PAYMENT UPDATE.

SEC. 4411. PAYMENT UPDATE. (a) In General.—Section 1886(b)(3)(B) (42 U.S.C. 1395ww(b)(3)(B)) is amended— (1) in clause (ii)— (A) by striking “and” at the end of subclause (V), (B) by redesignating subclause (VI) as subclause (VIII); and (C) by inserting after subclause (V), the following subclauses: “(VI) for fiscal year 1998, is 0 percent; “(VII) for fiscal years 1999 through 2002, is the applicable update factor specified under clause (vi) for the fiscal year; and”; and (2) by adding at the end the following new clause: “(vi) For purposes of clause (ii)(VII) for a fiscal year, if a hospital’s allowable operating costs of inpatient hospital services recognized under this title for the most recent cost reporting period for which information is available— “(I) is equal to, or exceeds, 110 percent of the hospital’s target amount (as determined under subparagraph (A)) for such cost reporting period, the applicable update factor specified under this clause is the market basket percentage; “(II) exceeds 100 percent, but is less than 110 percent, of such target amount for the hospital, the applicable update factor specified under this clause is 0 percent or, if greater, the market basket percentage minus 0.25 percentage points for each percentage point by which such allowable operating costs (expressed as a percentage of such target amount) is less than 110 percent of such target amount; “(III) is equal to, or less than 100 percent, but exceeds ⅔ of such target amount for the hospital, the applicable update factor specified under this clause is 0 percent or, if greater, the market basket percentage minus 2.5 percentage points; or “(IV) does not exceed ⅔ of such target amount for the hospital, the applicable update factor specified under this clause is 0 percent.”. (b) No Effect of Payment Reduction on Exceptions and Adjustments.—Section 1886(b)(4)(A)(ii) (42 U.S.C. 1395ww(b)(4)(A)(ii)) is amended by adding at the end the following new sentence: “In making such reductions, the Secretary shall treat the applicable update factor described in paragraph (3)(B)(vi) 111 STAT. 404for a fiscal year as being equal to the market basket percentage for that year.”.