--For purposes of this 
        part, an individual who has not elected qualified prescription 
        drug coverage under section 1860D-1(b) shall be treated as 
        being ineligible to enroll in a Medicare Advantage plan under 
        this part that offers such coverage.
            ``(3) Compliance with certain additional beneficiary 
        protections for prescription drug coverage.--With respect to 
        the offering of qualified prescription drug coverage by a 
        Medicare Advantage organization under this part on and after 
        January 1, 2006, the organization and plan shall meet the 
        requirements of subsections (a) through (d) of section 1860D-3 
        in the same manner as they apply to a PDP sponsor and a 
        prescription drug plan under part D and shall submit to the 
        Administrator the information described in section 1860D-
        6(a)(2). The Administrator shall waive such requirements to the 
        extent the Administrator determines that such requirements 
        duplicate requirements otherwise applicable to the organization 
        or plan under this part.
            ``(4) Availability of premium and cost-sharing subsidies.--
        In the case of low-income individuals who are enrolled in a 
        Medicare Advantage plan that provides qualified prescription 
        drug coverage, premium and cost-sharing subsidies are provided 
        for such coverage under section 1860D-7.
            ``(5) Availability of direct and reinsurance subsidies to 
        reduce bids and premiums.--Medicare Advantage organizations are 
        provided direct and reinsurance subsidy payments for providing 
        qualified prescription drug coverage under this part under 
        section 1860D-8.
            ``(6) Consolidation of drug and non-drug premiums.--In the 
        case of a Medicare Advantage plan that includes qualified 
        prescription drug coverage, with respect to an enrollee in such 
        plan there shall be a single premium for both drug and non-drug 
        coverage provided under the plan.
            ``(7) Transition in initial enrollment period.--
        Notwithstanding any other provision of this part, the annual, 
        coordinated election period under subsection (e)(3)(B) for 2006 
        shall be the 6-month period beginning with November 2005.
            ``(8) Qualified prescription drug coverage; standard 
        coverage.--For purposes of this part, the terms `qualified 
        prescription drug coverage' and `standard coverage' have the 
        meanings given such terms in section 1860D-2.
            ``(9) Special rules for private fee-for-service plans.--
        With respect to a Medicare Advantage plan described in section 
        1851(a)(2)(C) that offers qualified prescription drug 
        coverage--
                    ``(A) Requirements regarding negotiated prices.--
                Subsections (a)(1) and (d)(1) of section 1860D-2 shall 
                not be construed to require the plan to negotiate 
                prices or discounts but shall apply to the extent the 
                plan does so.
                    ``(B) Modification of pharmacy participation 
                requirement.--If the plan provides access, without 
                charging additional copayments, to all pharmacies 
                without regard to whether they are participating 
                pharmacies in a network, section 1860D-3(c)(1)(A)(iii) 
                shall not apply to the plan.
                    ``(C) Drug utilization management program not 
                required.--The requirements of section 1860D-3(d)(1)(A) 
                shall not apply to the plan.
                    ``(D) Non-participating pharmacy disclosure 
                exception.--If the plan provides coverage for drugs 
                purchased from all pharmacies, without entering into 
                contracts or agreements with pharmacies to provide 
                drugs to enrollees covered by the plan, section 1860D-
                3(d)(5) shall not apply to the plan.''.
    (b) Application to EFFS Plans.--Subsection (d) of section 1860E-2, 
as added by section 201(a), is amended to read as follows:
    ``(d) Availability of Prescription Drug Benefits and Subsidies.--
            ``(1) Offering of qualified prescription drug coverage.--An 
        EFFS organization--
                    ``(A) may not offer an EFFS plan in an area unless 
                either that plan (or another EFFS plan offered by the 
                organization in that area) includes qualified 
                prescription drug coverage; and
                    ``(B) may not offer the prescription drug coverage 
                (other than that required under parts A and B) to an 
                enrollee under an EFFS plan, unless such drug coverage 
                is at least qualified prescription drug coverage and 
                unless the requirements of this subsection with respect 
                to such coverage are met.
            ``(2) Requirement for election of part d coverage to obtain 
        qualified prescription drug coverage.--For purposes of this 
        part, an individual who has not elected qualified prescription 
        drug coverage under section 1860D-1(b) shall be treated as 
        being ineligible to enroll in an EFFS plan under this part that 
        offers such coverage.
            ``(3) Compliance with certain additional beneficiary 
        protections for prescription drug coverage.--With respect to 
        the offering of qualified prescription drug coverage by an EFFS 
        organization under this part, the organization and plan shall 
        meet the requirements of subsections (a) through (d) of section 
        1860D-3 in the same manner as they apply to a PDP sponsor and a 
        prescription drug plan under part D and shall submit to the 
        Administrator the information described in section 1860D-
        6(a)(2). The Administrator shall waive such requirements to the 
        extent the Administrator determines that such requirements 
        duplicate requirements otherwise applicable to the organization 
        or plan under this part.
            ``(4) Availability of premium and cost-sharing subsidies.--
        In the case of low-income individuals who are enrolled in an 
        EFFS plan that provides qualified prescription drug coverage, 
        premium and cost-sharing subsidies are provided for such 
        coverage under section 1860D-7.
            ``(5) Availability of direct and reinsurance subsidies to 
        reduce bids and premiums.--EFFS organizations are provided 
        direct and reinsurance subsidy payments for providing qualified 
        prescription drug coverage under this part under section 1860D-
        8.
            ``(6) Consolidation of drug and non-drug premiums.--In the 
        case of an EFFS plan that includes qualified prescription drug 
        coverage, with respect to an enrollee in such plan there shall 
        be a single premium for both drug and non-drug coverage 
        provided under the plan.
            ``(7) Qualified prescription drug coverage; standard 
        coverage.--For purposes of this part, the terms `qualified 
        prescription drug coverage' and `standard coverage' have the 
        meanings given such terms in section 1860D-2.''.
    (c) Conforming Amendments.--Section 1851 (42 U.S.C. 1395w-21) is 
amended--
            (1) in subsection (a)(1)--
                    (A) by inserting ``(other than qualified 
                prescription drug benefits)'' after ``benefits'';
                    (B) by striking the period at the end of 
                subparagraph (B) and inserting a comma; and
                    (C) by adding after and below subparagraph (B) the 
                following:
        ``and may elect qualified prescription drug coverage in 
        accordance with section 1860D-1.''; and
            (2) in subsection (g)(1), by inserting ``and section 1860D-
        1(c)(2)(B)'' after ``in this subsection''.
    (d) Effective Date.--The amendments made by this section apply to 
coverage provided on or after January 1, 2006.

SEC. 103. MEDICAID AMENDMENTS.

    (a) Determinations of Eligibility for Low-Income Subsidies.--
            (1) Requirement.--Section 1902(a) (42 U.S.C. 1396a(a)) is 
        amended--
                    (A) by striking ``and'' at the end of paragraph 
                (64);
                    (B) by striking the period at the end of paragraph 
                (65) and inserting ``; and''; and
                    (C) by inserting after paragraph (65) the following 
                new paragraph:
            ``(66) provide for making eligibility determinations under 
        section 1935(a).''.
            (2) New section.--Title XIX is further amended--
                    (A) by redesignating section 1935 as section 1936; 
                and
                    (B) by inserting after section 1934 the following 
                new section:

  ``special provisions relating to medicare prescription drug benefit

    ``Sec. 1935. (a) Requirement for Making Eligibility Determinations 
for Low-Income Subsidies.--As a condition of its State plan under this 
title under section 1902(a)(66) and receipt of any Federal financial 
assistance under section 1903(a), a State shall--
            ``(1) make determinations of eligibility for premium and 
        cost-sharing subsidies under (and in accordance with) section 
        1860D-7;
            ``(2) inform the Administrator of the Medicare Benefits 
        Administration of such determinations in cases in which such 
        eligibility is established; and
            ``(3) otherwise provide such Administrator with such 
        information as may be required to carry out part D of title 
        XVIII (including section 1860D-7).
    ``(b) Payments for Additional Administrative Costs.--
            ``(1) In general.--The amounts expended by a State in 
        carrying out subsection (a) are, subject to paragraph (2), 
        expenditures reimbursable under the appropriate paragraph of 
        section 1903(a); except that, notwithstanding any other 
        provision of such section, the applicable Federal matching 
        rates with respect to such expenditures under such section 
        shall be increased as follows (but in no case shall the rate as 
        so increased exceed 100 percent):
                    ``(A) For expenditures attributable to costs 
                incurred during 2005, the otherwise applicable Federal 
                matching rate shall be increased by 6-\2/3\ percent of 
                the percentage otherwise payable (but for this 
                subsection) by the State.
                    ``(B)(i) For expenditures attributable to costs 
                incurred during 2006 and each subsequent year through 
                2018, the otherwise applicable Federal matching rate 
                shall be increased by the applicable percent (as 
                defined in clause (ii)) of the percentage otherwise 
                payable (but for this subsection) by the State.
                    ``(ii) For purposes of clause (i), the `applicable 
                percent' for--
                            ``(I) 2006 is 13-\1/3\ percent; or
                            ``(II) a subsequent year is the applicable 
                        percent under this clause for the previous year 
                        increased by 6-\2/3\ percentage points.
                    ``(C) For expenditures attributable to costs 
                incurred after 2018, the otherwise applicable Federal 
                matching rate shall be increased to 100 percent.
            ``(2) Coordination.--The State shall provide the 
        Administrator with such information as may be necessary to 
        properly allocate administrative expenditures described in 
        paragraph (1) that may otherwise be made for similar 
        eligibility determinations.''.
    (b) Phased-In Federal Assumption of Medicaid Responsibility for 
Premium and Cost-Sharing Subsidies for Dually Eligible Individuals.--
            (1) In general.--Section 1903(a)(1) (42 U.S.C. 1396b(a)(1)) 
        is amended by inserting before the semicolon the following: ``, 
        reduced by the amount computed under section 1935(c)(1) for the 
        State and the quarter''.
            (2) Amount described.--Section 1935, as inserted by 
        subsection (a)(2), is amended by adding at the end the 
        following new subsection:
    ``(c) Federal Assumption of Medicaid Prescription Drug Costs for 
Dually-Eligible Beneficiaries.--
            ``(1) In general.--For purposes of section 1903(a)(1), for 
        a State that is one of the 50 States or the District of 
        Columbia for a calendar quarter in a year (beginning with 2005) 
        the amount computed under this subsection is equal to the 
        product of the following:
                    ``(A) Medicare subsidies.--The total amount of 
                payments made in the quarter under section 1860D-7 
                (relating to premium and cost-sharing prescription drug 
                subsidies for low-income medicare beneficiaries) that 
                are attributable to individuals who are residents of 
                the State and are entitled to benefits with respect to 
                prescribed drugs under the State plan under this title 
                (including such a plan operating under a waiver under 
                section 1115).
                    ``(B) State matching rate.--A proportion computed 
                by subtracting from 100 percent the Federal medical 
                assistance percentage (as defined in section 1905(b)) 
                applicable to the State and the quarter.
                    ``(C) Phase-out proportion.--The phase-out 
                proportion (as defined in paragraph (2)) for the 
                quarter.
            ``(2) Phase-out proportion.--For purposes of paragraph 
        (1)(C), the `phase-out proportion' for a calendar quarter in--
                    ``(A) 2006 is 93-\1/3\ percent;
                    ``(B) a subsequent year before 2021, is the phase-
                out proportion for calendar quarters in the previous 
                year decreased by 6-\2/3\ percentage points; or
                    ``(C) a year after 2020 is 0 percent.''.
    (c) Medicaid Providing Wrap-Around Benefits.--Section 1935, as so 
inserted and amended, is further amended by adding at the end the 
following new subsection:
    ``(d) Additional Provisions.--
            ``(1) Medicaid as secondary payor.--In the case of an 
        individual who is entitled to qualified prescription drug 
        coverage under a prescription drug plan under part D of title 
        XVIII (or under a MA-EFFS Rx plan under part C or E of such 
        title) and medical assistance for prescribed drugs under this 
        title, medical assistance shall continue to be provided under 
        this title (other than for copayment amounts specified in 
        section 1860D-7(a)(1)(B), notwithstanding section 1916) for 
        prescribed drugs to the extent payment is not made under the 
        prescription drug plan or MA-EFFS Rx plan selected by the 
        individual.
            ``(2) Condition.--A State may require, as a condition for 
        the receipt of medical assistance under this title with respect 
        to prescription drug benefits for an individual eligible to 
        obtain qualified prescription drug coverage described in 
        paragraph (1), that the individual elect qualified prescription 
        drug coverage under section 1860D-1.''.
    (d) Treatment of Territories.--
            (1) In general.--Section 1935, as so inserted and amended, 
        is further amended--
                    (A) in subsection (a) in the matter preceding 
                paragraph (1), by inserting ``subject to subsection 
                (e)'' after ``section 1903(a)'';
                    (B) in subsection (c)(1), by inserting ``subject to 
                subsection (e)'' after ``1903(a)(1)''; and
                    (C) by adding at the end the following new 
                subsection:
    ``(e) Treatment of Territories.--
            ``(1) In general.--In the case of a State, other than the 
        50 States and the District of Columbia--
                    ``(A) the previous provisions of this section shall 
                not apply to residents of such State; and
                    ``(B) if the State establishes a plan described in 
                paragraph (2) (for providing medical assistance with 
                respect to the provision of prescription drugs to 
                medicare beneficiaries), the amount otherwise 
                determined under section 1108(f) (as increased under 
                section 1108(g)) for the State shall be increased by 
                the amount specified in paragraph (3).
            ``(2) Plan.--The plan described in this paragraph is a plan 
        that--
                    ``(A) provides medical assistance with respect to 
                the provision of covered outpatient drugs (as defined 
                in section 1860D-2(f)) to low-income medicare 
                beneficiaries; and
                    ``(B) assures that additional amounts received by 
                the State that are attributable to the operation of 
                this subsection are used only for such assistance.
            ``(3) Increased amount.--
                    ``(A) In general.--The amount specified in this 
                paragraph for a State for a year is equal to the 
                product of--
                            ``(i) the aggregate amount specified in 
                        subparagraph (B); and
                            ``(ii) the amount specified in section 
                        1108(g)(1) for that State, divided by the sum 
                        of the amounts specified in such section for 
                        all such States.
                    ``(B) Aggregate amount.--The aggregate amount 
                specified in this subparagraph for--
                            ``(i) 2006, is equal to $25,000,000; or
                            ``(ii) a subsequent year, is equal to the 
                        aggregate amount specified in this subparagraph 
                        for the previous year increased by annual 
                        percentage increase specified in section 1860D-
                        2(b)(5) for the year involved.
            ``(4) Report.--The Administrator shall submit to Congress a 
        report on the application of this subsection and may include in 
        the report such recommendations as the Administrator deems 
        appropriate.''.
            (2) Conforming amendment.--Section 1108(f) (42 U.S.C. 
        1308(f)) is amended by inserting ``and section 1935(e)(1)(B)'' 
        after ``Subject to subsection (g)''.
    (e) Amendment to Best Price.--Section 1927(c)(1)(C)(i) (42 U.S.C. 
1396r-8(c)(1)(C)(i)) is amended--
            (1) by striking ``and'' at the end of subclause (III);
            (2) by striking the period at the end of subclause (IV) and 
        inserting ``; and''; and
            (3) by adding at the end the following new subclause:
                                    ``(V) any prices charged which are 
                                negotiated by a prescription drug plan 
                                under part D of title XVIII, by a MA-
                                EFFS Rx plan under part C or E of such 
                                title with respect to covered 
                                outpatient drugs, or by a qualified 
                                retiree prescription drug plan (as 
                                defined in section 1860D-8(f)(1)) with 
                                respect to such drugs on behalf of 
                                individuals entitled to benefits under 
                                part A or enrolled under part B of such 
                                title.''.

SEC. 104. MEDIGAP TRANSITION.

    (a) In General.--Section 1882 (42 U.S.C. 1395ss) is amended by 
adding at the end the following new subsection:
    ``(v) Coverage of Prescription Drugs.--
            ``(1) In general.--Notwithstanding any other provision of 
        law, except as provided in paragraph (3) no new medicare 
        supplemental policy that provides coverage of expenses for 
        prescription drugs may be issued under this section on or after 
        January 1, 2006, to an individual unless it replaces a medicare 
        supplemental policy that was issued to that individual and that 
        provided some coverage of expenses for prescription drugs. 
        Nothing in this subsection shall be construed as preventing the 
        policy holder of a medicare supplemental policy issued before 
        January 1, 2006, from continuing to receive benefits under such 
        policy on and after such date.
            ``(2) Issuance of substitute policies for beneficiaries 
        enrolled with a plan under part d.--
                    ``(A) In general.--The issuer of a medicare 
                supplemental policy--
                            ``(i) may not deny or condition the 
                        issuance or effectiveness of a medicare 
                        supplemental policy that has a benefit package 
                        classified as `A', `B', `C', `D', `E', `F', or 
                        `G' (under the standards established under 
                        subsection (p)(2)) and that is offered and is 
                        available for issuance to new enrollees by such 
                        issuer;
                            ``(ii) may not discriminate in the pricing 
                        of such policy, because of health status, 
                        claims experience, receipt of health care, or 
                        medical condition; and
                            ``(iii) may not impose an exclusion of 
                        benefits based on a pre-existing condition 
                        under such policy,
                in the case of an individual described in subparagraph 
                (B) who seeks to enroll under the policy not later than 
                63 days after the date of the termination of enrollment 
                described in such paragraph and who submits evidence of 
                the date of termination or disenrollment along with the 
                application for such medicare supplemental policy.
                    ``(B) Individual covered.--An individual described 
                in this subparagraph is an individual who--
                            ``(i) enrolls in a prescription drug plan 
                        under part D; and
                            ``(ii) at the time of such enrollment was 
                        enrolled and terminates enrollment in a 
                        medicare supplemental policy which has a 
                        benefit package classified as `H', `I', or `J' 
                        under the standards referred to in subparagraph 
                        (A)(i) or terminates enrollment in a policy to 
                        which such standards do not apply but which 
                        provides benefits for prescription drugs.
                    ``(C) Enforcement.--The provisions of paragraph (4) 
                of subsection (s) shall apply with respect to the 
                requirements of this paragraph in the same manner as 
                they apply to the requirements of such subsection.
            ``(3) New standards.--In applying subsection (p)(1)(E) 
        (including permitting the NAIC to revise its model regulations 
        in response to changes in law) with respect to the change in 
        benefits resulting from title I of the Medicare Prescription 
        Drug and Modernization Act of 2003, with respect to policies 
        issued to individuals who are enrolled in a plan under part D, 
        the changes in standards shall only provide for substituting 
        (for the benefit packages described in paragraph (2)(B)(ii) 
        that included coverage for prescription drugs) two benefit 
        packages that may provide for coverage of cost-sharing (other 
        than the prescription drug deductible) with respect to 
        qualified prescription drug coverage under such part. The two 
        benefit packages shall be consistent with the following:
                    ``(A) First new policy.--The policy described in 
                this subparagraph has the following benefits, 
                notwithstanding any other provision of this section 
                relating to a core benefit package:
                            ``(i) Coverage of 50 percent of the cost-
                        sharing otherwise applicable under parts A and 
                        B, except coverage of 100 percent of any cost-
                        sharing otherwise applicable for preventive 
                        benefits.
                            ``(ii) No coverage of the part B 
                        deductible.
                            ``(iii) Coverage for all hospital 
                        coinsurance for long stays (as in the current 
                        core benefit package).
                            ``(iv) A limitation on annual out-of-pocket 
                        expenditures under parts A and B to $4,000 in 
                        2005 (or, in a subsequent year, to such 
                        limitation for the previous year increased by 
                        an appropriate inflation adjustment specified 
                        by the Secretary).
                    ``(B) Second new policy.--The policy described in 
                this subparagraph has the same benefits as the policy 
                described in subparagraph (A), except as follows:
                            ``(i) Substitute `75 percent' for `50 
                        percent' in clause (i) of such subparagraph.
                            ``(ii) Substitute `$2,000' for `$4,000' in 
                        clause (iv) of such subparagraph.
            ``(4) Construction.--Any provision in this section or in a 
        medicare supplemental policy relating to guaranteed 
        renewability of coverage shall be deemed to have been met 
        through the offering of other coverage under this 
        subsection.''.
    (b) NAIC Report to Congress on Medigap Modernization.--The 
Secretary shall request the National Association of Insurance 
Commissioners to submit to Congress, not later than 18 months after the 
date of the enactment of this Act, a report that includes 
recommendations on the modernization of coverage under the medigap 
program under section 1882 of the Social Security Act (42 U.S.C. 
1395ss).

SEC. 105. MEDICARE PRESCRIPTION DRUG DISCOUNT CARD AND ASSISTANCE 
              PROGRAM.

    (a) In General.--Title XVIII is amended by inserting after section 
1806 the following new sections:

 ``medicare prescription drug discount card endorsement and assistance 
                                program

    ``Sec. 1807. (a) Establishment of Program.--
            ``(1) In general.--The Secretary shall establish a 
        program--
                    ``(A) to endorse prescription drug discount card 
                programs (each such program referred to as an `endorsed 
                program') that meet the requirements of this section in 
                order to provide access to prescription drug discounts 
                through eligible entities for medicare beneficiaries 
                throughout the United States; and
                    ``(B) to provide for prescription drug accounts and 
                public contributions into such accounts.
        The Secretary shall make available to medicare beneficiaries 
        information regarding endorsed programs and accounts under this 
        section.
            ``(2) Limited period of operation.--The Secretary shall 
        begin--
                    ``(A) the card endorsement part of the program 
                under paragraph (1)(A) as soon as possible, but in no 
                case later than 90 days after the date of the enactment 
                of this section; and
                    ``(B) the prescription drug account part of the 
                program under paragraph (1)(B) as soon as possible, but 
                in no case later than September 2004.
            ``(3) Transition.--The program under this section shall 
        continue through 2005 throughout the United States. The 
        Secretary shall provide for an appropriate transition and 
        termination of such program on January 1, 2006.
            ``(4) Voluntary nature of program.--Nothing in this section 
        shall be construed as requiring an eligible beneficiary to 
        enroll in the program under this section.
    ``(b) Eligible Beneficiary; Eligible Entity; Prescription Drug 
Account.--For purposes of this section:
            ``(1) Eligible beneficiary.--The term `eligible 
        beneficiary' means an individual who is eligible for benefits 
        under part A or enrolled under part B and who is not enrolled 
        in a Medicare Advantage plan that offers qualified prescription 
        drug coverage.
            ``(2) Eligible entity.--The term `eligible entity' means 
        any entity that the Secretary determines to be appropriate to 
        provide the benefits under this section, including--
                    ``(A) pharmaceutical benefit management companies;
                    ``(B) wholesale and retail pharmacy delivery 
                systems;
                    ``(C) insurers;
                    ``(D) Medicare Advantage organizations;
                    ``(E) other entities; or
                    ``(F) any combination of the entities described in 
                subparagraphs (A) through (E).
            ``(3) Prescription drug account.--The term `prescription 
        drug account' means, with respect to an eligible beneficiary, 
        an account established for the benefit of that beneficiary 
        under section 1807A.
    ``(c) Enrollment in Endorsed Plan.--
            ``(1) Establishment of process.--
                    ``(A) In general.--The Secretary shall establish a 
                process through which an eligible beneficiary may make 
                an election to enroll under this section with an 
                endorsed program.
                    ``(B) Requirement of enrollment.--An eligible 
                beneficiary must enroll under this section for a year 
                in order to be eligible to receive the benefits under 
                this section for that year.
                    ``(C) Limitation on enrollment.--
                            ``(i) In general.--Except as provided under 
                        this subparagraph and under such exceptional 
                        circumstances as the Secretary may provide, an 
                        eligible individual shall have the opportunity 
                        to enroll under this section during an initial, 
                        general enrollment period as soon as possible 
                        after the date of the enactment of this section 
                        and annually thereafter. The Secretary shall 
                        specify the form, manner, and timing of such 
                        election but shall permit the exercise of such 
                        election at the time the individual is eligible 
                        to enroll. The annual open enrollment periods 
                        shall be coordinated with those provided under 
                        the Medicare Advantage program under part C.
                            ``(ii) Reelection after termination of 
                        enrollment in a medicare advantage plan.--In 
                        the case of an individual who is enrolled under 
                        this section and who subsequently enrolls in a 
                        Medicare Advantage plan that provides qualified 
                        prescription drug coverage under part C, the 
                        individual shall be given the opportunity to 
                        reenroll under this section at the time the 
                        individual discontinues the enrollment under 
                        such part.
                            ``(iii) Late enrollment.--The Secretary 
                        shall permit individuals to elect to enroll 
                        under this section at times other than as 
                        permitted under the previous provisions of this 
                        paragraph.
                    ``(D) Termination of enrollment.--An enrollee under 
                this section shall be disenrolled--
                            ``(i) upon enrollment in a Medicare 
                        Advantage plan under part C that provides 
                        qualified prescription drug coverage;
                            ``(ii) upon failure to pay the applicable 
                        enrollment fee under subsection (f);
                            ``(iii) upon termination of coverage under 
                        part A or part B; or
                            ``(iv) upon notice submitted to the 
                        Secretary in such form, manner, and time as the 
                        Secretary shall provide.
                Terminations of enrollment under this subparagraph 
                shall be effective as specified by the Secretary in 
                regulations.
            ``(2) Enrollment periods.--
                    ``(A) In general.--Except as provided under this 
                paragraph, an eligible beneficiary may not enroll in 
                the program under this part during any period after the 
                beneficiary's initial enrollment period under part B 
                (as determined under section 1837).
                    ``(B) Open enrollment period for current 
                beneficiaries.--The Secretary shall establish a period, 
                which shall begin on the date on which the Secretary 
                first begins to accept elections for enrollment under 
                this section and shall end not earlier than 3 months 
                later, during which any eligible beneficiary may enroll 
                under this section.
                    ``(C) Special enrollment period in case of 
                termination of coverage under a group health plan.--The 
                Secretary shall provide for a special enrollment period 
                under this section in the same manner as is provided 
                under section 1837(i) with respect to part B, except 
                that for purposes of this subparagraph any reference to 
                `by reason of the individual's (or the individual's 
                spouse's) current employment status' shall be treated 
                as being deleted.
            ``(3) Period of coverage.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B) and subject to subparagraph (C), an 
                eligible beneficiary's coverage under the program under 
                this section shall be effective for the period provided 
                under section 1838, as if that section applied to the 
                program under this section.
                    ``(B) Enrollment during open and special 
                enrollment.--Subject to subparagraph (C), an eligible 
                beneficiary who enrolls under the program under this 
                section under subparagraph (B) or (C) of paragraph (2) 
                shall be entitled to the benefits under this section 
                beginning on the first day of the month following the 
                month in which such enrollment occurs.
    ``(d) Selection of an Eligible Entity for Access to Negotiated 
Prices.--
            ``(1) Process.--
                    ``(A) In general.--The Secretary shall establish a 
                process through which an eligible beneficiary who is 
                enrolled under this section shall select any eligible 
                entity, that has been awarded a contract under this 
                section and serves the State in which the beneficiary 
                resides, to provide access to negotiated prices under 
                subsection (i).
                    ``(B) Rules.--In establishing the process under 
                subparagraph (A), the Secretary shall use rules similar 
                to the rules for enrollment and disenrollment with a 
                Medicare Advantage plan under section 1851 (including 
                the special election periods under subsection (e)(4) of 
                such section), including that--
                            ``(i) an individual may not select more 
                        than one eligible entity at any time; and
                            ``(ii) an individual shall only be 
                        permitted (except for unusual circumstances) to 
                        change the selection of the entity once a year.
                In carrying out clause (ii), the Secretary may consider 
                a change in residential setting (such as placement in a 
                nursing facility) to be an unusual circumstance.
                    ``(C) Default selection.--In establishing such 
                process, the Secretary shall provide an equitable 
                method for selecting an eligible entity for individuals 
                who enroll under this section and fail to make such a 
                selection.
            ``(2) Competition.--Eligible entities with a contract under 
        this section shall compete for beneficiaries on the basis of 
        discounts, formularies, pharmacy networks, and other services 
        provided for under the contract.
    ``(e) Providing Enrollment, Selection, and Coverage Information to 
Beneficiaries.--
            ``(1) Activities.--The Secretary shall provide for 
        activities under this section to broadly disseminate 
        information to eligible beneficiaries (and prospective eligible 
        beneficiaries) regarding enrollment under this section, the 
        selection of eligible entities, and the prescription drug 
        coverage made available by eligible entities with a contract 
        under this section.
            ``(2) Special rule for first enrollment under the 
        program.--To the extent practicable, the activities described 
        in paragraph (1) shall ensure that eligible beneficiaries are 
        provided with such information at least 60 days prior to the 
        first enrollment period described in subsection (c).
    ``(f) Enrollment Fee.--
            ``(1) Amount.--Except as provided in paragraph (3), 
        enrollment under the program under this section is conditioned 
        upon payment of an annual enrollment fee of $30. Such fee for 
        2004 shall include any portion of 2003 in which the program is 
        implemented under this section.
            ``(2) Collection of enrollment fee.--The annual enrollment 
        fee shall be collected and credited to the Federal 
        Supplementary Medical Insurance Trust Fund in the same manner 
        as the monthly premium determined under section 1839 is 
        collected and credited to such Trust Fund under section 1840, 
        except that it shall be collected only 1 time per year.
            ``(3) Payment of enrollment fee by state for certain 
        beneficiaries.--
                    ``(A) In general.--The Secretary shall establish an 
                arrangement under which a State may provide for payment 
                of some or all of the enrollment fee for some or all 
                low income enrollees in the State, as specified by the 
                State under the arrangement. Insofar as such a payment 
                arrangement is made with respect to an enrollee, the 
                amount of the enrollment fee shall be paid directly by 
                the State and shall not be collected under paragraph 
                (2). In carrying out this paragraph, the Secretary may 
                apply procedures similar to that applied under state 
                agreements under section 1843.
                    ``(B) No federal matching available under medicaid 
                or schip.--Expenditures made by a State described in 
                subparagraph (A) shall not be treated as State 
                expenditures for purposes of Federal matching payments 
                under titles XIX and XXI insofar as such expenditures 
                are for an enrollment fee under this subsection.
            ``(4) Distribution of portion of enrollment fee.--Of the 
        enrollment fee collected by the Secretary under this subsection 
        with respect to a beneficiary, \2/3\ of that fee shall be made 
        available to the eligible entity selected by the eligible 
        beneficiary.
    ``(g) Issuance of Card and Coordination.--Each eligible entity 
shall--
                    ``(1) issue, in a uniform standard format specified 
                by the Secretary, to each enrolled beneficiary a card 
                and an enrollment number that establishes proof of 
                enrollment and that can be used in a coordinated 
                manner--
                    ``(A) to identify the eligible entity selected to 
                provide access to negotiated prices under subsection 
                (i); and
                    ``(B) to make deposits to and withdrawals from a 
                prescription drug account under section 1807A; and
            ``(2) provide for electronic methods to coordinate with the 
        accounts established under section 1807A.
    ``(h) Enrollee Protections.--
            ``(1) Guaranteed issue and nondiscrimination.--
                    ``(A) Guaranteed issue.--
                            ``(i) In general.--An eligible beneficiary 
                        who is eligible to select an eligible entity 
                        under subsection (b) for prescription drug 
                        coverage under this section at a time during 
                        which selections are accepted under this 
                        section with respect to the coverage shall not 
                        be denied selection based on any health status-
                        related factor (described in section 2702(a)(1) 
                        of the Public Health Service Act) or any other 
                        factor and may not be charged any selection or 
                        other fee as a condition of such acceptance.
                            ``(ii) Medicare advantage limitations 
                        permitted.--The provisions of paragraphs (2) 
                        and (3) (other than subparagraph (C)(i), 
                        relating to default enrollment) of section 
                        1851(g) (relating to priority and limitation on 
                        termination of election) shall apply to 
                        selection of eligible entities under this 
                        paragraph.
                    ``(B) Nondiscrimination.--An eligible entity 
                offering prescription drug coverage under this section 
                shall not establish a service area in a manner that 
                would discriminate based on health or economic status 
                of potential enrollees.
                    ``(C) Coverage of all portions of a state.--If an 
                eligible entity with a contract under this section 
                serves any part of a State it shall serve the entire 
                State.
            ``(2) Dissemination of information.--
                    ``(A) General information.--An eligible entity with 
                a contract under this section shall disclose, in a 
                clear, accurate, and standardized form to each eligible 
                beneficiary who has selected the entity to provide 
                access to negotiated prices under this section at the 
                time of selection and at least annually thereafter, the 
                information described in section 1852(c)(1) relating to 
                such prescription drug coverage. Such information 
                includes the following (in a manner designed to permit 
                and promote competition among eligible entities):
                            ``(i) Summary information regarding 
                        negotiated prices (including discounts) for 
                        covered outpatient drugs.
                            ``(ii) Access to such prices through 
                        pharmacy networks.
                            ``(iii) How any formulary used by the 
                        eligible entity functions.
                    ``(B) Disclosure upon request of general coverage, 
                utilization, and grievance information.--Upon request 
                of an eligible beneficiary, the eligible entity shall 
                provide the information described in section 1852(c)(2) 
                (other than subparagraph (D)) to such beneficiary.
                    ``(C) Response to beneficiary questions.--Each 
                eligible entity offering prescription drug coverage 
                under this section shall have a mechanism (including a 
                toll-free telephone number) for providing upon request 
                specific information (such as negotiated prices, 
                including discounts) to individuals who have selected 
                the entity. The entity shall make available, through an 
                Internet website and in writing upon request, 
                information on specific changes in its formulary.
                    ``(D) Coordination with prescription drug account 
                benefits.--Each such eligible entity shall provide for 
                coordination of such information as the Secretary may 
                specify to carry out section 1807A.
            ``(3) Access to covered benefits.--
                    ``(A) Ensuring pharmacy access.--The provisions of 
                subsection (c)(1) of section 1860D-3 (other than 
                payment provisions under section 1860D-8 with respect 
                to sponsors under such subsection) shall apply to an 
                eligible entity under this section in the same manner 
                as they apply to a PDP sponsor under such section.
                    ``(B) Access to negotiated prices for prescription 
                drugs.--For requirements relating to the access of an 
                eligible beneficiary to negotiated prices (including 
                applicable discounts), see subsection (i).
                    ``(C) Requirements on development and application 
                of formularies.--Insofar as an eligible entity with a 
                contract under this part uses a formulary, the entity 
                shall comply with the requirements of section 1860D-
                3(c)(3), insofar as the Secretary determines that such 
                requirements can be implemented on a timely basis.
            ``(4) Cost and utilization management; quality assurance; 
        medication therapy management program.--
                    ``(A) In general.--For purposes of providing access 
                to negotiated benefits under subsection (i), the 
                eligible entity shall have in place the programs and 
                measure described in section 1860D-3(d), including an 
                effective cost and drug utilization management program, 
                quality assurance measures and systems, and a program 
                to control fraud, abuse, and waste, insofar as the 
                Secretary determines that such provisions can be 
                implemented on a timely basis.
                    ``(B) Treatment of accreditation.--Section 
                1852(e)(4) (relating to treatment of accreditation) 
                shall apply to the requirements for an endorsed program 
                under this section with respect to the following 
                requirements, in the same manner as they apply to 
                Medicare Advantage plans under part C with respect to 
                the requirements described in a clause of section 
                1852(e)(4)(B):
                            ``(i) Paragraph (3)(A) (relating to access 
                        to covered benefits).
                            ``(ii) Paragraph (7) (relating to 
                        confidentiality and accuracy of enrollee 
                        records).
            ``(5) Grievance mechanism.--Each eligible entity shall 
        provide meaningful procedures for hearing and resolving 
        grievances between the organization consistent with the 
        requirements of section 1860D-3(e) insofar as they relate to 
        PDP sponsors of prescription drug plans.
            ``(6) Beneficiary services.--An eligible entity shall 
        provide for its enrollees pharmaceutical support services, such 
        as education and counseling, and services to prevent adverse 
        drug interactions.
            ``(7) Coverage determinations and reconsiderations.--An 
        eligible entity shall meet the requirements of paragraphs (1) 
        through (3) of section 1852(g) with respect to covered benefits 
        under the prescription drug coverage it offers under this 
        section in the same manner as such requirements apply to a 
        Medicare Advantage organization with respect to benefits it 
        offers under a Medicare Advantage plan under part C.
            ``(8) Confidentiality and accuracy of enrollee records.--An 
        eligible entity shall meet the requirements of section 1852(h) 
        with respect to enrollees under this section in the same manner 
        as such requirements apply to a Medicare Advantage organization 
        with respect to enrollees under part C. The eligible entity 
        shall implement policies and procedures to safeguard the use 
        and disclosure of enrollees' individually identifiable health 
        information in a manner consistent with the Federal regulations 
        (concerning the privacy of individually identifiable health 
        information) promulgated under section 264(c) of the Health 
        Insurance Portability and Accountability Act of 1996. The 
        eligible entity shall be treated as a covered entity for 
        purposes of the provisions of subpart E of part 164 of title 
        45, Code of Federal Regulations, adopted pursuant to the 
        authority of the Secretary under section 264(c) of the Health 
        Insurance Portability and Accountability Act of 1996 (42 U.S. 
        C. 1320d-2 note).
            ``(9) Periodic reports and oversight.--The eligible entity 
        shall submit to the Secretary periodic reports on performance, 
        utilization, finances, and such other matters as the Secretary 
        may specify. The Secretary shall provide appropriate oversight 
        to ensure compliance of eligible entities with the requirements 
        of this subsection, including verification of the discounts and 
        services provided.
            ``(10) Additional beneficiary protections.--The eligible 
        entity meets such additional requirements as the Secretary 
        identifies to protect and promote the interest of enrollees, 
        including requirements that ensure that enrollees are not 
        charged more than the lower of the negotiated retail price or 
        the usual and customary price.
    ``(i) Benefits Under the Program Through Savings to Enrollees 
Through Negotiated Prices.--
            ``(1) In general.--Subject to paragraph (2), each eligible 
        entity with a contract under this section shall provide each 
        eligible beneficiary enrolled with the entity with access to 
        negotiated prices (including applicable discounts). For 
        purposes of this paragraph, the term `prescription drugs' is 
        not limited to covered outpatient drugs, but does not include 
        any over-the-counter drug that is not a covered outpatient 
        drug. The prices negotiated by an eligible entity under this 
        paragraph shall (notwithstanding any other provision of law) 
        not be taken into account for the purposes of establishing the 
        best price under section 1927(c)(1)(C).
            ``(2) Formulary restrictions.--Insofar as an eligible 
        entity with a contract under this part uses a formulary, the 
        negotiated prices (including applicable discounts) for 
        prescription drugs shall only be available for drugs included 
        in such formulary.
            ``(3) Prohibition on application only to mail order.--The 
        negotiated prices under this subsection shall apply to 
        prescription drugs that are available other than solely through 
        mail order.
            ``(4) Prohibition on charges for required services.--An 
        eligible entity (and any pharmacy contracting with such entity 
        for the provision of a discount under this section) may not 
        charge a beneficiary any amount for any services required to be 
        provided by the entity under this section.
            ``(5) Disclosure.--The eligible entity offering the 
        endorsed program shall disclose to the Secretary (in a manner 
        specified by the Secretary) the extent to which discounts or 
        rebates or other remuneration or price concessions made 
        available to the entity by a manufacturer are passed through to 
        enrollees through pharmacies and other dispensers or otherwise. 
        The provisions of section 1927(b)(3)(D) shall apply to 
        information disclosed to the Secretary under this paragraph in 
        the same manner as such provisions apply to information 
        disclosed under such section.
            ``(6) Public disclosure of pharmaceutical prices for 
        equivalent drugs.--Each eligible entity shall provide that each 
        pharmacy or other dispenser that arranges for the dispensing of 
        a covered outpatient drug in connection with its endorsed 
        program shall inform the enrollee in that program at the time 
        of purchase of the drug of any differential between the price 
        of the prescribed drug to the enrollee and the price of the 
        lowest cost available generic drug covered under the program 
        that is therapeutically equivalent and bioequivalent.
    ``(j) Contribution Into Prescription Drug Account.--
            ``(1) In general.--In the case of an individual enrolled 
        under this section, the Secretary shall--
                    ``(A) establish a prescription drug account for the 
                individual under section 1807A; and
                    ``(B) subject to paragraph (5), deposit into such 
                account on a monthly or other periodic basis an amount 
                that, on an annual basis, is equivalent to the annual 
                Federal contribution amount specified in paragraph (2) 
                for the enrollee involved.
            ``(2) Annual federal contribution amount.--Subject to 
        paragraph (3), in the case of an accountholder whose income 
        is--
                    ``(A) not more than 135 percent of the poverty 
                line, the annual Federal contribution amount for a year 
                is $800;
                    ``(B) more than 135 percent, but not more than 150 
                percent, of the poverty line, the annual Federal 
                contribution amount for a year is $500; or
                    ``(C) more than 150 percent of the poverty line, 
                the annual Federal contribution amount for a year is 
                $100.
            ``(3) Income eligibility determinations.--The determination 
        of whether an individual residing in a State is a eligible for 
        a contribution under paragraph (1) shall be determined under 
        the State medicaid plan for the State under section 1935(a) or 
        by the Social Security Administration. In the case of a State 
        that does not operate such a medicaid plan (either under title 
        XIX or under a statewide waiver granted under section 1115), 
        such determination shall be made under arrangements made by the 
        Secretary. There are authorized to be appropriated to the 
        Social Security Administration such sums as may be necessary 
        for the determination of eligibility under this paragraph.
            ``(4) Partial year.--Insofar as the provisions of this 
        subsection and section 1807A are not implemented for all months 
        in 2004, the annual contribution amount under this subsection 
        for 2004 shall be prorated to reflect the portion of that year 
        in which such provisions are in effect.
            ``(5) Restriction on contributions.--There shall only be an 
        annual Federal contribution under paragraph (1) for an 
        individual if the individual is not eligible for coverage of, 
        or assistance for, outpatient prescription drugs under any of 
        the following:
                    ``(A) A medicaid plan under title XIX (including 
                under any waiver approved under section 1115).
                    ``(B) Enrollment under a group health plan or 
                health insurance coverage.
                    ``(C) Enrollment under a medicare supplemental 
                insurance policy.
                    ``(D) Chapter 55 of title 10, United States Code 
                (relating to medical and dental care for members of the 
                uniformed services).
                    ``(E) Chapter 17 of title 38, United States Code 
                (relating to Veterans' medical care).
                    ``(F) Enrollment under a plan under chapter 89 of 
                title 5, United States Code (relating to the Federal 
                employees' health benefits program).
                    ``(G) The Indian Health Care Improvement Act (25 
                U.S.C. 1601 et seq.).
            ``(6) Appropriation to cover net program expenditures.--
        There are authorized to be appropriated from time to time, out 
        of any moneys in the Treasury not otherwise appropriated, to 
        the Federal Supplementary Medical Insurance Trust Fund 
        established under section 1841, an amount equal to the amount 
        by which the benefits and administrative costs of providing the 
        benefits under this section exceed the sum of the portion of 
        the enrollment fees retained by the Secretary.
    ``(k) Definitions.--In this part and section 1807A:
            ``(1) Covered outpatient drug.--
                    ``(A) In general.--Except as provided in this 
                paragraph, for purposes of this section, the term 
                `covered outpatient drug' means--
                            ``(i) a drug that may be dispensed only 
                        upon a prescription and that is described in 
                        subparagraph (A)(i) or (A)(ii) of section 
                        1927(k)(2); or
                            ``(ii) a biological product described in 
                        clauses (i) through (iii) of subparagraph (B) 
                        of such section or insulin described in 
                        subparagraph (C) of such section and medical 
                        supplies associated with the injection of 
                        insulin (as defined in regulations of the 
                        Secretary),
                and such term includes a vaccine licensed under section 
                351 of the Public Health Service Act and any use of a 
                covered outpatient drug for a medically accepted 
                indication (as defined in section 1927(k)(6)).
                    ``(B) Exclusions.--
                            ``(i) In general.--Such term does not 
                        include drugs or classes of drugs, or their 
                        medical uses, which may be excluded from 
                        coverage or otherwise restricted under section 
                        1927(d)(2), other than subparagraph (E) thereof 
                        (relating to smoking cessation agents), or 
                        under section 1927(d)(3).
                            ``(ii) Avoidance of duplicate coverage.--A 
                        drug prescribed for an individual that would 
                        otherwise be a covered outpatient drug under 
                        this section shall not be so considered if 
                        payment for such drug is available under part A 
                        or B for an individual entitled to benefits 
                        under part A and enrolled under part B.
                    ``(C) Application of formulary restrictions.--A 
                drug prescribed for an individual that would otherwise 
                be a covered outpatient drug under this section shall 
                not be so considered under an endorsed program if the 
                eligible entity offering the program excludes the drug 
                under a formulary and a review of such exclusion is not 
                successfully resolved under subsection (h)(5).
                    ``(D) Application of general exclusion 
                provisions.--An eligible entity offering an endorsed 
                program may exclude from qualified prescription drug 
                coverage any covered outpatient drug--
                            ``(i) for which payment would not be made 
                        if section 1862(a) applied to part D; or
                            ``(ii) which are not prescribed in 
                        accordance with the program or this section.
                Such exclusions are determinations subject to review 
                pursuant to subsection (h)(5).
            ``(2) Poverty line.--The term `poverty line' means the 
        income official poverty line (as defined by the Office of 
        Management and Budget, and revised annually in accordance with 
        section 673(2) of the Omnibus Budget Reconciliation Act of 
        1981) applicable to a family of the size involved.
    ``(l) Authorization of Appropriations.--There are authorized to be 
appropriated such sums as may be necessary to carry out this section 
and section 1807A.
    ``(m) Interim, Final Regulatory Authority.--In order to carry out 
this section and section 1807A in a timely manner, the Secretary may 
promulgate regulations that take effect on an interim basis, after 
notice and pending opportunity for public comment.

                      ``prescription drug accounts

    ``Sec. 1807A. ``(a) Establishment of Accounts.--
            ``(1) In general.--The Secretary shall establish and 
        maintain for each eligible beneficiary who is enrolled under 
        section 1807 at the time of enrollment a prescription drug 
        account (in this section and section 1807 referred to as an 
        `account').
            ``(2) Reserve accounts.--In cases described in subsections 
        (b)(3)(A), (b)(3)(B)(i), and (b)(3)(B)(ii)(I), the Secretary 
        shall establish and maintain for each surviving spouse who is 
        not enrolled under section 1807 a reserve prescription drug 
        account (in this section referred to as an `reserve account').
            ``(3) Accountholder defined.--In this section and section 
        1807A, the term `accountholder' means an individual for whom an 
        account or reserve account has been established under this 
        section.
            ``(4) Expenditures from account.--Nothing in this section 
        shall be construed as requiring the Federal Government to 
        obligate funds for amounts in any account until such time as a 
        withdrawal from such account is authorized under this section.
    ``(b) Use of Accounts.--
            ``(1) Application of account.--Except as provided in this 
        subsection, amounts credited to an account shall only be used 
        for the purchase of covered outpatient drugs for the 
        accountholder. Any amounts remaining at the end of a year 
        remain available for expenditures in succeeding years.
            ``(2) Account rules for public and private contributions.--
        The Secretary shall establish a ongoing process for the 
        determination of the amount in each account that is 
        attributable to public and private contributions (including 
        spousal rollover contributions) based on the following rules:
                    ``(A) Treatment of expenditures.--Expenditures from 
                the account shall--
                            ``(i) first be counted against any public 
                        contribution; and
                            ``(ii) next be counted against private 
                        contributions.
                    ``(B) Treatment of spousal rollover 
                contributions.--With respect to any spousal rollover 
                contribution, the portions of such contribution that 
                were attributable to public and private contributions 
                at the time of its distribution under subsection (b)(3) 
                shall be treated under this paragraph as if it were a 
                direct public or private contribution, respectively, 
                into the account of the spouse.
            ``(3) Death of accountholder.--In the case of the death of 
        an accountholder, the balance in any account (taking into 
        account liabilities accrued before the time of death) shall be 
        distributed as follows:
                    ``(A) Treatment of public contributions.--If the 
                accountholder is married at the time of death, the 
                amount in the account that is attributable to public 
                contributions shall be credited to the account (if any) 
                of the surviving spouse of the accountholder (or, if 
                the surviving spouse is not an eligible beneficiary, 
                into a reserve account to be held for when that spouse 
                becomes an eligible beneficiary).
                    ``(B) Treatment of private contributions.--The 
                amount in the account that is attributable to private 
                contributions shall be distributed as follows:
                            ``(i) Designation of distributee.--If the 
                        accountholder has made a designation, in a form 
                        and manner specified by the Secretary, for the 
                        distribution of some or all of such amount, 
                        such amount shall be distributed in accordance 
                        with the designation. Such designation may 
                        provide for the distribution into an account 
                        (including a reserve account) of a surviving 
                        spouse.
                            ``(ii) Absence of designation.--Insofar as 
                        the accountholder has not made such a 
                        designation--
                                    ``(I) Surviving spouse.--If the 
                                accountholder was married at the time 
                                of death, the remainder shall be 
                                credited to an account (including a 
                                reserve account) of the accountholder's 
                                surviving spouse.
                                    ``(II) No surviving spouse.--If the 
                                accountholder was not so married, the 
                                remainder shall be distributed to the 
                                estate of the accountholder and 
                                distributed as provided by law.
            ``(4) Use of account for premiums for enrollment in a 
        medicare advantage plan.--During any period in which an 
        accountholder is enrolled in a Medicare Advantage plan under 
        part C, the balance in the account may be used and applied only 
        to reimburse the amount of the premium (if any) established for 
        enrollment under the plan.
            ``(5) Application to medicaid expenses in certain cases.--
                    ``(A) In general.--Except as provided in this 
                paragraph, an account shall be treated as an asset for 
                purposes of establishing eligibility for medical 
                assistance under title XIX.
                    ``(B) Application towards spenddown.--In the case 
                of an accountholder who is applying for such medical 
                assistance and who would, but for the application of 
                subparagraph (A), be eligible for such assistance--
                            ``(i) subparagraph (A) shall not apply; and
                            ``(ii) the account shall be available (in 
                        accordance with a procedure established by the 
                        Secretary) to the State to reimburse the State 
                        for any expenditures made under the plan for 
                        such medical assistance.
    ``(c) Amounts Credited in Account.--The Secretary shall credit to a 
prescription drug account of an eligible beneficiary the following 
amounts:
            ``(1) Public contributions.--The following contributions 
        (each referred to in this section as a `public contribution'):
                    ``(A) Federal contributions.--Federal contributions 
                provided under subsection (d).
                    ``(B) State contributions.--Contributions made by a 
                State under subsection (f).
            ``(2) Spousal rollover contribution.--A distribution from a 
        deceased spouse under subsection (b)(3) (referred to in this 
        section as a `spousal rollover contribution').
            ``(3) Private contributions.--The following contributions 
        (each referred to in this section as a `private contribution'):
                    ``(A) Employer and individual contributions.--
                Contributions made under subsection (e).
                    ``(B) Other individual contributions.--
                Contributions made by accountholder other than under 
                subsection (e).
                    ``(C) Contributions by nonprofit organizations.--
                Contributions made by a charitable, not-for-profit 
                organization (that may be a religious organization).
Except as provided in this subsection, no amounts may be contributed 
to, or credited to, a prescription drug account.
    ``(d) Federal Contribution.--For Federal contributions in the case 
of accountholders, see section 1807(j).
    ``(e) Employer and Individual Contributions.--
            ``(1) Employment-related contribution.--
                    ``(A) In general.--In the case of any accountholder 
                who is a beneficiary or participant in a group health 
                plan (including a multi-employer plan), whether as an 
                employee, former employee or otherwise, including as a 
                dependent of an employee or former employee, the plan 
                may make a contribution into the accountholder's 
                account (but not into a reserve account of the 
                accountholder).
                    ``(B) Limitation.--The total amount that may be 
                contributed under subparagraph (A) under a plan to an 
                account during any year may not exceed $5,000.
                    ``(C) Condition.--A group health plan may condition 
                a contribution with respect to an accountholder under 
                this paragraph on the accountholder's enrollment under 
                section 1807 with an eligible entity that is recognized 
                or approved by that plan.
            ``(2) Other individuals.--
                    ``(A) In general.--Any individual may also 
                contribute to the account of that individual or the 
                account of any other individual under this subsection.
                    ``(B) Limitation.--The total amount that may be 
                contributed to an account under subparagraph (A) during 
                any year may not exceed $5,000, regardless of who makes 
                such contribution.
            ``(3) No contribution permitted to reserve account.--No 
        contribution may be made under this subsection to a reserve 
        account.
            ``(4) Form and manner of contribution.--The Secretary shall 
        specify the form and manner of contributions under this 
        subsection.
    ``(f) State Contributions.--
            ``(1) In general.--A State may enter into arrangements with 
        the Secretary for the crediting of amounts for accountholders.
            ``(2) Form and manner of contribution.--The Secretary shall 
        specify the form and manner of contributions under this 
        subsection.
            ``(3) Medicaid treatment.--Amounts credited under this 
        subsection shall not be treated as medical assistance for 
        purposes of title XIX or child health assistance for purposes 
        of title XXI for individuals who are not qualifying low income 
        enrollees.''.
    (b) Exclusion of Costs from Determination of Part B Monthly 
Premium.--Section 1839(g) (42 U.S.C. 1395r(g)) is amended--
            (1) by striking ``attributable to the application of 
        section'' and inserting ``attributable to--
            ``(1) the application of section'';
            (2) by striking the period and inserting ``; and''; and
            (3) by adding at the end the following new paragraph:
            ``(2) the Voluntary Medicare Outpatient Prescription Drug 
        Discount and Security Program under sections 1807 and 1807A.''.
    (c) State Eligibility Determinations.--Section 1935, as added by 
section 103(a)(2), is amended--
            (1) in subsection (a)(1), by inserting ``and of eligibility 
        for an annual Federal contribution amount under section 
        1807A(j)(2)'' before the semicolon; and
            (2) in subsection (a)(3), by inserting ``and sections 1807 
        and 1807A'' after ``1860D-7)''.
    (d) Report on Progress in Implementation of Prescription Drug 
Benefit.--Not later than March 1, 2005, the Administrator shall submit 
a report to Congress on the progress that has been made in implementing 
the prescription drug benefit under this title. The Administrator shall 
include in the report specific steps that have been taken, and that 
need to be taken, to ensure a timely start of the program on January 1, 
2006.

SEC. 106. DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF CARRYING OUT 
              MEDICARE CATASTROPHIC PRESCRIPTION DRUG PROGRAM.

    (a) Disclosure.--
            (1) In general.--Subsection (l) of section 6103 of the 
        Internal Revenue Code of 1986 (relating to disclosure of 
        returns and return information for purposes other than tax 
        administration) is amended by adding at the end the following 
        new paragraph:
            ``(19) Disclosure of return information for purposes of 
        carrying out medicare catastrophic prescription drug program.--
                    ``(A) In general.--The Secretary may, upon written 
                request from the Secretary of Health and Human Services 
                under section 1860D-2(b)(4)(E)(i) of the Social 
                Security Act, disclose to officers and employees of the 
                Department of Health and Human Services with respect to 
                a specified taxpayer for the taxable year specified by 
                the Secretary of Health and Human Services in such 
                request--
                            ``(i) the taxpayer identity information 
                        with respect to such taxpayer, and
                            ``(ii) the adjusted gross income of such 
                        taxpayer for the taxable year (or, if less, the 
                        income threshold limit specified in section 
                        1860D-2(b)(4)(D)(ii) for the calendar year 
                        specified by such Secretary in such request).
                    ``(B) Specified taxpayer.--For purposes of this 
                paragraph, the term `specified taxpayer' means any 
                taxpayer who--
                            ``(i) is identified by the Secretary of 
                        Health and Human Services in the request 
                        referred to in subparagraph (A), and
                            ``(ii) either--
                                    ``(I) has an adjusted gross income 
                                for the taxable year referred to in 
                                subparagraph (A) in excess of the 
                                income threshold specified in section 
                                1860D-2(b)(4)(D)(ii) of such Act for 
                                the calendar year referred to in such 
                                subparagraph, or
                                    ``(II) is identified by such 
                                Secretary under subparagraph (A) as 
                                being an individual who elected to use 
                                more recent information under section 
                                1860D-2(b)(4)(D)(v) of such Act.
                    ``(C) Joint returns.--In the case of a joint 
                return, the Secretary shall, for purposes of applying 
                this paragraph, treat each spouse as a separate 
                taxpayer having an adjusted gross income equal to one-
                half of the adjusted gross income determined with 
                respect to such return.
                    ``(D) Restriction on use of disclosed 
                information.--Return information disclosed under 
                subparagraph (A) may be used by officers and employees 
                of the Department of Health and Human Services only for 
                the purpose of administering the prescription drug 
                benefit under title XVIII of the Social Security Act. 
                Such officers and employees may disclose the annual 
                out-of-pocket threshold which applies to an individual 
                under such part to the entity that offers the plan 
                referred to in section 1860D-2(b)(4)(E)(ii) of such Act 
                in which such individual is enrolled. Such sponsor may 
                use such information only for purposes of administering 
                such benefit.''.
            (2) Joint return permitted in case of surviving spouses.--
        Under section 6103(a)(3) of the Internal Revenue Code of 1986, 
        a surviving spouse may file a joint return for the taxable year 
        in which one spouse dies.
    (b) Confidentiality.--Paragraph (3) of section 6103(a) of such Code 
is amended by striking ``or (16)'' and inserting ``(16), or (19)''.
    (c) Procedures and Recordkeeping Related to Disclosures.--
Subsection (p)(4) of section 6103 of such Code is amended by striking 
``any other person described in subsection (l)(16) or (17)'' each place 
it appears and inserting ``any other person described in subsection 
(l)(16), (17), or (19)''.
    (d) Unauthorized Disclosure.--Paragraph (2) of section 7213(a) of 
such Code is amended by striking ``or (16)'' and inserting ``(16), or 
(19)''.
    (e) Unauthorized Inspection.--Subparagraph (B) of section 
7213A(a)(1) of such Code is amended by inserting ``or (19)'' after 
``subsection (l)(18)''.

SEC. 107. STATE PHARMACEUTICAL ASSISTANCE TRANSITION COMMISSION.

    (a) Establishment.--
            (1) In general.--There is established, as of the first day 
        of the third month beginning after the date of the enactment of 
        this Act, a State Pharmaceutical Assistance Transition 
        Commission (in this section referred to as the ``Commission'') 
        to develop a proposal for addressing the unique transitional 
        issues facing State pharmaceutical assistance programs, and 
        program participants, due to the implementation of the medicare 
        prescription drug program under part D of title XVIII of the 
        Social Security Act.
            (2) Definitions.--For purposes of this section:
                    (A) State pharmaceutical assistance program 
                defined.--The term ``State pharmaceutical assistance 
                program'' means a program (other than the medicaid 
                program) operated by a State (or under contract with a 
                State) that provides as of the date of the enactment of 
                this Act assistance to low-income medicare 
                beneficiaries for the purchase of prescription drugs.
                    (B) Program participant.--The term ``program 
                participant'' means a low-income medicare beneficiary 
                who is a participant in a State pharmaceutical 
                assistance program.
    (b) Composition.--The Commission shall include the following:
            (1) A representative of each governor of each State that 
        the Secretary identifies as operating on a statewide basis a 
        State pharmaceutical assistance program that provides for 
        eligibility and benefits that are comparable or more generous 
        than the low-income assistance eligibility and benefits offered 
        under part D of title XVIII of the Social Security Act.
            (2) Representatives from other States that the Secretary 
        identifies have in operation other State pharmaceutical 
        assistance programs, as appointed by the Secretary.
            (3) Representatives of organizations that have an inherent 
        interest in program participants or the program itself, as 
        appointed by the Secretary but not to exceed the number of 
        representatives under paragraphs (1) and (2).
            (4) Representatives of Medicare Advantage organizations and 
        other private health insurance plans, as appointed by the 
        Secretary.
            (5) The Secretary (or the Secretary's designee) and such 
        other members as the Secretary may specify
The Secretary shall designate a member to serve as chair of the 
Commission and the Commission shall meet at the call of the chair.
    (c) Development of Proposal.--The Commission shall develop the 
proposal described in subsection (a) in a manner consistent with the 
following principles:
            (1) Protection of the interests of program participants in 
        a manner that is the least disruptive to such participants and 
        that includes a single point of contact for enrollment and 
        processing of benefits.
            (2) Protection of the financial and flexibility interests 
        of States so that States are not financially worse off as a 
        result of the enactment of this title.
            (3) Principles of medicare modernization provided under 
        title II of this Act.
    (d) Report.--By not later than January 1, 2005, the Commission 
shall submit to the President and the Congress a report that contains a 
detailed proposal (including specific legislative or administrative 
recommendations, if any) and such other recommendations as the 
Commission deems appropriate.
    (e) Support.--The Secretary shall provide the Commission with the 
administrative support services necessary for the Commission to carry 
out its responsibilities under this section.
    (f) Termination.--The Commission shall terminate 30 days after the 
date of submission of the report under subsection (d).

SEC. 108. ADDITIONAL REQUIREMENTS FOR ANNUAL FINANCIAL REPORT AND 
              OVERSIGHT ON MEDICARE PROGRAM, INCLUDING PRESCRIPTION 
              DRUG SPENDING.

    (a) In General.--Section 1817 (42 U.S.C. 1395i) is amended by 
adding at the end the following new subsection:
    ``(l) Combined Report on Operation and Status of the Trust Fund, 
the Federal Supplementary Medical Insurance Trust Fund, and Medicare 
Prescription Drug Trust Fund.--
            ``(1) In general.--In addition to the duty of the Board of 
        Trustees to report to Congress under subsection (b), on the 
        date the Board submits the report required under subsection 
        (b)(2), the Board shall submit to Congress a report on the 
        operation and status of the Trust Fund, the Federal 
        Supplementary Medical Insurance Trust Fund established under 
        section 1841, and the Medicare Prescription Drug Trust Fund 
        under section 1860D-9(a) (in this subsection collectively 
        referred to as the `Trust Funds'). Such report shall included 
        the following information:
                    ``(A) Overall spending from the general fund of the 
                treasury.--A statement of total amounts obligated 
                during the preceding fiscal year from the General 
                Revenues of the Treasury to the Trust Funds for payment 
                for benefits covered under this title, stated in terms 
                of the total amount and in terms of the percentage such 
                amount bears to all other amounts obligated from such 
                General Revenues during such fiscal year.
                    ``(B) Historical overview of spending.--From the 
                date of the inception of the program of insurance under 
                this title through the fiscal year involved, a 
                statement of the total amounts referred to in 
                subparagraph (A).
                    ``(C) 10-year and 75-year projections.--An estimate 
                of total amounts referred to in subparagraph (A) 
                required to be obligated for payment for benefits 
                covered under this title for each of the 10 fiscal 
                years succeeding the fiscal year involved and for the 
                75-year period beginning with the succeeding fiscal 
                year.
                    ``(D) Relation to gdp growth.--A comparison of the 
                rate of growth of the total amounts referred to in 
                subparagraph (A) to the rate of growth in the gross 
                domestic product for the same period.
            ``(2) Publication.--Each report submitted under paragraph 
        (1) shall be published jointly by the Committee on Ways and 
        Means and the Committee on Energy and Commerce as a public 
        document and shall be made available by such Committees on the 
        Internet.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply with respect to fiscal years beginning on or after the date of 
the enactment of this Act.

  TITLE II--MEDICARE ENHANCED FEE-FOR-SERVICE AND MEDICARE ADVANTAGE 
                     PROGRAMS; MEDICARE COMPETITION

SEC. 200. MEDICARE MODERNIZATION AND REVITALIZATION.

    This title provides for--
            (1) establishment of the medicare enhanced fee-for-service 
        (EFFS) program under which medicare beneficiaries are provided 
        access to a range of enhanced fee-for-service (EFFS) plans that 
        may use preferred provider networks to offer an enhanced range 
        of benefits;
            (2) establishment of a Medicare Advantage program that 
        offers improved managed care plans with coordinated care; and
            (3) competitive bidding, in the style of the Federal 
        Employees Health Benefits program (FEHBP), among enhanced fee-
        for-service plans and Medicare Advantage plans in order to 
        promote greater efficiency and responsiveness to medicare 
        beneficiaries.

         Subtitle A--Medicare Enhanced Fee-for-Service Program

SEC. 201. ESTABLISHMENT OF ENHANCED FEE-FOR-SERVICE (EFFS) PROGRAM 
              UNDER MEDICARE.

    (a) In General.--Title XVIII, as amended by section 101(a), is 
amended--
            (1) by redesignating part E as part F; and
            (2) by inserting after part D the following new part:

               ``Part E--Enhanced Fee-for-Service Program

  ``offering of enhanced fee-for-service plans throughout the united 
                                 states

    ``Sec. 1860E-1. (a) Establishment of Program.--
            ``(1) In general.--The Administrator shall establish under 
        this part beginning January 1, 2006, an enhanced fee-for-
        service program under which enhanced fee-for-service plans (as 
        defined in subsection (b)) are offered to EFFS-eligible 
        individuals (as so defined) in EFFS regions throughout the 
        United States.
            ``(2) EFFS regions.--For purposes of this part the 
        Administrator shall establish EFFS regions throughout the 
        United States by dividing the entire United States into at 
        least 10 such regions. Before establishing such regions, the 
        Administrator shall conduct a market survey and analysis, 
        including an examination of current insurance markets, to 
        determine how the regions should be established. The regions 
        shall be established in a manner to take into consideration 
        maximizing full access for all EFFS-eligible individuals, 
        especially those residing in rural areas.
    ``(b) Definitions.--For purposes of this part:
            ``(1) EFFS organization.--The `EFFS organization' means an 
        entity that the Administrator certifies as meeting the 
        requirements and standards applicable to such organization 
        under this part.
            ``(2) Enhanced fee-for-service plan; effs plan.--The terms 
        `enhanced fee-for-service plan' and `EFFS plan' mean health 
        benefits coverage offered under a policy, contract, or plan by 
        an EFFS organization pursuant to and in accordance with a 
        contract pursuant to section 1860E-4(c), but only if the plan 
        provides either fee-for-service coverage described in the 
        following subparagraph (A) or preferred provider coverage 
        described in the following subparagraph (B):
                    ``(A) Fee-for-service coverage.--The plan--
                            ``(i) reimburses hospitals, physicians, and 
                        other providers at a rate determined by the 
                        plan on a fee-for-service basis without placing 
                        the provider at financial risk;
                            ``(ii) does not vary such rates for such a 
                        provider based on utilization relating to such 
                        provider; and
                            ``(iii) does not restrict the selection of 
                        providers among those who are lawfully 
                        authorized to provide the covered services and 
                        agree to accept the terms and conditions of 
                        payment established by the plan.
                    ``(B) Preferred provider coverage.--The plan--
                            ``(i) has a network of providers that have 
                        agreed to a contractually specified 
                        reimbursement for covered benefits with the 
                        organization offering the plan; and
                            ``(ii) provides for reimbursement for all 
                        covered benefits regardless of whether such 
                        benefits are provided within such network of 
                        providers.
            ``(3) EFFS eligible individual.--The term `EFFS eligible 
        individual' means an eligible individual described in section 
        1851(a)(3).
            ``(4) EFFS region.--The term `EFFS region' means a region 
        established under subsection (a)(2).
    ``(c) Application of Certain Eligibility, Enrollment, Etc. 
Requirements.--The provisions of section 1851 (other than subsection 
(h)(4)(A)) shall apply to EFFS plans offered by an EFFS organization in 
an EFFS region, including subsection (g) (relating to guaranteed issue 
and renewal).

          ``offering of enhanced fee-for-service (effs) plans

    ``Sec. 1860E-2. (a) Plan Requirements.--No EFFS plan may be offered 
under this part in an EFFS region unless the requirements of this part 
are met with respect to the plan and EFFS organization offering the 
plan.
    ``(b) Available to All EFFS Beneficiaries in the Entire Region.--
With respect to an EFFS plan offered in an EFFS region--
            ``(1) In general.--The plan must be offered to all EFFS-
        eligible individuals residing in the region.
            ``(2) Assuring access to services.--The plan shall comply 
        with the requirements of section 1852(d)(4).
    ``(c) Benefits.--
            ``(1) In general.--Each EFFS plan shall provide to members 
        enrolled in the plan under this part benefits, through 
        providers and other persons that meet the applicable 
        requirements of this title and part A of title XI--
                    ``(A) for the items and services described in 
                section 1852(a)(1);
                    ``(B) that are uniform for the plan for all EFFS 
                eligible individuals residing in the same EFFS region;
                    ``(C) that include a single deductible applicable 
                to benefits under parts A and B and include a 
                catastrophic limit on out-of-pocket expenditures for 
                such covered benefits; and
                    ``(D) that include benefits for prescription drug 
                coverage for each enrollee who elects under part D to 
                be provided qualified prescription drug coverage 
                through the plan.
            ``(2) Disapproval authority.--The Administrator shall not 
        approve a plan of an EFFS organization if the Administrator 
        determines (pursuant to the last sentence of section 
        1852(b)(1)(A)) that the benefits are designed to substantially 
        discourage enrollment by certain EFFS eligible individuals with 
        the organization.
    ``(d) Outpatient Prescription Drug Coverage.--For rules concerning 
the offering of prescription drug coverage under EFFS plans, see the 
amendment made by section 102(b) of the Medicare Prescription Drug and 
Modernization Act of 2003.
    ``(e) Other Additional Provisions.--The provisions of section 1852 
(other than subsection (a)(1)) shall apply under this part to EFFS 
plans. For the application of chronic care improvement provisions, see 
the amendment made by section 722(b).

      ``submission of bids; beneficiary savings; payment of plans

    ``Sec. 1860E-3. (a) Submission of Bids.--
            ``(1) Requirement.--
                    ``(A) EFFS monthly bid amount.--For each year 
                (beginning with 2006), an EFFS organization shall 
                submit to the Administrator an EFFS monthly bid amount 
                for each EFFS plan offered in each region. Each such 
                bid is referred to in this section as the `EFFS monthly 
                bid amount'.
                    ``(B) Form.--Such bid amounts shall be submitted 
                for each such plan and region in a form and manner and 
                time specified by the Administrator, and shall include 
                information described in paragraph (3)(A).
            ``(2) Uniform bid amounts.--Each EFFS monthly bid amount 
        submitted under paragraph (1) by an EFFS organization under 
        this part for an EFFS plan in an EFFS region may not vary among 
        EFFS eligible individuals residing in the EFFS region involved.
            ``(3) Submission of bid amount information by effs 
        organizations.--
                    ``(A) Information to be submitted.--The information 
                described in this subparagraph is as follows:
                            ``(i) The EFFS monthly bid amount for 
                        provision of all items and services under this 
                        part, which amount shall be based on average 
                        costs for a typical beneficiary residing in the 
                        region, and the actuarial basis for determining 
                        such amount.
                            ``(ii) The proportions of such bid amount 
                        that are attributable to--
                                    ``(I) the provision of statutory 
                                non-drug benefits (such portion 
                                referred to in this part as the 
                                `unadjusted EFFS statutory non-drug 
                                monthly bid amount');
                                    ``(II) the provision of statutory 
                                prescription drug benefits; and
                                    ``(III) the provision of non-
                                statutory benefits;
                        and the actuarial basis for determining such 
                        proportions.
                            ``(iii) Such additional information as the 
                        Administrator may require to verify the 
                        actuarial bases described in clauses (i) and 
                        (ii).
                    ``(B) Statutory benefits defined.--For purposes of 
                this part:
                            ``(i) The term `statutory non-drug 
                        benefits' means benefits under section 
                        1852(a)(1).
                            ``(ii) The term `statutory prescription 
                        drug benefits' means benefits under part D.
                            ``(iii) The term `statutory benefits' means 
                        statutory prescription drug benefits and 
                        statutory non-drug benefits.
                    ``(C) Acceptance and negotiation of bid amounts.--
                The Administrator has the authority to negotiate 
                regarding monthly bid amounts submitted under 
                subparagraph (A) (and the proportion described in 
                subparagraph (A)(ii)), and for such purpose, the 
                Administrator has negotiation authority that the 
                Director of the Office of Personnel Management has with 
                respect to health benefits plans under chapter 89 of 
                title 5, United States Code. The Administrator may 
                reject such a bid amount or proportion if the 
                Administrator determines that such amount or proportion 
                is not supported by the actuarial bases provided under 
                subparagraph (A).
                    ``(D) Contract authority.--The Administrator may, 
                taking into account the unadjusted EFFS statutory non-
                drug monthly bid amounts accepted under subparagraph 
                (C), enter into contracts for the offering of EFFS 
                plans by up to 3 EFFS organizations in any region.
    ``(b) Provision of Beneficiary Savings for Certain Plans.--
            ``(1) Beneficiary rebate rule.--
                    ``(A) Requirement.--The EFFS plan shall provide to 
                the enrollee a monthly rebate equal to 75 percent of 
                the average per capita savings (if any) described in 
                paragraph (2) applicable to the plan and year involved.
                    ``(B) Form of rebate.--A rebate required under this 
                paragraph shall be provided--
                            ``(i) through the crediting of the amount 
                        of the rebate towards the EFFS monthly 
                        prescription drug beneficiary premium (as 
                        defined in section 1860E-4(a)(3)(B)) and the 
                        EFFS monthly supplemental beneficiary premium 
                        (as defined in section 1860E-4(a)(3)(C));
                            ``(ii) through a direct monthly payment 
                        (through electronic funds transfer or 
                        otherwise); or
                            ``(iii) through other means approved by the 
                        Medicare Benefits Administrator,
                or any combination thereof.
            ``(2) Computation of average per capita monthly savings.--
        For purposes of paragraph (1)(A), the average per capita 
        monthly savings referred to in such paragraph for an EFFS plan 
        and year is computed as follows:
                    ``(A) Determination of region-wide average risk 
                adjustment.--
                            ``(i) In general.--The Medicare Benefits 
                        Administrator shall determine, at the same time 
                        rates are promulgated under section 1853(b)(1) 
                        (beginning with 2006), for each EFFS region the 
                        average of the risk adjustment factors 
                        described in subsection (c)(3) to be applied to 
                        enrollees under this part in that region. In 
                        the case of an EFFS region in which an EFFS 
                        plan was offered in the previous year, the 
                        Administrator may compute such average based 
                        upon risk adjustment factors applied under 
                        subsection (c)(3) in that region in a previous 
                        year.
                            ``(ii) Treatment of new regions.--In the 
                        case of a region in which no EFFS plan was 
                        offered in the previous year, the Administrator 
                        shall estimate such average. In making such 
                        estimate, the Administrator may use average 
                        risk adjustment factors applied to comparable 
                        EFFS regions or applied on a national basis.
                    ``(B) Determination of risk adjusted benchmark and 
                risk-adjusted bid.--For each EFFS plan offered in an 
                EFFS region, the Administrator shall--
                            ``(i) adjust the EFFS region-specific non-
                        drug monthly benchmark amount (as defined in 
                        paragraph (3)) by the applicable average risk 
                        adjustment factor computed under subparagraph 
                        (A); and
                            ``(ii) adjust the unadjusted EFFS statutory 
                        non-drug monthly bid amount by such applicable 
                        average risk adjustment factor.
                    ``(C) Determination of average per capita monthly 
                savings.--The average per capita monthly savings 
                described in this subparagraph is equal to the amount 
                (if any) by which--
                            ``(i) the risk-adjusted benchmark amount 
                        computed under subparagraph (B)(i), exceeds
                            ``(ii) the risk-adjusted bid computed under 
                        subparagraph (B)(ii).
            ``(3) Computation of effs region-specific non-drug monthly 
        benchmark amount.--For purposes of this part, the term `EFFS 
        region-specific non-drug monthly benchmark amount' means, with 
        respect to an EFFS region for a month in a year, an amount 
        equal to \1/12\ of the average (weighted by number of EFFS 
        eligible individuals in each payment area described in section 
        1853(d)) of the annual capitation rate as calculated under 
        section 1853(c)(1) for that area.
    ``(c) Payment of Plans Based on Bid Amounts.--
            ``(1) Non-drug benefits.--Under a contract under section 
        1860E-4(c) and subject to section 1853(g) (as made applicable 
        under subsection (d)), the Administrator shall make monthly 
        payments under this subsection in advance to each EFFS 
        organization, with respect to coverage of an individual under 
        this part in an EFFS region for a month, in an amount 
        determined as follows:
                    ``(A) Plans with bids below benchmark.--In the case 
                of a plan for which there are average per capita 
                monthly savings described in subsection (b)(2)(C), the 
                payment under this subsection is equal to the 
                unadjusted EFFS statutory non-drug monthly bid amount, 
                adjusted under paragraphs (3) and (4), plus the amount 
                of the monthly rebate computed under subsection 
                (b)(1)(A) for that plan and year.
                    ``(B) Plans with bids at or above benchmark.--In 
                the case of a plan for which there are no average per 
                capita monthly savings described in subsection 
                (b)(2)(C), the payment amount under this subsection is 
                equal to the EFFS region-specific non-drug monthly 
                benchmark amount, adjusted under paragraphs (3) and 
                (4).
            ``(2) For federal drug subsidies.--In the case in which an 
        enrollee who elects under part D to be provided qualified 
        prescription drug coverage through the plan, the EFFS 
        organization offering such plan also is entitled--
                    ``(A) to direct subsidy payment under section 
                1860D-8(a)(1);
                    ``(B) to reinsurance subsidy payments under section 
                1860D-8(a)(2); and
                    ``(C) to reimbursement for premium and cost-sharing 
                reductions for low-income individuals under section 
                1860D-7(c)(3).
            ``(3) Demographic risk adjustment, including adjustment for 
        health status.--The Administrator shall adjust under paragraph 
        (1)(A) the unadjusted EFFS statutory non-drug monthly bid 
        amount and under paragraph (1)(B) the EFFS region-specific non-
        drug monthly benchmark amount for such risk factors as age, 
        disability status, gender, institutional status, and such other 
        factors as the Administrator determines to be appropriate, 
        including adjustment for health status under section 1853(a)(3) 
        (as applied under subsection (d)), so as to ensure actuarial 
        equivalence. The Administrator may add to, modify, or 
        substitute for such adjustment factors if such changes will 
        improve the determination of actuarial equivalence.
            ``(4) Adjustment for intra-regional geographic 
        variations.--The Administrator shall also adjust such amounts 
        in a manner to take into account variations in payments rates 
        under part C among the different payment areas under such part 
        included in each EFFS region.
    ``(d) Application of Additional Payment Rules.--The provisions of 
section 1853 (other than subsections (a)(1)(A), (d), and (e)) shall 
apply to an EFFS plan under this part, except as otherwise provided in 
this section.

``premiums; organizational and financial requirements; establishment of 
              standards; contracts with effs organizations

    ``Sec. 1860E-4. (a) Premiums.--
            ``(1) In general.--The provisions of section 1854 (other 
        than subsections (a)(6)(C) and (h)), including subsection 
        (b)(5) relating to the consolidation of drug and non-drug 
        beneficiary premiums and subsection (c) relating to uniform 
        bids and premiums, shall apply to an EFFS plan under this part, 
        subject to paragraph (2).
            ``(2) Cross-walk.--In applying paragraph (1), any reference 
        in section 1854(b)(1)(A) or 1854(d) to--
                    ``(A) a Medicare Advantage monthly basic 
                beneficiary premium is deemed a reference to the EFFS 
                monthly basic beneficiary premium (as defined in 
                paragraph (3)(A));
                    ``(B) a Medicare Advantage monthly prescription 
                drug beneficiary premium is deemed a reference to the 
                EFFS monthly prescription drug beneficiary premium (as 
                defined in paragraph (3)(B)); and
                    ``(C) a Medicare Advantage monthly supplemental 
                beneficiary premium is deemed a reference to the EFFS 
                monthly supplemental beneficiary premium (as defined in 
                paragraph (3)(C)).
            ``(3) Definitions.--For purposes of this part:
                    ``(A) EFFS monthly basic beneficiary premium.--The 
                term `EFFS monthly basic beneficiary premium' means, 
                with respect to an EFFS plan--
                            ``(i) described in section 1860E-3(c)(1)(A) 
                        (relating to plans providing rebates), zero; or
                            ``(ii) described in section 1860E-
                        3(c)(1)(B), the amount (if any) by which the 
                        unadjusted EFFS statutory non-drug monthly bid 
                        amount exceeds the EFFS region-specific non-
                        drug monthly benchmark amount (as defined in 
                        section 1860E-3(b)(3)).
                    ``(B) EFFS monthly prescription drug beneficiary 
                premium.--The term `EFFS monthly prescription drug 
                beneficiary premium' means, with respect to an EFFS 
                plan, the portion of the aggregate monthly bid amount 
                submitted under clause (i) of section 1860E-3(a)(3)(A) 
                for the year that is attributable under such section to 
                the provision of statutory prescription drug benefits.
                    ``(C) EFFS monthly supplemental beneficiary 
                premium.--The term `EFFS monthly supplemental 
                beneficiary premium' means, with respect to an EFFS 
                plan, the portion of the aggregate monthly bid amount 
                submitted under clause (i) of section 1860E-3(a)(3)(A) 
                for the year that is attributable under such section to 
                the provision of nonstatutory benefits.
    ``(b) Organizational and Financial Requirements.--The provisions of 
section 1855 shall apply to an EFFS plan offered by an EFFS 
organization under this part.
    ``(c) Standards.--The provisions of paragraphs (1), (3), and (4) of 
section 1856(b) shall apply to an EFFS plan offered by an EFFS 
organization under this part.
    ``(d) Contracts with EFFS Organizations.--The provisions of section 
1857 shall apply to an EFFS plan offered by an EFFS organization under 
this part, except that any reference in such section to part C is 
deemed a reference to this part.''.
    (b) Application of Medigap Provisions to EFFS Plans.--Section 1882 
of the Social Security Act (42 U.S.C. 1395ss) shall be administered as 
if any reference to a Medicare+Choice organization offering a 
Medicare+Choice plan under part C of title XVIII of such Act were a 
reference both to a Medicare Advantage organization offering a Medicare 
Advantage plan under such part and an EFFS organization offering an 
EFFS plan under part E of such title.

                 Subtitle B--Medicare Advantage Program

                  CHAPTER 1--IMPLEMENTATION OF PROGRAM

SEC. 211. IMPLEMENTATION OF MEDICARE ADVANTAGE PROGRAM.

    (a) In General.--There is hereby established the Medicare Advantage 
program. The Medicare Advantage program shall consist of the program 
under part C of title XVIII of the Social Security Act, as amended by 
this title.
    (b) References.--Any reference to the program under part C of title 
XVIII of the Social Security Act shall be deemed a reference to the 
Medicare Advantage program and, with respect to such part, any 
reference to ``Medicare+Choice'' is deemed a reference to ``Medicare 
Advantage''.

SEC. 212. MEDICARE ADVANTAGE IMPROVEMENTS.

    (a) Equalizing Payments With Fee-For-Service.--
            (1) In general.--Section 1853(c)(1) (42 U.S.C. 1395w-
        23(c)(1)) is amended by adding at the end the following:
                    ``(D) Based on 100 percent of fee-for-service 
                costs.--
                            ``(i) In general.--For 2004, the adjusted 
                        average per capita cost for the year involved, 
                        determined under section 1876(a)(4) for the 
                        Medicare Advantage payment area for services 
                        covered under parts A and B for individuals 
                        entitled to benefits under part A and enrolled 
                        under part B who are not enrolled in a Medicare 
                        Advantage under this part for the year, but 
                        adjusted to exclude costs attributable to 
                        payments under section 1886(h).
                            ``(ii) Inclusion of costs of va and dod 
                        military facility services to medicare-eligible 
                        beneficiaries.--In determining the adjusted 
                        average per capita cost under clause (i) for a 
                        year, such cost shall be adjusted to include 
                        the Secretary's estimate, on a per capita 
                        basis, of the amount of additional payments 
                        that would have been made in the area involved 
                        under this title if individuals entitled to 
                        benefits under this title had not received 
                        services from facilities of the Department of 
                        Veterans Affairs or the Department of 
                        Defense.''.
            (2) Conforming amendment.--Such section is further amended, 
        in the matter before subparagraph (A), by striking ``or (C)'' 
        and inserting ``(C), or (D)''.
    (b) Change in Budget Neutrality for Blend.--Section 1853(c) (42 
U.S.C. 1395w-23(c)) is amended--
            (1) in paragraph (1)(A), by inserting ``(for a year other 
        than 2004)'' after ``multiplied''; and
            (2) in paragraph (5), by inserting ``(other than 2004)'' 
        after ``for each year''.
    (c) Increasing Minimum Percentage Increase to National Growth 
Rate.--
            (1) In general.--Section 1853(c)(1) (42 U.S.C. 1395w-
        23(c)(1)) is amended--
                    (A) in subparagraph (A), by striking ``The sum'' 
                and inserting ``For a year before 2005, the sum'';
                    (B) in subparagraph (B)(iv), by striking ``and each 
                succeeding year'' and inserting ``, 2003, and 2004'';
                    (C) in subparagraph (C)(iv), by striking ``and each 
                succeeding year'' and inserting ``and 2003''; and
                    (D) by adding at the end of subparagraph (C) the 
                following new clause:
                            ``(v) For 2004 and each succeeding year, 
                        the greater of--
                                    ``(I) 102 percent of the annual 
                                Medicare Advantage capitation rate 
                                under this paragraph for the area for 
                                the previous year; or
                                    ``(II) the annual Medicare 
                                Advantage capitation rate under this 
                                paragraph for the area for the previous 
                                year increased by the national per 
                                capita Medicare Advantage growth 
                                percentage, described in paragraph (6) 
                                for that succeeding year, but not 
                                taking into account any adjustment 
                                under paragraph (6)(C) for a year 
                                before 2004.''.
            (2) Conforming amendment.--Section 1853(c)(6)(C) (42 U.S.C. 
        1395w-23(c)(6)(C)) is amended by inserting before the period at 
        the end the following: ``, except that for purposes of 
        paragraph (1)(C)(v)(II), no such adjustment shall be made for a 
        year before 2004''.
    (d) Inclusion of Costs of DOD and VA Military Facility Services to 
Medicare-Eligible Beneficiaries in Calculation of Medicare+Choice 
Payment Rates.--Section 1853(c)(3) (42 U.S.C. 1395w-23(c)(3)) is 
amended--
            (1) in subparagraph (A), by striking ``subparagraph (B)'' 
        and inserting ``subparagraphs (B) and (E)'', and
            (2) by adding at the end the following new subparagraph:
                    ``(E) Inclusion of costs of dod and va military 
                facility services to medicare-eligible beneficiaries.--
                In determining the area-specific Medicare+Choice 
                capitation rate under subparagraph (A) for a year 
                (beginning with 2004), the annual per capita rate of 
                payment for 1997 determined under section 1876(a)(1)(C) 
                shall be adjusted to include in the rate the 
                Secretary's estimate, on a per capita basis, of the 
                amount of additional payments that would have been made 
                in the area involved under this title if individuals 
                entitled to benefits under this title had not received 
                services from facilities of the Department of Defense 
                or the Department of Veterans Affairs.''.
    (e) Extending Special Rule for Certain Inpatient Hospital Stays to 
Rehabilitation Hospitals.--
            (1) In general.--Section 1853(g) (42 U.S.C. 1395w-23(g)) is 
        amended--
                    (A) by inserting ``or from a rehabilitation 
                facility (as defined in section 1886(j)(1)(A))'' after 
                ``1886(d)(1)(B))''; and
                    (B) in paragraph (2)(B), by inserting ``or section 
                1886(j), as the case may be,'' after ``1886(d)''.
            (2) Effective date.--The amendments made by paragraph (1) 
        shall apply to contract years beginning on or after January 1, 
        2004.
    (f) MedPAC Study of AAPCC.--
            (1) Study.--The Medicare Payment Advisory Commission shall 
        conduct a study that assesses the method used for determining 
        the adjusted average per capita cost (AAPCC) under section 
        1876(a)(4) of the Social Security Act (42 U.S.C. 1395mm(a)(4)) 
        as applied under section 1853(c)(1)(A) of such Act (as amended 
        by subsection (a)). Such study shall include an examination 
        of--
                    (A) the bases for variation in such costs between 
                different areas, including differences in input prices, 
                utilization, and practice patterns;
                    (B) the appropriate geographic area for payment 
                under the Medicare Advantage program under part C of 
                title XVIII of such Act; and
                    (C) the accuracy of risk adjustment methods in 
                reflecting differences in costs of providing care to 
                different groups of beneficiaries served under such 
                program.
            (2) Report.--Not later than 18 months after the date of the 
        enactment of this Act, the Commission shall submit to Congress 
        a report on the study conducted under paragraph (1).
    (g) Report on Impact of Increased Financial Assistance to Medicare 
Advantage Plans.--Not later than July 1, 2006, the Medicare Benefits 
Administrator shall submit to Congress a report that describes the 
impact of additional financing provided under this Act and other Acts 
(including the Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 and BIPA) on the availability of Medicare Advantage plans 
in different areas and its impact on lowering premiums and increasing 
benefits under such plans.
    (h) Announcement of Revised Medicare Advantage Payment Rates.--
Within 6 weeks after the date of the enactment of this Act, the 
Secretary shall determine, and shall announce (in a manner intended to 
provide notice to interested parties) Medicare Advantage capitation 
rates under section 1853 of the Social Security Act (42 U.S.C. 1395w-
23) for 2004, revised in accordance with the provisions of this 
section.

            CHAPTER 2--IMPLEMENTATION OF COMPETITION PROGRAM

SEC. 221. COMPETITION PROGRAM BEGINNING IN 2006.

    (a) Submission of EFFS-Like Bidding Information Beginning in 
2006.--Section 1854 (42 U.S.C. 1395w-24) is amended--
            (1) by amending the section heading to read as follows:

                      ``premiums and bid amount'';

            (2) in subsection (a)(1)(A)--
                    (A) by striking ``(A)'' and inserting ``(A)(i) if 
                the following year is before 2006,''; and
                    (B) by inserting before the semicolon at the end 
                the following: ``or (ii) if the following year is 2006 
                or later, the information described in paragraph (3) or 
                (6)(A) for the type of plan involved''; and
            (3) by adding at the end of subsection (a) the following:
            ``(6) Submission of bid amounts by medicare advantage 
        organizations.--
                    ``(A) Information to be submitted.--The information 
                described in this subparagraph is as follows:
                            ``(i) The monthly aggregate bid amount for 
                        provision of all items and services under this 
                        part, which amount shall be based on average 
                        costs for a typical beneficiary residing in the 
                        area, and the actuarial basis for determining 
                        such amount.
                            ``(ii) The proportions of such bid amount 
                        that are attributable to--
                                    ``(I) the provision of statutory 
                                non-drug benefits (such portion 
                                referred to in this part as the 
                                `unadjusted Medicare Advantage 
                                statutory non-drug monthly bid 
                                amount');
                                    ``(II) the provision of statutory 
                                prescription drug benefits; and
                                    ``(III) the provision of non-
                                statutory benefits;
                        and the actuarial basis for determining such 
                        proportions.
                            ``(iii) Such additional information as the 
                        Administrator may require to verify the 
                        actuarial bases described in clauses (i) and 
                        (ii).
                    ``(B) Statutory benefits defined.--For purposes of 
                this part:
                            ``(i) The term `statutory non-drug 
                        benefits' means benefits under section 
                        1852(a)(1).
                            ``(ii) The term `statutory prescription 
                        drug benefits' means benefits under part D.
                            ``(iii) The term `statutory benefits' means 
                        statutory prescription drug benefits and 
                        statutory non-drug benefits.
                    ``(C) Acceptance and negotiation of bid amounts.--
                            ``(i) In general.--Subject to clause (ii)--
                                    ``(I) the Administrator has the 
                                authority to negotiate regarding 
                                monthly bid amounts submitted under 
                                subparagraph (A) (and the proportion 
                                described in subparagraph (A)(ii)), and 
                                for such purpose and subject to such 
                                clause, the Administrator has 
                                negotiation authority that the Director 
                                of the Office of Personnel Management 
                                has with respect to health benefits 
                                plans under chapter 89 of title 5, 
                                United States Code; and
                                    ``(II) the Administrator may reject 
                                such a bid amount or proportion if the 
                                Administrator determines that such 
                                amount or proportion is not supported 
                                by the actuarial bases provided under 
                                subparagraph (A).
                            ``(ii) Exception.--In the case of a plan 
                        described in section 1851(a)(2)(C), the 
                        provisions of clause (i) shall not apply and 
                        the provisions of paragraph (5)(B), prohibiting 
                        the review, approval, or disapproval of amounts 
                        described in such paragraph, shall apply to the 
                        negotiation and rejection of the monthly bid 
                        amounts and proportion referred to in 
                        subparagraph (A).''.
    (b) Providing for Beneficiary Savings for Certain Plans.--
            (1) In general.--Section 1854(b) (42 U.S.C. 1395w-24(b)) is 
        amended--
                    (A) by adding at the end of paragraph (1) the 
                following new subparagraph:
                    ``(C) Beneficiary rebate rule.--
                            ``(i) Requirement.--The Medicare Advantage 
                        plan shall provide to the enrollee a monthly 
                        rebate equal to 75 percent of the average per 
                        capita savings (if any) described in paragraph 
                        (3) applicable to the plan and year involved.
                            ``(iii) Form of rebate.--A rebate required 
                        under this subparagraph shall be provided--
                                    ``(I) through the crediting of the 
                                amount of the rebate towards the 
                                Medicare Advantage monthly 
                                supplementary beneficiary premium or 
                                the premium imposed for prescription 
                                drug coverage under part D;
                                    ``(II) through a direct monthly 
                                payment (through electronic funds 
                                transfer or otherwise); or
                                    ``(III) through other means 
                                approved by the Medicare Benefits 
                                Administrator,
                        or any combination thereof.''; and
                    (B) by adding at the end the following new 
                paragraphs:
            ``(3) Computation of average per capita monthly savings.--
        For purposes of paragraph (1)(C)(i), the average per capita 
        monthly savings referred to in such paragraph for a Medicare 
        Advantage plan and year is computed as follows:
                    ``(A) Determination of state-wide average risk 
                adjustment.--
                            ``(i) In general.--The Medicare Benefits 
                        Administrator shall determine, at the same time 
                        rates are promulgated under section 1853(b)(1) 
                        (beginning with 2006), for each State the 
                        average of the risk adjustment factors to be 
                        applied under section 1853(a)(1)(A) to payment 
                        for enrollees in that State. In the case of a 
                        State in which a Medicare Advantage plan was 
                        offered in the previous year, the Administrator 
                        may compute such average based upon risk 
                        adjustment factors applied in that State in a 
                        previous year.
                            ``(ii) Treatment of new states.--In the 
                        case of a State in which no Medicare Advantage 
                        plan was offered in the previous year, the 
                        Administrator shall estimate such average. In 
                        making such estimate, the Administrator may use 
                        average risk adjustment factors applied to 
                        comparable States or applied on a national 
                        basis.
                    ``(B) Determination of risk adjusted benchmark and 
                risk-adjusted bid.--For each Medicare Advantage plan 
                offered in a State, the Administrator shall--
                            ``(i) adjust the Medicare Advantage area-
                        specific non-drug monthly benchmark amount (as 
                        defined in subsection (j)) by the applicable 
                        average risk adjustment factor computed under 
                        subparagraph (A); and
                            ``(ii) adjust the unadjusted Medicare 
                        Advantage statutory non-drug monthly bid amount 
                        by such applicable average risk adjustment 
                        factor.
                    ``(C) Determination of average per capita monthly 
                savings.--The average per capita monthly savings 
                described in this subparagraph is equal to the amount 
                (if any) by which--
                            ``(i) the risk-adjusted benchmark amount 
                        computed under subparagraph (B)(i), exceeds
                            ``(ii) the risk-adjusted bid computed under 
                        subparagraph (B)(ii).
                    ``(D) Authority to determine risk adjustment for 
                areas other than states.--The Administrator may provide 
                for the determination and application of risk 
                adjustment factors under this paragraph on the basis of 
                areas other than States.
            ``(4) Beneficiary's option of payment through withholding 
        from social security payment or use of electronic funds 
        transfer mechanism.--In accordance with regulations, a Medicare 
        Advantage organization shall permit each enrollee, at the 
        enrollee's option, to make payment of premiums under this part 
        to the organization indirectly through withholding from benefit 
        payments in the manner provided under section 1840 with respect 
        to monthly premiums under section 1839 or through an electronic 
        funds transfer mechanism (such as automatic charges of an 
        account at a financial institution or a credit or debit card 
        account) or otherwise. All premium payments that are withheld 
        under this paragraph that are credited to the Federal 
        Supplementary Medical Insurance Drug Trust Fund shall be paid 
        to the Medicare Advantage organization involved.''.
            (2) Provision of single consolidated premium.--Section 
        1854(b) (42 U.S.C. 1395w-24(b)), as amended by paragraph (1), 
        is further amended by adding at the end the following new 
        paragraph:
            ``(5) Single consolidated premium.--In the case of an 
        enrollee in a Medicare Advantage plan who elects under part D 
        to be provided qualified prescription drug coverage through the 
        plan, the Administrator shall provide a mechanism for the 
        consolidation of the beneficiary premium amount for non-drug 
        benefits under this part with the premium amount for 
        prescription drug coverage under part D provided through the 
        plan.''.
            (3) Computation of medicare advantage area-specific non-
        drug benchmark.--Section 1853 (42 U.S.C. 1395w-23) is amended 
        by adding at the end the following new subsection:
    ``(j) Computation of Medicare Advantage Area-Specific Non-Drug 
Monthly Benchmark Amount.--For purposes of this part, the term 
`Medicare Advantage area-specific non-drug monthly benchmark amount' 
means, with respect to a Medicare Advantage payment area for a month in 
a year, an amount equal to \1/12\ of the annual Medicare Advantage 
capitation rate under section 1853(c)(1) for the area for the year.''.
    (c) Payment of Plans Based on Bid Amounts.--
            (1) In general.--Section 1853(a)(1)(A) (42 U.S.C. 1395w-23) 
        is amended by striking ``in an amount'' and all that follows 
        and inserting the following: ``in an amount determined as 
        follows:
                            ``(i) Payment before 2006.--For years 
                        before 2006, the payment amount shall be equal 
                        to \1/12\ of the annual Medicare Advantage 
                        capitation rate (as calculated under subsection 
                        (c)(1)) with respect to that individual for 
                        that area, reduced by the amount of any 
                        reduction elected under section 1854(f)(1)(E) 
                        and adjusted under clause (iv).
                            ``(ii) Payment for statutory non-drug 
                        benefits beginning with 2006.--For years 
                        beginning with 2006--
                                    ``(I) Plans with bids below 
                                benchmark.--In the case of a plan for 
                                which there are average per capita 
                                monthly savings described in section 
                                1854(b)(3)(C), the payment under this 
                                subsection is equal to the unadjusted 
                                Medicare Advantage statutory non-drug 
                                monthly bid amount, adjusted under 
                                clause (iv), plus the amount of the 
                                monthly rebate computed under section 
                                1854(b)(1)(C)(i) for that plan and 
                                year.
                                    ``(II) Plans with bids at or above 
                                benchmark.--In the case of a plan for 
                                which there are no average per capita 
                                monthly savings described in section 
                                1854(b)(3)(C), the payment amount under 
                                this subsection is equal to the 
                                Medicare Advantage area-specific non-
                                drug monthly benchmark amount, adjusted 
                                under clause (iv).
                            ``(iii) For federal drug subsidies.--In the 
                        case in which an enrollee who elects under part 
                        D to be provided qualified prescription drug 
                        coverage through the plan, the Medicare 
                        Advantage organization offering such plan also 
                        is entitled--
                                    ``(I) to direct subsidy payment 
                                under section 1860D-8(a)(1);
                                    ``(II) to reinsurance subsidy 
                                payments under section 1860D-8(a)(2); 
                                and
                                    ``(III) to reimbursement for 
                                premium and cost-sharing reductions for 
                                low-income individuals under section 
                                1860D-7(c)(3).
                            ``(iv) Demographic adjustment, including 
                        adjustment for health status.--The 
                        Administrator shall adjust the payment amount 
                        under clause (i), the unadjusted Medicare 
                        Advantage statutory non-drug monthly bid amount 
                        under clause (ii)(I), and the Medicare 
                        Advantage area-specific non-drug monthly 
                        benchmark amount under clause (ii)(II) for such 
                        risk factors as age, disability status, gender, 
                        institutional status, and such other factors as 
                        the Administrator determines to be appropriate, 
                        including adjustment for health status under 
                        paragraph (3), so as to ensure actuarial 
                        equivalence. The Administrator may add to, 
                        modify, or substitute for such adjustment 
                        factors if such changes will improve the 
                        determination of actuarial equivalence.''.
    (d) Conforming Amendments.--
            (1) Protection against beneficiary selection.--Section 
        1852(b)(1)(A) (42 U.S.C. 1395w-22(b)(1)(A)) is amended by 
        adding at the end the following: ``The Administrator shall not 
        approve a plan of an organization if the Administrator 
        determines that the benefits are designed to substantially 
        discourage enrollment by certain Medicare Advantage eligible 
        individuals with the organization.''.
            (2) Conforming amendment to premium terminology.--Section 
        1854(b)(2) (42 U.S.C. 1395w-24(b)(2)) is amended by 
        redesignating subparagraph (C) as subparagraph (D) and by 
        striking subparagraphs (A) and (B) and inserting the following:
                    ``(A) Medicare advantage monthly basic beneficiary 
                premium.--The term `Medicare Advantage monthly basic 
                beneficiary premium' means, with respect to a Medicare 
                Advantage plan--
                            ``(i) described in section 
                        1853(a)(1)(A)(ii)(I) (relating to plans 
                        providing rebates), zero; or
                            ``(ii) described in section 
                        1853(a)(1)(A)(ii)(II), the amount (if any) by 
                        which the unadjusted Medicare Advantage 
                        statutory non-drug monthly bid amount exceeds 
                        the Medicare Advantage area-specific non-drug 
                        monthly benchmark amount.
                    ``(B) Medicare advantage monthly prescription drug 
                beneficiary premium.--The term `Medicare Advantage 
                monthly prescription drug beneficiary premium' means, 
                with respect to a Medicare Advantage plan, that portion 
                of the bid amount submitted under clause (i) of 
                subsection (a)(6)(A) for the year that is attributable 
                under such section to the provision of statutory 
                prescription drug benefits.
                    ``(C) Medicare advantage monthly supplemental 
                beneficiary premium.--The term `Medicare Advantage 
                monthly supplemental beneficiary premium' means, with 
                respect to a Medicare Advantage plan, the portion of 
                the aggregate monthly bid amount submitted under clause 
                (i) of subsection (a)(6)(A) for the year that is 
                attributable under such section to the provision of 
                nonstatutory benefits.''.
            (3) Requirement for uniform premium and bid amounts.--
        Section 1854(c) (42 U.S.C. 1395w-24(c)) is amended to read as 
        follows:
    ``(c) Uniform Premium and Bid Amounts.--The Medicare Advantage 
monthly bid amount submitted under subsection (a)(6), the Medicare 
Advantage monthly basic, prescription drug, and supplemental 
beneficiary premiums, and the Medicare Advantage monthly MSA premium 
charged under subsection (b) of a Medicare Advantage organization under 
this part may not vary among individuals enrolled in the plan.''.
            (4) Permitting beneficiary rebates.--
                    (A) Section 1851(h)(4)(A) (42 U.S.C. 1395w-
                21(h)(4)(A)) is amended by inserting ``except as 
                provided under section 1854(b)(1)(C)'' after ``or 
                otherwise''.
                    (B) Section 1854(d) (42 U.S.C. 1395w-24(d)) is 
                amended by inserting ``, except as provided under 
                subsection (b)(1)(C),'' after ``and may not provide''.
            (5) Other conforming amendments relating to bids.--Section 
        1854 (42 U.S.C. 1395w-24) is amended--
                    (A) in the heading of subsection (a), by inserting 
                ``and Bid Amounts'' after ``Premiums''; and
                    (B) in subsection (a)(5)(A), by inserting 
                ``paragraphs (2), (3), and (4) of'' after ``filed 
                under''.
    (e) Additional Conforming Amendments.--
            (1) Annual determination and announcement of certain 
        factors.--Section 1853(b)(1) (42 U.S.C. 1395w-23(b)(1)) is 
        amended by striking ``the respective calendar year'' and all 
        that follows and inserting the following: ``the calendar year 
        concerned with respect to each Medicare Advantage payment area, 
        the following:
                    ``(A) Pre-competition information.--For years 
                before 2006, the following:
                            ``(i) Medicare advantage capitation 
                        rates.--The annual Medicare Advantage 
                        capitation rate for each Medicare Advantage 
                        payment area for the year.
                            ``(ii) Adjustment factors.--The risk and 
                        other factors to be used in adjusting such 
                        rates under subsection (a)(1)(A) for payments 
                        for months in that year.
                    ``(B) Competition information.--For years beginning 
                with 2006, the following:
                            ``(i) Benchmark.--The Medicare Advantage 
                        area-specific non-drug benchmark under section 
                        1853(j).
                            ``(ii) Adjustment factors.--The adjustment 
                        factors applied under section 1853(a)(1)(A)(iv) 
                        (relating to demographic adjustment), section 
                        1853(a)(1)(B) (relating to adjustment for end-
                        stage renal disease), and section 1853(a)(3) 
                        (relating to health status adjustment).''.
            (2) Repeal of provisions relating to adjusted community 
        rate (acr).--
                    (A) In general.--Subsections (e) and (f) of section 
                1854 (42 U.S.C. 1395w-24) are repealed.
                    (B) Conforming amendments.--(i) Section 1839(a)(2) 
                (42 U.S.C. 1395r(a)(2)) is amended by striking ``, and 
                to reflect'' and all that follows and inserting a 
                period.
                    (ii) Section 1852(a)(1) (42 U.S.C. 1395w-22(a)(1)) 
                is amended by striking ``title XI'' and all that 
                follows and inserting the following: ``title XI those 
                items and services (other than hospice care) for which 
                benefits are available under parts A and B to 
                individuals residing in the area served by the plan.''.
                    (iii) Section 1857(d)(1) (42 U.S.C. 1395w-27(d)(1)) 
                is amended by striking ``, costs, and computation of 
                the adjusted community rate'' and inserting ``and 
                costs''.
    (f) References under Part E.--Section 1859 (42 U.S.C. 1395w-29) is 
amended by adding at the end the following new subsection:
    ``(f) Application under Part E.--In the case of any reference under 
part E to a requirement or provision of this part in the relation to an 
EFFS plan or organization under such part, except as otherwise 
specified any such requirement or provision shall be applied to such 
organization or plan in the same manner as such requirement or 
provision applies to a Medicare Advantage private fee-for-service plan 
(and the Medicare Advantage organization that offers such plan) under 
this part.''.
    (g) Effective Date.--The amendments made by this section shall 
apply to payments and premiums for months beginning with January 2006.

                     CHAPTER 3--ADDITIONAL REFORMS

SEC. 231. MAKING PERMANENT CHANGE IN MEDICARE ADVANTAGE REPORTING 
              DEADLINES AND ANNUAL, COORDINATED ELECTION PERIOD.

    (a) Change in Reporting Deadline.--Section 1854(a)(1) (42 U.S.C. 
1395w-24(a)(1)), as amended by section 532(b)(1) of the Public Health 
Security and Bioterrorism Preparedness and Response Act of 2002, is 
amended by striking ``2002, 2003, and 2004 (or July 1 of each other 
year)'' and inserting ``2002 and each subsequent year''.
    (b) Delay in Annual, Coordinated Election Period.--Section 
1851(e)(3)(B) (42 U.S.C. 1395w-21(e)(3)(B)), as amended by section 
532(c)(1)(A) of the Public Health Security and Bioterrorism 
Preparedness and Response Act of 2002, is amended--
            (1) by striking ``and after 2005''; and
            (2) by striking ``, 2004, and 2005'' and inserting ``and 
        any subsequent year''.
    (c) Annual Announcement of Payment Rates.--Section 1853(b)(1) (42 
U.S.C. 1395w-23(b)(1)), as amended by section 532(d)(1) of the Public 
Health Security and Bioterrorism Preparedness and Response Act of 2002, 
is amended--
            (1) by striking ``and after 2005''; and
            (2) by striking ``and 2005'' and inserting ``and each 
        subsequent year''.
    (d) Requiring Provision of Available Information Comparing Plan 
Options.--The first sentence of section 1851(d)(2)(A)(ii) (42 U.S.C. 
1395w-21(d)(2)(A)(ii)) is amended by inserting before the period the 
following: ``to the extent such information is available at the time of 
preparation of materials for the mailing''.

SEC. 232. AVOIDING DUPLICATIVE STATE REGULATION.

    (a) In General.--Section 1856(b)(3) (42 U.S.C. 1395w-26(b)(3)) is 
amended to read as follows:
            ``(3) Relation to state laws.--The standards established 
        under this subsection shall supersede any State law or 
        regulation (other than State licensing laws or State laws 
        relating to plan solvency) with respect to Medicare Advantage 
        plans which are offered by Medicare Advantage organizations 
        under this part.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on the date of the enactment of this Act.

SEC. 233. SPECIALIZED MEDICARE ADVANTAGE PLANS FOR SPECIAL NEEDS 
              BENEFICIARIES.

    (a) Treatment as Coordinated Care Plan.--Section 1851(a)(2)(A) (42 
U.S.C. 1395w-21(a)(2)(A)) is amended by adding at the end the following 
new sentence: ``Specialized Medicare Advantage plans for special needs 
beneficiaries (as defined in section 1859(b)(4)) may be any type of 
coordinated care plan.''.
    (b) Specialized Medicare Advantage Plan for Special Needs 
Beneficiaries Defined.--Section 1859(b) (42 U.S.C. 1395w-29(b)) is 
amended by adding at the end the following new paragraph:
            ``(4) Specialized medicare advantage plans for special 
        needs beneficiaries.--
                    ``(A) In general.--The term `specialized Medicare 
                Advantage plan for special needs beneficiaries' means a 
                Medicare Advantage plan that exclusively serves special 
                needs beneficiaries (as defined in subparagraph (B)).
                    ``(B) Special needs beneficiary.--The term `special 
                needs beneficiary' means a Medicare Advantage eligible 
                individual who--
                            ``(i) is institutionalized (as defined by 
                        the Secretary);
                            ``(ii) is entitled to medical assistance 
                        under a State plan under title XIX; or
                            ``(iii) meets such requirements as the 
                        Secretary may determine would benefit from 
                        enrollment in such a specialized Medicare 
                        Advantage plan described in subparagraph (A) 
                        for individuals with severe or disabling 
                        chronic conditions.''.
    (c) Restriction on Enrollment Permitted.--Section 1859 (42 U.S.C. 
1395w-29) is amended by adding at the end the following new subsection:
    ``(f) Restriction on Enrollment for Specialized Medicare Advantage 
Plans for Special Needs Beneficiaries.--In the case of a specialized 
Medicare Advantage plan (as defined in subsection (b)(4)), 
notwithstanding any other provision of this part and in accordance with 
regulations of the Secretary and for periods before January 1, 2007, 
the plan may restrict the enrollment of individuals under the plan to 
individuals who are within one or more classes of special needs 
beneficiaries.''.
    (d) Authority To Designate Other Plans as Specialized Medicare 
Advantage Plans.--In promulgating regulations to carry out the last 
sentence of section 1851(a)(2)(A) of the Social Security Act (as added 
by subsection (a)) and section 1859(b)(4) of such Act (as added by 
subsection (b)), the Secretary may provide (notwithstanding section 
1859(b)(4)(A) of such Act) for the offering of specialized Medicare 
Advantage plans by Medicare Advantage plans that disproportionately 
serve special needs beneficiaries who are frail, elderly medicare 
beneficiaries.
    (e) Report to Congress.--Not later than December 31, 2005, the 
Medicare Benefits Administrator shall submit to Congress a report that 
assesses the impact of specialized Medicare Advantage plans for special 
needs beneficiaries on the cost and quality of services provided to 
enrollees. Such report shall include an assessment of the costs and 
savings to the medicare program as a result of amendments made by 
subsections (a), (b), and (c).
    (f) Effective Dates.--
            (1) In general.--The amendments made by subsections (a), 
        (b), and (c) shall take effect upon the date of the enactment 
        of this Act.
            (2) Deadline for issuance of requirements for special needs 
        beneficiaries; transition.--No later than 6 months after the 
        date of the enactment of this Act, the Secretary shall issue 
        interim final regulations to establish requirements for special 
        needs beneficiaries under section 1859(b)(4)(B)(iii) of the 
        Social Security Act, as added by subsection (b).

SEC. 234. MEDICARE MSAS.

    (a) Exemption from Reporting Enrollee Encounter Data.--
            (1) In general.--Section 1852(e)(1) (42 U.S.C. 1395w-
        22(e)(1)) is amended by inserting ``(other than MSA plans)'' 
        after ``plans''.
            (2) Conforming amendments.--Section 1852 (42 U.S.C. 1395w-
        22) is amended--
                    (A) in subsection (c)(1)(I), by inserting before 
                the period at the end the following: ``if required 
                under such section''; and
                    (B) in subparagraphs (A) and (B) of subsection 
                (e)(2), by striking ``, a non-network MSA plan,'' and 
                ``, non-network msa plans,'' each place it appears.
    (b) Making Program Permanent and Eliminating Cap.--Section 
1851(b)(4) (42 U.S.C. 1395w-21(b)(4)) is amended--
            (1) in the heading, by striking ``on a demonstration 
        basis'';
            (2) by striking the first sentence of subparagraph (A); and
            (3) by striking the second sentence of subparagraph (C).
    (c) Applying Limitations on Balance Billing.--Section 1852(k)(1) 
(42 U.S.C. 1395w-22(k)(1)) is amended by inserting ``or with an 
organization offering a MSA plan'' after ``section 1851(a)(2)(A)''.
    (d) Additional Amendment.--Section 1851(e)(5)(A) (42 U.S.C. 1395w-
21(e)(5)(A)) is amended--
            (1) by adding ``or'' at the end of clause (i);
            (2) by striking ``, or'' at the end of clause (ii) and 
        inserting a semicolon; and
            (3) by striking clause (iii).

SEC. 235. EXTENSION OF REASONABLE COST CONTRACTS.

    Subparagraph (C) of section 1876(h)(5) (42 U.S.C. 1395mm(h)(5)) is 
amended to read as follows:
    ``(C)(i) Subject to clause (ii), may be extended or renewed under 
this subsection indefinitely.
    ``(ii) For any period beginning on or after January 1, 2008, a 
reasonable cost reimbursement contract under this subsection may not be 
extended or renewed for a service area insofar as such area, during the 
entire previous year, was within the service area of 2 or more plans 
which were coordinated care Medicare Advantage plans under part C or 2 
or more enhanced fee-for-service plans under part E and each of which 
plan for that previous year for the area involved meets the following 
minimum enrollment requirements:
            ``(I) With respect to any portion of the area involved that 
        is within a Metropolitan Statistical Area with a population of 
        more than 250,000 and counties contiguous to such Metropolitan 
        Statistical Area, 5,000 individuals.
            ``(II) With respect to any other portion of such area, 
        1,500 individuals.''.

SEC. 236. EXTENSION OF MUNICIPAL HEALTH SERVICE DEMONSTRATION PROJECTS.

    Section 9215(a) of the Consolidated Omnibus Budget Reconciliation 
Act of 1985 (42 U.S.C. 1395b-1 note), as amended by section 6135 of the 
Omnibus Budget Reconciliation Act of 1989, section 13557 of the Omnibus 
Budget Reconciliation Act of 1993, section 4017 of BBA, section 534 of 
BBRA (113 Stat. 1501A-390), and section 633 of BIPA, is amended by 
striking ``December 31, 2004'' and inserting ``December 31, 2009''.

SEC. 237. STUDY OF PERFORMANCE-BASED PAYMENT SYSTEMS.

    (a) In General.--The Secretary shall request the Institute of 
Medicine of the National Academy of Sciences to--
            (1) conduct a study that reviews and evaluates public and 
        private sector experiences in establishing performance measures 
        and payment incentives under the medicare program and linking 
        performance to payment; and
            (2) submit a report to the Secretary and Congress, not 
        later than 18 months after the date of the enactment of this 
        Act, regarding such study.
    (b) Study.--The study under subsection (a)(1) shall--
            (1) include a review and evaluation of incentives that have 
        been or could be used to encourage quality performance, 
        including those aimed at health plans and their enrollees, 
        providers and their patients, and other incentives that 
        encourage quality-based health care purchasing and 
        collaborative efforts to improve performance; and
            (2) examine how these measures and incentives might be 
        applied in the Medicare Advantage program, the Enhanced Fee-
        For-Service (EFFS) program, and traditional fee-for-service 
        programs.
    (c) Report Recommendations.--The report under subsection (a)(2) 
shall--
            (1) include recommendations regarding appropriate 
        performance measures for use in assessing and paying for 
        quality; and
            (2) identify options for updating performance measures.

       Subtitle C--Application of FEHBP-Style Competitive Reforms

SEC. 241. APPLICATION OF FEHBP-STYLE COMPETITIVE REFORM BEGINNING IN 
              2010.

    (a) Identification of Competitive EFFS Regions; Computation of 
Competitive EFFS Non-Drug Benchmarks Under EFFS Program.--
            (1) In general.--Section 1860E-3, as added by section 
        201(a), is amended by adding at the end the following new 
        subsection:
    ``(e) Application of Competition.--
            ``(1) Determination of competitive effs regions.--
                    ``(A) In general.--For purposes of this part, the 
                term `competitive EFFS region' means, for a year 
                beginning with 2010, an EFFS region that the 
                Administrator finds--
                            ``(i) there will be offered in the region 
                        during the annual, coordinated election period 
                        under section 1851(e)(3)(B) (as applied under 
                        section 1860E-1(c)) before the beginning of the 
                        year at least 2 EFFS plans (in addition to the 
                        fee-for-service program under parts A and B), 
                        each offered by a different EFFS organization 
                        and each of which met the minimum enrollment 
                        requirements of paragraph (1) of section 
                        1857(b) (as applied without regard to paragraph 
                        (3) thereof) as of March of the previous year; 
                        and
                            ``(ii) during March of the previous year at 
                        least the percentage specified in subparagraph 
                        (C) of the number of EFFS eligible individuals 
                        who reside in the region were enrolled in an 
                        EFFS plan.
                    ``(B) Percentage specified.--
                            ``(i) In general.--For purposes of 
                        subparagraph (A), subject to clause (ii), the 
                        percentage specified in this subparagraph for a 
                        year is equal the lesser of 20 percent or to 
                        the sum of--
                                    ``(I) the percentage, as estimated 
                                by the Administrator, of EFFS eligible 
                                individuals in the United States who 
                                are enrolled in EFFS plans during March 
                                of the previous year; and
                                    ``(II) the percentage, as estimated 
                                by the Administrator, of Medicare 
                                Advantage eligible individuals in the 
                                United States who are enrolled in 
                                Medicare Advantage plans during March 
                                of the previous year.
                            ``(ii) Exception.--In the case of an EFFS 
                        region that was a competitive EFFS region for 
                        the previous year, the Medicare Benefits 
                        Administrator may continue to treat the region 
                        as meeting the requirement of subparagraph 
                        (A)(ii) if the region would meet such 
                        requirement but for a de minimis reduction 
                        below the percentage specified in clause (i).
            ``(2) Competitive effs non-drug monthly benchmark amount.--
        For purposes of this part, the term `competitive EFFS non-drug 
        monthly benchmark amount' means, with respect to an EFFS region 
        for a month in a year and subject to paragraph (8), the sum of 
        the 2 components described in paragraph (3) for the region and 
        year. The Administrator shall compute such benchmark amount for 
        each competitive EFFS region before the beginning of each 
        annual, coordinated election period under section 1851(e)(3)(B) 
        for each year (beginning with 2010) in which it is designated 
        as such a region.
            ``(3) 2 components.--For purposes of paragraph (2), the 2 
        components described in this paragraph for an EFFS region and a 
        year are the following:
                    ``(A) EFFS component.--The product of the 
                following:
                            ``(i) Weighted average of plan bids in 
                        region.--The weighted average of the EFFS plan 
                        bids for the region and year (as determined 
                        under paragraph (4)(A)).
                            ``(ii) Non-ffs market share.--1 minus the 
                        fee-for-service market share percentage 
                        determined under paragraph (5) for the region 
                        and the year.
                    ``(B) Fee-for-service component.--The product of 
                the following:
                            ``(i) Fee-for-service region-specific non-
                        drug amount.--The fee-for-service region-
                        specific non-drug amount (as defined in 
                        paragraph (6)) for the region and year.
                            ``(ii) Fee-for-service market share.--The 
                        fee-for-service market share percentage 
                        (determined under paragraph (5)) for the region 
                        and the year.
            ``(4) Determination of weighted average effs plan bids for 
        a region.--
                    ``(A) In general.--For purposes of paragraph 
                (3)(A)(i), the weighted average of EFFS plan bids for 
                an EFFS region and a year is the sum of the following 
                products for EFFS plans described in subparagraph (C) 
                in the region and year:
                            ``(i) Unadjusted effs statutory non-drug 
                        monthly bid amount.--The unadjusted EFFS 
                        statutory non-drug monthly bid amount (as 
                        defined in subsection (a)(3)(A)(ii)(I)) for the 
                        region and year.
                            ``(ii) Plan's share of effs enrollment in 
                        region.--The number of individuals described in 
                        subparagraph (B), divided by the total number 
                        of such individuals for all EFFS plans 
                        described in subparagraph (C) for that region 
                        and year.
                    ``(B) Counting of individuals.--The Administrator 
                shall count, for each EFFS plan described in 
                subparagraph (C) for an EFFS region and year, the 
                number of individuals who reside in the region and who 
                were enrolled under such plan under this part during 
                March of the previous year.
                    ``(C) Exclusion of plans not offered in previous 
                year.--For an EFFS region and year, the EFFS plans 
                described in this subparagraph are plans that are 
                offered in the region and year and were offered in the 
                region in March of the previous year.
            ``(5) Computation of fee-for-service market share 
        percentage.--The Administrator shall determine, for a year and 
        an EFFS region, the proportion (in this subsection referred to 
        as the `fee-for-service market share percentage') of the EFFS 
        eligible individuals who are residents of the region during 
        March of the previous year, of such individuals who were not 
        enrolled in an EFFS plan or in a Medicare Advantage plan (or, 
        if greater, such proportion determined for individuals 
        nationally).
            ``(6) Fee-for-service region-specific non-drug amount.--
                    ``(A) In general.--For purposes of paragraph 
                (3)(B)(i) and section 1839(h)(2)(A), subject to 
                subparagraph (C), the term `fee-for-service region-
                specific non-drug amount' means, for a competitive EFFS 
                region and a year, the adjusted average per capita cost 
                for the year involved, determined under section 
                1876(a)(4) for such region for services covered under 
                parts A and B for individuals entitled to benefits 
                under part A and enrolled under this part who are not 
                enrolled in an EFFS plan under part E or a Medicare 
                Advantage plan under part C for the year, but adjusted 
                to exclude costs attributable to payments under section 
                1886(h).
                    ``(B) Use of full risk adjustment to standardize 
                fee-for-service costs to typical beneficiary.--In 
                determining the adjusted average per capita cost for a 
                region and year under subparagraph (A), such costs 
                shall be adjusted to fully take into account the 
                demographic and health status risk factors established 
                under subsection (c)(3) so that such per capita costs 
                reflect the average costs for a typical beneficiary 
                residing in the region.
                    ``(C) Inclusion of costs of va and dod military 
                facility services to medicare-eligible beneficiaries.--
                In determining the adjusted average per capita cost 
                under subparagraph (A) for a year, such cost shall be 
                adjusted to include the Administrator's estimate, on a 
                per capita basis, of the amount of additional payments 
                that would have been made in the region involved under 
                this title if individuals entitled to benefits under 
                this title had not received services from facilities of 
                the Department of Veterans Affairs or the Department of 
                Defense.
            ``(7) Application of competition.--In the case of an EFFS 
        region that is a competitive EFFS region for a year, for 
        purposes of applying subsections (b) and (c)(1) and section 
        1860E-4(a), any reference to an EFFS region-specific non-drug 
        monthly benchmark amount shall be treated as a reference to the 
        competitive EFFS non-drug monthly benchmark amount under 
        paragraph (2) for the region and year.
            ``(8) Phase-in of benchmark for each region.--
                    ``(A) Use of blended benchmark.--In the case of a 
                region that has not been a competitive EFFS region for 
                each of the previous 4 years, the competitive EFFS non-
                drug monthly benchmark amount shall be equal to the sum 
                of the following:
                            ``(i) New competitive component.--The 
                        product of--
                                    ``(I) the weighted average phase-in 
                                proportion for that area and year, as 
                                specified in subparagraph (B); and
                                    ``(II) the competitive EFFS non-
                                drug monthly benchmark amount for the 
                                region and year, determined under 
                                paragraph (2) without regard to this 
                                paragraph.
                            ``(ii) Old competitive component.--The 
                        product of--
                                    ``(I) 1 minus the weighted average 
                                phase-in proportion for that region and 
                                year; and
                                    ``(II) the EFFS region-specific 
                                non-drug benchmark amount for the 
                                region and the year.
                    ``(B) Computation of weighted average phase-in 
                proportion.--For purposes of this paragraph, the 
                `weighted average phase-in proportion' for an EFFS 
                region for a year shall be determined as follows:
                            ``(i) First year (and region not 
                        competitive region in previous year).--If the 
                        area was not a competitive EFFS region in the 
                        previous year, the weighted average phase-in 
                        proportion for the region for the year is equal 
                        to \1/5\.
                            ``(ii) Competitive region in previous 
                        year.--If the region was a competitive EFFS 
                        region in the previous year, the weighted 
                        average phase-in proportion for the region for 
                        the year is equal to the weighted average 
                        phase-in proportion determined under this 
                        subparagraph for the region for the previous 
                        year plus \1/5\, but in no case more than 1.''.
            (2) Conforming amendments.--
                    (A) Such section 1860E-3 is further amended--
                            (i) in subsection (b), by adding at the end 
                        the following new paragraph:
                    ``(4) Application in competitive regions.--For 
                special rules applying this subsection in competitive 
                EFFS regions, see subsection (e)(7).'';
                            (ii) in subsection (c)(1), by inserting 
                        ``and subsection (e)(7)'' after ``(as made 
                        applicable under subsection (d))''; and
                            (iii) in subsection (d) , by striking ``and 
                        (e)'' and inserting ``(e), and (k)''.
                    (B) Section 1860E-4(a)(1), as inserted by section 
                201(a)(2), is amended by inserting ``, except as 
                provided in section 1860E-3(e)(7)'' after ``paragraph 
                (2)''.
    (b) Identification of Competitive Medicare Advantage Areas; 
Application of Competitive Medicare Advantage Non-Drug Benchmarks Under 
Medicare Advantage Program.--
            (1) In general.--Section 1853, as amended by section 
        221(b)(3), is amended by adding at the end the following new 
        subsection:
    ``(k) Application of Competition.--
            ``(1) Determination of competitive medicare advantage 
        areas.--
                    ``(A) In general.--For purposes of this part, the 
                terms `competitive Medicare Advantage area' and `CMA 
                area' mean, for a year beginning with 2010, an area 
                (which is a metropolitan statistical area or other area 
                with a substantial number of Medicare Advantage 
                enrollees) that the Administrator finds--
                            ``(i) there will be offered during the 
                        annual, coordinated election period under 
                        section 1851(e)(3)(B) under this part before 
                        the beginning of the year at least 2 Medicare 
                        Advantage plans (in addition to the fee-for-
                        service program under parts A and B), each 
                        offered by a different Medicare Advantage 
                        organization and each of which met the minimum 
                        enrollment requirements of paragraph (1) of 
                        section 1857(b) (as applied without regard to 
                        paragraph (3) thereof) as of March of the 
                        previous year with respect to the area; and
                            ``(ii) during March of the previous year at 
                        least the percentage specified in subparagraph 
                        (B) of the number of Medicare Advantage 
                        eligible individuals who reside in the area 
                        were enrolled in a Medicare Advantage plan.
                    ``(B) Percentage specified.--
                            ``(i) In general.--For purposes of 
                        subparagraph (A), subject to clause (ii), the 
                        percentage specified in this subparagraph for a 
                        year is equal the lesser of 20 percent or to 
                        the sum of--
                                    ``(I) the percentage, as estimated 
                                by the Administrator, of EFFS eligible 
                                individuals in the United States who 
                                are enrolled in EFFS plans during March 
                                of the previous year; and
                                    ``(II) the percentage, as estimated 
                                by the Administrator, of Medicare 
                                Advantage eligible individuals in the 
                                United States who are enrolled in 
                                Medicare Advantage plans during March 
                                of the previous year.
                            ``(ii) Exception.--In the case of an area 
                        that was a competitive area for the previous 
                        year, the Medicare Benefits Administrator may 
                        continue to treat the area as meeting the 
                        requirement of subparagraph (A)(ii) if the area 
                        would meet such requirement but for a de 
                        minimis reduction below the percentage 
                        specified in clause (i).
            ``(2) Competitive medicare advantage non-drug monthly 
        benchmark amount.--For purposes of this part, the term 
        `competitive Medicare Advantage non-drug monthly benchmark 
        amount' means, with respect to a competitive Medicare Advantage 
        area for a month in a year subject to paragraph (8), the sum of 
        the 2 components described in paragraph (3) for the area and 
        year. The Administrator shall compute such benchmark amount for 
        each competitive Medicare Advantage area before the beginning 
        of each annual, coordinated election period under section 
        1851(e)(3)(B) for each year (beginning with 2010) in which it 
        is designated as such an area.
            ``(3) 2 components.--For purposes of paragraph (2), the 2 
        components described in this paragraph for a competitive 
        Medicare Advantage area and a year are the following:
                    ``(A) Medicare advantage component.--The product of 
                the following:
                            ``(i) Weighted average of medicare 
                        advantage plan bids in area.--The weighted 
                        average of the plan bids for the area and year 
                        (as determined under paragraph (4)(A)).
                            ``(ii) Non-ffs market share.--1 minus the 
                        fee-for-service market share percentage, 
                        determined under paragraph (5) for the area and 
                        year.
                    ``(B) Fee-for-service component.--The product of 
                the following:
                            ``(i) Fee-for-service area-specific non-
                        drug amount.--The fee-for-service area-specific 
                        non-drug amount (as defined in paragraph (6)) 
                        for the area and year.
                            ``(ii) Fee-for-service market share.--The 
                        fee-for-service market share percentage, 
                        determined under paragraph (5) for the area and 
                        year.
            ``(4) Determination of weighted average medicare advantage 
        bids for an area.--
                    ``(A) In general.--For purposes of paragraph 
                (3)(A)(i), the weighted average of plan bids for an 
                area and a year is the sum of the following products 
                for Medicare Advantage plans described in subparagraph 
                (C) in the area and year:
                            ``(i) Monthly medicare advantage statutory 
                        non-drug bid amount.--The unadjusted Medicare 
                        Advantage statutory non-drug monthly bid 
                        amount.
                            ``(ii) Plan's share of medicare advantage 
                        enrollment in area.--The number of individuals 
                        described in subparagraph (B), divided by the 
                        total number of such individuals for all 
                        Medicare Advantage plans described in 
                        subparagraph (C) for that area and year.
                    ``(B) Counting of individuals.--The Administrator 
                shall count, for each Medicare Advantage plan described 
                in subparagraph (C) for an area and year, the number of 
                individuals who reside in the area and who were 
                enrolled under such plan under this part during March 
                of the previous year.
                    ``(C) Exclusion of plans not offered in previous 
                year.--For an area and year, the Medicare Advantage 
                plans described in this subparagraph are plans 
                described in the first sentence of section 
                1851(a)(2)(A) that are offered in the area and year and 
                were offered in the area in March of the previous year.
            ``(5) Computation of fee-for-service market share 
        percentage.--The Administrator shall determine, for a year and 
        a competitive Medicare Advantage area, the proportion (in this 
        subsection referred to as the `fee-for-service market share 
        percentage') of Medicare Advantage eligible individuals 
        residing in the area who during March of the previous year were 
        not enrolled in a Medicare Advantage plan or in an EFFS plan 
        (or, if greater, such proportion determined for individuals 
        nationally).
            ``(6) Fee-for-service area-specific non-drug amount.--
                    ``(A) In general.--For purposes of paragraph 
                (3)(B)(i) and section 1839(h)(1)(A), subject to 
                subparagraph (C), the term `fee-for-service area-
                specific non-drug amount' means, for a competitive 
                Medicare Advantage area and a year, the adjusted 
                average per capita cost for the year involved, 
                determined under section 1876(a)(4) for such area for 
                services covered under parts A and B for individuals 
                entitled to benefits under part A and enrolled under 
                this part who are not enrolled in a Medicare Advantage 
                plan under part C or an EFFS plan under part E for the 
                year, but adjusted to exclude costs attributable to 
                payments under section 1886(h).
                    ``(B) Use of full risk adjustment to standardize 
                fee-for-service costs to typical beneficiary.--In 
                determining the adjusted average per capita cost for an 
                area and year under subparagraph (A), such costs shall 
                be adjusted to fully take into account the demographic 
                and health status risk factors established under 
                subsection (a)(1)(A)(iv) so that such per capita costs 
                reflect the average costs for a typical beneficiary 
                residing in the area.
                    ``(C) Inclusion of costs of va and dod military 
                facility services to medicare-eligible beneficiaries.--
                In determining the adjusted average per capita cost 
                under subparagraph (A) for a year, such cost shall be 
                adjusted to include the Administrator's estimate, on a 
                per capita basis, of the amount of additional payments 
                that would have been made in the area involved under 
                this title if individuals entitled to benefits under 
                this title had not received services from facilities of 
                the Department of Veterans Affairs or the Department of 
                Defense.
            ``(7) Application of competition.--In the case of an area 
        that is a competitive Medicare Advantage area for a year, for 
        purposes of applying subsection (a)(1)(A)(ii) and sections 
        1854(b)(2)(A)(ii) and 1854(b)(3)(B)(i), any reference to a 
        Medicare Advantage area-specific non-drug monthly benchmark 
        amount shall be treated as a reference to the competitive 
        Medicare Advantage non-drug monthly benchmark amount under 
        paragraph (2) for the area and year.
            ``(8) Phase-in of benchmark for each area.--
                    ``(A) Use of blended benchmark.--In the case of an 
                area that has not been a competitive Medicare Advantage 
                area for each of the previous 4 years, the competitive 
                Medicare Advantage non-drug monthly benchmark amount 
                shall be equal to the sum of the following:
                            ``(i) New competitive component.--The 
                        product of--
                                    ``(I) the weighted average phase-in 
                                proportion for that area and year, as 
                                specified in subparagraph (B); and
                                    ``(II) the competitive Medicare 
                                Advantage non-drug monthly benchmark 
                                amount for the area and year, 
                                determined under paragraph (2) without 
                                regard to this paragraph.
                            ``(ii) Old competitive component.--The 
                        product of--
                                    ``(I) 1 minus the weighted average 
                                phase-in proportion for that area and 
                                year; and
                                    ``(II) the Medicare Advantage area-
                                wide non-drug benchmark amount for the 
                                area and the year.
                    ``(B) Computation of weighted average phase-in 
                proportion.--For purposes of this paragraph, the 
                `weighted average phase-in proportion' for a Medicare 
                Advantage payment area for a year shall be determined 
                as follows:
                            ``(i) First year (and area not competitive 
                        area in previous year).--If the area was not a 
                        Medicare Advantage competitive area in the 
                        previous year, the weighted average phase-in 
                        proportion for the area for the year is equal 
                        to \1/5\.
                            ``(ii) Competitive area in previous year.--
                        If the area was a competitive Medicare 
                        Advantage area in the previous year, the 
                        weighted average phase-in proportion for the 
                        area for the year is equal to the weighted 
                        average phase-in proportion determined under 
                        this subparagraph for the area for the previous 
                        year plus \1/5\, but in no case more than 1.
                    ``(C) Medicare advantage area-wide non-drug 
                benchmark amount.--For purposes of subparagraph 
                (A)(ii)(II), the term `Medicare Advantage area-wide 
                non-drug benchmark amount' means, for an area and year, 
                the weighted average of the amounts described in 
                section 1853(j) for Medicare Advantage payment area or 
                areas included in the area (based on the number of 
                traditional fee-for-service enrollees in such payment 
                area or areas) and year.''.
            (2) Application.--Section 1854 (42 U.S.C. 1395w-24) is 
        amended--
                    (A) in subsection (b)(1)(C)(i), as added by section 
                221(b)(1)(A), by striking ``(i) Requirement.--The'' and 
                inserting ``(i) Requirement for non-competitive 
                areas.--In the case of a Medicare Advantage payment 
                area that is not a competitive Medicare Advantage area 
                designated under section 1853(k)(1), the'';
                    (B) in subsection (b)(1)(C), as so added, by 
                inserting after clause (i) the following new clause:
                            ``(ii) Requirement for competitive medicare 
                        advantage areas.--In the case of a Medicare 
                        Advantage payment area that is designated as a 
                        competitive Medicare Advantage area under 
                        section 1853(k)(1), if there are average per 
                        capita monthly savings described in paragraph 
                        (6) for a Medicare Advantage plan and year, the 
                        Medicare Advantage plan shall provide to the 
                        enrollee a monthly rebate equal to 75 percent 
                        of such savings.''; and
                    (C) by adding at the end of subsection (b), as 
                amended by sections 221(b)(1)(B) and 221(b)(2), the 
                following new paragraph:
            ``(6) Computation of average per capita monthly savings for 
        competitive medicare advantage areas.--For purposes of 
        paragraph (1)(C)(ii), the average per capita monthly savings 
        referred to in such paragraph for a Medicare Advantage plan and 
        year shall be computed in the same manner as the average per 
        capita monthly savings is computed under paragraph (3) except 
        that the reference to the Medicare Advantage area-specific non-
        drug monthly benchmark amount in paragraph (3)(B)(i) (or to the 
        benchmark amount as adjusted under paragraph (3)(C)(i)) is 
        deemed to be a reference to the competitive Medicare Advantage 
        non-drug monthly benchmark amount (or such amount as adjusted 
        in the manner described in paragraph (3)(B)(i)).''.
            (3) Additional conforming amendments.--
                    (A) Payment of plans.--Section 1853(a)(1)(A)(ii), 
                as amended by section 221(c)(1), is amended--
                            (i) in subclauses (I) and (II), by 
                        inserting ``(or, insofar as such payment area 
                        is a competitive Medicare Advantage area, 
                        described in section 1854(b)(6))'' after 
                        ``section 1854(b)(3)(C)''; and
                            (ii) in subclause (II), by inserting ``(or, 
                        insofar as such payment area is a competitive 
                        Medicare Advantage area, the competitive 
                        Medicare Advantage non-drug monthly benchmark 
                        amount)'' after ``Medicare Advantage area-
                        specific non-drug monthly benchmark amount''; 
                        and
                    (B) Disclosure of information.--Section 
                1853(b)(1)(B), as amended by section 221(e)(1), is 
                amended to read as follows:
                    ``(B) Competition information.--For years beginning 
                with 2006, the following:
                            ``(i) Benchmarks.--The Medicare Advantage 
                        area-specific non-drug benchmark under section 
                        1853(j) and, if applicable, the competitive 
                        Medicare Advantage non-drug benchmark under 
                        section 1853(k)(2), for the year and 
                        competitive Medicare Advantage area involved 
                        and the national fee-for-service market share 
                        percentage for the area and year.
                            ``(ii) Adjustment factors.--The adjustment 
                        factors applied under section 1853(a)(1)(A)(iv) 
                        (relating to demographic adjustment), section 
                        1853(a)(1)(B) (relating to adjustment for end-
                        stage renal disease), and section 1853(a)(3) 
                        (relating to health status adjustment).
                            ``(iii) Certain benchmarks and amounts.--In 
                        the case of a competitive Medicare Advantage 
                        area, the Medicare Advantage area-wide non-drug 
                        benchmark amount (as defined in subsection 
                        (k)(8)(C)) and the fee-for-service area-
                        specific non-drug amount (as defined in section 
                        1853(k)(6)) for the area.
                            ``(iv) Individuals.--The number of 
                        individuals counted under subsection (k)(4)(B) 
                        and enrolled in each Medicare Advantage plan in 
                        the area.''.
                    (C) Definition of monthly basic premium.--Section 
                1854(b)(2)(A)(ii), as amended by section 221(d)(2), is 
                amended by inserting ``(or, in the case of a 
                competitive Medicare Advantage area, the competitive 
                Medicare Advantage non-drug monthly benchmark amount 
                or, in applying this paragraph under part E in the case 
                of a competitive EFFS region, the competitive EFFS non-
                drug monthly benchmark amount)'' after ``benchmark 
                amount''.
    (c) Premium Adjustment.--
            (1) In general.--Section 1839 (42 U.S.C. 1395r) is amended 
        by adding at the end the following new subsection:
    ``(h)(1)(A) In the case of an individual who resides in a 
competitive Medicare Advantage area under section 1853(k)(1) 
(regardless of whether such area is in a competitive EFFS region under 
section 1860E-3(e)) and who is not enrolled in a Medicare Advantage 
plan under part C or in an EFFS plan under part E, the monthly premium 
otherwise applied under this part (determined without regard to 
subsections (b) and (f) or any adjustment under this subsection) shall 
be adjusted as follows: If the fee-for-service area-specific non-drug 
amount (as defined in section 1853(k)(6)) for the competitive Medicare 
Advantage area in which the individual resides for a month--
            ``(i) does not exceed the competitive Medicare Advantage 
        non-drug benchmark (as determined under paragraph (2) of 
        section 1853(k), without regard to paragraph (8) thereof) for 
        such area, the amount of the premium for the individual for the 
        month shall be reduced by an amount equal to the product of the 
        adjustment factor under subparagraph (C) and 75 percent of the 
        amount by which such competitive benchmark exceeds such fee-
        for-service area-specific non-drug amount; or
            ``(ii) exceeds such competitive Medicare Advantage non-drug 
        benchmark, the amount of the premium for the individual for the 
        month shall be adjusted to ensure, subject to subparagraph (B), 
        that--
                    ``(I) the sum of the amount of the adjusted premium 
                and the competitive Medicare Advantage non-drug 
                benchmark for the area, is equal to
                    ``(II) the sum of the unadjusted premium plus 
                amount of the fee-for-service area-specific non-drug 
                amount for the area.
    ``(B) In no case shall the actual amount of an adjustment under 
subparagraph (A)(ii) exceed the product of the adjustment factor under 
subparagraph (C) and the amount of the adjustment otherwise computed 
under subparagraph (A)(ii) without regard to this subparagraph.
    ``(C) The adjustment factor under this subparagraph for an area for 
a year is equal to--
            ``(i) the number of consecutive years (in the 5-year period 
        ending with the year involved) in which such area was a 
        competitive Medicare Advantage area; divided by
            ``(ii) 5.
    ``(2)(A) In the case of an individual who resides in an area that 
is within a competitive EFFS region under section 1860E-3(e) but is not 
within a competitive Medicare Advantage area under section 1853(k)(1) 
and who is not enrolled in a Medicare Advantage plan under part C or in 
an EFFS plan under part E, the monthly premium otherwise applied under 
this part (determined without regard to subsections (b) and (f) or any 
adjustment under this subsection) shall be adjusted as follows: If the 
fee-for-service region-specific non-drug amount (as defined in section 
1860E-3(e)(6)) for a region for a month--
            ``(i) does not exceed the competitive EFFS non-drug monthly 
        benchmark amount (as determined under paragraph (2) of section 
        1860E-3(e), without regard to paragraph (8) thereof) for such 
        region, the amount of the premium for the individual for the 
        month shall be reduced by an amount equal to the product of the 
        adjustment factor under subparagraph (C) and 75 percent of the 
        amount by which such competitive benchmark amount exceeds such 
        fee-for-service region-specific non-drug benchmark amount; or
            ``(ii) exceeds such competitive EFFS non-drug monthly 
        benchmark amount, the amount of the premium for the individual 
        for the month shall be adjusted to ensure, subject to 
        subparagraph (B), that--
                    ``(I) the sum of the amount of the adjusted premium 
                and the competitive EFFS non-drug monthly benchmark 
                amount for the region, is equal to
                    ``(II) the sum of the unadjusted premium plus the 
                amount of the EFFS region-specific non-drug monthly 
                bidfor the region.
    ``(B) In no case shall the actual amount of an adjustment under 
subparagraph (A)(ii) exceed the product of the adjustment factor under 
subparagraph (C) and the amount of the adjustment otherwise computed 
under subparagraph (A)(ii) without regard to this subparagraph.
    ``(C) The adjustment factor under this subparagraph for an EFFS 
region for a year is equal to--
            ``(i) the number of consecutive years (in the 5-year period 
        ending with the year involved) in which such region was a 
        competitive EFFS region; divided by
            ``(ii) 5.
    ``(3) Nothing in this subsection shall be construed as preventing a 
reduction under paragraph (1)(A) or paragraph (2)(A) in the premium 
otherwise applicable under this part to zero or from requiring the 
provision of a rebate to the extent such premium would otherwise be 
required to be less than zero.
    ``(4) The adjustment in the premium under this subsection shall be 
effected in such manner as the Medicare Benefits Administrator 
determines appropriate.
    ``(5) In order to carry out this subsection (insofar as it is 
effected through the manner of collection of premiums under 1840(a)), 
the Medicare Benefits Administrator shall transmit to the Commissioner 
of Social Security--
            ``(A) at the beginning of each year, the name, social 
        security account number, and the amount of the adjustment (if 
        any) under this subsection for each individual enrolled under 
        this part for each month during the year; and
            ``(B) periodically throughout the year, information to 
        update the information previously transmitted under this 
        paragraph for the year.''.
            (2) No change in medicare's defined benefit package.--
        Nothing in this part (or the amendments made by this part) 
        shall be construed as changing the entitlement to defined 
        benefits under parts A and B of title XVIII of the Social 
        Security Act.
            (3) Conforming amendment.--Section 1844(c) (42 U.S.C. 
        1395w(c)) is amended by inserting ``and without regard to any 
        premium adjustment effected under section 1839(h)'' before the 
        period at the end.
    (d) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2010.

             TITLE III--COMBATTING WASTE, FRAUD, AND ABUSE

SEC. 301. MEDICARE SECONDARY PAYOR (MSP) PROVISIONS.

    (a) Technical Amendment Concerning Secretary's Authority to Make 
Conditional Payment When Certain Primary Plans Do Not Pay Promptly.--
            (1) In general.--Section 1862(b)(2) (42 U.S.C. 1395y(b)(2)) 
        is amended--
                    (A) in subparagraph (A)(ii), by striking ``promptly 
                (as determined in accordance with regulations)'';
                    (B) in subparagraph (B)--
                            (i) by redesignating clauses (i) through 
                        (iii) as clauses (ii) through (iv), 
                        respectively; and
                            (ii) by inserting before clause (ii), as so 
                        redesignated, the following new clause:
                            ``(i) Authority to make conditional 
                        payment.--The Secretary may make payment under 
                        this title with respect to an item or service 
                        if a primary plan described in subparagraph 
                        (A)(ii) has not made or cannot reasonably be 
                        expected to make payment with respect to such 
                        item or service promptly (as determined in 
                        accordance with regulations). Any such payment 
                        by the Secretary shall be conditioned on 
                        reimbursement to the appropriate Trust Fund in 
                        accordance with the succeeding provisions of 
                        this subsection.''.
            (2) Effective date.--The amendments made by paragraph (1) 
        shall be effective as if included in the enactment of title III 
        of the Medicare and Medicaid Budget Reconciliation Amendments 
        of 1984 (Public Law 98-369).
    (b) Clarifying Amendments to Conditional Payment Provisions.--
Section 1862(b)(2) (42 U.S.C. 1395y(b)(2)) is further amended--
            (1) in subparagraph (A), in the matter following clause 
        (ii), by inserting the following sentence at the end: ``An 
        entity that engages in a business, trade, or profession shall 
        be deemed to have a self-insured plan if it carries its own 
        risk (whether by a failure to obtain insurance, or otherwise) 
        in whole or in part.'';
            (2) in subparagraph (B)(ii), as redesignated by subsection 
        (a)(2)(B)--
                    (A) by striking the first sentence and inserting 
                the following: ``A primary plan, and an entity that 
                receives payment from a primary plan, shall reimburse 
                the appropriate Trust Fund for any payment made by the 
                Secretary under this title with respect to an item or 
                service if it is demonstrated that such primary plan 
                has or had a responsibility to make payment with 
                respect to such item or service. A primary plan's 
                responsibility for such payment may be demonstrated by 
                a judgment, a payment conditioned upon the recipient's 
                compromise, waiver, or release (whether or not there is 
                a determination or admission of liability) of payment 
                for items or services included in a claim against the 
                primary plan or the primary plan's insured, or by other 
                means.''; and
                    (B) in the final sentence, by striking ``on the 
                date such notice or other information is received'' and 
                inserting ``on the date notice of, or information 
                related to, a primary plan's responsibility for such 
                payment or other information is received''; and
            (3) in subparagraph (B)(iii), , as redesignated by 
        subsection (a)(2)(B), by striking the first sentence and 
        inserting the following: ``In order to recover payment made 
        under this title for an item or service, the United States may 
        bring an action against any or all entities that are or were 
        required or responsible (directly, as an insurer or self-
        insurer, as a third-party administrator, as an employer that 
        sponsors or contributes to a group health plan, or large group 
        health plan, or otherwise) to make payment with respect to the 
        same item or service (or any portion thereof) under a primary 
        plan. The United States may, in accordance with paragraph 
        (3)(A) collect double damages against any such entity. In 
        addition, the United States may recover under this clause from 
        any entity that has received payment from a primary plan or 
        from the proceeds of a primary plan's payment to any entity.''.
    (c) Clerical Amendments.--Section 1862(b) (42 U.S.C. 1395y(b)) is 
amended--
            (1) in paragraph (1)(A), by moving the indentation of 
        clauses (ii) through (v) 2 ems to the left; and
            (2) in paragraph (3)(A), by striking ``such'' before 
        ``paragraphs''.

SEC. 302. COMPETITIVE ACQUISITION OF CERTAIN ITEMS AND SERVICES.

    (a) In General.--Section 1847 (42 U.S.C. 1395w-3) is amended to 
read as follows:

        ``competitive acquisition of certain items and services

    ``Sec. 1847. (a) Establishment of Competitive Acquisition 
Programs.--
            ``(1) Implementation of programs.--
                    ``(A) In general.--The Secretary shall establish 
                and implement programs under which competitive 
                acquisition areas are established throughout the United 
                States for contract award purposes for the furnishing 
                under this part of competitively priced items and 
                services (described in paragraph (2)) for which payment 
                is made under this part. Such areas may differ for 
                different items and services.
                    ``(B) Phased-in implementation.--The programs shall 
                be phased-in--
                            ``(i) among competitive acquisition areas 
                        over a period of not longer than 3 years in a 
                        manner so that the competition under the 
                        programs occurs in--
                                    ``(I) at least \1/3\ of such areas 
                                in 2005; and
                                    ``(II) at least \2/3\ of such areas 
                                in 2006; and
                            ``(ii) among items and services in a manner 
                        such that the programs apply to the highest 
                        cost and highest volume items and services 
                        first.
                    ``(C) Waiver of certain provisions.--In carrying 
                out the programs, the Secretary may waive such 
                provisions of the Federal Acquisition Regulation as are 
                necessary for the efficient implementation of this 
                section, other than provisions relating to 
                confidentiality of information and such other 
                provisions as the Secretary determines appropriate.
            ``(2) Items and services described.--The items and services 
        referred to in paragraph (1) are the following:
                    ``(A) Durable medical equipment and medical 
                supplies.--Covered items (as defined in section 
                1834(a)(13)) for which payment is otherwise made under 
                section 1834(a), including items used in infusion and 
                drugs and supplies used in conjunction with durable 
                medical equipment, but excluding class III devices 
                under the Federal Food, Drug, and Cosmetic Act.
                    ``(B) Other equipment and supplies.--Items, 
                equipment, and supplies (as described in section 
                1842(s)(2)(D) other than enteral nutrients).
                    ``(C) Off-the-shelf orthotics.--Orthotics 
                (described in section 1861(s)(9)) for which payment is 
                otherwise made under section 1834(h) which require 
                minimal self-adjustment for appropriate use and does 
                not require expertise in trimming, bending, molding, 
                assembling, or customizing to fit to the patient.
            ``(3) Exception authority.--In carrying out the programs 
        under this section, the Secretary may exempt--
                    ``(A) rural areas and areas with low population 
                density within urban areas that are not competitive, 
                unless there is a significant national market through 
                mail order for a particular item or service; and
                    ``(B) items and services for which the application 
                of competitive acquisition is not likely to result in 
                significant savings.
            ``(4) Special rule for certain rented items of durable 
        medical equipment.--In the case of a covered item for which 
        payment is made on a rental basis under section 1834(a), the 
        Secretary shall establish a process by which rental agreements 
        for the covered items entered into before the application of 
        the competitive acquisition program under this section for the 
        item may be continued notwithstanding this section. In the case 
        of any such continuation, the supplier involved shall provide 
        for appropriate servicing and replacement, as required under 
        section 1834(a).
            ``(5) Physician authorization.--The Secretary may establish 
        a process under which a physician may prescribe a particular 
        brand or mode of delivery of an item or service if the item or 
        service involved is clinically more appropriate than other 
        similar items or services.
            ``(6) Application.--For each competitive acquisition area 
        in which the program is implemented under this subsection with 
        respect to items and services, the payment basis determined 
        under the competition conducted under subsection (b) shall be 
        substituted for the payment basis otherwise applied under 
        section 1834(a).
    ``(b) Program Requirements.--
            ``(1) In general.--The Secretary shall conduct a 
        competition among entities supplying items and services 
        described in subsection (a)(2) for each competitive acquisition 
        area in which the program is implemented under subsection (a) 
        with respect to such items and services.
            ``(2) Conditions for awarding contract.--
                    ``(A) In general.--The Secretary may not award a 
                contract to any entity under the competition conducted 
                in an competitive acquisition area pursuant to 
                paragraph (1) to furnish such items or services unless 
                the Secretary finds all of the following:
                            ``(i) The entity meets quality and 
                        financial standards specified by the Secretary 
                        or developed by the Program Advisory and 
                        Oversight Committee established under 
                        subsection (c).
                            ``(ii) The total amounts to be paid under 
                        the contract (including costs associated with 
                        the administration of the contract) are 
                        expected to be less than the total amounts that 
                        would otherwise be paid.
                            ``(iii) Beneficiary access to a choice of 
                        multiple suppliers in the area is maintained.
                            ``(iv) Beneficiary liability is limited to 
                        20 percent of the applicable contract award 
                        price, except in such cases where a supplier 
                        has furnished an upgraded item and has executed 
                        an advanced beneficiary notice.
                    ``(B) Development of quality standards for dme 
                products.--
                            ``(i) In general.--The quality standards 
                        specified under subparagraph (A)(i) shall not 
                        be less than the quality standards that would 
                        otherwise apply if this section did not apply 
                        and shall include consumer services standards. 
                        Not later than July 1, 2004, the Secretary 
                        shall establish new quality standards for 
                        products subject to competitive acquisition 
                        under this section. Such standards shall be 
                        applied prospectively and shall be published on 
                        the website of the Department of Health and 
                        Human Services.
                            ``(ii) Consultation with program advisory 
                        and oversight committee.--The Secretary shall 
                        consult with the Program Advisory and Oversight 
                        Committee (established under subsection (c)) to 
                        review (and advise the Secretary concerning) 
                        the quality standards referred to in clause 
                        (i).
                            ``(iii) Construction.--Nothing in this 
                        subparagraph shall be construed as delaying the 
                        effective date of the implementation of the 
                        competitive acquisition program under this 
                        section.
            ``(3) Contents of contract.--
                    ``(A) In general.--A contract entered into with an 
                entity under the competition conducted pursuant to 
                paragraph (1) is subject to terms and conditions that 
                the Secretary may specify.
                    ``(B) Term of contracts.--The Secretary shall 
                recompete contracts under this section not less often 
                than once every 3 years.
            ``(4) Limit on number of contractors.--
                    ``(A) In general.--The Secretary may limit the 
                number of contractors in a competitive acquisition area 
                to the number needed to meet projected demand for items 
                and services covered under the contracts. In awarding 
                contracts, the Secretary shall take into account the 
                ability of bidding entities to furnish items or 
                services in sufficient quantities to meet the 
                anticipated needs of beneficiaries for such items or 
                services in the geographic area covered under the 
                contract on a timely basis.
                    ``(B) Multiple winners.--The Secretary shall award 
                contracts to multiple entities submitting bids in each 
                area for an item or service.
            ``(5) Payment.--Payment under this part for competitively 
        priced items and services described in subsection (a)(2) shall 
        be based on the bids submitted and accepted under this section 
        for such items and services.
            ``(6) Participating contractors.--Payment shall not be made 
        for items and services described in subsection (a)(2) furnished 
        by a contractor and for which competition is conducted under 
        this section unless--
                    ``(A) the contractor has submitted a bid for such 
                items and services under this section; and
                    ``(B) the Secretary has awarded a contract to the 
                contractor for such items and services under this 
                section.
        In this section, the term `bid' means a request for a proposal 
        for an item or service that includes the cost of the item or 
        service, and where appropriate, any services that are attendant 
        to the provision of the item or service.
            ``(7) Consideration in determining categories for bids.--
        The Secretary shall consider the similarity of the clinical 
        efficiency and value of specific codes and products, including 
        products that may provide a therapeutic advantage to 
        beneficiaries, before delineating the categories and products 
        that will be subject to bidding.
            ``(8) Authority to contract for education, monitoring, 
        outreach and complaint services.--The Secretary may enter into 
        a contract with an appropriate entity to address complaints 
        from beneficiaries who receive items and services from an 
        entity with a contract under this section and to conduct 
        appropriate education of and outreach to such beneficiaries and 
        monitoring quality of services with respect to the program.
    ``(c) Program Advisory and Oversight Committee.--
            ``(1) Establishment.--There is established a Program 
        Advisory and Oversight Committee (hereinafter in this section 
        referred to as the `Committee').
            ``(2) Membership; terms.--The Committee shall consist of 
        such members as the Secretary may appoint who shall serve for 
        such term as the Secretary may specify.
            ``(3) Duties.--
                    ``(A) Technical assistance.--The Committee shall 
                provide advice and technical assistance to the 
                Secretary with respect to the following functions:
                            ``(i) The implementation of the program 
                        under this section.
                            ``(ii) The establishment of requirements 
                        for collection of data.
                            ``(iii) The development of proposals for 
                        efficient interaction among manufacturers and 
                        distributors of the items and services and 
                        providers and beneficiaries.
                    ``(B) Additional duties.--The Committee shall 
                perform such additional functions to assist the 
                Secretary in carrying out this section as the Secretary 
                may specify.
            ``(4) Inapplicability of faca.--The provisions of the 
        Federal Advisory Committee Act (5 U.S.C. App.) shall not apply.
    ``(d) Annual Reports.--The Secretary shall submit to Congress an 
annual management report on the programs under this section. Each such 
report shall include information on savings, reductions in beneficiary 
cost-sharing, access to and quality of items and services, and 
beneficiary satisfaction.
    ``(e) Demonstration Project for Clinical Laboratory Services.--
            ``(1) In general.--The Secretary shall conduct a 
        demonstration project on the application of competitive 
        acquisition under this section to clinical diagnostic 
        laboratory tests--
                    ``(A) for which payment is otherwise made under 
                section 1833(h) or 1834(d)(1) (relating to colorectal 
                cancer screening tests); and
                    ``(B) which are furnished by entities that did not 
                have a face-to-face encounter with the individual.
            ``(2) Terms and conditions.--Such project shall be under 
        the same conditions as are applicable to items and services 
        described in subsection (a)(2).
            ``(3) Report.--The Secretary shall submit to Congress--
                    ``(A) an initial report on the project not later 
                than December 31, 2005; and
                    ``(B) such progress and final reports on the 
                project after such date as the Secretary determines 
                appropriate.''.
    (b) Conforming Amendments.--
            (1) Durable medical equipment; elimination of inherent 
        reasonableness authority.--Section 1834(a) (42 U.S.C. 1395m(a)) 
        is amended--
                    (A) in paragraph (1)(B), by striking ``The payment 
                basis'' and inserting ``Subject to subparagraph (E)(i), 
                the payment basis'';
                    (B) in paragraph (1)(C), by striking ``This 
                subsection'' and inserting ``Subject to subparagraph 
                (E)(ii), this subsection'';
                    (C) by adding at the end of paragraph (1) the 
                following new subparagraph:
                    ``(E) Application of competitive acquisition; 
                elimination of inherent reasonableness authority.--In 
                the case of covered items and services that are 
                included in a competitive acquisition program in a 
                competitive acquisition area under section 1847(a)--
                            ``(i) the payment basis under this 
                        subsection for such items and services 
                        furnished in such area shall be the payment 
                        basis determined under such competitive 
                        acquisition program; and
                            ``(ii) the Secretary may use information on 
                        the payment determined under such competitive 
                        acquisition programs to adjust the payment 
                        amount otherwise recognized under subparagraph 
                        (B)(ii) for an area that is not a competitive 
                        acquisition area under section 1847 and in the 
                        case of such adjustment, paragraph (10)(B) 
                        shall not be applied.''; and
                    (D) in paragraph (10)(B), by inserting ``in an area 
                and with respect to covered items and services for 
                which the Secretary does not make a payment amount 
                adjustment under paragraph (1)(E)'' after ``under this 
                subsection''.
            (2) Off-the-shelf orthotics; elimination of inherent 
        reasonableness authority.--Section 1834(h) (42 U.S.C. 1395m(h)) 
        is amended--
                    (A) in paragraph (1)(B), by striking ``and (E)'' 
                and inserting ``, (E) , and (H)(i)'';
                    (B) in paragraph (1)(D), by striking ``This 
                subsection'' and inserting ``Subject to subparagraph 
                (H)(ii), this subsection'';
                    (C) by adding at the end of paragraph (1) the 
                following new subparagraph:
                    ``(H) Application of competitive acquisition to 
                orthotics; elimination of inherent reasonableness 
                authority.--In the case of orthotics described in 
                paragraph (2)(B) of section 1847(a) that are included 
                in a competitive acquisition program in a competitive 
                acquisition area under such section--
                            ``(i) the payment basis under this 
                        subsection for such orthotics furnished in such 
                        area shall be the payment basis determined 
                        under such competitive acquisition program; and
                            ``(ii) the Secretary may use information on 
                        the payment determined under such competitive 
                        acquisition programs to adjust the payment 
                        amount otherwise recognized under subparagraph 
                        (B)(ii) for an area that is not a competitive 
                        acquisition area under section 1847, and in the 
                        case of such adjustment, paragraphs (8) and (9) 
                        of section 1842(b) shall not be applied.''.
    (c) Report on Activities of Suppliers.--The Secretary shall conduct 
a study to determine the extent to which (if any) suppliers of covered 
items of durable medical equipment that are subject to the competitive 
acquisition program under section 1847 of the Social Security Act, as 
amended by subsection (a), are soliciting physicians to prescribe 
certain brands or modes of delivery of covered items based on 
profitability.
    (d) GAO Study on Safe and Effective Home Infusion and Inhalation 
Therapy; Standards.--
            (1) Study.--The Comptroller General of the United States 
        shall conduct a study of the standards, professional services, 
        and related functions necessary for the provision of safe and 
        effective home infusion therapy and home inhalation therapy.
            (2) Report.--Not later than May 1, 2004, the Comptroller 
        General shall submit to Congress a report on the study 
        conducted under paragraph (1).
            (3) Use of findings in developing standards.--In 
        promulgating regulations to carry out section 1847 of the 
        Social Security Act, as amended by subsection (a), the 
        Secretary shall ensure that quality standards developed under 
        subsection (b)(2)(B) of such section reflect the findings of 
        the Comptroller General set forth in the report under paragraph 
        (2).

SEC. 303. COMPETITIVE ACQUISITION OF COVERED OUTPATIENT DRUGS AND 
              BIOLOGICALS.

    (a) Adjustment to Physician Fee Schedule.--
            (1) Adjustment in practice expense relative value units.--
        Section 1848(c)(2) (42 U.S.C. 1395w-4(c)(2)) is amended--
                    (A) in subparagraph (B)--
                            (i) in clause (ii)(II), by striking ``The 
                        adjustments'' and inserting ``Subject to clause 
                        (iv), the adjustments''; and
                            (ii) by adding at the end of subparagraph 
                        (B), the following new clause:
                            ``(iv) Exception to budget neutrality.--The 
                        additional expenditures attributable to clauses 
                        (ii) and (iii) of subparagraph (H) shall not be 
                        taken into account in applying clause (ii)(II) 
                        for 2005.''; and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(H) Adjustments in practice expense relative 
                value units for 2005.--
                            ``(i) In general.--As part of the annual 
                        process of establishing the physician fee 
                        schedule under subsection (b) for 2005, the 
                        Secretary shall increase the practice expense 
                        relative value units for 2005 consistent with 
                        clauses (ii) and (iii).
                            ``(ii) Use of supplemental survey data.--
                        For 2005 for any specialty that submitted 
                        survey data that included expenses for the 
                        administration of drugs and biologicals for 
                        which payment is made under section 1842(o) (or 
                        section 1847A), the Secretary shall use such 
                        supplemental survey data in carrying out this 
                        subparagraph insofar as they are collected and 
                        provided by entities and organizations 
                        consistent with the criteria established by the 
                        Secretary pursuant to section 212(a) of the 
                        Medicare, Medicaid, and SCHIP Balanced Budget 
                        Refinement Act of 1999 and insofar as such data 
                        are submitted to the Secretary by December 31, 
                        2004.
                            ``(iii) Provisions for appropriate 
                        reporting and billing for physicians' services 
                        associated with the administration of covered 
                        outpatient drugs and biologicals.--
                                    ``(I) Evaluation of codes.--The 
                                Secretary shall promptly evaluate 
                                existing codes for physicians' services 
                                associated with the administration of 
                                covered outpatient drugs and 
                                biologicals (as defined in section 
                                1847A(a)(2)(A)) to ensure accurate 
                                reporting and billing for such 
                                services.
                                    ``(II) Use of existing processes.--
                                In carrying out subclause (I), the 
                                Secretary shall use existing processes 
                                for the consideration of coding changes 
                                and, to the extent coding changes are 
                                made, shall use such processes in 
                                establishing relative values for such 
                                services.
                                    ``(III) Implementation.--In 
                                carrying out subclause (I), the 
                                Secretary shall consult with 
                                representatives of physician 
                                specialties affected by the 
                                implementation of section 1847A or 
                                section 1847B, and shall take such 
                                steps within the Secretary's authority 
                                to expedite such considerations under 
                                subclause (II).
                            ``(iv) Subsequent, budget neutral 
                        adjustments permitted.--Nothing in this 
                        subparagraph shall be construed as preventing 
                        the Secretary from providing for adjustments in 
                        practice expense relative value units under 
                        (and consistent with) subparagraph (B) for 
                        years after 2005.
                            ``(v) Consultation.--Before publishing the 
                        notice of proposed rulemaking to carry out this 
                        subparagraph, the Secretary shall consult with 
                        the Comptroller General of the United States 
                        and with groups representing the physician 
                        specialties involved.
                            ``(vi) Treatment as change in law and 
                        regulation in sustainable growth rate 
                        determination.--The enactment of subparagraph 
                        (B)(iv) and this subparagraph shall be treated 
                        as a change in law for purposes of applying 
                        subsection (f)(2)(D).''.
            (2) Prohibition of administrative and judicial review.--
        Section 1848(i)(1) (42 U.S.C. 1395w-4(i)(1)) is amended--
            (A) by striking ``and'' at the end of subparagraph (D);
            (B) by striking the period at the end of subparagraph (E) 
        and inserting ``, and''; and
            (C) by adding at the end the following new subparagraph:
                    ``(F) adjustments in practice expense relative 
                value units for 2005 under subsection (c)(2)(H).''.
            (3) Treatment of other services currently in the non-
        physician work pool.--The Secretary shall make adjustments to 
        the non-physician work pool methodology (as such term is used 
        in the regulations promulgated by the Secretary in the Federal 
        Register as of December 31, 2002) for determination of practice 
        expense relative value units under the physician fee schedule 
        described in section 1848(c)(2)(C)(ii) of the Social Security 
        Act so that the practice expense relative value units for 
        services determined under such methodology are not affected 
        relative to the practice expense relative value units of other 
        services not determined under such non-physician work pool 
        methodology, as the result of amendments made by paragraph (1).
    (b) Payment Based on Competition.--Title XVIII is amended by 
inserting after section 1847 (42 U.S.C. 1395w-3), as amended by section 
302, the following new sections:

 ``competitive acquisition of covered outpatient drugs and biologicals

    ``Sec. 1847A. (a) Implementation of Competitive Acquisition.--
            ``(1) Implementation of program.--
                    ``(A) In general.--The Secretary shall establish 
                and implement a competitive acquisition program under 
                which--
                            ``(i) competitive acquisition areas are 
                        established throughout the United States for 
                        contract award purposes for acquisition of and 
                        payment for categories of covered outpatient 
                        drugs and biologicals (as defined in paragraph 
                        (2)) under this part;
                            ``(ii) each physician is given the 
                        opportunity annually to elect to obtain drugs 
                        and biologicals under the program or under 
                        section 1847B; and
                            ``(iii) each physician who elects to obtain 
                        drugs and biologicals under the program makes 
                        an annual selection under paragraph (5) of the 
                        contractor through which drugs and biologicals 
                        within a category of drugs and biologicals will 
                        be acquired and delivered to the physician 
                        under this part.
                    ``(B) Implementation.--The Secretary shall 
                implement the program so that the program applies to--
                            ``(i) the oncology category beginning in 
                        2005; and
                            ``(ii) the non-oncology category beginning 
                        in 2006.
                This section shall not apply in the case of a physician 
                who elects section 1847B to apply.
                    ``(C) Waiver of certain provisions.--In order to 
                promote competition, efficient service, and product 
                quality, in carrying out the program the Secretary may 
                waive such provisions of the Federal Acquisition 
                Regulation as are necessary for the efficient 
                implementation of this section, other than provisions 
                relating to confidentiality of information and such 
                other provisions as the Secretary determines 
                appropriate.
                    ``(D) Exclusion authority.--The Secretary may 
                exclude covered outpatient drugs and biologicals 
                (including a class of such drugs and biologicals) from 
                the competitive bidding system under this section if 
                the drugs or biologicals (or class) are not appropriate 
                for competitive bidding due to low volume of 
                utilization by beneficiaries under this part or a 
                unique mode or method of delivery or similar reasons.
            ``(2) Covered outpatient drugs and biologicals, categories, 
        program defined.--For purposes of this section--
                    ``(A) Covered outpatient drugs and biologicals 
                defined.--The term `covered outpatient drugs and 
                biologicals' means drugs and biologicals to which 
                section 1842(o) applies and which are not covered under 
                section 1847 (relating to competitive acquisition for 
                items of durable medical equipment). Such term does not 
                include the following:
                            ``(i) Blood clotting factors.
                            ``(ii) Drugs and biologicals furnished to 
                        individuals in connection with the treatment of 
                        end stage renal disease.
                            ``(iii) Radiopharmaceuticals.
                            ``(iv) Vaccines.
                    ``(B) 2 categories.--Each of the following shall be 
                a separate category of covered outpatient drugs and 
                biologicals, as identified by the Secretary:
                            ``(i) Oncology category.--A category (in 
                        this section referred to as the `oncology 
                        category') consisting of those covered 
                        outpatient drugs and biologicals that, as 
                        determined by the Secretary, are typically 
                        primarily billed by oncologists or are 
                        otherwise used to treat cancer.
                            ``(ii) Non-oncology categories.--Such 
                        numbers of categories (in this section referred 
                        to as the `non-oncology categories') consisting 
                        of covered outpatient drugs and biologicals not 
                        described in clause (i), and appropriate 
                        subcategories of such drugs and biologicals as 
                        the Secretary may specify.
                    ``(C) Program.--The term `program' means the 
                competitive acquisition program under this section.
                    ``(D) Competitive acquisition area; area.--The 
                terms `competitive acquisition area' and `area' mean an 
                appropriate geographic region established by the 
                Secretary under the program.
                    ``(E) Contractor.--The term `contractor' means an 
                entity that has entered into a contract with the 
                Secretary under this section.
            ``(3) Application of program payment methodology.--With 
        respect to covered outpatient drugs and biologicals which are 
        supplied under the program in an area and which are prescribed 
        by a physician who has not elected section 1847B to apply--
                    ``(A) the claim for such drugs and biologicals 
                shall be submitted by the contractor that supplied the 
                drugs and biologicals;
                    ``(B) collection of amounts of any deductible and 
                coinsurance applicable with respect to such drugs and 
                biologicals shall be the responsibility of such 
                contractor and shall not be collected unless the drug 
                or biological is administered to the beneficiary 
                involved; and
                    ``(C) the payment under this section (and related 
                coinsurance amounts) for such drugs and biologicals--
                            ``(i) shall be made only to such 
                        contractor;
                            ``(ii) shall be conditioned upon the 
                        administration of such drugs and biologicals; 
                        and
                            ``(iii) shall be based on the average of 
                        the bid prices for such drugs and biologicals 
                        in the area, as computed under subsection (d).
                The Secretary shall provide a process for recoupment in 
                the case in which payment is made for drugs and 
                biologicals which were billed at the time of dispensing 
                but which were not actually administered.
            ``(4) Contract required.--
                    ``(A) In general.--Payment may not be made under 
                this part for covered outpatient drugs and biologicals 
                prescribed by a physician who has not elected section 
                1847B to apply within a category and a competitive 
                acquisition area with respect to which the program 
                applies unless--
                            ``(i) the drugs or biologicals are supplied 
                        by a contractor with a contract under this 
                        section for such category of drugs and 
                        biologicals and area; and
                            ``(ii) the physician has elected such 
                        contractor under paragraph (5) for such 
                        category and area.
                    ``(B) Physician choice.--Subparagraph (A) shall not 
                apply for a category of drugs for an area if the 
                physician prescribing the covered outpatient drug in 
                such category and area has elected to apply section 
                1847B instead of this section.
            ``(5) Contractor selection process.--
                    ``(A) In general.--The Secretary shall provide a 
                process for the selection of a contractor, on an annual 
                basis and in such exigent circumstances as the 
                Secretary may provide and with respect to each category 
                of covered outpatient drugs and biologicals for an 
                area, by physicians prescribing such drugs and 
                biologicals in the area of the contractor under this 
                section that will supply the drugs and biologicals 
                within that category and area. Such selection shall 
                also include the election described in section 
                1847B(a).
                    ``(B) Information on contractors.--The Secretary 
                shall make available to physicians on an ongoing basis, 
                through a directory posted on the Department's Internet 
                website or otherwise and upon request, a list of the 
                contractors under this section in the different 
                competitive acquisition areas.
                    ``(C) Selecting physician defined.--For purposes of 
                this section, the term `selecting physician' means, 
                with respect to a contractor and category and 
                competitive acquisition area, a physician who has not 
                elected section 1847B to apply and has selected to 
                apply under this section such contractor for such 
                category and area.
    ``(b) Program Requirements.--
            ``(1) Contract for covered outpatient drugs and 
        biologicals.--The Secretary shall conduct a competition among 
        entities for the acquisition of a covered outpatient drug or 
        biological within each HCPCS code within each category for each 
        competitive acquisition area.
            ``(2) Conditions for awarding contract.--
                    ``(A) In general.--The Secretary may not award a 
                contract to any entity under the competition conducted 
                in a competitive acquisition area pursuant to paragraph 
                (1) with respect to the acquisition of covered 
                outpatient drugs and biologicals within a category 
                unless the Secretary finds that the entity meets all of 
                the following with respect to the contract period 
                involved:
                            ``(i) Capacity to supply covered outpatient 
                        drug or biological within category.--
                                    ``(I) In general.--The entity has 
                                sufficient arrangements to acquire and 
                                to deliver covered outpatient drugs and 
                                biologicals within such category in the 
                                area specified in the contract at the 
                                bid price specified in the contract for 
                                all physicians that may elect such 
                                entity.
                                    ``(II) Shipment methodology.--The 
                                entity has arrangements in effect for 
                                the shipment at least 5 days each week 
                                of covered outpatient drugs and 
                                biologicals under the contract and for 
                                the timely delivery (including for 
                                emergency situations) of such drugs and 
                                biologicals in the area under the 
                                contract.
                            ``(ii) Quality, service, financial 
                        performance and solvency standards.--The entity 
                        meets quality, service, financial performance, 
                        and solvency standards specified by the 
                        Secretary, including--
                                    ``(I) the establishment of 
                                procedures for the prompt response and 
                                resolution of physician and beneficiary 
                                complaints and inquiries regarding the 
                                shipment of covered outpatient drugs 
                                and biologicals; and
                                    ``(II) a grievance process for the 
                                resolution of disputes.
                    ``(B) Additional considerations.--The Secretary may 
                refuse to award a contract under this section, and may 
                terminate such a contract, with an entity based upon--
                            ``(i) the suspension or revocation, by the 
                        Federal Government or a State government, of 
                        the entity's license for the distribution of 
                        drugs or biologicals (including controlled 
                        substances); or
                            ``(ii) the exclusion of the entity under 
                        section 1128 from participation under this 
                        title.
                    ``(C) Application of medicare provider ombudsman.--
                For provision providing for a program-wide Medicare 
                Provider Ombudsman to review complaints, see section 
                1868(b), as added by section 923 of the Medicare 
                Prescription Drug and Modernization Act of 2003.
            ``(3) Awarding multiple contracts for a category and 
        area.--In order to provide a choice of at least 2 contractors 
        in each competitive acquisition area for a category of drugs 
        and biologicals, the Secretary may limit (but not below 2) the 
        number of qualified entities that are awarded such contracts 
        for any category and area. The Secretary shall select among 
        qualified entities based on the following:
                    ``(A) The bid prices for covered outpatient drugs 
                and biologicals within the category and area.
                    ``(B) Bid price for distribution of such drugs and 
                biologicals.
                    ``(C) Ability to ensure product integrity.
                    ``(D) Customer service.
                    ``(E) Past experience in the distribution of drugs 
                and biologicals, including controlled substances.
                    ``(F) Such other factors as the Secretary may 
                specify.
            ``(4) Terms of contracts.--
                    ``(A) In general.--A contract entered into with an 
                entity under the competition conducted pursuant to 
                paragraph (1) is subject to terms and conditions that 
                the Secretary may specify consistent with this section.
                    ``(B) Period of contracts.--A contract under this 
                section shall be for a term of 2 years, but may be 
                terminated by the Secretary or the entity with 
                appropriate, advance notice.
                    ``(C) Integrity of drug and biological distribution 
                system.--The Secretary--
                            ``(i) shall require that for all drug and 
                        biological products distributed by a contractor 
                        under this section be acquired directly from 
                        the manufacturer or from a distributor that has 
                        acquired the products directly from the 
                        manufacturer; and
                            ``(ii) may require, in the case of such 
                        products that are particularly susceptible to 
                        counterfeit or diversion, that the contractor 
                        comply with such additional product integrity 
                        safeguards as may be determined to be 
                        necessary.
                    ``(D) Implementation of anti-counterfeiting, 
                quality, safety, and record keeping requirements.--The 
                Secretary shall require each contractor to implement 
                (through its officers, agents, representatives, and 
                employees) requirements relating to the storage and 
                handling of covered outpatient drugs and biologicals 
                and for the establishment and maintenance of 
                distribution records for such drugs and biologicals. A 
                contract under this section may include requirements 
                relating to the following:
                            ``(i) Secure facilities.
                            ``(ii) Safe and appropriate storage of 
                        drugs and biologicals.
                            ``(iii) Examination of drugs and 
                        biologicals received and dispensed.
                            ``(iv) Disposition of damaged and outdated 
                        drugs and biologicals.
                            ``(v) Record keeping and written policies 
                        and procedures.
                            ``(vi) Compliance personnel.
                    ``(E) Compliance with code of conduct and fraud and 
                abuse rules.--Under the contract--
                            ``(i) the contractor shall comply with a 
                        code of conduct, specified or recognized by the 
                        Secretary, that includes standards relating to 
                        conflicts of interest; and
                            ``(ii) the contractor shall comply with all 
                        applicable provisions relating to prevention of 
                        fraud and abuse, including compliance with 
                        applicable guidelines of the Department of 
                        Justice and the Inspector General of the 
                        Department of Health and Human Services.
                    ``(F) Direct delivery of drugs and biologicals to 
                physicians.--Under the contract the contractor shall 
                only supply covered outpatient drugs and biologicals 
                directly to the selecting physicians and not directly 
                to beneficiaries, except under circumstances and 
                settings where a beneficiary currently receives a drug 
                or biological in the beneficiary's home or other non-
                physician office setting as the Secretary may provide. 
                The contractor shall not deliver drugs and biologicals 
                to a selecting physician except upon receipt of a 
                prescription for such drugs and biologicals, and such 
                necessary data as may be required by the Secretary to 
                carry out this section. This section does not--
                            ``(i) require a physician to submit a 
                        prescription for each individual treatment; or
                            ``(ii) change a physician's flexibility in 
                        terms of writing a prescription for drugs for a 
                        single treatment or a course of treatment.
            ``(5) Permitting access to drugs and biologicals.--The 
        Secretary shall establish rules under this section under which 
        drugs and biologicals which are acquired through a contractor 
        under this section may be used to resupply inventories of such 
        drugs and biologicals which are administered consistent with 
        safe drug practices and with adequate safeguards against fraud 
        and abuse. The previous sentence shall apply if the physicians 
        can demonstrate to the Secretary all of the following:
                    ``(A) The drugs or biologicals are required 
                immediately.
                    ``(B) The physician could not have reasonably 
                anticipated the immediate requirement for the drugs or 
                biologicals.
                    ``(C) The contractor could not deliver to the 
                physician the drugs or biologicals in a timely manner.
                    ``(D) The drugs or biologicals were administered in 
                an emergency situation.
            ``(6) Construction.--Nothing in this section shall be 
        construed as waiving applicable State requirements relating to 
        licensing of pharmacies.
    ``(c) Bidding Process.--
            ``(1) In general.--In awarding a contract for a category of 
        drugs and biologicals in an area under the program, the 
        Secretary shall consider with respect to each entity seeking to 
        be awarded a contract the prices bid to acquire and supply the 
        covered outpatient drugs and biologicals for that category and 
        area and the other factors referred to in subsection (b)(3).
            ``(2) Prices bid.--The prices bid by an entity under 
        paragraph (1) shall be the prices in effect and available for 
        the supply of contracted drugs and biologicals in the area 
        through the entity for the contract period.
            ``(3) Rejection of contract offer.--The Secretary shall 
        reject the contract offer of an entity with respect to a 
        category of drugs and biologicals for an area if the Secretary 
        estimates that the prices bid, in the aggregate on average, 
        would exceed 100 percent of the average sales price (as 
        determined under section 1847B).
            ``(4) Bidding on a national or regional basis.--Nothing in 
        this section shall be construed as precluding a bidder from 
        bidding for contracts in all areas of the United States or as 
        requiring a bidder to submit a bid for all areas of the United 
        States.
            ``(5) Uniformity of bids within area.--The amount of the 
        bid submitted under a contract offer for any covered outpatient 
        drug or biological for an area shall be the same for that drug 
        or biological for all portions of that area.
            ``(6) Confidentiality of bids.--The provisions of 
        subparagraph (D) of section 1927(b)(3) shall apply to a bid 
        submitted in a contract offer for a covered outpatient drug or 
        biological under this section in the same manner as it applies 
        to information disclosed under such section, except that any 
        reference--
                    ``(A) in that subparagraph to a `manufacturer or 
                wholesaler' is deemed a reference to a `bidder' under 
                this section;
                    ``(B) in that section to `prices charged for drugs' 
                is deemed a reference to a `bid' submitted under this 
                section; and
                    ``(C) in clause (i) of that section to `this 
                section', is deemed a reference to `part B of title 
                XVIII'.
            ``(7) Inclusion of costs.--The bid price submitted in a 
        contract offer for a covered outpatient drug or biological 
        shall--
                    ``(A) include all costs related to the delivery of 
                the drug or biological to the selecting physician (or 
                other point of delivery); and
                    ``(B) include the costs of dispensing (including 
                shipping) of such drug or biological and management 
                fees, but shall not include any costs related to the 
                administration of the drug or biological, or wastage, 
                spillage, or spoilage.
            ``(8) Price adjustments during contract period; disclosure 
        of costs.--Each contract awarded shall provide for--
                    ``(A) disclosure to the Secretary the contractor's 
                reasonable, net acquisition costs for periods specified 
                by the Secretary, not more often than quarterly, of the 
                contract; and
                    ``(B) appropriate price adjustments over the period 
                of the contract to reflect significant increases or 
                decreases in a contractor's reasonable, net acquisition 
                costs, as so disclosed.
    ``(d) Computation of Average Bid Prices for a Category and Area.--
            ``(1) In general.--For each year or other contract period 
        for each covered outpatient drug or biological and area with 
        respect to which a competition is conducted under the program, 
        the Secretary shall compute an area average of the bid prices 
        submitted, in contract offers accepted for the category and 
        area, for that year or other contract period.
            ``(2) Special rules.--The Secretary shall establish rules 
        regarding the use under this section of the alternative payment 
        amount provided under section 1847B to the use of a price for 
        specific covered outpatient drugs and biologicals in the 
        following cases:
                    ``(A) New drugs and biologicals.--A covered 
                outpatient drug or biological for which an average bid 
                price has not been previously determined.
                    ``(B) Other cases.--Such other exceptional cases as 
                the Secretary may specify in regulations, such as oral 
                drugs under section 1861(s)(2)(Q) and 
                immmunosuppressives under section 1861(s)(2)(J).
    ``(e) Coinsurance.--
            ``(1) In general.--Coinsurance under this part with respect 
        to a covered outpatient drug or biological for which payment is 
        payable under this section shall be based on 20 percent of the 
        payment basis under this section.
            ``(2) Collection.--Such coinsurance shall be collected by 
        the contractor that supplies the drug or biological involved 
        and, subject to subsection (a)(3)(B), in the same manner as 
        coinsurance is collected for durable medical equipment under 
        this part.
    ``(f) Special Payment Rules.--
            ``(1) In general.--The Secretary may not provide for an 
        adjustment to reimbursement for covered outpatient drugs and 
        biologicals unless adjustments to the practice expense payment 
        adjustment are made on the basis of supplemental surveys under 
        section 1848(c)(2)(H)(ii) of the Social Security Act, as added 
        by subsection (a)(1)(B).
            (2) Use in exclusion cases.--If the Secretary excludes a 
        drug or biological (or class of drugs or biologicals) under 
        subsection (a)(1)(D), the Secretary may provide for 
        reimbursement to be made under this part for such drugs and 
        biologicals (or class) using the payment methodology under 
        section 1847B.
            ``(3) Coordination rules.--The provisions of section 
        1842(h)(3) shall apply to a contractor with respect to covered 
        outpatients drugs and biologicals supplied by that contractor 
        in the same manner as they apply to a participating supplier. 
        In order to administer this section, the Secretary may 
        condition payment under this part to a person for the 
        administration of a drug or biological supplied under this 
        section upon person's provision of information on such 
        administration.
            ``(4) Application of requirement for assignment.--For 
        provision requiring assignment of claims for covered outpatient 
        drugs and biologicals, see section 1842(o)(3).
            ``(5) Protection for beneficiary in case of medical 
        necessity denial.--For protection of beneficiaries against 
        liability in the case of medical necessity determinations, see 
        section 1842(b)(3)(B)(ii)(III).
            ``(6) Physician role in appeals process.--The Secretary 
        shall establish a procedure under which a physician who 
        prescribes a drug or biological for which payment is made under 
        this section has appeal rights that are similar to those 
        provided to a physician who prescribes durable medical 
        equipment or a laboratory test.
    ``(g) Advisory Committee.--The Secretary shall establish an 
advisory committee that includes representatives of parties affected by 
the program under this section, including physicians, specialty 
pharmacies, distributors, manufacturers, and beneficiaries. The 
committee shall advise the Secretary on issues relating to the 
effective implementation of this section.
    ``(h) Annual Reports.--The Secretary shall submit to Congress an 
annual report in each of 2005, 2006, and 2007, on the program. Each 
such report shall include information on savings, reductions in cost-
sharing, access to covered outpatient drugs and biologicals, the range 
of choices of contractors available to providers, and beneficiary and 
provider satisfaction.

       ``optional use of average sales price payment methodology

    ``Sec. 1847B. (a) In General.--
            ``(1) Election.--In connection with the annual election 
        made by a physician under section 1847A(a)(5), the physician 
        may elect to apply this section to the payment for covered 
        outpatient drugs and biologicals instead of the payment 
        methodology under section 1847A.
            ``(2) Implementation.--This section shall be implemented 
        with respect to categories of covered outpatient drugs and 
        biologicals described in section 1847A(a)(2)(B).
            ``(3) Covered outpatient drugs and biologicals defined.--
        For purposes of this section, the term `covered outpatient 
        drugs and biologicals' has the meaning given such term in 
        section 1847A(a)(2)(A).
    ``(b) Computation of Payment Amount.--
            ``(1) In general.--If this section applies with respect to 
        a covered outpatient drug or biological, the amount payable for 
        the drug or biological (based on a minimum dosage unit) is, 
        subject to applicable deductible and coinsurance--
                    ``(A) in the case of a multiple source drug (as 
                defined in subsection (c)(6)(C)), 100 percent (or in 
                the case of covered outpatient drugs and biologicals 
                furnished during 2005 and 2006, 112 percent) of the 
                amount determined under paragraph (3); or
                    ``(B) in the case of a single source drug (as 
                defined in subsection (c)(6)(D)), 100 percent (or in 
                the case of covered outpatient drugs and biologicals 
                furnished during 2005 and 2006, 112 percent) of the 
                amount determined under paragraph (4).
            ``(2) Specification of unit.--
                    ``(A) Specification by manufacturer.--The 
                manufacturer of a covered outpatient drug shall specify 
                the unit associated with each National Drug Code as 
                part of the submission of data under section 
                1927(b)(3)(A)(iii).
                    ``(B) Unit defined.--In this section, the term 
                `unit' means, with respect to a covered outpatient 
                drug, the lowest identifiable quantity (such as a 
                capsule or tablet, milligram of molecules, or grams) of 
                the drug that is dispensed, exclusive of any diluent 
                without reference to volume measures pertaining to 
                liquids.
            ``(3) Multiple source drug.--For all drug products included 
        within the same multiple source drug, the amount specified in 
        this paragraph is the volume-weighted average of the average 
        sales prices reported under section 1927(b)(3)(A)(iii) computed 
        as follows:
                    ``(A) Compute the sum of the products (for each 
                national drug code assigned to such drug products) of--
                            ``(i) the manufacturer's average sales 
                        price (as defined in subsection (c)); and
                            ``(ii) the total number of units specified 
                        under paragraph (2) sold, as reported under 
                        section 1927(b)(3)(A)(iii).
                    ``(B) Divide the sum computed under subparagraph 
                (A) by the sum of the total number of units under 
                subparagraph (A)(ii) for all national drug codes 
                assigned to such drug products.
            ``(4) Single source drug.--The amount specified in this 
        paragraph for a single source drug is the lesser of the 
        following:
                    ``(A) Manufacturer's average sales price.--The 
                manufacturer's average sales price for a national drug 
                code, as computed using the methodology applied under 
                paragraph (3).
                    ``(B) Wholesale acquisition cost (wac).--The 
                wholesale acquisition cost (as defined in subsection 
                (c)(6)(B)) reported for the single source drug.
            ``(5) Basis for determination.--The payment amount shall be 
        determined under this subsection based on information reported 
        under subsection (e) and without regard to any special 
        packaging, labeling, or identifiers on the dosage form or 
        product or package.
    ``(c) Manufacturer's Average Sales Price.--
            ``(1) In general.--For purposes of this subsection, subject 
        to paragraphs (2) and (3), the manufacturer's `average sales 
        price' means, of a covered outpatient drug for a NDC code for a 
        calendar quarter for a manufacturer for a unit--
                    ``(A) the manufacturer's total sales (as defined by 
                the Secretary in regulations for purposes of section 
                1927(c)(1)) in the United States for such drug in the 
                calendar quarter; divided by
                    ``(B) the total number of such units of such drug 
                sold by the manufacturer in such quarter.
            ``(2) Certain sales exempted from computation.--In 
        calculating the manufacturer's average sales price under this 
        subsection, the following sales shall be excluded:
                    ``(A) Sales exempt from best price.--Sales exempt 
                from the inclusion in the determination of `best price' 
                under section 1927(c)(1)(C)(i).
                    ``(B) Sales at nominal charge.--Such other sales as 
                the Secretary identifies by regulation as sales to an 
                entity that are nominal in price or do not reflect a 
                market price paid by an entity to which payment is made 
                under this section.
            ``(3) Sale price net of discounts.--In calculating the 
        manufacturer's average sales price under this subsection, such 
        price shall be determined taking into account volume discounts, 
        prompt pay discounts, cash discounts, the free goods that are 
        contingent on any purchase requirement, chargebacks, and 
        rebates (other than rebates under section 1927), that result in 
        a reduction of the cost to the purchaser. A rebate to a payor 
        or other entity that does not take title to a covered 
        outpatient drug shall not be taken into account in determining 
        such price unless the manufacturer has an agreement with the 
        payor or other entity under which the purchaser's price for the 
        drug is reduced as a consequence of such rebate.
            ``(4) Authority to disregard average sales price during 
        first quarter of sales.--In the case of a covered outpatient 
        drug during an initial period (not to exceed a full calendar 
        quarter) in which data on the prices for sales for the drug is 
        not sufficiently available from the manufacturer to compute an 
        average sales price for the drug, the Secretary may determine 
        the amount payable under this section for the drug without 
        considering the manufacturer's average sales price of that 
        manufacturer for that drug.
            ``(5) Frequency of determinations.--
                    ``(A) In general on a quarterly basis.--The 
                manufacturer's average sales price, for a covered 
                outpatient drug of a manufacturer, shall be determined 
                by such manufacturer under this subsection on a 
                quarterly basis. In making such determination insofar 
                as there is a lag in the reporting of the information 
                on rebates and chargebacks under paragraph (3) so that 
                adequate data are not available on a timely basis, the 
                manufacturer shall apply a methodology established by 
                the Secretary based on a 12-month rolling average for 
                the manufacturer to estimate costs attributable to 
                rebates and chargebacks.
                    ``(B) Updates in rates.--The payment rates under 
                subsection (b)(1) and (b)(2)(A) shall be updated by the 
                Secretary on a quarterly basis and shall be applied 
                based upon the manufacturer's average sales price 
                determined for the most recent calendar quarter.
                    ``(C) Use of contractors; implementation.--The 
                Secretary may use a carrier, fiscal intermediary, or 
                other contractor to determine the payment amount under 
                subsection (b). Notwithstanding any other provision of 
                law, the Secretary may implement, by program memorandum 
                or otherwise, any of the provisions of this section.
            ``(6) Definitions and other rules.--In this section:
                    ``(A) Manufacturer.--The term `manufacturer' means, 
                with respect to a covered outpatient drug, the 
                manufacturer (as defined in section 1927(k)(5)) whose 
                national drug code appears on such drug.
                    ``(B) Wholesale acquisition cost.--The term 
                `wholesale acquisition cost' means, with respect to a 
                covered outpatient drug, the manufacturer's list price 
                for the drug to wholesalers or direct purchasers in the 
                United States, not including prompt pay or other 
                discounts, rebates or reductions in price, for the most 
                recent month for which the information is available, as 
                reported in wholesale price guides or other 
                publications of drug pricing data.
                    ``(C) Multiple source drug.--The term `multiple 
                source drug' means, for a calendar quarter, a covered 
                outpatient drug for which there are 2 or more drug 
                products which--
                            ``(i) are rated as therapeutically 
                        equivalent (under the Food and Drug 
                        Administration's most recent publication of 
                        `Approved Drug Products with Therapeutic 
                        Equivalence Evaluations'),
                            ``(ii) except as provided in subparagraph 
                        (E), are pharmaceutically equivalent and 
                        bioequivalent, as determined under subparagraph 
                        (F) and as determined by the Food and Drug 
                        Administration, and
                            ``(iii) are sold or marketed in the United 
                        States during the quarter.
                    ``(D) Single source drug.--The term `single source 
                drug' means a covered outpatient drug which is not a 
                multiple source drug and which is produced or 
                distributed under an original new drug application 
                approved by the Food and Drug Administration, including 
                a drug product marketed by any cross-licensed producers 
                or distributors operating under the new drug 
                application, or which is a biological.
                    ``(E) Exception from pharmaceutical equivalence and 
                bioequivalence requirement.--Subparagraph (C)(ii) shall 
                not apply if the Food and Drug Administration changes 
                by regulation the requirement that, for purposes of the 
                publication described in subparagraph (C)(i), in order 
                for drug products to be rated as therapeutically 
                equivalent, they must be pharmaceutically equivalent 
                and bioequivalent, as defined in subparagraph (F).
                    ``(F) Determination of pharmaceutical equivalence 
                and bioequivalence.--For purposes of this paragraph--
                            ``(i) drug products are pharmaceutically 
                        equivalent if the products contain identical 
                        amounts of the same active drug ingredient in 
                        the same dosage form and meet compendial or 
                        other applicable standards of strength, 
                        quality, purity, and identity; and
                            ``(ii) drugs are bioequivalent if they do 
                        not present a known or potential bioequivalence 
                        problem, or, if they do present such a problem, 
                        they are shown to meet an appropriate standard 
                        of bioequivalence.
                    ``(G) Inclusion of vaccines.--In applying 
                provisions of section 1927 under this section, `other 
                than a vaccine' is deemed deleted from section 
                1927(k)(2)(B).
    ``(d) Authority To Use Alternative Payment in Response to Public 
Health Emergency.--In the case of a public health emergency under 
section 319 of the Public Health Service Act in which there is a 
documented inability to access covered outpatient drugs and 
biologicals, and a concomitant increase in the price, of a drug or 
biological which is not reflected in the manufacturer's average sales 
price for one or more quarters, the Secretary may use the wholesale 
acquisition cost (or other reasonable measure of drug price) instead of 
the manufacturer's average sales price for such quarters and for 
subsequent quarters until the price and availability of the drug or 
biological has stabilized and is substantially reflected in the 
applicable manufacturer's average sales price.
    ``(e) Reports.--
            ``(1) Quarterly report on average sales price.--For 
        requirements for reporting the manufacturer's average sales 
        price (and, if required to make payment, the manufacturer's 
        wholesale acquisition cost) for the covered outpatient drug or 
        biological, see section 1927(b)(3).
            ``(2) Annual report to congress.--The Secretary shall 
        submit to the Committees on Energy and Commerce and Ways and 
        Means of the House of Representatives and the Committee on 
        Finance of the Senate an annual report on the operation of this 
        section. Such report shall include information on the 
        following:
                    ``(A) Trends in average sales price under 
                subsection (b).
                    ``(B) Administrative costs associated with 
                compliance with this section.
                    ``(C) Total value of payments made under this 
                section.
                    ``(D) Comparison of the average manufacturer price 
                as applied under section 1927 for a covered outpatient 
                drug or biological with the manufacturer's average 
                sales price for the drug or biological under this 
                section.
    ``(f) Restriction on administrative and judicial review.--There 
shall be no administrative or judicial review under section 1869, 
section 1878, or otherwise, of determinations of manufacturer's average 
sales price under subsection (c).''.
    (c) Continuation of Payment Methodology for Radiopharmaceuticals.--
Nothing in the amendments made by this section shall be construed as 
changing the payment methodology under part B of title XVIII of the 
Social Security Act for radiopharmaceuticals, including the use by 
carriers of invoice pricing methodology.
    (d) Conforming Amendments.--
            (1) In general.--Section 1842(o) (42 U.S.C. 1395u(o)) is 
        amended--
                    (A) in paragraph (1), by inserting ``, subject to 
                section 1847A and 1847B,'' before ``the amount payable 
                for the drug or biological''; and
                    (B) by adding at the end of paragraph (2) the 
                following: ``This paragraph shall not apply in the case 
                of payment under section 1847A or 1847B.''.
            (2) No change in coverage basis.--Section 1861(s)(2)(A) (42 
        U.S.C. 1395x(s)(2)(A)) is amended by inserting ``(or would have 
        been so included but for the application of section 1847A or 
        1847B)'' after ``included in the physicians' bills''.
            (3) Payment.--Section 1833(a)(1)(S) (42 U.S.C. 
        1395l(a)(1)(S)) is amended by inserting ``(or, if applicable, 
        under section 1847A or 1847B)'' after ``1842(o)''.
            (4) Consolidated reporting of pricing information.--Section 
        1927 (42 U.S.C. 1396r-8) is amended--
                    (A) in subsection (a)(1), by inserting ``or under 
                part B of title XVIII'' after ``section 1903(a)'';
                    (B) in subsection (b)(3)(A)--
                            (i) in clause (i), by striking ``and'' at 
                        the end;
                            (ii) in clause (ii), by striking the period 
                        and inserting ``; and''; and
                            (iii) by adding at the end the following 
                        new clause:
                            ``(iii) for calendar quarters beginning on 
                        or after April 1, 2004, in conjunction with 
                        reporting required under clause (i) and by 
                        national drug code (NDC)--
                                    ``(I) the manufacturer's average 
                                sales price (as defined in section 
                                1847B(c)) and the total number of units 
                                specified under section 1847B(b)(2)(A);
                                    ``(II) if required to make payment 
                                under section 1847B, the manufacturer's 
                                wholesale acquisition cost, as defined 
                                in subsection (c)(6) of such section; 
                                and
                                    ``(III) information on those sales 
                                that were made at a nominal price or 
                                otherwise described in section 
                                1847B(c)(2)(B), which information is 
                                subject to audit by the Inspector 
                                General of the Department of Health and 
                                Human Services;
                        for a covered outpatient drug or biological for 
                        which payment is made under section 1847B.'';
                    (C) in subsection (b)(3)(B)--
                            (i) in the heading, by inserting ``and 
                        manufacturer's average sales price'' after 
                        ``price''; and
                            (ii) by inserting ``and manufacturer's 
                        average sales prices (including wholesale 
                        acquisition cost) if required to make payment'' 
                        after ``manufacturer prices''; and
                    (D) in subsection (b)(3)(D)(i), by inserting ``and 
                section 1847B'' after ``this section''.
    (e) GAO Study.--
            (1) Study.--The Comptroller General of the United States 
        shall conduct a study to assess the impact of the amendments 
        made by this section on the delivery of services, including 
        their impact on--
                    (A) beneficiary access to drugs and biologicals for 
                which payment is made under part B of title XVIII of 
                the Social Security Act; and
                    (B) the site of delivery of such services.
            (2) Report.--Not later than 2 years after the year in which 
        the amendment made by subsection (a)(1) first takes effect, the 
        Comptroller General shall submit to Congress a report on the 
        study conducted under paragraph (1).
    (f) MedPAC Recommendations on Blood Clotting Factors.--The Medicare 
Payment Advisory Commission shall submit to Congress, in its annual 
report in 2004, specific recommendations regarding a payment amount (or 
amounts) for blood clotting factors and its administration under the 
medicare program.
    (g) Establishment of Pharmaceutical Management Fee Where Drugs 
Provided Through a Contractor.--Section 1848(a) (42 U.S.C. 1395w-4(a)) 
is amended by adding at the end the following new paragraph:
            ``(5) Recognition of pharmaceutical management fee in 
        certain cases.--In establishing the fee schedule under this 
        section, the Secretary shall provide for a separate payment 
        with respect to physicians' services consisting of the unique 
        administrative and management costs associated with covered 
        drugs and biologicals which are furnished to physicians through 
        a contractor under section 1847A (compared with such costs if 
        such drugs and biologicals were acquired directly by such 
        physicians).''.
    (h) Study on Codes for Non-oncology Codes.--
            (1) Study.--The Secretary shall conduct a study to 
        determine the appropriateness of establishing and implementing 
        separate codes for non-oncology infusions that are based on the 
        level of complexity of the administration and resource 
        consumption.
            (2) Report.--Not later than 1 year after the date of the 
        enactment of this Act, the Secretary shall submit a report to 
        Congress on the study. To the extent the Secretary determines 
        it to be appropriate, the Secretary may implement appropriate 
        changes in the payment methodology for such codes.

SEC. 304. DEMONSTRATION PROJECT FOR USE OF RECOVERY AUDIT CONTRACTORS.

    (a) In General.--The Secretary of Health and Human Services shall 
conduct a demonstration project under this section (in this section 
referred to as the ``project'') to demonstrate the use of recovery 
audit contractors under the Medicare Integrity Program in identifying 
underpayments and overpayments and recouping overpayments under the 
medicare program for services for which payment is made under part A or 
part B of title XVIII of the Social Security Act. Under the project--
            (1) payment may be made to such a contractor on a 
        contingent basis;
            (2) a percentage of the amount recovered may be retained by 
        the Secretary and shall be available to the program management 
        account of the Centers for Medicare & Medicaid Services; and
            (3) the Secretary shall examine the efficacy of such use 
        with respect to duplicative payments, accuracy of coding, and 
        other payment policies in which inaccurate payments arise.
    (b) Scope and Duration.--
            (1) Scope.--The project shall cover at least 2 States that 
        are among the States with--
                    (A) the highest per capita utilization rates of 
                medicare services, and
                    (B) at least 3 contractors.
            (2) Duration.--The project shall last for not longer than 3 
        years.
    (c) Waiver.--The Secretary of Health and Human Services shall waive 
such provisions of title XVIII of the Social Security Act as may be 
necessary to provide for payment for services under the project in 
accordance with subsection (a).
    (d) Qualifications of Contractors.--
            (1) In general.--The Secretary shall enter into a recovery 
        audit contract under this section with an entity only if the 
        entity has staff that has the appropriate clinical knowledge of 
        and experience with the payment rules and regulations under the 
        medicare program or the entity has or will contract with 
        another entity that has such knowledgeable and experienced 
        staff.
            (2) Ineligibility of certain contractors.--The Secretary 
        may not enter into a recovery audit contract under this section 
        with an entity to the extent that the entity is a fiscal 
        intermediary under section 1816 of the Social Security Act (42 
        U.S.C. 1395h), a carrier under section 1842 of such Act (42 
        U.S.C. 1395u), or a Medicare Administrative Contractor under 
        section 1874A of such Act.
            (3) Preference for entities with demonstrated 
        proficiency.--In awarding contracts to recovery audit 
        contractors under this section, the Secretary shall give 
        preference to those risk entities that the Secretary determines 
        have demonstrated more than 3 years direct management 
        experience and a proficiency for cost control or recovery 
        audits with private insurers, health care providers, health 
        plans, or under the medicaid program under title XIX of the 
        Social Security Act.
    (e) Construction Relating to Conduct of Investigation of Fraud.--A 
recovery of an overpayment to a provider by a recovery audit contractor 
shall not be construed to prohibit the Secretary or the Attorney 
General from investigating and prosecuting, if appropriate, allegations 
of fraud or abuse arising from such overpayment.
    (f) Report.--The Secretary of Health and Human Services shall 
submit to Congress a report on the project not later than 6 months 
after the date of its completion. Such reports shall include 
information on the impact of the project on savings to the medicare 
program and recommendations on the cost-effectiveness of extending or 
expanding the project.

                TITLE IV--RURAL HEALTH CARE IMPROVEMENTS

SEC. 401. ENHANCED DISPROPORTIONATE SHARE HOSPITAL (DSH) TREATMENT FOR 
              RURAL HOSPITALS AND URBAN HOSPITALS WITH FEWER THAN 100 
              BEDS.

    (a) Doubling the Cap.--
            (1) In general.--Section 1886(d)(5)(F) (42 U.S.C. 
        1395ww(d)(5)(F)) is amended by adding at the end the following 
        new clause:
    ``(xiv)(I) In the case of discharges in a fiscal year beginning on 
or after October 1, 2003, subject to subclause (II), there shall be 
substituted for the disproportionate share adjustment percentage 
otherwise determined under clause (iv) (other than subclause (I)) or 
under clause (viii), (x), (xi), (xii), or (xiii), the disproportionate 
share adjustment percentage determined under clause (vii) (relating to 
large, urban hospitals).
    ``(II) Under subclause (I), the disproportionate share adjustment 
percentage shall not exceed 10 percent for a hospital that is not 
classified as a rural referral center under subparagraph (C).''.
            (2) Conforming amendments.--Section 1886(d)(5)(F) (42 
        U.S.C. 1395ww(d)(5)(F)) is amended--
                    (A) in each of subclauses (II), (III), (IV), (V), 
                and (VI) of clause (iv), by inserting ``subject to 
                clause (xiv) and'' before ``for discharges occurring'';
                    (B) in clause (viii), by striking ``The formula'' 
                and inserting ``Subject to clause (xiv), the formula''; 
                and
                    (C) in each of clauses (x), (xi), (xii), and 
                (xiii), by striking ``For purposes'' and inserting 
                ``Subject to clause (xiv), for purposes''.
    (b) Effective Date.--The amendments made by this section shall 
apply with respect to discharges occurring on or after October 1, 2003.

SEC. 402. IMMEDIATE ESTABLISHMENT OF UNIFORM STANDARDIZED AMOUNT IN 
              RURAL AND SMALL URBAN AREAS.

    (a) In General.--Section 1886(d)(3)(A) (42 U.S.C. 1395ww(d)(3)(A)) 
is amended--
            (1) in clause (iv), by inserting ``and ending on or before 
        September 30, 2003,'' after ``October 1, 1995,''; and
            (2) by redesignating clauses (v) and (vi) as clauses (vii) 
        and (viii), respectively, and inserting after clause (iv) the 
        following new clauses:
            ``(v) For discharges occurring in the fiscal year beginning 
        on October 1, 2003, the average standardized amount for 
        hospitals located in areas other than a large urban area shall 
        be equal to the average standardized amount for hospitals 
        located in a large urban area.''.
    (b) Conforming Amendments.--
            (1) Computing drg-specific rates.--Section 1886(d)(3)(D) 
        (42 U.S.C. 1395ww(d)(3)(D)) is amended--
                    (A) in the heading, by striking ``in different 
                areas'';
                    (B) in the matter preceding clause (i), by striking 
                ``, each of'';
                    (C) in clause (i)--
                            (i) in the matter preceding subclause (I), 
                        by inserting ``for fiscal years before fiscal 
                        year 2004,'' before ``for hospitals''; and
                            (ii) in subclause (II), by striking ``and'' 
                        after the semicolon at the end;
                    (D) in clause (ii)--
                            (i) in the matter preceding subclause (I), 
                        by inserting ``for fiscal years before fiscal 
                        year 2004,'' before ``for hospitals''; and
                            (ii) in subclause (II), by striking the 
                        period at the end and inserting ``; and''; and
                    (E) by adding at the end the following new clause:
                    ``(iii) for a fiscal year beginning after fiscal 
                year 2003, for hospitals located in all areas, to the 
                product of--
                            ``(I) the applicable standardized amount 
                        (computed under subparagraph (A)), reduced 
                        under subparagraph (B), and adjusted or reduced 
                        under subparagraph (C) for the fiscal year; and
                            ``(II) the weighting factor (determined 
                        under paragraph (4)(B)) for that diagnosis-
                        related group.''.
            (2) Technical conforming sunset.--Section 1886(d)(3) (42 
        U.S.C. 1395ww(d)(3)) is amended--
                    (A) in the matter preceding subparagraph (A), by 
                inserting ``, for fiscal years before fiscal year 
                1997,'' before ``a regional adjusted DRG prospective 
                payment rate''; and
                    (B) in subparagraph (D), in the matter preceding 
                clause (i), by inserting ``, for fiscal years before 
                fiscal year 1997,'' before ``a regional DRG prospective 
                payment rate for each region,''.

SEC. 403. ESTABLISHMENT OF ESSENTIAL RURAL HOSPITAL CLASSIFICATION.

    (a) Classification.--Section 1861(mm) (42 U.S.C. 1395x(mm)) is 
amended--
            (1) in the heading by adding ``Essential Rural Hospitals'' 
        at the end; and
            (2) by adding at the end the following new paragraphs:
    ``(4)(A) The term `essential rural hospital' means a subsection (d) 
hospital (as defined in section 1886(d)(1)(B)) that is located in a 
rural area (as defined for purposes of section 1886(d)), has more than 
25 licensed acute care inpatient beds, has applied to the Secretary for 
classification as such a hospital, and with respect to which the 
Secretary has determined that the closure of the hospital would 
significantly diminish the ability of medicare beneficiaries to obtain 
essential health care services.
    ``(B) The determination under subparagraph (A) shall be based on 
the following criteria:
            ``(i) High proportion of medicare beneficiaries receiving 
        care from hospital.--(I) A high percentage of such 
        beneficiaries residing in the area of the hospital who are 
        hospitalized (during the most recent year for which complete 
        data are available) receive basic inpatient medical care at the 
        hospital.
            ``(II) For a hospital with more than 200 licensed beds, a 
        high percentage of such beneficiaries residing in such area who 
        are hospitalized (during such recent year) receive specialized 
        surgical inpatient care at the hospital.
            ``(III) Almost all physicians described in section 
        1861(r)(1) in such area have privileges at the hospital and 
        provide their inpatient services primarily at the hospital.
            ``(IV) The hospital inpatient score for quality of care is 
        not less than the median hospital score for qualify of care for 
        hospitals in the State, as established under standards of the 
        utilization and quality control peer review organization under 
        part B of title XI or other quality standards recognized by the 
        Secretary.
            ``(ii) Significant adverse impact in absence of hospital.--
        If the hospital were to close--
                    ``(I) there would be a significant amount of time 
                needed for residents to reach emergency treatment, 
                resulting in a potential significant harm to 
                beneficiaries with critical illnesses or injuries;
                    ``(II) there would be an inability in the community 
                to stablize emergency cases for transfers to another 
                acute care setting, resulting in a potential for 
                significant harm to medicare beneficiaries; and
                    ``(III) any other nearby hospital lacks the 
                physical and clinical capacity to take over the 
                hospital's typical admissions.
    ``(C) In making such determination, the Secretary may also consider 
the following:
            ``(i) Free-standing ambulatory surgery centers, office-
        based oncology care, and imaging center services are 
        insufficient in the hospital's area to handle the outpatient 
        care of the hospital.
            ``(ii) Beneficiaries in nearby areas would be adversely 
        affected if the hospital were to close as the hospital provides 
        specialized knowledge and services to a network of smaller 
        hospitals and critical access hospitals.
            ``(iii) Medicare beneficiaries would have difficulty in 
        accessing care if the hospital were to close as the hospital 
        provides significant subsidies to support ambulatory care in 
        local clinics, including mental health clinics and to support 
        post acute care.
            ``(iv) The hospital has a committment to provide graduate 
        medical education in a rural area.
A hospital classified as an essential rural hospital may not change 
such classification and a hospital so classified shall not be treated 
as a sole community hospital, medicare dependent hospital, or rural 
referral center for purposes of section 1886.''.
    (b) Payment Based on 102 Percent of Allowed Costs.--
            (1) Inpatient hospital services.--Section 1886(d) (42 
        U.S.C. 1395ww(d)) is amended by adding at the end the 
        following:
    ``(11) In the case of a hospital classified as an essential rural 
hospital under section 1861(mm)(4) for a cost reporting period, the 
payment under this subsection for inpatient hospital services for 
discharges occurring during the period shall be based on 102 percent of 
the reasonable costs for such services. Nothing in this paragraph shall 
be construed as affecting the application or amount of deductibles or 
copayments otherwise applicable to such services under part A or as 
waiving any requirement for billing for such services.''.
            (2) Hospital outpatient services.--Section 1833(t)(13) (42 
        U.S.C. 1395l(t)(13)) is amended by adding at the end the 
        following new subparagraph:
                    ``(B) Special rule for essential rural hospitals.--
                In the case of a hospital classified as an essential 
                rural hospital under section 1861(mm)(4) for a cost 
                reporting period, the payment under this subsection for 
                covered OPD services during the period shall be based 
                on 102 percent of the reasonable costs for such 
                services. Nothing in this subparagraph shall be 
                construed as affecting the application or amount of 
                deductibles or copayments otherwise applicable to such 
                services under this part or as waiving any requirement 
                for billing for such services.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to cost reporting periods beginning on or after October 1, 2004.

SEC. 404. MORE FREQUENT UPDATE IN WEIGHTS USED IN HOSPITAL MARKET 
              BASKET.

    (a) More Frequent Updates in Weights.--After revising the weights 
used in the hospital market basket under section 1886(b)(3)(B)(iii) of 
the Social Security Act (42 U.S.C. 1395ww(b)(3)(B)(iii)) to reflect the 
most current data available, the Secretary shall establish a frequency 
for revising such weights, including the labor share, in such market 
basket to reflect the most current data available more frequently than 
once every 5 years.
    (b) Report.--Not later than October 1, 2004, the Secretary shall 
submit a report to Congress on the frequency established under 
subsection (a), including an explanation of the reasons for, and 
options considered, in determining such frequency.

SEC. 405. IMPROVEMENTS TO CRITICAL ACCESS HOSPITAL PROGRAM.

    (a) Increase in Payment Amounts.--
            (1) In general.--Sections 1814(l), 1834(g)(1), and 
        1883(a)(3) (42 U.S.C. 1395f(l); 1395m(g)(1); 42 U.S.C. 
        1395tt(a)(3)) are each amended by inserting ``equal to 102 
        percent of'' before ``the reasonable costs''.
            (2) Effective date.--The amendments made by paragraph (1) 
        shall apply to payments for services furnished during cost 
        reporting periods beginning on or after October 1, 2003.
    (b) Coverage of Costs for Certain Emergency Room On-Call 
Providers.--
            (1) In general.--Section 1834(g)(5) (42 U.S.C. 1395m(g)(5)) 
        is amended--
                    (A) in the heading--
                            (i) by inserting ``certain'' before 
                        ``emergency''; and
                            (ii) by striking ``physicians'' and 
                        inserting ``providers'';
                    (B) by striking ``emergency room physicians who are 
                on-call (as defined by the Secretary)'' and inserting 
                ``physicians, physician assistants, nurse 
                practitioners, and clinical nurse specialists who are 
                on-call (as defined by the Secretary) to provide 
                emergency services''; and
                    (C) by striking ``physicians' services'' and 
                inserting ``services covered under this title''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply with respect to costs incurred for services 
        provided on or after January 1, 2004.
    (c) Modification of the Isolation Test for Cost-Based CAH Ambulance 
Services.--
            (1) In general.--Section 1834(l)(8) (42 U.S.C. 1395m(l)), 
        as added by section 205(a) of BIPA (114 Stat. 2763A-482), is 
        amended by adding at the end the following: ``The limitation 
        described in the matter following subparagraph (B) in the 
        previous sentence shall not apply if the ambulance services are 
        furnished by such a provider or supplier of ambulance services 
        who is a first responder to emergencies in accordance with 
        local protocols (as determined by the Secretary).''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to ambulances services furnished on or after the 
        first cost reporting period that begins after the date of the 
        enactment of this Act.
    (d) Reinstatement of Periodic Interim Payment (PIP).--
            (1) In general.--Section 1815(e)(2) (42 U.S.C. 1395g(e)(2)) 
        is amended--
                    (A) in the matter before subparagraph (A), by 
                inserting ``, in the cases described in subparagraphs 
                (A) through (D)'' after ``1986''; and
                    (B) by striking ``and'' at the end of subparagraph 
                (C);
                    (C) by adding ``and'' at the end of subparagraph 
                (D); and
                    (D) by inserting after subparagraph (D) the 
                following new subparagraph:
            ``(E) inpatient critical access hospital services;''.
            (2) Development of alternative methods of periodic interim 
        payments.--With respect to periodic interim payments to 
        critical access hospitals for inpatient critical access 
        hospital services under section 1815(e)(2)(E) of the Social 
        Security Act, as added by paragraph (1), the Secretary shall 
        develop alternative methods for such payments that are based on 
        expenditures of the hospital.
            (3) Reinstatement of pip.--The amendments made by paragraph 
        (1) shall apply to payments made on or after January 1, 2004.
    (e) Condition for Application of Special Physician Payment 
Adjustment.--
            (1) In general.--Section 1834(g)(2) (42 U.S.C. 1395m(g)(2)) 
        is amended by adding after and below subparagraph (B) the 
        following:
        ``The Secretary may not require, as a condition for applying 
        subparagraph (B) with respect to a critical access hospital, 
        that each physician providing professional services in the 
        hospital must assign billing rights with respect to such 
        services, except that such subparagraph shall not apply to 
        those physicians who have not assigned such billing rights.''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall be effective as if included in the enactment of section 
        403(d) of the Medicare, Medicaid, and SCHIP Balanced Budget 
        Refinement Act of 1999 (113 Stat. 1501A-371).
    (f) Flexibility in Bed Limitation for Hospitals.--Section 1820 (42 
U.S.C. 1395i-4) is amended--
            (1) in subsection (c)(2)(B)(iii), by inserting ``subject to 
        paragraph (3)'' after ``(iii) provides'';
            (2) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(3) Increase in maximum number of beds for hospitals with 
        strong seasonal census fluctuations.--
                    ``(A) In general.--Subject to subparagraph (C), in 
                the case of a hospital that demonstrates that it meets 
                the standards established under subparagraph (B) and 
                has not made the election described in subsection 
                (f)(2)(A), the bed limitations otherwise applicable 
                under paragraph (2)(B)(iii) and subsection (f) shall be 
                increased by 5 beds.
                    ``(B) Standards.--The Secretary shall specify 
                standards for determining whether a critical access 
                hospital has sufficiently strong seasonal variations in 
                patient admissions to justify the increase in bed 
                limitation provided under subparagraph (A).''; and
            (3) in subsection (f)--
                    (A) by inserting ``(1)'' after ``(f)''; and
                    (B) by adding at the end the following new 
                paragraph:
    ``(2)(A) A hospital may elect to treat the reference in paragraph 
(1) to `15 beds' as a reference to `25 beds', but only if no more than 
10 beds in the hospital are at any time used for non-acute care 
services. A hospital that makes such an election is not eligible for 
the increase provided under subsection (c)(3)(A).
    ``(B) The limitations in numbers of beds under the first sentence 
of paragraph (1) are subject to adjustment under subsection (c)(3).''.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to designations made before, on, or after January 
        1, 2004.
    (g) Additional 5-Year Period of Funding for Grant Program.--
            (1) In general.--Section 1820(g) (42 U.S.C. 1395i-4(g)) is 
        amended by adding at the end the following new paragraph:
            ``(4) Funding.--
                    ``(A) In general.--Subject to subparagraph (B), 
                payment for grants made under this subsection during 
                fiscal years 2004 through 2008 shall be made from the 
                Federal Hospital Insurance Trust Fund.
                    ``(B) Annual aggregate limitation.--In no case may 
                the amount of payment provided for under subparagraph 
                (A) for a fiscal year exceed $25,000,000.''.
            (2) Conforming amendment.--Section 1820 (42 U.S.C. 1395i-4) 
        is amended by striking subsection (j).

SEC. 406. REDISTRIBUTION OF UNUSED RESIDENT POSITIONS.

    (a) In General.--Section 1886(h)(4) (42 U.S.C. 1395ww(h)(4)) is 
amended--
            (1) in subparagraph (F)(i), by inserting ``subject to 
        subparagraph (I),'' after ``October 1, 1997,'';
            (2) in subparagraph (H)(i), by inserting ``subject to 
        subparagraph (I),'' after ``subparagraphs (F) and (G),''; and
            (3) by adding at the end the following new subparagraph:
                    ``(I) Redistribution of unused resident 
                positions.--
                            ``(i) Reduction in limit based on unused 
                        positions.--
                                    ``(I) In general.--If a hospital's 
                                resident level (as defined in clause 
                                (iii)(I)) is less than the otherwise 
                                applicable resident limit (as defined 
                                in clause (iii)(II)) for each of the 
                                reference periods (as defined in 
                                subclause (II)), effective for cost 
                                reporting periods beginning on or after 
                                January 1, 2004, the otherwise 
                                applicable resident limit shall be 
                                reduced by 75 percent of the difference 
                                between such limit and the reference 
                                resident level specified in subclause 
                                (III) (or subclause (IV) if 
                                applicable).
                                    ``(II) Reference periods defined.--
                                In this clause, the term `reference 
                                periods' means, for a hospital, the 3 
                                most recent consecutive cost reporting 
                                periods of the hospital for which cost 
                                reports have been settled (or, if not, 
                                submitted) on or before September 30, 
                                2002.
                                    ``(III) Reference resident level.--
                                Subject to subclause (IV), the 
                                reference resident level specified in 
                                this subclause for a hospital is the 
                                highest resident level for the hospital 
                                during any of the reference periods.
                                    ``(IV) Adjustment process.--Upon 
                                the timely request of a hospital, the 
                                Secretary shall adjust (subject to 
                                audit) the reference resident level for 
                                a hospital to be the resident level for 
                                the hospital for the cost reporting 
                                period that includes July 1, 2003.
                                    ``(V) Affiliation.--With respect to 
                                hospitals which are members of the same 
                                affiliated group (as defined by the 
                                Secretary under subparagraph (H)(ii)), 
                                the provisions of this section shall be 
                                applied with respect to such an 
                                affiliated group by deeming the 
                                affiliated group to be a single 
                                hospital.
                            ``(ii) Redistribution.--
                                    ``(I) In general.--The Secretary is 
                                authorized to increase the otherwise 
                                applicable resident limits for 
                                hospitals by an aggregate number 
                                estimated by the Secretary that does 
                                not exceed the aggregate reduction in 
                                such limits attributable to clause (i) 
                                (without taking into account any 
                                adjustment under subclause (IV) of such 
                                clause).
                                    ``(II) Effective date.--No increase 
                                under subclause (I) shall be permitted 
                                or taken into account for a hospital 
                                for any portion of a cost reporting 
                                period that occurs before July 1, 2004, 
                                or before the date of the hospital's 
                                application for an increase under this 
                                clause. No such increase shall be 
                                permitted for a hospital unless the 
                                hospital has applied to the Secretary 
                                for such increase by December 31, 2005.
                                    ``(III) Considerations in 
                                redistribution.--In determining for 
                                which hospitals the increase in the 
                                otherwise applicable resident limit is 
                                provided under subclause (I), the 
                                Secretary shall take into account the 
                                need for such an increase by specialty 
                                and location involved, consistent with 
                                subclause (IV).
                                    ``(IV) Priority for rural and small 
                                urban areas.--In determining for which 
                                hospitals and residency training 
                                programs an increase in the otherwise 
                                applicable resident limit is provided 
                                under subclause (I), the Secretary 
                                shall first distribute the increase to 
                                programs of hospitals located in rural 
                                areas or in urban areas that are not 
                                large urban areas (as defined for 
                                purposes of subsection (d)) on a first-
                                come-first-served basis (as determined 
                                by the Secretary) based on a 
                                demonstration that the hospital will 
                                fill the positions made available under 
                                this clause and not to exceed an 
                                increase of 25 full-time equivalent 
                                positions with respect to any hospital.
                                    ``(V) Application of locality 
                                adjusted national average per resident 
                                amount.--With respect to additional 
                                residency positions in a hospital 
                                attributable to the increase provided 
                                under this clause, notwithstanding any 
                                other provision of this subsection, the 
                                approved FTE resident amount is deemed 
                                to be equal to the locality adjusted 
                                national average per resident amount 
                                computed under subparagraph (E) for 
                                that hospital.
                                    ``(VI) Construction.--Nothing in 
                                this clause shall be construed as 
                                permitting the redistribution of 
                                reductions in residency positions 
                                attributable to voluntary reduction 
                                programs under paragraph (6) or as 
                                affecting the ability of a hospital to 
                                establish new medical residency 
                                training programs under subparagraph 
                                (H).
                            ``(iii) Resident level and limit defined.--
                        In this subparagraph:
                                    ``(I) Resident level.--The term 
                                `resident level' means, with respect to 
                                a hospital, the total number of full-
                                time equivalent residents, before the 
                                application of weighting factors (as 
                                determined under this paragraph), in 
                                the fields of allopathic and 
                                osteopathic medicine for the hospital.
                                    ``(II) Otherwise applicable 
                                resident limit.--The term `otherwise 
                                applicable resident limit' means, with 
                                respect to a hospital, the limit 
                                otherwise applicable under 
                                subparagraphs (F)(i) and (H) on the 
                                resident level for the hospital 
                                determined without regard to this 
                                subparagraph.''.
    (b) Conforming Amendment to IME.--Section 1886(d)(5)(B)(v) (42 
U.S.C. 1395ww(d)(5)(B)(v)) is amended by adding at the end the 
following: ``The provisions of subparagraph (I) of subsection (h)(4) 
shall apply with respect to the first sentece of this clause in the 
same manner as it applies with respect to subparagraph (F) of such 
subsection.''.
    (c) Report on Extension of Applications Under Redistribution 
Program.--Not later than July 1, 2005, the Secretary shall submit to 
Congress a report containing recommendations regarding whether to 
extend the deadline for applications for an increase in resident limits 
under section 1886(h)(4)(I)(ii)(II) of the Social Security Act (as 
added by subsection (a)).

SEC. 407. TWO-YEAR EXTENSION OF HOLD HARMLESS PROVISIONS FOR SMALL 
              RURAL HOSPITALS AND SOLE COMMUNITY HOSPITALS UNDER 
              PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT 
              DEPARTMENT SERVICES.

    (a) Hold Harmless Provisions.--
            (1) In general.--Section 1833(t)(7)(D)(i) (42 U.S.C. 
        1395l(t)(7)(D)(i)) is amended--
                    (A) in the heading, by striking ``small'' and 
                inserting ``certain'';
                    (B) by inserting ``or a sole community hospital (as 
                defined in section 1886(d)(5)(D)(iii)) located in a 
                rural area'' after ``100 beds''; and
                    (C) by striking ``2004'' and inserting ``2006''.
            (2) Effective date.--The amendment made by subsection 
        (a)(2) shall apply with respect to payment for OPD services 
        furnished on and after January 1, 2004.
    (b) Study; Adjustment.--
            (1) Study.--The Secretary shall conduct a study to 
        determine if, under the prospective payment system for hospital 
        outpatient department services under section 1833(t) of the 
        Social Security Act (42 U.S.C. 1395l(t)), costs incurred by 
        rural providers of services by ambulatory payment 
        classification groups (APCs) exceed those costs incurred by 
        urban providers of services.
            (2) Adjustment.--Insofar as the Secretary determines under 
        paragraph (1) that costs incurred by rural providers exceed 
        those costs incurred by urban providers of services, the 
        Secretary shall provide for an appropriate adjustment under 
        such section 1833(t) to reflect those higher costs by January 
        1, 2005.

SEC. 408. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC AND FEDERALLY 
              QUALIFIED HEALTH CENTER SERVICES FROM THE PROSPECTIVE 
              PAYMENT SYSTEM FOR SKILLED NURSING FACILITIES.

    (a) In General.--Section 1888(e)(2)(A) (42 U.S.C. 1395yy(e)(2)(A)) 
is amended--
            (1) in clause (i)(II), by striking ``clauses (ii) and 
        (iii)'' and inserting ``clauses (ii), (iii), and (iv)''; and
            (2) by adding at the end the following new clause:
                            ``(iv) Exclusion of certain rural health 
                        clinic and federally qualified health center 
                        services.--Services described in this clause 
                        are--
                                    ``(I) rural health clinic services 
                                (as defined in paragraph (1) of section 
                                1861(aa)); and
                                    ``(II) Federally qualified health 
                                center services (as defined in 
                                paragraph (3) of such section);
                        that would be described in clause (ii) if such 
                        services were not furnished by an individual 
                        affiliated with a rural health clinic or a 
                        Federally qualified health center.''.
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to services furnished on or after January 1, 2004.

SEC. 409. RECOGNITION OF ATTENDING NURSE PRACTITIONERS AS ATTENDING 
              PHYSICIANS TO SERVE HOSPICE PATIENTS.

    (a) In General.--Section 1861(dd)(3)(B) (42 U.S.C. 1395x(dd)(3)(B)) 
is amended by inserting ``or nurse practitioner (as defined in 
subsection (aa)(5))'' after ``the physician (as defined in subsection 
(r)(1))''.
    (b) Clarification of Hospice Role of Nurse Practitioners.--Section 
1814(a)(7)(A)(i)(I) (42 U.S.C. 1395f(a)(7)(A)(i)(I)) is amended by 
inserting ``(which for purposes of this subparagraph does not include a 
nurse practitioner)'' after ``attending physician (as defined in 
section 1861(dd)(3)(B))''.

SEC. 410. IMPROVEMENT IN PAYMENTS TO RETAIN EMERGENCY CAPACITY FOR 
              AMBULANCE SERVICES IN RURAL AREAS.

    Section 1834(l) (42 U.S.C. 1395m(l)) is amended--
            (1) by redesignating paragraph (8), as added by section 
        221(a) of BIPA (114 Stat. 2763A-486), as paragraph (9); and
            (2) by adding at the end the following new paragraph:
            ``(10) Assistance for rural providers furnishing services 
        in low medicare population density areas.--
                    ``(A) In general.--In the case of ground ambulance 
                services furnished on or after January 1, 2004, for 
                which the transportation originates in a qualified 
                rural area (as defined in subparagraph (B)), the 
                Secretary shall provide for a percent increase in the 
                base rate of the fee schedule for a trip established 
                under this subsection. In establishing such percent 
                increase, the Secretary shall estimate the average cost 
                per trip for the base rate in the lowest quartile as 
                compared to the average cost for the base rate for such 
                services that is in the highest quartile of all rural 
                county populations.
                    ``(B) Qualified rural area defined.--For purposes 
                of subparagraph (A), the term `qualified rural area' is 
                a rural area (as defined in section 1886(d)(2)(D)) with 
                a population density of medicare beneficiaries residing 
                in the area that is in the lowest quartile of all rural 
                county populations.''.

SEC. 411. TWO-YEAR INCREASE FOR HOME HEALTH SERVICES FURNISHED IN A 
              RURAL AREA.

    (a) In General.--In the case of home health services furnished in a 
rural area (as defined in section 1886(d)(2)(D) of the Social Security 
Act (42 U.S.C. 1395ww(d)(2)(D))) during 2004 and 2005, the Secretary 
shall increase the payment amount otherwise made under section 1895 of 
such Act (42 U.S.C. 1395fff) for such services by 5 percent.
    (b) Waiving Budget Neutrality.--The Secretary shall not reduce the 
standard prospective payment amount (or amounts) under section 1895 of 
the Social Security Act (42 U.S.C. 1395fff) applicable to home health 
services furnished during a period to offset the increase in payments 
resulting from the application of subsection (a).

SEC. 412. PROVIDING SAFE HARBOR FOR CERTAIN COLLABORATIVE EFFORTS THAT 
              BENEFIT MEDICALLY UNDERSERVED POPULATIONS.

    (a) In General.--Section 1128B(b)(3) (42 U.S.C. 1320a-7(b)(3)), as 
amended by section 101(b)(2), is amended--
            (1) in subparagraph (F), by striking ``and'' after the 
        semicolon at the end;
            (2) in subparagraph (G), by striking the period at the end 
        and inserting ``; and''; and
            (3) by adding at the end the following new subparagraph:
                    ``(H) any remuneration between a public or 
                nonprofit private health center entity described under 
                clause (i) or (ii) of section 1905(l)(2)(B) and any 
                individual or entity providing goods, items, services, 
                donations or loans, or a combination thereof, to such 
                health center entity pursuant to a contract, lease, 
                grant, loan, or other agreement, if such agreement 
                contributes to the ability of the health center entity 
                to maintain or increase the availability, or enhance 
                the quality, of services provided to a medically 
                underserved population served by the health center 
                entity.''.
    (b) Rulemaking for Exception for Health Center Entity 
Arrangements.--
            (1) Establishment.--
                    (A) In general.--The Secretary of Health and Human 
                Services (in this subsection referred to as the 
                ``Secretary'') shall establish, on an expedited basis, 
                standards relating to the exception described in 
                section 1128B(b)(3)(H) of the Social Security Act, as 
                added by subsection (a), for health center entity 
                arrangements to the antikickback penalties.
                    (B) Factors to consider.--The Secretary shall 
                consider the following factors, among others, in 
                establishing standards relating to the exception for 
                health center entity arrangements under subparagraph 
                (A):
                            (i) Whether the arrangement between the 
                        health center entity and the other party 
                        results in savings of Federal grant funds or 
                        increased revenues to the health center entity.
                            (ii) Whether the arrangement between the 
                        health center entity and the other party 
                        restricts or limits a patient's freedom of 
                        choice.
                            (iii) Whether the arrangement between the 
                        health center entity and the other party 
                        protects a health care professional's 
                        independent medical judgment regarding 
                        medically appropriate treatment.
                The Secretary may also include other standards and 
                criteria that are consistent with the intent of 
                Congress in enacting the exception established under 
                this section.
            (2) Interim final effect.--No later than 180 days after the 
        date of enactment of this Act, the Secretary shall publish a 
        rule in the Federal Register consistent with the factors under 
        paragraph (1)(B). Such rule shall be effective and final 
        immediately on an interim basis, subject to such change and 
        revision, after public notice and opportunity (for a period of 
        not more than 60 days) for public comment, as is consistent 
        with this subsection.

SEC. 413. GAO STUDY OF GEOGRAPHIC DIFFERENCES IN PAYMENTS FOR 
              PHYSICIANS' SERVICES.

    (a) Study.--The Comptroller General of the United States shall 
conduct a study of differences in payment amounts under the physician 
fee schedule under section 1848 of the Social Security Act (42 U.S.C. 
1395w-4) for physicians' services in different geographic areas. Such 
study shall include--
            (1) an assessment of the validity of the geographic 
        adjustment factors used for each component of the fee schedule;
            (2) an evaluation of the measures used for such adjustment, 
        including the frequency of revisions; and
            (3) an evaluation of the methods used to determine 
        professional liability insurance costs used in computing the 
        malpractice component, including a review of increases in 
        professional liability insurance premiums and variation in such 
        increases by State and physician specialty and methods used to 
        update the geographic cost of practice index and relative 
        weights for the malpractice component.
    (b) Report.--Not later than 1 year after the date of the enactment 
of this Act, the Comptroller General shall submit to Congress a report 
on the study conducted under subsection (a). The report shall include 
recommendations regarding the use of more current data in computing 
geographic cost of practice indices as well as the use of data directly 
representative of physicians' costs (rather than proxy measures of such 
costs).

SEC. 414. TREATMENT OF MISSING COST REPORTING PERIODS FOR SOLE 
              COMMUNITY HOSPITALS.

    (a) In General.--Section 1886(b)(3)(I) (42 U.S.C. 1395ww(b)(3)(I)) 
is amended by adding at the end the following new clause:
    ``(iii) In no case shall a hospital be denied treatment as a sole 
community hospital or payment (on the basis of a target rate as such as 
a hospital) because data are unavailable for any cost reporting period 
due to changes in ownership, changes in fiscal intermediaries, or other 
extraordinary circumstances, so long as data for at least one 
applicable base cost reporting period is available.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to cost reporting periods beginning on or after January 1, 2004.

SEC. 415. EXTENSION OF TELEMEDICINE DEMONSTRATION PROJECT.

    Section 4207 of Balanced Budget Act of 1997 (Public Law 105-33) is 
amended--
            (1) in subsection (a)(4), by striking ``4-year'' and 
        inserting ``8-year''; and
            (2) in subsection (d)(3), by striking ``$30,000,000'' and 
        inserting ``$60,000,000''.

SEC. 416. ADJUSTMENT TO THE MEDICARE INPATIENT HOSPITAL PPS WAGE INDEX 
              TO REVISE THE LABOR-RELATED SHARE OF SUCH INDEX.

    (a) In General.--Section 1886(d)(3)(E) (42 U.S.C. 1395ww(d)(3)(E)) 
is amended--
            (1) by striking ``wage levels.--The Secretary'' and 
        inserting ``wage levels.--
                    ``(i) In general.--Except as provided in clause 
                (ii), the Secretary''; and
            (2) by adding at the end the following new clause:
                    ``(ii) Alternative proportion to be adjusted 
                beginning in fiscal year 2004.--
                            ``(I) In general.--Except as provided in 
                        subclause (II), for discharges occurring on or 
                        after October 1, 2003, the Secretary shall 
                        substitute the `62 percent' for the proportion 
                        described in the first sentence of clause (i).
                            ``(II) Hold harmless for certain 
                        hospitals.--If the application of subclause (I) 
                        would result in lower payments to a hospital 
                        than would otherwise be made, then this 
                        subparagraph shall be applied as if this clause 
                        had not been enacted.''.
    (b) Waiving Budget Neutrality.--Section 1886(d)(3)(E) (42 U.S.C. 
1395ww(d)(3)(E)), as amended by subsection (a), is amended by adding at 
the end of clause (i) the following new sentence: ``The Secretary shall 
apply the previous sentence for any period as if the amendments made by 
section 402(a) of the Medicare Prescription Drug and Modernization Act 
of 2003 had not been enacted.''.

SEC. 417. MEDICARE INCENTIVE PAYMENT PROGRAM IMPROVEMENTS FOR PHYSICIAN 
              SCARCITY.

    (a) Additional Bonus Payment for Certain Physician Scarcity 
Areas.--
            (1) In general.--Section 1833 (42 U.S.C. 1395l) is amended 
        by adding at the end the following new subsection:
    ``(u) Incentive Payments for Physician Scarcity Areas.--
            ``(1) In general.--In the case of physicians' services 
        furnished in a year--
                    ``(A) by a primary care physician in a primary care 
                scarcity county (identified under paragraph (4)); or
                    ``(B) by a physician who is not a primary care 
                physician in a specialist care scarcity county (as so 
                identified),
        in addition to the amount of payment that would otherwise be 
        made for such services under this part, there also shall be 
        paid an amount equal to 5 percent of the payment amount for the 
        service under this part.
            ``(2) Determination of ratios of physicians to medicare 
        beneficiaries in area.--Based upon available data, the 
        Secretary shall periodically determine, for each county or 
        equivalent area in the United States, the following:
                    ``(A) Number of physicians practicing in the 
                area.--The number of physicians who furnish physicians' 
                services in the active practice of medicine or 
                osteopathy in that county or area, other than 
                physicians whose practice is exclusively for the 
                Federal Government, physicians who are retired, or 
                physicians who only provide administrative services. Of 
                such number, the number of such physicians who are--
                            ``(i) primary care physicians; or
                            ``(ii) physicians who are not primary care 
                        physicians.
                    ``(B) Number of medicare beneficiaries residing in 
                the area.--The number of individuals who are residing 
                in the county and are entitled to benefits under part A 
                or enrolled under this part, or both.
                    ``(C) Determination of ratios.--
                            ``(i) Primary care ratio.--The ratio (in 
                        this paragraph referred to as the `primary care 
                        ratio') of the number of primary care 
                        physicians (determined under subparagraph 
                        (A)(i)), to number of medicare beneficiaries 
                        determined under subparagraph (B).
                            ``(ii) Specialist care ratio.--The ratio 
                        (in this paragraph referred to as the 
                        `specialist care ratio') of the number of other 
                        physicians (determined under subparagraph 
                        (A)(ii)), to number of medicare beneficiaries 
                        determined under subparagraph (B).
            ``(3) Ranking of counties.--The Secretary shall rank each 
        such county or area based separately on its primary care ratio 
        and its specialist care ratio.
            ``(4) Identification of counties.--The Secretary shall 
        identify--
                    ``(A) those counties and areas (in this paragraph 
                referred to as `primary care scarcity counties') with 
                the lowest primary care ratios that represent, if each 
                such county or area were weighted by the number of 
                medicare beneficiaries determined under paragraph 
                (2)(B), an aggregate total of 20 percent of the total 
                of the medicare beneficiaries determined under such 
                paragraph; and
                    ``(B) those counties and areas (in this subsection 
                referred to as `specialist care scarcity counties') 
                with the lowest specialist care ratios that represent, 
                if each such county or area were weighted by the number 
                of medicare beneficiaries determined under paragraph 
                (2)(B), an aggregate total of 20 percent of the total 
                of the medicare beneficiaries determined under such 
                paragraph.
        There is no administrative or judicial review respecting the 
        identification of a county or area or the assignment of a 
        specialty of any physician under this paragraph.
            ``(5) Rural census tracks.--To the extent feasible, the 
        Secretary shall treat a rural census tract of a metropolitan 
        statistical area (as determined under the most recent 
        modification of the Goldsmith Modification, originally 
        published in the Federal Register on February 27, 1992 (57 Fed. 
        Reg. 6725) as an equivalent area for purposes of qualifying as 
        a primary care scarcity county or specialist care scarcity 
        county under this subsection.
            ``(6) Physician Defined.--For purposes of this paragraph, 
        the term `physician' means a physician described in section 
        1861(r)(1) and the term `primary care physician' means a 
        physician who is identified in the available data as a general 
        practitioner, family practice practitioner, general internist, 
        or obstetrician or gynecologist.
            ``(7) Publication of list of counties.--In carrying out 
        this subsection for a year, the Secretary shall include, as 
        part of the proposed and final rule to implement the physician 
        fee schedule under section 1848 for the year, a list of all 
        areas which will qualify as a primary care scarcity county or 
        specialist care scarcity county under this subsection for the 
        year involved.''.
            (2) Effective date.--The amendments made by subsection (a) 
        shall apply to physicians' services furnished or after January 
        1, 2004.
    (b) Improvement to Medicare Incentive Payment Program.--
            (1) In general.--Section 1833(m) (42 U.S.C. 1395l(m)) is 
        amended--
                    (A) by inserting ``(1)'' after ``(m)''; and
                    (B) by adding at the end the following new 
                paragraphs:
    ``(2) The Secretary shall establish procedures under which the 
Secretary, and not the physician furnishing the service, is responsible 
for determining when a payment is required to be made under paragraph 
(1).
    ``(3) In carrying out paragraph (1) for a year, the Secretary shall 
include, as part of the proposed and final rule to implement the 
physician fee schedule under section 1848 for the year, a list of all 
areas which will qualify as a health professional shortage area under 
paragraph (1) for the year involved.''.
            (2) Effective date.--The amendments made by paragraph (1) 
        shall apply to physicians' services furnished or after January 
        1, 2004.

SEC. 418. RURAL HOSPICE DEMONSTRATION PROJECT.

    (a) In General.--The Secretary shall conduct a demonstration 
project for the delivery of hospice care to medicare beneficiaries in 
rural areas. Under the project medicare beneficiaries who are unable to 
receive hospice care in the home for lack of an appropriate caregiver 
are provided such care in a facility of 20 or fewer beds which offers, 
within its walls, the full range of services provided by hospice 
programs under section 1861(dd) of the Social Security Act (42 U.S.C. 
1395x(dd)).
    (b) Scope of Project.--The Secretary shall conduct the project 
under this section with respect to no more than 3 hospice programs over 
a period of not longer than 5 years each.
    (c) Compliance with Conditions.--Under the demonstration project--
            (1) the hospice program shall comply with otherwise 
        applicable requirements, except that it shall not be required 
        to offer services outside of the home or to meet the 
        requirements of section 1861(dd)(2)(A)(iii) of the Social 
        Security Act; and
            (2) payments for hospice care shall be made at the rates 
        otherwise applicable to such care under title XVIII of such 
        Act.
The Secretary may require the program to comply with such additional 
quality assurance standards for its provision of services in its 
facility as the Secretary deems appropriate.
    (d) Report.--Upon completion of the project, the Secretary shall 
submit a report to Congress on the project and shall include in the 
report recommendations regarding extension of such project to hospice 
programs serving rural areas.

                 TITLE V--PROVISIONS RELATING TO PART A

                Subtitle A--Inpatient Hospital Services

SEC. 501. REVISION OF ACUTE CARE HOSPITAL PAYMENT UPDATES.

    Section 1886(b)(3)(B)(i) (42 U.S.C. 1395ww(b)(3)(B)(i)) is 
amended--
            (1) by striking ``and'' at the end of subclause (XVIII);
            (2) by striking subclause (XIX); and
            (3) by inserting after subclause (XVIII) the following new 
        subclauses:
            ``(XIX) for each of fiscal years 2004 through 2006, the 
        market basket percentage increase minus 0.4 percentage points 
        for hospitals in all areas; and
            ``(XX) for fiscal year 2007 and each subsequent fiscal 
        year, the market basket percentage increase for hospitals in 
        all areas.''.

SEC. 502. RECOGNITION OF NEW MEDICAL TECHNOLOGIES UNDER INPATIENT 
              HOSPITAL PPS.

    (a) Improving Timeliness of Data Collection.--Section 1886(d)(5)(K) 
(42 U.S.C. 1395ww(d)(5)(K)) is amended by adding at the end the 
following new clause:
    ``(vii) Under the mechanism under this subparagraph, the Secretary 
shall provide for the addition of new diagnosis and procedure codes in 
April 1 of each year, but the addition of such codes shall not require 
the Secretary to adjust the payment (or diagnosis-related group 
classification) under this subsection until the fiscal year that begins 
after such date.''.
    (b) Eligibility Standard for Technology Outliers.--
            (1) Minimum period for recognition of new technologies.--
        Section 1886(d)(5)(K)(vi) (42 U.S.C. 1395ww(d)(5)(K)(vi)) is 
        amended--
                    (A) by inserting ``(I)'' after ``(vi)''; and
                    (B) by adding at the end the following new 
                subclause:
    ``(II) Under such criteria, a service or technology shall not be 
denied treatment as a new service or technology on the basis of the 
period of time in which the service or technology has been in use if 
such period ends before the end of the 2-to-3-year period that begins 
on the effective date of implementation of a code under ICD-9-CM (or a 
successor coding methodology) that enables the identification of 
specific discharges in which the service or technology has been 
used.''.
            (2) Adjustment of threshold.--Section 1886(d)(5)(K)(ii)(I) 
        (42 U.S.C. 1395ww(d)(5)(K)(ii)(I)) is amended by inserting 
        ``(applying a threshold specified by the Secretary that is the 
        lesser of 75 percent of the standardized amount (increased to 
        reflect the difference between cost and charges) or 75 percent 
        of one standard deviation for the diagnosis-related group 
        involved)'' after ``is inadequate''.
            (3) Criterion for substantial improvement.--Section 
        1886(d)(5)(K)(vi) (42 U.S.C. 1395ww(d)(5)(K)(vi)), as amended 
        by paragraph (1), is further amended by adding at the end the 
        following subclause:
    ``(III) The Secretary shall by regulation provide for further 
clarification of the criteria applied to determine whether a new 
service or technology represents an advance in medical technology that 
substantially improves the diagnosis or treatment of beneficiaries. 
Under such criteria, in determining whether a new service or technology 
represents an advance in medical technology that substantially improves 
the diagnosis or treatment of beneficiaries, the Secretary shall deem a 
service or technology as meeting such requirement if the service or 
technology is a drug or biological that is designated under section 506 
of the Federal Food, Drug, and Cosmetic Act, approved under section 
314.510 or 601.41 of title 21, Code of Federal Regulations, or 
designated for priority review when the marketing application for such 
drug or biological was filed or is a medical device for which an 
exemption has been granted under section 520(m) of such Act, or for 
which priority review has been provided under section 515(d)(5) of such 
Act. Nothing in this subclause shall be construed as effecting the 
authority of the Secretary to determine whether items and services are 
medically necessary and appropriate under section 1862(a)(1).''.
            (4) Process for public input.--Section 1886(d)(5)(K) (42 
        U.S.C. 1395ww(d)(5)(K)), as amended by paragraph (1), is 
        amended--
                    (A) in clause (i), by adding at the end the 
                following: ``Such mechanism shall be modified to meet 
                the requirements of clause (viii).''; and
                    (B) by adding at the end the following new clause:
    ``(viii) The mechanism established pursuant to clause (i) shall be 
adjusted to provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology not described in 
the second sentence of clause (vi)(III) represents an advance in 
medical technology that substantially improves the diagnosis or 
treatment of beneficiaries as follows:
            ``(I) The Secretary shall make public and periodically 
        update a list of all the services and technologies for which an 
        application for additional payment under this subparagraph is 
        pending.
            ``(II) The Secretary shall accept comments, 
        recommendations, and data from the public regarding whether the 
        service or technology represents a substantial improvement.
            ``(III) The Secretary shall provide for a meeting at which 
        organizations representing hospitals, physicians, medicare 
        beneficiaries, manufacturers, and any other interested party 
        may present comments, recommendations, and data to the clinical 
        staff of the Centers for Medicare & Medicaid Services before 
        publication of a notice of proposed rulemaking regarding 
        whether service or technology represents a substantial 
        improvement.''.
    (c) Preference for Use of DRG Adjustment.--Section 1886(d)(5)(K) 
(42 U.S.C. 1395ww(d)(5)(K)) is further amended by adding at the end the 
following new clause:
    ``(ix) Before establishing any add-on payment under this 
subparagraph with respect to a new technology, the Secretary shall seek 
to identify one or more diagnosis-related groups associated with such 
technology, based on similar clinical or anatomical characteristics and 
the cost of the technology. Within such groups the Secretary shall 
assign an eligible new technology into a diagnosis-related group where 
the average costs of care most closely approximate the costs of care of 
using the new technology. No add-on payment under this subparagraph 
shall be made with respect to such new technology and this clause shall 
not affect the application of paragraph (4)(C)(iii).''.
    (d) Improvement in Payment for New Technology.--Section 
1886(d)(5)(K)(ii)(III) (42 U.S.C. 1395ww(d)(5)(K)(ii)(III)) is amended 
by inserting after ``the estimated average cost of such service or 
technology'' the following: ``(based on the marginal rate applied to 
costs under subparagraph (A))''.
    (e) Establishment of New Funding for Hospital Inpatient 
Technology.--
            (1) In general.--Section 1886(d)(5)(K)(ii)(III) (42 U.S.C. 
        1395ww(d)(5)(K)(ii)(III)) is amended by striking ``subject to 
        paragraph (4)(C)(iii),''.
            (2) Not budget neutral.--There shall be no reduction or 
        other adjustment in payments under section 1886 of the Social 
        Security Act because an additional payment is provided under 
        subsection (d)(5)(K)(ii)(III) of such section.
    (f) Effective Date.--
            (1) In general.--The Secretary shall implement the 
        amendments made by this section so that they apply to 
        classification for fiscal years beginning with fiscal year 
        2005.
            (2) Reconsiderations of applications for fiscal year 2004 
        that are denied.--In the case of an application for a 
        classification of a medical service or technology as a new 
        medical service or technology under section 1886(d)(5)(K) of 
        the Social Security Act (42 U.S.C. 1395ww(d)(5)(K)) that was 
        filed for fiscal year 2004 and that is denied--
                    (A) the Secretary shall automatically reconsider 
                the application as an application for fiscal year 2005 
                under the amendments made by this section; and
                    (B) the maximum time period otherwise permitted for 
                such classification of the service or technology shall 
                be extended by 12 months.

SEC. 503. INCREASE IN FEDERAL RATE FOR HOSPITALS IN PUERTO RICO.

    Section 1886(d)(9) (42 U.S.C. 1395ww(d)(9)) is amended--
            (1) in subparagraph (A)--
                    (A) in clause (i), by striking ``for discharges 
                beginning on or after October 1, 1997, 50 percent (and 
                for discharges between October 1, 1987, and September 
                30, 1997, 75 percent)'' and inserting ``the applicable 
                Puerto Rico percentage (specified in subparagraph 
                (E))''; and
                    (B) in clause (ii), by striking ``for discharges 
                beginning in a fiscal year beginning on or after 
                October 1, 1997, 50 percent (and for discharges between 
                October 1, 1987, and September 30, 1997, 25 percent)'' 
                and inserting ``the applicable Federal percentage 
                (specified in subparagraph (E))''; and
            (2) by adding at the end the following new subparagraph:
    ``(E) For purposes of subparagraph (A), for discharges occurring--
            ``(i) on or after October 1, 1987, and before October 1, 
        1997, the applicable Puerto Rico percentage is 75 percent and 
        the applicable Federal percentage is 25 percent;
            ``(ii) on or after October 1, 1997, and before October 1, 
        2003, the applicable Puerto Rico percentage is 50 percent and 
        the applicable Federal percentage is 50 percent;
            ``(iii) during fiscal year 2004, the applicable Puerto Rico 
        percentage is 41 percent and the applicable Federal percentage 
        is 59 percent;
            ``(iv) during fiscal year 2005, the applicable Puerto Rico 
        percentage is 33 percent and the applicable Federal percentage 
        is 67 percent; and
            ``(v) on or after October 1, 2005, the applicable Puerto 
        Rico percentage is 25 percent and the applicable Federal 
        percentage is 75 percent.''.

SEC. 504. WAGE INDEX ADJUSTMENT RECLASSIFICATION REFORM .

    (a) In General.--Section 1886(d) (42 U.S.C. 1395ww(d)) is amended 
by adding at the end the following:
    ``(11)(A) In order to recognize commuting patterns among 
Metropolitan Statistical Areas and between such Areas and rural areas, 
the Secretary shall establish a process, upon application of a 
subsection (d) hospital that establishes that it is a qualifying 
hospital described in subparagraph (B), for an increase of the wage 
index applied under paragraph (3)(E) for the hospital in the amount 
computed under subparagraph (D).
    ``(B) A qualifying hospital described in this subparagraph is a 
subsection (d) hospital--
            ``(i) the average wages of which exceed the average wages 
        for the area in which the hospital is located; and
            ``(ii) which has at least 10 percent of its employees who 
        reside in one or more higher wage index areas.
    ``(C) For purposes of this paragraph, the term `higher wage index 
area' means, with respect to a hospital, an area with a wage index that 
exceeds that of the area in which the hospital is located.
    ``(D) The increase in the wage index under subparagraph (A) for a 
hospital shall be equal to the percentage of the employees of the 
hospital that resides in any higher wage index area multiplied by the 
sum of the products, for each higher wage index area of--
            ``(i) the difference between (I) the wage index for such 
        area, and (II) the wage index of the area in which the hospital 
        is located (before the application of this paragraph); and
            ``(ii) the number of employees of the hospital that reside 
        in such higher wage index area divided by the total number of 
        such employees that reside in all high wage index areas.
    ``(E) The process under this paragraph shall be based upon the 
process used by the Medicare Geographic Classification Review Board 
under paragraph (10) with respect to data submitted by hospitals to the 
Board on the location of residence of hospital employees and wages 
under the applicable schedule established for geographic 
reclassification.
    ``(F) A reclassification under this paragraph shall be effective 
for a period of 3 fiscal years, except that the Secretary shall 
establish procedures under which a subsection (d) hospital may elect to 
terminate such reclassification before the end of such period.
    ``(G) A hospital that is reclassified under this paragraph for a 
period is not eligible for reclassification under paragraphs (8) or 
(10) during that period.
    ``(H) Any increase in a wage index under this paragraph for a 
hospital shall not be taken into account for purposes of--
            ``(i) computing the wage index for the area in which the 
        hospital is located or any other area; or
            ``(ii) applying any budget neutrality adjustment with 
        respect to such index under paragraph (8)(D).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
first apply to the wage index for discharges occurring on or after 
October 1, 2004.

SEC. 505. MEDPAC REPORT ON SPECIALTY HOSPITALS.

    (a) MedPAC Study.--The Medicare Payment Advisory Commission shall 
conduct a study of specialty hospitals compared with other similar 
general acute care hospitals under the medicare program. Such study 
shall examine--
            (1) whether there are excessive self-referrals;
            (2) quality of care furnished;
            (3) the impact of specialty hospitals on such general acute 
        care hospitals; and
            (4) differences in the scope of services, medicaid 
        utilization, and uncompensated care furnished.
    (b) Report.--Not later than 1 year after the date of the enactment 
of this Act, the Secretary shall submit to Congress a report on the 
study conducted under subsection (a), and shall include any 
recommendations for legislation or administrative change as the 
Secretary determines appropriate.

                      Subtitle B--Other Provisions

SEC. 511. PAYMENT FOR COVERED SKILLED NURSING FACILITY SERVICES.

    (a) Adjustment to RUGs for AIDS Residents.--Paragraph (12) of 
section 1888(e) (42 U.S.C. 1395yy(e)) is amended to read as follows:
            ``(12) Adjustment for residents with aids.--
                    ``(A) In general.--Subject to subparagraph (B), in 
                the case of a resident of a skilled nursing facility 
                who is afflicted with acquired immune deficiency 
                syndrome (AIDS), the per diem amount of payment 
                otherwise applicable shall be increased by 128 percent 
                to reflect increased costs associated with such 
                residents.
                    ``(B) Sunset.--Subparagraph (A) shall not apply on 
                and after such date as the Secretary certifies that 
                there is an appropriate adjustment in the case mix 
                under paragraph (4)(G)(i) to compensate for the 
                increased costs associated with residents described in 
                such subparagraph.''.
    (b) Effective Date.--The amendment made by paragraph (1) shall 
apply to services furnished on or after October 1, 2003.

SEC. 512. COVERAGE OF HOSPICE CONSULTATION SERVICES.

    (a) Coverage of Hospice Consultation Services.--Section 1812(a) (42 
U.S.C. 1395d(a)) is amended--
            (1) by striking ``and'' at the end of paragraph (3);
            (2) by striking the period at the end of paragraph (4) and 
        inserting ``; and''; and
            (3) by inserting after paragraph (4) the following new 
        paragraph:
            ``(5) for individuals who are terminally ill, have not made 
        an election under subsection (d)(1), and have not previously 
        received services under this paragraph, services that are 
        furnished by a physician who is either the medical director or 
        an employee of a hospice program and that consist of--
                    ``(A) an evaluation of the individual's need for 
                pain and symptom management;
                    ``(B) counseling the individual with respect to 
                end-of-life issues and care options; and
                    ``(C) advising the individual regarding advanced 
                care planning.''.
    (b) Payment.--Section 1814(i) (42 U.S.C. l395f(i)) is amended by 
adding at the end the following new paragraph:
    ``(4) The amount paid to a hospice program with respect to the 
services under section 1812(a)(5) for which payment may be made under 
this part shall be equal to an amount equivalent to the amount 
established for an office or other outpatient visit for evaluation and 
management associated with presenting problems of moderate severity 
under the fee schedule established under section 1848(b), other than 
the portion of such amount attributable to the practice expense 
component.''.
    (c) Conforming Amendment.--Section 1861(dd)(2)(A)(i) (42 U.S.C. 
1395x(dd)(2)(A)(i)) is amended by inserting before the comma at the end 
the following: ``and services described in section 1812(a)(5)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to services provided by a hospice program on or after January 1, 
2004.

SEC. 513. CORRECTION OF TRUST FUND HOLDINGS.

    (a) In General.--Within 120 days after the effective date of this 
section, the Secretary of the Treasury shall take the actions described 
in subsection (b) with respect to the Federal Hospital Insurance Trust 
Fund (in this section referred to as the ``Trust Fund'') with the goal 
being that, after the actions are taken, the holdings of the Trust Fund 
will replicate, to the extent practicable in the judgment of the 
Secretary of the Treasury, in consultation with the Secretary, the 
obligations that would have been held by the trust fund if the clerical 
error had not occurred.
    (b) Obligations Issued and Redeemed.--The Secretary of the Treasury 
shall--
            (1) issue to the Trust Fund obligations under chapter 31 of 
        title 31, United States Code, that bear issue dates, interest 
        rates, and maturity dates as the obligations that--
                    (A) would have been issued to the Trust Fund if the 
                clerical error had not occurred; or
                    (B) were issued to the Trust Fund and were redeemed 
                by reason of the clerical error; and
            (2) redeem from the Trust Fund obligations that would have 
        been redeemed from the Trust Fund if the clerical error had not 
        occurred.
    (c) Appropriation to Trust Fund.--Within 120 days after the 
effective date of this section, there is hereby appropriated to the 
Trust Fund, out of any money in the Treasury not otherwise 
appropriated, an amount determined by the Secretary of the Treasury, in 
consultation with the Secretary of Health and Human Services, to be 
equal to the interest income lost by the trust fund through the date of 
credit by reason of the clerical error.
    (d) Clerical Error Defined.--For purposes of this section, the term 
``clerical error'' means the failure to have transferred the correct 
amount from the general fund to the Trust Fund, which failure occurred 
on April 15, 2001.

                TITLE VI--PROVISIONS RELATING TO PART B

                    Subtitle A--Physicians' Services

SEC. 601. REVISION OF UPDATES FOR PHYSICIANS' SERVICES.

    (a) Update for 2004 and 2005.--
            (1) In general.--Section 1848(d) (42 U.S.C. 1395w-4(d)) is 
        amended by adding at the end the following new paragraph:
            ``(5) Update for 2004 and 2005.--The update to the single 
        conversion factor established in paragraph (1)(C) for each of 
        2004 and 2005 shall be not less than 1.5 percent.''.
            (2) Conforming amendment.--Paragraph (4)(B) of such section 
        is amended, in the matter before clause (i), by inserting ``and 
        paragraph (5)'' after ``subparagraph (D)''.
            (3) Not treated as change in law and regulation in 
        sustainable growth rate determination.--The amendments made by 
        this subsection shall not be treated as a change in law for 
        purposes of applying section 1848(f)(2)(D) of the Social 
        Security Act (42 U.S.C. 1395w-4(f)(2)(D)).
    (b) Use of 10-Year Rolling Average in Computing Gross Domestic 
Product.--
            (1) In general.--Section 1848(f)(2)(C) (42 U.S.C. 1395w-
        4(f)(2)(C)) is amended--
                    (A) by striking ``projected'' and inserting 
                ``annual average''; and
                    (B) by striking ``from the previous applicable 
                period to the applicable period involved'' and 
                inserting ``during the 10-year period ending with the 
                applicable period involved''.
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to computations of the sustainable growth rate for 
        years beginning with 2003.

SEC. 602. STUDIES ON ACCESS TO PHYSICIANS' SERVICES.

    (a) GAO Study on Beneficiary Access to Physicians' Services.--
            (1) Study.--The Comptroller General of the United States 
        shall conduct a study on access of medicare beneficiaries to 
        physicians' services under the medicare program. The study 
        shall include--
                    (A) an assessment of the use by beneficiaries of 
                such services through an analysis of claims submitted 
                by physicians for such services under part B of the 
                medicare program;
                    (B) an examination of changes in the use by 
                beneficiaries of physicians' servic