[Title 42 CFR ]
[Code of Federal Regulations (annual edition) - October 1, 2002 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



                    42


          Parts 400 to 429

                         Revised as of October 1, 2002

Public Health





          Containing a codification of documents of general 
          applicability and future effect
          As of October 1, 2002
          With Ancillaries
          Published by
          Office of the Federal Register
          National Archives and Records
          Administration

A Special Edition of the Federal Register



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                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002



  For sale by the Superintendent of Documents, U.S. Government Printing 
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[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 42:
          Chapter IV--Centers for Medicare & Medicaid 
          Services, Department of Health and Human Services          3
  Finding Aids:
      Material Approved for Incorporation by Reference........     963
      Table of CFR Titles and Chapters........................     965
      Alphabetical List of Agencies Appearing in the CFR......     983
      List of CFR Sections Affected...........................     993



[[Page iv]]


      


                     ----------------------------

                     Cite this Code:  CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 42 CFR 400.200 
                       refers to title 42, part 
                       400, section 200.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, October 1, 2002), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
requirement to publish regulations in the Federal Register by referring 
to materials already published elsewhere. For an incorporation to be 
valid, the Director of the Federal Register must approve it. The legal 
effect of incorporation by reference is that the material is treated as 
if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    Properly approved incorporations by reference in this volume are 
listed in the Finding Aids at the end of this volume.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed in 
the Finding Aids of this volume as an approved incorporation by 
reference, please contact the agency that issued the regulation 
containing that incorporation. If, after contacting the agency, you find 
the material is not available, please notify the Director of the Federal 
Register, National Archives and Records Administration, Washington DC 
20408, or call (202) 523-4534.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
and parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

[[Page vii]]


REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408 or e-mail 
[email protected].

SALES

    The Government Printing Office (GPO) processes all sales and 
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ELECTRONIC SERVICES

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    The Office of the Federal Register also offers a free service on the 
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site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.nara.gov/fedreg. The NARA 
site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

October 1, 2002.



[[Page ix]]



                               THIS TITLE

    Title 42--Public Health is composed of three volumes. The parts in 
these volumes are arranged in the following order: Parts 1-399, parts 
400-429 and part 430 to end. The first volume (parts 1-399) contains 
current regulations issued under chapter I--Public Health Service (HHS). 
The second volume (parts 400-429) includes regulations issued under 
chapter IV--Centers for Medicare & Medicaid Services (HHS) and the third 
volume (part 430 to end) contains the remaining regulations in chapter 
IV and the regulations issued under chapter V by the Office of Inspector 
General-Health Care (HHS). The contents of these volumes represent all 
current regulations codified under this title of the CFR as of October 
1, 2002.

    The OMB control numbers for the Centers for Medicare & Medicaid 
Services appear in Sec. 400.310 of chapter IV. For the convenience of 
the user, subpart C consisting of Secs. 400.300-400.310 is reprinted in 
the Finding Aids section of the third volume.

[[Page x]]





[[Page 1]]



                         TITLE 42--PUBLIC HEALTH




                  (This book contains parts 400 to 429)

  --------------------------------------------------------------------
                                                                    Part

chapter iv-- Centers for Medicare & Medicaid Services, 
  Department of Health and Human Services...................         400

[[Page 3]]



                    CHAPTER IV--CENTERS FOR MEDICARE






                          & MEDICAID SERVICES,






                        DEPARTMENT OF HEALTH AND






                             HUMAN SERVICES




  --------------------------------------------------------------------


  Editorial Note: Nomenclature changes affecting chapter IV appear at 56 
FR 8852, Mar. 1, 1991, 62 FR 46037, Aug. 29, 1997, 66 FR 39452, July 31, 
2001, and 67 FR 36540, May 24, 2002.

                    SUBCHAPTER A--GENERAL PROVISIONS
Part                                                                Page
400             Introduction; definitions...................           5
401             General administrative requirements.........           9
402             Civil money penalties, assessments, and 
                    exclusions..............................          22
403             Special programs and projects...............          36
                     SUBCHAPTER B--MEDICARE PROGRAM
405             Federal health insurance for the aged and 
                    disabled................................          65
406             Hospital insurance eligibility and 
                    entitlement.............................         172
407             Supplementary medical insurance (SMI) 
                    enrollment and entitlement..............         188
408             Premiums for supplementary medical insurance         198
409             Hospital insurance benefits.................         215
410             Supplementary medical insurance (SMI) 
                    benefits................................         241
411             Exclusions from Medicare and limitations on 
                    Medicare payment........................         299
412             Prospective payment systems for inpatient 
                    hospital services.......................         367
413             Principles of reasonable cost reimbursement; 
                    payment for end-stage renal disease 
                    services; prospectively determined 
                    payment rates for skilled nursing 
                    facilities..............................         490
414             Payment for Part B medical and other health 
                    services................................         622
415             Services furnished by physicians in 
                    providers, supervising physicians in 
                    teaching settings, and residents in 
                    certain settings........................         654
416             Ambulatory surgical services................         672

[[Page 4]]

417             Health maintenance organizations, 
                    competitive medical plans, and health 
                    care prepayment plans...................         682
418             Hospice care................................         775
419             Prospective payment system for hospital 
                    outpatient department services..........         792
420             Program integrity: Medicare.................         804
421             Intermediaries and carriers.................         815
422             Medicare+Choice program.....................         827
424             Conditions for Medicare payment.............         931

[[Page 5]]



                    SUBCHAPTER A--GENERAL PROVISIONS





PART 400--INTRODUCTION; DEFINITIONS--Table of Contents




Subpart A [Reserved]

                         Subpart B--Definitions

Sec.
400.200  General definitions.
400.202  Definitions specific to Medicare.
400.203  Definitions specific to Medicaid.

 Subpart C--OMB Control Numbers for Approved Collections of Information

400.300  Scope.
400.310  Display of currently valid OMB control numbers.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh) and 44 U.S.C. Chapter 35.

Subpart A [Reserved]



                         Subpart B--Definitions



Sec. 400.200  General definitions.

    In this chapter, unless the context indicates otherwise--
    Act means the Social Security Act, and titles referred to are titles 
of that Act.
    Administrator means the Administrator, Centers for Medicare & 
Medicaid Services (CMS), formerly the Health Care Financing 
Administration (HCFA).
    ALJ stands for administrative law judge.
    Area means the geographical area within the boundaries of a State, 
or a State or other jurisdiction, designated as constituting an area 
with respect to which a Professional Standards Review Organization or a 
Utilization and Quality Control Peer Review Organization has been or may 
be designated.
    CMP stands for competitive medical plan.
    Conditions of participation includes requirements for participation 
as the latter term is used in part 483 of this chapter.
    Condition level deficiencies includes deficiencies with respect to 
``level A requirements'' as the latter term is used in parts 442 and 483 
of this chapter.
    CORF stands for comprehensive outpatient rehabilitation facility.
    CFR stands for Code of Federal Regulations.
    CMS stands for Centers for Medicare & Medicaid Services, formerly 
the Health Care Financing Administration (HCFA).
    CY stands for calendar year.
    DAB stands for Departmental Appeals Board.
    Department means the Department of Health and Human Services (HHS), 
formerly the Department of Health, Education, and Welfare.
    ESRD stands for end-stage renal disease.
    FDA stands for the Food and Drug Administration.
    FQHC means Federally qualified health center.
    FR stands for Federal Register.
    FY stands for fiscal year.
    HCPP stands for health care prepayment plan.
    HHS stands for the Department of Health and Human Services.
    HHA stands for home health agency.
    HMO stands for health maintenance organization.
    ICF stands for intermediate care facility.
    ICF/MR stands for intermediate care facility for the mentally 
retarded.
    Medicaid means medical assistance provided under a State plan 
approved under title XIX of the Act.
    Medicare means the health insurance program for the aged and 
disabled under title XVIII of the Act.
    NCD stands for national coverage determination.
    OASDI stands for the Old Age, Survivors, and Disability Insurance 
program under title II of the Act.
    OIG stands for the Department's Office of the Inspector General.
    QDWI stands for Qualified Disabled and Working Individual.
    QIO stands for quality improvement organization.
    QMB stands for Qualified Medicare Beneficiary.
    Qualified Disabled and Working Individual means an individual who--

[[Page 6]]

    (1) Is eligible to enroll for Medicare Part A under section 1818A of 
the Act.
    (2) Has income, as determined in accordance with SSI methodologies, 
that does not exceed 200 percent of the Federal poverty guidelines (as 
defined and revised annually by the Office of Management and Budget) for 
a family of the size of the individual's family;
    (3) Has resources, as determined in accordance with SSI 
methodologies, that do not exceed twice the relevant maximum amount 
established, for SSI eligibility, for an individual or for an individual 
and his or her spouse; and
    (4) Is not otherwise eligible for Medicaid.
    Qualified Medicare Beneficiary means an individual who--
    (1) Is entitled to Medicare Part A, with or without payment of 
premiums, but is not entitled solely because he or she is eligible to 
enroll as a QDWI;
    (2) Has resources, as determined in accordance with SSI 
methodologies, that do not exceed twice the maximum amount established 
for SSI eligibility; and
    (3) Has income, as determined in accordance with SSI methodologies, 
that does not exceed 100 percent of the Federal poverty guidelines.
    Quality improvement organization means an organization that has a 
contract with CMS, under part B of title XI of the Act, to perform 
utilization and quality control review of the health care furnished, or 
to be furnished, to Medicare beneficiaries.
    Regional Administrator means a Regional Administrator of CMS.
    Regional Office means one of the regional offices of CMS.
    RHC stands for rural health clinic.
    RRB stands for Railroad Retirement Board.
    Secretary means the Secretary of Health and Human Services.
    SNF stands for skilled nursing facility.
    Social security benefits means monthly cash benefits payable under 
section 202 or 223 of the Act.
    SSA stands for Social Security Administration.
    United States means the fifty States, the District of Columbia, the 
Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, 
and the Northern Mariana Islands.
    U.S.C. stands for United States Code.

[48 FR 12534, Mar. 25, 1983, as amended at 49 FR 7206, Feb. 27, 1984; 50 
FR 15326 and 15358, Apr. 17, 1985; 50 FR 41886, Oct. 16, 1985; 51 FR 
43197, Dec. 1, 1986; 52 FR 27764, July 23, 1987; 56 FR 8852, Mar. 1, 
1991; 56 FR 38077, Aug. 12, 1991; 57 FR 24975, June 12, 1992; 57 FR 
55912, Nov. 25, 1992; 63 FR 35065, June 26, 1998; 63 FR 52611, Oct. 1, 
1998; 63 FR 68690, Dec. 14, 1998; 66 FR 39452, July 31, 2001; 67 FR 
36540, May 24, 2002]



Sec. 400.202  Definitions specific to Medicare.

    As used in connection with the Medicare program, unless the context 
indicates otherwise--
    Beneficiary means a person who is entitled to Medicare benefits.
    Carrier means an entity that has a contract with CMS to determine 
and make Medicare payments for Part B benefits payable on a charge basis 
and to perform other related functions.
    Critical access hospital (CAH) means a facility designated by HFCA 
as meeting the applicable requirements of section 1820 of the Act and of 
subpart F of part 485 of this chapter.
    Entitled means that an individual meets all the requirements for 
Medicare benefits.
    Essential access community hospital (EACH) means a hospital 
designated by CMS as meeting the applicable requirements of section 1820 
of the Act and of subpart G of part 412 of this chapter, as in effect on 
September 30, 1997.
    GME stands for graduate medical education.
    Hospital insurance benefits means payments on behalf of, and in rare 
circumstances directly to, an entitled individual for services that are 
covered under Part A of title XVIII of the Act.
    Intermediary means an entity that has a contract with CMS to 
determine and make Medicare payments for Part A or Part B benefits 
payable on a cost basis and to perform other related functions.
    Medicare Part A means the hospital insurance program authorized 
under Part A of title XVIII of the Act.
    Medicare Part B means the supplementary medical insurance program 
authorized under Part B of title XVIII of the Act.

[[Page 7]]

    National coverage determination (NCD) means a national policy 
determination regarding the coverage status of a particular service, 
that makes under section 1862(a)(1) of the Act, and publishes as a 
Federal Register notice or CMS Ruling. (The term does not include 
coverage changes mandated by statute.)
    Nonparticipating supplier means a supplier that does not have an 
agreement with CMS to participate in Part B of Medicare in effect on the 
date of the service.
    Participating supplier means a supplier that has an agreement with 
CMS to participate in Part B of Medicare in effect on the date of the 
service.
    Payment on an assignment-related basis means payment for Part B 
services--
    (1) To a physician or other supplier that accepts assignment from 
the beneficiary, in accordance with Sec. 424.55 or Sec. 424.56 of this 
chapter;
    (2) To a physician or other supplier after the beneficiary's death, 
in accordance with Sec. 424.64(c)(1) of this chapter; or
    (3) To an entity that pays the physician or other supplier under a 
health benefit plan, in accordance with Sec. 424.66 of this chapter.
    Provider means a hospital, a CAH, a skilled nursing facility, a 
comprehensive outpatient rehabilitation facility, a home health agency, 
or a hospice that has in effect an agreement to participate in Medicare, 
or a clinic, a rehabilitation agency, or a public health agency that has 
in effect a similar agreement but only to furnish outpatient physical 
therapy or speech pathology services, or a community mental health 
center that has in effect a similar agreement but only to furnish 
partial hospitalization services.
    Railroad retirement benefits means monthly benefits payable to 
individuals under the Railroad Retirement Act of 1974 (45 U.S.C. 
beginning at section 231).
    Services means medical care or services and items, such as medical 
diagnosis and treatment, drugs and biologicals, supplies, appliances, 
and equipment, medical social services, and use of hospital, CAH, or SNF 
facilities.
    Supplementary medical insurance benefits means payment to or on 
behalf of an entitled individual for services covered under Part B of 
title XVIII of the Act.
    Supplier means a physician or other practitioner, or an entity other 
than a provider, that furnishes health care services under Medicare.

[48 FR 12534, Mar. 25, 1983, as amended at 48 FR 56024, Dec. 16, 1983; 
49 FR 3658, Jan. 30, 1984; 51 FR 43197, Dec. 1, 1986; 52 FR 27764, July 
23, 1987; 55 FR 24567, June 18, 1990; 56 FR 8852, Mar. 1, 1991; 58 FR 
30666, May 26, 1993; 59 FR 6576, Feb. 11, 1994; 60 FR 63175, Dec. 8, 
1995; 62 FR 46025, Aug. 29, 1997; 62 FR 59098, Oct. 31, 1997; 63 FR 
35065, June 26, 1998]



Sec. 400.203  Definitions specific to Medicaid.

    As used in connection with the Medicaid program, unless the context 
indicates otherwise--
    Applicant means an individual whose written application for Medicaid 
has been submitted to the agency determining Medicaid eligibility, but 
has not received final action. This includes an individual (who need not 
be alive at the time of application) whose application is submitted 
through a representative or a person acting responsibly for the 
individual.
    Federal financial participation (FFP) means the Federal Government's 
share of a State's expenditures under the Medicaid program.
    FMAP stands for the Federal medical assistance percentage, which is 
used to calculate the amount of Federal share of State expenditures for 
services.
    Medicaid agency or agency means the single State agency 
administering or supervising the administration of a State Medicaid 
plan.
    Nursing facility (NF), effective October 1, 1990, means an SNF or an 
ICF participating in the Medicaid program.
    PCCM stands for primary care case manager.
    PCP stands for primary care physician.
    Provider means either of the following:
    (1) For the fee-for-service program, any individual or entity 
furnishing Medicaid services under an agreement with the Medicaid 
agency.
    (2) For the managed care program, any individual or entity that is 
engaged in the delivery of health care services and is legally 
authorized to do

[[Page 8]]

so by the State in which it delivers the services.
    Recipient means an individual who has been determined eligible for 
Medicaid.
    Services means the types of medical assistance specified in section 
1905(a) of the Act and defined in subpart A of part 440 of this chapter.
    State means the several States, the District of Columbia, the 
Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa 
and the Northern Mariana Islands.
    State plan or the plan means a comprehensive written commitment by a 
Medicaid agency, submitted under section 1902(a) of the Act, to 
administer or supervise the administration of a Medicaid program in 
accordance with Federal requirements.

[48 FR 12534, Mar. 25, 1983, as amended at 50 FR 33029, Aug. 16, 1985; 
56 FR 8852, Mar. 1, 1991; 57 FR 29155, June 30, 1992; 67 FR 41094, June 
14, 2002]



 Subpart C--OMB Control Numbers for Approved Collections of Information

    Source: 49 FR 4477, Feb. 7, 1984, unless otherwise noted.



Sec. 400.300  Scope.

    This subpart collects and displays control numbers assigned by the 
Office of Management and Budget (OMB) to collections of information 
contained in CMS regulations, in accordance with OMB's regulations for 
controlling paperwork burdens on the public, 5 CFR part 1320. CMS 
intends that the subpart comply with the requirements of section 3507(f) 
of the Paperwork Reduction Act of 1980, 44 U.S.C. chapter 35 which 
requires that agencies shall not engage in a ``collection of 
information'' without obtaining a control number from OMB.



Sec. 400.310  Display of currently valid OMB control numbers.

------------------------------------------------------------------------
                                                             Current OMB
Sections in 42 CFR that contain collections of information  control Nos.
------------------------------------------------------------------------
403.510...................................................    0938--0641
405.509...................................................    0938--0666
405.512...................................................    0938--0008
405.2112, 405.2123, 405.2134, 405.2136-405.2140, 405.2171.    0938--0386
409.43....................................................    0938--0365
410.105...................................................    0938--0267
411.25, 411.32............................................    0938--0564
411.54....................................................    0938--0558
411.165...................................................    0938--0564
411.404, 411.406..........................................    0938--0465
411.408...................................................    0938--0566
412.42....................................................    0938--0666
412.92....................................................    0938--0477
412.105...................................................    0938--0456
412.230, 412.232, 412.234, 412.236, 412.254, 412.260,         0938--0573
 412.266, 412.278.........................................
415.60....................................................    0938--0301
415.162...................................................    0938--0301
416.43....................................................    0938--0506
416.47....................................................    0938--0266
                                                                     and
                                                              0938--0506
417.126...................................................    0938--0472
417.436, 417.801..........................................    0938--0610
418.22, 418.24, 418.28, 418.56, 418.58, 418.70, 418.74....    0938--0302
418.30, 418.82, 418.83, 418.96, 418.100...................    0938--0475
418.96, 418.100...........................................    0938--0302
421.117...................................................    0938--0542
424.3.....................................................    0938--0008
424.5, 424.7, 424.20......................................    0938--0454
424.22....................................................    0938--0489
424.32, 424.34............................................    0938--0008
431.17....................................................    0938--0467
431.50, 431.52, 431.55....................................    0938--0247
431.107...................................................    0938--0610
431.306...................................................    0938--0467
431.625...................................................    0938--0247
431.630...................................................    0938--0445
431.800...................................................    0938--0247
431.806, 431.830, 431.432, 431.834, 431.836...............    0938--0438
432.50....................................................    0938--0459
433.36, 433.37............................................    0938--0247
433.68, 433.74............................................    0938--0618
433.110, 433.112-433.114, 433.116, 433.117, 433.119-          0938--0247
 433.121, 433.123, 433.127, 433.130, 433.131, 433.135.....
433.138...................................................    0938--0502
                                                              0938--0553
                                                                     and
                                                              0938--0555
433.139...................................................    0938--0459
                                                              0938--0554
                                                                     and
                                                              0938--0555
434.27....................................................    0938--0572
434.28....................................................    0938--0610
435.1, 435.910, 435.919, 435.920, 435.940, 435.945,           0938--0247
 435.948, 435.952, 435.953, 435.955, 435.960, 435.965,
 435.1003, 441.11, 441.15, 441.20.........................
441.56, 441.58, 441.60, 441.61............................    0938--0354
441.302...................................................    0938--0449
441.303...................................................    0938--0272
                                                                     and
                                                              0938--0449
441.351, 441.352, 441.353, 441.356, 441.365...............    0938--0613
442.505...................................................    0938--0366
447.31....................................................    0938--0287
447.45, 447.50, 447.51, 447.52............................    0938--0247
447.53....................................................    0938--0429
447.55....................................................    0938--0247
447.253...................................................    0938--0366
                                                              0938--0523
                                                                     and
                                                              0938--0556
447.255...................................................    0938--0193

[[Page 9]]

 
447.272, 447.299..........................................    0938--0618
447.302, 447.331, 447.332, 447.333........................    0938--0247
456.80....................................................    0938--0247
456.654...................................................    0938--0445
456.700, 456.705, 456.709, 456.711, 456.712...............    0938--0659
462.102, 462.103..........................................    0938--0526
466.70, 466.72, 466.74....................................    0938--0445
466.78....................................................    0938--0445
                                                                     and
                                                              0938--0665
466.80, 466.94............................................    0938--0445
473.18, 473.34, 473.36, 473.42............................    0938--0443
476.104, 476.105, 476.116, 476.134........................    0938--0426
481.61....................................................    0938--0328
482.12, 482.21, 482.22, 482.27, 482.30, 482.41, 482.43,       0938--0328
 482.53, 482.56, 482.57, 482.60, 482.62...................
483.10....................................................    0938--0610
483.410, 483.420, 483.440, 483.460, 483.470...............    0938--0366
484.1, 484.2..............................................    0938--0365
484.10....................................................    0938--0365
                                                                     and
                                                              0938--0610
484.12, 484.14, 484.16, 484.18, 484.30, 484.32, 484.34,       0938--0365
 484.36, 484.48, 484.52...................................
485.56, 485.58, 485.60, 485.64, 485.66....................    0938--0267
                                                                     and
                                                              0938--0538
485.709, 485.711, 485.717, 485.719, 485.721, 487.723,         0938--0336
 485.725, 485.727.........................................
486.104, 486.106, 486.110.................................    0938--0338
486.155, 486.161, 486.163.................................    0938--0336
488.10....................................................    0938--0646
488.18....................................................    0938--0667
488.26....................................................    0938--0646
489.20....................................................    0938--0564
                                                                     and
                                                              0938--0667
489.24....................................................    0938--0334
                                                              0938--0663
                                                                     and
                                                              0938--0667
489.102...................................................    0938--0610
491.9, 491.10.............................................    0938--0334
493.35, 493.37, 493.39, 493.43, 493.45, 493.47, 493.49,
 493.51, 493.53,..........................................
493.55, 493.60, 493.61, 493.62, 493.63....................    0938--0612
493.614, 493.633, 494.634.................................    0938--0607
493.801-493.1285, 493.1425, 493.1701, 493.1703, 493.1705,     0938--0612
 493.1707, 493.1709, 493.1711, 493.1713, 493.1715,
 493.1717, 493.1719, 493.1721, 493.1775, 493.1776,
 493.1777, 493.1780, 493.2001.............................
494.52, 494.54, 494.56, 494.58, 494.64....................    0938--0608
498.22, 498.40, 498.58, 498.82............................    0938--0508
1004.40, 1004.50, 1004.60, 1004.70........................    0938--0444
------------------------------------------------------------------------


[60 FR 50445, Sept. 29, 1995, as amended at 60 FR 63188, Dec. 8, 1995]



PART 401--GENERAL ADMINISTRATIVE REQUIREMENTS--Table of Contents




Subpart A [Reserved]

                Subpart B--Confidentiality and Disclosure

Sec.
401.101  Purpose and scope.
401.102  Definitions.
401.105  Rules for disclosure.
401.106  Publication.
401.108  CMS rulings.
401.110  Publications for sale.
401.112  Availability of administrative staff manuals.
401.116  Availability of records upon request.
401.118  Deletion of identifying details.
401.120  Creation of records.
401.126  Information or records that are not available.
401.128  Where requests for records may be made.
401.130  Materials available at social security district offices and 
          branch offices.
401.132  Materials in field offices of the Office of Hearings and 
          Appeals, SSA.
401.133  Availability of official reports on providers and suppliers of 
          services, State agencies, intermediaries, and carriers under 
          Medicare.
401.134  Release of Medicare information to State and Federal agencies.
401.135  Release of Medicare information to the public.
401.136  Requests for information or records.
401.140  Fees and charges.
401.144  Denial of requests.
401.148  Administrative review.
401.152  Court review.

Subparts C-E [Reserved]

               Subpart F--Claims Collection and Compromise

401.601  Basis and scope.
401.603  Definitions.
401.605  Omissions not a defense.
401.607  Claims collection.
401.613  Compromise of claims.
401.615  Payment of compromise amount.
401.617  Suspension of collection action.
401.621  Termination of collection action.
401.623  Joint and several liability.
401.625  Effect of CMS claims collection decisions on appeals.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh). Subpart F is also issued under the authority of the 
Federal Claims Collection Act (31 U.S.C. 3711).

Subpart A [Reserved]



                Subpart B--Confidentiality and Disclosure

    Source: 46 FR 55696, Nov. 12, 1981, unless otherwise noted.



Sec. 401.101  Purpose and scope.

    (a) The regulations in this subpart:

[[Page 10]]

    (1) Implement section 1106(a) of the Social Security Act as it 
applies to the Centers for Medicare & Medicaid Services (CMS). The rules 
apply to information obtained by officers or employees of CMS in the 
course of administering title XVIII of the Social Security Act 
(Medicare), information obtained by Medicare intermediaries or carriers 
in the course of carrying out agreements under sections 1816 and 1842 of 
the Social Security Act, and any other information subject to section 
1106(a) of the Social Security Act;
    (2) Relate to the availability to the public, under 5 U.S.C. 552, of 
records of CMS and its components. They set out what records are 
available and how they may be obtained; and
    (3) Supplement the regulations of the Department of Health and Human 
Services relating to availability of information under 5 U.S.C. 552, 
codified in 45 CFR part 5, and do not replace or restrict them.
    (b) Except as authorized by the rules in this subpart, no 
information described in paragraph (a)(1) of this section shall be 
disclosed. The procedural rules in this subpart (Secs. 401.106 through 
401.152) shall be applied to requests for information which is subject 
to the rules for disclosure in this subpart.
    (c) Requests for information which may not be disclosed according to 
the provisions of this subpart shall be denied under authority of 
section 1106(a) of the Social Security Act and this subpart, and 
furthermore, such requests which have been made pursuant to the Freedom 
of Information Act shall be denied under authority of an appropriate 
Freedom of Information Act exemption, 5 U.S.C. 552(b).



Sec. 401.102  Definitions.

    For purposes of this subpart:
    Act means the Social Security Act.
    Freedom of Information Act rules means the substantive mandatory 
disclosure provisions of the Freedom of Information Act, 5 U.S.C. 552 
(including the exemptions from mandatory disclosure, 5 U.S.C. 552(b), as 
implemented by the Department's public information regulation, 45 CFR 
part 5, subpart F and by Secs. 401.106 to 401.152 of this subpart.
    Person means a person as defined in the Administrative Procedure 
Act, 5 U.S.C. 551(2). This includes State or local agencies, but does 
not include Federal agencies or State or Federal courts.
    Record has the same meaning as that provided in 45 CFR 5.5.
    Subject individual means an individual whose record is maintained by 
the Department in a system of records, as the terms ``individual,'' 
``record'', and ``system of records'' are defined in the Privacy Act of 
1974, 5 U.S.C. 552a(a).



Sec. 401.105  Rules for disclosure.

    (a) General rule. The Freedom of Information Act rules shall be 
applied to every proposed disclosure of information. If, considering the 
circumstances of the disclosure, the information would be made available 
in accordance with the Freedom of Information Act rules, then the 
information may be disclosed regardless of whether the requester or 
recipient of the information has a statutory right to request the 
information under the Freedom of Information Act, 5 U.S.C. 552, or 
whether a request has been made.
    (b) Application of the general rule. Pursuant to the general rule in 
paragraph (a) of this section,
    (1) Information shall be disclosed--
    (i) To a subject individual when required by the access provision of 
the Privacy Act, 5 U.S.C. 552a(d), as implemented by the Department 
Privacy Act regulation, 45 CFR part 5b; and
    (ii) To a person upon request when required by the Freedom of 
Information Act, 5 U.S.C. 552;
    (2) Unless prohibited by any other statute (e.g., the Privacy Act of 
1974, 5 U.S.C. 552a(b), the Tax Reform Act of 1976, 26 U.S.C. 6103, or 
section 1106(d) and (e) of the Social Security Act), information may be 
disclosed to any requester or recipient of the information, including 
another Federal agency or a State or Federal court, when the information 
would not be exempt from mandatory disclosure under Freedom of 
Information Act rules or when the information nevertheless would be made 
available under the Department's public information regulation's 
criteria for disclosures which are in the public interest and consistent 
with obligations

[[Page 11]]

of confidentiality and administrative necessity, 45 CFR part 5, subpart 
F, as supplemented by Secs. 401.106 to 401.152 of this subpart.

[42 FR 14704, Mar. 16, 1977. Redesignated at 45 FR 74913, 74914, Nov. 
13, 1980, and correctly redesignated at 46 FR 24551, May 1, 1981, as 
amended at 46 FR 55697, Nov. 12, 1981]



Sec. 401.106  Publication.

    (a) Methods of publication. Materials required to be published under 
the provisions of The Freedom of Information Act, 5 U.S.C. 552 (a)(1) 
and (2) are published in one of the following ways:
    (1) By publication in the Federal Register of CMS regulations, and 
by their subsequent inclusion in the Code of Federal Regulations;
    (2) By publication in the Federal Register of appropriate general 
notices;
    (3) By other forms of publication, when incorporated by reference in 
the Federal Register with the approval of the Director of the Federal 
Register; and
    (4) By publication of indexes of precedential orders and opinions 
issued in the adjudication of claims, statements of policy and 
interpretations which have been adopted but have not been published in 
the Federal Register, and of administrative staff manuals and 
instructions to staff that affect a member of the public.
    (b) Availability for inspection. Those materials which are published 
in the Federal Register pursuant to 5 U.S.C. 552(a)(1) shall, to the 
extent practicable and to further assist the public, be made available 
for inspection at the places specified in Sec. 401.128.

[46 FR 55696, Nov. 12, 1981, as amended at 48 FR 22924, May 23, 1983]



Sec. 401.108  CMS rulings.

    (a) After September 1981, a precedent final opinion or order or a 
statement of policy or interpretation that has not been published in the 
Federal Register as a part of a regulation or of a notice implementing 
regulations, but which has been adopted by CMS as having precedent, may 
be published in the Federal Register as a CMS Ruling and will be made 
available in the publication entitled CMS Rulings.
    (b) Precedent final opinions and orders and statements of policy and 
interpretation that were adopted by CMS before October, 1981, and that 
have not been published in the Federal Register are available in CMS 
Rulings.
    (c) CMS Rulings are published under the authority of the 
Administrator, CMS. They are binding on all CMS Components, and on the 
Social Security Administration to the extent that components of the 
Social Security Administration adjudicate matters under the jurisdiction 
of CMS.

[48 FR 22924, May 23, 1983]



Sec. 401.110  Publications for sale.

    The following publications containing information pertaining to the 
program, organization, functions, and procedures of CMS may be purchased 
from the Superintendent of Documents, Government Printing Office, 
Washington, DC 20402.
    (a) Titles 20, 42, and 45 of the Code of Federal Regulations.
    (b) Federal Register issues.
    (c) Compilation of the Social Security Laws.
    (d) CMS Rulings.
    (e) Social Security Handbook. The information in the Handbook is not 
of precedent or interpretative force.
    (f) Medicare/Medicaid Directory of Medical Facilities.



Sec. 401.112  Availability of administrative staff manuals.

    All CMS administrative staff manuals and instructions to staff 
personnel which contain policies, procedures, or interpretations that 
affect the public are available for inspection and copying. A complete 
listing of such materials is published in CMS Rulings. These manuals are 
generally not printed in a sufficient quantity to permit sale or other 
general distribution to the public. Selected material is maintained at 
Social Security Administration district offices and field offices and 
may be inspected there. See Secs. 401.130 and 401.132 for a listing of 
this material.



Sec. 401.116  Availability of records upon request.

    (a) General. In addition to the records made available pursuant to 
Secs. 401.106,

[[Page 12]]

401.108, 401.110 and 401.112, CMS will, upon request made in accordance 
with this subpart, make identified records available to any person, 
unless they are exempt from disclosure under the provisions of section 
552(b) of title 5, United States Code (see Sec. 401.126), or any other 
provision of law.
    (b) Misappropriation, alteration, or destruction of records. No 
person may remove any record made available to him for inspection or 
copying under this part, from the place where it is made available. In 
addition, no person may steal, alter, mutilate, obliterate, or destroy 
in whole or in part, such a record. See sections 641 and 2071 of title 
18 of the United States Code.



Sec. 401.118  Deletion of identifying details.

    When CMS publishes or otherwise makes available an opinion or order, 
statement of policy, or other record which relates to a private party or 
parties, the name or names or other identifying details will be deleted.



Sec. 401.120  Creation of records.

    Records will not be created by compiling selected items from the 
files, and records will not be created to provide the requester with 
such data as ratios, proportions, percentages, per capitas, frequency 
distributions, trends, correlations, and comparisons. If such data have 
been compiled and are available in the form of a record, the record 
shall be made available as provided in this subpart.



Sec. 401.126  Information or records that are not available.

    (a) Specific exemptions from disclosure. Pursuant to paragraph (b) 
of 5 U.S.C. 552, certain classes of records are exempt from disclosure. 
For some examples of the kinds of materials which are exempt, see 
subpart F of the public information regulation of the Department of 
Health and Human Services (45 CFR part 5) and the appendix to that 
regulation.
    (b) Materials exempt from disclosure by statute. Pursuant to 
paragraph (b)(3) of 5 U.S.C. 552, as amended, which exempts from the 
requirement for disclosure matters that are exempted from disclosure by 
statute, provided that such statute requires that the matters be 
withheld from the public in such a manner as to leave no discretion on 
the issue, or establishes particular criteria for withholding or refers 
to particular types of matter to be withheld:
    (1) Reports described in sections 1106 (d) and (e) of the Social 
Security Act shall not be disclosed, except in accordance with the 
provisions of sections 1106 (d) and (e). Sections 1106 (d) and (e) 
provide for public inspection of certain official reports dealing with 
the operation of the health programs established by titles XVIII and XIX 
of the Social Security Act (Medicare and Medicaid), but require that 
program validation survey reports and other formal evaluations of 
providers of services shall not identify individual patients, individual 
health care practitioners, or other individuals. Section 1106(e) further 
requires that none of the reports shall be made public until the 
contractor or provider whose performance is being evaluated has had a 
reasonable opportunity to review that report and to offer comments. See 
Sec. 401.133 (b) and (c);
    (2)(i) Except as specified in paragraph (b)(2)(ii) of this section, 
CMS may not disclose any accreditation survey or any information 
directly related to the survey (including corrective action plans) made 
by and released to it by the Joint Commission on Accreditation of 
Healthcare Organizations, the American Osteopathic Association or any 
other national accreditation organization that meets the requirements of 
Sec. 488.6 or Sec. 493.506 of this chapter. Materials that are 
confidential include accreditation letters and accompanying 
recommendations and comments prepared by an accreditation organization 
concerning the entities it surveys.
    (ii) Exceptions.
    (A) CMS may release the accreditation survey of any home health 
agency; and
    (B) CMS may release the accreditation survey and other information 
directly related to the survey (including corrective action plans) to 
the extent the survey and information relate to an enforcement action 
(for example, denial of payment for new admissions,

[[Page 13]]

civil money penalties, temporary management and termination) taken by 
CMS; and
    (3) Tax returns and return information defined in section 6103 of 
the Internal Revenue Code, as amended by the Tax Reform Act of 1976, 
shall not be disclosed except as authorized by the Internal Revenue 
Code.
    (c) Effect of exemption. Neither 5 U.S.C. 552 nor this regulation 
directs the withholding of any record or information, except to the 
extent of the prohibitions in paragraph (b) of this section. Except for 
material required to be withheld under the statutory provisions 
incorporated in paragraph (b) of this section or under another statute 
which meets the standards in 5 U.S.C. 552(b)(3), materials exempt from 
mandatory disclosure will nevertheless be made available when this can 
be done consistently with obligations of confidentiality and 
administrative necessity. The disclosure of materials or records under 
these circumstances in response to a specific request, however, is of no 
precedent force with respect to any other request.

[46 FR 55696, Nov. 12, 1981, as amended at 58 FR 61837, Nov. 23, 1993]



Sec. 401.128  Where requests for records may be made.

    (a) General. Any request for any record may be made to--
    (1) Any CMS component;
    (2) Director, Office of Public Affairs, CMS 313-H, Hubert H. 
Humphrey Building, 200 Independence Avenue, Washington, DC 20201; or
    (3) Director of Public Affairs in any Regional Office of the 
Department of Health and Human Services.

The locations and service areas of these offices are as follows:

Region I--John F. Kennedy Federal Building, Boston, MA 02203. 
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont.
Region II--26 Federal Plaza, New York, NY 10007. New York, New Jersey, 
Puerto Rico, Virgin Islands.
Region III--Gateway Building, 3535 Market Street, Philadelphia, PA 
19101. Delaware, Maryland, Pennsylvania, Virginia, West Virginia, 
District of Columbia.
Region IV--101 Marietta Street, Altanta, GA 30323. Alabama, Florida, 
Georgia, Kentucky, Mississippi, North Carolina, South Carolina, 
Tennessee.
Region V--300 South Wacker Drive, Chicago, IL 60606. Illinois, Indiana, 
Michigan, Minnesota, Ohio, Wisconsin.
Region VI--1200 Main Tower Building, Dallas, TX 75202. Arkansas, 
Louisiana, New Mexico, Oklahoma, Texas.
Region VII--601 East 12th Street, Kansas City, MO 64106. Iowa, Kansas, 
Missouri, Nebraska.
Region VIII--Federal Office Building, 19th and Stout Streets, Denver, CO 
80294. Colorado, Montana, North Dakota, South Dakota, Utah, Wyoming.
Region IX--Federal Office Building, 50 United Nations Plaza, San 
Francisco, CA 94102. Arizona, California, Hawaii, Nevada, Guam, Trust 
Territory of Pacific Islands, American Samoa.
Region X--Arcade Plaza Building, 1321 Second Avenue, Seattle, WA 98101. 
Alaska, Idaho, Oregon, Washington.

    (b) Records pertaining to individuals. CMS maintains some records 
pertaining to individuals. Disclosure of such records is generally 
prohibited by section 1106 of the Social Security Act (42 U.S.C. 1306), 
except as prescribed in Sec. 401.105 (See also Sec. 401.126(b)). 
Requests for records pertaining to individuals may be addressed to:

Director, Office of Research, Demonstrations and Statistics, CMS, 
Baltimore, Maryland 21235, when information is sought from the record of 
a person who has participated in a research survey conducted by or for 
CMS, Office of Research, Demonstrations and Statistics; or whose records 
have been included by statistical sampling techniques in research and 
statistical studies authorized by the Social Security Act in the field 
of health care financing.
    (c) Requests for materials listed in Sec. 401.130 or Sec. 401.132 or 
indexed in the CMS Rulings. A request to inspect and copy materials 
listed in Sec. 401.130 or Sec. 401.132 or indexed in CMS Rulings may be 
made to any district or branch office of the Social Security 
Administration. If the specific material requested is not available in 
the office receiving the request, the material will be obtained and made 
available promptly.

[[Page 14]]



Sec. 401.130  Materials available at social security district offices and branch offices.

    (a) Materials available for inspection. The following are available 
or will be made available for inspection at the social security district 
offices and branch offices:
    (1) Compilation of the Social Security Laws.
    (2) The Public Information Regulation of the Department of Health 
and Human Services (45 CFR part 5).
    (3) Medicare Program regulations issued by the Centers for Medicare 
& Medicaid Services. 42 CFR chapter IV .
    (4) CMS Rulings.
    (5) Social Security Handbook.
    (b) Materials available for inspection and copying. The following 
materials are available or will be made available for inspection and 
copying at the social security district offices and branch offices:
    (1) Claims Manual of the Social Security Administration.
    (2) Department Staff Manual on Organization, Department of Health 
and Human Services, Part F, CMS.
    (3) Parts 2 and 3 of the Part A

Intermediary Manual (Provider Services under Medicare CMS Pub. 13-2 and 
13-3).
    (4) Parts 2 and 3 of the Part B Intermediary Manual (Physician and 
Supplier Services).
    (5) Intermediary Letters Related to Parts 2 and 3 of the Part A and 
Part B Intermediary Manuals.
    (6) State Buy-In Handbook (State Enrollment of Eligible Individuals 
under the Supplementary Medical Insurance Program) and Letters.
    (7) Group Practice Prepayment Plan Manual (HIM-8) and Letters.
    (8) State Operations Manual (HIM-7).
    (9) CMS Letters to State Agencies on Medicare.
    (10) Skilled Nursing Facility Manual (CMS Pub. 12).
    (11) Hearing Officers Handbook (Supplementary Medical Insurance 
Program--HIM-21).
    (12) Hospital Manual (HIM-10).
    (13) Home Health Agency Manual (HIM-11).
    (14) Outpatient Physical Therapy Provider Manual (HIM-9).
    (15) Provider Reimbursement Manual (HIM-15).
    (16) Audit Program Manuals for Hospital (HIM-16), Home Health Agency 
(HIM-17), and Extended Care Facilities (HIM-18).
    (17) Statements of deficiencies based upon survey reports of health 
care institutions or facilities prepared after January 31, 1973, by a 
State agency, and such reports (including pertinent written statements 
furnished by such institution or facility on such statements of 
deficiencies), as set forth in Sec. 401.133(a). Except as otherwise 
provided for at Secs. 401.133 and 488.325 of this chapter for SNFs, such 
statements of deficiencies, reports, and pertinent written statements 
shall be available or made available only at the social security 
district office and regional office servicing the area in which the 
institution or facility is located, except that such statements of 
deficiencies and pertinent written statements shall also be available at 
the local public assistance offices servicing such area.
    (18) Indexes to the materials listed in paragraph (a) of this 
section and in this paragraph (b) and an index to the Bureau of Hearings 
and Appeals Handbook.

[46 FR 55696, Nov. 12, 1981, as amended at 59 FR 56232, Nov. 10, 1994]



Sec. 401.132  Materials in field offices of the Office of Hearings and Appeals, SSA.

    (a) Materials available for inspection. The following materials are 
available for inspection in the field offices of the Office of Hearings 
and Appeals, SSA.
    (1) Title 45 of the Code of Federal Regulations (including the 
public information regulation of the Department of Health and Human 
Services).
    (2) Regulations of the Social Security Administration and CMS.
    (3) Title 5, United States Code.
    (4) Compilation of the Social Security Laws.
    (5) CMS Rulings.
    (6) Social Security Handbook.
    (b) Handbook available for inspection and copying. The Office of 
Hearings and Appeals Handbook is available for inspection and copying in 
the field offices of the Office of Hearings and Appeals.

[[Page 15]]



Sec. 401.133  Availability of official reports on providers and suppliers of services, State agencies, intermediaries, and carriers under Medicare.

    Except as otherwise provided for in Sec. 488.325 of this chapter for 
SNFs, the following must be made available to the public under the 
conditions specified:
    (a) Statements of deficiencies and survey reports on providers of 
services prepared by State agencies. (1) Statements of deficiencies 
based upon official survey reports prepared after January 31, 1973, by a 
State agency pursuant to its agreement entered into under section 1864 
of the Social Security Act and furnished to CMS, which relate to a State 
agency's findings on the compliance of a health care institution or 
facility with the applicable provisions in section 1861 of the Act and 
with the regulations, promulgated pursuant to those provisions, dealing 
with health and safety of patients in those institutions and facilities; 
and (2) State agency survey reports. The statement of deficiencies or 
report and any pertinent written statements furnished by the institution 
or facility on the statement of deficiencies shall be disclosed within 
90 days following the completion of the survey by the State agency, but 
not to exceed 30 days following the receipt of the report by CMS. (See 
Sec. 401.130(b)(17)) for places where statements of deficiencies, 
reports, and pertinent written statements will be available.)
    (b) CMS reports on providers of services. Upon request in writing, 
official reports and other formal evaluations (including followup 
reviews), excluding references to internal tolerance rules and practices 
contained therein, internal working papers or other informal memoranda, 
prepared and completed after January 31, 1973, which relate to the 
performance of providers of services under Medicare: Provided, That no 
information identifying individual patients, physicians, or other 
practitioners, or other individuals shall be disclosed under this 
paragraph. Those reports and other evaluations shall be disclosed within 
30 days following the final preparation thereof by CMS during which time 
the providers of services shall be afforded a reasonable opportunity to 
offer comments, and there shall be disclosed with those reports and 
evaluations any pertinent written statements furnished CMS by those 
providers on those reports and evaluations.
    (c) Contractor performance review reports. Upon request in writing, 
official contractor performance review reports and other formal 
evaluations (including followup reviews), excluding references to 
internal tolerance rules and practices contained therein, internal 
working papers or other informal memoranda, prepared and completed after 
January 31, 1973, which relate to the evaluation of the performance of 
(1) intermediaries and carriers under their agreements entered into 
pursuant to sections 1816 and 1842 of the Social Security Act and (2) 
State agencies under their agreements entered into pursuant to section 
1864 of the Act (including comparative evaluations of the performance of 
those intermediaries, carriers, and State agencies). The latest Contract 
Performance Review Report pertaining to a particular intermediary or 
carrier, prepared prior to February 1, 1973, may also be disclosed to 
any person upon request in writing. Those reports and evaluations shall 
be disclosed within 30 days following their final preparation by CMS (or 
30 days following the request therefor, in the case of the contract 
performance review report prepared prior to February 1, 1973), during 
which time those intermediaries, carriers, and State agencies, as the 
case may be, shall be afforded a reasonable opportunity to offer 
comments, and there shall be disclosed with those reports and 
evaluations any pertinent written statements furnished CMS by those 
intermediaries, carriers, on State agencies or those reports and 
evaluations.
    (d) Accreditation surveys. Upon written request, CMS will release 
the accreditation survey and related information from an accreditation 
organization meeting the requirements of Sec. 488.5, Sec. 488.6 or 
Sec. 493.506 of this chapter to the extent the survey and information 
relate to an enforcement action taken (for example, denial of payment 
for new admission, civil money penalties, temporary management and 
termination) by CMS;

[[Page 16]]

    (e) Upon written request, CMS will release the accreditation survey 
of any home health agency.

[46 FR 55696, Nov. 12, 1981; 46 FR 59249, Dec. 4, 1981, as amended at 58 
FR 61838, Nov. 23, 1993; 59 FR 56232, Nov. 10, 1994]



Sec. 401.134  Release of Medicare information to State and Federal agencies.

    (a) Except as provided in paragraph (b) of this section, the 
following information may be released to an officer or employee of an 
agency of the Federal or a State government lawfully charged with the 
administration of a program receiving grants-in-aid under title V and 
XIX of the Social Security Act for the purpose of administration of 
those titles, or to any officer or employee of the Department of Army, 
Department of Defense, solely for the administration of its Civilian 
Health and Medical Program of the Uniformed Services (CHAMPUS):
    (1) Information, including the identification number, concerning 
charges made by physicians, other practitioners, or suppliers, and 
amounts paid under Medicare for services furnished to beneficiaries by 
such physicians, other practioners, or suppliers, to enable the agency 
to determine the proper amount of benefits payable for medical services 
performed in accordance with those programs; or
    (2) Information as to physicians or other practioners that has been 
disclosed under Sec. 401.105.
    (3) Information relating to the qualifications and certification 
status of hospitals and other health care facilities obtained in the 
process of determining whether, and certifying as to whether, 
institutions or agencies meet or continue to meet the conditions of 
participation of providers of services or whether other entities meet or 
continue to meet the conditions for coverage of services they furnish.
    (b) The release of such information shall not be authorized by a 
fiscal intermediary or carrier.
    (c) The following information may be released to any officer or 
employee of an agency of the Federal or a State government lawfully 
charged with the duty of conducting an investigation or prosecution with 
respect to possible fraud or abuse against a program receiving grants-
in-aid under Medicaid, but only for the purpose of conducting such an 
investigation or prosecution, or to any officer or employee of the 
Department of the Army, Department of Defense, solely for the 
administration of its Civilian Health and Medical Program of the 
Uniformed Services (CHAMPUS), provided that the agency has filed an 
agreement with CMS that the information will be released only to the 
agency's enforcement branch and that the agency will preserve the 
confidentiality of the information received and will not disclose that 
information for other than program purposes:
    (1) The name and address of any provider of medical services, 
organization, or other person being actively investigated for possible 
fraud in connection with Medicare, and the nature of such suspected 
fraud. An active investigation exists when there is significant evidence 
supporting an initial complaint but there is need for further 
investigation.
    (2) The name and address of any provider of medical services, 
organization, or other person found, after consultation with an 
appropriate professional association or a program review team, to have 
provided unnecessary services, or of any physician or other individual 
found to have violated the assignment agreement on at least three 
occasions.
    (3) The name and address of any provider of medical services, 
organization or other person released under paragraph (c)(1) or (2) of 
this section concerning which an active investigation is concluded with 
a finding that there is no fraud or other prosecutable offense.



Sec. 401.135  Release of Medicare information to the public.

    The following shall be made available to the public under the 
conditions specified:
    (a) Information as to amounts paid to providers and other 
organizations and facilities for services to beneficiaries under title 
XVIII of the Act: Provided, That no information identifying any 
particular beneficiaries shall be disclosed under this paragraph.

[[Page 17]]

    (b) The name of any provider of services or other person furnishing 
services to Medicare beneficiaries who--
    (1) Has been found by a Federal court to have been guilty of 
submitting false claims in connection with Medicare; or
    (2) Has been found by a carrier or intermediary, after consultation 
with a professional medical association functioning external to program 
administration or, if appropriate, the State medical authority, to have 
been engaged in a pattern of furnishing services to beneficiaries which 
are substantially in excess of their medical needs; except that the name 
of any provider or other person shall not be disclosed pursuant to a 
finding under this paragraph (b)(2) of this section, unless that 
provider or other person has first been afforded a reasonable 
opportunity to offer evidence on his behalf.
    (c) Upon request in writing, cost reports submitted by providers of 
services pursuant to section 1815 of the Act to enable the Secretary to 
determine amounts due the providers.



Sec. 401.136  Requests for information or records.

    (a) A request should reasonably identify the requested record by 
brief description. Requesters who have detailed information which would 
assist in identifying the records requested are urged to provide such 
information in order to expedite the handling of the request. Envelopes 
in which written requests are submitted should be clearly identified as 
Freedom of Information requests. The request should include the fee or 
request determination of the fee. When necessary, a written request will 
be promptly forwarded to the proper office, and the requester will be 
advised of the date of the receipt and identification and address of the 
proper office.
    (b) Determinations of whether records will be released or withheld 
will be made within 10 working days from date of receipt of the request 
in the office listed in Sec. 401.128 except where CMS extends this time 
and sends notice of such extension to the requester. Such extension may 
not exceed 10 additional working days and shall apply only where the 
following unusual circumstances exist:
    (1) The need to search for and collect the requested records from 
field facilities or other establishments that are separate from the 
office processing the requests;
    (2) The need to search for, collect, and appropriately examine a 
voluminous amount of separate and distinct records which are requested 
in a single request; or
    (3) The need for consultation, which shall be conducted with all 
practicable speed, with another agency having a substantial interest in 
the request or among two or more components of CMS having a substantial 
interest in the subject matter of the request.
    (c) If an extension is made, the requester will be notified in 
writing before the expiration of 10 working days from receipt of the 
request and will be given an explanation of why the extension was 
necessary and the date on which a determination will be made.
    (d) Authority to extend the time limit with respect to any request 
for information or records is granted to the Director, Office of Public 
Affairs, CMS and to the Director of Public Affairs in any HHS Regional 
Office. Those officers and employees of CMS who are listed in 
Sec. 401.144(a) as having authority to deny requests for information 
from records maintained on individuals are granted authority to extend 
the time limit for responding to requests for information from such 
records.



Sec. 401.140  Fees and charges.

    (a) Statement of policy. It is CMS's policy to comply with certain 
requests for information services without charge. Except as otherwise 
determined pursuant to paragraph (c) of this section, fees will be 
charged for the following services with respect to all other requests 
for information from records which are reasonably identified by the 
requesters:
    (1) Reproduction, duplication, or copying of records;
    (2) Searches for records; and
    (3) Certification or authentication of records.
    (b) Fee schedules. The fee schedule is as follows:
    (1) Search for records. Three dollars per hour: Provided, however, 
That no

[[Page 18]]

charge will be made for the first half hour.
    (2) Reproduction, duplication, or copying of records. Ten cents per 
page where such reproduction can be made by commonly available 
photocopying machines. The cost of reproducing records which cannot be 
so photocopied will be determined on an individual basis at actual cost.
    (3) Certification or authentication of records. Three dollars per 
certification or authentication.
    (4) Forwarding materials to destination. Any special arrangements 
for forwarding which are requested shall be charged at actual cost; 
however, no charge will be made for postage.
    (5) No charge will be made when the total amount does not exceed 
five dollars.
    (c) Waiver or reduction of fees. Waiver or reduction of the fees in 
paragraph (b) of this section may be made upon a determination that such 
waiver or reduction is in the public interest because furnishing the 
information can be considered as primarily benefiting the general 
public. Such determination may be made by the appropriate officer or 
employee identified in Sec. 401.144.
    (d) Sale of documents. On occasion, a previously printed document 
may be available for sale to the public; the cost of supplying the 
document is one cent per page unless the document is available for sale 
from the Superintendent of Documents, in which case the price shall be 
that determined by the Superintendent.



Sec. 401.144  Denial of requests.

    (a) General authority. Only the Director, Office of Public Affairs, 
CMS, and the Regional Directors of Public Affairs, HHS, are authorized 
to deny written requests to obtain, inspect or copy any CMS information 
or record.
    (b) Forms of denials. (1) Oral requests may be dealt with orally, 
but the requester should be advised that the oral response is not an 
official determination and that an official determination may be 
obtained only by submitting the request in writing. Appropriate 
available assistance will be offered.
    (2) Written Requests--Denials of written requests will be in writing 
and will contain the reasons for the denial including, as appropriate, a 
statement that a document requested is nonexistent or not reasonably 
described or is subject to one or more clearly described exemption(s). 
Denials will also provide the requester with appropriate information on 
how to exercise the right of appeal.



Sec. 401.148  Administrative review.

    (a) Review by the Administrator. A person whose request has been 
denied may initiate a review by filing a request for review with the 
Administrator of CMS, 700 East High Rise Building, 6401 Security 
Boulevard, Baltimore, Maryland 21235, within 30 days of receipt of the 
determination to deny or within 30 days of receipt of records which are 
in partial response to his request if a portion of a request is granted 
and a portion denied, whichever is later. Upon receipt of a timely 
request for review, the Administrator will review the decision in 
question and the findings upon which it was based. Upon the basis of the 
data considered in connection with the decision and whatever other 
evidence and written argument is submitted by the person requesting the 
review or which is otherwise obtained, the Administrator or his designee 
will affirm or revise in whole or in part the findings and decision in 
question. A decision to affirm the denial will be made only upon 
concurrence of the Assistant Secretary for Public Affairs, or his 
designee, after consultation with the General Counsel or his or her 
designee, and the appropriate program policy official. Written notice of 
the decision of the Administrator will be mailed to the person who 
requested the review. A written decision will be made within 20 working 
days from receipt of the request for review. Extension of the time limit 
may be granted under the circumstances listed in Sec. 401.136(b) to the 
extent that the maximum 10 days limit on extensions has not been 
exhausted on the initial determination. The decision will include the 
basis for it and will advise the requester of his right to judicial 
review.
    (b) Failure of the Administrator to comply with the time limits. 
Failure of the Administrator to comply with the time

[[Page 19]]

limits set forth in Sec. 401.136 and this section constitutes an 
exhaustion of the requester's administrative remedies.



Sec. 401.152  Court review.

    Where the Administrator upon review affirms the denial of a request 
for records, in whole or in part, the requester may seek court review in 
the district court of the United States pursuant to 5 U.S.C. 
552(a)(4)(B).

Subparts C-E [Reserved]



               Subpart F--Claims Collection and Compromise

    Source: 48 FR 39064, Aug. 29, 1983, unless otherwise noted.



Sec. 401.601  Basis and scope.

    (a) Basis. This subpart implements for CMS the Federal Claims 
Collection Act (FCCA) of 1966 (31 U.S.C. 3711), and conforms to the 
regulations (4 CFR parts 101-105) issued jointly by the General 
Accounting Office and the Department of Justice that generally prescribe 
claims collection standards and procedures under the FCCA for the 
Federal government.
    (b) Scope. Except as provided in paragraphs (c) through (f) of this 
section, the regulations in this subpart describe CMS's procedures and 
standards for the collection of claims in any amount, and the compromise 
of, or the suspension or termination of collection action on, all claims 
for money or property that do not exceed $100,000 or such higher amount 
as the Attorney General may from time to time prescribe, exclusive of 
interest, arising under any functions delegated to CMS by the Secretary.
    (c) Amount of claim. CMS refers all claims that exceed $100,000 or 
such higher amount as the Attorney General may from time to time 
prescribe, exclusive of interest, to the Department of Justice or the 
General Accounting Office for the compromise of claims, or the 
suspension or termination of collection action.
    (d) Related regulations--(1) Department regulations. DHHS 
regulations applicable to CMS that generally implement the FCCA for the 
Department are located at 45 CFR part 30. These regulations apply only 
to the extent CMS regulations do not address a situation.
    (2) CMS regulations. The following regulations govern specific debt 
management situations encountered by CMS and supplement this subpart:
    (i) Claims against Medicare beneficiaries for the recovery of 
overpayments are covered in 20 CFR 404.515.
    (ii) Adjustments in Railroad Retirement or Social Security benefits 
to recover Medicare overpayments to individuals are covered in 
Secs. 405.350--405.358 of this chapter.
    (iii) Claims against providers, physicians, or other suppliers of 
services for overpayments under Medicare and for assessment of interest 
are covered in Secs. 405.377 and 405.378 of this chapter, respectively.
    (iv) Claims against beneficiaries for unpaid hospital insurance or 
supplementary medical insurance premiums under Medicare are covered in 
Sec. 408.110 of this chapter.
    (v) State repayment of Medicaid funds by installments is covered in 
Sec. 430.48 of this chapter.
    (e) Collection and compromise under other statutes and at common 
law. The regulations in this subpart do not--
    (1) Preclude disposition by CMS of claims under statutes, other than 
the FCCA, that provide for the collection or compromise of a claim, or 
suspension or termination of collection action.
    (2) Affect any rights that CMS may have under common law as a 
creditor.
    (f) Fraud. The regulations in this subpart do not apply to claims in 
which there is an indication of fraud, the presentation of a false 
claim, or misrepresentation on the part of a debtor or any other party 
having an interest in the claim. CMS forwards these claims to the 
Department of Justice for disposition under 4 CFR 105.1.
    (g) Enforced collection. CMS refers claims to the Department of 
Justice for enforced collection through litigation in those cases which 
cannot be compromised or on which collection action cannot be suspended 
or terminated in accordance with this subpart or the regulations issued 
jointly by the

[[Page 20]]

Attorney General and the Comptroller General.

[48 FR 39064, Aug. 29, 1983, as amended at 52 FR 48123, Dec. 18, 1987; 
57 FR 56998, Dec. 2, 1992; 61 FR 49271, Sept. 19, 1996; 61 FR 63748, 
Dec. 2, 1996]



Sec. 401.603  Definitions.

    For purposes of this subpart--
    Claim means any debt owed to CMS.
    Debtor means any individual, partnership, corporation, estate, trust 
or other legal entity against which CMS has a claim.



Sec. 401.605  Omissions not a defense.

    The failure of CMS to comply with the regulations in this subpart, 
or with the related regulations listed in Sec. 401.601(d), is not 
available as a defense to a debtor against whom CMS has a claim for 
money or property.



Sec. 401.607  Claims collection.

    (a) General policy. CMS recovers amounts of claims due from debtors, 
including interest where appropriate, by--
    (1) Direct collections in lump sums or in installments; or
    (2) Offsets against monies owed to the debtor by the Federal 
government where possible.
    (b) Collection in lump sums. Whenever possible, CMS attempts to 
collect claims in full in one lump sum. However, if CMS determines that 
a debtor is unable to pay the claim in one lump sum, CMS may instead 
enter into an agreement to accept regular installment payments.
    (c) Collection in installments. Generally, CMS requires that all 
claims to be satisfied by installment payments must be liquidated in 
three years or less. If unusual circumstances exist, such as the 
possibility of debtor insolvency, an installment agreement that extends 
beyond three years may be approved.
    (1) Debtor request. If a debtor desires to repay a claim in 
installments, the debtor must submit--
    (i) A request to CMS; and
    (ii) Any information required by CMS to make a decision regarding 
the request.
    (2) CMS decision. CMS will determine the number, amount and 
frequency of installment payments based on the information submitted by 
the debtor and on other factors such as--
    (i) Total amount of the claim;
    (ii) Debtor's ability to pay; and
    (iii) Cost to CMS of administering an installment agreement.
    (d) Collection by offset. (1) CMS may offset, where possible, the 
amount of a claim against the amount of pay, compensation, benefits or 
other monies that a debtor is receiving or is due from the Federal 
government.
    (2) Under regulations at Sec. 405.350--405.358 of this chapter, CMS 
may initiate adjustments in program payments to which an individual is 
entitled under title II of the Act (Federal Old Age, Survivors, and 
Disability Insurance Benefits) or under the Railroad Retirement Act of 
1974 (45 U.S.C. 231) to recover Medicare overpayments.

[48 FR 39064, Aug. 29, 1983, as amended at 61 FR 49271, Sept. 19, 1996; 
61 FR 63748, Dec. 2, 1996]



Sec. 401.613  Compromise of claims.

    (a) Amount of compromise. HFCA requires that the amount to be 
recovered through a compromise of a claim must--
    (1) Bear a reasonable relation to the amount of the claim; and
    (2) Be recoverable through enforced collection procedures.
    (b) General factors. After considering the bases for a decision to 
compromise a claim under paragraph (c) of this section, CMS may further 
consider factors such as--
    (1) The age and health of the debtor if the debtor is an individual;
    (2) Present and potential income of the debtor; and
    (3) Whether assets have been concealed or improperly transferred by 
the debtor.
    (c) Basis for compromise. Bases on which CMS may compromise a claim 
include the following--
    (1) Inability to pay. CMS may compromise a claim if it determines 
that the debtor, or the estate of a deceased debtor, does not have the 
present or prospective ability to pay the full amount of the claim 
within a reasonable time.
    (2) Litigative probabilities. CMS may compromise a claim if it 
determines

[[Page 21]]

that it would be difficult to prevail in a case before a court of law as 
a result of the legal issues involved or inability of the parties to 
agree to the facts of the case. The amount that CMS accepts in 
compromise under this provision will reflect--
    (i) The likelihood that CMS would have prevailed on the legal 
question(s) involved;
    (ii) Whether and to what extent CMS would have obtained a full or 
partial recovery of a judgment, depending on the availability of 
witnesses, or other evidentiary support for CMS's claim; and
    (iii) The amount of court costs that would be assessed to CMS.
    (3) Cost of collecting the claim. CMS may compromise a claim if it 
determines that the cost of collecting the claim does not justify the 
enforced collection of the full amount. In this case, CMS may adjust the 
amount it accepts as a compromise to allow an appropriate discount for 
the costs of collection it would have incurred but for the compromise.
    (d) Enforcement policy. CMS may compromise statutory penalties, 
forfeitures, or debts established as an aid to enforcement or to compel 
compliance, if it determines that its enforcement policy, in terms of 
deterrence and securing compliance both present and future, is 
adequately served by acceptance of the compromise amount.



Sec. 401.615  Payment of compromise amount.

    (a) Time and manner of compromise. Payment by the debtor of the 
amount that CMS has agreed to accept as a compromise in full settlement 
of a claim must be made within the time and in the manner prescribed by 
CMS. Accordingly, CMS will not settle a claim until the full payment of 
the compromise amount has been made.
    (b) Effect of failure to pay compromise amount. Failure of the 
debtor to make payment, as provided by the compromise agreement, 
reinstates the full amount of the claim, less any amounts paid prior to 
the default.
    (c) Prohibition against grace periods. CMS will not agree to 
inclusion of a provision in an installment agreement that would permit 
grace periods for payments that are late under the terms of the 
agreement.



Sec. 401.617  Suspension of collection action.

    (a) General conditions. CMS may temporarily suspend collection 
action on a claim if the following general conditions are met--
    (1) Amount of future recovery. CMS determines that future collection 
action may result in a recovery of an amount sufficient to justify 
periodic review and action on the claim by CMS during the period of 
suspension.
    (2) Statute of limitations. CMS determines that--
    (i) The applicable statute of limitations has been tolled, waived or 
has started running anew; or
    (ii) Future collections may be made by CMS through offset despite an 
applicable statute of limitations.
    (b) Basis for suspension. Bases on which CMS may suspend collection 
action on a particular claim include the following--
    (1) A debtor cannot be located; or
    (2) A debtor--
    (i) Owns no substantial equity in property;
    (ii) Is unable to make payment on CMS's claim or is unable to effect 
a compromise; and
    (iii) Has future prospects that justify retention of the claim.
    (c) Locating debtors. CMS will make every reasonable effort to 
locate missing debtors sufficiently in advance of the bar of an 
applicable statute of limitations to permit timely filing of a lawsuit 
to recover the amount of the claim.
    (d) Effect of suspension on liquidation of security. CMS will 
liquidate security, obtained in partial recovery of a claim, despite a 
decision under this section to suspend collection action against the 
debtor for the remainder of the claim.



Sec. 401.621  Termination of collection action.

    (a) General factors. After considering the bases for a decision to 
terminate collection action under paragraph (b) of this section, CMS may 
further consider factors such as--
    (1) The age and health of the debtor if the debtor is an individual;

[[Page 22]]

    (2) Present and potential income of the debtor; and
    (3) Whether assets have been concealed or improperly transferred by 
the debtor.
    (b) Basis for termination of collection action. Bases on which CMS 
may terminate collection action on a claim include the following--
    (1) Inability to collect a substantial amount of the claim. CMS may 
terminate collection action if it determines that it is unable to 
collect, or to enforce collection, of a significant amount of the claim. 
In making this determination, CMS will consider factors such as--
    (i) Judicial remedies available;
    (ii) The debtor's future financial prospects; and
    (iii) Exemptions available to the debtor under State or Federal law.
    (2) Inability to locate debtor. In cases involving missing debtors, 
CMS may terminate collection action if--
    (i) There is no security remaining to be liquidated;
    (ii) The applicable statute of limitations has run; or
    (iii) The prospects of collecting by offset, whether or not an 
applicable statute of limitations has run, are considered by CMS to be 
too remote to justify retention of the claim.
    (3) Cost of collection exceeds recovery. CMS may terminate 
collection action if it determines that the cost of further collection 
action will exceed the amount recoverable.
    (4) Legal insufficiency. CMS may terminate collection action if it 
determines that the claim is legally without merit.
    (5) Evidence unavailable. CMS may terminate collection action if--
    (i) Efforts to obtain voluntary payment are unsuccessful; and
    (ii) Evidence or witnesses necessary to prove the claim are 
unavailable.



Sec. 401.623  Joint and several liability.

    (a) Collection action. CMS will liquidate claims as quickly as 
possible. In cases of joint and several liability among two or more 
debtors, CMS will not allocate the burden of claims payment among the 
debtors. CMS will proceed with collection action against one debtor even 
if other liable debtors have not paid their proportionate shares.
    (b) Compromise. Compromise with one debtor does not release a claim 
against remaining debtors. Furthermore, CMS will not consider the amount 
of a compromise with one debtor to be a binding precedent concerning the 
amounts due from other debtors who are jointly and severally liable on 
the claim.



Sec. 401.625  Effect of CMS claims collection decisions on appeals.

    Any action taken under this subpart regarding the compromise of a 
claim, or suspension or termination of collection action on a claim, is 
not an initial determination for purposes of CMS appeal procedures.



PART 402--CIVIL MONEY PENALTIES, ASSESSMENTS, AND EXCLUSIONS--Table of Contents




                      Subpart A--General Provisions

Sec.
402.1  Basis and scope.
402.3  Definitions.
402.5  Right to a hearing before the final determination.
402.7  Notice of proposed determination.
402.9  Failure to request a hearing.
402.11  Notice to other agencies and other entities.
402.13  Penalty, assessment, and exclusion not exclusive.
402.15  Collateral estoppel.
402.17  Settlement.
402.19  Hearings and appeals.
402.21  Judicial review.

            Subpart B--Civil Money Penalties and Assessments

402.105  Amount of penalty.
402.107  Amount of assessment.
402.109  Statistical sampling.
402.111  Factors considered determinations regarding the amount of 
          penalties and assessments.
402.113  When a penalty and assessment are collectible.
402.115  Collection of penalty or assessment.

Subpart C--Exclusions [Reserved]

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 63 FR 68690, Dec. 14, 1998, unless otherwise noted.

[[Page 23]]



                      Subpart A--General Provisions



Sec. 402.1  Basis and scope.

    (a) Basis. This part is based on the sections of the Act that are 
specified in paragraph (c) of this section.
    (b) Scope. This part--
    (1) Provides for the imposition of civil money penalties, 
assessments, and exclusions against persons that violate the provisions 
of the Act specified in paragraph (c), (d), or (e) of this section; and
    (2) Sets forth the appeal rights of persons subject to penalties, 
assessments, or exclusion and the procedures for reinstatement following 
exclusion.
    (c) Civil money penalties. CMS or OIG may impose civil money 
penalties against any person or other entity specified in paragraphs 
(c)(1) through (c)(33) of this section under the identified section of 
the Act. (The authorities that also permit imposition of an assessment 
or exclusion are noted in the applicable paragraphs.)
    (1) Sections 1833(h)(5)(D) and 1842(j)(2)--Any person that knowingly 
and willfully, and on a repeated basis, bills for a clinical diagnostic 
laboratory test, other than on an assignment-related basis. This 
provision includes tests performed in a physician's office but excludes 
tests performed in a rural health clinic. (This violation may also 
include an assessment and cause exclusion.)
    (2) Section 1833(i)(6)--Any person that knowingly and willfully 
presents, or causes to be presented, a bill or request for payment for 
an intraocular lens inserted during or after cataract surgery for which 
the Medicare payment rate includes the cost of acquiring the class of 
lens involved.
    (3) Section 1833(q)(2)(B)--Any entity that knowingly and willfully 
fails to provide information about a referring physician, including the 
physician's name and unique physician identification number for the 
referring physician, when seeking payment on an unassigned basis. (This 
violation, if it occurs in repeated cases, may also cause an exclusion.)
    (4) Sections 1834(a)(11)(A) and 1842(j)(2)--Any durable medical 
equipment supplier that knowingly and willfully charges for a covered 
service that is furnished on a rental basis after the rental payments 
may no longer be made (except for maintenance and servicing) as provided 
in section 1834(a)(7)(A). (This violation may also include an assessment 
and cause exclusion.)
    (5) Sections 1834(a)(18)(B) and 1842(j)(2)--Any nonparticipating 
durable medical equipment supplier that knowingly and willfully, in 
violation of section 1834(a)(18)(A), fails to make a refund to Medicare 
beneficiaries for a covered service for which payment is precluded due 
to an unsolicited telephone contact from the supplier. (This violation 
may also include an assessment and cause exclusion.)
    (6) Sections 1834(b)(5)(C) and 1842(j)(2)--Any nonparticipating 
physician or supplier that knowingly and willfully charges a Medicare 
beneficiary more than the limiting charge, as specified in section 
1834(b)(5)(B), for radiologist services. (This violation may also 
include an assessment and cause exclusion.)
    (7) Sections 1834(c)(4)(C) and 1842(j)(2)--Any nonparticipating 
physician or supplier that knowingly and willfully charges a Medicare 
beneficiary more than the limiting charge, as specified in section 
1834(c)(4)(B), for mammography screening. (This violation may also 
include an assessment and cause exclusion.)
    (8) Sections 1834(h)(3) and 1842(j)(2)--Any supplier of prosthetic 
devices, orthotics, and prosthetics that knowingly and willfully charges 
for a covered prosthetic device, orthotic, or prosthetic that is 
furnished on a rental basis after the rental payment may no longer be 
made (except for maintenance and servicing). (This violation may also 
include an assessment and cause exclusion.)
    (9) Section 1834(j)(2)(A)(iii)--Any supplier of durable medical 
equipment, including a supplier of prosthetic devices, prosthetics, 
orthotics, or supplies, that knowingly and willfully distributes a 
certificate of medical necessity in violation of section 
1834(j)(2)(A)(i) or fails to provide the information required under 
section 1834(j)(2)(A)(ii).
    (10) Sections 1834(j)(4) and 1842(j)(2)--

[[Page 24]]

    (i) Any supplier of durable medical equipment, including a supplier 
of prosthetic devices, prosthetics, orthotics, or supplies, that 
knowingly and willfully fails to make refunds in a timely manner to 
Medicare beneficiaries for services billed other than on an assignment-
related basis if--
    (A) The supplier does not possess a Medicare supplier number;
    (B) The service is denied in advance under section 1834(a)(15); or
    (C) The service is determined not to be medically necessary or 
reasonable.
    (ii) These violations may also include an assessment and cause 
exclusion.
    (11) Sections 1842(b)(18)(B) and 1842(j)(2)--Any practitioner 
specified in section 1842(b)(18)(C) (physician assistants, nurse 
practitioners, clinical nurse specialists, certified registered nurse 
anesthetists, certified nurse-midwives, clinical social workers, and 
clinical psychologists) or other person that knowingly and willfully 
bills or collects for any services by the practitioners on other than an 
assignment-related basis. (This violation may also include an assessment 
and cause exclusion.)
    (12) Sections 1842(k) and 1842(j)(2)--Any physician who knowingly 
and willfully presents, or causes to be presented, a claim or bill for 
an assistant at cataract surgery performed on or after March 1, 1987 for 
which payment may not be made because of section 1862(a)(15). (This 
violation may also include an assessment and cause exclusion.)
    (13) Sections 1842(l)(3) and 1842(j)(2)--Any nonparticipating 
physician who does not accept payment on an assignment-related basis and 
who knowingly and willfully fails to refund on a timely basis any 
amounts collected for services that are not reasonable or medically 
necessary or are of poor quality, in accordance with section 
1842(l)(1)(A). (This violation may also include an assessment and cause 
exclusion.)
    (14) Sections 1842(m)(3) and 1842(j)(2)--(i) Any nonparticipating 
physician, who does not accept payment for an elective surgical 
procedure on an assignment-related basis and whose charge is at least 
$500, who knowingly and willfully fails to--
    (A) Disclose the information required by section 1842(m)(1) 
concerning charges and coinsurance amounts; and
    (B) Refund on a timely basis any amount collected for the procedure 
in excess of the charges recognized and approved by the Medicare 
program.
    (ii) This violation may also include an assessment and cause 
exclusion.
    (15) Sections 1842(n)(3) and 1842(j)(2)--Any physician who knowingly 
and willfully, in repeated cases, bills one or more beneficiaries, for 
purchased diagnostic tests, any amount other than the payment amount 
specified in section 1842(n)(1)(A) or section 1842(n)(1)(B). (This 
violation may also include an assessment and cause exclusion.)
    (16) Section 1842(p)(3)(A)--Any physician or practitioner who 
knowingly and willfully fails promptly to provide the appropriate 
diagnosis code or codes upon request by CMS or a carrier on any request 
for payment or bill not submitted on an assignment-related basis for any 
service furnished by the physician. (This violation, if it occurs in 
repeated cases, may also cause exclusion.)
    (17) Sections 1848(g)(1)(B) and 1842(j)(2)--
    (i) Any nonparticipating physician, supplier, or other person that 
furnishes physicians' services and does not accept payment on an 
assignment-related basis, that--
    (A) Knowingly and willfully bills or collects in excess of the 
limiting charge (as defined in section 1848(g)(2)) on a repeated basis; 
or
    (B) Fails to make an adjustment or refund on a timely basis as 
required by section 1848(g)(1)(A)(iii) or (iv).
    (ii) These violations may also include an assessment and cause 
exclusion.
    (18) Section 1848(g)(3)(B) and 1842(j)(2)--Any person that knowingly 
and willfully bills for State plan approved physicians' services, as 
defined in section 1848(j)(3), on other than an assignment-related basis 
for a Medicare beneficiary who is also eligible for Medicaid (these 
individuals include qualified Medicare beneficiaries). This provision 
applies to services furnished on or after April 1, 1990. (This violation 
may also include an assessment and cause exclusion.)

[[Page 25]]

    (19) Section 1848(g)(4)(B)(ii), 1842(p)(3), and 1842(j)(2)(A)--
    (i) Any physician, supplier, or other person (except any person that 
has been excluded from the Medicare program) that, for services 
furnished after September 1, 1990, knowingly and willfully--
    (A) Fails to submit a claim on a standard claim form for services 
provided for which payment is made under Part B on a reasonable charge 
or fee schedule basis; or
    (B) Imposes a charge for completing and submitting the standard 
claims form.
    (ii) These violations, if they occur in repeated cases, may also 
cause exclusion.
    (20) Section 1862(b)(5)(C)--Any employer (other than a Federal or 
other governmental agency) that, before October 1, 1998, willfully or 
repeatedly fails to provide timely and accurate information requested 
relating to an employee's group health insurance coverage.
    (21) Section 1862(b)(6)(B)--Any entity that knowingly, willfully, 
and repeatedly--
    (i) Fails to complete a claim form relating to the availability of 
other health benefit plans in accordance with section 1862(b)(6)(A); or
    (ii) Provides inaccurate information relating to the availability of 
other health benefit plans on the claim form.
    (22) Section 1877(g)(5)--Any person that fails to report information 
required by HHS under section 1877(f) concerning ownership, investment, 
and compensation arrangements. (This violation may also include an 
assessment and cause exclusion.)
    (23) Sections 1879(h), 1834(a)(18), and 1842(j)(2)--
    (i) Any durable medical equipment supplier, including a supplier of 
prosthetic devices, prosthetics, orthotics, or supplies, that knowingly 
and willfully fails to make refunds in a timely manner to Medicare 
beneficiaries for services billed on an assignment-related basis if--
    (A) The supplier did not possess a Medicare supplier number;
    (B) The service is denied in advance under section 1834(a)(15) of 
the Act; or
    (C) The service is determined not to be payable under section 
1834(a)(17)(b) because of unsolicited telephone contacts.
    (ii) These violations may also include an assessment and cause 
exclusion.
    (24) Section 1882(a)(2)--Any person that issues a Medicare 
supplemental policy that has not been approved by the State regulatory 
program or does not meet Federal standards on and after the effective 
date in section 1882(p)(1)(C). (This violation may also include an 
assessment and cause exclusion.)
    (25) Section 1882(p)(8)--Any person that sells or issues Medicare 
supplemental policies, on or after July 30, 1992, that fail to conform 
to the NAIC or Federal standards established under section 1882(p). 
(This violation may also include an assessment and cause exclusion.)
    (26) Section 1882(p)(9)(C)--
    (i) Any person that sells a Medicare supplemental policy and--
    (A) Fails to make available for sale the core group of basic 
benefits when selling other Medicare supplemental policies with 
additional benefits; or
    (B) Fails to provide the individual, before the sale of the policy, 
an outline of coverage describing the benefits provided by the policy.
    (ii) These violations may also include an assessment and cause 
exclusion.
    (27) Section 1882(q)(5)(C)--
    (i) Any person that fails to--
    (A) Suspend a Medicare supplemental policy at the policyholder's 
request, if the policyholder applies for and is determined eligible for 
medical assistance, and the policyholder provides notice within 90 days 
of the eligibility determination; or
    (B) Automatically reinstate the policy as of the date of termination 
of medical assistance if the policyholder loses eligibility for medical 
assistance and the policyholder provides notice within 90 days of loss 
of eligibility.
    (ii) These violations may also include an assessment and cause 
exclusion.
    (28) Section 1882(r)(6)(A)--Any person that fails to provide refunds 
or credits as required by section 1882(r)(1)(B). (This violation may 
also include an assessment and cause exclusion.)
    (29) Section 1882(s)(4)--

[[Page 26]]

    (i) Any issuer of a Medicare supplemental policy that--
    (A) Does not waive any time periods applicable to preexisting 
conditions, waiting periods, elimination periods, or probationary 
periods if the time periods were already satisfied under a preceding 
Medicare supplemental policy; or
    (B) Denies a policy, conditions the issuance or effectiveness of the 
policy, or discriminates in the pricing of the policy based on health 
status or other criteria as specified in section 1882(s)(2)(A).
    (ii) These violations may also include an assessment and cause 
exclusion.
    (30) Section 1882(t)(2)--
    (i) Any issuer of a Medicare supplemental policy that--
    (A) Fails substantially to provide medically necessary services to 
enrollees seeking the services through the issuer's network of entities;
    (B) Imposes premiums on enrollees in excess of the premiums approved 
by the State;
    (C) Acts to expel an enrollee for reasons other than nonpayment of 
premiums; or
    (D) Does not provide each enrollee at the time of enrollment with 
the specific information provided in section 1882(t)(1)(E)(i) or fails 
to obtain a written acknowledgment from the enrollee of receipt of the 
information (as required by section 1882(t)(1)(E)(ii)).
    (ii) These violations may also include an assessment and cause 
exclusion.
    (31) Sections 1834(k)(6) and 1842(j)(2)--Any person or entity who 
knowingly and willfully bills or collects for any outpatient therapy 
services or comprehensive outpatient rehabilitation services on other 
than an assignment-related basis. (This violation may also include an 
assessment and cause exclusion.)
    (32) Sections 1834(l)(6) and 1842(j)(2)--Any supplier of ambulance 
services who knowingly and willfully bills or collects for any services 
on other than an assignment-related basis. (This violation may also 
include an assessment and cause exclusion.)
    (33) Section 1806(b)(2)(B)--Any person who knowingly and willfully 
fails to furnish a beneficiary with an itemized statement of items or 
services within 30 days of the beneficiary's request.
    (d) Assessments. CMS or OIG may impose assessments in addition to 
civil money penalties for violations of the following statutory 
sections:
    (1) Section 1833: Paragraph (h)(5)(D).
    (2) Section 1834: Paragraphs (a)(11)(A), (a)(18)(B), (b)(5)(C), 
(c)(4)(C), (h)(3), (j)(4), (k)(6), and (l)(6).
    (3) Section 1842: Paragraphs (k), (l)(3), (m)(3), and (n)(3).
    (4) Section 1848: Paragraph (g)(1)(B).
    (5) Section 1877: Paragraph (g)(5).
    (6) Section 1879: Paragraph (h).
    (7) Section 1882: Paragraphs (a)(2), (p)(8), (p)(9)(C), (q)(5)(C), 
(r)(6)(A), (s)(3), and (t)(2).
    (e) Exclusions. (1) CMS or OIG may exclude any person from 
participation in the Medicare program on the basis of any of the 
following violations of the statute:
    (i) Section 1833: Paragraphs (h)(5)(D) and, in repeated cases, 
(q)(2)(B).
    (ii) Section 1834: Paragraphs (a)(11)(A), (a)(18)(B), (b)(5)(C), 
(c)(4)(C), (h)(3), (j)(4), (k)(6), and (l)(6).
    (iii) Section 1842: Paragraphs (b)(18)(B), (k), (l)(3), (m)(3), 
(n)(3), and, in repeated cases, (p)(3)(B).
    (iv) Section 1848: Paragraphs (g)(1)(B), (g)(3)(B), and, in repeated 
cases, (g)(4)(B)(ii).
    (v) Section 1877: Paragraph (g)(5).
    (vi) Section 1879: Paragraph (h).
    (vii) Section 1882: Paragraphs (a)(2), (p)(8), (p)(9)(C), (q)(5)(C), 
(r)(6)(A), (s)(4), and (t)(2).
    (2) CMS or OIG must exclude from participation in the Medicare 
program any of the following, under the identified section of the Act:
    (i) Section 1834(a)(17)(C)--Any supplier of durable medical 
equipment and supplies that are covered under section 1834(a)(13) that 
knowingly contacts Medicare beneficiaries by telephone regarding the 
furnishing of covered services in violation of section 1834(a)(17)(A) 
and whose conduct establishes a pattern of prohibited contacts as 
described under section 1834(a)(17)(A).
    (ii) Section 1834(h)(3)--Any supplier of prosthetic devices, 
orthotics, and prosthetics that knowingly contacts

[[Page 27]]

Medicare beneficiaries by telephone regarding the furnishing of 
prosthetic devices, orthotics, or prosthetics in the same manner as in 
the violation under section 1834(a)(17)(A) and whose conduct establishes 
a pattern of prohibited contacts in the same manner as described in 
section 1834(a)(17)(C).
    (f) Responsible persons. (1) If CMS or OIG determines that more than 
one person is responsible for any of the violations described in 
paragraph (c) or paragraph (d) of this section, it may impose a civil 
money penalty or a civil money penalty and assessment against any one of 
those persons or jointly and severally against two or more of those 
persons. However, the aggregate amount of the assessments collected may 
not exceed the amount that could be assessed if only one person were 
responsible.
    (2) A principal is liable for penalties and assessments for the 
actions of his or her agent acting within the scope of the agency.
    (g) Time limits. Neither CMS nor OIG initiates an action to impose a 
civil money penalty, assessment, or proceeding to exclude a person from 
participation in the Medicare program unless it begins the action within 
6 years from the date on which the claim was presented, the request for 
payment was made, or the incident occurred.

[63 FR 68690, Dec. 14, 1998, as amended at 66 FR 49546, Sept. 28, 2001]



Sec. 402.3  Definitions.

    For purposes of this part:
    Assessment means the amount described in Sec. 402.107 and includes 
the plural of that term.
    Assignment-related basis means that the claim submitted by a 
physician, supplier or other person is paid on the basis of an 
assignment, whereby the physician, supplier or other person agrees to 
accept the Medicare payment as payment in full for the services 
furnished to the beneficiary and is precluded from charging the 
beneficiary more than the deductible and coinsurance based upon the 
approved Medicare fee amount. Additional obligations, including 
obligations to make refunds in certain circumstances, are established at 
section 1842(b)(3) of the Act.
    Claim means an application for payment for a service for which the 
Medicare or Medicaid program may pay.
    Covered means that a service is described as reasonable and 
necessary for the diagnosis or treatment of illness or injury or to 
improve the functioning of a malformed body member. A service is not 
covered if it is specifically identified as excluded from Medicare Part 
B coverage or is not a defined Medicare Part B benefit.
    Exclusion means the temporary or permanent barring of a person or 
other entity from participation in the Medicare or State health care 
program and that services furnished or ordered by that person are not 
paid for under either program.
    General Counsel means the General Counsel of HHS or his or her 
designees.
    Knowingly or knowingly and willfully means that a person, with 
respect to information--
    (1) Has actual knowledge of the information;
    (2) Acts in deliberate ignorance of the truth or falsity of the 
information; or
    (3) Acts in reckless disregard of the truth or falsity of the 
information; and
    (4) No proof of specific intent is required.
    Medicare supplemental policy means a policy guaranteeing that a 
health plan will pay a policyholder's coinsurance and deductible and 
will cover other limitations on payment imposed under title XVIII of the 
Act and will provide additional health plan or non-Medicare coverage for 
services up to a predefined benefit limit.
    NAIC stands for the National Association of Insurance Commissioners.
    Nonparticipating describes a physician, supplier, or other person 
(excluding any provider of services) that, at the time of furnishing the 
services to Medicare Part B beneficiaries, is not a participating 
physician or supplier.
    Participating describes a physician or supplier (excluding any 
provider of services) that, before the beginning of any given year, 
enters into an agreement with HHS that provides that the physician or 
supplier will accept payment under the Medicare program on an 
assignment-related basis for all services furnished to Medicare Part B 
beneficiaries.

[[Page 28]]

    Penalty means the amount described in Sec. 402.105 and includes the 
plural of that term.
    Person means an individual, trust or estate, partnership, 
corporation, professional association or corporation, or other entity, 
public or private.
    Physicians' services means the following Medicare covered 
professional services:
    (1) Surgery, consultation, home, office and institutional calls, and 
other professional services performed by physicians.
    (2) Services and supplies furnished ``incident to'' a physician's 
professional services.
    (3) Outpatient physical and occupational therapy services.
    (4) Diagnostic x-ray tests and other diagnostic tests (excluding 
clinical diagnostic laboratory tests).
    (5) X-ray, radium, and radioactive isotope therapy, including 
materials and services of technicians.
    (6) Antigens prepared by a physician.
    Radiologist service means radiology services performed only by, or 
under the direction of, a physician who is certified, or eligible to be 
certified, by the American Board of Radiology or for whom radiology 
services account for at least 50 percent of the total amount of charges 
made under part B of title XVIII of the Act.
    Request for payment means an application submitted by a person to 
any person for payment for a service.
    Respondent means the person upon which CMS or OIG has imposed, or 
proposes to impose, a civil money penalty, assessment, or exclusion.
    Service includes--
    (1) Any item, device, medical supply, or service claimed to have 
been furnished to a patient and listed in an itemized claim for program 
payment; or
    (2) In the case of a claim based on costs, any entry or omission in 
a cost report, books of account or other documents supporting the claim.
    State includes the District of Columbia, Puerto Rico, the Virgin 
Islands, Guam, American Samoa, the Northern Mariana Islands, and the 
Trust Territory of the Pacific Islands.
    Timely basis means that the adjustment to a bill or a refund is 
considered ``on a timely basis'' if the physician, supplier, or other 
person makes the adjustment or refund to the appropriate party no later 
than 30 days after the date the physician, supplier, or other person is 
notified by the Medicare Part B contractor of the violation and the 
requirement to refund any excess collections.



Sec. 402.5  Right to a hearing before the final determination.

    CMS or OIG does not make a determination adverse to any person under 
this part until the person has been given a written notice and 
opportunity for the determination to be made on the record after a 
hearing at which the person is entitled to be represented by counsel, to 
present witnesses, and to cross-examine witnesses against the person.



Sec. 402.7  Notice of proposed determination.

    (a) If CMS or OIG proposes a penalty and, as applicable, an 
assessment, or proposes to exclude a respondent from participation in 
Medicare in accordance with this part, it sends the respondent written 
notice of its intent by certified mail, return receipt requested. The 
notice includes the following information:
    (1) Reference to the statutory basis or bases for the penalty, 
assessment, exclusion, or any combination, as applicable.
    (2)(i) A description of the claims, requests for payment, or 
incidents with respect to which the penalty, assessment, and exclusion 
are proposed; or
    (ii) If CMS or OIG is relying upon statistical sampling to project 
the number and types of claims or requests for payment and the dollar 
amount, a description of the claims and requests for payment comprising 
the sample and a brief description of the statistical sampling technique 
CMS or OIG used.
    (3) The reason why the claims, requests for payment, or incidents 
are subject to a penalty and assessment.
    (4) The amount of the proposed penalty and of any proposed 
assessment.
    (5) Any mitigating or aggravating circumstances that CMS or OIG 
considered when it determined the amount of

[[Page 29]]

the proposed penalty and any applicable assessment.
    (6) Information concerning response to the notice, including--
    (i) A specific statement of the respondent's right to a hearing; and
    (ii) A statement that failure to request a hearing within 60 days 
renders the proposed determination final and permits the imposition of 
the proposed penalty and any assessment.
    (iii) A statement that the debt may be collected through an 
administrative offset.
    (7) In the case of a respondent that has an agreement under section 
1866 of the Act, notice that imposition of an exclusion may result in 
termination of the provider's agreement in accordance with section 
1866(b)(2)(C) of the Act.



Sec. 402.9  Failure to request a hearing.

    (a) If the respondent does not request a hearing within 60 days of 
receipt of the notice of proposed determination specified in Sec. 402.7, 
any civil money penalty, assessment, or exclusion becomes final and CMS 
or OIG may impose the proposed penalty, assessment, or exclusion, or any 
less severe penalty, assessment, or suspension.
    (b) CMS or OIG notifies the respondent by certified mail, return 
receipt requested, of any penalty, assessment, or exclusion that has 
been imposed and of the means by which the respondent may satisfy the 
judgment.
    (c) The respondent has no right to appeal a penalty, assessment, or 
exclusion for which he or she has not requested a hearing.



Sec. 402.11  Notice to other agencies and other entities.

    (a) Whenever a penalty, assessment, or exclusion becomes final, CMS 
or OIG notifies the following organizations and entities about the 
action and the reasons for it:
    (1) The appropriate State or local medical or professional 
association.
    (2) The appropriate quality improvement organization.
    (3) As appropriate, the State agency responsible for the 
administration of each State health care program (Medicaid, the Maternal 
and Child Health Services Block Grant Program, and the Social Services 
Block Grant Program).
    (4) The appropriate Medicare carrier or fiscal intermediary.
    (5) The appropriate State or local licensing agency or organization 
(including the Medicare and Medicaid State survey agencies).
    (6) The long-term care ombudsman.
    (b) For exclusions, CMS or OIG also notifies the public and 
specifies the effective date.



Sec. 402.13  Penalty, assessment, and exclusion not exclusive.

    Penalties, assessments, and exclusions imposed under this part are 
in addition to any other penalties prescribed by law.



Sec. 402.15  Collateral estoppel.

    (a) When a final determination that the respondent presented or 
caused to be presented a claim or request for payment falling within the 
scope of Sec. 402.1 has been rendered in any proceeding in which the 
respondent was a party and had an opportunity to be heard, the 
respondent is bound by that determination in any proceeding under this 
part.
    (b) A person who has been convicted (whether upon a verdict after 
trial or upon a plea of guilty or nolo contendere) of a Federal crime 
charging fraud or false statements is barred from denying the essential 
elements of the criminal offense if the proceedings under this part 
involve the same transactions.



Sec. 402.17  Settlement.

    CMS or OIG has exclusive authority to settle any issues or case, 
without the consent of the ALJ or the Secretary, at any time before a 
final decision by the Secretary. Thereafter, the General Counsel has the 
exclusive authority.



Sec. 402.19  Hearings and appeals.

    The hearings and appeals procedures set forth in part 1005 of 
chapter V of this title are available to any person that receives an 
adverse determination under this part. For an appeal of a civil money 
penalty, assessment, or exclusion imposed under this part, either CMS or 
OIG may represent the government in the hearing and appeals process.

[[Page 30]]



Sec. 402.21  Judicial review.

    After exhausting all available administrative remedies, a respondent 
may seek judicial review of a penalty, assessment, or exclusion that has 
become final. The respondent may seek review only with respect to a 
penalty, assessment, or exclusion with respect to which the respondent 
filed an exception under Sec. 1005.21(c) of this title unless the court 
excuses the failure or neglect to urge the exception in accordance with 
section 1128A(e) of the Act because of extraordinary circumstances.



            Subpart B--Civil Money Penalties and Assessments



Sec. 402.105  Amount of penalty.

    (a) $2,000. Except as provided in paragraphs (b) through (g) of this 
section, CMS or OIG may impose a penalty of not more than $2,000 for 
each service, bill, or refusal to issue a timely refund that is subject 
to a determination under this part and for each incident involving the 
knowing, willful, and repeated failure of an entity furnishing a service 
to submit a properly completed claim form or to include on the claim 
form accurate information regarding the availability of other health 
insurance benefit plans (Sec. 402.1(c)(21)).
    (b) $1,000. CMS or OIG may impose a penalty of not more than $1,000 
for the following:
    (1) Per certificate of medical necessity knowingly and willfully 
distributed to physicians on or after December 31, 1994 that--
    (i) Contains information concerning the medical condition of the 
patient; or
    (ii) Fails to include cost information.
    (2) Per individual about whom information is requested, for willful 
or repeated failure of an employer to respond to an intermediary or 
carrier about coverage of an employee or spouse under the employer's 
group health plan (Sec. 402.1(c)(20)).
    (c) $5,000. CMS or OIG may impose a penalty of not more than $5,000 
for each violation resulting from the following:
    (1) The failure of a Medicare supplemental policy issuer, on a 
replacement policy, to waive any time periods applicable to pre-existing 
conditions, waiting periods, elimination periods, or probationary 
periods that were satisfied under a preceding policy 
(Sec. 402.1(c)(29)); and
    (2) Any issuer of any Medicare supplemental policy denying a policy, 
conditioning the issuance or effectiveness of the policy, or 
discriminating in the pricing of the policy based on health status or 
other criteria as specified in section 1882(s)(2)(A). 
(Sec. 402.1(c)(29)).
    (d) $10,000. (1) CMS or OIG may impose a penalty of not more than 
$10,000 for each day that reporting entity ownership arrangements is 
late (Sec. 402.1(c)(22)).
    (2) CMS or OIG may impose a penalty of not more than $10,000 for the 
following violations that occur on or after January 1, 1997:
    (i) Knowingly and willfully, and on a repeated basis, billing for a 
clinical diagnostic laboratory test, other than on an assignment-related 
basis (Sec. 402.1(c)(1)).
    (ii) By any durable medical equipment supplier, knowingly and 
willfully charging for a covered service that is furnished on a rental 
basis after the rental payments may no longer be made (except for 
maintenance and servicing) as provided in section 1834(a)(7)(A) 
(Sec. 402.1(c)(4)).
    (iii) By any durable medical equipment supplier, knowingly and 
willfully, in violation of section 1834(a)(18)(A), failing to make a 
refund to Medicare beneficiaries for a covered service for which payment 
is precluded due to an unsolicited telephone contact from the supplier 
(Sec. 402.1(c)(5)).
    (iv) By any nonparticipating physician or supplier, knowingly and 
willfully charging a Medicare beneficiary more than the limiting charge, 
as specified in section 1834(b)(5)(B), for radiologist services 
(Sec. 402.1(c)(6)).
    (v) By any nonparticipating physician or supplier, knowingly and 
willfully charging a Medicare beneficiary more than the limiting charge, 
as specified in section 1834(c)(3), for mammography screening 
(Sec. 402.1(c)(7)).
    (vi) By any supplier of prosthetic devices, orthotics, and 
prosthetics, knowingly and willfully charging for a covered prosthetic 
device, orthotic, or prosthetic that is furnished on a rental

[[Page 31]]

basis after the rental payment may no longer be made (except for 
maintenance and servicing) (Sec. 401.2(c)(8)).
    (vii) By any supplier of durable medical equipment, including a 
supplier of prosthetic devices, prosthetics, orthotics, or supplies, 
knowingly and willfully failing to make refunds in a timely manner to 
Medicare beneficiaries for services billed other than on an assigned-
related basis if--
    (A) The supplier does not possess a Medicare supplier number;
    (B) The service is denied in advance; or
    (C) The service is determined not to be medically necessary or 
reasonable (Sec. 402.1(c)(10)).
    (viii) Knowingly and willfully billing or collecting for any 
services on other than an assignment-related basis for practitioners 
specified in section 1842(b)(18)(B) (Sec. 402.1(c)(11)).
    (xix) By any physician, knowingly and willfully presenting, or 
causing to be presented, a claim or bill for an assistant at cataract 
surgery performed on or after March 1, 1987 for which payment may not be 
made because of section 1862(a)(15) (Sec. 402.1(c)(12)).
    (x) By any nonparticipating physician who does not accept payment on 
an assignment-related basis, knowingly and willfully failing to refund 
on a timely basis any amounts collected for services that are not 
reasonable or medically necessary or are of poor quality, in accordance 
with section 1842(l)(1)(A) (Sec. 402.1(c)(13)).
    (xi) By any nonparticipating physician, who does not accept payment 
for an elective surgical procedure on an assignment-related basis and 
whose charge is at least $500, knowingly and willfully failing to--
    (A) Disclose the information required by section 1842(m)(1) 
concerning charges and coinsurance amounts; and
    (B) Refund on a timely basis any amount collected for the procedure 
in excess of the charges recognized and approved by the Medicare program 
(Sec. 402.1(c)(14)).
    (xii) By any physician, in repeated cases, knowingly and willfully 
billing one or more beneficiaries, for purchased diagnostic tests, any 
amount other than the payment amount specified in section 1842(n)(1)(A) 
or section 1842(n)(1)(B) (Sec. 402.1(c)(15)).
    (xiii) By any nonparticipating physician, supplier, or other person 
that furnishes physicians' services and does not accept payment on an 
assignment-related basis--
    (A) Knowingly and willfully billing or collecting in excess of the 
limiting charge (as defined in section 1843(g)(2)) on a repeated basis; 
or
    (B) Failing to make an adjustment or refund on a timely basis as 
required by section 1848(g)(1)(A)(iii) or (iv) (Sec. 402.1(c)(17)).
    (xiv) Knowingly and willfully billing for State plan approved 
physicians' services on other than an assignment-related basis for a 
Medicare beneficiary who is also eligible for Medicaid 
(Sec. 402.1(c)(18)).
    (xv) By any supplier of durable medical equipment, including a 
supplier of prosthetic devices, prosthetics, orthotics, or supplies, 
knowingly and willfully failing to make refunds in a timely manner to 
Medicare beneficiaries for services billed on an assignment-related 
basis if--
    (A) The supplier did not possess a Medicare supplier number;
    (B) The service is denied in advance; or
    (C) The service is determined not to be medically necessary or 
reasonable (Sec. 402.1(c)(23)).
    (3) CMS or OIG may impose a penalty of not more than $10,000 for 
each violation, if a person or entity knowingly and willfully bills or 
collects for outpatient therapy or comprehensive rehabilitation services 
other than on an assignment-related basis.
    (4) CMS or OIG may impose a penalty of not more than $10,000 for 
each violation, if a person or entity knowingly and willfully bills or 
collects for outpatient ambulance services other than on an assignment-
related basis.
    (e) $15,000. CMS or OIG may impose a penalty of not more than 
$15,000 if the seller of a Medicare supplemental policy is not the 
issuer, for each violation described in paragraphs (f)(2) and (f)(3) of 
this section (Sec. 402.1 (c)(25) and (c)(26)).
    (f) $25,000. CMS or OIG may impose a penalty of not more than 
$25,000 for each of the following violations:

[[Page 32]]

    (1) Issuance of a Medicare supplemental policy that has not been 
approved by an approved State regulatory program or does not meet 
Federal standards on and after the effective date in section 
1882(p)(1)(C) of the Act (Sec. 402.1(c)(23)).
    (2) Sale or issuance after July 30, 1992, of a Medicare supplemental 
policy that fails to conform with the NAIC or Federal standards 
established under section 1882(p) of the Act (Sec. 402.1(c)(25)).
    (3) Failure to make the core group of basic benefits available for 
sale when selling other Medicare supplemental plans with additional 
benefits (Sec. 402.1(c)(26)).
    (4) Failure to provide, before sale of a Medicare supplemental 
policy, an outline of coverage describing the benefits provided by the 
policy (Sec. 402.1(c)(26)).
    (5) Failure of an issuer of a policy to suspend or reinstate a 
policy, based on the policy holder's request, during entitlement to or 
upon loss of eligibility for medical assistance (Sec. 402.1(c)(27)).
    (6) Failure to provide refunds or credits for Medicare supplemental 
policies as required by section 1882(r)(1)(B) (Sec. 402.1(c)(28)).
    (7) By an issuer of a Medicare supplemental policy--
    (i) Substantial failure to provide medically necessary services to 
enrollees seeking the services through the issuer's network of entities;
    (ii) Imposition of premiums on enrollees in excess of the premiums 
approved by the State;
    (iii) Action to expel an enrollee for reasons other than nonpayment 
of premiums; or
    (iv) Failure to provide each enrollee, at the time of enrollment, 
with the specific information provided in section 1882(t)(1)(E)(i) or 
failure to obtain a written acknowledgment from the enrollee of receipt 
of the information (as required by section 1882(t)(1)(E)(ii)) (section 
1882(t)(2)).
    (g) $100. CMS or OIG may impose a penalty of not more than $100 for 
each violation if the person or entity does not furnish an itemized 
statement to a Medicare beneficiary within 30 days of the beneficiary's 
request.

[63 FR 68690, Dec. 14, 1998, as amended at 66 FR 49546, Sept. 28, 2001]



Sec. 402.107  Amount of assessment.

    A person subject to civil money penalties specified in Sec. 402.1(c) 
may be subject, in addition, to an assessment. An assessment is a 
monetary payment in lieu of damages sustained by HHS or a State agency.
    (a) The assessment may not be more than twice the amount claimed for 
each service that was a basis for the civil money penalty, except for 
the violations specified in paragraph (b) of this section that occur 
before January 1, 1997.
    (b) For the violations specified in this paragraph occurring after 
January 1, 1997, the assessment may not be more than three times the 
amount claimed for each service that was the basis for a civil money 
penalty. The violations are the following:
    (1) Knowingly and willfully billing, and on a repeated basis, for a 
clinical diagnostic laboratory test, other than on an assignment-related 
basis (Sec. 402.1(c)(1)).
    (2) By any durable medical equipment supplier, knowingly and 
willfully charging for a covered service that is furnished on a rental 
basis after the rental payments may no longer be made (except for 
maintenance and servicing) as provided in section 1834(a)(7)(A) 
(Sec. 402.1(c)(4)).
    (3) By any durable medical equipment supplier, knowingly and 
willfully failing, in violation of section 1834(a)(18)(A), to make a 
refund to Medicare beneficiaries for a covered service for which payment 
is precluded due to an unsolicited telephone contact from the supplier 
(Sec. 402.1(c)(5)).
    (4) By any nonparticipating physician or supplier, knowingly and 
willfully charging a Medicare beneficiary more than the limiting charge, 
as specified in section 1834(b)(5)(B), for radiologist services 
(Sec. 402.1(c)(6)).
    (5) By any nonparticipating physician or supplier, knowingly and 
willfully charging a Medicare beneficiary more than the limiting charge 
as specified in section 1834(c)(3), for mammography screening 
(Sec. 402.1(c)(7)).
    (6) By any supplier of prosthetic devices, orthotics, and 
prosthetics, knowingly and willfully charging for a covered prosthetic 
device, orthotic, or prosthetic that is furnished on a rental

[[Page 33]]

basis after the rental payment may no longer be made (except for 
maintenance and servicing) (Sec. 401.2(c)(8)).
    (7) By any supplier of durable medical equipment, including a 
supplier of prosthetic devices, prosthetics, orthotics, or supplies, 
knowingly and willfully failing to make refunds in a timely manner to 
Medicare beneficiaries for services billed other than on an assignment-
related basis if--
    (i) The supplier does not possess a Medicare supplier number;
    (ii) The service is denied in advance; or
    (iii) The service is determined not to be medically necessary or 
reasonable (Sec. 402.1(c)(10)).
    (8) Knowingly and willfully billing or collecting for any services 
on other than an assignment-related basis for a person or entity 
specified in sections 1834(k)(6), 1834(l)(6), or 1842(b)(18)(B) 
(Sec. 402.1(c)(11), (c)(31), or (c)(32)).
    (9) By any physician, knowingly and willfully presenting, or causing 
to be presented, a claim or bill for an assistant at cataract surgery 
performed on or after March 1, 1987 for which payment may not be made 
because of section 1862(a)(15) (Sec. 402.1(c)(12)).
    (10) By any nonparticipating physician who does not accept payment 
on an assignment-related basis, knowingly and willfully failing to 
refund on a timely basis any amounts collected for services that are not 
reasonable or medically necessary or are of poor quality, in accordance 
with section 1842(l)(1)(A) (Sec. 402.1(c)(13)).
    (11) By any nonparticipating physician, who does not accept payment 
for an elective surgical procedure on an assignment-related basis and 
whose charge is at least $500, knowingly and willfully failing to--
    (i) Disclose the information required by section 1842(m)(1) 
concerning charges and coinsurance amounts; and
    (ii) Refund on a timely basis any amount collected for the procedure 
in excess of the charges recognized and approved by the Medicare program 
(Sec. 402.1(c)(14)).
    (12) By any physician, in repeated cases, knowingly and willfully 
billing one or more beneficiaries, for purchased diagnostic tests, any 
amount other than the payment amount specified in section 1842(n)(1)(A) 
or section 1842(n)(1)(B) (Sec. 402.1(c)(15)).
    (13) By any nonparticipating physician, supplier, or other person 
that furnishes physicians' services and does not accept payment on an 
assignment-related basis--
    (i) Knowingly and willfully billing or collecting in excess of the 
limiting charge (as defined in section 1843(g)(2)) on a repeated basis; 
or
    (ii) Failing to make an adjustment or refund on a timely basis as 
required by section 1848(g)(1)(A) (iii) or (iv) (Sec. 402.1(c)(17)).
    (14) Knowingly and willfully billing for State plan approved 
physicians' services on other than an assignment-related basis for a 
Medicare beneficiary who is also eligible for Medicaid 
(Sec. 402.1(c)(18)).
    (15) By any supplier of durable medical equipment, including 
suppliers of prosthetic devices, prosthetics, orthotics, or supplies, 
knowingly and willfully failing to make refunds in a timely manner to 
Medicare beneficiaries for services billed on an assignment-related 
basis if--
    (i) The supplier did not possess a Medicare supplier number;
    (ii) The service is denied in advance; or
    (iii) The service is determined not to be medically necessary or 
reasonable (Sec. 402.1(c)(23)).

[63 FR 68690, Dec. 14, 1998, as amended at 66 FR 49546, Sept. 28, 2001]



Sec. 402.109  Statistical sampling.

    (a) Purpose. CMS or OIG may introduce the results of a statistical 
sampling study to show the number and amount of claims subject to 
sanction under this part that the respondent presented or caused to be 
presented.
    (b) Prima facie evidence. The results of the statistical sampling 
study, if based upon an appropriate sampling and computed by valid 
statistical methods, constitute prima facie evidence of the number and 
amount of claims or requests for payment subject to sanction under 
Sec. 402.1.
    (c) Burden of proof. Once CMS or OIG has made a prima facie case, 
the burden is on the respondent to produce evidence reasonably 
calculated to rebut the findings of the statistical

[[Page 34]]

sampling study. CMS or OIG then has the opportunity to rebut this 
evidence.



Sec. 402.111  Factors considered in determinations regarding the amount of penalties and assessments.

    (a) Basic factors. In determining the amount of any penalty or 
assessment, CMS or OIG takes into account the following:
    (1) The nature of the claim, request for payment, or information 
given and the circumstances under which it was presented or given.
    (2) The degree of culpability, history of prior offenses, and 
financial condition of the person submitting the claim or request for 
payment or giving the information.
    (3) The resources available to the person submitting the claim or 
request for payment or giving the information.
    (4) Such other matters as justice may require.
    (b) Criteria to be considered. As guidelines for taking into account 
the factors listed in paragraph (a) of this section, CMS or OIG 
considers the following circumstances:
    (1) Aggravating circumstances of the incident. An aggravating 
circumstance is any of the following:
    (i) The services or incidents were of several types, occurring over 
a lengthy period of time.
    (ii) There were many of these services or incidents or the nature 
and circumstances indicate a pattern of claims or requests for payment 
for these services or a pattern of incidents.
    (iii) The amount claimed or requested for these services was 
substantial.
    (iv) Before the incident or presentation of any claim or request for 
payment subject to imposition of a civil money penalty, the respondent 
was held liable for criminal, civil, or administrative sanctions in 
connection with a program covered by this part or any other public or 
private program of payment for medical services.
    (v) There is proof that a respondent engaged in wrongful conduct, 
other than the specific conduct upon which liability is based, relating 
to government programs or in connection with the delivery of a health 
care service. (The statute of limitations governing civil money penalty 
proceedings does not apply to proof of other wrongful conduct as an 
aggravating circumstance.)
    (2) Mitigating circumstances. The following circumstances are 
mitigating circumstances:
    (i) All the services or incidents subject to a civil money penalty 
were few in number and of the same type, occurred within a short period 
of time, and the total amount claimed or requested for the services was 
less than $1,000.
    (ii) The claim or request for payment for the service was the result 
of an unintentional and unrecognized error in the process of presenting 
claims or requesting payment and the respondent took corrective steps 
promptly after discovering the error.
    (iii) Imposition of the penalty or assessment without reduction 
would jeopardize the ability of the respondent to continue as a health 
care provider.
    (3) Other matters as justice may require. Other circumstances of an 
aggravating or mitigating nature are taken into account if, in the 
interests of justice, they require either a reduction of the penalty or 
assessment or an increase in order to ensure the achievement of the 
purposes of this part.
    (c) Effect of aggravating or mitigating circumstances. In 
determining the amount of the penalty and assessment to be imposed for 
every service or incident subject to a determination under 
Sec. 402.1(c)--
    (1) If there are substantial or several mitigating circumstances, 
the aggregate amount of the penalty and assessment is set at an amount 
sufficiently below the maximum permitted by Secs. 402.105(a) and 402.107 
to reflect that fact.
    (2) If there are substantial or several aggravating circumstances, 
the aggregate amount of the penalty and assessment is set at an amount 
at or sufficiently close to the maximum permitted by Secs. 402.105(a) 
and 402.107 to reflect that fact.
    (d)(1) The standards set forth in this section are binding, except 
to the extent that their application would result in imposition of an 
amount that would exceed limits imposed by the United States 
Constitution.

[[Page 35]]

    (2) The amount imposed is not less than the approximate amount 
required to fully compensate the United States, or any State, for its 
damages and costs, tangible and intangible, including but not limited to 
the costs attributable to the investigation, prosecution, and 
administrative review of the case.
    (3) Nothing in this section limits the authority of CMS or OIG to 
settle any issue or case as provided by Sec. 402.19 or to compromise any 
penalty and assessment as provided by Sec. 402.115.



Sec. 402.113  When a penalty and assessment are collectible.

    A civil money penalty and assessment become collectible after the 
earliest of the following:
    (a) Sixty days after the respondent receives CMS's or OIG's notice 
of proposed determination under Sec. 402.7, if the respondent has not 
requested a hearing before an ALJ.
    (b) Immediately after the respondent abandons or waives his or her 
appeal right at any administrative level.
    (c) Thirty days after the respondent receives the ALJ's decision 
imposing a civil money penalty or assessment under Sec. 1005.20(d) of 
this title, if the respondent has not requested a review before the DAB.
    (d) If the DAB grants an extension of the period for requesting the 
DAB's review, the day after the extension expires if the respondent has 
not requested the review.
    (e) Immediately after the ALJ's decision denying a request for a 
stay of the effective date under Sec. 1005.22(b) of this title.
    (f) If the ALJ grants a stay under Sec. 1005.22(b) of this title, 
immediately after the judicial ruling is completed.
    (g) Sixty days after the respondent receives the DAB's decision 
imposing a civil money penalty if the respondent has not requested a 
stay of the decision under Sec. 1005.22(b) of this title.



Sec. 402.115  Collection of penalty or assessment.

    (a) Once a determination by HHS has become final, CMS is responsible 
for the collection of any penalty or assessment.
    (b) The General Counsel may compromise a penalty or assessment 
imposed under this part, after consultation with CMS or OIG, and the 
Federal government may recover the penalty or assessment in a civil 
action brought in the United States district court for the district 
where the claim was presented or where the respondent resides.
    (c) The United States or a State agency may deduct the amount of a 
penalty and assessment when finally determined, or the amount agreed 
upon in compromise, from any sum then or later owing to the respondent.
    (d) Matters that were raised or that could have been raised in a 
hearing before an ALJ or in an appeal under section 1128A(e) of the Act 
may not be raised as a defense in a civil action by the United States to 
collect a penalty under this part.

Subpart C--Exclusions [Reserved]



PART 403--SPECIAL PROGRAMS AND PROJECTS--Table of Contents




Subpart A [Reserved]

                Subpart B--Medicare Supplemental Policies

Sec.
403.200  Basis and scope.

                           General Provisions

403.201  State regulation of insurance policies.
403.205  Medicare supplement policy.
403.206  General standards for Medicare supplemental policies.
403.210  NAIC model standards.
403.215  Loss ratio standards.

                        State Regulatory Programs

403.220  Supplemental Health Insurance Panel.
403.222  State with an approved regulatory program.

           Voluntary Certification Program: General Provisions

403.231  Emblem.
403.232  Requirements and procedures for obtaining certification.
403.235  Review and certification of policies.
403.239  Submittal of material to retain certification.
403.245  Loss of certification.
403.248  Administrative review of CMS determinations.

[[Page 36]]

         Voluntary Certification Program: Loss Ratio Provisions

403.250  Loss ratio calculations: General provisions.
403.251  Loss ratio date and time frame provisions.
403.253  Calculation of benefits.
403.254  Calculation of premiums.
403.256  Loss ratio supporting data.
403.258  Statement of actuarial opinion.

      Subpart C--Recognition of State Reimbursement Control Systems

403.300  Basis and purpose.
403.302  Definitions.
403.304  Minimum requirements for State systems--discretionary approval.
403.306  Additional requirements for State systems--mandatory approval.
403.308  State systems under demonstration projects--mandatory approval.
403.310  Reduction in payments.
403.312  Submittal of application.
403.314  Evaluation of State systems.
403.316  Reconsideration of certain denied applications.
403.318  Approval of State systems.
403.320  CMS review and monitoring of State systems.
403.321  State systems for hospital outpatient services.
403.322  Termination of agreements for Medicare recognition of State 
          systems.

Subpart D [Reserved]

         Subpart E--Beneficiary Counseling and Assistance Grants

403.500  Basis, scope, and definition.
403.501  Eligibility for grants.
403.502  Availability of grants.
403.504  Number and size of grants.
403.508  Limitations.
403.510  Reporting requirements.
403.512  Administration.

Subpart F [Reserved]

  Subpart G--Religious Nonmedical Health Care Institutions--Benefits, 
                Conditions of Participation, and Payment

403.700  Basis and purpose.
403.702  Definitions and terms.
403.720  Conditions for coverage.
403.724  Valid election requirements.
403.730  Condition of participation: Patient rights.
403.732  Condition of participation: Quality assessment and performance 
          improvement.
403.734  Condition of participation: Food services.
403.736  Condition of participation: Discharge planning.
403.738  Condition of participation: Administration.
403.740  Condition of participation: Staffing.
403.742  Condition of participation: Physical environment.
403.744  Condition of participation: Life safety from fire.
403.746  Condition of participation: Utilization review.
403.750  Estimate of expenditures and adjustments.
403.752  Payment provisions.
403.754  Monitoring expenditure level.
403.756  Sunset provision.

     Subpart H--Medicare-Endorsed Prescription Drug Card Assistance 
                               Initiative

403.800  Basis and scope.
403.802  Definitions.
403.804  General rules for Medicare endorsement.
403.806  Requirements for eligibility for endorsement.
403.807  Application process.
403.808  Agreement terms and conditions.
403.810  Administrative consortium responsibilities and oversight.
403.811  Beneficiary enrollment.
403.812  Withdrawal of endorsement.
403.820  Oversight and beneficiary education.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

Subpart A [Reserved]



                Subpart B--Medicare Supplemental Policies

    Source: 47 FR 32400, July 26, 1982, unless otherwise noted.



Sec. 403.200  Basis and scope.

    (a) Provisions of the legislation. This subpart implements, in part, 
section 1882 of the Social Security Act. The intent of that section is 
to enable Medicare beneficiaries to identify Medicare supplemental 
policies that do not duplicate Medicare, and that provide adequate, 
fairly priced protection against expenses not covered by Medicare. The 
legislation establishes certain standards for Medicare supplemental 
policies and provides two methods for informing Medicare beneficiaries 
which policies meet those standards:

[[Page 37]]

    (1) Through a State approved program, that is, a program that a 
Supplemental Health Insurance Panel determines to meet certain minimum 
requirements for the regulation of Medicare supplemental policies; and
    (2) In a State without an approved program, through certification by 
the Secretary of policies voluntarily submitted by insuring 
organizations for review against the standards.
    (b) Scope of subpart. This subpart sets forth the standards and 
procedures CMS will use to implement the voluntary certification 
program.

                           General Provisions



Sec. 403.201  State regulation of insurance policies.

    (a) The provisions of this subpart do not affect the right of a 
State to regulate policies marketed in that State.
    (b) Approval of a policy under the voluntary certification program, 
as provided for in Sec. 403.235(b), does not authorize the insuring 
organization to market a policy that does not conform to applicable 
State laws and regulations.



Sec. 403.205  Medicare supplemental policy.

    (a) Except as specified in paragraph (d) of this section, Medicare 
supplemental policy (policy) means a health insurance policy or other 
health benefit plan--
    (1) That a private entity offers to a Medicare beneficiary; and
    (2) That is primarily designed, or is advertised, marketed, or 
otherwise purported to provide payment for expenses incurred for 
services and items that are not reimbursed under the Medicare program 
because of deductibles, coinsurance, or other limitations under 
Medicare.
    (b) Unless otherwise specified in this subpart, the term policy 
includes both policy form and policy.
    (1) Policy form means the form of health insurance contract that is 
approved by and on file with the State agency for the regulation of 
insurance.
    (2) Policy means the contract--
    (i) Issued under the policy form; and
    (ii) Held by the policyholder.
    (c) Medicare supplemental policy includes the following--
    (1) An individual policy.
    (2) A group policy.
    (d) Medicare supplemental policy does not include a Medicare+Choice 
plan or any of the following health insurance policies or health benefit 
plans:
    (1) A policy or plan of one or more employers for employees, former 
employees, or any combination thereof.
    (2) A policy or plan of one or more labor organizations for members, 
former members, or any combination thereof.
    (3) A policy or plan of the trustees of a fund established by one or 
more labor organizations, one or more employers, or any combination, for 
any one or combination of the following--
    (i) Employees.
    (ii) Former employees.
    (iii) Members.
    (iv) Former members.
    (4) A policy or plan of a profession, trade, or occupational 
association, if the association--
    (i) Is composed of individuals all of whom are actively engaged in 
the same profession, trade, or occupation;
    (ii) Has been maintained in good faith for a purpose other than 
obtaining insurance; and
    (iii) Has been in existence for at least two years before the date 
of its initial offering of a Medicare supplemental health insurance 
policy to its members.
    (5) For purposes of the voluntary certification program, a policy 
issued to an employee or to a member of a labor organization as an 
addition to a franchise plan (a plan that enables members of the same 
entity to purchase an individual policy marketed to them under group 
underwriting procedures), if the plan is in existence on July 1, 1982.

[47 FR 32400, July 26, 1982, as amended at 63 FR 35066, June 26, 1998]



Sec. 403.206  General standards for Medicare supplemental policies.

    (a) For purposes of the voluntary certification program described in 
this subpart, a policy must meet--
    (1) The National Association of Insurance Commissioners (NAIC) model 
standards as defined in Sec. 405.210; and

[[Page 38]]

    (2) The loss ratio standards specified in Sec. 403.215.
    (b) Except as specified in paragraph (c) of this section, the 
standards specified in paragraph (a) of this section must be met in a 
single policy.
    (c) In the case of a nonprofit hospital or a medical association 
where State law prohibits the inclusion of all benefits in a single 
policy, the standards specified in paragraph (a) of the section must be 
met in two or more policies issued in conjunction with one another.



Sec. 403.210  NAIC model standards.

    (a) NAIC model standards means the National Association of Insurance 
Commissioners (NAIC) ``Model Regulation to Implement the Individual 
Accident and Insurance Minimum Standards Act'' (as amended and adopted 
by the NAIC on June 6, 1979, as it applies to Medicare supplemental 
policies). Copies of the NAIC model standards can be purchased from the 
National Association of Insurance Commissioners at 350 Bishops Way, 
Brookfield, Wisconsin 53004, and from the NIARS Corporation, 318 
Franklin Avenue, Minneapolis, Minnesota 55404.
    (b) The policy must comply with the provisions of the NAIC model 
standards, except as follows--
    (1) Policy, for purposes of this paragraph, means individual and 
group policy, as specified in Sec. 403.205. The NAIC model standards 
limit ``policy'' to individual policy.
    (2) The policy must meet the loss ratio standards specified in 
Sec. 403.215.

[47 FR 32400, July 26, 1982; 49 FR 44472, Nov. 7, 1984]



Sec. 403.215  Loss ratio standards.

    (a) The policy must be expected to return to the policyholders, in 
the form of aggregate benefits provided under the policy--
    (1) At least 75 percent of the aggregate amount of premiums in the 
case of group policies; and
    (2) At least 60 percent of the aggregate amount of premiums in the 
case of individual policies.
    (b) For purposes of loss ratio requirements, policies issued as a 
result of solicitation of individuals through the mail or by mass media 
advertising are considered individual policies.

                        State Regulatory Programs



Sec. 403.220  Supplemental Health Insurance Panel.

    (a) Membership. The Supplemental Health Insurance Panel (Panel) 
consists of--
    (1) The Secretary or a designee, who serves as chairperson, and
    (2) Four State Commissioners or Superintendents of Insurance 
appointed by the President. (The terms Commissioner or Superintendent of 
Insurance include persons of similar rank.)
    (b) Functions. (1) The Panel determines whether or not a State 
regulatory program for Medicare supplemental health insurance policies 
meets and continues to meet minimum requirements specified in section 
1882 of the Social Security Act.
    (2) The chairperson of the Panel informs the State Commissioners and 
Superintendents of Insurance of all determinations made under paragraph 
(b)(1) of this section.



Sec. 403.222  State with an approved regulatory program.

    (a) A State has an approved regulatory program if the Panel 
determines that the State has in effect under State law a regulatory 
program that provides for the application of standards, with respect to 
each Medicare supplemental policy issued in that State, that are equal 
to or more stringent than those specified in section 1882 of the Social 
Security Act.
    (b) Policy issued in that State means--
    (1) A group policy, if the holder of the master policy resides in 
that State; and
    (2) An individual policy, if the policy is--
    (i) Issued in that State; or
    (ii) Issued for delivery in that State.
    (c) A policy issued in a State with an approved regulatory program 
is considered to meet the NAIC model standards in Sec. 403.210 and loss 
ratio standards in Sec. 403.215.

           Voluntary Certification Program: General Provisions



Sec. 403.231  Emblem.

    (a) The emblem is a graphic symbol, approved by HHS, that indicates 
that

[[Page 39]]

CMS has certified a policy as meeting the requirements of the voluntary 
certification program, specified in Sec. 403.232.
    (b) Unless prohibited by the State in which the policy is marketed, 
the insuring organization may display the emblem on policies certified 
under the voluntary certification program.
    (c) The manner in which the emblem may be displayed and the 
conditions and restrictions relating to its use will be stated in the 
letter with which CMS notifies the insuring organization that a policy 
has been certified. The insuring organization must comply with these 
conditions and restrictions.
    (d) If a certified policy is issued in a State that later has an 
approved regulatory program, as provided for in Sec. 403.222, the 
insuring organization may display the emblem on the policy until the 
earliest of the following--
    (1) When prohibited by State law or regulation.
    (2) When the policy no longer meets the requirements for Medicare 
supplemental policies specified in Sec. 403.206.
    (3) The date the insuring organization would be required to submit 
material to CMS for annual review in order to retain certification, if 
the State did not have an approved program (see Sec. 403.239).



Sec. 403.232  Requirements and procedures for obtaining certification.

    (a) To be certified by CMS, a policy must meet--
    (1) The NAIC model standards specified in Sec. 403.210;
    (2) The loss ratio standards specified in Sec. 403.215; and
    (3) Any State requirements applicable to a policy--
    (i) Issued in that State; or
    (ii) Marketed in that State.
    (b) An insuring organization requesting certification of a policy 
must submit the following to CMS for review--
    (1) A copy of the policy form (including all the documents that 
would constitute the contract of insurance that is proposed to be 
marketed as a certified policy).
    (2) A copy of the application form including all attachments.
    (3) A copy of the uniform certificate issued under a group policy.
    (4) A copy of the outline of coverage, in the form prescribed by the 
NAIC model standards.
    (5) A copy of the Medicare supplement buyers' guide to be provided 
to all applicants if the buyers' guide is not the CMS/NAIC buyers' 
guide.
    (6) A statement of when and how the outline of coverage and the 
buyers' guide will be delivered and copies of applicable receipt forms.
    (7) A copy of the notice of replacement and statement as to when and 
how that notice will be delivered.
    (8) A list of States in which the policy is authorized for sale. If 
the policy was approved under a deemer provision in any State, the 
conditions involved must be specified.
    (9) A copy of the loss ratio calculations, as specified in 
Sec. 403.250.
    (10) Loss ratio supporting data, as specified in Sec. 403.256.
    (11) A statement of actuarial opinion, as specified in Sec. 403.258.
    (12) A statement that the insuring organization will notify the 
policyholders in writing, within the period of time specified in 
Sec. 403.245(c), if the policy is identified as a certified policy at 
the time of sale and later loses certification.
    (13) A signed statement in which the president of the insuring 
organization, or a designee, attests that--
    (i) The policy meets the requirements specified in paragraph (a) of 
this section; and
    (ii) The information submitted to CMS for review is accurate and 
complete and does not misrepresent any material fact.



Sec. 403.235  Review and certification of policies.

    (a) CMS will review policies that the insuring organization 
voluntarily submits, except that CMS will not review a policy issued in 
a State with an approved regulatory program under Sec. 403.222.
    (b) If the requirements specified in Sec. 403.232 are met, CMS will-
-
    (1) Certify the policy; and
    (2) Authorize the insuring organization to display the emblem on the 
policy, as provided for in Sec. 403.231.
    (c) If CMS certifies a policy, it will inform all State 
Commissioners and

[[Page 40]]

Superintendents of Insurance of that fact.



Sec. 403.239  Submittal of material to retain certification.

    (a) CMS certification of a policy that continues to meet the 
standards will remain in effect, if the insuring organization files the 
following material with CMS no later than the date specified in 
paragraph (b) or (c) of this section--
    (1) Any changes in the material, specified in Sec. 403.232(b), that 
was submitted for previous certification.
    (2) The loss ratio supporting data specified in Sec. 403.256(b).
    (3) A signed statement in which the president of the insuring 
organization, or a designee, attests that--
    (i) The policy continues to meet the requirements specified in 
Sec. 403.232(a); and
    (ii) The information submitted to CMS for review is accurate and 
complete and does not misrepresent any material fact.
    (b) Except as specified in paragraph (c) of this section, the 
insuring organization must file the material with CMS no later than June 
30 of each year. The first time the insuring organization must file the 
material is no later than June 30 of the calendar year that follows the 
year in which CMS--
    (1) Certifies a new policy; or
    (2) Certifies a policy that lost certification as provided in 
Sec. 403.245.
    (c) If the loss ratio calculation period, used to calculate the 
expected loss ratio for the last actuarial certification submitted to 
CMS, ends before the June 30 date of paragraph (b) of this section, the 
insuring organization must file the material with CMS no later then the 
last day of that rate calculation period.



Sec. 403.245  Loss of certification.

    (a) A policy loses certification if--
    (1) The insuring organization withdraws the policy from the 
voluntary certification program; or
    (2) CMS determines that--
    (i) The policy fails to meet the requirements specified in 
Sec. 403.232(a); or
    (ii) The insuring organization has failed to meet the requirements 
for submittal of material specified in Sec. 403.239.
    (b) If a policy loses its certification, CMS will inform all State 
Commissioners and Superintendents of Insurance of that fact.
    (c) If a policy that displays the emblem, or that has been marketed 
as a certified policy without the emblem, loses certification, the 
insuring organization must notify each holder of the policy, or of a 
certificate issued under the policy, of that fact. The notice must be in 
writing and sent by the earlier of--
    (1) The date of the first regular premium notice after the date the 
policy loses its certification; or
    (2) 60 days after the date the policy loses its certification.



Sec. 403.248  Administrative review of CMS determinations.

    (a) This section provides for administrative review if CMS 
determines--
    (1) Not to certify a policy; or
    (2) That a policy no longer meets the standards for certification.
    (b) If CMS makes a determination specified in paragraph (a) of this 
section, it will send a notice to the insuring organization containing 
the following information:
    (1) That CMS has made such a determination.
    (2) The reasons for the determination.
    (3) That the insuring organization has 30 days from the date of the 
notice to--
    (i) Request, in writing, an administrative review of the CMS 
determination; and
    (ii) Submit additional information to CMS for review.
    (4) That, if the insuring organization requests an administrative 
review, CMS will conduct the review, as provided for in paragraph (c) of 
this section.
    (5) That, in a case involving loss of certification, the CMS 
determination will go into effect 30 days from the date of the notice, 
unless the insuring organization requests an administrative review. If 
the insuring organization requests an administrative review, the policy 
retains its certification until CMS makes a final determination.

[[Page 41]]

    (c) If the insuring organization requests an administrative review, 
CMS will conduct the review as follows--
    (1) A CMS official, not involved in the initial CMS determination, 
will initiate and complete an administrative review within 90 days of 
the date of the notice provided for in paragraph (b) of this section.
    (2) The official will consider--
    (i) The original material submitted to CMS for review, as specified 
in Sec. 403.232(b) or Sec. 403.239(a); and
    (ii) Any additional information, that the insuring organization 
submits to CMS.
    (3) Within 15 days after the administrative review is completed, CMS 
will inform the insuring organization in writing of the final decision, 
with an explanation of the final decision.
    (4) If the final decision is that a policy lose its certification, 
the loss of certification will go into effect 15 days after the date of 
CMS's notice informing the insuring organization of the final decision.

         Voluntary Certification Program: Loss Ratio Provisions



Sec. 403.250  Loss ratio calculations: General provisions.

    (a) Basic formula. The expected loss ratio is calculated by 
determining the ratio of benefits to premiums.
    (b) Calculations. The insuring organization must calculate loss 
ratios according to the provisions of Secs. 403.251, 403.253, and 
403.254.



Sec. 403.251  Loss ratio date and time frame provisions.

    (a) Initial calculation date means the first date of the period that 
the insuring organization uses to calculate the policy's expected loss 
ratio.
    (1) The initial calculation date may be before, the same as, or 
after the date the insuring organization sends the policy to CMS for 
review, except--
    (2) The initial calculation date must not be earlier than January 1 
of the calendar year in which the policy is sent to CMS.
    (b) Loss ratio calculation period means the period beginning with 
the initial calculation date and ending with the last day of the period 
for which the insuring organization calculates the policy's scale of 
premiums.
    (c) To calculate ``present values'', the insuring organization may 
ignore discounting (an actuarial procedure that provides for the impact 
of a variety of factors, such as lapse of policies) for loss ratio 
calculation periods not exceeding 12 months.



Sec. 403.253  Calculation of benefits.

    (a) General provisions. (1) Except as provided for in paragraph 
(a)(2) of this section, calculate the amount of ``benefits'' by--
    (i) Adding the present values on the initial calculation date of--
    (A) Expected incurred benefits in the loss ratio calculation period, 
to--
    (B) The total policy reserve at the last day of the loss ratio 
calculation period: and
    (ii) Subtracting the total policy reserve on the initial calculation 
date from the sum of these values.
    (2) To calculate the amount of ``benefits'' in the case of community 
or pool rated individual or group policies rerated on an annual basis, 
calculate the expected incurred benefits in the loss ratio calculation 
period.
    (b) Calculation of total policy reserve--(1) Option for calculation. 
The insuring organization must calculate ``total policy reserve'' 
according to the provisions of paragraph (b) (2) or (3) of this section.
    (2) Total policy reserve: Federal provisions. (i) ``Total policy 
reserve'' means the sum of--
    (A) Additional reserve; and
    (B) The reserve for future contingent benefits.
    (ii) Additional reserve means the amount calculated on a net level 
reserve basis, using appropriate values to account for lapse, mortality, 
morbidity, and interest, that on the valuation date represents--
    (A) The present value of expected incurred benefits over the loss 
ratio calculation period; less--
    (B) The present value of expected net premiums over the loss ratio 
calculation period.
    (iii) Net premium means the level portion of the gross premium used 
in calculating the additional reserve. On the day the policy is issued, 
the present

[[Page 42]]

value of the series of those portions equals the present value of the 
expected incurred claims over the period that the gross premiums are 
computed to provide coverage.
    (iv) Reserve for future contingent benefits means the amounts, not 
elsewhere included, that provide for the extension of benefits after 
insurance coverage terminates. These benefits--
    (A) Are predicated on a health condition existing on the date 
coverage ends;
    (B) Accrue after the date coverage ends; and
    (C) Are payable after the valuation date.
    (3) Total policy reserve: State provisions. ``Total policy reserve'' 
means the total policy reserve calculated according to appropriate State 
law or regulation.



Sec. 403.254  Calculation of premiums.

    (a) General provisions. To calculate the amount of ``premiums'', 
calculate the present value on the initial calculation date of expected 
earned premiums for the loss ratio calculation period.
    (b) Specific provisions. (1) Earned premium for a given period 
means--
    (i) Written premiums for the period; plus--
    (ii) The total premium reserve at the beginning of the period; less-
-
    (iii) The total premium reserve at the end of the period.
    (2) Written premiums in a period means--
    (i) Premiums collected in that period; plus--
    (ii) Premiums due and uncollected at the end of that period; less--
    (iii) Premiums due and uncollected at the beginning of that period.
    (3) Total premium reserve means the sum of--
    (i) The unearned premium reserve;
    (ii) The advance premium reserve; and
    (iii) The reserve for rate credits.
    (4) Unearned premium reserve means the portion of gross premiums due 
that provide for days of insurance coverage after the valuation date.
    (5) Advance premium reserve means premiums received by the insuring 
organization that are due after the valuation date.
    (6) Reserve for rate credits means rate credits on a group policy 
that--
    (i) Accrue by the valuation date of the policy; and
    (ii) Are paid or credited after the valuation date.



Sec. 403.256  Loss ratio supporting data.

    (a) For purposes of requesting CMS certification under Sec. 403.232, 
the insuring organization must submit the following loss ratio data to 
CMS for review--
    (1) A statement of why the policy is to be considered, for purposes 
of the loss ratio standards, an individual or a group policy.
    (2) The earliest age at which policyholders can purchase the policy.
    (3) The general marketing method and the underwriting criteria used 
for the selection of applicants to whom coverage is offered.
    (4) What policies are to be included under the one policy form, by 
the dates the policies are issued.
    (5) The loss ratio calculation period.
    (6) The scale of premiums for the loss ratio calculation period.
    (7) The expected level of earned premiums in the loss ratio 
calculation period.
    (8) The expected level of incurred claims in the loss ratio 
calculation period.
    (9) A description of how the following assumptions were used in 
calculating the loss ratio.
    (i) Morbidity.
    (ii) Mortality.
    (iii) Lapse.
    (iv) Assumed increases in the Medicare deductible.
    (v) Impact of inflation on reimbursement per service.
    (vi) Interest.
    (vii) Expected distribution, by age and sex, of persons who will 
purchase the policy in the coming year.
    (viii) Expected impact on morbidity by policy duration of--
    (A) The process used to select insureds from among those that apply 
for a policy; and
    (B) Pre-existing condition clauses in the policy.

[[Page 43]]

    (b) For purposes of requesting continued CMS certification under 
Sec. 403.239(a), the insuring organization must submit the following to 
CMS--
    (1) A description of all changes in the loss ratio data, specified 
in paragraph (a) of this section, that occurred since CMS last reviewed 
the policy.
    (2) The past loss ratio experience for the policy, including the 
experience of all riders and endorsements issued under the policy. The 
loss ratio experience data must include earned premiums, incurred 
claims, and total policy reserves that the insuring organization 
calculates--
    (i) For all years of issue combined; and
    (ii) Separately for each calendar year since CMS first certified the 
policy.



Sec. 403.258  Statement of actuarial opinion.

    (a) For purposes of certification requests submitted under 
Sec. 403.232(b) and subsequent review as specified in Sec. 403.239(a), 
statement of actuarial opinion means a signed declaration in which a 
qualified actuary states that the assumptions used in calculating the 
expected loss ratio are appropriate and reasonable, taking into account 
actual policy experience, if any, and reasonable expectations.
    (b) Qualified actuary means--
    (1) A member in good standing of the American Academy of Actuaries; 
or
    (2) A person who has otherwise demonstrated his or her actuarial 
competence to the satisfaction of the Commissioner or Superintendent of 
Insurance of the domiciliary State of the insuring organization.



      Subpart C--Recognition of State Reimbursement Control Systems

    Source: 51 FR 15492, Apr. 24, 1986, unless otherwise noted.



Sec. 403.300  Basis and purpose.

    (a) Basis. This subpart implements section 1886(c) of the Act, which 
authorizes payment for Medicare inpatient hospital services in 
accordance with a State's reimbursement control system rather than under 
the Medicare reimbursement principles as described in CMS's regulations 
and instructions.
    (b) Purpose. Contained in this subpart are--
    (1) The basic requirements that a State reimbursement control system 
must meet in order to be approved by CMS;
    (2) A description of CMS's review and evaluation procedures; and
    (3) The conditions that apply if the system is approved.



Sec. 403.302  Definitions.

    For purposes of this subpart--
    Chief executive officer of a State means the Governor of the State 
or the Governor's designee.
    Existing demonstration project refers to demonstration projects 
approved by CMS under the authority of section 402(a) of the Social 
Security Amendments of 1967 (42 U.S.C. 1395b-1) or section 222(a) of the 
Social Security Amendments of 1972 (42 U.S.C. 1395b-1 (note)) and in 
effect on April 20, 1983 (the date of the enactment of Pub. L. 98-21 
(Social Security Amendments of 1983)).
    Federal hospital means a hospital that is administered by, or that 
is under exclusive contract with, the Department of Defense, the 
Veterans Administration, or the Indian Health Service.
    State system or system refers to a State reimbursement control 
system that is approved by CMS under the authority of section 1886(c) of 
the Act and that satisfies the requirements described in this subpart.



Sec. 403.304  Minimum requirements for State systems--discretionary approval.

    (a) Discretionary approval by CMS. CMS may approve Medicare payments 
under a State system, if CMS determines that the system meets the 
requirements in paragraphs (b) and (c) of this section and, if 
applicable paragraph (d) of this section.
    (b) Requirements for State system. (1) An application for approval 
of the system must be submitted to CMS by the Chief Executive Officer of 
the State.
    (2) The State system must apply to substantially all non-Federal 
acute care hospitals in the State.

[[Page 44]]

    (3) All hospitals covered by the system must have and maintain a 
utilization and quality control review agreement with a Quality 
Improvement Organization, as required under section 1866(a)(1)(F) of the 
Act and Sec. 466.78(a) of this chapter.
    (4) Federal hospitals must be excluded from the State system.
    (5) Nonacute care or specialty hospital (such as rehabilitation, 
psychiatric, or children's hospitals) may, at the option of the State, 
be excluded from the State system.
    (6) The State system must apply to at least 75 percent of all 
revenues or expenses--
    (i) For inpatient hospital services in the State; and
    (ii) For inpatient hospital services under the State's Medicaid 
plan.
    (7) Under the system, HMOs and competitive medical plans (CMPs), as 
defined by section 1876(b) of the Act and part 417 of this chapter, must 
be allowed to negotiate payment rates with hospitals.
    (8) The system must limit hospital charges for Medicare 
beneficiaries to deductibles, coinsurance or non-covered services.
    (9) Unless a waiver is granted by CMS under Sec. 489.23 of this 
chapter, the system must prohibit payment, as required under section 
1862(a)(14) of the Act and Sec. 405.310(m) of this chapter, for 
nonphysician services provided to hospital inpatients under Part B of 
Medicare.
    (10) The system must require hospitals to submit Medicare cost 
reports or approved reports in lieu of Medicare cost reports as 
required.
    (11) The system must require--
    (i) Preparation, collection, or retention by the State of reports 
(such as financial, administrative, or statistical reports) that may be 
necessary, as determined by CMS, to review and monitor the State's 
assurances; and
    (ii) Submission of the reports to CMS upon request.
    (12) The system must provide hospitals an opportunity to appeal 
errors that they believe have been made in the determination of their 
payment rates. The system, if it is prospective may not permit providers 
to file administrative appeals that would result in a retroactive 
revision of prospectively determined payment rates.
    (c) Satisfactory assurances. The State must provide to CMS 
satisfactory assurance as to the following:
    (1) The system provides for equitable treatment of hospital patients 
and hospital employees.
    (2) The system provides for equitable treatment of all entities that 
pay hospitals for inpatient hospital services, including Federal and 
State programs. Under the requirement, the following conditions must be 
met:
    (i) Both the Medicare and Medicaid programs must participate under 
the system.
    (ii) The State must assure equitable and uniform treatment under the 
system of third-party payors of inpatient hospital services in terms of 
opportunity. Equitable opportunity must include, but need not be limited 
to, participation in the system and availability of discounts. Criteria 
under which discounts are made available must be equitably and uniformly 
applied to all payors, except for discounts negotiated by HMOs and CMPs. 
Discounts available to HMOs and CMPs as result of their statutory right 
to negotiate payment rates independently of a State system, as described 
in paragraph (b)(7) of this section, need not be available to other 
payors.
    (iii) The State must assure that all third-party payors that 
participate under the system share in the system's risks and benefits.
    (3) The amount of Medicare payments made under the system over 36-
month periods may not exceed the amount of Medicare payment that would 
otherwise have been made under the Medicare principles of reimbursement 
for Medicare items and services had the State system not been in effect. 
States must submit the assurance and supporting data as required by 
Sec. 403.320 to document that the payment limit is not exceeded. States 
that have an existing Medicare demonstration project in effect on April 
20, 1983, and that have requested approval of a State system under 
section 1886(c)(4) of the Act, may elect to have the effectiveness of 
the State system under this paragraph judged on the basis of the State 
system's rate of increase or inflation in

[[Page 45]]

Medicare inpatient hospital payments as compared to the national rate of 
increase or inflation for such payments during the three cost reporting 
periods of the hospitals in the State beginning on or after October 1, 
1983.
    (d) Additional cost-effectiveness assurance. If the assurances and 
supporting data required under paragraph (c)(3) of this section are 
insufficient to provide assurance satisfactory to CMS regarding the 
cost-effectiveness of a State system, the State may additionally submit 
one of the following assurances in order to meet the cost-effectiveness 
test:
    (1) State responsibility for excess payments. The State must agree 
that each month Medicare intermediaries will disburse to the State's 
hospital Federal funds that in the aggregate equal no more than would 
have been disbursed in the absence of the State system. Any additional 
funds necessary to pay hospitals for Medicare services required by the 
State system will be paid to the intermediaries by the State. These 
additional amounts will be refunded to the State by the intermediaries 
to the extent that, in subsequent months, the State system requires a 
smaller aggregate payment for Medicare services than would have been 
paid in the absence of the State system.
    (2) Limitations on payments. (i) The State must agree that if its 
projections exceed what Medicare would pay in any particular period, the 
State and CMS will establish and agreed upon payment schedule that will 
limit payments under the State system based on a predetermined 
percentage relationship between projected State payments and what 
payments would have been under Medicare.
    (ii) If deviation from the predetermined relationship described in 
paragraph (d)(2)(i) of this section occurs, the State must further agree 
that--
    (A) Medicare payments would be capped automatically at payment 
levels based on the rates used for the Medicare prospective payment 
system and the State would be required to pay the difference to 
individual hospitals in its system; or
    (B) The State may provide by legislation or legally binding 
regulations that any reduced payments to hospitals under the system that 
result from this cost-effectiveness assurance will constitute full and 
final payment for hospital services furnished to Medicare beneficiaries 
for the period covered by these reduced payments.



Sec. 403.306  Additional requirements for State systems--mandatory approval.

    (a) General policy--(1) Mandatory approval. HFCA will approve an 
application for Medicare reimbursement under a State system if the 
system meets all of the requirements of Sec. 403.304 and of paragraph 
(b) of this section.
    (2) Exception. CMS may approve an application if the State system 
meets all of the requirements of Sec. 403.304 but only some of the 
requirements of paragraph (b) of this section.
    (b) Additional requirements--(1) Operation of system. The system 
must--
    (i) Be operated directly by the State or by entity designated under 
State law;
    (ii) Provide for payments to hospitals using a methodology under 
which--
    (A) Prospectively determined payment rates are established; and
    (B) Exceptions, adjustments, and methods for changes in methodology 
are set forth;
    (iii) Provide that a change by the State in the system that has the 
effect of materially changing payments to hospitals can take effect only 
upon 60 days notice to CMS and to the hospitals likely to be materially 
affected by the change and upon CMS's approval of the change.
    (2) Satisfactory assurances--(i) Admissions practice. The State must 
assure that the operation of the system will not result in any change in 
hospital admission practices that result in--
    (A) A significant reduction in the proportion of patients receiving 
hospital services covered under the system who have no third-party 
coverage and who are unable to pay for hospital services;
    (B) A significant reduction in the proportion of individuals 
admitted to hospitals for inpatient hospital services for which payment 
is less, or is likely to be less, than the anticipated charges for or 
cost of the services;

[[Page 46]]

    (C) A refusal to admit patients who would be expected to require 
unusually costly or prolonged treatment for reasons other than those 
related to the appropriateness of the care available at the hospital; or
    (D) A refusal to provide emergency services to any person who is in 
need of emergency services, if the hospital provides the services.
    (ii) Consultation with local government officials. The State must 
provide documentation that it has consulted with local government 
officials concerning the impact of the system on publicly owned or 
operated hospitals.



Sec. 403.308  State systems under demonstration projects--mandatory approval.

    CMS will approve an application from a State for a State system if--
    (a) The system was in effect prior to April 20, 1983 under an 
existing demonstration project; and
    (b) The minimum requirements and assurances for approval of a State 
system are met under Sec. 403.304 (b)(1)-(10) and Sec. 403.304(c), and, 
if appropriate Sec. 403.304(d).



Sec. 403.310  Reduction in payments.

    (a) General rule. If CMS determines that the satisfactory assurances 
required of a State under Sec. 403.304(c) and, if applicable, 
Sec. 403.304(d) have not been met, or will not be met, with respect to 
any 36-month period, CMS will reduce Medicare payments to individual 
hospitals being reimbursed under the State's system or, if applicable, 
under the Medicare payment system, in an amount equal to the amount by 
which the Medicare payments under the system exceed the amount of 
Medicare payments to such hospitals that otherwise would have been made 
not using the State system. The amount of the recoupment will include, 
when appropriate, interest charges computed in accordance with 
Sec. 405.378 of this chapter.
    (b) Recoupment procedures. The amount of the overpayment will be 
recouped on a proportionate basis from each of those hospitals that 
received payments under the State system that exceeded the payments they 
would have received under the Medicare payment system. Each hospital's 
share of the aggregate excess payment will be determined on the basis of 
a comparison of the hospital's proportionate share of the aggregate 
payment received under the State system that is in excess of what the 
aggregate payment would have been under the Medicare payment system. 
Recoupments may be accomplished by a hospital's direct payment to the 
Medicare program or by offsets to future payments made to the hospital.
    (c) Alternative recoupment procedures. As an alternative to the 
recoupment procedures described in paragraph (b) of this section and 
subject to CMS's acceptance, the State may provide, by legislation or 
legally binding regulations, procedures for the recoupment of the amount 
of payments that exceed the amount of payments that otherwise would have 
been paid by Medicare if the State system had not been in effect.
    (d) Rule for existing Medicare demonstration projects. In cases of 
existing Medicare demonstration projects where the expenditure test is 
to be applied by a rate of increase factor, the amount of the excess 
payment will be determined, for the three hospital cost reporting 
periods beginning before October 1, 1986, by a comparison of the State 
system's rate of increase to the national rate of increase. Recoupment 
of excessive payments will be assessed and recouped as described in this 
section.

[51 FR 15492, Apr. 24, 1986, as amended at 61 FR 63748, Dec. 2, 1996]



Sec. 403.312  Submittal of application.

    The Chief Executive Officer of the State is responsible for--
    (a) Submittal of the application to CMS for approval; and
    (b) Supplying the assurances and necessary documentation as required 
under Secs. 403.304 through 403.308.



Sec. 403.314  Evaluation of State systems.

    CMS will evaluate all State applications for approval of State 
systems and notify the State of its determination within 60 days.

[[Page 47]]



Sec. 403.316  Reconsideration of certain denied applications.

    (a) Request for reconsideration. If CMS denies an application for a 
State system, the State may request that CMS reconsider the denial if 
the State believes that its system meets all of the requirements for 
mandatory approval under Secs. 403.304 and 403.306 or, in the case of a 
State with a system operating under an existing demonstration project, 
the applicable requirements of Secs. 403.304 and 403.308.
    (b) Time limit. (1) The State must submit its request for 
reconsideration within 60 days after the date of CMS's notice that the 
application was denied.
    (2) CMS will notify the State of the results of its reconsideration 
within 60 days after it receives the request for reconsideration.



Sec. 403.318  Approval of State systems.

    (a) Approval agreement. If CMS approves a State system, a written 
agreement will be executed between CMS and the Chief Executive Officer 
of the State. The agreement must incorporate any terms of the State's 
application for approval of the system as agreed to by the parties and, 
as a minimum, must contain provisions that require the following:
    (1) The system is operated directly by the State or an entity 
designated by State law.
    (2) For purposes of the Medicare program, the State's system applies 
only to Medicare payments for inpatient, and if applicable, outpatient 
hospital services.
    (3) The system conforms to applicable Medicare law and regulations 
other than those relating to the amount of reimbursement for inpatient 
hospital services, or for inpatient and outpatient services, whichever 
the State system covers. Applicable regulations include, for example, 
those describing Medicare benefits and entitlement requirements for 
program beneficiaries, as explained in parts 406 and 409 of this 
chapter; the requirements at part 405, subpart J of this chapter 
specifying conditions of participation for hospitals; the requirements 
at part 405, subparts A, G, and S of this chapter on Medicare program 
administration; and all applicable fraud and abuse regulations contained 
in titles 42 and 45 of the CFR.
    (4) The State must obtain CMS's approval of the State's reporting 
forms and of provider cost reporting forms or other forms that have not 
been approved by CMS but that are necessary for the collection of 
required information.
    (b) Effective date. An approved State system may not be effective 
earlier than the date of the approval agreement, which may not be 
retroactive.



Sec. 403.320  CMS review and monitoring of State systems.

    (a) General rule. The State must submit an assurance and detailed 
and quantitative studies of provider cost and financial data and 
projections to support the effectiveness of its system, as required by 
paragraphs (b) and (c) of this section.
    (b) Required information. (1) Under Sec. 403.304(c)(3) an assurance 
is required that the system will not result in greater payments over a 
36-month period than would have otherwise been made under Medicare not 
using such system. If a State that has an existing demonstration project 
in effect on April 20, 1983 elects under Sec. 403.304(c)(3) to have the 
effectiveness of its system judged on the basis of a rate of increase 
factor, the State must submit an assurance that its rate of increase or 
inflation in inpatient hospital payments does not exceed, for that 
portion of the 36-month period that is subject to this test, the 
national rate of increase or inflation in Medicare inpatient hospital 
payments. The election of the rate of increase test applies only to the 
three cost reporting periods beginning on or after October 1, 1983. At 
the end of these cost reporting periods, the State must assure, 
beginning with the first month after the expiration of the third cost 
reporting period beginning after October 1, 1983, that payments under 
its system will not exceed over the remainder of the 36-month period 
what Medicare payments would have been.
    (2) Estimates and data are required to support the State's 
assurance, required under Sec. 403.304(c)(3), that expenditures under 
the State system will not exceed what Medicare would have paid

[[Page 48]]

over a 36-month period. The estimates and projections of what Medicare 
would have otherwise paid must take into account all the Medicare 
reimbursement principles in effect at the time and, for any period in 
which payments either exceed or are less than Medicare levels, the 
values of interest the Medicare Trust Fund earned, or would have earned, 
on these amounts. Upon application for approval, the State must submit 
projections for each hospital for the first 12-month period covered by 
the assurance, in both the aggregate and on a per discharge basis, of 
Medicare inpatient expenditures under Medicare principles of 
reimbursement and parallel projections of Medicare inpatient 
expenditures under the State's system and the resulting cost or savings 
to Medicare. The State must also submit separate statewide projections 
for each year of the 36-month period, in both the aggregate and on a 
weighted average discharge basis, of inpatient expenditures under the 
State system and under the Medicare principles of reimbursement.
    (3) The projection submitted under paragraph (b)(2) of this section 
must include a detailed description of the methodology and assumptions 
used to derive the expenditure amounts under both systems. In instances 
where the assumptions are different under the projections cited in 
paragraph (b)(2) of this section, the State must provide a detailed 
explanation of the reasons for the differences. At a minimum, the 
following separate data and assumptions are to be included in the 
projections for the Medicare principles and for the State's system.
    (i) The State system base year and the Medicare allowable and 
reimbursable cost of each hospital that the State used to develop the 
projections, including the amount of estimated pass through costs.
    (ii) The categories of costs that are included in the State system 
and are reimbursed differently under the State system than under the 
Medicare system.
    (iii) The number of Medicare and total base year discharges and 
admissions for each hospital.
    (iv) The rate of change factor (and the method of application of 
this factor) used to project the base year costs over the 36-month 
period to which the assurance would apply.
    (v) Any allowance for anticipated growth in the amount of services 
from the base year (if applicable, the allowance must be presented in 
separate estimates for population increases or for increases in rates of 
admissions or both).
    (vi) Any adjustment in which the State is permitted by CMS to take 
into account previous reductions in the Medicare payment amounts that 
were the result of the effectiveness of the State's system even though 
Medicare was not a part of that system.
    (vii) Appropriate recognition and projection of the time value of 
trust fund expenditures for the period the State system expenditures 
were either less than or exceeded the Medicare system payments.
    (viii) States applying under a rate of increase effectiveness test 
under Sec. 403.304(c)(3) must also submit data projecting the parallel 
rates of increase during the requisite period.
    (4) The projections must include both the aggregate payments and the 
payments per discharge for the individual hospitals and for the State as 
a whole.
    (5) On a case-by-case basis. CMS may require additional data and 
documentation as needed to complete its review and monitoring.
    (6) For existing Medicare demonstration projects in effect on April 
20, 1983, the assurance and data as required by paragraphs (a) and (b) 
of this section, if appropriate, may be based on aggregate payments or 
payments per inpatient admission or discharge. CMS will judge the 
effectiveness of these systems on the basis of the rate of increase or 
inflation in Medicare inpatient hospital payments compared to the 
national rate of increase or inflation for such payments during the 
State's hospitals' three cost reporting periods beginning on or after 
October 1, 1983. The data submitted by the State for the period subject 
to the rate of increase test must include the rate of increase 
projection for that particular period of time. For the subsequent period 
of time, the State must assure that payments under its system will not 
exceed

[[Page 49]]

what Medicare payments would have been, as described in 
Sec. 403.304(c)(3).
    (7) If the amount of Medicare payments under the State system 
exceeds what would have been paid under the Medicare reimbursement 
principles in any given year, the State must also submit quantitative 
evidence that the system will result in expenditures that do not exceed 
what Medicare expenditures would have been over the 36 month period 
beginning with the first month that the State system is operating. For a 
State that has an existing demonstration project in effect on April 20, 
1983, and that elects under Sec. 403.304(c)(3) to have a rate of 
increase test apply, if the State's rate of increase or inflation 
exceeds the national rate of increase or inflation in a given year, the 
State must submit quantitative evidence that, over 36 months, its 
payments will not exceed the national rate of increase or inflation. 
Furthermore, if payments under the State's system must be compared to 
actual Medicare expenditures, at the end of the third cost reporting 
period, as described in paragraph (b)(1) of this section, and payments 
under the State's system exceed what Medicare would have paid in a given 
year, the State must submit quantitative evidence that, over 36 months, 
payments under its system will not exceed what Medicare would have paid.
    (c) Review of assurances regarding expenditures. CMS will review the 
State's assurances and data submitted under this section, as a 
prerequisite to the approval of the State's system. CMS will compare the 
State's projections of payment amounts to CMS data in order to determine 
if the State's assurance is reasonable and fully supportable. If the CMS 
data indicate that the State's system would result in payment amounts 
that would be more then that which would have been paid under the 
Medicare principles, the State's assurances would not be acceptable. For 
States applying in accordance with Sec. 403.308, if CMS data indicate 
that the State's system would result in a rate of increase or inflation 
that would be more than the national rate of increase or inflation, the 
State's assurances would not be acceptable.
    (d) Medicaid upper limit. In accordance with Sec. 447.253 of this 
chapter, the State system may not result in aggregate payments for 
Medicaid inpatient hospital services that would exceed the amount that 
would have otherwise have been paid under the Medicare principles as 
applied through the State system.
    (e) Monitoring of Medicare expenditures. CMS will monitor on a 
quarterly basis expenditures under the State's system as compared to 
what Medicare expenditures would have been if the system had not been in 
effect. If CMS determines at any time that the payments made under the 
State's system exceed the States' projections, as established by the 
satisfactory assurances required under Sec. 403.304(c) and, if 
appropriate, the predetermined percentage relationship of the payments 
as required under Sec. 403.304(d). CMS will--
    (1) Conclude that payments under the State system over a 36-month 
period will exceed what Medicare would have paid:
    (2) Terminate the waiver; and
    (3) Recoup overpayments to the affected hospitals in accordance with 
the procedures described in Sec. 403.310.



Sec. 403.321  State systems for hospital outpatient services.

    CMS may approve a State's application for approval of an outpatient 
system if the following conditions are met:
    (a) The State's inpatient system is approved.
    (b) The State's outpatient application meets the requirements and 
assurances for an inpatient system described in Sec. 403.304 (b) and 
(c), and Sec. 403.306 (b)(1) and (b)(2)(ii).
    (c) The State submits a separate application that provides separate 
assurances and estimates and data in further support of its assurance 
submitted under paragraph (b)(1) of Sec. 403.320, as follows:
    (1) Upon application for approval, the State must submit estimates 
and data that include, but are not limited to, projections for the first 
12-month period covered by the assurance for each hospital, in both the 
aggregate and on

[[Page 50]]

an average cost per service and payment basis, of Medicare outpatient 
expenditures under Medicare principles of reimbursement; parallel 
projections of Medicare outpatient expenditures under the State system; 
and the resulting cost or savings to Medicare independent of the State 
system for hospital inpatient services.
    (2) The State must submit separate statewide projections for each 
year of the 36-month period of the aggregate outpatient expenditures for 
each system. The projections submitted under this paragraph must--
    (i) Comply with the requirements of paragraphs (b) (3) and (5) of 
Sec. 403.320 regarding a detailed description of the methodology used to 
derive the expenditure amounts:
    (ii) Include the data and assumptions set forth in paragraphs (b)(3) 
(i), (ii), (iii), (iv), and (v) of Sec. 403.320; and
    (iii) Include any assumption the State has adopted for establishing 
the number of Medicare and total base year outpatient services for each 
hospital.
    (3) The State must provide a detailed explanation of the reasons for 
any difference between the data or assumptions used for the separate 
projections.



Sec. 403.322  Termination of agreements for Medicare recognition of State systems.

    (a) Termination of agreements. (1) CMS may terminate any approved 
agreement if it finds, after the procedures described in this paragraph 
are followed that the State system does not satisfactorily meet the 
requirements of section 1886(c) of the Act or the regulations in this 
subpart. A termination must be effective on the last day of a calendar 
quarter.
    (2) CMS will give the State reasonable notice of the proposed 
termination of an agreement and of the reasons for the termination at 
least 90 days before the effective date of the termination.
    (3) CMS will give the State the opportunity to present evidence to 
refute the finding.
    (4) CMS will issue a final notice of termination upon a final review 
and determination on the State's evidence.
    (b) Termination by State. A State may voluntarily terminate a State 
system by giving CMS notice of its intent to terminate. A termination 
must be effective on the last day of a calendar quarter. The State must 
notify CMS of its intent to terminate at least 90 days before the 
effective date of the termination.

Subpart D [Reserved]



         Subpart E--Beneficiary Counseling and Assistance Grants

    Source: 59 FR 51128, Oct. 7, 1994, unless otherwise noted.



Sec. 403.500  Basis, scope, and definition.

    (a) Basis. This subpart implements, in part, the provisions of 
section 4360 of Public Law 101-508 by establishing a minimum level of 
funding for grants made to States for the purpose of providing 
information, counseling, and assistance relating to obtaining adequate 
and appropriate health insurance coverage to individuals eligible to 
receive benefits under the Medicare program.
    (b) Scope of subpart. This subpart sets forth the following:
    (1) Conditions of eligibility for the grant.
    (2) Minimum levels of funding for those States qualifying for the 
grants.
    (3) Reporting requirements.
    (c) Definition. For purposes of this subpart, the term ``State'' 
includes (except where otherwise indicated by the context) the 50 
States, the District of Columbia, the Commonwealth of Puerto Rico, the 
Virgin Islands, Guam, and American Samoa.



Sec. 403.501  Eligibility for grants.

    To be eligible for a grant under this subpart, the State must have 
an approved Medicare supplemental regulatory program under section 1882 
of the Act and submit a timely application to CMS that meets the 
requirements of--
    (a) Section 4360 of Public Law 101-508 (42 USC 1395b-4);
    (b) This subpart; and
    (c) The applicable solicitation for grant applications issued by 
CMS.

[[Page 51]]



Sec. 403.502  Availability of grants.

    CMS awards grants to States subject to availability of funds, and if 
applicable, subject to the satisfactory progress in the State's project 
during the preceding grant period. The criteria by which progress is 
evaluated and the performance standards for determining whether 
satisfactory progress has been made are specified in the terms and 
conditions included in the notice of grant award sent to each State. CMS 
advises each State as to when to make application, what to include in 
the application, and provides information as to the timing of the grant 
award and the duration of the grant award. CMS also provides an estimate 
of the amount of funds that may be available to the State.

[65 FR 34985, June 1, 2000]



Sec. 403.504  Number and size of grants.

    (a) General. For available grant funds, up to and including 
$10,000,000, grants will be made to States according to the terms and 
formula in paragraphs (b) and (c) of this section. For any available 
grant funds in excess of $10,000,000, distribution of grants will be at 
the discretion of CMS, and will be made according to criteria that CMS 
will communicate to the States via grant solicitation. CMS will provide 
information to each State as to what must be included in the application 
for grant funds. CMS awards the following type of grants:
    (1) New program grants.
    (2) Existing program enhancement grants.
    (b) Grant Award. Subject to the availability of funds, each eligible 
State that submits an acceptable application receives a grant that 
includes a fixed amount (minimum funding level) and a variable amount.
    (1) A fixed portion is awarded to States in the following amounts:
    (i) Each of the 50 States, $75,000.
    (ii) The District of Columbia, $75,000.
    (iii) Puerto Rico, $75,000.
    (iv) American Samoa, $25,000.
    (v) Guam, $25,000.
    (vi) The Virgin Islands, $25,000.
    (2) A variable portion, which is based on the number and location of 
Medicare beneficiaries residing in the State is awarded to each State. 
The variable amount a particular State receives is determined as set 
forth in paragraph (c) of this section.
    (c) Calculation of variable portion of the grant. (1) CMS bases the 
variable portion of the grant on--
    (i) The amount of available funds, and
    (ii) A comparison of each State with the average of all of the 
States (except the State being compared) with respect to three factors 
that relate to the size of the State's Medicare population and where 
that population resides.
    (2) The factors CMS uses to compare States' Medicare populations 
comprise separate components of the variable amount. These factors, and 
the extent to which they each contribute to the variable amount, are as 
follows:
    (i) Approximately 75 percent of the variable amount is based on the 
number of Medicare beneficiaries living in the State as a percentage of 
all Medicare beneficiaries nationwide.
    (ii) Approximately 10 percent of the variable amount is based on the 
percentage of the State's total population who are Medicare 
beneficiaries.
    (iii) Approximately 15 percent of the variable amount is based on 
the percentage of the State's Medicare beneficiaries that reside in 
rural areas (``rural areas'' are defined as all areas not included 
within a Metropolitan Statistical Area).
    (3) Based on the foregoing four factors (that is, the amount of 
available funds and the three comparative factors), CMS determines a 
variable rate for each participating State for each grant period.
    (d) Submission of revised budget. A State that receives an amount of 
grant funds under this subpart that differs from the amount requested in 
the budget submitted with its application must submit a revised budget 
to CMS, along with its acceptance of the grant award, that reflects the 
amount awarded.

[59 FR 51128, Oct. 7, 1994, as amended at 65 FR 34986, June 1, 2000]



Sec. 403.508  Limitations.

    (a) Use of grants. Except as specified in paragraph (b) of this 
section, and in the terms and conditions in the notice

[[Page 52]]

of grant award, a State that receives a grant under this subpart may use 
the grant for any reasonable expenses for planning, developing, 
implementing, and/or operating the program for which the grant is made 
as described in the solicitation for application for the grant.
    (b) Maintenance of effort. A State that receives a grant to 
supplement an existing program (that is, an existing program enhancement 
grant)--
    (1) Must not use the grant to supplant funds for activities that 
were conducted immediately preceding the date of the initial award of a 
grant made under this subpart and funded through other sources 
(including in-kind contributions).
    (2) Must maintain the activities of the program at least at the 
level that those activities were conducted immediately preceding the 
initial award of a grant made under this subpart.

[59 FR 51128, Oct. 7, 1994, as amended at 65 FR 34986, June 1, 2000]



Sec. 403.510  Reporting requirements.

    A State that receives a grant under this subpart must submit at 
least one annual report to CMS and any additional reports as CMS may 
prescribe in the notice of grant award. CMS advises the State of the 
requirements concerning the frequency, timing, and contents of reports 
in the notice of grant award that it sends to the State.



Sec. 403.512  Administration.

    (a) General. Administration of grants will be in accordance with the 
provisions of this subpart, 45 CFR part 92 (``Uniform Administrative 
Requirements for Grants and Cooperative Agreements to State and Local 
Governments''), 45 CFR 74.4, the terms of the solicitation, and the 
terms of the notice of grant award. Except for the minimum funding 
levels established by Sec. 403.504(b)(1), in the event of conflict 
between a provision of the notice of grant award, any provision of the 
solicitation, or of any regulation enumerated in 45 CFR 74.4 or in part 
92, the terms of the notice of grant award control.
    (b) Notice. CMS provides notice to each applicant regarding CMS's 
decision on an application for grant funding under Sec. 403.504.
    (c) Appeal. Any applicant for a grant under this subpart has the 
right to appeal CMS's determination regarding its application. Appeal 
procedures are governed by the regulations at 45 CFR part 16 (Procedures 
of the Departmental Grant Appeals Board).

Subpart F [Reserved]



  Subpart G--Religious Nonmedical Health Care Institutions--Benefits, 
                Conditions of Participation, and Payment

    Source: 64 FR 67047, Nov. 30, 1999, unless otherwise noted.



Sec. 403.700  Basis and purpose.

    This subpart implements sections 1821; 1861(e), (y), and (ss); 1869; 
and 1878 of the Act regarding Medicare payment for inpatient hospital or 
posthospital extended care services furnished to eligible beneficiaries 
in religious nonmedical health care institutions.



Sec. 403.702  Definitions and terms.

    For purposes of this subpart, the following definitions and terms 
apply:
    Election means a written statement signed by the beneficiary or the 
beneficiary's legal representative indicating the beneficiary's choice 
to receive nonmedical care or treatment for religious reasons.
    Excepted medical care means medical care that is received 
involuntarily or required under Federal, State, or local laws.
    FFY stands for Federal fiscal year.
    Medical care or treatment means health care furnished by or under 
the direction of a licensed physician that can involve diagnosing, 
treating, or preventing disease and other damage to the mind and body. 
It may involve the use of pharmaceuticals, diet, exercise, surgical 
intervention, and technical procedures.
    Nonexcepted medical care means medical care (other than excepted 
medical care) that is sought by or for a beneficiary who has elected 
religious nonmedical health care institution services.

[[Page 53]]

    Religious nonmedical care or religious method of healing means 
health care furnished under established religious tenets that prohibit 
conventional or unconventional medical care for the treatment of a 
beneficiary, and the sole reliance on these religious tenets to fulfill 
a beneficiary's total health care needs.
    RNHCI stands for ``religious nonmedical health care institution,'' 
as defined in section 1861(ss)(1) of the Act.
    Religious nonmedical nursing personnel means individuals who are 
grounded in the religious beliefs of the RNHCI, trained and experienced 
in the principles of nonmedical care, and formally recognized as 
competent in the administration of care within their religious 
nonmedical health care group.



Sec. 403.720  Conditions for coverage.

    Medicare covers services furnished in an RNHCI if the following 
conditions are met:
    (a) The provider meets the definition of an RNHCI as defined in 
section 1861(ss)(1) of the Act. That is, it is an institution that:
    (1) Is described in section 501(c)(3) of the Internal Revenue Code 
of 1986 and is exempt from taxes under section 501(a).
    (2) Is lawfully operated under all applicable Federal, State, and 
local laws and regulations.
    (3) Furnishes only nonmedical nursing items and services to 
beneficiaries who choose to rely solely upon a religious method of 
healing and for whom the acceptance of medical services would be 
inconsistent with their religious beliefs.
    (4) Furnishes nonmedical items and services exclusively through 
nonmedical nursing personnel who are experienced in caring for the 
physical needs of nonmedical patients.
    (5) Furnishes nonmedical items and services to inpatients on a 24-
hour basis.
    (6) Does not furnish, on the basis of religious beliefs, through its 
personnel or otherwise medical items and services (including any medical 
screening, examination, diagnosis, prognosis, treatment, or the 
administration of drugs) for its patients.
    (7) Is not owned by, is not under common ownership with, or does not 
have an ownership interest of 5 percent or more in, a provider of 
medical treatment or services and is not affiliated with a provider of 
medical treatment or services or with an individual who has an ownership 
interest of 5 percent or more in, a provider of medical treatment or 
services. (Permissible affiliations are described at Sec. 403.738(c).)
    (8) Has in effect a utilization review plan that sets forth the 
following:
    (i) Provides for review of the admissions to the institution, the 
duration of stays, and the need for continuous extended duration of 
stays in the institution, and the items and services furnished by the 
institution.
    (ii) Requires that reviews be made by an appropriate committee of 
the institution that included the individuals responsible for overall 
administration and for supervision of nursing personnel at the 
institution.
    (iii) Provides that records be maintained of the meetings, 
decisions, and actions of the review committee.
    (iv) Meets other requirements as the Secretary finds necessary to 
establish an effective utilization review plan.
    (9) Provides information CMS may require to implement section 1821 
of the Act, including information relating to quality of care and 
coverage decisions.
    (10) Meets other requirements CMS finds necessary in the interest of 
the health and safety of the patients who receive services in the 
institution. These requirements are the conditions of participation in 
this subpart.
    (b) The provider meets the conditions of participation cited in 
Secs. 403.730 through 403.746. (A provider may be deemed to meet 
conditions of participation in accordance with part 488 of this 
chapter.)
    (c) The provider has a valid provider agreement as a hospital with 
CMS in accordance with part 489 of this chapter and for payment purposes 
is classified as an extended care hospital.
    (d) The beneficiary has a condition that would make him or her 
eligible to receive services covered under Medicare Part A as an 
inpatient in a hospital or SNF.

[[Page 54]]

    (e) The beneficiary has a valid election as described in 
Sec. 403.724 in effect for Medicare covered services furnished in an 
RNHCI.



Sec. 403.724  Valid election requirements.

    (a) General requirements. An election statement must be made by the 
Medicare beneficiary or his or her legal representative.
    (1) The election must be a written statement that must include the 
following statements:
    (i) The beneficiary is conscientiously opposed to acceptance of 
nonexcepted medical treatment.
    (ii) The beneficiary acknowledges that the acceptance of nonexcepted 
medical treatment is inconsistent with his or her sincere religious 
beliefs.
    (iii) The beneficiary acknowledges that the receipt of nonexcepted 
medical treatment constitutes a revocation of the election and may limit 
further receipt of services in an RNHCI.
    (iv) The beneficiary acknowledges that the election may be revoked 
by submitting a written statement to CMS.
    (v) The beneficiary acknowledges that revocation of the election 
will not prevent or delay access to medical services available under 
Medicare Part A in facilities other than RNHCIs.
    (2) The election must be signed and dated by the beneficiary or his 
or her legal representative.
    (3) The election must be notarized.
    (4) The RNHCI must keep a copy of the election statement on file and 
submit the original to CMS with any information obtained regarding prior 
elections or revocations.
    (5) The election becomes effective on the date it is signed.
    (6) The election remains in effect until revoked.
    (b) Revocation of election. (1) A beneficiary's election is revoked 
by one of the following:
    (i) The beneficiary receives nonexcepted medical treatment for which 
Medicare payment is requested.
    (ii) The beneficiary voluntarily revokes the election and notifies 
CMS in writing.
    (2) The receipt of excepted medical treatment as defined in 
Sec. 403.702 does not revoke the election made by a beneficiary.
    (c) Limitation on subsequent elections. (1) If a beneficiary's 
election has been made and revoked twice, the following limitations on 
subsequent elections apply:
    (i) The third election is not effective until 1 year after the date 
of the most recent revocation.
    (ii) Any succeeding elections are not effective until 5 years after 
the date of the most recent revocation.
    (2) CMS will not accept as the basis for payment of any claim any 
elections executed on or after January 1 of the calendar year in which 
the sunset provision described in Sec. 403.756 becomes effective.



Sec. 403.730  Condition of participation: Patient rights.

    An RNHCI must protect and promote each patient's rights.
    (a) Standard: Notice of rights. The RNHCI must do the following:
    (1) Inform each patient of his or her rights in advance of 
furnishing patient care.
    (2) Have a process for prompt resolution of grievances, including a 
specific person within the facility whom a patient may contact to file a 
grievance. In addition, the facility must provide patients with 
information about the facility's process as well as with contact 
information for appropriate State and Federal resources.
    (b) Standard: Exercise of rights. The patient has the right to:
    (1) Be informed of his or her rights and to participate in the 
development and implementation of his or her plan of care.
    (2) Make decisions regarding his or her care, including transfer and 
discharge from the RNHCI. (See Sec. 403.736 for discharge and transfer 
requirements.)
    (3) Formulate advance directives and expect staff who furnish care 
in the RNHCI to comply with those directives, in accordance with part 
489, subpart I of this chapter. For purposes of conforming with the 
requirement in Sec. 489.102 that there be documentation in the patient's 
medical records concerning advanced directives, the patient care records 
of a beneficiary in an

[[Page 55]]

RNHCI are equivalent to medical records held by other providers.
    (c) Standard: Privacy and safety. The patient has the right to the 
following:
    (1) Personal privacy.
    (2) Care in a safe setting.
    (3) Freedom from verbal, psychological, and physical abuse, and 
misappropriation of property.
    (4) Freedom from the use of restraints.
    (5) Freedom from involuntary seclusion.
    (d) Standard: Confidentiality of patient records. For any patient 
care records or election information it maintains on patients, the RNHCI 
must establish procedures to do the following:
    (1) Safeguard the privacy of any information that identifies a 
particular patient. Information from, or copies of, records may be 
released only to authorized individuals, and the RNHCI must ensure that 
unauthorized individuals cannot gain access to or alter patient records. 
Original patient care records must be released only in accordance with 
Federal or State laws, court orders, or subpoenas.
    (2) Maintain the records and information in an accurate and timely 
manner.
    (3) Ensure timely access by patients to the records and other 
information that pertains to that patient.
    (4) Abide by all Federal and State laws regarding confidentiality 
and disclosure for patient care records and election information.



Sec. 403.732  Condition of participation: Quality assessment and performance improvement.

    The RNHCI must develop, implement, and maintain a quality assessment 
and performance improvement program.
    (a) Standard: Program scope. (1) The quality assessment and 
performance improvement program must include, but is not limited to, 
measures to evaluate:
    (i) Access to care.
    (ii) Patient satisfaction.
    (iii) Staff performance.
    (iv) Complaints and grievances.
    (v) Discharge planning activities.
    (vi) Safety issues, including physical environment.
    (2) In each of the areas listed in paragraph (a)(1) of this section, 
and any other areas the RNHCI includes, the RNHCI must do the following:
    (i) Define quality assessment and performance improvement measures.
    (ii) Describe and outline quality assessment and performance 
improvement activities appropriate for the services furnished by or in 
the RNHCI.
    (iii) Measure, analyze, and track performance that reflect care and 
RNHCI processes.
    (iv) Inform all patients, in writing, of the scope and 
responsibilities of the quality assessment and performance improvement 
program.
    (3) The RNHCI must set priorities for performance improvement, 
considering the prevalence of and severity of identified problems.
    (4) The RNHCI must act to make performance improvements and must 
track performance to assure that improvements are sustained.
    (b) Standard: Program responsibilities. (1) The governing body, 
administration, and staff are responsible for ensuring that the quality 
assessment and performance improvement program addresses identified 
priorities in the RNHCI and are responsible for the development, 
implementation, maintenance, and performance improvement of assessment 
actions.
    (2) The RNHCI must include all programs, departments, functions, and 
contracted services when developing, implementing, maintaining, and 
evaluating the program of quality assessment and performance 
improvement.



Sec. 403.734  Condition of participation: Food services.

    The RNHCI must have an organized food service that is directed and 
adequately staffed by qualified personnel.
    (a) Standard: Sanitary conditions. The RNHCI must furnish food to 
the patient that is obtained, stored, prepared, distributed, and served 
under sanitary conditions.
    (b) Standard: Meals. The RNHCI must serve meals that furnish each 
patient with adequate nourishment in accordance with the recommended 
dietary allowances of the Food and Nutrition

[[Page 56]]

Board of the National Research Council, National Academy of Sciences. 
The RNHCI must do the following:
    (1) Furnish food that is palatable, attractive, and at the proper 
temperature and consistency.
    (2) Offer substitutes of similar nourishment to patients who refuse 
food served or desire alternative choices.
    (3) Furnish meals at regular times comparable to normal mealtimes in 
the community. There must be no more than 14 hours between a substantial 
evening meal and breakfast the following day.
    (4) The RNHCI must offer snacks at bedtime.



Sec. 403.736  Condition of participation: Discharge planning.

    The RNHCI must have in effect a discharge planning process that 
applies to all patients. The process must assure that appropriate post-
institution services are obtained for each patient, as necessary.
    (a) Standard: Discharge planning evaluation. (1) The RNHCI must 
assess the need for a discharge plan for any patient identified as 
likely to suffer adverse consequences if there is no planning and for 
any other patient upon his or her request or at the request of his or 
her legal representative. This discharge planning evaluation must be 
initiated at admission and must include the following:
    (i) An assessment of the possibility of a patient needing post-RNHCI 
services and of the availability of those services.
    (ii) An assessment of the probability of a patient's capacity for 
self-care or of the possibility of the patient being cared for in the 
environment from which he or she entered the RNHCI.
    (2) The staff must complete the assessment on a timely basis so that 
arrangements for post-RNHCI care are made before discharge and so that 
unnecessary delays in discharge are avoided.
    (3) The discharge planning evaluation must be included in the 
patient's rights record for use in establishing an appropriate discharge 
plan and must discuss the results of the evaluation with the patient or 
a legal representative acting on his or her behalf.
    (b) Standard: Discharge plan. (1) If the discharge planning 
evaluation indicates a need for a discharge plan, qualified and 
experienced personnel must develop or supervise the development of the 
plan.
    (2) In the absence of a finding by the RNHCI that the beneficiary 
needs a discharge plan, the beneficiary or his or her legal 
representative may request a discharge plan. In this case, the RNHCI 
must develop a discharge plan for the beneficiary.
    (3) The RNHCI must arrange for the initial implementation of the 
beneficiary's discharge plan.
    (4) If there are factors that may affect continuing care needs or 
the appropriateness of the discharge plan, the RNHCI must reevaluate the 
beneficiary's discharge plan.
    (5) The RNHCI must inform the beneficiary or legal representative 
about the beneficiary's post-RNHCI care requirements.
    (6) The discharge plan must inform the beneficiary or his or her 
legal representative about the freedom to choose among providers of care 
when a variety of providers is available that are willing to respect the 
discharge preferences of the beneficiary or legal representative.
    (c) Standard: Transfer or referral. The RNHCI must transfer or refer 
patients in a timely manner to another facility (including a medical 
facility if requested by the beneficiary, or his or her legal 
representative) in accordance with Sec. 403.730(b)(2).
    (d) Standard: Reassessment. The RNHCI must reassess its discharge 
planning process on an ongoing basis. The reassessment must include a 
review of discharge plans to ensure that they are responsive to 
discharge needs.



Sec. 403.738  Condition of participation: Administration.

    An RNHCI must have written policies regarding its organization, 
services, and administration.
    (a) Standard: Compliance with Federal, State, and local laws. The 
RNHCI must operate in compliance with all applicable Federal, State, and 
local laws, regulations, and codes including, but not limited to, those 
pertaining to the following:

[[Page 57]]

    (1) Protection against discrimination on the basis of race, color, 
national origin, age, or handicap (45 CFR parts 80, 84, and 91).
    (2) Protection of human research subjects (45 CFR part 46).
    (3) Application of all safeguards to protect against the possibility 
of fraud and abuse (42 CFR part 455).
    (b) Standard: Governing body. (1) The RNHCI must have a governing 
body, or a person designated to function as a governing body, that is 
legally responsible for establishing and implementing all policies 
regarding the RNHCI's management and operation.
    (2) The governing body must appoint the administrator responsible 
for the management of the RNHCI.
    (c) Standard: Affiliations and disclosure. (1) An affiliation is 
permissible if it is between one of the following:
    (i) An individual serving as an uncompensated director, trustee, 
officer, or other member of the governing body of an RNHCI and a 
provider of medical treatment or services.
    (ii) An individual who is a director, trustee, officer, employee, or 
staff member of an RNHCI and another individual, with whom he or she has 
a family relationship, who is affiliated with (or has an ownership 
interest in) a provider of medical treatment or services.
    (iii) The RNHCI and an individual or entity furnishing goods or 
services as a vendor to both providers of medical treatment or services 
and RNHCIs.
    (2) The RNHCI complies with the disclosure requirements of 
Secs. 420.206 and 455.104 of this chapter.
    (3) The RNHCI furnishes written notice, including the identity of 
each new individual or company, to CMS at the time of a change, if a 
change occurs in any of the following:
    (i) Persons with an ownership or control interest, as defined in 
Secs. 420.201 and 455.101 of this chapter.
    (ii) The officers, directors, agents, or managing employees.
    (iii) The religious entity, corporation, association, or other 
company responsible for the management of the RNHCI.
    (iv) The RNHCI's administrator or director of nonmedical nursing 
services.



Sec. 403.740  Condition of participation: Staffing.

    The RNHCI must be staffed with qualified experienced personnel who 
are present in sufficient numbers to meet the needs of the patients.
    (a) Standard: Personnel qualifications. The RNHCI must ensure that 
staff who supervise or furnish services to patients are qualified to do 
so and that staff allowed to practice without direct supervision have 
specific training to furnish these services.
    (b) Standard: Education, training, and performance evaluation. (1) 
The RNHCI must ensure that staff (including contractors and other 
individuals working under arrangement) have the necessary education and 
training concerning their duties so that they can furnish services 
competently. This education includes, but is not limited to, training 
related to the individual job description, performance expectations, 
applicable organizational policies and procedures, and safety 
responsibilities.
    (2) Staff must demonstrate, in practice, the skills and techniques 
necessary to perform their duties and responsibilities.
    (3) The RNHCI must evaluate the performance of staff and implement 
measures for improvement.



Sec. 403.742  Condition of participation: Physical environment.

    A RNHCI must be designed, constructed, and maintained to ensure the 
safety of the patients, staff, and the public.
    (a) Standard: Buildings. The physical plant and the overall 
environment must be maintained in a manner that ensures the safety and 
well-being of the patients. The RNHCI must have the following:
    (1) Emergency power for emergency lights, for fire detection and 
alarm systems, and for fire extinguishing systems.
    (2) Procedures for the proper storage and disposal of trash.
    (3) Proper ventilation and temperature control and appropriate 
lighting levels to ensure a safe and secure environment.
    (4) A written disaster plan to address loss of power, water, sewage, 
and other emergencies.

[[Page 58]]

    (5) Facilities for emergency gas and water supply.
    (6) An effective pest control program.
    (7) A preventive maintenance program to maintain essential 
mechanical, electrical, and fire protection equipment operating in an 
efficient and safe manner.
    (8) A working call system for patients to summon aid or assistance.
    (b) Standard: Patient rooms. Patient rooms must be designed and 
equipped for adequate care, comfort, and privacy of the patient.
    (1) Patient rooms must meet the following conditions:
    (i) Accommodate no more than four patients.
    (ii) Measure at least 80 square feet per patient in multiple patient 
rooms and at least 100 square feet in single patient rooms.
    (iii) Have direct access to an exit corridor.
    (iv) Be designed or equipped to assure full visual privacy for each 
patient.
    (v) Have at least one window to the outside.
    (vi) Have a floor at or above grade level.
    (2) The RNHCI must furnish each patient with the following:
    (i) A separate bed of proper size and height for the convenience of 
the patient.
    (ii) A clean, comfortable mattress.
    (iii) Bedding appropriate to the weather and climate.
    (iv) Functional furniture appropriate to the patient's needs and 
individual closet space with clothes racks and shelves accessible to the 
patient.
    (3) CMS may permit variances in requirements specified in paragraphs 
(b)(1)(i) and (ii) of this section relating to rooms on an individual 
basis when the RNHCI adequately demonstrates in writing that the 
variances meet the following:
    (i) Are in accordance with the special needs of the patients.
    (ii) Will not adversely affect patients' health and safety.



Sec. 403.744  Condition of participation: Life safety from fire.

    (a) General. An RNHCI must meet the following conditions:
    (1) Except as provided in paragraph (b) of this section, the RNHCI 
must meet the new or existing health care occupancies provisions of the 
1997 edition of the Life Safety Code of the National Fire Protection 
Association (NFPA 101), which is incorporated by reference. 
Incorporation by reference of NFPA 101, the Life Safety Code, 1997 
edition, was approved by the Director of the Federal Register in 
accordance with 5 U.S.C. 552(a) and 1 CFR part 51.\1\ (See Sec. 483.70).
---------------------------------------------------------------------------

    \1\ The 1997 edition of the Life Safety Code (NFPA 101) is available 
for inspection at the CMS Information Resource Center, 7500 Security 
Boulevard, Central Building, Baltimore, MD, and at the Office of the 
Federal Register, 800 North Capitol Street, NW, suite 700, Washington, 
DC. Copies of this publication may be purchased from the National Fire 
Protection Association, 1 Batterymarch Park, P.O. Box 9101, Quincy, MA 
02263-9101.
---------------------------------------------------------------------------

    (2) The RNHCI must have written fire control plans that contain 
provisions for prompt reporting of fires; extinguishing fires; 
protection of patients, staff, and the public; evacuation; and 
cooperation with fire fighting authorities.
    (3) The RNHCI must maintain written evidence of regular inspection 
and approval by State or local fire control agencies.
    (b) Exceptions. (1) If application of the Life Safety Code required 
under paragraph (a)(1) of this section would result in unreasonable 
hardship upon the RNHCI, CMS may waive specific provisions of the Life 
Safety Code, but only if the waiver does not adversely affect the health 
and safety of patients.
    (2) If CMS finds that the fire and safety code imposed by State law 
adequately protects patients in the institution, the provisions of the 
Life Safety Code required in paragraph (a)(1) of this section do not 
apply in that State.



Sec. 403.746  Condition of participation: Utilization review.

    The RNHCI must have in effect a written utilization review plan to 
assess the necessity of services furnished. The plan must provide that 
records be maintained of all meetings, decisions, and actions by the 
utilization review committee.

[[Page 59]]

    (a) Standard: Utilization review plan. The utilization review plan 
must contain written procedures for evaluating the following:
    (1) Admissions.
    (2) Duration of care.
    (3) Continuing care of an extended duration.
    (4) Items and services furnished.
    (b) Standard: Utilization review committee. The committee is 
responsible for evaluating each admission and ensuring that the 
admission is necessary and appropriate. The utilization review plan must 
be carried out by the utilization review committee, consisting of the 
governing body, administrator or other individual responsible for the 
overall administration of the RNHCI, the supervisor of nursing staff, 
and other staff as appropriate.



Sec. 403.750  Estimate of expenditures and adjustments.

    (a) Estimates. CMS estimates the level of expenditures for services 
provided under this subpart before the start of each FFY beginning with 
FFY 2000.
    (b) Adjustments to payments. When the level of estimated 
expenditures is projected to exceed the FFY trigger level as described 
in paragraph (d) of this section, for the year of the projection, 
payments to RNHCIs will be reduced by a proportional percentage to 
prevent estimated expenditures from exceeding the trigger level. In 
addition to reducing payments proportionally, CMS may impose alternative 
adjustments.
    (c) Notification of adjustments. CMS notifies participating RNHCIs 
before the start of the FFY of the type and level of expenditure 
reductions to be made and when these adjustments will apply.
    (d) Calculation of trigger level. The trigger level for FFY 1998 is 
$20,000,000. For subsequent FFYs, the trigger level is the unadjusted 
trigger level increased or decreased by the carry forward as described 
in Sec. 403.754(b). The unadjusted trigger level is the base year amount 
(the unadjusted trigger level dollar amount for the prior FFY) increased 
by the average consumer price index (the single numerical value 
published monthly by the Bureau of Labor Statistics that presents the 
relationship in United States urban areas for the current cost of goods 
and services compared to a base year, to represent the change in 
spending power) for the 12-month period ending on July 31 preceding the 
beginning of the FFY.



Sec. 403.752  Payment provisions.

    (a) Payment to RNHCIs. Payment for services may be made to an RNHCI 
that meets the conditions for coverage described in Sec. 403.720 and the 
conditions of participation described in Secs. 403.730 through 403.746. 
Payment is made in accordance with Sec. 413.40 of this chapter to an 
RNHCI meeting these conditions.
    (b) Review of estimates and adjustments. There is no administrative 
or judicial review of the level of estimated expenditures or the 
adjustments in payments described in Secs. 403.750(a) and (b).
    (c) Effect on beneficiary liability. When payments are reduced in 
accordance with Sec. 403.750(b), the RNHCI may bill the beneficiary the 
amount of the Medicare reduction attributable to his or her covered 
services.
    (d) Notification of beneficiary liability. (1) The RNHCI must notify 
the beneficiary in writing at the time of admission of any proposed or 
current proportional Medicare adjustment. A beneficiary currently 
receiving care in the RNHCI must be notified in writing at least 30 days 
before the Medicare reduction is to take effect. The notification must 
inform the beneficiary that the RNHCI can bill him or her for the 
proportional Medicare adjustment.
    (2) The RNHCI must, at time of billing, provide the beneficiary with 
his or her liability for payment, based on a calculation of the Medicare 
reduction pertaining to the beneficiary's covered services permitted by 
Sec. 403.750(b).



Sec. 403.754  Monitoring expenditure level.

    (a) Tracking expenditures. Starting in FFY 1999 CMS begins 
monitoring Medicare payments to RNHCIs.
    (b) Carry forward. The difference between the trigger level and 
Medicare expenditures for a FFY results in a carry forward that either 
increases or decreases the unadjusted trigger level described in 
Sec. 403.750(d). In no case may the carry forward exceed $50,000,000 for 
an FFY.

[[Page 60]]



Sec. 403.756  Sunset provision.

    (a) Effective date. Beginning with FFY 2002, if the level of 
estimated expenditures for all RNHCIs exceeds the trigger level for 3 
consecutive FFYs, CMS will not accept as the basis for payment of any 
claim any election executed on or after January 1 of the following 
calendar year.
    (b) Notice of activation. A notice in the Federal Register will be 
published at least 60 days before January 1 of the calendar year that 
the sunset provision becomes effective.
    (c) Effects of sunset provision. Only those beneficiaries who have a 
valid election in effect before January 1 of the year in which the 
sunset provision becomes effective will be able to claim Medicare 
payment for care in an RNHCI, and only for RNCHI services furnished 
during that election.



     Subpart H--Medicare-Endorsed Prescription Drug Card Assistance 
                               Initiative

    Effective Date Note: At 67 FR 56682, Sept. 4, 2002, Secs. 403.800--
403.820 (Subpart H) were added effective November 4, 2002.



Sec. 403.800  Basis and scope.

    (a) Provisions of the legislation. This subpart implements, in part, 
the provisions of section 4359 of the Omnibus Budget Reconciliation Act 
of 1990 (OBRA). Section 4359 of OBRA requires the Secretary to establish 
a health insurance advisory service program (the beneficiary assistance 
program) to assist Medicare beneficiaries with the receipt of services 
(including both covered and uncovered benefits) under the Medicare and 
Medicaid programs and other health insurance programs. The subpart is 
also based on sections 1102 and 1871 of the Act.
    (b) Scope of subpart. This subpart sets forth the standards and 
procedures CMS uses to implement the Medicare-Endorsed Prescription Drug 
Card Assistance Initiative.



Sec. 403.802  Definitions.

    For purposes of this subpart, the following definitions apply:
    Administrative consortium means a private entity established and 
financed by the Medicare-endorsed prescription drug card program 
sponsors to carry out a set of specific administrative tasks required 
under the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative.
    Applicant means the organization or entity (along with any 
subcontractors or others with whom it has legal arrangements for the 
purpose of meeting the requirements for endorsement) that is applying 
for Medicare endorsement of its prescription drug discount card program.
    Application means the document submitted to CMS by an applicant that 
demonstrates compliance with the requirements specified in this subpart 
in order to obtain Medicare endorsement of the applicant's drug card 
program.
    Formulary means the list of specific drugs for which the Medicare-
endorsed prescription drug card program offers discounts to Medicare 
beneficiaries enrolled in the Medicare-endorsed prescription drug card 
program.
    Medicare-Endorsed Prescription Drug Card Assistance Initiative means 
an effort whereby CMS provides information, counseling, and assistance 
to Medicare beneficiaries by soliciting applications for Medicare 
endorsement of prescription drug card programs, reviewing them, offering 
agreements to program sponsors that meet all of the requirements for 
endorsement, awarding Medicare endorsements to program sponsors who sign 
the agreement, and educating beneficiaries about the options available 
to them in the private marketplace.
    Medicare-endorsed prescription drug card program means a program 
developed by an organization or group of organizations, endorsed by CMS 
under the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative, to educate Medicare beneficiaries about tools to lower their 
prescription drug costs and to offer prescription drug discount cards to 
Medicare beneficiaries.
    Medicare-endorsed prescription drug card program sponsor means any 
applicant that has received endorsement from Medicare for its 
prescription drug card program.
    Solicitation means a notice published in the Federal Register 
announcing a

[[Page 61]]

request for applications from applicants seeking Medicare endorsement 
for their prescription drug card programs.



Sec. 403.804  General rules for Medicare endorsement.

    (a) Applications. Applicants must submit applications by the 
deadline announced in the solicitation to participate in the Medicare-
Endorsed Prescription Drug Card Assistance Initiative and become a 
Medicare-endorsed prescription drug card program sponsor.
    (b) Number of programs sponsored. An organization or entity may 
sponsor no more than two drug card programs. The same organization or 
entity may have operational responsibilities in multiple drug card 
programs.
    (c) Requirements. In order to be eligible for endorsement, 
applicants must submit applications and meet all of the requirements 
specified in Sec. 403.806.
    (d) Eligibility to receive endorsement. Any applicant that submits 
an application by the deadline announced in the solicitation that 
contains all information necessary for CMS to determine whether the 
applicant meets all of the requirements in Sec. 403.806, and whose 
application meets all of the requirements in Sec. 403.806, will be 
eligible to enter into an agreement with CMS to receive a Medicare 
endorsement.
    (e) Period of endorsement. In Year One of the initiative, the 
Medicare endorsement will be effective for a period of at least 12 
months but fewer than 24 months. Beginning in Year Two, the endorsement 
will be effective at least 12 months, but fewer than 15 months. CMS will 
consider card program sponsor performance under an existing Medicare 
endorsement as a factor in determining eligibility for endorsement in 
future annual cycles.
    (f) Termination of endorsement by CMS. CMS may terminate the 
endorsement at any time.
    (g) Termination of participation by Medicare-endorsed drug card 
sponsor. A Medicare-endorsed prescription drug card program sponsor may 
choose not to continue participation in the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative.
    (h) Notification to beneficiaries of termination of participation. 
(1) In the event of termination of participation in the initiative by 
the drug card program sponsor, or termination by CMS, the Medicare-
endorsed prescription drug card program sponsor must notify all of its 
Medicare beneficiary enrollees in writing that they may enroll in an 
alternative Medicare-endorsed prescription drug card program. This 
notice must be provided by United States mail within 10 days of 
providing CMS with notice of termination or within 10 days of receiving 
notice of termination from CMS.
    (2) In the event of termination by the drug card program sponsor, or 
termination by CMS, drug card programs must remain available to 
beneficiaries for 90 days after beneficiaries are provided with notice 
of termination. In the event of termination by the drug card program 
sponsor, or termination by CMS, drug card program sponsors must suspend 
information and outreach and enrollment of beneficiaries once 
beneficiaries have been notified of the termination.



Sec. 403.806  Requirements for eligibility for endorsement.

    (a) General. To be eligible for Medicare endorsement, an applicant 
must submit an application by the deadline announced in the 
solicitation, demonstrating that it meets and will comply with the 
requirements described in this section.
    (b) Applicant structure, experience, and participation in 
administrative consortium. (1) A single organization or entity that is 
either the applicant or a subcontractor or under other legal arrangement 
with the applicant must have no less than 3 years experience in pharmacy 
benefit management, in administering a prescription drug discount 
program, or in administering a low income drug assistance program that 
provides prescription drugs at low or no cost;
    (2) A single organization or entity that is either the applicant or 
a subcontractor or under other legal arrangement with the applicant 
must, at

[[Page 62]]

the time of application for endorsement, manage at least 1 million 
covered lives in an insured pharmacy benefit, prescription drug discount 
program, or a low income drug assistance program that provides 
prescription drugs at low or no cost.
    (3) A single organization or entity that is either the applicant or 
a subcontractor or under other legal arrangement with the applicant 
must--
    (i) Have a pharmacy network serving all 50 States and the District 
of Columbia to qualify as a national program; or
    (ii) Have a regional pharmacy network serving at least 2 contiguous 
States (with the exception of Hawaii and Alaska, which can partner with 
2 or more contiguous States) to qualify as a regional program.
    (4) The applicant must demonstrate that it is financially solvent.
    (5) The applicant must have a satisfactory record of integrity and 
business ethics.
    (6) The applicant must agree to, and demonstrate the ability to, 
jointly administer, abide by the guidelines of, and fund a private 
administrative consortium with other Medicare-endorsed prescription drug 
card program sponsors in accordance with the requirements of this 
subpart.
    (7) The applicant must comply with all applicable Federal and State 
laws.
    (c) Customer service. The applicant must comply with the following 
customer service requirements:
    (1) Limit its one time enrollment fee in Year One to no more than 
$25. In future years, CMS may adjust the fee based on a determination of 
what is a reasonable amount to defray costs of the applicant's 
administrative activities.
    (2) Enroll only Medicare beneficiaries, and all Medicare 
beneficiaries who wish to participate in its Medicare-endorsed 
prescription drug card program.
    (3) Provide information and outreach materials regarding its 
Medicare-endorsed prescription drug card program to all enrolled 
Medicare beneficiaries.
    (4) Maintain a toll free customer call center that is open during 
usual business hours and that provides customer telephone service, 
including to pharmacists, in accordance with standard business 
practices.
    (d) Privacy and confidentiality of beneficiary-specific information. 
(1) The applicant must comply, beginning at the time of Medicare 
endorsement, with 45 CFR 160.103, 160.202, 164.501 through 164.514, and 
164.520, subject to the following modifications:
    (i) All references to covered entities will be applicable to the 
drug card sponsor, and health care operations means the routine 
activities, including providing information and outreach, as provided 
under the Medicare endorsement; and
    (ii) For the purpose of authorization in 45 CFR 164.508, marketing 
means any use or disclosure of protected health information to be 
outside the scope of Medicare endorsement.
    (2) The applicant must develop and implement a written data security 
plan for protected health information.
    (3) The requirements of this paragraph (d) are enforceable by CMS 
under the provisions of Sec. 403.812.
    (4) Nothing in this paragraph (d) modifies the applicability of 45 
CFR 160.103, 160.202, 164.501 through 164.514, and 164.520 to 
organizations or entities independently subject to the mandates of the 
Health Insurance Portability and Accountability Act of 1996 (HIPAA).
    (e) Discounts, rebates, and access. The applicant must comply with 
the following discount, rebate, and access requirements:
    (1) Offer a discount on at least one brand name or generic 
prescription drug in each of the therapeutic drug classes, groups, or 
subgroups representing the prescription drugs commonly needed by 
Medicare beneficiaries.
    (2) Obtain pharmaceutical manufacturer drug rebates or discounts on 
brand name or generic drugs or both, and ensure that a substantial share 
is provided to beneficiaries either directly or indirectly through 
pharmacies.
    (3) Ensure that a specific drug offered under the program is not 
dropped from the formulary nor its price increased for periods of at 
least 60 days, starting on the first day of the program's operation, and 
notify CMS, the consortium,

[[Page 63]]

and the network pharmacies of these changes 30 days before the change 
becomes effective.
    (4) Guarantee that for the drugs for which the applicant will offer 
discounts, Medicare beneficiaries enrolled in its Medicare-endorsed 
prescription drug discount card program will receive the lower of the 
discounted price available through the program, or the price the 
pharmacy would charge a cash paying customer.
    (5) Have a national or regional contracted pharmacy network 
sufficient to ensure that pharmacies are locally accessible to 
beneficiaries where the drug discount card will be offered. At least 90 
percent of Medicare beneficiaries, on average, in all Metropolitan 
Statistical Areas (MSAs) served by the program must live within 5 miles 
of a contracted pharmacy; and at least 90 percent of Medicare 
beneficiaries, on average, in all non-MSAs served by the program must 
live within 10 miles of a contracted pharmacy.
    (6) Provide to the administrative consortium information on drugs 
and their pricing included in the applicant's formularies.



Sec. 403.807  Application process.

    (a) CMS will solicit applications through an application process.
    (b) CMS will review applications and determine whether the applicant 
has met and is able to comply with all of the requirements set forth in 
Sec. 403.806 to become Medicare-endorsed.
    (c) All applications that are submitted by the deadline announced in 
the solicitation and that demonstrate that the applicant has met and is 
able to comply with all of the requirements to become Medicare-endorsed 
will be eligible to enter into an agreement to receive Medicare 
endorsement from CMS.



Sec. 403.808  Agreement terms and conditions.

    In order to receive a Medicare endorsement, an applicant that 
complies with all of the application procedures and meets all of the 
requirements described in this subpart must enter into a written 
agreement with CMS. The agreement must include a statement by the 
applicant that it has met the requirements of this subpart and will 
continue to meet all requirements as long as the agreement is in effect. 
The agreement must include a statement that the applicant will comply 
with information and outreach guidelines established by CMS.



Sec. 403.810  Administrative consortium responsibilities and oversight.

    (a) The administrative consortium will be responsible for--
    (1) Ensuring that beneficiaries are not enrolled in more than one 
Medicare-endorsed prescription drug card program at the same time;
    (2) Facilitating the publication of, or publishing, information, 
including comparative price information on discounted drugs, that 
assists beneficiaries in determining which Medicare-endorsed 
prescription drug card program is the most appropriate for their needs;
    (3) Ensuring the integrity of the information distributed by the 
Medicare-endorsed prescription drug card programs; and
    (4) Developing and implementing a written data security plan for 
protected health information; and
    (5) Abiding by applicable Federal and State laws.
    (b) In order to facilitate the formation of the administrative 
consortium and ensure that all functions are performed in a timely 
manner, CMS may assist in the start-up of the administrative consortium 
and perform any of the functions in this section for a transitional 
period of time.



Sec. 403.811  Beneficiary enrollment.

    (a) Individual enrollment. (1) Medicare beneficiaries who are 
enrolling in a Medicare-endorsed prescription drug card program for the 
first time may enroll at any time.
    (2) Once enrolled, a Medicare beneficiary may belong to only one 
Medicare-endorsed prescription drug card program at a time.
    (3) Once enrolled, and except as provided in paragraph (a)(4) of 
this section, enrollees may change enrollment to a different Medicare-
endorsed prescription drug card program, to be effective the first day 
of the following

[[Page 64]]

January or July following the request for change, whichever comes first.
    (4) If the Medicare endorsement of a prescription drug card program 
is terminated, either by CMS or by the sponsor, enrolled Medicare 
beneficiaries may enroll in a different Medicare-endorsed prescription 
drug card program to become effective immediately.
    (b) Group enrollment. (1) The prescription drug card program sponsor 
may accept group enrollment from health insurers and must ensure--
    (i) Disclosure to Medicare beneficiaries of the intent to enroll 
them as a group;
    (ii) Disclosure to beneficiaries of the enrollment exclusivity 
restrictions and other enrollment rules of the initiative;
    (2) Medicare+Choice (M+C) organizations may subsidize the enrollment 
fee and offer the drug card program as part of their Adjusted Community 
Rate filing, but may not require enrollment in a drug card program as a 
condition of enrollment in any of their M+C plans.



Sec. 403.812  Withdrawal of endorsement.

    If CMS obtains evidence that a Medicare-endorsed prescription drug 
card program or its sponsor has failed to meet any of the requirements 
for endorsement or has not complied with the agreement necessary to 
receive endorsement under this subpart, CMS may withdraw the 
endorsement. CMS may also take appropriate intermediate actions and may 
also refer the card program sponsor to appropriate Federal or State 
authorities, including the Office of Inspector General, for sanctions or 
prosecution under section 1140 of the Act.



Sec. 403.820  Oversight and beneficiary education.

    (a) The Medicare-endorsed prescription drug card program sponsor 
must report to CMS on a periodic basis on major features of its programs 
that correspond to the qualifications for endorsement, including savings 
to beneficiaries, customer service, and discount card program 
operations. Card program sponsors must certify the validity of their 
reported data.
    (b) The Medicare-endorsed prescription drug card program sponsor 
must establish and maintain a customer complaints process. This process 
must be designed to track and address in a timely manner enrollees' 
complaints about any aspect of the drug card program.
    (c) CMS will conduct beneficiary education about, and oversight of, 
the Medicare-endorsed prescription drug card programs, as determined by 
CMS.

[[Page 65]]



                     SUBCHAPTER B--MEDICARE PROGRAM





PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED--Table of Contents




Subpart A [Reserved]

  Subpart B--Medical Services Coverage Decisions That Relate to Health 
                             Care Technology

Sec.
405.201  Scope of subpart and definitions.
405.203  FDA categorization of investigational devices.
405.205  Coverage of a non-experimental/investigational (Category B) 
          device.
405.207  Services related to a noncovered device.
405.209  Payment for a non-experimental/investigational (Category B) 
          device.
405.211  Procedures for Medicare contractors in making coverage 
          decisions for a non-experimental/investigational (Category B) 
          device.
405.213  Re-evaluation of a device categorization.
405.215  Confidential commercial and trade secret information.

    Subpart C--Suspension of Payment, Recovery of Overpayments, and 
                   Repayment of Scholarships and Loans

                           General Provisions

405.301  Scope of subpart.

   Liability for Payments to Providers and Suppliers, and Handling of 
                           Incorrect Payments

405.350  Individual's liability for payments made to providers and other 
          persons for items and services furnished the individual.
405.351  Incorrect payments for which the individual is not liable.
405.352  Adjustment of title XVIII incorrect payments.
405.353  Certification of amount that will be adjusted against 
          individual title II or railroad retirement benefits.
405.354  Procedures for adjustment or recovery--title II beneficiary.
405.355  Waiver of adjustment or recovery.
405.356  Principles applied in waiver of adjustment or recovery.
405.357  Notice of right to waiver consideration.
405.358  When waiver of adjustment or recovery may be applied.
405.359  Liability of certifying or disbursing officer.

  Suspension and Recoupment of Payment to Providers and Suppliers and 
                Collection and Compromise of Overpayments

405.370  Definitions.
405.371   Suspension, offset, and recoupment of Medicare payments to 
          providers and suppliers of services.
405.372   Proceeding for suspension of payment.
405.373  Proceeding for offset or recoupment.
405.374  Opportunity for rebuttal.
405.375  Time limits for, and notification of, administrative 
          determination after receipt of rebuttal statement.
405.376  Suspension and termination of collection action and compromise 
          of claims for overpayment.
405.377  Withholding Medicare payments to recover Medicaid overpayments.
405.378  Interest charges on overpayment and underpayments to providers, 
          suppliers, and other entities.

                   Repayment of Scholarships and Loans

405.380  Collection of past-due amounts on scholarship and loan 
          programs.

                      Subpart D--Private Contracts

405.400  Definitions.
405.405  General rules.
405.410  Conditions for properly opting-out of Medicare.
405.415  Requirements of the private contract.
405.420  Requirements of the opt-out affidavit.
405.425  Effects of opting-out of Medicare.
405.430  Failure to properly opt-out.
405.435  Failure to maintain opt-out.
405.440  Emergency and urgent care services.
405.445  Renewal and early termination of opt-out.
405.450  Appeals.
405.455  Application to Medicare+Choice contracts.

         Subpart E--Criteria for Determining Reasonable Charges

405.500  Basis.
405.501  Determination of reasonable charges.
405.502  Criteria for determining reasonable charges.
405.503  Determining customary charges.
405.504  Determining prevailing charges.
405.505  Determination of locality
405.506  Charges higher than customary or prevailing charges or lowest 
          charge levels.

[[Page 66]]

405.507  Illustrations of the application of the criteria for 
          determining reasonable charges.
405.508  Determination of comparable circumstances; limitation.
405.509  Determining the inflation-indexed charge.
405.511  Reasonable charges for medical services, supplies, and 
          equipment.
405.512  Carriers' procedural terminology and coding systems.
405.515  Reimbursement for clinical laboratory services billed by 
          physicians.
405.517  Payment for drugs and biologicals that are not paid on a cost 
          or prospective payment basis.
405.520  Payment for a physician assistant's, nurse practitioner's, and 
          clinical nurse specialists' services and services furnished 
          incident to their professional services.
405.534  Limitation on payment for screening mammography services.
405.535   Special rule for nonparticipating physicians and suppliers 
          furnishing screening mammography services before January 1, 
          2002.

Subpart F [Reserved]

      Subpart G--Reconsiderations and Appeals Under Medicare Part A

405.701  Basis, purpose and definitions.
405.702  Notice of initial determination.
405.704  Actions which are initial determinations.
405.705  Actions which are not initial determinations.
405.706  Decisions of utilization review committees.
405.708  Effect of initial determination.
405.710  Right to reconsideration.
405.711  Time and place of filing request for reconsideration.
405.712  Extension of time to request reconsideration.
405.714  Withdrawal of request for reconsideration.
405.715  Reconsidered determination.
405.716  Notice of reconsidered determination.
405.717  Effect of a reconsidered determination.
405.718  Expedited appeals process.
405.720  Hearing; right to hearing.
405.722  Time and place of filing request for a hearing.
405.724  Departmental Appeals Board (DAB) review.
405.730  Court review.
405.732  Review of national coverage decisions (NCDs).
405.740  Principles for determining the amount in controversy.
405.745  Amount in controversy ascertained after reconsideration.
405.747  Dismissal of request for hearing; amount in controversy less 
          than $100.
405.750  Time period for reopening initial, revised, or reconsidered 
          determinations and decisions or revised decisions of an ALJ or 
          the Departmental Appeals Board (DAB); binding effect of 
          determination and decisions.
405.753  Appeal of a categorization of a device.

          Subpart H--Appeals Under the Medicare Part B Program

405.801  Part B appeals--general description.
405.802  Definitions.
405.803  Initial determination.
405.804  Notice of initial determination.
405.805  Parties to the initial determination.
405.806  Effect of initial determination.
405.807  Request for review of initial determination.
405.808  Parties to the review.
405.809  Opportunity to submit evidence.
405.810  Review determination.
405.811  Notice of review determination.
405.812  Effect of review determination.
405.815  Amount in controversy for carrier hearing, ALJ hearing and 
          judicial review.
405.817  Principles for determining amount in controversy.
405.821  Request for carrier hearing.
405.822  Parties to a carrier hearing.
405.823  Carrier hearing officer.
405.824  Disqualification of carrier hearing officer.
405.825  Location of carrier hearing.
405.826  Notice of carrier hearing.
405.830  Conduct of the carrier hearing.
405.831  Waiver of right to appear at carrier hearing and present 
          evidence.
405.832  Dismissal of request for carrier hearing.
405.833  Record of carrier hearing.
405.834  Carrier hearing officer's decision.
405.835  Effect of carrier hearing officer's decision.
405.836  Authority of the carrier hearing officer.
405.841  Reopening initial or review determination of the carrier, and 
          decision of a carrier hearing officer.
405.842  Notice of reopening and revision.
405.850  Change of ruling or legal precedent.
405.853  Expedited appeals process.
405.855  ALJ hearing.
405.856  Departmental Appeals Board (DAB) review.
405.857  Court review.
405.860  Review of national coverage decisions (NCDs).
405.870  Appointment of representative.
405.871  Qualifications of representatives.
405.872  Authority of representatives.
405.874  Appeals of carrier decisions that supplier standards are not 
          met.

[[Page 67]]

405.877  Appeal of a categorization of a device.

Subparts I-Q [Reserved]

      Subpart R--Provider Reimbursement Determinations and Appeals

405.1801  Introduction.
405.1803  Intermediary determination and notice of amount of program 
          reimbursement.
405.1804  Matters not subject to administrative or judicial review under 
          prospective payment.
405.1805  Parties to intermediary determination.
405.1807  Effect of intermediary determination.
405.1809  Intermediary hearing procedures.
405.1811  Right to intermediary hearing; time, place, form, and content 
          of request for intermediary hearing.
405.1813  Failure to timely request an intermediary hearing.
405.1815  Parties to the intermediary hearing.
405.1817  Hearing officer or panel of hearing officers authorized to 
          conduct intermediary hearing; disqualification of officers.
405.1819  Conduct of intermediary hearing.
405.1821  Prehearing discovery and other proceedings prior to the 
          intermediary hearing.
405.1823  Evidence at intermediary hearing.
405.1825  Witnesses at intermediary hearing.
405.1827  Record of intermediary hearing.
405.1829  Authority of hearing officer(s) at intermediary hearing.
405.1831  Intermediary hearing decision and notice.
405.1833  Effect of intermediary hearing decision.
405.1835  Right to Board hearing.
405.1837  Group appeal.
405.1839  Amount in controversy.
405.1841  Time, place, form, and content of request for Board hearing.
405.1842  Expediting Board proceedings.
405.1843  Parties to Board hearing.
405.1845  Composition of Board.
405.1847  Disqualification of Board members.
405.1849  Establishment of time and place of hearing by the Board.
405.1851  Conduct of Board hearing.
405.1853  Prehearing discovery and other proceedings prior to the Board 
          hearing.
405.1855  Evidence at Board hearing.
405.1857  Subpoenas.
405.1859  Witnesses.
405.1861  Oral argument and written allegations.
405.1863  Administrative policy at issue.
405.1865  Record of Board hearing.
405.1867  Sources of Board's authority.
405.1869  Scope of Board's decision-making authority.
405.1871  Board hearing decision and notice.
405.1873  Board's jurisdiction.
405.1875  Administrator's review.
405.1877  Judicial review.
405.1881  Appointment of representative.
405.1883  Authority of representative.
405.1885  Reopening a determination or decision.
405.1887  Notice of reopening.
405.1889  Effect of a revision.

Subparts S-T [Reserved]

   Subpart U--Conditions for Coverage of Suppliers of End-Stage Renal 
                         Disease (ESRD) Services

405.2100  Scope of subpart.
405.2101  Objectives of the end-stage renal disease (ESRD) program.
405.2102  Definitions.
405.2110  Designation of ESRD networks.
405.2111  [Reserved]
405.2112  ESRD network organizations.
405.2113  Medical review board.
405.2114  [Reserved]
405.2120  Minimum utilization rates: general.
405.2121  Basis for determining minimum utilization rates.
405.2122  Types and duration of classification according to utilization 
          rates.
405.2123  Reporting of utilization rates for classification.
405.2124  Calculation of utilization rates for comparison with minimal 
          utilization rates(s) and notification of status.
405.2130  Condition: Minimum utilization rates.
405.2131  Condition: Provider status: Renal transplantation center or 
          renal dialysis center.
405.2132  [Reserved]
405.2133  Condition: Furnishing data and information for ESRD program 
          administration.
405.2134  Condition: Participation in network activities.
405.2135  Condition: Compliance with Federal, State, and local laws and 
          regulations.
405.2136  Condition: Governing body and management.
405.2137  Condition: Patient long-term program and patient care plan.
405.2138  Condition: Patients' rights and responsibilities.
405.2139  Condition: Medical records.
405.2140  Condition: Physical environment.
405.2150  Condition: Reuse of hemodialyzers and other dialysis supplies.
405.2160  Condition: Affiliation agreement or arrangement.
405.2161  Condition: Director of a renal dialysis facility or renal 
          dialysis center.

[[Page 68]]

405.2162  Condition: Staff of a renal dialysis facility or renal 
          dialysis center.
405.2163  Condition: Minimal service requirements for a renal dialysis 
          facility or renal dialysis center.
405.2164  Conditions for coverage of special purpose renal dialysis 
          facilities.
405.2170  Condition: Director of a renal transplantation center.
405.2171  Condition: Minimal service requirements for a renal 
          transplantation center.
405.2180  Termination of Medicare coverage.
405.2181  Alternative sanctions.
405.2182  Notice of sanction and appeal rights: Termination of coverage.
405.2184  Notice of appeal rights: Alternative sanctions.

Subparts V-W [Reserved]

  Subpart X--Rural Health Clinic and Federally Qualified Health Center 
                                Services

405.2400  Basis.
405.2401  Scope and definitions.
405.2402  Basic requirements.
405.2403  Content and terms of the agreement with the Secretary.
405.2404  Terminations of agreements.
405.2410  Application of Part B deductible and coinsurance.
405.2411  Scope of benefits.
405.2412  Physicians' services.
405.2413  Services and supplies incident to a physician's services.
405.2414  Nurse practitioner and physician assistant services.
405.2415  Services and supplies incident to nurse practitioner and 
          physician assistant services.
405.2416  Visiting nurse services.
405.2417  Visiting nurse services: Determination of shortage of 
          agencies.

               Federally Qualified Health Center Services

405.2430  Basic requirements.
405.2434  Content and terms of the agreement.
405.2436  Termination of agreement.
405.2440  Conditions for reinstatement after termination by CMS.
405.2442  Notice to the public.
405.2444  Change of ownership.
405.2446  Scope of services.
405.2448  Preventive primary services.
405.2450  Clinical psychologist and clinical social worker services.
405.2452  Services and supplies incident to clinical psychologist and 
          clinical social worker services.

 Payment for Rural Health Clinic and Federally Qualified Health Center 
                                Services

405.2460  Applicability of general payment exclusions.
405.2462  Payment for rural health clinic and Federally qualified health 
          center services.
405.2463  What constitutes a visit.
405.2464  All-inclusive rate.
405.2466  Annual reconciliation.
405.2468  Allowable costs.
405.2470  Reports and maintenance of records.
405.2472  Beneficiary appeals.

    Authority: Secs. 1102, 1861, 1862(a), 1871, 1874, 1881, and 1886(k) 
of the Social Security Act (42 U.S.C. 1302, 1395x, 1395y(a), 1395hh, 
1395kk, 1395rr and 1395ww(k)), and sec. 353 of the Public Health Service 
Act (42 U.S.C. 263a).

Subpart A [Reserved]



  Subpart B--Medical Services Coverage Decisions That Relate to Health 
                             Care Technology

    Authority: Secs. 1102, 1862 and 1871 of the Social Security Act as 
amended (42 U.S.C.1302, 1395y, and 1395hh).

    Source: 60 FR 48423, Sept. 19, 1995, unless otherwise noted.



Sec. 405.201  Scope of subpart and definitions.

    (a) Scope. This subpart establishes that--
    (1) CMS uses the FDA categorization of a device as a factor in 
making Medicare coverage decisions; and
    (2) CMS may consider for Medicare coverage certain devices with an 
FDA-approved investigational device exemption (IDE) that have been 
categorized as non-experimental/investigational (Category B).
    (b) Definitions. As used in this subpart--
    Class I refers to devices for which the general controls of the 
Food, Drug, and Cosmetic Act, such as adherence to good manufacturing 
practice regulations, are sufficient to provide a reasonable assurance 
of safety and effectiveness.
    Class II refers to devices that, in addition to general controls, 
require special controls, such as performance standards or postmarket 
surveillance, to provide a reasonable assurance of safety and 
effectiveness.
    Class III refers to devices that cannot be classified into Class I 
or Class II because insufficient information exists to

[[Page 69]]

determine that either special or general controls would provide 
reasonable assurance of safety and effectiveness. Class III devices 
require premarket approval.
    Contractors refers to carriers, fiscal intermediaries, and other 
entities that contract with CMS to review and adjudicate claims for 
Medicare services.
    Experimental/investigational (Category A) device refers to an 
innovative device believed to be in Class III for which ``absolute 
risk'' of the device type has not been established (that is, initial 
questions of safety and effectiveness have not been resolved and the FDA 
is unsure whether the device type can be safe and effective).
    IDE stands for investigational device exemption. An FDA-approved IDE 
application permits a device, which would otherwise be subject to 
marketing clearance, to be shipped lawfully for the purpose of 
conducting a clinical trial in accordance with 21 U.S.C. 360j(g) and 21 
CFR parts 812 and 813.
    Non-experimental/investigational (Category B) device refers to a 
device believed to be in Class I or Class II, or a device believed to be 
in Class III for which the incremental risk is the primary risk in 
question (that is, underlying questions of safety and effectiveness of 
that device type have been resolved), or it is known that the device 
type can be safe and effective because, for example, other manufacturers 
have obtained FDA approval for that device type.
    PMA stands for ``premarket approval'' and refers to a marketing 
application for a Class III device, which includes all information 
submitted with or incorporated by reference in the application in 
accordance with 21 U.S.C. 360e and 360j and 21 CFR 814.3(e).
    Sponsor refers to a person or entity that initiates, but does not 
conduct, an investigation under an IDE.



Sec. 405.203  FDA categorization of investigational devices.

    (a) The FDA assigns a device with an FDA-approved IDE to one of two 
categories:
    (1) Experimental/Investigational (Category A) Devices.
    (2) Non-Experimental/Investigational (Category B) Devices.
    (b) The FDA notifies CMS, when it notifies the sponsor, that the 
device is categorized by FDA as experimental/investigational (Category 
A) or non-experimental/investigational (Category B).
    (c) CMS uses the categorization of the device as a factor in making 
Medicare coverage decisions.



Sec. 405.205  Coverage of a non-experimental/investigational (Category B) device.

    (a) For any device that meets the requirements of the exception at 
Sec. 411.15(o) of this chapter, the following procedures apply:
    (1) The FDA notifies CMS, when it notifies the sponsor, that the 
device is categorized by FDA as non-experimental/investigational 
(Category B).
    (2) CMS uses the categorization of the device as a factor in making 
Medicare coverage decisions.
    (b) If the FDA becomes aware that a categorized device no longer 
meets the requirements of the exception at Sec. 411.15(o) of this 
chapter, the FDA notifies the sponsor and CMS and the procedures 
described in paragraph (a)(2) of this section apply.



Sec. 405.207  Services related to a noncovered device.

    (a) When payment is not made. Medicare payment is not made for 
medical and hospital services that are related to the use of a device 
that is not covered because CMS determines the device is not 
``reasonable'' and ``necessary'' under section 1862(a)(1)(A) of the Act 
or because it is excluded from coverage for other reasons. These 
services include all services furnished in preparation for the use of a 
noncovered device, services furnished contemporaneously with and 
necessary to the use of a noncovered device, and services furnished as 
necessary after-care that are incident to recovery from the use of the 
device or from receiving related noncovered services.
    (b) When payment is made. Medicare payment may be made for services, 
ordinarily covered by Medicare, to treat a condition or complication 
that arises

[[Page 70]]

because of the use of a noncovered device or from the furnishing of 
related noncovered services.



Sec. 405.209  Payment for a non-experimental/investigational (Category B) device.

    Payment under Medicare for a non-experimental/investigational 
(Category B) device is based on, and may not exceed, the amount that 
would have been paid for a currently used device serving the same 
medical purpose that has been approved or cleared for marketing by the 
FDA.



Sec. 405.211  Procedures for Medicare contractors in making coverage decisions for a non-experimental/investigational (Category B) device.

    (a) General rule. In their review of claims for payment, Medicare 
contractors are bound by the statute, regulations, and all CMS 
administrative issuances, including all national coverage decisions.
    (b) Potentially covered non-experimental/investigational (Category 
B) devices. Medicare contractors may approve coverage for any device 
with an FDA-approved IDE categorized as a non-experimental/
investigational (Category B) device if all other coverage requirements 
are met.
    (c) Other considerations. Medicare contractors must consider whether 
any restrictions concerning site of service, indications for use, or any 
other list of conditions for coverage have been placed on the device's 
use.



Sec. 405.213  Re-evaluation of a device categorization.

    (a) General rules. (1) Any sponsor that does not agree with an FDA 
decision that categorizes its device as experimental/investigational 
(Category A) may request re-evaluation of the categorization decision.
    (2) A sponsor may request review by CMS only after the requirements 
of paragraph (b) of this section are met.
    (3) No reviews other than those described in paragraphs (b) and (c) 
of this section are available to the sponsor.
    (4) Neither the FDA original categorization or re-evaluation 
(described in paragraph (b) of this section) nor CMS's review (described 
in paragraph (c) of this section) constitute an initial determination 
for purposes of the Medicare appeals processes under part 405, subpart G 
or subpart H, or parts 417, 473, or 498 of this chapter.
    (b) Request to FDA. A sponsor that does not agree with the FDA's 
categorization of its device may submit a written request to the FDA at 
any time requesting re-evaluation of its original categorization 
decision, together with any information and rationale that it believes 
support recategorization. The FDA notifies both CMS and the sponsor of 
its decision.
    (c) Request to CMS. If the FDA does not agree to recategorize the 
device, the sponsor may seek review from CMS. A device sponsor must 
submit its request in writing to CMS. CMS obtains copies of relevant 
portions of the application, the original categorization decision, and 
supplementary materials. CMS reviews all material submitted by the 
sponsor and the FDA's recommendation. CMS reviews only information in 
the FDA record to determine whether to change the categorization of the 
device. CMS issues a written decision and notifies the sponsor of the 
IDE and the FDA.



Sec. 405.215  Confidential commercial and trade secret information.

    To the extent that CMS relies on confidential commercial or trade 
secret information in any judicial proceeding, CMS will maintain 
confidentiality of the information in accordance with Federal law.



    Subpart C--Suspension of Payment, Recovery of Overpayments, and 
                   Repayment of Scholarships and Loans

    Authority: Secs. 1102, 1815, 1833, 1842, 1866, 1870, 1871, 1879, and 
1892 of the Social Security Act (42 U.S.C. 1302, 1395g, 1395l, 1395u, 
1395cc, 1395gg, 1395hh, 1395pp, and 1395ccc) and 31 U.S.C. 3711.

    Source: 31 FR 13534, Oct. 20, 1966, unless otherwise noted. 
Redesignated at 42 FR 52826, Sept. 30, 1977.

[[Page 71]]

                           General Provisions



Sec. 405.301  Scope of subpart.

    This subpart sets forth the policies and procedures for handling of 
incorrect payments and recovery of overpayments.

[54 FR 41733, Oct. 11, 1989]

    Liability for Payments To Providers or Suppliers and Handling of 
                           Incorrect Payments



Sec. 405.350  Individual's liability for payments made to providers and other persons for items and services furnished the individual.

    Any payment made under title XVIII of the Act to any provider of 
services or other person with respect to any item or service furnished 
an individual shall be regarded as a payment to the individual, and 
adjustment shall be made pursuant to Secs. 405.352 through 405.358 
where:
    (a) More than the correct amount is paid to a provider of services 
or other person and the Secretary determines that:
    (1) Within a reasonable period of time, the excess over the correct 
amount cannot be recouped from the provider of services or other person, 
or
    (2) The provider of services or other person was without fault with 
respect to the payment of such excess over the correct amount, or
    (b) A payment has been made under the provisions described in 
section 1814(e) of the Act, to a provider of services for items and 
services furnished the individual.
    (c) For purposes of paragraph (a)(2) of this section, a provider of 
services or other person shall, in the absence of evidence to the 
contrary, be deemed to be without fault if the determination of the 
carrier, the intermediary, or the Centers for Medicare & Medicaid 
Services that more than the correct amount was paid was made subsequent 
to the third year following the year in which notice was sent to such 
individual that such amount had been paid.

[41 FR 1492, Jan. 8, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 61 FR 49271, Sept. 19, 1996]



Sec. 405.351  Incorrect payments for which the individual is not liable.

    Where an incorrect payment has been made to a provider of services 
or other person, the individual is liable only to the extent that he has 
benefited from such payment.



Sec. 405.352  Adjustment of title XVIII incorrect payments.

    Where an individual is liable for an incorrect payment (i.e., a 
payment made under Sec. 405.350(a) or Sec. 405.350(b)) adjustment is 
made (to the extent of such liability) by:
    (a) Decreasing any payment under title II of the Act, or under the 
Railroad Retirement Act of 1937, to which the individual is entitled; or
    (b) In the event of the individual's death before adjustment is 
completed, by decreasing any payment under title II of the Act, or under 
the Railroad Retirement Act of 1937 payable to the estate of the 
individual or to any other person, that are based on the individual's 
earnings record (or compensation).

[31 FR 13534, Oct. 20, 1966, as amended by 41 FR 1492, Jan. 8, 1976. 
Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.353  Certification of amount that will be adjusted against individual title II or railroad retirement benefits.

    As soon as practicable after any adjustment is determined to be 
necessary, the Secretary, for purposes of this subpart, shall certify 
the amount of the overpayment or payment (see Sec. 405.350) with respect 
to which the adjustment is to be made. If the adjustment is to be made 
by decreasing subsequent payments under the Railroad Retirement Act of 
1937, such certification shall be made to the Railroad Retirement Board.



Sec. 405.354  Procedures for adjustment or recovery--title II beneficiary.

    The procedures applied in making an adjustment or recovery in the 
case of a title II beneficiary are the applicable procedures of 20 CFR 
404.502.

[31 FR 13534, Oct. 20, 1966, as amended at 32 FR 18027, Dec. 16, 1967. 
Redesignated at 42 FR 52826, Sept. 30, 1977]

[[Page 72]]



Sec. 405.355  Waiver of adjustment or recovery.

    (a) The provisions of Sec. 405.352 may not be applied and there may 
be no adjustment or recovery of an incorrect payment (i.e., a payment 
made under Sec. 405.350(a) or Sec. 405.350(b)) in any case where such 
incorrect payment has been made with respect to an individual who is 
without fault, or where such adjustment or recovery would be made by 
decreasing payments to which another person who is without fault is 
entitled as provided in section 1870(b) of the Act where such adjustment 
or recovery would defeat the purpose of title II or title XVIII of the 
Act or would be against equity and good conscience. (See 20 CFR 404.509 
and 404.512.)
    (b) Adjustment or recovery of an incorrect payment (or only such 
part of an incorrect payment as may be determined to be inconsistent 
with the purposes of Title XVIII of the Act) against an individual who 
is without fault shall be deemed to be against equity and good 
conscience if the determination that such payment was incorrect was made 
subsequent to the third year following the year in which notice of such 
payment was sent to such individual. (See Secs. 405.330-405.332 for 
conditions under which payment may be made for items or services 
furnished after October 30, 1972 which are noncovered by reasons of 
Sec. 405.310 (g) and (k).)

[41 FR 1493, Jan. 8, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.356  Principles applied in waiver of adjustment or recovery.

    The principles applied in determining waiver of adjustment or 
recovery (Sec. 405.355) are the applicable principles of Sec. 405.358 
and 20 CFR 404.507-404.509, 404.510a, and 404.512.

[61 FR 49271, Sept. 19, 1996]



Sec. 405.357  Notice of right to waiver consideration.

    Whenever an initial determination is made that more than the correct 
amount of payment has been made, notice of the provisions of section 
1870(c) of the Act regarding waiver of adjustment or recovery shall be 
sent to the overpaid individual and to any other individual against whom 
adjustment or recovery of the overpayment is to be effected (see 
Sec. 405.358).

[61 FR 49271, Sept. 19, 1996]



Sec. 405.358  When waiver of adjustment or recovery may be applied.

    Section 1870(c) of the Act provides that there shall be no 
adjustment or recovery in any case where an incorrect payment under 
title XVIII (hospital and supplementary medical insurance benefits) has 
been made (including a payment under section 1814(e) of the Act with 
respect to an individual:
    (a) Who is without fault, and
    (b) Adjustment or recovery would either:
    (1) Defeat the purposes of title II or title XVIII of the Act, or
    (2) Be against equity and good conscience.

[61 FR 49271, Sept. 19, 1996]



Sec. 405.359  Liability of certifying or disbursing officer.

    No certifying or disbursing officer shall be held liable for any 
amount certified or paid by him to any provider of services or other 
person:
    (a) Where the adjustment or recovery of such amount is waived (see 
Sec. 405.355), or
    (b) Where adjustment (see Sec. 405.352) or recovery is not completed 
prior to the death of all persons against whose benefits such adjustment 
is authorized.

  Suspension and Recoupment of Payment to Providers and Suppliers and 
                Collection and Compromise of Overpayments



Sec. 405.370   Definitions.

    For purposes of this subpart, the following definitions apply:
    Offset. The recovery by Medicare of a non-Medicare debt by reducing 
present or future Medicare payments and applying the amount withheld to 
the indebtedness. (Examples are Public Health Service debts or Medicaid 
debts recovered by CMS).
    Recoupment. The recovery by Medicare of any outstanding Medicare 
debt by reducing present or future Medicare payments and applying the 
amount withheld to the indebtedness.
    Suspension of payment. The withholding of payment by an intermediary

[[Page 73]]

or carrier from a provider or supplier of an approved Medicare payment 
amount before a determination of the amount of the overpayment exists.

[61 FR 63745, Dec. 2, 1996]



Sec. 405.371   Suspension, offset, and recoupment of Medicare payments to providers and suppliers of services.

    (a) General. Medicare payments to providers and suppliers, as 
authorized under this subchapter (excluding payments to beneficiaries), 
may be--
    (1) Suspended, in whole or in part, by CMS, an intermediary, or a 
carrier if CMS, the intermediary, or the carrier possesses reliable 
information that an overpayment or fraud or willful misrepresentation 
exists or that the payments to be made may not be correct, although 
additional evidence may be needed for a determination; or
    (2) Offset or recouped, in whole or in part, by an intermediary or a 
carrier if the intermediary, carrier, or CMS has determined that the 
provider or supplier to whom payments are to be made has been overpaid.
    (b) Steps necessary for suspension of payment, offset, and 
recoupment. Except as provided in paragraph (c) of this section, CMS, 
the intermediary, or carrier suspends payments only after it has 
complied with the procedural requirements set forth at Sec. 405.372. The 
intermediary or carrier offsets or recoups payments only after it has 
complied with the procedural requirements set forth at Sec. 405.373.
    (c) Suspension of payment in the case of unfiled cost reports. If a 
provider has failed to timely file an acceptable cost report, payment to 
the provider is immediately suspended until a cost report is filed and 
determined by the intermediary to be acceptable. In the case of an 
unfiled cost report, the provisions of Sec. 405.372 do not apply. (See 
Sec. 405.372(a)(2) concerning failure to furnish other information.)

[61 FR 63746, Dec. 2, 1996]



Sec. 405.372   Proceeding for suspension of payment.

    (a) Notice of intention to suspend--(1) General rule. Except as 
provided in paragraphs (a)(2) through (a)(4) of this section, if the 
intermediary, carrier, or CMS has determined that a suspension of 
payments under Sec. 405.371(a)(1) should be put into effect, the 
intermediary or carrier must notify the provider or supplier of the 
intention to suspend payments, in whole or in part, and the reasons for 
making the suspension.
    (2) Failure to furnish information. The notice requirement of 
paragraph (a)(1) of this section does not apply if the intermediary or 
carrier suspends payments to a provider or supplier in accordance with 
section 1815(a) or section 1833(e) of the Act, respectively, because the 
provider or supplier has failed to submit information requested by the 
intermediary or carrier that is needed to determine the amounts due the 
provider or supplier. (See Sec. 405.371(c) concerning failure to file 
timely acceptable cost reports.)
    (3) Harm to Trust Funds. A suspension of payment may be imposed 
without prior notice if CMS, the intermediary, or carrier determines 
that the Medicare Trust Funds would be harmed by giving prior notice. 
CMS may base its determination on an intermediary's or carrier's belief 
that giving prior notice would hinder the possibility of recovering the 
money.
    (4) Fraud or misrepresentation. If the intended suspension of 
payment involves suspected fraud or misrepresentation, CMS determines 
whether to impose the suspension and if prior notice is appropriate. CMS 
directs the intermediary or carrier as to the timing and content of the 
notification to the provider or supplier. CMS is the real party in 
interest and is responsible for the decision. CMS may base its decision 
on information from the intermediary, carrier, law enforcement agencies, 
or other sources. CMS determines whether the information is reliable.
    (b) Rebuttal--(1) If prior notice is required. If prior notice is 
required under paragraph (a) of this section, the intermediary or 
carrier must give the provider or supplier an opportunity for rebuttal 
in accordance with Sec. 405.374. If a rebuttal statement is received 
within the specified time period, the suspension of payment goes into 
effect on the date stated in the notice, and the procedures and 
provisions set forth in

[[Page 74]]

Sec. 405.375 apply. If by the end of the period specified in the notice 
no statement has been received, the suspension goes into effect 
automatically, and the procedures set forth in paragraph (c) of this 
section are followed.
    (2) If prior notice is not required. If, under the provisions of 
paragraphs (a)(2) through (a)(4) of this section, a suspension of 
payment is put into effect without prior notice to the provider or 
supplier, the intermediary or carrier must, once the suspension is in 
effect, give the provider or supplier an opportunity to submit a 
rebuttal statement as to why the suspension should be removed.
    (c) Subsequent action. If a suspension of payment is put into 
effect, the intermediary, carrier, or CMS takes timely action after the 
suspension to obtain the additional evidence it may need to make a 
determination as to whether an overpayment exists or the payments may be 
made. The intermediary, carrier, or CMS makes all reasonable efforts to 
expedite the determination. As soon as the determination is made, the 
intermediary or carrier informs the provider or supplier and, if 
appropriate, the suspension is rescinded or any existing recoupment or 
offset is adjusted to take into account the determination.
    (d) Duration of suspension of payment--(1) General rule. Except as 
provided in paragraphs (d)(2) and (d)(3) of this section, a suspension 
of payment is limited to 180 days, starting with the date the suspension 
begins.
    (2) 180-day extension. (i) An intermediary, a carrier, or, in cases 
of fraud and misrepresentation, OIG or a law enforcement agency, may 
request a one-time only extension of the suspension period for up to 180 
additional days if it is unable to complete its examination of the 
information or investigation, as appropriate, within the 180-day time 
limit. The request must be submitted in writing to CMS.
    (ii) Upon receipt of a request for an extension, CMS notifies the 
provider or supplier of the requested extension. CMS then either extends 
the suspension of payment for up to an additional 180 days or determines 
that the suspended payments are to be released to the provider or 
supplier.
    (3) Exceptions to the time limits. (i) The time limits specified in 
paragraphs (d)(1) and (d)(2) of this section do not apply if the case 
has been referred to, and is being considered by, the OIG for 
administrative action (for example, civil money penalties).
    (ii) CMS may grant an extension in addition to the extension 
provided under paragraph (d)(2) of this section if the Department of 
Justice submits a written request to CMS that the suspension of payment 
be continued based on the ongoing investigation and anticipated filing 
of criminal and/or civil actions. At a minimum, the request must include 
the following:
    (A) Identification of the entity under suspension.
    (B) The amount of time needed for continued suspension in order to 
implement the criminal and/or civil proceedings.
    (C) A statement of why and/or how criminal and/or civil actions may 
be affected if the requested extension is not granted.
    (e) Disposition of suspended payments. Payments suspended under the 
authority of Sec. 405.371(b) are first applied to reduce or eliminate 
any overpayments determined by the intermediary, carrier, or CMS, 
including any interest assessed under the provisions of Sec. 405.378, 
and then applied to reduce any other obligation to CMS or to HHS. In the 
absence of a legal requirement that the excess be paid to another 
entity, the excess is released to the provider or supplier.

[61 FR 63746, Dec. 2, 1996]



Sec. 405.373  Proceeding for offset or recoupment.

    (a) General rule. Except as specified in paragraph (b) of this 
section, if the intermediary, carrier, or CMS has determined that an 
offset or recoupment of payments under Sec. 405.371(a)(2) should be put 
into effect, the intermediary or carrier must--
    (1) Notify the provider or supplier of its intention to offset or 
recoup payment, in whole or in part, and the reasons for making the 
offset or recoupment; and
    (2) Give the provider or supplier an opportunity for rebuttal in 
accordance with Sec. 405.374.

[[Page 75]]

    (b) Paragraph (a) of this section does not apply if the 
intermediary, after furnishing a provider a written notice of the amount 
of program reimbursement in accordance with Sec. 405.1803, recoups 
payment under paragraph (c) of Sec. 405.1803. (For provider rights in 
this circumstance, see Secs. 405.1809, 405.1811, 405.1815, 405.1835, and 
405.1843.)
    (c) Actions following receipt of rebuttal statement. If a provider 
or supplier submits, in accordance with Sec. 405.374, a statement as to 
why an offset or recoupment should not be put into effect on the date 
specified in the notice, the intermediary or carrier must comply with 
the time limits and notification requirements of Sec. 405.375.
    (d) No rebuttal statement received. If, by the end of the time 
period specified in the notice, no statement has been received, the 
recoupment or offset goes into effect automatically.
    (e) Duration of recoupment or offset. If a recoupment or offset is 
put into effect, it remains in effect until the earliest of the 
following:
    (1) The overpayment and any assessed interest are liquidated.
    (2) The intermediary or carrier obtains a satisfactory agreement 
from the provider or supplier for liquidation of the overpayment.
    (3) The intermediary or carrier, on the basis of subsequently 
acquired evidence or otherwise, determines that there is no overpayment.

[61 FR 63747, Dec. 2, 1996]



Sec. 405.374  Opportunity for rebuttal.

    (a) General rule. If prior notice of the suspension of payment, 
offset, or recoupment is given under Sec. 405.372 or Sec. 405.373, the 
intermediary or carrier must give the provider or supplier an 
opportunity, before the suspension, offset, or recoupment takes effect, 
to submit any statement (to include any pertinent information) as to why 
it should not be put into effect on the date specified in the notice. 
Except as provided in paragraph (b) of this section, the provider or 
supplier has at least 15 days following the date of notification to 
submit the statement.
    (b) Exception. The intermediary or carrier may for cause--
    (1) Impose a shorter period for rebuttal; or
    (2) Extend the time within which the statement must be submitted.

[61 FR 63747, Dec. 2, 1996]



Sec. 405.375  Time limits for, and notification of, administrative determination after receipt of rebuttal statement.

    (a) Submission and disposition of evidence. If the provider or 
supplier submits a statement, under Sec. 405.374, as to why a suspension 
of payment, offset, or recoupment should not be put into effect, or, 
under Sec. 405.372(b)(2), why a suspension should be terminated, CMS, 
the intermediary, or carrier must within 15 days, from the date the 
statement is received, consider the statement (including any pertinent 
evidence submitted), together with any other material bearing upon the 
case, and determine whether the facts justify the suspension, offset, or 
recoupment or, if already initiated, justify the termination of the 
suspension, offset, or recoupment. Suspension, offset, or recoupment is 
not delayed beyond the date stated in the notice in order to review the 
statement.
    (b) Notification of determination. The intermediary or carrier must 
send written notice of the determination made under paragraph (a) of 
this section to the provider or supplier. The notice must--
    (1) In the case of offset or recoupment, contain rationale for the 
determination; and
    (2) In the case of suspension of payment, contain specific findings 
on the conditions upon which the suspension is initiated, continued, or 
removed and an explanatory statement of the determination.
    (c) Determination is not appealable. A determination made under 
paragraph (a) of this section is not an initial determination and is not 
appealable.

[61 FR 63747, Dec. 2, 1996]



Sec. 405.376  Suspension and termination of collection action and compromise of claims for overpayment.

    (a) Basis and purpose. This section contains requirements and 
procedures for the compromise of, or suspension or termination of 
collection action on, claims for overpayments against a provider or a 
supplier under the Medicare

[[Page 76]]

program. It is adopted under the authority of the Federal Claims 
Collection Act (31 U.S.C. 3711). Collection and compromise of claims 
against Medicare beneficiaries are explained at 20 CFR 404.515.
    (b) Definitions. As used in this section, debtor means a provider of 
services or a physician or other supplier of services that has been 
overpaid under title XVIII of the Social Security Act. It includes an 
individual, partnership, corporation, estate, trust, or other legal 
entity.
    (c) Basic conditions. A claim for recovery of Medicare overpayments 
against a debtor may be compromised, or collection action on it may be 
suspended or terminated, by the Centers for Medicare & Medicaid Services 
(CMS) if;
    (1) The claim does not exceed $100,000, or such higher amount as the 
Attorney General may from time to time prescribe, exclusive of interest; 
and
    (2) There is no indication of fraud, the filing of a false claim, or 
misrepresentation on the part of the debtor or any director, partner, 
manager, or other party having an interest in the claim.
    (d) Basis for compromise. A claim may be compromised for one or more 
of the following reasons:
    (1) The debtor, or the estate of a deceased debtor, does not have 
the present or prospective ability to pay the full amount within a 
reasonable time;
    (2) The debtor refuses to pay the claim in full and the United 
States is unable to collect the full amount within a reasonable time by 
legal proceedings;
    (3) There is real doubt the United States can prove its case in 
court; or
    (4) The cost of collecting the claim does not justify enforced 
collection of the full amount.
    (e) Basis for termination of collection action. Collection action 
may be terminated for one or more of the following reasons:
    (1) The United States cannot enforce collection of any significant 
sum;
    (2) The debtor cannot be located, there is no security to be 
liquidated, the statute of limitations has run, and the prospects of 
collecting by offset are too remote to justify retention of the claim;
    (3) The cost of further collection action is likely to exceed any 
recovery;
    (4) It is determined the claim is without merit; or
    (5) Evidence to substantiate the claim is no longer available.
    (f) Basis for suspension of collection action. Collection action may 
be suspended for either of the following reasons if future collection 
action is justified based on potential productivity, including 
foreseeable ability to pay, and size of claim:
    (1) The debtor cannot be located; or
    (2) The debtor is unable to make payments on the claim or to fulfill 
an acceptable compromise.
    (g) Factors considered. In determining whether a claim will be 
compromised, or collection action terminated or suspended, CMS will 
consider the following factors:
    (1) Age and health of the debtor, present and potential income, 
inheritance prospects, possible concealment or fraudulent transfer of 
assets, and the availability of assets which may be reached by enforced 
collection proceedings, for compromise under paragraph (d)(1) of this 
section, termination under paragraph (e)(1) of this section, and 
suspension under paragraph (f)(2) of this section;
    (2) Applicable exemptions available to a debtor and uncertainty 
concerning the price of the property in a forced sale, for compromise 
under paragraph (d)(2) of this section and termination under paragraph 
(e)(1) of this section; and
    (3) The probability of proving the claim in court, the probability 
of full or partial recovery, the availability of necessary evidence, and 
related pragmatic considerations, for compromise under paragraph (d)(3) 
of this section.
    (h) Amount of compromise. The amount accepted in compromise will be 
reasonable in relation to the amount that can be recovered by enforced 
collection proceedings.

Consideration shall be given to the following:
    (1) The exemptions available to the debtor under State or Federal 
law;
    (2) The time necessary to collect the overpayment;

[[Page 77]]

    (3) The litigative probabilities involved; and
    (4) The administrative and litigative costs of collection where the 
cost of collecting the claim is a basis for compromise.
    (i) Payment of compromise--(1) Time and manner. Payment of the 
amount that CMS has agreed to accept as a compromise in full settlement 
of a Medicare overpayment claim must be made within the time and in the 
manner prescribed by CMS. An overpayment claim is not compromised or 
settled until the full payment of the compromised amount has been made 
within the time and in the manner prescribed by CMS.
    (2) Failure to pay compromised amount. Failure of the debtor or the 
estate to make payment as provided by the comprise reinstates the full 
amount of the overpayment claim, less any amounts paid prior to the 
default.
    (j) Effect of compromise, or suspension, or termination of 
collection action. Any action taken by CMS under this section regarding 
the compromise of an overpayment claim, or termination or suspension of 
collection action on an overpayment claim, is not an initial 
determination for purposes of the appeal procedures under subparts G, H, 
and R of this part.

[43 FR 59381, Dec. 20, 1978, as amended at 57 56998, Dec. 2, 1992. 
Redesignated and amended at 61 FR 63745, 63747, Dec. 2, 1996]



Sec. 405.377  Withholding Medicare payments to recover Medicaid overpayments.

    (a) Basis and purpose. This section implements section 1885 of the 
Act, which provides for withholding Medicare payments to certain 
Medicaid providers that have not arranged to repay Medicaid overpayments 
as determined by the Medicaid State agency or have failed to provide 
information necessary to determine the amount (if any) of overpayments.
    (b) When withholding may be used. CMS may withhold Medicare payment 
to offset Medicaid overpayments that a Medicaid agency has been unable 
to collect if--
    (1) The Medicaid agency has followed the procedure specified in 
Sec. 447.31 of this chapter; and
    (2) The institution or person is one described in paragraph (c) of 
this section and either--
    (i) Has not made arrangements satisfactory to the Medicaid agency to 
repay the overpayment; or
    (ii) Has not provided information to the Medicaid agency necessary 
to enable the agency to determine the existence or amount of Medicaid 
overpayment.
    (c) Institutions or persons affected. Withholding under paragraph 
(b) of this section may be made with respect to any of the following 
entities that has or had in effect an agreement with a Medicaid agency 
to furnish services under an approved Medicaid State plan:
    (1) An institutional provider that has in effect an agreement under 
section 1866 of the Act. (Part 489 (Provider and Supplier Agreements) 
implements section 1866 of the Act.)
    (2) A physician or supplier that has accepted payment on the basis 
of an assignment under section 1842(b)(3)(B)(ii) of the Act. (Section 
424.55 sets forth the conditions a supplier agrees to in accepting 
assignment.)
    (d) Amount to be withheld. (1) CMS contacts the appropriate 
intermediary or carrier to determine the amount of Medicare payment to 
which the institution or person is entitled.
    (2) CMS may require the intermediary or carrier to withhold Medicare 
payments to the institution or person by the lesser of the following 
amounts:
    (i) The amount of the Medicare payments to which the institution or 
person would otherwise be entitled.
    (ii) The total Medicaid overpayment to the institution or person.
    (e) Notice of withholding. If CMS intends to withhold payments under 
this section, it notifies by certified mail, return receipt requested, 
the institution or person and the appropriate intermediary or carrier of 
the intention to withhold Medicare payments and follows the procedure in 
Sec. 405.374. The notice includes--
    (1) Identification of the institution or person; and
    (2) The amount of Medicaid overpayment to be withheld from payments 
to which the institution or person would otherwise be entitled under 
Medicare.

[[Page 78]]

    (f) Termination of withholding. CMS terminates the withholding if--
    (1) The Medicaid overpayment is completely recovered;
    (2) The institution or person enters into an agreement satisfactory 
to the Medicaid agency to repay the overpayment; or
    (3) The Medicaid agency determines that there is no overpayment 
based on newly acquired evidence or a subsequent audit.
    (g) Disposition of funds withheld. CMS releases amounts withheld 
under this section to the Medicaid agency to be applied against the 
Medicaid overpayment made by the State agency.

[61 FR 63747, Dec. 2, 1996]



Sec. 405.378  Interest charges on overpayment and underpayments to providers, suppliers, and other entities.

    (a) Basis and purpose. This section, which implements sections 
1815(d) and 1833(j) of the common law and Act, and authority granted 
under the Federal Claims Collection Act, provides for the charging and 
payment of interest on overpayments and underpayments to Medicare 
providers, suppliers, HMOs, competitive medical plans (CMPs), and health 
care prepayment plans (HCPPs).
    (b) Basic rules. (1) CMS will charge interest on overpayments, and 
pay interest on underpayments, to providers and suppliers of services 
(including physicians and other practitioners), except as specified in 
paragraphs (f) and (h) of this section.
    (2) Interest will accrue from the date of the final determination as 
defined in paragraph (c) of this section, and will either be charged on 
the overpayment balance or paid on the underpayment balance for each 30-
day period that payment is delayed. (Periods of less than 30 days will 
be treated as a full 30-day period, and the 30-day interest charge will 
be applied to any balance.)
    (c) Definition of final determination. (1) For purposes of this 
section, any of the following constitutes a final determination:
    (i) A Notice of Amount of Program Reimbursement (NPR) is issued, as 
discussed in Secs. 405.1803, 417.576, and 417.810, and either--
    (A) A written demand for payment is made; or
    (B) A written determination of an underpayment is made by the 
intermediary after a cost report is filed.
    (ii) In cases in which an NPR is not used as a notice of 
determination (that is, primarily under part B), one of the following 
determinations is issued--
    (A) A written determination that an overpayment exists and a written 
demand for payment;
    (B) A written determination of an underpayment; or
    (C) An Administrative Law Judge (ALJ) decision that reduces the 
amount of an overpayment below the amount that CMS has already 
collected.
    (iii) Other examples of cases in which an NPR is not used are 
carrier reasonable charge determinations under subpart E of this part, 
interim cost settlements made for HMOs, CMPs, and HCPPs under 
Secs. 417.574 and 417.810(e) of this chapter, and initial retroactive 
adjustment determinations under Sec. 413.64(f)(2) of this chapter. In 
the case of interim cost settlements and initial retroactive adjustment 
determinations, if the debtor does not dispute the adjustment 
determination within the timeframe designated in the notice of the 
determination (generally at least 15 days), a final determination is 
deemed to have been made. If the provider or supplier does dispute 
portions of the determination, a final determination is deemed to have 
been made on those portions when the intermediary issues a new 
determination in response to the dispute.
    (iv) The due date of a timely-filed cost report that indicates an 
amount is due CMS, and is not accompanied by payment in full. (If an 
additional overpayment or underpayment is determined by the carrier or 
intermediary, a final determination on the additional amount is made in 
accordance with paragraphs (c)(1)(i), (c)(1)(ii), or (c)(1)(iii), of 
this section.)
    (v) With respect to a cost report that is not filed on time, the day 
following the date the cost report was due (plus a single extension of 
time not to exceed 30 days if granted for good cause), until the time as 
a cost report is filed. (When the cost report is subsequently filed, 
there is an additional determination as

[[Page 79]]

specified in paragraphs (c)(1) (i), (ii), (iii), or (iv) of this 
section.)
    (2) Except as required by any subsequent administrative or judicial 
reversal, interest accrues from the date of final determination as 
specified in this subsection.
    (d) Rate of interest. (1) The interest rate on overpayments and 
underpayments is the higher of--
    (i) The rate as fixed by the Secretary of the Treasury after taking 
into consideration private consumer rates of interest prevailing on the 
date of final determination as defined in paragraph (c) of this section 
(this rate is published quarterly in the Federal Register by the 
Department under 45 CFR 30.13(a)); or
    (ii) The current value of funds rate (this rate is published 
annually in the Federal Register by the Secretary of the Treasury, 
subject to quarterly revisions).
    (2) [Reserved]
    (e) Accrual of interest. (1) If a cost report is filed that does not 
indicate an amount is due CMS but the intermediary makes a final 
determination that an overpayment exists, or if a carrier makes a final 
determination that an overpayment to a physician or supplier exists, 
interest will accrue beginning with the date of such final 
determination. Interest will continue to accrue during periods of 
administrative and judicial appeal and until final disposition of the 
claim.
    (2)(i) If a cost report is filed and indicates that an amount is due 
CMS, interest on the amount due will accrue from the due date of the 
cost report unless--
    (A) Full payment on the amount due accompanies the cost report; or
    (B) The provider and the intermediary agree in advance to liquidate 
the overpayment through a reduction in interim payments over the next 
30-day period.
    (ii) If the intermediary determines an additional overpayment during 
the cost settlement process, interest will accrue from the date of each 
determination.
    (iii) The interest rate on each of the final determinations of an 
overpayment will be the rate of interest in effect on the date the 
determination is made.
    (3) In the case of a cost report that is not filed on time, interest 
also will accrue on a determined overpayment from the day following the 
due date of the report (plus a single extension of time not to exceed 30 
days if granted for good cause, as specified in Sec. 413.24(f)) of this 
chapter, to the time the cost report is filed.
    (4) If an intermediary or a carrier makes a final determination that 
an underpayment exists, interest to the provider or the supplier will 
accrue from the date of notification of the underpayment.
    (f) Waiver of interest charges. (1) When an intermediary or a 
carrier makes a final determination that an overpayment or underpayment 
exists, as specified in paragraphs (e)(1), (e)(2)(ii), and (e)(4)--
    (i) Interest charges will be waived if the overpayment or 
underpayment is completely liquidated within 30 days from the date of 
the final determination.
    (ii) CMS may waive interest charges if it determines that the 
administrative cost of collecting them exceeds the interest charges.
    (2) Interest will not be waived for that period of time during which 
the cost report was due but remained unfiled for more than 30 days, as 
specified in paragraph (e)(3) of this section.
    (g) Rules applicable to partial payments. If an overpayment is 
repaid in installments or recouped by withholding from several payments 
due the provider or supplier of services--
    (1) Each payment or recoupment will be applied first to accrued 
interest and then to the principal; and
    (2) After each payment or recoupment, interest will accrue on the 
remaining unpaid balance.
    (h) Exceptions to applicability. (1) The provisions of this section 
do not apply to the time period for which interest is payable under 
Sec. 413.64(j) of this chapter because the provider seeks judicial 
review of a decision of the Provider Reimbursement Review Board, or a 
subsequent reversal, affirmance, or modification of that decision by the 
Administrator. Prior to that time, until the provider seeks judicial 
review, interest

[[Page 80]]

accrues at the rate specified in this section on outstanding unpaid 
balances resulting from final determinations as defined in paragraph (c) 
of this section.
    (2) If an overpayment or an underpayment determination is reversed 
administratively or judicially, and the reversal is no longer subject to 
appeal, appropriate adjustments will be made with respect to the 
overpayment or underpayment and the amount of interest charged.
    (i) Nonallowable cost. As specified in Secs. 412.113 and 413.153 of 
this chapter, interest accrued on overpayments and interest on funds 
borrowed specifically to repay overpayments are not considered allowable 
costs, up to the amount of the overpayment, unless the provider had made 
a prior commitment to borrow funds for other purposes (for example, 
capital improvements).


(See Sec. 413.153(a)(2) of this chapter for exceptions based on 
administrative or judicial reversal.)

[47 FR 54814, Dec. 6, 1982, as amended at 49 FR 36102, Sept. 14, 1984; 
49 FR 44472, Nov. 7, 1984; 51 FR 34792, Sept. 30, 1986; 56 FR 31336, 
July 10, 1991. Redesignated at 61 FR 63745, Dec. 2, 1996]

                   Repayment of Scholarships and Loans



Sec. 405.380  Collection of past-due amounts on scholarship and loan programs.

    (a) Basis and purpose. This section implements section 1892 of the 
Act, which authorizes the Secretary to deduct from Medicare payments for 
services amounts considered as past-due obligations under the National 
Health Service Corps Scholarship program, the Physician Shortage Area 
Scholarship program, and the Health Education Assistance Loan program.
    (b) Offsetting against Medicare payment. (1) Medicare carriers and 
intermediaries offset against Medicare payments in accordance with the 
signed repayment agreement between the Public Health Service and 
individuals who have breached their scholarship or loan obligations and 
who--
    (i) Accept Medicare assignment for services;
    (ii) Are employed by or affiliated with a provider, HMO, or 
Competitive Medical Plan (CMP) that receives Medicare payment for 
services; or
    (iii) Are members of a group practice that receives Medicare payment 
for services.
    (2) For purposes of this section, ``provider'' includes all entities 
eligible to receive Medicare payment in accordance with an agreement 
under section 1866 of the Act.
    (c) Beginning of offset. (1) The Medicare carrier offsets Medicare 
payments beginning six months after it notifies the individual or the 
group practice of the amount to be deducted and the particular 
individual to whom the deductions are attributable.
    (2) The Medicare intermediary offsets payments beginning six months 
after it notifies the provider, HMO, CMP or group practice of the amount 
to be deducted and the particular individuals to whom the deductions are 
attributable. Offset of payments is made in accordance with the terms of 
the repayment agreement. If the individual ceases to be employed by the 
provider, HMO, or CMP, or leaves the group practice, no deduction is 
made.
    (d) Refusal to offset against Medicare payment. If the individual 
refuses to enter into a repayment agreement, or breaches any provision 
of the agreement, or if Medicare payment is insufficient to maintain the 
offset collection according to the agreed upon formula, then--
    (1) The Department, within 30 days if feasible, informs the Attorney 
General; and
    (2) The Department excludes the individual from Medicare until the 
entire past due obligation has been repaid, unless the individual is a 
sole community practitioner or the sole source of essential specialized 
services in a community and the State requests that the individual not 
be excluded.

[57 FR 19092, May 4, 1992]



                      Subpart D--Private Contracts

    Authority: Secs. 1102, 1802, and 1871 of the Social Security Act (42 
U.S.C. 1302, 1395a, and 1395hh).

    Source: 63 FR 58901, Nov. 2, 1998, unless otherwise noted.

[[Page 81]]



Sec. 405.400  Definitions.

    For purposes of this subpart, the following definitions apply:
    Beneficiary means an individual who is enrolled in Part B of 
Medicare.
    Emergency care services means services furnished to an individual 
for treatment of an ``emergency medical condition'' as that term is 
defined in Sec. 422.2 of this chapter.
    Legal representative means one or more individuals who, as 
determined by applicable State law, has the legal authority to enter 
into the contract with the physician or practitioner on behalf of the 
beneficiary.
    Opt-out means the status of meeting the conditions specified in 
Sec. 405.410.
    Opt-out period means the 2-year period beginning on the effective 
date of the affidavit as specified by Sec. 405.410(c)(1) or 
Sec. 405.410(c)(2), as applicable.
    Participating physician means a ``physician'' as defined in this 
section who has signed an agreement to participate in Part B of 
Medicare.
    Physician means a doctor of medicine or a doctor of osteopathy who 
is currently licensed as that type of doctor in each State in which he 
or she furnishes services to patients.
    Practitioner means a physician assistant, nurse practitioner, 
clinical nurse specialist, certified registered nurse anesthetist, 
certified nurse midwife, clinical psychologist, or clinical social 
worker, who is currently legally authorized to practice in that capacity 
by each State in which he or she furnishes services to patients or 
clients.
    Private contract means a document that meets the criteria specified 
in Sec. 405.415.
    Properly opt-out means to complete, without defect, the requirements 
for opt-out as specified in Sec. 405.410.
    Properly terminate opt-out means to complete, without defect, the 
requirements for terminating opt-out as specified in Sec. 405.445.
    Urgent care services means services furnished to an individual who 
requires services to be furnished within 12 hours in order to avoid the 
likely onset of an emergency medical condition.



Sec. 405.405  General rules.

    (a) A physician or practitioner may enter into one or more private 
contracts with Medicare beneficiaries for the purpose of furnishing 
items or services that would otherwise be covered by Medicare, provided 
the conditions of this subpart are met.
    (b) A physician or practitioner who enters into at least one private 
contract with a Medicare beneficiary under the conditions of this 
subpart, and who submits one or more affidavits in accordance with this 
subpart, opts-out of Medicare for a 2-year period unless the opt-out is 
terminated early according to Sec. 405.445. The physician's or 
practitioner's opt-out may be renewed for subsequent 2-year periods.
    (c) Both the private contracts described in paragraph (a) of this 
section and the physician's or practitioner's opt-out described in 
paragraph (b) of this section are null and void if the physician or 
practitioner fails to properly opt-out in accordance with the conditions 
of this subpart.
    (d) Both the private contracts described in paragraph (a) of this 
section and the physician's or practitioner's opt-out described in 
paragraph (b) of this section are null and void for the remainder of the 
opt-out period if the physician or practitioner fails to remain in 
compliance with the conditions of this subpart during the opt-out 
period.
    (e) Services furnished under private contracts meeting the 
requirements of this subpart are not covered services under Medicare, 
and no Medicare payment will be made for such services either directly 
or indirectly, except as permitted in accordance with Sec. 405.435(c).



Sec. 405.410  Conditions for properly opting-out of Medicare.

    The following conditions must be met for a physician or practitioner 
to properly opt-out of Medicare:
    (a) Each private contract between a physician or a practitioner and 
a Medicare beneficiary that is entered into prior to the submission of 
the affidavit described in paragraph (b) of this section must meet the 
specifications of Sec. 405.415.

[[Page 82]]

    (b) The physician or practitioner must submit an affidavit that 
meets the specifications of Sec. 405.420 to each Medicare carrier with 
which he or she would file claims absent completion of opt-out.
    (c) A nonparticipating physician or a practitioner may opt-out of 
Medicare at any time in accordance with the following:
    (1) The 2-year opt-out period begins the date the affidavit meeting 
the requirements of Sec. 405.420 is signed, provided the affidavit is 
filed within 10 days after he or she signs his or her first private 
contract with a Medicare beneficiary.
    (2) If the physician or practitioner does not timely file any 
required affidavit, the 2-year opt-out period begins when the last such 
affidavit is filed. Any private contract entered into before the last 
required affidavit is filed becomes effective upon the filing of the 
last required affidavit and the furnishing of any items or services to a 
Medicare beneficiary under such contract before the last required 
affidavit is filed is subject to standard Medicare rules.
    (d) A participating physician may properly opt-out of Medicare at 
the beginning of any calendar quarter, provided that the affidavit 
described in Sec. 405.420 is submitted to the participating physician's 
Medicare carriers at least 30 days before the beginning of the selected 
calendar quarter. A private contract entered into before the beginning 
of the selected calendar quarter becomes effective at the beginning of 
the selected calendar quarter and the furnishing of any items or 
services to a Medicare beneficiary under such contract before the 
beginning of the selected calendar quarter is subject to standard 
Medicare rules.



Sec. 405.415  Requirements of the private contract.

    A private contract under this subpart must:
    (a) Be in writing and in print sufficiently large to ensure that the 
beneficiary is able to read the contract.
    (b) Clearly state whether the physician or practitioner is excluded 
from Medicare under sections 1128, 1156, or 1892 or any other section of 
the Social Security Act.
    (c) State that the beneficiary or his or her legal representative 
accepts full responsibility for payment of the physician's or 
practitioner's charge for all services furnished by the physician or 
practitioner.
    (d) State that the beneficiary or his or her legal representative 
understands that Medicare limits do not apply to what the physician or 
practitioner may charge for items or services furnished by the physician 
or practitioner.
    (e) State that the beneficiary or his or her legal representative 
agrees not to submit a claim to Medicare or to ask the physician or 
practitioner to submit a claim to Medicare.
    (f) State that the beneficiary or his or her legal representative 
understands that Medicare payment will not be made for any items or 
services furnished by the physician or practitioner that would have 
otherwise been covered by Medicare if there was no private contract and 
a proper Medicare claim had been submitted.
    (g) State that the beneficiary or his or her legal representative 
enters into this contract with the knowledge that he or she has the 
right to obtain Medicare-covered items and services from physicians and 
practitioners who have not opted-out of Medicare, and that the 
beneficiary is not compelled to enter into private contracts that apply 
to other Medicare-covered services furnished by other physicians or 
practitioners who have not opted-out.
    (h) State the expected or known effective date and expected or known 
expiration date of the opt-out period.
    (i) State that the beneficiary or his or her legal representative 
understands that Medigap plans do not, and that other supplemental plans 
may elect not to, make payments for items and services not paid for by 
Medicare.
    (j) Be signed by the beneficiary or his or her legal representative 
and by the physician or practitioner.
    (k) Not be entered into by the beneficiary or by the beneficiary's 
legal representative during a time when the beneficiary requires 
emergency care services or urgent care services. (However, a physician 
or practitioner may

[[Page 83]]

furnish emergency or urgent care services to a Medicare beneficiary in 
accordance with Sec. 405.440.)
    (l) Be provided (a photocopy is permissible) to the beneficiary or 
to his or her legal representative before items or services are 
furnished to the beneficiary under the terms of the contract.
    (m) Be retained (original signatures of both parties required) by 
the physician or practitioner for the duration of the opt-out period.
    (n) Be made available to CMS upon request.
    (o) Be entered into for each opt-out period.



Sec. 405.420  Requirements of the opt-out affidavit.

    An affidavit under this subpart must:
    (a) Be in writing and be signed by the physician or practitioner.
    (b) Contain the physician's or practitioner's full name, address, 
telephone number, national provider identifier (NPI) or billing number, 
if one has been assigned, uniform provider identification number (UPIN) 
if one has been assigned, or, if neither an NPI nor a UPIN has been 
assigned, the physician's or practitioner's tax identification number 
(TIN).
    (c) State that, except for emergency or urgent care services (as 
specified in Sec. 405.440), during the opt-out period the physician or 
practitioner will provide services to Medicare beneficiaries only 
through private contracts that meet the criteria of paragraph 
Sec. 405.415 for services that, but for their provision under a private 
contract, would have been Medicare-covered services.
    (d) State that the physician or practitioner will not submit a claim 
to Medicare for any service furnished to a Medicare beneficiary during 
the opt-out period, nor will the physician or practitioner permit any 
entity acting on his or her behalf to submit a claim to Medicare for 
services furnished to a Medicare beneficiary, except as specified in 
Sec. 405.440.
    (e) State that, during the opt-out period, the physician or 
practitioner understands that he or she may receive no direct or 
indirect Medicare payment for services that he or she furnishes to 
Medicare beneficiaries with whom he or she has privately contracted, 
whether as an individual, an employee of an organization, a partner in a 
partnership, under a reassignment of benefits, or as payment for a 
service furnished to a Medicare beneficiary under a Medicare+Choice 
plan.
    (f) State that a physician or practitioner who opts-out of Medicare 
acknowledges that, during the opt-out period, his or her services are 
not covered under Medicare and that no Medicare payment may be made to 
any entity for his or her services, directly or on a capitated basis.
    (g) State a promise by the physician or practitioner to the effect 
that, during the opt-out period, the physician or practitioner agrees to 
be bound by the terms of both the affidavit and the private contracts 
that he or she has entered into.
    (h) Acknowledge that the physician or practitioner recognizes that 
the terms of the affidavit apply to all Medicare-covered items and 
services furnished to Medicare beneficiaries by the physician or 
practitioner during the opt-out period (except for emergency or urgent 
care services furnished to the beneficiaries with whom he or she has not 
previously privately contracted) without regard to any payment 
arrangements the physician or practitioner may make.
    (i) With respect to a physician who has signed a Part B 
participation agreement, acknowledge that such agreement terminates on 
the effective date of the affidavit.
    (j) Acknowledge that the physician or practitioner understands that 
a beneficiary who has not entered into a private contract and who 
requires emergency or urgent care services may not be asked to enter 
into a private contract with respect to receiving such services and that 
the rules of Sec. 405.440 apply if the physician furnishes such 
services.



Sec. 405.425  Effects of opting-out of Medicare.

    If a physician or practitioner opts-out of Medicare in accordance 
with this subpart for the 2-year period for which the opt-out is 
effective, the following results obtain:
    (a) Except as provided in Sec. 405.440, no payment may be made 
directly by

[[Page 84]]

Medicare or by any Medicare+Choice plan to the physician or practitioner 
or to any entity to which the physician or practitioner reassigns his 
right to receive payment for services.
    (b) The physician or practitioner may not furnish any item or 
service that would otherwise be covered by Medicare (except for 
emergency or urgent care services) to any Medicare beneficiary except 
through a private contract that meets the requirements of this subpart.
    (c) The physician or practitioner is not subject to the requirement 
to submit a claim for items or services furnished to a Medicare 
beneficiary, as specified in Sec. 424.5(a)(6) of this chapter, except as 
provided in Sec. 405.440.
    (d) The physician or practitioner is prohibited from submitting a 
claim to Medicare for items or services furnished to a Medicare 
beneficiary except as provided in Sec. 405.440.
    (e) In the case of a physician, he or she is not subject to the 
limiting charge provisions of Sec. 414.48 of this chapter, except for 
services provided under Sec. 405.440.
    (f) The physician or practitioner is not subject to the prohibition-
on-reassignment provisions of Sec. 414.80 of this chapter, except for 
services provided under Sec. 405.440.
    (g) In the case of a practitioner, he or she is not prohibited from 
billing or collecting amounts from beneficiaries (as provided in 42 
U.S.C. 1395u(b)(18)(B)).
    (h) The death of a beneficiary who has entered into a private 
contract (or whose legal representative has done so) does not invoke 
Sec. 424.62 or Sec. 424.64 of this chapter with respect to the physician 
or practitioner with whom the beneficiary (or legal representative) has 
privately contracted.
    (i) The physician or practitioner who has not been excluded under 
sections 1128, 1156, or 1892 of the Social Security Act may order, 
certify the need for, or refer a beneficiary for Medicare-covered items 
and services, provided the physician or practitioner is not paid, 
directly or indirectly, for such services (except as provided in 
Sec. 405.440).
    (j) The physician or practitioner who is excluded under sections 
1128, 1156, or 1892 of the Social Security Act may not order, prescribe, 
or certify the need for Medicare-covered items and services except as 
provided in Sec. 1001.1901 of this title, and must otherwise comply with 
the terms of the exclusion in accordance with Sec. 1001.1901 effective 
with the date of the exclusion.



Sec. 405.430  Failure to properly opt-out.

    (a) A physician or practitioner fails to properly opt-out if--
    (1) Any private contract between the physician or practitioner and a 
Medicare beneficiary, that was entered into before the affidavit 
described in Sec. 405.420 was filed, does not meet the specifications of 
Sec. 405.415; or
    (2) He or she fails to submit the affidavit(s) in accordance with 
Sec. 405.420.
    (b) If a physician or practitioner fails to properly opt-out in 
accordance with paragraph (a) of this section, the following results 
obtain:
    (1) The physician's or practitioner's attempt to opt-out of Medicare 
is nullified, and all of the private contracts between the physician or 
practitioner and Medicare beneficiaries for the two-year period covered 
by the attempted opt-out are deemed null and void.
    (2) The physician or practitioner must submit claims to Medicare for 
all Medicare-covered items and services furnished to Medicare 
beneficiaries, including the items and services furnished under the 
nullified contracts. A nonparticipating physician is subject to the 
limiting charge provisions of Sec. 414.48 of this chapter. A 
participating physician is subject to the limitations on charges of the 
participation agreement he or she signed.
    (3) The practitioner may not reassign any claim except as provided 
in Sec. 424.80 of this chapter.
    (4) The practitioner may neither bill nor collect an amount from the 
beneficiary except for applicable deductible and coinsurance amounts.
    (5) The physician or practitioner may make another attempt to 
properly opt-out at any time.



Sec. 405.435  Failure to maintain opt-out.

    (a) A physician or practitioner fails to maintain opt-out under this 
subpart if, during the opt-out period--
    (1) He or she knowingly and willfully--

[[Page 85]]

    (i) Submits a claim for Medicare payment (except as provided in 
Sec. 405.440); or
    (ii) Receives Medicare payment directly or indirectly for Medicare-
covered services furnished to a Medicare beneficiary (except as provided 
in Sec. 405.440).
    (2) He or she fails to enter into private contracts with Medicare 
beneficiaries for the purpose of furnishing items and services that 
would otherwise be covered by Medicare, or enters into contracts that 
fail to meet the specifications of Sec. 405.415; or
    (3) He or she fails to comply with the provisions of Sec. 405.440 
regarding billing for emergency care services or urgent care services; 
or
    (4) He or she fails to retain a copy of each private contract that 
he or she has entered into for the duration of the opt-out period for 
which the contracts are applicable or fails to permit CMS to inspect 
them upon request.
    (b) If a physician or practitioner fails to maintain opt-out in 
accordance with paragraph (a) of this section, and fails to demonstrate, 
within 45 days of a notice from the carrier of a violation of paragraph 
(a) of this section, that he or she has taken good faith efforts to 
maintain opt-out (including by refunding amounts in excess of the charge 
limits to beneficiaries with whom he or she did not sign a private 
contract), the following results obtain, effective 46 days after the 
date of the notice, but only for the remainder of the opt-out period:
    (1) All of the private contracts between the physician or 
practitioner and Medicare beneficiaries are deemed null and void.
    (2) The physician's or practitioner's opt-out of Medicare is 
nullified.
    (3) The physician or practitioner must submit claims to Medicare for 
all Medicare-covered items and services furnished to Medicare 
beneficiaries.
    (4) The physician or practitioner or beneficiary will not receive 
Medicare payment on Medicare claims for the remainder of the opt-out 
period, except as provided in paragraph (c) of this section.
    (5) The physician is subject to the limiting charge provisions of 
Sec. 414.48 of this chapter.
    (6) The practitioner may not reassign any claim except as provided 
in Sec. 424.80 of this chapter.
    (7) The practitioner may neither bill nor collect any amount from 
the beneficiary except for applicable deductible and coinsurance 
amounts.
    (8) The physician or practitioner may not attempt to once more meet 
the criteria for properly opting-out until the 2-year opt-out period 
expires.
    (c) Medicare payment may be made for the claims submitted by a 
beneficiary for the services of an opt-out physician or practitioner 
when the physician or practitioner did not privately contract with the 
beneficiary for services that were not emergency care services or urgent 
care services and that were furnished no later than 15 days after the 
date of a notice by the carrier that the physician or practitioner has 
opted-out of Medicare.



Sec. 405.440  Emergency and urgent care services.

    (a) A physician or practitioner who has opted-out of Medicare under 
this subpart need not enter into a private contract to furnish emergency 
care services or urgent care services to a Medicare beneficiary. 
Accordingly, a physician or practitioner will not be determined to have 
failed to maintain opt-out if he or she furnishes emergency care 
services or urgent care services to a Medicare beneficiary with whom the 
physician or practitioner has not previously entered into a private 
contract, provided the physician or practitioner complies with the 
billing requirements specified in paragraph (b) of this section.
    (b) When a physician or practitioner who has not been excluded under 
sections 1128, 1156, or 1892 of the Social Security Act furnishes 
emergency care services or urgent care services to a Medicare 
beneficiary with whom the physician or practitioner has not previously 
entered into a private contract, he or she:
    (1) Must submit a claim to Medicare in accordance with both 42 CFR 
part 424 and Medicare instructions (including but not limited to 
complying with proper coding of emergency or urgent care services 
furnished by physicians

[[Page 86]]

and practitioners who have opted-out of Medicare).
    (2) May collect no more than--
    (i) The Medicare limiting charge, in the case of a physician; or
    (ii) The deductible and coinsurance, in the case of a practitioner.
    (c) Emergency care services or urgent care services furnished to a 
Medicare beneficiary with whom the physician or practitioner has 
previously entered into a private contract (that is, entered into before 
the onset of the emergency medical condition or urgent medical 
condition), are furnished under the terms of the private contract.
    (d) Medicare may make payment for emergency care services or urgent 
care services furnished by a physician or practitioner who has properly 
opted-out when the services are furnished and the claim for services is 
made in accordance with this section. A physician or practitioner who 
has been excluded must comply with the regulations at Sec. 1001.1901 
(Scope and effect of exclusion) of this title when he or she furnishes 
emergency services to beneficiaries and may not bill and be paid for 
urgent care services.



Sec. 405.445  Renewal and early termination of opt-out.

    (a) A physician or practitioner may renew opt-out by filing an 
affidavit with each carrier with which he or she would file claims 
absent completion of opt-out, provided the affidavits are filed within 
30 days after the current opt-out period expires.
    (b) To properly terminate opt-out a physician or practitioner must:
    (1) Not have previously opted out of Medicare.
    (2) Notify all Medicare carriers, with which he or she filed an 
affidavit, of the termination of the opt-out no later than 90 days after 
the effective date of the opt-out period.
    (3) Refund to each beneficiary with whom he or she has privately 
contracted all payment collected in excess of:
    (i) The Medicare limiting charge (in the case of physicians); or
    (ii) The deductible and coinsurance (in the case of practitioners).
    (4) Notify all beneficiaries with whom the physician or practitioner 
entered into private contracts of the physician's or practitioner's 
decision to terminate opt-out and of the beneficiaries' right to have 
claims filed on their behalf with Medicare for the services furnished 
during the period between the effective date of the opt-out and the 
effective date of the termination of the opt-out period.
    (c) When the physician or practitioner properly terminates opt-out 
in accordance with paragraph (b), he or she will be reinstated in 
Medicare as if there had been no opt-out, and the provision of 
Sec. 405.425 shall not apply unless the physician or practitioner 
subsequently properly opts out.
    (d) A physician or practitioner who has completed opt-out on or 
before January 1, 1999 may terminate opt-out during the 90 days 
following January 1, 1999 if he or she notifies all carriers to whom he 
or she would otherwise submit claims of the intent to terminate opt-out 
and complies with paragraphs (b)(3) and (4) of this section. Paragraph 
(c) of this section applies in these cases.



Sec. 405.450  Appeals.

    (a) A determination by CMS that a physician or practitioner has 
failed to properly opt-out, failed to maintain opt-out, failed to timely 
renew opt-out, failed to privately contract, or failed to properly 
terminate opt-out is an initial determination for purposes of 
Sec. 405.803.
    (b) A determination by CMS that no payment can be made to a 
beneficiary for the services of a physician who has opted-out is an 
initial determination for purposes of Sec. 405.803.



Sec. 405.455  Application to Medicare+Choice contracts.

    An organization that has a contract with CMS to provide one or more 
Medicare+Choice (M+C) plans to beneficiaries (part 422 of this chapter):
    (a) Must acquire and maintain information from Medicare carriers on 
physicians and practitioners who have opted-out of Medicare.
    (b) Must make no payment directly or indirectly for Medicare covered 
services furnished to a Medicare beneficiary by a physician or 
practitioner who has opted-out of Medicare.

[[Page 87]]

    (c) May make payment to a physician or practitioner who furnishes 
emergency or urgent care services to a beneficiary who has not 
previously entered into a private contract with the physician or 
practitioner in accordance with Sec. 405.440.



         Subpart E--Criteria for Determining Reasonable Charges

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 32 FR 12599, Aug. 31, 1967, unless otherwise noted. 
Redesignated at 42 FR 52826, Sept. 30, 1977.



Sec. 405.500  Basis.

    Subpart E is based on the provisions of the following sections of 
the Act: Section 1814(b) provides for Part A payment on the basis of the 
lesser of a provider's reasonable costs or customary charges. Section 
1832 establishes the scope of benefits provided under the Part B 
supplementary medical insurance program. Section 1833(a) sets forth the 
amounts of payment for supplementary medical insurance services on the 
basis of the lesser of a provider's reasonable costs or customary 
charges. Section 1834(a) specifies how payments are made for the 
purchase or rental of new and used durable medical equipment for 
Medicare beneficiaries. Section 1834(b) provides for payment for 
radiologist services on a fee schedule basis. Section 1834(c) provides 
for payments and standards for screening mammography. Section 1842(b) 
sets forth the provisions for a carrier to enter into a contract with 
the Secretary and to make determinations with respect to Part B claims. 
Section 1842(h) sets forth the requirements for a physician or supplier 
to voluntarily enter into an agreement with the Secretary to become a 
participating physician or supplier. Section 1842(i) sets forth the 
provisions for the payment of Part B claims. Section 1848 establishes a 
fee schedule for payment of physician services. Section 1861(b) sets 
forth the inpatient hospital services covered by the Medicare program. 
Section 1861(s) sets forth medical and other health services covered by 
the Medicare program. Section 1861(v) sets forth the general authority 
under which CMS may establish limits on provider costs recognized as 
reasonable in determining Medicare program payments. Section 1861(aa) 
sets forth the rural health clinic services and Federally qualified 
health center services covered by the Medicare program. Section 1861(jj) 
defines the term ``covered osteoporosis drug.'' Section 1862(a)(14) 
lists services that are excluded from coverage. Section 1866(a) 
specifies the terms for provider agreements. Section 1881 authorizes 
special rules for the coverage of and payment for services furnished to 
patients with end-stage renal disease. Section 1886 sets forth the 
requirements for payment to hospitals for inpatient hospital services. 
Section 1887 sets forth requirements for payment of provider-based 
physicians and payment under certain percentage arrangements. Section 
1889 provides for Medicare and Medigap information by telephone.

[60 FR 63175, Dec. 8, 1995]



Sec. 405.501  Determination of reasonable charges.

    (a) Except as specified in paragraphs (b), (c), and (d) of this 
section, Medicare pays no more for Part B medical and other health 
services than the ``reasonable charge'' for such service. The reasonable 
charge is determined by the carriers (subject to any deductible and 
coinsurance amounts as specified in Secs. 410.152 and 410.160 of this 
chapter).
    (b) Part B of Medicare pays on the basis of ``reasonable cost'' (see 
part 413 of this chapter) for certain institutional services, certain 
services furnished under arrangements with institutions, and services 
furnished by entities that elect to be paid on a cost basis (including 
health maintenance organizations, rural health clinics, Federally 
qualified health centers and end-stage renal disease facilities).
    (c) Carriers will determine the reasonable charge on the basis of 
the criteria specified in Sec. 405.502, and the customary and prevailing 
charge screens in effect when the service was furnished. (Also see 
Secs. 415.55 through 415.70 and Secs. 415.100 through 415.130 of this 
chapter, which pertain to the determination of reimbursement for 
services

[[Page 88]]

performed by hospital-based physicians.) However, when services are 
furnished more than 12 months before the beginning of the fee screen 
year (January 1 through December 30) in which a request for payment is 
made, payment is based on the customary and prevailing charge screens in 
effect for the fee screen year that ends immediately preceding the fee 
screen year in which the claim or request for payment is made.
    (d) Payment under Medicare Part B for durable medical equipment and 
prosthetic and orthotic devices is determined in accordance with the 
provisions of subpart D of part 414 of this chapter.

[47 FR 63274, Dec. 31, 1981, as amended at 51 FR 34978, Oct. 1, 1986; 51 
FR 37911, Oct. 27, 1986; 54 FR 9003, Mar. 2, 1989; 57 FR 24975, June 12, 
1992; 57 FR 33896, July 31, 1992; 57 FR 57688, Dec. 7, 1992; 60 FR 
63176, Dec. 8, 1995]



Sec. 405.502  Criteria for determining reasonable charges.

    (a) Criteria. The law allows for flexibility in the determination of 
reasonable charges to accommodate reimbursement to the various ways in 
which health services are furnished and charged for. The criteria for 
determining what charges are reasonable include:
    (1) The customary charges for similar services generally made by the 
physician or other person furnishing such services.
    (2) The prevailing charges in the locality for similar services.
    (3) In the case of physicians' services, the prevailing charges 
adjusted to reflect economic changes as provided under Sec. 405.504 of 
this subpart.
    (4) In the case of medical services, supplies, and equipment that 
are reimbursed on a reasonable charge basis (excluding physicians' 
services), the inflation-indexed charge as determined under 
Sec. 405.509.
    (5) [Reserved]
    (6) In the case of medical services, supplies, and equipment 
(including equipment servicing) that the Secretary judges do not 
generally vary significantly in quality from one supplier to another, 
the lowest charge levels at which such services, supplies, and equipment 
are widely and consistently available in a locality.
    (7) Other factors that may be found necessary and appropriate with 
respect to a category of service to use in judging whether the charge is 
inherently reasonable. This includes special reasonable charge limits 
(which may be either upper or lower limits) established by CMS or a 
carrier if it determines that the standard rules for calculating 
reasonable charges set forth in this subpart result in the grossly 
deficient or excessive charges. The determination of these limits is 
described in paragraphs (g) and (h) of this section.
    (8) In the case of laboratory services billed by a physician but 
performed by an outside laboratory, the payment levels established in 
accordance with the criteria stated in Sec. 405.515.
    (9) Except as provided in paragraph (a)(10) of this section, in the 
case of services of assistants-at-surgery as defined in Sec. 405.580 in 
teaching and non-teaching settings, charges that are not more than 16 
percent of the prevailing charge in the locality, adjusted by the 
economic index, for the surgical procedure performed by the primary 
surgeon. Payment is prohibited for the services of an assistant-at-
surgery in surgical procedures for which CMS has determined that 
assistants-at-surgery on average are used in less than 5 percent of such 
procedures nationally.
    (10) In the case of services of assistants at surgery that meet the 
exception under Sec. 415.190(c)(2) or (c)(3) of this chapter because the 
physician is performing a unique, necessary, specialized medical service 
in the total care of a patient during surgery, reasonable charges 
consistent with prevailing practice in the carrier's service area rather 
than the special assistant at surgery rate.
    (b) Comparable services limitation. The law also specifies that the 
reasonable charge cannot be higher than the charge applicable for a 
comparable service under comparable circumstances to the carriers' own 
policyholders and subscribers.
    (c) Application of criteria. In applying these criteria, the 
carriers are to exercise judgment based on factual data on the charges 
made by physicians to patients generally and by other persons

[[Page 89]]

to the public in general and on special factors that may exist in 
individual cases so that determinations of reasonable charge are 
realistic and equitable.
    (d) Responsibility of Administration and carriers. Determinations by 
carriers of reasonable charge are not reviewed on a case-by-case basis 
by the Centers for Medicare & Medicaid Services, although the general 
procedures and performance of functions by carriers are evaluated. In 
making determinations, carriers apply the provisions of the law under 
broad principles issued by the Centers for Medicare & Medicaid Services. 
These principles are intended to assure overall consistency among 
carriers in their determinations of reasonable charge. The principles in 
Secs. 405.503 through 405.507 establish the criteria for making such 
determinations in accordance with the statutory provisions.
    (e) Determination of reasonable charges under the End-Stage Renal 
Disease (ESRD) Program--(1) General. Reasonable charges for renal-
related items and services (furnished in connection with transplantation 
or dialysis) must be related to costs and allowances that are reasonable 
when the treatments are furnished in an effective and economical manner.
    (2) Nonprovider (independent) dialysis facilities. Reasonable 
charges for renal-related items and services furnished before August 1, 
1983 must be determined related to costs and charges prior to July, 
1973, in accordance with the regulations at Sec. 405.541. Items and 
services related to outpatient maintenance dialysis that are furnished 
after that date are paid for in accordance with Secs. 405.544 and 
413.170 of this chapter.
    (3) Provider services and (hospital-based) dialysis facilities. 
Renal-related items and services furnished by providers, or by ESRD 
facilities based in hospitals, before August 1, 1983 are paid for under 
the provider reimbursement provisions found generally in part 413 of 
this chapter. Items and services related to outpatient maintenance 
dialysis that are furnished after that date are paid for in accordance 
with Secs. 405.544 and 413.170 of this chapter.
    (4) Physicians' services. Reasonable charges for renal-related 
physicians' services must be determined considering charges made for 
other services involving comparable physicians' time and skill 
requirements, in accordance with regulations at Secs. 405.542 and 
405.543.
    (5) Health maintenance organizations (HMOs). For special rules 
concerning the reimbursement of ESRD services furnished by risk-basis 
HMOs, or by facilities owned or operated by or related to such HMOs by 
common ownership or control, see Secs. 405.2042(b)(14) and 405.2050(c).
    (f) Determining payments for certain physician services furnished in 
outpatient hospital settings--(1) General rule. If physician services of 
the type routinely furnished in physicians' offices are furnished in 
outpatient hospital settings before January 1, 1992, carriers determine 
the reasonable charge for those services by applying the limits 
described in paragraph (f)(5) of this section.
    (2) Definition. As used in this paragraph (f), outpatient settings 
means--
    (i) Hospital outpatient departments, including clinics and emergency 
rooms; and
    (ii) Comprehensive outpatient rehabilitation facilities.
    (3) Services covered by limits. The carrier establishes a list of 
services routinely furnished in physicians' offices in the area. The 
carrier has the discretion to determine which professional services are 
routinely furnished in physicians' offices, based on current medical 
practice in the area. Listed below are some examples of routine services 
furnished by office-based physicians.

                                Examples

    Review of recent history, determination of blood pressure, 
ausculation of heart and lungs, and adjustment of medication.
    Brief history and examination, and initiation of diagnostic and 
treatment programs.
    Treatment of an acute respiratory infection.

    (4) Services excluded from limits. The limits established under this 
paragraph do not apply to the following:
    (i) Rural health clinic services.
    (ii) Surgical services included on the ambulatory surgical center 
list of procedures published under Sec. 416.65(c) of this chapter.

[[Page 90]]

    (iii) Services furnished in a hospital emergency room after the 
sudden onset of a medical condition manifesting itself by acute symptoms 
of sufficient severity (including severe pain) such that the absence of 
immediate medical attention could reasonably be expected to result in--
    (A) Placing the patient's health in serious jeopardy;
    (B) Serious impairment to bodily functions; or
    (C) Serious dysfunction of any bodily organ or part.
    (iv) Anesthesiology services and diagnostic and therapeutic 
radiology services.
    (v) Federally qualified health center services paid under the rules 
in part 405 subpart X.
    (5) Methodology for developing limits--(i) Development of a charge 
base. The carrier establishes a charge base for each service identified 
as a routine office-based physician service. The charge base consists of 
the prevailing charge in the locality for each such service adjusted by 
the economic index. The carrier uses the prevailing charges that apply 
to services by nonspecialists in office practices in the locality in 
which the outpatient setting is located.
    (ii) Calculation of the outpatient limits. The carrier calculates 
the charge limit for each service by multiplying the charge base amount 
for each service by .60.
    (6) Application of limits. The reasonable charge for physician 
services of the type described in paragraph (f)(3) of this section that 
are furnished in an outpatient setting is the lowest of the actual 
charges, the customary charges in accordance with Sec. 405.503, the 
prevailing charges applicable to these services in accordance with 
Sec. 405.504, or the charge limits calculated in paragraph (f)(5)(ii) of 
this section.
    (g) Determination of payment amounts in special circumstances--(1) 
General. (i) For purposes of this paragraph, a ``category of items or 
services'' may consist of a single item or service or any number of 
items or services.
    (ii) CMS or a carrier may determine that the standard rules for 
calculating Part B payment amounts for a category of items or services 
identified in section 1861(s) of the Act (other than physician services 
paid under section 1848 of the Act) will result in grossly deficient or 
excessive amounts.
    (iii) If CMS or the carrier determines that the standard rules for 
calculating payment amounts for a category of items or services set 
forth in this subpart will result in grossly deficient or excessive 
amounts, CMS or the carrier may establish special payment limits that 
are realistic and equitable for a category of items or services.
    (iv) The limit on the payment amount is either an upper limit to 
correct a grossly excessive payment amount or a lower limit to correct a 
grossly deficient payment amount.
    (v) The limit is either a specific dollar amount or is based on a 
special method to be used in determining the payment amount.
    (vi) Except as provided in paragraph (h) of this section, a payment 
limit for a given year may not vary by more than 15 percent from the 
payment amount established for the preceding year.
    (vii) Examples of excessive or deficient payment amounts. Examples 
of the factors that may result in grossly deficient or excessive payment 
amounts include, but are not limited to, the following:
    (A) The marketplace is not competitive. This includes circumstances 
in which the marketplace for a category of items or services is not 
truly competitive because a limited number of suppliers furnish the item 
or service.
    (B) Medicare and Medicaid are the sole or primary sources of payment 
for a category of items or services.
    (C) The payment amounts for a category of items or services do not 
reflect changing technology, increased facility with that technology, or 
changes in acquisition, production, or supplier costs.
    (D) The payment amounts for a category of items or services in a 
particular locality are grossly higher or lower than payment amounts in 
other comparable localities for the category of items or services, 
taking into account the relative costs of furnishing the category of 
items or services in the different localities.

[[Page 91]]

    (E) Payment amounts for a category of items or services are grossly 
higher or lower than acquisition or production costs for the category of 
items or services.
    (F) There have been increases in payment amounts for a category of 
items or services that cannot be explained by inflation or technology.
    (G) The payment amounts for a category of items or services are 
grossly higher or lower than the payments made for the same category of 
items or services by other purchasers in the same locality.
    (2) Establishing a limit. In establishing a payment limit for a 
category of items or services, CMS or a carrier considers the available 
information that is relevant to the category of items or services and 
establishes a payment amount that is realistic and equitable. The 
factors CMS or a carrier consider in establishing a specific dollar 
amount or special payment method for a category of items or services may 
include, but are not limited to, the following:
    (i) Price markup. This is the relationship between the retail and 
wholesale prices or manufacturer's costs of a category of items or 
services. If information on a particular category of items or services 
is not available, CMS or a carrier may consider the markup on a similar 
category of items or services and information on general industry 
pricing trends.
    (ii) Differences in charges. CMS or a carrier may consider the 
differences in charges for a category of items or services made to non-
Medicare and Medicare patients or to institutions and other large volume 
purchasers.
    (iii) Costs. CMS or a carrier may consider resources (for example, 
overhead, time, acquisition costs, production costs, and complexity) 
required to produce a category of items or services.
    (iv) Utilization. CMS or a carrier may impute a reasonable rate of 
use for a category of items or services and consider unit costs based on 
efficient utilization.
    (v) Payment amounts in other localities. CMS or a carrier may 
consider payment amounts for a category of items or services furnished 
in another locality.
    (3) Notification of limits--(i) National limits. CMS publishes in 
the Federal Register proposed and final notices announcing a special 
payment limit described in this paragraph (g) before it adopts the 
limit. The notices set forth the criteria and circumstances, if any, 
under which a carrier may grant an exception to a payment limit for a 
category of items or services.
    (ii) Carrier-level limits. A carrier proposing to establish a 
special payment limit for a category of items or services must inform 
the affected suppliers and State Medicaid agencies of the factors it 
considered in determining and in establishing the limit, as described in 
paragraphs (g)(1) through (g)(3) of this section, and solicit comments. 
The carrier must evaluate the comments it receives and inform the 
affected suppliers, State Medicaid agencies, and CMS of any final limits 
it establishes. CMS acknowledges in writing to the carrier that it 
received the carrier's notification. After the carrier has received 
CMS's acknowledgement, the limit may be effective for services furnished 
at least 30 days after the date of the carrier's notification.
    (h) Special payment limit adjustments greater than 15 percent of the 
payment amount. In addition to applying the general rules under 
paragraphs (g)(1) through (g)(3) of this section, CMS applies the 
following rules in determining and establishing a payment adjustment 
greater than 15 percent of the payment amount for a category of items or 
services within a year:
    (1) Potential impact of special limit. CMS considers the potential 
impact on quality, access, beneficiary liability, assignment rates, and 
participation of suppliers.
    (2) Supplier consultation. Before making a determination that a 
payment amount for a category of items or services is not inherently 
reasonable by reason of its grossly excessive or deficient amount, CMS 
consults with representatives of the suppliers likely to be affected by 
the change in the payment amount.
    (3) Publication of national limits. If CMS determines under this 
paragraph (h) to establish a special payment limit for a category of 
items or services, it publishes in the Federal Register

[[Page 92]]

proposed and final notices of a special payment limit before it adopts 
the limit. The notice sets forth the criteria and circumstances, if any, 
under which a carrier may grant an exception to the limit for the 
category of items or services.
    (i) Proposed notice. The proposed notice--
    (A) Explains the factors and data that CMS considered in determining 
that the payment amount for a category of items or services is grossly 
excessive or deficient;
    (B) Specifies the proposed payment amount or methodology to be 
established with respect to a category of items or services;
    (C) Explains the factors and data that CMS considered in determining 
the payment amount or methodology, including the economic justification 
for a uniform fee or payment limit if it is proposed;
    (D) Explains the potential impacts of a limit on a category of items 
or services as described in paragraph (h)(1) of this section; and
    (E) Allows no less than 60 days for public comment on the proposed 
payment limit for the category of items or services.
    (ii) Final notice. The final notice--
    (A) Explains the factors and data that CMS considered, including the 
economic justification for any uniform fee or payment limit established; 
and
    (B) Responds to the public comments.
    (i) Paramedic intercept ambulance services. (1) CMS establishes its 
payment allowance on a carrier-wide basis by using the median allowance 
from all localities within an individual carrier's jurisdiction.
    (2) CMS's payment allowance is equal to the advanced life support 
rate minus 40 percent of the basic life support rate.
    (3) CMS bases payment on the lower of the actual charge or the 
amount described in paragraph (i)(1) and (i)(2) of this section.

(Secs. 1102, 1814(b), 1833(a), 1842(b), and (h), and 1871, 1903(i)(1) of 
the Social Security Act; 49 Stat. 647, as amended, 79 Stat. 296, 302, 
310, 331; 86 Stat. 1395, 1454; 42 U.S.C. 1302, 1395u(b), 1395hh, 
1396b(i)(1).

[32 FR 12599, Aug. 31, 1967]

    Editorial Note: For Federal Register citations affecting 
Sec. 405.502, see the List of CFR Sections Affected, which appears in 
the Finding Aids section of the printed volume and on GPO Access.



Sec. 405.503  Determining customary charges.

    (a) Customary charge defined. The term ``customary charges'' will 
refer to the uniform amount which the individual physician or other 
person charges in the majority of cases for a specific medical procedure 
or service. In determining such uniform amount, token charges for 
charity patients and substandard charges for welfare and other low 
income patients are to be excluded. The reasonable charge cannot, except 
as provided in Sec. 405.506, be higher than the individual physician's 
or other person's customary charge. The customary charge for different 
physicians or other persons may, of course, vary. Payment for covered 
services would be based on the actual charge for the service when, in a 
given instance, that charge is less than the amount which the carrier 
would otherwise have found to be within the limits of acceptable charges 
for the particular service. Moreover, the income of the individual 
beneficiary is not to be taken into account by the carrier in 
determining the amount which is considered to be a reasonable charge for 
a service rendered to him. There is no provision in the law for a 
carrier to evaluate the reasonableness of charges in light of an 
individual beneficiary's economic status.
    (b) Variation of charges. If the individual physician or other 
person varies his charges for a specific medical procedure or service, 
so that no one amount is charged in the majority of cases, it will be 
necessary for the carrier to exercise judgment in the establishment of a 
``customary charge'' for such physician or other person. In making this 
judgment, an important guide, to be utilized when a sufficient volume of 
data on the physician's or other person's charges is available, would be 
the median or midpoint of his charges, excluding token and substandard 
charges as well as exceptional charges on the high side. A significant 
clustering of charges in the vicinity of the median amount might 
indicate that a point of such clustering should be taken as the 
physician's or other person's ``customary'' charge. Use of

[[Page 93]]

relative value scales will help in arriving at a decision in such 
instances.
    (c) Use of relative value scales. If, for a particular medical 
procedure or service, the carrier is unable to determine the customary 
charge on the basis of reliable statistical data (for example, because 
the carrier does not yet have sufficient data or because the performance 
of the particular medical procedure or service by the physician or other 
person is infrequent), the carrier may use appropriate relative value 
scales to determine the customary charge for such procedure or service 
in relation to customary charges of the same physician or person for 
other medical procedures and services.
    (d) Revision of customary charge. A physician's or other person's 
customary charge is not necessarily a static amount. Where a physician 
or other person alters his charges, a revised pattern of charges for his 
services may develop. Where on the basis of adequate evidence, the 
carrier finds that the physician or other person furnishing services has 
changed his charge for a service to the public in general, the customary 
charge resulting from the revised charge for the service should be 
recognized as the customary charge in making determinations of 
reasonable charges for such service when rendered thereafter to 
supplementary insurance beneficiaries. If the new customary charge is 
not above the top of the range of prevailing charges (see 
Sec. 405.504(a)), it should be deemed to be reasonable by the carrier, 
subject to the provisions of Sec. 405.508.



Sec. 405.504  Determining prevailing charges.

    (a) Ranges of charges. (1) In the case of physicians' services 
furnished beginning January 1, 1987, the prevailing charges for a 
nonparticipating physician as defined in this paragraph will be no 
higher than the same level that was set for services furnished during 
the previous calendar year for a physician who was a participating 
physician during that year. A nonparticipating physician is a physician 
who has not entered into an agreement with the Medicare program to 
accept payment on an assignment-related basis (in accordance with 
Sec. 424.55 of this chapter) for all items and services furnished to 
individuals enrolled under Part B of Medicare during a given calendar 
year.
    (2) No charge for Part B medical or other health services may be 
considered to be reasonable if it exceeds the higher of:
    (i) The prevailing charge for similar services in the same locality 
in effect on December 31, 1970, provided such prevailing charge had been 
found acceptable by CMS; or
    (ii) The prevailing charge that, on the basis of statistical data 
and methodology acceptable to CMS, would cover:
    (A) 75 percent of the customary charges made for similar services in 
the same locality during the 12-month period of July 1 through June 30 
preceding the fee screen year (January 1 through December 31) in which 
the service was furnished; or
    (B) In the case of services furnished more than 12 months before the 
beginning of the fee screen year (January 1 through December 31) in 
which the claim or request for payment is submitted, 75 percent of the 
customary charges made for similar services in the same locality during 
the 12 month period of July 1 through June 30 preceding the fee screen 
year that ends immediately preceding the fee screen year in which the 
claim or request for payment is submitted.
    (3)(i) In the case of physicians' services, furnished before January 
1, 1992, each prevailing charge in each locality may not exceed the 
prevailing charge determined for the FY ending June 30, 1973 (without 
reference to the adjustments made in accordance with the economic 
stabilization program then in effect), except on the basis of 
appropriate economic index data that demonstrate the higher prevailing 
charge level is justified by:
    (A) Changes in general earnings levels of workers that are 
attributable to factors other than increases in their productivity; and
    (B) changes in expenses of the kind incurred by physicians in office 
practice. The office-expense component and the earnings component of 
such index shall be given the relative weights shown in data on self-
employed physicians' gross incomes.


[[Page 94]]


    Example. The available data indicate the office-expense and earnings 
components of the index should be given relative weights of 40 percent 
and 60 percent, respectively, and it is calculated that the aggregate 
increase in expenses of practice for a particular July through June 
period was 112 percent over the expenses of practice for calendar year 
1971 and the increase in earnings (less increases in workers' 
productivity was 110 percent over the earnings for calendar year 1971. 
The allowable increase in any prevailing charge that could be recognized 
during the next fee screen year would be 110.8 percent 
((.40x112)+(.60)x110)=110.8) above the prevailing charge recognized for 
fiscal year 1973.

    (ii)(A) If the increase in the prevailing charge in a locality for a 
particular physician service resulting from an aggregate increase in 
customary charges for that service does not exceed the index determined 
under paragraph (a)(3)(i) of this section, the increase is permitted and 
any portion of the allowable increase not used is carried forward and is 
a basis for justifying increases in that prevailing charge in the 
future. However, if the increase in the prevailing charge exceeds the 
allowable increase, the increase will be reduced to the allowable 
amount. Further increases will be justified only to the degree that they 
do not exceed further rises in the economic index. The prevailing charge 
for physicians' services furnished during the 15-month period beginning 
July 1, 1984 may not exceed the prevailing charge for physicians' 
services in effect for the 12-month period beginning July 1, 1983. The 
increase in prevailing charges for physicians' services for subsequent 
fee screen years similarly may not reflect the rise in the economic 
index that would have otherwise been provided for the period beginning 
July 1, 1984, and must be treated as having fully provided for the rise 
in the economic index which would have been otherwise taken into 
account.
    (B) Notwithstanding the provisions of paragraphs (a)(3)(i) and 
(ii)(A) of this section, the prevailing charge in the case of a 
physician service in a particular locality determined pursuant to 
paragraphs (a)(2) and (3)(i) of this section for the fiscal year 
beginning July 1, 1975, and for any subsequent fee screen years, if 
lower than the prevailing charge for the fiscal year ending June 30, 
1975, by reason of the application of economic index data, must be 
raised to such prevailing charge which was in effect for the fiscal year 
ending June 30, 1975. (If the amount paid on any claim processed by a 
carrier after the original reasonable charge update for the fiscal year 
beginning July 1, 1975, and prior to the adjustments required by the 
preceding sentence, was at least $1 less than the amount due pursuant to 
the preceding sentence, the difference between the amount previously 
paid and the amount due shall be paid within 6 months after December 31, 
1975; however, no payment shall be made on any claim where the 
difference between the amount previously and the amount due shall be 
paid within 6 months after December 31, 1975; however, no payment shall 
be made on any claim where the difference between the amount previously 
paid and the amount due is less than $1.)
    (iii) If, for any reason, a prevailing charge for a service in a 
locality has no precise counterpart in the carrier's charge data for 
calendar year 1971 (the data on which the prevailing charge calculations 
for fiscal year 1973 were based), the limit on the prevailing charge 
will be estimated, on the basis of data and methodology acceptable to 
CMS, to seek to produce the effect intended by the economic index 
criterion. The allowance or reduction of an increase in a prevailing 
charge for any individual medical item or service may affect the 
allowance or reduction of an increase in the prevailing charges for 
other items or services if, for example, the limit on the prevailing 
charge is estimated, or if the prevailing charges for more than one item 
or service are established through the use of a relative value schedule 
and dollar conversion factors.
    (b) Variation in range of prevailing charges. The range of 
prevailing charges in a locality may be different for physicians or 
other persons who engage in a specialty practice or service than for 
others. Existing differentials in the level of charges between different 
kinds of practice or service could, in some localities, lead to the 
development of more than one range of prevailing charges for application 
by

[[Page 95]]

the carrier in its determinations of reasonable charges. Carrier 
decisions in this respect should be responsive to the existing patterns 
of charges by physicians and other persons who render covered services, 
and should establish differentials in the levels of charges between 
different kinds of practice or service only where in accord with such 
patterns.
    (c) Re-evaluation and adjustment of prevailing charges. 
Determinations of prevailing charges by the carrier are to be re-
evaluated and adjusted from time to time on the basis of factual 
information about the charges made by physicians and other persons to 
the public in general. This information should be obtained from all 
possible sources including a carrier's experience with its own programs 
as well as with the supplementary medical insurance program.
    (d) Computation and issuance of the MEI after CY 1992--(1) For 
update years after CY 1992, the MEI is a physician input price index, in 
which the annual percent changes for the direct-labor price components 
are adjusted by an annual percent change in a 10-year moving average 
index of labor productivity in the nonfarm business sector.
    (2) The MEI is constructed, using as a base year, CY 1989 weights 
and annual percent changes in the economic price proxies as shown on the 
following chart:

   Medicare Economic Index Expenditure Categories, Weights, and Price
                                 Proxies
------------------------------------------------------------------------
                                   1989 weights
        Expense category             \1\,\2\          Price proxy \3\
                                    (percent)
------------------------------------------------------------------------
    Total......................            100.0
1. Physician's Own Time (net                54.2
 income, general earnings).
    a. Wages and Salaries......             45.3  Average hourly
                                                   earnings, total
                                                   private non-farm.\4\
    b. Fringe Benefits.........              8.8  Employment Cost Index,
                                                   fringe benefits,
                                                   private non-farm.\4\
2. Physician Practice Expense..             45.8
    a. Non-physician Employee               16.3
     Compensation.
        (1) Wages and Salaries.             13.8  Employment Cost Index,
                                                   wages and salaries
                                                   weighted for
                                                   occupational mix of
                                                   non-physician
                                                   employees.\4\
        (2) Fringe Benefits....              2.5  Employment Cost Index,
                                                   fringe benefits,
                                                   white collar.\4\
    b. Office Expense..........             10.3  CPI-U, housing.
    c. Medical Materials and                 5.2  PPI, ethical drugs;
     Supplies.                                     PPI, surgical
                                                   appliances and
                                                   supplies; and CPI-U
                                                   medical equipment and
                                                   supplies (equally
                                                   weighted).
    d. Professional Liability                4.8  CMS survey of change
     Insurance.                                    in average liability
                                                   premiums for $100,000/
                                                   $300,000 liability
                                                   coverage among 9
                                                   major insurers.
    e. Medical Equipment.......              2.3  PPI, medical
                                                   instruments and
                                                   equipment.
    f. Other Professional                    6.9
     Expense.
        (1) Professional Car...              1.4  CPI-U, private
                                                   transportation.
        (2) Other..............              5.5  CPI-U, all items less
                                                   food and energy.
------------------------------------------------------------------------
\1\ Sources: Martin L. Gonzalez, ed.: Physician Marketplace Statistics,
  Fall, 1990. Center for Health Policy Research, Chicago, American
  Medical Association, 1990; Mark Holoweiko, ``Practice Expenses Take
  the Leap of the Decade,'' Medical Economics, November 12, 1990; and
  CMS, OACT special study.
\2\ Due to rounding, weights may not sum to 100.0%
\3\ All price proxies are for annual percent changes for the 12 months
  ending June 30th.
\4\ Annual percent change values for Physicians' Own Time and Non-
  physician Employee Compensation are net of the change in the 10-year
  moving average of output per man-hour to exclude changes in non-farm
  business sector labor productivity.

    (3) If there is no methodological change, CMS publishes a notice in 
the Federal Register to announce the annual increase in the MEI before 
the beginning of the update year to which it applies. If there are 
changes in the base year weights or price proxies, or if there are any 
other MEI methodological changes, they are published in the Federal 
Register with an opportunity for public comment.

[32 FR 12600, Aug. 31, 1967, as amended at 40 FR 25447, June 16, 1975; 
42 FR 18275, Apr. 6, 1977. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 4430, Feb. 2, 1978; 47 FR 63274, Dec. 31, 1982; 51 
FR 34978, Oct. 1, 1986; 53 FR 6648, Mar. 2, 1988; 57 FR 55912, Nov. 25, 
1992]

[[Page 96]]



Sec. 405.505  Determination of locality.

    ``Locality'' is the geographical area for which the carrier is to 
derive the reasonable charges or fee schedule amounts for services or 
items. Usually, a locality may be a State (including the District of 
Columbia, a territory, or a Commonwealth), a political or economic 
subdivision of a State, or a group of States. It should include a cross 
section of the population with respect to economic and other 
characteristics. Where people tend to gravitate toward certain 
population centers to obtain medical care or service, localities may be 
recognized on a basis constituting medical services areas (interstate or 
otherwise), comparable in concept to ``trade areas.'' Localities may 
differ in population density, economic level, and other major factors 
affecting charges for services. Carriers therefore shall delineate 
localities on the basis of their knowledge of local conditions. However, 
distinctions between localities are not to be so finely made that a 
locality includes only a very limited geographic area whose population 
has distinctly similar income characteristics (e.g., a very rich or very 
poor neighborhood within a city).

[57 FR 27305, June 18, 1992]



Sec. 405.506  Charges higher than customary or prevailing charges or lowest charge levels.

    A charge which exceeds the customary charge of the physician or 
other person who rendered the medical or other health service, or the 
prevailing charge in the locality, or an applicable lowest charge level 
may be found to be reasonable, but only where there are unusual 
circumstances, or medical complications requiring additional time, 
effort or expense which support an additional charge, and only if it is 
acceptable medical or medical service practice in the locality to make 
an extra charge in such cases. The mere fact that the physician's or 
other person's customary charge is higher than prevailing would not 
justify a determination that it is reasonable.

(Secs. 1102, 1842(b) and 1871, 1903(i)(1) of the Social Security Act; 49 
Stat. 647, 79 Stat. 302, 310, 331; 86 Stat. 1395, 1454; (42 U.S.C. 1302, 
1395u(b), 1395hh, 1396b(i)(1)))

[43 FR 32300, July 26, 1978]



Sec. 405.507  Illustrations of the application of the criteria for determining reasonable charges.

    The following examples illustrate how the general criteria on 
customary charges and prevailing charges might be applied in determining 
reasonable charges under the supplementary medical insurance program. 
Basically, these examples demonstrate that, except where the actual 
charge is less, reasonable charges will reflect current customary 
charges of the particular physician or other person within the ranges of 
the current prevailing charges in the locality for that type and level 
of service:

    The prevailing charge for a specific medical procedure ranges from 
$80 to $100 in a certain locality.
    Doctor A's bill is for $75 although he customarily charges $80 for 
the procedure.
    Doctor B's bill is his customary charge of $85
    Doctor C's bill is his customary charge of $125
    Doctor D's bill is for $100, although he customarily charges $80, 
and there are no special circumstances in the case.
    The reasonable charge for Doctor A would be limited to $75 since 
under the law the reasonable charge cannot exceed the actual charge, 
even if it is lower than his customary charge and below the prevailing 
charges for the locality.
    The reasonable charge for Doctor B would be $85, because it is his 
customary charge and it falls within the range of prevailing charges for 
that locality.
    The reasonable charge for Doctor C could not be more than $100, the 
top of the range of prevailing charges.
    The reasonable charge for Doctor D would be $80, because that is his 
customary charge. Even though his actual charge of $100 falls within the 
range of prevailing charges, the reasonable charge cannot exceed his 
customary charge in the absence of special circumstances.

[[Page 97]]



Sec. 405.508  Determination of comparable circumstances; limitation.

    (a) Application of limitation. The carrier may not in any case make 
a determination of reasonable charge which would be higher than the 
charge upon which it would base payment to its own policyholders for a 
comparable service in comparable circumstances. The charge upon which it 
would base payment, however, does not necessarily mean the amount the 
carrier would be obligated to pay. Under certain circumstances, some 
carriers pay amounts on behalf of individuals who are their 
policyholders, which are below the customary charges of physicians or 
other persons to other individuals. Payment under the supplementary 
medical insurance program would not be limited to these lower amounts.
    (b) When comparability exists. ``Comparable circumstances,'' as used 
in the Act and this subpart, refers to the circumstances under which 
services are rendered to individuals and the nature of the carrier's 
health insurance programs and the method it uses to determine the 
amounts of payments under these programs. Generally, comparability would 
exist where:
    (1) The carrier bases payment under its program on the customary 
charges, as presently constituted, of physicians or other persons and on 
current prevailing charges in a locality, and
    (2) The determination does not preclude recognition of factors such 
as speciality status and unusual circumstances which affect the amount 
charged for a service.
    (c) Responsibility for determining comparability. Responsibility for 
determining whether or not a carrier's program has comparability will in 
the first instance fall upon the carrier in reporting pertinent 
information about its programs to the Centers for Medicare & Medicaid 
Services. When the pertinent information has been reported, the Centers 
for Medicare & Medicaid Services will advise the carrier whether any of 
its programs have comparability.



Sec. 405.509  Determining the inflation-indexed charge.

    (a) Definition. For purposes of this section, inflation-indexed 
charge means the lowest of the fee screens used to determine reasonable 
charges (as determined in Sec. 405.503 for the customary charge, 
Sec. 405.504 for the prevailing charge, this section for the inflation-
indexed charge, and Sec. 405.511 for the lowest charge level) for 
services, supplies, and equipment reimbursed on a reasonable charge 
basis (excluding physicians' services), that is in effect on December 31 
of the previous fee screen year, updated by the inflation adjustment 
factor, as described in paragraph (b) of this section.
    (b) Application of inflation adjustment factor to determine 
inflation-indexed charge. (1) For fee screen years beginning on or after 
January 1, 1987, the inflation-indexed charge is determined by updating 
the fee screen used to determine the reasonable charges in effect on 
December 31 of the previous fee screen year by application of an 
inflation adjustment factor, that is, the annual change in the level of 
the consumer price index for all urban consumers, as compiled by the 
Bureau of Labor Statistics, for the 12-month period ending on June 30 of 
each year.
    (2) For services, supplies, and equipment furnished from October 1, 
1985 through December 31, 1986 the inflation adjustment factor is zero.
    (c) The inflation-indexed charge does not apply to any services, 
supplies, or equipment furnished after December 31, 1991, that are 
covered under or limited by the fee schedule for physicians' services 
established under section 1848 of the Act and part 415 of this chapter. 
These services are subject to the Medicare Economic Index described in 
Sec. 415.30 of this chapter.

[51 FR 34979, Oct. 1, 1986; 51 FR 37911, Oct. 27, 1986, as amended at 56 
FR 59621, Nov. 25, 1991]



Sec. 405.511  Reasonable charges for medical services, supplies, and equipment.

    (a) General rule. (1) A charge for any medical service, supply, or 
equipment (including equipment servicing) that in the judgment of CMS 
generally does not vary significantly in quality from one supplier to 
another (and that is

[[Page 98]]

identified by a notice published in the Federal Register) may not be 
considered reasonable if it exceeds:
    (i) The customary charge of the supplier (see Sec. 405.503);
    (ii) The prevailing charge in the locality (see Sec. 405.504);
    (iii) The charge applicable for a comparable service and under 
comparable circumstances to the policyholders or subscribers of the 
carrier (see Sec. 405.508);
    (iv) The lowest charge level at which the item or service is widely 
and consistently available in the locality (see paragraph (c) of this 
section); or
    (v) The inflation-indexed charge, as determined under Sec. 405.509, 
in the case of medical services, supplies, and equipment that are 
reimbursed on a reasonable charge basis (excluding physicians' 
services).
    (2) In the case of laboratory services, paragraph (a)(1) of this 
section is applicable to services furnished by physicians in their 
offices, by independent laboratories (see Sec. 405.1310(a)) and to 
services furnished by a hospital laboratory for individuals who are 
neither inpatients nor outpatients of a hospital. Allowance of 
additional charges exceeding the lowest charge level can be approved by 
the carrier on the basis of unusual circumstances or medical 
complications in accordance with Sec. 405.506.
    (b) Public notice of items and services subject to the lowest charge 
level rule. Before the Secretary determines that lowest charge levels 
should be established for an item or service, notice of the proposed 
determination will be published with an opportunity for public comment. 
The descriptions or specifications of items or services in the notice 
will be in sufficient detail to permit a determination that items or 
services conforming to the descriptions will not vary significantly in 
quality.
    (c) Calculating the lowest charge level. The lowest charge level at 
which an item or service is widely and consistently available in a 
locality is calculated by the carrier in accordance with instructions 
from CMS as follows:
    (1) For items or services furnished on or before December 31, 1986.
    (i) A lowest charge level is calculated for each identified item or 
service in January and July of each year.
    (ii) The lowest charge level for each identified item or service is 
set at the 25th percentile of the charges (incurred or submitted on 
claims processed by the carrier) for that item or service, in the 
locality designated by the carrier for this purpose, during the second 
calendar quarter preceding the determination date. Accordingly, the 
January calculations will be based on charges for the July through 
September quarter of the previous calendar year, and the July 
calculations will be based on charges for the January through March 
quarter of the same calendar year.
    (2) For items or services furnished on or after January 1, 1987.
    (i) A lowest charge level is calculated for each identified item or 
service in January of each year.
    (ii) The lowest charge level for each identified item or service is 
set at the 25th percentile of the charges (incurred or submitted on 
claims processed by the carrier) for that item or service, in the 
locality designated by the carrier for this purpose, during the 3-month 
period of July 1 through September 30 preceding the fee screen year 
(January 1 through December 31) for which the item or service was 
furnished.
    (3) Lowest charge levels for laboratory services. In setting lowest 
charge levels for laboratory services, the carrier will consider only 
charges made for laboratory services performed by physicians in their 
offices, by independent laboratories which meet coverage requirements, 
and for services furnished by a hospital laboratory for individuals who 
are neither inpatients nor outpatients of a hospital.
    (d) Locality. Subject to the approval of the Secretary, the carrier 
may designate its entire service area as the locality for purposes of 
this section, or may otherwise modify the localities used for 
calculating prevailing charges. (The modified locality for an item or 
service will also be used for calculating the prevailing charge for that 
item or service.)

(Secs. 1102, 1842(b) and 1871, 1903(i)(1) of the Social Security Act; 49 
Stat. 647, 79 Stat. 302, 310, 331, 86 Stat. 1395, 1454 (42 U.S.C. 1302, 
1395u(b), 1395hh, 1396b(i)(1)))

[43 FR 32300, July 26, 1978, as amended at 50 FR 40174, Oct. 1, 1985; 51 
FR 34979, Oct. 1, 1986]

[[Page 99]]



Sec. 405.512  Carriers' procedural terminology and coding systems.

    (a) General. Procedural terminology and coding systems are designed 
to provide physicians and third party payers with a common language that 
accurately describes the kinds and levels of services provided and that 
can serve as a basis for coverage and payment determinations.
    (b) Modification of terminology and/or coding systems. A carrier 
that wishes to modify its system of procedural terminology and coding 
shall submit its request to the Centers for Medicare & Medicaid Services 
with all pertinent data and information for approval before the revision 
is implemented. The Centers for Medicare & Medicaid Services will 
evaluate the proposal in the light of the guidelines specified in 
paragraph (c) of this section and such other considerations as may be 
pertinent, and consult with the Assistant Secretary for Health. The 
Centers for Medicare & Medicaid Services will approve such a revision if 
it determines that the potential advantages of the proposed new system, 
outweigh the disadvantages.
    (c) Guidelines. The following considerations and guidelines are 
taken into account in evaluating a carrier's proposal to change its 
system of procedural terminology and coding:
    (1) The rationale for converting to the new terminology and coding;
    (2) The estimated short-run and long-run impact on the cost of the 
health insurance program, other medical care costs, administrative 
expenses, and the reliability of the estimates;
    (3) The degree to which the conversion to the proposed new 
terminology and coding can be accomplished in a way that permits full 
implementation of the reasonable charge criteria in accordance with the 
provisions of this subpart;
    (4) The degree to which the proposed new terminology and coding are 
accepted by physicians in the carrier's area (physician acceptance is 
assumed only if a majority of the Medicare and non-Medicare bills and 
claims completed by physicians in the area and submitted to the carrier 
can reasonably be expected to utilize the proposed new terminology and 
coding);
    (5) The extent to which the proposed new terminology and coding 
system is used by the carrier in its non-Medicare business;
    (6) The clarity with which the proposed system defines its 
terminology and whether the system lends itself to:
    (i) Accurate determinations of coverage;
    (ii) Proper assessment of the appropriate level of payment; and
    (iii) Meeting the carrier's or Professional Standards Review 
Organizations' review needs and such other review needs as may be 
appropriate;
    (7) Compatibility of the new terminology and coding system with 
other systems that the carrier and other carriers may utilize in the 
administration of the Medicare program--e.g., its compatibility with 
systems and statistical requirements and with the historical data in the 
carrier's processing system; and
    (8) Compatibility of the proposed system with the carriers methods 
for determining payment under the fee schedule for physicians' services 
for services which are identified by a single element of terminology but 
which may vary in content.

[40 FR 7639, Feb. 21, 1975. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 59 FR 10298, Mar. 4, 1994]



Sec. 405.515  Reimbursement for clinical laboratory services billed by physicians.

    This section implements section 1842(h) of the Social Security Act, 
which places a limitation on reimbursement for markups on clinical 
laboratory services billed by physicians. If a physician's bill, or a 
request for payment for a physician's services, includes a charge for a 
laboratory test for which payment may be made under this part, the 
amount payable with respect to the test shall be determined as follows 
(subject to the coinsurance and deductible provisions at Secs. 410.152 
and 410.160 of this chapter):
    (a) If the bill or request for payment indicates that the test was 
personally performed or supervised either by the physician who submitted 
the bill (or for whose services the request for payment was made), or by 
another physician with whom that physician shares

[[Page 100]]

his or her practice, the payment will be based on the physician's 
reasonable charge for the test (as determined in accordance with 
Sec. 405.502).
    (b) If the bill or request for payment indicates that the test was 
performed by an outside laboratory, and identifies both the laboratory 
and the amount the laboratory charged, payment for the test will be 
based on the lower of--
    (1) The laboratory's reasonable charge for the service (as 
determined in accordance with Sec. 405.502), or
    (2) The amount that the laboratory charged the physician for the 
service.
    (c) If the bill or request for payment does not indicate that the 
conditions specified in paragraph (a) of this section were met, and does 
not identify both the laboratory and the amount the laboratory charged, 
payment will be based on the lowest charge at which the carrier 
estimates the test could have been secured from a laboratory serving the 
physician's locality. The carrier will estimate this lowest amount twice 
a year by (i) obtaining lists of charges laboratories make to physicians 
from as many commercial laboratories serving the carrier's area as 
possible (including laboratories in other States from which tests may be 
obtained by physicians in the carrier's service area) and (ii) 
establishing a schedule of lowest prices based on this information. The 
carrier will take into consideration specific circumstances, such as a 
need for emergency services that may be costlier than routine services, 
in making the estimate in a particular case. However, in no case may 
this estimate be higher than the lowest customary charge for commercial 
laboratories, or when applicable to the laboratory service, the lowest 
charge level determined in accordance with Sec. 405.511, in the 
carrier's service area.
    (d) When a physician bills, in accordance with paragraph (b) or (c) 
of this section, for a laboratory test and indicates that it was 
performed by an independent laboratory, a nominal payment will also be 
made to the physician for collecting, handling, and shipping the 
specimen to the laboratory, if the physician bills for such a service.

[46 FR 42672, Aug. 24, 1981, as amended at 51 FR 41351, Nov. 14, 1986]



Sec. 405.517  Payment for drugs and biologicals that are not paid on a cost or prospective payment basis.

    (a) Applicability. Payment for a drug or biological that is not paid 
on a cost or prospective payment basis is determined by the standard 
methodology described in paragraph (b) of this section. Examples of when 
this procedure applies include a drug or biological furnished incident 
to a physician's service, a drug or biological furnished by an 
independent dialysis facility that is not included in the ESRD composite 
rate set forth in Sec. 413.170(c) of this chapter, and a drug or 
biological furnished as part of the durable medical equipment benefit.
    (b) Methodology. Payment for a drug or biological described in 
paragraph (a) of this section is based on the lower of the actual charge 
on the Medicare claim for benefits or 95 percent of the national average 
wholesale price of the drug or biological.
    (c) Multiple-source drugs. For multiple-source drugs and 
biologicals, for purposes of this regulation, the average wholesale 
price is defined as the lesser of the median average wholesale price for 
all sources of the generic forms of the drug or biological or the lowest 
average wholesale price of the brand name forms of the drug or 
biological.

[63 FR 58905, Nov. 2, 1998]



Sec. 405.520  Payment for a physician assistant's, nurse practitioner's, and clinical nurse specialists' services and services furnished incident to their 
          professional services.

    (a) General rule. A physician assistant's, nurse practitioner's, and 
clinical nurse specialists' services, and services and supplies 
furnished incident to their professional services, are paid in 
accordance with the physician fee schedule. The payment for a physician 
assistants' services may not exceed the limits at Sec. 414.52 of this 
chapter. The payment for a nurse practitioners' and clinical nurse 
specialists' services may not exceed the limits at Sec. 414.56 of this 
chapter.
    (b) Requirements. Medicare payment is made only if all claims for 
payment are made on an assignment-related basis in accordance with 
Sec. 424.55 of this chapter, that sets forth, respectively,

[[Page 101]]

the conditions for coverage of physician assistants' services, nurse 
practitioners' services and clinical nurse specialists' services, and 
services and supplies furnished incident to their professional services.
    (c) Civil money penalties. Any person or entity who knowingly and 
willingly bills a Medicare beneficiary amounts in excess of the 
appropriate coinsurance and deductible is subject to a civil money 
penalty as described in Secs. 402.1(c)(11), 402.105(d)(2)(viii), and 
402.107(b)(8) of this chapter.

[63 FR 58905, Nov. 2, 1998, as amended at 66 FR 49547, Sept. 28, 2001]



Sec. 405.534  Limitation on payment for screening mammography services.

    The provisions in paragraphs (a), (b), and (c) of this section apply 
for services provided from January 1, 1991 until December 31, 2001. 
Screening mammography services provided after December 31, 2001 are paid 
under the physician fee schedule in accordance with Sec. 414.2 of this 
chapter.
    (a) Basis and scope. This section implements section 1834(c) of the 
Act by establishing a limit on payment for screening mammography 
examinations. There are three categories of billing for screening 
mammography services. Those categories and the payment limitations on 
each are set forth in paragraphs (b) through (d) of this section.
    (b) Global or complete service billing representing both the 
professional and technical components of the procedure. If a fee is 
billed for a global service, the amount of payment subject to the 
deductible is equal to 80 percent of the least of the following:
    (1) The actual charge for the service.
    (2) The amount established for the global procedure for a diagnostic 
bilateral mammogram under the fee schedule for physicians' services set 
forth at part 414, subpart A.
    (3) The payment limit for the procedure. For screening mammography 
services furnished in CY 1994, the payment limit is $59.63. On January 1 
of each subsequent year, the payment limit is updated by the percentage 
increase in the Medicare Economic Index (MEI) and reflects the 
relationship between the relative value units for the professional and 
technical components of a diagnostic bilateral mammogram under the fee 
schedule for physicians' services.
    (c) Professional component billing representing only the physician's 
interpretation for the procedure. If the professional component of 
screening mammography services is billed separately, the amount of 
payment for that professional component, subject to the deductible, is 
equal to 80 percent of the least of the following:
    (1) The actual charge for the professional component of the service.
    (2) The amount established for the professional component of a 
diagnostic bilateral mammogram under the fee schedule for physicians' 
services.
    (3) The professional component of the payment limit for screening 
mammography services described in paragraph (b)(3) of this section.
    (d) Technical component billing representing other resources 
involved in furnishing the procedure. If the technical component of 
screening mammography services is billed separately, the amount of 
payment, subject to the deductible, is equal to 80 percent of the least 
of the following:
    (1) The actual charge for the technical component of the service.
    (2) The amount established for the technical component of a 
diagnostic bilateral mammogram under the fee schedule for physicians' 
services.
    (3) The technical component of the payment limit for screening 
mammography services described in paragraph (b)(3) of this section.

[55 FR 53521, Dec. 31, 1990, as amended at 59 FR 49833, Sept. 30, 1994; 
66 FR 55328, Nov. 1, 2001]



Sec. 405.535  Special rule for nonparticipating physicians and suppliers furnishing screening mammography services before January 1, 2002.

    The provisions in this section apply for screening mammography 
services provided from January 1, 1991 until December 31, 2001. 
Screening mammography services provided after December 31, 2001 are 
physician services pursuant to Sec. 414.2 of this chapter paid under the 
physician fee schedule. If screening mammography services are furnished 
to a beneficiary by a nonparticipating

[[Page 102]]

physician or supplier that does not accept assignment, a limiting charge 
applies to the charges billed to the beneficiary. The limiting charge is 
the lesser of the following:
    (a) 115 percent of the payment limit set forth in 
Sec. 405.534(b)(3), (c)(3), and (d)(3) (limitations on the global 
service, professional component, and technical component of screening 
mammography services, respectively).
    (b) The limiting charge for the global service, professional 
component, and technical component of a diagnostic bilateral mammogram 
under the fee schedule for physicians' services set forth at 
Sec. 414.48(b) of this chapter.

[59 FR 49833, Sept. 30, 1994, as amended at 62 FR 59098, Oct. 31, 1997; 
66 FR 55328, Nov. 1, 2001]

Subpart F [Reserved]



      Subpart G--Reconsiderations and Appeals Under Medicare Part A

    Authority: Secs. 1102, 1155, 1869(b), 1871, 1872, and 1879 of the 
Social Security Act (42 U.S.C. 1302, 1320c-4, 1395ff(b), 1395hh, 1395ii, 
and 1395pp).

    Source: 37 FR 5814, Mar. 22, 1972, unless otherwise noted. 
Redesignated at 42 FR 52826, Sept. 30, 1977.



Sec. 405.701  Basis, purpose and definitions.

    (a) This subpart implements section 1869 of the Social Security Act. 
Section 1869(a) provides that the Secretary will make determinations 
about the following matters, and section 1869(b) provides for a hearing 
for an individual who is dissatisfied with the Secretary's determination 
as to:
    (1) Whether the individual is entitled to hospital insurance (part 
A) or supplementary medical insurance (part B) under title XVIII of the 
Act; or
    (2) The amount payable under hospital insurance.
    (b) This subpart establishes the procedures governing initial 
determinations, reconsidered determinations, hearings, and final agency 
review, and the reopening of determinations and decisions that are 
applicable to matters arising under paragraph (a) of this section.
    (c) Subparts J and R of 20 CFR part 404 (dealing with 
determinations, the administrative review process and representation of 
parties) are also applicable to matters arising under paragraph (a) of 
this section, except to the extent that specific provisions are 
contained in this subpart.
    (d) Definitions. As used in subpart G of this part, the term--
    Appellant designates the beneficiary, provider or other person or 
entity that has filed an appeal concerning a particular determination of 
benefits under Medicare part A. Designation as an appellant does not in 
itself convey standing to appeal the determination in question.
    Common issues of law and fact, with respect to the aggregation of 
claims by two or more appellants to meet the minimum amount in 
controversy needed for a hearing, occurs when the claims sought to be 
aggregated are denied or reduced for similar reasons and arise from a 
similar fact pattern material to the reason the claims are denied.
    Delivery of similar or related services, with respect to the 
aggregation of claims by two or more provider appellants to meet the 
minimum amount in controversy needed for a hearing, means like or 
coordinated services or items provided to the same beneficiary by the 
appellants.

[55 FR 11020, Mar. 26, 1990, as amended at 59 FR 12181, Mar. 16, 1994]



Sec. 405.702  Notice of initial determination.

    After a request for payment under part A of title XVIII of the Act 
is filed with the intermediary by or on behalf of the individual who 
received inpatient hospital services, extended care services, or home 
health services, and the intermediary has ascertained whether the items 
and services furnished are covered under part A of title XVIII, and 
where appropriate, ascertained and made payment of amounts due or has 
ascertained that no payments were due, the individual will be notified 
in writing of the initial determination in his case. In addition, if the 
items or services furnished such individual are not covered under part A 
of title XVIII by reason of Sec. 411.15(g) or

[[Page 103]]

Sec. 411.15(k) and payment may not be made for such items or services 
under Sec. 411.400 only because the requirements of Sec. 411.400(a)(2) 
are not met, the provider of services which furnished such items or 
services will be notified in writing of the initial determination in 
such individual's case. These notices shall be mailed to the individual 
and the provider of services at their last known addresses and shall 
state in detail the basis for the determination. Such written notices 
shall also inform the individual and the provider of services of their 
right to reconsideration of the determination if they are dissatisfied 
with the determination.

[55 FR 11020, Mar. 26, 1990]



Sec. 405.704  Actions which are initial determinations.

    (a) Applications and entitlement of individuals. An initial 
determination with respect to an individual includes the following--
    (1) A determination with respect to entitlement to hospital 
insurance or supplementary medical insurance;
    (2) A disallowance of an individual's application for entitlement to 
hospital or supplementary medical insurance, if the individual fails to 
submit evidence requested by SSA to support the application. (SSA will 
specify in the initial determination the conditions of entitlement that 
the applicant failed to establish by not submitting the requested 
evidence);
    (3) A denial of a request for withdrawal of an application for 
hospital or supplementary medical insurance;
    (4) A denial of a request for cancellation of a ``request for 
withdrawal''; and
    (5) A determination as to whether an individual, previously 
determined to be entitled to hospital or supplementary medical 
insurance, is no longer entitled to such benefits, including a 
determination based on nonpayment of premiums.
    (b) Requests for payment by or on behalf of individuals. An initial 
determination with respect to an individual includes any determination 
made on the basis of a request for payment by or on behalf of the 
individual under part A of Medicare, including a determination with 
respect to:
    (1) The coverage of items and services furnished;
    (2) The amount of an applicable deductible;
    (3) The application of the coinsurance feature;
    (4) The number of days of inpatient hospital benefits utilized 
during a spell of illness or for purposes of the inpatient psychiatric 
hospital 190-day lifetime maximum;
    (5) The number of days of the 60-day lifetime reserve utilized for 
inpatient hospital coverage;
    (6) The number of days of posthospital extended care benefits 
utilized;
    (7) The number of home health visits utilized;
    (8) The physician certification requirement;
    (9) The request for payment requirement;
    (10) The beginning and ending of a spell of illness, including a 
determination made under the presumptions established under 
Sec. 409.60(c)(2) of this chapter, as specified in Sec. 409.60(c)(4) of 
this chapter.
    (11) The medical necessity of services (See parts 466 and 473 of 
this chapter for provisions pertaining to initial and reconsidered 
determinations made by a QIO);
    (12) When services are excluded from coverage as custodial care 
(Sec. 411.15(g)) or as not reasonable and necessary (Sec. 411.15(k)), 
whether the individual or the provider of services who furnished the 
services, or both, knew or could reasonably have been expected to know 
that the services were excluded from coverage (see Sec. 411.402);
    (13) Any other issues having a present or potential effect on the 
amount of benefits to be paid under part A of Medicare, including a 
determination as to whether there has been an overpayment or 
underpayment of benefits paid under part A, and if so, the amount 
thereof; and
    (14) Whether a waiver of adjustment or recovery under sections 1870 
(b) and (c) of the Act is appropriate when an overpayment of hospital 
insurance benefits or supplementary medical insurance benefits 
(including a payment under section 1814(e) of the Act) has

[[Page 104]]

been made with respect to an individual.
    (c) Initial determination with respect to a provider of services. An 
initial determination with respect to a provider of services shall be a 
determination made on the basis of a request for payment filed by the 
provider under part A of Medicare on behalf of an individual who was 
furnished items or services by the provider, but only if the 
determination involves the following:
    (1) A finding by the intermediary that such items or services are 
not covered by reason of Sec. 411.15(g) or Sec. 411.15(k); and
    (2) A finding by the intermediary that either such individual or 
such provider of services, or both, knew or could reasonably have been 
expected to know that such items or services were excluded from coverage 
under the program.

[55 FR 11020, Mar. 26, 1990]



Sec. 405.705  Actions which are not initial determinations.

    An initial determination under Part A of Medicare does not include 
determinations relating to:
    (a) The reasonable cost of items or services furnished under Part A 
of Medicare;
    (b) Whether an institution or agency meets the conditions for 
participation in the program;
    (c) Whether an individual is qualified for use of the expedited 
appeals process as provided in Sec. 405.718;
    (d) An action regarding compromise of a claim arising under the 
Medicare program, or termination or suspension of collection action on 
such a claim under the Federal Claims Collection Act of 1966 (31 U.S.C. 
3711). See 20 CFR 404.515 for overpayment claims against an individual, 
Sec. 405.376 for overpayment claims against a provider, physician or 
other supplier, and Sec. 408.110 for claims concerning unpaid Medicare 
premiums;
    (e) The transfer or discharge of residents of skilled nursing 
facilities in accordance with Sec. 483.12 of this chapter; or
    (f) The preadmission screening and annual resident review processes 
required by part 483 subparts C and E of this chapter.

[45 FR 73932, Nov. 7, 1980; 46 FR 24565, May 1, 1981, as amended at 52 
FR 22454, June 12, 1987; 52 FR 48123, Dec. 18, 1987; 57 FR 56504, Nov. 
30, 1992; 61 FR 63749, Dec. 2, 1996]



Sec. 405.706  Decisions of utilization review committees.

    (a) General rule. A decision of a utilization review committee is a 
medical determination by a staff committee of the provider or a group 
similarly composed and does not constitute a determination by the 
Secretary within the meaning of section 1869 of the Act. The decision of 
a utilization review committee may be considered by CMS along with other 
pertinent medical evidence in determining whether or not an individual 
has the right to have payment made under Part A of title XVIII.
    (b) Applicability under the prospective payment system. CMS may 
consider utilization review committee decisions related to inpatient 
hospital services paid for under the prospective payment system (see 
part 412 of this chapter) only as those decisions concern:
    (1) The appropriateness of admissions resulting in payments under 
subparts D, E and G of part 412 of this chapter.
    (2) The covered days of care involved in determinations of outlier 
payments under Sec. 412.80(a)(1)(i) of this chapter; and
    (3) The necessity of professional services furnished in high cost 
outliers under Sec. 412.80(a)(1)(ii) of this chapter.

[48 FR 39831, Sept. 1, 1983]



Sec. 405.708  Effect of initial determination.

    (a) The initial determination under Sec. 405.704 (a) or (b) shall be 
binding upon the individual on whose behalf payment under part A has 
been requested or, if such individual is deceased, upon the 
representative of such individual's estate, unless it is reconsidered in 
accordance with Secs. 405.710 through 405.717 or revised in accordance 
with Sec. 405.750. Such individual (or the representative of such 
individual's estate if the individual is deceased) shall be the party to 
such initial determination.
    (b) The initial determination under Sec. 405.704(c) shall be binding 
upon the

[[Page 105]]

provider of services unless it is reconsidered in accordance with 
Secs. 405.710 through 405.717 or revised in accordance with 
Sec. 405.750. Such provider of services shall be the party to such 
initial determination.

[55 FR 11021, Mar. 26, 1990, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.710  Right to reconsideration.

    (a) An individual who is a party to an initial determination, as 
specified in Sec. 405.704 (a) and (b), (or if such individual is 
deceased, the representative of such individual's estate) and who is 
dissatisfied with the initial determination may request a 
reconsideration of such determination in accordance with Sec. 405.711 
regardless of the amount in controversy.
    (b) A provider of services who is a party to an initial 
determination (as specified in Sec. 405.704(c)) and who is dissatisfied 
with such initial determination may request a reconsideration of such 
determination in accordance with Sec. 405.711, regardless of the amount 
in controversy, but only if the individual on whose behalf the request 
for payment was made has indicated in writing that he does not intend to 
request reconsideration of the intermediary's initial determination on 
such request for payment, or if the intermediary has made a finding (see 
Sec. 405.704(c)) that such individual did not know or could not 
reasonably have been expected to know that the expenses incurred for the 
items or services for which such request for payment was made were not 
reimbursable by reason of Sec. 411.15(g) or Sec. 411.15(k).

[55 FR 11021, Mar. 26, 1990]



Sec. 405.711  Time and place of filing request for reconsideration.

    The request for reconsideration shall be made in writing and filed 
at an office of the SSA or the CMS or, in the case of a qualified 
railroad retirement beneficiary (see 20 CFR 404.368) filed at an office 
of the Railroad Retirement Board, within 60 days after the date of 
receipt of notice of initial determination, unless such time is extended 
as provided in Sec. 405.712. A request for reconsideration which is 
filed with the intermediary which received the request for payment 
submitted on behalf of the individual is considered to have been filed 
with the CMS as of the date it is filed with the intermediary. For 
purposes of this section, the date of receipt of notice of the initial 
determination shall be presumed to be 5 days after the date of such 
notice, unless there is a reasonable showing to the contrary.

[41 FR 47917, Nov. 1, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 62 FR 25855, May 12, 1997]



Sec. 405.712  Extension of time to request reconsideration.

    If a party to an initial determination desires to file a request for 
reconsideration after the time for filing such request in accordance 
with Sec. 405.711 has passed, such party may file a petition with the 
SSA or the CMS or, in the case of a qualified railroad retirement 
beneficiary, with the Railroad Retirement Board, for an extension of 
time for the filing of such request. Such petition shall be in writing 
and shall state the reasons why the request for reconsideration was not 
filed within the required time. For good cause shown, the CMS may extend 
the time for filing the request for reconsideration.

[37 FR 5814, Mar. 22, 1972. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 62 FR 25855, May 12, 1997]



Sec. 405.714  Withdrawal of request for reconsideration.

    A request for reconsideration may be withdrawn by the party to the 
initial determination who filed the request or by his representative 
provided that the withdrawal is made in writing and filed at an office 
of the SSA or the CMS or, in the case of a qualified railroad retirement 
beneficiary, with the Railroad Retirement Board prior to the date of the 
mailing of the notice of reconsidered determination. A withdrawal filed 
with the intermediary which received the request for payment submitted 
on behalf of the individual is considered to have been filed with the 
CMS as of the date it is filed with the intermediary.

[40 FR 1025, Jan. 6, 1975. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 62 FR 25855, May 12, 1997]

[[Page 106]]



Sec. 405.715  Reconsidered determination.

    (a) In reconsidering an initial determination, the CMS shall review 
such initial determination, the evidence and findings upon which such 
determination was based, and any additional evidence submitted to the 
SSA or the CMS or otherwise obtained by the intermediary or the CMS; and 
shall make a determination affirming or revising, in whole or in part, 
such initial determination.
    (b) If the request for reconsideration is filed by an individual 
with respect to an initial determination specified in 
Sec. 405.704(b)(12), the provider of services who furnished the items or 
services shall, prior to the making of the reconsidered determination, 
be made a party thereto. If pursuant to Sec. 405.710(b) a request for 
reconsideration is filed by a provider of services with respect to an 
individual determination under Sec. 405.704(c), the individual who was 
furnished the items or services shall, prior to the making of the 
reconsidered determination, be made a party thereto.

[55 FR 11021, Mar. 26, 1990, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.716  Notice of reconsidered determination.

    Written notice of the reconsidered determination shall be mailed by 
the CMS to the parties and their representatives at their last known 
addresses. Such notice shall state the specific reasons for the 
reconsidered determination and shall advise the parties of their right 
to a hearing if the amount in controversy is $100 or more, or, if 
appropriate, advise them of the requirements for use of the expedited 
appeals process (see Sec. 405.718).

[40 FR 53387, Nov. 18, 1975. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.717  Effect of a reconsidered determination.

    The reconsidered determination is binding upon all parties unless--
    (a) A request for a hearing is filed with SSA or CMS within 60 days 
after the date of receipt of notice of the reconsidered determination by 
the parties (for purposes of this section, the date of receipt of notice 
of the reconsidered determination is presumed to be 5 days after the 
date of the notice, unless it is shown that the notice was received 
earlier or later); or
    (b) The reconsidered determination is revised in accordance with 
Sec. 405.750; or
    (c) The expedited appeals process is used in accordance with 
Sec. 405.718.

[62 FR 25852, May 12, 1997]



Sec. 405.718  Expedited appeals process.

    (a) Conditions for use of expedited appeals process (EAP). A party 
may use the EAP to request court review in place of an administrative 
law judge (ALJ) hearing or Departmental Appeals Board (DAB) review if 
the following conditions are met:
    (1) CMS has made a reconsideration determination; an ALJ has made a 
hearing decision; or DAB review has been requested, but a final decision 
has not been issued.
    (2) The filing entity is a party referred to in Sec. 405.718(d).
    (3) The party has filed a request for an ALJ hearing in accordance 
with Sec. 405.722, or DAB review in accordance with 20 CFR 404.968.
    (4) The amount remaining in controversy is $1,000 or more.
    (5) If there is more than one party to the reconsideration 
determination or hearing decision, each party concurs, in writing, with 
the request for the EAP.
    (b) Content of the request for EAP. The request for the EAP:
    (1) Alleges that there are no material issues of fact in dispute; 
and
    (2) Asserts that the only factor precluding a decision favorable to 
the party is a statutory provision that is unconstitutional or a 
regulation, national coverage decision under section 1862(a)(1) of the 
Act, or CMS Ruling that is invalid.
    (c) Place and time for requesting an EAP--(1) Place for filing 
request. The person must file a written request--
    (i) At an office of SSA or CMS; or
    (ii) If the person is in the Philippines, at the Veterans 
Administration Regional Office or with an ALJ; or
    (iii) If the person is a qualified railroad retirement beneficiary, 
at an office of the Railroad Retirement Board.
    (2) Time of filing request. The party may file a request for the 
EAP--

[[Page 107]]

    (i) If the party has requested a hearing, at any time prior to 
receipt of the notice of the ALJ's decision;
    (ii) Within 60 days after the date of receipt of notice of the ALJ's 
decision or dismissal, unless the time is extended in accordance with 
the standards set out in 20 CFR 404.925(c). For purposes of this 
section, the date of receipt of the notice is presumed to be 5 days 
after the date on the notice, unless it is shown that the notice was 
received later; or
    (iii) If the party has requested DAB review, at any time prior to 
receipt of notice of the Board's decision.
    (d) Parties to the EAP. The parties to the EAP are the persons who 
were parties to the reconsideration determination and, if appropriate, 
to the hearing.
    (e) Determination on request for EAP. (1) For EAP requests initiated 
at the ALJ level, an ALJ determines whether all conditions of paragraphs 
(a) and (b) of this section are met.
    (2) If a hearing decision has been issued, the DAB determines 
whether all conditions of paragraphs (a) and (b) of this section are 
met.
    (f) ALJ or DAB certification for the EAP. If the party meets the 
requirements for the EAP, the ALJ or the DAB, as appropriate, certifies 
the case in writing stating that:
    (1) The facts involved in the claim are not in dispute;
    (2) Except as indicated in paragraph (f)(3) of this section, CMS's 
interpretation of the law is not in dispute;
    (3) The sole issue(s) in dispute is the constitutionality of a 
statutory provision or the validity of a regulation, CMS Ruling, or 
national coverage decision based on section 1862(a)(1) of the Act.
    (4) Except for the provision challenged, the right(s) of the party 
is established; and
    (5) The determination or decision made by the ALJ or DAB is final 
for purposes of seeking judicial review.
    (g) Effect of ALJ or DAB certification. (1) Following the issuance 
of the certification described in paragraph (f) of this section, the 
party waives completion of the remaining steps of the administrative 
appeals process.
    (2) The 60-day period for filing a civil suit in a Federal district 
court begins on the date of receipt of the ALJ or DAB certification.
    (h) Effect of a request for EAP that does not result in 
certification. If a request for the EAP does not meet all the conditions 
for use of the process, the ALJ or DAB so advises the party and treats 
the request as a request for hearing or DAB review, as appropriate.

[62 FR 25852, May 12, 1997]



Sec. 405.720  Hearing; right to hearing.

    A person has a right to a hearing regarding any initial 
determination made under Sec. 405.704 if:
    (a) Such initial determination has been reconsidered by the CMS;
    (b) Such person was a party to the reconsidered determination;
    (c) Such person or his representative has filed a written request 
for a hearing in accordance with the procedure described in 
Sec. 405.722; and
    (d) The amount in controversy is $100 or more.

[40 FR 1025, Jan. 6, 1975. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 62 FR 25855, May 12, 1997]



Sec. 405.722  Time and place of filing request for a hearing.

    The request for a hearing shall be made in writing and filed at an 
office of the SSA or the CMS or with a ALJ, or, in the case of a 
qualified railroad retirement beneficiary, at an office of the Railroad 
Retirement Board. Such request must be filed within 60 days after the 
date of receipt of notice of the reconsidered determination by such 
individual, except where the time is extended as provided in 20 CFR 
404.933(c). For purposes of this section, the date of receipt of notice 
of the reconsidered determination shall be presumed to be 5 days after 
the date of such notice, unless there is a reasonable showing to the 
contrary.

[45 FR 73933, Nov. 7, 1980, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.724  Departmental Appeals Board (DAB) review.

    Regulations beginning at 20 CFR 404.967 regarding SSA Appeals 
Council

[[Page 108]]

Review are also applicable to DAB review of matters addressed by this 
subpart.

[62 FR 25852, May 12, 1997]



Sec. 405.730  Court review.

    (a) To the extent authorized by sections 1869, 1876(c)(5)(B), and 
1879(d) of the Act, a party to a Departmental Appeals Board (DAB) 
decision or an ALJ decision if the DAB does not review the ALJ decision, 
may obtain a court review if the amount remaining in controversy is 
$1,000 or more. A party may obtain court review by filing a civil action 
in a district court of the United States in accordance with the 
provisions of section 205(g) of the Act. The filing procedure is set 
forth at 20 CFR 422.210.
    (b) A party to a reconsidered determination or an ALJ hearing 
decision may obtain a court review if the amount in controversy is 
$1,000 or more, and he or she requests and meets the conditions for the 
expedited appeals process set forth in Sec. 405.718.

[62 FR 25852, May 12, 1997]



Sec. 405.732  Review of national coverage decisions (NCDs).

    (a) General. (1) CMS makes NCDs either granting, limiting, or 
excluding Medicare coverage for a specific medical service, procedure or 
device. NCDs are made under section 1862(a)(1) of the Act or other 
applicable provisions of the Act. An NCD is binding on all Medicare 
carriers, fiscal intermediaries, QIOs, HMOs, CMPs, and HCPPs when 
published in CMS program manuals or the Federal Register.
    (2) Under section 1869(b)(3) of the Act, only NCDs made under 
section 1862(a)(1) of the Act are subject to the conditions of 
paragraphs (b) through (d) of this section.
    (b) Review by ALJ. (1) An ALJ may not disregard, set aside, or 
otherwise review an NCD.
    (2) An ALJ may review the facts of a particular case to determine 
whether an NCD applies to a specific claim for benefits and, if so, 
whether the NCD has been applied correctly to the claim.
    (c) Review by Court. (1) A court's review of an NCD is limited to 
whether the record is incomplete or otherwise lacks adequate information 
to support the validity of the decision, unless the case has been 
remanded to the Secretary to supplement the record regarding the NCD. 
The court may not invalidate an NCD except upon review of the 
supplemented record.
    (2) A Federal court may not hold unlawful or set aside an NCD 
because it was not issued in accordance with the notice and comment 
procedures of the Administrative Procedure Act (5 U.S.C. 553) or section 
1871(b) of the Act.
    (d) Remands--(1) Secretary's action. When a court remands an NCD 
matter to the Secretary because the record in support of the NCD is 
incomplete or otherwise lacks adequate information, the Secretary 
remands the case to CMS in order to supplement the record.
    (2) Remand to CMS. CMS supplements the record with new or updated 
evidence, including additional information from other sources, and may 
issue a revised NCD.
    (3) Final Actions. (i) The proceedings to supplement the record are 
expedited.
    (ii) When CMS does not issue a revised NCD, it returns the 
supplemented record to the court for review.
    (iii) When CMS issues a revised NCD, it forwards the case to an ALJ 
who issues a new decision applying the revised NCD to the facts of the 
claim(s) under consideration. The ALJ's decision is subject to DAB 
review and, ultimately, judicial review.

[62 FR 25852, May 12, 1997]



Sec. 405.740  Principles for determining the amount in controversy.

    (a) Individual appellants. For the purpose of determining whether an 
individual appellant meets the minimum amount in controversy needed for 
a hearing ($100), the following rules apply:
    (1) The amount in controversy is computed as the actual amount 
charged the individual for the items and services in question, less any 
amount for which payment has been made by the intermediary and less any 
deductible and coinsurance amounts applicable in the particular case.

[[Page 109]]

    (2) A single beneficiary may aggregate claims from two or more 
providers to meet the $100 hearing threshold and a single provider may 
aggregate claims for services provided to one or more beneficiaries to 
meet the $100 hearing threshold.
    (3) In either of the circumstances specified in paragraph (a)(2) of 
this section, two or more claims may be aggregated by an individual 
appellant only if the claims have previously been reconsidered and a 
request for hearing has been made within 60 days after receipt of the 
reconsideration determination(s).
    (4) When requesting a hearing, the appellant must specify in his or 
her appeal request the specific claims to be aggregated.
    (b) Two or more appellants. As specified below, under section 
1869(b)(2) of the Act, two or more appellants may aggregate their claims 
together to meet the minimum amount in controversy needed for a hearing 
($100). The right to aggregate under this statutory provision applies to 
claims for items and services furnished on or after January 1, 1987.
    (1) The aggregate amount in controversy is computed as the actual 
amount charged the individual(s) for the items and services in question, 
less any amount for which payment has been made by the intermediary and 
less any deductible and coinsurance amounts applicable in the particular 
case.
    (2) In determining the amount in controversy, two or more appellants 
may aggregate their claims together under the following circumstances:
    (i) Two or more beneficiaries may combine claims representing 
services from the same or different provider(s) if the claims involve 
common issues of law and fact;
    (ii) Two or more providers may combine their claims if the claims 
involve the delivery of similar or related services to the same 
beneficiary; or
    (iii) Two or more providers may combine their claims if the claims 
involve common issues of law and fact with respect to services furnished 
to two or more beneficiaries.
    (iv) In any of the circumstances specified in paragraphs (b)(2)(i) 
through (b)(2)(iii) of this section, the claims may be aggregated only 
if the claims have previously been reconsidered and a request for 
hearing has been made within 60 days after receipt of the 
reconsideration determination(s). Moreover, in the request for hearing, 
the appellants must specify the claims that they seek to aggregate.
    (c) The determination as to whether the amount in controversy is 
$100 or more is made by the administrative law judge (ALJ).
    (d) In determining the amount in controversy under paragraph (b) of 
this section, the ALJ also makes the determination as to what 
constitutes ``similar or related services'' or ``common issues of law 
and fact.''
    (e) When a civil action is filed by either an individual appellant 
or two or more appellants, the Secretary may assert that the aggregation 
principles contained in this subpart may be applied to determine the 
amount in controversy for judicial review ($1000).
    (f) Notwithstanding the provisions of paragraphs (a)(1) and (b)(1) 
of this section, when payment is made for certain excluded services 
under Sec. 411.400 of this chapter or the liability of the beneficiary 
for those services is limited under Sec. 411.402 of this chapter, the 
amount in controversy is computed as the amount that would have been 
charged the beneficiary for the items or services in question, less any 
deductible and coinsurance amounts applicable in the particular case, 
had such expenses not been paid pursuant to Sec. 411.400 of this chapter 
or had such liability not been limited pursuant to Sec. 411.402 of this 
chapter.
    (g) Under this subpart, an appellant may not combine part A and part 
B claims together to meet the requisite amount in controversy for a 
hearing. HMO, CMP and HCPP appellants under part 417 of this chapter may 
combine part A and part B claims together to meet the requisite amounts 
in controversy for a hearing.

[59 FR 12181, Mar. 16, 1994]



Sec. 405.745  Amount in controversy ascertained after reconsideration.

    For the purpose of determining whether a party to a reconsidered 
determination is entitled to a hearing,

[[Page 110]]

the amount in controversey after the reconsideration action rather than 
the amount in controversy initially at issue shall be controlling.

[40 FR 1026, Jan. 6, 1975. Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.747  Dismissal of request for hearing; amount in controversy less than $100.

    The ALJ shall, without holding a hearing, dismiss the request for 
hearing if the request for hearing plainly shows that less than $100 is 
in controversy. If a hearing is held and the ALJ finds that the amount 
in controversy is less than $100, the ALJ shall dismiss the request for 
hearing and will not rule on the substantive issues involved in the 
appeal.

[37 FR 5814, Mar. 23, 1972. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 62 FR 25855, May 12, 1997]



Sec. 405.750  Time period for reopening initial, revised, or reconsidered determinations and decisions or revised decisions of an ALJ or the Departmental 
          Appeals Board (DAB); binding effect of determination and 
          decisions.

    (a) Reopenings concerning applications and entitlement. A 
determination, or decision, or revised determination or decision made by 
the SSA concerning any matter under Sec. 405.704(a), may be reopened and 
revised under 20 CFR 404.988 (Conditions for reopening).
    (b) Reopenings concerning a request for payment. An initial, 
revised, or reconsidered determination of CMS, or a decision or revised 
decision of an ALJ or of the DAB, with respect to an individual's right 
concerning a request for payment under Medicare Part A, which is 
otherwise binding under 20 CFR 404.955 or 404.981 and Secs. 405.708 or 
405.717 of this subpart may be reopened:
    (1) Within 12 months from the date of the notice of the initial or 
reconsidered determination to the party to such determination;
    (2) After such 12-month period, but within 4 years after the date of 
the notice of the initial determination to the individual, upon 
establishment of good cause for reopening such determination or decision 
(see 20 CFR 404.988(b) and 404.989); or
    (3) At any time, when:
    (i) Such initial, revised, or reconsidered determination or such 
decision or revised decision is unfavorable, in whole or in part, to the 
party thereto, but only for the purpose of correcting clerical error or 
error on the face of the evidence on which such determination or 
decision was based; or
    (ii) Such initial, revised, or reconsidered determination or such 
decision or revised decision was procured by fraud or similar fault of 
the beneficiary or some other person.

[45 FR 73933, Nov. 7, 1980, as amended at 61 FR 32348, June 24, 1996; 62 
FR 25853, 25855, May 12, 1997]



Sec. 405.753  Appeal of a categorization of a device.

    (a) CMS's acceptance of the FDA categorization of a device as an 
experimental/investigational (Category A) device under Sec. 405.203 is a 
national coverage decision under section 1862(a)(1) of the Act.
    (b) CMS's acceptance of the FDA categorization of a device as an 
experimental/investigational (Category A) device under Sec. 405.203 is 
an aspect of an initial determination that, under section 1862 of the 
Act, payment may not be made.
    (c) In accordance with section 1869(b)(3)(A) of the Act, CMS's 
acceptance of the FDA categorization of a device as an experimental/
investigational (Category A) device under Sec. 405.203 may not be 
reviewed by an administrative law judge.

[60 FR 48424, Sept. 19, 1995]



          Subpart H--Appeals Under the Medicare Part B Program

    Authority: Secs. 1102, 1842(b)(3)(C), 1869(b), and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395u(b)(3)(C), 1395ff(b), and 
1395hh).

    Source: 32 FR 18028, Dec. 16, 1967, unless otherwise noted. 
Redesignated at 42 FR 52826, Sept. 30, 1977.



Sec. 405.801  Part B appeals--general description.

    (a) The Medicare carrier makes an initial determination when a 
request for payment for Part B benefits is submitted. If an individual 
beneficiary is

[[Page 111]]

dissatisfied with the initial determination, he or she may request, and 
the carrier will perform, a review of the claim. Following the carrier's 
review determination, the beneficiary may obtain a carrier hearing if 
the amount remaining in controversy is at least $100. The beneficiary is 
also entitled to a carrier hearing without the benefit of a review 
determination when the initial request for payment is not being acted 
upon with reasonable promptness (as defined in Sec. 405.802). Following 
the carrier hearing, the beneficiary may obtain a hearing before an ALJ 
if the amount remaining in controversy is at least $500. If the 
beneficiary is dissatisfied with the decision of the ALJ, he or she may 
request the Departmental Appeals Board (DAB) to review the case. 
Following the action of the DAB, the beneficiary may file suit in 
Federal district court if the amount remaining in controversy is at 
least $1,000.
    (b) The rights of a beneficiary under paragraph (a) of this section 
to appeal the carrier's initial determination are granted also to--
    (1) A physician or supplier that furnishes services to a beneficiary 
and that accepts an assignment from the beneficiary, or
    (2) A physician who meets the conditions of section 1842(l)(1)(A) of 
the Act pertaining to refund requirements for nonparticipating 
physicians who have not taken assignment on the claim(s) at issue.
    (c) Procedures governing the determinations by SSA as to whether an 
individual has met basic Part B entitlement requirements are covered in 
subpart G of this part and 20 CFR part 404, subpart J. Subparts J and R 
of 20 CFR part 404 are also applicable to ALJ, DAB, and judicial review 
conducted under subpart H, except to the extent that specific provisions 
are contained in this subpart.

[62 FR 25853, May 12, 1997]



Sec. 405.802  Definitions.

    As used in subpart H of this part, the term--
    After receipt of the notice means 5 days after the date on the 
notice, unless it is shown that the notice was received earlier or 
later.
    Appellant designates the beneficiary, assignee or other person or 
entity that has filed an appeal concerning a particular determination of 
benefits under Medicare part B. Designation as an appellant does not in 
itself convey standing to appeal the determination in question.
    Assignee means a physician or supplier who furnishes services to a 
beneficiary under Medicare part B and who has accepted a valid 
assignment executed by the beneficiary.
    Assignment means the transfer by the assignor of his or her claim 
for payment to the assignee in return for the latter's promise not to 
charge more for his or her services than the carrier finds to be the 
reasonable charge or other approved amount.
    Assignor means a beneficiary under Medicare part B whose physician 
or supplier has taken assignment of a claim.
    Carrier means an organization which has entered into a contract with 
the Secretary pursuant to section 1842 of the Act and which is 
authorized to make determinations with respect to part B of title XVIII 
of the Act. For purposes of this subpart, the term carrier also refers 
to an intermediary that has entered into a contract with the Secretary 
under section 1816 of the Act and is authorized to make determinations 
with respect to part B provider services, as specified in Sec. 421.5(c) 
of this chapter.
    Common issues of law and fact, with respect to the aggregation of 
claims by two or more appellants to meet the minimum amount in 
controversy needed for an ALJ hearing, occurs when the claims sought to 
be aggregated are denied or reduced for similar reasons and arise from a 
similar fact pattern material to the reason the claims are denied.
    Delivery of similar or related services, with respect to the 
aggregation of claims by two or more physician/supplier appellants to 
meet the minimum amount in controversy needed for an ALJ hearing, means 
like or coordinated services or items provided to the same beneficiary 
by the appellants.
    Representative means an individual meeting the conditions described 
in Secs. 405.870 through 405.871.

[[Page 112]]

    With reasonable promptness means within a period of 60 consecutive 
days after the receipt by the carrier of a request for payment.

[59 FR 12182, Mar. 16, 1994, as amended at 62 FR 25853, May 12, 1997]



Sec. 405.803  Initial determination.

    (a) Carriers make initial determinations regarding claims for 
benefits under Medicare Part B.
    (b) An initial determination for purposes of this subpart includes 
determinations such as the following:
    (1) Whether services furnished are covered.
    (2) Whether the deductible has been met.
    (3) Whether the receipted bill or other evidence of payment is 
acceptable.
    (4) Whether the charges for services furnished are reasonable.
    (5) If the services furnished to a beneficiary by a physician or a 
supplier pursuant to an assignment under Sec. 424.55 of this chapter are 
not covered because they are determined to be not reasonable and 
necessary under Sec. 411.15(k) of this chapter, whether the beneficiary, 
physician or supplier, or a physician who meets the requirements of 
Sec. 411.408, knew or could reasonably have been expected to know at the 
time the services were furnished that the services were not covered.
    (c) The following are not initial determinations for purposes of 
this subpart:
    (1) Any issue or factor for which SSA or CMS has sole 
responsibility, for example, whether an independent laboratory meets the 
conditions for coverage of services; whether a Medicare overpayment 
claim should be compromised, or collection action terminated or 
suspended.
    (2) Any issue or factor which relates to hospital insurance benefits 
under Medicare Part A.

[62 FR 25853, May 12, 1997]



Sec. 405.804  Notice of initial determination.

    After a carrier has made an initial determination on a request for 
payment written notice of this determination shall be mailed to each 
party to the determination at his last known address. The notice of the 
determination shall inform each party to the determination of his right 
to have such determination reviewed.



Sec. 405.805  Parties to the initial determination.

    The parties to the initial determination (see Sec. 405.803) may be 
any party described in Sec. 405.802.

[64 FR 52670, Sept. 30, 1999]



Sec. 405.806  Effect of Initial Determination.

    The initial determination is binding upon all parties to the claim 
for benefits unless the determination is--
    (a) Reviewed in accordance with Secs. 405.810 through 405.812; or
    (b) Revised as a result of a reopening in accordance with 
Sec. 405.841.

[62 FR 25853, May 12, 1997]



Sec. 405.807  Request for review of initial determination.

    (a) General. A party to an initial determination by a carrier, that 
is dissatisfied with the initial determination and wants to appeal the 
matter, may request that the carrier review the determination. The 
request for review by the party to an initial determination must clearly 
indicate that he or she is dissatisfied with the initial determination 
and wants to appeal the matter. The request for review does not 
constitute a waiver of the party's right to a hearing (under 
Sec. 405.815) after the review.
    (b) Place and method of filing a request. A request by a party for a 
carrier to review the initial determination may be made in one of the 
following ways:
    (1) In writing and filed at an office of the carrier, SSA, or CMS.
    (2) By telephone to the telephone number designated by the carrier 
as the appropriate number for the receipt of requests for review.
    (c) Time of filing request. (1) The carrier must provide a period of 
6 months after the date of the notice of the initial determination 
within which the party to the initial determination may request a 
review.

[[Page 113]]

    (2) The carrier may, upon request by the party, extend the period 
for requesting the review of the initial determination.

[64 FR 52670, Sept. 30, 1999]



Sec. 405.808  Parties to the review.

    The parties to the review (as provided for in Sec. 405.807(a)) shall 
be the persons who were parties to the carrier's initial determination 
as described in Sec. 405.805, and any other party whose rights with 
respect to the particular claim being reviewed may be affected by such 
review.

[39 FR 12097, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.809  Opportunity to submit evidence.

    The parties to the review (as provided for in Sec. 405.807(a)) shall 
have a reasonable opportunity to submit written evidence and contentions 
as to fact or law relative to the claim at issue.

[39 FR 12097, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.810  Review determination.

    Subject to the provisions of Secs. 405.807 through 405.809, the 
carrier shall review the claim in dispute and, upon the basis of the 
evidence of record, shall make a separate determination affirming or 
revising in whole or in part the findings and determination in question.

[39 FR 12097, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.811  Notice of review determination.

    Written notice of the review determination is mailed to a party at 
his or her last known address. The review determination states the basis 
of the determination and advises the party of his or her right to a 
carrier hearing when the amount in controversy is $100 or more as 
determined in accordance with Sec. 405.817. The notice states the place 
and manner of requesting a carrier hearing as well as the time limit 
under which a hearing must be requested (see Sec. 405.821).

[59 FR 12182, Mar. 16, 1994]



Sec. 405.812  Effect of review determination.

    The review determination is binding upon all parties to the review 
unless a carrier hearing decision is issued pursuant to a request for 
hearing made in accordance with Sec. 405.821 or is revised as a result 
of reopening in accordance with Sec. 405.841.

[59 FR 12182, Mar. 16, 1994, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.815  Amount in controversy for carrier hearing, ALJ hearing and judicial review.

    Any party designated in Sec. 405.822 is entitled to a carrier 
hearing after a review determination has been made by the carrier if the 
amount remaining in controversy is $100 or more and the party meets the 
requirements of Sec. 405.821 of this subpart. To be entitled to a 
hearing before an ALJ following the carrier hearing, the amount 
remaining in controversy must be $500 or more, and for judicial review 
following the ALJ hearing and Departmental Appeals Board Review, the 
amount remaining in controversy must be $1000 or more.

[59 FR 12182, Mar. 16, 1994, as amended at 61 FR 32348, June 24, 1996]



Sec. 405.817  Principles for determining amount in controversy.

    (a) Individual appellants. For the purpose of determining whether an 
individual appellant meets the minimum amount in controversy needed for 
a carrier hearing ($100) or ALJ hearing ($500), the following rules 
apply:
    (1) The amount in controversy is computed as the actual amount 
charged the individual for the items and services in question, less any 
amount for which payment has been made by the carrier and less any 
deductible and coinsurance amounts applicable in the particular case.
    (2) A single beneficiary may aggregate claims from two or more 
physicians/suppliers to meet the $100 or $500 thresholds. A single 
physician/supplier may aggregate claims from two or more beneficiaries 
to meet the $100 or $500 threshold levels of appeal.

[[Page 114]]

    (3) In either of the circumstances specified in paragraph (a)(2) of 
this section, two or more claims may be aggregated by an individual 
appellant to meet the amount in controversy for a carrier hearing only 
if the claims have previously been reviewed and a request for hearing 
has been made within six months after the date of the review 
determination(s).
    (4) In either of the circumstances specified in paragraph (a)(2) of 
this section, two or more claims may be aggregated by an individual 
appellant to meet the amount in controversy for an ALJ hearing only if 
the claims have previously been decided by a carrier hearing officer and 
a request for an ALJ hearing has been made within 60 days after receipt 
of the carrier hearing officer decision(s).
    (5) When requesting a carrier hearing or an ALJ hearing, the 
appellant must specify in his or her appeal request the specific claims 
to be aggregated.
    (b) Two or more appellants. As specified in this paragraph, under 
section 1869(b)(2) of the Act, two or more appellants may aggregate 
their claims together to meet the minimum amount in controversy needed 
for an ALJ hearing ($500). The right to aggregate under this statutory 
provision applies to claims for items and services furnished on or after 
January 1, 1987.
    (1) The aggregate amount in controversy is computed as the actual 
amount charged the individual(s) for the items and services in question, 
less any amount for which payment has been made by the carrier and less 
any deductible and coinsurance amounts applicable in the particular 
case.
    (2) In determining the amount in controversy, two or more appellants 
may aggregate their claims together under the following circumstances:
    (i) Two or more beneficiaries may combine claims representing 
services from the same or different physician(s) or supplier(s) if the 
claims involve common issues of law and fact;
    (ii) Two or more physicians/suppliers may combine their claims if 
the claims involve the delivery of similar or related services to the 
same beneficiary;
    (iii) Two or more physicians/suppliers may combine their claims if 
the claims involve common issues of law and fact with respect to 
services furnished to two or more beneficiaries.
    (iv) In any of the circumstances specified in paragraphs (b)(2)(i) 
through (b)(2)(iii) of this section, the claims may be aggregated only 
if the claims have previously been decided by a carrier hearing 
officer(s) and a request for ALJ hearing has been made within 60 days 
after receipt of the carrier hearing officer decision(s). Moreover, in a 
request for ALJ hearing, the appellants must specify the claims that 
they seek to aggregate.
    (c) The determination as to whether the amount in controversy is 
$100 or more is made by the carrier hearing officer. The determination 
as to whether the amount in controversy is $500 or more is made by the 
ALJ.
    (d) In determining the amount in controversy under paragraph (b) of 
this section, the ALJ will also make the determination as to what 
constitutes ``similar or related services'' or ``common issues of law 
and fact.''
    (e) When a civil action is filed by either an individual appellant 
or two or more appellants, the Secretary may assert that the aggregation 
principles contained in this subpart may be applied to determine the 
amount in controversy for judicial review ($1000).
    (f) Notwithstanding the provisions of paragraphs (a)(1) and (b)(1) 
of this section, when payment is made for certain excluded services 
under Sec. 411.400 of this chapter or the liability of the beneficiary 
for those services is limited under Sec. 411.402 of this chapter, the 
amount in controversy is computed as the amount that would have been 
charged the beneficiary for the items or services in question, less any 
deductible and coinsurance amounts applicable in the particular case, 
had such expenses not been paid under Sec. 411.400 of this chapter or 
had such liability not been limited under Sec. 411.402 of this chapter.
    (g) Under this subpart, an appellant may not combine part A and part 
B claims together to meet the requisite amount in controversy for a 
carrier hearing or ALJ hearing. HMO, CMP and HCPP appellants under part 
417 of this chapter may combine part A and

[[Page 115]]

part B claims together to meet the requisite amount in controversy for a 
hearing.

[59 FR 12182, Mar. 16, 1994]



Sec. 405.821  Request for carrier hearing.

    (a) A request for a carrier hearing is any clear expression in 
writing by a claimant asking for a hearing to adjudicate a claim when 
not acted upon with reasonable promptness or by a party to a review 
determination who states, in effect, that he or she is dissatisfied with 
the carrier's review determination and wants further opportunity to 
appeal the matter to the carrier.
    (b) The hearing request must be filed at an office of the carrier or 
at an office of SSA or CMS.
    (c) Except when a carrier hearing is held because the carrier did 
not act upon a claim with reasonable promptness, a party to the review 
determination may request a carrier hearing within six months after the 
date of the notice of the review determination. The carrier may, upon 
request by the party affected, extend the period for filing the request 
for hearing.

[59 FR 12183, Mar. 16, 1994, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.822  Parties to a carrier hearing.

    The parties to a hearing shall be the persons who were parties to 
the carrier's review determination (Sec. 405.808) which is in question. 
Any other person may be made a party if that person's rights with 
respect to supplementary medical insurance benefits may be prejudiced by 
the decision.

[39 FR 12097, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 59 FR 12183, Mar. 16, 1994]



Sec. 405.823  Carrier hearing officer.

    Any hearing provided for in this subpart shall be conducted by a 
hearing officer designated by the appropriate official of the carrier.

[39 FR 12097, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977, 
and amended at 59 FR 12183, Mar. 16, 1994]



Sec. 405.824  Disqualification of carrier hearing officer.

    A hearing officer shall not conduct a hearing in any case in which 
he is prejudiced or partial with respect to any party, or if he has any 
interest in the matter before him. Notice of any objection with respect 
to the hearing officer who will conduct the hearing shall be made by the 
objecting party at his earliest opportunity. The hearing officer shall 
consider such objection and shall, at his discretion, withdraw. If the 
hearing officer withdraws, the appropriate official of the carrier shall 
designate another hearing officer to conduct the hearing. If the hearing 
officer does not withdraw, the objecting party may present his 
objections to the carrier for consideration at any time prior to the 
issuance of a decision. The carrier shall review the request and take 
appropriate action. The fact that a hearing officer is an employee of 
the carrier may not serve as prima facie cause for disqualification.

[32 FR 18028, Dec. 16, 1967. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 59 FR 12183, Mar. 16, 1994]



Sec. 405.825  Location of carrier hearing.

    (a) Time and place. The hearing officer shall fix a time and place 
for the hearing reasonably convenient to the requesting party and not 
inconsistent with the public interest.
    (b) Adjournment or postponement. The hearing officer may, for a good 
and sufficient reason, fix a new time and/or place for the hearing; he 
may change the time and place for the hearing or adjourn the hearing on 
his own motion upon reasonable notification to the parties.

[32 FR 18028, Dec. 16, 1967. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 59 FR 12183, Mar. 16, 1994]



Sec. 405.826  Notice of carrier hearing.

    The notice of hearing is to include notice of the time and place of 
the hearing; information as to the specific issues to be determined; and 
the matters on which findings will be made and conclusions will be 
reached. The notice is to contain sufficient information about the 
hearing procedure (including

[[Page 116]]

the party's right to representation) for effective preparation for the 
hearing.

[32 FR 18028, Dec. 16, 1967. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 59 FR 12183, Mar. 16, 1994]



Sec. 405.830  Conduct of the carrier hearing.

    (a) General. Hearings shall be open to the parties and to such other 
persons as the hearing officer deems necessary and proper for the 
orderly and efficient conduct of the hearing. The hearing officer shall 
inquire fully into the matters at issue and shall receive in evidence 
the testimony of witnesses and any documents which are relevant and 
material to such matters. The parties shall be provided an opportunity 
to enter any objection to the inclusion of any document. The order in 
which evidence and allegations shall be presented and the procedure at 
the hearing, except as this subpart otherwise expressly provides, shall 
be at the discretion of the hearing officer and of such nature as to 
afford the parties a proper hearing.
    (b) Evidence. Evidence may be received at the hearing even though 
inadmissible under rules of evidence applicable to court procedures.
    (c) Witnesses. The hearing officer may examine the witnesses and 
shall allow the parties or their representatives to do so. If the 
hearing officer conducts the examination of a witness, he may allow the 
parties to suggest matters upon which they desire the witness to be 
questioned, and the hearing officer shall question the witness with 
respect to such matters if they are relevant and material to any issue 
pending for decision before him.
    (d) Oral argument and written allegations. The parties, upon their 
request shall be allowed a reasonable time for the presentation of oral 
argument or for the filing of briefs or other written statements or 
allegations of facts or law.
    (e) Consolidated issues. When one or more new issues are raised at 
any time after a request for hearing has been made, but before the 
mailing of notice of the decision, the hearing officer may, at his 
discretion, consider the issues along with the other issues pending 
before him on the same request for hearing.

[32 FR 18028, Dec. 16, 1967. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 59 FR 12183, Mar. 16, 1994]



Sec. 405.831  Waiver of right to appear at carrier hearing and present evidence.

    If all parties waive their right to appear before the hearing 
officer and present evidence and contentions personally or by 
representative, it shall not be necessary for the hearing officer to 
give notice of or conduct a formal hearing as provided in Secs. 405.825 
through 405.830. A waiver of the right to appear is to be in writing and 
filed with the hearing officer or the carrier. Such waiver may be 
withdrawn by a party at any time prior to the mailing of notice of the 
decision in the case. Even though all of the parties have filed a waiver 
of the right to appear and present evidence and contentions at a hearing 
before the hearing officer, the hearing officer may, nevertheless, give 
notice of a time and place and conduct a hearing as provided in 
Secs. 405.825 through 405.830, if he believes that the personal 
appearance and testimony of the party or parties would assist him to 
ascertain the facts at issue in the case. For purposes of this section, 
failure of the parties to appear shall not be cause for a finding of 
abandonment and the hearing officer shall make his decision on the basis 
of all evidence adduced.

[32 FR 18028, Dec. 16, 1967. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 62 FR 25855, May 12, 1997]



Sec. 405.832  Dismissal of request for carrier hearing.

    (a) By application of party. With the approval of the hearing 
officer, a request for a hearing may be withdrawn or dismissed at any 
time prior to the mailing of notice of the decision upon the application 
of the party or parties filing the request for such hearing. A party may 
request a dismissal by filing a written notice of such request with the 
carrier, the hearing officer or orally stating such request at the 
hearing. The dismissal of a request for hearing shall be binding unless 
vacated (see paragraph (d) of this section).

[[Page 117]]

    (b) Dismissal by abandonment of party. A hearing officer may dismiss 
a request for hearing upon abandonment by the party or parties who filed 
the request. A party shall be deemed to have abandoned a request for 
hearing, other than where personal appearance is waived in accordance 
with Sec. 405.831, if neither the party nor his representative appears 
at the time and place fixed for the hearing and within 10 days after the 
mailing of a notice to him by the hearing officer to show cause, such 
party does not show good and sufficient cause for such failure to appear 
and failure to notify the hearing officer prior to the time fixed for 
hearing that he cannot appear.
    (c) Dismissal for cause. The hearing officer may, on his own motion, 
dismiss a hearing request, either entirely or as to any stated issue, 
under either of the following circumstances:
    (1) Where the party requesting a hearing is not a proper party under 
Sec. 405.822 or does not otherwise have a right to a hearing under 
section 1842(b)(3)(C) of the Act; or
    (2) Where the party who filed the hearing request dies and there is 
no information before the hearing officer showing that an individual who 
is not a party may be prejudiced by the carrier's determination.
    (d) Dismissal without prejudice. The hearing officer may on his own 
motion dismiss without prejudice a hearing request where the amount in 
controversy is less than $100.
    (e) Vacation of dismissal. A hearing officer may, on request of a 
party and for good and sufficient cause shown, vacate any dismissal of a 
request for hearing at any time within 6 months from the date of mailing 
notice of the dismissal to the party requesting the hearing at his last 
known address.

[32 FR 18028, Dec. 16, 1967, as amended at 39 FR 12098, Apr. 3, 1974. 
Redesignated at 42 FR 52826, Sept. 30, 1977, as amended at 59 FR 12183, 
Mar. 16, 1994; 62 FR 25855, May 12, 1997]



Sec. 405.833  Record of carrier hearing.

    A complete record of the proceedings at the carrier hearing is made. 
The testimony is transcribed and copies of other documentary evidence 
are reproduced in any case when directed by the hearing officer, the 
carrier, or CMS. The record will also be transcribed and reproduced at 
the request of any party to the hearing provided the requesting party 
bears the cost.

[62 FR 25853, May 12, 1997]



Sec. 405.834  Carrier hearing officer's decision.

    (a) As soon as practicable after the close of a carrier hearing, the 
carrier hearing officer issues a decision in the case based upon the 
evidence presented at the hearing or otherwise included in the hearing 
record. The decision is issued as a written notice to the parties and 
contains--
    (1) Findings of fact,
    (2) A statement of reasons, and
    (3) Notification to the parties of their right to an ALJ hearing 
when the amount remaining in controversy is at least $500.
    (b) A copy of the decision is mailed to the parties to the hearing 
at their last known addresses.

[62 FR 25854, May 12, 1997]



Sec. 405.835  Effect of carrier hearing officer's decision.

    The carrier hearing officer's decision is binding upon all parties 
to the hearing unless--
    (a) A request for an ALJ hearing is filed in accordance with 
Sec. 405.855, or
    (b) The decision is revised in accordance with Sec. 405.841.

[62 FR 25854, May 12, 1997]



Sec. 405.836  Authority of the carrier hearing officer.

    The carrier hearing officer, in adjudicating Medicare Part B claims, 
complies with all of the provisions of, and regulations issued under, 
title XVIII of the Act, as well as with CMS Rulings, national coverage 
decisions, and other policy statements, instructions, and guides issued 
by CMS.

[62 FR 25854, May 12, 1997]



Sec. 405.841  Reopening initial or review determination of the carrier, and decision of a carrier hearing officer.

    An initial or review determination of a carrier or a decision of a 
hearing officer may be reopened by such carrier or hearing officer:

[[Page 118]]

    (a) Within 12 months from the date of the notice of such initial or 
review determination or decision to the party to such determination or 
decision; or
    (b) After such 12-month period, but within 4 years from the date of 
the notice of the initial determination to the party to such 
determination, upon establishment of good cause for reopening such 
determination or decision (see 20 CFR 404.988(b) and 404.989); or
    (c) At any time, when:
    (1) Such initial or review determination or decision was procured by 
fraud or similar fault of the beneficiary or some other person, or
    (2) Such initial or review determination or decision is unfavorable, 
in whole or in part, to the party thereto, but only for the purpose of 
correcting a clerical error or error on the face of the evidence on 
which such determination or decision was based.

[39 FR 12098, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 59 FR 12183, Mar. 16, 1994; 62 FR 25855, May 12, 1997]



Sec. 405.842  Notice of reopening and revision.

    (a) Notice. When any determination or decision is reopened as 
provided in Sec. 405.841, notice of such reopening shall be mailed to 
the parties to such determination or decision at their last known 
addresses. A notice of revision following a reopening of a decision, 
shall be mailed to the parties and shall state the basis for the revised 
determination or decision.
    (b) Effect of revised determination. The revision of a determination 
(see Sec. 405.841) shall be binding upon all parties thereto unless a 
party files a written request for a hearing with respect to a revised 
determination when the amount in controversy is $100 or more.

[32 FR 18028, Dec. 16, 1967, as amended at 39 FR 12098, Apr. 3, 1974. 
Redesignated at 42 FR 52826, Sept. 30, 1977; 62 FR 25855, May 12, 1997]



Sec. 405.850  Change of ruling or legal precedent.

    Change of a legal interpretation or administrative ruling upon which 
a determination or decision was made shall not be considered as good and 
sufficient reason for reopening the determination or decision.



Sec. 405.853  Expedited appeals process.

    (a) Conditions for use of expedited appeals process (EAP). A party 
may use the EAP set forth in Sec. 405.718 of this chapter to request 
court review in place of the ALJ hearing or Departmental Appeals Board 
(DAB) review if the following conditions are met:
    (1) The carrier hearing officer has made a decision; an ALJ has made 
a hearing decision; or DAB review has been requested, but a final 
decision has not been issued.
    (2) The filing entity is a party referred to in Sec. 405.718(d) of 
this chapter.
    (3) The party has filed a request for an ALJ hearing in accordance 
with Sec. 405.855, or DAB review in accordance with 20 CFR 404.968.
    (4) The amount remaining in controversy is $1,000 or more.
    (5) If there is more than one party to the hearing decision, each 
party concurs, in writing, with the request for an EAP.
    (b) Content of the request for EAP. The request for an EAP:
    (1) Alleges that there are no material issues of fact in dispute; 
and
    (2) Asserts that the only factor precluding a decision favorable to 
the party is a statutory provision that is unconstitutional or a 
regulation, national coverage decision under section 1862(a)(1) of the 
Act, or CMS Ruling that is invalid.

[62 FR 25854, May 12, 1997]



Sec. 405.855  ALJ hearing.

    (a) Right to hearing. A party to the carrier hearing has a right to 
a hearing before an ALJ if--
    (1) The party files a written request for an ALJ hearing within 60 
days after receipt of the notice of the carrier hearing decision; and
    (2) The amount remaining in controversy is $500 or more.
    (b) Place of filing hearing request. The request for an ALJ hearing 
must be made in writing and filed with the carrier that issued the 
decision, a Social Security office, or, in the case of a qualified 
railroad retirement beneficiary, an office of the Railroad Retirement 
Board.

[[Page 119]]

    (c) Effect of ALJ hearing decision. (1) An ALJ's decision is binding 
on all parties to the hearing unless--
    (i) The DAB reviews the ALJ decision;
    (ii) The DAB does not review the ALJ decision, and the party 
requests judicial review;
    (iii) The decision is revised by the DAB or an ALJ in accordance 
with the provisions of Sec. 405.750 of this chapter; or
    (iv) The expedited appeals process is used.

[62 FR 25854, May 12, 1997]



Sec. 405.856  Departmental Appeals Board (DAB) review.

    Regulations beginning at 20 CFR 404.967 regarding SSA Appeals 
Council Review are applicable to DAB review of matters addressed by this 
subpart.

[62 FR 25854, May 12, 1997]



Sec. 405.857  Court review.

    (a) General rule. To the extent authorized by sections 1869, 
1876(c)(5)(B), and 1879(d) of the Act, a party to a DAB decision, or an 
ALJ decision if the DAB does not review the ALJ's decision, may obtain a 
court review if the amount remaining in controversy is $1,000 or more. A 
party may obtain court review by filing a civil action in a district 
court of the United States in accordance with the provisions of section 
205(g) of the Act. The filing procedure is set forth in 20 CFR 422.210.
    (b) Prohibition against court review of certain Part B regulations 
or instructions. Under section 1869(b)(4) of the Act, a court may not 
review a regulation or instruction that relates to a method of payment 
under Part B if the regulation was promulgated, or the instruction 
issued, before January 1, 1981.

[62 FR 25854, May 12, 1997]



Sec. 405.860  Review of national coverage decisions (NCDs).

    (a) General. (1) CMS makes NCDs either granting, limiting, or 
excluding Medicare coverage for a specific medical service, procedure or 
device. NCDs are made under section 1862(a)(1) of the Act or other 
applicable provisions of the Act. An NCD is binding on all Medicare 
carriers, fiscal intermediaries, QIOs, HMOs, CMPs, and HCPPs when 
published in CMS program manuals or the Federal Register.
    (2) Under section 1869(b)(3) of the Act, only NCDs made under 
section 1862(a)(1) of the Act are subject to the conditions of 
paragraphs (b) through (d) of this section.
    (b) Review by ALJ. (1) An ALJ may not disregard, set aside, or 
otherwise review an NCD.
    (2) An ALJ may review the facts of a particular case to determine 
whether an NCD applies to a specific claim for benefits and, if so, 
whether the NCD has been applied correctly to the claim.
    (c) Review by Court. (1) A court's review of an NCD is limited to 
whether the record is incomplete or otherwise lacks adequate information 
to support the validity of the decision, unless the case has been 
remanded to the Secretary to supplement the record regarding the NCD. 
The court may not invalidate an NCD except upon review of the 
supplemented record.
    (2) A Federal court may not hold unlawful or set aside an NCD 
because it was not issued in accordance with the notice and comment 
procedures of the Administrative Procedure Act (5 U.S.C. 553) or section 
1871(b) of the Act.
    (d) Remands--(1) Secretary's action. When a court remands an NCD 
matter to the Secretary because the record in support of the NCD is 
incomplete or otherwise lacks adequate information, the Secretary 
remands the case to CMS in order to supplement the record.
    (2) Remand to CMS. CMS supplements the record with new or updated 
evidence, including additional information from other sources, and may 
issue a revised NCD.
    (3) Final Actions. (i) The proceedings to supplement the record, are 
expedited.
    (ii) When CMS does not issue a revised NCD, it returns the 
supplemented record to the court for review.
    (iii) When CMS issues a revised NCD, it forwards the case to an ALJ 
who issues a new decision applying the revised NCD to the facts of the 
claim(s) under consideration. The ALJ's decision is subject to DAB 
review and, ultimately, judicial review.

[62 FR 25854, May 12, 1997]

[[Page 120]]



Sec. 405.870  Appointment of representative.

    A party to an initial determination, informal review or hearing as 
provided in Secs. 405.803 through 405.934, may appoint as his 
representative in any such proceeding any person qualified under 
Sec. 405.871. Where the representative is an attorney, in the absence of 
information to the contrary, his representation that he has such 
authority shall be accepted as evidence of the attorney's authority to 
represent a party.



Sec. 405.871  Qualifications of representatives.

    Any individual may be appointed to act as representative in 
accordance with Sec. 405.870, unless he is disqualified or suspended 
from acting as a representative in proceedings before the SSA or the CMS 
or unless otherwise prohibited by law.

[39 FR 12098, Apr. 3, 1974. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 62 FR 25855, May 12, 1997]



Sec. 405.872  Authority of representatives.

    A representative, appointed and qualified as provided in 
Secs. 405.870 and 405.871, may make or give, on behalf of the party he 
represents, any request or notice relative to any proceeding before the 
carrier including review and hearing. A representative shall be entitled 
to present evidence and allegations as to facts and law in any 
proceeding affecting the party he represents and to obtain information 
with respect to the claim of such party to the same extent as such 
party. Notice to any party or any action, determination, or decision, or 
request to any party for the production of evidence, shall be sent to 
the representative of such party.



Sec. 405.874  Appeals of carrier decisions that supplier standards are not met.

    (a) An entity serving as a National Supplier Clearinghouse must act 
promptly to determine if any entity submitting a request for a billing 
number as a Medicare supplier of part B items meets the standards set 
forth in part 424. Effective July 1, 1993, the National Supplier 
Clearinghouse must accept, reject or request additional information 
within 15 days of the receipt of an enrollment application.
    (b) If the National Supplier Clearinghouse disallows an entity's 
request for a billing number or revokes, with the concurrence of CMS, an 
entity's billing number, the National Supplier Clearinghouse notifies 
the entity by certified mail. Revocation is effective 15 days after the 
National Supplier Clearinghouse mails notice of its determination. The 
carrier disallows payment for items furnished by the supplier beginning 
with that effective date. The notice must inform the entity of the 
reason for the rejection or revocation, its right to appeal, the date by 
which it must file that appeal (90 days after the postmark of the 
notice) and the address to which the appeal must be sent in writing.
    (c) A fair hearing officer not involved in the original 
determination to disallow an entity's request for a billing number, or 
to revoke an entity's billing number, must schedule a hearing to be held 
within one week of receipt of an appeal, or later at the request of the 
entity. Both the entity and carrier may offer evidence. The hearing 
officer issues notice of his/her decision within 2 weeks of the hearing. 
The notice is sent by certified letter to CMS, the carrier, and the 
appealing entity. This notice must include information about the 
supplier's further right to appeal, the carrier's right to appeal, the 
date by which the appeal must be filed (90 days after the postmark of 
the notice) and the address to which the appeals must be sent in 
writing. Either the carrier or entity may appeal the hearings officer's 
decision to CMS.
    (d) A CMS official, designated by the Administrator of CMS, must 
make an appeal decision based on the evidence presented to the fair 
hearing officer and his or her decision. The CMS official requests any 
additional information he or she deems necessary from either the carrier 
or the entity within two weeks of receipt by the CMS of the appeal. 
Notice of the CMS official's decision--
    (1) Is issued within two weeks of when the last information is 
received is received by the CMS official, or four weeks of when the 
information is requested, whichever is shorter, unless

[[Page 121]]

the party appealing the fair hearing decision requests a delay;
    (2) Is sent by the CMS official by certified mail to both the 
carrier and the entity; and
    (3) Contains information on any further appeals the entity and 
carrier may have.
    (e) A billing number is not issued, or remains revoked, and payment 
is not made, for items or services furnished by any entity which a 
carrier determines does not qualify for a billing number, until the 
carrier (upon reapplication of the entity), a fair hearing officer, or a 
CMS official designated to hear such appeals, determines that the entity 
qualifies for a billing number. Any claims for items or services 
furnished after revocation of the supplier's billing number and 
submitted by the entity during the appeals period are held and not 
processed, i.e., are neither approved, denied or developed, until all 
administrative appeals have been exhausted. If an entity is determined 
not to have qualified for a billing number in one period but to have 
qualified in another, the carrier pays for claims for items sold or 
rented to beneficiaries during the period the entity qualified as a 
supplier. If there is evidence of an overpayment, see subpart C of part 
405 of this Chapter.
    (f) A billing number may be reinstated after revocation when an 
entity completes a corrective action plan, to which CMS has agreed, and 
provided sufficient assurance of its intent to comply fully with the 
supplier standards.

[57 FR 27305, June 18, 1992]



Sec. 405.877  Appeal of a categorization of a device.

    (a) CMS's acceptance of the FDA categorization of a device as an 
experimental/investigational (Category A) device under Sec. 405.203 is a 
national coverage decision under section 1862(a)(1) of the Act.
    (b) CMS's acceptance of the FDA categorization of a device as an 
experimental/investigational (Category A) device under Sec. 405.203 is 
an aspect of an initial determination that, under section 1862 of the 
Act, payment may not be made.
    (c) In accordance with section 1869(b)(3)(A) of the Act, CMS's 
acceptance of the FDA categorization of a device as an experimental/
investigational (Category A) device under Sec. 405.203 may not be 
reviewed by an administrative law judge.

[60 FR 48424, Sept. 19, 1995]

Subparts I-Q [Reserved]



      Subpart R--Provider Reimbursement Determinations and Appeals

    Authority: Secs. 205, 1102, 1814(b), 1815(a), 1833, 1861(v), 1871, 
1872, 1878, and 1886 of the Social Security Act (42 U.S.C. 405, 1302, 
1395f(b), 1395g(a), 1395l, 1395x(v), 1395hh, 1395ii, 1395oo, and 
1395ww).

    Source: 39 FR 34515, Sept. 26, 1974, unless otherwise noted. 
Redesignated at 42 FR 52826, Sept. 30, 1977.



Sec. 405.1801  Introduction.

    (a) Definitions. As used in this subpart:
    Administrator means the Administrator or Deputy Administrator of 
CMS.
    Administrator's review means that review provided for in section 
1878(f) of the Act (42 U.S.C. 1395oo(f)) and Sec. 405.1875.
    Board means the Provider Reimbursement Review Board established in 
accordance with section 1878 of the Act (42 U.S.C. 1395oo) and 
Sec. 405.1845.
    Board hearing means that hearing provided for in section 1878(a) of 
the Act (42 U.S.C. 1395oo(a)), and Sec. 405.1835.
    Date of filing and date of submission of materials mean the day of 
the mailing (as evidenced by the postmark) or hand-delivery of 
materials, unless otherwise defined in this subpart.
    Date of receipt means the date on the return receipt of ``return 
receipt requested'' mail, unless otherwise defined in this subpart.
    Intermediary determination means the following:
    (1) With respect to a provider of services that has filed a cost 
report under Secs. 413.20 and 413.24(f) of this chapter, the term means 
a determination of the amount of total reimbursement due the

[[Page 122]]

provider, pursuant to Sec. 405.1803 following the close of the 
provider's cost reporting period, for items and services furnished to 
beneficiaries for which reimbursement may be made on a reasonable cost 
basis under Medicare for the period covered by the cost report.
    (2) With respect to a hospital that receives payments for inpatient 
hospital services under the prospective payment system (part 412 of this 
chapter), the term means a determination of the total amount of payment 
due the hospital, pursuant to Sec. 405.1803 following the close of the 
hospital's cost reporting period, under that system for the period 
covered by the determination.
    (3) For purposes of appeal to the Provider Reimbursement Review 
Board, the term is synonymous with the phrases ``intermediary's final 
determination'' and ``final determination of the Secretary'', as those 
phrases are used in section 1878(a) of the Act.
    (4) For purposes of Sec. 405.376 concerning claims collection 
activities, the term does not include an action by CMS with respect to a 
compromise of a Medicare overpayment claim, or termination or suspension 
of collection action on an overpayment claim, against a provider or 
physician or other supplier.
    Intermediary hearing means that hearing provided for in 
Sec. 405.1809.
    (b) General rule--(1) Providers. The principles of reimbursement for 
determining reasonable cost and prospective payment are contained in 
parts 413 and 412, respectively, of this chapter. In order to be 
reimbursed for covered services furnished to Medicare beneficiaries, 
providers of services are obliged to file cost reports with their 
intermediaries as specified in Sec. 413.24(f) of this chapter. Where the 
term ``provider'' appears in this subpart, it includes hospitals paid 
under the prospective payment system for purposes of applying the appeal 
procedures described in this subpart to those hospitals.
    (2) Other entities participating in Medicare Part A. In addition to 
providers of services whose status as such is indicated in the Act, 
there are entities (such as health maintenance organizations) that do 
not meet the statutory test for providers of services, which may also 
participate in Medicare. These entities are required to file periodic 
cost reports and are reimbursed on the basis of information furnished in 
the reports. Although the entities do not qualify for Board review, the 
rules as set forth in this subpart with respect to intermediary hearings 
are applicable to the entities to the maximum extent possible, for cost-
reporting periods ending on or after December 31, 1971, where the amount 
of program reimbursement in controversy is at least $1,000.
    (c) Effective dates. (1) Except as provided in paragraphs (c)(2) and 
(c)(3) of this section or in Sec. 405.1885(e), this subpart applies to 
all cost reporting periods ending on or after December 31, 1971, for 
which reimbursement may be made on a reasonable cost basis.
    (2) Sections 405.1835 to 405.1877 apply only to cost reporting 
periods ending on or after June 30, 1973, for which reimbursement may be 
made on a reasonable cost basis.
    (3) With respect to hospitals under the prospective payment system 
(see part 412 of this chapter), the appeals procedures in Secs. 405.1811 
to 405.1877 that apply become applicable with the hospital's first cost 
reporting period beginning on or after October 1, 1983.

[39 FR 34515, Sept. 26, 1974. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 48 FR 39834, Sept. 1, 1983; 48 FR 45773, Oct. 7, 
1983; 49 FR 322, Jan. 3, 1984; 49 FR 23013, June 1, 1984; 51 FR 34793, 
Sept. 30, 1986; 61 FR 63749, Dec. 2, 1996]



Sec. 405.1803  Intermediary determination and notice of amount of program reimbursement.

    (a) General requirement. Upon receipt of a provider's cost report, 
or amended cost report where permitted or required, the intermediary 
must within a reasonable period of time (see Sec. 405.1835(b)), furnish 
the provider and other parties as appropriate (see Sec. 405.1805) a 
written notice reflecting the intermediary's determination of the total 
amount of reimbursement due the provider. The intermediary must include 
the following information in the notice, as appropriate:
    (1) Reasonable cost. The notice must--

[[Page 123]]

    (i) Explain the intermediary's determination of total program 
reimbursement due the provider on the basis of reasonable cost for the 
reporting period covered by the cost report or amended cost report; and
    (ii) Relate this determination to the provider's claimed total 
program reimbursement due the provider for this period.
    (2) Prospective payment. With respect to a hospital that receives 
payments for inpatient hospital services under the prospective payment 
system (see part 412 of this chapter), the intermediary must include in 
the notice its determination of the total amount of the payments due the 
hospital under that system for the cost reporting period covered by the 
notice. The notice must explain (with appropriate use of the applicable 
money amounts) any difference in the amount determined to be due, and 
the amounts received by the hospital during the cost reporting period 
covered by the notice.
    (b) Requirements for intermediary notices. The intermediary must 
include in each notice appropriate references to law, regulations, CMS 
Rulings, or program instructions to explain why the intermediary's 
determination of the amount of program reimbursement for the period 
differs from the amount the provider claimed. The notice must also 
inform the provider of its right to an intermediary or Board hearing 
(see Secs. 405.1809, 405.1811, 405.1815, 405.1835, and 405.1843) and 
that the provider must request the hearing within 180 days after the 
date of the notice.
    (c) Use of notice as basis for recoupment of overpayments. The 
intermediary's determination contained in its notice is the basis for 
making the retroactive adjustment (required by Sec. 413.64(f) of this 
chapter) to any program payments made to the provider during the period 
to which the determination applies, including recoupment under 
Sec. 405.373 from ongoing payments to the provider of any overpayments 
to the provider identified in the determination. Recoupment is made 
notwithstanding any request for hearing on the determination the 
provider may make under Sec. 405.1811 or Sec. 405.1835.

[48 FR 39834, Sept. 1, 1983, as amended at 49 FR 322, Jan 3, 1984; 51 FR 
34793, Sept. 30, 1986; 61 FR 63748, Dec. 2, 1996]



Sec. 405.1804  Matters not subject to administrative and judicial review under prospective payment.

    Neither administrative nor judicial review is available for 
controversies about the following matters:
    (a) The determination of the requirement, or the proportional 
amount, of any budget neutrality adjustment in the prospective payment 
rates.
    (b) The establishment of--
    (1) Diagnosis related groups (DRGs);
    (2) The methodology for the classification of inpatient discharges 
within the DRGs; or
    (3) Appropriate weighting factors that reflect the relative hospital 
resources used with respect to discharge within each DRG.

[49 FR 322, Jan. 1, 1984]



Sec. 405.1805  Parties to intermediary determination.

    The parties to the intermediary's determination are the provider and 
any other entity found by the intermediary to be a related organization 
of the provider under Sec. 413.17 of this chapter.

[48 FR 39835, Sept. 1, 1983, as amended at 51 FR 34793, Sept. 30, 1986]



Sec. 405.1807  Effect of intermediary determination.

    The determination shall be final and binding on the party or parties 
to such determination unless:
    (a) An intermediary hearing is requested in accordance with 
Sec. 405.1811 and an intermediary hearing decision rendered in 
accordance with Sec. 405.1831; or
    (b) The intermediary determination is revised in accordance with 
Sec. 405.1885; or
    (c) A Board hearing is requested in accordance with Sec. 405.1835 
and a hearing decision rendered pursuant thereto.

[[Page 124]]



Sec. 405.1809  Intermediary hearing procedures.

    (a) Hearings. Each intermediary must establish and maintain written 
procedures for intermediary hearings, in accordance with the regulations 
in this subpart, for resolving issues that may arise between the 
intermediary and a provider concerning the amount of reasonable cost 
reimbursement, or prospective payment due the provider (except as 
provided in Sec. 405.1804) under the Medicare program. The procedures 
must provide for a hearing on the intermediary determination contained 
in the notice of program reimbursement (Sec. 405.1803), if the provider 
files a timely request for a hearing.
    (b) Amount in controversy. In order for an intermediary to grant a 
hearing, the following dates and amounts in controversy apply:
    (1) For cost reporting periods ending prior to June 30, 1973, the 
amount of program reimbursement in controversy must be at least $1000.
    (2) For cost reporting periods ending on or after June 30, 1973, the 
amount of program reimbursement in controversy must be at least $1000 
but less than $10,000.

[48 FR 39835, Sept. 1, 1983, as amended at 49 FR 323, Jan. 1, 1984]



Sec. 405.1811  Right to intermediary hearing; time, place, form, and content of request for intermediary hearing.

    (a) A provider that has been furnished a notice of amount of program 
reimbursement may request an intermediary hearing if it is dissatisfied 
with the intermediary's determination contained in the notice and the 
amount in controversy requirement described in Sec. 405.1809 is met. The 
request must be in writing and be filed with the intermediary within 180 
calendar days after the date of the notice. (See Sec. 405.1835(c)). No 
other individual, entity, or party has the right to an intermediary 
hearing.
    (b) The request must (1) identify the aspect(s) of the determination 
with which the provider is dissatisfied, and (2) explain why the 
provider believes the determination on these matters is incorrect, and 
(3) be submitted with any documentary evidence the provider considers 
necessary to support its position.
    (c) Following the timely filing of the request for hearing, the 
provider may identify in writing, prior to the onset of the hearing 
proceedings, additional aspects of the determination with which it is 
dissatisfied and furnish any documentary evidence in support thereof. If 
such additional aspects are submitted, the hearing officer may postpone 
the hearing to allow for his examination of such additional aspects.

[39 FR 34515, Sept. 26, 1974. Redesignated at 42 FR 52826, Sept. 30, 
1977, as amended at 48 FR 39835, Sept. 1, 1983]



Sec. 405.1813  Failure to timely request an intermediary hearing.

    If a provider requests an intermediary hearing on an intermediary's 
determination after the time limit prescribed in Sec. 405.1811, the 
designated intermediary hearing officer or panel of hearing officers 
will dismiss the request and furnish the provider a written notice that 
explains the time limitation, except that for good cause shown, the time 
limit prescribed in Sec. 405.1811 may be extended. However, an extension 
may not be granted if the extension request is filed more than 3 years 
after the date of the original notice of the intermediary determination.

[48 FR 39835, Sept. 1, 1983]



Sec. 405.1815  Parties to the intermediary hearing.

    The parties to the intermediary hearing shall be the parties to the 
intermediary determination and any other entity determined by the 
intermediary to be a related organization of such provider. Said parties 
shall be given reasonable notice of the time, date, and place of such 
hearing. Neither the intermediary nor the Centers for Medicare & 
Medicaid Services are parties (see Sec. 405.1819).



Sec. 405.1817  Hearing officer or panel of hearing officers authorized to conduct intermediary hearing; disqualification of officers.

    The intermediary hearing provided for in Sec. 405.1809 shall be 
conducted by a hearing officer or panel of hearing officers designated 
by the intermediary.

[[Page 125]]

Such hearing officer or officers shall be persons knowledgeable in the 
field of health care reimbursement. The hearing officer or officers 
shall not have had any direct responsibility for the program 
reimbursement determination with respect to which a request for hearing 
is filed; no hearing officer (or officers) shall conduct a hearing in a 
case in which he is prejudiced or partial with respect to any party, or 
where he has any interest in the matter pending for determination before 
him. Notice of any objection which a party may have with respect to a 
hearing officer shall be presented in writing to such officer by the 
objecting party at the party's earliest opportunity. The hearing officer 
shall consider the objection and shall, at his discretion, either 
proceed in the conduct of the hearing or withdraw. If the hearing 
officer does not withdraw, the objecting party may, after the hearing, 
present his objections to an executive official of the intermediary, who 
shall rule promptly on the objection.



Sec. 405.1819  Conduct of intermediary hearing.

    The hearing shall be open to all parties thereto (see Sec. 405.1815) 
and to representatives of the intermediary and of the Centers for 
Medicare & Medicaid Services (see Sec. 405.1815). The hearing officer(s) 
shall inquire fully into all of the matters at issue and shall receive 
into evidence the testimony and any documents which are relevant and 
material to such matters. If the hearing officer(s) believes that there 
is relevant and material evidence available which has not been presented 
at the hearing, he (they) may, at any time prior to the mailing of 
notice of the decision, reopen the hearing record for the receipt of 
such evidence. The order in which the evidence and the allegations shall 
be presented and the conduct of the hearing shall be at the discretion 
of the hearing officer(s).



Sec. 405.1821  Prehearing discovery and other proceedings prior to the intermediary hearing.

    (a) Prehearing discovery shall be permitted upon timely request of 
any party. To be timely, a request for discovery and inspection shall be 
made before the beginning of the hearing. A reasonable time for 
inspection and reproduction of documents shall be provided by order of 
the hearing officer(s).
    (b) If, in the discretion of the hearing officer(s), the purpose of 
defining the issues more clearly would be served, the hearing officer(s) 
may schedule a prehearing conference. For this purpose, a single member 
of a panel of hearing officers, when such is the case, may be appointed 
to act for the panel with respect to prehearing activities.



Sec. 405.1823  Evidence at intermediary hearing.

    Evidence may be received at the intermediary hearing even though 
inadmissible under the rules of evidence applicable to court procedure. 
The hearing officer(s) shall give the parties opportunity for submission 
and consideration of facts and arguments, and during the course of the 
hearing, should in ruling upon admissibility of evidence, exclude 
irrelevant, immaterial, or unduly repetitious evidence. The hearing 
officer(s) shall render a final ruling on the admissibility of evidence.



Sec. 405.1825  Witnesses at intermediary hearing.

    The hearing officer(s) may examine the witnesses and shall allow the 
parties and their representatives to do so. Parties to the proceedings 
may also cross-examine witnesses.



Sec. 405.1827  Record of intermediary hearing.

    A complete recordation of the proceedings at the intermediary 
hearing shall be made and transcribed in all cases. It shall be made 
available to any party upon request. The record will not be closed until 
a decision (see Sec. 405.1831) has been issued.



Sec. 405.1829  Authority of hearing officer(s) at intermediary hearing.

    (a) The hearing officer(s) in exercising his authority must comply 
with all the provisions of title XVIII of the Act and regulations issued 
thereunder, as well as with CMS Rulings issued under the authority of 
the Administrator of the Centers for Medicare & Medicaid Services (see 
42 CFR 401.108),

[[Page 126]]

and with the general instructions issued by the Centers for Medicare & 
Medicaid Services in accordance with the Secretary's agreement with the 
intermediary.
    (b) The determination of a fiscal intermediary that no payment may 
be made under title XVIII of the Act for any expense incurred for items 
and services furnished to an individual because such items and services 
are excluded from coverage pursuant to section 1862 of the Act, 42 
U.S.C. 1395y (see subpart C of this part), shall not be reviewed by the 
hearing officer(s). Such determination shall be reviewed only in 
accordance with the applicable provisions of subparts G and H of this 
part.



Sec. 405.1831  Intermediary hearing decision and notice.

    The hearing officer(s) shall, on a timely basis, render a decision 
in writing based on the evidence in the record; such decision shall 
constitute the final determination of the intermediary. In such 
decision, he will cite applicable law, regulations, CMS Rulings, and 
general instructions of the Centers for Medicare & Medicaid Services, as 
well as findings on all the matters in issue at the hearing. A copy of 
the decision will be mailed to all parties to the hearing at their last 
known addresses.



Sec. 405.1833  Effect of intermediary hearing decision.

    The intermediary hearing decision provided for in Sec. 405.1831 
shall be final and binding upon all parties to the hearing unless such 
intermediary determination is revised in accordance with Sec. 405.1885.



Sec. 405.1835  Right to Board hearing.

    (a) Criteria. The provider (but no other individual, entity, or 
party) has a right to a hearing before the Board about any matter 
designated in Sec. 405.1801(a)(1), if:
    (1) An intermediary determination has been made with respect to the 
provider; and
    (2) The provider has filed a written request for a hearing before 
the Board under the provisions described in Sec. 405.1841(a)(1); and
    (3) The amount in controversy (as determined in Sec. 405.1839(a)) is 
$10,000 or more.
    (b) Prospective payment exceptions. Except with respect to matters 
for which administrative or judicial review is not permitted as 
specified in Sec. 405.1804, hospitals that are paid under the 
prospective payment system are entitled to hearings before the Board 
under this section if they otherwise meet the criteria described in 
paragraph (a) of this section.
    (c) Right to hearing based on late intermediary determination about 
reasonable cost. Notwithstanding the provisions of paragraph (a)(1) of 
this section, the provider also has a right to a hearing before the 
Board if an intermediary's determination concerning the amount of 
reasonable cost reimbursement due a provider is not rendered within 12 
months after receipt by the intermediary of a provider's perfected cost 
report or amended cost report (as permitted or as required to furnish 
sufficient data for purposes of making such determination--see 
Sec. 405.1803(a)) provided such delay was not occasioned by the fault of 
the provider.

[48 FR 39835, Sept. 1, 1983]



Sec. 405.1837  Group appeal.

    (a) Criteria for group appeals. Subject to paragraph (b) of this 
section, a group of providers may bring an appeal before the Board but 
only if--
    (1) Each provider in the group is identified as one which would, 
upon the filing of a request for a hearing before the Board, but without 
regard to the $10,000 amount in controversy requirement, be entitled to 
a hearing under Sec. 405.1835;
    (2) The matters at issue involve a common question of fact or of 
interpretation of law, regulations or CMS Rulings; and
    (3) The amount in controversy is, in the aggregate, $50,000 or more.
    (b) Providers under common ownership or control. Effective April 20, 
1983, any appeal filed by providers that are under common ownership or 
control must be brought by the providers as a group appeal in accordance 
with the provisions of paragraph (a) of this section with respect to any 
matters involving an issue common to the providers and for which the 
amount in controversy is, in the

[[Page 127]]

aggregate, $50,000 or more (see Sec. 405.1841(a)(2)). A single provider 
involved in a group appeal that also wishes to appeal issues that are 
not common to the other providers in the group must file a separate 
hearing request (see Sec. 405.1841(a)(1)) and must separately meet the 
requirements in Sec. 405.1811 or Sec. 405.1835, as applicable.

[48 FR 39836, Sept. 1, 1983]



Sec. 405.1839  Amount in controversy.

    (a) Single appeals. The $1,000 amount in controversy required under 
Sec. 405.1809 for an intermediary hearing and the $10,000 amount in 
controversy required under Sec. 405.1835 for a Board hearing is, as 
applicable to the matters for which the provider has requested a 
hearing, the combined total of the amounts computed as follows:
    (1) Providers under prospective payment. For providers that are paid 
under the prospective payment system, by deducting--
    (i) The total of the payment due the provider on other than a 
reasonable cost basis under the prospective payment system from the 
total amount that would be payable after a recomputation that takes into 
account any exclusion, exception, adjustment, or additional payment 
denied the provider under part 412 of this chapter, as applicable;
    (ii) The total of the payment due the provider on a reasonable cost 
basis under the prospective payment system from the total reimbursable 
costs claimed by the provider; and
    (iii) The adjusted total reimbursable costs due the provider on a 
reasonable cost basis under other than the prospective payment system 
from the total reimbursable costs claimed by the provider.
    (2) Providers not under prospective payment. For providers that are 
not paid under the prospective payment system, by deducting the adjusted 
total reimbursable program costs due the provider on a reasonable cost 
basis from the total reimbursable costs claimed by the provider.
    (b) Group appeals. The $50,000 amount in controversy required under 
Sec. 405.1837 for group appeals to the Board is, as applicable to the 
common matters for which the group of providers have requested a 
hearing, the combined total of the amounts computed as follows:
    (1) Providers under prospective payment. For providers that are paid 
under the prospective payment system, by deducting--
    (i) The total of the payment due the providers (in the aggregate) on 
other than a reasonable cost basis under the prospective payment system 
from the total amount that would be payable to the providers (in the 
aggregate) after a recomputation that takes into account any applicable 
exception, exclusion, adjustment, or additional payment denied the 
providers under part 412 of this chapter.
    (ii) The total of the payment due the providers (in the aggregate) 
on a reasonable cost basis under the prospective payment system from the 
total reimbursable costs claimed in the aggregate by the providers; and
    (iii) The adjusted total reimbursable costs due the providers (in 
the aggregate) on a reasonable cost basis under other than the 
prospective payment system from the total reimbursable costs claimed in 
the aggregate by the providers.
    (2) Providers not under prospective payment. For providers that are 
not paid under the prospective payment system, by deducting the adjusted 
total reimbursable program costs due the providers (in the aggregate) on 
a reasonable cost basis from the total reimbursable costs claimed in the 
aggregate by the providers.

[49 FR 323, Jan. 3, 1984]



Sec. 405.1841  Time, place, form, and content of request for Board hearing.

    (a) General requirements. (1) The request for a Board hearing must 
be filed in writing with the Board within 180 days of the date the 
notice of the intermediary's determination was mailed to the provider 
or, where notice of the determination was not timely rendered, within 
180 days after the expiration of the period specified in 
Sec. 405.1835(c). Such request for Board hearing must identify the 
aspects of the determination with which the provider is dissatisfied, 
explain why the provider believes the determination is incorrect in such 
particulars, and be

[[Page 128]]

accompanied by any documenting evidence the provider considers necessary 
to support its position. Prior to the commencement of the hearing 
proceedings, the provider may identify in writing additional aspects of 
the intermediary's determination with which it is dissatisfied and 
furnish any documentary evidence in support thereof.
    (2) Effective April 20, 1983, any request for a Board hearing by 
providers that are under common ownership or control (see Sec. 413.17 of 
this chapter) must be brought by the providers as a group appeal (see 
Sec. 405.1837(b)) with respect to any matters at issue involving a 
question of fact or of interpretation of law, regulations, or CMS 
Rulings common to the providers and for which the amount in controversy 
is $50,000 or more in the aggregate. If a group appeal is filed, the 
provider seeking the appeal must be separately identified in the request 
for hearing, which must be prepared and filed consistently with the 
requirements of paragraph (a)(1) of this section.
    (b) Extension of time limit for good cause. A request for a Board 
hearing filed after the time limit prescribed in paragraph (a) of this 
section shall be dismissed by the Board, except that for good cause 
shown, the time limit may be extended. However, no such extension shall 
be granted by the Board if such request is filed more than 3 years after 
the date the notice of the intermediary's determination is mailed to the 
provider.

[48 FR 39836, Sept. 1, 1983, as amended at 51 FR 34793, Sept. 30, 1986]



Sec. 405.1842  Expediting Board proceedings.

    (a) Basis and purpose. This section implements section 1878(f)(1) of 
the Social Security Act, as amended by section 955 of Public Law 96-499 
(42 U.S.C. 1395oo(f)(1)). The amendment provides an opportunity for 
providers to obtain expedited administrative review when the Board 
determines that it does not have the authority to decide a question of 
law, regulation, or CMS Ruling relevant to the case (see Sec. 405.1867).
    (b) Basic rule. (1) Except as provided in paragraph (b)(4) of this 
section, a provider may submit a written request to the Board, with 
supporting documentation, to determine whether the Board has the 
authority to decide a question of law, regulations, or CMS Rulings 
relevant to and controlling upon an issue to be reviewed by the Board. 
The Board is required to make an expedited review determination in 
writing, either denying or granting the request, within 30 days after 
the date of receipt of the request, as defined in paragraph (1) of this 
section. The Board may also issue a determination on its own motion that 
it lacks authority to decide a question of law, regulations or CMS 
Rulings.
    (2) The Board must determine that the provider (including each 
provider in a group appeal) is entitled to a hearing under section 
1878(a) of the Act before making the determination described in 
paragraph (b)(1) of this section. Thus, the provider must file (or have 
already filed) a written request for a Board hearing that meets the 
requirements in Sec. 405.1841. The information and documentation 
required with respect to the filing of a request for a hearing is used 
by the Board to determine jurisdiction under section 1878(a) of the Act.
    (3) A provider's request for an expedited review determination 
cannot be considered to be filed with the Board, nor can the 30-day time 
period during which the Board is required to make an expedited review 
determination begin, until such time as the Board accepts jurisdiction 
of the case.
    (4) Proceedings conducted by the Board under an authority other than 
section 1878(a) of the Act and Secs. 405.1835 through 405.1873 of this 
subpart are not hearings for purposes of this section and are not 
subject to the expedited Board proceedings set forth in this section. 
For example, proceedings concerning reimbursement for capital 
expenditures conducted under section 1122(f) of the Act and 
Sec. 405.1890 of this subpart are not hearings for purposes of this 
section. (Section 1122(f) specifically bars any administrative or 
judicial review.)
    (c) ``Own motion'' review. If the Board is considering issuing a 
determination on its own motion that it lacks the authority to decide a 
question of law, regulations, or CMS Rulings, it will notify

[[Page 129]]

the provider and intermediary of its proposed determination and allow 
them a reasonable period of time to file evidence or arguments either to 
support or oppose the proposed determination.
    (d) Provider requests. (1) If a provider seeks an expedited Board 
proceeding, it must--(i) File its appropriately documented request in 
writing with the Board; and
    (ii) Send a copy of the request and documentation simultaneously to 
the intermediary.
    (2) The request to the Board for an expedited review determination 
must--(i) Identify the issues and the controlling law, regulation or CMS 
Ruling for which the Board is to make a determination;
    (ii) Allege and demonstrate that there are no factual issues in 
dispute;
    (iii) Contain an explanation of why the provider believes the Board 
cannot decide the legal issue or issues that are in dispute; and
    (iv) Include all other information or details that support the 
request.
    (3) If the information in the provider request is insufficient for 
the Board to determine whether it has the authority to decide an issue, 
the Board will request more information from the provider. Such a 
request will affect the 30-day time limit as provided in paragraph (i) 
of this section. If the provider does not send more information or sends 
inadequate information, the Board will determine that it has the 
authority to decide the issue and will begin the regular procedure for a 
hearing.
    (e) Intermediary participation. (1) After receiving a copy of the 
provider's request for an expedited review determination, the 
intermediary may send comments to the Board on the provider's request 
and supporting documentation. The intermediary will send a copy of its 
comments to the provider simultaneously.
    (2) If the intermediary's comments raise questions about the 
provider's request for expedited review, the Board may request 
additional information from the provider as provided in paragraph (d)(3) 
of this section.
    (f) Criteria for a Board determination. The Board will review all 
documentation forwarded by the provider and the intermediary relevant to 
the request for a Board determination concerning the Board's authority 
to decide an issue. In its review, the Board will consider--
    (1) The controlling facts in the case;
    (2) The applicability of law, regulations, or CMS rulings;
    (3) Whether there are factual issues for the Board to resolve; and
    (4) Whether there are legal issues within the authority of the Board 
to decide.
    (g) Board determination. (1) Within 30 days after the date of 
receipt (as defined in paragraph (i) of this section) of a provider's 
request and all necessary documentation the Board will issue a 
determination concerning its authority to decide the question of law, 
regulations, or CMS Rulings relevant to the issues identified by the 
provider in its request.
    (2) If there are factual or legal issues in dispute on an issue 
within the authority of the Board to decide, the Board will not make an 
expedited review determination on the particular issue but will proceed 
with a hearing. The Board has the authority to decide when two or more 
issues are sufficiently related to preclude separation for purposes of 
an expedited review determination on one or more of them and a hearing 
on the other or others.
    (3) The Board will promptly notify the provider in writing of its 
determination and will send a copy of the determination to the 
intermediary.
    (4) The Board's determination concerning its authority or its lack 
of a determination is not subject to the Secretary's review under 
Sec. 405.1875.
    (h) Effect of a Board decision. (1) The Board's determination, 
issued on its own motion or at the request of a provider, that it lacks 
authority to decide a question of law, regulations or CMS Rulings is a 
final decision permitting a provider to seek judicial review with 
respect to the matter or matters in controversy contained in the 
determination, within 60 days of the date of the Board's determination.
    (2) After the Board has determined that it does not have the 
authority to decide an issue, the provider will not be granted a hearing 
on the same issue.

[[Page 130]]

    (3) If the Board fails to issue an expedited review determination 
within 30 days of the date of receipt of a complete request (as 
determined under paragraph (i) of this section), the provider may, 
within 60 days from the end of that period, seek judicial review of the 
matters for which it requested the Board's determination.
    (4) If the Board fails to make an expedited review determination 
within the required 30 days, it will begin regular hearing procedures as 
though it has the authority to decide the issue.
    (5) If the provider seeks judicial review because the Board fails to 
make a determination as provided in paragraph (g)(1) of this section, it 
should notify the Board at the time it files for judicial review. The 
Board will not hold a hearing, even if one has been scheduled, on the 
matter or matters for which the provider is seeking judicial review.
    (6) The Board's determination does not affect the right of the 
provider to a Board hearing for issues for which the provider did not 
request expedited review, or for which the Board determines it does have 
the authority to decide, or for which the Board did not make a 
determination and the provider did not request judicial review.
    (i) Date of receipt. For purposes of this section, the date of 
receipt of the provider's request is the later of--
    (1) The actual date of receipt by the Board of the information 
required under paragraph (d)(2) of this section, or of additional 
information requested by the Board under paragraph (d)(3) of this 
section, whichever the Board receives later; or
    (2) The date indicated on the Board's written notification to the 
provider that the Board has accepted jurisdiction of the case.
    (j) Examples. Below are examples showing when a provider may expect 
to receive an expedited review determination, in relation to various 
circumstances affecting its request for the determination.
    (1) The provider requests a hearing and expedited review at or about 
the same time. If all information is complete, the Board could send 
notification that it has accepted jurisdiction of the case and the 
expedited review determination simultaneously.
    (2) The provider requests both a hearing and an expedited review 
determination, and supplies complete information. The Board accepts 
jurisdiction but, for example, because of the complexity of the case, 
the Board makes its expedited review determination within 30 days after 
it has accepted jurisdiction.
    (3) The provider requests both a hearing and an expedited review 
determination, but the request for a hearing does not contain enough 
information for the Board to determine jurisdiction. The Board would 
request more information to determine jurisdiction and would make its 
expedited review determination within 30 days after it has accepted 
jurisdiction.
    (4) The provider requests both a hearing and an expedited review 
determination, but does not send enough information for the Board to 
make an expedited review determination. Assuming the Board accepts 
jurisdiction, the Board would request more information about the request 
for expedited review and make its determination within 30 days after it 
receives the additional information.
    (5) The provider requests an expedited review determination after 
the Board has accepted jurisdiction. The Board would make its 
determination within 30 days after receipt of an appropriately 
documented request for an expedited review determination.

[47 FR 31690, July 22, 1982, as amended at 48 FR 22925, May 23, 1983]



Sec. 405.1843  Parties to Board hearing.

    (a) The parties to the Board hearing shall be the provider, the 
intermediary (including the Centers for Medicare & Medicaid Services 
when acting directly as intermediary) that rendered the determination 
being appealed (see Sec. 405.1833), and any other entity found by the 
intermediary to be a related organization of such provider.
    (b) Except as provided in paragraph (a), neither the Secretary nor 
the Centers for Medicare & Medicaid Services may be made a party to the 
hearing.

[[Page 131]]

However, the Board may call as a witness any employee or officer of the 
Department of Health and Human Services having personal knowledge of the 
facts and the issues in controversy in a hearing pending before the 
Board and may call as a consultant to the Board in connection with any 
such hearing any individual designated by the Secretary for such 
purpose. (See Sec. 405.1863.)



Sec. 405.1845  Composition of Board.

    (a) The Board will consist of five members appointed by the 
Secretary. All shall be knowledgeable in the field of cost 
reimbursement. At least one shall be a certified public accountant. Two 
Board members shall be representative of providers of services.
    (b) The term of office for Board members shall be 3 years, except 
that initial appointments may be for such shorter terms as the Secretary 
may designate to permit staggered terms of office. No member shall serve 
more than two consecutive 3-year terms of office. The Secretary shall 
have the authority to terminate a Board member's term of office for good 
cause.
    (c) One member of the Board shall be designated by the Secretary as 
Chairman thereof and shall coordinate and direct the administrative 
activities of the Board, and shall have such other authority which may 
be granted to him by the Board.
    (d) A quorum shall be required for the rendering of Board decisions. 
Three members, at least one of whom is representative of providers of 
services, shall be required to constitute a quorum. The Chairman of the 
Board, with approval of the provider, may designate one or more Board 
members to conduct any hearing and to prepare a recommended decision 
(where less than a quorum conducts the hearing). (See Sec. 405.1869.)

[39 FR 34515, Sept. 26, 1974, as amended at 41 FR 52051, Nov. 26, 1976. 
Redesignated at 42 FR 52826, Sept. 30, 1977]



Sec. 405.1847  Disqualification of Board members.

    No Board member shall join in the conduct of a hearing in a case in 
which he is prejudiced or partial with respect to any party or in which 
he has any interest in the matter pending for decision before him. 
Notice of any objection which a party may have with respect to a Board 
member shall be presented in writing to such Board member by the 
objecting party at its earliest opportunity. The Board member shall 
consider the objection and shall, in his discretion, either proceed to 
join in the conduct of the hearing or withdraw. If he does not withdraw, 
the objecting party may petition the Board, presenting its objection and 
reasons therefor, and be entitled to a ruling thereon before the hearing 
can proceed.



Sec. 405.1849  Establishment of time and place of hearing by the Board.

    The Board shall fix the time and place for the hearing and shall 
mail written notice thereof to the parties at their last known 
addresses, not less than 30 days prior to the scheduled time. Either on 
its own motion or for good cause shown by a party, the Board may, as 
appropriate, reschedule, adjourn, postpone, or reopen the hearing, 
provided that reasonable written notice is given to the parties.



Sec. 405.1851  Conduct of Board hearing.

    The Board hearing shall be open to the parties, to representatives 
of the Centers for Medicare & Medicaid Services, and to such other 
persons as the Board deems necessary and proper. The Board shall inquire 
fully into all of the matters at issue and shall receive into evidence 
the testimony of witnesses and any documents which are relevant and 
material to such matters. If the Board believes that there is relevant 
and material evidence available which has not been presented at the 
hearing, it may at any time prior to the mailing of notice of the 
decision, reconvene the hearing for the receipt of such evidence. The 
order in which the evidence and the allegations shall be presented and 
the conduct of the hearing shall be at the discretion of the Board.



Sec. 405.1853  Prehearing discovery and other proceedings prior to the Board hearing.

    (a) Upon notification that a request for Board hearing has been 
filed, the intermediary shall forthwith review

[[Page 132]]

the materials submitted by the provider in accordance with 
Sec. 405.1841. Simultaneously, the intermediary shall review the 
information which formed the basis for its determination of the amount 
of program reimbursement. Based on the findings of such review, the 
intermediary shall expeditiously attempt to join with the provider in 
written stipulations setting forth the issues that said review has 
resolved and designating the issues that remain for Board resolution. 
Having obtained such stipulations and being satisfied that no further 
agreements can be negotiated, the intermediary shall ensure that all 
available documentary evidence in support of each party's position is 
part of the record. Such evidence will ordinarily include a position 
paper from the provider, a position paper from the intermediary, and any 
documents which support the issues addressed in the stipulations. These 
materials, in addition to all relevant documents which formed the basis 
for its determination of the amount of program reimbursement, shall be 
forwarded to the Board within 60 days after the date of the provider's 
request for Board review.
    (b) Prehearing discovery shall be permitted upon timely request of a 
party. To be timely, a request for discovery and inspection shall be 
made before the beginning of the hearing. A reasonable time for 
inspection and reproduction of documents shall be provided by order of 
the Board. The Board's order on all discovery matters shall be final.
    (c) If, in the discretion of the Board, the purpose of defining the 
issues more clearly would be served, the Board may schedule a prehearing 
conference. For this purpose, a single member of the Board may be 
appointed to act for the Board with respect to prehearing activities.



Sec. 405.1855  Evidence at Board hearing.

    Evidence may be received at the Board hearing even though 
inadmissible under the rules of evidence applicable to court procedure. 
The Board shall give the parties opportunity for submission and 
consideration of facts and arguments and during the course of the 
hearing should, in ruling upon admissibility of evidence, exclude 
irrelevant, immaterial, or unduly repetitious evidence. The Board shall 
render a final ruling on the admissibility of evidence.



Sec. 405.1857  Subpoenas.

    When reasonably necessary for the full presentation of a case, the 
Board may, either upon its own motion or upon the request of a party, 
issue subpoenas for the attendance and testimony of witnesses and for 
the production of books, records, correspondence, papers, or other 
documents which are relevant and material to any matter in issue at the 
hearing. Parties who desire the issuance of a subpoena shall, not less 
than 10 days prior to the time fixed for the hearing, file with the 
Board a written request therefor, designating the witnesses or documents 
to be produced, and describing the address, or location thereof with 
sufficient particularity to permit such witnesses or documents to be 
found. The request for a subpoena shall state the pertinent facts which 
the party expects to establish by such witnesses or documents and 
whether such facts could be established by other evidence without the 
use of a subpoena. Subpoenas, as provided for above, shall be issued in 
the name of the Board, and the Centers for Medicare & Medicaid Services 
shall assume the cost of the issuance and the fees and mileage of any 
witness so subpoenaed, as provided in section 205(d) of the Act, 42 
U.S.C. 405(d).



Sec. 405.1859  Witnesses.

    Witnesses at the hearing shall testify under oath or affirmation, 
unless excused by the Board for cause. The Board may examine the 
witnesses and shall allow the parties or their representatives to do so. 
Parties to the proceeding may also cross-examine witnesses.



Sec. 405.1861  Oral argument and written allegations.

    The parties, upon their request, shall be allowed a reasonable time 
for the presentation of oral argument or for the filing of briefs or 
other written statements of allegations as to facts or law. Copies of 
any brief or other written statement shall be filed in sufficient number 
that they may be made

[[Page 133]]

available to all parties and to the Centers for Medicare & Medicaid 
Services.



Sec. 405.1863  Administrative policy at issue.

    Where a party to the Board hearing puts into issue an administrative 
policy which is interpretative of the law or regulations, the Board will 
promptly notify to the Centers for Medicare & Medicaid Services.



Sec. 405.1865  Record of Board hearing.

    A complete record of the proceedings at the hearing shall be made 
and transcribed in all cases. It shall be made available to the parties 
upon request. The record will not be closed until a decision has been 
issued.



Sec. 405.1867  Sources of Board's authority.

    In exercising its authority to conduct the hearings described 
herein, the Board must comply with all the provisions of title XVIII of 
the Act and regulations issued thereunder, as well as CMS Rulings issued 
under the authority of the Administrator of the Centers for Medicare & 
Medicaid Services (see Sec. 401.108 of this subchapter). The Board shall 
afford great weight to interpretive rules, general statements of policy, 
and rules of agency organization, procedure, or practice established by 
CMS.

[48 FR 22925, May 23, 1983]



Sec. 405.1869  Scope of Board's decision-making authority.

    The Board shall have the power to affirm, modify, or reverse a 
determination of an intermediary with respect to a cost report and to 
make any other modifications on matters covered by such cost report 
(including modifications adverse to the provider or other parties) even 
though such matters were not considered in the intermediary's 
determination. The opinion of the majority of those Board members 
deciding the case will constitute the Board's decision.



Sec. 405.1871  Board hearing decision and notice.

    (a) The Board shall, as soon as practicable after the conclusion of 
its hearing, render a written decision based upon the record made at 
such hearing, the record established in support of the determination of 
the intermediary (see Sec. 405.1803), and such other evidence as may be 
obtained or received by the Board. Such Board decision shall be 
supported by substantial evidence when the record of the Board hearing 
is viewed as a whole and shall cite applicable law, regulations, and CMS 
Rulings. A copy of the decision shall be mailed to all parties to the 
hearing at their last known addresses and, at the same time, to the 
Administrator and CMS.
    (b) The decision of the Board provided for in paragraph (a) of this 
section shall be final and binding upon all parties to the hearing 
before the Board unless it is reviewed by the Secretary in accordance 
with Sec. 405.1875, or revised in accordance with Sec. 405.1885.

[39 FR 34515, Sept. 26, 1974, as amended at 41 FR 52051, Nov. 26, 1976. 
Redesignated at 42 FR 52826, Sept. 30, 1977, as amended at 48 FR 45773, 
Oct. 7, 1983]



Sec. 405.1873  Board's jurisdiction.

    (a) Board decides jurisdiction. The Board decides questions relating 
to its jurisdiction to grant a hearing, including (1) the timeliness of 
an intermediary determination (see Sec. 405.1835(c)), and (2) the right 
of a provider to a hearing before the Board when the amount in 
controversy is in issue (see Secs. 405.1835(a)(3) and 405.1837).
    (b) Matters not subject to board review. (1) The determination of a 
fiscal intermediary that no payment may be made under title XVIII of the 
Act for any expenses incurred for items and services furnished to an 
individual because such items and services are excluded from coverage 
pursuant to section 1862 of the Act, 42 U.S.C. 1395y (see subpart C of 
this part), may not be reviewed by the Board. (Such determination shall 
be reviewed only in accordance with the applicable provisions of subpart 
G or H of this part.)
    (2) The Board may not review certain matters affecting payments to 
hospitals under the prospective payment system as provided in 
Sec. 405.1804.

[48 FR 39836, Sept. 1, 1983]

[[Page 134]]



Sec. 405.1875  Administrator's review.

    (a) General rule. (1) Except for a Board determination under 
Sec. 405.1842 that it lacks the authority to decide an issue, the 
Administrator, at his or her discretion, may review any final decision 
of the Board, including a decision under Sec. 405.1873 about the Board's 
jurisdiction to grant a hearing. The Administrator may exercise this 
discretion on his or her own motion, in response to a request from a 
party to a Board hearing or in response to a request from CMS.
    (2) The Office of the Attorney Advisory will examine the Board's 
decisions, the requests made by a party or CMS and any submission made 
in accordance with the provisions of this section in order to assist the 
Administrator in deciding whether to exercise this review authority.
    (b) Request for review. A party or CMS requesting the Administrator 
to review a Board decision must file a written request with the 
Administrator within 15 days of the receipt of the Board decision.
    (c) Criteria for deciding whether to review. In deciding whether to 
review a Board decision, either on his or her own motion or in response 
to a request from a party to the hearing or CMS, the Administrator will 
normally consider whether it appears that:
    (1) The Board made an erroneous interpretation of law, regulation or 
CMS Ruling;
    (2) The Board's decision is not supported by substantial evidence; 
or
    (3) The case presents a significant policy issue having a basis in 
law and regulations, and review is likely to lead to the issuance of a 
CMS Ruling or other directive needed to clarify a statutory or 
regulatory provision;
    (4) The Board has incorrectly assumed or denied jurisdiction or 
extended its authority to a degree not provided for by statute, 
regulation or CMS Ruling; and
    (5) The decision of the Board requires clarification, amplification, 
or an alternative legal basis for the decision.
    (d) Decision to review. (1) Whether or not a party or CMS has 
requested review, the Administrator will promptly notify the parties and 
CMS whether he or she has decided to review a decision of the Board and, 
if so, will indicate the particular issues he or she will consider.
    (2) The Administrator may decline to review a case or any issue in a 
case even if a party has filed a written request for review under 
paragraph (b) of this section.
    (e) Written submissions. (1) Within 15 days of receipt of a notice 
that the Administrator has decided to review a Board decision, a party 
or CMS may submit to the Administrator, in writing:
    (i) Proposed findings and conclusions;
    (ii) Supporting views or exceptions to the Board decision;
    (iii) Supporting reasons for the exceptions and proposed findings; 
and
    (iv) A rebuttal of the other party's request for review or other 
submissions already filed with the Administrator.
    (2) These submissions shall be limited to issues the Administrator 
has decided to review and confined to the record of the Board hearing.
    (3) A party or CMS, within 15 days of receipt of a notice that the 
Administrator has decided to review a decision, may also request that 
the decision be remanded and state reasons for doing so. Reasons for a 
request to remand may include new, substantial evidence concerning--
    (i) Issues presented to the Board; and
    (ii) New issues that have arisen since the case was presented to the 
Board.
    (4) A copy of any written submission made under this paragraph shall 
be sent simultaneously to each other party to the Board hearing and to 
CMS, if CMS has previously--
    (i) Requested that the Administrator review a Board decision or 
filed a written submission in response to a party's request for review.
    (ii) Responded to a party's request for review; or
    (iii) Submitted material after the Administrator has announced that 
he or she will review a Board decision.
    (f) Ex parte communications prohibited. All communications from any 
of the parties or CMS about a Board decision being reviewed by the 
Administrator must be in writing and must contain a certification that 
copies have been served on the parties and CMS, as appropriate. The 
Administrator will not

[[Page 135]]

consider any communication that does not meet these requirements or is 
not submitted within the required time limits.
    (g) Administrator's decision. (1) If the Administrator has notified 
the parties and CMS that he or she has decided to review a Board 
decision, the Administrator will affirm, reverse, modify or remand the 
case.
    (2) The Administrator will make this decision within 60 days after 
the provider received notification of the Board decision and will 
promptly mail a copy of the decision to each party and to CMS.
    (3) Any decision other than to remand will be confined to--
    (i) The record of the Board, as forwarded by the Board;
    (ii) Any materials submitted under paragraphs (b) or (e) of this 
section; and
    (iii) Generally known facts that are not subject to reasonable 
dispute.
    (4) The Administrator may rely on prior decisions of the Board, the 
Administrator and the courts, and other applicable law, whether or not 
cited by the parties and CMS.
    (h) Remand. (1) A remand to the Board by the Administrator vacates 
the Board's decision.
    (2) The Administrator may direct the Board to take further action 
with respect to the development of additional facts or new issues, or to 
consider the applicability of laws or regulations other than those 
considered by the Board. The following are not acceptable bases for 
remand--
    (i) Presentation of evidence existing at the time of the Board 
hearing that was known or reasonably could have been known;
    (ii) Introduction of a favorable court case that was either not 
available in print at the time of the Board hearing or was decided after 
the Board hearing;
    (iii) Change of a party's representation before the Board;
    (iv) Presentation of an alternative legal basis concerning an issue 
in dispute; or
    (v) Attempted retraction of a waiver of a right made before or at 
the Board hearing.
    (3) After remand, the Board will take the action requested in the 
remand action and issue a new decision.
    (4) The new decision will be final unless the Administrator 
reverses, affirms, modifies, or again remands the decision in accordance 
with the provisions of the section.

[48 FR 45773, Oct. 7, 1983]



Sec. 405.1877  Judicial review.

    (a) General rule. Section 1878(f) of the Act permits a provider to 
obtain judicial review of a final decision of the Board, or of a 
reversal, affirmation, or modification by the Administrator of a Board 
decision, by filing a civil action pursuant to the Federal Rules of 
Civil Procedure within 60 days of the date on which the provider 
received notice of--
    (1) A final decision by the Board; or
    (2) Any reversal, affirmance, or modification by the Administrator.

The Board's decision is not final if the Administrator reverses, affirms 
or modifies the decision within 60 days of the date on which the 
provider received notice of the decision.
    (b) Administrator declines to review a Board decision. If the 
Administrator declines to review a Board decision, the provider must 
file its appeal within 60 days of receipt of the decision of the Board.
    (c) Administrator does not act after reviewing a Board decision. If 
the Administrator notifies the parties that he or she has decided to 
review a Board decision and then does not make a decision within the 60 
days allotted for his or her review, this subsequent inaction 
constitutes an affirmance allowing a provider an additional 60 days in 
which to file for judicial review, beginning with the date the 
Administrator's time expires for taking action under 
Sec. 405.1875(g)(2).
    (d) Matters not subject to judicial review. Certain matters 
affecting payments to hospital under the prospective payment system are 
not subject to judicial review, as provided in section 1886(d)(7) of the 
Act and Sec. 405.1804.
    (e) Group appeals. Any action under this section by providers that 
are under common ownership or control (see Sec. 413.17 of this chapter) 
must be brought by the providers as a group

[[Page 136]]

with respect to any matter involving an issue common to the providers.
    (f) Venue for appeals. An action for judicial review must be brought 
in the District Court of the United States for the judicial district in 
which the provider is located (or, effective April 20, 1983, in an 
action brought jointly by several providers, the judicial district in 
which the greatest number of such providers are located) or in the 
District Court for the District of Columbia. Effective April 20, 1983, 
any action for judicial review by providers under common ownership or 
control (Sec. 413.17 of this chapter), must be brought by such providers 
as a group with respect to any matter involving an issue common to the 
providers.
    (g) Service of process. Process must be served as described under 45 
CFR part 4.

[48 FR 39836, Sept. 1, 1983, as amended at 48 FR 45774, Oct. 7, 1983; 51 
FR 34793, Sept. 30, 1986]



Sec. 405.1881  Appointment of representative.

    A provider or other party may be represented by legal counsel or any 
other person it appoints to act as its representative at the 
proceedings, conducted in accordance with Secs. 405.1819 and 405.1851.



Sec. 405.1883  Authority of representative.

    A representative appointed by a provider or other party may accept 
or give on behalf of the provider or other party any request or notice 
relative to any proceeding before a hearing officer or the Board. A 
representative shall be entitled to present evidence and allegations as 
to facts and law in any proceeding affecting the party he represents and 
to obtain information with respect to a request for an intermediary 
hearing or a Board hearing made in accordance with Secs. 405.1811, 
405.1835, or 405.1837 to the same extent as the party he represents. 
Notice to a provider or other party of any action, determination, or 
decision, or a request for the production of evidence by a hearing 
officer or the Board sent to the representative of the provider or other 
party shall have the same force and effect as if it had been sent to the 
provider or other party.



Sec. 405.1885  Reopening a determination or decision.

    (a) A determination of an intermediary, a decision by a hearing 
officer or panel of hearing officers, a decision by the Board, or a 
decision of the Secretary may be reopened with respect to findings on 
matters at issue in such determination or decision, by such intermediary 
officer or panel of hearing officers, Board, or Secretary, as the case 
may be, either on motion of such intermediary officer or panel of 
hearing officers, Board, or Secretary, or on the motion of the provider 
affected by such determination or decision to revise any matter in issue 
at any such proceedings. Any such request to reopen must be made within 
3 years of the date of the notice of the intermediary or Board hearing 
decision, or where there has been no such decision, any such request to 
reopen must be made within 3 years of the date of notice of the 
intermediary determination. No such determination or decision may be 
reopened after such 3-year period except as provided in paragraphs (d) 
and (e) of this section.
    (b)(1) An intermediary determination or an intermediary hearing 
decision must be reopened and revised by the intermediary if, within the 
3-year period specified in paragraph (a) of this section, CMS--
    (i) Provides notice to the intermediary that the intermediary 
determination or the intermediary hearing decision is inconsistent with 
the applicable law, regulations, CMS ruling, or CMS general instructions 
in effect, and as CMS understood those legal provisions, at the time the 
determination or decision was rendered by the intermediary; and
    (ii) Explicitly directs the intermediary to reopen and revise the 
intermediary determination or the intermediary hearing decision.
    (2) A change of legal interpretation or policy by CMS in a 
regulation, CMS ruling, or CMS general instruction, whether made in 
response to judicial precedent or otherwise, is not a basis for 
reopening an intermediary determination or an intermediary hearing 
decision under this section.
    (3) Notwithstanding paragraph (b)(1)(i) of this section, CMS may 
direct

[[Page 137]]

the intermediary to reopen a particular intermediary determination or 
intermediary hearing decision in order to implement, for the same 
intermediary determination or intermediary decision--
    (i) A final agency decision under Secs. 405.1833, 405.1871(b), 
405.1875, or 405.1877(a) of this part;
    (ii) A final nonappealable court judgment; or
    (iii) An agreement to settle an administrative appeal or a lawsuit.
    (c) Jurisdiction for reopening a determination or decision rests 
exclusively with that administrative body that rendered the last 
determination or decision.
    (d) Notwithstanding the provisions of paragraph (a) of this section, 
an intermediary determination or hearing decision, a decision of the 
Board, or a decision of the Secretary shall be reopened and revised at 
any time if it is established that such determination or decision was 
procured by fraud or similar fault of any party to the determination or 
decision.
    (e) Notwithstanding an intermediary's discretion to reopen or not 
reopen an intermediary determination or an intermediary hearing decision 
under paragraphs (a) and (c) of this section, CMS may direct an 
intermediary to reopen, or not to reopen, an intermediary determination 
or an intermediary hearing decision in accordance with paragraphs (a) 
and (c) of this section.
    (f) Paragraphs (a) and (b) of this section apply to determinations 
on cost reporting periods ending on or after December 31, 1971. (See 
Sec. 405.1801(c).) However, the 3-year period described shall also apply 
to determinations with respect to cost reporting periods ending prior to 
December 31, 1971, but only if the reopening action was undertaken after 
May 27, 1972 (the effective date of regulations which, prior to the 
publication of this subpart R, governed the reopening of such 
determinations).

[39 FR 34515, Sept. 26, 1974. Redesignated at 42 FR 52826, Sept. 30, 
1977, and amended at 50110, Aug. 1, 2002]



Sec. 405.1887  Notice of reopening.

    (a) All parties to any reopening described above shall be given 
written notice of the reopening. When such reopening results in any 
revision in the prior decision notice of said revision or revisions will 
be mailed to the parties with a complete explanation of the basis for 
the revision or revisions. Notices of reopenings by the Board shall also 
be sent to the Secretary.
    (b) In any such reopening, the parties to the prior decision shall 
be allowed a reasonable period of time in which to present any 
additional evidence or argument in support of their position.



Sec. 405.1889  Effect of a revision.

    Where a revision is made in a determination or decision on the 
amount of program reimbursement after such determination or decision has 
been reopened as provided in Sec. 405.1885, such revision shall be 
considered a separate and distinct determination or decision to which 
the provisions of Secs. 405.1811, 405.1835, 405.1875 and 405.1877 are 
applicable. (See Sec. 405.1801(c) for applicable effective dates.)

Subparts S-T [Reserved]



   Subpart U--Conditions for Coverage of Suppliers of End-Stage Renal 
                         Disease (ESRD) Services

    Authority: Secs. 1102, 1138, 1861, 1862(a), 1871, 1874, and 1881 of 
the Social Security Act (42 U.S.C. 1302, 1320b-8, 1395x, 1395y(a), 
1395hh, 1395kk, and 1395rr), unless otherwise noted.

    Source: 41 FR 22511, June 3, 1976, unless otherwise noted. 
Redesignated at 42 FR 52826, Sept. 30, 1977.



Sec. 405.2100  Scope of subpart.

    (a) The regulations in this subpart prescribe the role which End-
Stage Renal Disease (ESRD) networks have in the ESRD program, establish 
the mechanism by which minimal utilization rates are promulgated and 
applied, under section 1881(b)(1) of the Act, and describe the health 
and safety requirements that facilities furnishing ESRD care to 
beneficiaries must meet. These regulations further prescribe the role of 
ESRD networks in meeting the requirements of section 1881(c) of the Act.

[[Page 138]]

    (b) The general objectives of the ESRD program are contained in 
Sec. 405.2101, and general definitions are contained in Sec. 405.2102. 
The provisions of Secs. 405.2110, 405.2112 and 405.2113 discuss the 
establishment and activities of ESRD networks, network organizations and 
membership requirements and restrictions for members of the medical 
review boards. Sections 405.2120 through 405.2124 discuss the 
establishment of minimal utilization rates and the requirements for 
approval of facilities with respect to such rates. Sections 405.2130 
through 405.2140 discuss general requirements for, and description of, 
all facilities furnishing ESRD services. Sections 405.2160 through 
405.2164 discuss specific requirements for facilities which furnish ESRD 
dialysis services. Sections 405.2170 and 405.2171 discuss specific 
requirements for facilities which furnish ESRD transplantation services.

[51 FR 30361, Aug. 26, 1986]



Sec. 405.2101  Objectives of the end-stage renal disease (ESRD) program.

    The objectives of the end-stage renal disease program are:
    (a) To assist beneficiaries who have been diagnosed as having end-
stage renal disease (ESRD) to receive the care they need;
    (b) To encourage proper distribution and effective utlization of 
ESRD treatment resources while maintaining or improving the quality of 
care;
    (c) To provide the flexibility necessary for the efficient delivery 
of appropriate care by physicians and facilities; and
    (d) To encourage self-dialysis or transplantation for the maximum 
practical number of patients who are medically, socially, and 
psychologically suitable candidates for such treatment.

[43 FR 48950, Oct. 19, 1979]



Sec. 405.2102  Definitions.

    As used in this subpart, the following definitions apply:
    Agreement. A written document executed between an ESRD facility and 
another facility in which the other facility agrees to assume 
responsibility for furnishing specified services to patients and for 
obtaining reimbursement for those services.
    Arrangement. A written document executed between an ESRD facility 
and another facility in which the other facility agrees to furnish 
specified services to patients but the ESRD facility retains 
responsibility for those services and for obtaining reimbursement for 
them.
    Dialysis. A process by which dissolved substances are removed from a 
patient's body by diffusion from one fluid compartment to another across 
a semipermeable membrane. The two types of dialysis that are currently 
in common use are hemodialysis and peritoneal dialysis.
    End-Stage Renal Disease (ESRD). That stage of renal impairment that 
appears irreversible and permanent, and requires a regular course of 
dialysis or kidney transplantation to maintain life.
    ESRD facility. A facility which is approved to furnish at least one 
specific ESRD service (see definition of ``ESRD service''). Such 
facilities are:
    (a) Renal Transplantation Center. A hospital unit which is approved 
to furnish directly transplantation and other medical and surgical 
specialty services required for the care of the ESRD transplant 
patients, including inpatient dialysis furnished directly or under 
arrangement. A Renal Transplantation Center may also be a Renal Dialysis 
Center.
    (b) Renal dialysis center. A hospital unit which is approved to 
furnish the full spectrum of diagnostic, therapeutic, and rehabilitative 
services required for the care of ESRD dialysis patients (including 
inpatient dialysis furnished directly or under arrangement). A hospital 
need not provide renal transplantation to qualify as a renal dialysis 
center.
    (c) Renal dialysis facility. A unit which is approved to furnish 
dialysis service(s) directly to ESRD patients.
    (d) Self-dialysis unit. A unit that is part of an approved renal 
transplantation center, renal dialysis center, or renal dialysis 
facility, and furnishes self-dialysis services.
    (e) Special purpose renal dialysis facility. A renal dialysis 
facility which is

[[Page 139]]

approved under Sec. 405.2164 to furnish dialysis at special locations on 
a short-term basis to a group of dialysis patients otherwise unable to 
obtain treatment in the geographical area. The special locations must be 
either special rehabilitative (including vacation) locations serving 
ESRD patients temporarily residing there, or locations in need of ESRD 
facilities under emergency circumstances.
    ESRD service. The type of care or services furnished to an ESRD 
patient. Such types of care are:
    (a) Transplantation service. A process by which (1) a kidney is 
excised from a live or cadaveric donor, (2) that kidney is implanted in 
an ESRD patient, and (3) supportive care is furnished to the living 
donor and to the recipient following implantation.
    (b) Dialysis service--(1) Inpatient dialysis. Dialysis which, 
because of medical necessity, is furnished to an ESRD patient on a 
temporary inpatient basis in a hospital;
    (2) Outpatient dialysis. Dialysis furnished on an outpatient basis 
at a renal dialysis center or facility. Outpatient dialysis includes:
    (i) Staff-assisted dialysis. Dialysis performed by the staff of the 
center or facility.
    (ii) Self-dialysis. Dialysis performed, with little or no 
professional assistance, by an ESRD patient who has completed an 
appropriate course of training.
    (3) Home dialysis. Dialysis performed by an appropriately trained 
patient at home.
    (c) Self-dialysis and home dialysis training. A program that trains 
ESRD patients to perform self-dialysis or home dialysis with little or 
no professional assistance, and trains other individuals to assist 
patients in performing self-dialysis or home dialysis.
    Furnishes directly. The ESRD facility provides the service through 
its own staff and employees, or through individuals who are under direct 
contract to furnish such services personally for the facility (i.e., not 
through ``agreements'' or ``arrangements'').
    Furnishes on the premises. The ESRD facility furnishes services on 
its main premises; or on its other premises that are (a) contiguous with 
or in immediate proximity to the main premises, and under the direction 
of the same professional staff and governing body as the main premises, 
or (b) approved on a time-limited basis as a special purpose renal 
dialysis facility.
    Histocompatibility testing. Laboratory test procedures which 
determine compatibility between a potential organ donor and a potential 
organ transplant recipient.
    Medical care criteria. Predetermined elements against which aspects 
of the quality of a medical service may be compared. They are developed 
by professionals relying on professional expertise and on the 
professional literature.
    Medical care norms. Numerical or statistical measures of usual 
observed performance. Norms are derived from aggregate information 
related to the health care provided to a large number of patients over a 
period of time.
    Medical care standards. Professionally developed expressions of the 
range of acceptable variation from a norm or criterion.
    Medical care evaluation study (MCE). Review of health care services, 
usually performed retrospectively, in which an indepth assessment of the 
quality and/or utilization of such services is made.
    Network, ESRD. All Medicare-approved ESRD facilities in a designated 
geographic area specified by CMS.
    Network organization. The administrative governing body to the 
network and liaison to the Federal government.
    Organ procurement. The process of acquiring donor kidneys. (See 
definition of Organ procurement organization in Sec. 485.302 of this 
chapter.)
    Qualified personnel. Personnel that meet the requirements specified 
in this paragraph.
    (a) Chief executive officer. A person who:
    (1) Holds at least a baccalaureate degree or its equivalent and has 
at least 1 year of experience in an ESRD unit; or
    (2) Is a registered nurse or physician director as defined in this 
definition; or
    (3) As of September 1, 1976, has demonstrated capability by acting 
for at least 2 years as a chief executive officer in a dialysis unit or 
transplantation program.

[[Page 140]]

    (b) Dietitian. A person who:
    (1) Is eligible for registration by the American Dietetic 
Association under its requirements in effect on June 3, 1976, and has at 
least 1 year of experience in clinical nutrition; or
    (2) Has a baccalaureate or advanced degree with major studies in 
food and nutrition or dietetics, and has at least 1 year of experience 
in clinical nutrition.
    (c) Medical record practitioner. A person who:
    (1) Has graduated from a program for Medical Record Administrators 
accredited by the Council on Medical Education of the American Medical 
Association and the American Medical Record Association, and is eligible 
for certification as a Registered Record Administrator (RRA) by the 
American Medical Record Association under its requirements in effect on 
June 3, 1976.
    (2) Has graduated from a program for Medical Record Technicians 
approved jointly by the Council on Medical Education of the American 
Medical Association and the American Medical Record Association, and is 
eligible for certification as an Accredited Record Technician (ART) by 
the American Medical Record Association under its requirements in effect 
June 3, 1976, or
    (3) Has successfully completed and received a satisfactory grade in 
the American Medical Record Association's Correspondence Course for 
Medical Record Personnel approved by the Accrediting Commission of the 
National Home Study Council, and is eligible for certification as an 
Accredited Record Technician by the American Medical Record Association 
under its requirements in effect June 3, 1976.
    (d) Nurse responsible for nursing service. A person who is licensed 
as a registered nurse by the State in which practicing, and (1) has at 
least 12 months of experience in clinical nursing, and an additional 6 
months of experience in nursing care of the patient with permanent 
kidney failure or undergoing kidney transplantation, including training 
in and experience with the dialysis process; or
    (2) Has 18 months of experience in nursing care of the patient on 
maintenance dialysis, or in nursing care of the patient with a kidney 
transplant, including training in and experience with the dialysis 
process;
    (3) If the nurse responsible for nursing service is in charge of 
self-care dialysis training, at least 3 months of the total required 
ESRD experience is in training patients in self-care.
    (e) Physician-director. A physician who:
    (1) Is board eligible or board certified in internal medicine or 
pediatrics by a professional board, and has had at least 12 months of 
experience or training in the care of patients at ESRD facilities; or
    (2) During the 5-year period prior to September 1, 1976, served for 
at least 12 months as director of a dialysis or transplantation program;
    (3) In those areas where a physician who meets the definition in 
paragraph (1) or (2) of this definition is not available to direct a 
participating dialysis facility, another physician may direct the 
facility, subject to the approval of the Secretary.
    (f) Social worker. A person who is licensed, if applicable, by the 
State in which practicing, and
    (1) Has completed a course of study with specialization in clinical 
practice at, and holds a masters degree from, a graduate school of 
social work accredited by the Council on Social Work Education; or
    (2) Has served for at least 2 years as a social worker, 1 year of 
which was in a dialysis unit or transplantation program prior to 
September 1, 1976, and has established a consultative relationship with 
a social worker who qualifies under paragraph (f)(1) of this definition.
    (g) Transplantation surgeon. A person who:
    (1) Is board eligible or board certified in general surgery or 
urology by a professional board; and
    (2) Has at least 12 months training or experience in the performance 
of renal transplantation and the care of patients with renal 
transplants.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 48950, Oct. 19, 1978; 51 FR 30361, Aug. 26, 1986; 53 
FR 6547, Mar. 1, 1988; 55 FR 9575, Mar. 14, 1990]

[[Page 141]]



Sec. 405.2110  Designation of ESRD networks.

    CMS designated ESRD networks in which the approved ESRD facilities 
collectively provide the necessary care for ESRD patients.
    (a) Effect on patient choice of facility. The designation of 
networks does not require an ESRD patient to seek care only through the 
facilities in the designated network where the patient resides, nor does 
the designation of networks limit patient choice of physicians or 
facilities, or preclude patient referral by physicians to a facility in 
another designated network.
    (b) Redesignation of networks. CMS will redesignate networks, as 
needed, to ensure that the designations are consistent with ESRD program 
experience, consistent with ESRD program objectives specified in 
Sec. 405.2101, and compatible with efficient program administration.

[51 FR 30361, Aug. 26, 1986]



Sec. 405.2111  [Reserved]



Sec. 405.2112  ESRD network organizations.

    CMS will designate an administrative governing body (network 
organization) for each network. The functions of a network organization 
include but are not limited to the following:
    (a) Developing network goals for placing patients in settings for 
self-care and transplantation.
    (b) Encouraging the use of medically appropriate treatment settings 
most compatible with patient rehabilitation and the participation of 
patients, providers of services, and renal disease facilities in 
vocational rehabilitation programs.
    (c) Developing criteria and standards relating to the quality and 
appropriateness of patient care and, with respect to working with 
patients, facilities, and providers of services, for encouraging 
participation in vocational rehabilitation programs.
    (d) Evaluating the procedures used by facilities in the network in 
assessing patients for placement in appropriate treatment modalities.
    (e) Making recommendations to member facilities as needed to achieve 
network goals.
    (f) On or before July 1 of each year, submitting to CMS an annual 
report that contains the following information:
    (1) A statement of the network goals.
    (2) The comparative performance of facilities regarding the 
placement of patients in appropriate settings for--
    (i) Self-care;
    (ii) Transplants; and
    (iii) Vocational rehabilitation programs.
    (3) Identification of those facilities that consistently fail to 
cooperate with the goals specified under paragraph (f)(1) of this 
section or to follow the recommendations of the medical review board.
    (4) Identification of facilities and providers that are not 
providing appropriate medical care.
    (5) Recommendations with respect to the need for additional or 
alternative services in the network including self-dialysis training, 
transplantation and organ procurement.
    (g) Evaluating and resolving patient grievances.
    (h) Appointing a network council and a medical review board (each 
including at least one patient representative) and supporting and 
coordinating the activities of each.
    (i) Conducting on-site reviews of facilities and providers as 
necessary, as determined by the medical review board or CMS, using 
standards of care as specified under paragraph (c) of this section.
    (j) Collecting, validating, and analyzing such data as necessary to 
prepare the reports required under paragraph (f) of this section and the 
Secretary's report to Congress on the ESRD program and to assure the 
maintenance of the registry established under section 1881(c)(7) of the 
Act.

[53 FR 1620, Jan. 21, 1988]



Sec. 405.2113  Medical review board.

    (a) General. The medical review board must be composed of 
physicians, nurses, and social workers engaged in treatment relating to 
ESRD and qualified to evaluate the quality and appropriateness of care 
delivered to ESRD patients, and at least one patient representative.

[[Page 142]]

    (b) Restrictions on medical review board members. (1) A medical 
review board member must not review or provide advice with respect to 
any case in which he or she has, or had, any professional involvement, 
received reimbursement or supplied goods.
    (2) A medical review board member must not review the ESRD services 
of a facility in which he or she has a direct or indirect financial 
interest (as described in section 1126(a)(1) of the Act).

[51 FR 30361, Aug. 26, 1986, as amended at 53 FR 1620, Jan. 21, 1988]



Sec. 405.2114  [Reserved]



Sec. 405.2120  Minimum utilization rates: general.

    Section 1881(b)(1) of the Social Security Act (42 U.S.C. 
1395rr(b)(1)) authorizes the Secretary to limit payment for ESRD care to 
those facilities that meet the requirements that the Secretary may 
prescribe, including minimum utilization rates for covered 
transplantations. The minimum utilization rates, which are explained and 
specified in Secs. 405.2121 through 405.2130, may be changed from time 
to time in accordance with program experience. Changes will be published 
as amendments to these regulations.

[55 FR 23440, June 8, 1990]



Sec. 405.2121  Basis for determining minimum utilization rates.

    In developing minimum utilization rates, the Secretary takes into 
account the performance of ESRD facilities, the availability of care, 
the quality of care, and the efficient utilization of equipment and 
personnel, based on the following evidence:
    (a) Information on the geographic distribution of ESRD patients and 
facilities;
    (b) Information on quality of care; and
    (c) Information on operational and management efficiency.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept 30, 1977, 
as amended at 51 FR 30362, Aug. 26, 1986; 55 FR 23440, June 8, 1990]



Sec. 405.2122  Types and duration of classification according to utilization rates.

    A renal transplantation center that meets all the other conditions 
for coverage of ESRD services will be classified according to its 
utilization rate(s) as follows: Unconditional status, conditional 
status, exception status, or not eligible for reimbursement for that 
ESRD service. Such classification will be based on previously reported 
utilization data (see Sec. 405.2124, except as specified in paragraph 
(a) of this section), and will be effective until notification of 
subsequent classification occurs. (See Sec. 405.2123 for reporting 
requirements; Sec. 405.2124 for method of calculating rates: 
Sec. 405.2130 for specific standards.)
    (a) Initial classification. (1) A renal transplantation center that 
has not previously participated in the ESRD program will be granted 
conditional status if it submits a written plan, detailing how it will 
achieve the utilization rates for conditional status by the end of the 
second calendar year of its operation under the ESRD program, and the 
rates required for unconditional status by the end of its fourth 
calendar year of operation.
    (2) The renal transplantation center's performance will be evaluated 
at the end of the first calendar year to ascertain whether it is 
properly implementing the plan.
    (b) Exception status. (1) A renal transplantation center that does 
not meet the minimum utilization rate for unconditional or conditional 
status may be approved by the Secretary for a time limited exception 
status if:
    (i) It meets all other conditions for coverage under this subpart;
    (ii) It is unable to meet the minimum utilization rate because it 
lacks a sufficient number of patients and is located in an area without 
a sufficient population base to support a center or facility which would 
meet the rate; and
    (iii) Its absence would adversely affect the achievement of ESRD 
program objectives.
    (2) A hospital that furnishes renal transplantation services 
primarily to pediatric patients and is approved as a renal dialysis 
center under this subpart, but does not meet the utilization

[[Page 143]]

standards prescribed in Sec. 405.2130(a), may be approved by the 
Secretary for a time limited exception status if:
    (i) It meets all other conditions for coverage as a renal 
transplantation center;
    (ii) The surgery is performed under the direct supervision of a 
qualified transplantation surgeon (Sec. 405.2102) who is also performing 
renal transplantation surgery at an approved renal transplantation 
center that is primarily oriented to adult nephrology;
    (iii) It has an agreement, with the other hospital serviced by the 
surgeon, for sharing limited resources that are needed for kidney 
transplantation; and
    (iv) There are pediatric patients who need the surgery and who 
cannot obtain it from any other hospital located within a reasonable 
distance.

[43 FR 48951, Oct. 19, 1978, as amended at 45 FR 58124, Sept. 2, 1980; 
51 FR 30362, Aug. 26, 1986; 55 FR 23440, June 8, 1990]



Sec. 405.2123  Reporting of utilization rates for classification.

    Each hospital furnishing renal transplantation services must submit 
an annual report to CMS on its utilization rates. The report must 
include both the number of transplants performed during the most recent 
year of operation and the number performed during each of the preceding 
2 calendar years.

[55 FR 23441, June 8, 1990]



Sec. 405.2124  Calculation of utilization rates for comparison with minimal utilization rate(s) and notification of status.

    For purposes of classification the Secretary will use either the 
utilization rate for the preceding 12 months or the average utilization 
rate of the preceding 2 calendar years, whichever is higher. The 
Secretary will inform each ESRD facility and the network coordinating 
council of the network area in which the ESRD facility is located of the 
results of this classification.



Sec. 405.2130  Condition: Minimum utilization rates.

    Unless a renal transplantation center is granted an exception under 
Sec. 405.2122(b), the center must meet the following minimum utilization 
rate(s) for unconditional or conditional status:
    (a) Unconditional status: 15 or more transplants performed annually.
    (b) Conditional status: 7 to 14 transplants performed annually.

[55 FR 23441, June 8, 1990]



Sec. 405.2131  Condition: Provider status: Renal transplantation center or renal dialysis center.

    A renal transplantation center or a renal dialysis center 
(Sec. 405.2102(e) (1) or (2)) operated by a hospital may qualify for 
approval and be reimbursed under the ESRD program only if the hospital 
is otherwise an approved provider in the Medicare program.



Sec. 405.2132  [Reserved]



Sec. 405.2133  Condition: Furnishing data and information for ESRD program administration.

    The ESRD facility, laboratory performing histocompatibility testing, 
and organ procurement organization furnishes data and information in the 
manner and at the intervals specified by the Secretary, pertaining to 
its ESRD patient care activities and costs, for inclusion in a national 
ESRD medical information system and in compilations relevant to program 
administration, including claims processing and reimbursement. Such 
information is treated as confidential when it pertains to individual 
patients and is not disclosed except as authorized by Department 
regulations on confidentiality and disclosure (see 45 CFR parts 5, 5b, 
and part 401 of this chapter).

[53 FR 6548, Mar. 1, 1988]



Sec. 405.2134  Condition: Participation in network activities.

    Each facility must participate in network activities and pursue 
network goals.

[51 FR 30362, Aug. 26, 1986]



Sec. 405.2135  Condition: Compliance with Federal, State and local laws and regulations.

    The ESRD facility is in compliance with applicable Federal, State 
and local laws, and regulations.

[[Page 144]]

    (a) Standard: licensure. Where State or applicable local law 
provides for the licensing of ESRD facilities, the facility is:
    (1) Licensed pursuant to such law; or
    (2) Approved by the agency of such State or locality responsible for 
such licensing as meeting the standards established for such licensing.
    (b) Standard: licensure or registration of personnel. Each staff 
member is currently licensed or registered in accordance with applicable 
law.
    (c) Standard: conformity with other laws. The facility is in 
conformity with applicable laws and regulations pertaining to fire 
safety, equipment, and other relevant health and safety requirements.



Sec. 405.2136  Condition: Governing body and management.

    The ESRD facility is under the control of an identifiable governing 
body, or designated person(s) so functioning, with full legal authority 
and responsibility for the governance and operation of the facility. The 
governing body adopts and enforces rules and regulations relative to its 
own governance and to the health care and safety of patients, to the 
protection of the patients' personal and property rights, and to the 
general operation of the facility. The governing body receives and acts 
upon recommendations from the network organization. The governing body 
appoints a chief executive officer who is responsible for the overall 
management of the facility.
    (a) Standard: disclosure of ownership. The ESRD facility supplies 
full and complete information to the State survey agency 
(Sec. 405.1902(a)) as to the identity of:
    (1) Each person who has any direct or indirect ownership interest of 
10 per centum or more in the facility, or who is the owner (in whole or 
in part) of any mortgage, deed of trust, note, or other obligation 
secured (in whole or in part) by the facility or any of the property or 
assets of the facility;
    (2) Each officer and director of the corporation, if the facility is 
organized as a corporation; and
    (3) Each partner, if the facility is organized as a partnership; and 
promptly reports to the State survey agency any changes which would 
affect the current accuracy of the information so required to be 
supplied.
    (b) Standard: Operational objectives. The operational objectives of 
the ESRD facility, including the services that it provides, are 
established by the governing body and delineated in writing. The 
governing body adopts effective administrative rules and regulations 
that are designed to safeguard the health and safety of patients and to 
govern the general operations of the facility, in accordance with legal 
requirements. Such rules and regulations are in writing and dated. The 
governing body ensures that they are operational, and that they are 
reviewed at least annually and revised as necessary. If the ESRD 
facility is engaged in the practice of hemodialyzer reuse, the governing 
body ensures that there are written policies and procedures with respect 
to reuse, to assure that recommended standards and conditions are being 
followed, and requires that patients be informed of the policies and 
procedures.
    (1) The objectives of the facility are formulated in writing and 
clearly stated in documents appropriate for distribution to patients, 
facility personnel, and the public.
    (2) A description of the services provided by the facility, together 
with a categorical listing of the types of diagnostic and therapeutic 
procedures that may be performed, is readily available upon request to 
all concerned.
    (3) Admission criteria that insure equitable access to services are 
adopted by the facility and are readily available to the public. Access 
to the self-dialysis unit is available only to patients for whom the 
facility maintains patient care plans (see Sec. 405.2137).
    (4) The operational objectives and administrative rules and 
regulations of the facility are reviewed at least annually and revised 
as necessary by the administrative staff, medical director, and other 
appropriate personnel of the facility, and are adopted when approved by 
the governing body.
    (c) Standard: chief executive officer. The governing body appoints a 
qualified chief executive officer who, as the ESRD facility's 
administrator: Is responsible for the overall management

[[Page 145]]

of the facility; enforces the rules and regulations relative to the 
level of health care and safety of patients, and to the protection of 
their personal and property rights; and plans, organizes, and directs 
those responsibilities delegated to him by the governing body. Through 
meetings and periodic reports, the chief executive officer maintains on-
going liaison among the governing body, medical and nursing personnel, 
and other professional and supervisory staff of the facility, and acts 
upon recommendations made by the medical staff and the governing body. 
In the absence of the chief executive officer, a qualified person is 
authorized in writing to act on the officer's behalf.
    (1) The governing body delineates in writing the responsibilities of 
the chief executive officer, and ensures that he/she is sufficiently 
free from other duties to provide effective direction and management of 
the operations and fiscal affairs of the facility.
    (2) The chief executive officer serves on a full-time or part-time 
basis, in accordance with the scope of the facility's operations and 
administrative needs, and devotes sufficient time to the conduct of such 
responsibilities.
    (3) The responsibilities of the chief executive officer include but 
are not limited to:
    (i) Implementing the policies of the facility and coordinating the 
provision of services, in accordance with delegations by the governing 
body.
    (ii) Organizing and coordinating the administrative functions of the 
facility, redelegating duties as authorized, and establishing formal 
means of accountability for those involved in patient care.
    (iii) Authorizing expenditures in accordance with established 
policies and procedures.
    (iv) Familiarizing the staff with the facility's policies, rules, 
and regulations, and with applicable Federal, State, and local laws and 
regulations.
    (v) Maintaining and submitting such records and reports, including a 
chronological record of services provided to patients, as may be 
required by the facility's internal committees and governing body, or as 
required by the Secretary.
    (vi) Participating in the development, negotiation, and 
implementation of agreements or contracts into which the facility may 
enter, subject to approval by the governing body of such agreements or 
contracts.
    (vii) Participating in the development of the organizational plan 
and ensuring the development and implementation of an accounting and 
reporting system, including annual development of a detailed budgetary 
program, maintenance of fiscal records, and quarterly submission to the 
governing body of reports of expenses and revenues generated through the 
facility's operation.
    (viii) Ensuring that the facility employs the number of qualified 
personnel needed; that all employees have appropriate orientation to the 
facility and their work responsibilities upon employment; and that they 
have an opportunity for continuing education and related development 
activities.
    (d) Standard: personnel policies and procedures. The governing body, 
through the chief executive officer of the ESRD facility, is responsible 
for maintaining and implementing written personnel policies and 
procedures that support sound patient care and promote good personnel 
practices. These policies and procedures ensure that:
    (1) All members of the facility's staff are qualified to perform the 
duties and responsibilities assigned to them and meet such Federal, 
State, and local professional requirements as may apply.
    (2) A safe and sanitary environment for patients and personnel 
exists, and reports of incidents and accidents to patients and personnel 
are reviewed to identify health and safety hazards. Health supervision 
of personnel is provided, and they are referred for periodic health 
examinations and treatments as necessary or as required by Federal, 
State, and local laws. Procedures are established for routine testing to 
ensure detection of hepatitis and other infectious diseases.
    (3) If the services of trainees are utilized in providing ESRD 
services, such trainees are under the direct supervision of qualified 
professional personnel.

[[Page 146]]

    (4) Complete personnel records are maintained on all personnel. 
These include health status reports, resumes of training and experience, 
and current job descriptions that reflect the employees' 
responsibilities and work assignments.
    (5) Personnel policies are written and made available to all 
personnel in the facility. The policies provide for an effective 
mechanism to handle personnel grievances.
    (6) All personnel of the facility participate in educational 
programs on a regular basis. These programs cover initial orientation, 
and continuing inservice training, including procedures for infection 
control. Records are maintained showing the content of training sessions 
and the attendance at such sessions.
    (7) Personnel manuals are maintained, periodically updated, and made 
available to all personnel involved in patient care.
    (e) Standard: use of outside resources. If the ESRD facility makes 
arrangements for the provision of a specific service as authorized in 
this subpart, the responsibilities, functions, objectives, and the terms 
of each arrangement, including financial provisions and charges, are 
delineated in a document signed by an authorized representative of the 
facility and the person or agency providing the service. The chief 
executive officer when utilizing outside resource, as a consultant, 
assures that he is apprised of recommendations, plans for 
implementation, and continuing assessment through dated, signed reports, 
which are retained by the chief executive officer for follow-up action 
and evaluation of performance.
    (f) Standard: patient care policies. The ESRD facility has written 
policies, approved by the governing body, concerning the provision of 
dialysis and other ESRD services to patients. The governing body reviews 
implementation of policies periodically to ensure that the intent of the 
policies is carried out. These policies are developed by the physician 
responsible for supervising and directing the provision of ESRD 
services, or the facility's organized medical staff (if there is one), 
with the advice of (and with provision for review of such policies from 
time to time, but at least annually, by) a group of professional 
personnel associated with the facility, including, but not limited to, 
one or more physicians and one or more registered nurses experienced in 
rendering ESRD care.
    (1) The patient care policies cover the following:
    (i) Scope of services provided by the facility (either directly or 
under arrangement).
    (ii) Admission and discharge policies (in relation to both in-
facility care and home care).
    (iii) Medical supervision and physician services.
    (iv) Patient long term programs, patient care plans and methods of 
implementation.
    (v) Care of patients in medical and other emergencies.
    (vi) Pharmaceutical services.
    (vii) Medical records (including those maintained in the ESRD 
facility and in the patients' homes, to ensure continuity of care).
    (viii) Administrative records.
    (ix) Use and maintenance of the physical plant and equipment.
    (x) Consultant qualifications, functions, and responsibilities.
    (xi) The provision of home dialysis support services, if offered 
(see Sec. 405.2163(e)).
    (2) The physician-director of the facility is designated in writing 
to be responsible for the execution of patient care policies. If the 
responsibility for day-to-day execution of patient care policies has 
been delegated by a physican director to (or, in the case of a self-
dialysis unit, to another licensed health practitioner) a registered 
nurse, the physican-director provides medical guidance in such matters.
    (3) The facility policy provides that, whenever feasible, hours for 
dialysis are scheduled for patient convenience and that arrangements are 
made to accommodate employed patients who wish to be dialyzed during 
their non-working hours.
    (4) The governing body adopts policies to ensure there is evaluation 
of the progress each patient is making toward the goals stated in the 
patient's long term program and patient's care plan (see 
Sec. 405.2137(a)). Such evaluations are

[[Page 147]]

carried out through regularly scheduled conferences, with participation 
by the staff involved in the patient's care.
    (g) Standard: medical supervision and emergency coverage. The 
governing body of the ESRD dialysis and/or transplant facility ensures 
that the health care of every patient is under the continuing 
supervision of a physician and that a physician is available in 
emergency situations.
    (1) The physician responsible for the patient's medical supervision 
evaluates the patient's immediate and long-term needs and on this basis 
prescribes a planned regimen of care which covers indicated dialysis and 
other ESRD treatments, services, medications, diet, special procedures 
recommended for the health and safety of the patient, and plans for 
continuing care and discharge. Such plans are made with input from other 
professional personnel involved in the care of the patient.
    (2) The governing body ensures that there is always available 
medical care for emergencies, 24 hours a day, 7 days a week. There is 
posted at the nursing/monitoring station a roster with the names of the 
physicians to be called, when they are available for emergencies, and 
how they can be reached.
    (h) Standard: medical staff. The governing body of the ESRD facility 
designates a qualified physician (see Sec. 405.2102) as director of the 
ESRD services; the appointment is made upon the recommendation of the 
facility's organized medical staff, if there is one. The governing body 
establishes written policies regarding the development, negotiation, 
consummation, evaluation, and termination of appointments to the medical 
staff.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
and amended at 43 FR 48952, Oct. 19, 1978; 51 FR 30362, Aug. 26, 1986; 
52 FR 36934, Oct. 2, 1987]



Sec. 405.2137  Condition: Patient long-term program and patient care plan.

    Each facility maintains for each patient a written long-term program 
and a written patient care plan to ensure that each patient receives the 
appropriate modality of care and the appropriate care within that 
modality. The patient, or where appropriate, parent or legal guardian is 
involved with the health team in the planning of care. A copy of the 
current program and plan accompany the patient on interfacility 
transfer.
    (a) Standard: patient long-term program. There is a written long-
term program representing the selection of a suitable treatment modality 
(i.e., dialysis or transplantation) and dialysis setting (e.g., home, 
self-care) for each patient.
    (1) The program is developed by a professional team which includes 
but is not limited to the physician director of the dialysis facility or 
center where the patient is currently being treated, a physician 
director of a center or facility which offers self-care dialysis 
training (if not available at the location where the patient is being 
treated), a transplant surgeon, a qualified nurse responsible for 
nursing services, a qualified dietitian and a qualified social worker.
    (2) The program is formally reviewed and revised in writing as 
necessary by a team which includes but is not limited to the physician 
director of the dialysis facility or center where the patient is 
presently being treated, in addition to the other personnel listed in 
paragraph (a)(1) of this section at least every 12 months or more often 
as indicated by the patient's response to treatment (see 
Sec. 405.2161(b)(1) and Sec. 405.2170(a)).
    (3) The patient, parent, or legal guardian, as appropriate, is 
involved in the development of the patient's long-term program, and due 
consideration is given to his preferences.
    (4) A copy of the patient's long-term program accompanies the 
patient on interfacility transfer or is sent within 1 working day.
    (b) Standard: patient care plan. There is a written patient care 
plan for each patient of an ESRD facility (including home dialysis 
patients under the supervision of the ESRD facility; see 
Sec. 405.2163(e)), based upon the nature of the patient's illness, the 
treatment prescribed, and an assessment of the patient's needs.
    (1) The patient care plan is personalized for the individual, 
reflects the psychological, social, and functional needs of the patient, 
and indicates the ESRD

[[Page 148]]

and other care required as well as the individualized modifications in 
approach necessary to achieve the long-term and short-term goals.
    (2) The plan is developed by a professional team consisting of at 
least the physician responsible for the patient's ESRD care, a qualified 
nurse responsible for nursing services, a qualified social worker, and a 
qualified dietitian.
    (3) The patient, parent, or legal guardian, as appropriate, is 
involved in the development of the care plan, and due consideration is 
given to his preferences.
    (4) The care plan for patients whose medical condition has not 
become stabilized is reviewed at least monthly by the professional 
patient care team described in paragraph (b)(2) of this section. For 
patients whose condition has become stabilized, the care plan is 
reviewed every 6 months. The care plan is revised as necessary to insure 
that it provides for the patients ongoing needs.
    (5) If the patient is transferred to another facility, the care plan 
is sent with the patient or within 1 working day.
    (6) For a home-dialysis patient whose care is under the supervision 
of the ESRD facility, the care plan provides for periodic monitoring of 
the patient's home adaptation, including provisions for visits to the 
home by qualified facility personnel to the extent appropriate. (See 
Sec. 405.2163(e).)
    (7) Beginning July 1, 1991, for a home dialysis patient, and 
beginning January 1, 1994, for any dialysis patient, who uses EPO in the 
home, the plan must provide for monitoring home use of EPO that includes 
the following:
    (i) Review of diet and fluid intake for indiscretions as indicated 
by hyperkalemia and elevated blood pressure secondary to volume 
overload.
    (ii) Review of medications to ensure adequate provision of 
supplemental iron.
    (iii) Ongoing evaluations of hematocrit and iron stores.
    (iv) A reevaluation of the dialysis prescription taking into account 
the patient's increased appetite and red blood cell volume.
    (v) A method for physician followup on blood tests and a mechanism 
(such as a patient log) for keeping the physician informed of the 
results.
    (vi) Training of the patient to identify the signs and symptoms of 
hypotension and hypertension.
    (vii) The decrease or discontinuance of EPO if hypertension is 
uncontrollable.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 48952, Oct. 19, 1978; 59 FR 1284, Jan. 10, 1994; 59 
FR 26958, May 25, 1994]



Sec. 405.2138  Condition: Patients' rights and responsibilities.

    The governing body of the ESRD facility adopts written policies 
regarding the rights and responsibilities of patients and, through the 
chief executive officer, is responsible for development of, and 
adherence to, procedures implementing such policies. These policies and 
procedures are made available to patients and any guardians, next of 
kin, sponsoring agency(ies), representative payees (selected pursuant to 
section 205(j) of the Social Security Act and subpart Q of 20 CFR part 
404), and to the public. The staff of the facility is trained and 
involved in the execution of such policies and procedures. The patients' 
rights policies and procedures ensure at least the following:
    (a) Standard: informed patients. All patients in the facility:
    (1) Are fully informed of these rights and responsibilities, and of 
all rules and regulations governing patient conduct and 
responsibilities;
    (2) Are fully informed of services available in the facility and of 
related charges including any charges for services not covered under 
title XVIII of the Social Security Act;
    (3) Are fully informed by a physician of their medical condition 
unless medically contraindicated (as documented in their medical 
records);
    (4) Are fully informed regarding the facility's reuse of dialysis 
supplies, including hemodialyzers. If printed materials such as 
brochures are utilized to describe a facility and its services, they 
must contain a statement with respect to reuse; and
    (5) Are fully informed regarding their suitability for 
transplantation and home dialysis.

[[Page 149]]

    (b) Standard: participation in planning. All patients treated in the 
facility:
    (1) Are afforded the opportunity to participate in the planning of 
their medical treatment and to refuse to participate in experimental 
research;
    (2) Are transferred or discharged only for medical reasons or for 
the patient's welfare or that of other patients, or for nonpayment of 
fees (except as prohibited by title XVIII of the Social Security Act), 
and are given advance notice to ensure orderly transfer or discharge.
    (c) Standard: respect and dignity. All patients are treated with 
consideration, respect, and full recognition of their individuality and 
personal needs, including the need for privacy in treatment. Provision 
is made for translators where a significant number of patients exhibit 
language barriers.
    (d) Standard: confidentiality. All patients are ensured confidential 
treatment of their personal and medical records, and may approve or 
refuse release of such records to any individual outside the facility, 
except in case of their transfer to another health care institution or 
as required by Federal, State, or local law and the Secretary for proper 
administration of the program.
    (e) Standard: grievance mechanism. All patients are encouraged and 
assisted to understand and exercise their rights. Grievances and 
recommended changes in policies and services may be addressed to 
facility staff, administration, the network organization, and agencies 
or regulatory bodies with jurisdiction over the facility, through any 
representative of the patient's choice, without restraint or 
interference, and without fear of discrimination or reprisal.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 51 FR 30362, Aug. 26, 1986; 52 FR 36934, Oct. 2, 1987]



Sec. 405.2139  Condition: Medical records.

    The ESRD facility maintains complete medical records on all patients 
(including self-dialysis patients within the self-dialysis unit and home 
dialysis patients whose care is under the supervision of the facility) 
in accordance with accepted professional standards and practices. A 
member of the facility's staff is designated to serve as supervisor of 
medical records services, and ensures that all records are properly 
documented, completed, and preserved. The medical records are completely 
and accurately documented, readily available, and systematically 
organized to facilitate the compilation and retrieval of information.
    (a) Standard: medical record. Each patient's medical record contains 
sufficient information to identify the patient clearly, to justify the 
diagnosis and treatment, and to document the results accurately. All 
medical records contain the following general categories of information: 
Documented evidence of assessment of the needs of the patient, whether 
the patient is treated with a reprocessed hemodialyzer, of establishment 
of an appropriate plan of treatment, and of the care and services 
provided (see Sec. 405.2137(a) and (b)); evidence that the patient was 
informed of the results of the assessment described in 
Sec. 405.2138(a)(5); identification and social data; signed consent 
forms referral information with authentication of diagnosis; medical and 
nursing history of patient; report(s) of physician examination(s); 
diagnostic and therapeutic orders; observations, and progress notes; 
reports of treatments and clinical findings; reports of laboratory and 
other diagnostic tests and procedures; and discharge summary including 
final diagnosis and prognosis.
    (b) Standard: protection of medical record information. The ESRD 
facility safeguards medical record information against loss, 
destruction, or unauthorized use. The ESRD facility has written policies 
and procedures which govern the use and release of information contained 
in medical records. Written consent of the patient, or of an authorized 
person acting in behalf of the patient, is required for release of 
information not provided by law. Medical records are made available 
under stipulation of confidentiality for inspection by authorized agents 
of the Secretary, as required for administration of the ESRD program 
under Medicare.
    (c) Standard: medical records supervisor. A member of the ESRD 
facility's staff is designated to serve as supervisor of the facility's 
medical records service. The functions of the medical

[[Page 150]]

records supervisor include, but are not limited to, the following: 
Ensuring that the records are documented, completed, and maintained in 
accordance with accepted professional standards and practices; 
safeguarding the confidentiality of the records in accordance with 
established policy and legal requirements; ensuring that the records 
contain pertinent medical information and are filed for easy retrieval. 
When necessary, consultation is secured from a qualified medical record 
practitioner.
    (d) Standard: Completion of medical records and centralization of 
clinical information. Current medical records and those of discharged 
patients are completed promptly. All clinical information pertaining to 
a patient is centralized in the patient's medical record. Provision is 
made for collecting and including in the medical record medical 
information generated by self-dialysis patients. Entries concerning the 
daily dialysis process may either be completed by staff, or be completed 
by trained self-dialysis patients, trained home dialysis patients or 
trained assistants and countersigned by staff.
    (e) Standard: retention and preservation of records. Medical records 
are retained for a period of time not less than that determined by the 
State statute governing records retention or statute of limitations; or 
in the absence of a State statute, 5 years from the date of discharge; 
or, in the case of a minor, 3 years after the patient becomes of age 
under State law, whichever is longest.
    (f) Standard: location and facilities. The facility maintains 
adequate facilities, equipment, and space conveniently located, to 
provide efficient processing of medical records (e.g., reviewing, 
filing, and prompt retrieval) and statistical medical information (e.g., 
required abstracts, reports, etc.).
    (g) Standard: transfer of medical information. The facility provides 
for the interchange of medical and other information necessary or useful 
in the care and treatment of patients transferred between treating 
facilities, or in determining whether such patients can be adequately 
cared for otherwise than in either of such facilities.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 48952, Oct. 19, 1978; 52 FR 36934, Oct. 2, 1987]



Sec. 405.2140  Condition: Physical environment.

    The physical environment in which ESRD services are furnished 
affords a functional, sanitary, safe, and comfortable setting for 
patients, staff, and the public.
    (a) Standard: building and equipment. The physical structure in 
which ESRD services are furnished is constructed, equipped, and 
maintained to insure the safety of patients, staff, and the public.
    (1) Fire extinguishers are conveniently located on each floor of the 
facility and in areas of special hazard. Fire regulations and fire 
management procedures are prominently posted and properly followed.
    (2) All electrical and other equipment used in the facility is 
maintained free of defects which could be a potential hazard to patients 
or personnel. There is established a planned program of preventive 
maintenance of equipment used in dialysis and related procedures in the 
facility.
    (3) The areas used by patients are maintained in good repair and 
kept free of hazards such as those created by damaged or defective parts 
of the building.
    (4) [Reserved]
    (5)(i) The ESRD facility must employ the water quality requirements 
listed in paragraph (a)(5)(ii) of this section developed by the 
Association for the Advancement of Medical Instrumentation (AAMI) and 
published in ``Hemodialysis Systems,'' second edition, which is 
incorporated by reference.
    (ii) Required water quality requirements are those listed in 
sections 3.2.1, Water Bacteriology; 3.2.2, Maximum Level of Chemical 
Contaminants; and in Appendix B: Guideline for Monitoring Purity of 
Water Used for Hemodialysis as B1 through B5.
    (iii) Incorporation by reference of the AAMI's ``Hemodialysis 
Systems,'' second edition, 1992, was approved by the Director of the 
Federal Register in accordance with 5 U.S.C. 552(a) and 1 CFR

[[Page 151]]

part 51.1 If any changes in ``Hemodialysis Systems,'' second 
edition, are also to be incorporated by reference, a notice to that 
effect will be published in the Federal Register.
---------------------------------------------------------------------------

    \1\ The publication entitled ``Hemodialysis Systems,'' second 
edition, 1992, is available for inspection at the CMS Information 
Resource Center, 7500 Security Boulevard, Baltimore, MD 21244-1850 and 
the Office of the Federal Register, 800 North Capitol Street, NW., Suite 
700, Washington, DC. Copies may be purchased from the Association for 
the Advancement of Medical Instrumentation, 3300 Washington Boulevard, 
Suite 400, Arlington, VA 22201-4598.
---------------------------------------------------------------------------

    (b) Standard: favorable environment for patients. The facility is 
maintained and equipped to provide a functional sanitary, and 
comfortable environment with an adequate amount of well-lighted space 
for the service provided.
    (1) There are written policies and procedures in effect for 
preventing and controlling hepatitis and other infections. These 
policies include, but are not limited to, appropriate procedures for 
surveillance and reporting of infections, housekeeping, handling and 
disposal of waste and contaminants, and sterilization and disinfection, 
including the sterilization and maintenance of equipment where dialysis 
supplies are reused, there are written policies and procedures covering 
the rinsing, cleaning, disinfection, preparation and storage of reused 
items which conform to requirements for reuse in Sec. 405.2150.
    (2) Treatment areas are designed and equipped to provide adequate 
and safe dialysis therapy, as well as privacy and comfort for patients. 
The space for treating each patient is sufficient to accomodate 
medically needed emergency equipment and staff and to ensure that such 
equipment and staff can reach the patient in an emergency. There is 
sufficient space in units for safe storage of self-dialysis supplies.
    (3) There is a nursing/monitoring station from which adequate 
surveillance of patients receiving dialysis services can be made.
    (4) Heating and ventilation systems are capable of maintaining 
adequate and comfortable temperatures.
    (5) Each ESRD facility utilizing a central-batch delivery system 
provides, either on the premises or through affiliation agreement or 
arrangement (see Sec. 405.2160) sufficient individual delivery systems 
for the treatment of any patient requiring special dialysis solutions.
    (c) Standard contamination prevention. The facility employs 
appropriate techniques to prevent cross-contamination between the unit 
and adjacent hospital or public areas including, but not limited to, 
food service areas, laundry, disposal of solid waste and blood-
contaminated equipment, and disposal of contaminants into sewage 
systems. Waste storage and disposal are carried out in accordance with 
applicable local laws and accepted public health procedures. The written 
patient care policies (see Sec. 405.2136(f)(1)) specify the functions 
that are carried out by facility personnel and by the self-dialysis 
patients with respect to contamination prevention. Where dialysis 
supplies are reused, records are maintained that can be used to 
determine whether established procedures covering the rinsing, cleaning, 
disinfection, preparation and storage of reused items, conform to 
requirements for reuse in Sec. 405.2150.
    (d) Standard: emergency preparedness. Written policies and 
procedures specifically define the handling of emergencies which may 
threaten the health or safety of patients. Such emergencies would exist 
during a fire or natural disaster or during functional failures in 
equipment. Specific emergency preparedness procedures exist for 
different kinds of emergencies. These are reviewed and tested at least 
annually and revised as necessary by, or under the direction of, the 
chief executive officer. All personnel are knowledgeable and trained in 
their respective roles in emergency situations.
    (1) There is an established written plan for dealing with fire and 
other emergencies which, when necessary, is developed in cooperation 
with fire and other expert personnel.
    (2) All personnel are trained, as part of their employment 
orientation, in all aspects of preparedness for any emergency or 
disaster. The emergency preparedness plan provides for orientation and 
regular training and periodic drills for all personnel in all procedures 
so

[[Page 152]]

that each person promptly and correctly carries out a specified role in 
case of an emergency.
    (3) There is available at all times on the premises a fully equipped 
emergency tray, including emergency drugs, medical supplies, and 
equipment, and staff are trained in its use.
    (4) The staff is familiar with the use of all dialysis equipment and 
procedures to handle medical emergencies.
    (5) Patients are trained to handle medical and nonmedical 
emergencies. Patients must be fully informed regarding what to do, where 
to go, and whom to contact if a medical or nonmedical emergency occurs.

(Secs. 1102, 1871, 1881(b), Social Security Act; 42 U.S.C. 1302, 1395hh, 
1395rr(b))

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 48952, Oct. 19, 1978; 45 FR 24839, Apr. 10, 1980; 52 
FR 36934, Oct. 2, 1987; 60 FR 48043, Sept. 18, 1995]



Sec. 405.2150  Condition: Reuse of hemodialyzers and other dialysis supplies.

    An ESRD facility that reuses hemodialyzers and other dialysis 
supplies meets the requirements of this section. Failure to meet any of 
paragraphs (a) through (c) of this section constitutes grounds for 
denial of payment for the dialysis treatment affected and termination 
from participation in the Medicare program.
    (a) Standard: Hemodialyzers. If the ESRD facility reuses 
hemodialyzers, it conforms to the following:
    (1) Reuse guidelines. Voluntary guidelines adopted by the AAMI 
(``Reuse of Hemodialyzers,'' second edition). Incorporation by reference 
of the AAMI's ``Reuse of Hemodialyzers,'' second edition, 1993, was 
approved by the Director of the Federal Register in accordance with 5 
U.S.C. 552(a) and 1 CFR part 51.1 If any changes in ``Reuse 
of Hemodialyzers,'' second edition, are also to be incorporated by 
reference, a notice to that effect will be published in the Federal 
Register.
---------------------------------------------------------------------------

    \1\ The publication entitled ``Reuse of Hemodialyzers,'' second 
edition, 1993, is available for inspection at the CMS Information 
Resources Center, 7500 Security Boulevard, Baltimore, MD 21244-1850 and 
the Office of the Federal Register, 800 North Capitol Street, NW., Suite 
700, Washington, DC. Copies may be purchased from the Association for 
the Advancement of Medical Instrumentation, 3300 Washington Boulevard, 
Suite 400, Arlington, VA 22201-4598.
---------------------------------------------------------------------------

    (2) Procedure for chemical germicides. To prevent any risk of 
dialyzer membrane leaks due to the combined action of different chemical 
germicides, dialyzers are exposed to only one chemical germicide during 
the reprocessing procedure. If a dialyzer is exposed to a second 
germicide, the dialyzer must be discarded.
    (3) Surveillance of patient reactions. In order to detect bacteremia 
and to maintain patient safety when unexplained events occur, the 
facility--
    (i) Takes appropriate blood cultures at the time of a febrile 
response in a patient; and
    (ii) If pyrogenic reactions, bacteremia, or unexplained reactions 
associated with ineffective reprocessing are identified, terminates 
reuse of hemodialyzers in that setting and does not continue reuse until 
the entire reprocessing system has been evaluated.
    (b) Standard: Transducer filters. To control the spread of 
hepatitis, transducer filters are changed after each dialysis treatment 
and are not reused.
    (c) Standard: Bloodlines. If the ESRD facility reuses bloodlines, it 
must--
    (1) Limit the reuse of bloodlines to the same patient;
    (2) Not reuse bloodlines labeled for ``single use only'';
    (3) Reuse only bloodlines for which the manufacturer's protocol for 
reuse has been accepted by the Food and Drug Administration (FDA) 
pursuant to the premarket notification (section 510(k)) provision of the 
Food, Drug, and Cosmetic Act; and
    (4) Follow the FDA-accepted manufacturer's protocol for reuse of 
that bloodline.

[52 FR 36935, Oct. 2, 1987, as amended at 55 FR 18335, May 2, 1990; 60 
FR 48044, Sept. 18, 1995]



Sec. 405.2160  Condition: Affiliation agreement or arrangement.

    (a) A renal dialysis facility and a renal dialysis center (see 
Sec. 405.2102(e)(2)) have in effect an affiliation agreement or 
arrangement with

[[Page 153]]

each other, in writing, for the provision of inpatient care and other 
hospital services.
    (b) The affiliation agreement or arrangement provides the basis for 
effective working relationships under which inpatient hospital care or 
other hospital services are available promptly to the dialysis 
facility's patients when needed. The dialysis facility has in its files 
documentation from the renal dialysis center to the effect that patients 
from the dialysis facility will be accepted and treated in emergencies. 
There are reasonable assurances that:
    (1) Transfer or referral of patients will be effected between the 
renal dialysis center and the dialysis facility whenever such transfer 
or referral is determined as medically appropriate by the attending 
physician, with timely acceptance and admission;
    (2) There will be interchange, within 1 working day, of the patient 
long-term program and patient care plan, and of medical and other 
information necessary or useful in the care and treatment of patients 
transferred or referred between the facilities, or in determining 
whether such patients can be adequately cared for otherwise than in 
either of such facilities; and
    (3) Security and accountability for patients' personal effects are 
assured.



Sec. 405.2161  Condition: Director of a renal dialysis facility or renal dialysis center.

    Treatment is under the general supervision of a Director who is a 
physician. The physician-director need not devote full time as Director 
but is responsible for planning, organizing, conducting, and directing 
the professional ESRD services and must devote sufficient time to 
carrying out these responsibilities. The director may also serve as the 
Chief Executive Officer of the facility.
    (a) Standard: qualifications. The director of a dialysis facility is 
a qualified physician-director. (See Sec. 405.2102.)
    (b) Standard: responsibilities. The responsibilities of the 
physician-director include but are not limited to the following:
    (1) Participating in the selection of a suitable treatment modality, 
i.e., transplantation or dialysis, and dialysis setting, for all 
patients;
    (2) Assuring adequate training of nurses and technicians in dialysis 
techniques;
    (3) Assuring adequate monitoring of the patient and the dialysis 
process, including, for self-dialysis patients, assuring periodic 
assessment of patient performance of dialysis tasks;
    (4) Assuring the development and availability of a patient care 
policy and procedures manual and its implementation. As a minimum, the 
manual describes the types of dialysis used in the facility and the 
procedures followed in performance of such dialysis; hepatitis 
prevention and procedures for handling an individual with hepatitis; and 
a disaster preparedness plan (e.g., patient emergency, fire, flood); and
    (5) When self-dialysis training or home dialysis training is 
offered, assuring that patient teaching materials are available for the 
use of all trainees during training and at times other than during the 
dialysis procedure.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 48952, Oct. 19, 1978; 51 FR 30362, Aug. 26, 1986]



Sec. 405.2162  Condition: Staff of a renal dialysis facility or renal dialysis center.

    Properly trained personnel are present in adequate numbers to meet 
the needs of the patients, including those arising from medical and 
nonmedical emergencies.
    (a) Standard: Registered nurse. The dialysis facility employs at 
least one full time qualified nurse responsible for nursing service. 
(See Sec. 405.2102.)
    (b) Standard: On-duty personnel. Whenever patients are undergoing 
dialysis:
    (1) One currently licensed health professional (e.g., physician, 
registered nurse, or licensed practical nurse) experienced in rendering 
ESRD care is on duty to oversee ESRD patient care;
    (2) An adequate number of personnel are present so that the patient/
staff ratio is appropriate to the level of dialysis care being given and 
meets the needs of patients; and
    (3) An adequate number of personnel are readily available to meet 
medical and nonmedical needs.

[[Page 154]]

    (c) Standard: Self-care dialysis training personnel. If the facility 
offers self-care dialysis training, a qualified nurse is in charge of 
such training (see Sec. 405.2102.)

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 43 FR 48953, Oct. 19, 1978; 51 FR 30362, Aug. 26, 1986]



Sec. 405.2163  Condition: Minimal service requirements for a renal dialysis facility or renal dialysis center.

    The facility must provide dialysis services, as well as adequate 
laboratory, social, and dietetic services to meet the needs of the ESRD 
patient.
    (a) Standard: Outpatient dialysis services--(1) Staff-assisted 
dialysis services. The facility must provide all necessary institutional 
dialysis services and staff required in performing the dialysis.
    (2) Self-dialysis services. If the facility offers self-dialysis 
services, it must provide all medically necessary supplies and equipment 
and any other service specified in the facility's patient care policies.
    (b) Standard: Laboratory services. The dialysis facility makes 
available laboratory services (other than the specialty of tissue 
pathology and histocompatibility testing), to meet the needs of the ESRD 
patient. All laboratory services must be performed by an appropriately 
certified laboratory in accordance with part 493 of this chapter. If the 
renal dialysis facility furnishes its own laboratory services, it must 
meet the applicable requirements established for certification of 
laboratories found in part 493 of this chapter. If the facility does not 
provide laboratory services, it must make arrangements to obtain these 
services from a laboratory certified in the appropriate specialties and 
subspecialties of service in accordance with the requirements of part 
493 of this chapter.
    (c) Standard: Social services. Social services are provided to 
patients and their families and are directed at supporting and 
maximizing the social functioning and adjustment of the patient. Social 
services are furnished by a qualified social worker (Sec. 405.2102) who 
has an employment or contractual relationship with the facility. The 
qualified social worker is responsible for conducting psychosocial 
evaluations, participating in team review of patient progress and 
recommending changes in treatment based on the patient's current 
psychosocial needs, providing casework and groupwork services to 
patients and their families in dealing with the special problems 
associated with ESRD, and identifying community social agencies and 
other resources and assisting patients and families to utilize them.
    (d) Standard: Dietetic services. Each patient is evaluated as to his 
nutritional needs by the attending physician and by a qualified 
dietician (Sec. 405.2102) who has an employment or contractual 
relationship with the facility. The dietician, in consultation with the 
attending physician, is responsible for assessing the nutritional and 
dietetic needs of each patient, recommending therapeutic diets, 
counseling patients and their families on prescribed diets, and 
monitoring adherence and response to diets.
    (e) Standard: Self-dialysis support services. The renal dialysis 
facility or center furnishing self-dialysis training upon completion of 
the patient's training, furnishes (either directly, under agreement or 
by arrangement with another ESRD facility) the following services:
    (1) Surveillance of the patient's home adaptation, including 
provisions for visits to the home or the facility;
    (2) Consultation for the patient with a qualified social worker and 
a qualified dietitian;
    (3) A recordkeeping system which assures continuity of care;
    (4) Installation and maintenance of equipment;
    (5) Testing and appropriate treatment of the water; and
    (6) Ordering of supplies on an ongoing basis.
    (f) Standard: Participation in recipient registry. The dialysis 
facility or center participates in a patient registry program with an 
OPO designated or redesignated under part 486, subpart G of this 
chapter, for patients who are awaiting cadaveric donor transplantation.
    (g) Use of EPO at home: Patient selection. The dialysis facility, or 
the physician responsible for all dialysis-related services furnished to 
the patient, must

[[Page 155]]

make a comprehensive assessment that includes the following:
    (1) Pre-selection monitoring. The patient's hematocrit (or 
hemoglobin), serum iron, transferrin saturation, serum ferritin, and 
blood pressure must be measured.
    (2) Conditions the patient must meet. The assessment must find that 
the patient meets the following conditions:
    (i) On or after July 1, 1991, is a home dialysis patient or, on or 
after January 1, 1994, is a dialysis patient;
    (ii) Has a hematocrit (or comparable hemoglobin level) that is as 
follows:
    (A) For a patient who is initiating EPO treatment, no higher than 30 
percent unless there is medical documentation showing the need for EPO 
despite a hematocrit (or comparable hemoglobin level) higher than 30 
percent. (Patients with severe angina, severe pulmonary distress, or 
severe hypertension may require EPO to prevent adverse symptoms even if 
they have higher hematocrit or hemoglobin levels.)
    (B) For a patient who has been receiving EPO from the facility or 
the physician, between 30 and 33 percent.
    (iii) Is under the care of--
    (A) A physician who is responsible for all dialysis-related services 
and who prescribes the EPO and follows the drug labeling instructions 
when monitoring the EPO home therapy; and
    (B) A renal dialysis facility that establishes the plan of care and 
monitors the progress of the home EPO therapy.
    (3) Conditions the patient or the patient's caregiver must meet. The 
assessment must find that the patient or a caregiver who assists the 
patient in performing self-dialysis meets the following conditions:
    (i) Is trained by the facility to inject EPO and is capable of 
carrying out the procedure.
    (ii) Is capable of reading and understanding the drug labeling.
    (iii) Is trained in, and capable of observing, aseptic techniques.
    (4) Care and storage of drug. The assessment must find that EPO can 
be stored in the patient's residence under refrigeration and that the 
patient is aware of the potential hazard of a child's having access to 
the drug and syringes.
    (h) Use of EPO at home: Responsibilities of the physician or the 
dialysis facility. The patient's physician or dialysis facility must--
    (1) Develop a protocol that follows the drug label instructions;
    (2) Make the protocol available to the patient to ensure safe and 
effective home use of EPO; and
    (3) Through the amounts prescribed, ensure that the drug ``on hand'' 
at any time does not exceed a 2-month supply.

[43 FR 48953, Oct. 19, 1978, as amended at 51 FR 30362, Aug. 26, 1986; 
57 FR 7134, Feb. 28, 1992; 59 FR 1284, Jan. 10, 1994; 59 FR 26958, May 
25, 1994; 59 FR 46513, Sept. 8, 1994; 61 FR 19743, May 2, 1996]



Sec. 405.2164  Conditions for coverage of special purpose renal dialysis facilities.

    (a) A special purpose renal dialysis facility must comply with all 
conditions for coverage for renal dialysis facilities specified in 
Secs. 405.2130 through 405.2164, with the exception of Secs. 405.2134, 
and 405.2137 that relate to participation in the network activities and 
patient long-term programs.
    (b) A special purpose renal dialysis facility must consult with a 
patient's physician to assure that care provided in the special purpose 
dialysis facility is consistent with the patient's long-term program and 
patient care plan required under Sec. 405.2137.
    (c) The period of approval for a special purpose renal dialysis 
facility may not exceed 8 calendar months in any calendar year.
    (d) A special purpose renal dialysis facility may provide services 
only to those patients who would otherwise be unable to obtain 
treatments in the geographical areas served by the facility.

[48 FR 21283, May 11, 1983, as amended at 51 FR 30362, Aug. 26, 1986]



Sec. 405.2170  Condition: Director of a renal transplantation center.

    The renal transplantation center is under the general supervision of 
a qualified transplantation surgeon (Sec. 405.2102) or a qualified 
physician-director (Sec. 405.2102), who need not serve full time. This 
physician is responsible for planning, organizing, conducting, and 
directing the renal transplantation center and devotes sufficient time 
to

[[Page 156]]

carry out these responsibilities, which include but are not limited to 
the following:
    (a) Participating in the selection of a suitable treatment modality 
for each patient.
    (b) Assuring adequate training, of nurses in the care of transplant 
patients.
    (c) Assuring that tissue typing and organ procurement services are 
available either directly or under arrangement.
    (d) Assuring that transplantation surgery is performed under the 
direct supervision of a qualified transplantation surgeon.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 51 FR 30362, Aug. 26, 1986; 59 FR 46514, Sept. 8, 1994]



Sec. 405.2171  Condition: Minimal service requirements for a renal transplantation center.

    Kidney transplantation is furnished directly by a hospital that is 
participating as a provider of services in the Medicare program and is 
approved by CMS as a renal transplantation center. The renal 
transplantation center is under the overall direction of a hospital 
administrator and medical staff; if operated by an organizational 
subsidiary, it is under the direction of an administrator and medical 
staff member (or committee) who are directly responsible to the hospital 
administrator and medical staff, respectively. Patients are accepted for 
transplantation only on the order of a physician and their care 
continues under the supervision of a physician.
    (a) Standard: participation in recipient registry. The renal 
transplantation center participates in a patient registry program with 
an OPO certified or recertified under part 485, subpart D of this 
chapter for patients who are awaiting cadaveric donor transplantation.
    (b) Standard: social services. Social services are provided to 
patients and their families and are directed at supporting and 
maximizing the social functioning and adjustment of the patient. Social 
services are furnished by a qualified social worker (Sec. 405.2102) who 
has an employment or contractual relationship with the facility. The 
qualified social worker is responsible for conducting psychosocial 
evaluations, participating in team review of patient progress and 
recommending changes in treatment based on the patient's current 
psychosocial needs, providing casework and groupwork services to 
patients and their families in dealing with the special problems 
associated with ESRD, and identifying community social agencies and 
other resources and assisting patients and families to utilize them.
    (c) Standard: dietetic services. Each patient is evaluated as to his 
nutritional needs by the attending physician and a qualified dietician 
(Sec. 405.2102) who has an employment or contractual relationship with 
the facility. The dietician, in consultation with the attending 
physician, is responsible for assessing the nutritional and dietetic 
needs of each patient, recommending therapeutic diets, counseling 
patients and their families on prescribed diets, and monitoring 
adherence and response to diets.
    (d) Standard: Laboratory services: (1) The renal transplantation 
center makes available, directly or under arrangements, laboratory 
services to meet the needs of ESRD patients. Laboratory services are 
performed in a laboratory facility certified in accordance with part 493 
of this chapter.
    (2) Laboratory services for crossmatching of recipient serum and 
donor lymphocytes for pre-formed antibodies by an acceptable technique 
are available on a 24-hour emergency basis.
    (e) Standard: Organ procurement. A renal transplantation center 
using the services of an organ procurement organization designated or 
redesignated under part 485, subpart D of this chapter to obtain donor 
organs has a written agreement covering these services. The renal 
transplantation center agrees to notify CMS in writing within 30 days of 
the termination of the agreement.

[41 FR 22511, June 3, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, 
as amended at 51 FR 30362, Aug. 26, 1986; 53 FR 6548, Mar. 1, 1988; 57 
FR 7134, Feb. 28, 1992; 59 FR 46514, Sept. 8, 1994]

[[Page 157]]



Sec. 405.2180  Termination of Medicare coverage.

    (a) Except as provided in Sec. 405.2181, failure of a supplier of 
ESRD services to meet one or more of the conditions for coverage set 
forth in this subpart U will result in termination of Medicare coverage 
of the services furnished by that supplier.
    (b) If termination of coverage is based solely on a supplier's 
failure to participate in network activities and pursue network goals, 
as required by Sec. 405.2134, coverage may be reinstated when CMS 
determines that the supplier is making reasonable and appropriate 
efforts to meet that condition.
    (c) If termination of coverage is based on failure to meet any of 
the other conditions specified in this subpart, coverage will not be 
reinstated until CMS finds that the reason for termination has been 
removed and there is reasonable assurance that it will not recur.

[53 FR 36277, Sept. 19, 1988]



Sec. 405.2181  Alternative sanctions.

    (a) Basis for application of alternative sanctions. CMS may, as an 
alternative to termination of Medicare coverage, impose one of the 
sanctions specified in paragraph (b) of this section if CMS finds that--
    (1) The supplier fails to participate in the activities and pursue 
the goals of the ESRD network that is designated to encompass its 
geographic area; and
    (2) This failure does not jeopardize patient health and safety.
    (b) Alternative sanctions. The alternative sanctions that CMS may 
apply in the circumstances specified in paragraph (a) of this section 
include the following:
    (1) Denial of payment for services furnished to patients first 
accepted for care after the effective date of sanction as specified in 
the sanction notice.
    (2) Reduction of payments, for all ESRD services furnished by the 
supplier, by 20 percent for each 30-day period after the effective date 
of sanction.
    (3) Withholding of all payments, without interest, for all ESRD 
services furnished by the supplier to Medicare beneficiaries.
    (c) Duration of sanction. An alternative sanction remains in effect 
until CMS finds that the supplier is in substantial compliance with the 
requirement to cooperate in the network plans and goals, or terminates 
coverage of the supplier's services for lack of compliance.

[53 FR 36277, Sept. 19, 1988]



Sec. 405.2182  Notice of sanction and appeal rights: Termination of coverage.

    (a) Notice of sanction. CMS gives the supplier and the general 
public notice of sanction and of the effective date of the sanction. The 
effective date of the sanction is at least 30 days after the date of the 
notice.
    (b) Appeal rights. Termination of Medicare coverage of a supplier's 
ESRD services because the supplier no longer meets the conditions for 
coverage of its services is an initial determination appealable under 
part 498 of this chapter.

[53 FR 36277, Sept. 19, 1988]



Sec. 405.2184  Notice of appeal rights: Alternative sanctions.

    If CMS proposes to apply a sanction specified in Sec. 405.2181(b), 
the following rules apply:
    (a) CMS gives the facility notice of the proposed sanction and 15 
days in which to request a hearing.
    (b) If the facility requests a hearing, CMS provides an informal 
hearing by a CMS official who was not involved in making the appealed 
decision.
    (c) During the informal hearing, the facility--
    (1) May be represented by counsel;
    (2) Has access to the information on which the allegation was based; 
and
    (3) May present, orally or in writing, evidence and documentation to 
refute the finding of failure to participate in network activities and 
pursue network goals.
    (d) If the written decision of the informal hearing supports 
application of the alternative sanction, CMS provides the facility and 
the public, at least 30 days before the effective date of the sanction, 
with a written notice that

[[Page 158]]

specifies the effective date and the reasons for the sanction.

[53 FR 36277, Sept. 19, 1988]

Subparts V-W [Reserved]



  Subpart X--Rural Health Clinic and Federally Qualified Health Center 
                                Services

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 43 FR 8261, Mar. 1, 1978, unless otherwise noted.



Sec. 405.2400  Basis.

    Subpart X is based on the provisions of the following sections of 
the Act: Section 1833 sets forth the amounts of payment for 
supplementary medical insurance services. Section 1861(aa) sets forth 
the rural health clinic services and Federally qualified health center 
services covered by the Medicare program.

[60 FR 63176, Dec. 8, 1995]



Sec. 405.2401  Scope and definitions.

    (a) Scope. This subpart establishes the requirements for coverage 
and reimbursement of rural health clinic and Federally qualified health 
center services under Medicare.
    (b) Definitions. As used in this subpart, unless the context 
indicates otherwise:
    Act means the Social Security Act.
    Allowable costs means costs that are incurred by a clinic or center 
and are reasonable in amount and proper and necessary for the efficient 
delivery of rural health clinic and Federally qualified health center 
services.
    Beneficiary means an individual enrolled in the Supplementary 
Medical Insurance program for the Aged and Disabled (part of title XVIII 
of the Act).
    Coinsurance means that portion of the clinic's charge for covered 
services for which the beneficiary is liable in addition to the 
deductible.
    Carrier means an organization that has a contract with the Secretary 
to administer the benefits covered by this subpart.
    Covered services means items or services for which the beneficiary 
is entitled to have payment made on his or her behalf under this 
subpart.
    Deductible means:
    (1) The first $100 of expenses incurred by the beneficiary during 
any calendar year for items and services covered under Part B of title 
XVIII; and
    (2) The expenses incurred for the first 3 pints of blood or 3 units 
of packed red blood cells furnished to a beneficiary during any calendar 
year. (See Secs. 410.160 and 410.161 of this chapter for greater 
detail.)
    Federally qualified health center (FQHC) means an entity that has 
entered into an agreement with CMS to meet Medicare program requirements 
under Secs. 405.2434 and--
    (1) Is receiving a grant under section 329, 330, or 340 of the 
Public Health Service Act, or is receiving funding from such a grant 
under a contract with the recipient of such a grant and meets the 
requirements to receive a grant under section 329, 330 or 340 of the 
Public Health Service Act;
    (2) Based on the recommendation of the PHS, is determined by CMS to 
meet the requirements for receiving such a grant;
    (3) Was treated by CMS, for purposes of part B, as a comprehensive 
federally funded health center (FFHC) as of January 1, 1990; or
    (4) Is an outpatient health program or facility operated by a tribe 
or tribal organizations under the Indian Self-Determination Act or by an 
Urban Indian organization receiving funds under title V of the Indian 
Health Care Improvement Act.
    CMS stands for Centers for Medicare & Medicaid Services.
    Intermittent nursing care means a medically predictable need for 
nursing care from time to time, but usually not less frequently than 
once every 60 days.
    Nurse-midwife means a registered professional nurse who meets the 
following requirements:
    (1) Is currently licensed to practice in the State as a registered 
professional nurse.
    (2) Is legally authorized under State law or regulations to practice 
as a nurse-midwife.

[[Page 159]]

    (3) Except as provided in paragraph (b)(10)(iv) of this section, has 
completed a program of study and clinical experience for nurse-midwives, 
as specified by the State.
    (4) If the State does not specify a program of study and clinical 
experience that nurse-midwives must complete to practice in that State, 
meets one of the following conditions:
    (i) Is currently certified as a nurse-midwife by the American 
College of Nurse-Midwives.
    (ii) Has satisfactorily completed a formal education program (of at 
least one academic year) that, upon completion, qualifies the nurse to 
take the certification examination offered by the American College of 
Nurse-Midwives.
    (iii) Has successfully completed a formal educational program for 
preparing registered nurses to furnish gynecological and obstetrical 
care to women during pregnancy, delivery, and the postpartum period, and 
care to normal newborns, and was practicing as a nurse-midwife for a 
total of 12 months during any 18-month period from August 8, 1976 to 
July 16, 1982.
    Nurse practitioner and physician assistant means individuals who 
meet the applicable education, training experience and other 
requirements of Sec. 491.2 of this chapter.
    Part-time nursing care means nursing care that is required on less 
than a full-time basis, that is, less than 8 hours a day or 40 hours a 
week.
    Physician means the following:
    (1) A doctor of medicine or osteopathy legally authorized to 
practice medicine and surgery by the State in which the function is 
performed.
    (2) Within limitations as to the specific services furnished, a 
doctor of dentistry or dental or oral surgery, a doctor of optometry, a 
doctor of podiatry or surgical chiropody or a chiropractor. (See section 
1861(r) of the Act for specific limitations.)
    (3) A resident (including residents as defined in Sec. 415.152 of 
this chapter who meet the requirements in Sec. 415.206(b) of this 
chapter for payment under the physician fee schedule).
    Reporting period means a period of 12 consecutive months specified 
by the intermediary as the period for which a clinic or center must 
report its costs and utilization. The first and last reporting periods 
may be less than 12 months.
    Rural health clinic means a facility that:
    (1) Has been determined by the Secretary to meet the requirements of 
section 1861(aa)(2) of the Act and part 491 of this chapter; and
    (2) Has filed an agreement with the Secretary in order to provide 
rural health clinic services under Medicare. (See Sec. 405.2402.)
    Secretary means the Secretary of Health and Human Services or his 
delegate.
    Visiting nurse services means part-time or intermittent nursing care 
and related medical supplies (other than drugs or biologicals) furnished 
by a registered nurse or licensed practical nurse to a homebound 
patient.

(Secs. 1102, 1833, 1861(aa), 1871, 1902(a)(13), Social Security Act; 49 
Stat. 647, 79 Stat. 302, 322, and 331, 91 Stat. 1485 (42 U.S.C. 1302, 
1395l, 1395hh, 1395x(aa), and 1396(a)(13))

[43 FR 8261, Mar. 1, 1978, as amended at 43 FR 30526, July 14, 1978; 47 
FR 21049, May 17, 1982; 47 FR 23448, May 28, 1982; 51 FR 41351, Nov. 14, 
1986; 57 FR 24975, June 12, 1992; 59 FR 26958, May 25, 1994; 60 FR 
63176, Dec. 8, 1995; 61 FR 14657, Apr. 3, 1996]



Sec. 405.2402  Basic requirements.

    (a) Certification by the State survey agency. The rural health 
clinic must be certified in accordance with part 491 of this chapter.
    (b) Acceptance of the clinic as qualified to furnish rural health 
clinic services. If the Secretary, after reviewing the survey agency 
recommendation and other evidence relating to the qualifications of the 
rural health clinic, determines that it meets the requirements of this 
subpart and of part 491 of this chapter, he will send the clinic:
    (1) Written notice of the determination; and
    (2) Two copies of the agreement to be filed as required by section 
1861(aa)(1) of the Act.
    (c) Filing of agreement by the rural health clinic. If the rural 
health clinic wishes to participate in the program, it must:

[[Page 160]]

    (1) Have both copies of the agreement signed by an authorized 
representative; and
    (2) File them with the Secretary.
    (d) Acceptance by the Secretary. If the Secretary accepts the 
agreement filed by the rural health clinic, he will return to the clinic 
one copy of the agreement, with a notice of acceptance specifying the 
effective date.
    (e) Duration of agreement. The agreement shall be for a term of one 
year and may be renewed annually by mutual consent of the Secretary and 
the rural health clinic.
    (f) Appeal rights. If the Secretary does not certify a rural health 
clinic, or refuses to enter into or renew an agreement, the facility is 
entitled to a hearing in accordance with part 498 of this chapter.

[43 FR 8261, Mar. 1, 1978, as amended at 52 FR 22454, June 12, 1987]



Sec. 405.2403  Content and terms of the agreement with the Secretary.

    (a) Under the agreement, the rural health clinic agrees to the 
following:
    (1) Maintaining compliance with conditions. The clinic agrees to 
maintain compliance with the conditions set forth in part 491 of this 
chapter and to report promptly to CMS any failure to do so.
    (2) Charges to beneficiaries. The clinic agrees not to charge the 
beneficiary or any other person for items and services for which the 
beneficiary is entitled to have payment made under the provisions of 
this part (or for which the beneficiary would have been entitled if the 
rural health clinic had filed a request for payment in accordance with 
Sec. 410.165 of this chapter), except for any deductible or coinsurance 
amounts for which the beneficiary is liable under Sec. 405.2410.
    (3) Refunds to beneficiaries. (i) The clinic agrees to refund as 
promptly as possible any money incorrectly collected from beneficiaries 
or from someone on their behalf.
    (ii) As used in this section, money incorrectly collected means sums 
collected in excess of the amount for which the beneficiary was liable 
under Sec. 405.2410. It includes amounts collected at a time when the 
beneficiary was believed not to be entitled to Medicare benefits but:
    (A) The beneficiary is later determined to have been entitled to 
Medicare benefits; and
    (B) The beneficiary's entitlement period falls within the time the 
rural health clinic's agreement with the Secretary is in effect.
    (4) Beneficiary treatment. (i) The clinic agrees to accept 
beneficiaries for care and treatment; and
    (ii) The clinic agrees not to impose any limitations on the 
acceptance of beneficiaries for care and treatment that it does not 
impose on all other persons.
    (b) Additional provisions. The agreement may contain any additional 
provisions that the Secretary finds necessary or desirable for the 
efficient and effective administration of the Medicare program.

[43 FR 8261, Mar. 1, 1978, as amended at 51 FR 41351, Nov. 14, 1986]



Sec. 405.2404  Terminations of agreements.

    (a) Termination by rural health clinic. (1) Notice to Secretary. If 
the clinic wishes to terminate its agreement it shall file with the 
Secretary a written notice stating the intended effective date of 
termination.
    (2) Action by the Secretary. (i) The Secretary may approve the date 
proposed by the clinic, or set a different date no later than 6 months 
after the date of the clinic's notice.
    (ii) The Secretary may approve a date which is less than 6 months 
after the date of notice if he determines that termination on that date 
would not:
    (A) Unduly disrupt the furnishing of services to the community 
serviced by the clinic; or
    (B) Otherwise interfere with the effective and efficient 
administration of the Medicare program.
    (3) Cessation of business. If a clinic ceases to furnish services to 
the community, that shall be deemed to be a voluntary termination of the 
agreement by the clinic, effective on the last day of business.
    (b) Termination by the Secretary. (1) Cause for termination. The 
Secretary may terminate an agreement if he determines that the rural 
health clinic:
    (i) No longer meets the conditions for certification under part 491 
of this chapter; or

[[Page 161]]

    (ii) Is not in substantial compliance with the provisions of the 
agreement, the requirements of this subpart, any other applicable 
regulations of this part, or any applicable provisions of title XVIII of 
the Act; or
    (iii) Has undergone a change of ownership.
    (2) Notice of termination. The Secretary will give notice of 
termination to the rural health clinic at least 15 days before the 
effective date stated in the notice.
    (3) Appeal by the rural health clinic. A rural health clinic may 
appeal the termination of its agreement in accordance with the 
provisions set forth in part 498 of this chapter.
    (c) Effect of termination. Payment will not be available for rural 
health clinic services furnished on or after the effective date of 
termination.
    (d) Notice to the public. Prompt notice of the date and effect of 
termination shall be given to the public, through publication in local 
newspapers:
    (1) By the clinic, after the Secretary has approved or set a 
termination date; or
    (2) By the Secretary, when he has terminated the agreement.
    (e) Conditions for reinstatement after termination of agreement by 
the Secretary. When an agreement with a rural health clinic is 
terminated by the Secretary, the rural health clinic may not file 
another agreement to participate in the Medicare program unless the 
Secretary:
    (1) Finds that the reason for the termination of the prior agreement 
has been removed; and
    (2) Is assured that the reason for the termination will not recur.

[43 FR 8261, Mar. 1, 1978, as amended at 52 FR 22454, June 12, 1987]



Sec. 405.2410  Application of Part B deductible and coinsurance.

    (a) Application of deductible. (1) Medicare payment for rural health 
clinic services begins only after the beneficiary has incurred the 
deductible.
    (2) Medicare payment for services covered under the Federally 
qualified health center benefit is not subject to the usual Part B 
deductible.
    (b) Application of coinsurance. (1) The beneficiary is responsible 
for a coinsurance amount which cannot exceed 20 percent of the clinic's 
reasonable customary charge for the covered service; and
    (2)(i) The beneficiary's deductible and coinsurance liability, with 
respect to any one item or service furnished by the rural health clinic, 
may not exceed a reasonable amount customarily charged by the clinic for 
that particular item or service.
    (ii) For any one item or service furnished by a Federally qualified 
health center, the coinsurance liability may not exceed 20 percent of a 
reasonable amount customarily charged by the center for that particular 
item or service.

[57 FR 24976, June 12, 1992]



Sec. 405.2411  Scope of benefits.

    (a) Rural health clinic services reimbursable under this subpart 
are:
    (1) The physicians' services specified in Sec. 405.2412;
    (2) Services and supplies furnished as an incident to a physician's 
professional service;
    (3) The nurse practitioner or physician assistant services specified 
in Sec. 405.2414;
    (4) Services and supplies furnished as an incident to a nurse 
practitioner's or physician assistant's services; and
    (5) Visiting nurse services.
    (b) Rural health clinic services are reimbursable when furnished to 
a patient at the clinic, at a hospital or other medical facility, or at 
the patient's place of residence.



Sec. 405.2412  Physicians' services.

    (a) Physicians' services are professional services that are 
performed by a physician at the clinic or are performed away from the 
clinic by a physician whose agreement with the clinic provides that he 
or she will be paid by the clinic for such services.



Sec. 405.2413  Services and supplies incident to a physician's services.

    (a) Services and supplies incident to a physician's professional 
service are reimbursable under this subpart if the service or supply is:
    (1) Of a type commonly furnished in physicians' offices;

[[Page 162]]

    (2) Of a type commonly rendered either without charge or included in 
the rural health clinic's bill;
    (3) Furnished as an incidental, although integral, part of a 
physician's professional services;
    (4) Furnished under the direct, personal supervision of a physician; 
and
    (5) In the case of a service, furnished by a member of the clinic's 
health care staff who is an employee of the clinic.
    (b) Only drugs and biologicals which cannot be self-administered are 
included within the scope of this benefit.



Sec. 405.2414  Nurse practitioner and physician assistant services.

    (a) Professional services are reimbursable under this subpart if:
    (1) Furnished by a nurse practitioner, physician assistant, nurse 
midwife, or specialized nurse practitioner who is employed by, or 
receives compensation from, the rural health clinic;
    (2) Furnished under the medical supervision of a physician;
    (3) Furnished in accordance with any medical orders for the care and 
treatment of a patient prepared by a physician;
    (4) They are of a type which the nurse practitioner, physician 
assistant, nurse midwife or specialized nurse practitioner who furnished 
the service is legally permitted to perform by the State in which the 
service is rendered; and
    (5) They would be covered if furnished by a physician.
    (b) The physician supervision requirement is met if the conditions 
specified in Sec. 491.8(b) of this chapter and any pertinent 
requirements of State law are satisfied.
    (c) The services of nurse practitioners, physician assistants, nurse 
midwives or specialized nurse practitioners are not covered if State law 
or regulations require that the services be performed under a 
physician's order and no such order was prepared.



Sec. 405.2415  Services and supplies incident to nurse practitioner and physician assistant services.

    (a) Services and supplies incident to a nurse practitioner's or 
physician assistant's services are reimbursable under this subpart if 
the service or supply is:
    (1) Of a type commonly furnished in physicians' offices;
    (2) Of a type commonly rendered either without charge or included in 
the rural health clinic's bill;
    (3) Furnished as an incidental, although integral part of 
professional services furnished by a nurse practitioner, physician 
assistant, nurse midwife, or specialized nurse practitioner;
    (4) Furnished under the direct, personal supervision of a nurse 
practitioner, physician assistant, nurse midwife, specialized nurse 
practitioner or a physician; and
    (5) In the case of a service, furnished by a member of the clinic's 
health care staff who is an employee of the clinic.
    (b) The direct personal supervision requirement is met in the case 
of a nurse practitioner, physician assistant, nurse midwife, or 
specialized nurse practitioner only if such a person is permitted to 
supervise such services under the written policies governing the rural 
health clinic.
    (c) Only drugs and biologicals which cannot be self-administered are 
included within the scope of this benefit.



Sec. 405.2416  Visiting nurse services.

    (a) Visiting nurse services are covered if:
    (1) The rural health clinic is located in an area in which the 
Secretary has determined that there is a shortage of home health 
agencies;
    (2) The services are rendered to a homebound individual;
    (3) The services are furnished by a registered nurse, licensed 
practical nurse, or licensed vocational nurse who is employed by, or 
receives compensation for the services from the clinic; and
    (4) The services are furnished under a written plan of treatment 
that is:
    (i) Established and reviewed at least every 60 days by a supervising 
physician of the rural health clinic or established by a nurse 
practitioner, physician assistant, nurse midwife, or specialized nurse 
practitioner and reviewed at least every 60 days by a supervising 
physician; and
    (ii) Signed by the nurse practitioner, physician assistant, nurse 
midwife,

[[Page 163]]

specialized nurse practitioner, or the supervising physician of the 
clinic.
    (b) The nursing care covered by this section includes:
    (1) Services that must be performed by a registered nurse, licensed 
practical nurse, or licensed vocational nurse if the safety of the 
patient is to be assured and the medically desired results achieved; and
    (2) Personal care services, to the extent covered under Medicare as 
home health services. These services include helping the patient to 
bathe, to get in and out of bed, to exercise and to take medications.
    (c) This benefit does not cover household and housekeeping services 
or other services that would constitute custodial care.
    (d) For purposes of this section, homebound means an individual who 
is permanently or temporarily confined to his or her place of residence 
because of a medical or health condition. The individual may be 
considered homebound if he or she leaves the place of residence 
infrequently. For this purpose, ``place of residence'' does not include 
a hospital or long term care facility.



Sec. 405.2417  Visiting nurse services: Determination of shortage of agencies.

    A shortage of home health agencies exists if the Secretary 
determines that the rural health clinic:
    (a) Is located in a county, parish, or similar geographic area in 
which there is no participating home health agency or adequate home 
health services are not available to patients of the rural health 
clinic;
    (b) Has (or expects to have) patients whose permanent residences are 
not within the area serviced by a participating home health agency; or
    (c) Has (or expects to have) patients whose permanent residences are 
not within a reasonable traveling distance, based on climate and 
terrain, of a participating home health agency.

               Federally Qualified Health Center Services

    Source: 57 FR 24978, June 12, 1992, unless otherwise noted.



Sec. 405.2430  Basic requirements.

    (a) Filing procedures. (1) In response to a request from an entity 
that wishes to participate in the Medicare program, CMS enters into an 
agreement with an entity when--
    (i) PHS recommends that the entity qualifies as a Federally 
qualified health center;
    (ii) The Federally qualified health center assures CMS that it meets 
the Federally qualified health center requirements specified in this 
subpart and part 491, as described in Sec. 405.2434(a); and
    (iii) The FQHC terminates other provider agreements, unless the FQHC 
assures CMS that it is not using the same space, staff and resources 
simultaneously as a physician's office or another type of provider or 
supplier. A corporate entity may own other provider types as long as the 
provider types are distinct from the FQHC.
    (2) CMS sends the entity a written notice of the disposition of the 
request.
    (3) When the requirement of paragraph (a)(1) of this section is 
satisfied, CMS sends the entity two copies of the agreement. The entity 
must sign and return both copies of the agreement to CMS.
    (4) If CMS accepts the agreement filed by the Federally qualified 
health center, CMS returns to the center one copy of the agreement with 
the notice of acceptance specifying the effective date (see 
Sec. 489.11), as determined under Sec. 405.2434.
    (b) Recommendations by PHS about Federally qualified health centers. 
(1) An entity must--
    (i) Meet the applicable requirements of the PHS Act, as specified in 
Sec. 405.2401(b); and
    (ii) Be recommended by PHS to CMS as a Federally qualified health 
center.
    (2) The PHS notifies CMS of entities that meet the requirements 
specified in Sec. 405.2401(b).
    (c) Provider-based and freestanding Federally qualified health 
centers. The requirements and benefits under Medicare for provider-based 
or freestanding Federally qualified health centers are the same, except 
that payment methodologies differ, as described in Sec. 405.2462.

[[Page 164]]

    (d) Appeals. An entity is entitled to a hearing in accordance with 
part 498 of this chapter when CMS fails to enter into an agreement with 
the entity.

[57 FR 24978, June 12, 1992, as amended at 61 FR 14657, Apr. 3, 1996]



Sec. 405.2434  Content and terms of the agreement.

    Under the agreement, the Federally qualified health center must 
agree to the following:
    (a) Maintain compliance with the requirements. (1) The Federally 
qualified health center must agree to maintain compliance with the 
Federally qualified health center requirements set forth in this subpart 
and part 491, except that the provisions of Sec. 491.3 do not apply.
    (2) Centers must promptly report to CMS any changes that result in 
noncompliance with any of these requirements.
    (b) Effective date of agreement. (1) Except as specified in 
paragraph (b)(2) of this section, the effective date of the agreement is 
the date CMS accepts the signed agreement, which assures that all 
Federal requirements are met.
    (2) For facilities that met all requirements on October 1, 1991, the 
effective date of the agreement can be October 1, 1991.
    (c) Charges to beneficiaries. (1) The beneficiary is responsible for 
payment of a coinsurance amount which is 20 percent of the amount of 
Part B payment made to the Federally qualified health center for the 
covered services. There is no coinsurance for a second or third opinion 
obtained in accordance with section 1164 of the Act or for pneumococcal 
vaccine and its administration.
    (2) The beneficiary is responsible for blood deductible expenses, as 
specified in Sec. 410.161.
    (3) The Federally qualified health center agrees not to charge the 
beneficiary (or any other person acting on behalf of a beneficiary) for 
any Federally qualified health center services for which the beneficiary 
is entitled to have payment made on his or her behalf by the Medicare 
program (or for which the beneficiary would have been entitled if the 
Federally qualified health center had filed a request for payment in 
accordance with Sec. 410.165 of this chapter), except for coinsurance 
amounts.
    (4) The Federally qualified health center may charge the beneficiary 
for items and services that are not Federally qualified health center 
services. However, if the item or service is covered under Part B of 
Medicare, and the Federally qualified health center agrees to receive 
Part B payment under the assignment method, the Federally qualified 
health center may not charge the beneficiary more than 20 percent of the 
Part B payment.
    (d) Refunds to beneficiaries. (1) The Federally qualified health 
center must agree to refund as promptly as possible any money 
incorrectly collected from Medicare beneficiaries or from someone on 
their behalf.
    (2) As used in this section, ``money incorrectly collected'' means 
any amount for covered services that is greater than the amount for 
which the beneficiary was liable because of the coinsurance requirements 
specified in part 410, subpart E.
    (3) Amounts also are considered incorrectly collected if the 
Federally qualified health center believed the beneficiary was not 
entitled to Medicare benefits but--
    (i) The beneficiary was later determined to have been so entitled;
    (ii) The beneficiary's entitlement period fell within the time the 
Federally qualified health center's agreement with CMS was in effect; 
and
    (iii) The amounts exceed the beneficiary's coinsurance liability.
    (e) Treatment of beneficiaries. (1) The Federally qualified health 
center must agree to accept Medicare beneficiaries for care and 
treatment.
    (2) The Federally qualified health center may not impose any 
limitations with respect to care and treatment of Medicare beneficiaries 
that it does not also impose upon all other persons seeking care and 
treatment from the Federally qualified health center. Failure to comply 
with this requirement is a cause for termination of the Federally 
qualified health center's agreement with CMS in accordance with 
Sec. 405.2436(d).
    (3) If the Federally qualified health center does not furnish 
treatment for

[[Page 165]]

certain illnesses and conditions to patients who are not Medicare 
beneficiaries, it need not furnish such treatment to Medicare 
beneficiaries.



Sec. 405.2436  Termination of agreement.

    (a) Termination by Federally qualified health center. The Federally 
qualified health center may terminate its agreement by--
    (1) Filing with CMS a written notice stating its intention to 
terminate the agreement; and
    (2) Notifying CMS of the date on which the Federally qualified 
health center requests that the termination take effect.
    (b) Effective date. (1) Upon receiving a Federally qualified health 
center's notice of intention to terminate the agreement, CMS will set a 
date upon which the termination takes effect. This effective date may 
be--
    (i) The date proposed by the Federally qualified health center in 
its notice of intention to terminate, if that date is acceptable to CMS; 
or
    (ii) Except as specified in paragraph (2) of this section, a date 
set by CMS, which is no later than 6 months after the date CMS receives 
the Federally qualified health center's notice of intention to 
terminate.
    (2) The effective date of termination may be less than 6 months 
following CMS's receipt of the Federally qualified health center's 
notice of intention to terminate if CMS determines that termination on 
such a date would not--
    (i) Unduly disrupt the furnishing of Federally qualified health 
center services to the community; or
    (ii) Otherwise interfere with the effective and efficient 
administration of the Medicare program.
    (3) The termination is effective at the end of the last day of 
business as a Federally qualified health center.
    (c) Termination by CMS. (1) CMS may terminate an agreement with a 
Federally qualified health center if it finds that the Federally 
qualified health center--
    (i) No longer meets the requirements specified in this subpart; or
    (ii) Is not in substantial compliance with--
    (A) The provisions of the agreement; or
    (B) The requirements of this subpart, any other applicable 
regulations of this part, or any applicable provisions of title XVIII of 
the Act.
    (2) Notice by CMS. CMS will notify the Federally qualified health 
center in writing of its intention to terminate an agreement at least 15 
days before the effective date stated in the written notice.
    (3) Appeal. A Federally qualified health center may appeal CMS's 
decision to terminate the agreement in accordance with part 498 of this 
chapter.
    (d) Effect of termination. When a Federally qualified health 
center's agreement is terminated whether by the Federally qualified 
health center or CMS, payment will not be available for Federally 
qualified health center services furnished on or after the effective 
date of termination.



Sec. 405.2440  Conditions for reinstatement after termination by CMS.

    When CMS has terminated an agreement with a Federally qualified 
health center, CMS will not enter into another agreement with the 
Federally qualified health center to participate in the Medicare program 
unless CMS--
    (a) Finds that the reason for the termination no longer exists; and
    (b) Is assured that the reason for the termination of the prior 
agreement will not recur.



Sec. 405.2442  Notice to the public.

    (a) When the Federally qualified health center voluntarily 
terminates the agreement and an effective date is set for the 
termination, the Federally qualified health center must notify the 
public prior to a prospective effective date or on the actual day that 
business ceases, if no prospective date of termination has been set, 
through publication in at least one newspaper in general circulation in 
the area serviced by the Federally qualified health center of the--
    (1) Effective date of termination of the provision of services; and
    (2) Effect of termination of the agreement.
    (b) When CMS terminates the agreement, CMS will notify the public 
through publication in at least one newspaper in general circulation in 
the

[[Page 166]]

Federally qualified health center's service area.



Sec. 405.2444  Change of ownership.

    (a) What constitutes change of ownership--(1) Incorporation. The 
incorporation of an unincorporated FQHC constitutes change of ownership.
    (2) Merger. The merger of the center corporation into another 
corporation, or the consolidation of two or more corporations, one of 
which is the center corporation, resulting in the creation of a new 
corporation, constitutes a change of ownership. (The merger of another 
corporation into the center corporation does not constitute change of 
ownership.)
    (3) Leasing. The lease of all or part of an entity constitutes a 
change of ownership of the leased portion.
    (b) Notice to CMS. A center which is contemplating or negotiating 
change of ownership must notify CMS.
    (c) Assignment of agreement. When there is a change of ownership as 
specified in paragraph (a) of this section, the agreement with the 
existing center is automatically assigned to the new owner if it 
continues to meet the conditions to be a Federally qualified health 
center.
    (d) Conditions that apply to assigned agreements. An assigned 
agreement is subject to all applicable statutes and regulations and to 
the terms and conditions under which it was originally issued including, 
but not limited to, the following:
    (1) Compliance with applicable health and safety standards.
    (2) Compliance with the ownership and financial interest disclosure 
requirements of part 420, subpart C of this subchapter.



Sec. 405.2446  Scope of services.

    (a) For purposes of this section, the terms rural health clinic and 
clinic when they appear in the cross references in paragraph (b) of this 
section also mean Federally qualified health centers.
    (b) FQHC services that are paid for under this subpart are 
outpatient services that include the following:
    (1) Physician services specified in Sec. 405.2412.
    (2) Services and supplies furnished as an incident to a physician's 
professional services, as specified in Sec. 405.2413.
    (3) Nurse practitioner or physician assistant services specified in 
Sec. 405.2414.
    (4) Services and supplies furnished as an incident to a nurse 
practitioner or physician assistant services, as specified in 
Sec. 405.2415.
    (5) Clinical psychologist and clinical social worker services 
specified in Sec. 405.2450.
    (6) Services and supplies furnished as an incident to a clinical 
psychologist or clinical social worker services, as specified in 
Sec. 405.2452.
    (7) Visiting nurse services specified in Sec. 405.2416.
    (8) Nurse-midwife services specified in Sec. 405.2401.
    (9) Preventive primary services specified in Sec. 405.2448 of this 
subpart.
    (c) Federally qualified health center services are covered when 
provided in outpatient settings only, including a patient's place of 
residence, which may be a skilled nursing facility or a nursing facility 
or other institution used as a patient's home.
    (d) Federally qualified health center services are not covered in a 
hospital, as defined in section 1861(e)(1) of the Act.

[57 FR 24979, June 12, 1992, as amended at 61 FR 14657, Apr. 3, 1996]



Sec. 405.2448  Preventive primary services.

    (a) Preventive primary services are those health services that--
    (1) A center is required to provide as preventive primary health 
services under section 329, 330, and 340 of the Public Health Service 
Act;
    (2) Are furnished by or under the direct supervision of a nurse 
practitioner, physician assistant, nurse midwife, specialized nurse 
practitioner, clinical psychologist, clinical social worker, or a 
physician;
    (3) In the case of a service, are furnished by a member of the 
center's health care staff who is an employee of the center or by a 
physician under arrangements with the center; and
    (4) Except as specifically provided in section 1861(s) of the Act, 
include only drugs and biologicals that cannot be self-administered.

[[Page 167]]

    (b) Preventive primary services which may be paid for when provided 
by Federally qualified health centers are the following:
    (1) Medical social services.
    (2) Nutritional assessment and referral.
    (3) Preventive health education.
    (4) Children's eye and ear examinations.
    (5) Prenatal and post-partum care.
    (6) Perinatal services.
    (7) Well child care, including periodic screening.
    (8) Immunizations, including tetanus-diptheria booster and influenza 
vaccine.
    (9) Voluntary family planning services.
    (10) Taking patient history.
    (11) Blood pressure measurement.
    (12) Weight.
    (13) Physical examination targeted to risk.
    (14) Visual acuity screening.
    (15) Hearing screening.
    (16) Cholesterol screening.
    (17) Stool testing for occult blood.
    (18) Dipstick urinalysis.
    (19) Risk assessment and initial counseling regarding risks.
    (20) Tuberculosis testing for high risk patients.
    (21) For women only.
    (i) Clinical breast exam.
    (ii) Referral for mammography; and
    (iii) Thyroid function test.
    (c) Preventive primary services do not include group or mass 
information programs, health education classes, or group education 
activities, including media productions and publications.
    (d) Screening mammography is not considered a Federally qualified 
health center service, but may be provided at a Federally qualified 
health center if the center meets the requirements applicable to that 
service specified in Sec. 410.34 of this subchapter. Payment is made 
under applicable Medicare requirements.
    (e) Preventive primary services do not include eyeglasses, hearing 
aids, or preventive dental services.

[57 FR 24980, June 12, 1992, as amended at 61 FR 14657, Apr. 3, 1996]



Sec. 405.2450  Clinical psychologist and clinical social worker services.

    (a) For clinical psychologist or clinical social worker professional 
services to be payable under this subpart, the services must be--
    (1) Furnished by an individual who owns, is employed by, or 
furnishes services under contract to the FQHC;
    (2) Of a type that the clinical psychologist or clinical social 
worker who furnishes the services is legally permitted to perform by the 
State in which the service is furnished;
    (3) Performed by a clinical social worker or clinical psychologist 
who is legally authorized to perform such services under State law or 
the State regulatory mechanism provided by the law of the State in which 
such services are performed; and
    (4) Covered if furnished by a physician.
    (b) If State law prescribes a physician supervision requirement, it 
is met if the conditions specified in Sec. 491.8(b) of this chapter and 
any pertinent requirements of State law are satisfied.
    (c) The services of clinical psychologists or clinical social 
workers are not covered if State law or regulations require that the 
services be performed under a physician's order and no such order was 
prepared.

[57 FR 24980, June 12, 1992, as amended at 61 FR 14657, Apr. 3, 1996]



Sec. 405.2452  Services and supplies incident to clinical psychologist and clinical social worker services.

    (a) Services and supplies incident to a clinical psychologist's or 
clinical social worker's services are reimbursable under this subpart if 
the service or supply is--
    (1) Of a type commonly furnished in a physician's office;
    (2) Of a type commonly furnished either without charge or included 
in the Federally qualified health center's bill;
    (3) Furnished as an incidental, although integral part of 
professional services furnished by a clinical psychologist or clinical 
social worker;
    (4) Furnished under the direct, personal supervision of a clinical 
psychologist, clinical social worker or physician; and

[[Page 168]]

    (5) In the case of a service, furnished by a member of the center's 
health care staff who is an employee of the center.
    (b) The direct personal supervision requirement in paragraph (a)(4) 
of this section is met only if the clinical psychologist or clinical 
social worker is permitted to supervise such services under the written 
policies governing the Federally qualified health center.

 Payment for Rural Health Clinic and Federally Qualified Health Center 
                                Services

    Source: 57 FR 24976, 24977, June 12, 1992, unless otherwise noted.



Sec. 405.2460  Applicability of general payment exclusions.

    The payment conditions, limitations, and exclusions set out in 
subpart C of this part, part 410 and part 411 of this chapter are 
applicable to payment for services provided by rural health clinics and 
Federally qualified health centers, except that preventive primary 
services, as defined in Sec. 405.2448, are covered in Federally 
qualified health centers and not excluded by the provisions of section 
1862(a) of the Act.



Sec. 405.2462  Payment for rural health clinic and Federally qualified health center services.

    (a) Payment to provider-based rural health clinics and Federally 
qualified health centers. A rural health clinic or Federally qualified 
health center is paid in accordance with parts 405 and 413 of this 
subchapter, as applicable, if:
    (1) The clinic or center is an integral and subordinate part of a 
hospital, skilled nursing facility or home health agency participating 
in Medicare (i.e., a provider of services); and
    (2) The clinic or center is operated with other departments of the 
provider under common licensure, governance and professional 
supervision.
    (b) Payment to independent rural health clinics and freestanding 
Federally qualified health centers. (1) All other clinics and centers 
will be paid on the basis of an all-inclusive rate for each beneficiary 
visit for covered services. This rate will be determined by the 
intermediary, in accordance with this subpart and general instructions 
issued by CMS.
    (2) The amount payable by the intermediary for a visit will be 
determined in accordance with paragraph (b)(3) and (4) of this section.
    (3) Federally qualified health centers. For Federally qualified 
health center visits, Medicare will pay 80 percent of the all-inclusive 
rate since no deductible is applicable to Federally qualified health 
center services.
    (4) Rural health clinics. (i) If the deductible has been fully met 
by the beneficiary prior to the rural health clinic visit, Medicare pays 
80 percent of the all-inclusive rate.
    (ii) If the deductible has not been fully met by the beneficiary 
before the visit, and the amount of the clinic's reasonable customary 
charge for the services that is applied to the deductible is--
    (A) Less than the all-inclusive rate, the amount applied to the 
deductible will be subtracted from the all-inclusive rate and 80 percent 
of the remainder, if any, will be paid to the clinic;
    (B) Equal to or exceeds the all-inclusive rate, no payment will be 
made to the clinic.
    (5) To receive payment, the clinic or center must follow the payment 
procedures specified in section 410.165 of this chapter.
    (6) Payment for treatment of mental psychoneurotic or personality 
disorders is subject to the limitations on payment in Sec. 410.155(c).



Sec. 405.2463  What constitutes a visit.

    (a) Visit. (1) A visit is a face-to-face encounter between a clinic 
or center patient and a physician, physician assistant, nurse 
practitioner, nurse-midwife, or visiting nurse.
    (2) For FQHCs, a visit also means a face-to-face encounter between a 
patient and a qualified clinical psychologist or clinical social worker.
    (3) Encounters with more than one health professional and multiple 
encounters with the same health professional that take place on the same 
day and at a single location constitute a single visit, except when one 
of the following conditions exist:

[[Page 169]]

    (i) After the first encounter, the patient suffers illness or injury 
requiring additional diagnosis or treatment.
    (ii) For FQHCs, the patient has a medical visit and an other health 
visit, as defined in paragraphs (b) and (c) of this section.
    (4) Payment. (i) Medicare pays for two visits per day when the 
conditions in paragraph (a)(3) of this section are met.
    (ii) In all other cases, payment is limited to one visit per day.
    (b) Medical visit. For purposes of paragraph (a)(3) of this section, 
a medical visit is a face-to-face encounter between an FQHC patient and 
a physician, physician assistant, nurse practitioner, nurse-midwife, or 
visiting nurse.
    (c) Other health visit. For purposes of paragraph (a)(3) of this 
section, an other health visit is a face-to-face encounter between an 
FQHC patient and a clinical psychologist, clinical social worker, or 
other health professional for mental health services.

[61 FR 14657, Apr. 3, 1996]



Sec. 405.2464  All-inclusive rate.

    (a) Determination of rate. (1) An all-inclusive rate is determined 
by the intermediary at the beginning of the reporting period.
    (2) The rate is determined by dividing the estimated total allowable 
costs by estimated total visits for rural health clinic or Federally 
qualified health center services.
    (3) The rate determination is subject to any tests of reasonableness 
that may be established in accordance with this subpart.
    (b) Adjustment of rate. (1) The intermediary, during each reporting 
period, periodically reviews the rate to assure that payments 
approximate actual allowable costs and visits for rural health clinic or 
Federally qualified health center services and adjusts the rate if:
    (i) There is a significant change in the utilization of clinic or 
center services;
    (ii) Actual allowable costs vary materially from the clinic or 
center's allowable costs; or
    (iii) Other circumstances arise which warrant an adjustment.
    (2) The clinic or center may request the intermediary to review the 
rate to determine whether adjustment is required.



Sec. 405.2466  Annual reconciliation.

    (a) General. Payments made to a rural health clinic or a Federally 
qualified health center during a reporting period are subject to 
reconciliation to assure that those payments do not exceed or fall short 
of the allowable costs attributable to covered services furnished to 
Medicare beneficiaries during that period.
    (b) Calculation of reconciliation. (1) The total reimbursement 
amount due the clinic or center for covered services furnished to 
Medicare beneficiaries is based on the report specified in 
Sec. 405.2470(c)(2) and is calculated by the intermediary as follows:
    (i) The average cost per visit is calculated by dividing the total 
allowable cost incurred for the reporting period by total visits for 
rural health clinic or Federally qualified health center services 
furnished during the period. The average cost per visit is subject to 
tests of reasonableness which may be established in accordance with this 
subpart.
    (ii) The total cost of rural health clinic or Federally qualified 
health center services furnished to Medicare beneficiaries is calculated 
by multiplying the average cost per visit by the number of visits for 
covered rural health clinic or Federally qualified health center 
services by beneficiaries.
    (iii) For rural health clinics, the total reimbursement due the 
clinic is 80 percent of the amount calculated by subtracting the amount 
of deductible incurred by beneficiaries that is attributable to rural 
health clinic services from the cost of these services. The 
reimbursement computation for Federally qualified health centers does 
not include a reduction related to the deductible because Federally 
qualified health center services are not subject to a deductible.
    (iv) For rural health clinics and FQHCs, payment for pneumococcal 
and influenza vaccine and their administration is 100 percent of 
Medicare reasonable cost.

[[Page 170]]

    (2) The total reimbursement amount due is compared with total 
payments made to the clinic or center for the reporting period, and the 
difference constitutes the amount of the reconciliation.
    (c) Notice of program reimbursement. The intermediary sends written 
notice to the clinic or center:
    (1) Setting forth its determination of the total reimbursement 
amount due the clinic or center for the reporting period and the amount, 
if any, of the reconciliation; and
    (2) Informing the clinic or center of its right to have the 
determination reviewed at a hearing under the procedures set forth in 
subpart R of this part.
    (d) Payment of reconciliation amount--(1) Underpayments. If the 
total reimbursement due the clinic or center exceeds the payments made 
for the reporting period, the intermediary makes a lump-sum payment to 
the clinic or center to bring total payments into agreement with total 
reimbursement due the clinic or center.
    (2) Overpayments. If the total payments made to a clinic or center 
for the reporting period exceed the total reimbursement due the clinic 
or center for the period, the intermediary arranges with the clinic or 
center for repayment through a lump-sum refund, or, if that poses a 
hardship for the clinic or center, through offset against subsequent 
payments or a combination of offset and refund. The repayment must be 
completed as quickly as possible, generally within 12 months from the 
date of the notice of program reimbursement. A longer repayment period 
may be agreed to by the intermediary if the intermediary is satisfied 
that unusual circumstances exist which warrant a longer period.

[57 FR 24976, June 12, 1992, as amended at 61 FR 14657, Apr. 3, 1996]



Sec. 405.2468  Allowable costs.

    (a) Applicability of general Medicare principles. In determining 
whether and to what extent a specific type or item of cost is allowable, 
such as interest, depreciation, bad debts and owner compensation, the 
intermediary applies the principles for reimbursement of provider costs, 
as set forth in part 413 of this subchapter.
    (b) Typical rural health clinic and Federally qualified health 
center costs. The following types and items of cost are included in 
allowable costs to the extent that they are covered and reasonable:
    (1) Compensation for the services of a physician, physician 
assistant, nurse practitioner, nurse-midwife, visiting nurse, qualified 
clinical psychologist, and clinical social worker who owns, is employed 
by, or furnishes services under contract to an FQHC. (RHCs are not paid 
for services furnished by contracted individuals other than physicians.)
    (2) Compensation for the duties that a supervising physician is 
required to perform under the agreement specified in Sec. 491.8 of this 
chapter.
    (3) Costs of services and supplies incident to the services of a 
physician, physician assistant, nurse practitioner, nurse-midwife, 
qualified clinical psychologist, or clinical social worker.
    (4) Overhead costs, including clinic or center administration, costs 
applicable to use and maintenance of the entity, and depreciation costs.
    (5) Costs of services purchased by the clinic or center.
    (c) Tests of reasonableness for rural health clinic cost and 
utilization. Tests of reasonableness authorized by sections 1833(a) and 
1861(v)(1)(A) of the Act may be established by CMS or the carrier with 
respect to direct or indirect overall costs, costs of specific items and 
services, or costs of groups of items and services. Those tests include, 
but are not limited to, screening guidelines and payment limitations.
    (d) Screening guidelines. (1) Costs in excess of amounts established 
by the guidelines are not included unless the clinic or center provides 
reasonable justification satisfactory to the intermediary.
    (2) Screening guidelines are used to assess the costs of services, 
including the following:
    (i) Compensation for the professional and supervisory services of 
physicians and for the services of physician assistants, nurse 
practitioners, and nurse-midwives.

[[Page 171]]

    (ii) Services of physicians, physician assistants, nurse 
practitioners, nurse-midwives, visiting nurses, qualified clinical 
psychologists, and clinical social workers.
    (iii) The level of administrative and general expenses.
    (iv) Staffing (for example, the ratio of other clinic or center 
personnel to physicians, physician assistants, and nurse practitioners).
    (v) The reasonableness of payments for services purchased by the 
clinic or center, subject to the limitation that the costs of physician 
services purchased by the clinic or center may not exceed amounts 
determined under the applicable provisions of subpart E of part 405 or 
part 415 of this chapter.
    (e) Payment limitations. Limits on payments may be set by CMS, on 
the basis of costs estimated to be reasonable for the provision of such 
services.
    (f) Graduate medical education. (1) Effective for that portion of 
cost reporting periods occurring on or after January 1, 1999, if an RHC 
or an FQHC incurs ``all or substantially all'' of the costs for the 
training program in the nonhospital setting as defined in Sec. 413.86(b) 
of this chapter, the RHC or FQHC may receive direct graduate medical 
education payment for those residents.
    (2) Direct graduate medical education costs are not included as 
allowable cost under Sec. 405.2466(b)(1)(i); and therefore, are not 
subject to the limit on the all-inclusive rate for allowable costs.
    (3) Allowable graduate medical education costs must be reported on 
the RHC's or the FQHC's cost report under a separate cost center.
    (4) Allowable graduate medical education costs are non-reimbursable 
if payment for these costs are received from a hospital or a 
Medicare+Choice organization.
    (5) Allowable direct graduate medical education costs under 
paragraphs (f)(6) and (f)(7)(i) of this section, are subject to 
reasonable cost principles under part 413 and the reasonable 
compensation equivalency limits in Secs. 415.60 and 415.70 of this 
chapter.
    (6) The allowable direct graduate medical education costs are those 
costs incurred by the nonhospital site for the educational activities 
associated with patient care services of an approved program, subject to 
the redistribution and community support principles in Sec. 413.85(c).
    (i) The following costs are allowable direct graduate medical 
education costs to the extent that they are reasonable--
    (A) The costs of the residents' salaries and fringe benefits 
(including travel and lodging expenses where applicable).
    (B) The portion of teaching physicians' salaries and fringe benefits 
that are related to the time spent teaching and supervising residents.
    (C) Facility overhead costs that are allocated to direct graduate 
medical education.
    (ii) The following costs are not allowable graduate medical 
education costs--
    (A) Costs associated with training, but not related to patient care 
services.
    (B) Normal operating and capital-related costs.
    (C) The marginal increase in patient care costs that the RHC or FQHC 
experiences as a result of having an approved program.
    (D) The costs associated with activities described in Sec. 413.85(h) 
of this chapter.
    (7) Payment is equal to the product of--
    (i) The RHC's or the FQHC's allowable direct graduate medical 
education costs; and
    (ii) Medicare's share, which is equal to the ratio of Medicare 
visits to the total number of visits (as defined in Sec. 405.2463).
    (8) Direct graduate medical education payments to RHCs and FQHCs 
made under this section are made from the Federal Supplementary Medical 
Insurance Trust Fund.

[43 FR 8261, Mar. 1, 1978. Redesignated and amended at 57 FR 24977, June 
12, 1992; 60 FR 63176, Dec. 8, 1995; 61 FR 14658, Apr. 3, 1996; 63 FR 
41002, July 31, 1998; 66 FR 39932, Aug. 1, 2001]

[[Page 172]]



Sec. 405.2470  Reports and maintenance of records.

    (a) Maintenance and availability of records. The rural health clinic 
or Federally qualified health center must:
    (1) Maintain adequate financial and statistical records, in the form 
and containing the data required by CMS, to allow the intermediary to 
determine payment for covered services furnished to Medicare 
beneficiaries in accordance with this subpart;
    (2) Make the records available for verification and audit by HHS or 
the General Accounting Office;
    (3) Maintain financial data on an accrual basis, unless it is part 
of a governmental institution that uses a cash basis of accounting. In 
the latter case, appropriate depreciation on capital assets is allowable 
rather than the expenditure for the capital asset.
    (b) Adequacy of records. (1) The intermediary may suspend 
reimbursement if it determines that the clinic or center does not 
maintain records that provide an adequate basis to determine payments 
under Medicare.
    (2) The suspension continues until the clinic or center demonstrates 
to the intermediary's satisfaction that it does, and will continue to, 
maintain adequate records.
    (c) Reporting requirements--(1) Initial report. At the beginning of 
its initial reporting period, the clinic or center must submit an 
estimate of budgeted costs and visits for rural health clinic or 
Federally qualified health center services for the reporting period, in 
the form and detail required by CMS, and such other information as CMS 
may require to establish the payment rate.
    (2) Annual reports. Within 90 days after the end of its reporting 
period, the clinic or center must submit, in such form and detail as may 
be required by CMS, a report of:
    (i) Its operations, including the allowable costs actually incurred 
for the period and the actual number of visits for rural health clinic 
or Federally qualified health center services furnished during the 
period; and
    (ii) The estimated costs and visits for rural health clinic services 
or Federally qualified health center services for the succeeding 
reporting period and such other information as CMS may require to 
establish the payment rate.
    (3) Late reports. If the clinic or center does not submit an 
adequate annual report on time, the intermediary may reduce or suspend 
payments to preclude excess payment to the clinic or center.
    (4) Inadequate reports. If the clinic or center does not furnish a 
report or furnishes a report that is inadequate for the intermediary to 
make a determination of program payment, CMS may deem all payments for 
the reporting period to be overpayments.
    (5) Postponement of due date. For good cause shown by the clinic or 
center, the intermediary may, with CMS's approval, grant a 30-day 
postponement of the due date for the annual report.
    (6) Reports following termination of agreement or change of 
ownership. The report from a clinic or center which voluntarily or 
involuntarily ceases to participate in the Medicare program or 
experiences a change in ownership (see Secs. 405.2436-405.2438) is due 
no later than 45 days following the effective date of the termination of 
agreement or change of ownership.



Sec. 405.2472  Beneficiary appeals.

    A beneficiary may request a hearing by an intermediary (subject to 
the limitations and conditions set forth in subpart H of this part) if:
    (a) The beneficiary is dissatisfied with an intermediary's 
determination denying a request for payment made on his or her behalf by 
a rural health clinic or Federally qualified health center; or
    (b) The beneficiary is dissatisfied with the amount of payment; or
    (c) The beneficiary believes the request for payment is not being 
acted upon with reasonable promptness.

[43 FR 8261, Mar. 1, 1978. Redesignated and amended at 57 FR 24978, June 
12, 1992]



PART 406--HOSPITAL INSURANCE ELIGIBILITY AND ENTITLEMENT--Table of Contents




                      Subpart A--General Provisions

Sec.
406.1  Statutory basis.
406.2  Scope.
406.3  Definitions.
406.5  Basis of eligibility and entitlement.

[[Page 173]]

406.6  Application or enrollment for hospital insurance.
406.7  Forms to apply for entitlement under Medicare Part A.

         Subpart B--Hospital Insurance Without Monthly Premiums

406.10  Individual age 65 or over who is entitled to social security or 
          railroad retirement benefits, or who is eligible for social 
          security benefits.
406.11  Individual age 65 or over who is not eligible as a social 
          security or railroad retirement benefits beneficiary, or on 
          the basis of government employment.
406.12  Individual under age 65 who is entitled to social security or 
          railroad retirement disability benefits.
406.13  Individual who has end-stage renal disease.
406.15  Special provisions applicable to Medicare qualified government 
          employment.

                  Subpart C--Premium Hospital Insurance

406.20  Basic requirements.
406.21  Individual enrollment.
406.22  Effect of month of enrollment on entitlement.
406.24  Special enrollment period.
406.26  Enrollment under State buy-in.
406.28  End of entitlement.
406.32  Monthly premiums.
406.33  Determination of months to be counted for premium increase: 
          Enrollment.
406.34  Determination of months to be counted for premium increase: 
          Reenrollment.
406.38  Prejudice to enrollment rights because of Federal Government 
          error.

  Subpart D--Special Circumstances That Affect Entitlement to Hospital 
                                Insurance

406.50  Nonpayment of benefits on behalf of certain aliens.
406.52  Conviction of certain offenses.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 48 FR 12536, Mar. 25, 1983, unless otherwise noted. 
Redesignated at 51 FR 41338, Nov. 14, 1986.



                      Subpart A--General Provisions



Sec. 406.1  Statutory basis.

    Sections 226, 226A, 1818 and 1818A of the Social Security Act and 
section 103 of Public Law 89-97 establish the conditions for entitlement 
to hospital insurance benefits. Sections 202 (t) and (u) of the Act 
specify limitations that apply to certain aliens and to persons 
convicted of certain offenses.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986, 
as amended at 56 FR 38078, Aug. 12, 1991]



Sec. 406.2  Scope.

    Subparts A through D of this part specify the conditions of 
eligibility for hospital insurance and set forth certain specific 
conditions that affect entitlement to benefits. Hospital insurance is 
authorized under Part A of title XVIII and is also referred to as 
Medicare Part A. It includes inpatient hospital care, posthospital SNF 
care, home health services, and hospice care.

[48 FR 56026, Dec. 16, 1983, as amended at 50 FR 33033, Aug. 16, 1985. 
Redesignated and amended at 51 FR 41338, Nov. 14, 1986]



Sec. 406.3  Definitions.

    First month of eligibility means the first month in which an 
individual meets all the requirements for entitlement to hospital 
insurance except application or enrollment if that is required.
    First month of entitlement means the first month for which the 
individual meets all the requirements for entitlement to Part A 
benefits.
    Insured individual means an individual who has the number of 
quarters of coverage required for monthly social security benefits.
    Quarter of coverage means a calendar quarter that is counted toward 
the number of covered quarters required to make the individual eligible 
for monthly social security benefits. A quarter is counted if during 
that quarter (or that calendar year) the individual earned a required 
minimum amount of money. (For details, see 20 CFR part 404, subpart B.)



Sec. 406.5  Basis of eligibility and entitlement.

    (a) Hospital insurance without premiums. Hospital insurance is 
available to most individuals without payment of a premium if they:
    (1) Are age 65 or over, or
    (2) Have received social security or railroad retirement disability 
benefits for 25 months; or

[[Page 174]]

    (3) Have end-stage renal disease. Subpart B of this part explains 
the requirements such individuals must meet to obtain hospital insurance 
without premiums.
    (b) Premium hospital insurance. Many individuals who are age 65 or 
over, but do not meet the requirements set forth in subpart B of this 
part, and certain individuals under age 65, may obtain the benefits by 
paying a premium. Section 406.20 of this part explains the requirements 
individuals must meet to obtain premium hospital insurance.

[48 FR 12536, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
56 FR 38078, Aug. 12, 1991]



Sec. 406.6  Application or enrollment for hospital insurance.

    (a) Basic provision. In most cases, eligibility for Medicare Part A 
is a result of entitlement to monthly social security or railroad 
retirement cash benefits or eligibility for monthly social security cash 
benefits. This section specifies the individuals who need not file an 
application to become entitled to hospital insurance, those who must 
file an application, and those who must enroll.
    (b) Individuals who need not file an application for hospital 
insurance. An individual who meets any of the following conditions need 
not file an application for hospital insurance:
    (1) Is under age 65 and has been entitled, for more than 24 months, 
to monthly social security or railroad retirement benefits based on 
disability.
    (2) At the time of attainment of age 65, is entitled to monthly 
social security or railroad retirement benefits.
    (3) Establishes entitlement to monthly social security or railroad 
retirement benefits at any time after attaining age 65.
    (c) Individuals who must file an application for hospital insurance. 
An individual must file an application for hospital insurance if he or 
she seeks entitlement to hospital insurance on the basis of--
    (1) The transitional provisions set forth in Sec. 406.11;
    (2) Deemed entitlement to disabled widow's or widower's benefit 
under certain circumstances as provided in Sec. 406.12;
    (3) A diagnosis of end-stage renal disease, as specified in 
Sec. 406.13;
    (4) Effective January 1, 1981, eligibility for social security cash 
benefits, as specified in Sec. 406.10(a)(3), if the individual has 
attained age 65 without applying for those benefits; or
    (5) The special provisions applicable to government employment as 
set forth in Sec. 406.15.
    (d) When application is deemed to be filed. (1) An application based 
on the transitional provisions or on ESRD is deemed to be filed in the 
first month of eligibility if it is filed not more than 3 months before 
the first month, and is retroactive to that month if filed within 12 
months after the first month. An application filed more than 12 months 
after the first month of eligibility is retroactive to the 12th month 
before the month it is filed.
    (2) An application for deemed entitlement to disabled widow's or 
widower's benefits, that is filed before the first month in which the 
individual meets all conditions of entitlement for this benefit, will be 
deemed a valid application if those conditions are met before an initial 
determination, reconsideration, or hearing decision is made on the 
application. If the conditions are met after the date of any hearing 
decision, a new application will have to be filed. An application 
validly filed within 12 months after the first month of eligibility is 
retroactive to that first month. If filed more than 12 months after that 
first month, it is retroactive to the 12th month before the month of 
filing.
    (3) Effective June 8, 1980, an application based on eligibility for 
social security benefits at or after age 65, that is filed before the 
first month in which the individual meets all eligibility conditions for 
this benefit, will be deemed a valid application if those conditions are 
met before an initial determination, reconsideration, or hearing 
decision is made on the application. If the conditions are met after the 
date of any hearing decision, a new application will have to be filed.
    (4) Effective March 1, 1981, an application under Sec. 406.10 that 
is validly filed within 6 months after the first month of eligibility is 
retroactive to that first month. If filed more than 6

[[Page 175]]

months after that first month, it is retroactive to the 6th month before 
the month of filing.
    (e) Individuals who must enroll for hospital insurance. An 
individual who must pay a monthly premium for hospital insurance must 
enroll in accordance with the procedures set forth in Sec. 406.21.

[48 FR 12536, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
53 FR 47202, Nov. 22, 1988; 61 FR 40345, Aug. 2, 1996]



Sec. 406.7  Forms to apply for entitlement under Medicare Part A.

    The following forms, available free of charge by mail from CMS or at 
any Social Security branch or district office, are used to apply for 
Medicare entitlement under the circumstances indicated:

    CMS-18-F-5--Application for Hospital Insurance Entitlement. (For use 
by individuals who are not eligible for retirement benefits under Title 
II of the Social Security Act or under the Railroad Retirement Act. This 
form may also be used for enrollment in the supplementary medical 
insurance program.)
    CMS-43--Application for Health Insurance Benefits under Medicare for 
Individuals with End Stage Renal Disease (ESRD). (An initial application 
for entitlement by individuals with ESRD).


As an alternative, an individual may use the application for monthly 
social benefits to apply also for Medicare entitlement if he or she is 
eligible for hospital insurance at that time.

[53 FR 6633, Mar. 2, 1988]



         Subpart B--Hospital Insurance Without Monthly Premiums



Sec. 406.10  Individual age 65 or over who is entitled to social security or railroad retirement benefits, or who is eligible for social security benefits.

    (a) Requirements. An individual is entitled to hospital insurance 
benefits under section 226 of the Act if he or she has attained aged 65 
and is:
    (1) Entitled to monthly social security benefits under section 202 
of the Social Security Act;
    (2) A qualified railroad retirement beneficiary who has been 
certified as such to the Social Security Administration by the Railroad 
Retirement Board in accordance with section 7(d) of the Railroad 
Retirement Act of 1974; or
    (3) Effective January 1, 1981, eligible for monthly social security 
benefits under section 202 of the Act and has filed an application for 
hospital insurance.
    (b) Beginning and end of entitlement. (1) Entitlement begins with 
the first day of the first month in which the individual meets the 
requirements of paragraph (a) of this section.
    (2) Entitlement continues until the individual dies or no longer 
meets the requirements of paragraph (a) of this section. An individual 
is not entitled to railroad retirement benefits and is neither entitled 
to, nor eligible for, monthly social security benefits in the month in 
which he or she dies. However, an individual who meets all other 
requirements for hospital insurance entitlement is entitled to hospital 
insurance in the month in which he or she dies if he or she--
    (i) Would have been entitled to monthly railroad retirement benefits 
or social security benefits in that month if he or she had not died; or
    (ii) Has filed an application for hospital insurance and would have 
been eligible for monthly social security benefits in that month if he 
or she had not died.



Sec. 406.11  Individual age 65 or over who is not eligible as a social security or railroad retirement benefits beneficiary, or on the basis of government 
          employment.

    (a) Basis. Section 103 of the law that established the Medicare 
program in 1965 (Pub. L. 89-97) provided for eligibility for certain 
individuals who were age 65 or would soon attain age 65 but would not be 
able to qualify for social security or railroad retirement benefits.
    (b) Requirements. Unless he or she is excluded under paragraph (c) 
of this section, an individual age 65 or over who does not meet the 
requirements of Sec. 406.10 or Sec. 406.15 (and who would not meet those 
requirements if he or she filed an application), is entitled to Medicare 
Part A benefits if he or she meets the following requirements:
    (1) Age and quarters of coverage. (i) He or she attained age 65 
before 1968; or

[[Page 176]]

    (ii) If he or she attained age 65 in 1968 or later, he or she must 
have at least 3 quarters of coverage for each year that elapsed after 
1966 and before the year in which he or she attained age 65. (The 
quarters of coverage may have been acquired at any time, not necessarily 
during the elapsed years.)
    (2) Residence and citizenship. He or she is a resident of the United 
States and--
    (i) A citizen of the United States; or
    (ii) An alien lawfully admitted for permanent residence who has 
continuously resided in the United States for 5 years immediately 
preceding the first month in which he or she meets all other 
requirements for entitlement to hospital insurance.
    (3) Application. He or she has filed an application for Medicare 
Part A no earlier than the third month before the first month of 
eligibility.
    (c) Bases for exclusion. An individual who meets the requirements of 
paragraph (b) of this section is excluded from Medicare Part A if he or 
she--
    (1) Has been convicted of spying, sabotage, or treason, sedition, 
and subversive action under chapter 37, 105, or 115 of title 18 of the 
United States Code;
    (2) Has been convicted of conspiracy to establish a dictatorship 
under section 4 of the Internal Security Act of 1950;
    (3) On February 16, 1965, was or could have been covered under the 
Federal Employees Health Benefits Act (FEHBA) of 1959; or
    (4) In his or her first month of eligibility;
    (i) Is covered by an enrollment under the FEHBA; or
    (ii) Could have been covered by an enrollment under that Act if he 
or she (or any other person who could provide him or her with coverage) 
was a Federal employee at any time after February 15, 1965, and had 
enrolled and retained coverage under that Act.
    (d) End of exclusion. An individual excluded under paragraph (c)(3) 
or (4) of this section can become entitled beginning with the first 
month in which he or she loses the right to FEHBA coverage solely 
because he or she or the other person leaves Federal employment.
    (e) Beginning and end of entitlement. (1) Entitlement begins--
    (i) In the first month of eligibility if the application is filed no 
later than 12 months after the first month of eligibility:
    (ii) In the 12th month before the month of application if the 
application is filed more than 12 months after the first month of 
eligibility.
    (2) Entitlement continues until death or until the month before the 
month in which the individual becomes entitled under Sec. 406.10 or 
Sec. 406.15.

[48 FR 12536, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
53 FR 47202, Nov. 22, 1988]



Sec. 406.12  Individual under age 65 who is entitled to social security or railroad retirement disability benefits.

    (a) Basic requirements. An individual under age 65 is entitled to 
hospital insurance benefits if, for 25 months, he or she has been--
    (1) Entitled or deemed entitled to social security disability 
benefits as an insured individual, child, widow, or widower who is 
``under a disability'' or
    (2) A disabled qualified beneficiary certified under Section 7(d) of 
the Railroad Retirement Act.
    (b) Previous periods of disability benefits entitlement. Months of a 
previous period of entitlement or deemed entitlement to disability 
benefits count toward the 25-month requirement if any of the following 
conditions is met:
    (1) Entitlement was as an insured individual or a disabled qualified 
railroad retirement beneficiary, and the previous period ended within 
the 60 months preceding the month in which the current disability began.
    (2) Entitlement was as a disabled child, widow, or widower, and the 
previous period ended within the 84 months preceding the month in which 
the current disability began.
    (3) The previous period ended on or after March 1, 1988 and the 
current impairment is the same as, or directly related to, the 
impairment on which the previous period of entitlement was based.
    (c) Deemed entitlement to disabled widow's or widower's monthly 
benefits.
    (1) Purpose. The provisions of paragraphs (c) (2), (3), and (4) of 
this section are intended to enable individuals--

[[Page 177]]

    (i) To meet the 25-month requirement of paragraph (a) of this 
section; or
    (ii) To retain hospital insurance entitlement when they are no 
longer entitled to monthly disability benefits.
    (2) Deemed entitlement for certain individuals entitled to old-age 
insurance benefits. An individual who becomes entitled to monthly old-
age insurance benefits before age 65, is, by law, precluded from 
establishing or retaining entitlement to disabled widow's or widower's 
monthly benefits. However, for purposes of meeting the 25-month 
requirement, a widow or widower who meets all other requirements for 
disability benefits and is excluded solely because of entitlement to 
old-age insurance benefits, shall be deemed to be (or to continue to be) 
entitled to disability benefits. A widow or widower who is not entitled 
to disability benefits for the month before attaining age 60 must file 
two applications, one for old-age insurance benefits and one for 
hospital insurance.
    (3) Deemed entitlement for certain individuals entitled to mother's 
benefits. An individual entitled to mother's insurance benefits under 
section 202(g) of the Social Security Act cannot at the same time be 
entitled to disabled widow's benefits. However, if she applies for 
hospital insurance, she will be deemed to be entitled to disabled 
widow's monthly benefits in the first month (of the 12 months before 
application) in which she would have been entitled to those benefits if 
she had filed an application for them.
    (4) Deemed entitlement for certain individuals entitled to father's 
benefits. An individual who is entitled to father's insurance benefits 
under section 202(g) of the Act cannot at the same time be entitled to 
disabled widower's benefits. However, if he applies for hospital 
insurance benefits, he will be deemed to be entitled to disabled 
widower's monthly benefits as follows:
    (i) If he applied for hospital insurance benefits before May 1984, 
he was deemed entitled to disabled widower's benefits for any month 
after April 1981 for which he would have been entitled to those benefits 
if he had filed an application for them.
    (ii) If he applies for hospital insurance benefits in or after May 
1984, he is deemed entitled to disabled widower's benefits for any 
month, up to 12 months before the month of application, for which he 
would have been entitled to those benefits if he had filed an 
application for them.
    (iii) Hospital insurance entitlement under this paragraph (c)(4) 
could not begin before May 1983.
    (5) Deemed retroactive entitlement for certain disabled widows and 
widowers. In some cases, disabled widows or widowers cannot become 
entitled to monthly cash benefits before the month in which they file 
application. However, for purposes of meeting the 25-month requirement, 
disability benefit entitlement will be deemed to have begun with the 
earliest month (of the 12 months before the application for cash 
benefits) in which the individual met all the requirements except the 
filing of an application. (This provision is effective for applications 
filed on or after January 1, 1978.)
    (d) When entitlement begins and ends. (1) Entitlement to hospital 
insurance begins with the 25th month of an individual's entitlement or 
deemed entitlement to disability benefits. Although an individual is not 
entitled to disability benefits for the month in which he or she dies, 
for purposes of this paragraph the individual will be deemed to be 
entitled for the month of death.
    (2) Except as provided in paragraph (e) of this section, entitlement 
to hospital insurance ends with the earliest of the following:
    (i) The last day of the last month in which he or she was entitled 
or deemed entitled to disability benefits or was qualified as a disabled 
railroad retirement beneficiary, if he or she was notified of the 
termination of entitlement before that month.
    (ii) The last day of the month following the month in which he or 
she is mailed a notice that his or her entitlement or deemed entitlement 
to disability benefits, or his or her status as a qualified disabled 
railroad retirement beneficiary, has ended.
    (iii) The last day of the month before the month he or she attains 
age 65. (An individual who is entitled to social security or railroad 
retirement cash benefits for the month of attainment of

[[Page 178]]

age 65 is automatically entitled to hospital insurance under 
Sec. 406.10.)
    (iv) The day of death.
    (e) Continuation of Medicare entitlement when disability benefit 
entitlement ends because of substantial gainful activity (SGA)--(1) 
Definitions. As used in this section--
    Trial work period means the 9-month period provided under title II 
of the Act and as defined 20 CFR 404.1592, during which the individual 
may test his or her ability to work and still receive disability cash 
benefits; and
    Reentitlement period means a period as defined in 20 CFR 404.1592a 
that begins with the first month after the trial work period and ends 
with the 36th month after the trial work period or, if earlier, with the 
first month in which the impairment no longer exists or is no longer 
disabling. (During the reentitlement period, benefits may be 
discontinued because of SGA. However, if SGA is later discontinued, 
benefits may be reinstated without a new application and a new 
disability determination.)
    (2) Duration of continued Medicare entitlement. Effective January 1, 
1988, if an individual's entitlement to disability benefits or status as 
a qualified disabled railroad retirement beneficiary ends because he or 
she engaged in, or demonstrated the ability to engage in, substantial 
gainful activity after the 36 months following the end of the trial work 
period, Medicare entitlement continues until the earlier of the 
following:
    (i) The last day of the 24th month following the first month of SGA 
occurring after the 15th month of the individual's reentitlement period 
or, if later, the end of the month following the month the individual's 
disability benefit entitlement ends.
    (ii) The last day of the month following the month in which notice 
is mailed to the individual indicating that he or she is no longer 
entitled to hospital insurance because of an event or circumstance (for 
example, there has been medical improvement, or the disabled widow has 
remarried) that would terminate disability benefit entitlement if it had 
not already been terminated because of substantial gainful activity.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986, 
as amended at 53 FR 47202, Nov. 22, 1988; 56 FR 38078, Aug. 12, 1991; 56 
FR 50058, Oct. 3, 1991; 61 FR 40345, Aug. 2, 1996]



Sec. 406.13  Individual who has end-stage renal disease.

    (a) Statutory basis and applicability. This section explains the 
conditions of entitlement to hospital insurance benefits on the basis of 
end-stage renal disease, and specifies the beginning and end of the 
period of entitlement. It implements section 226A of the Social Security 
Act.
    (b) Definitions. As used in this section:
    End-stage renal disease (ESRD) means that stage of kidney impairment 
that appears irreversible and permanent and requires a regular course of 
dialysis or kidney transplantation to maintain life.
    Child or spouse means a child or spouse whose relationship to the 
parent or spouse meets the relationship requirements for entitlement to 
child's monthly social security benefits or to wife's, husband's, 
widow's, widower's, mother's or father's monthly benefits, as set forth 
in 20 CFR part 404. However, the duration of relationship requirements 
apply only to divorced spouses. (See 20 CFR 404.331.)
    Dependent child means a person who, on the first day he or she has 
end-stage renal disease, is unmarried and meets the dependency 
requirements for entitlement to child's social security benefits on the 
basis of a parent's earnings (see 20 CFR 404.350-404.365) and who--
    (1) Is under age 22;
    (2) Is under a disability that began before age 22; or
    (3) Is under age 26, is receiving at least one-half support from 
that parent, and has continuously received at least one-half support 
from that parent since the day before attaining age 22.
    One-half support means regular contributions, in cash or in kind, 
that equals or exceeds one-half of the child's total support.
    (c) Requirements. An individual is entitled to hospital insurance 
benefits if--

[[Page 179]]

    (1) He or she is medically determined to have ESRD;
    (2) He or she is:
    (i) Fully or currently insured under the social security program 
(title II of the Act) or would be fully or currently insured if his or 
her employment (after 1936) as defined under the Railroad Retirement Act 
were considered ``employment'' under the Social Security Act;
    (ii) Entitled to monthly social security or railroad retirement 
benefits; or
    (iii) The spouse or dependent child of a person who meets the 
requirements of paragraph (c)(2)(i) or (c)(2)(ii) of this section;
    (3) He or she has filed an application for Medicare Part A; and
    (4) He or she has satisfied the waiting period explained in 
paragraph (e) of this section.
    (d) Filing an application. (1) An individual may obtain an 
application form, and help in completing it, from any social security 
office.
    (2) An application is not valid if it is filed earlier than the 
third month before the month in which the individual meets the 
conditions of paragraphs (c)(1), (c)(2), and (c)(4) of this section.
    (3) If an individual who has ESRD dies before he or she has filed an 
application, or is unable to file because of physical or mental 
condition, a relative or other person responsible for his or her affairs 
may file in his or her behalf. If a responsible person is not available, 
the hospital or dialysis facility that furnished treatment may file the 
application.
    (e) Beginning of entitlement--(1) Basic limitations. Entitlement can 
begin no earlier than the first month in which the individual meets the 
conditions specified in paragraph (c) of this section, or the 12th month 
before the month of application, whichever is later.
    (2) Waiting period. Entitlement begins on the first day of the third 
month after the month in which the individual initiates a regular course 
of renal dialysis, if the course is maintained throughout the waiting 
period, unless entitlement would begin earlier under paragraph (e) (3) 
or (4) of this section. This means that if dialysis began in January, 
entitlement would begin April 1.
    (3) Exceptions: Early kidney transplant. If the individual receives 
a transplant, entitlement begins with the first day of the month in 
which the transplant was performed. However, if the individual is 
admitted as an inpatient to a hospital that is an approved renal 
transplantation center or renal dialysis center (see Sec. 405.2102) for 
procedures preliminary to transplant surgery, entitlement begins--
    (i) On the first day of the month in which he or she initially 
enters the hospital, if the transplant is performed in that month or in 
either of the next 2 months; or
    (ii) On the first day of the second month before the month of kidney 
transplantation, if the transplant is delayed more than 2 months after 
the month of initial hospital stay.

For example, if an individual enters the hospital in January, and the 
transplant is performed in January, February, or March, entitlement 
would begin January 1. However, if the transplant is performed in April, 
entitlement would begin February 1.
    (4) Exceptions: Self-dialysis training. Entitlement begins on the 
first day of the month in which a regular course of renal dialysis began 
if:
    (i) Before the end of the waiting period, the individual 
participates in a self-dialysis training program offered by a 
participating Medicare facility that is approved to provide such 
training;
    (ii) The patient's physician has certified that it is reasonable to 
expect the individual will complete the training program and will self-
dialyze on a regular basis; and
    (iii) The regular course of dialysis is maintained throughout the 
time that would otherwise be the waiting period (unless it is terminated 
earlier because the individual dies).
    (f) End of entitlement. Entitlement ends with--
    (1) The end of the 12th month after the month in which a regular 
course of dialysis ends; or
    (2) The end of the 36th month after the month in which the 
individual has received a kidney transplant.

[[Page 180]]

    (g) Resumption of entitlement. Entitlement is resumed under the 
following conditions:
    (1) An individual who initiates a regular course of renal dialysis 
or has a kidney transplant during the 12-month period after the previous 
course of dialysis ended is entitled to Part A benefits and eligible to 
enroll in Part B with the month the regular course of dialysis is 
resumed or the month the kidney is transplanted.
    (2) An individual who initiates a regular course of renal dialysis 
or has a kidney transplant during the 36-month period after an earlier 
kidney transplant is entitled to Part A benefits and eligible to enroll 
in Part B with the month the regular course of dialysis begins or with 
the month the subsequent kidney transplant occurs.
    (3) An individual who initiates a regular course of renal dialysis 
more than 12 months after the previous course of regular dialysis ended 
or more than 36 months after the month of a kidney transplant is 
eligible to enroll in Part A and Part B with the month in which the 
regular course of dialysis is resumed. If he or she is otherwise 
entitled under the conditions specified in paragraph (c) of this 
section, including the filing of an application, entitlement begins with 
the month in which dialysis is initiated or resumed, without a waiting 
period, subject to the limitations of paragraph (e)(1) of this section.

[48 FR 12536, Mar. 25, 1983, as amended at 60 FR 22535, May 8, 1995]



Sec. 406.15  Special provisions applicable to Medicare qualified government employment.

    (a) Definition. As used in this section, Medicare-qualified 
government employment means Federal, State, or local government 
employment that is subject only to the hospital insurance portion of the 
tax imposed by the Federal Insurance Contributions Act (F.I.C.A.). This 
includes--
    (1) Wages paid for Federal employment after December 1982.
    (2) Wages paid to State and local government employees hired after 
March 31, 1986.
    (3) Wages paid to State and local government employees hired before 
April 1, 1986 but whose employment after March 31, 1986 is covered, for 
Medicare purposes only, under an agreement under section 218 of the Act.
    (b) Crediting of wages that are taxable only for Medicare purposes. 
Medicare qualified government employment is credited in the same way and 
in the same amount as social security covered employment is credited for 
monthly social security cash benefit purposes. However, since only the 
Medicare portion (not the social security portion) of the F.I.C.A. tax 
is imposed, Medicare qualified government employment does not help 
qualify the individual for monthly Social Security cash benefits.
    (c) Required quarters of coverage. (1) To qualify for hospital 
insurance on the basis of Medicare qualified government employment, an 
individual must have the number of quarters of coverage necessary to 
qualify for hospital insurance under Sec. 406.10, Sec. 406.12, or 
Sec. 406.13.
    (2) An individual who has worked in Medicare qualified government 
employment may qualify for hospital insurance on the basis of Medicare 
qualified government employment exclusively, or a combination of 
Medicare qualified government employment and social security covered 
employment.
    (d) Transitional provision for Federal employment. Any individual 
who was a Federal employee at any time both during and before January 
1983 will receive credit for quarters of Federal employment before 
January 1983 without paying tax. This transitional provision applies 
even if the Federal employee did not receive Federal wages for January 
1983, for instance, because he or she was on approved leave without pay 
or on loan to a State or foreign agency.
    (e) Conditions of entitlement. An individual who has worked in 
Medicare qualified government employment (or any related individual who 
would be entitled to social security cash benefits on the employee's 
record if Medicare qualified government employment qualified for those 
benefits) is entitled to hospital insurance benefits if he or she--
    (1) Would meet the requirements of Sec. 406.10, Sec. 406.12, or 
Sec. 406.13 if Medicare qualified government employment

[[Page 181]]

were social security covered employment; and
    (2) Has filed an application for hospital insurance.

For purposes of this section not more than 12 months before the month of 
application may be counted towards the 25-month qualifying period 
specified in Sec. 406.12(a).
    (f) Beginning and end of entitlement--(1) Basic rule. Subject to the 
limitations specified in paragraph (f)(2) and (f)(3) of this section, 
entitlement begins and ends as specified in Sec. 406.10, Sec. 406.12 or 
Sec. 406.13, whichever is used to establish hospital insurance 
entitlement for the Federal, State, or local government employee or 
related individual.
    (2) Limitations: Federal government employment. (i) Hospital 
insurance entitlement based on Federal employment could not begin before 
January 1983.
    (ii) No months before January 1983 may be used to satisfy the 
qualifying period required for entitlement based on disability.
    (3) Limitations: State and local government employment. (i) Hospital 
insurance entitlement based on State or local government employment 
cannot begin before April 1986.
    (ii) No months before April 1986 may be used to satisfy the 
qualifying period required for entitlement based on disability.

[53 FR 47202, Nov. 22, 1988]



                  Subpart C--Premium Hospital Insurance



Sec. 406.20  Basic requirements.

    (a) General provisions. Hospital insurance benefits are available to 
most individuals age 65 or over and to certain individuals under age 65 
who do not qualify for those benefits under subpart B of this part and 
are willing to pay a monthly premium. This is called premium hospital 
insurance.
    (b) Eligibility of individuals age 65 or over to enroll for premium 
hospital insurance. Any individual is eligible to enroll for Medicare 
Part A if he or she--
    (1) Has attained age 65;
    (2) Is a resident of the United States and is either--
    (i) A citizen of the United States; or
    (ii) An alien lawfully admitted for permanent residence who has 
resided in the United States continuously for the 5-year period 
immediately preceding the month in which he or she meets all other 
requirements;
    (3) Is not eligible for Part A benefits under subpart B of this 
part; and
    (4) Is entitled to supplementary medical insurance (Part B of 
Medicare) or is eligible and has enrolled for it during an enrollment 
period.
    (c) Eligibility of individuals under age 65 to enroll for premium 
hospital insurance. An individual who has not attained age 65 is 
eligible to enroll for Medicare Part A if he or she meets the following 
conditions:
    (1) Has been entitled to Medicare Part A (under Sec. 406.12 or 
Sec. 406.15) on the basis of entitlement or deemed entitlement to social 
security disability benefits, as provided under section 226(b) of the 
Act.
    (2) Continues to have a disabling physical or mental impairment.
    (3) Loses entitlement to disability benefits (and therefore also 
loses entitlement to Medicare Part A under Sec. 406.12) solely because 
his or her earnings exceed the amount allowed under the social security 
regulations pertaining to ``substantial gainful activity'' (20 CFR 
404.1571-404.1574); and
    (4) Is not otherwise entitled to Medicare Part A.

[56 FR 38078, Aug. 12, 1991; 56 FR 50058, Oct. 3, 1991]



Sec. 406.21  Individual enrollment.

    (a) Basic provision. An individual who meets the requirements of 
Sec. 406.20 (b) or (c) may enroll for premium hospital insurance only 
during his or her ``initial enrollment period'', a ``general enrollment 
period'', a ``special enrollment period'', or, for HMO/CMP enrollees, a 
``transfer enrollment period'', as set forth in paragraphs (b) through 
(f) of this section.
    (b) Initial enrollment periods--(1) Initial enrollment period for 
individual age 65 or over. The initial enrollment period extends for 7 
months, from the third month before the month the individual first meets 
the requirements of Sec. 406.20 (b)(1) through (b)(3) through the third 
month after that first month of eligibility.

[[Page 182]]

    (2) Initial enrollment period of individual under age 65. The 
initial enrollment period begins with the month in which the individual 
receives notice that entitlement to Medicare Part A will end because he 
or she has lost entitlement to disability benefits solely because of 
earnings in excess of the amounts allowed under the social security 
regulations on substantial gainful activity (20 CFR 404.1571-404.1574). 
It continues for 7 full months after that month.
    (c) General enrollment period. (1) Except as specified in paragraph 
(c)(4) of this section, the general enrollment period extends from 
January 1 to March 31 of each calendar year.
    (2) General enrollment periods are for individuals who do not enroll 
during the special enrollment period, who failed to enroll during the 
initial enrollment period, or whose previous period of entitlement had 
terminated.
    (3) If the individual enrolls or reenrolls during a general 
enrollment period, his or her entitlement begins on July 1 of the 
calendar year.
    (4) During the period April 1 through September 30, 1981, the 
general enrollment period was any time after the end of the individual's 
initial enrollment period. Any eligible individual whose initial 
enrollment period has ended, or whose previous period of entitlement had 
terminated, could enroll or reenroll during that 6-month period.
    (d) ``Deemed'' initial enrollment period for individual age 65 or 
over. (1) If an individual who has attained age 65 fails to enroll 
during the initial enrollment period because of reliance on incorrect 
documentary information which led him or her to believe that he or she 
was not yet age 65, an initial enrollment period may be established for 
him or her as though he or she had attained age 65 on the date indicated 
by the incorrect documentary information.
    (2) The deemed initial enrollment period will be used to determine 
the individual's premium and right to enroll in a general enrollment 
period if such use is advantageous to the individual.
    (e) [Reserved]
    (f) Transfer enrollment period for HMO/CMP enrollees. (1) 
Terminology. HMO or CMP means an eligible organization as defined in 
Sec. 417.401 which has a contract with CMS under part 417, subpart L of 
this chapter.
    (2) Basic rule. Effective February 1, 1991, individuals enrolled in 
an HMO or CMP under part 417, subpart K of this chapter who meet the 
requirements of Sec. 406.20(b) may enroll in premium hospital insurance 
during a transfer enrollment period. This transfer enrollment period 
begins with any month or any part of a month in which the individual is 
enrolled in an HMO or CMP and ends with the last day of the 8th 
consecutive month in which the individual is no longer enrolled in the 
HMO or CMP.
    (3) Effective date of coverage. (i) If the individual enrolls in 
premium hospital insurance while still enrolled in an HMO or CMP, or 
during the first month that he or she is no longer enrolled in the HMO 
or CMP, part A coverage will begin on the first day of the month of part 
A enrollment, or, at the option of the individual, on the first day of 
any of the following 3 months.
    (ii) If the individual enrolls in premium hospital insurance during 
any of the last 7 months of the transfer enrollment period, coverage 
will begin on the first day of the month after the month of enrollment.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986, 
as amended at 53 FR 47203, Nov. 22, 1988; 56 FR 38079, Aug. 12, 1991; 57 
FR 36014, Aug. 12, 1992; 61 FR 40345, Aug. 2, 1996]



Sec. 406.22  Effect of month of enrollment on entitlement.

    (a) Individual age 65 or over. For an individual who has attained 
age 65, the following rules apply:
    (1) If the individual enrolls during the 3 months before the first 
month of eligibility, entitlement begins with the first month of 
eligibility.
    (2) If the individual enrolls in the first month of eligibility, 
entitlement begins with the following month.
    (3) If the individual enrolls during the month after the first month 
of eligibility, entitlement begins with the second month after the month 
of enrollment.
    (4) If the individual enrolls in either of the last 2 months of the 
enrollment period, entitlement begins with the

[[Page 183]]

third month after the month of enrollment.
    (b) Individual under age 65. For an individual who has not attained 
age 65, the following rules apply:
    (1) If the individual enrolls before the month in which he or she 
meets the requirements of Sec. 406.20(c), entitlement begins with the 
month in which the individual meets those requirements.
    (2) If the individual enrolls in the month in which he or she first 
meets the requirements of Sec. 406.20(c), entitlement begins with the 
following month.
    (3) If the individual enrolls in the month following the month in 
which he or she meets the requirements of Sec. 406.20(c), entitlement 
begins with the second month after the month of enrollment.
    (4) If the individual enrolls more than one month after the month in 
which he or she first meets the requirements of Sec. 406.20(c), 
entitlement begins with the third month after the month of enrollment.

[56 FR 38079, Aug. 12, 1991]



Sec. 406.24  Special enrollment period.1
---------------------------------------------------------------------------

    \1\ Before August 1986, SEPs were available only for enrollment in 
supplementary medical insurance, not for enrollment in premium hospital 
insurance.
---------------------------------------------------------------------------

    (a) Terminology. As used in this subpart, the following terms have 
the indicated meanings.
    (1) Current employment status has the meaning given this term in 
Sec. 411.104 of this chapter.
    (2) Family member has the meaning given this term in Sec. 411.201 of 
this chapter.
    (3) Group health plan (GHP) and large group health plan (LGHP) have 
the meanings given those terms in Sec. 411.101 of this chapter, except 
that the ``former employee'' language of those definitions does not 
apply with respect to SEPs because--
    (i) Section 1837(i)(1)(A) of the Act explicitly requires that GHP 
coverage of an individual age 65 or older, be by reason of the 
individual's (or the individual's spouse's) current employment status; 
and
    (ii) The sentence following section 1837(i)(1)(B), of the Act refers 
to ``large group health plan''. Under section 1862(b)(1)(B)(i), as 
amended by OBRA '93, LGHP coverage of a disabled individual must be ``by 
virtue of the individual's or a family member's current employment 
status with an employer''.
    (4) Special enrollment period (SEP) is a period provided by statute 
to enable certain individuals to enroll in Medicare without having to 
wait for the general enrollment period.
    (b) Duration of SEP.2 (1) The SEP includes any month 
during any part of which--
---------------------------------------------------------------------------

    \2\ Before March 1995, SEPs began on the first day of the first 
month the individual was no longer covered under a GHP or LGHP by reason 
of current employment status.
---------------------------------------------------------------------------

    (i) An individual over age 65 is enrolled in a GHP by reason of the 
current employment status of the individual or the individual's spouse; 
or
    (ii) An individual under age 65 and disabled--
    (A) Is enrolled in a GHP by reason of the current employment status 
of the individual or the individual's spouse; or
    (B) Is enrolled in an LGHP by reason of the current employment 
status of the individual or a member of the individual's family.
    (2) The SEP ends on the last day of the eighth consecutive month 
during which the individual is at no time enrolled in a GHP or an LGHP 
by reason of current employment status.
    (c) Conditions for use of a SEP.3 In order to use a SEP, 
the individual must meet the following conditions:
---------------------------------------------------------------------------

    \3\ Before August 10, 1993, an individual under age 65 could qualify 
for a SEP only if he or she had LGHP coverage as an ``active 
individual'', which the statute defined as ``an employee, employer, 
self-employed individual (such as the employer), individual associated 
with the employer in a business relationship, or as a member of the 
family of any of those persons''.
---------------------------------------------------------------------------

    (1) When first eligible to enroll for premium hospital insurance 
under Sec. 406.20(b) or (c), the individual was--
    (i) Age 65 or over and covered under a GHP by reason of the current 
employment status of the individual or the individual's spouse;
    (ii) Under age 65 and covered under an LGHP by reason of the current 
employment status of the individual or a member of the individual's 
family ; or

[[Page 184]]

    (iii) Under age 65 and covered under a GHP by reason of the current 
employment status of the individual or the individual's spouse.
    (2) For all the months thereafter, the individual has maintained 
coverage either under hospital insurance or a GHP or LGHP.
    (d) Special rule: Additional SEPs. (1) Generally, if an individual 
fails to enroll during any available SEP, he or she is not entitled to 
any additional SEPs.
    (2) However, if an individual fails to enroll during a SEP, because 
coverage under the same or a different GHP or LGHP was restored before 
the end of that particular SEP, that failure to enroll does not preclude 
additional SEPs.
    (e) Effective date of coverage. (1) If the individual enrolls in a 
month during any part of which he or she is covered under a GHP or LGHP 
on the basis of current employment status, or in the first full month 
when no longer so covered, coverage begins on the first day of the month 
of enrollment or, at the individual's option, on the first day of any of 
the three following months.
    (2) If the individual enrolls in any month of the SEP other than the 
months specified in paragraph (e)(1) of this section, coverage begins on 
the first day of the month following the month of enrollment.

[61 FR 40346, Aug. 2, 1996]



Sec. 406.26  Enrollment under State buy-in.

    (a) Enrollment of QMBs under a State buy-in agreement--(1) Effective 
date. Beginning with calendar year 1990, a State may request and be 
granted a modification of its buy-in agreement to include enrollment and 
payment of Part A premiums for QMBs (as defined in section 1905(p)(1) of 
the Act) who can become entitled to Medicare Part A only by paying a 
premium.
    (2) Amount of premium. Premiums paid under State buy-in are not 
subject to increase because of late enrollment or reenrollment.
    (b) Beginning of coverage under buy-in. The coverage period begins 
with the latest of the following:
    (1) The third month following the month in which the agreement 
modification covering QMBs is effectuated.
    (2) The first month in which the individual is entitled to premium 
hospital insurance under Sec. 406.20(b) and has QMB status.
    (3) The date specified in the agreement modification.
    (c) End of coverage under buy-in. Buy-in coverage ends with the 
earlier of the following:
    (1) Death. Coverage ends on the last day of the month in which the 
QMB dies.
    (2) Loss of QMB status. If the individual loses eligibility for QMB 
status, coverage ends on the last day of the month in which CMS receives 
the State's notice of ineligibility.
    (3) Termination of buy-in agreement. If the State's buy-in agreement 
is terminated, coverage ends on the last day of the last month for which 
the agreement is in effect.
    (4) Entitlement to premium-free Part A. If the individual becomes 
entitled to premium-free Part A, buy-in coverage ends on the last day of 
entitlement to premium Part A.
    (d) Continuation of coverage: Individual enrollment following 
termination of buy-in coverage--(1) Deemed enrollment. If coverage under 
a buy-in agreement ends because the agreement is terminated or the 
individual loses QMB status, the individual--
    (i) Is considered to have enrolled during his or her initial 
enrollment period; and
    (ii) Is entitled to Part A benefits and liable for Part A premiums 
beginning with the first month for which he or she is no longer covered 
under the buy-in agreement.
    (2) Voluntary termination. (i) An individual may voluntarily 
terminate entitlement acquired under paragraph (d)(1) of this section by 
filing, with SSA or CMS, a request for disenrollment.
    (ii) Voluntary disenrollment is effective as follows:
    (A) If the individual files a request within 30 days after the date 
of CMS's notice that buy-in coverage has ended, the individual's 
entitlement ends on the last day of the last month for which the State 
paid the premium.
    (B) If the individual files the request more than 30 days but not 
more than 6

[[Page 185]]

months after buy-in coverage ends, entitlement ends on the last day of 
the month in which the request is filed.
    (C) If the individual files the request later than the 6th month 
after buy-in coverage ends, entitlement ends at the end of the month 
after the month in which request is filed.

[56 FR 38080, Aug. 12, 1991]



Sec. 406.28  End of entitlement.

    Any of the following actions or events ends entitlement to premium 
hospital insurance:
    (a) Filing of request for termination. The beneficiary may at any 
time give CMS or the Social Security Administration written notice that 
he or she no longer wishes to participate in the premium hospital 
insurance program.
    (1) If he or she files the notice before entitlement begins, he or 
she will be deemed not to have enrolled.
    (2) If he or she files the notice after entitlement begins, that 
entitlement will end at the close of the month following the month in 
which he or she filed the notice.
    (b) Eligibility for hospital insurance without premiums. (1) If an 
individual meets the eligibility requirements for hospital insurance 
specified in Sec. 406.10, Sec. 406.11, Sec. 406.13 or Sec. 406.15, 
entitlement to premium hospital insurance ends with the month before the 
month in which he or she meets those requirements.
    (2) If an individual meets the requirements of Sec. 406.10, 
Sec. 406.11, Sec. 406.13, or Sec. 406.15, he or she will be deemed to 
have filed the required application for hospital insurance benefits in 
his or her first month of eligibility under that section.
    (c) End of entitlement to supplementary medical insurance (SMI) for 
individual who has attained age 65. In the case of an individual 
enrolled on the basis of Sec. 406.20(b), entitlement to premium hospital 
insurance ends on the same date that entitlement to SMI ends.
    (d) Nonpayment of premium. (1) If an individual fails to pay the 
premium bill, entitlement will end on the last day of the third month 
after the billing month.
    (2) CMS may reinstate entitlement if the individual shows good cause 
for failure to pay on time, and pays all overdue premiums within 3 
calendar months after the date specified in paragraph (d)(1) of this 
section.
    (e) Death. Entitlement ends with the day of death. (A premium is due 
for the month of death.)
    (f) End of disabling impairment for individual under age 65. In the 
case of an individual enrolled on the basis of Sec. 406.20(c), 
entitlement to premium hospital insurance ends on the last day of the 
month after the month in which the individual is notified that he or she 
no longer has a disabling impairment.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986, 
as amended at 53 FR 47204, Nov. 22, 1988. Redesignated and amended at 56 
FR 38080, Aug. 12, 1991]



Sec. 406.32  Monthly premiums.

    (a) Promulgation and effective date. Beginning with 1984, premiums 
are promulgated each September, effective for the succeeding calendar 
year.
    (b) Monthly premiums: Determination of dollar amount.
    (1) Effective for calendar years beginning January 1989, the dollar 
amount is determined based on an estimate of one-twelfth of the average 
per capita costs for benefits and administrative costs that will be 
payable with respect to individuals age 65 or over from the Federal 
Hospital Insurance Trust Fund during the succeeding calendar year.
    (2) Before 1989, the dollar amount was determined by multiplying $33 
by the ratio of the next year's inpatient deductible to $76, which was 
the inpatient deductible determined for 1973. (Because of cost controls, 
the deductible actually charged for that year was $72.)
    (3) Effective for months beginning January 1994, if an individual 
meets the requirements in paragraph (c) of this section, the monthly 
premium determined under paragraph (b)(1) of this section is reduced in 
each month in which the individual meets the requirements by 25 percent 
in 1994, 30 percent in 1995, 35 percent in 1996, 40 percent in 1997 and 
45 percent in 1998 and thereafter.
    (4) The amount determined under paragraphs (b) (1), (2), or (3) of 
this section is rounded to the next nearest multiple of $1. (Fifty cents 
is rounded to the next higher dollar.)

[[Page 186]]

    (c) Qualifying for a reduction in monthly premium. An individual who 
qualifies for the reduction described in paragraph (b)(3) of this 
section must be an individual who--
    (1) Has 30 or more quarters of coverage (QCs) as defined in 20 CFR 
404.140 through 404.146;
    (2) Has been married for at least the previous one year period to a 
worker who has 30 or more QCs;
    (3) Had been married to a worker who had 30 or more QCs for a period 
of at least one year before the death of the worker;
    (4) Is divorced from, after at least 10 years of marriage to, a 
worker who had 30 or more QCs at the time the divorce became final; or
    (5) Is divorced from, after at least 10 years of marriage to, a 
worker who subsequently died and who had 30 or more QCs at the time the 
divorce became final.
    (d) Monthly premiums: Increase for late enrollment and for 
reenrollment. For an individual who enrolls after the close of the 
initial enrollment period or reenrolls, the amount of the monthly 
premium, as determined under paragraph (b) of this section, is increased 
by 10 percent for each full 12 months in the periods described in 
Secs. 406.33 and 406.34. Effective beginning with premiums due for July 
1986, the premium increase is limited to 10 percent and is payable for 
twice the number of full 12-month periods determined under those 
sections.
    (e) Collection of monthly premiums. (1) CMS will bill the enrollee 
on a monthly basis and include an addressed return envelope with the 
bill.
    (2) The enrollee must pay by check or money order that is payable to 
``CMS Medicare Insurance,'' and shows his or her name and the claim 
number that appears on his or her Medicare card. He or she must return 
the bill with the check or money order.
    (f) Months for which payment is due. (1) A premium payment is due 
for each month beginning with the first month of coverage and continuing 
through the month of death or if earlier, the month in which coverage 
ends.
    (2) A premium is due for the month of death if coverage is still in 
effect, even if the individual dies on the first day of the month.
    (g) Option for group payments. A public or private organization may 
pay the premiums on behalf of one or more enrollees under a contract or 
other arrangement with CMS if CMS determines that this method of payment 
is administratively feasible. (The rules set forth in subpart E of part 
408 of this chapter, for SMI premiums, also apply to group payment of 
Part A premiums.)

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986, 
as amended at 53 FR 47203, Nov. 22, 1988; 56 FR 8839, Mar. 1, 1991. 
Redesignated and amended at 56 FR 38079, 38080, Aug. 12, 1991; 57 FR 
36014, Aug. 12, 1992; 57 FR 58717, Dec. 11, 1992; 59 FR 26959, May 25, 
1994]



Sec. 406.33  Determination of months to be counted for premium increase: Enrollment.

    (a) Enrollment before April 1, 1981, or after September 30, 1981. 
The months to be counted for premium increase are the months from the 
end of the initial enrollment period through the end of the general 
enrollment period, the special enrollment period, or the transfer 
enrollment period in which the individual enrolls, excluding the 
following:
    (1) Any months before September 1973.
    (2) For premiums due for months after May 1986, any months beginning 
with January 1983 during which the individual was enrolled in an 
employer group health plan based on the current employment of the 
individual or the individual's spouse.
    (3) Any months during the 7-month special enrollment period under 
Sec. 406.21(e) during which premium hospital insurance coverage is in 
effect.
    (4) Any months that the individual was enrolled in an HMO or CMP 
under part 417, subpart K of this chapter as described in 
Sec. 406.21(f).
    (b) Enrollment during the period April 1 through September 30, 1981. 
The months to be counted for premium increase are the months from the 
end of the initial enrollment period through the month in which the 
individual enrolled, excluding any months before September 1973.
    (c) Examples. (1) John F's initial enrollment period ended July 1979 
but he did not enroll until January 1980. The

[[Page 187]]

months to be counted are August 1979 through March 1980. Since only 8 
months elapsed, there is no premium increase.
    (2) Mary T's initial enrollment period ended in April 1980 but she 
did not enroll until May 1981. The months to be counted are May 1980 
through May 1981. Since 13 months has elapsed, the premium would be 
increased by 10 percent.
    (3) Effective with July 1986, Mary T, in Example 2, would no longer 
have to pay an increased premium because she had paid it for twice the 
number of full 12-month periods during which she could have been, but 
was not, enrolled in the program.
    (4) Vincent C's initial enrollment period ended August 31, 1986. He 
was covered under his wife's employer group health plan until she 
retired on May 31, 1989. He enrolled during June 1989, the first month 
of the special enrollment period under Sec. 406.21(e). No months are 
countable for premium increase purposes because the exclusions of 
paragraph (a) of this section apply to all months.
    (5) Terry P enrolled in the 1987 general enrollment period, with 
coverage effective July 1987. There were 28 months after the end of his 
initial enrollment period through the end of the 1987 general enrollment 
period. His premium is increased by 10 percent. The increase will be 
eliminated after he has paid the additional 10 percent for 48 months.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986, 
as amended at 53 FR 47203, Nov. 22, 1988. Further redesignated and 
amended at 57 FR 36014, Aug. 12, 1992]



Sec. 406.34  Determination of months to be counted for premium increase: Reenrollment.

    (a) First reenrollment before April 1, 1981 or after September 30, 
1981. The months to be counted for premium increase are:
    (1) The months specified in Sec. 406.33(a) or (b); plus
    (2) The months from the end of the first period of entitlement 
through the end of the general enrollment period in which the individual 
reenrolled.
    (b) First reenrollment during the period April 1, 1981 through 
September 30, 1981. The months to be counted for premium increase are--
    (1) The months specified in Sec. 406.33(a); plus
    (2) The months from the end of the first period of entitlement 
through the month in which the individual reenrolled.
    (c) Subsequent reenrollment during the period April 1, 1981 through 
September 30, 1981. The months to be counted for premium increase are--
    (1) The months specified in paragraph (a) of this section; plus
    (2) The months from April 1981 through the month in which the 
individual reenrolled for the second time. (Since only one reenrollment 
was permitted before April 1981, any months from the end of the 
individual's first enrollment period of entitlement through March 1981 
are not counted.)
    (d) Subsequent reenrollment after September 30, 1981. The months to 
be counted for premium increase are--
    (1) The months specified in paragraph (a) or (b) of this section, 
for the first and second periods of coverage; plus
    (2) The months from the end of each subsequent period of entitlement 
through the end of the general enrollment period in which the individual 
reenrolled, excluding any months before April 1981.
    (e) Example. Peter M enrolled during his initial enrollment period, 
terminated his first coverage period in August 1979 and reenrolled for 
the first time in January 1980. The 7 months to be counted (September 
1979 through March, 1980) were not enough to require any increase in the 
premium. Peter terminated his second period of coverage in February 1981 
and reenrolled for the second time in July 1981. Since the 4 months 
(April through July 1981), when added to the previous 7 months, bring 
the total to only 11 months, no premium increase is required.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986. 
Further redesignated and amended at 57 FR 58717, Dec. 11, 1992]



Sec. 406.38  Prejudice to enrollment rights because of Federal Government error.

    (a) If an individual's enrollment or nonenrollment for premium 
hospital

[[Page 188]]

insurance is unintentional, inadvertent, or erroneous because of the 
error, misrepresentation, or inaction of a Federal employee, or any 
person authorized by the Federal Government to act on its behalf, the 
Social Security Administration or CMS may take whatever action it 
determines is necessary to provide appropriate relief.
    (b) The action may include--
    (1) Designation of a special initial or general enrollment period;
    (2) Designation of an entitlement period;
    (3) Adjustment of premiums;
    (4) Any combination of the actions specified in paragraph (b) (1) 
through (3) of this section; or
    (5) Any other remedial action which may be necessary to correct or 
eliminate the effects of such error, misrepresentation, or inaction.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986. 
Further redesignated at 56 FR 38080, Aug. 12, 1991]



  Subpart D--Special Circumstances That Affect Entitlement to Hospital 
                                Insurance



Sec. 406.50  Nonpayment of benefits on behalf of certain aliens.

    (a) Hospital insurance benefit payments may not be made for services 
furnished to an alien in any month in which his or her monthly social 
security benefits are suspended (or would be suspended if he or she were 
entitled to those benefits) because the alien remains outside the United 
States for more than 6 months.
    (b) Benefits will be payable beginning with services furnished in 
the first full calendar month the alien is back in the United States.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986. 
Further redesignated at 57 FR 58717, Dec. 11, 1992]



Sec. 406.52  Conviction of certain offenses.

    (a) Penalty that affects entitlement. (1) If an individual is 
convicted of any of the crimes listed in Sec. 406.11(c) (1) and (2), the 
court may impose, in addition to all other penalties, a penalty that 
affects entitlement to hospital insurance, beginning with the month of 
conviction.
    (2) The additional penalty is that the individual's income (or the 
income of the insured individual on whose earnings record he or she 
became or seeks to become entitled) for the year of conviction and any 
previous year may not be counted in determining the insured status 
necessary for entitlement to hospital insurance.
    (b) Effect of pardon. If the President of the United States pardons 
the convicted individual, that individual regains (or may again seek) 
entitlement effective with the month following the month in which the 
pardon is granted.

[48 FR 12536, Mar. 25, 1983. Redesignated at 51 FR 41338, Nov. 14, 1986. 
Further redesignated at 57 FR 58717, Dec. 11, 1992]



PART 407--SUPPLEMENTARY MEDICAL INSURANCE (SMI) ENROLLMENT AND ENTITLEMENT--Table of Contents




                      Subpart A--General Provisions

Sec.
407.1  Basis and scope.
407.2  General description of program.
407.4  Basic requirements for entitlement.

        Subpart B--Individual Enrollment and Entitlement for SMI

407.10  Eligibility to enroll.
407.11  Forms used to apply for enrollment under Medicare Part B.
407.12  General enrollment provisions.
407.14  Initial enrollment period.
407.15  General enrollment period.
407.17  Automatic enrollment.
407.18  Determining month of automatic enrollment.
407.20  Special enrollment period related to coverage under group health 
          plans.
407.22  Request for individual enrollment.
407.25  Beginning of entitlement: Individual enrollment.
407.27  Termination of entitlement: Individual enrollment.
407.30  Limitations on enrollment.
407.32  Prejudice to enrollment rights because of Federal Government 
          misrepresentation, inaction, or error.

                   Subpart C--State Buy-in Agreements

407.40  Enrollment under a State buy-in agreement.
407.42  Buy-in groups available to the 50 States, the District of 
          Columbia, and the Northern Mariana Islands.
407.43  Buy-in groups available to Puerto Rico, Guam, the Virgin 
          Islands, and American Samoa.

[[Page 189]]

407.45  Termination of State buy-in agreements.
407.47  Beginning of coverage under a State buy-in agreement.
407.48  Termination of coverage under a State buy-in agreement.
407.50  Continuation of coverage: Individual enrollment following end of 
          coverage under a State buy-in agreement.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 53 FR 47204, Nov. 22, 1988, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 407.1  Basis and scope.

    (a) Statutory basis. The supplementary medical insurance (SMI) 
program is authorized by Part B of title XVIII of the Social Security 
Act.
    (1) Section 1831 of the Act establishes the program.
    (2) Sections 1836 and 1837 set forth the eligibility and enrollment 
requirements.
    (3) Section 1838 specifies the entitlement periods, which vary 
depending on the time and method of enrollment and on the basis for 
termination.
    (4) Section 1843 sets forth the requirements for State buy-in 
agreements under which States may enroll, and pay the SMI premiums for, 
eligible individuals who are also eligible for cash assistance or 
Medicaid.
    (5) Section 104(b) of the Social Security Amendments of 1965 (Pub. 
L. 89-87) specifies the limitations that apply to certain aliens and 
persons convicted of subversive activities.
    (b) Scope. This part sets forth the eligibility, enrollment, and 
entitlement requirements and procedures for supplementary medical 
insurance. (The rules about premiums are in part 408 of this chapter.)



Sec. 407.2  General description of program.

    Part B of Title XVIII of the Act provides for voluntary 
``supplementary medical insurance'' available to most individuals age 65 
or over and to disabled individuals who are under age 65 and entitled to 
hospital insurance. The SMI program is financed by premiums paid by (or 
for) each individual enrolled in the program, plus contributions from 
Federal funds. It covers certain physicians' services, outpatient 
services, home health services, services furnished by rural health 
clinics (RHCs), Federally qualified health centers (FQHCS), ambulatory 
surgical centers (ASCs), and comprehensive outpatient rehabilitation 
facilities (CORFs), and other medical and other health services.

[57 FR 24980, June 12, 1992]



Sec. 407.4  Basic requirements for entitlement.

    (a) An individual must meet the following requirements to be 
entitled to SMI:
    (1) Eligibility. The individual must meet the eligibility 
requirements specified in Sec. 407.10(a).
    (2) Enrollment. The individual must enroll for SMI, or must be 
enrolled by a State under a buy-in agreement as specified in 
Sec. 407.40.
    (b) SMI pays only for covered expenses incurred during an 
individual's period of entitlement.



        Subpart B--Individual Enrollment and Entitlement for SMI



Sec. 407.10  Eligibility to enroll.

    (a) Basic rule. Except as specified in paragraph (b) of this 
section, an individual is eligible to enroll for SMI if he or she--
    (1) Is entitled to hospital insurance under any of the rules set 
forth in Secs. 406.10 through 406.15 of this chapter; or
    (2) Meets the following requirements:
    (i) Has attained age 65. (An individual is considered to have 
attained age 65 on the day before the 65th anniversary of his or her 
birth.)
    (ii) Is a resident of the United States.
    (iii) Is a citizen of the United States, or an alien lawfully 
admitted for permanent residence who has resided continuously in the 
United States during the 5 years preceding the month in which he or she 
applies for enrollment.
    (b) Exception. An individual is not eligible to enroll for SMI if he 
or she has been convicted of--
    (1) Spying, sabotage, treason, or subversive activities under 
chapter 37, 105, or 115 of title 18 of the United States Code; or

[[Page 190]]

    (2) Conspiracy to establish dictatorship under section 4 of the 
Internal Security Act of 1950.



Sec. 407.11  Forms used to apply for enrollment under Medicare Part B.

    The following forms, available free of charge by mail from CMS, or 
at any Social Security branch or district office, are used to apply for 
enrollment under the supplementary medical insurance program.

    CMS-4040--Application for Enrollment in the Supplementary Medical 
Insurance Program. (This form is used for enrollment by individuals who 
are not eligible for monthly benefits or for hospital insurance.)
    CMS-40-B--Application for Medical Insurance. (For general use by the 
SSA District Office in requesting medical insurance protection during 
the general enrollment period or during the initial enrollment period if 
the enrollee is not subject to automatic enrollment is SMI.)
    CMS-40-D--Application for Enrollment in the Supplementary Medical 
Insurance Program. (This form is mailed to individuals who do not have 
current supplementary medical insurance because of prior refusals, 
voluntary withdrawal, or premium default from prior coverage. It is used 
during the annual general enrollment period.)
    CMS-40-F--Application for Medical Insurance. (For use by 
beneficiaries residing outside the United States.)
    CMS-18-F-5--Application for Hospital Insurance Entitlement. (For use 
by individuals who are not eligible for retirement benefits under Title 
II of the Social Security Act or under the Railroad Retirement Act. This 
form may also be used for enrollment in the supplementary medical 
insurance program.)


As an alternative, the individual may request enrollment by answering 
the Part B enrollment questions on an application for monthly Social 
Security benefits, or by signing a simple statement of request, if he or 
she is eligible to enroll at that time.



Sec. 407.12  General enrollment provisions.

    (a) Opportunity to enroll. (1) An individual who is eligible to 
enroll for SMI may do so during an initial enrollment period or a 
general enrollment period as specified in Secs. 407.14, and 407.15. An 
individual who meets the conditions specified in Sec. 407.20 may enroll 
during a special enrollment period, as provided in that section.
    (2) An individual who fails to enroll during his or her initial 
enrollment period or whose enrollment has been terminated may enroll or 
reenroll during a general enrollment period, or, if he or she meets the 
specified conditions, during a special enrollment period.
    (b) Enrollment periods ending on a nonworkday. (1) If an enrollment 
period ends on a Federal nonworkday, that period is automatically 
extended to the next succeeding workday.
    (2) A Federal nonworkday is any Saturday, Sunday, or Federal legal 
holiday or a day that is declared by statute or executive order to be a 
day on which Federal employees are not required to work.



Sec. 407.14  Initial enrollment period.

    (a) Duration. (1) The initial enrollment period is the 7-month 
period that begins 3 months before the month an individual first meets 
the eligibility requirements of Sec. 407.10 and ends 3 months after that 
first month of eligibility.
    (2) In determining the initial enrollment period of an individual 
who is age 65 or over and eligible for enrollment solely because of 
entitlement to hospital insurance, the individual is considered as first 
meeting the eligibility requirements for SMI n the first day he or she 
becomes entitled to hospital insurance or would have been entitled if he 
or she filed an application for that program.
    (b) Deemed initial enrollment period. (1) SSA or CMS will establish 
a deemed initial enrollment period for an individual who fails to enroll 
during the initial enrollment period because of a belief, based on 
erroneous documentary evidence, that he or she had not yet attained age 
65. The period will be established as though the individual had attained 
age 65 on the date indicated by the incorrect information.
    (2) A deemed initial enrollment period established under paragraph 
(b)(1) of this section is used to determine the individual's premium and 
right to enroll in a general enrollment period if that is advantageous 
to the individual.

[[Page 191]]



Sec. 407.15  General enrollment period.

    (a) Except as specified in paragraph (b) of this section, the 
general enrollment period is January through March of each calendar 
year.
    (b) An unlimited general enrollment period existed between April 1 
and September 30, 1981. Any eligible individual whose initial enrollment 
period had ended, or whose previous period of entitlement had 
terminated, could have enrolled or reenrolled during any month of that 
6-month period.



Sec. 407.17  Automatic enrollment.

    (a) Who is automatically enrolled. An individual is automatically 
enrolled for SMI if he or she:
    (1) Resides in the United States, except in Puerto Rico;
    (2) Becomes entitled to hospital insurance under any of the 
provisions set forth in Secs. 406.10 through 406.15 of this chapter; and
    (3) Does not decline SMI enrollment.
    (b) Opportunity to decline automatic enrollment. (1) SSA will notify 
an individual that he or she is automatically enrolled under paragraph 
(a) of this section and grant the individual a specified period (at 
least 2 months after the month the notice is mailed) to decline 
enrollment.
    (2) The individual may decline enrollment by submitting to SSA or 
CMS a signed statement that he or she does not wish SMI.
    (3) The statement must be submitted before entitlement begins, or if 
later, within the time limits set in the notice of enrollment.



Sec. 407.18  Determining month of automatic enrollment.

    (a) An individual who is automatically enrolled in SMI under 
Sec. 407.17 will have the month of enrollment determined in accordance 
with paragraphs (b) through (f) of this section. The month of enrollment 
determines the month of entitlement.
    (b) An individual is automatically enrolled in the third month of 
the initial enrollment period if he or she--
    (1) Is entitled to social security benefits under section 202 of the 
Act on the first day of the initial enrollment period;
    (2) Is entitled to hospital insurance based on end-stage renal 
disease; on entitlement to disability benefits as a social security or 
railroad retirement beneficiary; or on deemed entitlement to disability 
benefits on the basis of Medicare-qualified government employment; or
    (3) Establishes entitlement to hospital insurance by filing an 
application and meeting all other requirements (as set forth in subpart 
B of part 406 of this chapter) during the first 3 months of the initial 
enrollment period.
    (c) If an individual establishes entitlement to hospital insurance 
on the basis of an application filed in the last 4 months of the SMI 
initial enrollment period, he or she is automatically enrolled for SMI 
in the month in which the application is filed.
    (d) If an individual establishes entitlement to hospital insurance 
on the basis of an application filed after the SMI initial enrollment 
period but not during a general enrollment period in effect before April 
1, 1981, or after September 30, 1981, he or she is automatically 
enrolled for SMI on the first day of the next general enrollment period.
    (e) If the individual establishes entitlement to hospital insurance 
on the basis of an application filed during a SMI general enrollment 
period in effect before April 1, 1981 or after September 30, 1981, he or 
she is automatically enrolled on the first day of that period.
    (f) If an individual established entitlement to hospital insurance 
on the basis of an application filed during the general enrollment 
period of April 1, 1981, through September 30, 1981, he or she was 
automatically enrolled for SMI on the first day of the month in which 
the application was filed.



Sec. 407.20  Special enrollment period related to coverage under group health plans.

    (a) Terminology--(1) Group health plan (GHP) and large group health 
plan (LGHP). These terms have the meanings given them in Sec. 411.101 of 
this chapter except that the ``former employee'' language of those 
definitions does not apply with respect to SEPs for the reasons 
specified in Sec. 406.24(a)(3) of this chapter.

[[Page 192]]

    (2) Special enrollment period (SEP). This term has the meaning set 
forth in Sec. 406.24(a)(4) of this chapter. In order to use a SEP, an 
individual must meet the conditions of paragraph (b) and of paragraph 
(c) or (d) of this section, as appropriate.
    (b) General rule. All individuals must meet the following 
conditions:
    (1) They are eligible to enroll for SMI on the basis of age or 
disability, but not on the basis of end-stage renal disease.
    (2) When first eligible for SMI coverage (4th month of their initial 
enrollment period), they were covered under a GHP or LGHP on the basis 
of current employment status or, if not so covered, they enrolled in SMI 
during their initial enrollment period; and
    (3) For all months thereafter, they maintained coverage under either 
SMI or a GHP or LGHP. (Generally, if an individual fails to enroll in 
SMI during any available SEP, he or she is not entitled to any 
additional SEPs. However, if an individual fails to enroll during a SEP 
because coverage under the same or a different GHP or LGHP was restored 
before the end of that particular SEP, that failure to enroll does not 
preclude additional SEPs.)
    (c) Special rule: Individual age 65 or over. For an individual who 
is or was covered under a GHP, coverage must be by reason of the current 
employment status of the individual or the individual's spouse.
    (d) Special rules: Disabled individual.4 Individuals 
entitled on the basis of disability (but not on the basis of end-stage 
renal disease) must meet conditions that vary depending on whether they 
were covered under a GHP or an LGHP.
---------------------------------------------------------------------------

    \4\ Under the current statute, the SEP provision applicable to 
disabled individuals covered under an LGHP expires on September 1998. 
Unless Congress changes that date, the last SEP available under those 
provisions will begin with June 1998.
---------------------------------------------------------------------------

    (1) For a disabled individual who is or was covered under a GHP, 
coverage must be on the basis of the current employment status of the 
individual or the individual's spouse.
    (2) For a disabled individual who is or was covered under an LGHP, 
coverage must be as follows:
    (i) Before August 10, 1993, as an ``active individual'', that is, as 
an employee, employer, self-employed individual (such as the employer), 
individual associated with the employer in a business relationship, or 
as a member of the family of any of those persons.
    (ii) On or after August 10, 1993, by reason of current employment 
status of the individual or a member of the individual's family.
    (e) Effective date of coverage. The rule set forth in Sec. 406.24(d) 
for Medicare Part A applies equally to Medicare Part B.

[61 FR 40346, Aug. 2, 1996]



Sec. 407.22  Request for individual enrollment.

    (a) A request for enrollment is required of an individual who meets 
the eligibility requirements of Sec. 407.10 and desires SMI, if the 
individual--
    (1) Is not entitled to hospital insurance;
    (2) Has previously declined enrollment in SMI;
    (3) Has had a previous period of SMI entitlement which terminated;
    (4) Resides in Puerto Rico or outside the United States; or
    (5) Is enrolling or reenrolling during a special enrollment period 
under Sec. 407.20.
    (b) A request for enrollment under paragraph (a) of this section 
must:
    (1) Be signed by the individual or someone acting in his or her 
behalf; and
    (2) Be filed with SSA or CMS during the initial enrollment period, a 
general enrollment period, or a special enrollment period as provided in 
Sec. 407.20.



Sec. 407.25  Beginning of entitlement: Individual enrollment.

    The following apply whether an individual is self-enrolled or 
automatically enrolled in SMI:
    (a) Enrollment during initial enrollment period. (1) If an 
individual enrolls during the first three months of the initial 
enrollment period, entitlement begins with the first month of 
eligibility.
    (2) If an individual enrolls during the fourth month of the initial 
enrollment period, entitlement begins with the following month.
    (3) If an individual enrolls during the fifth month of the initial 
enrollment

[[Page 193]]

period, entitlement begins with the second month after the month of 
enrollment.
    (4) If an individual enrolls in either of the last two months of the 
initial enrollment period, entitlement begins with the third month after 
the month of enrollment.
    (5) Example. An individual first meets the eligibility requirements 
for enrollment in April. The initial enrollment period is January 
through July. The month in which the individual enrolls determines the 
month that begins the period of entitlement, as follows:

------------------------------------------------------------------------
 Enrolls in initial enrollment period        Entitlement begins on--
------------------------------------------------------------------------
January...............................  April 1 (month eligibility
                                         requirements first met).
February..............................  April 1.
March.................................  April 1.
April.................................  May 1 (month following month of
                                         enrollment).
May...................................  July 1 (second month after month
                                         of enrollment).
June..................................  September 1 (third month after
                                         month of enrollment).
July..................................  October 1 (third month after
                                         month of enrollment).
------------------------------------------------------------------------

    (b) Enrollment on reenrollment during general enrollment period. (1) 
if an individual enrolls or reenrolls during a general enrollment period 
before April 1, 1981 or after September 30, 1981, entitlement begins on 
July 1 of that calendar year.
    (2) If an individual enrolled or reenrolled during the general 
enrollment period between April 1, 1981 and September 20, 1981, 
entitlement began with the third month after the month in which the 
enrollment request was filed.
    (c) Enrollment or reenrollment during a SEP. The rules set forth in 
Sec. 406.24(d) of this chapter apply.

[53 FR 47204, Nov. 22, 1988, as amended at 61 FR 40347, Aug. 2, 1996]



Sec. 407.27  Termination of entitlement: Individual enrollment.

    An individual's entitlement will terminate for any of the following 
reasons:
    (a) Death. Entitlement to SMI ends on the last day of the month in 
which the individual dies.
    (b) Termination of hospital insurance benefits. If an individual's 
entitlement to hospital insurance ends before the month in which he or 
she attains age 65, entitlement to SMI will end on the same day unless 
it has been previously terminated in accordance with paragraph (c) or 
(d) of this section.
    (c) Request by individual. An individual may at any time give CMS or 
SSA written notice that he or she no longer wishes to participate in 
SMI, and request disenrollment.
    (1) Before July 1987, entitlement ended at the end of the calendar 
quarter after the quarter in which the individual filed the 
disenrollment request.
    (2) For disenrollment requests filed in or after July 1987, 
entitlement ends at the end of the month after the month in which the 
individual files the disenrollment request.
    (d) Nonpayment of premiums. If an individual fails to pay the 
premiums, entitlement will end as provided in the rules for SMI 
premiums, set forth in part 408 of this chapter.



Sec. 407.30  Limitations on enrollment.

    (a) Initial enrollment periods--(1) Individual under age 65. An 
individual who has not attained age 65 may have one or more periods of 
entitlement to hospital insurance, based on disability. Since each 
period of disability entitlement entitles the individual to hospital 
insurance and since entitlement to hospital insurance makes the 
individual eligible for SMI enrollment, an individual may have an SMI 
initial enrollment period for each continous period of entitlement to 
hospital insurance.
    (2) Individuals who have attained age 65. An individual who has 
attained age 65 may not have more than one initial enrollment period on 
the basis of age. However, if the individual develops ESRD after age 65, 
he or she may have another initial enrollment period based on meeting 
the requirements of Sec. 406.13 of this chapter.
    (b) Number of enrollments. There is no limitation on the number of 
enrollments.
    (c) Coverage under buy-in agreements. For purposes of paragraph (a) 
of this section, the continued enrollment of an individual following the 
end of coverage under a State buy-in agreement in considered an initial 
enrollment.

[[Page 194]]



Sec. 407.32  Prejudice to enrollment rights because of Federal Government misrepresentation, inaction, or error.

    If an individual's enrollment or nonenrollment in SMI is 
unintentional, inadvertent, or erroneous because of the error, 
misrepresentation, on inaction of a Federal employee or any person 
authorized by the Federal Government to act in its behalf, the Social 
Security Administration or CMS may take whatever action it determines is 
necessary to provide appropriate relief. The action may include:
    (a) Designation of a special initial or general enrollment period;
    (b) Designation of an entitlement period based on that enrollment 
period;
    (c) Adjustment of premiums;
    (d) Any combination of actions under paragraphs (a) through (c) of 
this section; or
    (e) Any other remedial action that may be necessary to correct or 
eliminate the effects of the error, misrepresentation, or inaction.



                   Subpart C--State Buy-In Agreements



Sec. 407.40  Enrollment under a State buy-in agreement.

    (a) Statutory basis. (1) Section 1843 of the Act, as amended through 
1969, permitted a State to enter into an agreement with the Secretary to 
enroll in the SMI program certain individuals who are eligible for SMI 
and who are members of the buy-in group specified in the agreement. A 
buy-in group could include certain individuals receiving Federally-aided 
State cash assistance (with the option of excluding individuals also 
entitled to social security benefits or railroad retirement benefits) or 
could include all individuals eligible for Medicaid. Before 1981, 
December 31, 1969 was the last day on which a State could request a buy-
in agreement or a modification to include a coverage group broader than 
the one originally selected.
    (2) Section 945(e) of the Omnibus Reconciliation Act of 1980 (Pub. 
L. 96-499) further amended section 1843 to provide that, during calendar 
year 1981, a State could request a buy-in agreement if it did not 
already have one, or request a broader coverage group for an existing 
agreement.
    (3) Several laws enacted during 1980-1987 had the effect of 
requiring that the buy-in groups available under section 1843 of the Act 
be expanded to include certain individuals who lose eligibility for cash 
assistance payments but are treated as if they were cash assistance 
recipients for Medicaid eligibility purposes.
    (4) Section 301(e)(1) of the Medicare Catastrophic Coverage Act of 
1988 (Pub. L. 100-360) amends section 1843 of the Act to restore the 
1981 provisions on a permanent basis, effective ``after 1988.''
    (5) The same section 301, as amended by section 608(d)(14)(H) of the 
Family Support Act of 1988 (Pub. L. 100-485), further amended section 
1843 of the Act, beginning January 1, 1989, to establish a new buy-in 
category consisting of Qualified Medicare Beneficiaries and to provide 
that a State may request a buy-in agreement if it does not already have 
one, or request a broader buy-in group for the existing agreement.
    (b) Definitions. As used in this section, unless the context 
indicates otherwise--
    Cash assistance means any of the following kinds of monthly cash 
benefits, authorized by specified titles of the Act and, for 
convenience, represented by initials, as follows:
    AABD stands for aid to the aged, blind or disabled under the first 
title XVI of the Act in effect until December 31, 1973.
    AB stands for aid to the blind under title X of the Act.
    AFDC stands for aid to families with dependent children under Part A 
of title IV of the Act.
    APTD stands for aid to the permanently and totally disabled under 
title XIV of the Act.
    OAA stands for old-age assistance under title I of the Act.
    SSI stands for supplemental security income for the aged, blind, and 
disabled under the second title XVI of the Act, effective January 1, 
1974.
    SSP stands for State supplementary payments, whether mandatory or 
optional, to an aged, blind, or disabled individual under the second 
title XVI or the Act.

[[Page 195]]

    Qualified Medicare Beneficiary or QMB means an individual who meets 
the definition in Sec. 400.200 of this chapter and, therefore, is 
eligible to have the State Medicaid agency pay Medicare cost sharing 
amounts on his or her behalf.
    Railroad retirement beneficiary means an individual entitled to 
receive an annuity under the Railroad Retirement Act of 1974.
    State means one of the 50 States, the District of Columbia, Guam, 
Puerto Rico, the Virgin Islands, American Samoa, or the Northern Mariana 
Islands, except when reference is made to ``the 50 States''.
    State buy-in agreement or buy-in agreement means an agreement 
authorized by section 1843 of the Act, under which a State secures SMI 
or premium HI coverage for individuals who are members of the buy-in 
group specified in the agreement, by enrolling them and paying the 
premiums on their behalf.
    (c) Basic rules.
    (1) A State that has a buy-in agreement in effect must enroll any 
individual who is eligible to enroll in SMI under Sec. 407.10.
    (2) Any State that does not have a buy-in agreement in effect may 
request buy-in for any one of the groups specified in Secs. 407.42 and 
407.43.
    (3) Any State that does have an agreement may request a modification 
to cover a broader buy-in group or cancel its current agreement and 
request a new agreement to cover a narrower group.

[56 FR 38080, Aug. 12, 1991; 56 FR 50058, Oct. 3, 1991]



Sec. 407.42  Buy-in groups available to the 50 States, the District of Columbia, and the Northern Mariana Islands.

    (a) Categories included in the buy-in groups. The buy-in groups that 
are available to the 50 States, the District of Columbia, and the 
Northern Mariana Islands are specified in paragraph (b) of this section 
in terms of the following categories:
    (1) Category A: Individuals who--
    (i) Receive SSI or SSP or both; and
    (ii) Are covered under the State's Medicaid plan as categorically 
needy.
    (2) Category B: Individuals who--
    (i) Under the Act or any other provision of Federal law are treated, 
for Medicaid eligibility purposes, as though they were receiving SSI or 
SSP; and
    (ii) Are covered under the State's Medicaid plan as categorically 
needy.
    (3) Category C: Individuals who are receiving AFDC.
    (4) Category D: Individuals who, under the Act or any other 
provision of Federal law, are treated, for Medicaid eligibility 
purposes, as though they were receiving AFDC.
    (5) Category E: Individuals who, in accordance with Sec. 435.114 or 
Sec. 435.134 of this chapter, are covered under the State's Medicaid 
plan despite the increase in social security benefits provided by Public 
Law 92-336.
    (6) Category F: Individuals who are Qualified Medicare 
Beneficiaries.1
---------------------------------------------------------------------------

    \1\ Rules for buy-in for premium hospital insurance for QMBs are set 
forth in Sec. 406.26 of this chapter.
---------------------------------------------------------------------------

    (7) Category G: All other individuals who are eligible for Medicaid.
    (b) Buy-in groups available. Any of the 50 States, the District of 
Columbia, and the Northern Mariana Islands may buy-in for one of the 
following groups:
    (1) Group 1: Categories A through G.
    (2) Group 2: Categories A through F.
    (3) Group 3: Categories A through E.
    (4) Group 4: Categories A, B, and F, individuals in categories C and 
D who are not social security or railroad retirement beneficiaries, and 
individuals in category E who are included in that category (in 
accordance with Sec. 435.134 of this chapter) because they received OAA, 
AB, APTD, or AABD in August 1972 or would have been eligible to receive 
such cash assistance for that month if they had applied or had not been 
institutionalized.
    (5) Group 5: Categories A and B, individuals in categories C and D 
who are not social security or railroad retirement beneficiaries, and 
individuals in category E who are included in that category (in 
accordance with Sec. 435.134 of this chapter) because they received OAA, 
AB, APTD, or AABD in August 1972 or would have been eligible to receive 
such cash assistance for that month if they had applied or had not been 
institutionalized.
    (6) Group 6: Categories A, B, and F, and individuals in category E 
who are

[[Page 196]]

included in that category (in accordance with Sec. 435.134 of this 
chapter) because they received AABD in August 1972 or would have been 
eligible to receive AABD for that month if they had applied or had not 
been institutionalized. This option is available only to those States 
that had an AABD program as of December 31, 1973.
    (7) Group 7: Categories A and B, and individuals in category E who 
are included in that category (in accordance with Sec. 435.134 of this 
chapter) because they received AABD in August 1972 or would have been 
eligible to receive AABD for that month if they had applied or had not 
been institutionalized. This option is available only to those States 
that had an AABD program as of December 31, 1973.

[56 FR 38081, Aug. 12, 1991]



Sec. 407.43  Buy-in groups available to Puerto Rico, Guam, the Virgin Islands, and American Samoa.

    (a) Categories included in buy-in groups. The buy-in groups that are 
available to Puerto Rico, Guam, the Virgin Islands, and American Samoa, 
which are not covered by the SSI program, are described in paragraph (b) 
of this section in terms of the following categories:
    (1) Category A: Individuals receiving OAA, AB, APTD, or AFDC.
    (2) Category B: Individuals who, under the Act or any other 
provision of Federal law, are treated, for Medicaid eligibility 
purposes, as though they were receiving AFDC.
    (3) Category C: Individuals who, in accordance with Sec. 436.112 of 
this chapter, are covered under the State's Medicaid plan despite the 
increase in social security benefits provided by Public Law 92-336.
    (4) Category D: Individuals who are Qualified Medicare 
Beneficiaries.1
---------------------------------------------------------------------------

    \1\ Rules for buy-in for premium hospital insurance for QMBs are set 
forth in Sec. 406.26 of this chapter.
---------------------------------------------------------------------------

    (5) Category E: All other individuals who are eligible for Medicaid.
    (b) Buy-in groups available. Puerto Rico, Guam, the Virgin Islands, 
and American Samoa may choose any of the following coverage groups:
    (1) Group 1: Categories A through E.
    (2) Group 2: Categories A through D.
    (3) Group 3: Categories A through C.
    (4) Group 4: Individuals in category D, and individuals in 
categories A and B who are not social security or railroad retirement 
beneficiaries.
    (5) Group 5: Individuals in categories A and B who are not social 
security or railroad retirement beneficiaries.
    (6) Group 6: Individuals in category D, individuals in category A 
who are receiving OAA, and individuals in category C who are included in 
that category (in accordance with Sec. 436.112 of this chapter) because 
they received OAA for August 1972 or would have been eligible to receive 
OAA for that month if they had applied or had not been 
institutionalized.
    (7) Group 7: Individuals in category A who are receiving OAA, and 
individuals in category C who are included in that category (in 
accordance with Sec. 436.112 of this chapter) because they received OAA 
for August 1972 or would have been eligible to receive OAA for that 
month if they had applied or had not been institutionalized.
    (8) Group 8: Individuals in category D and individuals in category A 
who are receiving OAA and are not social security or railroad retirement 
beneficiaries.
    (9) Group 9: Individuals in category A who are receiving OAA and are 
not social security or railroad retirement beneficiaries.

[56 FR 38082, Aug. 12, 1991]



Sec. 407.45  Termination of State buy-in agreements.

    (a) Termination by the State--(1) Termination after advance notice. 
A State may terminate its buy-in agreement after giving CMS 3 months, 
advance notice.
    (2) Termination without advance notice. A State may terminate its 
buy-in agreement without advance notice if--
    (i) The State gives CMS written certification to the effect that it 
is no longer legally able to comply with one or more of the provisions 
of the agreement; and
    (ii) Submits a supporting opinion from the appropriate State legal 
officer, if CMS requests such an opinion.
    (b) Termination by CMS. If CMS, after giving the State notice and 
opportunity for hearing, finds that the State

[[Page 197]]

has failed to comply substantially with one or more of the provisions of 
the agreement, other than the requirement for timely payment of 
premiums, CMS will give the State written notice to the effect that the 
agreement will terminate on the date indicated in the notice unless, 
before that date, CMS finds that there is no longer that failure to 
comply. (Rules for collection of overdue premiums, including assessment 
of interest and offset against FFP due the State, are those set forth in 
the Notice published on September 30, 1985 at 50 FR 39784.)



Sec. 407.47  Beginning of coverage under a State buy-in agreement.

    (a) General rule. The beginning of an individual's coverage period 
depends on two factors:
    (1) The individual's meeting the SMI eligibility requirements and 
the requirements for being a member of the buy-in group; and
    (2) The effective date of the buy-in agreement or agreement 
modification that covers the group to which the individual belongs, and 
which may not be earlier than the third month after the month in which 
the agreement or modification is executed.
    (b) Application of general rule: Medicaid eligibles who are, or are 
treated as, cash assistance recipients. For Medicaid eligibles who are, 
or are treated as, cash assistance recipients (that is, are members of 
categories A through E of Sec. 407.42(a) or categories A through C of 
Sec. 407.43(a)), coverage begins with the later of the following:
    (1) The first month in which the individual--
    (i) Meets the SMI eligibility requirements specified in Sec. 407.10; 
and
    (ii) Is a member of one of those categories.
    (2) The month in which the buy-in agreement is effective.
    (c) Application of general rule: Qualified Medicare Beneficiaries. 
For individuals who are QMBs (that is, are members of category F of 
Sec. 407.42 or category D of Sec. 407.43(a)), coverage begins with the 
later of the following:
    (1) The first month in which the individual meets the SMI 
eligibility requirements specified in Sec. 407.10, and has QMB status.
    (2) The month in which the buy-in agreement or agreement 
modification covering QMBs is effective.
    (d) Application of general rule: Other individuals eligible for 
Medicaid. For individuals who are members of category G of 
Sec. 407.42(a) or category E of Sec. 407.43(a), coverage begins with the 
later of the following:
    (1) The second month after the month in which the individual--
    (i) Meets the SMI eligibility requirements specified in Sec. 407.10; 
and
    (ii) Is determined to be eligible for Medicaid.
    (2) The month in which the buy-in agreement or agreement 
modification is effective.
    (e) Coverage based on erroneous report. If the State erroneously 
reports to SSA that an individual is a member of its coverage group, the 
rules of paragraphs (a) through (d) of this section apply, and coverage 
begins as though the individual were in fact a member of the group. 
Coverage will end only as provided in Sec. 407.48.

[56 FR 38082, Aug. 12, 1991]



Sec. 407.48  Termination of coverage under a State buy-in agreement.

    An individual's coverage under a buy-in agreement terminates with 
the earliest of the following events:
    (a) Death. Coverage ends on the last day of the month in which the 
individual dies.
    (b) Loss of entitlement to hospital insurance benefits before age 
65. If an individual loses entitlement to hospital insurance benefits 
before attaining age 65, coverage ends on the last day of the last month 
for which he or she is entitled to hospital insurance.
    (c) Loss of eligibility for the buy-in group. If an individual loses 
eligibility for inclusion in the buy-in group, buy-in coverage ends as 
follows:
    (1) On the last day of the last month for which he or she is 
eligible for inclusion in the group, if CMS determines ineligibility or 
receives a State ineligibility notice by the 25th day of the second 
month after the month in which the individual becomes ineligible for 
inclusion in the group.
    (2) On the last day of the second month before the month in which 
CMS receives a State ineligibility notice

[[Page 198]]

later than the time specified in paragraph (c)(1) of this section. A 
notice received by CMS after the 25th day of the month is considered to 
have been received in the following month.
    (d) Termination or modification of buy-in agreement. If the State's 
buy-in agreement is terminated, or modified to substitute a narrower 
buy-in group, coverage ends on the last day of the last month for which 
the agreement was in effect, or covered the broader buy-in group.

[53 FR 47204, Nov. 22, 1988, as amended at 56 FR 38082, Aug. 12, 1991]



Sec. 407.50  Continuation of coverage: Individual enrollment following end of coverage under a State buy-in agreement.

    (a) Deemed enrollment. When coverage under a buy-in agreement ends 
because the agreement terminates, or is modified to substitute a 
narrower buy-in group, or because the individual is no longer eligible 
for inclusion in the buy-in group, the individual--
    (1) Is considered to have enrolled during his or her initial 
enrollment period; and
    (2) Will be entitled to SMI on this basis and liable for SMI 
premiums beginning with the first month for which he or she is no longer 
covered under the buy-in agreement.
    (b) Voluntary termination. (1) An individual may voluntarily 
terminate entitlement acquired under paragraph (a) of this section by 
filing, with SSA or CMS, a request for disenrollment.
    (2) Voluntary disenrollment is effective as follows:
    (i) If the individual files a request within 30 days after the date 
of CMS's notice that buy-in coverage has ended, the individual's 
entitlement ends on the last day of the last month for which the State 
paid the premium.
    (ii) If the individual files the request more than 30 days but not 
more than 6 months after buy-in coverage ends, entitlement ends on the 
last day of the month in which the request is filed.
    (iii) If the individual files the request later than the 6th month 
after buy-in coverage ends, entitlement ends at the end of the month 
after the month in which request is filed.1
---------------------------------------------------------------------------

    \1\ For requests filed before July 1987, entitlement ended on the 
last day of the calendar quarter after the quarter in which the 
disenrollment request was filed.

[53 FR 47204, Nov. 22, 1988, as amended at 56 FR 38082, Aug. 12, 1991]



PART 408--PREMIUMS FOR SUPPLEMENTARY MEDICAL INSURANCE--Table of Contents




                      Subpart A--General Provisions

Sec.
408.1  Statutory basis.
408.2  Scope and purpose.
408.3  Definitions.
408.4  Payment obligations.
408.6  Methods and priorities for payment.
408.8  Grace period and termination date.
408.10  Claim for monthly benefits pending concurrently with request for 
          SMI enrollment.

                  Subpart B--Amount of Monthly Premium

408.20  Monthly premiums.
408.22  Increased premiums for late enrollment and for reenrollment.
408.24  Individuals who enrolled or reenrolled before April 1, 1981 or 
          after September 30, 1981.
408.25  Individuals who enrolled or reenrolled between April 1 and 
          September 30, 1981.
408.26  Examples.
408.27  Rounding the monthly premium.

               Subpart C--Deduction From Monthly Benefits

408.40  Deduction from monthly benefits: Basic rules.
408.42  Deduction from railroad retirement benefits.
408.43  Deduction from social security benefits.
408.44  Deduction from civil service annuities.
408.45  Deduction from age 72 special payments.
408.46  Effect of suspension of social security benefits.
408.47  [Reserved]
408.50  When premiums are considered paid.
408.52  Change from direct remittance to deduction.
408.53  Change from partial direct remittance to full deduction.

            Subpart D--Direct Remittance: Individual Payment

408.60  Direct remittance: Basic rules.

[[Page 199]]

408.62  Initial and subsequent billings.
408.63  Billing procedures when monthly benefits are less than monthly 
          premiums.
408.65  Payment options.
408.68  When premiums are considered paid.
408.70  Change from quarterly to monthly payments.
408.71  Change from deduction or State payment to direct remittance.

               Subpart E--Direct Remittance: Group Payment

408.80  Basic rules.
408.82  Conditions for group billing.
408.84  Billing and payment procedures.
408.86  Responsibilities under group billing arrangement.
408.88  Refund of group payments.
408.90  Termination of group billing arrangement.
408.92  Change from group payment to deduction or individual payment.

          Subpart F--Termination and Reinstatement of Coverage

408.100  Termination of coverage for nonpayment of premiums.
408.102  Reconsideration of termination.
408.104  Reinstatement procedures.

  Subpart G--Collection of Unpaid Premiums; Refund of Excess Premiums 
                     After the Death of the Enrollee

408.110  Collection of unpaid premiums.
408.112  Refund of excess premiums after the enrollee dies.

 Subpart H--Supplementary Medical Insurance Premium Surcharge Agreements

Sec.
408.200  Statutory basis.
408.201  Definitions.
408.202  Conditions for participation.
408.205  Application procedures.
408.207  Billing and payment procedures.
408.210  Termination of SMI premium surcharge agreement.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 52 FR 48115, Dec. 18, 1987, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 408.1  Statutory basis.

    (a) This part implements certain provisions of sections 1837 through 
1840 and 1881(d) of the Social Security Act (the Act) and conforms to 
other regulations that implement section 1843 of the Act. Section 
1838(b) requires regulations to establish when an individual's coverage 
ends because of nonpayment of premiums. It also specifies that those 
regulations may provide a grace period for payment of overdue premiums 
without loss of coverage. Section 1839 sets forth the specific 
procedures for determining the amount of the monthly premium and section 
1840 establishes the rules for payment of premiums. Section 1843 
provides that a State may enter into a buy-in agreement to secure SMI 
coverage for certain individuals by enrolling them in the SMI program 
and paying the premiums on their behalf. Section 1881(d) provides that 
Medicare payment, for the reasonable charges incurred in connection with 
a kidney donation, shall be made (without regard to deductible, premium, 
or coinsurance provisions of title XVIII) as prescribed in regulations.
    (b) The Federal Claims Collection Act (31 U.S.C. 3711), as 
implemented by 4 CFR parts 101-105, provides the basic authority for 
recovery of debts owed the United States government and specifies the 
conditions for the suspension or termination of collection action. 
Departmental regulations at 45 CFR part 30, updated by a final rule 
published on January 5, 1987 (52 FR 260) set forth procedures for the 
exercise of the Department's authority to collect and dispose of debts 
and were intended to complement rules applicable to particular programs. 
CMS rules are set forth at 42 CFR part 401, subpart F.

[52 FR 48115, Dec. 18, 1987; 53 FR 4158, Feb. 12, 1988, as amended at 56 
FR 48112, Sept. 24, 1991]



Sec. 408.2  Scope and purpose.

    (a) This part sets forth the policies and procedures for determining 
the amount of monthly supplementary medical insurance (SMI) premiums, 
for the payment, collection, or refund of premiums, for termination of 
coverage because of nonpayment of premiums, and for reinstatement of 
coverage if certain conditions are met. It conforms to subpart C of part 
407 of this chapter, which sets forth the requirements for State buy-in 
agreements. These policies are intended to protect enrollee

[[Page 200]]

coverage to the maximum degree compatible with maintaining the integrity 
of the SMI program.
    (b) Policies that apply to premiums that certain individuals must 
pay in order to become entitled to Medicare Part A hospital insurance 
benefits, are set forth in part 406 of this chapter.

[52 FR 48115, Dec. 18, 1987; 53 FR 4159, Feb. 12, 1988]



Sec. 408.3  Definitions.

    As used in this part, unless the context indicates otherwise--
    Enrollee means an individual who is enrolled in the SMI program 
under Medicare Part B.
    Taxable year means the 12-month period (calendar or fiscal year) for 
which the individual files his or her income tax return.



Sec. 408.4  Payment obligations.

    (a) Month for which payment is due. (1) A payment is due for each 
month, beginning with the first month of SMI coverage and continuing 
through the month of death or, if earlier, the month in which coverage 
terminates.
    (2) A premium is due for the month of death, if SMI coverage is 
still in effect, even though the individual dies on the first day of the 
month.
    (b) Overdue premiums. (1) Overdue premiums constitute an obligation 
enforceable against the enrollee or the enrollee's estate.
    (2) Overdue premiums are collected--
    (i) By deduction from social security or railroad retirement 
benefits or Federal civil service annuities;
    (ii) Directly from the enrollee or the enrollee's estate; or
    (iii) By offset against any SMI payments payable to the enrollee or 
the enrollee's estate.
    (3) Interest is not charged on overdue premiums, except under a 
State buy-in agreement, as provided in Sec. 408.6(c)(4).
    (c) Premiums not required for certain kidney donors. (1) No premiums 
are required for SMI benefits related to the donation of a kidney if the 
donor is not an enrollee.
    (2) A kidney donor who is an enrollee is not relieved of the 
obligation for premiums.

[52 FR 48115, Dec. 18, 1987; 53 FR 4159, Feb. 12, 1988]



Sec. 408.6  Methods and priorities for payment.

    (a) Methods of payment--(1) General rules. Premiums are paid by one 
of the following four methods:
    (i) Payment by a State under a buy-in agreement.
    (ii) Deduction from monthly railroad retirement of social security 
cash benefits or Federal civil service annuities.
    (iii) Direct remittance on an individual basis, by or on behalf of 
the enrollee.
    (iv) Direct remittance on a group basis, by an employer, union, 
lodge or other organization, or by an entity of State or local 
government.
    (2) Special situations. (i) If the monthly social security benefit 
or age 72 special benefit is less than the monthly premium, the benefit 
is withheld and the enrollee is required to pay the balance through 
direct remittance. (This situation may arise if the individual first 
becomes eligible for social security benefits after December 31, 1981, 
and is, therefore, not eligible for the fixed minimum, or receives age 
72 special benefits that are reduced because the individual receives a 
government pension.)
    (ii) If the monthly railroad retirement benefit or civil service 
annuity payment is less than the premium, the monthly payment is not 
withheld and the enrollee is required to pay the total premium by direct 
remittance.
    (b) Priorities for payment. (1) If an enrollee is enrolled under a 
State buy-in agreement--
    (i) SMI premiums may not be deducted from monthly cash benefits or 
annuities; and
    (ii) The enrollee may not be required to pay by direct remittance.
    (2) If an enrollee is not covered under a State buy-in agreement, 
but is receiving a monthly benefit or an annuity specified in paragraph 
(a)(1)(ii) of this section--

[[Page 201]]

    (i) The premiums are deducted from that benefit or annuity; or
    (ii) If the monthly benefit or payment is less than the monthly 
premium, the rules of paragraph (a)(2) of this section apply.
    (3) If an enrollee is neither covered under a State buy-in 
agreement, nor receiving monthly benefits or annuity payments, the 
premiums must be paid totally by direct remittance.
    (c) Payment by a State under a buy-in agreement. (1) A buy-in 
agreement is an agreement under which a State, through enrollment and 
payment of SMI premiums, secures SMI benefits for individuals who are 
eligible for that program and also eligible for certain other cash or 
medical benefits. (Policies on enrollment under State buy-in agreements 
are contained in subpart C of part 407 of this chapter.)
    (2) The State pays the premiums for each month for which an 
individual is covered under the agreement.
    (3) If an individual's coverage under a State buy-in agreement 
terminates, his coverage continues on an individual enrollment basis. 
The premiums are then deducted from benefits, as set forth in subpart C 
of this part, or paid by direct remittance in accordance with subpart D 
or subpart E of this part.
    (4) Policy on collection of premiums from buy-in States is set forth 
in a Federal Register notice published on September 30, 1985 at 50 FR 
39784.



Sec. 408.8  Grace period and termination date.

    (a) Grace period. (1) For all initial premium payments (monthly or 
quarterly), and subsequent monthly or quarterly payments, the grace 
period ends with the last day of the third month after the billing 
month.
    (2) For payments required because the monthly benefit is less than 
the monthly premium, the grace period ends on April 30 of the year 
following the calendar year which the premiums are due.
    (b) Extension of grace period: Last day is nonwork day. If the last 
day of the grace period is a Saturday, Sunday, legal holiday, or a day 
that, by statute or executive order, is a nonwork day for Federal 
employees, the grace period is extended to the next succeeding work day.
    (c) Termination date. The end of the grace period is the termination 
date for SMI coverage if overdue premiums have not been paid by that 
date in accordance with Sec. 408.68.
    (d) Extension of grace period for good cause. (1) CMS may reinstate 
entitlement, without interruption of coverage, if the individual shows 
good cause for failure to pay within the initial grace period, and pays 
all overdue premiums within three calendar months after the termination 
date.
    (2) Good cause will be found if the individual establishes, by a 
credible statement, that failure to pay premiums within the initial 
grace period was due to conditions over which he or she had no control, 
or which he or she could not reasonably have been expected to foresee.

[52 FR 48115, Dec. 18, 1987, as amended at 56 FR 48112, Sept. 24, 1991]



Sec. 408.10  Claim for monthly benefits pending concurrently with request for SMI enrollment.

    (a) If it is clear that an individual who applies for social 
security or railroad retirement benefits and for SMI will be entitled to 
monthly benefits, the application for monthly benefits is processed 
simultaneously with the request for SMI enrollment.
    (1) If monthly benefits are paid, the SMI premiums are deducted from 
those benefits.
    (2) If monthly benefits are suspended (for instance, because the 
individual's earnings exceed the maximum allowed by law), the enrollee 
is billed for direct remittance.
    (b) If it is clear that an individual will be entitled to SMI, but 
there is substantial question as to eligibility for monthly benefits, 
the request for SMI enrollment is processed separately.
    (1) When SMI enrollment is approved, the enrollee is billed for 
direct remittance.
    (2) When the application for monthly benefits is adjudicated, the 
following rules apply:
    (i) If monthly benefits are paid, the SMI premiums are deducted from 
those benefits, with appropriate adjustments

[[Page 202]]

for any premiums already paid by direct remittance.
    (ii) If the application for monthly benefits is approved but the 
benefits are suspended, the grace period is as set forth in 
Sec. 408.8(a).
    (iii) If the application for monthly benefits is denied, the grace 
period is as set forth in Sec. 408.8(a)(1).

[52 FR 48115, Dec. 18, 1987, as amended at 56 FR 48112, Sept. 24, 1991]



                  Subpart B--Amount of Monthly Premiums



Sec. 408.20  Monthly premiums.

    (a) Statutory provisions. (1) The law established a monthly premium 
of $3 for the initial period of the program. It also set forth criteria 
and procedures for the Secretary to follow each December, beginning with 
December 1968, to determine and promulgate the standard monthly premium 
for the 12-month period beginning with July of the following year.
    (2) The law was amended in 1983 to require that the Secretary 
promulgate the standard monthly premium in September of that year, and 
each year thereafter, to be effective for the 12 months beginning with 
the following January.
    (3) The standard monthly premium applies to individuals who enroll 
during their initial enrollment periods. In other situations, that 
premium may be increased or decreased as specified in this subpart.
    (4) The law was further amended in 1984 to include a temporary 
``hold harmless'' provision (set forth in paragraph (e) of this 
section), that was subsequently extended and finally made permanent in 
1988.
    (b) Criteria and procedures for the period from July 1976 through 
December 1983, the period from January 1991 through December 1995, and 
for periods after December 1998. (1) For periods from July 1976 through 
December 1983 and after December 1998, the Secretary determines and 
promulgates as the standard monthly premium (for disabled as well as 
aged enrollees) the lower of the following:
    (i) The actuarial rate for the aged.
    (ii) The monthly premium promulgated the previous December for the 
year beginning July 1, increased by a percentage that is the same as the 
latest cost-of-living increase in old age insurance benefits that 
occurred before the current promulgation. (Because of the change in the 
effective dates of the premium amount (under paragraph (a)(2) of this 
section), there was no increase in the standard monthly premium for the 
period July 1983 through December 1983.)
    (2) For periods after December 1998, the Secretary determines the 
standard monthly premium in the manner specified in paragraph (b)(1) of 
this section, but promulgates it in September for the following calendar 
year.
    (3) The premiums for calendar years 1991 through 1995 are those 
amounts as specified by section 1839(e)(1)(B) of the Act as follows:
    (i) In 1991, $29.90;
    (ii) In 1992, $31.80;
    (iii) In 1993, $36.60;
    (iv) In 1994, $41.10; and
    (v) In 1995, $46.10.
    (c) Premiums for calendar years 1984 through 1990 and 1996 through 
1998. For calendar years 1984 through 1990 and 1996 through 1998, the 
standard monthly premium for all enrollees--
    (1) Is equal to 50 percent of the actuarial rate for enrollees age 
65 or over, that is, is calculated on the basis of 25 percent of program 
costs without regard to any cost-of-living increase in old age insurance 
benefits; and
    (2) Is promulgated in the preceding September.
    (d) Limitation on increase of standard premium: 1987 and 1988. If 
there is no cost-of-living increase in old age or disability benefits 
for December 1985 or December 1986, the standard monthly premiums for 
1987 and 1988 (promulgated in September 1986 and September 1987, 
respectively) may not be increased.
    (e) Nonstandard premiums for certain cases--(1) Basic rule. A 
nonstandard premium may be established in individual cases only if the 
individual is entitled to old age or disability benefits for the months 
of November and December, and actually receives the corresponding 
benefit checks in December and January.

[[Page 203]]

    (2) Special rules: Calendar years 1987 and 1988. For calendar years 
1987 and 1988, the following rules apply:
    (i) A nonstandard premium may be established if there is a cost-of-
living increase in old age or disability benefits but, because the 
increase in the standard premium is greater than the cost-of-living 
increase, the beneficiary would receive a lower cash benefit in January 
than he or she received in December.
    (ii) A nonstandard premium may not be established if the reduction 
in the individual's benefit would result, in whole or in part, from any 
circumstance other than the circumstance described in paragraph 
(e)(2)(i) of this section.
    (3) Special rule: Calendar years after 1988. (i) Beginning with 
calendar year 1989, a premium increase greater than the cost-of-living 
increase is still a prerequisite for a nonstandard premium.
    (ii) However, a nonstandard premium is not precluded solely because 
the cash benefit is further reduced as a result of government pension 
offset or workers' compensation payment.
    (4) Amount of nonstandard premium. The nonstandard premium is the 
greater of the following:
    (i) The premium paid for December.
    (ii) The standard premium promulgated for January, reduced as 
necessary to compensate for--
    (A) The fact that the cost-of-living increase was less than the 
increase in the standard premium; or
    (B) The further reduction in benefit because of government pension 
offset or workers' compensation payments.
    (5) Effective dates of nonstandard premium. A nonstandard premium 
established under this paragraph (e) continues in effect for the rest of 
the calendar year even if later there are retroactive adjustments in 
benefit payments. (The nonstandard premium could be affected by a 
determination that the individual had not established, or had lost, 
entitlement to monthly benefits for November or December, or both.)
    (6) Effect of late enrollment or reenrollment. A nonstandard premium 
is subject to increase for late enrollment or reenrollment as required 
under other sections of this subpart. The increase is computed on the 
basis of the standard premium and added to the nonstandard premium.

[56 FR 8839, Mar. 1, 1991, as amended at 59 FR 26959, May 25, 1994]



Sec. 408.22  Increased premiums for late enrollment and for reenrollment.

    For an individual who enrolls after expiration of his or her initial 
enrollment period or reenrolls after termination of a coverage period, 
the standard monthly premium determined under Sec. 408.20 is increased 
by ten percent for each full twelve months in the periods specified in 
Secs. 408.24 and 408.25.



Sec. 408.24  Individuals who enrolled or reenrolled before April 1, 1981 or after September 30, 1981.

    (a) Enrollment. For an individual who first enrolled before April 1, 
1981 or after September 30, 1981, the period includes the number of 
months elapsed between the close of the individual's initial enrollment 
period and the close of the enrollment period in which he or she first 
enrolled, and excludes the following:
    (1) The three months of January through March 1968, if the 
individual first enrolled before April 1968.
    (2) Any months before January 1973 during which the individual was 
precluded from enrolling or reenrolling by the 3-year limitation on 
enrollment or reenrollment that was in effect before October 30, 1972.
    (3) Any months in or before a period of coverage under a State buy-
in agreement.
    (4) For an individual under age 65, any month before his or her 
current continuous period of entitlement to hospital insurance.
    (5) For an individual age 65 or older, any month before the month he 
or she attained age 65.
    (6) For premiums due for months beginning with September 1984 and 
ending with May 1986, the following:
    (i) Any months after December 1982 during which the individual was--
    (A) Age 65 to 69;
    (B) Entitled to hospital insurance (Medicare Part A); and
    (C) Covered under a group health plan (GHP) by reason of current 
employment status.

[[Page 204]]

    (ii) Any months of SMI coverage for which the individual enrolled 
during a special enrollment period as provided in Sec. 407.20 of this 
chapter.
    (7) For premiums due for months beginning with June 1986, the 
following:
    (i) Any months after December 1982 during which the individual was:
    (A) Age 65 or over; and
    (B) Covered under a GHP by reason of current employment status.
    (ii) Any months of SMI coverage for which the individual enrolled 
during a special enrollment period as provided in Sec. 407.20 of this 
chapter.
    (8) For premiums due for months beginning with January 1987, the 
following:
    (i) Any months after December 1986 and before October 1998 during 
which the individual was:
    (A) A disabled Medicare beneficiary under age 65;
    (B) Not eligible for Medicare on the basis of end stage renal 
disease, under Sec. 406.13 of this chapter; and
    (C) Covered under an LGHP as described in Sec. 407.20 of this 
chapter.
    (ii) Any months of SMI coverage for which the individual enrolled 
during a special enrollment period as provided in Sec. 407.20 of this 
chapter.
    (9) For premiums due for months beginning with July 1990, the 
following:
    (i) Any months after December 1986 during which the individual met 
the conditions of paragraphs (a)(8)(i)(A) and (a)(8)(i)(B) of this 
section, and was covered under a GHP by reason of the current employment 
status of the individual or the individual's spouse.
    (ii) Any months of SMI coverage for which the individual enrolled 
during a special enrollment period as provided in Sec. 407.20 of this 
chapter.
    (b) Reenrollment. For an individual who reenrolled before April 1, 
1981 or after September 30, 1981, the period:
    (1) Includes the following:
    (i) The number of months elapsed between the close of the 
individual's initial enrollment period and the close of the enrollment 
period in which he or she first enrolled; plus
    (ii) The number of months elapsed between the individual's initial 
period of coverage and the close of the enrollment period in which he or 
she reenrolled; plus
    (iii) The number of months elapsed between each subsequent period of 
coverage and the close of the enrollment period in which he or she 
reenrolled.
    (2) Excludes the following:
    (i) The periods specified in paragraphs (a)(1) through (a)(9) of 
this section; and
    (ii) Any month before April 1981 during which the individual was 
precluded from reenrolling by the two-enrollment limitation in effect 
before that date.

[52 FR 48118, Dec. 18, 1987, as amended at 53 FR 6648, Mar. 2, 1988; 61 
FR 40347, Aug. 2, 1996]



Sec. 408.25  Individuals who enrolled or reenrolled between April 1 and September 30, 1981.

    (a) Basic rules. Except as specified in paragraph (b) of this 
section, the rules set forth in Sec. 408.24 apply to an individual who 
enrolled or reenrolled between April 1 and September 30, 1981.
    (b) Exception. For an individual who enrolled or reenrolled between 
April 1 and September 30, 1981, the months to be counted ran through the 
month in which he or she reenrolled. (During those 6 months, continuous 
open enrollment was in effect and there was no 3-month ``general 
enrollment period''.)



Sec. 408.26  Examples.

    Example 1. Mr. J, who became age 65 and otherwise eligible for 
enrollment in November 1965, first enrolls in March 1968. The months to 
be included in determining the amount of the increase in Mr. J's 
premiums begin with June 1966 (the first month after the close of his 
initial enrollment period) and extend through December 1967 (the period 
January through March of 1968 is excluded in determining the total 
months) for a total of 19 months. Since there is only one full 12-month 
period in 19 months, Mr. J's premiums will be 10 percent greater than if 
he had enrolled in his initial enrollment period.
    Example 2. Mr. V, who enrolled in December 1965, voluntarily 
terminates his enrollment effective midnight December 31, 1967. He 
enrolls for a second time in January 1969. The months to be included in 
determining the amount of the increase in Mr. V's premiums are January 
1968 through March 1969, a total of 15 months. Since this totals one 
full 12-month period. Mr. V's

[[Page 205]]

monthly premium, will be increased by 10 percent.
    Example 3. Ms. N becomes age 65 in July 1965 and first enrolls in 
December 1967. She pays premiums increased by 10 percent above the 
regular rate, beginning July 1968, the first month of her SMI coverage. 
Ms. N fails to pay the premiums for the calendar quarter ending June 30, 
1970, and her coverage is terminated on that date, the end of her grace 
period. Ms. N enrolls for a second time in January 1971. The months to 
be included in determining the amount of the increase in Ms. N's 
premiums are June 1966 through December 1967, a total of 19 months, and 
July 1970 through March 1971, a total of 9 months, for a grand total of 
28 months. Since this totals two full 12-month periods, Ms. N's monthly 
premium will be increased by 20 percent.
    Example 4. Mr. X attained age 65 in August 1966 and enrolled during 
his initial enrollment period. His coverage was terminated effective 
June 30, 1968, for nonpayment of premiums. He reenrolls in March 1973. 
For purposes of computing any applicable premium increase, he will not 
be charged any months between March 1971 (the end of the last general 
enrollment period during which he was eligible to reenroll under the law 
in effect before October 30, 1972) and January 1973. Therefore, he will 
be charged 36 months (July 1968-March 1971 plus January 1973-March 1973) 
and his premiums for his second period of coverage will be increased 30 
percent.
    Example 5. Ms. C, who attained age 65 in August 1973, had two 
periods of supplementary medical insurance coverage, both of which were 
terminated because of nonpayment of premiums: August 1973 through April 
1975 and July 1977 through August 1978. She reenrolls in July 1981. The 
months to be included in determining the amount of premium increase are 
May 1975 through March 1977 (23 months) and April 1981 through July 1981 
(4 months) for a total of 27 months. The 31 months from September 1978 
through March 1981 may not be counted because Ms. C was prevented from 
reenrolling by the two-enrollment limitation in effect before April 1, 
1981. For Ms. C, the standard monthly premium would be increased by 20 
percent.

[52 FR 48115, Dec. 18, 1987; 53 FR 4159, Feb. 12, 1988]



Sec. 408.27  Rounding the monthly premium.

    Any monthly premium that is not a multiple of 10 cents is rounded to 
the nearest multiple of 10 cents, and any odd mulitple of 5 cents is 
rounded to the next higher multiple of 10 cents.

[52 FR 48115, Dec. 18, 1987; 53 FR 4159, Feb. 12, 1988]



               Subpart C--Deduction From Monthly Benefits



Sec. 408.40  Deduction from monthly benefits: Basic rules.

    (a) Deduction from monthly benefits. (1) Enrollees who are receiving 
monthly benefits do not have the option of paying by direct remittance 
to avoid deduction.
    (2) If the enrollee is entitled to more than one type of monthly 
benefit, the order of priority for deduction is as follows:
    (i) Railroad retirement benefits.
    (ii) Social security benefits.
    (iii) Civil service annuities.
    (b) Deduction from initial or reinstated benefits. When an enrollee 
receives a monthly benefit check after an initial award or after a 
period of suspension, that check is, if administratively feasible, 
reduced or increased to deduct unpaid premiums or refund premiums paid 
in advance by direct remittance.
    (c) Ongoing deductions. The premium for each month is deducted from 
the cash benefit for the preceding month, e.g., the premium for March is 
deducted from the benefit for February, which is paid at the beginning 
of March.



Sec. 408.42  Deduction from railroad retirement benefits.

    (a) Responsibility for deductions. If an enrollee is entitled to 
railroad retirement benefits, his or her SMI premiums are deducted from 
those benefits by the Railroad Retirement Board (RRB) even though he or 
she is also entitled to social security benefits or a civil service 
annuity, or both.

[[Page 206]]

    (b) Action when benefits are suspended. If the railroad retirement 
benefits are suspended, the RRB sends premium notices requesting direct 
remittance, to be made in accordance with the rules set forth in Subpart 
D of this part.



Sec. 408.43  Deduction from social security benefits.

    SSA, acting as CMS's agent, deducts the premiums from the monthly 
social security benefits if the enrollee is not entitled to railroad 
retirement benefits. (If the benefit is less than the monthly premium, 
the benefit is withheld and the enrollee is required to pay the balance 
through direct remittance.)



Sec. 408.44  Deduction from civil service annuities.

    (a) Responsibility for deductions. If an enrollee is not entitled to 
railroad retirement benefits or social security benefits, and is 
receiving a civil service annuity, the premiums are deducted from that 
annuity by the Office of Personnel Management (OPM) on the basis of a 
notice from SSA indicating that the annuitant is entitled to SMI.
    (b) Deduction of spouse's premiums. If the annuitant's spouse is 
also enrolled for SMI and is not entitled to a civil service annuity or 
to social security or railroad retirement benefits, and the annuitant 
gives written consent, OPM also deducts the spouse's premium from the 
annuitant's monthly check.
    (c) Withdrawal of annuitant's consent. (1) If an annuitant wishes to 
withdraw consent for deduction of the spouse's premium, he or she must 
send written notice of withdrawal to OPM.
    (2) The withdrawal notice is effective with the third month after 
the month in which it is received, or with the month specified in the 
notice, whichever is later.



Sec. 408.45  Deduction from age 72 special payments.

    (a) Deduction of premiums. SMI premiums are deducted from age 72 
special payments made under section 228 of the Act or the payments are 
withheld under procedures that correspond to the rules set forth in 
Secs. 408.40 and 408.43.
    (b) Collection of premiums while age 72 special payments are 
suspended. If the age 72 special payments are suspended, CMS or its 
agent notifies the enrollee to pay premiums by direct remittance, in 
accordance with the rules set forth in Sec. 408.60.
    (c) Grace period. The grace period ends with the last day of the 
third month after the billing month.
    (d) Resumption of age 72 special payments. (1) If age 72 special 
payments are resumed before the end of the grace period and all premium 
arrears can be deducted from those special payments, SMI coverage 
continues and the enrollee need not pay by direct remittance.
    (2) Subsequent special payments are reduced by the amount of the 
premium for as long as the enrollee receives special payments.



Sec. 408.46  Effect of suspension of social security benefits.

    (a) Benefit payments to be resumed during the taxable year. (1) If 
social security benefit payments are scheduled to be resumed during the 
enrollee's current taxable year, the enrollee is not billed.
    (2) The enrollee may, if he or she wishes, pay the premiums during 
suspension of benefits.
    (b) Benefit payments not to be resumed during the enrollee's current 
taxable year. (1) If social security benefits are suspended for a period 
that will not permit collection of all premiums due from monthly 
benefits payable in the enrollee's current taxable year, CMS or its 
agents bill the enrollee and require direct remittance in accordance 
with subpart D of this part.
    (2) The first billing is for whatever premiums are necessary to 
place the enrollee in a quarterly cycle.
    (3) Thereafter, the billing is on a quarterly basis. (Quarters for 
different enrollees are staggered throughout the year.)
    (4) The enrollee has the option of paying premiums for more than one 
quarter at the same time.

[[Page 207]]



Sec. 408.47  [Reserved]



Sec. 408.50  When premiums are considered paid.

    (a) Actual deduction. A premium is considered paid if it is actually 
deducted from a monthly benefit check. Therefore--
    (1) The premium is ``paid'' even if SSA later finds that the benefit 
was paid in error; but
    (2) A finding that a monthly benefit was erroneously withheld does 
not constitute payment of the premium for that month. Since there was no 
payment, there was no deduction. The enrollee is billed and continuance 
of coverage depends on payment of premiums before the end of the grace 
period or extended grace period.
    (b) Payment within the grace period. Overdue premiums are considered 
paid within the grace period in the following situations:
    (1) Benefits are resumed during the grace period. (i) Monthly cash 
benefit payments are payable for the last month of the initial grace 
period or for earlier months on the basis of a notice filed by the 
enrollee before the initial grace period ends; and
    (ii) Those payments are sufficient to permit deduction of all 
overdue premiums.
    (2) Annual earnings report or other report submitted during the 
grace period shows a benefit is due. (i) Before the end of the grace 
period, the enrollee submits a report clearly showing that monthly cash 
benefits, previously withheld, are payable; and
    (ii) Those benefits are sufficient to permit deduction of the full 
amount of the overdue premiums.
    (3) Premium arrears are paid by direct remittance. The enrollee 
makes a direct remittance payment of all overdue premiums before the end 
of the grace period.

[52 FR 48115, Dec. 18, 1987; 53 FR 4159, Feb. 12, 1988; 56 FR 48112, 
Sept. 24, 1991]



Sec. 408.52  Change from direct remittance to deduction.

    If a direct remittance enrollee becomes entitled to monthly 
benefits--
    (a) The SMI premiums are deducted from those benefits; and
    (b) The enrollee is notified of the deduction and of any adjustment 
of the initial benefit check that is required to collect overdue 
premiums or refund premiums paid in advance.



Sec. 408.53  Change from partial direct remittance to full deduction.

    If a benefit that was less than the premium (and therefore required 
direct remittance of the difference) is increased to an amount equal to, 
or greater than, the premium--
    (a) The full premium is paid from the benefit; and
    (b) Any amounts the enrollee had paid toward premiums not yet due 
are refunded.



            Subpart D--Direct Remittance: Individual Payment



Sec. 408.60  Direct remittance: Basic rules.

    (a) Premiums not deducted from monthly benefits under Subpart C of 
this part or paid by a State buy-in agreement must be paid by direct 
remittance to CMS or its agents, by or on behalf of the enrollee.
    (b) Quarterly payment is preferred as more cost-effective, but 
monthly payment is accepted if the enrollee is unwilling or unable to 
make quarterly payments or is also paying hospital insurance premiums, 
which must be paid every month.
    (c) CMS, directly or through its agents, sends quarterly or monthly 
premium bills and includes an addressed return envelope with the bill.
    (d) The individual must--
    (1) Send a check or money order that is drawn payable to ``CMS 
Medicare Insurance'' and show the enrollee's name and claim number as it 
appears on the Medicare card; and
    (2) Return the bill with the check or money order in the 
preaddressed envelope.



Sec. 408.62  Initial and subsequent billings.

    (a) Monthly billing. (1) The first premium bill is for the period 
from the first month of coverage (or the first month of change from 
deduction or State buy-in payment) through the end of the first month 
after the month of billing.

[[Page 208]]

    (2) Subsequent billings are for periods of one month.
    (b) Quarterly billing. (1) The first premium bill is for the period 
from the first month of coverage (or of change from deduction or State 
buy-in payment) through the third month after the month of billing.
    (2) Subsequent billings are for periods of three months.



Sec. 408.63  Billing procedures when monthly benefits are less than monthly premiums.

    If monthly benefits are less than monthly premiums, the following 
procedures apply:
    (a) Notice of amount due. At the beginning of SMI entitlement, and 
at the beginning of each succeeding calendar year, SSA--
    (1) Notifies the enrollee of the amount of benefits payable for the 
rest of the year and the total premiums due for those same months; and
    (2) Bills the enrollee for the difference.
    (b) Notice of amount overdue. At the beginning of each succeeding 
calendar year, SSA--
    (1) Notifies the enrollee of any amounts overdue for premiums for 
the preceding calendar year; and
    (2) Indicates that if the amount still overdue on April 30 is equal 
to or greater than the premium for 3 months, SMI coverage will terminate 
on that date.



Sec. 408.65  Payment options.

    (a) The enrollee is not asked to pay premiums at the time of 
enrollment but is instructed to pay them upon receipt of a premium bill 
from CMS or its agents.
    (b) However, if the enrollee wishes, he or she may pay from one to 
12 months or from one to four quarters at the time of enrollment.



Sec. 408.68  When premiums are considered paid.

    (a) Payment by check. The premium is considered paid if the check is 
paid by the bank the first or second time it is presented for payment.
    (b) Payment within the grace period. (1) A premium is considered 
paid within the grace period if it is delivered personally, or mailed on 
or before the last day of that period.
    (2) A premium payment is considered to have been mailed 7 days 
before it is received by CMS.



Sec. 408.70  Change from quarterly to monthly payments.

    If an enrollee requests change from quarterly to monthly payment--
    (a) If the enrollee is paid up under the quarterly cycle, the first 
monthly bill is for one month.
    (b) If the enrollee is not paid up under the quarter system, the 
first bill includes all premiums due.



Sec. 408.71  Change from deduction or State payment to direct remittance.

    (a) Basis for change. An SMI enrollee is required to pay by direct 
remittance in any of the following circumstances:
    (1) The enrollee's entitlement to social security or railroad 
retirement benefits ends for any reason other than death.
    (2) The premiums can no longer be deducted from the civil service 
annuity of the enrollee or the enrollee's spouse.
    (3) The enrollee no longer qualifies for coverage under a State buy-
in agreement, and is not entitled to social security or railroad 
retirement monthly benefits.
    (b) Billing. When any of the events specified in paragraph (a) of 
this section occurs (or as soon thereafter as possible), CMS or its 
agents bill the enrollee for direct remittance, in accordance with this 
subpart.



               Subpart E--Direct Remittance: Group Payment



Sec. 408.80  Basic rules.

    (a) Sources of group payment. An employer, a lodge, union, or other 
organization may pay SMI premiums on behalf of one or more enrollees.
    (b) Informal arrangement. Enrollees may turn over their premium 
notices to their employer, union, lodge, or other organization and that 
organization may send a single payment (with the premium notices 
attached so that the payments can readily be identified with the 
appropriate enrollees) to the CMS Premium Collection Center. Prompt 
payment is essential since SMI

[[Page 209]]

coverage terminates if premiums are not paid by the end of the grace 
period.
    (c) Group billing arrangement. CMS may send a single notice for the 
premiums due from a group of enrollees if the following conditions are 
met:
    (1) The group payer--
    (i) Uses funds other than the enrollees' to pay all or a substantial 
part of the premiums; or
    (ii) Deducts the premiums from periodic payments it makes to the 
enrollees in the group.
    (2) The enrollee's rights are protected and enrollees are not 
required to pay the costs of having their premiums paid on a group 
basis.



Sec. 408.82  Conditions for group billing.

    CMS agrees to a group billing arrangement only if the following 
conditions are met:
    (a) Conditions the group payer must meet. The group payer submits a 
written request for group billing--
    (1) Showing that all or part of the payments are made from the 
payer's funds or from funds due the enrollees and in the payer's 
possession; and
    (2) Agreeing not to charge the enrollees for the service of paying 
the premiums or for the administrative costs such as recordkeeping and 
postage.
    (b) Enrollees eligible for group payment. (1) Group payment may be 
made only on behalf of individuals who are already enrolled and are 
being billed for direct remittance.
    (2) Group payment may not be made for enrollees whose premiums are 
being deducted from monthly benefits in accordance with Subpart C of 
this part or being paid by the State under a buy-in agreement.
    (c) Protection of enrollee's rights. The use of group billing must 
not jeopardize the enrollees' right--
    (1) To confidentiality of personal information;
    (2) To terminate enrollment;
    (3) To resume individual payment of premiums if he or she wishes; 
and
    (4) To receive notice of any action that affects the SMI benefits.
    (d) Authorization by the enrollee. (1) To ensure maximum feasible 
protection of the rights specified in paragraph (c) of this section, 
each enrollee must give written authorization as specified in 
Sec. 408.84(a)(2).
    (2) A group payer that is not an entity of State or local government 
must submit all enrollee authorizations to CMS.
    (3) A group payer that is an entity of State or local government may 
retain the authorizations and certify to CMS that it has on file an 
authorization for each enrollee included in the group.
    (4) It is on the basis of the enrollee's authorization that CMS 
sends the group payer information about each enrollee, as necessary to 
carry out the group payment function.
    (e) Size of group. The number of enrollees must be at least 20, 
which is the minimum size sufficient to make group billing efficient. 
(Smaller groups may use the informal procedure described in 
Sec. 408.80(b).)



Sec. 408.84  Billing and payment procedures.

    (a) Initial premium notice. (1) CMS or its agent always sends the 
initial premium notice to the enrollee.
    (2) An enrollee who wishes to have the premiums paid on a group 
basis must give the notice to the group payer, along with written 
authorization for sending subsequent notices to the group payer and for 
release of the information required for the group payment process.
    (b) Monthly billings. Group premiums are billed on a monthly basis. 
However, the group payer may pay up to 12 months in advance.
    (c) Group payers must make their payments within 30 days after 
billing, to avoid infringing on the 90-day grace period during which the 
premiums may be paid by the enrollee if he or she is dropped from the 
group.
    (d) Effect of group payment. Payment by a group payer is considered 
payment by the enrollee.



Sec. 408.86  Responsibilities under group billing arrangement.

    (a) Enrollee responsibilities. (1) The enrollee is still responsible 
for premium payments; the group payer simply acts as his agent. If the 
agent fails to pay, or identifies the payment incorrectly,

[[Page 210]]

SSA notifies both the agent and the enrollee that the enrollee's account 
is delinquent. If an enrollee fails to take action on that notice, 
entitlement is terminated for nonpayment of premiums.
    (2) The enrollee must promptly notify both SSA and the group payer 
of any change of address.
    (b) Group payer's responsibilities. The group payer must--
    (1) Make premium payments promptly upon receipt of notices;
    (2) Promptly notify both CMS and the enrollee when it drops an 
enrollee from the group;
    (3) Make payments in a way that facilitates efficient and economical 
processing; and
    (4) Maintain the confidentiality of the personal information 
obtained from CMS for the group payment process.
    (c) CMS responsibilities. CMS--
    (1) Sends the bill to the group payer upon authorization from the 
enrollee;
    (2) Notifies both the payer and the enrollee if the payer fails to 
make timely payments; and
    (3) Refunds excess premiums in accordance with Sec. 408.88.



Sec. 408.88  Refund of group payments.

    (a) Basis for refund. Group payments are refunded only in the 
following circumstances:
    (1) The premium was for a month after the month in which the 
enrollee's SMI coverage terminated or the enrollee died.
    (2) The premium was for a month after the month in which the group 
payer gave notice (before the 26th day of that month) that the enrollee 
was no longer eligible for group payment and was being dropped from the 
group.
    (b) Example. F is the wife of J who is a retiree of Corporation X. 
That corporation pays premiums on behalf of all of its retirees and 
their dependents. F obtains a divorce from J on October 20 and thus 
disqualifies herself for further premium payments by the corporation. 
The corporation gives notice on November 10 that a refund is due because 
F has been dropped from the list of persons for whom it has agreed to 
pay premiums. The premium paid for December would be refunded to the 
group payer.
    (c) To whom refund is made. (1) CMS ordinarily refunds to the group 
payer the premiums specified in paragraph (a) of this section.
    (2) However, if CMS has information that clearly shows those 
premiums were paid from the enrollee's funds, it sends the refund to the 
enrollee.



Sec. 408.90  Termination of group billing arrangement.

    (a) A group billing arrangement may be terminated either by the 
group payer or by CMS upon 30 days' notice.
    (b) CMS may terminate the arrangement if it finds that the group 
payer is not acting in the best interest of the enrollees or that, for 
any other reason, the arrangement has proved inconvenient for CMS.



Sec. 408.92  Change from group payment to deduction or individual payment.

    (a) Enrollee excluded from group payment arrangement because of 
entitlement to monthly benefits. (1) When an enrollee becomes entitled 
to monthly benefits from which premiums can be deducted as specified in 
subpart C of this part, CMS notifies the group payer to discontinue 
payment for that enrollee.
    (2) In order to maintain confidentiality, CMS does not explain to 
the group payer the reason for excluding the enrollee from the group 
payment arrangement.
    (3) The enrollee's premiums are thereafter deducted from the monthly 
benefits, in accordance with subpart C of this part.
    (b) Enrollee no longer eligible for the group. (1) When an enrollee 
is no longer eligible to be included in the group (for instance because 
he or she is no longer employed by the group payer or has terminated 
union or lodge membership), the group payer must promptly notify CMS and 
the enrollee.
    (2) CMS or its agents resume sending individual bills to the 
enrollee, for direct remittance subject to the grace period and 
termination dates specified in Sec. 408.8.

[[Page 211]]



          Subpart F--Termination and Reinstatement of Coverage



Sec. 408.100  Termination of coverage for nonpayment of premiums.

    (a) Effective date of termination. Termination is effective on the 
last day of the grace period. The determination is not made until 15 
days after that day to allow for processing of remittances mailed late 
in the grace period, as provided in Sec. 408.68.
    (b) Notice of termination. (1) SSA sends the enrollee notice of 
termination between 15 and 30 days after the end of the grace period and 
includes information regarding the enrollee's right of appeal.
    (2) CMS notifies any intermediary or carrier that had previously 
been informed that the enrollee had met the SMI deductible for the year 
in which the termination is effective.



Sec. 408.102  Reconsideration of termination.

    (a) Basic rules. Coverage may be reinstated without interruption of 
benefits if the following conditions are met:
    (1) The enrollee appeals the termination by the end of the month 
following the month in which SSA sent the notice of termination.
    (2) The enrollee alleges and it is found that the enrollee did not 
receive timely and adequate notice that the premiums were overdue.
    (3) The enrollee pays, within 30 days after SSA's subsequent request 
for payment, all premiums due through the month in which he or she 
appealed the termination.
    (b) Basis for reinstating coverage. Coverage may be reinstated if 
the evidence establishes one of the following:
    (1) The enrollee acted diligently to pay the premiums or to request 
relief upon receiving a premium notice very late in the grace period or 
shortly after its end, and the delayed notice was not the enrollee's 
fault. (For example, if the billing notice was misaddressed or lost in 
the mail, it would not be the enrollee's fault; if the enrollee had 
moved and not notified SSA of the new address, he or she would be 
responsible for the delay.)
    (2) On the basis of information given by SSA, the enrollee could 
reasonably have believed that the premiums were being paid by deduction 
from benefits or by some other means. (An example would be a notice 
indicating that premiums would be paid by a State Medicaid agency or a 
group payer or would be deducted from the spouse's civil service 
annuity.)
    (c) No basis for reinstating coverage. Coverage may not be 
reinstated if the enrollee--
    (1) Received timely and adequate notice but failed to pay within the 
grace period, for example because of insufficient income or resources; 
or
    (2) Appealed the termination more than one month after the month in 
which SSA sent the termination notice.



Sec. 408.104  Reinstatement procedures.

    (a) Request for payment. If the conditions of Sec. 408.102(a) (1) 
and (2) are met, SSA sends written notice requesting the enrollee to 
pay, within 30 days, all premiums due through the month in which the 
enrollee appealed the termination.
    (b) Reinstatement of coverage. If SSA receives the requested payment 
within 30 days, it sets aside the termination and reinstates the 
enrollee's coverage without interruption.



  Subpart G--Collection of Unpaid Premiums; Refund of Excess Premiums 
                     After the Death of the Enrollee



Sec. 408.110  Collection of unpaid premiums.

    (a) Basis and scope--(1) Basis. Under the Federal Claims Collection 
Act of 1966 (31 U.S.C. 3711), CMS is required to collect any debts due 
it but is authorized to suspend or terminate collection action on debts 
of less than $20,000 when certain conditions are met. (See 4 CFR, parts 
101-105 for general rules implementing the Federal Claims Collection 
Act.) As indicated in Sec. 408.4, unpaid premiums are debts owed the 
Federal government by the enrollee or the enrollee's estate.
    (2) Scope. This section sets forth the methods of collection used by 
CMS and the circumstances under which CMS terminates or renews 
collection action. The regulations in this section apply to

[[Page 212]]

hospital insurance premiums as well as SMI premiums.
    (b) Collection of unpaid premiums. Generally, CMS will attempt to 
collect unpaid premiums by one of the following methods:
    (1) By billing enrollees who pay the premiums directly to CMS or to 
a designated agent in accordance with Sec. 408.60.
    (2) By deduction from any benefits payable to the enrollee or the 
estate of a deceased enrollee under Title II or XVIII of the Social 
Security Act, the Railroad Retirement Act or any act administered by the 
Office of Personnel Management in accordance with Sec. 408.4(b) and 
Subpart C of this part (Deduction from Monthly Benefits); or
    (3) By billing the estate of a deceased enrollee.
    (c) Termination of collection action. CMS terminates collection 
action on unpaid premiums under either of the following circumstances, 
if the cost of collection exceeds the amount of overdue premiums:
    (1) The individual is not entitled to benefits under the Acts listed 
in paragraph (b)(2) of this section, is not currently enrolled for SMI 
or premium hospital insurance, and demonstrates, to CMS's satisfaction, 
that he or she is unable to pay the debt within a reasonable time.
    (2) The individual has been dead more than 27 months (the maximum 
time allowed for claiming SMI benefits), and the legal representative of 
his or her estate demonstrates, to CMS's satisfaction, that the estate 
is unable to pay the debt within a reasonable time.
    (d) Renewal of collection efforts. CMS renews collection efforts in 
either of the following circumstances, if the cost of collection does 
not exceed the amount of the overdue premiums:
    (1) The individual enrolls again for premium hospital insurance or 
SMI. (Payment of overdue premiums is not a prerequisite for 
reenrollment.)
    (2) The individual becomes entitled or reentitled to social security 
or railroad retirement benefits or a Federal civil service annuity.



Sec. 408.112  Refund of excess premiums after the enrollee dies.

    If CMS has received premiums for months after the enrollee's death, 
CMS refunds those premiums as follows:
    (a) To the person or persons who paid the premiums or, if the 
premiums were paid by the enrollee, to the representative of the 
enrollee's estate, if any.
    (b) If refund cannot be made under paragraph (a) of this section, 
CMS refunds the premiums to the enrollee's survivors in the following 
order of priority:
    (1) The surviving spouse, if he or she was either living in the same 
household with the deceased at the time of death, or was, for the month 
of death, entitled to monthly social security or railroad retirement 
benefits on the basis of the same earnings record as the deceased 
beneficiary;
    (2) The child or children who were, for the month of death, entitled 
to monthly social security or railroad retirement benefits on the basis 
of the same earnings record as the deceased (and, if there is more than 
one child, in equal parts to each child);
    (3) The parent or parents who were, for the month of death, entitled 
to monthly social security or railroad retirement benefits on the basis 
of the same earnings record as the deceased (and, if there is more than 
one parent, in equal parts to each parent);
    (4) The surviving spouse who was not living in the same household 
with the deceased at the time of death and was not, for the month of 
death, entitled to monthly social security or railroad retirement 
benefits on the basis of the same earnings record as the deceased 
beneficiary;
    (5) The child or children who were not entitled to monthly social 
security or railroad retirement benefits on the basis of the same 
earnings record as the deceased (and, if there is more than one child, 
in equal parts to each child);
    (6) The parent or parents who were not entitled to monthly social 
security or railroad retirement benefits on the basis of the same 
earnings record as the deceased (and, if there is more than one parent, 
in equal parts to each parent).

[[Page 213]]


If none of the listed relatives survives, no refund can be made.



 Subpart H--Supplementary Medical Insurance Premium Surcharge Agreements

    Effective Date Note: At 67 FR 60996, Sept. 27, 2002, subpart H was 
added to part 408 effective March 26, 2003.



Sec. 408.200  Statutory basis.

    This subpart implements provisions of section 1839(e) of the Social 
Security Act that allow State or local government agencies to enter into 
an agreement with the Secretary to pay, on a quarterly or other periodic 
basis, a lump sum for the total of the SMI premium late enrollment 
surcharge amounts due for a group of eligible enrollees.



Sec. 408.201  Definitions.

    For purposes of this subpart, the following definitions apply:
    SMI premium surcharge means the amount that the standard monthly SMI 
premium is increased for late enrollment or for reenrollment as 
specified in Secs. 408.22 through 408.25.
    SMI premium surcharge agreement means a written arrangement between 
the Secretary and a State or local government agency to pay, on a 
quarterly, monthly, or other periodic basis, a lump sum for the SMI 
premium surcharge amounts due for a designated group of eligible 
enrollees.



Sec. 408.202  Conditions for participation.

    (a) A State or local government agency may apply to CMS to enter 
into an SMI premium surcharge agreement if the following conditions are 
met:
    (1) Each individual designated for coverage under the premium 
surcharge agreement must be enrolled in Medicare Part B at the time the 
individual is added to the premium surcharge account.
    (2) Each enrollee designated for coverage under the agreement must, 
at the time the individual is added to the premium surcharge account, be 
responsible for paying the base premium and surcharge through direct 
remittance or benefit withholding from Social Security or Railroad 
Retirement benefits or a Civil Service annuity.
    (3) Each enrollee designated for coverage under the agreement must, 
at the time the individual is added to the premium surcharge account, 
not have premiums paid by a State Welfare Agency under a State buy-in 
agreement as described in Sec. 407.40 of this chapter or under a group 
billing arrangement as described in Sec. 408.80.
    (b) The State or local government agency must secure from each 
enrollee a signed, written statement authorizing CMS to send billing 
notices directly to the State or local government agency, and to release 
to the State or local government agency information required under the 
SMI premium surcharge agreement.
    (c) The authorization statement for each enrollee must be retained 
in the State or local government agency files for as long as the 
enrollee is covered by the agreement. These authorization statements 
need not be forwarded to CMS.
    (d) The State or local government agency must certify to CMS, in 
writing, that an authorization statement is on file for each enrollee 
covered under the SMI premium surcharge agreement. Only one 
certification is necessary for the entire group of covered enrollees.
    (e) A State or local government agency must establish an automated 
data exchange with CMS using the Third Party Premium Collection System, 
in order to transmit electronically an input file that will be used to 
add or remove enrollees from the billing system.



Sec. 408.205  Application procedures.

    (a) A State or local government agency must contact its CMS regional 
office (RO) to request application materials.
    (b) If interested in entering into an agreement, the State or local 
government agency must return to the RO two copies of the completed 
application materials.
    (c) CMS reviews the application materials, and, when they are 
approved, notifies the State or local government agency, and the RO.

[[Page 214]]



Sec. 408.207  Billing and payment procedures.

    (a) Adding and removing enrollees. The State or local government 
agency must transmit an input file containing addition and removal 
records electronically to CMS as follows:
    (1) Input files must be transmitted at least once each calendar 
month, but may be transmitted as often as once a day.
    (2) CMS will not add or remove enrollees retroactively, except for 
removals upon the death of an enrollee.
    (3) The State or local government agency must pay the SMI premium 
surcharge for each eligible enrollee who is included in the agreement 
for the time period beginning with the month the enrollee is added and 
continuing through the month the State or local government agency 
informs CMS that the enrollee is to be removed, the month the enrollee's 
Part B coverage terminates, or the month of the enrollee's death, 
whichever comes first.
    (b) Payment and grace period. Payment must be made to CMS as 
follows:
    (1) Payment to CMS must be received by CMS by the first day of each 
month.
    (2) There is a 10-day grace period for receipt of payment.
    (3) Payment must be made to CMS via electronic funds transfer.
    (c) Late payment penalties. CMS may assess interest for any payment 
it does not receive by the first day of the month as follows:
    (1) Interest will be assessed at the SMI trust fund rate as computed 
for new investments in accordance with section 1841(c) of the Act.
    (2) Interest will be waived if the full payment is received by the 
10th day of the month in which it is due.
    (3) Interest will be calculated and assessed in 30-day increments.
    (4) Interest will be assessed on the balance of the amount billed 
that remains unpaid at the expiration of the grace period and unpaid 
balances from prior periods.
    (5) Interest will continue to accrue on unpaid amounts until the 
balance is paid in full.
    (d) Disagreement over billing amounts or interest. If the State or 
local government agency disagrees with the amount assessed in a billing 
statement or interest charge, it must notify CMS as follows:
    (1) The State or local government agency must provide evidence 
suitable to CMS to substantiate its claim.
    (2) The State or local government agency must continue to make full 
payment while CMS evaluates the evidence provided.
    (3) Credit for payment amounts or interest that CMS determines to be 
due to the State or local government agency will be reflected as an 
adjustment in subsequent bills, effective on the date the corrected 
amount would have been due.



Sec. 408.210  Termination of SMI premium surcharge agreement.

    (a) Termination by the State or local government agency. The State 
or local government agency may voluntarily terminate its agreement with 
CMS as follows:
    (1) The State or local government agency must notify CMS, in 
writing, at least 30 days before the effective date of the termination.
    (2) The State or local government agency must pay any unpaid premium 
surcharge amounts and interest due within 30 days after the effective 
date of the termination.
    (3) Interest will continue to accrue until all amounts due are paid 
in full.
    (b) Termination by CMS. CMS may terminate the agreement with a State 
or local government agency as follows:
    (1) If a State or local government agency's payments are delinquent 
30 days or more, CMS may terminate the agreement with 30 days advance 
notice.
    (2) If the State or local government agency fails to comply with the 
terms of the agreement or procedures promulgated by CMS, CMS may 
terminate the agreement with 30 days advance notice.
    (3) If CMS finds that the State or local government agency is not 
acting in the best interest of the enrollees, or CMS, or for any reason 
other than those in paragraphs (b)(1) and (b)(2) of this section, CMS 
may terminate the agreement at any time.
    (4) The State or local government agency must pay all outstanding 
premium surcharge and any interest amounts due within 30 days after the 
effective date of the termination.

[[Page 215]]

    (5) Interest will continue to accrue until all amounts due are paid 
in full.
    (6) After the agreement is terminated, CMS will resume collection of 
the premium surcharge from the enrollees covered under the terminated 
agreement.
    (7) If an agreement is terminated by CMS, the State or local 
government agency must wait 3 years from the effective date of the 
termination before it can request to enter into another SMI premium 
surcharge agreement.



PART 409--HOSPITAL INSURANCE BENEFITS--Table of Contents




       Subpart A--Hospital Insurance Benefits: General Provisions

Sec.
409.1  Statutory basis.
409.2  Scope.
409.3  Definitions.
409.5  General description of benefits.

  Subpart B--Inpatient Hospital Services and Inpatient Critical Access 
                            Hospital Services

409.10  Included services.
409.11  Bed and board.
409.12  Nursing and related services; medical social services; use of 
          hospital or CAH facilities.
409.13  Drugs and biologicals.
409.14  Supplies, appliances, and equipment.
409.15  Services furnished by an intern or a resident-in-training.
409.16  Other diagnostic or therapeutic services.
409.18  Services related to kidney transplantations.

                    Subpart C--Posthospital SNF Care

409.20  Coverage of services.
409.21  Nursing care.
409.22  Bed and board.
409.23  Physical, occupational, and speech therapy.
409.24  Medical social services.
409.25  Drugs, biologicals, supplies, appliances, and equipment.
409.26  Transfer agreement hospital services.
409.27  Other services generally provided by (or under arrangements made 
          by) SNFs.

      Subpart D--Requirements for Coverage of Posthospital SNF Care

409.30  Basic requirements.
409.31  Level of care requirement.
409.32  Criteria for skilled services and the need for skilled services.
409.33  Examples of skilled nursing and rehabilitation services.
409.34  Criteria for ``daily basis''.
409.35  Criteria for ``practical matter''.
409.36  Effect of discharge from posthospital SNF care.

        Subpart E--Home Health Services Under Hospital Insurance

409.40  Basis, purpose, and scope.
409.41  Requirement for payment.
409.42  Beneficiary qualifications for coverage of services.
409.43  Plan of care requirements.
409.44  Skilled services requirements.
409.45  Dependent services requirements.
409.46  Allowable administrative costs.
409.47  Place of service requirements.
409.48  Visits.
409.49  Excluded services.
409.50  Coinsurance for durable medical equipment (DME) furnished as a 
          home health service.

             Subpart F--Scope of Hospital Insurance Benefits

409.60  Benefit periods.
409.61  General limitations on amounts of benefits.
409.62  Lifetime maximum on inpatient psychiatric care.
409.63  Reduction of inpatient psychiatric benefit days available in the 
          initial benefit period.
409.64  Services that are counted toward allowable amounts.
409.65  Lifetime reserve days.
409.66  Revocation of election not to use lifetime reserve days.
409.68  Guarantee of payment for inpatient hospital or inpatient CAH 
          services furnished before notification of exhaustion of 
          benefits.

        Subpart G--Hospital Insurance Deductibles and Coinsurance

409.80  Inpatient deductible and coinsurance: General provisions
409.82  Inpatient hospital deductible.
409.83  Inpatient hospital coinsurance.
409.85  Skilled nursing facility (SNF) care coinsurance.
409.87  Blood deductible.
409.89  Exemption of kidney donors from deductible and coinsurance 
          requirements.

           Subpart H--Payments of Hospital Insurance Benefits

409.100  To whom payment is made.
409.102  Amounts of payment.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

[[Page 216]]


    Source: 48 FR 12541, Mar. 25, 1983, unless otherwise noted.

    Editorial Note: Nomenclature changes to part 409 appear at 62 FR 
46037, Aug. 29, 1997.



       Subpart A--Hospital Insurance Benefits: General Provisions



Sec. 409.1  Statutory basis.

    This part is based on the identified provisions of the following 
sections of the Social Security Act:
    (a) Sections 1812 and 1813 establish the scope of benefits of the 
hospital insurance program under Medicare Part A and set forth 
deductible and coinsurance requirements.
    (b) Sections 1814 and 1815 establish conditions for, and limitations 
on, payment for services furnished by providers.
    (c) Section 1820 establishes the critical access hospital program.
    (d) Section 1861 describes the services covered under Medicare Part 
A, and benefit periods.
    (e) Section 1862(a) specifies exclusions from coverage.
    (f) Section 1881 sets forth the rules for individuals who have end-
stage renal disease (ESRD), for organ donors, and for dialysis, 
transplantation, and other services furnished to ESRD patients.

[60 FR 50441, Sept. 29, 1995, as amended at 65 FR 62646, Oct. 19, 2000]



Sec. 409.2  Scope.

    Subparts A through G of this part describe the benefits available 
under Medicare Part A and set forth the limitations on those benefits, 
including certain amounts of payment for which beneficiaries are 
responsible.

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985]



Sec. 409.3  Definitions.

    As used in this part, unless the context indicates otherwise--
    Arrangements means arrangements which provide that Medicare payment 
made to the provider that arranged for the services discharges the 
liability of the beneficiary or any other person to pay for those 
services.
    Covered refers to services for which the law and the regulations 
authorize Medicare payment.
    Nominal charge provider means a provider that furnishes services 
free of charge or at a nominal charge and is either a public provider, 
or another provider that (1) demonstrates to CMS's satisfaction that a 
significant portion of its patients are low-income, and (2) requests 
that payment for its services be determined accordingly.
    Participating refers to a hospital or other facility that meets the 
conditions of participation and has in effect a Medicare provider 
agreement.
    Qualified hospital means a facility that--
    (a) Is primarily engaged in providing, by or under the supervision 
of doctors of medicine or osteopathy, inpatient services for the 
diagnosis, treatment, and care or rehabilitation of persons who are 
sick, injured, or disabled;
    (b) Is not primarily engaged in providing skilled nursing care and 
related services for inpatients who require medical or nursing care;
    (c) Provides 24-hour nursing service in accordance with Sec. 
1861(e)(5) of the Act;
    (d) If it is a U.S. hospital, is licensed, or approved as meeting 
the standards for licensing, by the State or local licensing agency; and
    (e) If it is a foreign hospital, is licensed, or approved as meeting 
the standard for licensing, by the appropriate Canadian or Mexican 
licensing agency, and for purposes of furnishing non-emergency services 
to U.S. residents, is accredited by the Joint Commission on 
Accreditation of Hospitals (JCAH), or by a Canadian or Mexican program 
under standards that CMS finds to be equivalent to those of the JCAH.

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
51 FR 41338, Nov. 14, 1986]



Sec. 409.5  General description of benefits.

    Hospital insurance (Part A of Medicare) helps pay for inpatient 
hospital or inpatient CAH services and posthospital SNF care. It also 
pays for home health services and hospice care. There are limitations on 
the number of days of care that Medicare can pay for

[[Page 217]]

and there are deductible and coinsurance amounts for which the 
beneficiary is responsible. For each type of service, certain conditions 
must be met as specified in the pertinent sections of this subpart and 
in part 418 of this chapter regarding hospice care. The special 
conditions for inpatient hospital services furnished by a qualified 
U.S., Canadian, or Mexican hospital are set forth in subparts G and H of 
part 424 of this chapter.

[48 FR 56026, Dec. 16, 1983, as amended at 53 FR 6648, Mar. 2, 1988; 53 
FR 12945, Apr. 20, 1988; 58 FR 30666, May 26, 1993]



  Subpart B--Inpatient Hospital Services and Inpatient Critical Access 
                            Hospital Services



Sec. 409.10  Included services.

    (a) Subject to the conditions, limitations, and exceptions set forth 
in this subpart, the term ``inpatient hospital or inpatient CAH 
services'' means the following services furnished to an inpatient of a 
participating hospital or of a participating CAH or, in the case of 
emergency services or services in foreign hospitals, to an inpatient of 
a qualified hospital:
    (1) Bed and board.
    (2) Nursing services and other related services.
    (3) Use of hospital or CAH facilities.
    (4) Medical social services.
    (5) Drugs, biologicals, supplies, appliances, and equipment.
    (6) Certain other diagnostic or therapeutic services.
    (7) Medical or surgical services provided by certain interns or 
residents-in-training.
    (8) Transportation services, including transport by ambulance.
    (b) Inpatient hospital services does not include the following types 
of services:
    (1) Posthospital SNF care, as described in Sec. 409.20, furnished by 
a hospital or a critical access hospital that has a swing-bed approval.
    (2) Nursing facility services, described in Sec. 440.155 of this 
chapter, that may be furnished as a Medicaid service under title XIX of 
the Act in a swing-bed hospital that has an approval to furnish nursing 
facility services.
    (3) Physician services that meet the requirements of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (4) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (5) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (6) Certified nurse mid-wife services, as defined in section 
1861(gg) of the Act.
    (7) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (8) Services of an anesthetist, as defined in Sec. 410.69

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
58 FR 30666, May 26, 1993; 64 FR 3648, Jan. 25, 1999; 65 FR 18535, Apr. 
7, 2000]



Sec. 409.11  Bed and board.

    (a) Semiprivate and ward accommodations. Except for applicable 
deductible and coinsurance amounts, Medicare Part A pays in full for bed 
and board and semiprivate (2 to 4 beds), or ward (5 or more beds) 
accommodations.
    (b) Private accommodations--(1) Conditions for payment in full. 
Except for applicable deductible and coinsurance amounts, Medicare Part 
A pays in full for a private room if--
    (i) The patient's condition requires him or her to be isolated;
    (ii) The hospital or CAH has no semiprivate or ward accommodations; 
or
    (iii) The hospital's or CAH's semiprivate and ward accommodations 
are fully occupied by other patients, were so occupied at the time the 
patient was admitted to the hospital or CAH, respectively, for treatment 
of a condition that required immediate inpatient hospital or inpatient 
CAH care, and have been so occupied during the interval.
    (2) Period of payment. In the situations specified in paragraph 
(b)(1) (i) and (iii) of this section, Medicare pays for a private room 
until the patient's condition no longer requires isolation or until 
semiprivate or ward accommodations are available.
    (3) Conditions for patient's liability. The hospital or CAH may 
charge the patient the difference between its customary charge for the 
private room and its most prevalent charge for a semiprivate room if--

[[Page 218]]

    (i) None of the conditions of paragraph (b)(1) of this section is 
met; and
    (ii) The private room was requested by the patient or a member of 
the family, who, at the time of the request, was informed what the 
hospital's or CAH's charge would be.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]



Sec. 409.12  Nursing and related services, medical social services; use of hospital or CAH facilities.

    (a) Except as provided in paragraph (b) of this section, Medicare 
pays for nursing and related services, use of hospital or CAH 
facilities, and medical social services as inpatient hospital or 
inpatient CAH services only if those services are ordinarily furnished 
by the hospital or CAH, respectively, for the care and treatment of 
inpatients.
    (b) Exception. Medicare does not pay for the services of a private 
duty nurse or attendant. An individual is not considered to be a private 
duty nurse or attendant if he or she is a hospital or CAH employee at 
the time the services are furnished.

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
58 FR 30666, 30667, May 26, 1993]



Sec. 409.13  Drugs and biologicals.

    (a) Except as specified in paragraph (b) of this section, Medicare 
pays for drugs and biologicals as inpatient hospital or inpatient CAH 
services only if--
    (1) They represent a cost to the hospital or CAH;
    (2) They are ordinarily furnished by the hospital or CAH for the 
care and treatment of inpatients; and
    (3) They are furnished to an inpatient for use in the hospital or 
CAH.
    (b) Exception. Medicare pays for a limited supply of drugs for use 
outside the hospital or CAH if it is medically necessary to facilitate 
the beneficiary's departure from the hospital and required until he or 
she can obtain a continuing supply.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]



Sec. 409.14  Supplies, appliances, and equipment.

    (a) Except as specified in paragraph (b) of this section, Medicare 
pays for supplies, appliances, and equipment as inpatient hospital or 
inpatient CAH services only if--
    (1) They are ordinarily furnished by the hospital or CAH to 
inpatients; and
    (2) They are furnished to inpatients for use in the hospital or CAH.
    (b) Exceptions. Medicare pays for items to be used beyond the 
hospital or CAH stay if--
    (1) The item is one that the beneficiary must continue to use after 
he or she leaves the hospital or CAH, for example, heart valves or a 
heart pacemaker, or
    (2) The item is medically necessary to permit or facilitate the 
beneficiary's departure from the hospital or CAH and is required until 
the beneficiary can obtain a continuing supply. Tracheostomy or draining 
tubes are examples.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]



Sec. 409.15  Services furnished by an intern or a resident-in-training.

    Medical or surgical services provided by an intern or a resident-in-
training are included as ``inpatient hospital or inpatient CAH 
services'' if they are provided--
    (a) By an intern or a resident-in-training under a teaching program 
approved by the Council on Medical Education of the American Medical 
Association, or the Bureau of Professional Education of the American 
Osteopathic Association;
    (b) By an intern or a resident-in-training in the field of dentistry 
under a teaching program approved by the Council on Dental Education of 
the American Dental Association; or
    (c) By an intern or a resident-in-training in the field of podiatry 
under a teaching program approved by the Council on Podiatry Education 
of the American Podiatry Association.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]

[[Page 219]]



Sec. 409.16  Other diagnostic or therapeutic services.

    Diagnostic or therapeutic services other than those provided for in 
Secs. 409.12, 409.13, and 409.14 are considered as inpatient hospital or 
inpatient CAH services if--
    (a) They are furnished by the hospital or CAH, or by others under 
arrangements made by the hospital or CAH;
    (b) Billing for those services is through the hospital or CAH; and
    (c) The services are of a kind ordinarily furnished to inpatients 
either by the hospital or CAH or under arrangements made by the hospital 
or CAH.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]



Sec. 409.18  Services related to kidney transplantations.

    (a) Kidney transplants. Medicare pays for kidney transplantation 
surgery only if performed in a renal transplantation center approved 
under subpart U of part 405 of this chapter.
    (b) Services in connection with kidney donations. Medicare pays for 
services related to the evaluation or preparation of a potential or 
actual donor, to the donation of the kidney, or to postoperative 
recovery services directly related to the kidney donation--
    (1) If the kidney is intended for an individual who has ESRD and is 
entitled to Medicare benefits or can be expected to become so entitled 
within a reasonable time; and
    (2) Regardless of whether the donor is entitled to Medicare.



                    Subpart C--Posthospital SNF Care



Sec. 409.20  Coverage of services.

    (a) Included services. Subject to the conditions and limitations set 
forth in this subpart and subpart D of this part, ``posthospital SNF 
care'' means the following services furnished to an inpatient of a 
participating SNF, or of a participating hospital or critical access 
hospital (CAH) that has a swing-bed approval:
    (1) Nursing care provided by or under the supervision of a 
registered professional nurse.
    (2) Bed and board in connection with the furnishing of that nursing 
care.
    (3) Physical, occupational, or speech therapy.
    (4) Medical social services.
    (5) Drugs, biologicals, supplies, appliances, and equipment.
    (6) Services furnished by a hospital with which the SNF has a 
transfer agreement in effect under Sec. 483.75(n) of this chapter.
    (7) Other services that are generally provided by (or under 
arrangements made by) SNFs.
    (b) Excluded services--(1) Services that are not considered 
inpatient hospital services. No service is included as posthospital SNF 
care if it would not be included as an inpatient hospital service under 
Secs. 409.11 through 409.18.
    (2) Services not generally provided by (or under arrangements made 
by) SNFs. Except as specifically listed in Secs. 409.21 through 409.27, 
only those services generally provided by (or under arrangements made 
by) SNFs are considered as posthospital SNF care. For example, a type of 
medical or surgical procedure that is ordinarily performed only on an 
inpatient basis in a hospital is not included as ``posthospital SNF 
care,'' because such procedures are not generally provided by (or under 
arrangements made by) SNFs.
    (c) Terminology. In Secs. 409.22 through 409.36--
    (1) The terms SNF and swing-bed hospital are used when the context 
applies to the particular facility.
    (2) The term facility is used to mean both SNFs and swing-bed 
hospitals.
    (3) The term ``swing-bed hospital'' includes a CAH with swing-bed 
approval under subpart F of part 485 of this chapter.

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
58 FR 30667, May 26, 1993; 63 FR 26306, May 12, 1998; 64 FR 3648, Jan. 
25, 1999; 64 FR 41681, July 30, 1999]



Sec. 409.21  Nursing care.

    (a) Basic rule. Medicare pays for nursing care as posthospital SNF 
care when provided by or under the supervision of a registered 
professional nurse.
    (b) Exception. Medicare does not pay for the services of a private 
duty nurse or attendant. An individual is not considered to be a private 
duty nurse or

[[Page 220]]

attendant if he or she is an SNF employee at the time the services are 
furnished.

[63 FR 26306, May 12, 1998]



Sec. 409.22  Bed and board.

    (a) Semiprivate and ward accommodations. Except for applicable 
deductible and coinsurance amounts Medicare Part A pays in full for 
semiprivate (2 to 4 beds), or ward (5 or more beds) accommodations.
    (b) Private accommodations--(1) Conditions for payment in full. 
Except for applicable coinsurance amounts, Medicare pays in full for a 
private room if--
    (i) The patient's condition requires him to be isolated;
    (ii) The SNF has no semiprivate or ward accommodations; or
    (iii) The SNF semiprivate and ward accommodations are fully occupied 
by other patients, were so occupied at the time the patient was admitted 
to the SNF for treatment of a condition that required immediate 
inpatient SNF care, and have been so occupied during the interval.
    (2) Period of payment. In the situations specified in paragraph 
(b)(1) (i) and (iii) of this section. Medicare pays for a private room 
until the patient's condition no longer requires isolation or until 
semiprivate or ward accommodations are available.
    (3) Conditions for patient's liability. The facility may charge the 
patient the difference between its customary charge for the private room 
furnished and its most prevalent charge for a semiprivate room if:
    (i) None of the conditions of paragraph (b)(1) of this section is 
met, and
    (ii) The private room was requested by the patient or a member of 
the family who, at the time of request was informed what the charge 
would be.



Sec. 409.23  Physical, occupational, and speech therapy.

    Medicare pays for physical, occupational, or speech therapy as 
posthospital SNF care if--
    (a) It is furnished by the facility or under arrangements made by 
the facility, and
    (b) Billing for the therapy is by or through the facility.



Sec. 409.24  Medical social services.

    Medicare pays for medical social services as posthospital SNF care, 
including--
    (a) Assessment of the social and emotional factors related to the 
beneficiary's illness, need for care, response to treatment, and 
adjustment to care in the facility;
    (b) Case work services to assist in resolving social or emotional 
problems that may have an adverse effect on the beneficiary's ability to 
respond to treatment; and
    (c) Assessment of the relationship of the beneficiary's medical and 
nursing requirements to his or her home situation, financial resources, 
and the community resources available upon discharge from facility care.

[63 FR 26306, May 12, 1998]



Sec. 409.25  Drugs, biologicals, supplies, appliances, and equipment.

    (a) Drugs and biologicals. Except as specified in paragraph (b) of 
this section, Medicare pays for drugs and biologicals as posthospital 
SNF care only if--
    (1) They represent a cost to the facility;
    (2) They are ordinarily furnished by the facility for the care and 
treatment of inpatients; and
    (3) They are furnished to an inpatient for use in the facility.
    (b) Exception. Medicare pays for a limited supply of drugs for use 
outside the facility if it is medically necessary to facilitate the 
beneficiary's departure from the facility and required until he or she 
can obtain a continuing supply.
    (c) Supplies, appliances, and equipment. Except as specified in 
paragraph (d) of this section, Medicare pays for supplies, appliances, 
and equipment as posthospital SNF care only if they are--
    (1) Ordinarily furnished by the facility to inpatients; and
    (2) Furnished to inpatients for use in the facility.
    (d) Exception. Medicare pays for items to be used after the 
individual leaves the facility if--

[[Page 221]]

    (1) The item is one that the beneficiary must continue to use after 
leaving, such as a leg brace; or
    (2) The item is necessary to permit or facilitate the beneficiary's 
departure from the facility and is required until he or she can obtain a 
continuing supply, for example, sterile dressings.

[63 FR 26307, May 12, 1998]



Sec. 409.26  Transfer agreement hospital services.

    (a) Services furnished by an intern or a resident-in-training. 
Medicare pays for medical services that are furnished by an intern or a 
resident-in-training (under a hospital teaching program approved in 
accordance with the provisions of Sec. 409.15) as posthospital SNF care, 
if the intern or resident is in--
    (1) A participating hospital with which the SNF has in effect an 
agreement under Sec. 483.75(n) of this chapter for the transfer of 
patients and exchange of medical records; or
    (2) A hospital that has a swing-bed approval, and is furnishing 
services to an SNF-level inpatient of that hospital.
    (b) Other diagnostic or therapeutic services. Medicare pays for 
other diagnostic or therapeutic services as posthospital SNF care if 
they are provided--
    (1) By a participating hospital with which the SNF has in effect a 
transfer agreement as described in paragraph (a)(1) of this section; or
    (2) By a hospital or a CAH that has a swing-bed approval, to its own 
SNF-level inpatient.

[63 FR 26307, May 12, 1998]



Sec. 409.27  Other services generally provided by (or under arrangements made by) SNFs.

    In addition to those services specified in Secs. 409.21 through 
409.26, Medicare pays as posthospital SNF care for such other diagnostic 
and therapeutic services as are generally provided by (or under 
arrangements made by) SNFs, including--
    (a) Medical and other health services as described in subpart B of 
part 410 of this chapter, subject to any applicable limitations or 
exclusions contained in that subpart or in Sec. 409.20(b);
    (b) Respiratory therapy services prescribed by a physician for the 
assessment, diagnostic evaluation, treatment, management, and monitoring 
of patients with deficiencies and abnormalities of cardiopulmonary 
function; and
    (c) Transportation by ambulance that meets the general medical 
necessity requirements set forth in Sec. 410.40(d)(1) of this chapter.

[63 FR 26307, May 12, 1998, as amended at 64 FR 41681, July 30, 1999]



      Subpart D--Requirements for Coverage of Posthospital SNF Care



Sec. 409.30  Basic requirements.

    Posthospital SNF care, including SNF-type care furnished in a 
hospital or CAH that has a swing-bed approval, is covered only if the 
beneficiary meets the requirements of this section and only for days 
when he or she needs and receives care of the level described in 
Sec. 409.31. A beneficiary in an SNF is also considered to meet the 
level of care requirements of Sec. 409.31 up to and including the 
assessment reference date for the 5-day assessment prescribed in 
Sec. 413.343(b) of this chapter, when assigned to one of the Resource 
Utilization Groups that is designated (in the annual publication of 
Federal prospective payment rates described in Sec. 413.345 of this 
chapter) as representing the required level of care. For the purposes of 
this section, the assessment reference date is defined in accordance 
with Sec. 483.315(d) of this chapter, and must occur no later than the 
eighth day of posthospital SNF care.
    (a) Pre-admission requirements. The beneficiary must--
    (1) Have been hospitalized in a participating or qualified hospital 
or participating CAH, for medically necessary inpatient hospital or 
inpatient CAH care, for at least 3 consecutive calendar days, not 
counting the date of discharge; and
    (2) Have been discharged from the hospital or CAH in or after the 
month he or she attained age 65, or in a month for which he or she was 
entitled to hospital or CAH insurance benefits on the basis of 
disability or end-stage renal disease, in accordance with part 406 of 
this chapter.

[[Page 222]]

    (b) Date of admission requirements.1 (1) Except as 
specified in paragraph (b)(2) of this section, the beneficiary must be 
in need of posthospital SNF care, be admitted to the facility, and 
receive the needed care within 30 calendar days after the date of 
discharge from a hospital or CAH.
---------------------------------------------------------------------------

    1 Before December 5, 1980, the law required that 
admission and receipt of care be within 14 days after discharge from the 
hospital or CAH and permitted admission up to 28 days after discharge if 
a SNF bed was not available in the geographic area in which the patient 
lived, or at the time it would be medically appropriate to begin an 
active course of treatment, if SNF care would not be medically 
appropriate within 14 days after discharge.
---------------------------------------------------------------------------

    (2) Exception. A beneficiary for whom posthospital SNF care would 
not be medically appropriate within 30 days after discharge from the 
hospital or CAH may be admitted at the time it would be medically 
appropriate to begin an active course of treatment.

[48 FR 12541, Mar. 25, 1983, as amended at 51 FR 41338, Nov. 14, 1986; 
58 FR 30666, 30667, May 26, 1993; 62 FR 46025, Aug. 29, 1997; 63 FR 
26307, May 12, 1998; 64 FR 41681, July 30, 1999]



Sec. 409.31  Level of care requirement.

    (a) Definition. As used in this section, skilled nursing and skilled 
rehabilitation services means services that:
    (1) Are ordered by a physician;
    (2) Require the skills of technical or professional personnel such 
as registered nurses, licensed practical (vocational) nurses, physical 
therapists, occupational therapists, and speech pathologists or 
audiologists; and
    (3) Are furnished directly by, or under the supervision of, such 
personnel.
    (b) Specific conditions for meeting level of care requirements. (1) 
The beneficiary must require skilled nursing or skilled rehabilitation 
services, or both, on a daily basis.
    (2) Those services must be furnished for a condition--
    (i) For which the beneficiary received inpatient hospital or 
inpatient CAH services; or
    (ii) Which arose while the beneficiary was receiving care in a SNF 
or swing-bed hospital for a condition for which he or she received 
inpatient hospital or inpatient CAH services.
    (3) The daily skilled services must be ones that, as a practical 
matter, can only be provided in a SNF, on an inpatient basis.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]



Sec. 409.32  Criteria for skilled services and the need for skilled services.

    (a) To be considered a skilled service, the service must be so 
inherently complex that it can be safely and effectively performed only 
by, or under the supervision of, professional or technical personnel.
    (b) A condition that does not ordinarily require skilled services 
may require them because of special medical complications. Under those 
circumstances, a service that is usually nonskilled (such as those 
listed in Sec. 409.33(d)) may be considered skilled because it must be 
performed or supervised by skilled nursing or rehabilitation personnel. 
For example, a plaster cast on a leg does not usually require skilled 
care. However, if the patient has a preexisting acute skin condition or 
needs traction, skilled personnel may be needed to adjust traction or 
watch for complications. In situations of this type, the complications, 
and the skilled services they require, must be documented by physicians' 
orders and nursing or therapy notes.
    (c) The restoration potential of a patient is not the deciding 
factor in determining whether skilled services are needed. Even if full 
recovery or medical improvement is not possible, a patient may need 
skilled services to prevent further deterioration or preserve current 
capabilities. For example, a terminal cancer patient may need some of 
the skilled services described in Sec. 409.33.

[48 FR 12541, Mar. 25, 1983, as amended at 59 FR 65493, Dec. 20, 1994]



Sec. 409.33  Examples of skilled nursing and rehabilitation services.

    (a) Services that could qualify as either skilled nursing or skilled 
rehabilitation services--(1) Overall management and evaluation of care 
plan. (i) When overall management and evaluation of care

[[Page 223]]

plan constitute skilled services. The development, management, and 
evaluation of a patient care plan based on the physician's orders 
constitute skilled services when, because of the patient's physical or 
mental condition, those activities require the involvement of technical 
or professional personnel in order to meet the patient's needs, promote 
recovery, and ensure medical safety. Those activities include the 
management of a plan involving a variety of personal care services only 
when, in light of the patient's condition, the aggregate of those 
services requires the involvement of technical or professional 
personnel.
    (ii) Example. An aged patient with a history of diabetes mellitus 
and angina pectoris who is recovering from an open reduction of a 
fracture of the neck of the femur requires, among other services, 
careful skin care, appropriate oral medications, a diabetic diet, an 
exercise program to preserve muscle tone and body condition, and 
observation to detect signs of deterioration in his or her condition or 
complications resulting from restricted, but increasing, mobility. 
Although any of the required services could be performed by a properly 
instructed person, such a person would not have the ability to 
understand the relationship between the services and evaluate the 
ultimate effect of one service on the other. Since the nature of the 
patient's condition, age, and immobility create a high potential for 
serious complications, such an understanding is essential to ensure the 
patient's recovery and safety. Under these circumstances, the management 
of the plan of care would require the skills of a nurse even though the 
individual services are not skilled. Skilled planning and management 
activities are not always specifically identified in the patient's 
clinical record. Therefore, if the patient's overall condition supports 
a finding that recovery and safety can be ensured only if the total care 
is planned, managed, and evaluated by technical or professional 
personnel, it is appropriate to infer that skilled services are being 
provided.
    (2) Observation and assessment of the patient's changing condition--
(i) When observation and assessment constitute skilled services. 
Observation and assessment constitute skilled services when the skills 
of a technical or professional person are required to identify and 
evaluate the patient's need for modification of treatment or for 
additional medical procedures until his or her condition is stabilized.
    (ii) Examples. A patient with congestive heart failure may require 
continuous close observation to detect signs of decompensation, abnormal 
fluid balance, or adverse effects resulting from prescribed 
medication(s) that serve as indicators for adjusting therapeutic 
measures. Similarly, surgical patients transferred from a hospital to an 
SNF while in the complicated, unstabilized postoperative period, for 
example, after hip prosthesis or cataract surgery, may need continued 
close skilled monitoring for postoperative complications and adverse 
reaction. Patients who, in addition to their physical problems, exhibit 
acute psychological symptoms such as depression, anxiety, or agitation, 
may also require skilled observation and assessment by technical or 
professional personnel to ensure their safety or the safety of others, 
that is, to observe for indications of suicidal or hostile behavior. The 
need for services of this type must be documented by physicians' orders 
or nursing or therapy notes.
    (3) Patient education services--(i) When patient education services 
constitute skilled services. Patient education services are skilled 
services if the use of technical or professional personnel is necessary 
to teach a patient self-maintenance.
    (ii) Examples. A patient who has had a recent leg amputation needs 
skilled rehabilitation services provided by technical or professional 
personnel to provide gait training and to teach prosthesis care. 
Similarly, a patient newly diagnosed with diabetes requires instruction 
from technical or professional personnel to learn the self-
administration of insulin or foot-care precautions.
    (b) Services that qualify as skilled nursing services. (1) 
Intravenous or intramuscular injections and intravenous feeding.

[[Page 224]]

    (2) Enteral feeding that comprises at least 26 per cent of daily 
calorie requirements and provides at least 501 milliliters of fluid per 
day.
    (3) Nasopharyngeal and tracheostomy aspiration;
    (4) Insertion and sterile irrigation and replacement of suprapubic 
catheters;
    (5) Application of dressings involving prescription medications and 
aseptic techniques;
    (6) Treatment of extensive decubitus ulcers or other widespread skin 
disorder;
    (7) Heat treatments which have been specifically ordered by a 
physician as part of active treatment and which require observation by 
nurses to adequately evaluate the patient's progress;
    (8) Initial phases of a regimen involving administration of medical 
gases;
    (9) Rehabilitation nursing procedures, including the related 
teaching and adaptive aspects of nursing, that are part of active 
treatment, e.g., the institution and supervision of bowel and bladder 
training programs.
    (c) Services which would qualify as skilled rehabilitation services. 
(1) Ongoing assessment of rehabilitation needs and potential: Services 
concurrent with the management of a patient care plan, including tests 
and measurements of range of motion, strength, balance, coordination, 
endurance, functional ability, activities of daily living, perceptual 
deficits, speech and language or hearing disorders;
    (2) Therapeutic exercises or activities: Therapeutic exercises or 
activities which, because of the type of exercises employed or the 
condition of the patient, must be performed by or under the supervision 
of a qualified physical therapist or occupational therapist to ensure 
the safety of the patient and the effectiveness of the treatment;
    (3) Gait evaluation and training: Gait evaluation and training 
furnished to restore function in a patient whose ability to walk has 
been impaired by neurological, muscular, or skeletal abnormality;
    (4) Range of motion exercises: Range of motion exercises which are 
part of the active treatment of a specific disease state which has 
resulted in a loss of, or restriction of, mobility (as evidenced by a 
therapist's notes showing the degree of motion lost and the degree to be 
restored);
    (5) Maintenance therapy; Maintenance therapy, when the specialized 
knowledge and judgment of a qualified therapist is required to design 
and establish a maintenance program based on an initial evaluation and 
periodic reassessment of the patient's needs, and consistent with the 
patient's capacity and tolerance. For example, a patient with 
Parkinson's disease who has not been under a rehabilitation regimen may 
require the services of a qualified therapist to determine what type of 
exercises will contribute the most to the maintenance of his present 
level of functioning.
    (6) Ultrasound, short-wave, and microwave therapy treatment by a 
qualified physical therapist;
    (7) Hot pack, hydrocollator, infrared treatments, paraffin baths, 
and whirlpool; Hot pack hydrocollator, infrared treatments, paraffin 
baths, and whirlpool in particular cases where the patient's condition 
is complicated by circulatory deficiency, areas of desensitization, open 
wounds, fractures, or other complications, and the skills, knowledge, 
and judgment of a qualified physical therapist are required; and
    (8) Services of a speech pathologist or audiologist when necessary 
for the restoration of function in speech or hearing.
    (d) Personal care services. Personal care services which do not 
require the skills of qualified technical or professional personnel are 
not skilled services except under the circumstances specified in 
Sec. 409.32(b). Personal care services include, but are not limited to, 
the following:
    (1) Administration of routine oral medications, eye drops, and 
ointments;
    (2) General maintenance care of colostomy and ileostomy;
    (3) Routine services to maintain satisfactory functioning of 
indwelling bladder catheters;
    (4) Changes of dressings for noninfected postoperative or chronic 
conditions;
    (5) Prophylactic and palliative skin care, including bathing and 
application

[[Page 225]]

of creams, or treatment of minor skin problems;
    (6) Routine care of the incontinent patient, including use of 
diapers and protective sheets;
    (7) General maintenance care in connection with a plaster cast;
    (8) Routine care in connection with braces and similar devices;
    (9) Use of heat as a palliative and comfort measure, such as 
whirlpool and hydrocollator;
    (10) Routine administration of medical gases after a regimen of 
therapy has been established;
    (11) Assistance in dressing, eating, and going to the toilet;
    (12) Periodic turning and positioning in bed; and
    (13) General supervision of exercises which have been taught to the 
patient; including the actual carrying out of maintenance programs, 
i.e., the performance of the repetitive exercises required to maintain 
function do not require the skills of a therapist and would not 
constitute skilled rehabilitation services (see paragraph (c) of this 
section). Similarly, repetitious exercises to improve gait, maintain 
strength, or endurance; passive exercises to maintain range of motion in 
paralyzed extremities, which are not related to a specific loss of 
function; and assistive walking do not constitute skilled rehabilitation 
services.

[48 FR 12541, Mar. 25, 1983, as amended at 63 FR 26307, May 12, 1998; 64 
FR 41681, July 30, 1999]



Sec. 409.34  Criteria for ``daily basis''.

    (a) To meet the daily basis requirement specified in 
Sec. 409.31(b)(1), the following frequency is required:
    (1) Skilled nursing services or skilled rehabilitation services must 
be needed and provided 7 days a week; or
    (2) As an exception, if skilled rehabilitation services are not 
available 7 days a week those services must be needed and provided at 
least 5 days a week.
    (b) A break of one or two days in the furnishing of rehabilitation 
services will not preclude coverage if discharge would not be practical 
for the one or two days during which, for instance, the physician has 
suspended the therapy sessions because the patient exhibited extreme 
fatigue.



Sec. 409.35  Criteria for ``practical matter''.

    (a) General considerations. In making a ``practical matter'' 
determination, as required by Sec. 409.31(b)(3), consideration must be 
given to the patient's condition and to the availability and feasibility 
of using more economical alternative facilities and services. However, 
in making that determination, the availability of Medicare payment for 
those services may not be a factor. Example: The beneficiary can obtain 
daily physical therapy from a physical therapist in independent 
practice. However, Medicare pays only the appropriate portion (after 
deduction of applicable deductible and coinsurance amounts) of the first 
$500 of services furnished by such a practitioner in a year. This 
limitation on payment may not be a basis for finding that the needed 
care can only be provided in a SNF.
    (b) Examples of circumstances that meet practical matter criteria. 
(1) Beneficiary's condition. Inpatient care would be required ``as a 
practical matter'' if transporting the beneficiary to and from the 
nearest facility that furnishes the required daily skilled services 
would be an excessive physical hardship.
    (2) Economy and efficiency. Even if the beneficiary's condition does 
not preclude transportation, inpatient care might be more efficient and 
less costly if, for instance, the only alternative is daily 
transportation by ambulance.

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985]



Sec. 409.36  Effect of discharge from posthospital SNF care.

    If a beneficiary is discharged from a facility after receiving 
posthospital SNF care, he or she is not entitled to additional services 
of this kind in the same benefit period unless--
    (a) He or she is readmitted to the same or another facility within 
30 calendar days following the day of discharge (or, before December 5, 
1980, within 14 calendar days after discharge); or
    (b) He or she is again hospitalized for at least 3 consecutive 
calendar days.

[[Page 226]]



        Subpart E--Home Health Services Under Hospital Insurance



Sec. 409.40  Basis, purpose, and scope.

    This subpart implements sections 1814(a)(2)(C), 1835(a)(2)(A), and 
1861(m) of the Act with respect to the requirements that must be met for 
Medicare payment to be made for home health services furnished to 
eligible beneficiaries.

[59 FR 65493, Dec. 20, 1994]



Sec. 409.41  Requirement for payment.

    In order for home health services to qualify for payment under the 
Medicare program the following requirements must be met:
    (a) The services must be furnished to an eligible beneficiary by, or 
under arrangements with, an HHA that--
    (1) Meets the conditions of participation for HHAs at part 484 of 
this chapter; and
    (2) Has in effect a Medicare provider agreement as described in part 
489, subparts A, B, C, D, and E of this chapter.
    (b) The physician certification and recertification requirements for 
home health services described in Sec. 424.22.
    (c) All requirements contained in Secs. 409.42 through 409.47.

[59 FR 65494, Dec. 20, 1994]



Sec. 409.42  Beneficiary qualifications for coverage of services.

    To qualify for Medicare coverage of home health services, a 
beneficiary must meet each of the following requirements:
    (a) Confined to the home. The beneficiary must be confined to the 
home or in an institution that is not a hospital, SNF or nursing 
facility as defined in section 1861(e)(1), 1819(a)(1) or 1919(a)(1) of 
the Act, respectively.
    (b) Under the care of a physician. The beneficiary must be under the 
care of a physician who establishes the plan of care. A doctor of 
podiatric medicine may establish a plan of care only if that is 
consistent with the functions he or she is authorized to perform under 
State law.
    (c) In need of skilled services. The beneficiary must need at least 
one of the following skilled services as certified by a physician in 
accordance with the physician certification and recertification 
requirements for home health services under Sec. 424.22 of this chapter.
    (1) Intermittent skilled nursing services that meet the criteria for 
skilled services and the need for skilled services found in Sec. 409.32. 
(Also see Sec. 409.33(a) and (b) for a description of examples of 
skilled nursing and rehabilitation services.)
    (2) Physical therapy services that meet the requirements of 
Sec. 409.44(c).
    (3) Speech-language pathology services that meet the requirements of 
Sec. 409.44(c).
    (4) Continuing occupational therapy services that meet the 
requirements of Sec. 409.44(c) if the beneficiary's eligibility for home 
health services has been established by virtue of a prior need for 
intermittent skilled nursing care, speech-language pathology services, 
or physical therapy in the current or prior certification period.
    (d) Under a plan of care. The beneficiary must be under a plan of 
care that meets the requirements for plans of care specified in 
Sec. 409.43.
    (e) By whom the services must be furnished. The home health services 
must be furnished by, or under arrangements made by, a participating 
HHA.

[59 FR 65494, Dec. 20, 1994; 60 FR 39122, Aug. 1, 1995]



Sec. 409.43  Plan of care requirements.

    (a) Contents. The plan of care must contain those items listed in 
Sec. 484.18(a) of this chapter that specify the standards relating to a 
plan of care that an HHA must meet in order to participate in the 
Medicare program.
    (b) Physician's orders. The physician's orders for services in the 
plan of care must specify the medical treatments to be furnished as well 
as the type of home health discipline that will furnish the ordered 
services and at what frequency the services will be furnished. Orders 
for services to be provided ``as needed'' or ``PRN'' must be accompanied 
by a description of the beneficiary's medical signs and symptoms that 
would occasion the visit and a specific limit on the number of those 
visits to be made under the order before an additional physician order 
would have to be obtained. Orders for care may indicate a specific range 
in

[[Page 227]]

frequency of visits to ensure that the most appropriate level of 
services is furnished. If a range of visits is ordered, the upper limit 
of the range is considered the specific frequency.
    (c) Physician signature. (1) Request for Anticipated payment 
signature requirements. If the physician signed plan of care is not 
available at the time the HHA requests an anticipated payment of the 
initial percentage prospective payment in accordance with Sec. 484.205, 
the request for the anticipated payment must be based on--
    (i) A physician's verbal order that--
    (A) Is recorded in the plan of care;
    (B) Includes a description of the patient's condition and the 
services to be provided by the home health agency;
    (C) Includes an attestation (relating to the physician's orders and 
the date received) signed and dated by the registered nurse or qualified 
therapist (as defined in 42 CFR 484.4) responsible for furnishing or 
supervising the ordered service in the plan of care; and
    (D) Is copied into the plan of care and the plan of care is 
immediately submitted to the physician; or
    (ii) A referral prescribing detailed orders for the services to be 
rendered that is signed and dated by a physician.
    (2) Reduction or disapproval of anticipated payment requests. CMS 
has the authority to reduce or disapprove requests for anticipated 
payments in situations when protecting Medicare program integrity 
warrants this action. Since the request for anticipated payment is based 
on verbal orders as specified in paragraph (c)(1)(i) and/or a 
prescribing referral as specified in (c)(1)(ii) of this section and is 
not a Medicare claim for purposes of the Act (although it is a ``claim'' 
for purposes of Federal, civil, criminal, and administrative law 
enforcement authorities, including but not limited to the Civil Monetary 
Penalties Law (as defined in 42 U.S.C. 1320a-7a (i) (2)), the Civil 
False Claims Act (as defined in 31 U.S.C. 3729(c)), and the Criminal 
False Claims Act (18 U.S.C. 287)), the request for anticipated payment 
will be canceled and recovered unless the claim is submitted within the 
greater of 60 days from the end of the episode or 60 days from the 
issuance of the request for anticipated payment.
    (3) Final percentage payment signature requirements. The plan of 
care must be signed and dated--
    (i) By a physician as described who meets the certification and 
recertification requirements of Sec. 424.22 of this chapter; and
    (ii) Before the claim for each episode for services is submitted for 
the final percentage prospective payment.
    (4) Changes to the plan of care signature requirements. Any changes 
in the plan must be signed and dated by a physician.
    (d) Oral (verbal) orders. If any services are provided based on a 
physician's oral orders, the orders must be put in writing and be signed 
and dated with the date of receipt by the registered nurse or qualified 
therapist (as defined in Sec. 484.4 of this chapter) responsible for 
furnishing or supervising the ordered services. Oral orders may only be 
accepted by personnel authorized to do so by applicable State and 
Federal laws and regulations as well as by the HHA's internal policies. 
The oral orders must also be countersigned and dated by the physician 
before the HHA bills for the care.
    (e) Frequency of review. (1) The plan of care must be reviewed by 
the physician (as specified in Sec. 409.42(b)) in consultation with 
agency professional personnel at least every 60 days or more frequently 
when there is a--
    (i) Beneficiary elected transfer;
    (ii) Significant change in condition resulting in a change in the 
case-mix assignment; or
    (iii) Discharge and return to the same HHA during the 60-day 
episode.
    (2) Each review of a beneficiary's plan of care must contain the 
signature of the physician who reviewed it and the date of review.
    (f) Termination of the plan of care. The plan of care is considered 
to be terminated if the beneficiary does not receive at least one 
covered skilled nursing, physical therapy, speech-language pathology 
services, or occupational therapy visit in a 60-day period unless the 
physician documents that the interval without such care is appropriate 
to the treatment of the beneficiary's illness or injury.

[59 FR 65494, Dec. 20, 1994, as amended at 65 FR 41210, July 3, 2000]

[[Page 228]]



Sec. 409.44  Skilled services requirements.

    (a) General. The intermediary's decision on whether care is 
reasonable and necessary is based on information provided on the forms 
and in the medical record concerning the unique medical condition of the 
individual beneficiary. A coverage denial is not made solely on the 
basis of the reviewer's general inferences about patients with similar 
diagnoses or on data related to utilization generally but is based upon 
objective clinical evidence regarding the beneficiary's individual need 
for care.
    (b) Skilled nursing care. (1) Skilled nursing care consists of those 
services that must, under State law, be performed by a registered nurse, 
or practical (vocational) nurse, as defined in Sec. 484.4 of this 
chapter, and meet the criteria for skilled nursing services specified in 
Sec. 409.32. See Sec. 409.33(a) and (b) for a description of skilled 
nursing services and examples of them.
    (i) In determining whether a service requires the skill of a 
licensed nurse, consideration must be given to the inherent complexity 
of the service, the condition of the beneficiary, and accepted standards 
of medical and nursing practice.
    (ii) If the nature of a service is such that it can safely and 
effectively be performed by the average nonmedical person without direct 
supervision of a licensed nurse, the service cannot be regarded as a 
skilled nursing service.
    (iii) The fact that a skilled nursing service can be or is taught to 
the beneficiary or to the beneficiary's family or friends does not 
negate the skilled aspect of the service when performed by the nurse.
    (iv) If the service could be performed by the average nonmedical 
person, the absence of a competent person to perform it does not cause 
it to be a skilled nursing service.
    (2) The skilled nursing care must be provided on a part-time or 
intermittent basis.
    (3) The skilled nursing services must be reasonable and necessary 
for the treatment of the illness or injury.
    (i) To be considered reasonable and necessary, the services must be 
consistent with the nature and severity of the beneficiary's illness or 
injury, his or her particular medical needs, and accepted standards of 
medical and nursing practice.
    (ii) The skilled nursing care provided to the beneficiary must be 
reasonable within the context of the beneficiary's condition.
    (iii) The determination of whether skilled nursing care is 
reasonable and necessary must be based solely upon the beneficiary's 
unique condition and individual needs, without regard to whether the 
illness or injury is acute, chronic, terminal, or expected to last a 
long time.
    (c) Physical therapy, speech-language pathology services, and 
occupational therapy. To be covered, physical therapy, speech-language 
pathology services, and occupational therapy must satisfy the criteria 
in paragraphs (c)(1) through (4) of this section. Occupational therapy 
services initially qualify for home health coverage only if they are 
part of a plan of care that also includes intermittent skilled nursing 
care, physical therapy, or speech-language pathology services as 
follows:
    (1) Speech-language pathology services and physical or occupational 
therapy services must relate directly and specifically to a treatment 
regimen (established by the physician, after any needed consultation 
with the qualified therapist) that is designed to treat the 
beneficiary's illness or injury. Services related to activities for the 
general physical welfare of beneficiaries (for example, exercises to 
promote overall fitness) do not constitute physical therapy, 
occupational therapy, or speech-language pathology services for Medicare 
purposes.
    (2) Physical and occupational therapy and speech-language pathology 
services must be reasonable and necessary. To be considered reasonable 
and necessary, the following conditions must be met:
    (i) The services must be considered under accepted standards of 
medical practice to be a specific, safe, and effective treatment for the 
beneficiary's condition.
    (ii) The services must be of such a level of complexity and 
sophistication or the condition of the beneficiary must be such that the 
services required can safely and effectively be performed only by a 
qualified physical therapist

[[Page 229]]

or by a qualified physical therapy assistant under the supervision of a 
qualified physical therapist, by a qualified speech-language 
pathologist, or by a qualified occupational therapist or a qualified 
occupational therapy assistant under the supervision of a qualified 
occupational therapist (as defined in Sec. 484.4 of this chapter). 
Services that do not require the performance or supervision of a 
physical therapist or an occupational therapist are not considered 
reasonable or necessary physical therapy or occupational therapy 
services, even if they are performed by or supervised by a physical 
therapist or occupational therapist. Services that do not require the 
skills of a speech-language pathologist are not considered to be 
reasonable and necessary speech-language pathology services even if they 
are performed by or supervised by a speech-language pathologist.
    (iii) There must be an expectation that the beneficiary's condition 
will improve materially in a reasonable (and generally predictable) 
period of time based on the physician's assessment of the beneficiary's 
restoration potential and unique medical condition, or the services must 
be necessary to establish a safe and effective maintenance program 
required in connection with a specific disease, or the skills of a 
therapist must be necessary to perform a safe and effective maintenance 
program. If the services are for the establishment of a maintenance 
program, they may include the design of the program, the instruction of 
the beneficiary, family, or home health aides, and the necessary 
infrequent reevaluations of the beneficiary and the program to the 
degree that the specialized knowledge and judgment of a physical 
therapist, speech-language pathologist, or occupational therapist is 
required.
    (iv) The amount, frequency, and duration of the services must be 
reasonable.

[59 FR 65494, Dec. 20, 1994]



Sec. 409.45  Dependent services requirements.

    (a) General. Services discussed in paragraphs (b) through (g) of 
this section may be covered only if the beneficiary needs skilled 
nursing care on an intermittent basis, as described in Sec. 409.44(b); 
physical therapy or speech-language pathology services as described in 
Sec. 409.44(c); or has a continuing need for occupational therapy 
services as described in Sec. 409.44(c) if the beneficiary's eligibility 
for home health services has been established by virtue of a prior need 
for intermittent skilled nursing care, speech-language pathology 
services, or physical therapy in the current or prior certification 
period; and otherwise meets the qualifying criteria (confined to the 
home, under the care of a physician, in need of skilled services, and 
under a plan of care) specified in Sec. 409.42. Home health coverage is 
not available for services furnished to a beneficiary who is no longer 
in need of one of the qualifying skilled services specified in this 
paragraph. Therefore, dependent services furnished after the final 
qualifying skilled service are not covered, except when the dependent 
service was not followed by a qualifying skilled service as a result of 
the unexpected inpatient admission or death of the beneficiary, or due 
to some other unanticipated event.
    (b) Home health aide services. To be covered, home health aide 
services must meet each of the following requirements:
    (1) The reason for the visits by the home health aide must be to 
provide hands-on personal care to the beneficiary or services that are 
needed to maintain the beneficiary's health or to facilitate treatment 
of the beneficiary's illness or injury. The physician's order must 
indicate the frequency of the home health aide services required by the 
beneficiary. These services may include but are not limited to:
    (i) Personal care services such as bathing, dressing, grooming, 
caring for hair, nail and oral hygiene that are needed to facilitate 
treatment or to prevent deterioration of the beneficiary's health, 
changing the bed linens of an incontinent beneficiary, shaving, 
deodorant application, skin care with lotions and/or powder, foot care, 
ear care, feeding, assistance with elimination (including enemas unless

[[Page 230]]

the skills of a licensed nurse are required due to the beneficiary's 
condition, routine catheter care, and routine colostomy care), 
assistance with ambulation, changing position in bed, and assistance 
with transfers.
    (ii) Simple dressing changes that do not require the skills of a 
licensed nurse.
    (iii) Assistance with medications that are ordinarily self-
administered and that do not require the skills of a licensed nurse to 
be provided safely and effectively.
    (iv) Assistance with activities that are directly supportive of 
skilled therapy services but do not require the skills of a therapist to 
be safely and effectively performed, such as routine maintenance 
exercises and repetitive practice of functional communication skills to 
support speech-language pathology services.
    (v) Routine care of prosthetic and orthotic devices.
    (2) The services to be provided by the home health aide must be--
    (i) Ordered by a physician in the plan of care; and
    (ii) Provided by the home health aide on a part-time or intermittent 
basis.
    (3) The services provided by the home health aide must be reasonable 
and necessary. To be considered reasonable and necessary, the services 
must--
    (i) Meet the requirement for home health aide services in paragraph 
(b)(1) of this section;
    (ii) Be of a type the beneficiary cannot perform for himself or 
herself; and
    (iii) Be of a type that there is no able or willing caregiver to 
provide, or, if there is a potential caregiver, the beneficiary is 
unwilling to use the services of that individual.
    (4) The home health aide also may perform services incidental to a 
visit that was for the provision of care as described in paragraphs 
(b)(3)(i) through (iii) of this section. For example, these incidental 
services may include changing bed linens, personal laundry, or preparing 
a light meal.
    (c) Medical social services. Medical social services may be covered 
if the following requirements are met:
    (1) The services are ordered by a physician and included in the plan 
of care.
    (2)(i) The services are necessary to resolve social or emotional 
problems that are expected to be an impediment to the effective 
treatment of the beneficiary's medical condition or to his or her rate 
of recovery.
    (ii) If these services are furnished to a beneficiary's family 
member or caregiver, they are furnished on a short-term basis and it can 
be demonstrated that the service is necessary to resolve a clear and 
direct impediment to the effective treatment of the beneficiary's 
medical condition or to his or her rate of recovery.
    (3) The frequency and nature of the medical social services are 
reasonable and necessary to the treatment of the beneficiary's 
condition.
    (4) The medical social services are furnished by a qualified social 
worker or qualified social work assistant under the supervision of a 
social worker as defined in Sec. 484.4 of this chapter.
    (5) The services needed to resolve the problems that are impeding 
the beneficiary's recovery require the skills of a social worker or a 
social work assistant under the supervision of a social worker to be 
performed safely and effectively.
    (d) Occupational therapy. Occupational therapy services that are not 
qualifying services under Sec. 409.44(c) are nevertheless covered as 
dependent services if the requirements of Sec. 409.44(c)(2)(i) through 
(iv), as to reasonableness and necessity, are met.
    (e) Durable medical equipment. Durable medical equipment in 
accordance with Sec. 410.38 of this chapter, which describes the scope 
and conditions of payment for durable medical equipment under Part B, 
may be covered under the home health benefit as either a Part A or Part 
B service. Durable medical equipment furnished by an HHA as a home 
health service is always covered by Part A if the beneficiary is 
entitled to Part A.
    (f) Medical supplies. Medical supplies (including catheters, 
catheter supplies, ostomy bags, and supplies relating to ostomy care but 
excluding drugs and biologicals) may be covered as a home health 
benefit. For medical supplies to be covered as a Medicare home health 
benefit, the medical supplies must be needed to treat the beneficiary's 
illness

[[Page 231]]

or injury that occasioned the home health care.
    (g) Intern and resident services. The medical services of interns 
and residents in training under an approved hospital teaching program 
are covered if the services are ordered by the physician who is 
responsible for the plan of care and the HHA is affiliated with or under 
the common control of the hospital furnishing the medical services.

Approved means--
    (1) Approved by the Accreditation Council for Graduate Medical 
Education;
    (2) In the case of an osteopathic hospital, approved by the 
Committee on Hospitals of the Bureau of Professional Education of the 
American Osteopathic Association;
    (3) In the case of an intern or resident-in-training in the field of 
dentistry, approved by the Council on Dental Education of the American 
Dental Association; or
    (4) In the case of an intern or resident-in-training in the field of 
podiatry, approved by the Council on Podiatric Medical Education of the 
American Podiatric Medical Association.

[59 FR 65495, Dec. 20, 1994; 60 FR 39122, 39123, Aug. 1, 1995]



Sec. 409.46  Allowable administrative costs.

    Services that are allowable as administrative costs but are not 
separately billable include, but are not limited to, the following:
    (a) Registered nurse initial evaluation visits. Initial evaluation 
visits by a registered nurse for the purpose of assessing a 
beneficiary's health needs, determining if the agency can meet those 
health needs, and formulating a plan of care for the beneficiary are 
allowable administrative costs. If a physician specifically orders that 
a particular skilled service be furnished during the evaluation in which 
the agency accepts the beneficiary for treatment and all other coverage 
criteria are met, the visit is billable as a skilled nursing visit. 
Otherwise it is considered to be an administrative cost.
    (b) Visits by registered nurses or qualified professionals for the 
supervision of home health aides. Visits by registered nurses or 
qualified professionals for the purpose of supervising home health aides 
as required at Sec. 484.36(d) of this chapter are allowable 
administrative costs. Only if the registered nurse or qualified 
professional visits the beneficiary for the purpose of furnishing care 
that meets the coverage criteria at Sec. 409.44, and the supervisory 
visit occurs simultaneously with the provision of covered care, is the 
visit billable as a skilled nursing or therapist's visit.
    (c) Respiratory care services. If a respiratory therapist is used to 
furnish overall training or consultative advice to an HHA's staff and 
incidentally provides respiratory therapy services to beneficiaries in 
their homes, the costs of the respiratory therapist's services are 
allowable as administrative costs. Visits by a respiratory therapist to 
a beneficiary's home are not separately billable. However, respiratory 
therapy services that are furnished as part of a plan of care by a 
skilled nurse or physical therapist and that constitute skilled care may 
be separately billed as skilled visits.
    (d) Dietary and nutrition personnel. If dieticians or nutritionists 
are used to provide overall training or consultative advice to HHA staff 
and incidentally provide dietetic or nutritional services to 
beneficiaries in their homes, the costs of these professional services 
are allowable as administrative costs. Visits by a dietician or 
nutritionist to a beneficiary's home are not separately billable.

[59 FR 65496, Dec. 20, 1994]



Sec. 409.47  Place of service requirements.

    To be covered, home health services must be furnished in either the 
beneficiary's home or an outpatient setting as defined in this section.
    (a) Beneficiary's home. A beneficiary's home is any place in which a 
beneficiary resides that is not a hospital, SNF, or nursing facility as 
defined in sections 1861(e)(1), 1819(a)(1), of 1919(a)(1) of the Act, 
respectively.
    (b) Outpatient setting. For purposes of coverage of home health 
services, an outpatient setting may include a hospital, SNF or a 
rehabilitation center with which the HHA has an arrangement in 
accordance with the requirements of Sec. 484.14(h) of this chapter and

[[Page 232]]

that is used by the HHA to provide services that either--
    (1) Require equipment that cannot be made available at the 
beneficiary's home; or
    (2) Are furnished while the beneficiary is at the facility to 
receive services requiring equipment described in paragraph (b)(1) of 
this section.

[59 FR 65496, Dec. 20, 1994]



Sec. 409.48  Visits.

    (a) Number of allowable visits under Part A. To the extent that all 
coverage requirements specified in this subpart are met, payment may be 
made on behalf of eligible beneficiaries under Part A for an unlimited 
number of covered home health visits. All Medicare home health services 
are covered under hospital insurance unless there is no Part A 
entitlement.
    (b) Number of visits under Part B. To the extent that all coverage 
requirements specified in this subpart are met, payment may be made on 
behalf of eligible beneficiaries under Part B for an unlimited number of 
covered home health visits. Medicare home health services are covered 
under Part B only when the beneficiary is not entitled to coverage under 
Part A.
    (c) Definition of visit. A visit is an episode of personal contact 
with the beneficiary by staff of the HHA or others under arrangements 
with the HHA, for the purpose of providing a covered service.
    (1) Generally, one visit may be covered each time an HHA employee or 
someone providing home health services under arrangements enters the 
beneficiary's home and provides a covered service to a beneficiary who 
meets the criteria of Sec. 409.42 (confined to the home, under the care 
of a physician, in need of skilled services, and under a plan of care).
    (2) If the HHA furnishes services in an outpatient facility under 
arrangements with the facility, one visit may be covered for each type 
of service provided.
    (3) If two individuals are needed to provide a service, two visits 
may be covered. If two individuals are present, but only one is needed 
to provide the care, only one visit may be covered.
    (4) A visit is initiated with the delivery of covered home health 
services and ends at the conclusion of delivery of covered home health 
services. In those circumstances in which all reasonable and necessary 
home health services cannot be provided in the course of a single visit, 
HHA staff or others providing services under arrangements with the HHA 
may remain at the beneficiary's residence between visits (for example, 
to provide non-covered services). However, if all covered services could 
be provided in the course of one visit, only one visit may be covered.

[59 FR 65497, Dec. 20, 1994]



Sec. 409.49  Excluded services.

    (a) Drugs and biologicals. Drugs and biologicals are excluded from 
payment under the Medicare home health benefit.
    (1) A drug is any chemical compound that may be used on or 
administered to humans or animals as an aid in the diagnosis, treatment 
or prevention of disease or other condition or for the relief of pain or 
suffering or to control or improve any physiological pathologic 
condition.
    (2) A biological is any medicinal preparation made from living 
organisms and their products including, but not limited to, serums, 
vaccines, antigens, and antitoxins.
    (b) Transportation. The transportation of beneficiaries, whether to 
receive covered care or for other purposes, is excluded from home health 
coverage. Costs of transportation of equipment, materials, supplies, or 
staff may be allowable as administrative costs, but no separate payment 
is made for them.
    (c) Services that would not be covered as inpatient services. 
Services that would not be covered if furnished as inpatient hospital 
services are excluded from home health coverage.
    (d) Housekeeping services. Services whose sole purpose is to enable 
the beneficiary to continue residing in his or her home (for example, 
cooking, shopping, Meals on Wheels, cleaning, laundry) are excluded from 
home health coverage.
    (e) Services covered under the End Stage Renal Disease (ESRD) 
program.

[[Page 233]]

Services that are covered under the ESRD program and are contained in 
the composite rate reimbursement methodology, including any service 
furnished to a Medicare ESRD beneficiary that is directly related to 
that individual's dialysis, are excluded from coverage under the 
Medicare home health benefit.
    (f) Prosthetic devices. Items that meet the requirements of 
Sec. 410.36(a)(2) of this chapter for prosthetic devices covered under 
Part B are excluded from home health coverage. Catheters, catheter 
supplies, ostomy bags, and supplies relating to ostomy care are not 
considered prosthetic devices if furnished under a home health plan of 
care and are not subject to this exclusion from coverage.
    (g) Medical social services provided to family members. Except as 
provided in Sec. 409.45(c)(2), medical social services provided solely 
to members of the beneficiary's family and that are not incidental to 
covered medical social services being provided to the beneficiary are 
not covered.

[59 FR 65497, Dec. 20, 1994; 60 FR 39123, Aug. 1, 1995]



Sec. 409.50  Coinsurance for durable medical equipment (DME) furnished as a home health service.

    The coinsurance liability of the beneficiary or other person for DME 
furnished as a home health service is 20 percent of the customary 
(insofar as reasonable) charge for the services.

[51 FR 41339, Nov. 14, 1986. Redesignated at 59 FR 65496, Dec. 20, 1994]



             Subpart F--Scope of Hospital Insurance Benefits



Sec. 409.60  Benefit periods.

    (a) When benefit periods begin. The initial benefit period begins on 
the day the beneficiary receives inpatient hospital, inpatient CAH, or 
SNF services for the first time after becoming entitled to hospital 
insurance. Thereafter, a new benefit period begins whenever the 
beneficiary receives inpatient hospital, inpatient CAH, or SNF services 
after he or she has ended a benefit period as described in paragraph (b) 
of this section.
    (b) When benefit periods end--(1) A benefit period ends when a 
beneficiary has, for at least 60 consecutive days not been an inpatient 
in any of the following:
    (i) A hospital that meets the requirements of section 1861(e)(1) of 
the Act.
    (ii) A CAH that meets the requirements of section 1820 of the Act.
    (iii) A SNF that meets the requirements of sections 1819(a)(1) or 
1861(y) of the Act.
    (2) For purposes of ending a benefit period, a beneficiary was an 
inpatient of a SNF if his or her care in the SNF met the skilled level 
of care requirements specified in Sec. 409.31(b) (1) and (3).
    (c) Presumptions. (1) For purposes of determining whether a 
beneficiary was an inpatient of a SNF under paragraph (b)(2) of this 
section--
    (i) A beneficiary's care met the skilled level of care requirements 
if inpatient SNF claims were paid for those services under Medicare or 
Medicaid, unless:
    (A) Such payments were made under Sec. 405.330 or Medicaid 
administratively necessary days provisions which result in payment for 
care not meeting the skilled level of care requirements, or
    (B) A Medicare denial and a Medicaid payment are made for the same 
period, in which case the presumption in paragraph (c)(2)(ii) of this 
section applies;
    (ii) A beneficiary's care met the skilled level of care requirements 
if a SNF claim was paid under section 1879(e) of the Social Security 
Act;
    (iii) A beneficiary's care did not meet the skilled level of care 
requirements if a SNF claim was paid for the services under 
Sec. 405.330;
    (iv) A beneficiary's care did not meet the skilled level of care 
requirements if a Medicaid SNF claim was denied on the grounds that the 
services were not at the skilled level of care (even if paid under 
applicable Medicaid administratively necessary days provisions which 
result in payment for care not meeting the skilled level of care 
requirements);
    (2) For purposes of determining whether a beneficiary was an 
inpatient of a SNF under paragraph (b)(2) of this section a 
beneficiary's care in a SNF is presumed--
    (i) To have met the skilled level of care requirements during any 
period

[[Page 234]]

for which the beneficiary was assigned to one of the Resource 
Utilization Groups designated as representing the required level of 
care, as provided in Sec. 409.30.
    (ii) To have met the skilled level of care requirements if a 
Medicaid or Medicare claim was denied on grounds other than that the 
services were not at the skilled level of care;
    (iii) Not to have met the skilled level of care requirements if a 
Medicare SNF claim was denied on the grounds that the services were not 
at the skilled level of care and payment was not made under 
Sec. 405.330; or
    (iv) Not to have met the skilled level of care requirements if no 
Medicare or Medicaid claim was submitted by the SNF.
    (3) If information upon which to base a presumption is not readily 
available, the intermediary may, at its discretion review the 
beneficiary's medical records to determine whether he or she was an 
inpatient of a SNF as set forth under paragraph (b)(2) of this section.
    (4) When the intermediary makes a benefit period determination based 
upon paragraph (c)(1) of this section, the beneficiary may seek to 
reverse the benefit period determination by timely appealing the prior 
Medicare SNF claim determination under part 405, subpart G of this 
chapter, or the prior Medicaid SNF claim under part 431, subpart E of 
this chapter.
    (5) When the intermediary makes a benefit period determination under 
paragraph (c)(2) of this section, the beneficiary will be notified of 
the basis for the determination, and of his or her right to present 
evidence to rebut the determination that the skilled level of care 
requirements specified in Sec. 409.31 (b)(1) and (b)(3) were or were not 
met on reconsideration and appeal under 42 CFR, part 405, subpart G of 
this chapter.
    (d) Limitation on benefit period determinations. When the 
intermediary considers the same prior SNF stay of a particular 
beneficiary in making benefit period determinations for more than one 
inpatient Medicare claim--
    (1) Medicare will recognize only the initial level of care 
characterization for that prior SNF stay (or if appealed under 42 CFR 
part 405, subpart G of this chapter, the level of care determined under 
appeal); or
    (2) If part of a prior SNF stay has one level of care 
characterization and another part has another level of care 
characterization, Medicare will recognize only the initial level of care 
characterization for a particular part of a prior SNF stay (or if 
appealed under 42 CFR part 405, subpart G of this chapter, the level of 
care determined under appeal).
    (e) Relation of benefit period to benefit limitations. The 
limitations specified in Secs. 409.61 and 409.64, and the deductible and 
coinsurance requirements set forth in subpart G of this part apply for 
each benefit period. The limitations of Sec. 409.63 apply only to the 
initial benefit period.

[52 FR 22645, June 15, 1987; 52 FR 28824, Aug. 4, 1987, as amended at 58 
FR 30667, May 26, 1993; 63 FR 26307, May 12, 1998]



Sec. 409.61  General limitations on amount of benefits.

    (a) Inpatient hospital or inpatient CAH services. (1) Regular 
benefit days. Up to 90 days are available in each benefit period, 
subject to the limitations on days for psychiatric hospital services set 
forth in Secs. 409.62 and 409.63.
    (i) For the first 60 days (referred to in this subpart as full 
benefit days), Medicare pays the hospital or CAH for all covered 
services furnished the beneficiary, except for a deductible which is the 
beneficiary's responsibility. (Section 409.82 specifies the requirements 
for the inpatient hospital deductible.)
    (ii) For the next 30 days (referred to in this subpart as 
coinsurance days), Medicare pays for all covered services except for a 
daily coinsurance amount, which is the beneficiary's responsibility. 
(Section 409.83 specifies the inpatient hospital coinsurance amounts.)
    (2) Lifetime reserve days. Each beneficiary has a non-renewable 
lifetime reserve of 60 days of inpatient hospital or inpatient CAH 
services that he may draw upon whenever he is hospitalized for more than 
90 days in a benefit period. Upon exhaustion of the regular benefit 
days, the reserve days will be used unless the beneficiary elects not to 
use them, as provided in Sec. 409.65. For lifetime reserve days, 
Medicare pays for all covered services except for a

[[Page 235]]

daily coinsurance amount that is the beneficiary's responsibility. (See 
Sec. 409.83.)
    (3) Order of payment for inpatient hospital or inpatient CAH 
services. Medicare pays for inpatient hospital services in the following 
order.
    (i) The 60 full benefit days;
    (ii) The 30 coinsurance days;
    (iii) The remaining lifetime reserve days.
    (b) Posthospital SNF care furnished by a SNF, or by a hospital or a 
CAH with a swing-bed approval. Up to 100 days are available in each 
benefit period after discharge from a hospital or CAH. For the first 20 
days, Medicare pays for all covered services. For the 21st through 100th 
day, Medicare pays for all covered services except for a daily 
coinsurance amount that is the beneficiary's responsibility.
    (c) Renewal of inpatient benefits. The beneficiary's full 
entitlement to the 90 inpatient hospital or inpatient CAH regular 
benefit days, and the 100 SNF benefit days, is renewed each time he or 
she begins a benefit period. However, once lifetime reserve days are 
used, they can never be renewed.
    (d) Home health services. Medicare Part A pays for all covered home 
health services1 with no deductible, and subject to the 
following limitations on payment for durable medical equipment (DME):
---------------------------------------------------------------------------

    \1\ Before July 1, 1981, Medicare Part A paid for not more than 100 
home health visits during one year following the beneficiary's most 
recent discharge from a hospital or a SNF.
---------------------------------------------------------------------------

    (1) For DME furnished by an HHA that is a nominal charge provider, 
Medicare Part A pays 80 percent of fair compensation.
    (2) For DME furnished by an HHA that is not a nominal charge 
provider, Medicare Part A pays the lesser of the following:
    (i) 80 percent of the reasonable cost of the service.
    (ii) The reasonable cost of, or the customary charge for, the 
service, whichever is less, minus 20 percent of the customary (insofar 
as reasonable) charge for the service.

[48 FR 12541, Mar. 25, 1983, as amended at 51 FR 41339, Nov. 14, 1986; 
54 FR 4027, Jan. 27, 1989; 58 FR 30666, 30667, May 26, 1993]



Sec. 409.62  Lifetime maximum on inpatient psychiatric care.

    There is a lifetime maximum of 190 days on inpatient psychiatric 
hospital services available to any beneficiary. Therefore, once an 
individual receives benefits for 190 days of care in a psychiatric 
hospital, no further benefits of that type are available to that 
individual.



Sec. 409.63  Reduction of inpatient psychiatric benefit days available in the initial benefit period.

    (a) Reduction rule. (1) If the individual was an inpatient in a 
psychiatric hospital on the first day of Medicare entitlement and for 
any of the 150 days immediately before that first day of entitlement, 
those days are subtracted from the 150 days (90 regular days plus 60 
lifetime reserve days) which would otherwise be available in the initial 
benefit period for inpatient psychiatric services in a psychiatric or 
general hospital.
    (2) Reduction is required only if the hospital was participating in 
Medicare as a psychiatric hospital on the individual's first day of 
entitlement.
    (3) The reduction applies only to the beneficiary's first benefit 
period. For subsequent benefit periods, the 90 benefit days, plus any 
remaining lifetime reserve days, subject to the 190 day lifetime limit 
on psychiatric hospital care, are available.
    (b) Application to general hospital days. (1) Days spent in a 
general hospital before entitlement are not subtracted under paragraph 
(a) of this section even if the stay was for diagnosis or treatment of 
mental illness.
    (2) After entitlement, all psychiatric care days, whether in a 
general or a psychiatric hospital, are counted toward the number of days 
available in the initial benefit period.
    (c) Examples: (1) The individual was an inpatient of a participating 
psychiatric hospital for 20 days before the first day of entitlement and 
remained there for another 6 months. Therefore, 130 days of benefits 
(150 minus 20) are payable. Payment could be made for: 60 full benefit 
days, 30 coinsurance days, and 40 lifetime reserve days.

[[Page 236]]

    (2) During the 150-day period preceding Medicare entitlement, an 
individual had been a patient of a general hospital for 60 days of 
inpatient psychiatric care and had spent 90 days in a psychiatric 
hospital, ending with the first day of entitlement. During the initial 
benefit period, the beneficiary spent 90 days in a general hospital and 
received psychiatric care there. The 60 days spent in the general 
hospital for psychiatric treatment before entitlement do not reduce the 
benefits available in the first benefit period. Only the 90 days spent 
in the psychiatric hospital before entitlement reduce such benefits, 
leaving a total of 60 available psychiatric days. However, after 
entitlement, the reduction applies not only to days spent in a 
psychiatric hospital, but also to days of psychiatric treatment in a 
general hospital. Thus, Medicare payment could be made only for 60 of 
the 90 days spent in the general hospital.
    (3) An individual was admitted to a general hospital for a mental 
condition and, after 10 days, transferred to a participating psychiatric 
hospital. The individual remained in the psychiatric hospital for 78 
days before becoming entitled to hospital insurance benefits and for 130 
days after entitlement. The beneficiary was then transferred to a 
general hospital and received treatment of a medical condition for 20 
days. The 10 days spent in the general hospital during the 150-day pre-
entitlement period have no effect on the inpatient hospital benefit days 
available to the individual for psychiatric care in the first benefit 
period, even though the general hospital stay was for a mental 
condition. Only the 78 days spent in the psychiatric hospital during the 
pre-entitlement period are subtracted from the 150 benefit days. 
Accordingly, the individual has 72 days of psychiatric care (150 days 
less 78 days) available in the first benefit period. Benefits could be 
paid for the individual's hospitalization during the first benefit 
period in the following manner. For the 130-day psychiatric hospital 
stay, 72 days (60 full benefit days and 12 coinsurance days), and for 
the general hospital stay, 20 days (18 coinsurance and 2 lifetime 
reserve days).



Sec. 409.64  Services that are counted toward allowable amounts.

    (a) Except as provided in paragraph (b) of this section for lifetime 
reserve days, all covered inpatient days and home health visits are 
counted toward the allowable amounts specified in Secs. 409.61 through 
409.63 if--
    (1) They are paid for by Medicare; or
    (2) They would be paid for by Medicare if the following requirements 
had been met:
    (i) A proper and timely request for payment had been filed; and
    (ii) The hospital, CAH, SNF, or home health agency had submitted all 
necessary evidence, including physician certification of need for 
services when such certification was required; or
    (3) They could not be paid for because the total payment due was 
equal to, or less than, the applicable deductible and coinsurance 
amounts.
    (b) Exception. Even though the requirements of paragraph (a)(2) of 
this section are met, lifetime reserve days are not counted toward the 
allowable amounts if the beneficiary elected or is deemed to have 
elected not to use them as set forth in Sec. 409.65.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30667, May 26, 1993]



Sec. 409.65  Lifetime reserve days.

    (a) Election not to use lifetime reserve days. (1) Whenever a 
beneficiary has exhausted the 90 regular benefit days, the hospital or 
CAH may bill Medicare for lifetime reserve days unless the beneficiary 
elects not to use them or, in accordance with paragraph (b) of this 
section, is deemed to have elected not to use them.
    (2) It may be advantageous to elect not to use lifetime reserve days 
if the beneficiary has private insurance coverage that begins after the 
first 90 inpatient days in a benefit period, or if the daily charge is 
only slightly higher than the lifetime reserve days coinsurance amount. 
In such cases, the beneficiary may want to save the lifetime reserve 
days for future care that may be more expensive.
    (3) If the beneficiary elects not to use lifetime reserve days for a 
particular hospital or CAH stay, they are still available for a later 
stay. However,

[[Page 237]]

once the beneficiary uses lifetime reserve days, they can never be 
renewed.
    (4) If the beneficiary elects not to use lifetime reserve days, the 
hospital or CAH may require him or her to pay for any services furnished 
after the regular days are exhausted.
    (b) Deemed election. A beneficiary will be deemed to have elected 
not to use lifetime reserve days if the average daily charges for such 
days is equal to or less than the applicable coinsurance amount 
specified in Sec. 409.83. A beneficiary would get no benefit from using 
the days under those circumstances.
    (c) Who may file an election. An election not to use reserve days 
may be filed by--
    (1) The beneficiary; or
    (2) If the beneficiary is physically or mentally unable to act, by 
the beneficiary's legal representative. In addition, if some other 
payment source is available, such as private insurance, any person 
authorized under Sec. 405.1664 of this chapter to execute a request for 
payment for the beneficiary may file the election.
    (d) Filing the election. (1) The beneficiary's election not to use 
lifetime reserve days must be filed in writing with the hospital or CAH.
    (2) The election may be filed at the time of admission to the 
hospital or CAH or at any time thereafter up to 90 days after the 
beneficiary's discharge.
    (3) A retroactive election (that is, one made after lifetime reserve 
days have been used because the regular days were exhausted), is not 
acceptable unless it is approved by the hospital or CAH.
    (e) Period covered by election--(1) General rule. Except as provided 
in paragraph (e)(2) of this section, an election not to use lifetime 
reserve days may apply to an entire hospital or CAH stay or to a single 
period of consecutive days in a stay, but cannot apply to selected days 
in a stay. For example, a beneficiary may restrict the election to the 
period covered by private insurance but cannot use individual lifetime 
reserve days within that period. If an election not to use reserve days 
is effective after the first day on which reserve days are available, it 
must remain in effect until the end of the stay, unless it is revoked in 
accordance with Sec. 409.66.
    (2) Exception. A beneficiary election not to use lifetime reserve 
days for an inpatient hospital or inpatient CAH stay for which payment 
may be made under the prospective payment system (part 412 of this 
chapter) is subject to the following rules:
    (i) If the beneficiary has one or more regular benefit days (see 
Sec. 409.61(a)(1) of this chapter) remaining in the benefit period upon 
entering the hospital or CAH, an election not to use lifetime reserve 
days will apply automatically to all days that are not outlier days. The 
beneficiary may also elect not to use lifetime reserve days for outlier 
days but this election must apply to all outlier days.
    (ii) If the beneficiary has no regular benefit days (see 
Sec. 409.61(a)(1) of this chapter) remaining in the benefit period upon 
entering the hospital or CAH, an election not to use lifetime reserve 
days must apply to the entire hospital or CAH stay.

[48 FR 12541, Mar. 25, 1983, as amended at 48 FR 39837, Sept. 1, 1983; 
49 FR 323, Jan. 3, 1984; 58 FR 30666, 30667, May 26, 1993]



Sec. 409.66  Revocation of election not to use lifetime reserve days.

    (a) Except as provided in paragraph (c) of this section, a 
beneficiary (or anyone authorized to execute a request for payment, if 
the beneficiary is incapacitated) may revoke an election not to use 
lifetime reserve days during hospitalization or within 90 days after 
discharge.
    (b) The revocation must be submitted to the hospital or CAH in 
writing and identify the stay or stays to which it applies.
    (c) Exceptions. A revocation of an election not to use lifetime 
reserve days may not be filed--
    (1) After the beneficiary dies; or
    (2) After the hospital or CAH has filed a claim under the 
supplementary medical insurance program (Medicare Part B), for medical 
and other health services furnished to the beneficiary on the days in 
question.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]

[[Page 238]]



Sec. 409.68  Guarantee of payment for inpatient hospital or inpatient CAH services furnished before notification of exhaustion of benefits.

    (a) Conditions for payment. Payment may be made for inpatient 
hospital or inpatient CAH services furnished a beneficiary after he or 
she has exhausted the available benefit days if the following conditions 
are met:
    (1) The services were furnished before CMS or the intermediary 
notified the hospital or CAH that the beneficiary had exhausted the 
available benefit days and was not entitled to have payment made for 
those services.
    (2) At the time the hospital or CAH furnished the services, it was 
unaware that the beneficiary had exhausted the available benefit days 
and could reasonably have assumed that he or she was entitled to have 
payment made for these services.
    (3) Payment would be precluded solely because the beneficiary has no 
benefit days available for the particular hospital or CAH stay.
    (4) The hospital or CAH claims reimbursement for the services and 
refunds any payments made for those services by the beneficiary or by 
another person on his or her behalf.
    (b) Limitations on payment. (1) If all of the conditions in 
paragraph (a) of this section are met, Medicare payment may be made for 
the day of admission, and up to 6 weekdays thereafter, plus any 
intervening Saturdays, Sundays, and Federal holidays.
    (2) Payment may not be made under this section for any day after the 
hospital or CAH is notified that the beneficiary has exhausted the 
available benefit days.
    (c) Recovery from the beneficiary. Any payment made to a hospital or 
CAH under this section is considered an overpayment to the beneficiary 
and may be recovered from him or her under the provisions set forth 
elsewhere in this chapter.

[48 FR 12541, Mar. 25, 1983, as amended at 50 FR 33033, Aug. 16, 1985; 
58 FR 30666, May 26, 1993]



        Subpart G--Hospital Insurance Deductibles and Coinsurance



Sec. 409.80  Inpatient deductible and coinsurance: General provisions.

    (a) What they are. (1) The inpatient deductible and coinsurance 
amounts are portions of the cost of covered hospital or CAH or SNF 
services that Medicare does not pay.
    (2) The hospital or CAH or SNF may charge these amounts to the 
beneficiary or someone on his or her behalf.
    (b) Changes in the inpatient deductible and coinsurance amounts. (1) 
The law requires the Secretary to adjust the inpatient hospital 
deductible each year to reflect changes in the average cost of hospital 
care. In adjusting the deductible, the Secretary must use a formula 
specified in section 1813(b)(2) of the Act. Under that formula, the 
inpatient hospital deductible is increased each year by about the same 
percentage as the increase in the average Medicare daily hospital costs. 
The result of the deductible increase is that the beneficiary continues 
to pay about the same proportion of the hospital bill.
    (2) Since the coinsurance amounts are, by statute, specific 
fractions of the deductible, they change when the deductible changes.

[48 FR 12541, Mar. 25, 1983, as amended at 58 FR 30666, May 26, 1993]



Sec. 409.82  Inpatient hospital deductible.

    (a) General provisions--(1) The inpatient hospital deductible is a 
fixed amount chargeable to the beneficiary when he or she receives 
covered services in a hospital or a CAH for the first time in a benefit 
period.
    (2) Although the beneficiary may be hospitalized several times 
during a benefit period, the deductible is charged only once during that 
period. If the beneficiary begins more than one benefit period in the 
same year, a deductible is charged for each of those periods.
    (3) For services furnished before January 1, 1982, the applicable 
deductible is the one in effect when the benefit period began.

[[Page 239]]

    (4) For services furnished after December 31, 1981, the applicable 
deductible is the one in effect during the calendar year in which the 
services were furnished.
    (b) Specific deductible amounts. The specific deductible amounts for 
each calendar year are published in the Federal Register no later than 
October 1 of the preceding year.
    (c) Exception to published amounts. If the total hospital or CAH 
charge is less than the deductible amount applicable for the calendar 
year in which the services were furnished, the amount of the charge is 
the deductible for the year.

[48 FR 12541, Mar. 25, 1983, as amended at 54 FR 4026, Jan. 27, 1989; 58 
FR 30666, 30667, May 26, 1993]



Sec. 409.83  Inpatient hospital coinsurance.

    (a) General provisions--(1) Inpatient hospital coinsurance is the 
amount chargeable to a beneficiary for each day after the first 60 days 
of inpatient hospital care or inpatient CAH care or both in a benefit 
period.
    (2) For each day from the 61st to the 90th day, the coinsurance 
amount is \1/4\ of the applicable deductible.
    (3) For each day from the 91st to the 150th day (lifetime reserve 
days), the coinsurance amount is \1/2\ of the applicable deductible.
    (4) For coinsurance days before January 1, 1982, the coinsurance 
amount is based on the deductible applicable for the calendar year in 
which the benefit period began. The coinsurance amounts do not change 
during a beneficiary's benefit period even though the coinsurance days 
may fall in a subsequent year for which a higher deductible amount has 
been determined.
    (5) For coinsurance days after December 31, 1981, the coinsurance 
amount is based on the deductible applicable for the calendar year in 
which the services were furnished. For example, if an individual starts 
a benefit period by being admitted to a hospital in 1981 and remains in 
the hospital long enough to use coinsurance days in 1982, the 
coinsurance amount charged for those days is based on the 1982 inpatient 
hospital deductible.
    (b) Specific coinsurance amounts. The specific coinsurance amounts 
for each calendar year are published in the Federal Register no later 
than October 1 of the preceding year.
    (c) Exceptions to published amounts. (1) If the actual charge to the 
patient for the 61st through the 90th day of inpatient hospital or 
inpatient CAH services is less than the coinsurance amount applicable 
for the calendar year in which the services were furnished, the actual 
charge per day is the daily coinsurance amount.
    (2) If the actual charge to the patient for the 91st through the 
150th day (lifetime reserve days) is less than the coinsurance amount 
applicable for the calendar year in which the services were furnished, 
the beneficiary is deemed to have elected not to use the days because he 
or she would not benefit from using them.

[48 FR 12541, Mar. 25, 1983, as amended at 54 FR 4026, Jan. 27, 1989; 58 
FR 30666, 30667, May 26, 1993]



Sec. 409.85  Skilled nursing facility (SNF) care coinsurance.

    (a) General provisions. (1) SNF care coinsurance is the amount 
chargeable to a beneficiary after the first 20 days of SNF care in a 
benefit period.
    (2) For each day from the 21st through the 100th day, the 
coinsurance is \1/8\ of the applicable inpatient hospital deductible.
    (3) For coinsurance days before January 1, 1982, the coinsurance 
amount is based on the deductible applicable for the year in which the 
benefit period began. The coinsurance amounts do not change during a 
beneficiary's benefit period even though the coinsurance days may fall 
in a subsequent year for which a higher deductible amount has been 
determined.
    (4) For coinsurance days after December 31, 1981, the coinsurance 
amount is based on the deductible applicable for the calendar year in 
which the services were furnished.
    (b) Specific coinsurance amounts. The specific SNF coinsurance 
amounts for each calendar year are published in the Federal Register no 
later than October 1 of the preceding year.
    (c) Exception to published amounts. If the actual charge to the 
patient is less than the coinsurance amount applicable for the calendar 
year in which the

[[Page 240]]

services were furnished, the actual charge per day is the daily 
coinsurance.

[48 FR 12541, Mar. 25, 1983, as amended at 54 FR 4026, Jan. 27, 1989]



Sec. 409.87  Blood deductible.

    (a) General provisions. (1) As used in this section, packed red 
cells means the red blood cells that remain after plasma is separated 
from whole blood.
    (2) A unit of packed red cells is treated as the equivalent of a 
unit of whole blood.
    (3) Medicare does not pay for the first 3 units of whole blood or 
units of packed red cells that a beneficiary receives, during a calendar 
year, as an inpatient of a hospital or CAH or SNF, or on an outpatient 
basis under Medicare Part B.
    (4) The deductible does not apply to other blood components such as 
platelets, fibrinogen, plasma, gamma globulin, and serum albumin, or to 
the cost of processing, storing, and administering blood.
    (5) The blood deductible is in addition to the inpatient hospital 
deductible and daily coinsurance.
    (6) The Part A blood deductible is reduced to the extent that the 
Part B blood deductible has been applied. For example, if a beneficiary 
had received one unit under Medicare Part B, and later in the same 
benefit period received three units under Medicare Part A, Medicare Part 
A would pay for the third of the latter units. (As specified in 
Sec. 410.161 of this chapter, the Part B blood deductible is reduced to 
the extent a blood deductible has been applied under Medicare Part A.)
    (b) Beneficiary's responsibility for the first 3 units of whole 
blood or packed red cells. (1) Basic rule. Except as specified in 
paragraph (b)(2) of this section, the beneficiary is responsible for the 
first 3 units of whole blood or packed red cells. He or she has the 
option of paying the hospital's or CAH's charges for the blood or packed 
red cells or arranging for it to be replaced.
    (2) Exception. The beneficiary is not responsible for the first 3 
units of whole blood or packed red cells if the provider obtained that 
blood or red cells at no charge other than a processing or service 
charge. In that case, the blood or red cells is deemed to have been 
replaced.
    (c) Provider's right to charge for the first 3 units of whole blood 
or packed red cells--(1) Basic rule. Except as specified in paragraph 
(c)(2) of this section, a provider may charge a beneficiary its 
customary charge for any of the first 3 units of whole blood or packed 
red cells.
    (2) Exception. A provider may not charge the beneficiary for the 
first 3 units of whole blood or packed red cells in any of the following 
circumstances:
    (i) The blood or packed red cells has been replaced.
    (ii) The provider (or its blood supplier) receives, from an 
individual or a blood bank, a replacement offer that meets the criteria 
specified in paragraph (d) of this section. The provider is precluded 
from charging even if it or its blood supplier rejects the replacement 
offer.
    (iii) The provider obtained the blood or packed red cells at no 
charge other than a processing or service charge and it is therefore 
deemed to have been replaced.
    (d) Criteria for replacement of blood. A blood replacement offer 
made by a beneficiary, or an individual or a blood bank on behalf of a 
beneficiary, discharges the beneficiary's obligation to pay for 
deductible blood or packed red cells if the replacement blood meets the 
applicable criteria specified in Food and Drug Administration 
regulations under 21 CFR part 640, i.e.--
    (1) The replacement blood would not endanger the health of a 
recipient; and
    (2) The prospective donor's health would not be endangered by making 
a blood donation.

[48 FR 12541, Mar. 25, 1983, as amended at 56 FR 8840, Mar. 1, 1991; 57 
FR 36014, Aug. 12, 1992; 58 FR 30666, 30667, May 26, 1993]



Sec. 409.89  Exemption of kidney donors from deductible and coinsurance requirements.

    The deductible and coinsurance requirements set forth in this 
subpart do not apply to any services furnished to an individual in 
connection with the donation of a kidney for transplant surgery.

[[Page 241]]



            Subpart H--Payment of Hospital Insurance Benefits

    Source: 53 FR 6633, Mar. 2, 1988, unless otherwise noted.



Sec. 409.100  To whom payment is made.

    (a) Basic rule. Except as provided in paragraph (b) of this section-
-
    (1) Medicare pays hospital insurance benefits only to a 
participating provider.
    (2) For home health services (including medical supplies described 
in section 1861(m)(5) of the Act, but excluding durable medical 
equipment to the extent provided for in such section) furnished to an 
individual who at the time the item or service is furnished is under a 
plan of care of an HHA, payment is made to the HHA (without regard to 
whether the item or service is furnished by the HHA directly, under 
arrangement with the HHA, or under any other contracting or consulting 
arrangement).
    (b) Exceptions. Medicare may pay hospital insurance benefits as 
follows:
    (1) For emergency services furnished by a nonparticipating hospital, 
to the hospital or to the beneficiary, under the conditions prescribed 
in subpart G of part 424 of this chapter.
    (2) For services furnished by a Canadian or Mexican hospital, to the 
hospital or to the beneficiary, under the conditions prescribed in 
subpart H of part 424 of this chapter.

[53 FR 6633, Mar. 2, 1988, as amended at 65 FR 41211, July 3, 2000]



Sec. 409.102  Amounts of payment.

    (a) The amounts Medicare pays for hospital insurance benefits are 
generally determined in accordance with part 412 or part 413 of this 
chapter.
    (b) Except as provided in Secs. 409.61(d) and 409.89, hospital 
insurance benefits are subject to the deductible and coinsurance 
requirements set forth in subpart G of this part.



PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS--Table of Contents




                      Subpart A--General Provisions

Sec.
410.1  Basis and scope.
410.2  Definitions.
410.3  Scope of benefits.
410.5  Other applicable rules.

              Subpart B--Medical and Other Health Services

410.10  Medical and other health services: Included services.
410.12  Medical and other health services: Basic conditions and 
          limitations.
410.14  Special requirements for services furnished outside the United 
          States.
410.20  Physicians' services.
410.21  Limitations on services of a chiropractor.
410.22  Limitations on services of an optometrist.
410.23  Screening for glaucoma: Conditions for and limitations on 
          coverage
410.24  Limitations on services of a doctor of dental surgery or dental 
          medicine.
410.25  Limitations on services of a podiatrist.
410.26  Services and supplies incident to a physician's professional 
          services: Conditions.
410.27  Outpatient hospital services and supplies incident to a 
          physician service: Conditions.
410.28  Hospital or CAH diagnostic services furnished to outpatients: 
          Conditions.
410.29  Limitations on drugs and biologicals.
410.30  Prescription drugs used in immunosuppressive therapy.
410.31  Bone mass measurement: Conditions for coverage and frequency 
          standards.
410.32  Diagnostic X-ray tests, diagnostic laboratory tests, and other 
          diagnostic tests: Conditions.
410.33  Independent diagnostic testing facility.
410.34  Mammography services: Conditions for and limitations on 
          coverage.
410.35  X-ray therapy and other radiation therapy services: Scope.
410.36  Medical supplies, appliances, and devices: Scope.
410.37  Colorectal cancer screening tests: Conditions for and 
          limitations on coverage.
410.38  Durable medical equipment: Scope and conditions.
410.39  Prostate cancer screening tests: Conditions for and limitations 
          on coverage.

[[Page 242]]

410.40  Coverage of ambulance services.
410.41  Requirements for ambulance suppliers.
410.42  Limitations on coverage of certain services furnished to 
          hospital outpatients.
410.43  Partial hospitalization services: Conditions and exclusions.
410.45  Rural health clinic services: Scope and conditions.
410.46   Physician and other practitioner services furnished in or at 
          the direction of an IHS or Indian tribal hospital or clinic: 
          Scope and conditions.
410.50  Institutional dialysis services and supplies: Scope and 
          conditions.
410.52  Home dialysis services, supplies, and equipment: Scope and 
          conditions.
410.55  Services related to kidney donations: Conditions.
410.56  Screening pelvic examinations.
410.57  Pneumococcal vaccine and flu vaccine.
410.58  Additional services to HMO and CMP enrollees.
410.59  Outpatient occupational therapy services: Conditions.
410.60  Outpatient physical therapy services: Conditions.
410.61  Plan of treatment requirements for outpatient rehabilitation 
          services.
410.62  Outpatient speech-language pathology services: Conditions and 
          exclusions.
410.63  Hepatitis B vaccine and blood clotting factors: Conditions..
410.66  Emergency outpatient services furnished by a nonparticipating 
          hospital and services furnished in Mexico or Canada.
410.68  Antigens: Scope and conditions.
410.69  Services of a certified registered nurse anesthetist or an 
          anesthesiologist's assistant: Basic rule and definitions.
410.71  Clinical psychologist services and services and supplies 
          incident to clinical psychologist services.
410.73  Clinical social worker services.
410.74  Physician assistants' services.
410.75  Nurse practitioners' services.
410.76  Clinical nurse specialists' services.
410.77  Certified nurse-midwives' services: Qualifications and 
          conditions.
410.78   Office and other outpatient visits, consultation, individual 
          psychotherapy and pharmacologic management via an interactive 
          telecommunications system.

                Subpart C--Home Health Services Under SMI

410.80  Applicable rules.

   Subpart D--Comprehensive Outpatient Rehabilitation Facility (CORF) 
                                Services

410.100  Included services.
410.102  Excluded services.
410.105  Requirements for coverage of CORF services.

  Subpart E--Community Mental Health Centers (CMHCs) Providing Partial 
                        Hospitalization Services

410.110  Requirements for coverage of partial hospitalization services 
          by CMHCs.

Subpart F [Reserved]

                  Subpart G--Medical Nutrition Therapy

410.130  Definitions.
410.132  Medical nutrition therapy.
410.134  Provider qualifications.

  Subpart H--Outpatient Diabetes Self-Management Training and Diabetes 
                          Outcome Measurements

410.140  Definitions.
410.141  Outpatient diabetes self-management training.
410.142  CMS process for approving national accreditation organizations.
410.143  Requirements for approved accreditation organizations.
410.144  Quality standards for deemed entities.
410.145  Requirements for entities.
410.146  Diabetes outcome measurements.

                   Subpart I--Payment of SMI Benefits

410.150  To whom payment is made.
410.152  Amounts of payment.
410.155  Outpatient mental health treatment limitation.
410.160  Part B annual deductible.
410.161  Part B blood deductible.
410.163  Payment for services furnished to kidney donors.
410.165  Payment for rural health clinic services and ambulatory 
          surgical center services: Conditions.
410.170  Payment for home health services, for medical and other health 
          services furnished by a provider or an approved ESRD facility, 
          and for comprehensive outpatient rehabilitation facility 
          (CORF) services: Conditions.
410.172  Payment for partial hospitalization services in CMHCs: 
          Conditions.
410.175  Alien absent from the United States.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 51 FR 41339, Nov. 14, 1986, unless otherwise noted.

    Editorial Note: Nomenclature changes to part 410 appear at 62 FR 
46037, Aug. 29, 1997.

[[Page 243]]



                      Subpart A--General Provisions



Sec. 410.1  Basis and scope.

    (a) Statutory basis. This part is based on the indicated provisions 
of the following sections of the Act:
    (1) Section 1832--Scope of benefits furnished under the Medicare 
Part B supplementary medical insurance (SMI) program.
    (2) Section 1833 through 1835 and 1862--Amounts of payment for SMI 
services, the conditions for payment, and the exclusions from coverage.
    (3) Section 1861(qq)--Definition of the kinds of services that may 
be covered.
    (4) Section 1865(b)--Permission for CMS to approve and recognize a 
national accreditation organization for the purpose of deeming entities 
accredited by the organization to meet program requirements.
    (5) Section 1881--Medicare coverage for end-stage renal disease 
beneficiaries.
    (b) Scope of part. This part sets forth the benefits available under 
Medicare Part B, the conditions for payment and the limitations on 
services, the percentage of incurred expenses that Medicare Part B pays, 
and the deductible and copayment amounts for which the beneficiary is 
responsible. (Exclusions applicable to these services are set forth in 
subpart C of part 405 of this chapter. General conditions for Medicare 
payment are set forth in part 424 of this chapter.)

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988; 55 
FR 53521, Dec. 31, 1990; 59 FR 63462, Dec. 8, 1994; 63 FR 58905, Nov. 2, 
1998; 65 FR 83148, Dec. 29, 2000]



Sec. 410.2  Definitions.

    As used in this part--
    Community mental health center (CMHC) means an entity that--
    (1) Provides outpatient services, including specialized outpatient 
services for children, the elderly, individuals who are chronically 
mentally ill, and residents of its mental health service area who have 
been discharged from inpatient treatment at a mental health facility;
    (2) Provides 24-hour-a-day emergency care services;
    (3) Provides day treatment or other partial hospitalization 
services, or psychosocial rehabilitation services;
    (4) Provides screening for patients being considered for admission 
to State mental health facilities to determine the appropriateness of 
this admission; and
    (5) Meets applicable licensing or certification requirements for 
CMHCs in the State in which it is located.
    Encounter means a direct personal contact between a patient and a 
physician, or other person who is authorized by State licensure law and, 
if applicable, by hospital or CAH staff bylaws, to order or furnish 
hospital services for diagnosis or treatment of the patient.
    Nominal charge provider means a provider that furnishes services 
free of charge or at a nominal charge, and is either a public provider 
or another provider that (1) demonstrates to CMS's satisfaction that a 
significant portion of its patients are low-income; and (2) requests 
that payment for its services be determined accordingly.
    Outpatient means a person who has not been admitted as an inpatient 
but who is registered on the hospital or CAH records as an outpatient 
and receives services (rather than supplies alone) directly from the 
hospital or CAH.
    Partial hospitalization services means a distinct and organized 
intensive ambulatory treatment program that offers less than 24-hour 
daily care and furnishes the services described in Sec. 410.43.
    Participating refers to a hospital, CAH, SNF, HHA, CORF, or hospice 
that has in effect an agreement to participate in Medicare; or a clinic, 
rehabilitation agency, or public health agency that has a provider 
agreement to participate in Medicare but only for purposes of providing 
outpatient physical therapy, occupational therapy, or speech pathology 
services; or a CMHC that has in effect a similar agreement but only for 
purposes of providing partial hospitalization services, and 
nonparticipating refers to a hospital, CAH,

[[Page 244]]

SNF, HHA, CORF, hospice, clinic, rehabilitation agency, public health 
agency, or CMHC that does not have in effect a provider agreement to 
participate in Medicare.

[59 FR 6577, Feb. 11, 1994, as amended at 62 FR 46025, Aug. 29, 1997; 65 
FR 18536, Apr. 7, 2000]



Sec. 410.3  Scope of benefits.

    (a) Covered services. The SMI program helps pay for the following:
    (1) Medical and other health services such as physicians' services, 
outpatient services furnished by a hospital or a CAH, diagnostic tests, 
outpatient physical therapy and speech pathology services, rural health 
clinic services, Federally qualified health center services, IHS, Indian 
tribe, or tribal organization facility services, and outpatient renal 
dialysis services.
    (2) Services furnished by ambulatory surgical centers (ASCs), home 
health agencies (HHAs), comprehensive outpatient rehabilitation 
facilities (CORFs), and partial hospitalization services provided by 
community mental health centers (CMHCs).
    (3) Other medicial services, equipment, and supplies that are not 
covered under Medicare Part A hospital insurance.
    (b) Limitations on amount of payment. (1) Medicare Part B does not 
pay the full reasonable costs or charges for all covered services. The 
beneficiary is responsible for an annual deductible and a blood 
deductible and, after the annual deductible has been satisfied, for 
coinsurance amounts specified for most of the services.
    (2) Specific rules on payment are set forth in subpart E of this 
part.

[51 FR 41339, Nov. 14, 1986, as amended at 57 FR 24981, June 12, 1992; 
58 FR 30668, May 26, 1993; 59 FR 6577, Feb. 11, 1994; 66 FR 55328, Nov. 
1, 2001]



Sec. 410.5  Other applicable rules.

    The following other rules of this chapter set forth additional 
policies and procedures applicable to four of the kinds of services 
covered under the SMI program:
    (a) Part 405, subpart U: End-Stage Renal Disease services.
    (b) Part 405, Subpart X: Rural Health Clinic and Federally Qualified 
Health Center services.
    (c) Part 416: Ambulatory Surgical Center services.
    (d) Part 493: Laboratory Services.

[51 FR 41339, Nov. 14, 1986, as amended at 57 FR 7134, Feb. 28, 1992; 57 
FR 24981, June 12, 1992]



              Subpart B--Medical and Other Health Services



Sec. 410.10  Medical and other health services: Included services.

    Subject to the conditions and limitations specified in this subpart, 
``medical and other health services'' includes the following services:
    (a) Physicians' services.
    (b) Services and supplies furnished incident to a physician's 
professional services, of kinds that are commonly furnished in 
physicians' offices and are commonly either furnished without charge or 
included in the physicians' bills.
    (c) Services and supplies, including partial hospitalization 
services, that are incident to physician services and are furnished to 
outpatients by or under arrangements made by a hospital or a CAH.
    (d) Diagnostic services furnished to outpatients by or under 
arrangements made by a hospital or a CAH if the services are services 
that the hospital or CAH ordinarily furnishes to its outpatients for 
diagnostic study.
    (e) Diagnostic laboratory and X-ray tests (including diagnostic 
mammography that meets the conditions for coverage specified in 
Sec. 410.34(b) of this subpart) and other diagnostic tests.
    (f) X-ray therapy and other radiation therapy services.
    (g) Medical supplies, appliances, and devices.
    (h) Durable medical equipment.
    (i) Ambulance services.
    (j) Rural health clinic services.
    (k) Home dialysis supplies and equipment; on or after July 1, 1991, 
epoetin (EPO) for home dialysis patients, and, on or after January 1, 
1994, for dialysis patients, competent to use the drug; self-care home 
dialysis support services; and institutional dialysis services and 
supplies.

[[Page 245]]

    (l) Pneumococcal vaccinations.
    (m) Outpatient physical therapy and speech pathology services.
    (n) Cardiac pacemakers and pacemaker leads.
    (o) Additional services furnished to enrollees of HMOs or CMPs, as 
described in Sec. 410.58.
    (p) Hepatitis B vaccine.
    (q) Blood clotting factors for hemophilia patients competent to use 
these factors without medical or other supervision.
    (r) Screening mammography services.
    (s) Federally qualified health center services.
    (t) Services of a certified registered nurse anesthetist or an 
anesthesiologist's assistant.
    (u) Prescription drugs used in immunosuppressive therapy.
    (v) Clinical psychologist services and services and supplies 
furnished as an incident to the services of a clinical psychologist, as 
provided in Sec. 410.71.
    (w) Clinical social worker services, as provided in Sec. 410.73.
    (x) Services of physicians and other practitioners furnished in or 
at the direction of an IHS or Indian tribal hospital or clinic.

[51 FR 41339, Nov. 14, 1986, as amended at 52 FR 27765, July 23, 1987; 
55 FR 22790, June 4, 1990; 55 FR 53522, Dec. 31, 1990; 56 FR 8841, Mar. 
1, 1991; 56 FR 43709, Sept. 4, 1991; 57 FR 24981, June 12, 1992; 57 FR 
33896, July 31, 1992; 58 FR 30668, May 26, 1993; 59 FR 26959, May 25, 
1994; 59 FR 49833, Sept. 30, 1994; 60 FR 8955, Feb. 16, 1995; 63 FR 
20128, Apr. 23, 1998; 66 FR 55328, Nov. 1, 2001]



Sec. 410.12  Medical and other health services: Basic conditions and limitations.

    (a) Basic conditions. The medical and other health services 
specified in Sec. 410.10 are covered by Medicare Part B only if they are 
not excluded under subpart A of part 411 of this chapter, and if they 
meet the following conditions:
    (1) When the services must be furnished. The services must be 
furnished while the individual is in a period of entitlement. (The rules 
on entitlement are set forth in part 406 of this chapter.)
    (2) By whom the services must be furnished. The services must be 
furnished by a facility or other entity as specified in Secs. 410.14 
through 410.69.
    (3) Physician certification and recertification requirements. If the 
services are subject to physician certification requirements, they must 
be certified as being medically necessary, and as meeting other 
applicable requirements, in accordance with subpart B of part 424 of 
this chapter.
    (b) Limitations on payment. Payment for medical and other health 
services is subject to limitations on the amounts of payment as 
specified in Secs. 410.152 and 410.155 and to the annual and blood 
deductibles as set forth in Secs. 410.160 and 410.161.

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988; 57 
FR 33896, July 31, 1992]



Sec. 410.14  Special requirements for services furnished outside the United States.

    Medicare part B pays for physicians' services and ambulance services 
furnished outside the United States if the services meet the applicable 
conditions of Sec. 410.12 and are furnished in connection with covered 
inpatient hospital services that meet the specific requirements and 
conditions set forth in subpart H of part 424 of this chapter.

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988]



Sec. 410.20  Physicians' services.

    (a) Included services. Medicare Part B pays for physicians' 
services, including diagnosis, therapy, surgery, consultations, and 
home, office, and institutional calls.
    (b) By whom services must be furnished. Medicare Part B pays for the 
services specified in paragraph (a) of this section if they are 
furnished by one of the following professionals who is legally 
authorized to practice by the State in which he or she performs the 
functions or actions, and who is acting within the scope of his or her 
license.
    (1) A doctor of medicine or osteopathy, including an osteopathic 
practitioner recognized in section 1101(a)(7) of the Act.
    (2) A doctor of dental surgery or dental medicine.
    (3) A doctor of podiatric medicine.
    (4) A doctor of optometry.

[[Page 246]]

    (5) A chiropractor who meets the qualifications specified in 
Sec. 410.22
    (c) Limitations on services. The Services specified in paragraph (a) 
of this section may be covered under Medicare Part B if they are 
furnished within the limitations specified in Secs. 410.22 through 
410.25.



Sec. 410.21  Limitations on services of a chiropractor.

    (a) Qualifications for chiropractors. (1) A chiropractor licensed or 
authorized to practice before July 1, 1974, and an individual who began 
studies in a chiropractic college before that date, must have--
    (i) Had preliminary education equal to the requirements for 
graduation from an accredited high school or other secondary school;
    (ii) Graduated from a college of chiropractic approved by the 
State's chiropractic examiners after completing a course of study 
covering a period of not less than 3 school years of 6 months each year 
in actual continuous attendance and covering adequate courses of study 
in the subjects of anatomy, physiology, symptomatology and diagnosis, 
hygiene and sanitation, chemistry, histology, pathology, and principles 
and practice of chiropractic, including clinical instruction in 
vertebral palpation, nerve tracing and adjusting; and
    (iii) Passed an examination prescribed by the State's chiropractic 
examiners covering the subjects specified in paragraph (a)(1)(ii) of 
this section.
    (2) A chiropractor first licensed or authorized to practice after 
June 30, 1974, and an individual who begins studies in a chiropractic 
college after that date, must have--
    (i) Had preliminary education equal to the requirements for 
graduation from an accredited high school or other secondary school;
    (ii) Satisfactorily completed 2 years of pre-chiropractic study at 
the college level;
    (iii) Satisfactorily completed a 4-year course of 8 months each year 
offered by a college or school of chiropractic approved by the State's 
chiropractic examiners and including at least 4,000 hours in courses in 
anatomy, physiology, symptomatology and diagnosis, hygiene and 
sanitation, chemistry, histology, pathology, principles and practice of 
chiropractic, and clinical instruction in vertebral palpation, nerve 
tracing and adjusting, plus courses in the use and effect of X-ray and 
chiropractic analysis;
    (iv) Passed an examination prescribed by the State's chiropractic 
examiners covering the subjects specified in paragraph (a)(2)(iii) of 
this section; and
    (v) Attained 21 years of age.
    (b) Limitations on services. (1) Medicare Part B pays only for a 
chiropractor's manual manipulation of the spine to correct a subluxation 
if the subluxation has resulted in a neuromusculoskeletal condition for 
which manual manipulation is appropriate treatment.
    (2) Medicare Part B does not pay for X-rays or other diagnostic or 
therapeutic services furnished or ordered by a chiropractor.

[51 FR 41339, Nov. 14, 1986, as amended at 64 FR 59439, Nov. 2, 1999. 
Redesignated at 66 FR 55328, Nov. 1, 2001]



Sec. 410.22  Limitations on services of an optometrist.

    Medicare Part B pays for the services of a doctor of optometry, 
which he or she is legally authorized to perform in the State in which 
he or she performs them, if the services are among those described in 
section 1861(s) of the Act and Sec. 410.10 of this part.

[64 FR 59439, Nov. 2, 1999. Redesignated at 66 FR 55328, Nov. 1, 2001]



Sec. 410.23  Screening for glaucoma: Conditions for and limitations on coverage.

    (a) Definitions: As used in this section, the following definitions 
apply:
    (1) Direct supervision in the office setting means the optometrist 
or the ophthalmologist must be present in the office suite and be 
immediately available to furnish assistance and direction throughout the 
performance of the procedure. It does not mean the physician must be 
present in the room when the procedure is performed.
    (2) Eligible beneficiary means individuals in the following high 
risk categories:
    (i) Individual with diabetes mellitus;

[[Page 247]]

    (ii) Individual with a family history of glaucoma; or
    (iii) African-Americans age 50 and over.
    (3) Screening for glaucoma means the following procedures furnished 
to an individual for the early detection of glaucoma:
    (i) A dilated eye examination with an intraocular pressure 
measurement.
    (ii) A direct ophthalmoscopy examination, or a slit-lamp 
biomicroscopic examination.
    (b) Condition for coverage of screening for glaucoma.
    Medicare Part B pays for glaucoma screening examinations provided to 
eligible beneficiaries as described in paragraph (a)(2) of this section 
if they are furnished by or under the direct supervision in the office 
setting of an optometrist or ophthalmologist who is legally authorized 
to perform these services under State law (or the State regulatory 
mechanism provided by State law) of the State in which the services are 
furnished, as would otherwise be covered if furnished by a physician or 
incident to a physician's professional service.
    (c) Limitations on coverage of glaucoma screening examinations.
    (1) Payment may not be made for a glaucoma screening examination 
that is performed for an individual who is not an eligible beneficiary 
as described in paragraph (a)(2) of this section.
    (2) Payment may be made for a glaucoma screening examination that is 
performed on an individual who is an eligible beneficiary as described 
in paragraph (a)(2) of this section, after at least 11 months have 
passed following the month in which the last glaucoma screening 
examination was performed.

[66 FR 55328, Nov. 1, 2001]



Sec. 410.24  Limitations on services of a doctor of dental surgery or dental medicine.

    Medicare Part B pays for services furnished by a doctor of dental 
surgery or dental medicine within the scope of his or her license, if 
the services would be covered as physicians' services when performed by 
a doctor of medicine or osteopathy.1
---------------------------------------------------------------------------

    \1\ For services furnished before July 1, 1981, Medicare Part B paid 
only for the following services of a doctor of dental surgery or dental 
medicine;
    Surgery on the jaw or any adjoining structure; and
    Reduction of a fracture of the jaw or other facial bone.

[51 FR 41339, Nov. 14, 1986, as amended at 56 FR 8852, Mar. 1, 1991]



Sec. 410.25  Limitations on services of a podiatrist.

    Medicare Part B pays for the services of a doctor of podiatric 
medicine, acting within the scope of his or her license, if the services 
would be covered as physicians' services when performed by a doctor of 
medicine or osteopathy.



Sec. 410.26  Services and supplies incident to a physician's professional services: Conditions.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Auxiliary personnel means any individual who is acting under the 
supervision of a physician (or other practitioner), regardless of 
whether the individual is an employee, leased employee, or independent 
contractor of the physician (or other practitioner) or of the same 
entity that employs or contracts with the physician (or other 
practitioner).
    (2) Direct supervision means the level of supervision by the 
physician (or other practitioner) of auxiliary personnel as defined in 
Sec. 410.32(b)(3)(ii).
    (3) Independent contractor means an individual (or an entity that 
has hired such an individual) who performs part-time or full-time work 
for which the individual (or the entity that has hired such an 
individual) receives an IRS-1099 form.
    (4) Leased employment means an employment relationship that is 
recognized by applicable State law and that is established by two 
employers by a contract such that one employer hires the services of an 
employee of the other employer.
    (5) Noninstitutional setting means all settings other than a 
hospital or skilled nursing facility.

[[Page 248]]

    (6) Practitioner means a non-physician practitioner who is 
authorized by the Act to receive payment for services incident to his or 
her own services.
    (7) Services and supplies means any services or supplies (including 
drugs or biologicals that are not usually self-administered) that are 
included in section 1861(s)(2)(A) of the Act and are not specifically 
listed in the Act as a separate benefit included in the Medicare 
program.
    (b) Medicare Part B pays for services and supplies incident to the 
service of a physician (or other practitioner).
    (1) Services and supplies must be furnished in a noninstitutional 
setting to noninstitutional patients.
    (2) Services and supplies must be an integral, though incidental, 
part of the service of a physician (or other practitioner) in the course 
of diagnosis or treatment of an injury or illness.
    (3) Services and supplies must be commonly furnished without charge 
or included in the bill of a physician (or other practitioner).
    (4) Services and supplies must be of a type that are commonly 
furnished in the office or clinic of a physician (or other 
practitioner).
    (5) Services and supplies must be furnished under the direct 
supervision of the physician (or other practitioner). The physician (or 
other practitioner) directly supervising the auxiliary personnel need 
not be the same physician (or other practitioner) upon whose 
professional service the incident to service is based.
    (6) Services and supplies must be furnished by the physician, 
practitioner with an incident to benefit, or auxiliary personnel.
    (7) A physician (or other practitioner) may be an employee or an 
independent contractor.
    (c) Limitation. Drugs and biologicals are also subject to the 
limitations specified in Sec. 410.29.

[51 FR 41339, Nov. 14, 1986, as amended at 66 FR 55328, Nov. 1, 2001; 67 
FR 20684, Apr. 26, 2002]



Sec. 410.27  Outpatient hospital services and supplies incident to a physician service: Conditions.

    (a) Medicare Part B pays for hospital services and supplies 
furnished incident to a physician service to outpatients, including 
drugs and biologicals that cannot be self-administered, if--
    (1) They are furnished--
    (i) By or under arrangements made by a participating hospital, 
except in the case of an SNF resident as provided in Sec. 411.15(p) of 
this chapter;
    (ii) As an integral though incidental part of a physician's 
services; and
    (iii) In the hospital or at a location (other than an RHC or an 
FQHC) that CMS designates as a department of a provider under 
Sec. 413.65 of this chapter; and
    (2) In the case of partial hospitalization services, also meet the 
conditions of paragraph (d) of this section.
    (b) Drugs and biologicals are also subject to the limitations 
specified in Sec. 410.168.
    (c) Rules on emergency services furnished to outpatients by 
nonparticipating hospitals are specified in Sec. 410.168.
    (d) Medicare Part B pays for partial hospitalization services if 
they are--
    (1) Prescribed by a physician who certifies and recertifies the need 
for the services in accordance with subpart B of part 424 of this 
chapter; and
    (2) Furnished under a plan of treatment as required under subpart B 
of part 424 of this chapter.
    (e) Services furnished by an entity other than the hospital are 
subject to the limitations specified in Sec. 410.42(a).
    (f) Services furnished at a location (other than an RHC or an FQHC) 
that CMS designates as a department of a provider under Sec. 413.65 of 
this chapter must be under the direct supervision of a physician. 
``Direct supervision'' means the physician must be present and on the 
premises of the location and immediately available to furnish assistance 
and direction throughout the performance of the procedure. It does not 
mean that the physician must be present in the room when the procedure 
is performed.

[56 FR 8841, Mar. 1, 1991, as amended at 63 FR 26307, May 12, 1998; 65 
FR 18536, Apr. 7, 2000]



Sec. 410.28  Hospital or CAH diagnostic services furnished to outpatients: Conditions.

    (a) Medicare Part B pays for hospital or CAH diagnostic services 
furnished to

[[Page 249]]

outpatients, including drugs and biologicals required in the performance 
of the services (even if those drugs or biologicals are self-
administered), if those services meet the following conditions:
    (1) They are furnished by or under arrangements made by a 
participating hospital or participating CAH, except in the case of an 
SNF resident as provided in Sec. 411.15(p) of this chapter.
    (2) They are ordinarily furnished by, or under arrangements made by, 
the hospital or CAH to its outpatients for the purpose of diagnostic 
study.
    (3) They would be covered as inpatient hospital services if 
furnished to an inpatient.
    (b) Drugs and biologicals are also subject to the limitations 
specified in Sec. 410.29(b) and (c).
    (c) Diagnostic services furnished by an entity other than the 
hospital or CAH are subject to the limitations specified in 
Sec. 410.42(a).
    (d) Rules on emergency services furnished to outpatients by 
nonparticipating hospitals are set forth in subpart G of part 424 of 
this chapter.
    (e) Medicare Part B makes payment under section 1833(t) of the Act 
for diagnostic services furnished at a facility (other than an RHC or an 
FQHC) that CMS designates as having provider-based status only when the 
diagnostic services are furnished under the appropriate level of 
physician supervision specified by CMS in accordance with the 
definitions in Sec. 410.32(b)(3)(i), (b)(3)(ii), and (b)(3)(iii). Under 
general supervision at a facility accorded provider-based status, the 
training of the nonphysician personnel who actually perform the 
diagnostic procedure and the maintenance of the necessary equipment and 
supplies are the continuing responsibility of the facility.
    (f) The rules for clinical diagnostic laboratory tests set forth in 
Secs. 410.32(a) and (d)(2) through (d)(4) of this subpart are applicable 
to those tests when furnished in hospitals and CAHs.

[51 FR 41339, Nov. 14, 1986, as amended at 58 FR 30668, May 26, 1993; 63 
FR 26307, May 12, 1998; 65 FR 18536, Apr. 7, 2000; 66 FR 58809, Nov. 23, 
2001]



Sec. 410.29  Limitations on drugs and biologicals.

    Medicare part B does not pay for the following:
    (a) Except as provided in Sec. 410.28(a) for outpatient diagnostic 
services and Sec. 410.63(b) for blood clotting factors, and except for 
EPO, any drug or biological that can be self-administered.
    (b) Any drug product that meets all of the following conditions:
    (1) The drug product was approved by the Food and Drug 
Administration (FDA) before October 10, 1962.
    (2) The drug product is available only through prescription.
    (3) The drug product is the subject of a notice of opportunity for 
hearing issued under section 505(e) of the Federal Food, Drug, and 
Cosmetic Act and published in the Federal Register on a proposed order 
of FDA to withdraw its approval for the drug product because it has 
determined that the product is less than effective for all its labeled 
indications.
    (4) The drug product is presently not subject to a determination by 
FDA, made under its efficacy review program, that there is a compelling 
justification of the drug product's medical need. (21 CFR 310.6 contains 
an explanation of the efficacy review program.)
    (c) Any drug product that is identical, related, or similar, as 
defined in 21 CFR 310.6, to a drug product that meets the conditions of 
paragraph (b) of this section.

[51 FR 41339, Nov. 14, 1986, as amended at 55 FR 22790, June 4, 1990; 56 
FR 43709, Sept. 4, 1991]



Sec. 410.30  Prescription drugs used in immunosuppressive therapy.

    (a) Scope. Payment may be made for prescription drugs used in 
immunosuppressive therapy that have been approved for marketing by the 
FDA and that meet one of the following conditions:
    (1) The approved labeling includes the indication for preventing or 
treating the rejection of a transplanted organ or tissue.
    (2) The approved labeling includes the indication for use in 
conjunction with immunosuppressive drugs to prevent or treat rejection 
of a transplanted organ or tissue.

[[Page 250]]

    (3) Have been determined by a carrier (in accordance with part 421, 
subpart C of this chapter), in processing a Medicare claim, to be 
reasonable and necessary for the specific purpose of preventing or 
treating the rejection of a patient's transplanted organ or tissue, or 
for use in conjunction with immunosuppressive drugs for the purpose of 
preventing or treating the rejection of a patient's transplanted organ 
or tissue. (In making these determinations, the carriers may consider 
factors such as authoritative drug compendia, current medical 
literature, recognized standards of medical practice, and professional 
medical publications.)
    (b) Period of eligibility. Coverage is available only for 
prescription drugs used in immunosuppressive therapy, furnished to an 
individual who receives an organ or tissue transplant for which Medicare 
payment is made, for the following periods:
    (1) For drugs furnished before 1995, for a period of up to 1 year 
beginning with the date of discharge from the hospital during which the 
covered transplant was performed.
    (2) For drugs furnished during 1995, within 18 months after the date 
of discharge from the hospital during which the covered transplant was 
performed.
    (3) For drugs furnished during 1996, within 24 months after the date 
of discharge from the hospital during which the covered transplant was 
performed.
    (4) For drugs furnished during 1997, within 30 months after the date 
of discharge from the hospital during which the covered transplant was 
performed.
    (5) For drugs furnished after 1997, within 36 months after the date 
of discharge from the hospital during which the covered transplant was 
performed.
    (c) Coverage. Drugs are covered under this provision irrespective of 
whether they can be self-administered.

[60 FR 8955, Feb. 16, 1995. Redesignated at 63 FR 34327, June 24, 1998]



Sec. 410.31  Bone mass measurement: Conditions for coverage and frequency standards.

    (a) Definition. As used in this section unless specified otherwise, 
the following definition applies:
    Bone mass measurement means a radiologic, radioisotopic, or other 
procedure that meets the following conditions:
    (1) Is performed for the purpose of identifying bone mass, detecting 
bone loss, or determining bone quality.
    (2) Is performed with either a bone densitometer (other than dual-
photon absorptiometry) or with a bone sonometer system that has been 
cleared for marketing for this use by the FDA under 21 CFR part 807, or 
approved for marketing by the FDA for this use under 21 CFR part 814.
    (3) Includes a physician's interpretation of the results of the 
procedure.
    (b) Conditions for coverage. Medicare covers a medically necessary 
bone mass measurement if the following conditions are met:
    (1) Following an evaluation of the beneficiary's need for the 
measurement, including a determination as to the medically appropriate 
procedure to be used for the beneficiary, it is ordered by the physician 
or a qualified nonphysician practitioner (as these terms are defined in 
Sec. 410.32(a)) treating the beneficiary.
    (2) It is performed under the appropriate level of supervision of a 
physician (as set forth in Sec. 410.32(b)).
    (3) It is reasonable and necessary for diagnosing, treating, or 
monitoring the condition of a beneficiary who meets the conditions 
described in paragraph (d) of this section.
    (c) Standards on frequency of coverage--(1) General rule. Except as 
allowed under paragraph (c)(2) of this section, Medicare may cover a 
bone mass measurement for a beneficiary if at least 23 months have 
passed since the month the last bone mass measurement was performed.
    (2) Exception. If medically necessary, Medicare may cover a bone 
mass measurement for a beneficiary more frequently than allowed under 
paragraph (c)(1) of this section. Examples of situations where more 
frequent bone mass measurement procedures may be medically necessary 
include, but are not limited to, the following medical circumstances:
    (i) Monitoring beneficiaries on long-term glucocorticoid (steroid) 
therapy of more than 3 months.
    (ii) Allowing for a confirmatory baseline bone mass measurement 
(either

[[Page 251]]

central or peripheral) to permit monitoring of beneficiaries in the 
future if the initial test was performed with a technique that is 
different from the proposed monitoring method.
    (d) Beneficiaries who may be covered. The following categories of 
beneficiaries may receive Medicare coverage for a medically necessary 
bone mass measurement:
    (1) A woman who has been determined by the physician (or a qualified 
nonphysician practitioner) treating her to be estrogen-deficient and at 
clinical risk for osteoporosis, based on her medical history and other 
findings.
    (2) An individual with vertebral abnormalities as demonstrated by an 
x-ray to be indicative of osteoporosis, osteopenia, or vertebral 
fracture.
    (3) An individual receiving (or expecting to receive) glucocorticoid 
(steroid) therapy equivalent to 7.5 mg of prednisone, or greater, per 
day for more than 3 months.
    (4) An individual with primary hyperparathyroidism.
    (5) An individual being monitored to assess the response to or 
efficacy of an FDA-approved osteoporosis drug therapy.
    (e) Denial as not reasonable and necessary. If CMS determines that a 
bone mass measurement does not meet the conditions for coverage in 
paragraphs (b) or (d) of this section, or the standards on frequency of 
coverage in paragraph (c) of this section, it is excluded from Medicare 
coverage as not ``reasonable'' and ``necessary'' under section 
1862(a)(1)(A) of the Act and Sec. 411.15(k) of this chapter.

[63 FR 34327, June 24, 1998]



Sec. 410.32  Diagnostic x-ray tests, diagnostic laboratory tests, and other diagnostic tests: Conditions.

    (a) Ordering diagnostic tests. All diagnostic x-ray tests, 
diagnostic laboratory tests, and other diagnostic tests must be ordered 
by the physician who is treating the beneficiary, that is, the physician 
who furnishes a consultation or treats a beneficiary for a specific 
medical problem and who uses the results in the management of the 
beneficiary's specific medical problem. Tests not ordered by the 
physician who is treating the beneficiary are not reasonable and 
necessary (see Sec. 411.15(k)(1) of this chapter).
    (1) Chiropractic exception. A physician may order an x-ray to be 
used by a chiropractor to demonstrate the subluxation of the spine that 
is the basis for a beneficiary to receive manual manipulation treatments 
even though the physician does not treat the beneficiary.
    (2) Mammography exception. A physician who meets the qualification 
requirements for an interpreting physician under section 354 of the 
Public Health Service Act as provided in Sec. 410.34(a)(7) may order a 
diagnostic mammogram based on the findings of a screening mammogram even 
though the physician does not treat the beneficiary.
    (3) Application to nonphysician practitioners. Nonphysician 
practitioners (that is, clinical nurse specialists, clinical 
psychologists, clinical social workers, nurse-midwives, nurse 
practitioners, and physician assistants) who furnish services that would 
be physician services if furnished by a physician, and who are operating 
within the scope of their authority under State law and within the scope 
of their Medicare statutory benefit, may be treated the same as 
physicians treating beneficiaries for the purpose of this paragraph.
    (b) Diagnostic x-ray and other diagnostic tests--(1) Basic rule. 
Except as indicated in paragraph (b)(2) of this section, all diagnostic 
x-ray and other diagnostic tests covered under section 1861(s)(3) of the 
Act and payable under the physician fee schedule must be furnished under 
the appropriate level of supervision by a physician as defined in 
section 1861(r) of the Act. Services furnished without the required 
level of supervision are not reasonable and necessary (see 
Sec. 411.15(k)(1) of this chapter).
    (2) Exceptions. The following diagnostic tests payable under the 
physician fee schedule are excluded from the basic rule set forth in 
paragraph (b)(1) of this section:
    (i) Diagnostic mammography procedures, which are regulated by the 
Food and Drug Administration.

[[Page 252]]

    (ii) Diagnostic tests personally furnished by a qualified 
audiologist as defined in section 1861(ll)(3) of the Act.
    (iii) Diagnostic psychological testing services personally furnished 
by a clinical psychologist or a qualified independent psychologist as 
defined in program instructions.
    (iv) Diagnostic tests (as established through program instructions) 
personally performed by a physical therapist who is certified by the 
American Board of Physical Therapy Specialties as a qualified 
electrophysiologic clinical specialist and permitted to provide the 
service under State law.
    (v) Diagnostic tests performed by a nurse practitioner or clinical 
nurse specialist authorized to perform the tests under applicable State 
laws.
    (vi) Pathology and laboratory procedures listed in the 80000 series 
of the Current Procedural Terminology published by the American Medical 
Association.
    (3) Levels of supervision. Except where otherwise indicated, all 
diagnostic x-ray and other diagnostic tests subject to this provision 
and payable under the physician fee schedule must be furnished under at 
least a general level of physician supervision as defined in paragraph 
(b)(3)(i) of this section. In addition, some of these tests also require 
either direct or personal supervision as defined in paragraphs 
(b)(3)(ii) or (b)(3)(iii) of this section, respectively. (However, 
diagnostic tests performed by a physician assistant (PA) that the PA is 
legally authorized to perform under State law require only a general 
level of physician supervision.) When direct or personal supervision is 
required, physician supervision at the specified level is required 
throughout the performance of the test.
    (i) General supervision means the procedure is furnished under the 
physician's overall direction and control, but the physician's presence 
is not required during the performance of the procedure. Under general 
supervision, the training of the nonphysician personnel who actually 
perform the diagnostic procedure and the maintenance of the necessary 
equipment and supplies are the continuing responsibility of the 
physician.
    (ii) Direct supervision in the office setting means the physician 
must be present in the office suite and immediately available to furnish 
assistance and direction throughout the performance of the procedure. It 
does not mean that the physician must be present in the room when the 
procedure is performed.
    (iii) Personal supervision means a physician must be in attendance 
in the room during the performance of the procedure.
    (c) Portable x-ray services. Portable x-ray services furnished in a 
place of residence used as the patient's home are covered if the 
following conditions are met:
    (1) These services are furnished under the general supervision of a 
physician, as defined in paragraph (b)(3)(i) of this section.
    (2) The supplier of these services meets the requirements set forth 
in part 486, subpart C of this chapter, concerning conditions for 
coverage for portable x-ray services.
    (3) The procedures are limited to--
    (i) Skeletal films involving the extremities, pelvis, vertebral 
column, or skull;
    (ii) Chest or abdominal films that do not involve the use of 
contrast media; and
    (iii) Diagnostic mammograms if the approved portable x-ray supplier, 
as defined in subpart C of part 486 of this chapter, meets the 
certification requirements of section 354 of the Public Health Service 
Act, as implemented by 21 CFR part 900, subpart B.
    (d) Diagnostic laboratory tests. (1) Who may furnish services. 
Medicare Part B pays for covered diagnostic laboratory tests that are 
furnished by any of the following:
    (i) A participating hospital or participating RPCH.
    (ii) A nonparticipating hospital that meets the requirements for 
emergency outpatient services specified in subpart G of part 424 of this 
chapter and the laboratory requirements specified in part 493 of this 
chapter.
    (iii) The office of the patient's attending or consulting physician 
if that physician is a doctor of medicine, osteopathy, podiatric 
medicine, dental surgery, or dental medicine.

[[Page 253]]

    (iv) An RHC.
    (v) A laboratory, if it meets the applicable requirements for 
laboratories of part 493 of this chapter, including the laboratory of a 
nonparticipating hospital that does not meet the requirements for 
emergency outpatient services in subpart G of part 424 of this chapter.
    (vi) An FQHC.
    (vii) An SNF to its resident under Sec. 411.15(p) of this chapter, 
either directly (in accordance with Sec. 483.75(k)(1)(i) of this 
chapter) or under an arrangement (as defined in Sec. 409.3 of this 
chapter) with another entity described in this paragraph.
    (2) Documentation and recordkeeping requirements.
    (i) Ordering the service. The physician or (qualified nonphysican 
practitioner, as defined in paragraph (a)(3) of this section), who 
orders the service must maintain documentation of medical necessity in 
the beneficiary's medical record.
    (ii) Submitting the claim. The entity submitting the claim must 
maintain the following documentation:
    (A) The documentation that it receives from the ordering physician 
or nonphysician practitioner.
    (B) The documentation that the information that it submitted with 
the claim accurately reflects the information it received from the 
ordering physician or nonphysician practitioner.
    (iii) Requesting additional information. The entity submitting the 
claim may request additional diagnostic and other medical information to 
document that the services it bills are reasonable and necessary. If the 
entity requests additional documentation, it must request material 
relevant to the medical necessity of the specific test(s), taking into 
consideration current rules and regulations on patient confidentiality.
    (3) Claims review. (i) Documentation requirements. Upon request by 
CMS, the entity submitting the claim must provide the following 
information:
    (A) Documentation of the order for the service billed (including 
information sufficient to enable CMS to identify and contact the 
ordering physician or nonphysician practitioner).
    (B) Documentation showing accurate processing of the order and 
submission of the claim.
    (C) Diagnostic or other medical information supplied to the 
laboratory by the ordering physician or nonphysician practitioner, 
including any ICD-9-CM code or narrative description supplied.
    (ii) Services that are not reasonable and necessary. If the 
documentation provided under paragraph (d)(3)(i) of this section does 
not demonstrate that the service is reasonable and necessary, CMS takes 
the following actions:
    (A) Provides the ordering physician or nonphysician practitioner 
information sufficient to identify the claim being reviewed.
    (B) Requests from the ordering physician or nonphysician 
practitioner those parts of a beneficiary's medical record that are 
relevant to the specific claim(s) being reviewed.
    (C) If the ordering physician or nonphysician practitioner does not 
supply the documentation requested, informs the entity submitting the 
claim(s) that the documentation has not been supplied and denies the 
claim.
    (iii) Medical necessity. The entity submitting the claim may request 
additional diagnostic and other medical information from the ordering 
physician or nonphysician practitioner to document that the services it 
bills are reasonable and necessary. If the entity requests additional 
documentation, it must request material relevant to the medical 
necessity of the specific test(s), taking into consideration current 
rules and regulations on patient confidentiality.
    (4) Automatic denial and manual review. (i) General rule. Except as 
provided in paragraph (d)(4)(ii) of this section, CMS does not deny a 
claim for services that exceed utilization parameters without reviewing 
all relevant documentation that is submitted with the claim (for 
example, justifications prepared by providers, primary and secondary 
diagnoses, and copies of medical records).
    (ii) Exceptions. CMS may automatically deny a claim without manual 
review if a national coverage decision or LMRP specifies the 
circumstances under which the service is denied, or

[[Page 254]]

the service is specifically excluded from Medicare coverage by law.
    (e) Diagnostic laboratory tests furnished in hospitals and CAHs. The 
provisions of paragraphs (a) and (d)(2) through (d)(4), inclusive, of 
this section apply to all diagnostic laboratory test furnished by 
hospitals and CAHs to outpatients.

[62 FR 59098, Oct. 31, 1997, as amended at 63 FR 26308, May 12, 1998; 63 
FR 53307, Oct. 5, 1998; 63 FR 58906, Nov. 2, 1998; 64 FR 59440, Nov. 2, 
1999; 66 FR 58809, Nov. 23, 2001]



Sec. 410.33  Independent diagnostic testing facility.

    (a) General rule. (1) Effective for diagnostic procedures performed 
on or after March 15, 1999, carriers will pay for diagnostic procedures 
under the physician fee schedule only when performed by a physician, a 
group practice of physicians, an approved supplier of portable x-ray 
services, a nurse practitioner, or a clinical nurse specialist when he 
or she performs a test he or she is authorized by the State to perform, 
or an independent diagnostic testing facility (IDTF). An IDTF may be a 
fixed location, a mobile entity, or an individual nonphysician 
practitioner. It is independent of a physician's office or hospital; 
however, these rules apply when an IDTF furnishes diagnostic procedures 
in a physician's office.
    (2) Exceptions. The following diagnostic tests that are payable 
under the physician fee schedule and furnished by a nonhospital testing 
entity are not required to be furnished in accordance with the criteria 
set forth in paragraphs (b) through (e) of this section:
    (i) Diagnostic mammography procedures, which are regulated by the 
Food and Drug Administration.
    (ii) Diagnostic tests personally furnished by a qualified 
audiologist as defined in section 1861(ll)(3) of the Act.
    (iii) Diagnostic psychological testing services personally furnished 
by a clinical psychologist or a qualified independent psychologist as 
defined in program instructions.
    (iv) Diagnostic tests (as established through program instructions) 
personally performed by a physical therapist who is certified by the 
American Board of Physical Therapy Specialties as a qualified 
electrophysiologic clinical specialist and permitted to provide the 
service under State law.
    (b) Supervising physician. (1) An IDTF must have one or more 
supervising physicians who are responsible for the direct and ongoing 
oversight of the quality of the testing performed, the proper operation 
and calibration of the equipment used to perform tests, and the 
qualification of nonphysician personnel who use the equipment. This 
level of supervision is that required for general supervision set forth 
in Sec. 410.32(b)(3)(i).
    (2) The supervising physician must evidence proficiency in the 
performance and interpretation of each type of diagnostic procedure 
performed by the IDTF. The proficiency may be documented by 
certification in specific medical specialties or subspecialties or by 
criteria established by the carrier for the service area in which the 
IDTF is located. In the case of a procedure requiring the direct or 
personal supervision of a physician as set forth in 
Sec. 410.32(b)(3)(ii) or (b)(3)(iii), the IDTF's supervising physician 
must personally furnish this level of supervision whether the procedure 
is performed in the IDTF or, in the case of mobile services, at the 
remote location. The IDTF must maintain documentation of sufficient 
physician resources during all hours of operations to assure that the 
required physician supervision is furnished. In the case of procedures 
requiring direct supervision, the supervising physician may oversee 
concurrent procedures.
    (c) Nonphysician personnel. Any nonphysician personnel used by the 
IDTF to perform tests must demonstrate the basic qualifications to 
perform the tests in question and have training and proficiency as 
evidenced by licensure or certification by the appropriate State health 
or education department. In the absence of a State licensing board, the 
technician must be certified by an appropriate national credentialing 
body. The IDTF must maintain documentation available for review that 
these requirements are met.
    (d) Ordering of tests. All procedures performed by the IDTF must be 
specifically ordered in writing by the physician who is treating the 
beneficiary,

[[Page 255]]

that is, the physician who is furnishing a consultation or treating a 
beneficiary for a specific medical problem and who uses the results in 
the management of the beneficiary's specific medical problem. 
(Nonphysician practitioners may order tests as set forth in 
Sec. 410.32(a)(3).) The order must specify the diagnosis or other basis 
for the testing. The supervising physician for the IDTF may not order 
tests to be performed by the IDTF, unless the IDTF's supervising 
physician is in fact the beneficiary's treating physician. That is, the 
physician in question had a relationship with the beneficiary prior to 
the performance of the testing and is treating the beneficiary for a 
specific medical problem. The IDTF may not add any procedures based on 
internal protocols without a written order from the treating physician.
    (e) Multi-State entities. An IDTF that operates across State 
boundaries must maintain documentation that its supervising physicians 
and technicians are licensed and certified in each of the States in 
which it is furnishing services.
    (f) Applicability of State law. An IDTF must comply with the 
applicable laws of any State in which it operates.

[62 FR 59099, Oct. 31, 1997, as amended at 64 FR 59440, Nov. 2, 1999]



Sec. 410.34  Mammography services: Conditions for and limitations on coverage.

    (a) Definitions. As used in this section, the following definitions 
apply:
    (1) Diagnostic mammography means a radiologic procedure furnished to 
a man or woman with signs or symptoms of breast disease, or a personal 
history of breast cancer, or a personal history of biopsy-proven benign 
breast disease, and includes a physician's interpretation of the results 
of the procedure.
    (2) Screening mammography means a radiologic procedure furnished to 
a woman without signs or symptoms of breast disease, for the purpose of 
early detection of breast cancer, and includes a physician's 
interpretation of the results of the procedure.
    (3) Supplier of diagnostic mammography means a facility that is 
certified and responsible for ensuring that all diagnostic mammography 
services furnished to Medicare beneficiaries meet the conditions for 
coverage of diagnostic mammography services as specified in paragraph 
(b) of this section.
    (4) Supplier of screening mammography means a facility that is 
certified and responsible for ensuring that all screening mammography 
services furnished to Medicare beneficiaries meet the conditions and 
limitations for coverage of screening mammography services as specified 
in paragraphs (c) and (d) of this section.
    (5) Certificate means the certificate described in 21 CFR 900.2(b) 
that may be issued to, or renewed for, a facility that meets the 
requirements for conducting an examination or procedure involving 
mammography.
    (6) Provisional certificate means the provisional certificate 
described in 21 CFR 900.2(m) that may be issued to a facility to enable 
the facility to qualify to meet the requirements for conducting an 
examination or procedure involving mammography.
    (7) The term meets the certification requirements of section 354 of 
the Public Health Service (PHS) Act means that in order to qualify for 
coverage of its services under the Medicare program, a supplier of 
diagnostic or screening mammography services must meet the following 
requirements:
    (i) Must have a valid provisional certificate, or a valid 
certificate, that has been issued by FDA indicating that the supplier 
meets the certification requirements of section 354 of the PHS Act, as 
implemented by 21 CFR part 900, subpart B.
    (ii) Has not been issued a written notification by FDA that states 
that the supplier must cease conducting mammography examinations because 
the supplier is not in compliance with certain critical certification 
requirements of section 354 of the PHS Act, implemented by 21 CFR part 
900, subpart B.
    (iii) Must not employ for provision of the professional component of 
mammography services a physician or physicians for whom the facility has 
received written notification by FDA that the physician (or physicians) 
is (or are) in violation of the certification requirements set forth in 
section 354 of the PHS Act, as implemented by 21 CFR 900.12(a)(1)(i).

[[Page 256]]

    (b) Conditions for coverage of diagnostic mammography services. 
Medicare Part B pays for diagnostic mammography services if they meet 
the following conditions:
    (1) They are ordered by a doctor of medicine or osteopathy (as 
defined in section 1861(r)(1) of the Act).
    (2) They are furnished by a supplier of diagnostic mammography 
services that meets the certification requirements of section 354 of the 
PHS Act, as implemented by 21 CFR part 900, subpart B.
    (c) Conditions for coverage of screening mammography services. 
Medicare Part B pays for screening mammography services if they are 
furnished by a supplier of screening mammography services that meets the 
certification requirements of section 354 of the PHS Act, as implemented 
by 21 CFR part 900, subpart B.
    (d) Limitations on coverage of screening mammography services. The 
following limitations apply to coverage of screening mammography 
services as described in paragraphs (c) and (d) of this section:
    (1) The service must be, at a minimum a two-view exposure (that is, 
a cranio-caudal and a medial lateral oblique view) of each breast.
    (2) Payment may not be made for screening mammography performed on a 
woman under age 35.
    (3) Payment may be made for only 1 screening mammography performed 
on a woman over age 34, but under age 40.
    (4) For an asymptomatic woman over 39 years of age, payment may be 
made for a screening mammography performed after at least 11 months have 
passed following the month in which the last screening mammography was 
performed.

[59 FR 49833, Sept. 30, 1994, as amended at 60 FR 14224, Mar. 16, 1995; 
60 FR 63176, Dec. 8, 1995; 62 FR 59100, Oct. 31, 1997; 63 FR 4596, Jan. 
30, 1998]



Sec. 410.35  X-ray therapy and other radiation therapy services: Scope.

    Medicare Part B pays for X-ray therapy and other radiation therapy 
services, including radium therapy and radioactive isotope therapy, and 
materials and the services of technicians administering the treatment.

[51 FR 41339, Nov. 14, 1986. Redesignated at 55 FR 53522, Dec. 31, 1990]



Sec. 410.36  Medical supplies, appliances, and devices: Scope.

    (a) Medicare Part B pays for the following medical supplies, 
appliances and devices:
    (1) Surgical dressings, and splints, casts, and other devices used 
for reduction of fractures and dislocations.
    (2) Prosthetic devices, other than dental, that replace all or part 
of an internal body organ, including colostomy bags and supplies 
directly related to colostomy care, including--
    (i) Replacement of prosthetic devices; and
    (ii) One pair of conventional eyeglasses or conventional contact 
lenses furnished after each cataract surgery during which an intraocular 
lens is inserted.
    (3) Leg, arm, back, and neck braces and artificial legs, arms, and 
eyes, including replacements if required because of a change in the 
individual's physical condition.
    (b) As a requirement for payment, CMS may determine through carrier 
instructions, or carriers may determine, that an item listed in 
paragraph (a) of this section requires a written physician order before 
delivery of the item.

[51 FR 41339, Nov. 14, 1986, as amended at 57 FR 36014, Aug. 12, 1992; 
57 FR 57688, Dec. 7, 1992]



Sec. 410.37  Colorectal cancer screening tests: Conditions for and limitations on coverage.

    (a) Definitions. As used in this section, the following definitions 
apply:
    (1) Colorectal cancer screening tests means any of the following 
procedures furnished to an individual for the purpose of early detection 
of colorectal cancer:
    (i) Screening fecal-occult blood tests.
    (ii) Screening flexible sigmoidoscopies.
    (iii) In the case of an individual at high risk for colorectal 
cancer, screening colonoscopies.
    (iv) Screening barium enemas.

[[Page 257]]

    (v) Other tests or procedures, and modifications to tests under this 
paragraph, with such frequency and payment limits as CMS determines 
appropriate, in consultation with appropriate organizations.
    (2) Screening fecal-occult blood test means a guaiac-based test for 
peroxidase activity, testing two samples from each of three consecutive 
stools.
    (3) An individual at high risk for colorectal cancer means an 
individual with--
    (i) A close relative (sibling, parent, or child) who has had 
colorectal cancer or an adenomatous polyp;
    (ii) A family history of familial adenomatous polyposis;
    (iii) A family history of hereditary nonpolyposis colorectal cancer;
    (iv) A personal history of adenomatous polyps; or
    (v) A personal history of colorectal cancer; or
    (vi) Inflammatory bowel disease, including Crohn's Disease, and 
ulcerative colitis.
    (4) Screening barium enema means--
    (i) A screening double contrast barium enema of the entire 
colorectum (including a physician's interpretation of the results of the 
procedure); or
    (ii) In the case of an individual whose attending physician decides 
that he or she cannot tolerate a screening double contrast barium enema, 
a screening single contrast barium enema of the entire colorectum 
(including a physician's interpretation of the results of the 
procedure).
    (5) An attending physician for purposes of this provision is a 
doctor of medicine or osteopathy (as defined in section 1861(r)(1) of 
the Act) who is fully knowledgeable about the beneficiary's medical 
condition, and who would be responsible using the results of any 
examination performed in the overall management of the beneficiary's 
specific medical problem.
    (b) Condition for coverage of screening fecal-occult blood tests. 
Medicare Part B pays for a screening fecal-occult blood test if it is 
ordered in writing by the beneficiary's attending physician.
    (c) Limitations on coverage of screening fecal-occult blood tests. 
(1) Payment may not be made for a screening fecal-occult blood test 
performed for an individual under age 50.
    (2) For an individual 50 years of age or over, payment may be made 
for a screening fecal-occult blood test performed after at least 11 
months have passed following the month in which the last screening 
fecal-occult blood test was performed.
    (d) Condition for coverage of flexible sigmoidoscopy screening. 
Medicare Part B pays for a flexible sigmoidoscopy screening service if 
it is performed by a doctor of medicine or osteopathy (as defined in 
section 1861(r)(1) of the Act), or by a physician assistant, nurse 
practitioner, or clinical nurse specialist (as defined in section 
1861(aa)(5) of the Act and Secs. 410.74, 410.75, and 410.76) who is 
authorized under State law to perform the examination.
    (e) Limitations on coverage of screening flexible sigmoidoscopies. 
(1) Payment may not be made for a screening flexible sigmoidoscopy 
performed for an individual under age 50.
    (2) For an individual 50 years of age or over, except as described 
in paragraph (e)(3) of this section, payment may be made for screening 
flexible sigmoidoscopy after at least 47 months have passed following 
the month in which the last screening flexible sigmoidoscopy or, as 
provided in paragraphs (h) and (i) of this section, the last screening 
barium enema was performed.
    (3) In the case of an individual who is not at high risk for 
colorectal cancer as described in paragraph (a)(3) of this section but 
who has had a screening colonoscopy performed, payment may be made for a 
screening flexible sigmoidosocopy only after at least 119 months have 
passed following the month in which the last screening colonoscopy was 
performed.
    (f) Condition for coverage of screening colonoscopies. Medicare Part 
B pays for a screening colonoscopy if it is performed by a doctor of 
medicine or osteopathy (as defined in section 1861(r)(1) of the Act).
    (g) Limitations on coverage of screening colonoscopies. (1) 
Effective for services furnished on or after January 1, 1998 through 
June 30, 2001, payment may not be made for a screening colonoscopy for 
an individual who is

[[Page 258]]

not at high risk for colorectal cancer as described in paragraph (a)(3) 
of this section.
    (2) Effective for services furnished on or after July 1, 2001, 
except as described in paragraph (g)(4) of this section, payment may be 
made for a screening colonoscopy performed for an individual who is not 
at high risk for colorectal cancer as described in paragraph (a)(3) of 
this section, after at least 119 months have passed following the month 
in which the last screening colonoscopy was performed.
    (3) Payment may be made for a screening colonoscopy performed for an 
individual who is at high risk for colorectal cancer as described in 
paragraph (a)(3) of this section, after at least 23 months have passed 
following the month in which the last screening colonoscopy was 
performed, or, as provided in paragraphs (h) and (i) of this section, 
the last screening barium enema was performed.
    (4) In the case of an individual who is not at high risk for 
colorectal cancer as described in paragraph (a)(3) of this section but 
who has had a screening flexible sigmoidoscopy performed, payment may be 
made for a screening colonoscopy only after at least 47 months have 
passed following the month in which the last screening flexible 
sigmoidoscopy was performed.
    (h) Conditions for coverage of screening barium enemas. Medicare 
Part B pays for a screening barium enema if it is ordered in writing by 
the beneficiary's attending physician.
    (i) Limitations on coverage of screening barium enemas. (1) In the 
case of an individual age 50 or over who is not at high risk of 
colorectal cancer, payment may be made for a screening barium enema 
examination performed after at least 47 months have passed following the 
month in which the last screening barium enema or screening flexible 
sigmoidoscopy was performed.
    (2) In the case of an individual who is at high risk for colorectal 
cancer, payment may be made for a screening barium enema examination 
performed after at least 23 months have passed following the month in 
which the last screening barium enema or the last screening colonoscopy 
was performed.

[62 FR 59100, Oct. 31, 1997, as amended at 66 FR 55329, Nov. 1, 2001]



Sec. 410.38  Durable medical equipment: Scope and conditions.

    (a) Medicare Part B pays for the rental or purchase of durable 
medical equipment, including iron lungs, oxygen tents, hospital beds, 
and wheelchairs, if the equipment is used in the patient's home or in an 
institution that is used as a home.
    (b) An institution that is used as a home may not be a hospital or a 
CAH or a SNF as defined in sections 1861(e)(1), 1861(mm)(1) and 
1819(a)(1) of the Act, respectively.
    (c) Wheelchairs may include a power-operated vehicle that may be 
appropriately used as a wheelchair, but only if the vehicle--
    (1) Is determined to be necessary on the basis of the individual's 
medical and physical condition;
    (2) Meets any safety requirements specified by CMS; and
    (3) Except as provided in paragraph (c)(2) of this section, is 
ordered in writing by a specialist in physical medicine, orthopedic 
surgery, neurology, or rheumatology, the written order is furnished to 
the supplier before the delivery of the vehicle to the beneficiary, and 
the beneficiary requires the vehicle and is capable of using it.
    (4) A written prescription from the beneficiary's physician is 
acceptable for ordering a power-operated vehicle if a specialist in 
physical medicine, orthopedic surgery, neurology, or rheumatology is not 
reasonably accessible. For example, if travel to the specialist would be 
more than one day's trip from the beneficiary's home or if the 
beneficiary's medical condition precluded travel to the nearest 
available specialist, these circumstances would satisfy the ``not 
reasonably accessible'' requirement.
    (d) Medicare Part B pays for medically necessary equipment that is 
used for treatment of decubitus ulcers if--
    (1) The equipment is ordered in writing by the beneficiary's 
attending physician, or by a specialty physician on referral from the 
beneficiary's attending physician, and the written order is

[[Page 259]]

furnished to the supplier before the delivery of the equipment; and
    (2) The prescribing physician has specified in the prescription that 
he or she will be supervising the use of the equipment in connection 
with the course of treatment.
    (e) Medicare Part B pays for a medically necessary seat-lift if it--
    (1) Is ordered in writing by the beneficiary's attending physician, 
or by a specialty physician on referral from the beneficiary's attending 
physician, and the written order is furnished to the supplier before the 
delivery of the seat-lift;
    (2) Is for a beneficiary who has a diagnosis designated by CMS as 
requiring a seat-lift; and
    (3) Meets safety requirements specified by CMS.
    (f) Medicare Part B pays for transcutaneous electrical nerve 
stimulator units that are--
    (1) Determined to be medically necessary; and
    (2) Ordered in writing by the beneficiary's attending physician, or 
by a specialty physician on referral from the beneficiary's attending 
physician, and the written order is furnished to the supplier before the 
delivery of the unit to the beneficiary.
    (g) As a requirement for payment, CMS may determine through carrier 
instructions, or carriers may determine that an item of durable medical 
equipment requires a written physician order before delivery of the 
item.

[51 FR 41339, Nov. 14, 1986, as amended at 57 FR 57688, Dec. 7, 1992; 58 
FR 30668, May 26, 1993]



Sec. 410.39  Prostate cancer screening tests: Conditions for and limitations on coverage.

    (a) Definitions. As used in this section, the following definitions 
apply:
    (1) Prostate cancer screening tests means any of the following 
procedures furnished to an individual for the purpose of early detection 
of prostate cancer:
    (i) A screening digital rectal examination.
    (ii) A screening prostate-specific antigen blood test.
    (iii) For years beginning after 2002, other procedures CMS finds 
appropriate for the purpose of early detection of prostate cancer, 
taking into account changes in technology and standards of medical 
practice, availability, effectiveness, costs, and other factors CMS 
considers appropriate.
    (2) A screening digital rectal examination means a clinical 
examination of an individual's prostate for nodules or other 
abnormalities of the prostate.
    (3) A screening prostate-specific antigen blood test means a test 
that measures the level of prostate-specific antigen in an individual's 
blood.
    (4) A physician for purposes of this provision means a doctor of 
medicine or osteopathy (as defined in section 1861(r)(1) of the Act) who 
is fully knowledgeable about the beneficiary, and who would be 
responsible for explaining the results of the screening examination or 
test.
    (5) A physician assistant, nurse practitioner, clinical nurse 
specialist, or certified nurse midwife for purposes of this provision 
means a physician assistant, nurse practitioner, clinical nurse 
specialist, or certified nurse midwife (as defined in sections 1861(aa) 
and 1861(gg) of the Act) who is fully knowledgeable about the 
beneficiary, and who would be responsible for explaining the results of 
the screening examination or test.
    (b) Condition for coverage of screening digital rectal examinations. 
Medicare Part B pays for a screening digital rectal examination if it is 
performed by the beneficiary's physician, or by the beneficiary's 
physician assistant, nurse practitioner, clinical nurse specialist, or 
certified nurse midwife as defined in paragraphs (a)(4) or (a)(5) of 
this section who is authorized to perform this service under State law.
    (c) Limitation on coverage of screening digital rectal examinations. 
(1) Payment may not be made for a screening digital rectal examination 
performed for a man age 50 or younger.
    (2) For an individual over 50 years of age, payment may be made for 
a screening digital rectal examination only if the man has not had such 
an examination paid for by Medicare during the preceding 11 months 
following the month in which his last Medicare-covered screening digital 
rectal examination was performed.

[[Page 260]]

    (d) Condition for coverage of screening prostate-specific antigen 
blood tests. Medicare Part B pays for a screening prostate-specific 
antigen blood test if it is ordered by the beneficiary's physician, or 
by the beneficiary's physician assistant, nurse practitioner, clinical 
nurse specialist, or certified nurse midwife as defined in paragraphs 
(a)(4) or (a)(5) of this section who is authorized to order this test 
under State law.
    (e) Limitation on coverage of screening prostate-specific antigen 
blood test. (1) Payment may not be made for a screening prostate-
specific antigen blood test performed for a man age 50 or younger.
    (2) For an individual over 50 years of age, payment may be made for 
a screening prostate-specific antigen blood test only if the man has not 
had such an examination paid for by Medicare during the preceding 11 
months following the month in which his last Medicare-covered screening 
prostate-specific antigen blood test was performed.

[64 FR 59440, Nov. 2, 1999, as amended at 65 FR 19331, Apr. 11, 2000]



Sec. 410.40  Coverage of ambulance services.

    (a). Basic rules. Medicare Part B covers ambulance services if the 
following conditions are met:
    (1) The supplier meets the applicable vehicle, staff, and billing 
and reporting requirements of Sec. 410.41 and the service meets the 
medical necessity and origin and destination requirements of paragraphs 
(d) and (e) of this section.
    (2) Medicare Part A payment is not made directly or indirectly for 
the services.
    (b) Levels of service. Medicare covers the following levels of 
ambulance service, which are defined in Sec. 414.605 of this chapter:
    (1) Basic life support (BLS) (emergency and nonemergency).
    (2) Advanced life support, level 1 (ALS1) (emergency and 
nonemergency).
    (3) Advanced life support, level 2 (ALS2).
    (4) Paramedic ALS intercept (PI).
    (5) Specialty care transport (SCT).
    (6) Fixed wing transport (FW).
    (7) Rotary wing transport (RW).
    (c) Paramedic ALS intercept services. Paramedic ALS intercept 
services must meet the following requirements:
    (1) Be furnished in an area that is designated as a rural area by 
any law or regulation of the State or that is located in a rural census 
tract of a metropolitan statistical area (as determined under the most 
recent Goldsmith Modification). (The Goldsmith Modification is a 
methodology to identify small towns and rural areas within large 
metropolitan counties that are isolated from central areas by distance 
or other features.)
    (2) Be furnished under contract with one or more volunteer ambulance 
services that meet the following conditions:
    (i) Are certified to furnish ambulance services as required under 
Sec. 410.41.
    (ii) Furnish services only at the BLS level.
    (iii) Be prohibited by State law from billing for any service.
    (3) Be furnished by a paramedic ALS intercept supplier that meets 
the following conditions:
    (i) Is certified to furnish ALS services as required in 
Sec. 410.41(b)(2).
    (ii) Bills all the recipients who receive ALS intercept services fro 
the entity, regardless of whether or not those recipients are Medicare 
beneficiaries.
    (d) Medical necessity requirements--(1) General rule. Medicare 
covers ambulance services, including fixed wing and rotary wing 
ambulance services, only if they are furnished to a beneficiary whose 
medical condition is such that other means of transportation are 
contraindicated. The beneficiary's condition must require both the 
ambulance transportation itself and the level of service provided in 
order for the billed service to be considered medically necessary. 
Nonemergency transportation by ambulance is appropriate if either: the 
beneficiary is bed-confined, and it is documented that the beneficiary's 
condition is such that other methods of transportation are 
contraindicated; or, if his or her medical condition, regardless of bed 
confinement, is such that transportation by ambulance is medically 
required. Thus, bed confinement is not the sole criterion in determining 
the medical necessity of ambulance transportation. It is one factor that 
is

[[Page 261]]

considered in medical necessity determinations. For a beneficiary to be 
considered bed-confined, the following criteria must be met:
    (i) The beneficiary is unable to get up from bed without assistance.
    (ii) The beneficiary is unable to ambulate.
    (iii) The beneficiary is unable to sit in a chair or wheelchair.
    (2) Special rule for nonemergency, scheduled, repetitive ambulance 
services. Medicare covers medically necessary nonemergency, scheduled, 
repetitive ambulance services if the ambulance provider or supplier, 
before furnishing the service to the beneficiary, obtains a written 
order from the beneficiary's attending physician certifying that the 
medical necessity requirements of paragraph (d)(1) of this section are 
met. The physician's order must be dated no earlier than 60 days before 
the date the service is furnished.
    (3) Special rule for nonemergency ambulance services that are either 
unscheduled or that are scheduled on a nonrepetitive basis. Medicare 
covers medically necessary nonemergency ambulance services that are 
either unscheduled or that are scheduled on a nonrepetitive basis under 
one of the following circumstances:
    (i) For a resident of a facility who is under the care of a 
physician if the ambulance provider or supplier obtains a written order 
from the beneficiary's attending physician, within 48 hours after the 
transport, certifying that the medical necessity requirements of 
paragraph (d)(1) of this section are met.
    (ii) For a beneficiary residing at home or in a facility who is not 
under the direct care of a physician. A physician certification is not 
required.
    (iii) If the ambulance provider or supplier is unable to obtain a 
signed physician certification statement from the beneficiary's 
attending physician, a signed certification statement must be obtained 
from either the physician assistant (PA), nurse practitioner (NP), 
clinical nurse specialist (CNS), registered nurse (RN), or discharge 
planner, who has personal knowledge of the beneficiary's condition at 
the time the ambulance transport is ordered or the service is furnished. 
This individual must be employed by the beneficiary's attending 
physician or by the hospital or facility where the beneficiary is being 
treated and from which the beneficiary is transported. Medicare 
regulations for PAs, NPs, and CNSs apply and all applicable State 
licensure laws apply; or,
    (iv) If the ambulance provider or supplier is unable to obtain the 
required certification within 21 calendar days following the date of the 
service, the ambulance supplier must document its attempts to obtain the 
requested certification and may then submit the claim. Acceptable 
documentation includes a signed return receipt from the U.S. Postal 
Service or other similar service that evidences that the ambulance 
supplier attempted to obtain the required signature from the 
beneficiary's attending physician or other individual named in paragraph 
(d)(3)(iii) of this section.
    (v) In all cases, the provider or supplier must keep appropriate 
documentation on file and, upon request, present it to the contractor. 
The presence of the signed certification statement or signed return 
receipt does not alone demonstrate that the ambulance transport was 
medically necessary. All other program criteria must be met in order for 
payment to be made.
    (e) Origin and destination requirements. Medicare covers the 
following ambulance transportation:
    (1) From any point of origin to the nearest hospital, CAH, or SNF 
that is capable of furnishing the required level and type of care for 
the beneficiary's illness or injury. The hospital or CAH must have 
available the type of physician or physician specialist needed to treat 
the beneficiary's condition.
    (2) From a hospital, CAH, or SNF to the beneficiary's home.
    (3) From a SNF to the nearest supplier of medically necessary 
services not available at the SNF where the beneficiary is a resident, 
including the return trip.
    (4) For a beneficiary who is receiving renal dialysis for treatment 
of ESRD, from the beneficiary's home to the nearest facility that 
furnishes renal dialysis, including the return trip.
    (f) Specific limits on coverage of ambulance services outside the 
United States. If services are furnished outside the

[[Page 262]]

United States, Medicare Part B covers ambulance transportation to a 
foreign hospital only in conjunction with the beneficiary's admission 
for medically necessary inpatient services as specified in subpart H of 
part 424 of this chapter.

[64 FR 3648, Jan. 25, 1999, as amended at 65 FR 13914, Mar. 15, 2000; 67 
FR 9132, Feb. 27, 2002]



Sec. 410.41  Requirements for ambulance suppliers.

    (a) Vehicle. A vehicle used as an ambulance must meet the following 
requirements:
    (1) Be specially designed to respond to medical emergencies or 
provide acute medical care to transport the sick and injured and comply 
with all State and local laws governing an emergency transportation 
vehicle.
    (2) Be equipped with emergency warning lights and sirens, as 
required by State or local laws.
    (3) Be equipped with telecommunications equipment as required by 
State or local law to include, at a minimum, one two-way voice radio or 
wireless telephone.
    (4) Be equipped with a stretcher, linens, emergency medical 
supplies, oxygen equipment, and other lifesaving emergency medical 
equipment as required by State or local laws.
    (b) Vehicle staff--(1) BLS vehicles. A vehicle furnishing ambulance 
services must be staffed by at least two people, one of whom must meet 
the following requirements:
    (i) Be certified as an emergency medical technician by the State or 
local authority where the services are furnished.
    (ii) Be legally authorized to operate all lifesaving and life-
sustaining equipment on board the vehicle.
    (2) ALS vehicles. In addition to meeting the vehicle staff 
requirements of paragraph (b)(1) of this section, one of the two staff 
members must be certified as a paramedic or an emergency medical 
technician, by the State or local authority where the services are being 
furnished, to perform one or more ALS services.
    (c) Billing and reporting requirements. An ambulance supplier must 
comply with the following requirements:
    (1) Bill for ambulance services using CMS-designated procedure codes 
to describe origin and destination and indicate on claims form that the 
physician certification is on file.
    (2) Upon a carrier's request, complete and return the ambulance 
supplier form designated by CMS and provide the Medicare carrier with 
documentation of compliance with emergency vehicle and staff licensure 
and certification requirements in accordance with State and local laws.
    (3) Upon a carrier's request, provide additional information and 
documentation as required.

[64 FR 3648, Jan. 25, 1999]



Sec. 410.42  Limitations on coverage of certain services furnished to hospital outpatients.

    (a) General rule. Except as provided in paragraph (b) of this 
section, Medicare Part B does not pay for any item or service that is 
furnished to a hospital outpatient (as defined in Sec. 410.2) during an 
encounter (as defined in Sec. 410.2) by an entity other than the 
hospital unless the hospital has an arrangement (as defined in 
Sec. 409.3 of this chapter) with that entity to furnish that particular 
service to its patients. As used in this paragraph, the term 
``hospital'' includes a CAH.
    (b) Exception. The limitations stated in paragraph (a) of this 
section do not apply to the following services:
    (1) Physician services that meet the requirements of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (2) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (3) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (4) Certified nurse mid-wife services, as defined in section 
1861(gg) of the Act.
    (5) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (6) Services of an anesthetist, as defined in Sec. 410.69.
    (7) Services furnished to SNF residents as defined in Sec. 411.15(p) 
of this chapter.

[65 FR 18536, Apr. 7, 2000]

[[Page 263]]



Sec. 410.43  Partial hospitalization services: Conditions and exclusions.

    (a) Partial hospitalization services are services that--
    (1) Are reasonable and necessary for the diagnosis or active 
treatment of the individual's condition;
    (2) Are reasonably expected to improve or maintain the individual's 
condition and functional level and to prevent relapse or 
hospitalization; and
    (3) Include any of the following:
    (i) Individual and group therapy with physicians or psychologists or 
other mental health professionals to the extent authorized under State 
law.
    (ii) Occupational therapy requiring the skills of a qualified 
occupational therapist.
    (iii) Services of social workers, trained psychiatric nurses, and 
other staff trained to work with psychiatric patients.
    (iv) Drugs and biologicals furnished for therapeutic purposes, 
subject to the limitations specified in Sec. 410.29.
    (v) Individualized activity therapies that are not primarily 
recreational or diversionary.
    (vi) Family counseling, the primary purpose of which is treatment of 
the individual's condition.
    (vii) Patient training and education, to the extent the training and 
educational activities are closely and clearly related to the 
individual's care and treatment.
    (viii) Diagnostic services.
    (b) The following services are separately covered and not paid as 
partial hospitalization services:
    (1) Physician services that meet the requirements of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (2) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (3) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (4) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (5) Services furnished to SNF residents as defined in Sec. 411.15(p) 
of this chapter.

[59 FR 6577, Feb. 11, 1994, as amended at 65 FR 18536, Apr. 7, 2000]



Sec. 410.45  Rural health clinic services: Scope and conditions.

    (a) Medicare Part B pays for the following rural health clinic 
services, if they are furnished in accordance with the requirements and 
conditions specified in part 405, subpart X, and part 491 of this 
chapter:
    (1) Physicians' services.
    (2) Services and supplies furnished as an incident to physicians' 
professional services.
    (3) Nurse practitioner and physician assistant services.
    (4) Services and supplies furnished as an incident to nurse 
practitioners' or physician assistants' services.
    (5) Visiting nurse services.
    (b) Medicare pays for rural health clinic services when they are 
furnished at the clinic, at a hospital or other medical facility, or at 
the beneficiary's place of residence.



Sec. 410.46   Physician and other practitioner services furnished in or at the direction of an IHS or Indian tribal hospital or clinic: Scope and conditions.

    (a) Medicare Part B pays, in accordance with the physician fee 
schedule, for services furnished in or at the direction of a hospital or 
outpatient clinic (provider-based or free-standing) that is operated by 
the Indian Health Service (IHS) or by an Indian tribe or tribal 
organization (as those terms are defined in section 4 of the Indian 
Health Care Improvement Act). These services are subject to the same 
situations, terms, and conditions that would apply if the services were 
furnished in or at the direction of a hospital or clinic that is not 
operated by IHS or by an Indian tribe or tribal organization. Payments 
include health professional shortage areas incentive payments when the 
requirements for these incentive payments in Sec. 414.42 of this chapter 
are met.
    (b) Payment is not made under this section to the extent that 
Medicare otherwise pays for the same services under other provisions.
    (c) Payment is made under these provisions for the following 
services:
    (1) Services for which payment is made under the physician fee 
schedule

[[Page 264]]

in accordance with part 414 of this chapter.
    (2) Services furnished by non-physician practitioners for which 
payment under Part B is made under the physician fee schedule.
    (3) Services furnished by a physical therapist or occupational 
therapist, for which payment under Part B is made under the physician 
fee schedule.
    (d) Payments under these provisions will be paid to the IHS or 
tribal hospital or clinic.

[66 FR 55329, Nov. 1, 2001]



Sec. 410.50  Institutional dialysis services and supplies: Scope and conditions.

    Medicare Part B pays for the following institutional dialysis 
services and supplies if they are furnished in approved ESRD facilities:
    (a) All services, items, supplies, and equipment necessary to 
perform dialysis and drugs medically necessary in the treatment of the 
patient for ESRD.
    (b) Routine dialysis monitoring tests (i.e., hematocrit and clotting 
time) used by the facility to monitor the patients' fluids incident to 
each dialysis treatment, when performed by qualified staff of the 
facility under the direction of a physician, as provided in 
Sec. 405.2163(b) of this chapter, even if the facility does not meet the 
conditions for coverage of services of independent laboratories in 
subpart M of part 405 of this chapter.
    (c) Routine diagnostic tests.
    (d) Epoetin (EPO) and its administration.

[51 FR 41339, Nov. 14, 1986, as amended at 56 FR 43709, Sept. 4, 1991; 
59 FR 1285, Jan. 10, 1994]



Sec. 410.52  Home dialysis services, supplies, and equipment: Scope and conditions.

    (a) Medicare Part B pays for the following services, supplies, and 
equipment furnished to an ESRD patient in his or her home:
    (1) Purchase or rental, installation, and maintenance of all 
dialysis equipment necessary for home dialysis, and reconditioning of 
this equipment. Dialysis equipment includes, but is not limited to, 
artificial kidney and automated peritoneal dialysis machines, and 
support equipment such as blood pumps, bubble detectors, and other alarm 
systems.
    (2) Items and supplies required for dialysis, including (but not 
limited to) dialyzers, syringes and needles, forceps, scissors, scales, 
sphygmomanometer with cuff and stethoscope, alcohol wipes, sterile 
drapes, and rubber gloves.
    (3) Home dialysis support services furnished by an approved ESRD 
facility, including periodic monitoring of the patient's home 
adaptation, emergency visits by qualified provider or facility 
personnel, any of the tests specified in paragraphs (b) through (d) of 
Sec. 410.50, personnel costs associated with the installation and 
maintenance of dialysis equipment, testing and appropriate treatment of 
water, and ordering of supplies on an ongoing basis.
    (4) On or after July 1, 1991, epoetin (EPO) for use at home by a 
home dialysis patient and, on or after January 1, 1994, by a dialysis 
patient, if it has been determined, in accordance with Sec. 405.2163 of 
this chapter, that the patient is competent to use the drug safely and 
effectively.
    (b) Home dialysis support services specified in paragraph (a)(3) of 
this section must be furnished in accordance with a written treatment 
plan that is prepared and reviewed by a team consisting of the 
individual's physician and other qualified professionals. (Section 
405.2137 of this chapter contains specific details.)

[51 FR 41339, Nov. 14, 1986, as amended at 56 FR 43709, Sept. 4, 1991; 
59 FR 26959, May 25, 1994]



Sec. 410.55  Services related to kidney donations: Conditions.

    Medicare Part B pays for medical and other health services covered 
under this subpart that are furnished in connection with a kidney 
donation--
    (a) If the kidney is intended for an individual who has end-stage 
renal disease and is entitled to Medicare benefits; and
    (b) Regardless of whether the donor is entitled to Medicare.



Sec. 410.56  Screening pelvic examinations.

    (a) Conditions for screening pelvic examinations. Medicare Part B 
pays for a

[[Page 265]]

screening pelvic examination (including a clinical breast examination) 
if it is performed by a doctor of medicine or osteopathy (as defined in 
section 1861(r)(1) of the Act), or by a certified nurse midwife (as 
defined in section 1861(gg) of the Act), or a physician assistant, nurse 
practitioner, or clinic nurse specialist (as defined in section 1861(aa) 
of the Act) who is authorized under State law to perform the 
examination.
    (b) Limits on coverage of screening pelvic examinations. The 
following limitations apply to coverage of screening pelvic examination 
services:
    (1) General rule. Except as specified in paragraphs (b)(2) and 
(b)(3) of this section, payment may be made for a pelvic examination 
performed on an asymptomatic woman only if the individual has not had a 
pelvic examination paid for by Medicare during the preceding 23 months 
following the month in which her last Medicare-covered screening pelvic 
examination was performed.
    (2) More frequent screening based on high-risk factors. Subject to 
the limitation as specified in paragraph (b)(4) of this section, payment 
may be made for a screening pelvic examination performed more frequently 
than once every 24 months if the test is performed by a physician or 
other practitioner specified in paragraph (a) of this section, and there 
is evidence that the woman is at high risk (on the basis of her medical 
history or other findings) of developing cervical cancer or vaginal 
cancer, as determined in accordance with the following risk factors:
    (i) High risk factors for cervical cancer:
    (A) Early onset of sexual activity (under 16 years of age).
    (B) Multiple sexual partners (five or more in a lifetime).
    (C) History of a sexually transmitted disease (including HIV 
infection).
    (D) Absence of three negative or any Pap smears within the previous 
7 years.
    (ii) High risk factor for vaginal cancer: DES (diethylstilbestrol)-
exposed daughters of women who took DES during pregnancy.
    (3) More frequent screening for women of childbearing age. Subject 
to the limitation as specified in paragraph (b)(4) of this section, 
payment may be made for a screening pelvic examination performed more 
frequently than once every 24 months if the test is performed by a 
physician or other practitioner as specified in paragraph (a) of this 
section for a woman of childbearing age who has had an examination that 
indicated the presence of cervical or vaginal cancer or other 
abnormality during any of the preceding 3 years. The term ``woman of 
childbearing age'' means a woman who is premenopausal, and has been 
determined by a physician, or a qualified practitioner, as specified in 
paragraph (a) of this section, to be of childbearing age, based on her 
medical history or other findings.
    (4) Limitation applicable to women at high risk and those of 
childbearing age. Payment is not made for a screening pelvic examination 
for women considered to be at high risk (under any of the criteria 
described in paragraph (b)(2) of this section), or who qualify for 
coverage under the childbearing provision (under the criteria described 
in paragraph (b)(3) of this section) more frequently than once every 11 
months after the month that the last screening pelvic examination 
covered by Medicare was performed.

[62 FR 59101, Oct. 31, 1997; 63 FR 4596, Jan. 30, 1998, as amended at 66 
FR 55329, Nov. 1, 2001]



Sec. 410.57  Pneumococcal vaccine and flu vaccine.

    (a) Medicare Part B pays for pneumococcal vaccine and its 
administration when reasonable and necessary for the prevention of 
disease, if the vaccine is ordered by a doctor of medicine or 
osteopathy.
    (b) Medicare Part B pays for the influenza virus vaccine and its 
administration.

[63 FR 35066, June 26, 1998]



Sec. 410.58  Additional services to HMO and CMP enrollees.

    Services not usually covered under Medicare Part B may be covered as 
medical and other health services if they are furnished to an enrollee 
of an HMO or a CMP and the following conditions are met:
    (a) The services are--

[[Page 266]]

    (1) Furnished by a physician assistant or nurse practitioner as 
defined in Sec. 491.2 of this chapter, or are incident to services 
furnished by such a practitioner; or
    (2) Furnished by a clinical psychologist as defined in Sec. 417.416 
of this chapter to an enrollee of an HMO or CMP that participates in 
Medicare under a risk-sharing contract, or are incident to those 
services.
    (b) The services are services that would be covered under Medicare 
Part B if they were furnished by a physician or as incident to a 
physician's professional services.



Sec. 410.59  Outpatient occupational therapy services: Conditions.

    (a) Basic rule. Medicare Part B pays for outpatient occupational 
therapy services if they meet the following conditions:
    (1) They are furnished to a beneficiary while he or she is under the 
care of a physician who is a doctor of medicine, osteopathy, or 
podiatric medicine.
    (2) They are furnished under a written plan of treatment that meets 
the requirements of Sec. 410.61.
    (3) They are furnished--
    (i) By a provider as defined in Sec. 489.2 of this chapter, or by 
others under arrangements with, and under the supervision of, a 
provider; or
    (ii) By or under the personal supervision of an occupational 
therapist in private practice as described in paragraph (c) of this 
section.
    (b) Outpatient occupational therapy services furnished to certain 
inpatients of a hospital or a CAH or SNF. Medicare Part B pays for 
outpatient occupational therapy services furnished to an inpatient of a 
hospital, CAH, or SNF who requires them but who has exhausted or is 
otherwise ineligible for benefit days under Medicare Part A.
    (c) Special provisions for services furnished by occupational 
therapists in private practice.
    (1) Basic qualifications. In order to qualify under Medicare as a 
supplier of outpatient occupational therapy services, each individual 
occupational therapist in private practice must meet the following 
requirements:
    (i) Be legally authorized (if applicable, licensed, certified, or 
registered) to engage in the private practice of occupational therapy by 
the State in which he or she practices, and practice only within the 
scope of his or her license, certification, or registration.
    (ii) Engage in the private practice of occupational therapy on a 
regular basis as an individual, in one of the following practice types:
    (A) An unincorporated solo practice.
    (B) A partnership or unincorporated group practice.
    (C) An unincorporated solo practice, partnership, or group practice, 
a professional corporation or other incorporated occupational therapy 
practice. Private practice does not include any individual during the 
time he or she is working as an employee of a provider.
    (iii) Bill Medicare only for services furnished in his or her 
private practice office space, or in the patient's home. A therapist's 
private practice office space refers to the location(s) where the 
practice is operated, in the State(s) where the therapist (and practice, 
if applicable) is legally authorized to furnish services, during the 
hours that the therapist engages in practice at that location. When 
services are furnished in private practice office space, that space must 
be owned, leased, or rented by the practice and used for the exclusive 
purpose of operating the practice. A patient's home does not include any 
institution that is a hospital, an CAH, or a SNF.
    (iv) Treat individuals who are patients of the practice and for whom 
the practice collects fees for the services furnished.
    (2) Supervision of occupational therapy services. Occupational 
therapy services are performed by, or under the personal supervision of, 
the occupational therapist in private practice. All services not 
performed personally by the therapist must be performed by employees of 
the practice, personally supervised by the therapist, and included in 
the fee for the therapist's services.
    (d) Excluded services. No service is included as an outpatient 
occupational therapy service if it would not be included as an inpatient 
hospital service if furnished to a hospital or CAH inpatient.

[[Page 267]]

    (e) Annual limitation on incurred expenses. (1) Amount of 
limitation. (i) In 1999, 2000, and 2001, no more than $1,500 of 
allowable charges incurred in a calendar year for outpatient 
occupational therapy services are recognized incurred expenses.
    (ii) In 2002 and thereafter, the limitation is determined by 
increasing the limitation in effect in the previous calendar year by the 
increase in the Medicare Economic Index for the current year.
    (2) For purposes of applying the limitation, outpatient occupational 
therapy includes:
    (i) Except as provided in paragraph (e)(3) of this section, 
outpatient occupational therapy services furnished under this section;
    (ii) Outpatient occupational therapy services furnished by a 
comprehensive outpatient rehabilitation facility;
    (iii) Outpatient occupational therapy services furnished by a 
physician or incident to a physician's service;
    (iv) Outpatient occupational therapy services furnished by a nurse 
practitioner, clinical nurse specialist, or physician assistant or 
incident to their services.
    (3) For purposes of applying the limitation, outpatient occupational 
therapy services excludes services furnished by a hospital directly or 
under arrangements.

[63 FR 58906, Nov. 2, 1998]



Sec. 410.60  Outpatient physical therapy services: Conditions.

    (a) Basic rule. Medicare Part B pays for outpatient physical therapy 
services if they meet the following conditions:
    (1) They are furnished to a beneficiary while he or she is under the 
care of a physician who is a doctor of medicine, osteopathy, or 
podiatric medicine.
    (2) They are furnished under a written plan of treatment that meets 
the requirements of Sec. 410.61.
    (3) They are furnished--
    (i) By a provider as defined in Sec. 489.2 of this chapter, or by 
others under arrangements with, and under the supervision of, a 
provider; or
    (ii) By or under the personal supervision of a physical therapist in 
private practice as described in paragraph (c) of this section.
    (b) Outpatient physical therapy services furnished to certain 
inpatients of a hospital or a CAH or SNF. Medicare Part B pays for 
outpatient physical therapy services furnished to an inpatient of a 
hospital, CAH, or SNF who requires them but who has exhausted or is 
otherwise +ineligible for benefit days under Medicare Part A.
    (c) Special provisions for services furnished by physical therapists 
in private practice. (1) Basic qualifications. In order to qualify under 
Medicare as a supplier of outpatient physical therapy services, each 
individual physical therapist in private practice must meet the 
following requirements:
    (i) Be legally authorized (if applicable, licensed, certified, or 
registered) to engage in the private practice of physical therapy by the 
State in which he or she practices, and practice only within the scope 
of his or her license, certification, or registration.
    (ii) Engage in the private practice of physical therapy on a regular 
basis as an individual, in one of the following practice types:
    (A) An unincorporated solo practice.
    (B) An unincorporated partnership or unincorporated group practice.
    (C) An unincorporated solo practice, partnership, or group practice, 
or a professional corporation or other incorporated physical therapy 
practice. Private practice does not include any individual during the 
time he or she is working as an employee of a provider.
    (iii) Bill Medicare only for services furnished in his or her 
private practice office space, or in the patient's home. A therapist's 
private practice office space refers to the location(s) where the 
practice is operated, in the State(s) where the therapist (and practice, 
if applicable) is legally authorized to furnish services, during the 
hours that the therapist engages in practice at that location. When 
services are furnished in private practice office space, that space must 
be owned, leased, or rented by the practice and used for the exclusive 
purpose of operating the practice. A patient's home does not include any 
institution that is a hospital, a CAH, or a SNF.

[[Page 268]]

    (iv) Treat individuals who are patients of the practice and for whom 
the practice collects fees for the services furnished.
    (2) Supervision of physical therapy services. Physical therapy 
services are performed by, or under the personal supervision of, the 
physical therapist in private practice. All services not performed 
personally by the therapist must be performed by employees of the 
practice, personally supervised by the therapist, and included in the 
fee for the therapist's services.
    (d) Excluded services. No service is included as an outpatient 
physical therapy service if it would not be included as an inpatient 
hospital service if furnished to a hospital or CAH inpatient.
    (e) Annual limitation on incurred expenses. (1) Amount of 
limitation. (i) In 1999, 2000, and 2001, no more than $1,500 of 
allowable charges incurred in a calendar year for outpatient physical 
therapy services are recognized incurred expenses.
    (ii) In 2002 and thereafter, the limitation shall be determined by 
increasing the limitation in effect in the previous calendar year by the 
increase in the Medicare Economic Index for the current year.
    (2) For purposes of applying the limitation, outpatient physical 
therapy includes:
    (i) Except as provided in paragraph (e)(3) of this section, 
outpatient physical therapy services furnished under this section;
    (ii) Except as provided in paragraph (e)(3) of this section 
outpatient speech-language pathology services furnished under 
Sec. 410.62;
    (iii) Outpatient physical therapy and speech-language pathology 
services furnished by a comprehensive outpatient rehabilitation 
facility;
    (iv) Outpatient physical therapy and speech-language pathology 
services furnished by a physician or incident to a physician's service;
    (v) Outpatient physical therapy and speech-language pathology 
services furnished by a nurse practitioner, clinical nurse specialist, 
or physician assistant or incident to their services.
    (3) For purposes of applying the limitation, outpatient physical 
therapy excludes services furnished by a hospital or CAH directly or 
under arrangements.

[63 FR 58906, Nov. 2, 1998]



Sec. 410.61  Plan of treatment requirements for outpatient rehabilitation services.

    (a) Basic requirement. Outpatient rehabilitation services (including 
services furnished by a qualified physical or occupational therapist in 
private practice), must be furnished under a written plan of treatment 
that meets the requirements of paragraphs (b) through (e) of this 
section.
    (b) Establishment of the plan. The plan is established before 
treatment is begun by one of the following:
    (1) A physician.
    (2) A physical therapist who furnishes the physical therapy 
services.
    (3) A speech-language pathologist who furnishes the speech-language 
pathology services.
    (4) An occupational therapist who furnishes the occupational therapy 
services.
    (5) A nurse practitioner, a clinical nurse specialist, or a 
physician assistant.
    (c) Content of the plan. The plan prescribes the type, amount, 
frequency, and duration of the physical therapy, occupational therapy, 
or speech-language pathology services to be furnished to the individual, 
and indicates the diagnosis and anticipated goals.
    (d) Changes in the plan. Any changes in the plan--
    (1) Are made in writing and signed by one of the following:
    (i) The physician.
    (ii) The physical therapist who furnishes the physical therapy 
services.
    (iii) The occupational therapist who furnishes the physical therapy 
services.
    (iv) The speech-language pathologist who furnishes the speech-
language pathology services.
    (v) A registered professional nurse or a staff physician, in 
accordance with oral orders from the physician, physical therapist, 
occupational therapist, or speech-language pathologist who furnishes the 
services.
    (vi) A nurse practitioner, a clinical nurse specialist, or a 
physician assistant.

[[Page 269]]

    (2) The changes are incorporated in the plan immediately.
    (e) Review of the plan. (1) The physician reviews the plan as often 
as the individual's condition requires, but at least every 30 days.
    (2) Each review is dated and signed by the physician who performs 
it.

[53 FR 6638, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988, as amended at 54 
FR 38680, Sept. 20, 1989; 54 FR 46614, Nov. 6, 1989. Redesignated at 56 
FR 8854, Mar. 1, 1991; 56 FR 23022, May 20, 1991; 63 FR 58907, Nov. 2, 
1998]



Sec. 410.62  Outpatient speech-language pathology services: Conditions and exclusions.

    (a) Basic rule. Medicare Part B pays for outpatient speech pathology 
services if they meet the following conditions:
    (1) They are furnished to a beneficiary while he or she is under the 
care of a physician who is a doctor of medicine or osteopathy.
    (2) They are furnished under a written plan of treatment that--
    (i) Is established by a physician or, effective January 1, 1982, by 
either a physician or the speech pathologist who will provide the 
services to the particular individual;
    (ii) Is periodically reviewed by a physician; and
    (iii) Meets the requirements of Sec. 410.63.
    (3) They are furnished by a provider as defined in Sec. 489.2 of 
this chapter or by others under arrangements with, or under the 
supervision of, a provider.
    (b) Outpatient speech pathology services to certain inpatients of a 
hospital, CAH, or SNF. Medicare Part B pays for outpatient speech 
pathology services furnished to an inpatient of a hospital, CAH, or SNF 
who requires them but has exhausted or is otherwise ineligible for 
benefit days under Medicare Part A.
    (c) Excluded services. No service is included as an outpatient 
speech pathology service if it would not be included as an inpatient 
hospital service if furnished to a hospital or CAH inpatient.
    (d) Limitation. After 1998, outpatient speech-language pathology 
services are subject to the limitation in Sec. 410.60(e).

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988; 56 
FR 8852, Mar. 1, 1991; 56 FR 23022, May 20. 1991; 58 FR 30668, May 26, 
1993; 63 FR 58907, Nov. 2, 1998]



Sec. 410.63  Hepatitis B vaccine and blood clotting factors: Conditions.

    Notwithstanding the exclusion from coverage of vaccines (see 
Sec. 405.310 of this chapter) and self-administered drugs (see 
Sec. 410.29), the following services are included as medical and other 
health services covered under Sec. 410.10, subject to the specified 
conditions:
    (a) Hepatitis B vaccine: Conditions. Effective September 1, 1984, 
hepatitis B vaccinations that are reasonable and necessary for the 
prevention of illness for those individuals who are at high or 
intermediate risk of contracting hepatitis B as listed below:
    (1) High risk groups. (i) End-Stage Renal Disease (ESRD) patients;
    (ii) Hemophiliacs who receive Factor VIII or IX concentrates;
    (iii) Clients of institutions for the mentally retarded;
    (iv) Persons who live in the same household as a hepatitis B 
carrier;
    (v) Homosexual men;
    (vi) Illicit injectable drug abusers; and
    (vii) Pacific Islanders (that is, those Medicare beneficiaries who 
reside on Pacific islands under U.S. jurisdiction, other than residents 
of Hawaii).
    (2) Intermediate risk groups. (i) Staff in institutions for the 
mentally retarded and classroom employees who work with mentally 
retarded persons;
    (ii) Workers in health care professions who have frequent contact 
with blood or blood-derived body fluids during routine work (including 
workers who work outside of a hospital and have frequent contact with 
blood or other infectious secretions); and
    (iii) Heterosexually active persons with multiple sexual partners 
(that is, those Medicare beneficiaries who have had at least two 
documented episodes of sexually transmitted diseases within the 
preceding 5 years).

[[Page 270]]

    (3) Exception. Individuals described in paragraphs (a) (1) and (2) 
of this section are not considered at high or intermediate risk of 
contracting hepatitis B if they have undergone a prevaccination 
screening and have been found to be currently positive for antibodies to 
hepatitis B.
    (b) Blood clotting factors. Effective July 18, 1984, blood clotting 
factors to control bleeding for hemophilia patients competent to use 
these factors without medical or other supervision, and items related to 
the administration of those factors. The amount of clotting factors 
covered under this provision is determined by the carrier based on the 
historical utilization pattern or profile developed by the carrier for 
each patient, and based on consideration of the need for a reasonable 
reserve supply to be kept in the home in the event of emergency or 
unforeseen circumstance.

[55 FR 22790, Jun. 4, 1990; 55 FR 31186, Aug. 1, 1990]



Sec. 410.66  Emergency outpatient services furnished by a nonparticipating hospital and services furnished in Mexico or Canada.

    Conditions for payment of emergency outpatient services furnished by 
a nonparticipating U.S. hospital and for services furnished in Mexico or 
Canada are set forth in subparts G and H of part 424 of this chapter.

[53 FR 6634, Mar. 1, 1988; 53 FR 12945, Apr. 20, 1988]



Sec. 410.68  Antigens: Scope and conditions.

    Medicare Part B pays for--
    (a) Antigens that are furnished as services incident to a 
physician's professional services; or
    (b) A supply of antigen sufficient for not more than 12 months that 
is--
    (1) Prepared for a patient by a doctor of medicine or osteopathy who 
has examined the patient and developed a plan of treatment including 
dosage levels; and
    (2) Administered--
    (i) In accord with the plan of treatment developed by the doctor of 
medicine or osteopathy who prepared the antigen; and
    (ii) By a doctor of medicine or osteopathy or by a properly 
instructed person under the supervision of a doctor of medicine or 
osteopathy.

[54 FR 4026, Jan. 27, 1989, as amended at 65 FR 65440, Nov. 1, 2000]



Sec. 410.69  Services of a certified registered nurse anesthetist or an anesthesiologist's assistant: Basic rule and definitions.

    (a) Basic rule. Medicare Part B pays for anesthesia services and 
related care furnished by a certified registered nurse anesthetist or an 
anesthesiologist's assistant who is legally authorized to perform the 
services by the State in which the services are furnished.
    (b) Definitions. For purposes of this part--
    Anesthesiologist's assistant means a person who--
    (1) Works under the direction of an anesthesiologist;
    (2) Is in compliance with all applicable requirements of State law, 
including any licensure requirements the State imposes on nonphysician 
anesthetists; and
    (3) Is a graduate of a medical school-based anesthesiologist's 
assistant educational program that--
    (A) Is accredited by the Committee on Allied Health Education and 
Accreditation; and
    (B) Includes approximately two years of specialized basic science 
and clinical education in anesthesia at a level that builds on a 
premedical undergraduate science background.
    Anesthetist includes both an anesthesiologist's assistant and a 
certified registered nurse anesthetist.
    Certified registered nurse anesthetist means a registered nurse who:
    (1) Is licensed as a registered professional nurse by the State in 
which the nurse practices;
    (2) Meets any licensure requirements the State imposes with respect 
to non-physician anesthetists;
    (3) Has graduated from a nurse anesthesia educational program that 
meets the standards of the Council on Accreditation of Nurse Anesthesia 
Programs, or such other accreditation organization as may be designated 
by the Secretary; and

[[Page 271]]

    (4) Meets the following criteria:
    (i) Has passed a certification examination of the Council on 
Certification of Nurse Anesthetists, the Council on Recertification of 
Nurse Anesthetists, or any other certification organization that may be 
designated by the Secretary; or
    (ii) Is a graduate of a program described in paragraph (3) of this 
definition and within 24 months after that graduation meets the 
requirements of paragraph (4)(i) of this definition.

[57 FR 33896, July 31, 1992]



Sec. 410.71  Clinical psychologist services and services and supplies incident to clinical psychologist services.

    (a) Included services. (1) Medicare Part B covers services furnished 
by a clinical psychologist, who meets the requirements specified in 
paragraph (d) of this section, that are within the scope of his or her 
State license, if the services would be covered if furnished by a 
physician or as an incident to a physician's services.
    (2) Medicare Part B covers services and supplies furnished as an 
incident to the services of a clinical psychologist if the following 
requirements are met:
    (i) The services and supplies would be covered if furnished by a 
physician or as an incident to a physician's services.
    (ii) The services or supplies are of the type that are commonly 
furnished in a physician's or clinical psychologist's office and are 
either furnished without charge or are included in the physician's or 
clinical psychologist's bill.
    (iii) The services are an integral, although incidental, part of the 
professional services performed by the clinical psychologist.
    (iv) The services are performed under the direct supervision of the 
clinical psychologist. For example, when services are performed in the 
clinical psychologist's office, the clinical psychologist must be 
present in the office suite and immediately available to provide 
assistance and direction throughout the time the service is being 
performed.
    (v) The individual performing the service must be an employee of 
either the clinical psychologist or the legal entity that employs the 
supervising clinical psychologist, under the common law control test of 
the Act as more fully set forth in 20 CFR 404.1007.
    (b) Application of mental health treatment limitation. The treatment 
services of a clinical psychologist and services and supplies furnished 
as an incident to those services are subject to the limitation on 
payment for outpatient mental health treatment services set forth in 
Sec. 410.155.
    (c) Payment for consultations. A clinical psychologist or an 
attending or primary care physician may not bill Medicare or the 
beneficiary for the consultation that is required under paragraph (e) of 
this section.
    (d) Qualifications. For purposes of this subpart, a clinical 
psychologist is an individual who--
    (1) Holds a doctoral degree in psychology; and
    (2) Is licensed or certified, on the basis of the doctoral degree in 
psychology, by the State in which he or she practices, at the 
independent practice level of psychology to furnish diagnostic, 
assessment, preventive, and therapeutic services directly to 
individuals.
    (e) Agreement to consult. A clinical psychologist who bills Medicare 
Part B must agree to meet the requirements of paragraphs (e)(1) through 
(e)(3) of this section. The clinical psychologist's signature on a 
Medicare provider/supplier enrollment form indicates his or her 
agreement.
    (1) Unless the beneficiary's primary care or attending physician has 
referred the beneficiary to the clinical psychologist, to inform the 
beneficiary that it is desirable for the clinical psychologist to 
consult with the beneficiary's attending or primary care physician (if 
the beneficiary has such a physician) to consider any conditions 
contributing to the beneficiary's symptoms.
    (2) If the beneficiary assents to the consultation, in accordance 
with accepted professional ethical norms and taking into consideration 
patient confidentiality--
    (i) To attempt, within a reasonable time after receiving the 
consent, to consult with the physician; and
    (ii) If attempts to consult directly with the physician are not 
successful,

[[Page 272]]

to notify the physician, within a reasonable time, that he or she is 
furnishing services to the beneficiary.
    (3) Unless the primary care or attending physician referred the 
beneficiary to the clinical psychologist, to document, in the 
beneficiary's medical record, the date the patient consented or declined 
consent to consultation, the date of consultation, or, if attempts to 
consult did not succeed, the date and manner of notification to the 
physician.

[63 FR 20128, Apr. 23, 1998]



Sec. 410.73  Clinical social worker services.

    (a) Definition: clinical social worker. For purposes of this part, a 
clinical social worker is defined as an individual who--
    (1) Possesses a master's or doctor's degree in social work;
    (2) After obtaining the degree, has performed at least 2 years of 
supervised clinical social work; and
    (3) Either is licensed or certified as a clinical social worker by 
the State in which the services are performed or, in the case of an 
individual in a State that does not provide for licensure or 
certification as a clinical social worker--
    (i) Is licensed or certified at the highest level of practice 
provided by the laws of the State in which the services are performed; 
and
    (ii) Has completed at least 2 years or 3,000 hours of post master's 
degree supervised clinical social work practice under the supervision of 
a master's degree level social worker in an appropriate setting such as 
a hospital, SNF, or clinic.
    (b) Covered clinical social worker services. Medicare Part B covers 
clinical social worker services.
    (1) Definition. ``Clinical social worker services'' means, except as 
specified in paragraph (b)(2) of this section, the services of a 
clinical social worker furnished for the diagnosis and treatment of 
mental illness that the clinical social worker is legally authorized to 
perform under State law (or the State regulatory mechanism provided by 
State law) of the State in which the services are performed. The 
services must be of a type that would be covered if they were furnished 
by a physician or as an incident to a physician's professional service 
and must meet the requirements of this section.
    (2) Exception. The following services are not clinical social worker 
services for purposes of billing Medicare Part B:
    (i) Services furnished by a clinical social worker to an inpatient 
of a Medicare-participating hospital.
    (ii) Services furnished by a clinical social worker to an inpatient 
of a Medicare-participating SNF.
    (iii) Services furnished by a clinical social worker to a patient in 
a Medicare-participating dialysis facility if the services are those 
required by the conditions for coverage for ESRD facilities under 
Sec. 405.2163 of this chapter.
    (c) Agreement to consult. A clinical social worker must comply with 
the consultation requirements set forth at Sec. 410.71(f) (reading 
``clinical psychologist'' as ``clinical social worker'').
    (d) Prohibited billing. (1) A clinical social worker may not bill 
Medicare for the services specified in paragraph (b)(2) of this section.
    (2) A clinical social worker or an attending or primary care 
physician may not bill Medicare or the beneficiary for the consultation 
that is required under paragraph (c) of this section.

[63 FR 20128, Apr. 23, 1998]



Sec. 410.74  Physician assistants' services.

    (a) Basic rule. Medicare Part B covers physician assistants' 
services only if the following conditions are met:
    (1) The services would be covered as physicians' services if 
furnished by a physician (a doctor of medicine or osteopathy, as set 
forth in section 1861(r)(1) of the Act).
    (2) The physician assistant--
    (i) Meets the qualifications set forth in paragraph (c) of this 
section;
    (ii) Is legally authorized to perform the services in the State in 
which they are performed;
    (iii) Performs services that are not otherwise precluded from 
coverage because of a statutory exclusion;
    (iv) Performs the services under the general supervision of a 
physician (The supervising physician need not be physically present when 
the physician assistant is performing the services unless required by 
State law; however,

[[Page 273]]

the supervising physician must be immediately available to the physician 
assistant for consultation.);
    (v) Furnishes services that are billed by the employer of a 
physician assistant; and
    (vi) Performs the services--
    (A) In all settings in either rural and urban areas; or
    (B) As an assistant at surgery.
    (b) Services and supplies furnished incident to a physician 
assistant's services. Medicare covers services and supplies (including 
drugs and biologicals that cannot be self-administered) that are 
furnished incident to the physician assistant's services described in 
paragraph (a) of this section. These services and supplies are covered 
only if they--
    (1) Would be covered if furnished by a physician or as incident to 
the professional services of a physician;
    (2) Are the type that are commonly furnished in a physician's office 
and are either furnished without charge or are included in the bill for 
the physician assistants' services;
    (3) Are, although incidental, an integral part of the professional 
service performed by the physician;
    (4) Are performed under the direct supervision of the physician 
assistant (that is, the physician assistant is physically present and 
immediately available); and
    (5) Are performed by the employee of a physician assistant or an 
entity that employs both the physician assistant and the person 
providing the services.
    (c) Qualifications. For Medicare Part B coverage of his or her 
services, a physician assistant must meet all of the following 
conditions:
    (1) Have graduated from a physician assistant educational program 
that is accredited by the Commission on Accreditation of Allied Health 
Education Programs; or
    (2) Have passed the national certification examination that is 
administered by the National Commission on Certification of Physician 
Assistants; and
    (3) Be licensed by the State to practice as a physician assistant.
    (d) Professional services. Physician assistants can be paid for 
professional services only if the services have been professionally 
performed by them and no facility or other provider charges for the 
service or is paid any amount for the furnishing of those professional 
services.
    (1) Supervision of other nonphysician staff by a physician assistant 
does not constitute personal performance of a professional service by 
the physician assistant.
    (2) The services are provided on an assignment-related basis, and 
the physician assistant may not charge a beneficiary for a service not 
payable under this provision. If a beneficiary has made payment for a 
service, the physician assistant must make the appropriate refund to the 
beneficiary.

[63 FR 58907, Nov. 2, 1998; 64 FR 25457, May 12, 1999]



Sec. 410.75  Nurse practitioners' services.

    (a) Definition. As used in this section, the term ``physician'' 
means a doctor of medicine or osteopathy, as set forth in section 
1861(r)(1) of the Act.
    (b) Qualifications. For Medicare Part B coverage of his or her 
services, a nurse practitioner must--(1)(i) Be a registered professional 
nurse who is authorized by the State in which the services are furnished 
to practice as a nurse practitioner in accordance with State law; and
    (ii) Be certified as a nurse practitioner by a recognized national 
certifying body that has established standards for nurse practitioners; 
or
    (2) Be a registered professional nurse who is authorized by the 
State in which the services are furnished to practice as a nurse 
practitioner in accordance with State law and have been granted a 
Medicare billing number as a nurse practitioner by December 31, 2000; or
    (3) Be a nurse practitioner who on or after January 1, 2001, applies 
for a Medicare billing number for the first time and meets the standards 
for nurse practitioners in paragraphs (b)(1)(i) and (b)(1)(ii) of this 
section; or
    (4) Be a nurse practitioner who on or after January 1, 2003, applies 
for a Medicare billing number for the first time and possesses a 
master's degree in nursing and meets the standards for nurse 
practitioners in paragraphs (b)(1)(i) and (b)(1)(ii) of this section.

[[Page 274]]

    (c) Services. Medicare Part B covers nurse practitioners' services 
in all settings in both rural and urban areas, only if the services 
would be covered if furnished by a physician and the nurse practitioner-
-
    (1) Is legally authorized to perform them in the State in which they 
are performed;
    (2) Is not performing services that are otherwise excluded from 
coverage because of one of the statutory exclusions; and
    (3) Performs them while working in collaboration with a physician.
    (i) Collaboration is a process in which a nurse practitioner works 
with one or more physicians to deliver health care services within the 
scope of the practitioner's expertise, with medical direction and 
appropriate supervision as provided for in jointly developed guidelines 
or other mechanisms as provided by the law of the State in which the 
services are performed.
    (ii) In the absence of State law governing collaboration, 
collaboration is a process in which a nurse practitioner has a 
relationship with one or more physicians to deliver health care 
services. Such collaboration is to be evidenced by nurse practitioners 
documenting the nurse practitioners' scope of practice and indicating 
the relationships that they have with physicians to deal with issues 
outside their scope of practice. Nurse practitioners must document this 
collaborative process with physicians.
    (iii) The collaborating physician does not need to be present with 
the nurse practitioner when the services are furnished or to make an 
independent evaluation of each patient who is seen by the nurse 
practitioner.
    (d) Services and supplies incident to a nurse practitioners' 
services. Medicare Part B covers services and supplies (including drugs 
and biologicals that cannot be self-administered) incident to a nurse 
practitioner's services that meet the requirements in paragraph (c) of 
this section. These services and supplies are covered only if they--
    (1) Would be covered if furnished by a physician or as incident to 
the professional services of a physician;
    (2) Are of the type that are commonly furnished in a physician's 
office and are either furnished without charge or are included in the 
bill for the nurse practitioner's services;
    (3) Although incidental, are an integral part of the professional 
service performed by the nurse practitioner; and
    (4) Are performed under the direct supervision of the nurse 
practitioner (that is, the nurse practitioner must be physically present 
and immediately available).
    (e) Professional services. Nurse practitioners can be paid for 
professional services only when the services have been personally 
performed by them and no facility or other provider charges, or is paid, 
any amount for the furnishing of the professional services.
    (1) Supervision of other nonphysician staff by a nurse practitioner 
does not constitute personal performance of a professional service by a 
nurse practitioner.
    (2) The services are provided on an assignment-related basis, and a 
nurse practitioner may not charge a beneficiary for a service not 
payable under this provision. If a beneficiary has made payment for a 
service, the nurse practitioner must make the appropriate refund to the 
beneficiary.

[63 FR 58908, Nov. 2, 1998; 64 FR 25457, May 12, 1999, as amended at 64 
FR 59440, Nov. 2, 1999]



Sec. 410.76  Clinical nurse specialists' services.

    (a) Definition. As used in this section, the term ``physician'' 
means a doctor of medicine or osteopathy, as set forth in section 
1861(r)(1) of the Act.
    (b) Qualifications. For Medicare Part B coverage of his or her 
services, a clinical nurse specialist must--
    (1) Be a registered nurse who is currently licensed to practice in 
the State where he or she practices and be authorized to perform the 
services of a clinical nurse specialist in accordance with State law;
    (2) Have a master's degree in a defined clinical area of nursing 
from an accredited educational institution; and
    (3) Be certified as a clinical nurse specialist by the American 
Nurses Credentialing Center.
    (c) Services. Medicare Part B covers clinical nurse specialists' 
services in all settings in both rural and urban

[[Page 275]]

areas only if the services would be covered if furnished by a physician 
and the clinical nurse specialist--
    (1) Is legally authorized to perform them in the State in which they 
are performed;
    (2) Is not performing services that are otherwise excluded from 
coverage by one of the statutory exclusions; and
    (3) Performs them while working in collaboration with a physician.
    (i) Collaboration is a process in which a clinical nurse specialist 
works with one or more physicians to deliver health care services within 
the scope of the practitioner's expertise, with medical direction and 
appropriate supervision as provided for in jointly developed guidelines 
or other mechanisms as provided by the law of the State in which the 
services are performed.
    (ii) In the absence of State law governing collaboration, 
collaboration is a process in which a clinical nurse specialist has a 
relationship with one or more physicians to deliver health care 
services. Such collaboration is to be evidenced by clinical nurse 
specialists documenting the clinical nurse specialists' scope of 
practice and indicating the relationships that they have with physicians 
to deal with issues outside their scope of practice. Clinical nurse 
specialists must document this collaborative process with physicians.
    (iii) The collaborating physician does not need to be present with 
the clinical nurse specialist when the services are furnished, or to 
make an independent evaluation of each patient who is seen by the 
clinical nurse specialist.
    (d) Services and supplies furnished incident to clinical nurse 
specialists' services. Medicare Part B covers services and supplies 
(including drugs and biologicals that cannot be self-administered) 
incident to a clinical nurse specialist's services that meet the 
requirements in paragraph (c) of this section. These services and 
supplies are covered only if they--
    (1) Would be covered if furnished by a physician or as incident to 
the professional services of a physician;
    (2) Are of the type that are commonly furnished in a physician's 
office and are either furnished without charge or are included in the 
bill for the clinical nurse specialist's services;
    (3) Although incidental, are an integral part of the professional 
service performed by the clinical nurse specialist; and
    (4) Are performed under the direct supervision of the clinical nurse 
specialist (that is, the clinical nurse specialist must be physically 
present and immediately available).
    (e) Professional services. Clinical nurse specialists can be paid 
for professional services only when the services have been personally 
performed by them and no facility or other provider charges, or is paid, 
any amount for the furnishing of the professional services.
    (1) Supervision of other nonphysician staff by clinical nurse 
specialists does not constitute personal performance of a professional 
service by clinical nurse specialists.
    (2) The services are provided on an assignment-related basis, and a 
clinical nurse specialist may not charge a beneficiary for a service not 
payable under this provision. If a beneficiary has made payment for a 
service, the clinical nurse specialist must make the appropriate refund 
to the beneficiary.

[63 FR 58908, Nov. 2, 1998]



Sec. 410.77  Certified nurse-midwives' services: Qualifications and conditions.

    (a) Qualifications. For Medicare coverage of his or her services, a 
certified nurse-midwife must:
    (1) Be a registered nurse who is legally authorized to practice as a 
nurse-midwife in the State where services are performed;
    (2) Have successfully completed a program of study and clinical 
experience for nurse-midwives that is accredited by an accrediting body 
approved by the U.S. Department of Education; and
    (3) Be certified as a nurse-midwife by the American College of 
Nurse-Midwives or the American College of Nurse-Midwives Certification 
Council.
    (b) Services. A certified nurse-midwife's services are services 
furnished by a certified nurse-midwife and services and supplies 
furnished as an incident to the certified nurse-midwife's services that-
-
    (1) Are within the scope of practice authorized by the law of the 
State in

[[Page 276]]

which they are furnished and would otherwise be covered if furnished by 
a physician or as an incident to a physician's service; and
    (2) Unless required by State law, are provided without regard to 
whether the certified nurse-midwife is under the supervision of, or 
associated with, a physician or other health care provider.
    (c) Incident to services: Basic rule. Medicare covers services and 
supplies furnished incident to the services of a certified nurse-
midwife, including drugs and biologicals that cannot be self-
administered, if the services and supplies meet the following 
conditions:
    (1) They would be covered if furnished by a physician or as incident 
to the professional services of a physician.
    (2) They are of the type that are commonly furnished in a 
physician's office and are either furnished without charge or are 
included in the bill for the certified nurse-midwife's services.
    (3) Although incidental, they are an integral part of the 
professional service performed by the certified nurse-midwife.
    (4) They are furnished under the direct supervision of a certified 
nurse-midwife (that is, the midwife is physically present and 
immediately available).
    (d) Professional services. A nurse-midwife can be paid for 
professional services only when the services have been performed 
personally by the nurse-midwife.
    (1) Supervision of other nonphysician staff by a nurse-midwife does 
not constitute personal performance of a professional service by the 
nurse-midwife.
    (2) The service is provided on an assignment-related basis, and a 
nurse-midwife may not charge a beneficiary for a service not payable 
under this provision. If the beneficiary has made payment for a service, 
the nurse-midwife must make the appropriate refund to the beneficiary.
    (3) A nurse-midwife may provide services that he or she is legally 
authorized to perform under State law as a nurse-midwife, if the 
services would otherwise be covered by the Medicare program when 
furnished by a physician or incident to a physicians' professional 
services.

[63 FR 58909, Nov. 2, 1998]



Sec. 410.78  Office and other outpatient visits, consultation, individual psychotherapy and pharmacologic management via an interactive telecommunications 
          system.

    (a) Definitions. For the purposes of this section the following 
definitions apply:
    (1) Asynchronous store and forward technologies means the 
transmission of a patient's medical information from an originating site 
to the physician or practitioner at the distant site. The physician or 
practitioner at the distant site can review the medical case without the 
patient being present. An asynchronous telecommunications system in 
single media format does not include telephone calls, images transmitted 
via facsimile machines and text messages without visualization of the 
patient (electronic mail). Photographs visualized by a 
telecommunications system must be specific to the patient's medical 
condition and adequate for furnishing or confirming a diagnosis and or 
treatment plan. Dermatological photographs, for example, a photograph of 
a skin lesion, may be considered to meet the requirement of a single 
media format under this provision.
    (2) Distant site means the site at which the physician or 
practitioner delivering the service is located at the time the service 
is provided via a telecommunications system.
    (3) Interactive telecommunications system means multimedia 
communications equipment that includes, at a minimum, audio and video 
equipment permitting two-way, real-time interactive communication 
between the patient and distant site physician or practitioner. 
Telephones, facsimile machines, and electronic mail systems do not meet 
the definition of an interactive telecommunications system.
    (4) Originating site means, for purposes of a consultation, office 
or other outpatient visit, individual psychotherapy, or pharmacologic 
management via an interactive telecommunications system, the location of 
an eligible Medicare beneficiary at the time the service being furnished 
via a telecommunications system occurs. For asynchronous store and 
forward telecommunications technologies, the only

[[Page 277]]

originating sites are Federal telemedicine demonstration programs 
conducted in Alaska or Hawaii.
    (b) General rule. Medicare Part B pays for office and other 
outpatient visits, professional consultation, individual psychotherapy, 
and pharmacologic management furnished by means of an interactive 
telecommunications system if the following conditions are met:
    (1) The physician or practitioner at the distant site must be 
licensed to provide the service under State law. When the physician or 
practitioner at the distant site is licensed under State law to provide 
a covered telehealth service (that is, professional consultations, 
office and other outpatient visits, individual psychotherapy, and 
pharmacologic management), he or she may bill for, and receive payment 
for, this service when delivered via a telecommunications system.
    (2) The practitioner at the distant site is one of the following:
    (i) A physician as described in Sec. 410.20.
    (ii) A physician assistant as described Sec. 410.74.
    (iii) A nurse practitioner as described in Sec. 410.75.
    (iv) A clinical nurse specialist as described in Sec. 410.76.
    (v) A nurse-midwife as described in Sec. 410.77.
    (vi) A clinical psychologist as described in Sec. 410.71.
    (vii) A clinical social worker as described in Sec. 410.73.
    (3) The services are furnished to a beneficiary at an originating 
site, which is one of the following:
    (i) The office of a physician or practitioner.
    (ii) A critical access hospital (as described in section 1861(mm)(1) 
of the Act).
    (iii) A rural health clinic (as described in section 1861(aa)(2) of 
the Act).
    (iv) A Federally qualified health center (as defined in section 
1861(aa)(4) of the Act).
    (v) A hospital (as defined in section 1861(e) of the Act).
    (4) Originating sites must be located in either a rural health 
professional shortage area as defined under section 332(a)(1)(A) of the 
Public Health Service Act (42 U.S.C. 254e(a)(1)(A)) or in a county that 
is not included in a Metropolitan Statistical Area as defined in section 
1886(d)(2)(D) of the Act. Entities participating in a Federal 
telemedicine demonstration project that have been approved by, or 
receive funding from, the Secretary as of December 31, 2000 qualify as 
an eligible originating site regardless of geographic location.
    (5) The medical examination of the patient is under the control of 
the physician or practitioner at the distant site.
    (c) Telepresenter not required. A telepresenter is not required as a 
condition of payment unless a telepresenter is medically necessary as 
determined by the physician or practitioner at the distant site.
    (d) Exception to the interactive telecommunications system 
requirement. For Federal telemedicine demonstration programs conducted 
in Alaska or Hawaii only, Medicare payment is permitted for telehealth 
when asynchronous store and forward technologies, in single or 
multimedia formats, are used as a substitute for an interactive 
telecommunications system.
    (e) Limitation. A clinical psychologist and a clinical social worker 
may bill and receive payment for individual psychotherapy via a 
telecommunications system, but may not seek payment for medical 
evaluation and management services.

[66 FR 55330, Nov. 1, 2001]



                Subpart C--Home Health Services Under SMI



Sec. 410.80  Applicable rules.

    Home health services furnished under Medicare Part B are subject to 
the rules set forth in subpart E of part 409 of this chapter.



   Subpart D--Comprehensive Outpatient Rehabilitation Facility (CORF) 
                                Services



Sec. 410.100  Included services.

    Subject to the conditions and limitations set forth in Secs. 410.102 
and 410.105, CORF services means the following

[[Page 278]]

services furnished to an outpatient of the CORF by personnel that meet 
the qualifications set forth in Sec. 485.70 of this chapter.
    (a) Physicians' services. The following services of the facility 
physician constitute CORF services: consultation with and medical 
supervision of non-physician staff, establishment and review of the plan 
of treatment, and other medical and facility administration activities. 
Those services are reimbursed on a reasonable cost basis under part 413 
of this chapter. Diagnostic and therapeutic services furnished to an 
individual patient are not CORF physician's services. If covered, 
payment for these services would be made by the carrier on a reasonable 
charge basis subject to the provisions of subpart E of part 405 of this 
chapter.
    (b) Physical therapy services. (1) These services include--
    (i) Testing and measurement of the function or dysfunction of the 
neuromuscular, musculoskeletal, cardiovascular and respiratory systems; 
and.
    (ii) Assessment and treatment related to dysfunction caused by 
illness or injury, and aimed at preventing or reducing disability or 
pain and restoring lost function.
    (2) The establishment of a maintenance therapy program for an 
individual whose restoration potential has been reached is a physical 
therapy service; however, maintenance therapy itself is not covered as 
part of these services.
    (c) Occupational therapy services. These services include--
    (1) Teaching of compensatory techniques to permit an individual with 
a physical impairment or limitation to engage in daily activities.
    (2) Evaluation of an individual's level of independent functioning.
    (3) Selection and teaching of task-oriented therapeutic activities 
to restore sensory-integrative function; and
    (4) Assessment of an individual's vocational potential, except when 
the assessment is related solely to vocational rehabilitation.
    (d) Speech-language pathology services. These are services for the 
diagnosis and treatment of speech and language disorders that create 
difficulties in communication.
    (e) Respiratory therapy services. (1) These are services for the 
assessment, diagnostic evaluation, treatment, management, and monitoring 
of patients with deficiencies or abnormalities of cardiopulmonary 
function.
    (2) These services include--
    (i) Application of techniques for support of oxygenation and 
ventilation of the patient and for pulmonary rehabilitation.
    (ii) Therapeutic use and monitoring of gases, mists, and aerosols 
and related equipment;
    (iii) Bronchial hygiene therapy;
    (iv) Pulmonary rehabilitation techniques such as exercise 
conditioning, breathing retraining and patient education in the 
management of respiratory problems.
    (v) Diagnostic tests to be evaluated by a physician, such as 
pulmonary function tests, spirometry and blood gas analysis; and
    (vi) Periodic assessment of chronically ill patients and their need 
for respiratory therapy.
    (f) Prosthetic device services. These services include--
    (1) Prosthetic devices (excluding dental devices and renal dialysis 
machines), that replace all or part of an internal body organ or 
external body member (including contiguous tissue) or replace all or 
part of the function of a permanently inoperative or malfunctioning 
external body member or internal body organ; and
    (2) Services necessary to design the device, select materials and 
components, measure, fit, and align the device, and instruct the patient 
in its use.
    (g) Orthotic device services. These services include--
    (1) Orthopedic devices that support or align movable parts of the 
body, prevent or correct deformities, or improve functioning; and
    (2) Services necessary to design the device, select the materials 
and components, measure, fit, and align the device, and instruct the 
patient in its use.
    (h) Social services. These services include--
    (1) Assessment of the social and emotional factors related to the 
individual's illness, need for care, response to

[[Page 279]]

treatment, and adjustment to care furnished by the facility;
    (2) Casework services to assist in resolving social or emotional 
problems that may have an adverse effect on the beneficiary's ability to 
respond to treatment; and
    (3) Assessment of the relationship of the individual's medical and 
nursing requirements to his or her home situation, financial resources, 
and the community resources available upon discharge from facility care.
    (i) Psychological services. These services include--
    (1) Assessment, diagnosis and treatment of an individual's mental 
and emotional functioning as it relates to the individual's 
rehabilitation;
    (2) Psychological evaluations of the individual's response to and 
rate of progress under the treatment plan; and
    (3) Assessment of those aspects of an individual's family and home 
situation that affect the individual's rehabilitation treatment.
    (j) Nursing care services. These services include nursing services 
specified in the plan of treatment and any other nursing services 
necessary for the attainment of the rehabilitation goals.
    (k) Drugs and biologicals. These are drugs and biologicals that are-
-
    (1) Prescribed by a physician and administered by or under the 
supervision of a physician or a registered professional nurse; and
    (2) Not excluded from Medicare Part B payment for reasons specified 
in Sec. 410.29.
    (l) Supplies, appliances, and equipment. These include--
    (1) Non-reusable supplies such as oxygen and bandages;
    (2) Medical equipment and appliances; and
    (3) Durable medical equipment of the type specified in Sec. 410.38, 
(except renal dialysis systems) for use outside the CORF, whether 
purchased or rented.
    (m) Home environment evaluation. This is a single home visit to 
evaluate the potential impact of the home situation on the 
rehabilitation goals.

[51 FR 41339, Nov. 14, 1986; 52 FR 4499, Feb. 12, 1987]



Sec. 410.102  Excluded services.

    None of the services specified in Sec. 410.100 is covered as a CORF 
service if the service--
    (a) Would not be covered as an inpatient hospital service if 
furnished to a hospital inpatient;
    (b) Is not reasonable and necessary for the diagnosis or treatment 
of illness or injury or to improve the functioning of a malformed body 
member. An example would be services furnished as part of a maintenance 
program involving repetitive activities that do not require the skilled 
services of nurses or therapists.



Sec. 410.105  Requirements for coverage of CORF services.

    Services specified in Sec. 410.100 and not excluded under 
Sec. 410.102 are covered as CORF services if they are furnished by a 
participating CORF (that is, a CORF that meets the conditions of subpart 
B of part 485 of this chapter, and has in effect a provider agreement 
under part 489 of this chapter) and if the following requirements are 
met:
    (a) Referral and medical history. The services must be furnished to 
an individual who is referred by a physician who certifies that the 
individual needs skilled rehabilitation services, and makes the 
following information available to the CORF before or at the time 
treatment is begun:
    (1) The individual's significant medical history.
    (2) Current medical findings.
    (3) Diagnosis(es) and contraindications to any treatment modality.
    (4) Rehabilitation goals, if determined.
    (b) When and where services are furnished. (1) All services must be 
furnished while the individual is under the care of a physician.
    (2) Except as provided in paragraph (b)(3) of this section, the 
services must be furnished on the premises of the CORF.
    (3) Exceptions. (i) Physical therapy, occupational therapy, and 
speech pathology services may be furnished away from the premises of the 
CORF.
    (ii) The single home visit specified in Sec. 410.100(m) is also 
covered.

[[Page 280]]

    (c) Plan of treatment. (1) The services must be furnished under a 
written plan of treatment that--
    (i) Is established and signed by a physician before treatment is 
begun; and
    (ii) Prescribes the type, amount, frequency, and duration of the 
services to be furnished, and indicates the diagnosis and anticipated 
rehabilitation goals.
    (2) The plan must be reviewed at least every 60 days by a facility 
physician who, when appropriate, consults with the professional 
personnel providing the services.
    (3) The reviewing physician must certify or recertify that the plan 
is being followed, the patient is making progress in attaining the 
rehabilitation goals, and the treatment is having no harmful effects on 
the patient.

[51 FR 41339, Nov. 14, 1986, as amended at 56 FR 8841, Mar. 1, 1991]



  Subpart E--Community Mental Health Centers (CMHCs) Providing Partial 
                        Hospitalization Services



Sec. 410.110  Requirements for coverage of partial hospitalization services by CMHCs.

    Medicare part B covers partial hospitalization services furnished by 
or under arrangements made by a CMHC if they are provided by a CMHC as 
defined in Sec. 410.2 that has in effect a provider agreement under part 
489 of this chapter and if the services are--
    (a) Prescribed by a physician and furnished under the general 
supervision of a physician;
    (b) Subject to certification by a physician in accordance with 
Sec. 424.24(e)(1) of this subchapter; and
    (c) Furnished under a plan of treatment that meets the requirements 
of Sec. 424.24(e)(2) of this subchapter.

[59 FR 6577, Feb. 11, 1994]

Subpart F [Reserved]



                  Subpart G--Medical Nutrition Therapy

    Source: 66 FR 55331, Nov. 1, 2001, unless otherwise noted.



Sec. 410.130  Definitions.

    For the purposes of this subpart, the following definitions apply:
    Chronic renal insufficiency means the stage of renal disease 
associated with a reduction in renal function not severe enough to 
require dialysis or transplantation (glomerular filtration rate [GFR] 
13-50 ml/min/1.73m\2\).
    Diabetes means diabetes mellitus consisting of two types. Type 1 is 
an autoimmune disease that destroys the beta cells of the pancreas, 
leading to insulin deficiency. Type 2 is familial hyperglycemia that 
occurs primarily in adults but can also occur in children and 
adolescents. It is caused by an insulin resistance whose etiology is 
multiple and not totally understood. Gestational diabetes is any degree 
of glucose intolerance with onset or first recognition during pregnancy. 
The diagnostic criterion for a diagnosis of diabetes for a fasting 
glucose tolerance test is greater than or equal to 126 mg/dL.
    Episode of care means services covered in a 12-month time period 
when coordinated with initial diabetes self-management training (DSMT) 
and one calendar year for each year thereafter, starting with the 
assessment and including all covered interventions based on referral(s) 
from a physician as specified in Sec. 410.132(c). The time period 
covered for gestational diabetes extends only until the pregnancy ends.
    Medical nutrition therapy services means nutritional diagnostic, 
therapeutic, and counseling services provided by a registered dietitian 
or nutrition professional for the purpose of managing diabetes or a 
renal disease.
    Physician means a doctor of medicine or osteopathy legally 
authorized to practice medicine and surgery by the State in which he or 
she performs such function or action (including a physician within the 
meaning of section of 1101(a)(7) of the Act).
    Renal disease means chronic renal insufficiency, end-stage renal 
disease when dialysis is not received, or the medical condition of a 
beneficiary for 36 months after kidney transplant.
    Treating physician means the primary care physician or specialist 
coordinating care for the beneficiary with diabetes or renal disease.

[[Page 281]]



Sec. 410.132  Medical nutrition therapy.

    (a) Conditions for coverage of MNT services. Medicare Part B pays 
for MNT services provided by a registered dietitian or nutrition 
professional as defined in Sec. 410.134 when the beneficiary is referred 
for the service by the treating physician. Services covered consist of 
face-to-face nutritional assessments and interventions in accordance 
with nationally accepted dietary or nutritional protocols.
    (b) Limitations on coverage of MNT services.
    (1) MNT services based on a diagnosis of renal disease as described 
in this subpart are not covered for beneficiaries receiving maintenance 
dialysis for which payment is made under section 1881 of the Act.
    (2) A beneficiary may only receive the maximum number of hours 
covered under the DSMT benefit for both DSMT and MNT during the initial 
DSMT training period unless additional hours are determined to be 
medically necessary under the national coverage determination process.
    (3) In years when the beneficiary is eligible for MNT and follow-up 
DSMT, the beneficiary may only receive the maximum number of hours 
covered under MNT unless additional hours are determined to be medically 
necessary under the national coverage determination process.
    (4) If a beneficiary has both diabetes and renal disease, the 
beneficiary may only receive the maximum number of hours covered under 
the renal MNT benefit in one episode of care unless he or she is 
receiving initial DSMT services, in which case the beneficiary would 
receive whichever is greater.
    (5) An exception to the maximum number of hours in (b)(2), (3), and 
(4) of this section may be made when the treating physician determines 
that there is a change of diagnosis, medical condition, or treatment 
regimen related to diabetes or renal disease that requires a change in 
MNT during an episode of care.
    (c) Referrals. Referral may only be made by the treating physician 
when the beneficiary has been diagnosed with diabetes or renal disease 
as defined in this subpart with documentation maintained by the 
referring physician in the beneficiary's medical record. Referrals must 
be made for each episode of care and any additional assessments or 
interventions required by a change of diagnosis, medical condition, or 
treatment regimen during an episode of care.



Sec. 410.134  Provider qualifications.

    For Medicare Part B coverage of MNT, only a registered dietitian or 
nutrition professional may provide the services. ``Registered dietitian 
or nutrition professional'' means an individual who, on or after 
December 22, 2000:
    (a) Holds a bachelor's or higher degree granted by a regionally 
accredited college or university in the United States (or an equivalent 
foreign degree) with completion of the academic requirements of a 
program in nutrition or dietetics accredited by an appropriate national 
accreditation organization recognized for this purpose.
    (b) Has completed at least 900 hours of supervised dietetics 
practice under the supervision of a registered dietitian or nutrition 
professional.
    (c) Is licensed or certified as a dietitian or nutrition 
professional by the State in which the services are performed. In a 
State that does not provide for licensure or certification, the 
individual will be deemed to have met this requirement if he or she is 
recognized as a ``registered dietitian'' by the Commission on Dietetic 
Registration or its successor organization, or meets the requirements of 
paragraphs (a) and (b) of this section.
    (d) Exceptions.
    (i) A dietitian or nutritionist licensed or certified in a State as 
of December 21, 2000 is not required to meet the requirements of (a) and 
(b) of this section.
    (ii) A ``registered dietitian'' in good standing, as recognized by 
the Commission of Dietetic Registration or its successor organization, 
is deemed to have met the requirements of (a) and (b) of this section.

[66 55331, Nov. 1, 2001; 67 FR 20684, Apr. 26, 2002]

[[Page 282]]



  Subpart H--Outpatient Diabetes Self-Management Training and Diabetes 
                          Outcome Measurements

    Source: 65 FR 83148, Dec. 29, 2000, unless otherwise noted.



Sec. 410.140  Definitions.

    For purposes of this subpart, the following definitions apply:
    ADA stands for the American Diabetes Association.
    Approved entity means an individual, physician, or entity accredited 
by an approved organization as meeting one of the sets of quality 
standards described in Sec. 410.144 and approved by CMS under 
Sec. 410.141(e) to furnish training.
    Deemed entity means an individual, physician, or entity accredited 
by an approved organization, but that has not yet been approved by CMS 
to furnish and receive Medicare payment for the training. Upon being 
approved by CMS under Sec. 410.141(e) to furnish training, CMS refers to 
this entity as an ``approved entity''.
    NSDSMEP stands for the National Standards for Diabetes Self 
Management Education Programs.
    Organization means a national accreditation organization.
    Rural means an area that meets one of the following conditions:
    (1) Is not urbanized (as defined by the Bureau of the Census) and 
that is designated by the chief executive officer of the State, and 
certified by the Secretary, as an area with a shortage of personal 
health services.
    (2) Is designated by the Secretary either as an area with a shortage 
of personal health services or as a health professional shortage area.
    (3) Is designated by the Indian Health Service as a health service 
delivery area as defined in Sec. 36.15 of this title.
    Training means outpatient diabetes self-management training.



Sec. 410.141  Outpatient diabetes self-management training.

    (a) General rule. Medicare Part B covers training defined in 
Sec. 410.140 if all of the conditions and requirements of this subpart 
are met.
    (b) Conditions for coverage. The training must meet the following 
conditions:
    (1) Training orders. Following an evaluation of the beneficiary's 
need for the training, it is ordered by the physician (or qualified 
nonphysician practitioner) (as defined in Sec. 410.32(a)) treating the 
beneficiary's diabetes.
    (2) Plan of care. It is included in a comprehensive plan of care 
established by the physician (or qualified nonphysician practitioner) 
treating the beneficiary for diabetes that meets the following 
requirements:
    (i) Describes the content, number of sessions, frequency, and 
duration of the training as written by the physician (or qualified 
nonphysician practitioner) treating the beneficiary.
    (ii) Contains a statement specified by CMS and signed by the 
physician (or qualified nonphysician practitioner) managing the 
beneficiary's diabetic condition. By signing this statement, the 
physician (or qualified nonphysician practitioner) certifies that he or 
she is managing the beneficiary's diabetic condition and the training 
described in the plan of care is needed to ensure therapy compliance or 
to provide the beneficiary with the skills and knowledge to help manage 
the beneficiary's diabetes. The physician's (or qualified nonphysician 
practitioner's) statement must identify the beneficiary's specific 
medical conditions (described in paragraph (d) of this section) that the 
training will address.
    (iii) Provides that any changes to the plan of care are signed by 
the physician (or qualified nonphysician practitioner) treating the 
beneficiary.
    (iv) Is incorporated into the approved entity's medical record for 
the beneficiary and is made available, upon request, to CMS.
    (3) Reasonable and necessary. It is reasonable and necessary for 
treating or monitoring the condition of a beneficiary who meets the 
conditions described in paragraph (d) of this section.
    (c) Types and frequency of training--(1) Initial training--
    General rule. (i) Medicare Part B covers initial training that meets 
the following conditions:

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    (A) Is furnished to a beneficiary who has not previously received 
initial training under this benefit.
    (B) Is furnished within a continuous 12-month period.
    (C) Does not exceed a total of 10 hours.
    (D) Except as permitted under paragraph (c)(1)(ii) of this section, 
9 hours of the training are furnished in a group setting consisting of 2 
to 20 individuals who need not all be Medicare beneficiaries.
    (E) Is furnished in increments of no less than one-half hour.
    (F) May include 1 hour of individual training for an assessment of 
the beneficiary's training needs.
    (ii)
    Exception. Medicare covers training on an individual basis for a 
Medicare beneficiary who meets any of the following conditions:
    (A) No group session is available within 2 months of the date the 
training is ordered.
    (B) The beneficiary's physician (or qualified nonphysician 
practitioner) documents in the beneficiary's medical record that the 
beneficiary has special needs resulting from conditions, such as severe 
vision, hearing, or language limitations that will hinder effective 
participation in a group training session.
    (2)
    Follow-up training. After receiving the initial training described 
in paragraph (c)(1) of this section, Medicare covers follow-up training 
that meets the following conditions:
    (i) Consists of no more than 2 hours individual or group training 
for a beneficiary each year.
    (ii) Group training consists of 2 to 20 individuals who need not all 
be Medicare beneficiaries.
    (iii) Is furnished any time in a calendar year following the year in 
which the beneficiary completes the initial training.
    (iv) Is furnished in increments of no less than one-half hour.
    (v) The physician (or qualified nonphysician practitioner) treating 
the beneficiary must document, in the referral for training and the 
beneficiary's medical record, the specific medical condition (described 
in paragraph (d) of this section) that the follow-up training must 
address.
    (d) Beneficiaries who may be covered. Medicare Part B covers one 
course of initial training for a beneficiary who has one or more of the 
following medical conditions present within the 12-month period before 
the physician's order for the training:
    (1) New onset diabetes.
    (2) Inadequate glycemic control as evidenced by a glycosylated 
hemoglobin (HbA1C) level of 8.5 percent or more on two consecutive HbA1C 
determinations 3 or more months apart in the year before the beneficiary 
begins receiving training.
    (3) A change in treatment regimen from no diabetes medications to 
any diabetes medication, or from oral diabetes medication to insulin.
    (4) High risk for complications based on inadequate glycemic control 
(documented acute episodes of severe hypoglycemia or acute severe 
hyperglycemia occurring in the past year during which the beneficiary 
needed emergency room visits or hospitalization).
    (5) High risk based on at least one of the following documented 
complications:
    (i) Lack of feeling in the foot or other foot complications such as 
foot ulcers, deformities, or amputation.
    (ii) Pre-proliferative or proliferative retinopathy or prior laser 
treatment of the eye.
    (iii) Kidney complications related to diabetes, when manifested by 
albuminuria, without other cause, or elevated creatinine.
    (e) Who may furnish services. Training may be furnished by a 
physician, individual, or entity that meets the following conditions:
    (1) Furnishes other services for which direct Medicare payment may 
be made.
    (2) May properly receive Medicare payment under Sec. 424.73 or 
Sec. 424.80 of this chapter, which set forth prohibitions on assignment 
and reassignment of benefits.
    (3) Submits necessary documentation to, and is accredited by, an 
accreditation organization approved by CMS under Sec. 410.142 to meet 
one of the sets of quality standards described in Sec. 410.144.

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    (4) Provides documentation to CMS, as requested, including diabetes 
outcome measurements set forth at Sec. 410.146.



Sec. 410.142  CMS process for approving national accreditation organizations.

    (a) General rule. CMS may approve and recognize a nonprofit or not-
for-profit organization with demonstrated experience in representing the 
interest of individuals with diabetes to accredit entities to furnish 
training.
    (b) Required information and materials. An organization requesting 
CMS's approval and recognition of its accreditation program must furnish 
to CMS the following information and materials:
    (1) The requirements and quality standards that the organization 
uses to accredit entities to furnish training.
    (2) If an organization does not use the CMS quality standards or the 
NSDSMEP quality standards described in Sec. 410.144(a) or (b), a 
detailed comparison including a crosswalk between the organization's 
standards and the CMS quality standards described in Sec. 410.144(a).
    (3) Detailed information about the organization's accreditation 
process, including all of the following information:
    (i) Frequency of accreditation.
    (ii) Copies of accreditation forms, guidelines, and instructions to 
evaluators.
    (iii) Descriptions of the following:
    (A) The accreditation review process and the accreditation status 
decision making process.
    (B) The procedures used to notify a deemed entity of deficiencies in 
its outpatient diabetes self-management training program and procedures 
to monitor the correction of those deficiencies.
    (C) The procedures used to enforce compliance with the accreditation 
requirements and standards.
    (4) Detailed information about the individuals who perform 
evaluations for the organization, including all of the following 
information:
    (i) The education and experience requirements for the individuals 
who perform evaluations.
    (ii) The content and frequency of continuing education furnished to 
the individuals who perform evaluations.
    (iii) The process used to monitor the performance of individuals who 
perform evaluations.
    (iv) The organization's policies and practices for participation in 
the accreditation process by an individual who is professionally or 
financially affiliated with the entity being evaluated.
    (5) A description of the organization's data management and analysis 
system for its accreditation activities and decisions, including the 
kinds of reports, tables, and other displays generated by that system.
    (6) A description of the organization's procedures for responding to 
and investigating complaints against an approved entity, including 
policies and procedures regarding coordination of these activities with 
appropriate licensing bodies, ombudsmen programs, and CMS.
    (7) A description of the organization's policies and procedures for 
withholding or removing a certificate of accreditation for failure to 
meet the organization's standards or requirements, and other actions the 
organization takes in response to noncompliance with its standards and 
requirements.
    (8) A description of all types (for example, full or partial) and 
categories (for example, provisional, conditional, or temporary) of 
accreditation offered by the organization, the duration of each type and 
category of accreditation, and a statement identifying the types and 
categories that will serve as a basis for accreditation if CMS approves 
the organization.
    (9) A list of all of the approved entities currently accredited to 
furnish training and the type, category, and expiration date of the 
accreditation held by each of them.
    (10) The name and address of each person with an ownership or 
control interest in the organization.
    (11) Documentation that demonstrates its ability to furnish CMS with 
electronic data in CMS-compatible format.
    (12) A resource analysis that demonstrates that its staffing, 
funding, and

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other resources are adequate to perform the required accreditation 
activities.
    (13) A statement acknowledging that, as a condition for approval and 
recognition by CMS of its accreditation program, it agrees to comply 
with the requirements set forth in Secs. 410.142 through 410.146.
    (14) Additional information CMS requests to enable it to respond to 
the organization's request for CMS approval and recognition of its 
accreditation program to accredit entities to furnish training.
    (c) Onsite visit. CMS may visit the prospective organization's 
offices to verify information in the organization's application, 
including, but not limited to, review of documents, and interviews with 
the organization's staff.
    (d) Notice and comment--(1) Proposed notice. CMS publishes a 
proposed notice in the Federal Register announcing its intention to 
approve an organization's request for CMS approval and recognition of 
its accreditation program and the standards it uses to accredit entities 
to furnish training. The notice includes the following information:
    (i) The basis for approving the organization.
    (ii) A description of how the organization's accreditation program 
applies and enforces quality standards that have been determined by CMS 
to meet or exceed the CMS quality standards described in Sec. 410.144(a) 
or how the organization would use the NSDSMEP quality standards 
described in Sec. 410.144(b).
    (iii) An opportunity for public comment.
    (2) Final notice. (i) After considering public comments CMS receives 
on the proposed notice, it publishes a final notice in the Federal 
Register indicating whether it has approved an organization's request 
for CMS approval and recognition of its accreditation program and the 
standards it uses to accredit entities to furnish training.
    (ii) If CMS approves the request, the final notice specifies the 
effective date and the term of the approval, which may not exceed 6 
years.
    (e) Criteria CMS uses to approve national accreditation 
organizations. In deciding to approve and recognize an organization's 
accreditation program to accredit entities to furnish training, CMS 
considers the following criteria:
    (1) The organization uses and enforces quality standards that CMS 
has determined meet or exceed the CMS quality standards described in 
Sec. 410.144(a), or uses the NSDSMEP quality standards described in 
Sec. 410.144(b).
    (2) The organization meets the requirements for approved 
organizations in Sec. 410.143.
    (3) The organization is not owned or controlled by the entities it 
accredits, as defined in Sec. 413.17(b)(2) or (b)(3), respectively, of 
this chapter.
    (4) The organization does not accredit any entity it owns or 
controls.
    (f) Notice of CMS's decision. CMS notifies the prospective 
organization in writing of its decision. The notice includes the 
following information:
    (1) Statement of approval or denial.
    (2) If approved, the expiration date of CMS's approval and 
recognition of the accreditation program.
    (3) If denied, the rationale for the denial and the reconsideration 
and reapplication procedures.
    (g) Reconsideration of adverse decision. An organization that has 
received CMS's notice of denial of its request for CMS approval and 
recognition of its accreditation program to accredit entities to furnish 
training may request reconsideration of CMS's decision in accordance 
with part 488 subpart D of this chapter.
    (h) Request for approval following denial. (1) Except as provided in 
paragraph (h)(2) of this section, an organization that has received 
CMS's notice of denial of its request for CMS approval and recognition 
of its accreditation program to accredit entities to furnish training 
may submit a new request to CMS if it meets the following conditions:
    (i) Has revised its accreditation program to correct the 
deficiencies CMS noted in its denial notice.
    (ii) Demonstrates, through documentation, the use of one of the sets 
of quality standards described in Sec. 410.144.
    (iii) Resubmits the application in its entirety.

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    (2) For an organization that has requested reconsideration of CMS's 
denial of its request for CMS approval and recognition of its 
accreditation program to accredit entities to furnish training, CMS will 
not consider the organization's new request until all administrative 
proceedings on the previous request have been completed.
    (i) Withdrawal. An organization requesting CMS approval and 
recognition of its accreditation program to accredit entities may 
withdraw its application at any time.
    (j) Applying for continued CMS approval. At least 6 months before 
the expiration of CMS's approval and recognition of the organization's 
program, an organization must request from CMS continued approval and 
recognition.



Sec. 410.143  Requirements for approved accreditation organizations.

    (a) Ongoing responsibilities of an approved accreditation 
organization. An organization approved and recognized by CMS must 
undertake the following activities on an ongoing basis:
    (1) Provide to CMS in writing, on a monthly basis, all of the 
following:
    (i) Copies of all accreditation decisions and any accreditation-
related information that CMS may require (including corrective action 
plans and summaries of unmet quality standards described in 
Sec. 410.144).
    (ii) Notice of all complaints related to approved entities.
    (iii) Within 30 days of taking remedial or adverse action (including 
revocation, withdrawal, or revision of an approved entity's deemed 
status) against an approved entity, information describing the remedial 
or adverse action and the circumstances that led to taking the action.
    (iv) Notice of any proposed changes in its accreditation standards 
and requirements or evaluation process. If an organization implements 
changes without CMS approval (other than changes to the NSDSMEP quality 
standards described in Sec. 410.144(b)), CMS may withdraw its approval 
and recognition of the organization's accreditation program.
    (2) If an organization does not use the NSDSMEP quality standards 
described in Sec. 410.144(b), and wishes to change its quality standards 
that CMS previously approved, the organization must submit its plan to 
alter its quality standards and include a crosswalk between the set of 
quality standards described in Sec. 410.144 and the organization's 
revised standards. If an organization implements changes in its quality 
standards without CMS approval, CMS may withdraw its approval and 
recognition of the organization's accreditation program.
    (3) If CMS notifies an organization that uses the CMS quality 
standards described in Sec. 410.144(a) that it has changed the CMS 
quality standards, the organization must meet the following 
requirements:
    (i) Submit to CMS, within 30 days of CMS's notification of a change 
in the quality standards, its organization's plan to alter its quality 
standards to conform to the revised quality standards described in 
Sec. 410.144(a).
    (ii) Implement the changes to its accreditation program by the 
implementation date specified in CMS's notification of the changes in 
the quality standards.
    (b) CMS oversight of approved national accreditation organizations. 
CMS, or its agent, performs oversight activities to ensure that an 
approved organization and the entities the organization accredits 
continue to meet a set of quality standards described in Sec. 410.144. 
CMS (or its agent) uses the following procedures:
    (1) Equivalency review. CMS compares the organization's standards 
and its application and enforcement of its standards to a set of quality 
standards (described in Sec. 410.144) and processes when any of the 
following conditions exist:
    (i) CMS imposes new requirements or changes its process for 
approving and recognizing an organization.
    (ii) Except for an organization that uses the NSDSMEP quality 
standards, the organization proposes to adopt new standards or changes 
its accreditation process.
    (iii) The organization reapplies to CMS for continuation of its 
approval and recognition by CMS of its program to accredit entities to 
furnish training.

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    (2) Validation reviews. CMS validates an organization's 
accreditation process by conducting evaluations of approved entities 
accredited by the organization and comparing its results to the results 
of the organization's evaluation of the approved entities.
    (3) Onsite inspections. CMS may conduct an onsite inspection of the 
organization's operations and offices to verify information and assess 
the organization's compliance with its own policies and procedures. The 
onsite inspection may include, but is not limited to, reviewing 
documents, auditing documentation of meetings concerning the 
accreditation process, evaluating accreditation results or the 
accreditation status decision making process, and interviewing the 
organization's staff.
    (4) Withdrawal of CMS approval and recognition--(i) CMS gives an 
organization written notice of CMS's intent to withdraw its approval and 
recognition of the organization's program to accredit entities if CMS 
determines through an equivalency review, validation review, onsite 
inspection, or CMS's daily experience with the organization that any of 
the following conditions exist:
    (A) Except for those accrediting organizations using quality 
standards in Sec. 410.144(b), the quality standards that the 
organization applies and enforces do not meet or exceed the CMS quality 
standards described in Sec. 410.144(a).
    (B) The organization has failed to meet the requirements for 
accreditation in Secs. 410.142 through 410.144.
    (ii) Request for reconsideration. An organization may request a 
reconsideration of CMS's decision to withdraw its approval and 
recognition of the organization in accordance with part 488, subpart D 
of this chapter.



Sec. 410.144  Quality standards for deemed entities.

    An organization approved and recognized by CMS may accredit an 
entity to meet one of the following sets of quality standards:
    (a) CMS quality standards. Standards prescribed by CMS, which 
include the following:
    (1) Organizational structure. (i) Provides the educational resources 
to support the programs offered and the beneficiaries served, including 
adequate space, personnel, budget, instructional materials, 
confidentiality, privacy, and operational support.
    (ii) Defines clearly and documents the organizational relationships, 
lines of authority, staffing, job descriptions, and operational 
policies.
    (iii) Maintains a written policy that affirms education as an 
integral component of diabetes care.
    (iv) Includes in its operational policies, specific standards and 
procedures identifying the amount of collaborative, interactive, skill-
based training methods and didactic training methods furnished to the 
beneficiary.
    (v) Assesses the service area to define the target population in 
order to appropriately allocate personnel and resources.
    (vi) Identifies in its operational policies, the minimal amount that 
each team member must be involved in the following:
    (A) Development of training materials.
    (B) Instruction of beneficiaries.
    (2) Environment. Maintains a safe and sanitary environment, properly 
constructed, equipped, and maintained to protect the health and safety 
of all patients and that meets all applicable fire protection and life 
safety codes.
    (3) Program staff. (i) Requires a program coordinator who is 
responsible for program planning, implementation, and evaluation.
    (ii) Requires nonphysician professional staff to obtain 12 hours of 
continuing diabetes education concerning educational principles and 
behavior change strategies every 2 years.
    (4) Team approach. (i) Except as provided in paragraph (a)(4)(ii) of 
this section for a rural area, furnishes services using a 
multidisciplinary instructional team that meets the following 
requirements:
    (A) The team includes at least a registered dietitian, as recognized 
under State law, and a certified diabetes educator (CDE), certified by a 
qualified organization that has registered with CMS, who have didactic 
experience and knowledge of diabetes clinical and educational issues. 
(If the team includes a registered nurse, an approved entity

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may delay implementation of the requirement for a CDE until February 27, 
2004.)
    (B) The team is qualified to teach the training content areas 
required in paragraph (a)(5) of this section.
    (C) All appropriate team members must be present during the portion 
of the training for which they are responsible and must directly furnish 
the training within the scope of their practices.
    (ii) In a rural area, an individual who is qualified as a registered 
dietitian and as a CDE that is currently certified by an organization 
approved by CMS (or until February 27, 2004 an individual who is 
qualified as a registered dietitian and as a registered nurse) may 
furnish training and is deemed to meet the multidisciplinary team 
requirement in paragraph (a)(4)(i) of this section.
    (5) Training content. Offers training and is capable of meeting the 
needs of its patients on the following subjects:
    (i) Diabetes overview/pathophysiology of diabetes.
    (ii) Nutrition.
    (iii) Exercise and activity.
    (iv) Diabetes medications (including skills related to the self-
administration of injectable drugs).
    (v) Self-monitoring and use of the results.
    (vi) Prevention, detection, and treatment of acute complications.
    (vii) Prevention, detection, and treatment of chronic complications.
    (viii) Foot, skin, and dental care.
    (ix) Behavior change strategies, goal setting, risk factor 
reduction, and problem solving.
    (x) Preconception care, pregnancy, and gestational diabetes.
    (xi) Relationships among nutrition, exercise, medication, and blood 
glucose levels.
    (xii) Stress and psychosocial adjustment.
    (xiii) Family involvement and social support.
    (xiv) Benefits, risks, and management options for improving glucose 
control.
    (xv) Use of health care systems and community resources.
    (6) Training methods. (i) Offers individual and group instruction 
for effective training.
    (ii) Uses instructional methods and materials that are appropriate 
for the target population, and participants being served.
    (iii) Uses primarily interactive, collaborative, skill-based 
training methods and maximizes the use of interactive training methods.
    (7) Review of plan of care and goals. (i) Reviews each beneficiary's 
plan of care.
    (ii) Develops and updates an individual assessment, in collaboration 
with each beneficiary, that includes relevant medical history, present 
health status, health service or resource utilization, risk factors, 
diabetes knowledge and skills, cultural influences, health beliefs and 
attitudes, health behaviors and goals, support systems, barriers to 
learning, and socioeconomic factors.
    (iii) Based on the assessment, develops, in collaboration with each 
beneficiary, an individual education plan. Includes in the education 
plan, the goals for education, the periodic updates, the specific amount 
of interactive, collaborative, skill-based training methods and didactic 
training methods that have been and will be furnished.
    (iv) Documents the results, including assessment, intervention, 
evaluation and follow-up in the beneficiary's medical record.
    (v) Forwards a copy of the documentation in paragraph (a)(7)(ii) 
through (iv) of this section to the referring physician (or qualified 
nonphysician practitioner).
    (vi) Periodically updates the beneficiary's referring physician (or 
qualified nonphysician practitioner) about the beneficiary's educational 
status.
    (8) Educational intervention. Offers appropriate and timely 
educational intervention based on referral from the beneficiary's 
physician (or qualified nonphysician practitioner) and based on periodic 
reassessments of health status, knowledge, skills, attitudes, goals, and 
self-care behaviors.
    (9) Performance measurement and quality improvement. Establishes and

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maintains an effective internal performance measurement and quality 
improvement program that focuses on maximizing outcomes by improving 
patient safety and quality of care. The program must meet the following 
requirements:
    (i) Stresses health outcomes (for example, improved beneficiary 
diabetes control, beneficiary understanding, or beneficiary compliance) 
and provides for the collection, analysis, and reporting of data that 
permits measurement of performance outcomes, or other quality 
indicators.
    (ii) Requires an entity to take the following actions:
    (A) Evaluate itself on an annual basis as to its effectiveness in 
using performance measures.
    (B) Improve its performance on at least one outcome or quality 
indicator each year.
    (10) Quality improvement. Has an agreement with a QIO to participate 
in quality improvement projects defined by the QIO, or if a program 
elects not to participate in a QIO project, it must be able to 
demonstrate a level of achievement through a project of its own design 
that is comparable to or better than the achievement to be expected from 
participation in the QIO quality improvement project.
    (b) The National Standards for Diabetes Self-Management Education 
Programs. The set of quality standards contained in the NSDSMEP or any 
NSDSMEP standards subsequently revised.
    (c) Standards of a national accreditation organization that 
represents individuals with diabetes. Standards that meet or exceed the 
CMS quality standards described in paragraph (a) of this section that 
have been developed by a national organization (and approved by CMS) 
that is either a nonprofit or not-for-profit organization with 
demonstrated experience in representing the interest of individuals, 
including health care professionals and Medicare beneficiaries, with 
diabetes.



Sec. 410.145  Requirements for entities.

    (a) Deemed entities. (1) Except as permitted in paragraph (a)(2) of 
this section, an entity may be deemed to meet a set of quality standards 
described in Sec. 410.144 if the following conditions are met:
    (i) The entity has submitted necessary documentation and is fully 
accredited (and periodically reaccredited) by an organization approved 
by CMS under Sec. 410.142.
    (ii) The entity is not accredited by an organization that owns or 
controls the entity.
    (2) Before August 27, 2002 CMS may deem an entity to meet the 
NSDSMEP quality standards described in Sec. 410.144(b), if the entity 
provides the Medicare contractor that will process its claims with a 
copy of a current certificate the entity received from the ADA that 
verifies the training program it furnishes meets the NSDSMEP quality 
standards described in Sec. 410.144(b).
    (b) Approved entities. An entity may be approved to furnish training 
if the entity meets the following conditions:
    (1) Before submitting a claim for Medicare payment, forwards a copy 
of its certificate or proof of accreditation from an organization 
approved by CMS under Sec. 410.142 indicating that the entity meets a 
set of quality standards described in Sec. 410.144, or before August 27, 
2002, submits documentation of its current ADA recognition status.
    (2) Agrees to submit to evaluation (including onsite inspections) by 
CMS (or its agent) to validate its approved organization's accreditation 
process.
    (3) Authorizes its approved organization to release to CMS a copy of 
its most recent accreditation evaluation, and any accreditation-related 
information that CMS may require.
    (4) At a minimum, allows the QIO (under a contract with CMS) access 
to beneficiary or group training records.
    (c) Effective dates--(1) Deemed to meet quality standards. Except as 
permitted in paragraph (c)(2) of this section, the date on which an 
entity is deemed to meet a set of quality standards described in 
Sec. 410.144 is the later of one of the following dates:
    (i) The date CMS approves and recognizes the accreditation 
organization to accredit entities to furnish training.
    (ii) The date an organization accredits the entity to meet a set of 
quality standards described in Sec. 410.144.

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    (2) Approved to furnish training. CMS covers the training furnished 
by an entity beginning on the later of one of the following dates:
    (i) The date CMS approves the deemed entity as meeting the 
conditions for coverage in Sec. 410.141(e).
    (ii) The date the entity is deemed to meet a set of quality 
standards described in Sec. 410.144.
    (d) Removal of approved status--(1) General rule. CMS removes an 
entity's approved status for any of the following reasons:
    (i) CMS determines, on the basis of its own evaluation or the 
results of the accreditation evaluation, that the entity does not meet a 
set of quality standards described in Sec. 410.144.
    (ii) CMS withdraws its approval of the organization that deemed the 
entity to meet a set of quality standards described in Sec. 410.144.
    (iii) The entity fails to meet the requirements of paragraphs (a) 
and (b) of this section.
    (2) Effective date. The effective date of CMS's removal of an 
entity's approved status is 60 days after the date of CMS's notice to 
the entity.



Sec. 410.146  Diabetes outcome measurements.

    (a) Information collection. An approved entity must collect and 
record in an organized systematic manner the following patient 
assessment information at least on a quarterly basis for a beneficiary 
who receives training under Sec. 410.141:
    (1) Medical information that includes the following:
    (i) Duration of the diabetic condition.
    (ii) Use of insulin or oral agents.
    (iii) Height and weight by date.
    (iv) Results and date of last lipid test.
    (v) Results and date of last HbA1C.
    (vi) Information on self-monitoring (frequency and results).
    (vii) Blood pressure with the corresponding dates.
    (viii) Date of the last eye exam.
    (2) Other information that includes the following:
    (i) Educational goals.
    (ii) Assessment of educational needs.
    (iii) Training goals.
    (iv) Plan for a follow-up assessment of achievement of training 
goals between 6 months and 1 year after the beneficiary completes the 
training.
    (v) Documentation of the training goals assessment.
    (b) Follow-up assessment information. An approved entity may obtain 
information from the beneficiary's survey, primary care physician 
contact, and follow-up visits.



                   Subpart I--Payment of SMI Benefits

    Source: 51 FR 41339, Nov. 14, 1986. Redesignated at 59 FR 6577, Feb. 
11, 1994.



Sec. 410.150  To whom payment is made.

    (a) General rules. (1) Any SMI enrollee is, subject to the 
conditions, limitations, and exclusions set forth in this part and in 
parts 405, 416 and 424 of this chapter, entitled to have payment made as 
specified in paragraph (b) of this section.
    (2) The services specified in paragraphs (b)(5) through (b)(14) of 
this section must be furnished by a facility that has in effect a 
provider agreement or other appropriate agreement to participate in 
Medicare.
    (b) Specific rules. Subject to the conditions set forth in paragraph 
(a) of this section, Medicare Part B pays as follows:
    (1) To the individual, or to a physician or other supplier on the 
individual's behalf, for medical and other health services furnished by 
the physician or other supplier.
    (2) To a nonparticipating hospital on the individual's behalf for 
emergency outpatient services furnished by the hospital, in accordance 
with subpart G of part 424 of this chapter.
    (3) To the individual, for emergency outpatient services furnished 
by a nonparticipating hospital, in accordance with Sec. 424.53 of this 
chapter.
    (4) To the individual, for physicians' services and ambulance 
services furnished outside the United States in accordance with 
Sec. 424.53 of this chapter.
    (5) To a provider on the individual's behalf for medical and other 
health services furnished by the provider (or by others under 
arrangements made with them by the provider).

[[Page 291]]

    (6) To a home health agency on the individual's behalf for home 
health services furnished by the home health agency.
    (7) To a clinic, rehabilitation agency, or public health agency on 
the individual's behalf for outpatient physical therapy or speech 
pathology services furnished by the clinic or agency (or by others under 
arrangements made with them by the clinic or agency).
    (8) To a rural health clinic or Federally qualified health center on 
the individual's behalf for rural health clinic or Federally qualified 
health center services furnished by the rural health clinic or Federally 
qualified health center, respectively.
    (9) To an ambulatory surgical center (ASC) on the individual's 
behalf for covered ambulatory surgical center facility services that are 
furnished in connection with surgical procedures performed in an ASC, as 
provided in part 416 of this chapter.
    (10) To a comprehensive outpatient rehabilitation facility (CORF) on 
the individual's behalf for comprehensive outpatient rehabilitation 
facility services furnished by the CORF.
    (11) To a renal dialysis facility, on the individual's behalf, for 
institutional or home dialysis services, supplies, and equipment 
furnished by the facility.
    (12) To a critical access hospital (CAH) on the individual's behalf 
for outpatient CAH services furnished by the CAH.
    (13) To a community mental health center (CMHC) on the individual's 
behalf, for partial hospitalization services furnished by the CMHC (or 
by others under arrangements made with them by the CMHC).
    (14) To an SNF for services (other than those described in 
Sec. 411.15(p)(2) of this chapter) that it furnishes to a resident (as 
defined in Sec. 411.15(p)(3) of this chapter) of the SNF who is not in a 
covered Part A stay.
    (15) To the qualified employer of a physician assistant for 
professional services furnished by the physician assistant and for 
services and supplies furnished incident to his or her services. Payment 
is made to the employer of a physician assistant regardless of whether 
the physician assistant furnishes services under a W-2, employer-
employee employment relationship, or whether the physician assistant is 
an independent contractor who receives a 1099 reflecting the 
relationship. Both types of relationships must conform to the 
appropriate guidelines provided by the Internal Revenue Service. A 
qualified employer is not a group of physician assistants that 
incorporate to bill for their services. Payment is made only if no 
facility or other provider charges or is paid any amount for services 
furnished by a physician assistant.
    (16) To a nurse practitioner or clinical nurse specialist for 
professional services furnished by a nurse practitioner or clinical 
nurse specialist in all settings in both rural and nonrural areas and 
for services and supplies furnished incident to those services. Payment 
is made only if no facility or other provider charges, or is paid, any 
amount for the furnishing of the professional services of the nurse 
practitioner or clinical nurse specialist.
    (17) To a clinical psychologist on the individual's behalf for 
clinical psychologist services and for services and supplies furnished 
as an incident to his or her services.
    (18) To a clinical social worker on the individual's behalf for 
clinical social worker services.
    (19) To a participating HHA, for home health services (including 
medical supplies described in section 1861(m)(5) of the Act, but 
excluding durable medical equipment to the extent provided for in such 
section) furnished to an individual who at the time the item or service 
is furnished is under a plan of care of an HHA (without regard to 
whether the item or service is furnished by the HHA directly, under 
arrangement with the HHA, or under any other contracting or consulting 
arrangement).

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988; 57 
FR 24981, June 12, 1992; 58 FR 30668, May 26, 1993; 59 FR 6577, Feb. 11, 
1994; 63 FR 20129, Apr. 23, 1998; 63 FR 26308, May 12, 1998; 63 FR 
58909, Nov. 2, 1998; 65 FR 41211, July 3, 2000; 66 FR 39599, July 31, 
2001]



Sec. 410.152  Amounts of payment.

    (a) General provisions--(1) Exclusion from incurred expenses. As 
used in this

[[Page 292]]

section, ``incurred expenses'' are expenses incurred by an individual, 
during his or her coverage period, for covered Part B services, 
excluding the following:
    (i) Expenses incurred for services for which the beneficiary is 
entitled to have payment made under Medicare Part A or would be so 
entitled except for the application of the Part A deductible and 
coinsurance requirements.
    (ii) Expenses incurred in meeting the Part B blood deductible 
(Sec. 410.161).
    (iii) In the case of services payable under a formula that takes 
into account reasonable charges, reasonable costs, customary charges, 
customary (insofar as reasonable) charges, charges related to reasonable 
costs, fair compensation, a pre-treatment prospective payment rate, or a 
standard overhead amount, or any combination of two or more of these 
factors, expenses in excess of any factor taken into account under that 
formula.
    (iv) Expenses in excess of the outpatient mental health treatment 
limitation described in Sec. 410.155.
    (v) In the case of expenses incurred for outpatient physical therapy 
services including speech-language pathology services, the expenses 
excluded are from the incurred expenses under Sec. 410.60(e). In the 
case of expenses incurred for outpatient occupational therapy including 
speech-language pathology services, the expenses excluded are from the 
incurred expenses under Sec. 410.59(e).
    (2) Other applicable provisions. Medicare Part B pays for incurred 
expenses the amounts specified in paragraphs (b) through (k) of this 
section, subject to the following:
    (i) The principles and procedures for determining reasonable costs 
and reasonable charges and the conditions for Medicare payment, as set 
forth in parts 405 (subparts E and X), 413, and 424 of this chapter.
    (ii) The Part B annual deductible (Sec. 410.160).
    (iii) The special rules for payment to health maintenance 
organizations (HMOs), health care prepayment plans (HCPPs), and 
competitive medical plans (CMPs) that are set forth in part 417 of this 
chapter. (A prepayment organization that does not qualify as an HMO, 
CMP, or HCPP is paid in accordance with paragraph (b)(4) of this 
section.)
    (b) Basic rules for payment. Except as specified in paragraphs (c) 
through (h) of this section, Medicare Part B pays the following amounts:
    (1) For services furnished by, or under arrangements made by, a 
provider other than a nominal charge provider, whichever of the 
following is less:
    (i) 80 percent of the reasonable cost of the services.
    (ii) The reasonable cost of, or the customary charges for, the 
services, whichever is less, minus 20 percent of the customary (insofar 
as reasonable) charges for the services.
    (2) For services furnished by, or under arrangements made by, a 
nominal charge provider, 80 percent of fair compensation.
    (3) For emergency outpatient hospital services furnished by a 
nonparticipating hospital that is eligible to receive payment for those 
services under subpart G of part 424 of this chapter, the amount 
specified in paragraph (b)(1) of this section.
    (4) For services furnished by a person or an entity other than those 
specified in paragraphs (b)(1) through (b)(3) of this section, 80 
percent of the reasonable charges or 80 percent of the payment amount 
computed on any other payment basis for the services.
    (c) Amount of payment: Home health services other than durable 
medical equipment (DME). For home health services other than DME 
furnished by, or under arrangements made by, a participating HHA, 
Medicare Part B pays the following amounts:
    (1) For services furnished by an HHA that is a nominal charge 
provider, 100 percent of fair compensation.
    (2) For services furnished by an HHA that is not a nominal charge 
provider, the lesser of the reasonable cost of the services and the 
customary charges for the services.
    (d) Amount of payment: DME furnished as a home health service.
    (1) Basic rule. Except as specified in paragraph (d)(2) of this 
section--
    (i) For DME furnished by an HHA that is a nominal charge provider,

[[Page 293]]

Medicare Part B pays 80 percent of fair compensation.
    (ii) For DME furnished by an HHA that is not a nominal charge 
provider, Medicare Part B pays the lesser of the following:
    (A) 80 percent of the reasonable cost of the service.
    (B) The reasonable cost of, or the customary charge for, the 
service, whichever is less, minus 20 percent of the customary (insofar 
as reasonable) charge for the service.
    (2) Exception. If the DME is used DME purchased by or on behalf of 
the beneficiary at a price at least 25 percent less than the reasonable 
charge for new equipment--
    (i) For used DME furnished by an HHA that is a nominal charge 
provider, Medicare Part B pays 100 percent of fair compensation.
    (ii) For used DME furnished by an HHA that is not a nominal charge 
provider, Medicare Part B pays 100 percent of the reasonable cost of, or 
the customary charge for, the services, whichever is less.
    (e) Amount of payment: Renal dialysis services, supplies, and 
equipment. Effective for services furnished on or after August 1, 1983, 
Medicare Part B pays for the institutional dialysis services specified 
in Sec. 409.250 and the home dialysis services, supplies, and equipment 
specified in Sec. 409.252, as follows:
    (1) Except as provided in paragraph (d)(2) of this section, 80 
percent of the per treatment prospective reimbursement rate established 
under Sec. 413.170 of this chapter, for outpatient maintenance dialysis 
furnished by ESRD facilities approved in accordance with subpart U of 
part 405 of this chapter.
    (2) Exception. If a home dialysis patient elects to obtain home 
dialysis supplies or equipment (or both) from a party other than an 
approved ESRD facility, payment is in accordance with paragraph (b)(4) 
of this section.
    (f) Amount of payment: Rural health clinic and Federally qualified 
health center services. Medicare Part B pays, for services by a 
participating independent rural health clinic or Federally qualified 
health center, 80 percent of the costs determined under subpart X of 
part 405 of this chapter, to the extent those costs are reasonable and 
related to the cost of furnishing rural health clinic or Federally 
qualified health center services or reasonable on the basis of other 
tests specified by CMS.
    (g) Amount of payment: Used durable medical equipment furnished by 
otherthan an HHA. Medicare Part B pays the following amounts for used 
DME purchased by or on behalf of the beneficiary at a price at least 25 
percent less than the reasonable charge for comparable new equipment:
    (1) For used DME furnished by, or under arrangements made by, a 
nominal charge provider, 100 percent of fair compensation.
    (2) For used DME furnished by or under arrangements made by a 
provider that is not a nominal charge provider, 100 percent of the 
reasonable cost of the service or the customary charge for the service, 
whichever is less.
    (3) For used DME furnished by other than a provider, 100 percent of 
the reasonable charge.
    (h) Amount of payment: Pneumococcal vaccine. Medicare Part B pays 
for pneumococcal vaccine and its administration as follows:
    (1) For services furnished by a nominal charge provider, 100 percent 
of fair compensation.
    (2) For services furnished by a provider that is not a nominal 
charge provider, the reasonable cost of the services or the customary 
charge for the service, whichever is less.
    (3) For services furnished by other than a provider, a rural health 
clinic or a Federally qualified health center, 100 percent of the 
reasonable charge.
    (4) For services furnished by a rural health clinic or a Federally 
qualified health center, 100 percent of the reasonable cost.
    (i) Amount of payment: ASC facility services. For ASC facility 
services that are furnished in connection with the surgical procedures 
specified in part 416 of this chapter, Medicare Part B pays 80 percent 
of a standard overhead amount, as specified in Sec. 416.120(c) of this 
chapter.1
---------------------------------------------------------------------------

    \1\ For services furnished before July 1, 1987, Medicare Part B paid 
100 percent of the standard amount.

---------------------------------------------------------------------------

[[Page 294]]

    (j) Amount of payment: services of Federally funded health 
facilities prior to October 1, 1991. Medicare Part B pays 80 percent of 
charges related to the reasonable costs that a Federally funded health 
facility incurs in furnishing the services. See Sec. 411.8(b)(6) of this 
chapter.
    (k) Amount of payment: Outpatient CAH services. (1) Payment for CAH 
outpatient services is the reasonable cost of the CAH in providing these 
services, as determined in accordance with section 1861(v)(1)(A) of the 
Act, with Sec. 413.70(b) and (c) of this chapter, and with the 
applicable principles of cost reimbursement in part 413 and in part 415 
of this chapter.
    (2) Payment for CAH outpatient services is subject to the applicable 
Medicare Part B deductible and coinsurance amounts, except as described 
in Sec. 413.70(b)(2)(iii) of this chapter, with Part B coinsurance being 
calculated as 20 percent of the customary (insofar as reasonable) 
charges of the CAH for the services.
    (l) Amount of payment: Flu vaccine. Medicare Part B pays 100 percent 
of the Medicare allowed charge.

[51 FR 41339, Nov. 14, 1986; 52 FR 4499, Feb. 12, 1987, as amended at 53 
FR 6648, Mar. 2, 1988; 56 FR 2138, Jan. 22, 1991; 56 FR 8841, Mar. 1, 
1991; 57 FR 24981, June 12, 1992; 58 FR 30668, May 26, 1993; 59 FR 
63462, Dec. 8, 1994; 62 FR 46025, Aug. 29, 1997; 63 FR 20129, Apr. 23, 
1998; 63 FR 26357, May 12, 1998; 63 FR 35066, June 26, 1998; 63 FR 
58910, Nov. 2, 1998; 65 FR 47047, 47105, Aug. 1, 2000; 66 FR 32192, June 
13, 2001]



Sec. 410.155  Outpatient mental health treatment limitation.

    (a) Limitation. Only 62\1/2\ percent of the expenses incurred for 
services subject to the limit as specified in paragraph (b) of this 
section are considered incurred expenses under Medicare Part B when 
determining the amount of payment and deductible under Secs. 410.152 and 
410.160, respectively.
    (b) Application of the limitation--(1) Services subject to the 
limitation. Except as specified in paragraph (b)(2) of this section, the 
following services are subject to the limitation if they are furnished 
in connection with the treatment of a mental, psychoneurotic, or 
personality disorder (that is, any condition identified by a diagnosis 
code within the range of 290 through 319) and are furnished to an 
individual who is not an inpatient of a hospital:
    (i) Services furnished by physicians and other practitioners, 
whether furnished directly or as an incident to those practitioners' 
services.
    (ii) Services provided by a CORF.
    (2) Services not subject to the limitation. Services not subject to 
the limitation include the following:
    (i) Services furnished to a hospital inpatient.
    (ii) Brief office visits for the sole purpose of monitoring or 
changing drug prescriptions used in the treatment of mental, 
psychoneurotic, or personality disorders.
    (iii) Partial hospitalization services not directly provided by a 
physician.
    (iv) Diagnostic services, such as psychological testing, that are 
performed to establish a diagnosis.
    (v) Medical management, as opposed to psychotherapy, furnished to a 
patient diagnosed with Alzheimer's disease or a related disorder.
    (c) Examples. (1) A clinical psychologist submitted a claim for $200 
for outpatient treatment of a beneficiary's mental disorder. The 
Medicare approved amount was $180. Since clinical psychologists must 
accept assignment, the beneficiary is not liable for the $20 in excess 
charges. The beneficiary previously satisfied the $100 annual Part B 
deductible. The limitation reduces the amount of incurred expenses to 
62\1/2\ percent of the approved amount. After subtracting any unmet 
deductible, Medicare pays 80 percent of the remaining incurred expenses. 
Medicare payment and beneficiary liability are computed as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
1. Actual charges.............................................   $200.00
2. Medicare approved amount...................................    180.00
3. Medicare incurred expenses (0.625 x line 2)................    112.50
4. Unmet deductible...........................................      0.00
5. Remainder after subtracting deductible (line 3 minus line      112.50
 4)...........................................................
6. Medicare payment (0.80 x line 5)...........................     90.00
7. Beneficiary liability (line 2 minus line 6)................     90.00
------------------------------------------------------------------------

    (2) A clinical social worker submitted a claim for $135 for 
outpatient treatment of a beneficiary's mental disorder. The Medicare 
approved amount was $120. Since clinical social workers

[[Page 295]]

must accept assignment, the beneficiary is not liable for the $15 in 
excess charges. The beneficiary previously satisfied $70 of the $100 
annual Part B deductible, leaving $30 unmet.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
1. Actual charges.............................................   $135.00
2. Medicare approved amount...................................    120.00
3. Medicare incurred expenses (0.625 x line 2)................     75.00
4. Unmet deductible...........................................     30.00
5. Remainder after subtracting deductible (line 3 minus line       45.00
 4)...........................................................
6. Medicare payment (0.80 x line 5)...........................     36.00
7. Beneficiary liability (line 2 minus line 6)................     84.00
------------------------------------------------------------------------

    (3) A physician who did not accept assignment submitted a claim for 
$780 for services in connection with the treatment of a mental disorder 
that did not require inpatient hospitalization. The Medicare approved 
amount was $750. Because the physician did not accept assignment, the 
beneficiary is liable for the $30 in excess charges. The beneficiary had 
not satisfied any of the $100 Part B annual deductible.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
1. Actual charges.............................................   $780.00
2. Medicare approved amount...................................    750.00
3. Medicare incurred expenses (0.625 x line 2)................    468.75
4. Unmet deductible...........................................    100.00
5. Remainder after subtracting deductible (line 3 minus line      368.75
 4)...........................................................
6. Medicare payment (0.80 x line 5)...........................    295.00
7. Beneficiary liability (line 1 minus line 6)................    485.00
------------------------------------------------------------------------

    (4) A beneficiary's only Part B expenses during 1995 were for a 
physician's services in connection with the treatment of a mental 
disorder that initially required inpatient hospitalization. The 
remaining services were furnished on an outpatient basis. The 
beneficiary had not satisfied any of the $100 annual Part B deductible 
in 1995. The physician, who accepted assignment, submitted a claim for 
$780. The Medicare-approved amount was $750. The beneficiary incurred 
$350 of the approved amount while a hospital inpatient and incurred the 
remaining $400 of the approved amount for outpatient services. Only $400 
of the approved amount is subject to the 62\1/2\ percent limitation 
because the statutory limitation does not apply to services furnished to 
hospital inpatients.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
1. Actual charges.............................................   $780.00
2. Medicare approved amount...................................   $750.00
  2A. Inpatient portion.......................................      $350
  2B. Outpatient portion......................................      $400
3. Medicare incurred expenses.................................   $600.00
  3A. Inpatient portion.......................................      $350
  3B. Outpatient portion (0.625 x line 2B)....................      $250
4. Unmet deductible...........................................   $100.00
5. Remainder after subtracting deductible (line 3 minus line     $500.00
 4)...........................................................
6. Medicare payment (0.80 x line 5)...........................   $400.00
7. Beneficiary liability (line 2 minus line 6)................   $350.00
------------------------------------------------------------------------


[63 FR 20129, Apr. 23, 1998]



Sec. 410.160  Part B annual deductible.

    (a) Basic rule. Except as provided in paragraph (b) of this section, 
incurred expenses (as defined in Sec. 410.152) are subject to, and count 
toward meeting the annual deductible.
    (b) Exceptions. Expenses incurred for the following services are not 
subject to the Part B annual deductible and do not count toward meeting 
that deductible:
    (1) Home health services.
    (2) Pneumococcal vaccines and their administration.
    (3) Federally qualified health center services.
    (4) ASC facility services furnished before July 1987 and physician 
services furnished before April 1988 that met the requirements for 
payment of 100 percent of the reasonable charges.
    (5) Screening mammography services as described in Sec. 410.34 (c) 
and (d).
    (6) Screening pelvic examinations as described in Sec. 410.56.
    (c) Application of the Part B annual deductible. (1) Before payment 
is made under Sec. 410.152, an individual's incurred expenses for the 
calendar year are reduced by the Part B annual deductible.
    (2) The Part B annual deductible is applied to incurred expenses in 
the order in which claims for those expenses are processed by the 
Medicare program.
    (3) Only one Part B annual deductible may be imposed for any 
calendar year and it may be met by any combination of expenses incurred 
in that year.
    (d) Special rule for services reimbursable on a formula basis. (1) 
In applying the formula that takes into account reasonable costs, 
customary charges, and customary (insofar as reasonable)

[[Page 296]]

charges, and is used to determine payment for services furnished by a 
provider that is not a nominal charge provider, the Medicare 
intermediary takes the following steps:
    (i) Reduces the customary charges for the services by an amount 
equal to any unmet portion of the deductible for the calendar year, in 
accordance with paragraph (b) of this section. (The amount of this 
reduction is considered to be the amount of the deductible that is met 
on the basis of the services to which it is applied.)
    (ii) Determines 20 percent of any remaining portion of the customary 
(insofar as reasonable) charge.
    (iii) Determines the lesser of the reasonable cost of the services 
and the customary charges for the services.
    (iv) Reduces the amount determined under paragraph (c)(1)(iii) of 
this section by the sum of the reduction made under paragraph (c)(1)(i) 
of this section and the amount determined under parargaph (c)(1)(ii) of 
this section.
    (v) Reduces the reasonable cost of the services by the amount of the 
reduction made under paragraph (c)(1)(i) of this section and multiplies 
the result by 80 percent.
    (2) In accordance with Sec. 410.152(b)(1), the amount payable is the 
amount determined under paragraph (c)(1)(iv) of this section, or the 
amount determined under paragraph (c)(1)(v) of this section, whichever 
is less.
    (e) Special rule for services of an independent rural health clinic. 
Application of the Part B annual deductible to rural health clinic 
services is in accordance with Sec. 405.2425(b)(2) of this chapter.
    (f) Amount of the Part B annual deductible. (1) Beginning with 
expenses for services furnished during calendar year 1982, the Part B 
annual deductible is $75.
    (2) From 1973 through 1981, the deductible was $60.
    (3) From 1966 through 1972, the deductible was $50.
    (g) Carryover of Part B annual deductible. For calendar years before 
1982, the Part B annual deductible was reduced by the amount of expenses 
incurred during the last quarter of the preceding year that was applied 
to meet the deductible for that preceding year. Example: If $20 of 
expenses incurred in November 1980 was used to meet the 1980 deductible, 
the 1981 deductible was reduced to $40 ($60-$20).
    (h) Examples of application of the annual deductible. (1) Mr. A 
submitted claims for the following expenses incurred during 1982: $20 
for services furnished in March by physician X; $30 for services 
furnished in April by physician Y; $50 for services furnished in June by 
physician Z, for a total of $100. The carrier determined that the 
charges as submitted were the reasonable charges. The first $75 of 
expenses for which claims were processed is applied to meet the $75 
deductible for that year. Medicare Part B pays 80 percent of the 
remaining $25, or $20.
    (2) Mr. B submitted a claim that included a $25 charge by a doctor 
for an examination to prescribe a hearing aid and an $80 charge for 
office surgery. This was the first claim relating to Mr. B's medical 
expenses processed in the calendar year. The carrier disallowed the $25 
charge because the type of examination is not covered by Medicare. The 
carrier reduced the $80 surgery charge to a reasonable charge of $40. 
Only the $40 reasonable charge for covered services will count toward 
meeting Mr. B's deductible. Since the remainder of the surgery charge 
constitutes and excess over the reasonable charge, it cannot be applied 
to satisfy Mr. B's deductible.
    (3) Mr. C became entitled to Medicare Part B benefits on July 1, 
1982. He incurred expenses of $200 in July, August, and September. The 
carrier determined that the changes as submitted were reasonable. Even 
though Mr. C was entitled to benefits for only half the year, he must 
meet the full $75 deductible. Thus, $75 of this expense constitutes Mr. 
C's deductible. Medicare would pay $100, which is 80 percent of the 
remaining $125.

[51 FR 41339, Nov. 14, 1986, as amended at 56 FR 8842 and 8852, Mar. 1, 
1991; 57 FR 24981, June 12, 1992; 62 FR 59101, Oct. 31, 1997]



Sec. 410.161  Part B blood deductible.

    (a) General rules. (1) As used in this section, packed red cells 
means the red blood cells that remain after plasma is separated from 
whole blood.

[[Page 297]]

    (2) A unit of packed red cells is treated as the equivalent of a 
pint of whole blood, which in this section is referred to as a unit of 
whole blood.
    (3) Medicare does not pay for the first 3 units of whole blood or 
units of packed red cells that are furnished under Part A or Part B in a 
calendar year. The Part B blood deductible is reduced to the extent that 
a blood deductible has been applied under Part A.
    (4) The blood deductible does not apply to other blood components 
such as platelets, fibrinogen, plasma, gamma globulin and serum albumin, 
or to the costs of processing, storing, and administering blood.
    (5) The blood deductible is in addition to the Part B annual 
deductible specified in Sec. 410.160.
    (b) Beneficiary's responsibility for the first 3 units of blood. (1) 
The beneficiary is responsible for the first three units of whole blood 
or packed red cells received during a calendar year.
    (2) If the blood is furnished by a hospital or CAH, the rules set 
forth in Sec. 409.87 (b), (c), and (d) of this chapter apply.
    (3) If the blood is furnished by a physician, clinic, or other 
supplier that has accepted assignment of Medicare benefits, or claims 
payment under Sec. 424.64 of this chapter because the beneficiary died 
without assigning benefits, the supplier may charge the beneficiary the 
reasonable charge for the first 3 units, to the extent that those units 
are not replaced.

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988; 56 
FR 8852, Mar. 1, 1991; 58 FR 30668, May 26, 1993]



Sec. 410.163  Payment for services furnished to kidney donors.

    Notwithstanding any other provisions of this chapter, there are no 
deductible or coinsurance requirements with respect to services 
furnished to an individual who donates a kidney for transplant surgery.



Sec. 410.165  Payment for rural health clinic services and ambulatory surgical center services: Conditions.

    (a) Medicare Part B pays for covered rural health clinic and 
Federally qualified health center services if--
    (1) The services are furnished in accordance with the requirements 
of subpart X of part 405 of this chapter and subpart A of part 491 of 
this chapter; and
    (2) The clinic or center files a written request for payment on the 
form and in the manner prescribed by CMS.
    (b) Medicare Part B pays for covered ambulatory surgical center 
(ASC) services if--
    (1) The services are furnished in accordance with the requirements 
of part 416 of this chapter; and
    (2) The ASC files a written request for payment on the form and in 
the manner prescribed by CMS.

[51 FR 41339, Nov. 14, 1986, as amended at 57 FR 24981, June 12, 1992]



Sec. 410.170  Payment for home health services, for medical and other health services furnished by a provider or an approved ESRD facility, and for 
          comprehensive outpatient rehabilitation facility (CORF) 
          services: Conditions.

    Payment under Medicare Part B, for home health services, for medical 
and other health services, or for CORF services, may be made to the 
provider or facility only if the following conditions are met:
    (a) Request for payment. A written request for payment is filed by 
or on behalf of the individual to whom the services were furnished.
    (b) Physician certification. (1) For home health services, a 
physician provides certification and recertification in accordance with 
Sec. 424.22 of this chapter.
    (2) For medical and other health services, a physician provides 
certification and recertification in accordance with Sec. 424.24 of this 
chapter.
    (3) For CORF services, a physician provides certification and 
recertification in accordance with Sec. 424.27 of this chapter.
    (c) In the case of home dialysis support services described in 
Sec. 410.52, the services are furnished in accordance with a written 
plan prepared and periodically reviewed by a team that includes the 
patient's physician and other professionals familiar with the

[[Page 298]]

patient's condition as required by Sec. 405.2137(b)(3) of this chapter.

[51 FR 41339, Nov. 14, 1986, as amended at 53 FR 6648, Mar. 2, 1988]



Sec. 410.172  Payment for partial hospitalization services in CMHCs: Conditions.

    Medicare Part B pays for partial hospitalization services furnished 
in a CMHC on behalf of an individual only if the following conditions 
are met:
    (a) The CMHC files a written request for payment on the CMS form 
1450 and in the manner prescribed by CMS; and
    (b) The services are furnished in accordance with the requirements 
described in Sec. 410.110.

[59 FR 6578, Feb. 11, 1994]



Sec. 410.175  Alien absent from the United States.

    (a) Medicare does not pay Part B benefits for services furnished to 
an individual who is not a citizen or a national of the United States if 
those services are furnished in any month for which the individual is 
not paid monthly social security cash benefits (or would not be paid if 
he or she were entitled to those benefits) because he or she has been 
outside the United States continuously for 6 full calendar months.
    (b) Payment of benefits resumes with services furnished during the 
first full calendar month the alien is back in the United States.

[53 FR 6634, Mar. 2, 1988]



PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE PAYMENT--Table of Contents




   Subpart A--General Exclusions and Exclusion of Particular Services

Sec.
411.1  Basis and scope.
411.2  Conclusive effect of QIO determinations on payment of claims.
411.4  Services for which neither the beneficiary nor any other person 
          is legally obligated to pay.
411.6  Services furnished by a Federal provider of services or other 
          Federal agency.
411.7  Services that must be furnished at public expense under a Federal 
          law or Federal Government contract.
411.8  Services paid for by a Government entity.
411.9  Services furnished outside the United States.
411.10  Services required as a result of war.
411.12  Charges imposed by an immediate relative or member of the 
          beneficiary's household.
411.15  Particular services excluded from coverage.

  Subpart B--Insurance Coverage That Limits Medicare Payment: General 
                               Provisions

411.20  Basis and scope.
411.21  Definitions.
411.23  Beneficiary's cooperation.
411.24  Recovery of conditional payments.
411.25  Third party payer's notice of mistaken Medicare primary payment.
411.26  Subrogation and right to intervene.
411.28  Waiver of recovery and compromise of claims.
411.30  Effect of third party payment on benefit utilization and 
          deductibles.
411.31  Authority to bill third party payers for full charges.
411.32  Basis for Medicare secondary payments.
411.33  Amount of Medicare secondary payment.
411.35  Limitations on charges to a beneficiary or other party when a 
          workers' compensation plan, a no-fault insurer, or an employer 
          group health plan is primary payer.
411.37  Amount of Medicare recovery when a third party payment is made 
          as a result of a judgment or settlement.

 Subpart C--Limitations on Medicare Payment for Services Covered Under 
                          Workers' Compensation

411.40  General provisions.
411.43  Beneficiary's responsibility with respect to workers' 
          compensation.
411.45  Basis for conditional Medicare payment in workers' compensation 
          cases.
411.46  Lump-sum payments.
411.47  Apportionment of a lump-sum compromise settlement of a workers' 
          compensation claim.

 Subpart D--Limitations on Medicare Payment for Services Covered Under 
                     Liability or No-Fault Insurance

411.50  General provisions.
411.51  Beneficiary's responsibility with respect to no-fault insurance.
411.52  Basis for conditional Medicare payment in liability cases.
411.53  Basis for conditional Medicare payment in no-fault cases.
411.54  Limitation on charges when a beneficiary has received a 
          liability insurance

[[Page 299]]

          payment or has a claim pending against a liability insurer.

   Subpart E--Limitations on Payment for Services Covered Under Group 
                    Health Plans: General Provisions

411.100  Basis and scope.
411.101  Definitions.
411.102  Basic prohibitions and requirements.
411.103  Prohibition against financial and other incentives.
411.104  Current employment status.
411.106  Aggregation rules.
411.108  Taking into account entitlement to Medicare.
411.110  Basis for determination of nonconformance.
411.112  Documentation of conformance.
411.114  Determination of nonconformance.
411.115  Notice of determination of nonconformance.
411.120  Appeals.
411.121  Hearing procedures.
411.122  Hearing officer's decision.
411.124  Administrator's review of hearing decision.
411.126  Reopening of determinations and decisions.
411.130  Referral to Internal Revenue Service (IRS).

Subpart F--Special Rules: Individuals Eligible or Entitled on the Basis 
         of ESRD, Who Are Also Covered Under Group Health Plans

411.160  Scope.
411.161  Prohibition against taking into account Medicare eligibility or 
          entitlement or differentiating benefits.
411.162  Medicare benefits secondary to group health plan benefits.
411.163  Coordination of benefits: Dual entitlement situations.
411.165  Basis for conditional Medicare payments.

 Subpart G--Special Rules: Aged Beneficiaries and Spouses Who Are Also 
                    Covered Under Group Health Plans

411.170  General provisions.
411.172  Medicare benefits secondary to group health plan benefits.
411.175  Basis for Medicare primary payments.

 Subpart H--Special Rules: Disabled Beneficiaries Who Are Also Covered 
                     Under Large Group Health Plans

411.200  Basis.
411.201  Definitions.
411.204  Medicare benefits secondary to LGHP benefits.
411.206  Basis for Medicare primary payments and limits on secondary 
          payments.

Subpart I [Reserved]

     Subpart J--Physician Ownership of, and Referral of Patients or 
  Laboratory Specimens to, Entities Furnishing Clinical Laboratory or 
                          Other Health Services

411.350  Scope of subpart.
411.351  Definitions.
411.352  Group practice.
411.353  Prohibition on certain referrals by physicians and limitations 
          on billing.
411.354  Financial relationship, compensation, and ownership or 
          investment interest.
411.355  General exceptions to referral prohibition related to both 
          ownership/investment and compensation.
411.356  Exceptions to referral prohibitions related to ownership or 
          investment interests.
411.357  Exceptions to referral prohibitions related to compensation 
          arrangements.
411.360  Group practice attestation.
411.361  Reporting requirements.
411.370  Advisory opinions relating to physician referrals.
411.372  Procedure for submitting a request.
411.373  Certification.
411.375  Fees for the cost of advisory opinions.
411.377  Expert opinions from outside sources.
411.378  Withdrawing a request.
411.379  When CMS accepts a request.
411.380  When CMS issues a formal advisory opinion.
411.382  CMS's right to rescind advisory opinions.
411.384  Disclosing advisory opinions and supporting information.
411.386  CMS's advisory opinions as exclusive.
411.387  Parties affected by advisory opinions.
411.388  When advisory opinions are not admissible evidence.
411.389  Range of the advisory opinion.

            Subpart K--Payment for Certain Excluded Services

411.400  Payment for custodial care and services not reasonable and 
          necessary.
411.402  Indemnification of beneficiary.
411.404  Criteria for determining that a beneficiary knew that services 
          were excluded from coverage as custodial care or as not 
          reasonable and necessary.
411.406  Criteria for determining that a provider, practitioner, or 
          supplier knew that services were excluded from coverage as

[[Page 300]]

          custodial care or as not reasonable and necessary.
411.408  Refunds of amounts collected for physician services not 
          reasonable and necessary, payment not accepted on an 
          assignment-related basis.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 54 FR 41734, Oct. 11, 1989, unless otherwise noted.

    Editorial Note: Nomenclature changes affecting part 411 appear at 60 
FR 45370, Aug. 31, 1995.



   Subpart A--General Exclusions and Exclusion of Particular Services



Sec. 411.1  Basis and scope.

    (a) Statutory basis. Sections 1814(a) and 1835(a) of the Act require 
that a physician certify or recertify a patient's need for home health 
services but, in general, prohibit a physician from certifying or 
recertifying the need for services if the services will be furnished by 
an HHA in which the physician has a significant ownership interest, or 
with which the physician has a significant financial or contractual 
relationship. Sections 1814(c), 1835(d), and 1862 of the Act exclude 
from Medicare payment certain specified services. The Act provides 
special rules for payment of services furnished by the following: 
Federal providers or agencies (sections 1814(c) and 1835(d)); hospitals 
and physicians outside of the U.S. (sections 1814(f) and 1862(a)(4)); 
and hospitals and SNFs of the Indian Health Service (section 1880 of the 
Act). Section 1877 of the Act sets forth limitations on referrals and 
payment for designated health services furnished by entities with which 
the referring physician (or an immediate family member of the referring 
physician) has a financial relationship.
    (b) Scope. This subpart identifies:
    (1) The particular types of services that are excluded;
    (2) The circumstances under which Medicare denies payment for 
certain services that are usually covered; and
    (3) The circumstances under which Medicare pays for services usually 
excluded from payment.

[54 FR 41734, Oct. 11, 1989, as amended at 60 FR 41978, Aug. 14, 1995; 
60 FR 45361, Aug. 31, 1995; 66 FR 952, Jan. 4, 2001]



Sec. 411.2  Conclusive effect of QIO determinations on payment of claims.

    If a utilization and quality control quality improvement 
organization (QIO) has assumed review responsibility, in accordance with 
part 466 of this chapter, for services furnished to Medicare 
beneficiaries, Medicare payment is not made for those services unless 
the conditions of subpart C of part 466 of this chapter are met.



Sec. 411.4  Services for which neither the beneficiary nor any other person is legally obligated to pay.

    (a) General rule. Except as provided in Sec. 411.8(b) (for services 
paid by a governmental entity), Medicare does not pay for a service if--
    (1) The beneficiary has no legal obligation to pay for the service; 
and
    (2) No other person or organization (such as a prepayment plan of 
which the beneficiary is a member) has a legal obligation to provide or 
pay for that service.
    (b) Special conditions for services furnished to individuals in 
custody of penal authorities. Payment may be made for services furnished 
to individuals or groups of individuals who are in the custody of the 
police or other penal authorities or in the custody of a government 
agency under a penal statute only if the following conditions are met:
    (1) State or local law requires those individuals or groups of 
individuals to repay the cost of medical services they receive while in 
custody.
    (2) The State or local government entity enforces the requirement to 
pay by billing all such individuals, whether or not covered by Medicare 
or any other health insurance, and by pursuing collection of the amounts 
they owe in the same way and with the same vigor that it pursues the 
collection of other debts.

[[Page 301]]



Sec. 411.6  Services furnished by a Federal provider of services or other Federal agency.

    (a) Basic rule. Except as provided in paragraph (b) of this section, 
Medicare does not pay for services furnished by a Federal provider of 
services or other Federal agency.
    (b) Exceptions. Payment may be made--
    (1) For emergency hospital services, if the conditions of 
Sec. 424.103 of this chapter are met;
    (2) For services furnished by a participating Federal provider which 
CMS has determined is providing services to the public generally as a 
community institution or agency;
    (3) For services furnished by participating hospitals and SNFs of 
the Indian Health Service; and
    (4) For services furnished under arrangements (as defined in 
Sec. 409.3 of this chapter) made by a participating hospital.



Sec. 411.7  Services that must be furnished at public expense under a Federal law or Federal Government contract.

    (a) Basic rule. Except as provided in paragraph (b) of this section, 
payment may not be made for services that any provider or supplier is 
obligated to furnish at public expense, in accordance with a law of, or 
a contract with, the United States.
    (b) Exception. Payment may be made for services that a hospital or 
SNF of the Indian Health Service is obligated to furnish at public 
expense.



Sec. 411.8  Services paid for by a Government entity.

    (a) Basic rule. Except as provided in paragraph (b) of this section, 
Medicare does not pay for services that are paid for directly or 
indirectly by a government entity.
    (b) Exceptions. Payment may be made for the following:
    (1) Services furnished under a health insurance plan established for 
employees of the government entity.
    (2) Services furnished under a title of the Social Security Act 
other than title XVIII.
    (3) Services furnished in or by a participating general or special 
hospital that--
    (i) Is operated by a State or local government agency; and
    (ii) Serves the general community.
    (4) Services furnished in a hospital or elsewhere, as a means of 
controlling infectious diseases or because the individual is medically 
indigent.
    (5) Services furnished by a participating hospital or SNF of the 
Indian Health Service.
    (6) Services furnished by a public or private health facility that--
    (i) Is not a Federal provider or other facility operated by a 
Federal agency;
    (ii) Receives U.S. government funds under a Federal program that 
provides support to facilities that furnish health care services;
    (iii) Customarily seeks payment for services not covered under 
Medicare from all available sources, including private insurance and 
patients' cash resources; and
    (iv) Limits the amounts it collects or seeks to collect from a 
Medicare Part B beneficiary and others on the beneficiary's behalf to:
    (A) Any unmet deductible applied to the charges related to the 
reasonable costs that the facility incurs in providing the covered 
services;
    (B) Twenty percent of the remainder of those charges;
    (C) The charges for noncovered services.
    (7) Rural health clinic services that meet the requirements set 
forth in part 491 of this chapter.

[54 FR 41734, Oct. 11, 1989, as amended at 56 FR 2139, Jan. 22, 1991]



Sec. 411.9  Services furnished outside the United States.

    (a) Basic rule. Except as specified in paragraph (b) of this 
section, Medicare does not pay for services furnished outside the United 
States. For purposes of this paragraph (a), the following rules apply:
    (1) The United States includes the 50 States, the District of 
Columbia, Puerto Rico, the Virgin Islands, Guam,

[[Page 302]]

American Samoa, The Northern Mariana Islands, and for purposes of 
services rendered on board ship, the territorial waters adjoining the 
land areas of the United States.
    (2) Services furnished on board ship are considered to have been 
furnished in United States territorial waters if they were furnished 
while the ship was in a port of one of the jurisdictions listed in 
paragraph (a)(1) of this section, or within 6 hours before arrival at, 
or 6 hours after departure from, such a port.
    (3) A hospital that is not physically situated in one of the 
jurisdictions listed in paragraph (a)(1) of this section is considered 
to be outside the United States, even if it is owned or operated by the 
United States Government.
    (b) Exception. Under the circumstances specified in subpart H of 
part 424 of this chapter, payment may be made for covered inpatient 
services furnished in a foreign hospital and, on the basis of an 
itemized bill, for covered physicians' services and ambulance service 
furnished in connection with those inpatient services, but only for the 
period during which the inpatient hospital services are furnished.



Sec. 411.10  Services required as a result of war.

    Medicare does not pay for services that are required as a result of 
war, or an act of war, that occurs after the effective date of a 
beneficiary's current coverage for hospital insurance benefits or 
supplementary medical insurance benefits.



Sec. 411.12  Charges imposed by an immediate relative or member of the beneficiary's household.

    (a) Basic rule. Medicare does not pay for services usually covered 
under Medicare if the charges for those services are imposed by--
    (1) An immediate relative of the beneficiary; or
    (2) A member of the beneficiary's household.
    (b) Definitions. As used in this section--
    Immediate relative means any of the following:
    (1) Husband or wife.
    (2) Natural or adoptive parent, child, or sibling.
    (3) Stepparent, stepchild, stepbrother, or stepsister.
    (4) Father-in-law, mother-in-law, son-in-law, daughter-in-law, 
brother-in-law, or sister-in-law.
    (5) Grandparent or grandchild.
    (6) Spouse of grandparent or grandchild.
    Member of the household means any person sharing a common abode as 
part of a single family unit, including domestic employees and others 
who live together as part of a family unit, but not including a mere 
roomer or boarder.
    Professional corporation means a corporation that is completely 
owned by one or more physicians and is operated for the purpose of 
conducting the practice of medicine, osteopathy dentistry, podiatry, 
optometry, or chiropractic, or is owned by other health care 
professionals as authorized by State law.
    (c) Applicability of the exclusion. The exclusion applies to the 
following charges in the specified circumstances:
    (1) Physicians' services. (i) Charges for physicians' services 
furnished by an immediate relative of the beneficiary or member of the 
beneficiary's household, even if the bill or claim is submitted by 
another individual or by an entity such as a partnership or a 
professional corporation.
    (ii) Charges for services furnished incident to a physician's 
professional services (for example by the physician's nurse or 
technician), only if the physician who ordered or supervised the 
services has an excluded relationship to the beneficiary.
    (2) Services other than physicians' services. (i) Charges imposed by 
an individually owned provider or supplier if the owner has an excluded 
relationship to the beneficiary; and
    (ii) Charges imposed by a partnership if any of the partners has an 
excluded relationship to the beneficiary.
    (d) Exception to the exclusion. The exclusion does not apply to 
charges imposed by a corporation other than a professional corporation.

[[Page 303]]



Sec. 411.15  Particular services excluded from coverage.

    The following services are excluded from coverage:
    (a) Routine physical checkups such as:
    (1) Examinations performed for a purpose other than treatment or 
diagnosis of a specific illness, symptoms, complaint, or injury, except 
for screening mammography, colorectal cancer screening tests, screening 
pelvic examinations, prostate cancer screening tests, or glaucoma 
screening exams that meet the criteria specified in paragraphs (k)(6) 
through (k)(10) of this section.
    (2) Examinations required by insurance companies, business 
establishments, government agencies, or other third parties.
    (b) Eyeglasses or contact lenses, except for:
    (1) Post-surgical prosthetic lenses customarily used during 
convalescence for eye surgery in which the lens of the eye was removed 
(e.g., cataract surgery);
    (2) Prosthetic lenses for patients who lack the lens of the eye 
because of congenital absence or surgical removal; and
    (3) One pair of conventional eyeglasses or conventional contact 
lenses furnished after each cataract surgery during which an intraocular 
lens is inserted.
    (c) Eye examinations for the purpose of prescribing, fitting, or 
changing eyeglasses or contact lenses for refractive error only and 
procedures performed in the course of any eye examination to determine 
the refractive state of the eyes, without regard to the reason for the 
performance of the refractive procedures. Refractive procedures are 
excluded even when performed in connection with otherwise covered 
diagnosis or treatment of illness or injury.
    (d) Hearing aids or examination for the purpose of prescribing, 
fitting, or changing hearing aids.
    (e) Immunizations, except for--
    (1) Vaccinations or inoculations directly related to the treatment 
of an injury or direct exposure such as antirabies treatment, tetanus 
antitoxin or booster vaccine, botulin antitoxin, antivenom sera, or 
immune globulin;
    (2) Pneumococcal vaccinations that are reasonable and necessary for 
the prevention of illness;
    (3) Hepatitis B vaccinations that are reasonable and necessary for 
the prevention of illness for those individuals, as defined in 
Sec. 410.63(a) of this chapter, who are at high or intermediate risk of 
contracting hepatitis B; and
    (4) Influenza vaccinations that are reasonable and necessary for the 
prevention of illness.
    (f) Orthopedic shoes or other supportive devices for the feet, 
except when shoes are integral parts of leg braces.
    (g) Custodial care, except as necessary for the palliation or 
management of terminal illness, as provided in part 418 of this chapter. 
(Custodial care is any care that does not meet the requirements for 
coverage as SNF care as set forth in Secs. 409.31 through 409.35 of this 
chapter.)
    (h) Cosmetic surgery and related services, except as required for 
the prompt repair of accidental injury or to improve the functioning of 
a malformed body member.
    (i) Dental services in connection with the care, treatment, filling, 
removal, or replacement of teeth, or structures directly supporting the 
teeth, except for inpatient hospital services in connection with such 
dental procedures when hospitalization is required because of--
    (1) The individual's underlying medical condition and clinical 
status; or
    (2) The severity of the dental procedures.1
---------------------------------------------------------------------------

    \1\ Before July 1981, inpatient hospital care in connection with 
dental procedures was covered only when required by the patient's 
underlying medical condition and clinical status.
---------------------------------------------------------------------------

    (j) Personal comfort services, except as necessary for the 
palliation or management of terminal illness as provided in part 418 of 
this chapter. The use of a television set or a telephone are examples of 
personal comfort services.
    (k) Any services that are not reasonable and necessary for one of 
the following purposes:
    (1) For the diagnosis or treatment of illness or injury or to 
improve the functioning of a malformed body member.

[[Page 304]]

    (2) In the case of hospice services, for the palliation or 
management of terminal illness, as provided in part 418 of this chapter.
    (3) In the case of pneumococcal vaccine for the prevention of 
illness.
    (4) In the case of the patient outcome assessment program 
established under section 1875(c) of the Act, for carrying out the 
purpose of that section.
    (5) In the case of hepatitis B vaccine, for the prevention of 
illness for those individuals at high or intermediate risk of 
contracting hepatitis B. (Section 410.63(a) of this chapter sets forth 
criteria for identifying those individuals.)
    (6) In the case of screening mammography, for the purpose of early 
detection of breast cancer subject to the conditions and limitations 
specified in Sec. 410.34 of this chapter.
    (7) In the case of colorectal cancer screening tests, for the 
purpose of early detection of colorectal cancer subject to the 
conditions and limitations specified in Sec. 410.37 of this chapter.
    (8) In the case of screening pelvic examinations, for the purpose of 
early detection of cervical or vaginal cancer subject to the conditions 
and limitations specified in Sec. 410.56 of this chapter.
    (9) In the case of prostate cancer screening tests, for the purpose 
of early detection of prostate cancer, subject to the conditions and 
limitations specified in Sec. 410.39 of this chapter.
    (10) In the case of screening exams for glaucoma, for the purpose of 
early detection of glaucoma, subject to the conditions and limitations 
specified in Sec. 410.23 of this chapter.
    (l) Foot care. (1) Basic rule. Except as provided in paragraph 
(l)(2) of this section, any services furnished in connection with the 
following:
    (i) Routine foot care, such as the cutting or removal of corns, or 
calluses, the trimming of nails, routine hygienic care (preventive 
maintenance care ordinarily within the realm of self care), and any 
service performed in the absence of localized illness, injury, or 
symptoms involving the feet.
    (ii) The evaluation or treatment of subluxations of the feet 
regardless of underlying pathology. (Subluxations are structural 
misalignments of the joints, other than fractures or complete 
dislocations, that require treatment only by nonsurgical methods.
    (iii) The evaluation or treatment of flattened arches (including the 
prescription of supportive devices) regardless of the underlying 
pathology.
    (2) Exceptions. (i) Treatment of warts is not excluded.
    (ii) Treatment of mycotic toenails may be covered if it is furnished 
no more often than every 60 days or the billing physician documents the 
need for more frequent treatment.
    (iii) The services listed in paragraph (l)(1) of this section are 
not excluded if they are furnished--
    (A) As an incident to, at the same time as, or as a necessary 
integral part of a primary covered procedure performed on the foot; or
    (B) As initial diagnostic services (regardless of the resulting 
diagnosis) in connection with a specific symptom or complaint that might 
arise from a condition whose treatment would be covered.
    (m) Services to hospital patients--(1) Basic rule. Except as 
provided in paragraph (m)(3) of this section, any service furnished to 
an inpatient of a hospital or to a hospital outpatient (as defined in 
Sec. 410.2 of this chapter) during an encounter (as defined in 
Sec. 410.2 of this chapter) by an entity other than the hospital unless 
the hospital has an arrangement (as defined in Sec. 409.3 of this 
chapter) with that entity to furnish that particular service to the 
hospital's patients. As used in this paragraph (m)(1), the term 
``hospital'' includes a CAH.
    (2) Scope of exclusion. Services subject to exclusion from coverage 
under the provisions of this paragraph (m) include, but are not limited 
to, clinical laboratory services; pacemakers and other prostheses and 
prosthetic devices (other than dental) that replace all or part of an 
internal body organ (for example, intraocular lenses); artificial limbs, 
knees, and hips; equipment and supplies covered under the prosthetic 
device benefits; and services incident to a physician service.
    (3) Exceptions. The following services are not excluded from 
coverage:
    (i) Physicians' services that meet the criteria of Sec. 415.102(a) 
of this chapter for

[[Page 305]]

payment on a reasonable charge or fee schedule basis.
    (ii) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act, that are furnished after December 31, 1990.
    (iii) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (iv) Certified nurse-midwife services, as defined in section 
1861(ff) of the Act, that are furnished after December 31, 1990.
    (v) Qualified psychologist services, as defined in section 1861(ii) 
of the Act, that are furnished after December 31, 1990.
    (vi) Services of an anesthetist, as defined in Sec. 410.69 of this 
chapter.
    (n) Certain services of an assistant-at-surgery.
    (1) Services of an assistant-at-surgery in a cataract operation 
(including subsequent insertion of an intraocular lens) unless, before 
the surgery is performed, the appropriate QIO or a carrier has approved 
the use of such an assistant in the surgical procedure based on the 
existence of a complicating medical condition.
    (2) Services on an assistant-at-surgery in a surgical procedure (or 
class of surgical procedures) for which assistants-at-surgery on average 
are used in fewer than 5 percent of such procedures nationally.
    (o) Experimental or investigational devices, except for certain 
devices--
    (1) Categorized by the FDA as a non-experimental/investigational 
(Category B) device defined in Sec. 405.201(b) of this chapter; and
    (2) Furnished in accordance with the FDA-approved protocols 
governing clinical trials.
    (p) Services furnished to SNF residents--(1) Basic rule. Except as 
provided in paragraph (p)(2) of this section, any service furnished to a 
resident of an SNF during a covered Part A stay by an entity other than 
the SNF, unless the SNF has an arrangement (as defined in Sec. 409.3 of 
this chapter) with that entity to furnish that particular service to the 
SNF's residents. Services subject to exclusion under this paragraph 
include, but are not limited to--
    (i) Any physical, occupational, or speech-language therapy services, 
regardless of whether the services are furnished by (or under the 
supervision of) a physician or other health care professional, and 
regardless of whether the resident who receives the services is in a 
covered Part A stay; and
    (ii) Services furnished as an incident to the professional services 
of a physician or other health care professional specified in paragraph 
(p)(2) of this section.
    (2) Exceptions. The following services are not excluded from 
coverage, provided that the claim for payment includes the SNF's 
Medicare provider number in accordance with Sec. 424.32(a)(5) of this 
chapter:
    (i) Physicians' services that meet the criteria of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (ii) Services performed under a physician's supervision by a 
physician assistant who meets the applicable definition in section 
1861(aa)(5) of the Act.
    (iii) Services performed by a nurse practitioner or clinical nurse 
specialist who meets the applicable definition in section 1861(aa)(5) of 
the Act and is working in collaboration (as defined in section 
1861(aa)(6) of the Act) with a physician.
    (iv) Services performed by a certified nurse-midwife, as defined in 
section 1861(gg) of the Act.
    (v) Services performed by a qualified psychologist, as defined in 
section 1861(ii) of the Act.
    (vi) Services performed by a certified registered nurse anesthetist, 
as defined in section 1861(bb) of the Act.
    (vii) Dialysis services and supplies, as defined in section 
1861(s)(2)(F) of the Act, and those ambulance services that are 
furnished in conjunction with them.
    (viii) Erythropoietin (EPO) for dialysis patients, as defined in 
section 1861(s)(2)(O) of the Act.
    (ix) Hospice care, as defined in section 1861(dd) of the Act.
    (x) An ambulance trip that initially conveys an individual to the 
SNF to be admitted as a resident, or that conveys an individual from the 
SNF in connection with one of the circumstances specified in paragraphs 
(p)(3)(i) through (p)(3)(iv) of this section as ending the individual's 
status as an SNF resident.

[[Page 306]]

    (xi) The transportation costs of electrocardiogram equipment (HCPCS 
code R0076), but only with respect to those electrocardiogram test 
services furnished during 1998.
    (xii) Those chemotherapy items identified, as of July 1, 1999, by 
HCPCS codes J9000-J9020; J9040-J9151; J9170-J9185; J9200-J9201; J9206-
J9208; J9211; J9230-J9245; and J9265-J9600.
    (xiii) Those chemotherapy administration services identified, as of 
July 1, 1999, by HCPCS codes 36260-36262; 36489; 36530-36535; 36640; 
36823; and 96405-96542.
    (xiv) Those radioisotope services identified, as of July 1, 1999, by 
HCPCS codes 79030-79440.
    (xv) Those customized prosthetic devices (including artificial limbs 
and their components) identified, as of July 1, 1999, by HCPCS codes 
L5050-L5340; L5500-L5611; L5613-L5986; L5988; L6050-L6370; L6400-6880; 
L6920-L7274; and L7362-L7366, which are delivered for a resident's use 
during a stay in the SNF and intended to be used by the resident after 
discharge from the SNF.
    (3) SNF resident defined. For purposes of this paragraph, a 
beneficiary who is admitted to a Medicare-participating SNF is 
considered to be a resident of the SNF for the duration of the 
beneficiary's covered Part A stay. In addition, for purposes of the 
services described in paragraph (p)(1)(i) of this section, a beneficiary 
who is admitted to a Medicare-participating SNF is considered to be a 
resident of the SNF regardless of whether the beneficiary is in a 
covered Part A stay. Whenever the beneficiary leaves the facility, the 
beneficiary's status as an SNF resident for purposes of this paragraph 
(along with the SNF's responsibility to furnish or make arrangements for 
the services described in paragraph (p)(1) of this section) ends when 
one of the following events occurs--
    (i) The beneficiary is admitted as an inpatient to a Medicare-
participating hospital or CAH, or as a resident to another SNF;
    (ii) The beneficiary receives services from a Medicare-participating 
home health agency under a plan of care;
    (iii) The beneficiary receives outpatient services from a Medicare-
participating hospital or CAH (but only with respect to those services 
that are beyond the general scope of SNF comprehensive care plans, as 
required under Sec. 483.20 of this chapter); or
    (iv) The beneficiary is formally discharged (or otherwise departs) 
from the SNF, unless the beneficiary is readmitted (or returns) to that 
or another SNF by midnight of the day of departure.
    (q) Assisted suicide. Any health care service used for the purpose 
of causing, or assisting to cause, the death of any individual. This 
does not pertain to the withholding or withdrawing of medical treatment 
or care, nutrition or hydration or to the provision of a service for the 
purpose of alleviating pain or discomfort, even if the use may increase 
the risk of death, so long as the service is not furnished for the 
specific purpose of causing death.
    (r) A home health service (including medical supplies described in 
section 1861(m)(5) of the Act, but excluding durable medical equipment 
to the extent provided for in such section) as defined in section 
1861(m) of the Act furnished to an individual who is under a plan of 
care of an HHA, unless that HHA has submitted a claim for payment for 
such services.

[54 FR 41734, Oct. 11, 1989; 55 FR 1820, Jan. 19, 1990, as amended at 55 
FR 22789, June 4, 1990; 55 FR 31185, Aug. 1, 1990; 57 FR 33897, July 31, 
1992; 57 FR 36015, Aug. 12, 1992; 58 FR 30669, May 26, 1993; 59 FR 
49834, Sept. 30, 1994; 60 FR 48424, Sept. 19, 1995; 60 FR 63188, Dec. 8, 
1995; 62 FR 46037, Aug. 29, 1997; 62 FR 59101, Oct. 31, 1997; 63 FR 
26308, May 12, 1998; 63 FR 35066, June 26, 1998; 64 FR 41682, July 30, 
1999; 64 FR 59441, Nov. 2, 1999; 65 FR 18537, Apr. 7, 2000; 65 FR 41211, 
July 3, 2000; 65 FR 46796, July 31, 2000; 66 FR 32778, June 18, 2001; 66 
FR 39600, July 31, 2001; 66 FR 48078, Sept. 17, 2001; 66 FR 55331, Nov. 
1, 2001; 66 FR 58786, Nov. 23, 2001]



  Subpart B--Insurance Coverage That Limits Medicare Payment: General 
                               Provisions



Sec. 411.20  Basis and scope.

    (a) Statutory basis. (1) Section 1862(b)(2)(A)(i) of the Act 
precludes Medicare payment for services to the extent that payment has 
been made or can reasonably be expected to be made under a group health 
plan with respect to--

[[Page 307]]

    (i) A beneficiary entitled to Medicare on the basis of ESRD during 
the first 18 months of that entitlement;
    (ii) A beneficiary who is age 65 or over, entitled to Medicare on 
the basis of age, and covered under the plan by virtue of his or her 
current employment status or the current employment status of a spouse 
of any age; or
    (iii) A beneficiary who is under age 65, entitled to Medicare on the 
basis of disability, and covered under the plan by virtue of his or her 
current employment status or the current employment status of a family 
member.
    (2) Section 1862(b)(2)(A)(ii) of the Act precludes Medicare payment 
for services to the extent that payment has been made or can reasonably 
be expected to be made promptly under any of the following:
    (i) Workers' compensation.
    (ii) Liability insurance.
    (iii) No-fault insurance.
    (b) Scope. This subpart sets forth general rules that apply to the 
types of insurance specified in paragraph (a) of this section. Other 
general rules that apply to group health plans are set forth in subpart 
E of this part.

[60 FR 45361, Aug. 31, 1995]



Sec. 411.21  Definitions.

    In this subpart B and in subparts C through H of this part, unless 
the context indicates otherwise--
    Conditional payment means a Medicare payment for services for which 
another payer is responsible, made either on the bases set forth in 
subparts C through H of this part, or because the intermediary or 
carrier did not know that the other coverage existed.
    Coverage or covered services, when used in connection with third 
party payments, means services for which a third party payer would pay 
if a proper claim were filed.
    Monthly capitation payment means a comprehensive monthly payment 
that covers all physician services associated with the continuing 
medical management of a maintenance dialysis patient who dialyses at 
home or as an outpatient in an approved ESRD facility.
    Plan means any arrangement, oral or written, by one or more 
entities, to provide health benefits or medical care or assume legal 
liability for injury or illness.
    Prompt or promptly, when used in connection with third party 
payments, except as provided in Sec. 411.50, for payments by liability 
insurers, means payment within 120 days after receipt of the claim.
    Proper claim means a claim that is filed timely and meets all other 
claim filing requirements specified by the plan, program, or insurer.
    Secondary, when used to characterize Medicare benefits, means that 
those benefits are payable only to the extent that payment has not been 
made and cannot reasonably be expected to be made under other coverage 
that is primary to Medicare.
    Secondary payments means payments made for Medicare covered services 
or portions of services that are not payable under other coverage that 
is primary to Medicare.
    Third party payer means an insurance policy, plan, or program that 
is primary to Medicare.
    Third party payment means payment by a third party payer for 
services that are also covered under Medicare.

[54 FR 41734, Oct. 11, 1989, as amended at 60 FR 45361, Aug. 31, 1995]



Sec. 411.23  Beneficiary's cooperation.

    (a) If CMS takes action to recover conditional payments, the 
beneficiary must cooperate in the action.
    (b) If CMS's recovery action is unsuccessful because the beneficiary 
does not cooperate, CMS may recover from the beneficiary.



Sec. 411.24  Recovery of conditional payments.

    If a Medicare conditional payment is made, the following rules 
apply:
    (a) Release of information. The filing of a Medicare claim by on or 
behalf of the beneficiary constitutes an express authorization for any 
entity, including State Medicaid and workers' compensation agencies, and 
data depositories, that possesses information pertinent to the Medicare 
claim to release that information to CMS. This information will be used 
only for Medicare claims processing and for coordination of benefits 
purposes.

[[Page 308]]

    (b) Right to initiate recovery. CMS may initiate recovery as soon as 
it learns that payment has been made or could be made under workers' 
compensation, any liability or no-fault insurance, or an employer group 
health plan.
    (c) Amount of recovery. (1) If it is not necessary for CMS to take 
legal action to recover, CMS recovers the lesser of the following:
    (i) The amount of the Medicare primary payment.
    (ii) The full primary payment amount that the primary payer is 
obligated to pay under this part without regard to any payment, other 
than a full primary payment that the primary payer has paid or will 
make, or, in the case of a third party payment recipient, the amount of 
the third party payment.
    (2) If it is necessary for CMS to take legal action to recover from 
the primary payer, CMS may recover twice the amount specified in 
paragraph (c)(1)(i) of this section.
    (d) Methods of recovery. CMS may recover by direct collection or by 
offset against any monies CMS owes the entity responsible for refunding 
the conditional payment.
    (e) Recovery from third parties. CMS has a direct right of action to 
recover from any entity responsible for making primary payment. This 
includes an employer, an insurance carrier, plan, or program, and a 
third party administrator.
    (f) Claims filing requirements. (1) CMS may recover without regard 
to any claims filing requirements that the insurance program or plan 
imposes on the beneficiary or other claimant such as a time limit for 
filing a claim or a time limit for notifying the plan or program about 
the need for or receipt of services.
    (2) However, CMS will not recover its payment for particular 
services in the face of a claims filing requirement unless it has filed 
a claim for recovery by the end of the year following the year in which 
the Medicare intermediary or carrier that paid the claim has notice that 
the third party is primary to Medicare for those particular services. (A 
notice received during the last three months of a year is considered 
received during the following year.)
    (g) Recovery from parties that receive third party payments. CMS has 
a right of action to recover its payments from any entity, including a 
beneficiary, provider, supplier, physician, attorney, State agency or 
private insurer that has received a third party payment.
    (h) Reimbursement to Medicare. If the beneficiary or other party 
receives a third party payment, the beneficiary or other party must 
reimburse Medicare within 60 days.
    (i) Special rules. (1) In the case of liability insurance 
settlements and disputed claims under employer group health plans and 
no-fault insurance, the following rule applies: If Medicare is not 
reimbursed as required by paragraph (h) of this section, the third party 
payer must reimburse Medicare even though it has already reimbursed the 
beneficiary or other party.
    (2) The provisions of paragraph (i)(1) of this section also apply if 
a third party payer makes its payment to an entity other than Medicare 
when it is, or should be, aware that Medicare has made a conditional 
primary payment.
    (3) In situations that involve procurement costs, the rule of 
Sec. 411.37(b) applies.
    (j) Recovery against Medicaid agency. If a third party payment is 
made to a State Medicaid agency and that agency does not reimburse 
Medicare, CMS may reduce any Federal funds due the Medicaid agency 
(under title XIX of the Act) by an amount equal to the Medicare payment 
or the third party payment, whichever is less.
    (k) Recovery against Medicare contractor. If a Medicare contractor, 
including an intermediary or carrier, also insures, underwrites, or 
administers as a third party administrator, a program or plan that is 
primary to Medicare, and does not reimburse Medicare, CMS may offset the 
amount owed against any funds due the intermediary or carrier under 
title XVIII of the Act or due the contractor under the contract.
    (l) Recovery when there is failure to file a proper claim. (1) Basic 
rule. If Medicare makes a conditional payment with respect to services 
for which the beneficiary or provider or supplier has not filed a proper 
claim with a third party

[[Page 309]]

payer, and Medicare is unable to recover from the third party payer, 
Medicare may recover from the beneficiary or provider or supplier that 
was responsible for the failure to file a proper claim.
    (2) Exceptions: (i) This rule does not apply in the case of 
liability insurance nor when failure to file a proper claim is due to 
mental or physical incapacity of the beneficiary.
    (ii) CMS will not recover from providers or suppliers that are in 
compliance with the requirements of Sec. 489.20 of this chapter and can 
show that the reason they failed to file a proper claim is that the 
beneficiary, or someone acting on his or her behalf, failed to give, or 
gave erroneous, information regarding coverage that is primary to 
Medicare.
    (m) Interest charges. (1) With respect to recovery of payments for 
items and services furnished before October 31, 1994, CMS charges 
interest, exercising common law authority in accordance with 45 CFR 
30.13, consistent with the Federal Claims Collection Act (31 U.S.C. 
3711).
    (2) In addition to its common law authority with respect to recovery 
of payments for items and services furnished on or after October 31, 
1994, CMS charges interest in accordance with section 1862(b)(2)(B)(i) 
of the Act. Under that provision--
    (i) CMS may charge interest if reimbursement is not made to the 
appropriate trust fund before the expiration of the 60-day period that 
begins on the date on which notice or other information is received by 
CMS that payment has been or could be made under a primary plan;
    (ii) Interest may accrue from the date when that notice or other 
information is received by CMS and is charged until reimbursement is 
made; and
    (iii) The rate of interest is that provided at 42 CFR 405.376(d).

[54 FR 41734, Oct. 11, 1989, as amended at 55 FR 1820, Jan. 19, 1990; 60 
FR 45361, 45362, Aug. 31, 1995]



Sec. 411.25  Third party payer's notice of mistaken Medicare primary payment.

    (a) If a third party payer learns that CMS has made a Medicare 
primary payment for services for which the third party payer has made or 
should have made primary payment, it must give notice to that effect to 
the Medicare intermediary or carrier that paid the claim.
    (b) The notice must describe the specific situation and the 
circumstances (including the particular type of insurance coverage as 
specified in Sec. 411.20(a)) and, if appropriate, the time period during 
which the insurer is primary to Medicare.
    (c) If a plan is self-insured and self-administered, the employer 
must give the notice to CMS. Otherwise, the insurer, underwriter, or 
third party administrator must give the notice.

[54 FR 41734, Oct. 11, 1989; as amended at 55 FR 1820, Jan. 19, 1990]



Sec. 411.26  Subrogation and right to intervene.

    (a) Subrogation. With respect to services for which Medicare paid, 
CMS is subrogated to any individual, provider, supplier, physician, 
private insurer, State agency, attorney, or any other entity entitled to 
payment by a third party payer.
    (b) Right to intervene. CMS may join or intervene in any action 
related to the events that gave rise to the need for services for which 
Medicare paid.



Sec. 411.28  Waiver of recovery and compromise of claims.

    (a) CMS may waive recovery, in whole or in part, if the probability 
of recovery, or the amount involved, does not warrant pursuit of the 
claim.
    (b) General rules applicable to compromise of claims are set forth 
in subpart F of part 401 and Sec. 405.376 of this chapter.
    (c) Other rules pertinent to recovery are contained in subpart C of 
part 405 of this chapter.

[54 FR 41734, Oct. 11, 1989, as amended at 61 FR 63749, Dec. 2, 1996]

[[Page 310]]



Sec. 411.30  Effect of third party payment on benefit utilization and deductibles.

    (a) Benefit utilization. Inpatient psychiatric hospital and SNF care 
that is paid for by a third party payer is not counted against the 
number of inpatient care days available to the beneficiary under 
Medicare Part A.
    (b) Deductibles. Expenses for Medicare covered services that are 
paid for by third party payers are credited toward the Medicare Part A 
and Part B deductibles.



Sec. 411.31  Authority to bill third party payers for full charges.

    (a) The fact that Medicare payments are limited to the DRG amount, 
or the reasonable charge, reasonable cost, capitation or fee schedule 
rate, does not affect the amount that a third party payer may pay.
    (b) With respect to workers' compensation plans, no-fault insurers, 
and employer group health plans, a provider or supplier may bill its 
full charges and expect those charges to be paid unless there are limits 
imposed by laws other than title XVIII of the Act or by agreements with 
the third party payer.



Sec. 411.32  Basis for Medicare secondary payments.

    (a) Basic rules. (1) Medicare benefits are secondary to benefits 
payable by a third party payer even if State law or the third party 
payer states that its benefits are secondary to Medicare benefits or 
otherwise limits its payments to Medicare beneficiaries.
    (2) Except as provided in paragraph (b) of this section, Medicare 
makes secondary payments, within the limits specified in paragraph (c) 
of this section and in Sec. 411.33, to supplement the third party 
payment if that payment is less than the charges for the services and, 
in the case of services paid on other than a reasonable charge basis, 
less than the gross amount payable by Medicare under Sec. 411.33(e).
    (b) Exception. Medicare does not make a secondary payment if the 
provider or supplier is either obligated to accept, or voluntarily 
accepts, as full payment, a third party payment that is less than its 
charges.
    (c) General limitation: Failure to file a proper claim. When a 
provider or supplier, or a beneficiary who is not physically or mentally 
incapacitated, receives a reduced third party payment because of failure 
to file a proper claim, the Medicare secondary payment may not exceed 
the amount that would have been payable under Sec. 411.33 if the third 
party payer had paid on the basis of a proper claim.

The provider, supplier, or beneficiary must inform CMS that a reduced 
payment was made, and the amount that would have been paid if a proper 
claim had been filed.



Sec. 411.33  Amount of Medicare secondary payment.

    (a) Services for which CMS pays on a Medicare fee schedule or 
reasonable charge basis. The Medicare secondary payment is the lowest of 
the following:
    (1) The actual charge by the supplier (or the amount the supplier is 
obligated to accept as payment in full if that is less than the charges) 
minus the amount paid by the third party payer.
    (2) The amount that Medicare would pay if the services were not 
covered by a third party payer.
    (3) The higher of the Medicare fee schedule, Medicare reasonable 
charge, or other amount which would be payable under Medicare (without 
regard to any applicable Medicare deductible or coinsurance amounts) or 
the third party payer's allowable charge (without regard to any 
deductible or co-insurance imposed by the policy or plan) minus the 
amount actually paid by the third party payer.
    (b) Example: An individual received treatment from a physician for 
which the physician charged $175. The third party payer allowed $150 of 
the charge and paid 80 percent of this amount or $120. The Medicare fee 
schedule for this treatment is $125. The individual's Part B deductible 
had been met. As secondary payer, Medicare pays the lowest of the 
following amounts:
    (1) Excess of actual charge minus the third party payment: $175-
120=$55.
    (2) Amount Medicare would pay if the services were not covered by a 
third party payer: .80x$125=$100.

[[Page 311]]

    (3) Third party payer's allowable charge without regard to its 
coinsurance (since that amount is higher than the Medicare fee schedule 
in this case) minus amount paid by the third party payer: $150-120=$30.

The Medicare payment is $30.
    (c)-(d) [Reserved]
    (e) Services reimbursed on a basis other than fee schedule, 
reasonable charge, or monthly capitation rate. The Medicare secondary 
payment is the lowest of the following:
    (1) The gross amount payable by Medicare (that is, the amount 
payable without considering the effect of the Medicare deductible and 
coinsurance or the payment by the third party payer), minus the 
applicable Medicare deductible and coinsurance amounts.
    (2) The gross amount payable by Medicare, minus the amount paid by 
the third party payer.
    (3) The provider's charges (or the amount the provider is obligated 
to accept as payment in full, if that is less than the charges), minus 
the amount payable by the third party payer.
    (4) The provider's charges (or the amount the provider is obligated 
to accept as payment in full if that is less than the charges), minus 
the applicable Medicare deductible and coinsurance amounts.
    (f) Examples: (1) A hospital furnished 7 days of inpatient hospital 
care in 1987 to a Medicare beneficiary. The provider's charges for 
Medicare-covered services totaled $2,800. The third party payer paid 
$2,360. No part of the Medicare inpatient hospital deductible of $520 
had been met. If the gross amount payable by Medicare in this case is 
$2,700, then as secondary payer, Medicare pays the lowest of the 
following amounts:
    (i) The gross amount payable by Medicare minus the Medicare 
inpatient hospital deductible: $2,700-$520=$2,180.
    (ii) The gross amount payable by Medicare minus the third party 
payment: $2,700-$2,360=$340.
    (iii) The provider's charges minus the third party payment: $2,800-
$2,360=$440.
    (iv) The provider's charges minus the Medicare deductible: $2,800-
$520=$2,280. Medicare's secondary payment is $340 and the combined 
payment made by the third party payer and Medicare on behalf of the 
beneficiary is $2,700. The $520 deductible was satisfied by the third 
party payment so that the beneficiary incurred no out-of-pocket 
expenses.
    (2) A hospital furnished 1 day of inpatient hospital care in 1987 to 
a Medicare beneficiary. The provider's charges for Medicare-covered 
services totalled $750. The third party payer paid $450. No part of the 
Medicare inpatient hospital deductible had been met previously. The 
third party payment is credited toward that deductible. If the gross 
amount payable by Medicare in this case is $850, then as secondary 
payer, Medicare pays the lowest of the following amounts:
    (i) The gross amount payable by Medicare minus the Medicare 
deductible: $850-$520=$330.
    (ii) The gross amount payable by Medicare minus the third party 
payment: $850-$450=$400.
    (iii) The provider's charges minus the third party payment: $750-
$450=$300.
    (iv) The provider's charges minus the Medicare deductible: $750-
$520=$230. Medicare's secondary payment is $230, and the combined 
payment made by the third party payer and Medicare on behalf of the 
beneficiary is $680. The hospital may bill the beneficiary $70 (the $520 
deductible minus the $450 third party payment). This fully discharges 
the beneficiary's deductible obligation.
    (3) An ESRD beneficiary received 8 dialysis treatments for which a 
facility charged $160 per treatment for a total of $1,280. No part of 
the beneficiary's $75 Part B deductible had been met. The third party 
payer paid $1,024 for Medicare-covered services. The composite rate per 
dialysis treatment at this facility is $131 or $1,048 for 8 treatments. 
As secondary payer, Medicare pays the lowest of the following:
    (i) The gross amount payable by Medicare minus the applicable 
Medicare deductible and coinsurance: $1,048-$75-$194.60=$778.40. (The 
coinsurance is calculated as follows: $1,048 composite rate-$75 
deductible=$973x.20=$194.60).
    (ii) The gross amount payable by Medicare minus the third party 
payment: $1,048-$1,024=$24.

[[Page 312]]

    (iii) The provider's charges minus the third party payment: $1,280-
$1,024=$256.
    (iv) The provider's charge minus the Medicare deductible and 
coinsurance: $1,280-$75-$194.60=1010.40. Medicare pays $24. The 
beneficiary's Medicare deductible and coinsurance were met by the third 
party payment.
    (4) A hospital furnished 5 days of inpatient care in 1987 to a 
Medicare beneficiary. The provider's charges for Medicare-covered 
services were $4,000 and the gross amount payable was $3,500. The 
provider agreed to accept $3,000 from the third party as payment in 
full. The third party payer paid $2,900 due to a deductible requirement 
under the third party plan. Medicare considers the amount the provider 
is obligated to accept as full payment ($3,000) to be the provider 
charges. The Medicare secondary payment is the lowest of the following:
    (i) The gross amount payable by Medicare minus the Medicare 
inpatient deductible: $3,500-$520=$2,980.
    (ii) The gross amount payable by Medicare minus the third party 
payment: $3,500-$2,900=$600.
    (iii) The provider's charge minus the third party payment: $3,000-
$2,900=$100.
    (iv) The provider's charges minus the Medicare inpatient deductible: 
$3,000-$520=$2,480. The Medicare secondary payment is $100. When 
Medicare is the secondary payer, the combined payment made by the third 
party payer and Medicare on behalf of the beneficiary is $3,000. The 
beneficiary has no liability for Medicare-covered services since the 
third party payment satisfied the $520 deductible.

[54 FR 41734, Oct. 11, 1989, as amended at 55 FR 1820, Jan. 19, 1990; 60 
FR 45362, Aug. 31, 1995]



Sec. 411.35  Limitations on charges to a beneficiary or other party when a workers' compensation plan, a no-fault insurer, or an employer group health plan is 
          primary payer.

    (a) Definition. As used in this section Medicare-covered services 
means services for which Medicare benefits are payable or would be 
payable except for the Medicare deductible and coinsurance provisions 
and the amounts payable by the third party payer.
    (b) Applicability. This section applies when a workers' compensation 
plan, a no-fault insurer or an employer group health plan is primary to 
Medicare.
    (c) Basic rule. Except as provided in paragraph (d) of this section, 
the amounts the provider or supplier may collect or seek to collect, for 
the Medicare-covered services from the beneficiary or any entity other 
than the workers' compensation plan, the no-fault insurer, or the 
employer plan and Medicare, are limited to the following:
    (1) The amount paid or payable by the third party payer to the 
beneficiary. If this amount exceeds the amount payable by Medicare 
(without regard to deductible or coinsurance), the provider or supplier 
may retain the third party payment in full without violating the terms 
of the provider agreement or the conditions of assignment.
    (2) The amount, if any, by which the applicable Medicare deductible 
and coinsurance amounts exceed any third party payment made or due to 
the beneficiary or to the provider or supplier for the medical services.
    (3) The amount of any charges that may be made to a beneficiary 
under Sec. 413.35 of this chapter when cost limits are applied to the 
services, or under Sec. 489.32 of this chapter when the services are 
partially covered, but only to the extent that the third party payer is 
not responsible for those charges.
    (d) Exception. The limitations of paragraph (c) of this section do 
not apply if the services were furnished by a supplier that is not a 
participating supplier and has not accepted assignment for the services 
or claimed payment under Sec. 424.64 of this chapter.



Sec. 411.37  Amount of Medicare recovery when a third party payment is made as a result of a judgment or settlement.

    (a) Recovery against the party that received payment--(1) General 
rule. Medicare reduces its recovery to take account of the cost of 
procuring the judgment or settlement, as provided in this section, if--
    (i) Procurement costs are incurred because the claim is disputed; 
and

[[Page 313]]

    (ii) Those costs are borne by the party against which CMS seeks to 
recover.
    (2) Special rule. If CMS must file suit because the party that 
received payment opposes CMS's recovery, the recovery amount is as set 
forth in paragraph (e) of this section.
    (b) Recovery against the third party payer. If CMS seeks recovery 
from the third party payer, in accordance with Sec. 411.24(i), the 
recovery amount will be no greater than the amount determined under 
paragraph (c) or (d) or (e) of this section.
    (c) Medicare payments are less than the judgment or settlement 
amount. If Medicare payments are less than the judgment or settlement 
amount, the recovery is computed as follows:
    (1) Determine the ratio of the procurement costs to the total 
judgment or settlement payment.
    (2) Apply the ratio to the Medicare payment. The product is the 
Medicare share of procurement costs.
    (3) Subtract the Medicare share of procurement costs from the 
Medicare payments. The remainder is the Medicare recovery amount.
    (d) Medicare payments equal or exceed the judgment or settlement 
amount. If Medicare payments equal or exceed the judgment or settlement 
amount, the recovery amount is the total judgment or settlement payment 
minus the total procurement costs.
    (e) CMS incurs procurement costs because of opposition to its 
recovery. If CMS must bring suit against the party that received payment 
because that party opposes CMS's recovery, the recovery amount is the 
lower of the following:
    (1) Medicare payment.
    (2) The total judgment or settlement amount, minus the party's total 
procurement cost.



 Subpart C--Limitations on Medicare Payment for Services Covered Under 
                          Workers' Compensation



Sec. 411.40  General provisions.

    (a) Definition. ``Workers' compensation plan of the United States'' 
includes the workers' compensation plans of the 50 States, the District 
of Columbia, American Samoa, Guam, Puerto Rico, and the Virgin Islands, 
as well as the systems provided under the Federal Employees' 
Compensation Act and the Longshoremen's and Harbor Workers' Compensation 
Act.
    (b) Limitations on Medicare payment. (1) Medicare does not pay for 
any services for which--
    (i) Payment has been made, or can reasonably be expected to be made 
promptly under a workers' compensation law or plan of the United States 
or a state; or
    (ii) Payment could be made under the Federal Black Lung Program, but 
is precluded solely because the provider of the services has failed to 
secure, from the Department of Labor, a provider number to include in 
the claim.
    (2) If the payment for a service may not be made under workers' 
compensation because the service is furnished by a source not authorized 
to provide that service under the particular workers' compensation 
program, Medicare pays for the service if it is a covered service.
    (3) Medicare makes secondary payments in accordance with Sec. 411.32 
and Sec. 411.33.



Sec. 411.43  Beneficiary's responsibility with respect to workers' compensation.

    (a) The beneficiary is responsible for taking whatever action is 
necessary to obtain any payment that can reasonably be expected under 
workers' compensation.
    (b) Except as specified in Sec. 411.45(a), Medicare does not pay 
until the beneficiary has exhausted his or her remedies under workers' 
compensation.
    (c) Except as specified in Sec. 411.45(b), Medicare does not pay for 
services that would have been covered under workers' compensation if the 
beneficiary had filed a proper claim.
    (d) However, if a claim is denied for reasons other than not being a 
proper claim, Medicare pays for the services if they are covered under 
Medicare.



Sec. 411.45  Basis for conditional Medicare payment in workers' compensation cases.

    A conditional Medicare payment may be made under either of the 
following circumstances:

[[Page 314]]

    (a) The beneficiary has filed a proper claim for workers' 
compensation benefits, but the intermediary or carrier determines that 
the workers' compensation carrier will not pay promptly. This includes 
cases in which a workers' compensation carrier has denied a claim.
    (b) The beneficiary, because of physical or mental incapacity, 
failed to file a proper claim.



Sec. 411.46  Lump-sum payments.

    (a) Lump-sum commutation of future benefits. If a lump-sum 
compensation award stipulates that the amount paid is intended to 
compensate the individual for all future medical expenses required 
because of the work-related injury or disease, Medicare payments for 
such services are excluded until medical expenses related to the injury 
or disease equal the amount of the lump-sum payment.
    (b) Lump-sum compromise settlement. (1) A lump-sum compromise 
settlement is deemed to be a workers' compensation payment for Medicare 
purposes, even if the settlement agreement stipulates that there is no 
liability under the workers' compensation law or plan.
    (2) If a settlement appears to represent an attempt to shift to 
Medicare the responsibility for payment of medical expenses for the 
treatment of a work-related condition, the settlement will not be 
recognized. For example, if the parties to a settlement attempt to 
maximize the amount of disability benefits paid under workers' 
compensation by releasing the workers' compensation carrier from 
liability for medical expenses for a particular condition even though 
the facts show that the condition is work-related, Medicare will not pay 
for treatment of that condition.
    (c) Lump-sum compromise settlement: Effect on services furnished 
before the date of settlement. Medicare pays for medical expenses 
incurred before the lump-sum compromise settlement only to the extent 
specified in Sec. 411.47.
    (d) Lump-sum compromise settlement: Effect on payment for services 
furnished after the date of settlement--(1) Basic rule. Except as 
specified in paragraph (d)(2) of this section, if a lump-sum compromise 
settlement forecloses the possibility of future payment of workers' 
compensation benefits, medical expenses incurred after the date of the 
settlement are payable under Medicare.
    (2) Exception. If the settlement agreement allocates certain amounts 
for specific future medical services, Medicare does not pay for those 
services until medical expenses related to the injury or disease equal 
the amount of the lump-sum settlement allocated to future medical 
expenses.



Sec. 411.47  Apportionment of a lump-sum compromise settlement of a workers' compensation claim.

    (a) Determining amount of compromise settlement considered as a 
payment for medical expenses. (1) If a compromise settlement allocates a 
portion of the payment for medical expenses and also gives reasonable 
recognition to the income replacement element, that apportionment may be 
accepted as a basis for determining Medicare payments.
    (2) If the settlement does not give reasonable recognition to both 
elements of a workers' compensation award or does not apportion the sum 
granted, the portion to be considered as payment for medical expenses is 
computed as follows:
    (i) Determine the ratio of the amount awarded (less the reasonable 
and necessary costs incurred in procuring the settlement) to the total 
amount that would have been payable under workers' compensation if the 
claim had not been compromised.
    (ii) Multiply that ratio by the total medical expenses incurred as a 
result of the injury or disease up to the date of the settlement. The 
product is the amount of the workers' compensation settlement to be 
considered as payment for medical expenses.

    Example: As the result of a work injury, an individual suffered loss 
of income and incurred medical expenses for which the total workers' 
compensation payment would have been $24,000 if the case had not been 
compromised. The medical expenses amounted to $18,000. The workers' 
compensation carrier made a settlement with the beneficiary under which 
it paid $8,000 in total. A separate award was made for legal fees. Since 
the workers' compensation compromise settlement was for one-third of the 
amount which would have been payable under workers'

[[Page 315]]

compensation had the case not been compromised ($8,000/$24,000=\1/3\), 
the workers' compensation compromise settlement is considered to have 
paid for one-third of the total medical expenses (\1/3\x$18,000=$6,000).

    (b) Determining the amount of the Medicare overpayment. When 
conditional Medicare payments have been made, and the beneficiary 
receives a compromise settlement payment, the Medicare overpayment is 
determined as set forth in this paragraph (b). The amount of the 
workers' compensation payment that is considered to be for medical 
expenses (as determined under paragraph (a) of this section) is applied, 
at the workers' compensation rate of payment prevailing in the 
particular jurisdiction, in the following order:
    (1) First to any beneficiary payments for services payable under 
workers' compensation but not covered under Medicare.
    (2) Then to any beneficiary payments for services payable under 
workers' compensation and also covered under Medicare Part B. (These 
include deductible and coinsurance amounts and, in unassigned cases, the 
charge in excess of the reasonable charge.)
    (3) Last to any beneficiary payments for services payable under 
workers' compensation and also covered under Medicare Part A. (These 
include Part A deductible and coinsurance amounts and charges for 
services furnished after benefits are exhausted.)

The difference between the amount of the workers' compensation payment 
for medical expenses and any beneficiary payments constitutes the 
Medicare overpayment. The beneficiary is liable for that amount.

    Example: In the example in paragraph (a) of this section, it was 
determined that the workers' compensation settlement paid for $6,000 of 
the total medical expenses. The $18,000 in medical expenses included 
$1,500 in charges for services not covered under Medicare, $7,500 in 
charges for services covered under Medicare Part B, and $9,000 in 
hospital charges for services covered under Medicare Part A. All charges 
were at the workers' compensation payment rate, that is, in amounts the 
provider or supplier must accept as payment in full.
    The Medicare reasonable charge for physicians' services was $7,000 
and Medicare paid $5,600 (80 percent of the reasonable charge). The Part 
B deductible had been met. The Medicare payment rate for the hospital 
services was $8,000. Medicare paid the hospital $7,480 ($8,000--the Part 
A deductible of $520).
    In this situation, the beneficiary's payments totalled $3,920:

Services not covered under Medicare............................   $1,500
Excess of physicians' charges over reasonable charges..........      500
Medicare Part B coinsurance....................................    1,400
Part A deductible..............................................      520
                                                                --------
      Total....................................................    3,920
 

    The Medicare overpayment, for which the beneficiary is liable, would 
be $2,080 ($6,000-$3,920).



 Subpart D--Limitations on Medicare Payment for Services Covered Under 
                     Liability or No-Fault Insurance



Sec. 411.50  General provisions.

    (a) Limits on applicability. The provisions of this subpart C do not 
apply to any services required because of accidents that occurred before 
December 5, 1980.
    (b) Definitions.
    Automobile means any self-propelled land vehicle of a type that must 
be registered and licensed in the State in which it is owned.
    Liability insurance means insurance (including a self-insured plan) 
that provides payment based on legal liability for injury or illness or 
damage to property. It includes, but is not limited to, automobile 
liability insurance, uninsured motorist insurance, underinsured motorist 
insurance, homeowners' liability insurance, malpractice insurance, 
product liability insurance, and general casualty insurance.
    Liability insurance payment means a payment by a liability insurer, 
or an out-of-pocket payment, including a payment to cover a deductible 
required by a liability insurance policy, by any individual or other 
entity that carries liability insurance or is covered by a self-insured 
plan.
    No-fault insurance means insurance that pays for medical expenses 
for injuries sustained on the property or premises of the insured, or in 
the use, occupancy, or operation of an automobile, regardless of who may 
have been responsible for causing the accident. This insurance includes 
but is not limited to

[[Page 316]]

automobile, homeowners, and commercial plans. It is sometimes called 
``medical payments coverage'', ``personal injury protection'', or 
``medical expense coverage''.
    Prompt or promptly, when used in connection with payment by a 
liability insurer means payment within 120 days after the earlier of the 
following:
    (1) The date a claim is filed with an insurer or a lien is filed 
against a potential liability settlement.
    (2) The date the service was furnished or, in the case of inpatient 
hospital services, the date of discharge.
    Self-insured plan means a plan under which an individual, or a 
private or governmental entity, carries its own risk instead of taking 
out insurance with a carrier. The term includes a plan of an individual 
or other entity engaged in a business, trade, or profession, a plan of a 
non-profit organization such as a social, fraternal, labor, educational, 
religious, or professional organization, and the plan established by the 
Federal government to pay liability claims under the Federal Tort Claims 
Act.
    Underinsured motorist insurance means insurance under which the 
policyholder's level of protection against losses caused by another is 
extended to compensate for inadequate coverage in the other party's 
policy or plan.
    Uninsured motorist insurance means insurance under which the 
policyholder's insurer will pay for damages caused by a motorist who has 
no automobile liability insurance or who carries less than the amount of 
insurance required by law, or is underinsured.
    (c) Limitation on payment for services covered under no-fault 
insurance. Except as provided under Secs. 411.52 and 411.53 with respect 
to conditional payments. Medicare does not pay for the following:
    (1) Services for which payment has been made or can reasonably be 
expected to be made promptly under automobile no-fault insurance.
    (2) Services furnished on or after November 13, 1989 for which 
payment has been made or can reasonably be expected to be made promptly 
under any no-fault insurance other than automobile no-fault.

[54 FR 41734, Oct. 11, 1989, as amended at 55 FR 1820, Jan. 19, 1990]



Sec. 411.51  Beneficiary's responsibility with respect to no-fault insurance.

    (a) The beneficiary is responsible for taking whatever action is 
necessary to obtain any payment that can reasonably be expected under 
no-fault insurance.
    (b) Except as specified in Sec. 411.53, Medicare does not pay until 
the beneficiary has exhausted his or her remedies under no-fault 
insurance.
    (c) Except as specified in Sec. 411.53, Medicare does not pay for 
services that would have been covered by the no-fault insurance if the 
beneficiary had filed a proper claim.
    (d) However, if a claim is denied for reasons other than not being a 
proper claim, Medicare pays for the services if they are covered under 
Medicare.



Sec. 411.52  Basis for conditional Medicare payment in liability cases.

    If CMS has information that services for which Medicare benefits 
have been claimed are for treatment of an injury or illness that was 
allegedly caused by another party, a conditional Medicare payment may be 
made.



Sec. 411.53  Basis for conditional Medicare payment in no-fault cases.

    A conditional Medicare payment may be made in no-fault cases under 
either of the following circumstances:
    (a) The beneficiary, or the provider or supplier, has filed a proper 
claim for no-fault insurance benefits but the intermediary or carrier 
determines that the no-fault insurer will not pay promptly for any 
reason other than the circumstances described in Sec. 411.32(a)(1). This 
includes cases in which the no-fault insurance carrier has denied the 
claim.
    (b) The beneficiary, because of physical or mental incapacity, 
failed to meet a claim-filing requirement stipulated in the policy.

[[Page 317]]



Sec. 411.54  Limitation on charges when a beneficiary has received a liability insurance payment or has a claim pending against a liability insurer.

    (a) Definition. As used in this section, Medicare-covered services 
means services for which Medicare benefits are payable or would be 
payable except for applicable Medicare deductible and coinsurance 
provisions. Medicare benefits are payable notwithstanding potential 
liability insurance payments, but are recoverable in accordance with 
Sec. 411.24.
    (b) Applicability. This section applies when a beneficiary has 
received a liability insurance payment or has a claim pending against a 
liability insurer for injuries or illness allegedly caused by another 
party.
    (c) Basic rules--(1) Itemized bill. A hospital must, upon request, 
furnish to the beneficiary or his or her representative an itemized bill 
of the hospital's charges.
    (2) Specific limitations. Except as provided in paragraph (d) of 
this section, the provider or supplier--
    (i) May not bill the liability insurer nor place a lien against the 
beneficiary's liability insurance settlement for Medicare covered 
services.
    (ii) May only bill Medicare for Medicare-covered services; and
    (iii) May bill the beneficiary only for applicable Medicare 
deductible and coinsurance amounts plus the amount of any charges that 
may be made to a beneficiary under Sec. 413.35 of this chapter (when 
cost limits are applied to the services) or under Sec. 489.32 of this 
chapter (when services are partially covered).
    (d) Exceptions--(1) Nonparticipating suppliers. The limitations of 
paragraph (c)(2) of this section do not apply if the services were 
furnished by a supplier that is not a participating supplier and has not 
accepted assignment for the services or has not claimed payment for them 
under Sec. 424.64 of this chapter.
    (2) Prepaid health plans. If the services were furnished through an 
organization that has a contract under section 1876 of the Act (that is, 
through an HMO or CMP), or through an organization that is paid under 
section 1833(a)(1)(A) of the Act (that is, through an HCPP) the rules of 
Sec. 417.528 of this chapter apply.
    (3) Special rules for Oregon. For the State of Oregon, because of a 
court decision, and in the absence of a reversal on appeal or a 
statutory clarification overturning the decision, there are the 
following special rules:
    (i) The limitations of paragraph (c)(2) of this section do not apply 
if the liability insurer pays within 120 days after the earlier of the 
following dates:
    (A) The date the hospital files a claim with the insurer or places a 
lien against a potential liability settlement.
    (B) The date the services were provided or, in the case of inpatient 
hospital services, the date of discharge.
    (ii) If the liability insurer does not pay within the 120-day 
period, the hospital must withdraw its claim or lien and comply with the 
limitations imposed by paragraph (c)(2) of this section.



   Subpart E--Limitations on Payment for Services Covered Under Group 
                    Health Plans: General Provisions

    Source: 60 FR 45362, Aug. 31, 1995, unless otherwise noted.



Sec. 411.100  Basis and scope.

    (a) Statutory basis. (1) Section 1862(b) of the Act provides in part 
that Medicare is secondary payer, under specified conditions, for 
services covered under any of the following:
    (i) Group health plans of employers that employ at least 20 
employees and that cover Medicare beneficiaries age 65 or older who are 
covered under the plan by virtue of the individual's current employment 
status with an employer or the current employment status of a spouse of 
any age. (Section 1862(b)(1)(A))
    (ii) Group health plans (without regard to the number of individuals 
employed and irrespective of current employment status) that cover 
individuals who have ESRD. Except as provided in Sec. 411.163, group 
health plans are always primary payers throughout the first 18 months of 
ESRD-based Medicare eligibility or entitlement. (Section 1862(b)(1)(C))

[[Page 318]]

    (iii) Large group health plans (that is, plans of employers that 
employ at least 100 employees) and that cover Medicare beneficiaries who 
are under age 65, entitled to Medicare on the basis of disability, and 
covered under the plan by virtue of the individual's or a family 
member's current employment status with an employer. (Section 
1862(b)(1)(B))
    (2) Sections 1862(b)(1)(A), (B), and (C) of the Act provide that 
group health plans and large group health plans may not take into 
account that the individuals described in paragraph (a)(1) of this 
section are entitled to Medicare on the basis of age or disability, or 
eligible for, or entitled to Medicare on the basis of ESRD.
    (3) Section 1862(b)(1)(A)(i)(II) of the Act provides that group 
health plans of employers of 20 or more employees must provide to any 
employee or spouse age 65 or older the same benefits, under the same 
conditions, that it provides to employees and spouses under 65. The 
requirement applies regardless of whether the individual or spouse 65 or 
older is entitled to Medicare.
    (4) Section 1862(b)(1)(C)(ii) of the Act provides that group health 
plans may not differentiate in the benefits they provide between 
individuals who have ESRD and other individuals covered under the plan 
on the basis of the existence of ESRD, the need for renal dialysis, or 
in any other manner. Actions that constitute ``differentiating'' are 
listed in Sec. 411.161(b).
    (b) Scope. This subpart sets forth general rules pertinent to--
    (1) Medicare payment for services that are covered under a group 
health plan and are furnished to certain beneficiaries who are entitled 
on the basis of ESRD, age, or disability.
    (2) The prohibition against taking into account Medicare entitlement 
based on age or disability, or Medicare eligibility or entitlement based 
on ESRD.
    (3) The prohibition against differentiation in benefits between 
individuals who have ESRD and other individuals covered under the plan.
    (4) The requirement to provide to those 65 or over the same benefits 
under the same conditions as are provided to those under 65.
    (5) The appeals procedures for group health plans that CMS 
determines are nonconforming plans.



Sec. 411.101  Definitions.

    As used in this subpart and in subparts F through H of this part--
    COBRA stands for Consolidated Omnibus Budget Reconciliation Act of 
1985.
    Days means calendar days.
    Employee (subject to the special rules in Sec. 411.104) means an 
individual who--
    (1) Is working for an employer; or
    (2) Is not working for an employer but is receiving payments that 
are subject to FICA taxes, or would be subject to FICA taxes except that 
the employer is exempt from those taxes under the Internal Revenue Code.
    Employer means, in addition to individuals (including self-employed 
persons) and organizations engaged in a trade or business, other 
entities exempt from income tax such as religious, charitable, and 
educational institutions, the governments of the United States, the 
individual States, Puerto Rico, the Virgin Islands, Guam, American 
Samoa, the Northern Mariana Islands, and the District of Columbia, and 
the agencies, instrumentalities, and political subdivisions of these 
governments.
    FICA stands for the Federal Insurance Contributions Act, the law 
that imposes social security taxes on employers and employees under 
section 21 of the Internal Revenue Code.
    Group health plan (GHP) means any arrangement made by one or more 
employers or employee organizations to provide health care directly or 
through other methods such as insurance or reimbursement, to current or 
former employees, the employer, others associated or formerly associated 
with the employer in a business relationship, or their families, that--
    (1) Is of, or contributed to by, one or more employers or employee 
organizations.
    (2) If it involves more than one employer or employee organization, 
provides for common administration.
    (3) Provides substantially the same benefits or the same benefit 
options to

[[Page 319]]

all those enrolled under the arrangement.

The term includes self-insured plans, plans of governmental entities 
(Federal, State and local), and employee organization plans; that is, 
union plans, employee health and welfare funds or other employee 
organization plans. The term also includes employee-pay-all plans, which 
are plans under the auspices of one or more employers or employee 
organizations but which receive no financial contributions from them. 
The term does not include a plan that is unavailable to employees; for 
example, a plan only for self-employed persons.
    IRC stands for Internal Revenue Code.
    IRS stands for Internal Revenue Service.
    Large group health plan (LGHP) means a GHP that covers employees of 
either--
    (1) A single employer or employee organization that employed at 
least 100 full-time or part-time employees on 50 percent or more of its 
regular business days during the previous calendar year; or
    (2) Two or more employers, or employee organizations, at least one 
of which employed at least 100 full-time or part-time employees on 50 
percent or more of its regular business days during the previous 
calendar year.
    MSP stands for Medicare secondary payer.
    Multi-employer plan means a plan that is sponsored jointly by two or 
more employers (sometimes called a multiple-employer plan) or by 
employers and unions (sometimes under the Taft-Hartley law).
    Self-employed person encompasses consultants, owners of businesses, 
and directors of corporations, and members of the clergy and religious 
orders who are paid for their services by a religious body or other 
entity.
    Similarly situated individual means--
    (1) In the case of employees, other employees enrolled or seeking to 
enroll in the plan; and
    (2) In the case of other categories of individuals, other persons in 
any of those categories who are enrolled or seeking to enroll in the 
plan.



Sec. 411.102  Basic prohibitions and requirements.

    (a) ESRD. (1) A group health plan of any size--(i) May not take into 
account the ESRD-based Medicare eligibility or entitlement of any 
individual who is covered or seeks to be covered under the plan; and
    (ii) May not differentiate in the benefits it provides between 
individuals with ESRD and other individuals covered under the plan, on 
the basis of the existence of ESRD, or the need for dialysis, or in any 
other manner.
    (2) The prohibitions of paragraph (a) of this section do not 
prohibit a plan from paying benefits secondary to Medicare after the 
first 18 months of ESRD-based eligibility or entitlement.
    (b) Age. A GHP of an employer or employee organization of at least 
20 employees--
    (1) May not take into account the age-based Medicare entitlement of 
an individual or spouse age 65 or older who is covered (or seeks to be 
covered) under the plan by virtue of current employment status; and
    (2) Must provide, to employees age 65 or older and to spouses age 65 
or older of employees of any age, the same benefits under the same 
conditions as it provides to employees and spouses under age 65.
    (c) Disability. A GHP of an employer or employee organization of at 
least 100 employees may not take into account the disability-based 
Medicare entitlement of any individual who is covered (or seeks to be 
covered) under the plan by virtue of current employment status.



Sec. 411.103  Prohibition against financial and other incentives.

    (a) General rule. An employer or other entity (for example, an 
insurer) is prohibited from offering Medicare beneficiaries financial or 
other benefits as incentives not to enroll in, or to terminate 
enrollment in, a GHP that is, or would be, primary to Medicare. This 
prohibition precludes offering to Medicare beneficiaries an alternative 
to the employer primary plan (for example, coverage of prescription 
drugs) unless the beneficiary has primary coverage other than Medicare. 
An example

[[Page 320]]

would be primary coverage through his own or a spouse's employer.
    (b) Penalty for violation. (1) Any entity that violates the 
prohibition of paragraph (a) of this section is subject to a civil money 
penalty of up to $5,000 for each violation; and
    (2) The provisions of section 1128A of the Act (other than 
subsections (a) and (b)) apply to the civil money penalty of up to 
$5,000 in the same manner as the provisions apply to a penalty or 
proceeding under section 1128A(a).



Sec. 411.104  Current employment status.

    (a) General rule. An individual has current employment status if--
    (1) The individual is actively working as an employee, is the 
employer (including a self-employed person), or is associated with the 
employer in a business relationship; or
    (2) The individual is not actively working and--
    (i) Is receiving disability benefits from an employer for up to 6 
months (the first 6 months of employer disability benefits are subject 
to FICA taxes); or
    (ii) Retains employment rights in the industry and has not had his 
employment terminated by the employer, if the employer provides the 
coverage (or has not had his membership in the employee organization 
terminated, if the employee organization provides the coverage), is not 
receiving disability benefits from an employer for more than 6 months, 
is not receiving disability benefits from Social Security, and has GHP 
coverage that is not pursuant to COBRA continuation coverage (26 U.S.C. 
4980B; 29 U.S.C. 1161-1168; 42 U.S.C. 300bb-1 et seq.). Whether or not 
the individual is receiving pay during the period of nonwork is not a 
factor.
    (b) Persons who retain employment rights. For purposes of paragraph 
(a)(2) of this section, persons who retain employment rights include but 
are not limited to--
    (1) Persons who are furloughed, temporarily laid off, or who are on 
sick leave;
    (2) Teachers and seasonal workers who normally do not work 
throughout the year; and
    (3) Persons who have health coverage that extends beyond or between 
active employment periods; for example, based on an hours bank 
arrangement. (Active union members often have hours bank coverage.)
    (c) Coverage by virtue of current employment status. An individual 
has coverage by virtue of current employment status with an employer if-
-
    (1) the individual has GHP or LGHP coverage based on employment, 
including coverage based on a certain number of hours worked for that 
employer or a certain level of commissions earned from work for that 
employer at any time; and
    (2) the individual has current employment status with that employer, 
as defined in paragraph (a) of this section.
    (d) Special rule: Self-employed person. A self-employed individual 
is considered to have GHP or LGHP coverage by virtue of current 
employment status during a particular tax year only if, during the 
preceding tax year, the individual's net earnings, from work in that 
year related to the employer that offers the group health coverage, are 
at least equal to the amount specified in section 211(b)(2) of the Act, 
which defines ``self-employment income'' for social security purposes.
    (e) Special Rule: members of religious orders and members of clergy. 
(1) Members of religious orders who have not taken a vow of poverty. A 
member of a religious order who has not taken a vow of poverty is 
considered to have current employment status with the religious order 
if--
    (i) The religious order pays FICA taxes on behalf of that member; or
    (ii) The individual is receiving cash remuneration from the 
religious order.
    (2) Members of religious orders who have taken a vow of poverty. A 
member of a religious order whose members are required to take a vow of 
poverty is not considered to be employed by the order if the services he 
or she performs as a member of the order are considered employment only 
because the order elects social security coverage under section 3121(r) 
of the IRC. This exemption applies retroactively to services performed 
as a member of the order, beginning with the effective dates of the MSP 
provisions for the aged and the disabled, respectively.

[[Page 321]]

The exemption does not apply to services performed for employers outside 
of the order.
    (3) Members of the clergy. A member of the clergy is considered to 
have current employment status with a church or other religious 
organization if the individual is receiving cash remuneration from the 
church or other religious organization for services rendered.
    (f) Special rule: Delayed compensation subject to FICA taxes. An 
individual who is not working is not considered an employee solely on 
the basis of receiving delayed compensation payments for previous 
periods of work even if those payments are subject to FICA taxes (or 
would be subject to FICA taxes if the employer were not exempt from 
paying those taxes). For example, an individual who is not working in 
1993 and receives payments subject to FICA taxes for work performed in 
1992 is not considered to be an employee in 1993 solely on the basis of 
receiving those payments.



Sec. 411.106  Aggregation rules.

    The following rules apply in determining the number and size of 
employers, as required by the MSP provisions for the aged and disabled:
    (a) All employers that are treated as a single employer under 
subsection (a) or (b) of section 52 of the Internal Revenue Code (IRC) 
of 1986 (26 U.S.C. 52 (a) and (b)) are treated as a single employer.
    (b) All employees of the members of an affiliated service group (as 
defined in section 414(m) of the IRC (26 U.S.C. 414m)) are treated as 
employed by a single employer.
    (c) Leased employees (as defined in section 414(n)(2) of the IRC (26 
U.S.C. 414(n)(2)) are treated as employees of the person for whom they 
perform services to the same extent as they are treated under section 
414(n) of the IRC.
    (d) In applying the IRC provisions identified in this section, CMS 
relies upon regulations and decisions of the Secretary of the Treasury 
respecting those provisions.



Sec. 411.108  Taking into account entitlement to Medicare.

    (a) Examples of actions that constitute ``taking into account''. 
Actions by GHPs or LGHPs that constitute taking into account that an 
individual is entitled to Medicare on the basis of ESRD, age, or 
disability (or eligible on the basis of ESRD) include, but are not 
limited to, the following:
    (1) Failure to pay primary benefits as required by subparts F, G, 
and H of this part 411.
    (2) Offering coverage that is secondary to Medicare to individuals 
entitled to Medicare.
    (3) Terminating coverage because the individual has become entitled 
to Medicare, except as permitted under COBRA continuation coverage 
provisions (26 U.S.C. 4980B(f)(2)(B)(iv); 29 U.S.C. 1162.(2)(D); and 42 
U.S.C. 300bb-2.(2)(D)).
    (4) In the case of a LGHP, denying or terminating coverage because 
an individual is entitled to Medicare on the basis of disability without 
denying or terminating coverage for similarly situated individuals who 
are not entitled to Medicare on the basis of disability.
    (5) Imposing limitations on benefits for a Medicare entitled 
individual that do not apply to others enrolled in the plan, such as 
providing less comprehensive health care coverage, excluding benefits, 
reducing benefits, charging higher deductibles or coinsurance, providing 
for lower annual or lifetime benefit limits, or more restrictive pre-
existing illness limitations.
    (6) Charging a Medicare entitled individual higher premiums.
    (7) Requiring a Medicare entitled individual to wait longer for 
coverage to begin.
    (8) Paying providers and suppliers less for services furnished to a 
Medicare beneficiary than for the same services furnished to an enrollee 
who is not entitled to Medicare.
    (9) Providing misleading or incomplete information that would have 
the effect of inducing a Medicare entitled individual to reject the 
employer plan, thereby making Medicare the primary payer. An example of 
this would be informing the beneficiary of the right to accept or reject 
the employer plan but failing to inform the individual that, if he or 
she rejects the plan, the plan will not be permitted to provide or pay 
for secondary benefits.

[[Page 322]]

    (10) Including in its health insurance cards, claims forms, or 
brochures distributed to beneficiaries, providers, and suppliers, 
instructions to bill Medicare first for services furnished to Medicare 
beneficiaries without stipulating that such action may be taken only 
when Medicare is the primary payer.
    (11) Refusing to enroll an individual for whom Medicare would be 
secondary payer, when enrollment is available to similarly situated 
individuals for whom Medicare would not be secondary payer.
    (b) Permissible actions. (1) If a GHP or LGHP makes benefit 
distinctions among various categories of individuals (distinctions 
unrelated to the fact that the individual is disabled, based, for 
instance, on length of time employed, occupation, or marital status), 
the GHP or LGHP may make the same distinctions among the same categories 
of individuals entitled to Medicare whose plan coverage is based on 
current employment status. For example, if a GHP or LGHP does not offer 
coverage to employees who have worked less than one year and who are not 
entitled to Medicare on the basis of disability or age, the GHP or LGHP 
is not required to offer coverage to employees who have worked less than 
one year and who are entitled to Medicare on the basis of disability or 
age.
    (2) A GHP or LGHP may pay benefits secondary to Medicare for an aged 
or disabled beneficiary who has current employment status if the plan 
coverage is COBRA continuation coverage because of reduced hours of 
work. Medicare is primary payer for this beneficiary because, although 
he or she has current employment status, the GHP coverage is by virtue 
of the COBRA law rather than by virtue of the current employment status.
    (3) A GHP may terminate COBRA continuation coverage of an individual 
who becomes entitled to Medicare on the basis of ESRD, when permitted 
under the COBRA provisions.

[60 FR 45362, Aug. 31, 1995; 60 FR 53876, Oct. 18, 1995]



Sec. 411.110  Basis for determination of nonconformance.

    (a) A ``determination of nonconformance'' is a CMS determination 
that a GHP or LGHP is a nonconforming plan as provided in this section.
    (b) CMS makes a determination of nonconformance for a GHP or LGHP 
that, at any time during a calendar year, fails to comply with any of 
the following statutory provisions:
    (1) The prohibition against taking into account that a beneficiary 
who is covered or seeks to be covered under the plan is entitled to 
Medicare on the basis of ESRD, age, or disability, or eligible on the 
basis of ESRD.
    (2) The nondifferentiation clause for individuals with ESRD.
    (3) The equal benefits clause for the working aged.
    (4) The obligation to refund conditional Medicare primary payments.
    (c) CMS may make a determination of nonconformance for a GHP or LGHP 
that fails to respond to a request for information, or to provide 
correct information, either voluntarily or in response to a CMS request, 
on the plan's primary payment obligation with respect to a given 
beneficiary, if that failure contributes to either or both of the 
following:
    (1) Medicare erroneously making a primary payment.
    (2) A delay or foreclosure of CMS's ability to recover an erroneous 
primary payment.



Sec. 411.112  Documentation of conformance.

    (a) Acceptable documentation. CMS may require a GHP or LGHP to 
demonstrate that it has complied with the Medicare secondary payer 
provisions and to submit supporting documentation by an official 
authorized to act on behalf of the entity, under penalty of perjury. The 
following are examples of documentation that may be acceptable:
    (1) A copy of the employer's plan or policy that specifies the 
services covered, conditions of coverage, benefit levels and limitations 
with respect to persons entitled to Medicare on the basis of ESRD, age, 
or disability as compared to the provisions applicable to other 
enrollees and potential enrollees.
    (2) An explanation of the plan's allegation that it does not owe CMS 
any amount CMS claims the plan owes as

[[Page 323]]

repayment for conditional or mistaken Medicare primary payments.
    (b) Lack of acceptable documentation. If a GHP or LGHP fails to 
provide acceptable evidence or documentation that it has complied with 
the MSP prohibitions and requirements set forth in Sec. 411.110, CMS may 
make a determination of nonconformance for both the year in which the 
services were furnished and the year in which the request for 
information was made.



Sec. 411.114  Determination of nonconformance.

    (a) Starting dates for determination of nonconformance. CMS's 
authority to determine nonconformance of GHPs begins on the following 
dates:
    (1) On January 1, 1987 for MSP provisions that affect the disabled.
    (2) On December 20, 1989 for MSP provisions that affect ESRD 
beneficiaries and the working aged.
    (3) On August 10, 1993 for failure to refund mistaken Medicare 
primary payments.
    (b) Special rule for failure to repay. A GHP that fails to comply 
with Sec. 411.110 (a)(1), (a)(2), or (a)(3) in a particular year is 
nonconforming for that year. If, in a subsequent year, that plan fails 
to repay the resulting mistaken primary payments (in accordance with 
Sec. 411.110(a)(4)), the plan is also nonconforming for the subsequent 
year. For example, if a plan paid secondary for the working aged in 
1991, that plan was nonconforming for 1991. If in 1994 CMS identifies 
mistaken primary payments attributable to the 1991 violation, and the 
plan refuses to repay, it is also nonconforming for 1994.



Sec. 411.115  Notice of determination of nonconformance.

    (a) Notice to the GHP or LGHP. (1) If CMS determines that a GHP or 
an LGHP is nonconforming with respect to a particular calendar year, CMS 
mails to the plan written notice of the following:
    (i) The determination.
    (ii) The basis for the determination.
    (iii) The right of the parties to request a hearing.
    (iv) An explanation of the procedure for requesting a hearing.
    (v) The tax that may be assessed by the IRS in accordance with 
section 5000 of the IRC.
    (vi) The fact that if none of the parties requests a hearing within 
65 days from the date of its notice, the determination is binding on all 
parties unless it is reopened in accordance with Sec. 411.126.
    (2) The notice also states that the plan must, within 30 days from 
the date on its notice, submit to CMS the names and addresses of all 
employers and employee organizations that contributed to the plan during 
the calendar year for which CMS has determined nonconformance.
    (b) Notice to contributing employers and employee organizations. CMS 
mails written notice of the determination, including all the information 
specified in paragraph (a)(1) of this section, to all contributing 
employers and employee organizations already known to CMS or identified 
by the plan in accordance with paragraph (a)(2) of this section. 
Employers and employee organizations have 65 days from the date of their 
notice to request a hearing.



Sec. 411.120  Appeals.

    (a) Parties to the determination. The parties to the determination 
are CMS, the GHP or LGHP for which CMS determined nonconformance, and 
any employers or employee organizations that contributed to the plan 
during the calendar year for which CMS determined nonconformance.
    (b) Request for hearing. (1) A party's request for hearing must be 
in writing (not in facsimile or other electronic medium) and in the 
manner stipulated in the notice of nonconformance; it must be filed 
within 65 days from the date on the notice.
    (2) The request may include rationale showing why the parties 
believe that CMS's determination is incorrect and supporting 
documentation.
    (3) A request is considered filed on the date it is received by the 
appropriate office, as shown by the receipt date stamped on the request.



Sec. 411.121  Hearing procedures.

    (a) Nature of hearing. (1) If any of the parties requests a hearing 
within 65 days from the date on the notice of the

[[Page 324]]

determination of nonconformance, the CMS Administrator appoints a 
hearing officer.
    (2) If no party files a request within the 65-day period, the 
initial determination of nonconformance is binding upon all parties 
unless it is reopened in accordance with Sec. 411.126.
    (3) If more than one party requests a hearing the hearing officer 
conducts a single hearing in which all parties may participate.
    (4) On the record review. Ordinarily, the hearing officer makes a 
decision based upon review of the data and documents on which CMS based 
its determination of nonconformance and any other documentation 
submitted by any of the parties within 65 days from the date on the 
notice.
    (5) Oral hearing. The hearing officer may provide for an oral 
hearing either on his or her own motion or in response to a party's 
request if the party demonstrates to the hearing officer's satisfaction 
that an oral hearing is necessary. Within 30 days of receipt of the 
request, the hearing officer gives all known parties written notice of 
the request and whether the request for oral hearing is granted.
    (b) Notice of time and place of oral hearing. If the hearing officer 
provides an oral hearing, he or she gives all known parties written 
notice of the time and place of the hearing at least 30 days before the 
scheduled date.
    (c) Prehearing discovery. (1) The hearing officer may permit 
prehearing discovery if it is requested by a party at least 10 days 
before the scheduled date of the hearing.
    (2) If the hearing officer approves the request, he or she--
    (i) Provides a reasonable time for inspection and reproduction of 
documents; and
    (ii) In ruling on discovery matters, is guided by the Federal Rules 
of Civil Procedure. (28 U.S.C.A. Rules 26-37)
    (3) The hearing officer's orders on all discovery matters are final.
    (d) Conduct of hearing. The hearing officer determines the conduct 
of the hearing, including the order in which the evidence and the 
allegations are presented.
    (e) Evidence at hearing. (1) The hearing officer inquires into the 
matters at issue and may receive from all parties documentary and other 
evidence that is pertinent and material, including the testimony of 
witnesses, and evidence that would be inadmissible in a court of law.
    (2) Evidence may be received at any time before the conclusion of 
the hearing.
    (3) The hearing officer gives the parties opportunity for submission 
and consideration of evidence and arguments and, in ruling on the 
admissibility of evidence, excludes irrelevant, immaterial, or unduly 
repetitious evidence.
    (4) The hearing officer's ruling on admissibility of evidence is 
final and not subject to further review.
    (f) Subpoenas. (1) The hearing officer may, either on his or her own 
motion or upon the request of any party, issue subpoenas for either or 
both of the following if they are reasonably necessary for full 
presentation of the case:
    (i) The attendance and testimony of witnesses.
    (ii) The production of books, records, correspondence, papers, or 
other documents that are relevant and material to any matter at issue.
    (2) A party that wishes the issuance of a subpoena must, at least 10 
days before the date fixed for the hearing, file with the hearing 
officer a written request that identifies the witnesses or documents to 
be produced and describes the address or location in sufficient detail 
to permit the witnesses or documents to be found.
    (3) The request for a subpoena must state the pertinent facts that 
the party expects to establish by the witnesses or documents and whether 
those facts could be established by other evidence without the use of a 
subpoena.
    (4) The hearing officer issues the subpoenas at his or her 
discretion, and CMS assumes the cost of the issuance and the fees and 
mileage of any subpoenaed witness, in accordance with section 205(d) of 
the Act (42 U.S.C. 405(d)).
    (g) Witnesses. Witnesses at the hearing testify under oath or 
affirmation, unless excused by the hearing officer for cause. The 
hearing officer may examine the witnesses and shall allow the parties to 
examine and cross-examine witnesses.

[[Page 325]]

    (h) Record of hearing. A complete record of the proceedings at the 
hearing is made and transcribed in all cases. It is made available to 
the parties upon request. The record is not closed until a decision has 
been issued.
    (i) Sources of hearing officer's authority. In the conduct of the 
hearing, the hearing officer complies with all the provisions of title 
XVIII of the Act and implementing regulations, as well as with CMS 
Rulings issued under Sec. 401.108 of this chapter. The hearing officer 
gives great weight to interpretive rules, general statements of policy, 
and rules of agency organization, procedure, or practice established by 
CMS.



Sec. 411.122  Hearing officer's decision.

    (a) Timing. (1) If the decision is based on a review of the record, 
the hearing officer mails the decision to all known parties within 120 
days from the date of receipt of the request for hearing.
    (2) If the decision is based on an oral hearing, the hearing officer 
mails the decision to all known parties within 120 days from the 
conclusion of the hearing.
    (b) Basis, content, and distribution of hearing decision. (1) The 
written decision is based on substantial evidence and contains findings 
of fact, a statement of reasons, and conclusions of law.
    (2) The hearing officer mails a copy of the decision to each of the 
parties, by certified mail, return receipt requested, and includes a 
notice that the administrator may review the hearing decision at the 
request of a party or on his or her own motion.
    (c) Effect of hearing decision. The hearing officer's decision is 
the final Departmental decision and is binding upon all parties unless 
the Administrator chooses to review that decision in accordance with 
Sec. 411.124 or it is reopened by the hearing officer in accordance with 
Sec. 411.126.



Sec. 411.124  Administrator's review of hearing decision.

    (a) Request for review. A party's request for review of a hearing 
officer's decision must be in writing (not in facsimile or other 
electronic medium) and must be received by the Administrator within 25 
days from the date on the decision.
    (b) Office of the Attorney Advisor responsibility. The Office of the 
Attorney Advisor examines the hearing officer's decision, the requests 
made by any of the parties or CMS, and any submission made in accordance 
with the provisions of this section in order to assist the Administrator 
in deciding whether to review the decision.
    (c) Administrator's discretion. The Administrator may--
    (1) Review or decline to review the hearing officer's decision;
    (2) Exercise this discretion on his or her own motion or in response 
to a request from any of the parties; and
    (3) Delegate review responsibility to the Deputy Administrator. (As 
used in this section, the term ``Administrator'' includes ``Deputy 
Administrator'' if review responsibility has been delegated.)
    (d) Basis for decision to review. In deciding whether to review a 
hearing officer's decision, the Administrator considers--
    (1) Whether the decision--
    (i) Is based on a correct interpretation of law, regulation, or CMS 
Ruling;
    (ii) Is supported by substantial evidence;
    (iii) Presents a significant policy issue having a basis in law and 
regulations;
    (iv) Requires clarification, amplification, or an alternative legal 
basis for the decision; and
    (v) Is within the authority provided by statute, regulation, or CMS 
Ruling; and
    (2) Whether review may lead to the issuance of a CMS Ruling or other 
directive needed to clarify a statute or regulation.
    (e) Notice of decision to review or not to review. (1) The 
Administrator gives all parties prompt written notice of his or her 
decision to review or not to review.
    (2) The notice of a decision to review identifies the specific 
issues the Administrator will consider.
    (f) Response to notice of decision to review. (1) Within 20 days 
from the date on a notice of the Administrator's decision to review a 
hearing officer's decision, any of the parties may file with

[[Page 326]]

the Administrator any or all of the following:
    (i) Proposed findings and conclusions.
    (ii) Supporting views or exceptions to the hearing officer's 
decision.
    (iii) Supporting reasons for the proposed findings and exceptions.
    (iv) A rebuttal to another party's request for review or to other 
submissions already filed with the Administrator.
    (2) The submissions must be limited to the issues the Administrator 
has decided to review and confined to the record established by the 
hearing officer.
    (3) All communications from the parties concerning a hearing 
officer's decision being reviewed by the Administrator must be in 
writing (not in facsimile or other electronic medium) and must include a 
certification that copies have been sent to all other parties.
    (4) The Administrator does not consider any communication that does 
not meet the requirements of this paragraph.
    (g) Administrator's review decision. (1) The Administrator bases his 
or her decision on the following:
    (i) The entire record developed by the hearing officer.
    (ii) Any materials submitted in connection with the hearing or under 
paragraph (f) of this section.
    (iii) Generally known facts not subject to reasonable dispute.
    (2) The Administrator mails copies of the review decision to all 
parties within 120 days from the date of the hearing officer's decision.
    (3) The Administrator's review decision may affirm, reverse, or 
modify the hearing decision or may remand the case to the hearing 
officer.
    (h) Basis and effect of remand. (1) Basis. The bases for remand do 
not include the following:
    (i) Evidence that existed at the time of the hearing and that was 
known or could reasonably have been expected to be known.
    (ii) A court case that was either not available at the time of the 
hearing or was decided after the hearing.
    (iii) Change of the parties' representation.
    (iv) An alternative legal basis for an issue in dispute.
    (2) Effect of remand. (i) The Administrator may instruct the hearing 
officer to take further action with respect to the development of 
additional facts or new issues or to consider the applicability of laws 
or regulations other than those considered during the hearing.
    (ii) The hearing officer takes the action in accordance with the 
Administrator's instructions in the remand notice and again issues a 
decision.
    (iii) The Administrator may review or decline to review the hearing 
officer's remand decision in accordance with the procedures set forth in 
this section.
    (i) Finality of decision. The Administrator's review decision, or 
the hearing officer's decision following remand, is the final 
Departmental decision and is binding on all parties unless the 
Administrator chooses to review the decision in accordance with this 
section, or the decision is reopened in accordance with Sec. 411.126.



Sec. 411.126  Reopening of determinations and decisions.

    (a) A determination that a GHP or LGHP is a nonconforming GHP or the 
decision or revised decision of a hearing officer or of the CMS 
Administrator may be reopened within 12 months from the date on the 
notice of determination or decision or revised decision, for any reason 
by the entity that issued the determination or decision.
    (b) The decision to reopen or not to reopen is not appealable.



Sec. 411.130  Referral to Internal Revenue Service (IRS).

    (a) CMS responsibility. After CMS determines that a plan has been a 
nonconforming GHP in a particular year, it refers its determination to 
the IRS, but only after the parties have exhausted all CMS appeal rights 
with respect to the determination.
    (b) IRS responsibility. The IRS administers section 5000 of the IRC, 
which imposes a tax on employers (other than governmental entities) and 
employee organizations that contribute to a nonconforming GHP. The tax 
is equal to 25 percent of the employer's or employee organization's 
expenses, incurred during the calendar year in which the plan

[[Page 327]]

is a nonconforming GHP, for each GHP, both conforming and nonconforming, 
to which the employer or employee organization contributes.



Subpart F--Special Rules: Individuals Eligible or Entitled on the Basis 
         of ESRD, Who Are Also Covered Under Group Health Plans



Sec. 411.160  Scope.

    This subpart sets forth special rules that apply to individuals who 
are eligible for, or entitled to, Medicare on the basis of ESRD. 
(Section 406.13 of this chapter contains the rules for eligibility and 
entitlement based on ESRD.)

[60 FR 45367, Aug. 31, 1995]



Sec. 411.161  Prohibition against taking into account Medicare eligibility or entitlement or differentiating benefits.

    (a) Taking into account. (1) Basic rule. A GHP may not take into 
account that an individual is eligible for or entitled to Medicare 
benefits on the basis of ESRD during the coordination period specified 
in Sec. 411.162(b) and (c). Examples of actions that constitute taking 
into account Medicare entitlement are listed in Sec. 411.108(a).
    (2) Applicability. This prohibition applies for ESRD-based Medicare 
eligibility to the same extent as for ESRD-based Medicare entitlement. 
An individual who has ESRD but who has not filed an application for 
entitlement to Medicare on that basis is eligible for Medicare based on 
ESRD for purposes of paragraphs (b)(2) and (c)(2) through (c)(4) of 
Sec. 411.162 if the individual meets the other requirements of 
Sec. 406.13 of this chapter.
    (3) Relation to COBRA continuation coverage. This rule does not 
prohibit the termination of GHP coverage under title X of COBRA when 
termination of that coverage is expressly permitted, upon entitlement to 
Medicare, under 26 U.S.C. 4980B(f)(2)(B)(iv); 29 U.S.C. 1162.(2)(D); or 
42 U.S.C. 300bb-2.(2)(D).\1\ (Situations in which Medicare is secondary 
to COBRA continuation coverage are set forth in Sec. 411.162(a)(3).)
---------------------------------------------------------------------------

    \1\ COBRA requires that certain group health plans offer 
continuation of plan coverage for 18 to 36 months after the occurrence 
of certain ``qualifying events,'' including loss of employment or 
reduction of employment hours. Those are events that otherwise would 
result in loss of group health plan coverage unless the individual is 
given the opportunity to elect, and does so elect, to continue plan 
coverage at his or her own expense. With one exception, the COBRA 
amendments expressly permit termination of continuation coverage upon 
entitlement to Medicare. The exception is that the plan may not 
terminate continuation coverage of an individual (and his or her 
qualified dependents) if the individual retires on or before the date 
the employer substantially eliminates regular plan coverage by filing 
for Chapter 11 bankruptcy (26 U.S.C. 4980B(g)(1)(D) and 29 U.S.C. 
1167.(3)(C)).
---------------------------------------------------------------------------

    (b) Nondifferentiation. (1) A GHP may not differentiate in the 
benefits it provides between individuals who have ESRD and others 
enrolled in the plan, on the basis of the existence of ESRD, or the need 
for renal dialysis, or in any other manner.
    (2) GHP actions that constitute differentiation in plan benefits 
(and that may also constitute ``taking into account'' Medicare 
eligibility or entitlement) include, but are not limited to the 
following:
    (i) Terminating coverage of individuals with ESRD, when there is no 
basis for such termination unrelated to ESRD (such as failure to pay 
plan premiums) that would result in termination for individuals who do 
not have ESRD.
    (ii) Imposing on persons who have ESRD, but not on others enrolled 
in the plan, benefit limitations such as less comprehensive health plan 
coverage, reductions in benefits, exclusions of benefits, a higher 
deductible or coinsurance, a longer waiting period, a lower annual or 
lifetime benefit limit, or more restrictive preexisting illness 
limitations.
    (iii) Charging individuals with ESRD higher premiums.
    (iv) Paying providers and suppliers less for services furnished to 
individuals who have ESRD than for the same services furnished to those 
who do not have ESRD, such as paying 80 percent of the Medicare rate for 
renal dialysis on behalf of a plan enrollee who has ESRD and the usual, 
reasonable and customary charge for renal dialysis on

[[Page 328]]

behalf of an enrollee who does not have ESRD.
    (v) Failure to cover routine maintenance dialysis or kidney 
transplants, when a plan covers other dialysis services or other organ 
transplants.
    (c) Uniform Limitations on particular services permissible. A plan 
is not prohibited from limiting covered utilization of a particular 
service as long as the limitation applies uniformly to all plan 
enrollees. For instance, if a plan limits its coverage of renal dialysis 
sessions to 30 per year for all plan enrollees, the plan would not be 
differentiating in the benefits it provides between plan enrollees who 
have ESRD and those who do not.
    (d) Benefits secondary to Medicare. (1) The prohibition against 
differentiation of benefits does not preclude a plan from paying 
benefits secondary to Medicare after the expiration of the coordination 
period described in Sec. 411.162(b) and (c), but a plan may not 
otherwise differentiate, as described in paragraph (b) of this section, 
in the benefits it provides.
    (2) Example--

    Mr. Smith works for employer A, and he and his wife are covered 
through employer A's GHP (Plan A). Neither is eligible for Medicare nor 
has ESRD. Mrs. Smith works for employer B, and is also covered by 
employer B's plan (Plan B). Plan A is more comprehensive than Plan B and 
covers certain items and services which Plan B does not cover, such as 
prescription drugs. If Mrs. Smith obtains a medical service, Plan B pays 
primary and Plan A pays secondary. That is, Plan A covers Plan B 
copayment amounts and items and services that Plan A covers but that 
Plan B does not.
    Mr. Jones also works for employer A, and he and his wife are covered 
by Plan A. Mrs. Jones does not have other GHP coverage. Mrs. Jones 
develops ESRD and becomes entitled to Medicare on that basis. Plan A 
pays primary to Medicare during the first 18 months of Medicare 
entitlement based on ESRD. When Medicare becomes the primary payer, the 
plan converts Mrs. Jones' coverage to a Medicare supplement policy. That 
policy pays Medicare deductible and coinsurance amounts but does not pay 
for items and services not covered by Medicare, which plan A would have 
covered. That conversion is impermissible because the plan is providing 
a lower level of coverage for Mrs. Jones, who has ESRD, than it provides 
for Mrs. Smith, who does not. In other words, if Plan A pays secondary 
to primary payers other than Medicare, it must provide the same level of 
secondary benefits when Medicare is primary in order to comply with the 
nondifferentiation provision.

[60 FR 45368, Aug. 31, 1995]



Sec. 411.162  Medicare benefits secondary to group health plan benefits.

    (a) General provisions. (1) Basic rule. Except as provided in 
Sec. 411.163 (with respect to certain individuals who are also entitled 
on the basis of age or disability), Medicare is secondary to any GHP 
(including a retirement plan), with respect to benefits that are payable 
to an individual who is entitled to Medicare on the basis of ESRD, for 
services furnished during any coordination period determined in 
accordance with paragraphs (b) and (c) of this section. (No Medicare 
benefits are payable on behalf of an individual who is eligible but not 
yet entitled.)
    (2) Medicare benefits secondary without regard to size of employer 
and beneficiary's employment status. The size of employer and employment 
status requirements of the MSP provisions for the aged and disabled do 
not apply with respect to ESRD beneficiaries.
    (3) COBRA continuation coverage. Medicare is secondary payer for 
benefits that a GHP--
    (i) Is required to keep in effect under COBRA continuation 
requirements (as explained in the footnote to Sec. 411.161(a)(3)), even 
after the individual becomes entitled to Medicare; or
    (ii) Voluntarily keeps in effect after the individual becomes 
entitled to Medicare on the basis of ESRD, even though not obligated to 
do so under the COBRA provisions.
    (4) Medicare payments during the coordination period. During the 
coordination period, CMS makes Medicare payments as follows:
    (i) Primary payments only for Medicare covered services that are--
    (A) Furnished to Medicare beneficiaries who have declined to enroll 
in the GHP;
    (B) Not covered under the plan; \1\
---------------------------------------------------------------------------

    \1\ CMS does not pay if noncoverage of services constitutes 
differentiation as prohibited by Sec. 411.161(b).

---------------------------------------------------------------------------

[[Page 329]]

    (C) Covered under the plan but not available to particular enrollees 
because they have exhausted their benefits; or
    (D) Furnished to individuals whose COBRA continuation coverage has 
been terminated because of the individual's Medicare entitlement.
    (ii) Secondary payments, within the limits specified in Secs. 411.32 
and 411.33, to supplement the amount paid by the GHP if that plan pays 
only a portion of the charge for the services.
    (b) Beginning of coordination period. (1) For individuals who start 
a course of maintenance dialysis or who receive a kidney transplant 
before December 1989, the coordination period begins with the earlier 
of--
    (i) The month in which the individual initiated a regular course of 
renal dialysis; or
    (ii) In the case of an individual who received a kidney transplant, 
the first month in which the individual became entitled to Medicare, or, 
if earlier, the first month for which the individual would have been 
entitled to Medicare benefits if he or she had filed an application for 
such benefits.
    (2) For individuals other than those specified in paragraph (b)(1) 
of this section, the coordination period begins with the earlier of--
    (i) The first month in which the individual becomes entitled to 
Medicare part A on the basis of ESRD; or
    (ii) The first month the individual would have become entitled to 
Medicare part A on the basis of ESRD if he or she had filed an 
application for such benefits.
    (c) End of coordination period. (1) For individuals who start a 
regular course of renal dialysis or who receive a kidney transplant 
before December 1989, the coordination period ends with the earlier of 
the end of the 12th month of dialysis or the end of the 12th month of a 
transplant. The 12th month of dialysis may be any time from the 9th 
month through the 12th month of Medicare entitlement, depending on the 
extent to which the individual was subject to a waiting period before 
becoming entitled to Medicare.
    (2) The coordination period for the following individuals ends with 
the earlier of the 12th month of eligibility or the 12th month of 
entitlement to Medicare part A:
    (i) Individuals, other than those specified in paragraph (c)(1) of 
this section, who became entitled to Medicare part A solely on the basis 
of ESRD during December 1989 and January 1990.
    (ii) Individuals, other than those specified in paragraph (c)(1) of 
this section, who could have become entitled to Medicare Part A solely 
on the basis of ESRD during December 1989 and January 1990 if they had 
filed an application.
    (iii) Individuals who become entitled to Medicare part A on the 
basis of ESRD after September 1997.
    (iv) Individuals who can become entitled to Medicare part A on the 
basis of ESRD after September 1997.
    (3) The coordination period for the following individuals ends with 
the earlier of the end of the 18th month of eligibility or the 18th 
month of entitlement to Medicare part A:
    (i) Individuals, other than those specified in paragraph (c)(1) of 
this section, who become entitled to Medicare part A on the basis of 
ESRD from February 1990 through April 1997.
    (ii) Individuals, other than those specified in paragraph (c)(1) of 
this section, who could become entitled to Medicare part A on the basis 
of ESRD from February 1990 through April 1997 if they would file an 
application.
    (4) The coordination periods for the following individuals ends 
September 30, 1998:
    (i) Individuals who become entitled to Medicare part A on the basis 
of ESRD from May 1997, through September 1997.
    (ii) Individuals who could become entitled to Medicare part A on the 
basis of ESRD from May 1997, through September 1997, if they would file 
an application.
    (d) Examples. Based on the rules specified in paragraphs (b) and (c) 
of this section and the rules specified in Sec. 406.13 of this 
subchapter, the following examples illustrate how to determine, in 
different situations, the number of months during which Medicare is 
secondary payer.
    (1) An individual began dialysis on November 4, 1989. He did not 
initiate a course in self-dialysis training nor did

[[Page 330]]

he receive a kidney transplant during the first 3 calendar months of 
dialysis. Thus, he became entitled to Medicare on February 1, 1990. 
Since this individual began dialysis before December 1989, the 12-month 
period began with the first month of dialysis, November 1989, and ended 
October 31, 1990. The coordination period in this case is 9 months, 
February 1990 through October 1990.
    (2) An individual began dialysis on January 29, 1990. He did not 
initiate a course in self-dialysis training nor did he receive a kidney 
transplant during the first 3 calendar months of dialysis. Thus, he 
became entitled to Medicare on April 1, 1990. Since the individual began 
dialysis after November 1989, and became entitled to Medicare after 
January 1990, the coordination period began with the first month of 
entitlement, April 1990, and ended September 30, 1991, the end of the 
18th month of entitlement.
    (3) An individual began a regular course of maintenance dialysis on 
February 10, 1990. He did not initiate a course of self-dialysis 
training nor did he receive a kidney transplant during the first 3 
calendar months of dialysis. Thus, he became entitled to Medicare on May 
1, 1990. Medicare is secondary payer from May 1, 1990 through October 
1991, a total of 18 months.
    (4) The same facts exist as in the example under paragraph (d)(3), 
except that the individual began a course of self-dialysis training 
during the first 3 calendar months of dialysis. Thus, the effective date 
of his Medicare entitlement is February 1, 1990, and Medicare is 
secondary payer from February 1, 1990 through July 1991, a total of 18 
months.
    (5) An individual began dialysis on September 15, 1990. He did not 
initiate a course of self-dialysis training nor did he receive a kidney 
transplant during the first 3 calendar months of dialysis. Thus, he 
became entitled to Medicare effective December 1, 1990. Medicare is 
secondary payer from December 1, 1990 through May 1992, a total of 18 
months.
    (6) An individual began dialysis on November 17, 1990. He initiates 
a course of self-dialysis training in January 1991, and thus becomes 
entitled to Medicare effective November 1, 1990. Medicare is secondary 
payer from November 1, 1990, through April 1992, a total of 18 months.
    (7) An individual began a regular course of dialysis on December 10, 
1990. He does not initiate a course of self-dialysis training nor does 
he receive a kidney transplant. He decides to delay his enrollment in 
Medicare because his employer group health plan pays charges in full and 
he does not wish to incur part B premiums at this time. However, in 
March 1992, he files for part A and part B Medicare entitlement, and 
stipulates that he wants his Medicare entitlement to be effective March 
1, 1992 (one year later than he could have become entitled). Since this 
individual could have been entitled to Medicare as early as March 1, 
1991, Medicare is secondary payer only from March 1, 1992, through 
August 1992, a period of 6 months.

(While Medicare is secondary payer for only the last 6 months of this 
period, the Medicare program is effectively secondary payer for the full 
coordination period, due to the fact that the individual delayed his 
Medicare enrollment on account of his employer plan coverage and 
Medicare made no payments at all during the deferred period.)
    (8) The same facts exist as in the example under paragraph (d)(7) of 
this section, except that the individual defers Medicare entitlement 
beyond August 1992. (For purposes of this example, Medicare entitlement 
is not retroactive, but rather takes effect after August 1992.) There 
would be no period during which Medicare is secondary payer in this 
situation. This is because Medicare entitlement does not begin until 
after the 18-month period expires as specified in paragraph (c)(3)(ii) 
of this section. Medicare would become primary payer as of the effective 
date of Medicare entitlement. The employer plan is required to pay 
primary from December 1, 1990, through August 1992, a total of 21 
months.
    (9) An individual becomes entitled to Medicare on December 1, 1997. 
The employer plan is primary payer, and Medicare is secondary payer, 
from December 1, 1997, through November 30, 1998,

[[Page 331]]

a period of 12 months. Medicare becomes primary payer on December 1, 
1998, because the extension of the coordination period from 12 to 18 
months applies only to items and services furnished before October 1, 
1998.
    (10) An individual becomes entitled to Medicare on August 1, 1997. 
Medicare is secondary payer from August 1, 1997, through September 30, 
1998, a period of 14 months. Medicare becomes primary payer on October 
1, 1998, because the coordination period has expired.
    (e) [Reserved]
    (f) Determinations for subsequent periods of ESRD eligibility. If an 
individual has more than one period of eligibility based on ESRD, a 
coordination period will be determined for each period of eligibility in 
accordance with this section.

[57 FR 36015, Aug. 12, 1992; 57 FR 45113, Sept. 30, 1992. Redesignated 
and amended at 60 FR 45362, 45368, Aug. 31, 1995]



Sec. 411.163  Coordination of benefits: Dual entitlement situations.

    (a) Basic rule. Coordination of benefits is governed by this section 
if an individual is eligible for or entitled to Medicare on the basis of 
ESRD and also entitled on the basis of age or disability.
    (b) Specific rules. \1\ (1) Coordination period ended before August 
1993. If the first 18 months of ESRD-based eligibility or entitlement 
ended before August 1993, Medicare was primary payer from the first 
month of dual eligibility or entitlement, regardless of when dual 
eligibility or entitlement began.
---------------------------------------------------------------------------

    \1\ A lawsuit was filed in United States District Court for the 
District of Columbia on May 5, 1995 (National Medical Care, Inc. v. 
Shalala, Civil Action No. 95-0860), challenging the implementation of 
one aspect of the OBRA '93 provisions with respect to group health plan 
retirement coverage. The court issued a preliminary injunction order on 
June 6, 1995, which enjoins the Secretary from applying the rule 
contained in Sec. 411.163(b)(4) for items and services furnished between 
August 10, 1993 and April 24, 1995, pending the court's decision on the 
merits. CMS will modify the rules, if required, based on the final 
ruling by the court.
---------------------------------------------------------------------------

    (2) First month of ESRD-based eligibility or entitlement and first 
month of dual eligibility/entitlement after February 1992 and before 
August 10, 1993. Except as provided in paragraph (b)(4) of this section, 
if the first month of ESRD-based eligibility or entitlement and first 
month of dual eligibility/entitlement were after February 1992 and 
before August 10, 1993, Medicare--
    (i) Is primary payer from the first month of dual eligibility/
entitlement through August 9, 1993;
    (ii) Is secondary payer from August 10, 1993, through the 18th month 
of ESRD-based eligibility or entitlement; and
    (iii) Again becomes primary payer after the 18th month of ESRD-based 
eligibility or entitlement.
    (3) First month of ESRD-based eligibility or entitlement after 
February 1992 and first month of dual eligibility/entitlement after 
August 9, 1993. Except as provided in paragraph (b)(4) of this section, 
if the first month of ESRD-based eligibility or entitlement is after 
February 1992, and the first month of dual eligibility/entitlement is 
after August 9, 1993, the rules of Sec. 411.162(b) and (c) apply; that 
is, Medicare--
    (i) Is secondary payer during the first 18 months of ESRD-based 
eligibility or entitlement; and
    (ii) Becomes primary after the 18th month of ESRD-based eligibility 
or entitlement.
    (4) Medicare continues to be primary after an aged or disabled 
beneficiary becomes eligible on the basis of ESRD. (i) Applicability of 
the rule. Medicare remains the primary payer when an individual becomes 
eligible for Medicare based on ESRD if all of the following conditions 
are met:
    (A) The individual is already entitled on the basis of age or 
disability when he or she becomes eligible on the basis of ESRD.
    (B) The MSP prohibition against ``taking into account'' age-based or 
disability-based entitlement does not apply because plan coverage was 
not ``by virtue of current employment status'' or the employer had fewer 
than 20 employees (in the case of the aged) or fewer than 100 employees 
(in the case of the disabled).
    (C) The plan is paying secondary to Medicare because the plan had 
justifiably taken into account the age-based or disability-based 
entitlement.

[[Page 332]]

    (ii) Effect of the rule. The plan may continue to pay benefits 
secondary to Medicare under paragraph (b)(4)(i) of this section. 
However, the plan may not differentiate in the services covered and the 
payments made between persons who have ESRD and those who do not.
    (c) Examples. (1) (Rule (b)(1).) Mr. A, who is covered by a GHP, 
became entitled to Medicare on the basis of ESRD in January 1992. On 
December 20, 1992, Mr. A attained age 65 and became entitled on the 
basis of age. Since prior law was still in effect (OBRA '93 amendment 
was effective in August 1993), Medicare became primary payer as of 
December 1992, when dual entitlement began.
    (2) (Rule (b)(2).) Miss B, who has GHP coverage, became entitled to 
Medicare on the basis of ESRD in July 1992, and also entitled on the 
basis of disability in June 1993. Medicare was primary payer from June 
1993 through August 9, 1993, because the plan permissibly took into 
account the ESRD-based entitlement (ESRD was not the ``sole'' basis of 
Medicare entitlement); secondary payer from August 10, 1993, through 
December 1993, the 18th month of ESRD-based entitlement (the plan is no 
longer permitted to take into account ESRD-based entitlement that is not 
the ``sole'' basis of Medicare entitlement); and again became primary 
payer beginning January 1994.
    (3) (Rule (b)(3).) Mr. C, who is 67 years old and entitled to 
Medicare on the basis of age, has GHP coverage by virtue of current 
employment status. Mr. C is diagnosed as having ESRD and begins a course 
of maintenance dialysis on June 27, 1993. Effective September 1, 1993, 
Mr. C. is eligible for Medicare on the basis of ESRD. Medicare, which 
was secondary because Mr. C's GHP coverage was by virtue of current 
employment, continues to be secondary payer through February 1995, the 
18th month of ESRD-based eligibility, and becomes primary payer 
beginning March 1995.
    (4) (Rule (b)(3).) Mr. D retired at age 62 and maintained GHP 
coverage as a retiree. In January 1994, at the age of 64, Mr. D became 
entitled to Medicare based on ESRD. Seven months into the 18-month 
coordination period (July 1994) Mr. D turned age 65. The coordination 
period continues without regard to age-based entitlement, with the 
retirement plan continuing to pay primary benefits through June 1995, 
the 18th month of ESRD-based entitlement. Thereafter, Medicare becomes 
the primary payer.
    (5) (Rule (b)(3).) Mrs. E retired at age 62 and maintained GHP 
coverage as a retiree. In July 1994, she simultaneously became eligible 
for Medicare based on ESRD (maintenance dialysis began in April 1994) 
and entitled based on age. The retirement plan must pay benefits primary 
to Medicare from July 1994 through December 1995, the first 18 months of 
ESRD-based eligibility. Thereafter, Medicare becomes the primary payer.
    (6) (Rule (b)(3).) Mr. F, who is 67 years of age, is working and has 
GHP coverage because of his employment status, subsequently develops 
ESRD, and begins a course of maintenance dialysis in October 1994. He 
becomes eligible for Medicare based on ESRD effective January 1, 1995. 
Under the working aged provision, the plan continues to pay primary to 
Medicare through December 1994. On January 1, 1995, the working aged 
provision ceases to apply and the ESRD MSP provision takes effect. In 
September 1995, Mr. F retires. The GHP must ignore Mr. F's retirement 
status and continue to pay primary to Medicare through June 1996, the 
end of the 18-month coordination period.
    (7) (Rule (b)(4).) Mrs. G, who is 67 years of age, is retired. She 
has GHP retirement coverage through her former employer. Her plan 
permissibly took into account her age-based Medicare entitlement when 
she retired and is paying benefits secondary to Medicare. Mrs. G 
subsequently develops ESRD and begins a course of maintenance dialysis 
in October 1995. She automatically becomes eligible for Medicare based 
on ESRD effective January 1, 1996. The plan continues to be secondary on 
the basis of Mrs. G's age-based entitlement as long as the plan does not 
differentiate in the services it

[[Page 333]]

provides to Mrs. G and does not do anything else that would constitute 
``taking into account'' her ESRD-based eligibility.

[60 FR 45369, Aug. 31, 1995; 60 FR 53876, Oct. 18, 1995]



Sec. 411.165  Basis for conditional Medicare payments.

    (a) General rule. Except as specified in paragraph (b) of this 
section, the Medicare intermediary or carrier may make a conditional 
payment if--
    (1) The beneficiary, the provider, or the supplier that has accepted 
assignment files a proper claim under the group health plan and the plan 
denies the claim in whole or in part; or
    (2) The beneficiary, because of physical or mental incapacity, fails 
to file a proper claim.
    (b) Exception. Medicare does not make conditional primary payments 
under either of the following circumstances:
    (1) The claim is denied for one of the following reasons:
    (i) It is alleged that the group health plan is secondary to 
Medicare.
    (ii) The group health plan limits its payments when the individual 
is entitled to Medicare.
    (iii) Failure to file a proper claim if that failure is for any 
reason other than the physical or mental incapacity of the beneficiary.
    (2) The group health plan fails to furnish information requested by 
CMS and necessary to determine whether the employer plan is primary to 
Medicare.

[57 FR 36015, Aug. 12, 1992. Redesignated and amended at 60 FR 45362, 
45370, Aug. 31, 1995; 60 FR 53877, Oct. 18, 1995]



 Subpart G--Special Rules: Aged Beneficiaries and Spouses Who Are Also 
                    Covered Under Group Health Plans



Sec. 411.170  General provisions.

    (a) Basis. (1) This subpart is based on certain provisions of 
section 1862(b) of the Act, which impose specific requirements and 
limitations with respect to--
    (i) Individuals who are entitled to Medicare on the basis of age; 
and
    (ii) GHPs of at least one employer of 20 or more employees that 
cover those individuals.
    (2) Under these provisions, the following rules apply:
    (i) An employer is considered to employ 20 or more employees if the 
employer has 20 or more employees for each working day in each of 20 or 
more calendar weeks in the current calendar year or the preceding 
calendar year.
    (ii) The plan may not take into account the Medicare entitlement of-
-
    (A) An individual age 65 or older who is covered or seeks to be 
covered under the plan by virtue of current employment status; or
    (B) The spouse, including divorced or common-law spouse age 65 or 
older of an individual (of any age) who is covered or seeks to be 
covered by virtue of current employment status. (Section 411.108 gives 
examples of actions that constitute ``taking into account.'')
    (iii) Regardless of whether entitled to Medicare, employees and 
spouses age 65 or older, including divorced or common-law spouses of 
employees of any age, are entitled to the same plan benefits under the 
same conditions as employees and spouses under age 65.
    (b) [Reserved]
    (c) Determination of ``aged''. (1) An individual attains a 
particular age on the day preceding the anniversary of his or her birth.
    (2) The period during which an individual is considered to be 
``aged'' begins on the first day of the month in which that individual 
attains age 65.
    (3) For services furnished before May 1986, the period during which 
an individual is considered ``aged'' ends as follows:
    (i) For services furnished before July 18, 1984, it ends on the last 
day of the month in which the individual attains age 70.
    (ii) For services furnished between July 18, 1984 and April 30, 
1986, it ends on the last day of the month before the month the 
individual attains age 70.
    (4) For services furnished on or after May 1, 1986, the period has 
no upper age limit.

[54 FR 41734, Oct. 11, 1989. Redesignated and amended at 60 FR 45362, 
45370, Aug. 31, 1995]

[[Page 334]]



Sec. 411.172  Medicare benefits secondary to group health plan benefits.

    (a) Conditions that the individual must meet. Medicare Part A and 
Part B benefits are secondary to benefits payable by a GHP for services 
furnished during any month in which the individual--
    (1) Is aged;
    (2) Is entitled to Medicare Part A benefits under Sec. 406.10 of 
this chapter; and
    (3) Meets one of the following conditions:
    (i) Is covered under a GHP of an employer that has at least 20 
employees (including a multi-employer plan in which at least one of the 
participating employers meets that condition), and coverage under the 
plan is by virtue of the individual's current employment status.
    (ii) Is the aged spouse (including a divorced or common-law spouse) 
of an individual (of any age) who is covered under a GHP described in 
paragraph (a)(3)(i) of this section by virtue of the individual's 
current employment status.
    (b) Special rule for multi-employer plans. The requirements and 
limitations of paragraph (a) of this section and of (a)(2)(iii) of 
Sec. 411.170 do not apply with respect to individuals enrolled in a 
multi-employer plan if--
    (1) The individuals are covered by virtue of current employment 
status with an employer that has fewer than 20 employees; and
    (2) The plan requests an exception and identifies the individuals 
for whom it requests the exception as meeting the conditions specified 
in paragraph (b)(1) of this section.
    (c) Refusal to accept group health plan coverage. An employee or 
spouse may refuse the health plan offered by the employer. If the 
employee or spouse refuses the plan--
    (1) Medicare is primary payer for that individual; and
    (2) The plan may not offer that individual coverage complementary to 
Medicare.
    (d) Reemployed retiree or annuitant. A reemployed retiree or 
annuitant who is covered by a GHP and who performs sufficient services 
to qualify for coverage on that basis (that is, other employees in the 
same category are provided health benefits) is considered covered ``by 
reason of current employment status'' even if:
    (1) The employer provides the same GHP coverage to retirees; or
    (2) The premiums for the plan are paid from a retirement or pension 
fund.
    (e) Secondary payments. Medicare pays secondary benefits, within the 
limitations specified in Secs. 411.32 and 411.33, to supplement the 
primary benefits paid by the group health plan if that plan pays only a 
portion of the charge for the services.
    (f) Disabled aged individuals who are considered employed. (1) For 
services furnished on or after November 12, 1985, and before July 17, 
1987, a disabled, nonworking individual age 65 or older was considered 
employed if he or she--
    (i) Was receiving, from an employer, disability payments that were 
subject to tax under the Federal Insurance Contributions Act (FICA); and
    (ii) For the month before the month of attainment of age 65, was not 
entitled to disability benefits under title II of the Act and 20 CFR 
404.315 of the SSA regulations.
    (2) For services furnished on or after July 17, 1987, an individual 
is considered employed if he or she receives, from an employer, 
disability benefits that are subject to tax under FICA, even if he or 
she was entitled to Social Security disability benefits before attaining 
age 65.
    (g) Individuals entitled to Medicare on the basis of age who are 
also eligible for or entitled to Medicare on the basis of ESRD. If an 
aged individual is, or could upon filing an application become, entitled 
to Medicare on the basis of ESRD, the coordination of benefits rules of 
subpart F of this part apply.

[54 FR 41734, Oct. 11, 1989, as amended at 55 FR 1820, Jan. 19, 1990. 
Redesignated and amended at 60 FR 45362, 45370, Aug. 31, 1995; 60 FR 
53877, Oct. 18, 1995]



Sec. 411.175  Basis for Medicare primary payments.

    (a) General rule. CMS makes Medicare primary payments for covered 
services that are--
    (1) Furnished to Medicare beneficiaries who have declined to enroll 
in the GHP;

[[Page 335]]

    (2) Not covered by the plan for any individuals or spouses who are 
enrolled by virtue of the individual's current employment status;
    (3) Covered under the plan but not available to particular 
individuals or spouses enrolled by virtue of current employment status 
because they have exhausted their benefits under the plan;
    (4) Furnished to individuals whose COBRA continuation coverage has 
been terminated because of the individual's Medicare entitlement; or
    (5) Covered under COBRA continuation coverage notwithstanding the 
individual's Medicare entitlement.
    (b) Conditional Medicare payments: Basic rule. Except as provided in 
paragraph (c) of this section, Medicare may make a conditional primary 
payment if--
    (1) The beneficiary, the provider, or the supplier that has accepted 
assignment has filed a proper claim under the group health plan and the 
plan has denied the claim in whole or in part; or
    (2) The beneficiary, because of physical or mental incapacity, 
failed to file proper claim.
    (c) Conditional primary payments: Exception. Medicare does not make 
conditional primary payments under either of the following 
circumstances:
    (1) The claim is denied for one of the following reasons:
    (i) It is alleged that the group health plan is secondary to 
Medicare.
    (ii) The plan limits its payments when the individual is entitled to 
Medicare.
    (iii) The plan covers the services for individuals or spouses who 
are enrolled in the plan by virtue of current employment status and are 
under age 65 but not for individuals and spouses who are enrolled on the 
same basis but are age 65 or older.
    (iv) Failure to file a proper claim if that failure is for any 
reason other than physical or mental incapacity of the beneficiary.
    (2) The group health plan fails to furnish information requested by 
CMS and necessary to determine whether the employer plan is primary to 
Medicare.

[54 FR 41734, Oct. 11, 1989. Redesignated and amended at 60 FR 45362, 
45371, Aug. 31, 1995]



 Subpart H--Special Rules: Disabled Beneficiaries Who Are Also Covered 
                     Under Large Group Health Plans

    Source: 60 FR 45371, Aug. 31, 1995, unless otherwise noted.



Sec. 411.200  Basis.

    (a) This subpart is based on certain provisions of section 1862(b) 
of the Act, which impose specific requirements and limitations with 
respect to--
    (1) Individuals who are entitled to Medicare on the basis of 
disability; and
    (2) Large group health plans (LGHPs) that cover those individuals.
    (b) Under these provisions, the LGHP may not take into account the 
Medicare entitlement of a disabled individual who is covered (or seeks 
to be covered) under the plan by virtue of his or her own current 
employment status or that of a member of his or her family. 
(Sec. 411.108 gives examples of actions that constitute taking into 
account.)



Sec. 411.201  Definitions.

    As used in this subpart--
    Entitled to Medicare on the basis of disability means entitled or 
deemed entitled on the basis of entitlement to social security 
disability benefits or railroad retirement disability benefits. 
(Sec. 406.12 of this chapter explains the requirements an individual 
must meet in order to be entitled or deemed to be entitled to Medicare 
on the basis of disability.)
    Family member means a person who is enrolled in an LGHP based on 
another person's enrollment; for example, the enrollment of the named 
insured individual. Family members may include a spouse (including a 
divorced or common-law spouse), a natural, adopted, foster, or 
stepchild, a parent, or a sibling.



Sec. 411.204  Medicare benefits secondary to LGHP benefits.

    (a) Medicare benefits are secondary to benefits payable by an LGHP 
for services furnished during any month in which the individual--
    (1) Is entitled to Medicare Part A benefits under Sec. 406.12 of 
this chapter;
    (2) Is covered under an LGHP; and

[[Page 336]]

    (3) Has LGHP coverage by virtue of his or her own or a family 
member's current employment status.
    (b) Individuals entitled to Medicare on the basis of disability who 
are also eligible for, or entitled to, Medicare on the basis of ESRD. If 
a disabled individual is, or could upon filing an application become, 
entitled to Medicare on the basis of ESRD, the coordination of benefits 
rules of subpart F of this part apply.



Sec. 411.206  Basis for Medicare primary payments and limits on secondary payments.

    (a) General rule. CMS makes Medicare primary payments for services 
furnished to disabled beneficiaries covered under the LGHP by virtue of 
their own or a family member's current employment status if the services 
are--
    (1) Furnished to Medicare beneficiaries who have declined to enroll 
in the GHP;
    (2) Not covered under the plan for the disabled individual or 
similarly situated individuals;
    (3) Covered under the plan but not available to particular disabled 
individuals because they have exhausted their benefits under the plan;
    (4) Furnished to individuals whose COBRA continuation coverage has 
been terminated because of the individual's Medicare entitlement; or
    (5) Covered under COBRA continuation coverage notwithstanding the 
individual's Medicare entitlement.
    (b) Conditional primary payments: Basic rule. Except as provided in 
paragraph (c) of this section, CMS may make a conditional Medicare 
primary payment for any of the following reasons:
    (1) The beneficiary, the provider, or the supplier that has accepted 
assignment has filed a proper claim with the LGHP and the LGHP has 
denied the claim in whole or in part.
    (2) The beneficiary, because of physical or mental incapacity, 
failed to file a proper claim.
    (c) Conditional primary payments: Exceptions. CMS does not make 
conditional Medicare primary payments if--
    (1) The LGHP denies the claim in whole or in part for one of the 
following reasons:
    (i) It is alleged that the LGHP is secondary to Medicare.
    (ii) The LGHP limits its payments when the individual is entitled to 
Medicare.
    (iii) The LGHP does not provide the benefits to individuals who are 
entitled to Medicare on the basis of disability and covered under the 
plan by virtue of current employment status but does provide the 
benefits to other similarly situated individuals enrolled in the plan.
    (iv) The LGHP takes into account entitlement to Medicare in any 
other way.
    (v) There was failure to file a proper claim for any reason other 
than physical or mental incapacity of the beneficiary.
    (2) The LGHP, an employer or employee organization, or the 
beneficiary fails to furnish information that is requested by CMS and 
that is necessary to determine whether the LGHP is primary to Medicare.
    (d) Limit on secondary payments. The provisions of Sec. 411.172(e) 
also apply to services furnished to the disabled under this subpart.

Subpart I [Reserved]



     Subpart J--Physician Ownership of, and Referral of Patients or 
  Laboratory Specimens to, Entities Furnishing Clinical Laboratory or 
                          Other Health Services

    Source: 60 FR 41978, Aug. 14, 1995, unless otherwise noted.



Sec. 411.350  Scope of subpart.

    (a) This subpart implements section 1877 of the Act, which generally 
prohibits a physician from making a referral under Medicare for 
designated health services to an entity with which the physician or a 
member of the physician's immediate family has a financial relationship.
    (b) This subpart does not provide for exceptions or immunity from 
civil or criminal prosecution or other sanctions applicable under any 
State laws

[[Page 337]]

or under Federal law other than section 1877 of the Act. For example, 
although a particular arrangement involving a physician's financial 
relationship with an entity may not prohibit the physician from making 
referrals to the entity under this subpart, the arrangement may 
nevertheless violate another provision of the Act or other laws 
administered by HHS, the Federal Trade Commission, the Securities and 
Exchange Commission, the Internal Revenue Service, or any other Federal 
or State agency.
    (c) This subpart requires, with some exceptions, that certain 
entities furnishing covered services under Medicare Part A or Part B 
report information concerning their ownership, investment, or 
compensation arrangements in the form, manner, and at the times 
specified by CMS.

[66 FR 952, Jan. 4, 2001]



Sec. 411.351  Definitions.

    As used in this subpart, unless the context indicates otherwise:
    Centralized building means all or part of a building, including, for 
purposes of this definition only, a mobile vehicle, van, or trailer that 
is owned or leased on a full-time basis (that is, 24 hours per day, 7 
days per week, for a term of not less than 6 months) by a group practice 
and that is used exclusively by the group practice. Space in a building 
or a mobile vehicle, van, or trailer that is shared by more than one 
group practice, by a group practice and one or more solo practitioners, 
or by a group practice and another provider (for example, a diagnostic 
imaging facility) is not a centralized building for purposes of this 
rule. This provision does not preclude a group practice from providing 
services to other providers (for example, purchased diagnostic tests) in 
the group practice's centralized building. A group practice may have 
more than one centralized building.
    Clinical laboratory services means the biological, microbiological, 
serological, chemical, immunohematological, hematological, biophysical, 
cytological, pathological, or other examination of materials derived 
from the human body for the purpose of providing information for the 
diagnosis, prevention, or treatment of any disease or impairment of, or 
the assessment of the health of, human beings, including procedures to 
determine, measure, or otherwise describe the presence or absence of 
various substances or organisms in the body, as specifically identified 
by the CPT and HCPCS codes posted on the CMS web site, http://
www.cms.gov, (and in annual updates published in the Federal Register 
and posted on the CMS web site), except as specifically excluded on the 
CMS web site and in annual updates. All services identified on the CMS 
web site and in annual updates are clinical laboratory services for 
purposes of these regulations. Any service not specifically identified 
on the CMS web site, as amended from time to time and published in the 
Federal Register, is not a clinical laboratory service for purposes of 
these regulations.
    Consultation means a professional service furnished to a patient by 
a physician if the following conditions are satisfied:
    (1) The physician's opinion or advice regarding evaluation and/or 
management of a specific medical problem is requested by another 
physician.
    (2) The request and need for the consultation are documented in the 
patient's medical record.
    (3) After the consultation is provided, the physician prepares a 
written report of his or her findings, which is provided to the 
physician who requested the consultation.
    (4) With respect to radiation therapy services provided by a 
radiation oncologist, a course of radiation treatments over a period of 
time will be considered to be pursuant to a consultation, provided the 
radiation oncologist communicates with the referring physician on a 
regular basis about the patient's course of treatment and progress.
    Designated health services (DHS) means any of the following services 
(other than those provided as emergency physician services furnished 
outside of the U.S.), as they are defined in this section:
    (1) Clinical laboratory services.
    (2) Physical therapy, occupational therapy, and speech-language 
pathology services.

[[Page 338]]

    (3) Radiology and certain other imaging services.
    (4) Radiation therapy services and supplies.
    (5) Durable medical equipment and supplies.
    (6) Parenteral and enteral nutrients, equipment, and supplies.
    (7) Prosthetics, orthotics, and prosthetic devices and supplies.
    (8) Home health services.
    (9) Outpatient prescription drugs.
    (10) Inpatient and outpatient hospital services.
    Except as otherwise noted in these regulations, the term 
``designated health services (DHS)'' means only DHS payable, in whole or 
in part, by Medicare. DHS do not include services that are reimbursed by 
Medicare as part of a composite rate (for example, ambulatory surgical 
center services or SNF Part A payments), except to the extent the 
services listed in paragraphs (1) through (10) of this definition are 
themselves payable through a composite rate (that is, all services 
provided as home health services or inpatient and outpatient hospital 
services are DHS).
    Durable medical equipment (DME) and supplies has the meaning given 
in section 1861(n) of the Act and Sec. 414.202 of this chapter.
    Employee means any individual who, under the common law rules that 
apply in determining the employer-employee relationship (as applied for 
purposes of section 3121(d)(2) of the Internal Revenue Code of 1986), is 
considered to be employed by, or an employee of, an entity. (Application 
of these common law rules is discussed in 20 CFR 404.1007 and 26 CFR 
31.3121(d)-1(c).)
    Entity means a physician's sole practice or a practice of multiple 
physicians or any other person, sole proprietorship, public or private 
agency or trust, corporation, partnership, limited liability company, 
foundation, not-for-profit corporation, or unincorporated association 
that furnishes DHS. For purposes of this definition, an entity does not 
include the referring physician himself or herself, but does include his 
or her medical practice. A person or entity is considered to be 
furnishing DHS if it is the person or entity to which CMS makes payment 
for the DHS, directly or upon assignment on the patient's behalf, except 
that if the person or entity has reassigned its right to payment to an 
employer pursuant to Sec. 424.80(b)(1) of this chapter; a facility 
pursuant to Sec. 424.80(b)(2) of this chapter; or a health care delivery 
system, including clinics, pursuant to Sec. 424.80(b)(3) of this chapter 
(other than a health care delivery system that is a health plan (as 
defined in Sec. 1000.952(l) of this title), and other than any managed 
care organization (MCO), provider-sponsored organization (PSO), or 
independent practice association (IPA) with which a health plan 
contracts for services provided to plan enrollees), the person or entity 
furnishing DHS is the person or entity to which payment has been 
reassigned. Provided further, that a health plan, MCO, PSO, or IPA that 
employs a supplier or operates a facility that could accept reassignment 
from a supplier pursuant to Secs. 424.80(b)(1) and (b)(2) of this 
chapter is the entity furnishing DHS for any services provided by such 
supplier.
    Fair market value means the value in arm's-length transactions, 
consistent with the general market value. ``General market value'' means 
the price that an asset would bring, as the result of bona fide 
bargaining between well-informed buyers and sellers who are not 
otherwise in a position to generate business for the other party; or the 
compensation that would be included in a service agreement, as the 
result of bona fide bargaining between well-informed parties to the 
agreement who are not otherwise in a position to generate business for 
the other party, on the date of acquisition of the asset or at the time 
of the service agreement. Usually, the fair market price is the price at 
which bona fide sales have been consummated for assets of like type, 
quality, and quantity in a particular market at the time of acquisition, 
or the compensation that has been included in bona fide service 
agreements with comparable terms at the time of the agreement. With 
respect to the rentals and leases described in Sec. 411.357(a) and (b), 
``fair market value'' means the value of rental property for general 
commercial purposes (not taking into account its intended use). In the 
case of a lease of space, this value

[[Page 339]]

may not be adjusted to reflect the additional value the prospective 
lessee or lessor would attribute to the proximity or convenience to the 
lessor when the lessor is a potential source of patient referrals to the 
lessee. For purposes of this section, a rental payment does not take 
into account intended use if it takes into account costs incurred by the 
lessor in developing or upgrading the property or maintaining the 
property or its improvements.
    Home health services means the services described in section 1861(m) 
of the Act and part 409, subpart E of this chapter.
    Hospital means any entity that qualifies as a ``hospital'' under 
section 1861(e) of the Act, as a ``psychiatric hospital'' under section 
1861(f) of the Act, or as a ``rural primary care hospital'' under 
section 1861(mm)(1) of the Act, and refers to any separate legally 
organized operating entity plus any subsidiary, related entity, or other 
entities that perform services for the hospital's patients and for which 
the hospital bills. However, a ``hospital'' does not include entities 
that perform services for hospital patients ``under arrangements'' with 
the hospital.
    HPSA means, for purposes of this subpart, an area designated as a 
health professional shortage area under section 332(a)(1)(A) of the 
Public Health Service Act for primary medical care professionals (in 
accordance with the criteria specified in part 5 of this title).
    Immediate family member or member of a physician's immediate family 
means husband or wife; birth or adoptive parent, child, or sibling; 
stepparent, stepchild, stepbrother, or stepsister; father-in-law, 
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law; grandparent or grandchild; and spouse of a grandparent or 
grandchild.
    ``Incident to'' services means those services that meet the 
requirements of section 1861(s)(2)(A) of the Act and section 2050 of the 
Medicare Carriers Manual (CMS Pub. 14-3), Part 3--Claims Process. (Those 
wishing to subscribe to program manuals should contact either the 
Government Printing Office (GPO) or the National Technical Information 
Service (NTIS) at the following addresses: Superintendent of Documents, 
Government Printing Office, ATTN: New Orders, P.O. Box 371954, 
Pittsburgh, PA 15250-7954, Telephone (202) 512-1800, Fax number (202) 
512-2250 (for credit card orders); or National Technical Information 
Service, Department of Commerce, 5825 Port Royal Road, Springfield, VA 
22161, Telephone (703) 487-4630. In addition, individual manual 
transmittals and Program Memoranda can be purchased from NTIS. 
Interested parties should identify the transmittal(s) they want. GPO or 
NTIS can give complete details on how to obtain the publications they 
sell. Additionally, all manuals are available at the following Internet 
address: http://www.hcfa.gov/pubforms/progman.htm.)
    Inpatient hospital services means those services as defined in 
section 1861(b) of the Act and Sec. 409.10(a) and (b) of this chapter 
and includes inpatient psychiatric hospital services listed in section 
1861(c) of the Act and inpatient rural primary care hospital services, 
as defined in section 1861(mm)(2) of the Act. ``Inpatient hospital 
services'' do not include emergency inpatient services provided by a 
hospital located outside of the U.S. and covered under the authority in 
section 1814(f)(2) of the Act and part 424, subpart H of this chapter, 
or emergency inpatient services provided by a nonparticipating hospital 
within the U.S., as authorized by section 1814(d) of the Act and 
described in part 424, subpart G of this chapter. These services also do 
not include dialysis furnished by a hospital that is not certified to 
provide end-stage renal dialysis (ESRD) services under subpart U of part 
405 of this chapter. Inpatient hospital services include services that a 
hospital provides for its patients that are furnished either by the 
hospital or by others under arrangements with the hospital. ``Inpatient 
hospital services'' do not include professional services performed by 
physicians, physician assistants, nurse practitioners, clinical nurse 
specialists, certified nurse midwives, and certified registered nurse 
anesthetists and qualified psychologists if Medicare reimburses the 
services independently and not as part of the inpatient hospital service 
(even if they are billed by a hospital under an assignment or 
reassignment).

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    Laboratory means an entity furnishing biological, microbiological, 
serological, chemical, immunohematological, hematological, biophysical, 
cytological, pathological, or other examination of materials derived 
from the human body for the purpose of providing information for the 
diagnosis, prevention, or treatment of any disease or impairment of, or 
the assessment of the health of, human beings. These examinations also 
include procedures to determine, measure, or otherwise describe the 
presence or absence of various substances or organisms in the body. 
Entities only collecting or preparing specimens (or both) or only 
serving as a mailing service and not performing testing are not 
considered laboratories.
    List of CPT/HCPCS Codes Used to Describe Certain Designated Health 
Services Under the Physician Referral Provisions (Section 1877 of the 
Social Security Act) means the list of certain designated health 
services under section 1877 of the Act initially posted on the CMS web 
site and updated annually thereafter in an addendum to the physician fee 
schedule final rule and on the CMS web site.
    Member of the group means, for purposes of this rule, a direct or 
indirect physician owner of a group practice (including a physician 
whose interest is held by his or her individual professional corporation 
or by another entity), a physician employee of the group practice 
(including a physician employed by his or her individual professional 
corporation that has an equity interest in the group practice), a locum 
tenens physician (as defined in this section), or an on-call physician 
while the physician is providing on-call services for members of the 
group practice. A physician is a member of the group during the time he 
or she furnishes ``patient care services'' to the group as defined in 
this section. An independent contractor or a leased employee is not a 
member of the group. ``Locum tenens physician'' means a physician who 
substitutes (that is, ``stands in the shoes'') in exigent circumstances 
for a regular physician who is a member of the group, in accordance with 
applicable reassignment rules and regulations, including section 3060.7 
of the Medicare Carriers Manual (CMS Pub. 14-3), Part 3--Claims Process.
    Outpatient hospital services means the therapeutic, diagnostic, and 
partial hospitalization services listed under sections 1861(s)(2)(B) and 
(C) of the Act; outpatient services furnished by a psychiatric hospital, 
as defined in section 1861(f) of the Act; and outpatient rural primary 
care hospital services, as defined in section 1861(mm)(3) of the Act. 
Emergency services covered in nonparticipating hospitals are excluded 
under the conditions described in section 1835(b) of the Act and subpart 
G of part 424 of this chapter. ``Outpatient hospital services'' includes 
services that a hospital provides for its patients that are furnished 
either by the hospital or by others under arrangements with the 
hospital. ``Outpatient hospital services'' do not include professional 
services performed by physicians, physician assistants, nurse 
practitioners, clinical nurse specialists, certified nurse midwives, 
certified registered nurse anesthetists, and qualified psychologists if 
Medicare reimburses the services independently and not as part of the 
outpatient hospital service (even if they are billed by a hospital under 
an assignment or reassignment).
    Outpatient prescription drugs means all prescription drugs covered 
by Medicare Part B.
    Parenteral and enteral nutrients, equipment, and supplies means the 
following services (including all HCPCS level 2 codes for these 
services):
    (1) Parenteral nutrients, equipment, and supplies, meaning those 
items and supplies needed to provide nutriment to a patient with 
permanent, severe pathology of the alimentary tract that does not allow 
absorption of sufficient nutrients to maintain strength commensurate 
with the patient's general condition, as described in section 65-10 of 
the Medicare Coverage Issues Manual (CMS Pub. 6); and
    (2) Enteral nutrients, equipment, and supplies, meaning items and 
supplies needed to provide enteral nutrition to a patient with a 
functioning gastrointestinal tract who, due to pathology to or 
nonfunction of the structures that normally permit food to reach the 
digestive tract, cannot maintain weight and strength commensurate

[[Page 341]]

with his or her general condition, as described in section 65-10 of the 
Medicare Coverage Issues Manual (CMS Pub. 6).
    Patient care services means any tasks performed by a physician in 
the group practice that address the medical needs of specific patients 
or patients in general, regardless of whether they involve direct 
patient encounters; or generally benefit a particular practice. Patient 
care services can include, for example, the services of physicians who 
do not directly treat patients, such as time spent by a physician 
consulting with other physicians or reviewing laboratory tests, or time 
spent training staff members, arranging for equipment, or performing 
administrative or management tasks.
    Physical therapy, occupational therapy, and speech-language 
pathology services means those particular services identified by the CPT 
and HCPCS codes on the CMS web site (and in annual updates published in 
the Federal Register). All services identified on the CMS web site and 
in annual updates are physical therapy, occupational therapy, and 
speech-language pathology services for purposes of these regulations. 
Any service not specifically identified on the CMS web site, as amended 
from time to time and published in the Federal Register, is not a 
physical therapy, occupational therapy, or speech-language pathology 
service for purposes of these regulations. The list of codes identifying 
physical therapy, occupational therapy, and speech-language pathology 
services for purposes of these regulations includes the following:
    (1) Physical therapy services, meaning those outpatient physical 
therapy services (including speech-language pathology services) 
described at section 1861(p) of the Act that are covered under Medicare 
Part A or Part B, regardless of who provides them, if the services 
include--
    (i) Assessments, function tests and measurements of strength, 
balance, endurance, range of motion, and activities of daily living;
    (ii) Therapeutic exercises, massage, and use of physical medicine 
modalities, assistive devices, and adaptive equipment;
    (iii) Establishment of a maintenance therapy program for an 
individual whose restoration potential has been reached; however, 
maintenance therapy itself is not covered as part of these services; or
    (iv) Speech-language pathology services that are for the diagnosis 
and treatment of speech, language, and cognitive disorders that include 
swallowing and other oral-motor dysfunctions.
    (2) Occupational therapy services, meaning those services described 
at section 1861(g) of the Act that are covered under Medicare Part A or 
Part B, regardless of who provides them, if the services include--
    (i) Teaching of compensatory techniques to permit an individual with 
a physical or cognitive impairment or limitation to engage in daily 
activities;
    (ii) Evaluation of an individual's level of independent functioning;
    (iii) Selection and teaching of task-oriented therapeutic activities 
to restore sensory-integrative function; or
    (iv) Assessment of an individual's vocational potential, except when 
the assessment is related solely to vocational rehabilitation.
    Physician means a doctor of medicine or osteopathy, a doctor of 
dental surgery or dental medicine, a doctor of podiatric medicine, a 
doctor of optometry, or a chiropractor, as defined in section 1861(r) of 
the Act.
    Physician in the group practice means a member of the group 
practice, as well as an independent contractor physician, during the 
time the independent contractor is furnishing patient care services (as 
defined in this section) to the group practice under a contractual 
arrangement with the group practice to provide services to the group 
practice's patients in the group practice's facilities. The contract 
must contain the same restrictions on compensation that apply to members 
of the group practice under Sec. 411.352(g) (or the contract fits in the 
personal services exception in Sec. 411.357(d)), and the independent 
contractor's arrangement with the group practice must comply with the 
reassignment rules at Sec. 424.80(b)(3) of this chapter (see also 
section 3060.3 of the Medicare Carriers Manual (CMS

[[Page 342]]

Pub. 14-3), Part 3--Claims Process). Referrals from an independent 
contractor who is a physician in the group are subject to the 
prohibition on referrals in Sec. 411.353(a), and the group practice is 
subject to the limitation on billing for those referrals in 
Sec. 411.353(b).
    Physician incentive plan means any compensation arrangement between 
an entity and a physician or physician group that may directly or 
indirectly have the effect of reducing or limiting services furnished 
with respect to individuals enrolled with the entity.
    Plan of care means the establishment by a physician of a course of 
diagnosis or treatment (or both) for a particular patient, including the 
ordering of services.
    Prosthetics, Orthotics, and Prosthetic Devices and Supplies means 
the following services (including all HCPCS level 2 codes for these 
services that are covered by Medicare):
    (1) Orthotics, meaning leg, arm, back, and neck braces, as listed in 
section 1861(s)(9) of the Act.
    (2) Prosthetics, meaning artificial legs, arms, and eyes, as 
described in section 1861(s)(9) of the Act.
    (3) Prosthetic devices, meaning devices (other than a dental device) 
listed in section 1861(s)(8) of the Act that replace all or part of an 
internal body organ, including colostomy bags, and one pair of 
conventional eyeglasses or contact lenses furnished subsequent to each 
cataract surgery with insertion of an intraocular lens.
    (4) Prosthetic supplies, meaning supplies that are necessary for the 
effective use of a prosthetic device (including supplies directly 
related to colostomy care).
    Radiation therapy services and supplies means those particular 
services and supplies identified by the CPT and HCPCS codes on the CMS 
web site and in annual updates published in the Federal Register. All 
services identified on the CMS web site and in annual updates are 
radiation therapy services and supplies for purposes of these 
regulations. Any service not specifically identified on the CMS web 
site, as amended from time to time and published in the Federal 
Register, is not a radiation therapy service or supply for purposes of 
these regulations. The list of codes for radiation therapy services and 
supplies identified on the CMS web site and in annual updates is based 
on section 1861(s)(4) of the Act and Sec. 410.35 of this chapter but 
does not include nuclear medicine procedures.
    Radiology and certain other imaging services means those particular 
services identified by the CPT and HCPCS codes on the CMS web site and 
in annual updates published in the Federal Register (except as otherwise 
specifically excluded on the CMS web site and in annual updates). All 
services identified on the CMS web site and in annual updates are 
radiology and certain other imaging services for purposes of these 
regulations. Any service not specifically identified on the CMS web 
site, as amended from time to time and published in the Federal 
Register, is not a radiology or certain other imaging service for 
purposes of these regulations. The list of radiology and certain other 
imaging services set forth on the CMS web site and in annual updates 
includes the professional and technical components of any diagnostic 
test or procedure using x-rays, ultrasound, or other imaging services, 
computerized axial tomography, or magnetic resonance imaging, as covered 
under section 1861(s)(3) of the Act and Secs. 410.32 and 410.34 of this 
chapter but does not include--
    (1) X-ray, fluoroscopy, or ultrasonic procedures that require the 
insertion of a needle, catheter, tube, or probe through the skin or into 
a body orifice;
    (2) Radiology procedures that are integral to the performance of, 
and performed during, nonradiological medical procedures; and
    (3) Nuclear medicine procedures.
    Referral--
    (1) Means either of the following:
    (i) Except as provided in paragraph (2) of this definition, the 
request by a physician for, or ordering of, or the certifying or 
recertifying of the need for, any designated health service for which 
payment may be made under Medicare Part B, including a request for a 
consultation with another physician and any test or procedure ordered by 
or to be performed by (or under the supervision of) that other 
physician, but not including any designated health service personally 
performed or

[[Page 343]]

provided by the referring physician. A designated health service is not 
personally performed or provided by the referring physician if it is 
performed or provided by any other person, including, but not limited 
to, the referring physician's employees, independent contractors, or 
group practice members.
    (ii) Except as provided in paragraph (2) of this definition, a 
request by a physician that includes the provision of any designated 
health service for which payment may be made under Medicare, the 
establishment of a plan of care by a physician that includes the 
provision of such a designated health service, or the certifying or 
recertifying of the need for such a designated health service, but not 
including any designated health service personally performed or provided 
by the referring physician. A designated health service is not 
personally performed or provided by the referring physician if it is 
performed or provided by any other person including, but not limited to, 
the referring physician's employees, independent contractors, or group 
practice members.
    (2) Does not include a request by a pathologist for clinical 
diagnostic laboratory tests and pathological examination services, by a 
radiologist for diagnostic radiology services, and by a radiation 
oncologist for radiation therapy, if--
    (i) The request results from a consultation initiated by another 
physician (whether the request for a consultation was made to a 
particular physician or to an entity with which the physician is 
affiliated); and
    (ii) The tests or services are furnished by or under the supervision 
of the pathologist, radiologist, or radiation oncologist.
    (3) Can be in any form, including, but not limited to, written, 
oral, or electronic.
    Referring physician means a physician who makes a referral as 
defined in this section or who directs another person or entity to make 
a referral or who controls referrals made by another person or entity.
    Remuneration means any payment or other benefit made directly or 
indirectly, overtly or covertly, in cash or in kind, except that the 
following are not considered remuneration for purposes of this section:
    (1) The forgiveness of amounts owed for inaccurate tests or 
procedures, mistakenly performed tests or procedures, or the correction 
of minor billing errors.
    (2) The furnishing of items, devices, or supplies (not including 
surgical items, devices, or supplies) that are used solely to collect, 
transport, process, or store specimens for the entity furnishing the 
items, devices, or supplies or are used solely to order or communicate 
the results of tests or procedures for the entity.
    (3) A payment made by an insurer or a self-insured plan to a 
physician to satisfy a claim, submitted on a fee-for-service basis, for 
the furnishing of health services by that physician to an individual who 
is covered by a policy with the insurer or by the self-insured plan, if-
-
    (i) The health services are not furnished, and the payment is not 
made, under a contract or other arrangement between the insurer or the 
plan and the physician;
    (ii) The payment is made to the physician on behalf of the covered 
individual and would otherwise be made directly to the individual; and
    (iii) The amount of the payment is set in advance, does not exceed 
fair market value, and is not determined in a manner that takes into 
account directly or indirectly the volume or value of any referrals.
    Same building means a structure with, or combination of structures 
that share, a single street address as assigned by the U.S. Postal 
Service, excluding all exterior spaces (for example, lawns, courtyards, 
driveways, parking lots) and interior parking garages. For purposes of 
this rule, the ``same building'' does not include a mobile vehicle, van, 
or trailer.

[66 FR 952, Jan. 4, 2001]



Sec. 411.352  Group practice.

    For purposes of this subpart, a group practice is a physician 
practice that meets the following conditions:
    (a) Single legal entity. The group practice must consist of a single 
legal entity formed primarily for the purpose of

[[Page 344]]

being a physician group practice in any organizational form recognized 
by the State in which the group practice achieves its legal status, 
including, but not limited to, a partnership, professional corporation, 
limited liability company, foundation, not-for-profit corporation, 
faculty practice plan, or similar association. The single legal entity 
may be organized by any party or parties, including, but not limited to, 
physicians, health care facilities, or other persons or entities 
(including, but not limited to, physicians individually incorporated as 
professional corporations). The single legal entity may not be organized 
or owned (in whole or in part) by another medical practice that is an 
operating physician practice (regardless of whether the medical practice 
meets the conditions for a group practice under this section). For 
purposes of this rule, a single legal entity does not include informal 
affiliations of physicians formed substantially to share profits from 
referrals, or separate group practices under common ownership or control 
through a physician practice management company, hospital, health 
system, or other entity or organization. A group practice that is 
otherwise a single legal entity may itself own subsidiary entities.
    (b) Physicians. The group practice must have at least two physicians 
who are members of the group (whether employees or direct or indirect 
owners), as defined in this section.
    (c) Range of care. Each physician who is a member of the group, as 
defined in Sec. 411.351, must furnish substantially the full range of 
patient care services that the physician routinely furnishes, including 
medical care, consultation, diagnosis, and treatment, through the joint 
use of shared office space, facilities, equipment, and personnel.
    (d) Services furnished by group practice members. (1) Except as 
provided in paragraphs (d)(2) and (d)(3) of this section, substantially 
all of the patient care services of the physicians who are members of 
the group (that is, at least 75 percent of the total patient care 
services of the group practice members) must be furnished through the 
group and billed under a billing number assigned to the group, and the 
amounts received must be treated as receipts of the group. ``Patient 
care services'' must be measured by one of the following:
    (i) The total time each member spends on patient care services 
documented by any reasonable means (including, but not limited to, time 
cards, appointment schedules, or personal diaries). (For example, if a 
physician practices 40 hours a week and spends 30 hours on patient care 
services for a group practice, the physician has spent 75 percent of his 
or her time providing patient care services for the group.)
    (ii) Any alternative measure that is reasonable, fixed in advance of 
the performance of the services being measured, uniformly applied over 
time, verifiable, and documented.
    (2) The data used to calculate compliance with this ``substantially 
all test'' and related supportive documentation must be made available 
to the Secretary upon request.
    (3) The ``substantially all test'' does not apply to any group 
practice that is located solely in an HPSA, as defined in Sec. 411.351.
    (4) For a group practice located outside of an HPSA (as defined in 
Sec. 411.351), any time spent by a group practice member providing 
services in an HPSA should not be used to calculate whether the group 
practice has met the ``substantially all test,'' regardless of whether 
the member's time in the HPSA is spent in a group practice, clinic, or 
office setting.
    (5) During the ``start up'' period (not to exceed 12 months) that 
begins on the date of the initial formation of a new group practice, a 
group practice must make a reasonable, good faith effort to ensure that 
the group practice complies with the requirement set forth in paragraph 
(d)(1) of this section as soon as practicable, but no later than 12 
months from the date of the initial formation of the group practice. 
This paragraph (d)(5) does not apply when an existing group practice 
admits a new member or when an existing group practice reorganizes.
    (e) Distribution of expenses and income. The overhead expenses of, 
and income from, the practice must be distributed according to methods 
that are determined before the receipt of payment for the services 
giving rise to the overhead expense or producing the income.

[[Page 345]]

Nothing in this rule prevents a group practice from adjusting its 
compensation methodology prospectively, subject to restrictions on the 
distribution of revenue from DHS under paragraph (i) of this section.
    (f) Unified business. (1) The group practice must be a unified 
business having at least the following features:
    (i) Centralized decision-making by a body representative of the 
group practice that maintains effective control over the group's assets 
and liabilities (including, but not limited to, budgets, compensation, 
and salaries).
    (ii) Consolidated billing, accounting, and financial reporting.
    (iii) Centralized utilization review.
    (2) Location and specialty-based compensation practices are 
permitted with respect to revenues derived from services that are not 
DHS and may be permitted with respect to revenues derived from DHS under 
paragraph (i) of this section.
    (g) Volume or value of referrals. No physician who is a member of 
the group practice directly or indirectly receives compensation based on 
the volume or value of referrals by the physician, except as provided in 
paragraph (i) of this section.
    (h) Physician-patient encounters. Members of the group must 
personally conduct no less than 75 percent of the physician-patient 
encounters of the group practice.
    (i) Special rule for productivity bonuses and profit shares. (1) A 
physician in a group practice may be paid a share of overall profits of 
the group, or a productivity bonus based on services that he or she has 
personally performed (including services ``incident to'' those 
personally performed services as defined in Sec. 411.351), provided that 
the share or bonus is not determined in any manner that is directly 
related to the volume or value of referrals of DHS by the physician.
    (2) ``Overall profits'' means the group's entire profits derived 
from DHS payable by Medicare or Medicaid or the profits derived from DHS 
payable by Medicare or Medicaid of any component of the group practice 
that consists of at least five physicians. The share of overall profits 
will be deemed not to relate directly to the volume or value of 
referrals if one of the following conditions is met:
    (i) The group's profits are divided per capita (for example, per 
member of the group or per physician in the group).
    (ii) Revenues derived from DHS are distributed based on the 
distribution of the group practice's revenues attributed to services 
that are not DHS payable by any Federal health care program or private 
payer.
    (iii) Revenues derived from DHS constitute less than 5 percent of 
the group practice's total revenues, and the allocated portion of those 
revenues to each physician in the group practice constitutes 5 percent 
or less of his or her total compensation from the group.
    (iv) Overall profits are divided in a reasonable and verifiable 
manner that is not directly related to the volume or value of the 
physician's referrals of DHS.
    (3) A productivity bonus for personally performed services 
(including services ``incident to'' those personally performed services 
as defined in Sec. 411.351) will be deemed not to relate directly to the 
volume or value of referrals of DHS if one of the following conditions 
is met:
    (i) The bonus is based on the physician's total patient encounters 
or relative value units (RVUs). The methodology for establishing RVUs is 
set forth in Sec. 414.22 of this chapter.
    (ii) The bonus is based on the allocation of the physician's 
compensation attributable to services that are not DHS payable by any 
Federal health care program or private payer.
    (iii) Revenues derived from DHS are less than 5 percent of the group 
practice's total revenues, and the allocated portion of those revenues 
to each physician in the group practice constitutes 5 percent or less of 
his or her total compensation from the group practice.
    (iv) The bonus is calculated in a reasonable and verifiable manner 
that is not directly related to the volume or value of the physician's 
referrals of DHS.
    (4) Supporting documentation verifying the method used to calculate 
the profit shares or productivity bonus under paragraphs (i)(2) and 
(i)(3) of this section, and the resulting amount of

[[Page 346]]

compensation, must be made available to the Secretary upon request.

[66 FR 956, Jan. 4, 2001]



Sec. 411.353  Prohibition on certain referrals by physicians and limitations on billing.

    (a) Prohibition on referrals. Except as provided in this subpart, a 
physician who has a direct or indirect financial relationship with an 
entity, or who has an immediate family member who has a direct or 
indirect financial relationship with the entity, may not make a referral 
to that entity for the furnishing of DHS for which payment otherwise may 
be made under Medicare. A physician's prohibited financial relationship 
with an entity that furnishes DHS is not imputed to his or her group 
practice or its members or its staff; however, a referral made by a 
physician's group practice, its members, or its staff may be imputed to 
the physician, if the physician directs the group practice, its members, 
or its staff to make the referral or if the physician controls referrals 
made by his or her group practice, its members, or its staff.
    (b) Limitations on billing. An entity that furnishes DHS pursuant to 
a referral that is prohibited by paragraph (a) of this section may not 
present or cause to be presented a claim or bill to the Medicare program 
or to any individual, third party payer, or other entity for the DHS 
performed pursuant to the prohibited referral.
    (c) Denial of payment. Except as provided in paragraph (e) of this 
section, no Medicare payment may be made for a designated health service 
that is furnished pursuant to a prohibited referral.
    (d) Refunds. An entity that collects payment for a designated health 
service that was performed under a prohibited referral must refund all 
collected amounts on a timely basis, as defined in Sec. 1003.101 of this 
title.
    (e) Exception for certain entities. Payment may be made to an entity 
that submits a claim for a designated health service if--
    (1) The entity did not have actual knowledge of, and did not act in 
reckless disregard or deliberate ignorance of, the identity of the 
physician who made the referral of the designated health service to the 
entity; and
    (2) The claim otherwise complies with all applicable Federal laws, 
rules, and regulations.

[66 FR 958, Jan. 4, 2001]



Sec. 411.354  Financial relationship, compensation, and ownership or investment interest.

    (a) Financial relationships. (1) Financial relationship means--
    (i) A direct or indirect ownership or investment interest (as 
defined in paragraph (b) of this section) in any entity that furnishes 
DHS; or
    (ii) A direct or indirect compensation arrangement (as defined in 
paragraph (c) of this section) with an entity that furnishes DHS.
    (2) A direct financial relationship exists if remuneration passes 
between the referring physician (or a member of his or her immediate 
family) and the entity furnishing DHS without any intervening persons or 
entities (not including an agent of the physician, the immediate family 
member, or the entity furnishing DHS).
    (3) An indirect financial relationship exists under the conditions 
described in paragraphs (b)(5) and (c)(2) of this section.
    (b) Ownership or investment interest. An ownership or investment 
interest may be through equity, debt, or other means, and includes an 
interest in an entity that holds an ownership or investment interest in 
any entity that furnishes DHS.
    (1) An ownership or investment interest includes, but is not limited 
to, stock, partnership shares, limited liability company memberships, as 
well as loans, bonds, or other financial instruments that are secured 
with an entity's property or revenue or a portion of that property or 
revenue.
    (2) An ownership or investment interest in a subsidiary company is 
neither an ownership or investment interest in the parent company, nor 
in any other subsidiary of the parent, unless the subsidiary company 
itself has an ownership or investment interest in the parent or such 
other subsidiaries. It may, however, be part of an indirect financial 
relationship.

[[Page 347]]

    (3) Ownership and investment interests do not include, among other 
things--
    (i) An interest in a retirement plan;
    (ii) Stock options and convertible securities until the stock 
options are exercised or the convertible securities are converted to 
equity (before this time they are compensation arrangements as defined 
in paragraph (c) of this section);
    (iii) An unsecured loan subordinated to a credit facility (which is 
a compensation arrangement as defined in paragraph (c) of this section); 
or
    (iv) An ``under arrangements'' contract between a hospital and an 
entity owned by one or more physicians (or a group of physicians) 
providing DHS ``under arrangements'' to the hospital.
    (4) An ownership or investment interest that meets an exception set 
forth in Secs. 411.355 or 411.356 need not also meet an exception for 
compensation arrangements set forth in Sec. 411.357 with respect to 
profit distributions, dividends, interest payments on secured 
obligations, or the like.
    (5) Indirect ownership or investment interest. (i) An indirect 
ownership or investment interest exists if--
    (A) Between the referring physician (or immediate family member) and 
the entity furnishing DHS there exists an unbroken chain of any number 
(but no fewer than one) of persons or entities having ownership or 
investment interests between them; and
    (B) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) has some ownership or 
investment interest (through any number of intermediary ownership or 
investment interests) in the entity furnishing the DHS.
    (ii) The entity furnishing DHS need not know, or act in reckless 
disregard or deliberate ignorance of, the precise composition of the 
unbroken chain or the specific terms of the ownership or investment 
interests that form the links in the chain.
    (c) Compensation arrangement. A compensation arrangement can be any 
arrangement involving remuneration, direct or indirect, between a 
physician (or a member of a physician's immediate family) and an entity. 
An ``under arrangements'' contract between a hospital and an entity 
providing DHS ``under arrangements'' to the hospital creates a 
compensation arrangement for purposes of these regulations.
    (1) A compensation arrangement does not include any of the 
following:
    (i) The portion of any business arrangement that consists solely of 
the remuneration described in section 1877(h)(1)(C) of the Act and in 
paragraphs (1) through (3) of the definition of the term 
``remuneration'' in Sec. 411.351. (However, any other portion of the 
arrangement may still constitute a compensation arrangement.)
    (ii) Payments made by a consultant to a referring physician under 
Sec. 414.65(e) of this chapter.
    (2) Indirect compensation arrangement. An indirect compensation 
arrangement exists if--
    (i) Between the referring physician (or a member of his or her 
immediate family) and the entity furnishing DHS there exists an unbroken 
chain of any number (but not fewer than one) of persons or entities that 
have financial relationships (as defined in paragraph (a) of this 
section) between them (that is, each link in the chain has either an 
ownership or investment interest or a compensation arrangement with the 
preceding link);
    (ii) The referring physician (or immediate family member) receives 
aggregate compensation from the person or entity in the chain with which 
the physician (or immediate family member) has a direct financial 
relationship that varies with, or otherwise reflects, the volume or 
value of referrals or other business generated by the referring 
physician for the entity furnishing the DHS. If the financial 
relationship between the physician (or immediate family member) and the 
person or entity in the chain with which the referring physician (or 
immediate family member) has a direct financial relationship is an 
ownership or investment interest, the determination whether the 
aggregate compensation varies with, or otherwise reflects, the volume or 
value of referrals or other business generated by the referring 
physician for the entity furnishing the DHS will be measured by the 
nonownership or

[[Page 348]]

noninvestment interest closest to the referring physician (or immediate 
family member). (For example, if a referring physician has an ownership 
interest in company A, which owns company B, which has a compensation 
arrangement with company C, which has a compensation arrangement with 
entity D that furnishes DHS, we would look to the aggregate compensation 
between company B and company C for purposes of this paragraph 
(c)(2)(ii)); and
    (iii) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) receives aggregate 
compensation that varies with, or otherwise reflects, the value or 
volume of referrals or other business generated by the referring 
physician for the entity furnishing the DHS.
    (d) Special rules on compensation. The following special rules apply 
only to compensation under section 1877 of the Act and these regulations 
in subpart J of this part.
    (1) Compensation will be considered ``set in advance'' if the 
aggregate compensation or a time-based or per unit of service-based 
(whether per-use or per-service) amount is set in advance in the initial 
agreement between the parties in sufficient detail so that it can be 
objectively verified. The payment amount must be fair market value 
compensation for services or items actually provided, not taking into 
account the volume or value of referrals or other business generated by 
the referring physician at the time of the initial agreement or during 
the term of the agreement. Percentage compensation arrangements do not 
constitute compensation that is ``set in advance'' in which the 
percentage compensation is based on fluctuating or indeterminate 
measures or in which the arrangement results in the seller receiving 
different payment amounts for the same service from the same purchaser.
    (2) Compensation (including time-based or per unit of service-based 
compensation) will be deemed not to take into account ``the volume or 
value of referrals'' if the compensation is fair market value for 
services or items actually provided and does not vary during the course 
of the compensation agreement in any manner that takes into account 
referrals of DHS.
    (3) Compensation (including time-based or per unit of service-based 
compensation) will be deemed to not take into account ``other business 
generated between the parties'' so long as the compensation is fair 
market value and does not vary during the term of the agreement in any 
manner that takes into account referrals or other business generated by 
the referring physician, including private pay health care business.
    (4) A physician's compensation may be conditioned on the physician's 
referrals to a particular provider, practitioner, or supplier, so long 
as the compensation arrangement--
    (i) Is fixed in advance for the term of the agreement;
    (ii) Is consistent with fair market value for services performed 
(that is, the payment does not take into account the volume or value of 
anticipated or required referrals);
    (iii) Complies with an applicable exception under Secs. 411.355 or 
411.357; and
    (iv) Complies with the following conditions:
    (A) The requirement to make referrals to a particular provider, 
practitioner, or supplier is set forth in a written agreement signed by 
the parties.
    (B) The requirement to make referrals to a particular provider, 
practitioner, or supplier does not apply if the patient expresses a 
preference for a different provider, practitioner, or supplier; the 
patient's insurer determines the provider, practitioner, or supplier; or 
the referral is not in the patient's best medical interests in the 
physician's judgement.

[66 FR 958, Jan. 4, 2001]

    Effective Date Note: At 66 FR 958, Jan. 4, 2001, Sec. 411.354 was 
added, effective Jan. 4, 2002. At 66 FR 60154, Dec. 3, 2001, the 
effective date of the last sentence in Sec. 411.354(d)(1) was delayed 
from Jan. 4, 2002, until Jan. 6, 2003.

[[Page 349]]



Sec. 411.355  General exceptions to the referral prohibition related to both ownership/investment and compensation.

    The prohibition on referrals set forth in Sec. 411.353 does not 
apply to the following types of services:
    (a) Physician services. (1) Physician services as defined in 
Sec. 410.20(a) of this chapter that are furnished--
    (i) Personally by another physician who is a member of the referring 
physician's group practice or is a physician in the same group practice 
(as defined in Sec. 411.351) as the referring physician; or
    (ii) Under the supervision of another physician who is a member of 
the referring physician's group practice or is a physician in the same 
group practice (as defined at Sec. 411.351) as the referring physician, 
provided that the supervision complies with all other applicable 
Medicare payment and coverage rules for the physician services.
    (2) For purposes of paragraph (a) of this section, ``physician 
services'' includes only those ``incident to'' services (as defined in 
Sec. 411.351) that are physician services under Sec. 410.20(a) of this 
chapter.
    (3) All other ``incident to'' services (for example, diagnostic 
tests, physical therapy) are outside the scope of paragraph (a) of this 
section.
    (b) In-office ancillary services. Services (including certain items 
of durable medical equipment (DME), as defined in paragraph (b)(4) of 
this section, and infusion pumps that are DME (including external 
ambulatory infusion pumps), but excluding all other DME and parenteral 
and enteral nutrients, equipment, and supplies (such as infusion pumps 
used for PEN), that meet the following conditions:
    (1) They are furnished personally by one of the following 
individuals:
    (i) The referring physician.
    (ii) A physician who is a member of the same group practice as the 
referring physician.
    (iii) An individual who is supervised by the referring physician or 
by another physician in the group practice, provided the supervision 
complies with all other applicable Medicare payment and coverage rules 
for the services.
    (2) They are furnished in one of the following locations:
    (i) The same building (as defined in Sec. 411.351), but not 
necessarily in the same space or part of the building, in which--
    (A) The referring physician (or another physician who is a member of 
the same group practice) furnishes substantial physician services that 
are unrelated to the furnishing of DHS payable by Medicare, any other 
Federal health care payer, or a private payer, even though the unrelated 
services may lead to the ordering of DHS;
    (B) The physician services that are unrelated to the furnishing of 
DHS in paragraph (b)(2)(i)(A) of this section must represent 
substantially the full range of physician services unrelated to the 
furnishing of DHS that the referring physician routinely provides (or, 
in the case of a referring physician who is a member of a group 
practice, the full range of physician services that the physician 
routinely provides for the group practice); and
    (C) The receipt of DHS (whether payable by a Federal health care 
program or a private payer) is not the primary reason the patient comes 
in contact with the referring physician or his or her group practice.
    (ii) A centralized building (as defined in Sec. 411.351) that is 
used by the group practice for the provision of some or all of the group 
practice's clinical laboratory services.
    (iii) A centralized building (as defined in Sec. 411.351) that is 
used by the group practice for the provision of some or all of the group 
practice's DHS (other than clinical laboratory services).
    (3) They must be billed by one of the following:
    (i) The physician performing or supervising the service.
    (ii) The group practice of which the performing or supervising 
physician is a member under a billing number assigned to the group 
practice.
    (iii) The group practice if the supervising physician is a 
``physician in the group'' (as defined at Sec. 411.351) under a billing 
number assigned to the group practice.

[[Page 350]]

    (iv) An entity that is wholly owned by the performing or supervising 
physician or by that physician's group practice under the entity's own 
billing number or under a billing number assigned to the physician or 
group practice.
    (v) An independent third party billing company acting as an agent of 
the physician, group practice, or entity specified in paragraphs 
(b)(3)(i) through (b)(3)(iv) of this section under a billing number 
assigned to the physician, group practice, or entity, provided the 
billing arrangement meets the requirements of Sec. 424.80(b)(6) of this 
chapter. For purposes of this paragraph (b)(3), a group practice may 
have, and bill under, more than one Medicare billing number, subject to 
any applicable Medicare program restrictions.
    (4) For purposes of paragraph (b) of this section, DME covered by 
the in-office ancillary services exception means canes, crutches, 
walkers and folding manual wheelchairs, and blood glucose monitors, that 
meet the following conditions:
    (i) The item is one that a patient requires for the purposes of 
ambulating, uses in order to depart from the physician's office, or is a 
blood glucose monitor (including one starter set of test strips and 
lancets, consisting of no more than 100 of each). A blood glucose 
monitor may be furnished only by a physician or employee of a physician 
or group practice that also furnishes outpatient diabetes self-
management training to the patient.
    (ii) The item is furnished in a building that meets the ``same 
building'' requirements in the in-office ancillary services exception as 
part of the treatment for the specific condition for which the patient-
physician encounter occurred.
    (iii) The item is furnished personally by the physician who ordered 
the DME, by another physician in the group practice, or by an employee 
of the physician or the group practice.
    (iv) A physician or group practice that furnishes the DME meets all 
DME supplier standards located in Sec. 424.57(c) of this chapter.
    (v) The arrangement does not violate the anti-kickback statute, 
section 1128B(b) of the Act, or any law or regulation governing billing 
or claims submission.
    (vi) All other requirements of the in-office ancillary services 
exception in paragraph (b) of this section are met.
    (5) A designated health service is ``furnished'' for purposes of 
paragraph (b) of this section in the location where the service is 
actually performed upon a patient or where an item is dispensed to a 
patient in a manner that is sufficient to meet the applicable Medicare 
payment and coverage rules.
    (6) Special rule for home care physicians. In the case of a 
referring physician whose principal medical practice consists of 
treating patients in their private homes, the ``same building'' 
requirements of paragraph (b)(2)(i) of this section are met if the 
referring physician (or a qualified person accompanying the physician, 
such as a nurse or technician) provides the DHS contemporaneously with a 
physician service that is not a designated health service provided by 
the referring physician to the patient in the patient's private home. 
For purposes of paragraph (b)(5) of this section, a private home does 
not include a nursing, long-term care, or other facility or institution.
    (c) Services furnished by an organization (or its contractors or 
subcontractors) to enrollees. Services furnished by an organization (or 
its contractors or subcontractors) to enrollees of one of the following 
prepaid health plans (not including services provided to enrollees in 
any other plan or line of business offered or administered by the same 
organization):
    (1) An HMO or a CMP in accordance with a contract with CMS under 
section 1876 of the Act and part 417, subparts J through M of this 
chapter, which set forth qualifying conditions for Medicare contracts; 
enrollment, entitlement, and disenrollment under Medicare contracts; 
Medicare contract requirements; and change of ownership and leasing of 
facilities: effect on Medicare contracts.
    (2) A health care prepayment plan in accordance with an agreement 
with CMS under section 1833(a)(1)(A) of the Act and part 417, subpart U 
of this chapter.

[[Page 351]]

    (3) An organization that is receiving payments on a prepaid basis 
for Medicare enrollees through a demonstration project under section 
402(a) of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or 
under section 222(a) of the Social Security Amendments of 1972 (42 
U.S.C. 1395b--1 note).
    (4) A qualified HMO (within the meaning of section 1310(d) of the 
Public Health Service Act).
    (5) A coordinated care plan (within the meaning of section 
1851(a)(2)(A) of the Act) offered by an organization in accordance with 
a contract with CMS under section 1857 of the Act and part 422 of this 
chapter.
    (d) Clinical laboratory services furnished in an ambulatory surgical 
center (ASC) or end-stage renal disease (ESRD) facility, or by a hospice 
if payment for those services is included in the ASC rate, the ESRD 
composite rate, or as part of the per diem hospice charge, respectively.
    (e) Academic medical centers. (1) Services provided by an academic 
medical center if all of the following conditions are met:
    (i) The referring physician--
    (A) Is a bona fide employee of a component of the academic medical 
center on a full-time or substantial part-time basis. (``Components'' of 
an academic medical center means an affiliated medical school, faculty 
practice plan, hospital, teaching facility, institution of higher 
education, or departmental professional corporation.);
    (B) Is licensed to practice medicine in the State;
    (C) Has a bona fide faculty appointment at the affiliated medical 
school; and
    (D) Provides either substantial academic or substantial clinical 
teaching services for which the faculty member receives compensation as 
part of his or her employment relationship with the academic medical 
center.
    (ii) The total compensation paid for the previous 12-month period 
(or fiscal year or calendar year) from all academic medical center 
components to the referring physician is set in advance and, in the 
aggregate, does not exceed fair market value for the services provided, 
and is not determined in a manner that takes into account the volume or 
value of any referrals or other business generated by the referring 
physician within the academic medical center.
    (iii) The academic medical center must meet all of the following 
conditions:
    (A) All transfers of money between components of the academic 
medical center must directly or indirectly support the missions of 
teaching, indigent care, research, or community service.
    (B) The relationship of the components of the academic medical 
center must be set forth in a written agreement that has been adopted by 
the governing body of each component.
    (C) All money paid to a referring physician for research must be 
used solely to support bona fide research.
    (iv) The referring physician's compensation arrangement does not 
violate the anti-kickback statute, section 1128B(b) of the Act.
    (2) The ``academic medical center'' for purposes of this section 
consists of--
    (i) An accredited medical school (including a university, when 
appropriate);
    (ii) An affiliated faculty practice plan that is a 501(c)(3) or 
(c)(4) of the Internal Revenue Code nonprofit, tax-exempt organization 
under IRS regulations (or is a part of such an organization under an 
umbrella designation); and
    (iii) One or more affiliated hospital(s) in which a majority of the 
hospital medical staff consists of physicians who are faculty members 
and a majority of all hospital admissions are made by physicians who are 
faculty members.
    (f) Implants in an ASC. Implants, including, but not limited to, 
cochlear implants, intraocular lenses, and other implanted prosthetics, 
implanted prosthetic devices and implanted DME that meet the following 
conditions:
    (1) The implant is furnished by the referring physician or a member 
of the referring physician's group practice in a Medicare-certified ASC 
(under part 416 of this chapter) with which the referring physician has 
a financial relationship.
    (2) The implant is implanted in the patient during a surgical 
procedure

[[Page 352]]

performed in the same ASC where the implant is furnished.
    (3) The arrangement for the furnishing of the implant does not 
violate the Federal anti-kickback statute, section 1128B(b) of the Act.
    (4) Billing and claims submission for the implants complies with all 
Federal and State laws and regulations.
    (5) The exception set forth in this paragraph (f) does not apply to 
any financial relationships between the referring physician and any 
entity other than the ASC in which the implant is furnished to and 
implanted in the patient.
    (g) EPO and other dialysis-related outpatient prescription drugs 
furnished in or by an ESRD facility. EPO and other dialysis-related 
outpatient prescription drugs that are identified by the CPT and HCPCS 
codes on the CMS web site, http://www.cms.gov, and in annual updates 
published in the Federal Register and that meet the following 
conditions:
    (1) The EPO and other dialysis-related drugs are furnished in or by 
an ESRD facility. For purposes of this paragraph, ``furnished'' means 
that the EPO or drugs are either administered or dispensed to a patient 
in or by the ESRD facility, even if the EPO or drugs are furnished to 
the patient at home. ``Dialysis-related drugs'' means certain drugs 
required for the efficacy of dialysis, as identified on the CMS web site 
and in annual updates.
    (2) The arrangement for the furnishing of the EPO and other 
dialysis-related drugs does not violate the Federal anti-kickback 
statute, section 1128B(b) of the Act.
    (3) Billing and claims submission for the EPO and other dialysis 
related drugs complies with all Federal and State laws and regulations.
    (4) The exception set forth in this paragraph (g) does not apply to 
any financial relationships between the referring physician and any 
entity other than the ESRD facility that furnishes the EPO and other 
dialysis-related drugs to the patient.
    (h) Preventive screening tests, immunizations, and vaccines. 
Preventive screening tests, immunizations, and vaccines that are covered 
by Medicare and identified by the CPT and HCPCS codes included on the 
CMS web site and in annual updates published in the Federal Register and 
that meet the following conditions:
    (1) The preventive screening tests, immunizations, and vaccines are 
subject to CMS-mandated frequency limits.
    (2) The preventive screening tests, immunizations, and vaccines are 
reimbursed by Medicare based on a fee schedule.
    (3) The arrangement for the provision of the preventive screening 
tests, immunizations, and vaccines does not violate the Federal anti-
kickback statute, section 1128B(b) of the Act.
    (4) Billing and claims submission for the preventive screening 
tests, immunizations, and vaccines complies with all Federal and State 
laws and regulations.
    (5) To qualify under this exception, the preventive screening tests, 
immunizations, and vaccines must be covered by Medicare and must be 
listed on the CMS web site and in annual updates.
    (i) Eyeglasses and contact lenses following cataract surgery. 
Eyeglasses and contact lenses that are covered by Medicare when 
furnished to patients following cataract surgery that meet the following 
conditions:
    (1) The eyeglasses or contact lenses are provided in accordance with 
the coverage and payment provisions set forth in Sec. 410.36(a)(2)(ii) 
and Sec. 414.228 of this chapter, respectively.
    (2) The arrangement for the furnishing of the eyeglasses or contact 
lenses does not violate the Federal anti-kickback statute, section 
1128B(b) of the Act.
    (3) Billing and claims submission for the eyeglasses or contact 
lenses complies with all Federal and State laws and regulations.

[66 FR 959, Jan. 4, 2001]



Sec. 411.356  Exceptions to referral prohibitions related to ownership or investment interests.

    For purposes of Sec. 411.353, the following ownership or investment 
interests do not constitute a financial relationship:

[[Page 353]]

    (a) Publicly traded securities. Ownership of investment securities 
(including shares or bonds, debentures, notes, or other debt 
instruments) that may be purchased on terms generally available to the 
public and that meet the requirements of paragraphs (a)(1) and (a)(2) of 
this section.
    (1) They are either--
    (i) Listed for trading on the New York Stock Exchange, the American 
Stock Exchange, or any regional exchange in which quotations are 
published on a daily basis, or foreign securities listed on a recognized 
foreign, national, or regional exchange in which quotations are 
published on a daily basis; or
    (ii) Traded under an automated interdealer quotation system operated 
by the National Association of Securities Dealers.
    (2) In a corporation that had--
    (i) Until January 1, 1995, total assets at the end of the 
corporation's most recent fiscal year exceeding $100 million; or
    (ii) Stockholder equity exceeding $75 million at the end of the 
corporation's most recent fiscal year or on average during the previous 
3 fiscal years.
    (b) Mutual funds. Ownership of shares in a regulated investment 
company as defined in section 851(a) of the Internal Revenue Code of 
1986, if the company had, at the end of its most recent fiscal year, or 
on average during the previous 3 fiscal years, total assets exceeding 
$75 million.
    (c) Specific providers. Ownership or investment interest in the 
following entities:
    (1) A laboratory that is located in a rural area (that is, a 
laboratory that is not located in an urban area as defined in 
Sec. 412.62(f)(1)(ii) of this chapter) and that meets the following 
criteria:
    (i) The laboratory testing that is referred by a physician who has 
(or whose immediate family member has) an ownership or investment 
interest in the rural laboratory is either--
    (A) Performed on the premises of the rural laboratory; or
    (B) If not performed on the premises, the laboratory performing the 
testing bills the Medicare program directly for the testing.
    (ii) Substantially all of the laboratory tests furnished by the 
entity are furnished to individuals who reside in a rural area. 
Substantially all means no less than 75 percent.
    (2) A hospital that is located in Puerto Rico.
    (3) A hospital that is located outside of Puerto Rico if one of the 
following conditions is met:
    (i) The referring physician is authorized to perform services at the 
hospital, and the physician's ownership or investment interest is in the 
entire hospital and not merely in a distinct part or department of the 
hospital.
    (ii) Until January 1, 1995, the referring physician's ownership or 
investment interest does not relate (directly or indirectly) to the 
furnishing of clinical laboratory services.



Sec. 411.357  Exceptions to referral prohibitions related to compensation arrangements.

    For purposes of Sec. 411.353, the following compensation 
arrangements do not constitute a financial relationship:
    (a) Rental of office space. Payments for the use of office space 
made by a lessee to a lessor if there is a rental or lease agreement 
that meets the following requirements:
    (1) The agreement is set out in writing and is signed by the parties 
and specifies the premises covered by the lease.
    (2) The term of the agreement is at least 1 year.
    (3) The space rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used by 
the lessee, except that the lessee may make payments for the use of 
space consisting of common areas if the payments do not exceed the 
lessee's pro rata share of expenses for the space based upon the ratio 
of the space used exclusively by the lessee to the total amount of space 
(other than common areas) occupied by all persons using the common 
areas.
    (4) The rental charges over the term of the lease are set in advance 
and are consistent with fair market value.
    (5) The charges are not determined in a manner that takes into 
account the

[[Page 354]]

volume or value of any referrals or other business generated between the 
parties.
    (6) The agreement would be commercially reasonable even if no 
referrals were made between the lessee and the lessor.
    (b) Rental of equipment. Payments made by a lessee to a lessor for 
the use of equipment under the following conditions:
    (1) A rental or lease agreement is set out in writing and signed by 
the parties and specifies the equipment covered by the lease.
    (2) The equipment rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used by 
the lessee.
    (3) The lease provides for a term of rental or lease of at least 1 
year.
    (4) The rental charges over the term of the lease are set in 
advance, are consistent with fair market value, and are not determined 
in a manner that takes into account the volume or value of any referrals 
or other business generated between the parties.
    (5) The lease would be commercially reasonable even if no referrals 
were made between the parties.
    (c) Bona fide employment relationships. Any amount paid by an 
employer to a physician (or immediate family member) who has a bona fide 
employment relationship with the employer for the provision of services 
if the following conditions are met:
    (1) The employment is for identifiable services.
    (2) The amount of the remuneration under the employment is--
    (i) Consistent with the fair market value of the services; and
    (ii) Except as provided in paragraph (c)(4) of this section, is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of any referrals by the referring physician.
    (3) The remuneration is provided under an agreement that would be 
commercially reasonable even if no referrals were made to the employer.
    (4) Paragraph (c)(2)(ii) of this section does not prohibit payment 
of remuneration in the form of a productivity bonus based on services 
performed personally by the physician (or immediate family member of the 
physician).
    (d) Personal service arrangements. (1) General. Remuneration from an 
entity under an arrangement to a physician or immediate family member of 
the physician, including remuneration for specific physicians' services 
furnished to a nonprofit blood center, if the following conditions are 
met:
    (i) The arrangement is set out in writing, is signed by the parties, 
and specifies the services covered by the arrangement.
    (ii) The arrangement covers all of the services to be furnished by 
the physician (or an immediate family member of the physician) to the 
entity.
    (iii) The aggregate services contracted for do not exceed those that 
are reasonable and necessary for the legitimate business purposes of the 
arrangement.
    (iv) The term of the arrangement is for at least 1 year.
    (v) The compensation to be paid over the term of the arrangement is 
set in advance, does not exceed fair market value, and, except in the 
case of a physician incentive plan, is not determined in a manner that 
takes into account the volume or value of any referrals or other 
business generated between the parties.
    (vi) The services to be furnished under the arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates any State or Federal law.
    (2) Physician incentive plan exception. In the case of a physician 
incentive plan between a physician and an entity, the compensation may 
be determined in a manner (through a withhold, capitation, bonus, or 
otherwise) that takes into account directly or indirectly the volume or 
value of any referrals or other business generated between the parties, 
if the plan meets the following requirements:
    (i) No specific payment is made directly or indirectly under the 
plan to a physician or a physician group as an inducement to reduce or 
limit medically necessary services furnished with respect to a specific 
individual enrolled in the entity.

[[Page 355]]

    (ii) In the case of a plan that places a physician or a physician 
group at substantial financial risk as determined by the Secretary under 
section 1876(i)(8)(A)(ii) of the Act, the plan complies with any 
requirements the Secretary has imposed under that section.
    (iii) Upon request by the Secretary, the entity provides the 
Secretary with access to descriptive information regarding the plan, in 
order to permit the Secretary to determine whether the plan is in 
compliance with the requirements of paragraph (d)(2) of this section.
    (3) Until January 1, 1995, the provisions in paragraph (d)(1) and 
(2) of this section do not apply to any arrangements that meet the 
requirements of section 1877(e)(2) or section 1877(e)(3) of the Act as 
they read before they were amended by the Omnibus Budget Reconciliation 
Act of 1993 (Public Law 103-66).
    (e) Physician recruitment. Remuneration provided by a hospital to 
recruit a physician that is intended to induce the physician to relocate 
to the geographic area served by the hospital in order to become a 
member of the hospital's medical staff, if all of the following 
conditions are met:
    (1) The arrangement and its terms are in writing and signed by both 
parties.
    (2) The arrangement is not conditioned on the physician's referral 
of patients to the hospital.
    (3) The hospital does not determine (directly or indirectly) the 
amount or value of the remuneration to the physician based on the volume 
or value of any referrals the physician generates for the hospital.
    (4) The physician is not precluded from establishing staff 
privileges at another hospital or referring business to another entity.
    (f) Isolated transactions. Isolated financial transactions, such as 
a one-time sale of property or a practice, if all of the conditions set 
forth in paragraphs (c)(2) and (c)(3) of this section are met with 
respect to an entity in the same manner as they apply to an employer. 
There can be no additional transactions between the parties for 6 months 
after the isolated transaction, except for transactions which are 
specifically excepted under the other provisions in Secs. 411.355 
through 411.357.
    (g) Arrangements with hospitals. (1) Until January 1, 1995, any 
compensation arrangement between a hospital and a physician or a member 
of a physician's immediate family if the arrangement does not relate to 
the furnishing of clinical laboratory services; or
    (2) Remuneration provided by a hospital to a physician if the 
remuneration does not relate to the furnishing of clinical laboratory 
services.
    (h) Group practice arrangements with a hospital. An arrangement 
between a hospital and a group practice under which clinical laboratory 
services are provided by the group but are billed by the hospital if the 
following conditions are met:
    (1) With respect to services provided to an inpatient of the 
hospital, the arrangement is pursuant to the provision of inpatient 
hospital services under section 1861(b)(3) of the Act.
    (2) The arrangement began before December 19, 1989, and has 
continued in effect without interruption since then.
    (3) With respect to the clinical laboratory services covered under 
the arrangement, substantially all of these services furnished to 
patients of the hospital are furnished by the group under the 
arrangement.
    (4) The arrangement is in accordance with an agreement that is set 
out in writing and that specifies the services to be furnished by the 
parties and the compensation for services furnished under the agreement.
    (5) The compensation paid over the term of the agreement is 
consistent with fair market value, and the compensation per unit of 
services is fixed in advance and is not determined in a manner that 
takes into account the volume or value of any referrals or other 
business generated between the parties.
    (6) The compensation is provided in accordance with an agreement 
that would be commercially reasonable even if no referrals were made to 
the entity.
    (i) Payments by a physician. Payments made by a physician--

[[Page 356]]

    (1) To a laboratory in exchange for the provision of clinical 
laboratory services; or
    (2) To an entity as compensation for other items or services that 
are furnished at a price that is consistent with fair market value.
    (j) [Reserved]
    (k) Non-monetary compensation up to $300. Compensation from an 
entity in the form of items or services (not including cash or cash 
equivalents) that does not exceed an aggregate of $300 per year, if all 
of the following conditions are satisfied:
    (1) The compensation is not determined in any manner that takes into 
account the volume or value of referrals or other business generated by 
the referring physician.
    (2) The compensation may not be solicited by the physician or the 
physician's practice (including employees and staff members).
    (3) The compensation arrangement does not violate the Federal anti-
kickback statute, section 1128B(b) of the Act.
    (l) Fair market value compensation. Compensation resulting from an 
arrangement between an entity and a physician (or an immediate family 
member) or any group of physicians (regardless of whether the group 
meets the definition of a group practice set forth in Sec. 411.351) for 
the provision of items or services by the physician (or an immediate 
family member) or group practice to the entity, if the arrangement is 
set forth in an agreement that meets the following conditions:
    (1) It is in writing, signed by the parties, and covers only 
identifiable items or services, all of which are specified in the 
agreement.
    (2) It specifies the timeframe for the arrangement, which can be for 
any period of time and contain a termination clause, provided the 
parties enter into only one arrangement for the same items or services 
during the course of a year. An arrangement made for less than 1 year 
may be renewed any number of times if the terms of the arrangement and 
the compensation for the same items or services do not change.
    (3) It specifies the compensation that will be provided under the 
arrangement. The compensation must be set in advance, be consistent with 
fair market value, and not be determined in a manner that takes into 
account the volume or value of any referrals or any other business 
generated by the referring physician.
    (4) It involves a transaction that is commercially reasonable 
(taking into account the nature and scope of the transaction) and 
furthers the legitimate business purposes of the parties.
    (5) It meets a safe harbor under the anti-kickback statute in 
Sec. 1001.952 of this title, has been approved by the OIG under a 
favorable advisory opinion issued in accordance with part 1008 of this 
title, or does not violate the anti-kickback provisions in section 
1128B(b) of the Act.
    (6) The services to be performed under the arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates a State or Federal law.
    (m) Medical staff incidental benefits. Compensation in the form of 
items or services (not including cash or cash equivalents) from a 
hospital to a member of its medical staff when the item or service is 
used on the hospital's campus, if all of the following conditions are 
met:
    (1) The compensation is offered to all members of the medical staff 
without regard to the volume or value of referrals or other business 
generated between the parties.
    (2) The compensation is offered only during periods when the medical 
staff members are making rounds or performing other duties that benefit 
the hospital or its patients.
    (3) The compensation is provided by the hospital and used by the 
medical staff members only on the hospital's campus.
    (4) The compensation is reasonably related to the provision of, or 
designed to facilitate directly or indirectly the delivery of, medical 
services at the hospital.
    (5) The compensation is consistent with the types of benefits 
offered to medical staff members--
    (i) By other hospitals within the same local region; or

[[Page 357]]

    (ii) If no such hospitals exist within the same local region, by 
comparable hospitals in comparable regions.
    (6) The compensation is of low value (that is, less than $25) with 
respect to each occurrence of the benefit (for example, each meal given 
to a physician while he or she is serving patients who are hospitalized 
must be of low value).
    (7) The compensation is not determined in any manner that takes into 
account the volume or value of referrals or other business generated 
between the parties.
    (8) The compensation arrangement does not violate the Federal anti-
kickback provisions in section 1128B(b) of the Act.
    (n) Risk sharing arrangements. Compensation pursuant to a risk-
sharing arrangement (including, but not limited to, withholds, bonuses, 
and risk pools) between a managed care organization or an independent 
physicians association and a physician (either directly or indirectly 
through a subcontractor) for services provided to enrollees of a health 
plan, provided that the arrangement does not violate the Federal anti-
kickback statute, section 1128B(b) of the Act, or any law or regulation 
governing billing or claims submission. For purposes of this paragraph 
(n), ``health plan'' and ``enrollees'' have the meanings ascribed to 
those terms in Sec. 1001.952(l) of this title.
    (o) Compliance training. Compliance training provided by a hospital 
to a physician (or the physician's immediate family member) who 
practices in the hospital's local community or service area, provided 
the training is held in the local community or service area. For 
purposes of this paragraph (o), ``compliance training'' means training 
regarding the basic elements of a compliance program (for example, 
establishing policies and procedures, training of staff, internal 
monitoring, reporting) or specific training regarding the requirements 
of Federal health care programs (for example, billing, coding, 
reasonable and necessary services, documentation, unlawful referral 
arrangements).
    (p) Indirect compensation arrangements. Indirect compensation 
arrangements, as defined in Sec. 411.354(c)(2), if all of the following 
conditions are satisfied:
    (1) The compensation received by the referring physician (or 
immediate family member) described in Sec. 411.354(c)(2)(ii) is fair 
market value for services and items actually provided not taking into 
account the value or volume of referrals or other business generated by 
the referring physician for the entity furnishing DHS.
    (2) The compensation arrangement described in Sec. 411.354(c)(2)(ii) 
is set out in writing, signed by the parties, and specifies the services 
covered by the arrangement, except in the case of a bona fide employment 
relationship between an employer and an employee, in which case the 
arrangement need not be set out in a written contract, but must be for 
identifiable services and be commercially reasonable even if no 
referrals are made to the employer.
    (3) The compensation arrangement does not violate the anti-kickback 
statute or any laws or regulations governing billing or claims 
submission.

[60 FR 41978, Aug. 14, 1995, as amended at 66 FR 961, Jan. 4, 2001]



Sec. 411.360  Group practice attestation.

    (a) Except as provided in paragraph (b) of this section, a group 
practice (as defined in section 1877(h)(4) of the Act and Sec. 411.351) 
must submit a written statement to its carrier annually to attest that, 
during the most recent 12-month period (calendar year, fiscal year, or 
immediately preceding 12-month period) 75 percent of the total patient 
care services of group practice members was furnished through the group, 
was billed under a billing number assigned to the group, and the amounts 
so received were treated as receipts of the group.
    (b) A newly-formed group practice (one in which physicians have 
recently begun to practice together) or any group practice that has been 
unable in the past to meet the requirements of section 1877(h)(4) of the 
Act must--
    (1) Submit a written statement to attest that, during the next 12-
month period (calendar year, fiscal year, or next 12 months), it expects 
to meet the 75-percent standard and will take measures to ensure the 
standard is met; and

[[Page 358]]

    (2) At the end of the 12-month period, submit a written statement to 
attest that it met the 75-percent standard during that period, billed 
for those services under a billing number assigned to the group, and 
treated amounts received for those services as receipts of the group. If 
the group did not meet the standard, any Medicare payments made for 
clinical laboratory services furnished by the group during the 12-month 
period that were conditioned upon the standard being met are 
overpayments.
    (c) Once any group has chosen whether to use its fiscal year, the 
calendar year, or some other 12-month period, the group practice must 
adhere to this choice.
    (d) The attestation must contain a statement that the information 
furnished in the attestation is true and accurate and must be signed by 
a group representative.
    (e) A group that intends to meet the definition of a group practice 
in order to qualify for an exception described in Secs. 411.355 through 
411.357, must submit the attestation required by paragraph (a) or 
paragraph (b)(1) of this section, as applicable, to its carrier no later 
than 60 days after receipt of the attestation instructions from its 
carrier.

[60 FR 41978, Aug. 14, 1995, as amended at 60 FR 63440, Dec. 11, 1995]



Sec. 411.361  Reporting requirements.

    (a) Basic rule. Except as provided in paragraph (b) of this section, 
all entities furnishing items or services for which payment may be made 
under Medicare must submit information to CMS concerning their financial 
relationships (as defined in paragraph (d) of this section), in such 
form, manner, and at such times as CMS specifies.
    (b) Exception. The requirements of paragraph (a) of this section do 
not apply to entities that provide 20 or fewer Part A and Part B items 
and services during a calendar year, or to designated health services 
provided outside the United States.
    (c) Required information. The information submitted to CMS under 
paragraph (a) of this section must include at least the following:
    (1) The name and unique physician identification number (UPIN) of 
each physician who has a financial relationship with the entity;
    (2) The name and UPIN of each physician who has an immediate 
relative (as defined in Sec. 411.351) who has a financial relationship 
with the entity;
    (3) The covered items and services provided by the entity; and
    (4) With respect to each physician identified under paragraphs 
(c)(1) and (c)(2) of this section, the nature of the financial 
relationship (including the extent and/or value of the ownership or 
investment interest or the compensation arrangement, if requested by 
CMS).
    (d) Reportable financial relationships. For purposes of this 
section, a financial relationship is any ownership or investment 
interest or any compensation arrangement, as described in section 1877 
of the Act.
    (e) Form and timing of reports. Entities that are subject to the 
requirements of this section must submit the required information on a 
CMS-prescribed form within the time period specified by the servicing 
carrier or intermediary. Entities are given at least 30 days from the 
date of the carrier's or intermediary's request to provide the initial 
information. Thereafter, an entity must provide updated information 
within 60 days from the date of any change in the submitted information. 
Entities must retain documentation sufficient to verify the information 
provided on the forms and, upon request, must make that documentation 
available to CMS or the OIG.
    (f) Consequences of failure to report. Any person who is required, 
but fails, to submit information concerning his or her financial 
relationships in accordance with this section is subject to a civil 
money penalty of up to $10,000 for each day of the period beginning on 
the day following the applicable deadline established under paragraph 
(e) of this section until the information is submitted. Assessment of 
these penalties will comply with the applicable provisions of part 1003 
of this title.
    (g) Public disclosure. Information furnished to CMS under this 
section is subject to public disclosure in accordance with the 
provisions of part 401 of this chapter.

[[Page 359]]



Sec. 411.370  Advisory opinions relating to physician referrals.

    (a) Period during which CMS will accept requests. The provisions of 
Secs. 411.370 through 411.389 apply to requests for advisory opinions 
that are submitted to CMS after November 3, 1997, and before August 21, 
2000, and to any requests submitted during any other time period during 
which CMS is required by law to issue the advisory opinions described in 
this subpart.
    (b) Matters that qualify for advisory opinions and who may request 
one. Any individual or entity may request a written advisory opinion 
from CMS concerning whether a physician's referral relating to 
designated health services (other than clinical laboratory services) is 
prohibited under section 1877 of the Act. In the advisory opinion, CMS 
determines whether a business arrangement described by the parties to 
that arrangement appears to constitute a ``financial relationship'' (as 
defined in section 1877(a)(2) of the Act) that could potentially 
restrict a physician's referrals, and whether the arrangement or the 
designated health services at issue appear to qualify for any of the 
exceptions to the referral prohibition described in section 1877 of the 
Act.
    (1) The request must involve an existing arrangement or one into 
which the requestor, in good faith, specifically plans to enter. The 
planned arrangement may be contingent upon the party or parties 
receiving a favorable advisory opinion. CMS does not consider, for 
purposes of an advisory opinion, requests that present a general 
question of interpretation, pose a hypothetical situation, or involve 
the activities of third parties.
    (2) The requestor must be a party to the existing or proposed 
arrangement.
    (c) Matters not subject to advisory opinions. CMS does not address 
through the advisory opinion process--
    (1) Whether the fair market value was, or will be, paid or received 
for any goods, services, or property; and
    (2) Whether an individual is a bona fide employee within the 
requirements of section 3121(d)(2) of the Internal Revenue Code of 1986.
    (d) Facts subject to advisory opinions. CMS considers requests for 
advisory opinions that involve applying specific facts to the subject 
matter described in paragraph (b) of this section. Requestors must 
include in the advisory opinion request a complete description of the 
arrangement that the requestor is undertaking, or plans to undertake, as 
described in Sec. 411.372.
    (e) Requests that will not be accepted. CMS does not accept an 
advisory opinion request or issue an advisory opinion if--
    (1) The request is not related to a named individual or entity;
    (2) CMS is aware that the same, or substantially the same, course of 
action is under investigation, or is or has been the subject of a 
proceeding involving the Department of Health and Human Services or 
another governmental agency; or
    (3) CMS believes that it cannot make an informed opinion or could 
only make an informed opinion after extensive investigation, clinical 
study, testing, or collateral inquiry.
    (f) Effects of an advisory opinion on other Governmental authority. 
Nothing in this part limits the investigatory or prosecutorial authority 
of the OIG, the Department of Justice, or any other agency of the 
Government. In addition, in connection with any request for an advisory 
opinion, CMS, the OIG, or the Department of Justice may conduct whatever 
independent investigation it believes appropriate.

[63 FR 1655, Jan. 9, 1998]



Sec. 411.372  Procedure for submitting a request.

    (a) Format for a request. A party or parties must submit a request 
for an advisory opinion to CMS in writing, including an original request 
and 2 copies. The request must be addressed to: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
Advisory Opinions, P.O. Box 26505, Baltimore, MD 21207.
    (b) Information CMS requires with all submissions. The request must 
include the following:
    (1) The name, address, telephone number, and Taxpayer Identification 
Number of the requestor.
    (2) The names and addresses, to the extent known, of all other 
actual and

[[Page 360]]

potential parties to the arrangement that is the subject of the request.
    (3) The name, title, address, and daytime telephone number of a 
contact person who will be available to discuss the request with CMS on 
behalf of the requestor.
    (4) A complete and specific description of all relevant information 
bearing on the arrangement, including--
    (i) A complete description of the arrangement that the requestor is 
undertaking, or plans to undertake, including: the purpose of the 
arrangement; the nature of each party's (including each entity's) 
contribution to the arrangement; the direct or indirect relationships 
between the parties, with an emphasis on the relationships between 
physicians involved in the arrangement (or their immediate family 
members who are involved) and any entities that provide designated 
health services; the types of services for which a physician wishes to 
refer, and whether the referrals will involve Medicare or Medicaid 
patients;
    (ii) Complete copies of all relevant documents or relevant portions 
of documents that affect or could affect the arrangement, such as 
personal services or employment contracts, leases, deeds, pension or 
insurance plans, financial statements, or stock certificates (or, if 
these relevant documents do not yet exist, a complete description, to 
the best of the requestor's knowledge, of what these documents are 
likely to contain);
    (iii) Detailed statements of all collateral or oral understandings, 
if any; and
    (iv) Descriptions of any other arrangements or relationships that 
could affect CMS's analysis.
    (5) Complete information on the identity of all entities involved 
either directly or indirectly in the arrangement, including their names, 
addresses, legal form, ownership structure, nature of the business 
(products and services) and, if relevant, their Medicare and Medicaid 
provider numbers. The requestor must also include a brief description of 
any other entities that could affect the outcome of the opinion, 
including those with which the requestor, the other parties, or the 
immediate family members of involved physicians, have any financial 
relationships (either direct or indirect, and as defined in section 
1877(a)(2) of the Act and Sec. 411.351), or in which any of the parties 
holds an ownership or control interest as defined in section 1124(a)(3) 
of the Act.
    (6) A discussion of the specific issues or questions the requestor 
would like CMS to address including, if possible, a description of why 
the requestor believes the referral prohibition in section 1877 of the 
Act might or might not be triggered by the arrangement and which, if 
any, exceptions to the prohibition the requestor believes might apply. 
The requestor should attempt to designate which facts are relevant to 
each issue or question raised in the request and should cite the 
provisions of law under which each issue or question arises.
    (7) An indication of whether the parties involved in the request 
have also asked for or are planning to ask for an advisory opinion on 
the arrangement in question from the OIG under section 1128D(b) of the 
Act (42 U.S.C. 1320a-7d(b)) and whether the arrangement is or is not, to 
the best of the requestor's knowledge, the subject of an investigation.
    (8) The certification(s) described in Sec. 411.373. The 
certification(s) must be signed by--
    (i) The requestor, if the requestor is an individual;
    (ii) The chief executive officer, or comparable officer, of the 
requestor, if the requestor is a corporation;
    (iii) The managing partner of the requestor, if the requestor is a 
partnership; or
    (iv) A managing member, if the requestor is a limited liability 
company.
    (9) A check or money order payable to CMS in the amount described in 
Sec. 411.375(a).
    (c) Additional information CMS might require. If the request does 
not contain all of the information required by paragraph (b) of this 
section, or, if either before or after accepting the request, CMS 
believes it needs more information in order to render an advisory 
opinion, it may request whatever additional information or documents it 
deems necessary. Additional information must be provided in writing, 
signed by the same person who signed

[[Page 361]]

the initial request (or by an individual in a comparable position), and 
be certified as described in Sec. 411.373.

[63 FR 1655, Jan. 9, 1998]



Sec. 411.373  Certification.

    (a) Every request must include the following signed certification: 
``With knowledge of the penalties for false statements provided by 18 
U.S.C. 1001 and with knowledge that this request for an advisory opinion 
is being submitted to the Department of Health and Human Services, I 
certify that all of the information provided is true and correct, and 
constitutes a complete description of the facts regarding which an 
advisory opinion is sought, to the best of my knowledge and belief.''
    (b) If the advisory opinion relates to a proposed arrangement, in 
addition to the certification required by paragraph (a) of this section, 
the following certification must be included and signed by the 
requestor: ``The arrangement described in this request for an advisory 
opinion is one into which [the requestor], in good faith, plans to 
enter.'' This statement may be made contingent on a favorable advisory 
opinion, in which case the requestor should add one of the following 
phrases to the certification:
    (1) ``if CMS issues a favorable advisory opinion.''
    (2) ``if CMS and the OIG issue favorable advisory opinions.''

[63 FR 1656, Jan. 9, 1998]



Sec. 411.375  Fees for the cost of advisory opinions.

    (a) Initial payment. Parties must include with each request for an 
advisory opinion submitted through December 31, 1998, a check or money 
order payable to CMS for $250. For requests submitted after this date, 
parties must include a check or money order in this amount, unless CMS 
has revised the amount of the initial fee in a program issuance, in 
which case, the requestor must include the revised amount. This initial 
payment is nonrefundable.
    (b) How costs are calculated. Before issuing the advisory opinion, 
CMS calculates the costs the Department has incurred in responding to 
the request. The calculation includes the costs of salaries, benefits, 
and overhead for analysts, attorneys, and others who have worked on the 
request, as well as administrative and supervisory support for these 
individuals.
    (c) Agreement to pay all costs. (1) By submitting the request for an 
advisory opinion, the requestor agrees, except as indicated in paragraph 
(c)(3) of this section, to pay all costs the Department incurs in 
responding to the request for an advisory opinion.
    (2) In its request for an advisory opinion, the requestor may 
designate a triggering dollar amount. If CMS estimates that the costs of 
processing the advisory opinion request have reached or are likely to 
exceed the designated triggering dollar amount, CMS notifies the 
requestor.
    (3) If CMS notifies the requestor that the actual or estimated cost 
of processing the request has reached or is likely to exceed the 
triggering dollar amount, CMS stops processing the request until the 
requestor makes a written request for CMS to continue. If CMS is delayed 
in processing the request for an advisory opinion because of this 
procedure, the time within which CMS must issue an advisory opinion is 
suspended until the requestor asks CMS to continue working on the 
request.
    (4) If the requestor chooses not to pay for CMS to complete an 
advisory opinion, or withdraws the request, the requestor is still 
obligated to pay for all costs CMS has identified as costs it incurred 
in processing the request for an advisory opinion, up to that point.
    (5) If the costs CMS has incurred in responding to the request are 
greater than the amount the requestor has paid, CMS, before issuing the 
advisory opinion, notifies the requestor of any additional amount that 
is due. CMS does not issue an advisory opinion until the requestor has 
paid the full amount that is owed. Once the requestor has paid CMS the 
total amount due for the costs of processing the request, CMS issues the 
advisory opinion. The time period CMS has for issuing advisory opinions 
is suspended from the time CMS notifies the requestor of the amount owed 
until the time CMS receives full payment.

[[Page 362]]

    (d) Fees for outside experts. (1) In addition to the fees identified 
in this section, the requestor also must pay any required fees for 
expert opinions, if any, from outside sources, as described in 
Sec. 411.377.
    (2) The time period for issuing an advisory opinion is suspended 
from the time that CMS notifies the requestor that it needs an outside 
expert opinion until the time CMS receives that opinion.

[63 FR 1656, Jan. 9, 1998]



Sec. 411.377  Expert opinions from outside sources.

    (a) CMS may request expert advice from qualified sources if CMS 
believes that the advice is necessary to respond to a request for an 
advisory opinion. For example, CMS may require the use of accountants or 
business experts to assess the structure of a complex business 
arrangement or to ascertain a physician's or immediate family member's 
financial relationship with entities that provide designated health 
services.
    (b) If CMS determines that it needs to obtain expert advice in order 
to issue a requested advisory opinion, CMS notifies the requestor of 
that fact and provides the identity of the appropriate expert and an 
estimate of the costs of the expert advice. As indicated in 
Sec. 411.375(d), the requestor must pay the estimated cost of the expert 
advice.
    (c) Once CMS has received payment for the estimated cost of the 
expert advice, CMS arranges for the expert to provide a prompt review of 
the issue or issues in question. CMS considers any additional expenses 
for the expert advice, beyond the estimated amount, as part of the costs 
CMS has incurred in responding to the request, and the responsibility of 
the requestor, as described in Sec. 411.375(c).

[63 FR 1657, Jan. 9, 1998]



Sec. 411.378  Withdrawing a request.

    The party requesting an advisory opinion may withdraw the request 
before CMS issues a formal advisory opinion. This party must submit the 
withdrawal in writing to the same address as the request, as indicated 
in Sec. 411.372(a). Even if the party withdraws the request, the party 
must pay the costs the Department has expended in processing the 
request, as discussed in Sec. 411.375. CMS reserves the right to keep 
any request for an advisory opinion and any accompanying documents and 
information, and to use them for any governmental purposes permitted by 
law.

[63 FR 1657, Jan. 9, 1998]



Sec. 411.379  When CMS accepts a request.

    (a) Upon receiving a request for an advisory opinion, CMS promptly 
makes an initial determination of whether the request includes all of 
the information it will need to process the request.
    (b) Within 15 working days of receiving the request, CMS--
    (1) Formally accepts the request for an advisory opinion;
    (2) Notifies the requestor about the additional information it 
needs, or
    (3) Declines to formally accept the request.
    (c) If the requestor provides the additional information CMS has 
requested, or otherwise resubmits the request, CMS processes the 
resubmission in accordance with paragraphs (a) and (b) of this section 
as if it were an initial request for an advisory opinion.
    (d) Upon accepting the request, CMS notifies the requestor by 
regular U.S. mail of the date that CMS formally accepted the request.
    (e) The 90-day period that CMS has to issue an advisory opinion set 
forth in Sec. 411.380(c) does not begin until CMS has formally accepted 
the request for an advisory opinion.

[63 FR 1657, Jan. 9, 1998]



Sec. 411.380  When CMS issues a formal advisory opinion.

    (a) CMS considers an advisory opinion to be issued once it has 
received payment and once the opinion has been dated, numbered, and 
signed by an authorized CMS official.
    (b) An advisory opinion contains a description of the material facts 
known to CMS that relate to the arrangement that is the subject of the 
advisory opinion, and states CMS's opinion about the subject matter of 
the request based on those facts. If necessary, CMS includes in the 
advisory opinion material

[[Page 363]]

facts that could be considered confidential information or trade secrets 
within the meaning of 18 U.S.C. 1095.
    (c)(1) CMS issues an advisory opinion, in accordance with the 
provisions of this part, within 90 days after it has formally accepted 
the request for an advisory opinion, or, for requests that CMS 
determines, in its discretion, involve complex legal issues or highly 
complicated fact patterns, within a reasonable time period.
    (2) If the 90th day falls on a Saturday, Sunday, or Federal holiday, 
the time period ends at the close of the first business day following 
the weekend or holiday;
    (3) The 90-day period is suspended from the time CMS--
    (i) Notifies the requestor that the costs have reached or are likely 
to exceed the triggering amount as described in Sec. 411.375(c)(2) until 
CMS receives written notice from the requestor to continue processing 
the request;
    (ii) Requests additional information from the requestor until CMS 
receives the additional information;
    (iii) Notifies the requestor of the full amount due until CMS 
receives payment of this amount; and
    (iv) Notifies the requestor of the need for expert advice until CMS 
receives the expert advice.
    (d) After CMS has notified the requestor of the full amount owed and 
has received full payment of that amount, CMS issues the advisory 
opinion and promptly mails it to the requestor by regular first class 
U.S. mail.

[63 FR 1657, Jan. 9, 1998]



Sec. 411.382  CMS's right to rescind advisory opinions.

    Any advice CMS gives in an opinion does not prejudice its right to 
reconsider the questions involved in the opinion and, if it determines 
that it is in the public interest, to rescind or revoke the opinion. CMS 
provides notice to the requestor of its decision to rescind or revoke 
the opinion so that the requestor and the parties involved in the 
requestor's arrangement may discontinue any course of action they have 
taken in accordance with the advisory opinion. CMS does not proceed 
against the requestor with respect to any action the requestor and the 
involved parties have taken in good faith reliance upon CMS's advice 
under this part, provided--
    (a) The requestor presented to CMS a full, complete and accurate 
description of all the relevant facts; and
    (b) The parties promptly discontinue the action upon receiving 
notice that CMS had rescinded or revoked its approval, or discontinue 
the action within a reasonable ``wind down'' period, as determined by 
CMS.

[63 FR 1657, Jan. 9, 1998]



Sec. 411.384  Disclosing advisory opinions and supporting information.

    (a) Advisory opinions that CMS issues and releases in accordance 
with the procedures set forth in this subpart are available to the 
public.
    (b) Promptly after CMS issues an advisory opinion and releases it to 
the requestor, CMS makes available a copy of the advisory opinion for 
public inspection during its normal hours of operation and on the DHHS/
CMS web site.
    (c) Any predecisional document, or part of such predecisional 
document, that is prepared by CMS, the Department of Justice, or any 
other Department or agency of the United States in connection with an 
advisory opinion request under the procedures set forth in this part is 
exempt from disclosure under 5 U.S.C. 552, and will not be made publicly 
available.
    (d) Documents submitted by the requestor to CMS in connection with a 
request for an advisory opinion are available to the public to the 
extent they are required to be made available by 5 U.S.C. 552, through 
procedures set forth in 45 CFR part 5.
    (e) Nothing in this section limits CMS's obligation, under 
applicable laws, to publicly disclose the identity of the requesting 
party or parties, and the nature of the action CMS has taken in response 
to the request.

[63 FR 1657, Jan. 9, 1998]



Sec. 411.386  CMS's advisory opinions as exclusive.

    The procedures described in this subpart constitute the only method 
by which any individuals or entities can

[[Page 364]]

obtain a binding advisory opinion on the subject of a physician's 
referrals, as described in Sec. 411.370. CMS has not and does not issue 
a binding advisory opinion on the subject matter in Sec. 411.370, in 
either oral or written form, except through written opinions it issues 
in accordance with this subpart.

[63 FR 1658, Jan. 9, 1998]



Sec. 411.387  Parties affected by advisory opinions.

    An advisory opinion issued by CMS does not apply in any way to any 
individual or entity that does not join in the request for the opinion. 
Individuals or entities other than the requestor(s) may not rely on an 
advisory opinion.

[63 FR 1658, Jan. 9, 1998]



Sec. 411.388  When advisory opinions are not admissible evidence.

    The failure of a party to seek or to receive an advisory opinion may 
not be introduced into evidence to prove that the party either intended 
or did not intend to violate the provisions of sections 1128, 1128A or 
1128B of the Act.

[63 FR 1658, Jan. 9, 1998]



Sec. 411.389  Range of the advisory opinion.

    (a) An advisory opinion states only CMS's opinion regarding the 
subject matter of the request. If the subject of an advisory opinion is 
an arrangement that must be approved by or is regulated by any other 
agency, CMS's advisory opinion cannot be read to indicate CMS's views on 
the legal or factual issues that may be raised before that agency.
    (b) An advisory opinion that CMS issues under this part does not 
bind or obligate any agency other than the Department. It does not 
affect the requestor's, or anyone else's, obligations to any other 
agency, or under any statutory or regulatory provision other than that 
which is the specific subject matter of the advisory opinion.

[63 FR 1658, Jan. 9, 1998]



            Subpart K--Payment for Certain Excluded Services



Sec. 411.400  Payment for custodial care and services not reasonable and necessary.

    (a) Conditions for payment. Notwithstanding the exclusions set forth 
in Sec. 411.15 (g) and (k). Medicare pays for ``custodial care'' and 
``services not reasonable and necessary'' if the following conditions 
are met:
    (1) The services were funished by a provider or by a practitioner or 
supplier that had accepted assignment of benefits for those services.
    (2) Neither the beneficiary nor the provider, practitioner, or 
supplier knew, or could reasonably have been expected to know, that the 
services were excluded from coverage under Sec. 411.15 (g) or (k).
    (b) Time limits on payment. (1) Basic rule. Except as provided in 
paragraph (b)(2) of this section, payment may not be made for inpatient 
hospital care, posthospital SNF care, or home health services furnished 
after the earlier of the following:
    (i) The day on which the beneficiary has been determined, under 
Sec. 411.404, to have knowledge, actual or imputed, that the services 
were excluded from coverage by reason of Sec. 411.15(g) or 
Sec. 411.15(k).
    (ii) The day on which the provider has been determined, under 
Sec. 411.406 to have knowledge, actual or imputed, that the services are 
excluded from coverage by reason of Sec. 411.15(g) or Sec. 411.15(k).
    (2) Exception. Payment may be made for services furnished during the 
first day after the limit established in paragraph (b)(1) of this 
section, if the QIO or the intermediary determines that the additional 
period of one day is necessary for planning post-discharge care. It the 
QIO or the intermediary determines that yet another day is necessary for 
planning post-discharge care, payment may be made for services furnished 
during the second day after the limit established in paragraph (b)(1) of 
this section.

[[Page 365]]



Sec. 411.402  Indemnification of beneficiary.

    (a) Conditions for indemnification. If Medicare payment is precluded 
because the conditions of Sec. 411.400(a)(2) are not met. Medicare 
indemnifies the beneficiary (and recovers from the provider, 
practitioner, or supplier), if the following conditions are met:
    (1) The beneficiary paid the provider, practitioner, or supplier 
some or all of the charges for the excluded services.
    (2) The beneficiary did not know and could not reasonably have been 
expected to know that the services were not covered.
    (3) The provider, practitioner, or supplier knew, or could 
reasonably have been expected to know that the services were not 
covered.
    (4) The beneficiary files a proper request for indemnification 
before the end of the sixth month after whichever of the following is 
later:
    (i) The month is which the beneficiary paid the provider, 
practitioner, or supplier.
    (ii) The month in which the intermediary or carrier notified the 
beneficiary (or someone on his or her behalf) that the beneficiary would 
not be liable for the services.

For good cause shown by the beneficiary, the 6-month period may be 
extended.
    (b) Amount of indemnification.1 The amount of 
indemnification is the total that the beneficiary paid the provider, 
practitioner, or supplier.
---------------------------------------------------------------------------

    \1\ For services furnished before 1988, the indemnification amount 
was reduced by any deductible or coinsurance amounts that would have 
been applied if the services had been covered.
---------------------------------------------------------------------------

    (c) Effect of indemnification. The amount of indemnification is 
considered an overpayment to the provider, practitioner, or supplier, 
and as such is recoverable under this part or in accordance with other 
applicable provisions of law.



Sec. 411.404  Criteria for determining that a beneficiary knew that services were excluded from coverage as custodial care or as not reasonable and necessary.

    (a) Basic rule. A beneficiary who receives services that constitute 
custodial care under Sec. 411.15(g) or that are not reasonable and 
necessary under Sec. 411.15(k), is considered to have known that the 
services were not covered if the criteria of paragraphs (b) and (c) of 
this section are met.
    (b) Written notice. Written notice has been given to the 
beneficiary, or to someone acting on his or her behalf, that the 
services were not covered because they did not meet Medicare coverage 
guidelines. A notice concerning similar or reasonably comparable 
services furnished on a previous occasion also meets this criterion. For 
example, program payment may not be made for the treatment of obesity, 
no matter what form the treatment may take. After the beneficiary who is 
treated for obesity with dietary control is informed in writing that 
Medicare will not pay for treatment of obesity, he or she will be 
presumed to know that there will be no Medicare payment for any form of 
subsequent treatment of this condition, including use of a combination 
of exercise, machine treatment, diet, and medication.
    (c) Source of notice. The notice was given by one of the following:
    (1) The QIO, intermediary, or carrier.
    (2) The group or committee responsible for utilization review for 
the provider that furnished the services.
    (3) The provider, practitioner, or supplier that furnished the 
service.



Sec. 411.406  Criteria for determining that a provider, practitioner, or supplier knew that services were excluded from coverage as custodial care or as not 
          reasonable and necessary.

    (a) Basic rule. A provider, practitioner, or supplier that furnished 
services which constitute custodial care under Sec. 411.15(g) or that 
are not reasonable and necessary under Sec. 411.15(k) is considered to 
have known that the services were not covered if any one of

[[Page 366]]

the conditions specified in paragraphs (b) through (e) of this section 
is met.
    (b) Notice from the QIO, intermediary or carrier. The QIO, 
intermediary, or carrier had informed the provider, practitioner, or 
supplier that the services furnished were not covered, or that similar 
or reasonably comparable services were not covered.
    (c) Notice from the utilization review committee or the 
beneficiary's attending phyician. The utilization review group or 
committee for the provider or the beneficiary's attending physician had 
informed the provider that these services were not covered.
    (d) Notice from the provider, practitioner, or supplier to the 
beneficiary. Before the services were furnished, the provider, 
practitioner or supplier informed the beneficiary that--
    (1) The services were not covered; or
    (2) The beneficiary no longer needed covered services.
    (e) Knowledge based on experience, actual notice, or constructive 
notice. It is clear that the provider, practitioner, or supplier could 
have been expected to have known that the services were excluded from 
coverage on the basis of the following:
    (1) Its receipt of CMS notices, including manual issuances, 
bulletins, or other written guides or directives from intermediaries, 
carriers, or QIOs, including notification of QIO screening criteria 
specific to the condition of the beneficiary for whom the furnished 
services are at issue and of medical procedures subject to preadmission 
review by a QIO.
    (2) Federal Register publications containing notice of national 
coverage decisions or of other specifications regarding noncoverage of 
an item or service.
    (3) Its knowledge of what are considered acceptable standards of 
practice by the local medical community.

[54 FR 41734, Oct. 11, 1989, as amended at 60 FR 48425, Sept. 19, 1995]



Sec. 411.408  Refunds of amounts collected for physician services not reasonable and necessary, payment not accepted on an assignment-related basis.

    (a) Basic rule. Except as provided in paragraph (d) of this section, 
a physician who furnishes a beneficiary services for which the physician 
does not undertake to claim payment on an assignment-related basis must 
refund any amounts collected from the beneficiary for services otherwise 
covered if Medicare payment is denied because the services are found to 
be not reasonable and necessary under Sec. 411.15(k).
    (b) Time limits for making refunds. A timely refund of any 
incorrectly collected amounts of money must be made to the beneficiary 
to whom the services were furnished. A refund is timely if--
    (1) A physician who does not request a review within 30 days after 
receipt of the denial notice makes the refund within that time period; 
or
    (2) A physician who files a request for review within 30 days after 
receipt of the denial notice makes the refund within 15 days after 
receiving notice of an initial adverse review determination, whether or 
not the physician further appeals the initial adverse review 
determination.
    (c) Notices and appeals. If payment is denied for nonassignment-
related claims because the services are found to be not reasonable and 
necessary, a notice of denial will be sent to both the physician and the 
beneficiary. The physician who does not accept assignment will have the 
same rights as a physician who submits claims on an assignment-related 
basis, as detailed in subpart H of part 405 and subpart B of part 473, 
to appeal the determination, and will be subject to the same time 
limitations.
    (d) When a refund is not required. A refund of any amounts collected 
for services not reasonable and necessary is not required if--
    (1) The physician did not know, and could not reasonably have been 
expected to know, that Medicare would not pay for the service; or
    (2) Before the service was provided--
    (i) The physician informed the beneficiary, or someone acting on the 
beneficiary's behalf, in writing that the physician believed Medicare 
was likely to deny payment for the specific service; and
    (ii) The beneficiary (or someone eligible to sign for the 
beneficiary under Sec. 424.36(b) of this chapter) signed a

[[Page 367]]

statement agreeing to pay for that service.
    (e) Criteria for determining that a physician knew that services 
were excluded as not reasonable and necessary. A physician will be 
determined to have known that furnished services were excluded from 
coverage as not reasonable and necessary if one or more of the 
conditions in Sec. 411.406 of this subpart are met.
    (f) Acceptable evidence of prior notice to a beneficiary that 
Medicare was likely to deny payment for a particular service. To qualify 
for waiver of the refund requirement under paragraph (d)(2) of this 
section, the physician must inform the beneficiary (or person acting on 
his or her behalf) that the physician believes Medicare is likely to 
deny payment.
    (1) The notice must--
    (i) Be in writing, using approved notice language;
    (ii) Cite the particular service or services for which payment is 
likely to be denied; and
    (iii) Cite the physician's reasons for believing Medicare payment 
will be denied.
    (2) The notice is not acceptable evidence if--
    (i) The physician routinely gives this notice to all beneficiaries 
for whom he or she furnishes services; or
    (ii) The notice is no more than a statement to the effect that there 
is a possibility that Medicare may not pay for the service.
    (g) Applicability of sanctions to physicians who fail to make 
refunds under this section. A physician who knowingly and willfully 
fails to make refunds as required by this section may be subject to 
sanctions as provided for in chapter V, parts 1001, 1002, and 1003 of 
this title.

[55 FR 24568, June 18, 1990; 55 FR 35142, 35143, Aug. 28, 1990]



PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES--Table of Contents




                      Subpart A--General Provisions

Sec.
412.1  Scope of part.
412.2  Basis of payment.
412.4  Discharges and transfers.
412.6  Cost reporting periods subject to the prospective payment 
          systems.
412.8  Publication of schedules for determining prospective payment 
          rates.
412.10  Changes in the DRG classification system.

     Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and Inpatient 
                          Capital-Related Costs

412.20  Hospital services subject to the prospective payment systems.
412.22  Excluded hospitals and hospital units: General rules.
412.23  Excluded hospitals: Classifications.
412.25  Excluded hospital units: Common requirements.
412.27  Excluded psychiatric units: Additional requirements.
412.29  Excluded rehabilitation units: Additional requirements.
412.30  Exclusion of new rehabilitation units and expansion of units 
          already excluded.

Subpart C--Conditions for Payment Under the Prospective Payment Systems 
    for Inpatient Operating Costs and Inpatient Capital-Related Costs

412.40  General requirements.
412.42  Limitations on charges to beneficiaries.
412.44  Medical review requirements: Admissions and quality review.
412.46  Medical review requirements: Physician acknowledgement.
412.48  Denial of payment as a result of admissions and quality review.
412.50  Furnishing of inpatient hospital services directly or under 
          arrangements.
412.52  Reporting and recordkeeping requirements.

Subpart D--Basic Methodology for Determining Prospective Payment Federal 
                   Rates for Inpatient Operating Costs

412.60  DRG classification and weighting factors.
412.62  Federal rates for inpatient operating costs for fiscal year 
          1984.
412.63  Federal rates for inpatient operating costs for fiscal years 
          after Federal fiscal year 1984.

  Subpart E--Determination of Transition Period Payment Rates for the 
        Prospective Payment System for Inpatient Operating Costs

412.70  General description.
412.71  Determination of base-year inpatient operating costs.

[[Page 368]]

412.72  Modification of base-year costs.
412.73  Determination of the hospital-specific rate based on a Federal 
          fiscal year 1982 base period.
412.75  Determination of the hospital-specific rate for inpatient 
          operating costs based on a Federal fiscal year 1987 base 
          period.
412.77  Determination of the hospital-specific rate for inpatient 
          operating costs for sole community hospitals based on a 
          Federal fiscal year 1996 base period.
412.78  Recovery of excess transition period payment amounts resulting 
          from unlawful claims.

 Subpart F--Payment for Outlier Cases and Special Treatment Payment for 
                             New Technology

                        Payment for Outlier Cases

412.80  Outlier cases: General provisions.
412.82  Payment for extended length-of-stay cases (day outliers).
412.84  Payment for extraordinarily high-cost cases (cost outliers).
412.86  Payment for extraordinarily high-cost day outliers.

          Additional Special Payment for Certain New Technology

412.87  Additional payment for new medical services and technologies: 
          General provisions.
412.88  Additional payment for new medical service or technology.

Subpart G--Special Treatment of Certain Facilities Under the Prospective 
              Payment System for Inpatient Operating Costs

412.90  General rules.
412.92  Special treatment: Sole community hospitals.
412.96  Special treatment: Referral centers.
412.98  [Reserved]
412.100  Special treatment: Renal transplantation centers.
412.102  Special treatment: Hospitals located in areas that are 
          reclassified from urban to rural as a result of a geographic 
          redesignation.
412.103  Special treatment: Hospitals located in urban areas and that 
          apply for reclassification as rural.
412.104  Special treatment: Hospitals with high percentage of ESRD 
          discharges.
412.105  Special treatment: Hospitals that incur indirect costs for 
          graduate medical education programs.
412.106  Special treatment: Hospitals that serve a disproportionate 
          share of low-income patients.
412.107  Special treatment: Hospitals that receive an additional update 
          for FYs 1998 and 1999.
412.108  Special treatment: Medicare-dependent, small rural hospitals.
412.109  Special treatment: Essential access community hospitals 
          (EACHs).

 Subpart H--Payments to Hospitals Under the Prospective Payment Systems

412.110  Total Medicare payment.
412.112  Payments determined on a per case basis.
412.113  Other payments.
412.115  Additional payments.
412.116  Method of payment.
412.120  Reductions to total payments.
412.125  Effect of change of ownership on payments under the prospective 
          payment systems.
412.130  Retroactive adjustments for incorrectly excluded hospitals and 
          units.

Subparts I-J [Reserved]

Subpart K--Prospective Payment System for Inpatient Operating Costs for 
                    Hospitals Located in Puerto Rico

412.200  General provisions.
412.204  Payments to hospitals located in Puerto Rico.
412.208  Puerto Rico rates for Federal fiscal year 1988.
412.210  Puerto Rico rates for fiscal years after Federal fiscal year 
          1988.
412.212  National rate.
412.220  Special treatment of certain hospitals located in Puerto Rico.

     Subpart L--The Medicare Geographic Classification Review Board

                Criteria and Conditions for Redesignation

412.230  Criteria for an individual hospital seeking redesignation to 
          another rural area or an urban area.
412.232  Criteria for all hospitals in a rural county seeking urban 
          redesignation.
412.234  Criteria for all hospitals in an urban county seeking 
          redesignation to another urban area.
412.236  Alternative Criteria for hospitals located in an NECMA.

                       Composition and Procedures

412.246  MGCRB members.
412.248  Number of members needed for a decision or a hearing.
412.250  Sources of MGCRB's authority.
412.252  Applications.
412.254  Proceedings before MGCRB.
412.256  Application requirements.
412.258  Parties to MGCRB proceeding.
412.260  Time and place of the oral hearing.
412.262  Disqualification of an MGCRB member.

[[Page 369]]

412.264  Evidence and comments in MGCRB proceeding.
412.266  Availability of wage data.
412.268  Subpoenas.
412.270  Witnesses.
412.272  Record of proceedings before the MGCRB.
412.273  Withdrawing an application, terminating an approved 3-year 
          reclassification, or canceling a previous withdrawal or 
          termination.
412.274  Scope and effect of an MGCRB decision.
412.276  Timing of MGCRB decision and its appeal.
412.278  Administrator's review.
412.280  Representation.

  Subpart M--Prospective Payment System for Inpatient Hospital Capital 
                                  Costs

                           General Provisions

412.300  Scope of subpart and definition.
412.302  Introduction to capital costs.
412.304  Implementation of the capital prospective payment system.

 Basic Methodology for Determining the Federal Rate for Capital-Related 
                                  Costs

412.308  Determining and updating the Federal rate.
412.312  Payment based on the Federal rate.
412.316  Geographic adjustment factors.
412.320  Disproportionate share adjustment factor.
412.322  Indirect medical education adjustment factor.

  Determination of Transition Period Payment Rates for Capital-Related 
                                  Costs

412.324  General description.
412.328  Determining and updating the hospital-specific rate.
412.331  Determining hospital-specific rates in cases of hospital 
          merger, consolidation, or dissolution.
412.332  Payment based on the hospital-specific rate.
412.336  Transition period payment methodologies.
412.340  Fully prospective payment methodology.
412.344  Hold-harmless payment methodology.
412.348  Exception payments.
412.352  Budget neutrality adjustment.

                 Special Rules for Puerto Rico Hospitals

412.370  General provisions for hospitals located in Puerto Rico.
412.374  Payments to hospitals located in Puerto Rico.

Subpart N [Reserved]

   Subpart O--Prospective Payment System for Long-Term Care Hospitals

Sec.
412.500  Basis and scope of subpart.
412.503  Definitions.
412.505  Conditions for payment under the prospective payment system for 
          long-term care hospitals.
412.507  Limitation on charges to beneficiaries.
412.508  Medical review requirements.
412.509  Furnishing of inpatient hospital services directly or under 
          arrangement.
412.511  Reporting and recordkeeping requirements.
412.513  Patient classification system.
412.515  LTC-DRG weighting factors.
412.517  Revision of LTC-DRG group classifications and weighting 
          factors.
412.521  Basis of payment.
412.523  Methodology for calculating the Federal prospective payment 
          rates.
412.525  Adjustments to the Federal prospective payment.
412.529  Special payment provisions for short-stay outliers.
412.531  Special payment provisions when an interruption of a stay 
          occurs in a long-term care hospital.
412.532  Special payment provisions for patients who are transferred to 
          onsite providers and readmitted to a long-term care hospital.
412.533  Transition payments.
412.535  Publication of the Federal prospective payment rates.
412.541  Method of payment under the long-term care hospital prospective 
          payment system.

 Subpart P--Prospective Payment for Inpatient Rehabilitation Hospitals 
                        and Rehabilitation Units

412.600  Basis and scope of subpart.
412.602  Definitions.
412.604  Conditions for payment under the prospective payment system for 
          inpatient rehabilitation facilities.
412.606  Patient assessments.
412.608  Patients' rights regarding the collection of patient assessment 
          data.
412.610  Assessment schedule.
412.612  Coordination of the collection of patient assessment data.
412.614  Transmission of patient assessment data.
412.616  Release of information collected using the patient assessment 
          instrument.
412.618  Assessment process for interrupted stays.
412.620  Patient classification system.
412.622  Basis of payment.
412.624  Methodology for calculating the Federal prospective payment 
          rates.
412.626  Transition period.

[[Page 370]]

412.628  Publication of the Federal prospective payment rates.
412.630  Limitation on review.
412.632  Method of payment under the inpatient rehabilitation facility 
          prospective payment system.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 50 FR 12741, Mar. 29, 1985, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 412.1  Scope of part.

    (a) Purpose. (1) This part implements sections 1886(d) and (g) of 
the Act by establishing a prospective payment system for the operating 
costs of inpatient hospital services furnished to Medicare beneficiaries 
in cost reporting periods beginning on or after October 1, 1983 and a 
prospective payment system for the capital-related costs of inpatient 
hospital services furnished to Medicare beneficiaries in cost reporting 
periods beginning on or after October 1, 1991. Under these prospective 
payment systems, payment for the operating and capital-related costs of 
inpatient hospital services furnished by hospitals subject to the 
systems (generally, short-term, acute-care hospitals) is made on the 
basis of prospectively determined rates and applied on a per discharge 
basis. Payment for other costs related to inpatient hospital services 
(organ acquisition costs incurred by hospitals with approved organ 
transplantation centers, the costs of qualified nonphysician 
anesthetist's services, as described in Sec. 412.113(c), and direct 
costs of approved nursing and allied health educational programs) is 
made on a reasonable cost basis. Payment for the direct costs of 
graduate medical education is made on a per resident amount basis in 
accordance with Sec. 413.86 of this chapter. Additional payments are 
made for outlier cases, bad debts, indirect medical education costs, and 
for serving a disproportionate share of low-income patients. Under 
either prospective payment system, a hospital may keep the difference 
between its prospective payment rate and its operating or capital-
related costs incurred in furnishing inpatient services, and the 
hospital is at risk for inpatient operating or inpatient capital-related 
costs that exceed its payment rate.
    (2) This part implements section 1886(j) of the Act by establishing 
a prospective payment system for the inpatient operating and capital 
costs of inpatient hospital services furnished to Medicare beneficiaries 
by a rehabilitation hospital or rehabilitation unit that meets the 
conditions of Sec. 412.604.
    (3) This part implements section 123 of Public Law 106-113, which 
provides for the establishment of a prospective payment system for the 
costs of inpatient hospital services furnished to Medicare beneficiaries 
by long-term care hospitals described in section 1886(d)(1)(B)(iv) of 
the Act, for cost reporting periods beginning on or after October 1, 
2002. This part also reflects the provisions of section 307 of Public 
Law 106-554, which state that the Secretary shall examine and may 
provide for appropriate adjustments to the long-term care hospital 
prospective payment system, including adjustments to diagnosis-related 
group (DRG) weights, area wage adjustments, geographic reclassification, 
outlier adjustments, updates, and disproportionate share adjustments 
consistent with section 1886(d)(5)(F) of the Act.
    (b) Summary of content. (1) This subpart describes the basis of 
payment for inpatient hospital services under the prospective payment 
systems specified in paragraph (a)(1) of this section and sets forth the 
general basis of these systems.
    (2) Subpart B sets forth the classifications of hospitals that are 
included in and excluded from the prospective payment systems specified 
in paragraph (a)(1) of this section, and sets forth requirements 
governing the inclusion or exclusion of hospitals in the systems as a 
result of changes in their classification.
    (3) Subpart C sets forth certain conditions that must be met for a 
hospital to receive payment under the prospective payment systems 
specified in paragraph (a)(1) of this section.
    (4) Subpart D sets forth the basic methodology by which prospective 
payment rates for inpatient operating costs are determined under the 
prospective payment system specified in paragraph (a)(1) of this 
section.

[[Page 371]]

    (5) Subpart E describes the transition ratesetting methods that are 
used to determine transition payment rates for inpatient operating costs 
during the first 4 years of the prospective payment system specified in 
paragraph (a)(1) of this section.
    (6) Subpart F sets forth the methodology for determining payments 
for outlier cases under the prospective payment system specified in 
paragraph (a)(1) of this section.
    (7) Subpart G sets forth rules for special treatment of certain 
facilities under the prospective payment system specified in paragraph 
(a)(1) of this section for inpatient operating costs.
    (8) Subpart H describes the types, amounts, and methods of payment 
to hospitals under the prospective payment system specified in paragraph 
(a)(1) of this section for inpatient operating costs.
    (9) Subpart K describes how the prospective payment system specified 
in paragraph (a)(1) of this section for inpatient operating costs is 
implemented for hospitals located in Puerto Rico.
    (10) Subpart L sets forth the procedures and criteria concerning 
applications from hospitals to the Medicare Geographic Classification 
Review Board for geographic redesignation under the prospective payment 
systems specified in paragraph (a)(1) of this section.
    (11) Subpart M describes how the prospective payment system 
specified in paragraph (a)(1) of this section for inpatient capital-
related costs is implemented effective with reporting periods beginning 
on or after October 1, 1991.
    (12) Subpart O of this part describes the prospective payment system 
specified in paragraph (a)(3) of this section for long-term care 
hospitals and sets forth the general methodology for paying for the 
operating and capital-related costs of inpatient hospital services 
furnished by long-term care hospitals, effective with cost reporting 
periods beginning on or after October 1, 2002.
    (13) Subpart P describes the prospective payment system specified in 
paragraph (a)(2) of this section for rehabilitation hospitals and 
rehabilitation units and sets forth the general methodology for paying 
for the operating and capital-related costs of inpatient hospital 
services furnished by rehabilitation hospitals and rehabilitation units 
effective with cost reporting periods beginning on or after January 1, 
2002.

[66 FR 41385, Aug. 7, 2001, as amended at 67 FR 56048, Aug. 30, 2002]



Sec. 412.2  Basis of payment.

    (a) Payment on a per discharge basis. Under both the inpatient 
operating and inpatient capital-related prospective payment systems, 
hospitals are paid a predetermined amount per discharge for inpatient 
hospital services furnished to Medicare beneficiaries. The prospective 
payment rate for each discharge (as defined in Sec. 412.4) is determined 
according to the methodology described in subpart D, E, or G of this 
part, as appropriate, for operating costs, and according to the 
methodology described in subpart M of this part for capital-related 
costs. An additional payment is made for both inpatient operating and 
inpatient capital-related costs, in accordance with subpart F of this 
part, for cases that are extraordinarily costly to treat.
    (b) Payment in full. (1) The prospective payment amount paid for 
inpatient hospital services is the total Medicare payment for the 
inpatient operating costs (as described in paragraph (c) of this 
section) and the inpatient capital-related costs (as described in 
paragraph (d) of this section) incurred in furnishing services covered 
by the Medicare program.
    (2) The full prospective payment amount, as determined under subpart 
D, E, or G and under subpart M of this part, is made for each stay 
during which there is at least one Medicare payable day of care. Payable 
days of care, for purposes of this paragraph include the following:
    (i) Limitation of liability days payable under the payment 
procedures for custodial care and services that are not reasonable and 
necessary as specified in Sec. 411.400 of this chapter.
    (ii) Guarantee of payment days, as authorized under Sec. 409.68 of 
this chapter, for inpatient hospital services furnished to an individual 
whom the hospital has reason to believe is entitled

[[Page 372]]

to Medicare benefits at the time of admission.
    (c) Inpatient operating costs. The prospective payment system 
provides a payment amount for inpatient operating costs, including--
    (1) Operating costs for routine services (as described in 
Sec. 413.53(b) of this chapter), such as the costs of room, board, and 
routine nursing services;
    (2) Operating costs for ancillary services, such as radiology and 
laboratory services furnished to hospital inpatients;
    (3) Special care unit operating costs (intensive care type unit 
services, as described in Sec. 413.53(b) of this chapter);
    (4) Malpractice insurance costs related to services furnished to 
inpatients; and
    (5) Preadmission services otherwise payable under Medicare Part B 
furnished to a beneficiary during the 3 calendar days immediately 
preceding the date of the beneficiary's admission to the hospital that 
meet the following conditions:
    (i) The services are furnished by the hospital or by an entity 
wholly owned or operated by the hospital. An entity is wholly owned by 
the hospital if the hospital is the sole owner of the entity. An entity 
is wholly operated by a hospital if the hospital has exclusive 
responsibility for conducting and overseeing the entity's routine 
operations, regardless of whether the hospital also has policymaking 
authority over the entity.
    (ii) For services furnished after January 1, 1991, the services are 
diagnostic (including clinical diagnostic laboratory tests).
    (iii) For services furnished on or after October 1, 1991, the 
services are furnished in connection with the principal diagnosis that 
requires the beneficiary to be admitted as an inpatient and are not the 
following:
    (A) Ambulance services.
    (B) Maintenance renal dialysis.
    (d) Inpatient capital-related costs. For cost reporting periods 
beginning on or after October 1, 1991, the capital prospective payment 
system provides a payment amount for inpatient hospital capital-related 
costs as described in part 413, subpart G of this chapter.
    (e) Excluded costs. The following inpatient hospital costs are 
excluded from the prospective payment amounts and are paid for on a 
reasonable cost basis:
    (1) Capital-related costs for cost reporting periods beginning 
before October 1, 1991, and an allowance for return on equity, as 
described in Secs. 413.130 and 413.157, respectively, of this chapter.
    (2) Direct medical education costs for approved nursing and allied 
health education programs as described in Sec. 413.85 of this chapter.
    (3) Costs for direct medical and surgical services of physicians in 
teaching hospitals exercising the election in Sec. 405.521 of this 
chapter.
    (4) The acquisition costs of hearts, kidneys, livers, lungs, 
pancreas, and intestines (or multivisceral organs) incurred by approved 
transplantation centers.
    (5) The costs of qualified nonphysician anesthetists' services, as 
described in Sec. 412.113(c).
    (f) Additional payments to hospitals. In addition to payments based 
on the prospective payment system rates for inpatient operating and 
inpatient capital-related costs, hospitals receive payments for the 
following:
    (1) Outlier cases, as described in subpart F of this part.
    (2) The indirect costs of graduate medical education, as specified 
in subparts F and G of this part and in Sec. 412.105 for inpatient 
operating costs and in Sec. 412.322 for inpatient capital-related costs.
    (3) Costs excluded from the prospective payment rates under 
paragraph (e) of this section, as provided in Sec. 412.115.
    (4) Bad debts of Medicare beneficiaries, as provided in 
Sec. 412.115(a).
    (5) ESRD beneficiary discharges if such discharges are ten percent 
or more of the hospital's total Medicare discharges, as provided in 
Sec. 412.104.
    (6) Serving a disproportionate share of low-income patients, as 
provided in Sec. 412.106 for inpatient operating costs and Sec. 412.320 
for inpatient capital-related costs.
    (7) The direct graduate medical education costs for approved 
residency programs in medicine, osteopathy, dentistry, and podiatry as 
described in Sec. 413.86 of this chapter.

[[Page 373]]

    (8) For discharges on or after June 19, 1990, and before October 1, 
1994, and for discharges on or after October 1, 1997, a payment amount 
per unit for blood clotting factor provided to Medicare inpatients who 
have hemophilia.
    (9) Special additional payment for certain new technology as 
specified in Secs. 412.87 and 412.88 of Subpart F.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 
52 FR 33057, Sept. 1, 1987; 53 FR 38526, Sept. 30, 1988; 55 FR 15173, 
Apr. 20, 1990; 55 FR 36068, Sept. 4, 1990; 57 FR 33897, July 31, 1992; 
57 FR 39819, Sept. 1, 1992; 57 FR 46510, Oct. 9, 1992; 58 FR 46337, 
Sept. 1, 1993; 59 FR 1658, Jan. 12, 1994; 59 FR 45396, Sept. 1, 1994; 62 
FR 46025, Aug. 29, 1997; 63 FR 6868, Feb. 11, 1998; 64 FR 41540, July 
30, 1999; 65 FR 47106, Aug. 1, 2000; 66 FR 39933, Aug. 1, 2001; 66 FR 
46924, Sept. 7, 2001]



Sec. 412.4  Discharges and transfers.

    (a) Discharges. Subject to the provisions of paragraphs (b) and (c) 
of this section, a hospital inpatient is considered discharged from a 
hospital paid under the prospective payment system when--
    (1) The patient is formally released from the hospital; or
    (2) The patient dies in the hospital.
    (b) Transfer--Basic rule. A discharge of a hospital inpatient is 
considered to be a transfer for purposes of payment under this part if 
the discharge is made under any of the following circumstances:
    (1) From a hospital to the care of another hospital that is--
    (i) Paid under the prospective payment system; or
    (ii) Excluded from being paid under the prospective payment system 
because of participation in an approved Statewide cost control program 
as described in subpart C of part 403 of this chapter.
    (2) From one inpatient area or unit of a hospital to another 
inpatient area or unit of the hospital that is paid under the 
prospective payment system.
    (c) Transfers--Special 10 DRG rule. For discharges occurring on or 
after October 1, 1998, a discharge of a hospital inpatient is considered 
to be a transfer for purposes of this part when the patient's discharge 
is assigned, as described in Sec. 412.60(c), to one of the qualifying 
diagnosis-related groups (DRGs) listed in paragraph (d) of this section 
and the discharge is made under any of the following circumstances--
    (1) To a hospital or distinct part hospital unit excluded from the 
prospective payment system under subpart B of this part.
    (2) To a skilled nursing facility.
    (3) To home under a written plan of care for the provision of home 
health services from a home health agency and those services begin 
within 3 days after the date of discharge.
    (d) Qualifying DRGs. The qualifying DRGs for purposes of paragraph 
(c) of this section are DRGs 14, 113, 209, 210, 211, 236, 263, 264, 429, 
and 483.
    (e) Payment for discharges. The hospital discharging an inpatient 
(under paragraph (a) of this section) is paid in full, in accordance 
with Sec. 412.2(b).
    (f) Payment for transfers. (1) General rule. Except as provided in 
paragraph (f)(2) or (f)(3) of this section, a hospital that transfers an 
inpatient under the circumstances described in paragraph (b)(1) or (c) 
of this section, is paid a graduated per diem rate for each day of the 
patient's stay in that hospital, not to exceed the amount that would 
have been paid under subparts D and M of this part if the patient had 
been discharged to another setting. The per diem rate is determined by 
dividing the appropriate prospective payment rate (as determined under 
subparts D and M of this part) by the geometric mean length of stay for 
the specific DRG to which the case is assigned. Payment is graduated by 
paying twice the per diem amount for the first day of the stay, and the 
per diem amount for each subsequent day, up to the full DRG payment.
    (2) Special rule for DRGs 209, 210, and 211. A hospital that 
transfers an inpatient under the circumstances described in paragraph 
(c) of this section and the transfer is assigned to DRGs 209, 210 or 211 
is paid as follows:
    (i) 50 percent of the appropriate prospective payment rate (as 
determined under subparts D and M of this part) for the first day of the 
stay; and
    (ii) 50 percent of the amount calculated under paragraph (f)(1) of 
this section for each day of the stay, up to the full DRG payment.

[[Page 374]]

    (3) Transfer assigned to DRG 385. If a transfer is classified into 
DRG 385 (Neonates, died or transferred) the transferring hospital is 
paid in accordance with Sec. 412.2(b).
    (4) Outliers. Effective with discharges occurring on or after 
October 1, 1984, a transferring hospital may qualify for an additional 
payment for extraordinarily high-cost cases that meet the criteria for 
cost outliers as described in subpart F of this part.

[63 FR 41003, July 31, 1998, as amended at 65 FR 47106, Aug. 1, 2000; 67 
FR 50111, Aug. 1, 2002]



Sec. 412.6  Cost reporting periods subject to the prospective payment systems.

    (a) Initial cost reporting period for each prospective payment 
system. (1) Each subject hospital is paid under the prospective payment 
system for operating costs for inpatient hospital services effective 
with the hospital's first cost reporting period beginning on or after 
October 1, 1983 and for inpatient capital-related costs effective with 
the hospital's first cost reporting period beginning on or after October 
1, 1991.
    (2) The hospital is paid the applicable prospective payment rate for 
inpatient operating costs and capital-related costs for each discharge 
occurring on or after the first day of its first cost reporting period 
subject to the applicable prospective payment system.
    (3) If a discharged beneficiary was admitted to the hospital before 
the first day of the hospital's first cost reporting period subject to 
the prospective payment system for inpatient operating costs, the 
reasonable costs of services furnished before that day are paid under 
the cost reimbursement provisions of part 413 of this chapter. For such 
discharges, the amount otherwise payable under the applicable 
prospective payment rate is reduced by the amount paid on a reasonable 
cost basis for inpatient hospital services furnished to that beneficiary 
during the hospital stay. If the amount paid under reasonable cost 
exceeds the inpatient operating prospective payment amount, the 
reduction is limited to the inpatient operating prospective payment 
amount.
    (b) Changes in cost reporting periods. CMS recognizes a change in a 
hospital's cost reporting period made after November 30, 1982 only if 
the change has been requested in writing by the hospital and approved by 
the intermediary in accordance with Sec. 413.24(f)(3) of this chapter.

[57 FR 39819, Sept. 1, 1992]



Sec. 412.8  Publication of schedules for determining prospective payment rates.

    (a) Initial prospective payment rates--(1) For inpatient operating 
costs. Initial prospective payment rates for inpatient operating costs 
(for the period October 1, 1983 through September 30, 1984) were 
determined in accordance with documents published in the Federal 
Register on September 1, 1983 (48 FR 39838), and January 3, 1984 (49 FR 
324).
    (2) For inpatient capital-related costs. Initial prospective payment 
rates for inpatient capital-related costs (for the period October 1, 
1991 through September 30, 1992) were determined in accordance with the 
final rule published in the Federal Register on August 30, 1991 (56 FR 
43196).
    (b) Annual publication of schedule for determining prospective 
payment rates. (1) CMS proposes changes in the methods, amounts, and 
factors used to determine inpatient prospective payment rates in a 
Federal Register document published for public comment not later than 
the April 1 before the beginning of the Federal fiscal year in which the 
proposed changes would apply.
    (2) CMS publishes a Federal Register document setting forth final 
methods, amounts, and factors for determining inpatient prospective 
payment rates not later than the August 1 before the Federal fiscal year 
in which the rates would apply.

[57 FR 39820, Sept. 1, 1992, as amended at 62 FR 46025, Aug. 29, 1997]



Sec. 412.10  Changes in the DRG classification system.

    (a) General rule. CMS issues changes in the DRG classification 
system in a Federal Register notice at least annually. Except as 
specified in paragraphs (c) and (d) of this section, the DRG changes are 
effective prospectively with discharges occurring on or

[[Page 375]]

after the same date the payment rates are effective.
    (b) Basis for changes in the DRG classification system. All changes 
in the DRG classification system are made using the principles 
established for the DRG system. This means that cases are classified so 
each DRG is--
    (1) Clinically coherent; and
    (2) Embraces an acceptable range of resource consumption.
    (c) Interim coverage changes--(1) Criteria. CMS makes interim 
changes to the DRG classification system during the Federal fiscal year 
to incorporate items and services newly covered under Medicare.
    (2) Implementation and effective date. CMS issues interim coverage 
changes through its administrative issuance system and makes the change 
effective as soon as is administratively feasible.
    (3) Publication for comment. CMS publishes any change made under 
paragraph (c)(1) of this section in the next annual notice of changes to 
the DRG classification system published in accordance with paragraph (a) 
of this section.
    (d) Interim changes to correct omissions and inequities--(1) 
Criteria. CMS makes interim changes to the DRG classification system to 
correct a serious omission or inequity in the system only if failure to 
make the changes would have--
    (i) A potentially substantial adverse impact on the health and 
safety of beneficiaries; or
    (ii) A significant and unwarranted fiscal impact on hospitals or the 
Medicare program.
    (2) Publication and effective date. CMS publishes these changes in 
the Federal Register in a final notice with comment period with a 
prospective effective date. The change is also published for public 
information in the next annual notice of changes to the DRG 
classification system published in accordance with paragraph (a) of this 
section.
    (e) Review by ProPAC. Changes published annually in accordance with 
paragraph (a) of this section are subject to review and comment by 
ProPAC upon publication. Interim changes to the DRG classification 
system that are made in accordance with paragraphs (c) and (d) of this 
section are subject to review by ProPAC before implementation.

[50 FR 35688, Sept. 3, 1985, as amended at 51 FR 31496, Sept. 3, 1986; 
57 FR 39820, Sept. 1, 1992]



     Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and Inpatient 
                          Capital-Related Costs



Sec. 412.20  Hospital services subject to the prospective payment systems.

    (a) Except for services described in paragraphs (b), (c), and (d) of 
this section, all covered inpatient hospital services furnished to 
beneficiaries during subject cost reporting periods are paid under the 
prospective payment systems specified in Sec. 412.1(a)(1).
    (b) Effective for cost reporting periods beginning on or after 
January 1, 2002, covered inpatient hospital services furnished to 
Medicare beneficiaries by a rehabilitation hospital or rehabilitation 
unit that meet the conditions of Sec. 412.604 are paid under the 
prospective payment system described in subpart P of this part.
    (c) Effective for cost reporting periods beginning on or after 
October 1, 2002, covered inpatient hospital services furnished to 
Medicare beneficiaries by a long-term care hospital that meets the 
conditions for payment of Secs. 412.505 through 412.511 are paid under 
the prospective payment system described in subpart O of this part.
    (d) Inpatient hospital services will not be paid under the 
prospective payment systems specified in Sec. 412.1(a)(1) under any of 
the following circumstances:
    (1) The services are furnished by a hospital (or hospital unit) 
explicitly excluded from the prospective payment systems under 
Secs. 412.23, 412.25, 412.27, and 412.29.
    (2) The services are emergency services furnished by a 
nonparticipating hospital in accordance with Sec. 424.103 of this 
chapter.
    (3) The services are paid for by an HMO or competitive medical plan 
(CMP) that elects not to have CMS make payments directly to a hospital

[[Page 376]]

for inpatient hospital services furnished to the HMO's or CMP's Medicare 
enrollees, as provided in Sec. 417.240(d) and Sec. 417.586 of this 
chapter.

[50 FR 12741, Mar. 29, 1985, as amended at 53 FR 6648, Mar. 2, 1988; 57 
FR 39820, Sept. 1, 1992; 59 FR 45400, Sept. 1, 1994; 66 FR 41386, Aug. 
7, 2001; 67 FR 56048, Aug. 30, 2002]



Sec. 412.22  Excluded hospitals and hospital units: General rules.

    (a) Criteria. Subject to the criteria set forth in paragraph (e) of 
this section, a hospital is excluded from the prospective payment 
systems specified in Sec. 412.1(a)(1) of this part if it meets the 
criteria for one or more of the excluded classifications described in 
Sec. 412.23.
    (b) Cost reimbursement. Except for those hospitals specified in 
paragraph (c) of this section and Secs. 412.20(b) and (c), all excluded 
hospitals (and excluded hospital units, as described in Secs. 412.23 
through 412.29) are reimbursed under the cost reimbursement rules set 
forth in part 413 of this subchapter, and are subject to the ceiling on 
the rate of hospital cost increases described in Sec. 413.40 of this 
subchapter.
    (c) Special payment provisions. The following classifications of 
hospitals are paid under special provisions and therefore are not 
generally subject to the cost reimbursement or prospective payment rules 
of this chapter.
    (1) Veterans Administration hospitals.
    (2) Hospitals reimbursed under State cost control systems approved 
under part 403 of this chapter.
    (3) Hospitals reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-1) 
or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1 (note)).
    (4) Nonparticipating hospitals furnishing emergency services to 
Medicare beneficiaries.
    (d) Changes in hospitals' status. For purposes of exclusion from the 
prospective payment systems under this subpart, the status of each 
currently participating hospital (excluded or not excluded) is 
determined at the beginning of each cost reporting period and is 
effective for the entire cost reporting period. Any changes in the 
status of the hospital are made only at the start of a cost reporting 
period.
    (e) Hospitals within hospitals. Except as provided in paragraph (f) 
of this section, for cost reporting periods beginning on or after 
October 1, 1997, a hospital that occupies space in a building also used 
by another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital, must meet the 
following criteria in order to be excluded from the prospective payment 
systems specified in Sec. 412.1(a)(1):
    (1) Separate governing body. The hospital has a governing body that 
is separate from the governing body of the hospital occupying space in 
the same building or on the same campus. The hospital's governing body 
is not under the control of the hospital occupying space in the same 
building or on the same campus, or of any third entity that controls 
both hospitals.
    (2) Separate chief medical officer. The hospital has a single chief 
medical officer who reports directly to the governing body and who is 
responsible for all medical staff activities of the hospital. The chief 
medical officer of the hospital is not employed by or under contract 
with either the hospital occupying space in the same building or on the 
same campus or any third entity that controls both hospitals.
    (3) Separate medical staff. The hospital has a medical staff that is 
separate from the medical staff of the hospital occupying space in the 
same building or on the same campus. The hospital's medical staff is 
directly accountable to the governing body for the quality of medical 
care provided in the hospital, and adopts and enforces bylaws governing 
medical staff activities, including criteria and procedures for 
recommending to the governing body the privileges to be granted to 
individual practitioners.
    (4) Chief executive officer. The hospital has a single chief 
executive officer through whom all administrative authority flows, and 
who exercises control and surveillance over all administrative 
activities of the hospital. The chief executive officer is not employed 
by, or under contract with, either the hospital occupying space in the 
same building or on the same campus or any

[[Page 377]]

third entity that controls both hospitals.
    (5) Performance of basic hospital functions. The hospital meets one 
of the following criteria:
    (i) The hospital performs the basic functions specified in 
Secs. 482.21 through 482.27, 482.30, and 482.42 of this chapter through 
the use of employees or under contracts or other agreements with 
entities other than the hospital occupying space in the same building or 
on the same campus, or a third entity that controls both hospitals. Food 
and dietetic services and housekeeping, maintenance, and other services 
necessary to maintain a clean and safe physical environment could be 
obtained under contracts or other agreements with the hospital occupying 
space in the same building or on the same campus, or with a third entity 
that controls both hospitals.
    (ii) For the same period of at least 6 months used to determine 
compliance with the criterion regarding the age of patients in 
Sec. 412.23(d)(2) or the length-of-stay criterion in Sec. 412.23(e)(2), 
or for hospitals other than children's or long-term care hospitals, for 
a period of at least 6 months immediately preceding the first cost 
reporting period for which exclusion is sought, the cost of the services 
that the hospital obtained under contracts or other agreements with the 
hospital occupying space in the same building or on the same campus, or 
with a third entity that controls both hospitals, is no more than 15 
percent of the hospital's total inpatient operating costs, as defined in 
Sec. 412.2(c). For purposes of this paragraph (e)(5)(ii), however, the 
costs of preadmission services are those specified under 
Sec. 413.40(c)(2) rather than those specified under Sec. 412.2(c)(5).
    (iii) For the same period of at least 6 months used to determine 
compliance with the criterion regarding the age of inpatients in 
Sec. 412.23(d)(2) or the length-of-stay criterion in Sec. 412.23(e)(2), 
or for hospitals other than children's or long-term care hospitals, for 
the period of at least 6 months immediately preceding the first cost 
reporting period for which exclusion is sought, the hospital has an 
inpatient population of whom at least 75 percent were referred to the 
hospital from a source other than another hospital occupying space in 
the same building or on the same campus.
    (6) Notification of co-located status. A long-term care hospital 
that occupies space in a building used by another hospital, or in one or 
more entire buildings located on the same campus as buildings used by 
another hospital and that meets the criteria of paragraphs (e)(1) 
through (e)(5) of this section must notify its fiscal intermediary and 
CMS in writing of its co-location within 60 days of its first cost 
reporting period that begins on or after October 1, 2002.
    (f) Application for certain hospitals. If a hospital was excluded 
from the prospective payment systems under the provisions of this 
section on or before September 30, 1995, and at that time occupied space 
in a building also used by another hospital, or in one or more buildings 
located on the same campus as buildings used by another hospital, the 
criteria in paragraph (e) of this section do not apply to the hospital.
    (g) Definition of control. For purposes of this section, control 
exists if an individual or an organization has the power, directly or 
indirectly, significantly to influence or direct the actions or policies 
of an organization or institution.
    (h) Satellite facilities. (1) For purposes of paragraphs (h)(2) 
through (h)(4) of this section, a satellite facility is a part of a 
hospital that provides inpatient services in a building also used by 
another hospital, or in one or more entire buildings located on the same 
campus as buildings used by another hospital.
    (2) Except as provided in paragraph (h)(3) of this section, 
effective for cost reporting periods beginning on or after October 1, 
1999, a hospital that has a satellite facility must meet the following 
criteria in order to be excluded from the acute care hospital inpatient 
prospective payment systems for any period:
    (i) In the case of a hospital (other than a children's hospital) 
that was excluded from the prospective payment systems for the most 
recent cost reporting period beginning before October 1, 1997, the 
hospital's number of State-licensed and Medicare-certified beds, 
including those at the satellite

[[Page 378]]

facilities, does not exceed the hospital's number of State-licensed and 
Medicare-certified beds on the last day of the hospital's last cost 
reporting period beginning before October 1, 1997.
    (ii) The satellite facility independently complies with--
    (A) For psychiatric hospitals, the requirements under 
Sec. 412.23(a);
    (B) For rehabilitation hospitals, the requirements under 
Sec. 412.23(b)(2);
    (C) For children's hospitals, the requirements under 
Sec. 412.23(d)(2); or
    (D) For long-term care hospitals, the requirements under 
Secs. 412.23(e)(1) through (e)(3)(i).
    (iii) The satellite facility meets all of the following 
requirements:
    (A) Effective for cost reporting periods beginning on or after 
October 1, 2002, it is not under the control of the governing body or 
chief executive officer of the hospital in which it is located, and it 
furnishes inpatient care through the use of medical personnel who are 
not under the control of the medical staff or chief medical officer of 
the hospital in which it is located.
    (B) It maintains admission and discharge records that are separately 
identified from those of the hospital in which it is located and are 
readily available.
    (C) It has beds that are physically separate from (that is, not 
commingled with) the beds of the hospital in which it is located.
    (D) It is serviced by the same fiscal intermediary as the hospital 
of which it is a part.
    (E) It is treated as a separate cost center of the hospital of which 
it is a part.
    (F) For cost reporting and apportionment purposes, it uses an 
accounting system that properly allocates costs and maintains adequate 
statistical data to support the basis of allocation.
    (G) It reports its costs on the cost report of the hospital of which 
it is a part, covering the same fiscal period and using the same method 
of apportionment as the hospital of which it is a part.
    (3) Except as provided in paragraph (h)(4) of this section, the 
provisions of paragraph (h)(2) of this section do not apply to--
    (i) Any hospital structured as a satellite facility on September 30, 
1999, and excluded from the prospective payment systems on that date, to 
the extent the hospital continues operating under the same terms and 
conditions, including the number of beds and square footage considered, 
for purposes of Medicare participation and payment, to be part of the 
hospital, in effect on September 30, 1999; or
    (ii) Any hospital excluded from the prospective payment systems 
under Sec. 412.23(e)(2).
    (4) In applying the provisions of paragraph (h)(3) of this section, 
any hospital structured as a satellite facility on September 30, 1999, 
may increase or decrease the square footage of the satellite facility or 
may decrease the number of beds in the satellite facility if these 
changes are made necessary by relocation of a facility--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.
    (5) Notification of co-located status. A satellite of a long-term 
care hospital that occupies space in a building used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital and that meets the criteria of 
paragraphs (h)(1) through (h)(4) of this section must notify its fiscal 
intermediary and CMS in writing of its co-location within 60 days of its 
first cost reporting period beginning on or after October 1, 2002.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 
57 FR 39820, Sept. 1, 1994; 62 FR 46026, Aug. 29, 1997; 63 FR 26357, May 
12, 1998; 64 FR 41540, July 30, 1999; 66 FR 41386, Aug. 7, 2001; 67 FR 
50111, Aug. 1, 2002; 67 FR 56048, Aug. 30, 2002]



Sec. 412.23  Excluded hospitals: Classifications.

    Hospitals that meet the requirements for the classifications set 
forth in this section are not reimbursed under the prospective payment 
systems specified in Sec. 412.1(a)(1):
    (a) Psychiatric hospitals. A psychiatric hospital must--

[[Page 379]]

    (1) Be primarily engaged in providing, by or under the supervision 
of a psychiatrist, psychiatric services for the diagnosis and treatment 
of mentally ill persons; and
    (2) Meet the conditions of participation for hospitals and special 
conditions of participation for psychiatric hospitals set forth in part 
482 of this chapter.
    (b) Rehabilitation hospitals. A rehabilitation hospital must meet 
the following requirements to be excluded from the prospective payment 
systems specified in Sec. 412.1(a)(1) and to be paid under the 
prospective payment system specified in Sec. 412.1(a)(2) and in Subpart 
P of this part:
    (1) Have a provider agreement under part 489 of this chapter to 
participate as a hospital.
    (2) Except in the case of a newly participating hospital seeking 
classification under this paragraph as a rehabilitation hospital for its 
first 12-month cost reporting period, as described in paragraph (b)(8) 
of this section, show that during its most recent 12-month cost 
reporting period, it served an inpatient population of whom at least 75 
percent required intensive rehabilitative services for treatment of one 
or more of the following conditions:
    (i) Stroke.
    (ii) Spinal cord injury.
    (iii) Congenital deformity.
    (iv) Amputation.
    (v) Major multiple trauma.
    (vi) Fracture of femur (hip fracture).
    (vii) Brain injury.
    (viii) Polyarthritis, including rheumatoid arthritis.
    (ix) Neurological disorders, including multiple sclerosis, motor 
neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's 
disease.
    (x) Burns.
    (3) Have in effect a preadmission screening procedure under which 
each prospective patient's condition and medical history are reviewed to 
determine whether the patient is likely to benefit significantly from an 
intensive inpatient hospital program or assessment.
    (4) Ensure that the patients receive close medical supervision and 
furnish, through the use of qualified personnel, rehabilitation nursing, 
physical therapy, and occupational therapy, plus, as needed, speech 
therapy, social or psychological services, and orthotic and prosthetic 
services.
    (5) Have a director of rehabilitation who--
    (i) Provides services to the hospital and its inpatients on a full-
time basis;
    (ii) Is a doctor of medicine or osteopathy;
    (iii) Is licensed under State law to practice medicine or surgery; 
and
    (iv) Has had, after completing a one-year hospital internship, at 
least two years of training or experience in the medical-management of 
inpatients requiring rehabilitation services.
    (6) Have a plan of treatment for each inpatient that is established, 
reviewed, and revised as needed by a physician in consultation with 
other professional personnel who provide services to the patient.
    (7) Use a coordinated multidisciplinary team approach in the 
rehabilitation of each inpatient, as documented by periodic clinical 
entries made in the patient's medical record to note the patient's 
status in relationship to goal attainment, and that team conferences are 
held at least every two weeks to determine the appropriateness of 
treatment.
    (8) A hospital that seeks classification under this paragraph as a 
rehabilitation hospital for the first full 12-month cost reporting 
period that occurs after it becomes a Medicare-participating hospital 
may provide a written certification that the inpatient population it 
intends to serve meets the requirements of paragraph (b)(2) of this 
section, instead of showing that it has treated that population during 
its most recent 12-month cost reporting period. The written 
certification is also effective for any cost reporting period of not 
less than one month and not more than 11 months occurring between the 
date the hospital began participating in Medicare and the start of the 
hospital's regular 12-month cost reporting period.
    (9) For cost reporting periods beginning on or after October 1, 
1991, if a hospital is excluded from the prospective payment systems 
specified in Sec. 412.1(a)(1) or is paid under the prospective payment 
system specified in

[[Page 380]]

Sec. 412.1(a)(2) for a cost reporting period under paragraph (b)(8) of 
this section, but the inpatient population it actually treated during 
that period does not meet the requirements of paragraph (b)(2) of this 
section, we adjust payments to the hospital retroactively in accordance 
with the provisions in Sec. 412.130.
    (c) [Reserved]
    (d) Children's hospitals. A children's hospital must--
    (1) Have a provider agreement under part 489 of this chapter to 
participate as a hospital; and
    (2) Be engaged in furnishing services to inpatients who are 
predominantly individuals under the age of 18.
    (e) Long-term care hospitals. A long-term care hospital must meet 
the requirements of paragraph (e)(1) and (e)(2) of this section and, 
where applicable, the additional requirements of Sec. 412.22(e), to be 
excluded from the prospective payment systems specified in 
Sec. 412.1(a)(1) and to be paid under the prospective payment system 
specified in Sec. 412.1(a)(3) and in Subpart O of this part.
    (1) Provider agreements. The hospital must have a provider agreement 
under Part 489 of this chapter to participate as a hospital; and
    (2) Average length of stay. (i) The hospital must have an average 
Medicare inpatient length of stay of greater than 25 days (which 
includes all covered and noncovered days of stay of Medicare patients) 
as calculated under paragraph (e)(3) of this section; or
    (ii) For cost reporting periods beginning on or after August 5, 
1997, a hospital that was first excluded from the prospective payment 
system under this section in 1986 meets the length of stay criterion if 
it has an average inpatient length of stay for all patients, including 
both Medicare and non-Medicare inpatients, of greater than 20 days and 
demonstrates that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in fiscal year 
1997 have a principal diagnosis that reflects a finding of neoplastic 
disease as defined in paragraph (f)(1)(iv) of this section.
    (3) Calculation of average length of stay. (i) Subject to the 
provisions of paragraphs (e)(3)(ii) and (e)(3)(iii) of this section, the 
average Medicare inpatient length of stay is calculated by dividing the 
total number of covered and noncovered days of stay of Medicare 
inpatients (less leave or pass days) by the number of total Medicare 
discharges for the hospital's most recent complete cost reporting 
period.
    (ii) If a change in the hospital's Medicare average length of stay 
is indicated, the calculation is made by the same method for the 
immediately preceding 6-month period.
    (iii) If a hospital has undergone a change of ownership (as 
described in Sec. 489.18 of this chapter) at the start of a cost 
reporting period or at any time within the preceding 6 months, the 
hospital may be excluded from the prospective payment system as a long-
term care hospital for a cost reporting period if, for the 6 months 
immediately preceding the start of the period (including time before the 
change of ownership), the hospital has the required Medicare average 
length of stay, continuously operated as a hospital, and continuously 
participated as a hospital in Medicare.
    (4) Definition of new long-term care hospital. For purposes of 
payment under the long-term care hospital prospective payment system 
under Subpart O of this part, a new long-term care hospital is a 
provider of inpatient hospital services that meets the qualifying 
criteria in paragraphs (e)(1) and (e)(2) of this section and, under 
present or previous ownership (or both), its first cost reporting period 
as a LTCH begins on or after October 1, 2002.
    (f) Cancer hospitals--(1) General rule. Except as provided in 
paragraph (f)(2) of this section, if a hospital meets the following 
criteria, it is classified as a cancer hospital and is excluded from the 
prospective payment systems beginning with its first cost reporting 
period beginning on or after October 1, 1989. A hospital classified 
after December 19, 1989, is excluded beginning with its first cost 
reporting period beginning after the date of its classification.
    (i) It was recognized as a comprehensive cancer center or clinical 
cancer research center by the National Cancer Institute of the National 
Institutes of Health as of April 20, 1983.

[[Page 381]]

    (ii) It is classified on or before December 31, 1990, or, if on 
December 19, 1989, the hospital was located in a State operating a 
demonstration project under section 1814(b) of the Act, the 
classification is made on or before December 31, 1991.
    (iii) It demonstrates that the entire facility is organized 
primarily for treatment of and research on cancer (that is, the facility 
is not a subunit of an acute general hospital or university-based 
medical center).
    (iv) It shows that at least 50 percent of its total discharges have 
a principal diagnosis that reflects a finding of neoplastic disease. 
(The principal diagnosis for this purpose is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital. For the purposes of meeting 
this definition, only discharges with ICD-9-CM principal diagnosis codes 
of 140 through 239, V58.0, V58.1, V66.1, V66.2, or 990 will be 
considered to reflect neoplastic disease.)
    (2) Alternative. A hospital that applied for and was denied, on or 
before December 31, 1990, classification as a cancer hospital under the 
criteria set forth in paragraph (f)(1) of this section is classified as 
a cancer hospital and is excluded from the prospective payment systems 
beginning with its first cost reporting period beginning on or after 
January 1, 1991, if it meets the criterion set forth in paragraph 
(f)(1)(i) of this section and the hospital is--
    (i) Licensed for fewer than 50 acute care beds as of August 5, 1997;
    (ii) Is located in a State that as of December 19, 1989, was not 
operating a demonstration project under section 1814(b) of the Act; and
    (iii) Demonstrates that, for the 4-year period ending on December 
31, 1996, at least 50 percent of its total discharges have a principal 
diagnosis that reflects a finding of neoplastic disease as defined in 
paragraph (f)(1)(iv) of this section.
    (g) Hospitals outside the 50 States, the District of Columbia, or 
Puerto Rico. A hospital is excluded from the prospective payment systems 
if it is not located in one of the fifty States, the District of 
Columbia, or Puerto Rico.
    (h) Hospitals reimbursed under special arrangements. A hospital must 
be excluded from prospective payment for inpatient hospital services if 
it is reimbursed under special arrangement as provided in 
Sec. 412.22(c).
    (i) Changes in classification of hospitals. For purposes of 
exclusions from the prospective payment system, the classification of a 
hospital is effective for the hospital's entire cost reporting period. 
Any changes in the classification of a hospital are made only at the 
start of a cost reporting period.

[50 FR 12741, Mar. 29, 1985, as amended at 50 FR 35688, Sept. 3, 1985; 
51 FR 22041, June 17, 1986; 51 FR 31496, Sept. 3, 1986; 52 FR 33057, 
Sept. 1, 1987; 55 FR 36068, Sept. 4, 1990; 55 FR 46887, Nov. 7, 1990; 56 
FR 43240, Aug. 30, 1991; 57 FR 39820, Sept. 1, 1992; 59 FR 45396, Sept. 
1, 1994; 60 FR 45846, Sept. 1, 1995; 62 FR 46026, Aug. 29, 1997; 66 FR 
39933, Aug. 1, 2001; 66 FR 41386, Aug. 7, 2001; 67 FR 56048, Aug. 30, 
2002]



Sec. 412.25  Excluded hospital units: Common requirements.

    (a) Basis for exclusion. In order to be excluded from the 
prospective payment systems specified in Sec. 412.1(a)(1), a psychiatric 
or rehabilitation unit must meet the following requirements.
    (1) Be part of an institution that--
    (i) Has in effect an agreement under part 489 of this chapter to 
participate as a hospital;
    (ii) Is not excluded in its entirety from the prospective payment 
systems; and
    (iii) Has enough beds that are not excluded from the prospective 
payment systems to permit the provision of adequate cost information, as 
required by Sec. 413.24(c) of this chapter.
    (2) Have written admission criteria that are applied uniformly to 
both Medicare and non-Medicare patients.
    (3) Have admission and discharge records that are separately 
identified from those of the hospital in which it is located and are 
readily available.
    (4) Have policies specifying that necessary clinical information is 
transferred to the unit when a patient of the hospital is transferred to 
the unit.
    (5) Meet applicable State licensure laws.
    (6) Have utilization review standards applicable for the type of 
care offered in the unit.

[[Page 382]]

    (7) Have beds physically separate from (that is, not commingled 
with) the hospital's other beds.
    (8) Be serviced by the same fiscal intermediary as the hospital.
    (9) Be treated as a separate cost center for cost finding and 
apportionment purposes.
    (10) Use an accounting system that properly allocates costs.
    (11) Maintain adequate statistical data to support the basis of 
allocation.
    (12) Report its costs in the hospital's cost report covering the 
same fiscal period and using the same method of apportionment as the 
hospital.
    (13) As of the first day of the first cost reporting period for 
which all other exclusion requirements are met, the unit is fully 
equipped and staffed and is capable of providing hospital inpatient 
psychiatric or rehabilitation care regardless of whether there are any 
inpatients in the unit on that date.
    (b) Changes in the size of excluded units. For purposes of 
exclusions from the prospective payment systems under this section, 
changes in the number of beds and square footage considered to be part 
of each excluded unit are allowed as specified in paragraphs (b)(1) 
through (b)(3) of this section.
    (1) Increase in size. Except as described in paragraph (b)(3) of 
this section, the number of beds and square footage of an excluded unit 
may be increased only at the start of a cost reporting period.
    (2) Decrease in size. Except as described in paragraph (b)(3) of 
this section, the number of beds and square footage of an excluded unit 
may be decreased at any time during a cost reporting period if the 
hospital notifies its fiscal intermediary and the CMS Regional Office in 
writing of the planned decrease at least 30 days before the date of the 
decrease, and maintains the information needed to accurately determine 
costs that are attributable to the excluded unit. Any decrease in the 
number of beds or square footage considered to be part of an excluded 
unit made during a cost reporting period must remain in effect for the 
rest of that cost reporting period.
    (3) Exception to changes in square footage and bed size. The number 
of beds in an excluded unit may be decreased, and the square footage 
considered to be part of the unit may be either increased or decreased, 
at any time, if these changes are made necessary by relocation of a 
unit--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law affecting the physical 
facility; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.
    (c) Changes in the status of hospital units. For purposes of 
exclusions from the prospective payment systems under this section, the 
status of each hospital unit (excluded or not excluded) is determined as 
specified in paragraphs (c)(1) and (c)(2) of this section.
    (1) The status of a hospital unit may be changed from not excluded 
to excluded only at the start of the cost reporting period. If a unit is 
added to a hospital after the start of a cost reporting period, it 
cannot be excluded from the prospective payment systems before the start 
of a hospital's next cost reporting period.
    (2) The status of a hospital unit may be changed from excluded to 
not excluded at any time during a cost reporting period, but only if the 
hospital notifies the fiscal intermediary and the CMS Regional Office in 
writing of the change at least 30 days before the date of the change, 
and maintains the information needed to accurately determine costs that 
are or are not attributable to the excluded unit. A change in the status 
of a unit from excluded to not excluded that is made during a cost 
reporting period must remain in effect for the rest of that cost 
reporting period.
    (d) Number of excluded units. Each hospital may have only one unit 
of each type (psychiatric or rehabilitation) excluded from the 
prospective payment systems.
    (e) Satellite facilities. (1) For purposes of paragraphs (e)(2) 
through (e)(4) of this section, a satellite facility is a part of a 
hospital unit that provides inpatient services in a building also used 
by another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital.

[[Page 383]]

    (2) Except as provided in paragraph (e)(3) of this section, 
effective for cost reporting periods beginning on or after October 1, 
1999, a hospital that has a satellite facility must meet the following 
criteria in order to be excluded from the acute care hospital inpatient 
prospective payment systems for any period:
    (i) In the case of a unit excluded from the prospective payment 
systems for the most recent cost reporting period beginning before 
October 1, 1997, the unit's number of State-licensed and Medicare-
certified beds, including those at the satellite facility, does not 
exceed the unit's number of State-licensed and Medicare-certified beds 
on the last day of the unit's last cost reporting period beginning 
before October 1, 1997.
    (ii) The satellite facility independently complies with--
    (A) For a rehabilitation unit, the requirements under 
Sec. 412.23(b)(2); or
    (B) For a psychiatric unit, the requirements under Sec. 412.27(a).
    (iii) The satellite facility meets all of the following 
requirements:
    (A) Effective for cost reporting periods beginning on or after 
October 1, 2002, it is not under the control of the governing body or 
chief executive officer of the hospital in which it is located, and it 
furnishes inpatient care through the use of medical personnel who are 
not under the control of the medical staff or chief medical officer of 
the hospital in which it is located.
    (B) It maintains admission and discharge records that are separately 
identified from those of the hospital in which it is located and are 
readily available.
    (C) It has beds that are physically separate from (that is, not 
commingled with) the beds of the hospital in which it is located.
    (D) It is serviced by the same fiscal intermediary as the hospital 
unit of which it is a part.
    (E) It is treated as a separate cost center of the hospital unit of 
which it is a part.
    (F) For cost reporting and apportionment purposes, it uses an 
accounting system that properly allocates costs and maintains adequate 
statistical data to support the basis of allocation.
    (G) It reports its costs on the cost report of the hospital of which 
it is a part, covering the same fiscal period and using the same method 
of apportionment as the hospital of which it is a part.
    (3) Except as specified in paragraph (e)(4) of this section, the 
provisions of paragraph (e)(2) of this section do not apply to any unit 
structured as a satellite facility on September 30, 1999, and excluded 
from the prospective payment systems on that date, to the extent the 
unit continues operating under the same terms and conditions, including 
the number of beds and square footage considered to be part of the unit, 
in effect on September 30, 1999.
    (4) In applying the provisions of paragraph (h)(3) of this section, 
any unit structured as a satellite facility as of September 30, 1999, 
may increase or decrease the square footage of the satellite facility or 
may decrease the number of beds in the satellite facility at any time, 
if these changes are made necessary by relocation of the facility--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law affecting the physical 
facility; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.
    (f) Changes in classification of hospital units. For purposes of 
exclusions from the prospective payment system under this section, the 
classification of a hospital unit is effective for the unit's entire 
cost reporting period. Any changes in the classification of a hospital 
unit is made only at the start of a cost reporting period.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39820, Sept. 1, 1992; 
58 FR 46337, Sept. 1, 1993; 59 FR 45400, Sept. 1, 1994; 64 FR 41540, 
July 30, 1999; 66 FR 39933, Aug. 1, 2001; 66 FR 41387, Aug. 7, 2001; 67 
FR 50111, Aug. 1, 2002]



Sec. 412.27  Excluded psychiatric units: Additional requirements.

    In order to be excluded from the prospective payment systems, a 
psychiatric unit must meet the following requirements:
    (a) Admit only patients whose admission to the unit is required for 
active

[[Page 384]]

treatment, of an intensity that can be provided appropriately only in an 
inpatient hospital setting, of a psychiatric principal diagnosis that is 
listed in the Third Edition of the American Psychiatric Association's 
Diagnostic and Statistical Manual, or in Chapter Five (``Mental 
Disorders'') of the International Classification of Diseases, Ninth 
Revision, Clinical Modification.
    (b) Furnish, through the use of qualified personnel, psychological 
services, social work services, psychiatric nursing, occupational 
therapy, and recreational therapy.
    (c) Maintain medical records that permit determination of the degree 
and intensity of the treatment provided to individuals who are furnished 
services in the unit, and that meet the following requirements:
    (1) Development of assessment/diagnostic data. Medical records must 
stress the psychiatric components of the record, including history of 
findings and treatment provided for the psychiatric condition for which 
the inpatient is treated in the unit.
    (i) The identification data must include the inpatient's legal 
status.
    (ii) A provisional or admitting diagnosis must be made on every 
inpatient at the time of admission, and must include the diagnoses of 
intercurrent diseases as well as the psychiatric diagnoses.
    (iii) The reasons for admission must be clearly documented as stated 
by the inpatient or others significantly involved, or both.
    (iv) The social service records, including reports of interviews 
with inpatients, family members, and others must provide an assessment 
of home plans and family attitudes, and community resource contacts as 
well as a social history.
    (v) When indicated, a complete neurological examination must be 
recorded at the time of the admission physical examination.
    (2) Psychiatric evaluation. Each inpatient must receive a 
psychiatric evaluation that must--
    (i) Be completed within 60 hours of admission;
    (ii) Include a medical history;
    (iii) Contain a record of mental status;
    (iv) Note the onset of illness and the circumstances leading to 
admission;
    (v) Describe attitudes and behavior;
    (vi) Estimate intellectual functioning, memory functioning, and 
orientation; and
    (vii) Include an inventory of the inpatient's assets in descriptive, 
not interpretative fashion.
    (3) Treatment plan.
    (i) Each inpatient must have an individual comprehensive treatment 
plan that must be based on an inventory of the inpatient's strengths and 
disabilities. The written plan must include a substantiated diagnosis; 
short-term and long-term goals; the specific treatment modalities 
utilized; the responsibilities of each member of the treatment team; and 
adequate documentation to justify the diagnosis and the treatment and 
rehabilitation activities carried out; and
    (ii) The treatment received by the inpatient must be documented in 
such a way as to assure that all active therapeutic efforts are 
included.
    (4) Recording progress. Progress notes must be recorded by the 
doctor of medicine or osteopathy responsible for the care of the 
inpatient, a nurse, social worker and, when appropriate, others 
significantly involved in active treatment modalities. The frequency of 
progress notes is determined by the condition of the inpatient but must 
be recorded at least weekly for the first two months and at least once a 
month thereafter and must contain recommendations for revisions in the 
treatment plan as indicated as well as precise assessment of the 
inpatient's progress in accordance with the original or revised 
treatment plan.
    (5) Discharge planning and discharge summary. The record of each 
patient who has been discharged must have a discharge summary that 
includes a recapitulation of the inpatient's hospitalization in the unit 
and recommendations from appropriate services concerning follow-up or 
aftercare as well as a brief summary of the patient's condition on 
discharge.
    (d) Meet special staff requirements in that the unit must have 
adequate numbers of qualified professional and supportive staff to 
evaluate inpatients,

[[Page 385]]

formulate written, individualized, comprehensive treatment plans, 
provide active treatment measures and engage in discharge planning, as 
follows:
    (1) Personnel. The unit must employ or undertake to provide adequate 
numbers of qualified professional, technical, and consultative personnel 
to--
    (i) Evaluate inpatients;
    (ii) Formulate written, individualized, comprehensive treatment 
plans;
    (iii) Provide active treatment measures; and
    (iv) Engage in discharge planning.
    (2) Director of inpatient psychiatric services: Medical staff. 
Inpatient psychiatric services must be under the supervision of a 
clinical director, service chief, or equivalent who is qualified to 
provide the leadership required for an intensive treatment program. The 
number and qualifications of doctors of medicine and osteopathy must be 
adequate to provide essential psychiatric services.
    (i) The clinical director, service chief, or equivalent must meet 
the training and experience requirements for examination by the American 
Board of Psychiatry and Neurology or the American Osteopathic Board of 
Neurology and Psychiatry.
    (ii) The director must monitor and evaluate the quality and 
appropriateness of services and treatment provided by the medical staff.
    (3) Nursing services. The unit must have a qualified director of 
psychiatric nursing services. In addition to the director of nursing, 
there must be adequate numbers of registered nurses, licensed practical 
nurses, and mental health workers to provide nursing care necessary 
under each inpatient's active treatment program and to maintain progress 
notes on each inpatient.
    (i) The director of psychiatric nursing services must be a 
registered nurse who has a master's degree in psychiatric or mental 
health nursing, or its equivalent, from a school of nursing accredited 
by the National League for Nursing, or be qualified by education and 
experience in the care of the mentally ill. The director must 
demonstrate competence to participate in interdisciplinary formulation 
of individual treatment plans; to give skilled nursing care and therapy; 
and to direct, monitor, and evaluate the nursing care furnished.
    (ii) The staffing pattern must ensure the availability of a 
registered nurse 24 hours each day. There must be adequate numbers of 
registered nurses, licensed practical nurses, and mental health workers 
to provide the nursing care necessary under each inpatient's active 
treatment program.
    (4) Psychological services. The unit must provide or have available 
psychological services to meet the needs of the inpatients. The services 
must be furnished in accordance with acceptable standards of practice, 
service objectives, and established policies and procedures.
    (5) Social services. There must be a director of social services who 
monitors and evaluates the quality and appropriateness of social 
services furnished. The services must be furnished in accordance with 
accepted standards of practice and established policies and procedures. 
Social service staff responsibilities must include, but are not limited 
to, participating in discharge planning, arranging for follow-up care, 
and developing mechanisms for exchange of appropriate information with 
sources outside the hospital.
    (6) Therapeutic activities. The unit must provide a therapeutic 
activities program.
    (i) The program must be appropriate to the needs and interests of 
inpatients and be directed toward restoring and maintaining optimal 
levels of physical and psychosocial functioning.
    (ii) The number of qualified therapists, support personnel, and 
consultants must be adequate to provide comprehensive therapeutic 
activities consistent with each inpatient's active treatment program.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39820, Sept. 1, 1992; 
59 FR 45397, 45400, Sept. 1, 1994]



Sec. 412.29  Excluded rehabilitation units: Additional requirements.

    In order to be excluded from the prospective payment systems 
described in Sec. 412.1(a)(1) and to be paid under the prospective 
payment system specified in Sec. 412.1(a)(2), a rehabilitation unit must 
meet the following requirements:

[[Page 386]]

    (a) Have met either the requirements for--
    (1) New units under Sec. 412.30(a); or
    (2) Converted units under Sec. 412.30(b).
    (b) Have in effect a preadmission screening procedure under which 
each prospective patient's condition and medical history are reviewed to 
determine whether the patient is likely to benefit significantly from an 
intensive inpatient program or assessment.
    (c) Ensure that the patients receive close medical supervision and 
furnish, through the use of qualified personnel, rehabilitation nursing, 
physical therapy, and occupational therapy, plus, as needed, speech 
therapy, social services or psychological services, and orthotic and 
prosthetic services.
    (d) Have a plan of treatment for each inpatient that is established, 
reviewed, and revised as needed by a physician in consultation with 
other professional personnel who provide services to the patient.
    (e) Use a coordinated multidisciplinary team approach in the 
rehabilitation of each inpatient, as documented by periodic clinical 
entries made in the patient's medical record to note the patient's 
status in relationship to goal attainment, and that team conferences are 
held at least every two weeks to determine the appropriateness of 
treatment.
    (f) Have a director of rehabilitation who--
    (1) Provides services to the unit and to its inpatients for at least 
20 hours per week;
    (2) Is a doctor of medicine or osteopathy;
    (3) Is licensed under State law to practice medicine or surgery; and
    (4) Has had, after completing a one-year hospital internship, at 
least two years of training or experience in the medical management of 
inpatients requiring rehabilitation services.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39821, Sept. 1, 1992; 
59 FR 45397, 45400, Sept. 1, 1994; 60 FR 45847, Sept. 1, 1995; 66 FR 
41387, Aug. 7, 2001]



Sec. 412.30  Exclusion of new rehabilitation units and expansion of units already excluded.

    (a) Bed capacity in units. A decrease in bed capacity must remain in 
effect for at least a full 12-month cost reporting period before an 
equal or lesser number of beds can be added to the hospital's licensure 
and certification and considered ``new'' under paragraph (b) of this 
section. Thus, when a hospital seeks to establish a new unit under the 
criteria under paragraph (b) of this section, or to enlarge an existing 
unit under the criteria under paragraph (d) of this section, the 
regional office will review its records on the facility to determine 
whether any beds have been delicensed and decertified during the 12-
month cost reporting period before the period for which the hospital 
seeks to add the beds. To the extent bed capacity was removed from the 
hospital's licensure and certification during that period, that amount 
of bed capacity may not be considered ``new'' under paragraph (b) of 
this section.
    (b) New units. (1) A hospital unit is considered a new unit if the 
hospital--
    (i) Has not previously sought exclusion for any rehabilitation unit; 
and
    (ii) Has obtained approval, under State licensure and Medicare 
certification, for an increase in its hospital bed capacity that is 
greater than 50 percent of the number of beds in the unit.
    (2) A hospital that seeks exclusion of a new rehabilitation unit may 
provide a written certification that the inpatient population the 
hospital intends the unit to serve meets the requirements of 
Sec. 412.23(b)(2) instead of showing that the unit has treated such a 
population during the hospital's most recent cost reporting period.
    (3) The written certification described in paragraph (a)(2) of this 
section is effective for the first full cost reporting period during 
which the unit is used to provide hospital inpatient care. If the 
hospital has not previously participated in the Medicare program as a 
hospital, the written certification also is effective for any cost 
reporting period of not less than 1 month and not more than 11 months 
occurring between the date the hospital began participating in Medicare 
and the start of the hospital's regular 12-month cost reporting period.
    (4) If a hospital that has not previously participated in the 
Medicare

[[Page 387]]

program seeks exclusion of a rehabilitation unit, it may designate 
certain beds as a new rehabilitation unit for the first full 12-month 
cost reporting period that occurs after it becomes a Medicare-
participating hospital. The written certification described in paragraph 
(b)(2) of this section also is effective for any cost reporting period 
of not less than 1 month and not more than 11 months occurring between 
the date the hospital began participating in Medicare and the start of 
the hospital's regular 12-month cost reporting period.
    (5) A hospital that has undergone a change of ownership or leasing 
as defined in Sec. 489.18 of this chapter is not considered to have 
participated previously in the Medicare program.
    (c) Converted units. A hospital unit is considered a converted unit 
if it does not qualify as a new unit under paragraph (a) of this 
section. A converted unit must have treated, for the hospital's most 
recent 12-month cost reporting period, an inpatient population of which 
at least 75 percent required intensive rehabilitation services for the 
treatment of one or more conditions listed under Sec. 412.23(b)(2).
    (d) Expansion of excluded rehabilitation units.--(1) New bed 
capacity. The beds that a hospital seeks to add to its excluded 
rehabilitation unit are considered new beds only if--
    (i) The hospital's State-licensed and Medicare-certified bed 
capacity increases at the start of the cost reporting period for which 
the hospital seeks to increase the size of its excluded rehabilitation 
unit, or at any time after the start of the preceding cost reporting 
period; and
    (ii) The hospital has obtained approval, under State licensure and 
Medicare certification, for an increase in its hospital bed capacity 
that is greater than 50 percent of the number of beds it seeks to add to 
the unit.
    (2) Conversion of existing bed capacity.
    (i) Bed capacity is considered to be existing bed capacity if it 
does not meet the definition of new bed capacity under paragraph (c)(1) 
of this section.
    (ii) A hospital may increase the size of its excluded rehabilitation 
unit through conversion of existing bed capacity only if it shows that, 
for all of the hospital's most recent cost reporting period of at least 
12 months, the beds have been used to treat an inpatient population 
meeting the requirements of Sec. 412.23(b)(2).
    (e) Retroactive adjustments for certain units. For cost reporting 
periods beginning on or after October 1, 1991, if a hospital has a new 
rehabilitation unit excluded from the prospective payment systems for a 
cost reporting period under paragraph (a) of this section or expands an 
existing rehabilitation unit under paragraph (c) of this section, but 
the inpatient population actually treated in the new unit or the beds 
added to the existing unit during that cost reporting period does not 
meet the requirements in Sec. 412.23(b)(2), CMS adjusts payments to the 
hospital retroactively in accordance with the provisions in Sec. 412.130 
of this part.

[50 FR 12741, Mar. 29, 1985, as amended at 56 FR 43420, Aug. 30, 1991; 
57 FR 39821, Sept. 1, 1992; 59 FR 45400, Sept. 1, 1994; 60 FR 45847, 
Sept. 1, 1995; 62 FR 46027, Aug. 29, 1997]



Subpart C--Conditions for Payment Under the Prospective Payment Systems 
    for Inpatient Operating Costs and Inpatient Capital-Related Costs



Sec. 412.40  General requirements.

    (a) A hospital must meet the conditions of this subpart to receive 
payment under the prospective payment systems for inpatient hospital 
services furnished to Medicare beneficiaries.
    (b) If a hospital fails to comply fully with these conditions with 
respect to inpatient hospital services furnished to one or more Medicare 
beneficiaries, CMS may, as appropriate--
    (1) Withhold Medicare payment (in full or in part) to the hospital 
until the hospital provides adequate assurances of compliance; or
    (2) Terminate the hospital's provider agreement.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39821, Sept. 1, 1992]



Sec. 412.42  Limitations on charges to beneficiaries.

    (a) Prohibited charges. A hospital may not charge a beneficiary for 
any services for which payment is made by

[[Page 388]]

Medicare, even if the hospital's costs of furnishing services to that 
beneficiary are greater than the amount the hospital is paid under the 
prospective payment systems.
    (b) Permitted charges--Stay covered. A hospital receiving payment 
under the prospective payment systems for a covered hospital stay (that 
is, a stay that includes at least one covered day) may charge the 
Medicare beneficiary or other person only for the following:
    (1) The applicable deductible and coinsurance amounts under 
Secs. 409.82, 409.83, and 409.87 of this chapter.
    (2) Noncovered items and services, furnished at any time during a 
covered stay, unless they are excluded from coverage only on the basis 
of the following:
    (i) The exclusion of custodial care under Sec. 405.310(g) of this 
chapter (see paragraph (c) of this section for when charges may be made 
for custodial care).
    (ii) The exclusion of medically unnecessary items and services under 
Sec. 405.310(k) of this chapter (see paragraphs (c) and (d) of this 
section for when charges may be made for medically unnecessary items and 
services).
    (iii) The exclusion under Sec. 405.310(m) of this chapter of 
nonphysician services furnished to hospital inpatients by other than the 
hospital or a provider or supplier under arrangements made by the 
hospital.
    (iv) The exclusion of items and services furnished when the patient 
is not entitled to Medicare Part A benefits under subpart A of part 406 
of this chapter (see paragraph (e) of this section for when charges may 
be made for items and services furnished when the patient is not 
entitled to benefits).
    (v) The exclusion of items and services furnished after Medicare 
Part A benefits are exhausted under Sec. 409.61 of this chapter (see 
paragraph (e) of this section for when charges may be made for items and 
services furnished after benefits are exhausted).
    (c) Custodial care and medically unnecessary inpatient hospital 
care. A hospital may charge a beneficiary for services excluded from 
coverage on the basis of Sec. 411.15(g) of this chapter (custodial care) 
or Sec. 411.15(k) of this chapter (medically unnecessary services) and 
furnished by the hospital after all of the following conditions have 
been met:
    (1) The hospital (acting directly or through its utilization review 
committee) determines that the beneficiary no longer requires inpatient 
hospital care. (The phrase ``inpatient hospital care'' includes cases 
where a beneficiary needs a SNF level of care, but, under Medicare 
criteria, a SNF-level bed is not available. This also means that a 
hospital may find that a patient awaiting SNF placement no longer 
requires inpatient hospital care because either a SNF-level bed has 
become available or the patient no longer requires SNF-level care.)
    (2) The attending physician agrees with the hospital's determination 
in writing (for example, by issuing a written discharge order). If the 
hospital believes that the beneficiary does not require inpatient 
hospital care but is unable to obtain the agreement of the physician, it 
may request an immediate review of the case by the QIO. Concurrence by 
the QIO in the hospital's determination will serve in lieu of the 
physician's agreement.
    (3) The hospital (acting directly or through its utilization review 
committee) notifies the beneficiary (or person acting on his or her 
behalf) in writing that--
    (i) In the hospital's opinion, and with the attending physician's 
concurrence or that of the QIO, the beneficiary no longer requires 
inpatient hospital care;
    (ii) Customary charges will be made for continued hospital care 
beyond the second day following the date of the notice;
    (iii) The QIO will make a formal determination on the validity of 
the hospital's finding if the beneficiary remains in the hospital after 
he or she is liable for charges;
    (iv) The determination of the QIO made after the beneficiary 
received the purportedly noncovered services will be appealable by the 
hospital, the attending physician, or the beneficiary under the appeals 
procedures that apply to QIO determinations affecting Medicare Part A 
payment; and
    (v) The charges for continued care will be invalid and refunded if 
collected by the hospital, to the extent that a

[[Page 389]]

finding is made that the beneficiary required continued care beyond the 
point indicated by the hospital.
    (4) If the beneficiary remains in the hospital after the appropriate 
notification, and the hospital, the physician who concurred in the 
hospital determination on which the notice was based, or QIO 
subsequently finds that the beneficiary requires an acute level of 
inpatient hospital care, the hospital may not charge the beneficiary for 
continued care until the hospital once again determines that the 
beneficiary no longer requires inpatient care, secures concurrence, and 
notifies the beneficiary, as required in paragraphs (c)(1), (c)(2), and 
(c)(3) of this section.
    (d) Medically unnecessary diagnostic and therapeutic services. A 
hospital may charge a beneficiary for diagnostic procedures and studies, 
and therapeutic procedures and courses of treatment (for example, 
experimental procedures) that are excluded from coverage under 
Sec. 405.310(k) of this chapter (medically unnecessary items and 
services), even though the beneficiary requires continued inpatient 
hospital care, if those services are furnished after the beneficiary (or 
the person acting on his or her behalf) has acknowledged in writing that 
the hospital (acting directly or through its utilization review 
committee and with the concurrence of the intermediary) has informed him 
or her as follows:
    (1) In the hospital's opinion, which has been agreed to by the 
intermediary, the services to be furnished are not considered reasonable 
and necessary under Medicare.
    (2) Customary charges will be made if he or she receives the 
services.
    (3) If the beneficiary receives the services, a formal determination 
on the validity of the hospital's finding is made by the intermediary 
and, to the extent that the decision requires the exercise of medical 
judgment, the QIO.
    (4) The determination is appealable by the hospital, the attending 
physician, or the beneficiary under the appeals procedure that applies 
to determinations affecting Medicare Part A payment.
    (5) The charges for the services will be invalid and, to the extent 
collected, will be refunded by the hospital if the services are found to 
be covered by Medicare.
    (e) Services furnished on days when the individual is not entitled 
to Medicare Part A benefits or has exhausted the available benefits. The 
hospital may charge the beneficiary its customary charges for noncovered 
items and services furnished on outlier days (as described in Subpart F 
of this part) for which payment is denied because the beneficiary is not 
entitled to Medicare Part A or his or her Medicare Part A benefits are 
exhausted. (1) If payment is considered for outlier days, the entire 
stay is reviewed and days up to the number of days in excess of the 
outlier threshold may be denied on the basis of nonentitlement to Part A 
or exhaustion of benefits. (2) In applying this rule, the latest days 
will be denied first.
    (f) Differential for private room or other luxury services. The 
hospital may charge the beneficiary the customary charge differential 
for a private room or other luxury service that is more expensive than 
is medically required and is furnished for the personal comfort of the 
beneficiary at his or her request (or the request of the person acting 
on his or her behalf).
    (g) Review. (1) The QIO or intermediary may review any cases in 
which the hospital advises the beneficiary (or the person acting on his 
or her behalf) of the noncoverage of the services in accordance with 
paragraph (c)(3) or (d) of this section.
    (2) The hospital must identify such cases to the QIO or intermediary 
in accordance with CMS instructions.

[50 FR 12741, Mar. 29, 1985, as amended at 50 FR 35688, Sept. 3, 1985; 
54 FR 41747, Oct. 11, 1989; 57 FR 39821, Sept. 1, 1992]



Sec. 412.44  Medical review requirements: Admissions and quality review.

    Beginning on November 15, 1984, a hospital must have an agreement 
with a QIO to have the QIO review, on an ongoing basis, the following:
    (a) The medical necessity, reasonableness and appropriateness of 
hospital admissions and discharges.
    (b) The medical necessity, reasonableness and appropriateness of 
inpatient hospital care for which additional payment is sought under the 
outlier

[[Page 390]]

provisions of Secs. 412.82 and 412.84 of this chapter.
    (c) The validity of the hospital's diagnostic and procedural 
information.
    (d) The completeness, adequacy, and quality of the services 
furnished in the hospital.
    (e) Other medical or other practices with respect to beneficiaries 
or billing for services furnished to beneficiaries.

[50 FR 15326, Apr. 17, 1985, as amended at 50 FR 35689, Sept. 3, 1985; 
50 FR 41886, Oct. 16, 1985]



Sec. 412.46  Medical review requirements: Physician acknowledgement.

    (a) Basis. Because payment under the prospective payment system is 
based in part on each patient's principal and secondary diagnoses and 
major procedures performed, as evidenced by the physician's entries in 
the patient's medical record, physicians must complete an 
acknowledgement statement to this effect.
    (b) Content of physician acknowledgement statement. When a claim is 
submitted, the hospital must have on file a signed and dated 
acknowledgement from the attending physician that the physician has 
received the following notice:

    Notice to Physicians: Medicare payment to hospitals is based in part 
on each patient's principal and secondary diagnoses and the major 
procedures performed on the patient, as attested to by the patient's 
attending physician by virtue of his or her signature in the medical 
record. Anyone who misrepresents, falsifies, or conceals essential 
information required for payment of Federal funds, may be subject to 
fine, imprisonment, or civil penalty under applicable Federal laws.

    (c) Completion of acknowledgement. The acknowledgement must be 
completed by the physician at the time that the physician is granted 
admitting privileges at the hospital, or before or at the time the 
physician admits his or her first patient. Existing acknowledgements 
signed by physicians already on staff remain in effect as long as the 
physician has admitting privileges at the hospital.

[60 FR 45847, Sept. 1, 1995]



Sec. 412.48  Denial of payment as a result of admissions and quality review.

    (a) If CMS determines, on the basis of information supplied by a QIO 
that a hospital has misrepresented admissions, discharges, or billing 
information, or has taken an action that results in the unnecessary 
admission of an individual entitled to benefits under Part A, 
unnecessary multiple admissions of an individual, or other inappropriate 
medical or other practices with respect to beneficiaries or billing for 
services furnished to beneficiaries, CMS may as appropriate--
    (1) Deny payment (in whole or in part) under Part A with respect to 
inpatient hospital services provided with respect to such an unnecessary 
admission or subsequent readmission of an individual; or
    (2) Require the hospital to take other corrective action necessary 
to prevent or correct the inappropriate practice.
    (b) When payment with respect to admission of an individual patient 
is denied by a QIO under paragraph (a)(1) of this section, and liability 
is not waived in accordance with Secs. 405.330 through 405.332 of this 
chapter, notice and appeals are provided under procedures established by 
CMS to implement the provisions of section 1155 of the Act, Right to 
Hearing and Judicial Review.
    (c) A determination under paragraph (a) of this section, if it is 
related to a pattern of inappropriate admissions and billing practices 
that has the effect of circumventing the prospective payment systems, is 
referred to the Department's Office of Inspector General, for handling 
in accordance with Sec. 1001.301 of this title.

[50 FR 12741, Mar. 29, 1985, as amended at 50 FR 35688, 35689, Sept. 3, 
1985; 51 FR 34787, Sept. 30, 1986; 57 FR 39821, Sept. 1, 1992]



Sec. 412.50  Furnishing of inpatient hospital services directly or under arrangements.

    (a) The applicable payments made under the prospective payment 
systems, as described in subparts H and M of this part, are payment in 
full for all inpatient hospital services, as defined in Sec. 409.10 of 
this chapter. Inpatient hospital services do not include the following 
types of services:

[[Page 391]]

    (1) Physician services that meet the requirements of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (2) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (3) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (4) Certified nurse mid-wife services, as defined in section 
1861(gg) of the Act.
    (5) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (6) Services of an anesthetist, as defined in Sec. 410.69 of this 
chapter.
    (b) CMS does not pay any provider or supplier other than the 
hospital for services furnished to a beneficiary who is an inpatient, 
except for the services described in paragraphs (a)(1) through (a)(6) of 
this section.
    (c) The hospital must furnish all necessary covered services to the 
beneficiary either directly or under arrangements (as defined in 
Sec. 409.3 of this chapter).

[50 FR 12741, Mar. 29, 1985, as amended at 53 FR 38527, Sept. 30, 1988; 
57 FR 39821, Sept. 1, 1992; 60 FR 63188, Dec. 8, 1995; 65 FR 18537, Apr. 
7, 2000]



Sec. 412.52  Reporting and recordkeeping requirements.

    All hospitals participating in the prospective payment systems must 
meet the recordkeeping and cost reporting requirements of Secs. 413.20 
and 413.24 of this chapter.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 
57 FR 39821, Sept. 1, 1992]



Subpart D--Basic Methodology for Determining Prospective Payment Federal 
                   Rates for Inpatient Operating Costs



Sec. 412.60  DRG classification and weighting factors.

    (a) Diagnosis-related groups. CMS establishs a classification of 
inpatient hospital discharges by Diagnosis-Related Groups (DRGs).
    (b) DRG weighting factors. CMS assigns, for each DRG, an appropriate 
weighting factor that reflects the estimated relative cost of hospital 
resources used with respect to discharges classified within that group 
compared to discharges classified within other groups.
    (c) Assignment of discharges to DRGs. CMS establishs a methodology 
for classifying specific hospital discharges within DRGs which ensures 
that each hospital discharge is appropriately assigned to a single DRG 
based on essential data abstracted from the inpatient bill for that 
discharge.
    (1) The classification of a particular discharge is based, as 
appropriate, on the patient's age, sex, principal diagnosis (that is, 
the diagnosis established after study to be chiefly responsible for 
causing the patient's admission to the hospital), secondary diagnoses, 
procedures performed, and discharge status.
    (2) Each discharge is assigned to only one DRG (related, except as 
provided in paragraph (c)(3) of this section, to the patient's principal 
diagnosis) regardless of the number of conditions treated or services 
furnished during the patient's stay.
    (3) When the discharge data submitted by a hospital show a surgical 
procedure unrelated to a patient's principal diagnosis, the bill is 
returned to the hospital for validation and reverification. CMS's DRG 
classification system provides a DRG, and an appropriate weighting 
factor, for the group of cases for which the unrelated diagnosis and 
procedure are confirmed.
    (d) Review of DRG assignment. (1) A hospital has 60 days after the 
date of the notice of the initial assignment of a discharge to a DRG to 
request a review of that assignment. The hospital may submit additional 
information as a part of its request.
    (2) The intermediary reviews the hospital's request and any 
additional information and decides whether a change in the DRG 
assignment is appropriate. If the intermediary decides that a higher-
weighted DRG should be assigned, the case will be reviewed by the 
appropriate QIO as specified in Sec. 466.71(c)(2) of this chapter.
    (3) Following the 60-day period described in paragraph (d)(1) of 
this section, the hospital may not submit additional information with 
respect to the DRG assignment or otherwise revise its claim.

[[Page 392]]

    (e) Revision of DRG classification and weighting factors. Beginning 
with discharges in fiscal year 1988, CMS adjusts the classifications and 
weighting factors established under paragraphs (a) and (b) of this 
section at least annually to reflect changes in treatment patterns, 
technology, and other factors that may change the relative use of 
hospital resources.

[50 FR 12741, Mar. 29, 1985, as amended at 52 FR 33057, Sept. 1, 1987; 
57 FR 39821, Sept. 1, 1992; 59 FR 45397, Sept. 1, 1994]



Sec. 412.62  Federal rates for inpatient operating costs for fiscal year 1984.

    (a) General rule. CMS determines national adjusted DRG prospective 
payment rates for operating costs, for each inpatient hospital discharge 
in fiscal year 1984 involving inpatient hospital services of a hospital 
in the United States subject to the prospective payment system under 
subpart B of this part, and determines regional adjusted DRG prospective 
payment rates for inpatient operating costs for such discharges in each 
region, for which payment may be made under Medicare Part A. Such rates 
are determined for hospitals located in urban or rural areas within the 
United States and within each such region, respectively, as described in 
paragraphs (b) through (k) of this section.
    (b) Determining allowable individual hospital inpatient operating 
costs. CMS determines the Medicare allowable operating costs per 
discharge of inpatient hospital services for each hospital in the data 
base for the most recent cost reporting period for which data are 
available.
    (c) Updating for fiscal year 1984. CMS updates each amount 
determined under paragraph (b) of this section for fiscal year 1984 by--
    (1) Updating for fiscal year 1983 by the estimated average rate of 
change of hospital costs industry-wide between the cost reporting period 
used under paragraph (b) of this section and fiscal year 1983; and
    (2) Projecting for fiscal year 1984 by the applicable percentage 
increase in the hospital market basket for fiscal year 1984.
    (d) Standardizing amounts. CMS standardizes the amount updated under 
paragraph (c) of this section for each hospital by--
    (1) Adjusting for area variations in case mix among hospitals;
    (2) Excluding an estimate of indirect medical education costs;
    (3) Adjusting for area variations in hospital wage levels; and
    (4) Adjusting for the effects of a higher cost of living for 
hospitals located in Alaska and Hawaii.
    (e) Computing urban and rural averages. CMS computes an average of 
the standardized amounts determined under paragraph (d) of this section 
for urban and rural hospitals in the United States and for urban and 
rural hospitals in each region.
    (f) Geographic classifications. (1) For purposes of paragraph (e) of 
this section, the following definitions apply:
    (i) The term region means one of the nine census divisions, 
comprising the fifty States and the District of Columbia, established by 
the Bureau of the Census for statistical and reporting purposes.
    (ii) The term urban area means--
    (A) A Metropolitan Statistical Area (MSA) or New England County 
Metropolitan Area (NECMA), as defined by the Executive Office of 
Management and Budget; or
    (B) The following New England counties, which are deemed to be parts 
of urban areas under section 601(g) of the Social Security Amendments of 
1983 (Pub. L. 98-21, 42 U.S.C. 1395ww (note)): Litchfield County, 
Connecticut; York County, Maine; Sagadahoc County, Maine; Merrimack 
County, New Hampshire; and Newport County, Rhode Island.
    (iii) The term rural area means any area outside an urban area.
    (iv) The phrase hospital reclassified as rural means a hospital 
located in a county that was part of an MSA or NECMA, as defined by the 
Executive Office of Management and Budget, but is not part of an MSA or 
NECMA as a result of an Executive Office of Management and Budget 
redesignation occurring after April 20, 1983.
    (2) For hospitals within an MSA or NECMA that crosses census 
division boundaries, the following provisions apply:

[[Page 393]]

    (i) The MSA or NECMA is deemed to belong to the census division in 
which most of the hospitals within the MSA or NECMA are located.
    (ii) If a hospital would receive a lower Federal rate because most 
of the hospitals are located in a census division with a lower Federal 
rate than the rate applicable to the census division in which the 
hospital is located, the payment rate will not be reduced for the 
hospital's cost reporting period beginning before October 1, 1984.
    (iii) If an equal number of hospitals within the MSA or NECMA are 
located in each census division, such hospitals are deemed to be in the 
census division with the higher Federal rate.
    (g) Adjusting the average standardized amounts. CMS adjusts each of 
the average standardized amounts determined under paragraphs (c), (d), 
and (e) of this section by factors representing CMS's estimates of the 
following:
    (1) The amount of payment that would have been made under Medicare 
Part B for nonphysician services to hospital inpatients during the first 
cost reporting period subject to prospective payment were it not for the 
fact that such services must be furnished either directly by hospitals 
or under arrangements in order for any Medicare payment to be made after 
September 30, 1983 (the effective date of Sec. 405.310(m) of this 
chapter).
    (2) The amount of FICA taxes that would be incurred during the first 
cost reporting period subject to the prospective payment system, by 
hospitals that had not incurred such taxes for any or all of their 
employees during the base period described in paragraph (c) of this 
section.
    (h) Reducing for value of outlier payments. CMS reduces each of the 
adjusted average standardized amounts determined under paragraphs (c) 
through (g) of this section by a proportion equal to the proportion 
(estimated by CMS) of the total amount of payments based on DRG 
prospective payment rates that are additional payments for outlier cases 
under subpart F of this part.
    (i) Maintaining budget neutrality. (1) CMS adjusts each of the 
reduced standardized amounts determined under paragraphs (c) through (h) 
of this section as required for fiscal year 1984 so that the estimated 
amount of aggregate payments made, excluding the hospital-specific 
portion (that is, the total of the Federal portion of transition 
payments, plus any adjustments and special treatment of certain classes 
of hospitals for Federal fiscal year 1984) is not greater or less than 
25 percent of the payment amounts that would have been payable for the 
inpatient operating costs for those same hospitals for fiscal year 1984 
under the Social Security Act as in effect on April 19, 1983.
    (2) The aggregate payments considered under this paragraph exclude 
payments for per case review by a utilization and quality control 
quality improvement organization, as allowed under section 1866(a)(1)(F) 
of the Act.
    (j) Computing Federal rates for inpatient operating costs for urban 
and rural hospitals in the United States and in each region. For each 
discharge classified within a DRG, CMS establishes a national 
prospective payment rate for inpatient operating costs and a regional 
prospective payment rate for inpatient operating costs for each region, 
as follows:
    (1) For hospitals located in an urban area in the United States or 
in that region respectively, the rate equals the product of--
    (i) The adjusted average standardized amount (computed under 
paragraphs (c) through (i) of this section) for hospitals located in an 
urban area in the United States or in that region; and
    (ii) The weighting factor determined under Sec. 412.60(b) for that 
DRG.
    (2) For hospitals located in a rural area in the United States or in 
that region respectively, the rate equals the product of--
    (i) The adjusted average standardized amount (computed under 
paragraphs (c) through (i) of this section) for hospitals located in a 
rural area in the United States or that region; and
    (ii) The weighting factor determined under Sec. 412.60(b) for that 
DRG.
    (k) Adjusting for different area wage levels. CMS adjusts the 
proportion (as estimated by CMS from time to time) of Federal rates 
computed under paragraph (j) of this section that are attributable to 
wages and labor-related

[[Page 394]]

costs, for area differences in hospital wage levels by a factor 
(established by CMS) reflecting the relative hospital wage level in the 
geographic area (that is, urban or rural area as determined under the 
provisions of paragraph (f) of this section) of the hospital compared to 
the national average hospital wage level.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 
53 FR 38527, Sept. 30, 1988; 57 FR 39821, Sept. 1, 1992; 58 FR 46337, 
Sept. 1, 1993]



Sec. 412.63  Federal rates for inpatient operating costs for fiscal years after Federal fiscal year 1984.

    (a) General rule. (1) CMS determines a national adjusted prospective 
payment rate for inpatient operating costs for each inpatient hospital 
discharge in a Federal fiscal year after fiscal year 1984 involving 
inpatient hospital services of a hospital in the United States subject 
to the prospective payment system, and determines a regional adjusted 
prospective payment rate for operating costs for such discharges in each 
region, for which payment may be made under Medicare Part A.
    (2) Each such rate is determined for hospitals located in urban or 
rural areas within the United States and within each such region 
respectively, as described in paragraphs (b) through (g) of this 
section.
    (b) Geographic classifications. (1) For purposes of this section, 
the definitions set forth in Sec. 412.62(f) apply, except that, 
effective January 1, 2000, a hospital reclassified as rural may mean a 
reclassification that results from a geographic redesignation as set 
forth in Sec. 412.62(f)(1)(iv) or a reclassification that results from 
an urban hospital applying for reclassification as rural as set forth in 
Sec. 412.103.
    (2) For hospitals within an MSA or NECMA that crosses census 
division boundaries, the following provisions apply:
    (i) The MSA or NECMA is deemed to belong to the census division in 
which most of the hospitals within the MSA or NECMA are located.
    (ii) A hospital that met the conditions specified in 
Sec. 412.62(f)(2)(ii) and therefore did not receive a lower Federal rate 
that would have applied for cost reporting periods beginning before 
October 1, 1984, receives the lower Federal rate applicable to all 
hospitals in the MSA or NECMA in which it is located effective with the 
hospital's cost reporting period that begins on or after October 1, 
1984.
    (iii) The higher Federal rate is payable to all hospitals in the MSA 
or NECMA if an equal number of hospitals within the MSA or NECMA are 
located in each census division.
    (3) For discharges occurring on or after October 1, 1988, a hospital 
located in a rural county adjacent to one or more urban areas is deemed 
to be located in an urban area and receives the Federal payment amount 
for the urban area to which the greater number of workers in the county 
commute if the rural county would otherwise be considered part of an 
urban area, under the standards for designating MSAs or NECMAs if the 
commuting rates used in determining outlying counties were determined on 
the basis of the aggregate number of resident workers who commute to 
(and, if applicable under the standards, from) the central county or 
central counties of all adjacent MSAs or NECMAs. These EOMB standards 
are set forth in the notice of final standards for classification of 
MSAs published in the Federal Register on January 3, 1980 (45 FR 956), 
and available from CMS, East High Rise Building, room 132, 6325 Security 
Boulevard, Baltimore, Maryland 21207.
    (4) For purposes of this section, any change in an MSA or NECMA 
designation is recognized on the October 1 following the effective date 
of the change.
    (5) For discharges occurring on or after October 1, 1988, for 
hospitals that consist of two or more separately located inpatient 
hospital facilities the national adjusted prospective payment rate is 
based on the geographic location of the hospital facility at which the 
discharge occurs.
    (c) Updating previous standardized amounts. (1) CMS computes an 
average standardized amount for hospitals in urban areas and rural areas 
within the United States, and urban areas and rural areas within each 
region.

[[Page 395]]

    (2) Each of those amounts is equal to the respective adjusted 
average standardized amount computed for fiscal year 1984 under 
Sec. 412.62(g)--
    (i) Increased for fiscal year 1985 by the applicable percentage 
increase in the hospital market basket;
    (ii) Adjusted by the estimated amount of Medicare payment for 
nonphysician services furnished to hospital inpatients that would have 
been paid under Part B were it not for the fact that such services must 
be furnished either directly by hospitals or under arrangements;
    (iii) Reduced by a proportion equal to the proportion (estimated by 
CMS) of the total amount of prospective payments that are additional 
payment amounts attributable to outlier cases under subpart F of this 
part; and
    (iv) Adjusted for budget neutrality under paragraph (h) of this 
section.
    (3) For fiscal year 1986 and thereafter. CMS computes, for urban and 
rural hospitals in the United States and for urban and rural hospitals 
in each region, average standardized amount equal to the respective 
adjusted average standardized amounts computed for the previous fiscal 
year--
    (i) Increased by the applicable percentage increase determined under 
paragraphs (d) through (g) of this section;
    (ii) Adjusted by the estimated amount of Medicare payment for 
nonphysician services furnished to hospital inpatients that would have 
been paid under Part B were it not for the fact that such services must 
be furnished either directly by hospitals or under arrangements; and
    (iii) For discharges occurring on or after October 1, 1985 and 
before October 1, 1986, reduced by a proportion (estimated by CMS) of 
the amount of payments based on the total amount of prospective payments 
that are additional payment amounts attributable to outlier cases under 
subpart F of this part, and for discharges occurring on or after October 
1, 1986, reduced by a proportion (estimated by CMS) of the amount of 
payments that, based on the total amount of prospective payments for 
urban hospitals and the total amount of prospective payments for rural 
hospitals, are additional payments attributable to outlier cases in such 
hospitals under subpart F of this part.
    (4) For fiscal years 1987 through 1990 CMS standardizes the average 
standardized amounts by excluding an estimate of the payments for 
hospitals that serve a disproportionate share of low-income patients.
    (5) For fiscal year 1987 onward, CMS restandardizes the average 
standardized amounts by excluding an estimate of indirect medical 
education payments.
    (6) For fiscal year 1988 and thereafter, CMS computes average 
standardized amounts for hospitals located in large urban areas, other 
urban areas, and rural areas. The term large urban area means an MSA 
with a population of more than 1,000,000 or an NECMA, with a population 
of more than 970,000 based on the most recent available population data 
published by the Bureau of the Census.
    (d) Applicable percentage change for fiscal year 1986. (1) The 
applicable percentage change for fiscal year 1986 is--
    (i) For discharges occurring on or after October 1, 1985 and before 
May 1. 1986, zero percent; and
    (ii) For discharges occurring on or after May 1, 1986, one-half of 
one percent.
    (2) For purposes of determining the standardized amounts for 
discharges occurring on or after October 1, 1986, the applicable 
percentage increase for fiscal year 1986 is deemed to have been one-half 
of one percent.
    (e) Applicable percentage change for fiscal year 1987. The 
applicable percentage change for fiscal year 1987 is 1.15 percent.
    (f) Applicable percentage change for fiscal year 1988. (1) The 
applicable percentage change for fiscal year 1988 is--
    (i) For discharges occurring on or after October 1, 1987 and before 
November 21, 1987, zero percent;
    (ii) For discharges occurring on or after November 21, 1987 and 
before April 1, 1988, 2.7 percent; and
    (iii) For discharges occurring on or after April 1, 1988 and before 
October 1, 1988--
    (A) 3.0 percent for hospitals located in rural areas;

[[Page 396]]

    (B) 1.5 percent for hospitals located in large urban areas; and
    (C) 1.0 percent for hospitals located in other urban areas.
    (2) For purposes of determining the standardized amounts for 
discharges occurring on or after October 1, 1988 (for Federal fiscal 
year 1989), the applicable percentage change for fiscal year 1988 is 
deemed to have been--
    (i) 3.0 percent for hospitals located in rural areas;
    (ii) 1.5 percent for hospitals located in large urban areas; and
    (iii) 1.0 percent for hospitals located in other urban areas.
    (g) Applicable percentage change for fiscal year 1989. The 
applicable percentage change for fiscal year 1989 is the percentage 
increase in the market basket index (as defined in Sec. 413.40(a)(3) of 
this chapter)--
    (1) Minus 1.5 percentage points for hospitals located in rural 
areas;
    (2) Minus 2.0 percentage points for hospitals in large urban areas; 
and
    (3) Minus 2.5 percentage points for hospitals in other urban areas.
    (h) Applicable percentage change for fiscal year 1990. (1) The 
applicable percentage change for fiscal year 1990 is--
    (i) For discharges occurring on or after October 1, 1989 and before 
January 1, 1990, 5.5 percent; and
    (ii) For discharges occurring on or after January 1, 1990 and before 
October 1, 1990--
    (A) 9.72 percent for hospitals located in rural areas;
    (B) 5.62 percent for hospitals located in large urban areas; and
    (C) 4.97 percent for hospitals located in other urban areas.
    (2) For purposes of determining the standardized amounts for 
discharges occurring on or after October 1, 1990, the applicable 
percentage change for fiscal year 1990 is deemed to have been the 
percentage change provided for in paragraph (h)(1)(ii) of this section.
    (i) Applicable percentage change for fiscal year 1991. (1) The 
applicable percentage change for fiscal year 1991 is--
    (i) For discharges occurring on or after October 1, 1990 and before 
October 21, 1990, 5.2 percent;
    (ii) For discharges occurring on or after October 21, 1990 and 
before January 1, 1991, 0.0 percent; and
    (iii) For discharges occurring on or after January 1, 1991 and 
before October 1, 1991--
    (A) 4.5 percent for hospitals located in rural areas; and
    (B) 3.2 percent for hospitals located in large urban areas and other 
urban areas.
    (2) For purposes of determining the standardized amounts for 
discharges occurring on or after October 1, 1991, the applicable 
percentage change for fiscal year 1991 is deemed to have been the 
percentage change provided for in paragraph (i)(1)(iii) of this section.
    (j) Applicable percentage change for fiscal year 1992. The 
applicable percentage change for fiscal year 1992 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a)(3) of this chapter)--
    (1) Minus 0.6 percentage points for hospitals located in rural 
areas.
    (2) Minus 1.6 percentage points for hospitals located in large urban 
areas and other urban areas.
    (k) Applicable percentage change for fiscal year 1993. The 
applicable percentage change for fiscal year 1993 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a)(3) of this chapter)--
    (1) Minus 0.55 percentage points for hospitals located in rural 
areas.
    (2) Minus 1.55 percentage points for hospitals located in large 
urban areas and other urban areas.
    (l) Applicable percentage change for fiscal year 1994. The 
applicable percentage change for fiscal year 1994 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a) of this chapter)--
    (1) Minus 1.0 percentage point for hospitals located in rural areas.
    (2) Minus 2.5 percentage points for hospitals located in large urban 
areas and other urban areas.
    (m) Applicable percentage change for fiscal year 1995. The 
applicable percentage change for fiscal year 1995 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a) of this chapter)--

[[Page 397]]

    (1) Plus, for hospitals located in rural areas, the percentage 
increase necessary so that the average standardized amounts computed 
under paragraph (c) through (i) of this section are equal to the average 
standardized amounts for hospitals located in an urban area other than a 
large urban area.
    (2) Minus 2.5 percentage points for hospitals located in large urban 
areas and other urban areas.
    (n) Applicable percentage change for fiscal year 1996. The 
applicable percentage change for fiscal year 1996 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a) of this chapter) minus 2.0 percentage 
points for all areas.
    (o) Applicable percentage change for fiscal year 1997. The 
applicable percentage change for fiscal year 1997 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a) of this chapter) minus 0.5 percentage 
point for all areas.
    (p) Applicable percentage change for fiscal year 1998. The 
applicable percentage change for fiscal year 1998 is 0 percent for 
hospitals in all areas.
    (q) Applicable percentage change for fiscal year 1999. The 
applicable percentage change for fiscal year 1999 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a) of this subchapter) minus 1.9 percentage 
points for hospitals in all areas.
    (r) Applicable percentage change for fiscal year 2000. The 
applicable percentage change for fiscal year 2000 is the percentage 
increase in the market basket index for prospective payment hospitals 
(as defined in Sec. 413.40(a) of this chapter) minus 1.8 percentage 
points for hospitals in all areas.
    (s) Applicable percentage change for fiscal year 2001. The 
applicable percentage change for discharges occurring in fiscal year 
2001 is the percentage increase in the market basket index for 
prospective payment hospitals (as defined in Sec. 413.40(a) of this 
subchapter) for hospitals in all areas as follows:
    (1) For discharges occurring on October 1, 2000 or before April 1, 
2001 the percentage increase in the market basket index for prospective 
payment hospitals (as defined in Sec. 41340(a) of this subchapter) for 
sole community hospitals and the increase in the market basket index 
minus 1.1 percentage points for other hospitals in all areas; and
    (2) For discharges occurring on April 1, 2001 or before October 1, 
2001 the percentage increase in the market basket index for prospective 
payment hospitals (as defined in Sec. 413.40(a) of this subchapter) for 
sole community hospitals and the increase in the market basket index 
plus 1.1 percentage points for other hospitals in all areas.
    (t) Applicable percentage change for fiscal years 2002 and 2003. The 
applicable percentage change for fiscal years 2002 and 2003 is the 
percentage increase in the market basket index for prospective payment 
hospitals (as defined in Sec. 413.40(a) of this subchapter) minus 0.55 
percentage points for hospitals in all areas.
    (u) Applicable percentage change for fiscal year 2004 and for 
subsequent fiscal years. The applicable percentage change for fiscal 
year 2004 and for subsequent years is the percentage increase in the 
market basket index for prospective payment hospitals (as defined in 
Sec. 413.40(a) of this subchapter) for hospitals in all areas.
    (v) Maintaining budget neutrality for fiscal year 1985. (1) For 
fiscal year 1985, CMS will adjust each of the reduced standardized 
amounts determined under paragraph (c) of this section as required for 
fiscal year 1985 to ensure that the estimated amount of aggregate 
payments made, excluding the hospital-specific portion (that is, the 
total of the Federal portion of transition payments, plus any 
adjustments and special treatment of certain classes of hospitals for 
fiscal year 1985) is not greater or less than 50 percent of the payment 
amounts that would have been payable for the inpatient operating costs 
for those same hospitals for fiscal year 1985 under the law as in effect 
on April 19, 1983.
    (2) The aggregate payments considered under this paragraph exclude 
payments for per case review by a utilization and quality control 
quality improvement organization, as allowed under section 1866(a)(1)(F) 
of the Act.

[[Page 398]]

    (w) Computing Federal rates for inpatient operating costs for 
hospitals located in large urban and other areas. For each discharge 
classified within a DRG, CMS establishes for the fiscal year a national 
prospective payment rate and a regional prospective payment rate for 
inpatient operating costs, for each region, as follows:
    (1) For hospitals located in a large urban area in the United States 
or that region respectively, the rate equals the product of--
    (i) The adjusted average standardized amount (computed under 
paragraph (c) of this section) for the fiscal year for hospitals located 
in a large urban area in the United States or in that region; and
    (ii) The weighting factor determined under Sec. 412.60(b) for that 
DRG.
    (2) For hospitals located in an other area in the United States or 
that region respectively, the rate equals the product of--
    (i) The adjusted average standardized amount (computed under 
paragraph (c) of this section) for the fiscal year for hospitals located 
in an other area in the United States or that region; and
    (ii) The weighting factor (determined under Sec. 412.60(b)) for that 
DRG.
    (x) Adjusting for different area wage levels. (1) CMS adjusts the 
proportion (as estimated by CMS from time to time) of Federal rates for 
inpatient operating costs computed under paragraph (j) of this section 
that are attributable to wages and labor-related costs for area 
differences in hospital wage levels by a factor (established by CMS 
based on survey data) reflecting the relative level of hospital wages 
and wage-related costs in the geographic area (that is, urban or rural 
area as determined under the provisions of paragraph (b) of this 
section) of the hospital compared to the national average level of 
hospital wages and wage-related costs. The wage index is updated 
annually.
    (2)(i) CMS makes a midyear correction to the wage index for an area 
only if a hospital can show that--
    (A) The intermediary or CMS made an error in tabulating its data; 
and
    (B) The hospital could not have known about the error, or did not 
have the opportunity to correct the error, before the beginning of the 
Federal fiscal year.
    (ii) A midyear correction to the wage index is effective 
prospectively from the date the change is made to the wage index.
    (3) If a judicial decision reverses a CMS denial of a hospital's 
wage data revision request, CMS pays the hospital by applying a revised 
wage index that reflects the revised wage data as if CMS's decision had 
been favorable rather than unfavorable.

[50 FR 12741, Mar. 29, 1985]

    Editorial Note: For Federal Register citations affecting 
Sec. 412.63, see the List of Sections Affected, which appears in the 
finding Aids section of the printed volume and on GPO Access.



  Subpart E--Determination of Transition Period Payment Rates for the 
        Prospective Payment System for Inpatient Operating Costs



412.70  General description.

    For discharges occurring on or after April 1, 1988, and before 
October 1, 1996, payments to a hospital are based on the greater of the 
national average standardized amount or the sum of 85 percent of the 
national average standardized amount and 15 percent of the average 
standardized amount for the region in which the hospital is located.

[57 FR 39822, Sept. 1, 1992, as amended at 58 FR 46338, Sept. 1, 1993]



Sec. 412.71  Determination of base-year inpatient operating costs.

    (a) Base-year costs. (1) For each hospital, the intermediary will 
estimate the hospital's Medicare Part A allowable inpatient operating 
costs, as described in Sec. 412.2(c), for the 12-month or longer cost 
reporting period ending on or after September 30, 1982 and before 
September 30, 1983.
    (2) If the hospital's last cost reporting period ending before 
September 30, 1983 is for less than 12 months, the base period will be 
the hospital's most recent 12-month or longer cost reporting

[[Page 399]]

period ending before such short reporting period, with an appropriate 
adjustment for inflation. (The rules applicable to new hospitals are set 
forth in Sec. 412.74.)
    (b) Modifications to base-year costs. Prior to determining the 
hospital-specific rate, the intermediary will adjust the hospital's 
estimated base-year inpatient operating costs, as necessary, to include 
malpractice insurance costs in accordance with Sec. 413.53(a)(1)(i) of 
this chapter, and exclude the following:
    (1) Medical education costs as described in Sec. 413.85 of this 
chapter.
    (2) Capital-related costs as described in Sec. 413.130 of this 
chapter.
    (3) Kidney acquisition costs incurred by hospitals approved as renal 
transplantation centers as described in Sec. 412.100. Kidney acquisition 
costs in the base year will be determined by multiplying the hospital's 
average kidney acquisition cost per kidney times the number of kidney 
transplants covered by Medicare Part A during the base period.
    (4) Higher costs that were incurred for purposes of increasing base-
year costs.
    (5) One-time nonrecurring higher costs or revenue offsets that have 
the effect of distorting base-year costs as an appropriate basis for 
computing the hospital-specific rate.
    (6) Higher costs that result from changes in hospital accounting 
principles initiated in the base year.
    (7) The costs of qualified nonphysician anesthetists' services, as 
described in Sec. 412.113(c).
    (c) Hospital's request for adjustment of base-year inpatient 
operating costs. (1) Before the date it becomes subject to the 
prospective payment system for inpatient operating costs, a hospital may 
request the intermediary to further adjust its estimated base-period 
costs to take into account the following:
    (i) Services paid for under Medicare Part B during the hospital's 
base year that will be paid for under prospective payments. The base-
year costs may be increased to include estimated payments for certain 
services previously billed as physicians' services before the effective 
date of Sec. 415.102(a) of this chapter, and estimated payments for 
nonphysicians' services that were not furnished either directly or under 
arrangements before October 1, 1983 (the effective date of 
Sec. 405.310(m) of this chapter), but may not include the costs of 
anesthetists' services for which a physician employer continues to bill 
under Sec. 405.553(b)(4) of this chapter.
    (ii) The payment of FICA taxes during cost reporting periods subject 
to the prospective payment system, if the hospital had not paid such 
taxes for all its employees during its base period and will be required 
to participate effective January 1, 1984.
    (2) If a hospital requests that its base-period costs be adjusted 
under paragraph (c)(1) of this section, it must timely provide the 
intermediary with sufficient documentation to justify the adjustment, 
and adequate data to compute the adjusted costs. The intermediary 
decides whether to use part or all of the data on the basis of audit, 
survey and other information available.
    (d) Intermediary's determination. The intermediary uses the best 
data available at the time in estimating each hospital's base-year costs 
and the modifications to those costs authorized by paragraphs (b) and 
(c) of this section. The intermediary's estimate of base-year costs and 
modifications thereto is final and may not be changed after the first 
day of the first cost reporting period beginning on or after October 1, 
1983, except as provided in Sec. 412.72.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 
52 FR 33057, Sept. 1, 1987; 57 FR 33897, July 31, 1992; 57 FR 39822, 
Sept. 1, 1992; 59 FR 45398, Sept. 1, 1994; 60 FR 63188, Dec. 8, 1995]



Sec. 412.72  Modification of base-year costs.

    (a) Bases for modification of base-year costs. Base-year costs as 
determined under Sec. 412.71(d) may be modified under the following 
circumstances:
    (1) Inadvertent omissions. (i) A hospital that becomes subject to 
the prospective payment system beginning on or after October 1, 1983 and 
before November 16, 1983 has until November 15, 1983 to request its 
intermediary to reestimate its base-period costs to take into account 
inadvertent omissions in

[[Page 400]]

its previous submissions to the intermediary related to changes made by 
the prospective payment legislation for purposes of estimating the base-
period costs.
    (ii) The intermediary may also initiate changes to the estimation--
    (A) For any reason before the date the hospital becomes subject to 
prospective payment; and
    (B) Before November 16, 1983, for corrections to take into account 
inadvertent omissions in the hospital's previous submissions related to 
changes made by the prospective payment legislation for purposes of 
estimating the base-period costs.
    (iii) Such omissions pertain to adjustments to exclude capital-
related costs and the direct medical education costs of approved 
educational activities and to adjustments specified in Sec. 412.71(c).
    (iv) The intermediary must notify the provider of any change to the 
hospital-specific amount as a result of the provider's request within 30 
days of receipt of the additional data.
    (v) Any change to base-period costs made under this paragraph (a)(1) 
will be made effective retroactively, beginning with the first day of 
the affected hospital's fiscal year.
    (2) Correction of mathematical errors of calculations. (i) The 
hospital must report mathematical errors of calculations to the 
intermediary within 90 days of the intermediary's notification to the 
hospital of the hospital's payments rates.
    (ii) The intermediary may also identify such errors and initiate 
their correction during this period.
    (iii) The intermediary will either make an appropriate adjustment or 
notify the hospital that no adjustment is warranted within 30 days of 
receipt of the hospital's report of an error.
    (iv) Corrections of errors of calculation will be effective with the 
first day of the hospital's first cost reporting period subject to the 
prospective payment system.
    (3) Recognition of additional costs. (i) The intermediary may adjust 
base-period costs to take into account additional costs recognized as 
allowable costs for the hospital's base year as the result of any of the 
following:
    (A) A reopening and revision of the hospital's base-year notice of 
amount of program reimbursement under Secs. 405.1885 through 405.1889 of 
this chapter.
    (B) A prehearing order or finding issued during the provider payment 
appeals process by the appropriate reviewing authority under 
Sec. 405.1821 or Sec. 405.1853 of this chapter that resolved a matter at 
issue in the hospital's base-year notice of amount of program 
reimbursement.
    (C) An affirmation, modification, or reversal of a Provider 
Reimbursement Review Board decision by the Administrator of CMS under 
Sec. 405.1875 of this chapter that resolved a matter at issue in the 
hospital's base-year notice of amount of program reimbursement.
    (D) An administrative or judicial review decision under 
Secs. 405.1831, 405.1871, or 405.1877 of this chapter that is final and 
no longer subject to review under applicable law or regulations by a 
higher reviewing authority, and that resolved a matter at issue in the 
hospital's base-year notice of amount of program reimbursement.
    (ii) The intermediary will recalculate the hospital's base-year 
costs, incorporating the additional costs recognized as allowable for 
the hospital's base year. Adjustments to base-year costs to take into 
account these additional costs--
    (A) Will be effective with the first day of the hospital's first 
cost reporting period beginning on or after the date of the revision, 
order or finding, or review decision; and
    (B) Will not be used to recalculate the hospital-specific portion as 
determined for fiscal years beginning before the date of the revision, 
order or finding, or review decision.
    (4) Successful appeal. The intermediary may modify base-year costs 
to take into account a successful appeal relating to modifications to 
base-year costs that were made under Sec. 412.71(b). If a hospital 
successfully contests a modification to base-year costs--
    (i) The intermediary will recalculate the hospital's base-year costs 
to reflect the modification determined appropriate as a result of the 
appeal; and
    (ii) Such adjustments will be effective retroactively to the time of 
the

[[Page 401]]

intermediary's initial estimation of base-year costs.
    (5) Unlawfully claimed costs. The intermediary may modify base-year 
costs to exclude costs that were unlawfully claimed as determined as a 
result of criminal conviction, imposition of a civil judgment under the 
False Claims Act (31 U.S.C. 3729-3731), or a proceeding for exclusion 
from the Medicare program. In addition to adjusting base-year costs, CMS 
will recover both the excess costs reimbursed for the base period and 
the additional amounts paid due to the inappropriate increase of the 
hospital-specific portion of the hospital's transition payment rates. 
The amount to be recovered will be computed on the basis of the final 
resolution of the amount of the inappropriate base-year costs.
    (b) Right to administrative and judicial review. (1) An 
intermediary's estimation of a hospital's base-year costs, and 
modifications, made for purposes of determining the hospital-specific 
rate, are subject to administrative and judicial review. Review will be 
available to a hospital upon receipt of its notice of amount of program 
reimbursement following the close of its cost reporting period, but only 
with respect to whether the intermediary followed the provisions of 
Secs. 412.71 and 412.72. (Sections 405.1803 and 405.1807 of this chapter 
set forth the rules for intermediary determinations and notice of amount 
of program reimbursement and the effect of those determinations.)
    (2) In any administrative or judicial review of whether the 
intermediary used the best data available at the time, as required by 
Sec. 412.71(d), an intermediary's estimation will be revised on the 
basis of this review only if the estimation was unreasonable and clearly 
erroneous in light of the data available at the time the estimation was 
made.
    (3) Specifically excluded from administrative or judicial review are 
any issues based on data, information, or arguments not presented to the 
intermediary at the time of the estimation.



Sec. 412.73  Determination of the hospital-specific rate based on a Federal fiscal year 1982 base period.

    (a) Costs on a per discharge basis. The intermediary will determine 
the hospital's estimated adjusted base-year operating cost per discharge 
by dividing the total adjusted operating costs by the number of 
discharges in the base period.
    (b) Case-mix adjustment. The intermediary will divide the adjusted 
base-year costs by the hospital's 1981 case-mix index. If the hospital's 
case-mix index is statistically unreliable (as determined by CMS), the 
hospital's base-year costs will be divided by the lower of the 
following:
    (1) The hospital's estimated case-mix index.
    (2) The average case-mix index for the appropriate classifications 
of all hospitals subject to cost limits established under Sec. 413.30 of 
this chapter for cost reporting periods beginning on or after October 1, 
1982 and before October 1, 1983.
    (c) Updating base-year costs--(1) For Federal fiscal year 1984. The 
case-mix adjusted base-year cost per discharge will be updated by the 
applicable updating factor, that is, the rate-of-increase percentage 
determined under Sec. 413.40(c)(3) of this chapter, as adjusted for 
budget neutrality.
    (2) For Federal fiscal year 1985. The amount determined under 
paragraph (c)(1) of this section will be updated by the applicable 
updating factor, as adjusted for budget neutrality.
    (3) For Federal fiscal year 1986. (i) The amount determined under 
paragraph (c)(2) of this section is updated by--
    (A) Zero percent for the first seven months of the hospital's cost 
reporting period; and
    (B) One-half of one percent for the remaining five months of the 
hospital's cost reporting period.
    (ii) For purposes of determining the updated base-year costs for 
cost reporting periods beginning in Federal fiscal year 1987 (that is, 
on or after October 1, 1986 and before October 1, 1987), the update 
factor for the previous cost reporting period is deemed to have been 
one-half of one percent.

[[Page 402]]

    (4) For Federal fiscal year 1987. The amount determined under 
paragraph (c)(3)(ii) of this section is updated by 1.15 percent.
    (5) For Federal fiscal year 1988. (i) For purposes of determining 
the prospective payment rates for sole community hospitals under 
Sec. 412.92(d) for cost reporting periods beginning in Federal fiscal 
year 1988 (that is, on or after October 1, 1987 and before October 1, 
1988), the base-year cost per discharge is updated as follows:
    (A) For the first 51 days of the hospital's cost reporting period, 
by zero percent.
    (B) For the next 132 days of the hospital's cost reporting period, 
by 2.7 percent.
    (C) For the remainder of the hospital's cost reporting period, by--
    (1) 3.0 percent for hospitals located in rural areas;
    (2) 1.5 percent for hospitals located in large urban areas; and
    (3) 1.0 percent for hospitals located in other urban areas.
    (ii) For purposes of determining the updated base-year costs for 
cost reporting periods beginning in Federal fiscal year 1989 (that is, 
beginning on or after October 1, 1988 and before October 1, 1989), the 
update factor for the cost reporting period beginning during federal 
Fiscal year 1988 is deemed to have been--
    (A) 3.0 percent for hospitals located in rural areas;
    (B) 1.5 percent for hospitals located in large urban areas; and
    (C) 1.0 percent for hospitals located in other urban areas.
    (6) For Federal fiscal year 1989. For cost reporting periods 
beginning in Federal fiscal year 1989, the update factor is determined 
using the methodology set forth in Sec. 412.63(g).
    (7) For Federal fiscal year 1990. (i) Except as described in 
paragraph (c)(7)(ii) of this section, for cost reporting periods 
beginning in Federal fiscal year 1990, the base-period cost per 
discharge is updated as follows:
    (A) For cost reporting periods beginning on or after October 1, 1989 
and before January 1, 1990, by 5.5 percent for discharges occurring 
before January 1, 1990 and by the factors set forth in paragraph 
(c)(7)(i)(B) of this section for discharges occurring on or after 
January 1, 1990.
    (B) For cost reporting periods beginning on or after January 1, 1990 
and before October 1, 1990, by--
    (1) 9.72 percent for hospitals located in rural areas;
    (2) 5.62 percent for hospitals located in large urban areas; and
    (3) 4.97 percent for hospitals located in other urban areas.
    (ii) For discharges occurring on or after October 21, 1990 and 
before January 1, 1991, the base-period cost per discharge, updated as 
set forth in paragraph (c)(7)(i) of this section, is reduced by 5.5 
percent.
    (iii) For purposes of determining the updated base-period costs for 
cost reporting periods beginning in Federal fiscal year 1991 (that is, 
beginning on or after October 1, 1990 and before October 1, 1991), the 
update factor for the cost reporting period beginning during Federal 
fiscal year 1990 is deemed to have been the percentage change provided 
for in paragraph (c)(7)(i)(B) of this section.
    (8) For Federal fiscal year 1991. (i) Except as described in 
paragraph (c)(8)(ii) of this section, for cost reporting periods 
beginning in Federal fiscal year 1991, the base-period cost per 
discharge is updated by 5.2 percent.
    (ii) For discharges occurring on or after October 21, 1990 and 
before January 1, 1991, the base-period cost per discharge is updated by 
0.0 percent.
    (iii) For purposes of determining the updated base period costs for 
cost reporting periods beginning in Federal fiscal year 1992, the update 
factor for the cost reporting period beginning during Federal fiscal 
year 1991 is deemed to have been the percentage change provided for in 
paragraph (c)(8)(i) of this section.
    (9) For Federal fiscal years 1992 and 1993. For Federal fiscal years 
1992 and 1993, the update factor is the percentage increase in the 
market basket index for prospective payment hospitals (as defined in 
Sec. 413.40(a) of this chapter).
    (10) For Federal fiscal year 1994. For Federal fiscal year 1994, the 
update factor is the percentage increase in the market basket index for 
prospective payment hospitals (as defined in

[[Page 403]]

Sec. 413.40(a) of the chapter) minus 2.3 percentage points. For purposes 
of determining the hospital-specific rate for Federal fiscal year 1994 
and subsequent years, this update factor is adjusted to take into 
account the portion of the 12-month cost reporting period beginning 
during Federal fiscal year 1993 that occurs in Federal fiscal year 1994.
    (11) For Federal fiscal year 1995. For Federal fiscal year 1995, the 
update factor is the percentage increase in the market basket index for 
prospective payment hospitals (as defined in Sec. 413.40(a) of this 
chapter) minus 2.2 percentage points.
    (12) For Federal fiscal years 1996 through 2000. For Federal fiscal 
years 1996 through 2000, the update factor is the applicable percentage 
change for other prospective payment hospitals in each respective year 
as set forth in Secs. 412.63(n) through (r).
    (13) For Federal fiscal year 2001. For Federal fiscal year 2001, the 
update factor is the percentage increase in the market basket index for 
prospective payment hospitals (as defined in Sec. 413.40(a) of this 
chapter).
    (14) For Federal fiscal year 2002. For Federal fiscal year 2002, the 
update factor is the percentage increase in the market basket index for 
prospective payment hospitals (as defined in Sec. 413.40(a) of this 
chapter) minus 1.1 percentage points.
    (15) For Federal fiscal year 2003 and for subsequent years. For 
Federal fiscal year 2003 and subsequent years, the update factor is the 
percentage increase in the market basket index for prospective payment 
hospitals (as defined in Sec. 413.40(a) of this chapter).
    (d) Budget neutrality--(1) Federal fiscal year 1984. For cost 
reporting periods beginning on or after October 1, 1983 and before 
October 1, 1984, CMS adjusts the target rate percentage used under 
paragraph (c)(1) of this section. This adjustment is based on a factor 
actuarially estimated to ensure that the estimated amount of aggregate 
Medicare payments based on the hospital-specific portion of the 
transition payment rates is neither greater nor less than 75 percent of 
the amounts that would have been payable for the inpatient operating 
costs for those same hospitals for fiscal year 1984 under the law in 
effect before April 20, 1983.
    (2) Federal fiscal year 1985. For cost reporting periods beginning 
on or after October 1, 1984 and before October 1, 1985, CMS adjusts the 
target rate percentage used under paragraph (c)(2) of this section. This 
adjustment is based on a factor actuarially estimated to ensure that the 
estimated amount of aggregate Medicare payment based on the hospital-
specific portion of the transition payment rates is neither greater nor 
less than 50 percent of the amounts that would have been payable for the 
inpatient operating costs for those same hospitals for fiscal year 1985 
under the Social Security Act as in effect on April 19, 1983.
    (e) DRG adjustment. The applicable hospital-specific cost per 
discharge is multiplied by the appropriate DRG weighting factor to 
determine the hospital-specific base payment amount (target amount) for 
a particular covered discharge.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 16787, May 6, 1986; 51 
FR 34793, Sept. 30, 1986; 51 FR 42234, Nov. 24, 1986; 52 FR 33057, Sept. 
1, 1987; 53 FR 38528, Sept. 30, 1988; 55 FR 15173, Apr. 20, 1990; 56 FR 
573, Jan. 7, 1991; 57 FR 39822, Sept. 1, 1992; 58 FR 46338, Sept. 1, 
1993; 59 FR 1658, Jan. 12, 1994; 59 FR 32383, June 23, 1994; 65 FR 
47106, Aug. 1, 2000]



Sec. 412.75  Determination of the hospital-specific rate for inpatient operating costs based on a Federal fiscal year 1987 base period.

    (a) Base-period costs--(1) General rule. Except as provided in 
paragraph (a)(2) of this section, for each hospital, the intermediary 
determines the hospital's Medicare part A allowable inpatient operating 
costs, as described in Sec. 412.2(c), for the 12-month or longer cost 
reporting period ending on or after September 30, 1987 and before 
September 30, 1988.
    (2) Exceptions. (i) If the hospital's last cost reporting period 
ending before September 30, 1988 is for less than 12 months, the base 
period is the hospital's most recent 12-month or longer cost reporting 
period ending before the short period report.
    (ii) If the hospital does not have a cost reporting period ending on 
or after

[[Page 404]]

September 30, 1987 and before September 30, 1988 and does have a cost 
reporting period beginning on or after October 1, 1986 and before 
October 1, 1987, that cost reporting period is the base period unless 
the cost reporting period is for less than 12 months. In that case, the 
base period is the hospital's most recent 12-month or longer cost 
reporting period ending before the short cost reporting period.
    (b) Costs on a per discharge basis. The intermediary determines the 
hospital's average base-period operating cost per discharge by dividing 
the total operating costs by the number of discharges in the base 
period. For purposes of this section, a transfer as defined in 
Sec. 412.4(b) is considered to be a discharge.
    (c) Case-mix adjustment. The intermediary divides the average base-
period cost per discharge by the hospital's case-mix index for the base 
period.
    (d) Updating base-period costs. For purposes of determining the 
updated base-period costs for cost reporting periods beginning in 
Federal fiscal year 1988, the update factor is determined using the 
methodology set forth in Sec. 412.73 (c)(15).
    (e) DRG adjustment. The applicable hospital-specific cost per 
discharge is multiplied by the appropriate DRG weighting factor to 
determine the hospital-specific base payment amount (target amount) for 
a particular covered discharge.
    (f) Notice of hospital-specific rate. The intermediary furnishes the 
hospital a notice of its hospital-specific rate, which contains a 
statment of the hospital's Medicare part A allowable inpatient operating 
costs, number of Medicare discharges, and case-mix index adjustment 
factor used to determine the hospital's cost per discharge for the 
Federal fiscal year 1987 base period.
    (g) Right to administrative and judicial review. An intermediary's 
determination of the hospital-specific rate for a hospital is subject to 
administrative and judicial review. Review is available to a hospital 
upon receipt of the notice of the hospital-specific rate. This notice is 
treated as a final intermediary determination of the amount of program 
reimbursement for purposes of subpart R of part 405 of this chapter, 
governing provider reimbursement determinations and appeals.
    (h) Modification of hospital-specific rate. (1) The intermediary 
recalculates the hospital-specific rate to reflect the following:
    (i) Any modifications that are determined as a result of 
administrative or judicial review of the hospital-specific rate 
determinations; or
    (ii) Any additional costs that are recognized as allowable costs for 
the hospital's base period as a result of administrative or judicial 
review of the base-period notice of amount of program reimbursement.
    (2) With respect to either the hospital-specific rate determination 
or the amount of program reimbursement determination, the actions taken 
on administrative or judicial review that provide a basis for 
recalculations of the hospital-specific rate include the following:
    (i) A reopening and revision of the hospital's base-period notice of 
amount of program reimbursement under Secs. 405.1885 through 405.1889 of 
this chapter.
    (ii) A prehearing order or finding issued during the provider 
payment appeals process by the appropriate reviewing authority under 
Sec. 405.1821 or Sec. 405.1853 of this chapter that resolved a matter at 
issue in the hospital's base-period notice of amount of program 
reimbursement.
    (iii) An affirmation, modification, or reversal of a Provider 
Reimbursement Review Board decision by the Administrator of CMS under 
Sec. 405.1875 of this chapter that resolved a matter at issue in the 
hospital's base-period notice of amount of program reimbursement.
    (iv) An administrative or judicial review decision under 
Secs. 405.1831, 405.1871, or 405.1877 of this chapter that is final and 
no longer subject to review under applicable law or regulations by a 
higher reviewing authority, and that resolved a matter at issue in the 
hospital's base-period notice of amount of program reimbursement.
    (v) A final, nonappealable court judgment relating to the base-
period costs.
    (3) The adjustments to the hospital-specific rate made under 
paragraphs (h) (1) and (2) of this section are effective

[[Page 405]]

retroactively to the time of the intermediary's initial determination of 
the rate.

[55 FR 15173, Apr. 20, 1990, as amended at 55 FR 36069, Sept. 4, 1990; 
55 FR 39775, Sept. 2, 1990; 56 FR 573, Jan. 7, 1991; 55 FR 46887, Nov. 
7, 1990; 57 FR 39822, Sept. 1, 1992; 58 FR 46338, Sept. 1, 1993; 65 FR 
47106, Aug. 1, 2000]



Sec. 412.77  Determination of the hospital-specific rate for inpatient operating costs for sole community hospitals based on a Federal fiscal year 1996 base 
          period.

    (a) Applicability. (1) This section applies to a hospital that has 
been designated as a sole community hospital, as described in 
Sec. 412.92. If the 1996 hospital-specific rate exceeds the rate that 
would otherwise apply, that is, either the Federal rate under 
Sec. 412.63 or the hospital-specific rates for either fiscal year 1982 
under Sec. 412.73 or fiscal year 1987 under Sec. 412.75, this 1996 rate 
will be used in the payment forumla set forth in Sec. 412.92(d)(1).
    (2) This section applies only to cost reporting periods beginning on 
or after October 1, 2000.
    (3) The formula for determining the hospital-specific costs for 
hospitals described under paragraph (a)(1) of this section is set forth 
in paragraph (f) of this section.
    (b) Based costs for hospitals subject to fiscal year 1996 rebasing. 
(1) General rule. Except as provided in paragraph (b)(2) of this 
section, for each hospital eligible under paragraph (a) of this section, 
the intermediary determines the hospital's Medicare Part A allowable 
inpatient operating costs, as described in Sec. 412.2(c), for the 12-
month or longer cost reporting period ending on or after September 30, 
1996 and before September 30, 1997, and computes the hospital-specific 
rate for purposes of determining prospective payment rates for inpatient 
operating costs as determined under Sec. 412.92(d).
    (2) Exceptions. (i) If the hospital's last cost reporting period 
ending before September 30, 1997 is for less than 12 months, the base 
period is the hospital's most recent 12-month or longer cost reporting 
period ending before the short period report.
    (ii) If the hospital does not have a cost reporting period ending on 
or after September 30, 1996 and before September 30, 1997, and does have 
a cost reporting period beginning on or after October 1, 1995 and before 
October 1, 1996, that cost reporting period is the base period unless 
the cost reporting period is for less than 12 months. If that cost 
reporting period is for less than 12 months, the base period is the 
hospital's most recent 12-month or longer cost reporting period ending 
before the short cost reporting period. If a hospital has no cost 
reporting period beginning in fiscal year 1996, the hospital will not 
have a hospital-specific rate based on fiscal year 1996.
    (c) Costs on a per discharge basis. The intermediary determines the 
hospital's average base-period operating cost per discharge by dividing 
the total operating costs by the number of discharges in the base 
period. For purposes of this section, a transfer as defined in 
Sec. 412.4(b) is considered to be a discharge.
    (d) Case-mix adjustment. The intermediary divides the average base-
period cost per discharge by the hospital's case-mix index for the base 
period.
    (e) Updating base-period costs. For purposes of determining the 
updated base-period costs for cost reporting periods beginning in 
Federal fiscal year 1996, the update factor is determined using the 
methodology set forth in Sec. 412.73(c)(12) through (c)(15).
    (f) DRG adjustment. The applicable hospital-specific cost per 
discharge is multiplied by the appropriate DRG weighting factor to 
determine the hospital-specific base payment amount (target amount) for 
a particular covered discharge.
    (g) Notice of hospital-specific rates. The intermediary furnishes a 
hospital eligible for rebasing a notice of the hospital-specific rate as 
computed in accordance with this section. The notice will contain a 
statement of the hospital's Medicare Part A allowable inpatient 
operating costs, the number of Medicare discharges, and the case-mix 
index adjustment factor used to determine the hospital's cost per 
discharge for the Federal fiscal year 1996 base period.
    (h) Right to administrative and judicial review. An intermediary's 
determination of the hospital-specific rate for a

[[Page 406]]

hospital is subject to administrative and judicial review. Review is 
available to a hospital upon receipt of the notice of the hospital-
specific rate. This notice is treated as a final intermediary 
determination of the amount of program reimbursement for purposes of 
subpart R of part 405 of this chapter.
    (i) Modification of hospital-specific rate. (1) The intermediary 
recalculates the hospital-specific rate to reflect the following:
    (i) Any modifications that are determined as a result of 
administrative or judicial review of the hospital-specific rate 
determinations; or
    (ii) Any additional costs that are recognized as allowable costs for 
the hospital's base period as a result of administrative or judicial 
review of the base-period notice of amount of program reimbursement.
    (2) With respect to either the hospital-specific rate determination 
or the amount of program reimbursement determination, the actions taken 
on administrative or judicial review that provide a basis for the 
recalculations of the hospital-specific rate include the following:
    (i) A reopening and revision of the hospital's base-period notice of 
amount of program reimbursement under Secs. 405.1885 through 405.1889 of 
this chapter.
    (ii) A prehearing order or finding issued during the provider 
payment appeals process by the appropriate reviewing authority under 
Sec. 405.1821 or Sec. 405.1853 of this chapter that resolved a matter at 
issue in the hospital's base-period notice of amount of program 
reimbursement.
    (iii) An affirmation, modification, or reversal of a Provider 
Reimbursement Review Board decision by the Administrator of CMS under 
Sec. 405.1875 of this chapter that resolved a matter at issue in the 
hospital's base-period notice of amount of program reimbursement.
    (iv) An administrative or judicial review decision under 
Sec. 405.1831, Sec. 405.1871, or Sec. 405.1877 of this chapter that is 
final and no longer subject to review under applicable law or 
regulations by a higher reviewing authority, and that resolved a matter 
at issue in the hospital's base-period notice of amount of program 
reimbursement.
    (v) A final, nonappealable court judgment relating to the base-
period costs.
    (3) The adjustments to the hospital-specific rate made under 
paragraphs (i)(1) and (i)(2) of this section are effective retroactively 
to the time of the intermediary's initial determination of the rate.

[65 FR 47106, Aug. 1, 2000, as amended at 66 FR 32192, June 13, 2001]



Sec. 412.78  Recovery of excess transition period payment amounts resulting from unlawful claims.

    If a hospital's base-year costs, as estimated for purposes of 
determining the hospital-specific portion, are determined, by criminal 
conviction or imposition of a civil money penalty or assessment, to 
include costs that were unlawfully claimed, the hospital's base-period 
costs are adjusted to remove the effect of the excess costs, and CMS 
recovers both the excess costs reimbursed for the base period and the 
additional amounts paid due to the inappropriate increase of the 
hospital-specific portion of the hospital's transition payment rates.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39822, Sept. 1, 1992. 
Redesignated at 65 FR 47106, Aug. 1, 2000]



 Subpart F--Payment for Outlier Cases and Special Treatment Payment for 
                             New Technology

                        Payment for Outlier Cases



412.80  Outlier cases: General provisions.

    (a) Basic rule--(1) Discharges occurring on or after October 1, 1994 
and before October 1, 1997. For discharges occurring on or after October 
1, 1994, and before October 1, 1997, except as provided in paragraph (b) 
of this section concerning transferring hospitals, CMS provides for 
additional payment, beyond standard DRG payments, to a hospital for 
covered inpatient hospital services furnished to a Medicare beneficiary 
if either of the following conditions is met:
    (i) The beneficiary's length-of-stay (including days at the SNF 
level of care if a SNF bed is not available in the area) exceeds the 
mean length-of-

[[Page 407]]

stay for the applicable DRG by the lesser of the following:
    (A) A fixed number of days, as specified by CMS; or
    (B) A fixed number of standard deviations, as specified by CMS.
    (ii) The beneficiary's length-of-stay does not exceed criteria 
established under paragraph (a)(1)(i) of this section, but the 
hospital's charges for covered services furnished to the beneficiary, 
adjusted to operating costs and capital costs by applying cost-to-charge 
ratios as described in Sec. 412.84(h), exceed the DRG payment for the 
case plus a fixed dollar amount (adjusted for geographic variation in 
costs) as specified by CMS.
    (2) Discharges occurring on or after October 1, 1997 and before 
October 1, 2001. For discharges occurring on or after October 1, 1997 
and before October 1, 2001, except as provided in paragraph (b) of this 
section concerning transfers, CMS provides for additional payment, 
beyond standard DRG payments, to a hospital for covered inpatient 
hospital services furnished to a Medicare beneficiary if the hospital's 
charges for covered services, adjusted to operating costs and capital 
costs by applying cost-to-charge ratios, as described in Sec. 412.84(h), 
exceed the DRG payment for the case, payments for indirect costs of 
graduate medical education (Sec. 412.105), and payments for serving 
disproportionate share of low-income patients (Sec. 412.106), plus a 
fixed dollar amount (adjusted for geographic variation in costs) as 
specified by CMS.
    (3) Discharges occurring on or after October 1, 2001. For discharges 
occurring on or after October 1, 2001, except as provided in paragraph 
(b) of this section concerning transfers, CMS provides for additional 
payment, beyond standard DRG payments and beyond additional payments for 
new medical services or technology specified in Secs. 412.87 and 412.88, 
to a hospital for covered inpatient hospital services furnished to a 
Medicare beneficiary if the hospital's charges for covered services, 
adjusted to operating costs and capital costs by applying cost-to-charge 
ratios as described in Sec. 412.84(h), exceed the DRG payment for the 
case (plus payments for indirect costs of graduate medical education 
(Sec. 412.105), payments for serving a disproportionate share of low-
income patients (Sec. 412.106), and additional payments for new medical 
services or technologies) plus a fixed dollar amount (adjusted for 
geographic variation in costs) as specified by CMS.
    (b) Outlier cases in transferring hospitals. CMS provides cost 
outlier payments to a transferring hospital for cases paid in accordance 
with Sec. 412.4(f), if the hospital's charges for covered services 
furnished to the beneficiary, adjusted to costs by applying cost-to-
charge ratios as described in Sec. 412.84(h), exceed the DRG payment for 
the case plus a fixed dollar amount (adjusted for geographic variation 
in costs) as specified by CMS, divided by the geometric mean length of 
stay for the DRG, and multiplied by an applicable factor determined as 
follows:
    (1) For transfer cases paid in accordance with Sec. 412.4(f)(1), the 
applicable factor is equal to the length of stay plus 1 day.
    (2) For transfer cases paid in accordance with Sec. 412.4(f)(2), the 
applicable factor is equal to 0.5 plus the product of the length of stay 
plus 1 day multiplied by 0.5.
    (c) Publication and revision of outlier criteria. CMS will issue 
threshold criteria for determining outlier payment in the annual notice 
of the prospective payment rates published in accordance with 
Sec. 412.8(b).

[62 FR 46028, Aug. 29, 1997, as amended at 63 FR 41003, July 31, 1998; 
66 FR 46924, Sept. 7, 2001; 67 FR 50111, Aug. 1, 2002]



Sec. 412.82  Payment for extended length-of-stay cases (day outliers).

    (a) For discharges occurring before October 1, 1997, if the hospital 
stay reflected by a discharge includes covered days of care beyond the 
applicable threshold criterion, the intermediary will make an additional 
payment, on a per diem basis, to the discharging hospital for those 
days. A special request or submission by the hospital is not necessary 
to initiate this payment. However, a hospital may request payment for 
day outliers before the medical review required in paragraph (b) of this 
section.
    (b) The QIO must review and approve to the extent required by CMS--

[[Page 408]]

    (1) The medical necessity and appropriateness of the admission and 
outlier services in the context of the entire stay;
    (2) The validity of the diagnostic and procedural coding; and
    (3) The granting of grace days.
    (c) Except as provided in Sec. 412.86, the per diem payment made 
under paragraph (a) of this section is derived by taking a percentage of 
the average per diem payment for the applicable DRG, as calculated by 
dividing the Federal prospective payment rate for inpatient operating 
costs and inpatient capital-related costs determined under subpart D of 
this part, by the arithmetic mean length of stay for that DRG. CMS 
issues the applicable percentage of the average per diem payment in the 
annual publication of the prospective payment rates in accordance with 
Sec. 412.8(b).
    (d) Any days in a covered stay identified as noncovered reduce the 
number of days reimbursed at the day outlier rate but not to exceed the 
number of days that occur after the day outlier threshold.

[50 FR 12741, Mar. 29, 1985, as amended at 50 FR 15326, Apr. 17, 1985; 
50 FR 35689, Sept. 3, 1985; 53 FR 38529, Sept. 30, 1988; 57 FR 39822, 
Sept. 1, 1992; 59 FR 45398, Sept. 1, 1994; 62 FR 46028, Aug. 29, 1997]



Sec. 412.84  Payment for extraordinarily high-cost cases (cost outliers).

    (a) A hospital may request its intermediary to make an additional 
payment for inpatient hospital services that meet the criteria 
established in accordance with Sec. 412.80(a).
    (b) The hospital must request additional payment--
    (1) With initial submission of the bill; or
    (2) Within 60 days of receipt of the intermediary's initial 
determination.
    (c) Except as specified in paragraph (e) of this section, an 
additional payment for a cost outlier case is made prior to medical 
review.
    (d) As described in paragraph (f) of this section, the QIO reviews a 
sample of cost outlier cases after payment. The charges for any services 
identified as noncovered through this review are denied and any outlier 
payment made for these services are recovered, as appropriate, after a 
determination as to the provider's liability has been made.
    (e) If the QIO finds a pattern of inappropriate utilization by a 
hospital, all cost outlier cases from that hospital are subject to 
medical review, and this review may be conducted prior to payment until 
the QIO determines that appropriate corrective actions have been taken.
    (f) The QIO reviews the cost outlier cases, using the medical 
records and itemized charges, to verify the following:
    (1) The admission was medically necessary and appropriate.
    (2) Services were medically necessary and delivered in the most 
appropriate setting.
    (3) Services were ordered by the physician, actually furnished, and 
not duplicatively billed.
    (4) The diagnostic and procedural codings are correct.
    (g) The intermediary bases the operating and capital costs of the 
discharge on the billed charges for covered inpatient services adjusted 
by the cost to charge ratios applicable to operating and capital costs, 
respectively, as described in paragraph (h) of this section.
    (h) The operating cost-to-charge ratio and, effective with cost 
reporting periods beginning on or after October 1, 1991, the capital 
cost-to-charge ratio used to adjust covered charges are computed 
annually by the intermediary for each hospital based on the latest 
available settled cost report for that hospital and charge data for the 
same time period as that covered by the cost report. Statewide cost-to-
charge ratios are used in those instances in which a hospital's 
operating or capital cost-to-charge ratios fall outside reasonable 
parameters. CMS sets forth these parameters and the statewide cost-to-
charge ratios in each year's annual notice of prospective payment rates 
published under Sec. 412.8(b).
    (i) If any of the services are determined to be noncovered, the 
charges for these services will be deducted from the requested amount of 
reimbursement but not to exceed the amount claimed above the cost 
outlier threshold.

[[Page 409]]

    (j) Except as provided in paragraph (k) of this section, the 
additional amount is derived by first taking 80 percent of the 
difference between the hospital's adjusted operating cost for the 
discharge (as determined under paragraph (g) of this section) and the 
operating threshold criteria established under Sec. 412.80(a)(1)(ii); 80 
percent is also taken of the difference between the hospital's adjusted 
capital cost for the discharge (as determined under paragraph (g) of 
this section) and the capital threshold criteria established under 
Sec. 412.80(a)(1)(ii). The resulting capital amount is then multiplied 
by the applicable Federal portion of the payment as determined in 
Sec. 412.340(a) or Sec. 412.344(a).
    (k) For discharges occurring on or after April 1, 1988, the 
additional payment amount for the DRGs related to burn cases, which are 
identified in the most recent annual notice of prospective payment rates 
published in accordance with Sec. 412.8(b), is computed under the 
provisions of paragraph (j) of this section except that the payment is 
made using 90 percent of the difference between the hospital's adjusted 
cost for the discharge and the threshold criteria.

[50 FR 12741, Mar. 29, 1985, as amended at 50 FR 35689, Sept. 3, 1985; 
51 FR 31496, Sept. 3, 1986; 53 FR 38529, Sept. 30, 1988; 54 FR 36494, 
Sept. 1, 1989; 55 FR 15174, Apr. 20, 1990; 56 FR 43448, Aug. 30, 1991; 
57 FR 39823, Sept. 1, 1992; 59 FR 45398, Sept. 1, 1994; 62 FR 46028, 
Aug. 29, 1997]



Sec. 412.86  Payment for extraordinarily high-cost day outliers.

    For discharges occurring before October 1, 1997, if a discharge that 
qualifies for an additional payment under the provisions of Sec. 412.82 
has charges adjusted to costs that exceed the cost outlier threshold 
criteria for an extraordinarily high-cost case as set forth in 
Sec. 412.80(a)(1)(ii), the additional payment made for the discharge is 
the greater of--
    (a) The applicable per diem payment computed under Sec. 412.82 (c) 
or (d); or
    (b) The payment that would be made under Sec. 412.84 (i) or (j) if 
the case had not met the day outlier criteria threshold set forth in 
Sec. 412.80(a)(1)(i).

[53 FR 38529, Sept. 30, 1988, as amended at 62 FR 46028, Aug. 29, 1997]

          Additional Special Payment for Certain New Technology



Sec. 412.87  Additional payment for new medical services and technologies: General provisions.

    (a) Basis. Sections 412.87 and 412.88 implement sections 
1886(d)(5)(K) and 1886(d)(5)(L) of the Act, which authorize the 
Secretary to establish a mechanism to recognize the costs of new medical 
services and technologies under the hospital inpatient prospective 
payment system.
    (b) Eligibility criteria. For discharges occurring on or after 
October 1, 2001, CMS provides for additional payments (as specified in 
Sec. 412.88) beyond the standard DRG payments and outlier payments to a 
hospital for discharges involving covered inpatient hospital services 
that are new medical services and technologies, if the following 
conditions are met:
    (1) A new medical service or technology represents an advance that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries. CMS will determine 
whether a new medical service or technology meets this requirement and 
announce the results of its determinations in the Federal Register as a 
part of its annual updates and changes to the hospital inpatient 
prospective payment system.
    (2) A medical service or technology may be considered new within 2 
or 3 years after the point at which data begin to become available 
reflecting the ICD-9-CM code assigned to the new service or technology 
(depending on when a new code is assigned and data on the new service or 
technology become available for DRG recalibration). After CMS has 
recalibrated the DRGs, based on available data, to reflect the costs of 
an otherwise new medical service or technology, the medical service or 
technology will no longer be considered ``new'' under the criterion of 
this section.

[[Page 410]]

    (3) The DRG prospective payment rate otherwise applicable to 
discharges involving the medical service or technology is determined to 
be inadequate, based on application of a threshold amount to estimated 
charges incurred with respect to such discharges. To determine whether 
the payment would be adequate, CMS will determine whether the charges of 
the cases involving a new medical service or technology will exceed a 
threshold amount set at one standard deviation beyond the geometric mean 
standardized charge for all cases in the DRG to which the new medical 
service or technology is assigned (or the case-weighted average of all 
relevant DRGs if the new medical service or technology occurs in many 
different DRGs). Standardized charges reflect the actual charges of a 
case adjusted by the prospective payment system payment factors 
applicable to an individual hospital, such as the wage index, the 
indirect medical education adjustment factor, and the disproportionate 
share adjustment factor.

[66 FR 46924, Sept. 7, 2001]



Sec. 412.88  Additional payment for new medical service or technology.

    (a) For discharges involving new medical services or technologies 
that meet the criteria specified in Sec. 412.87, Medicare payment will 
be:
    (1) One of the following:
    (i) The full DRG payment (including adjustments for indirect medical 
education and disproportionate share but excluding outlier payments);
    (ii) The payment determined under Sec. 412.4(f) for transfer cases;
    (iii) The payment determined under Sec. 412.92(d) for sole community 
hospitals; or
    (iv) The payment determined under Sec. 412.108(c) for Medicare-
dependent hospitals; plus
    (2) If the costs of the discharge (determined by applying cost-to-
charge ratios as described in Sec. 412.84(h)) exceed the full DRG 
payment, an additional amount equal to the lesser of--
    (i) 50 percent of the costs of the new medical service or 
technology; or
    (ii) 50 percent of the amount by which the costs of the case exceed 
the standard DRG payment.
    (b) Unless a discharge case qualifies for outlier payment under 
Sec. 412.84, Medicare will not pay any additional amount beyond the DRG 
payment plus 50 percent of the estimated costs of the new medical 
service or technology.
    (c) If CMS estimates before the beginning of a Federal fiscal year 
that the additional payments under this section would exceed 1.0 percent 
of total operating payments under the hospital inpatient prospective 
payment system, the additional payment amounts under paragraph (a) of 
this section will be reduced prospectively to a percentage estimated to 
result in payments not to exceed 1.0 percent of total operating payments 
under the hospital inpatient prospective payment system.

[66 FR 46924, Sept. 7, 2001, as amended at 67 FR 50111, Aug. 1, 2002]



Subpart G--Special Treatment of Certain Facilities Under the Prospective 
              Payment System for Inpatient Operating Costs



Sec. 412.90  General rules.

    (a) Sole community hospitals. CMS may adjust the prospective payment 
rates for inpatient operating costs determined under subpart D or E of 
this part if a hospital, by reason of factors such as isolated location, 
weather conditions, travel conditions, or absence of other hosptials, is 
the sole source of inpatient hospital services reasonably available in a 
geographic area to Medicare beneficiaries. If a hospital meets the 
criteria for such an exception under Sec. 412.92(a), its prospective 
payment rates for inpatient operating costs are determined under 
Sec. 412.92(d).
    (b) Referral center. CMS may adjust the prospective payment rates 
for inpatient operating costs determined under subpart D or E of this 
part if a hospital acts as a referral center for patients transferred 
from other hospitals. Criteria for identifying such referral centers are 
set forth in Sec. 412.96.
    (c) [Reserved]
    (d) Kidney acquisition costs incurred by hospitals approved as renal 
transplantation centers. CMS pays for kidney acquisition costs incurred 
by renal transplanation centers on a reasonable

[[Page 411]]

cost basis. The criteria for this special payment provision are set 
forth in Sec. 412.100.
    (e) Hospitals located in areas that are reclassified from urban to 
rural. (1) CMS adjusts the rural Federal payment amounts for inpatient 
operating costs for hospitals located in geographic areas that are 
reclassified from urban to rural as defined in Sec. 412.62(f). This 
adjustment is set forth in Sec. 412.102.
    (2) CMS establishes a procedure by which certain individual 
hospitals located in urban areas may apply for reclassification as 
rural. The criteria for reclassification are set forth in Sec. 412.103.
    (f) Hospitals that have a high percentage of ESRD beneficiary 
discharges. CMS makes an additional payment to a hospital if ten percent 
or more of its total Medicare discharges in a cost reporting period 
beginning on or after October 1, 1984 are ESRD beneficiary discharges. 
In determining ESRD discharges, discharges in DRG Nos. 302, 316, and 317 
are excluded. The criteria for this additional payment are set forth in 
Sec. 412.104.
    (g) Hosptials that incur indirect costs for graduate medical 
education programs. CMS makes an additional payment for inpatient 
operating costs to a hospital for indirect medical education costs 
attributable to an approved graduate medical education program. The 
criteria for this additional payment are set forth in Sec. 412.105.
    (h) Hospitals that serve a disproportionate share of low-income 
patients. For discharges occurring on or after May 1, 1986, CMS makes an 
additional payment for inpatient operating costs to hospitals that serve 
a disproportionate share of low-income patients. The criteria for this 
additional payment are set forth in Sec. 412.106.
    (i) Hospitals that receive an additional update for FYs 1998 and 
1999. For FYs 1998 and 1999, CMS makes an upward adjustment to the 
standardized amounts for certain hospitals that do not receive indirect 
medical education or disproportionate share payments and are not 
Medicare- dependent, small rural hospitals. The criteria for identifying 
these hospitals are set forth in Sec. 412.107.
    (j) Medicare-dependent, small rural hospitals. For cost reporting 
periods beginning on or after April 1, 1990 and before October 1, 1994, 
or beginning on or after October 1, 1997 and before October 1, 2006, CMS 
adjusts the prospective payment rates for inpatient operating costs 
determined under subparts D and E of this part if a hospital is 
classified as a Medicare-dependent, small rural hospital.
    (k) Essential access community hospitals (EACHs). If a hospital was 
designated as an EACH by CMS as described in Sec. 412.109(a) and is 
located in a rural area as defined in Sec. 412.109(b), CMS determines 
the prospective payment rate for that hospital, as it does for sole 
community hospitals, under Sec. 412.92(d).

[57 FR 39823, Sept. 1, 1992, as amended at 58 FR 30669, May 26, 1993; 62 
FR 46028, Aug. 29, 1997; 64 FR 67051, Nov. 30, 1999; 65 FR 47047, Aug. 
1, 2000]



Sec. 412.92  Special treatment: Sole community hospitals.

    (a) Criteria for classification as a sole community hospital. CMS 
classifies a hospital as a sole community hospital if it is located more 
than 35 miles from other like hospitals, or it is located in a rural 
area (as defined in Sec. 412.83(b)) and meets one of the following 
conditions:
    (1) The hospital is located between 25 and 35 miles from other like 
hospitals and meets one of the following criteria:
    (i) No more than 25 percent of residents who become hospital 
inpatients or no more than 25 percent of the Medicare beneficiaries who 
become hospital inpatients in the hospital's service area are admitted 
to other like hospitals located within a 35-mile radius of the hospital, 
or, if larger, within its service area;
    (ii) The hospital has fewer than 50 beds and the intermediary 
certifies that the hospital would have met the criteria in paragraph 
(a)(1)(i) of this section were it not for the fact that some 
beneficiaries or residents were forced to seek care outside the service 
area due to the unavailability of necessary specialty services at the 
community hospital; or
    (iii) Because of local topography or periods of prolonged severe 
weather

[[Page 412]]

conditions, the other like hospitals are inaccessible for at least 30 
days in each 2 out of 3 years.
    (2) The hospital is located between 15 and 25 miles from other like 
hospitals but because of local topography or periods of prolonged severe 
weather conditions, the other like hospitals are inaccessible for at 
least 30 days in each 2 out of 3 years.
    (3) Because of distance, posted speed limits, and predictable 
weather conditions, the travel time between the hospital and the nearest 
like hospital is at least 45 minutes.
    (b) Classification procedures. (1) Request for classification as 
sole community hospital. (i) The hospital must make its request to its 
fiscal intermediary.
    (ii) If a hospital is seeking sole community hospital classification 
under paragraph (a)(1)(i) or (a)(1)(ii) of this section, the hospital 
must include the following information with its request:
    (A) The hospital must provide patient origin data (for example, the 
number of patients from each zip code from which the hospital draws 
inpatients) for all inpatient discharges to document the boundaries of 
its service area.
    (B) The hospital must provide patient origin data from all other 
hospitals located within a 35 mile radius of it or, if larger, within 
its service area, to document that no more than 25 percent of either all 
of the population or the Medicare beneficiaries residing in the 
hospital's service area and hospitalized for inpatient care were 
admitted to other like hospitals for care.
    (iii)(A) If the hospital is unable to obtain the information 
required under paragraph (b)(1)(ii)(A) of this section concerning the 
residences of Medicare beneficiaries who were inpatients in other 
hospitals located within a 35 mile radius of the hospital or, if larger, 
within the hospital's service area, the hospital may request that CMS 
provide this information.
    (B) If a hospital obtains the information as requested under 
paragraph (b)(1)(iii)(A) of this section, that information is used by 
both the intermediary and CMS in making the determination of the 
residences of Medicare beneficiaries under paragraphs (b)(1)(iii) and 
(b)(1)(iv) of this section, regardless of any other information 
concerning the residences of Medicare beneficiaries submitted by the 
hospital.
    (iv) The intermediary reviews the request and send the request, with 
its recommendation, to CMS.
    (v) CMS reviews the request and the intermediary's recommendation 
and forward its approval or disapproval to the intermediary.
    (2) Effective dates of classification. (i) Sole community hospital 
status is effective 30 days after the date of CMS's written notification 
of approval.
    (ii) When a court order or a determination by the Provider 
Reimbursement Review Board (PRRB) reverses an CMS denial of sole 
community hospital status and no further appeal is made, the sole 
community hospital status is effective as follows:
    (A) If the hospital's application was submitted prior to October 1, 
1983, its status as a sole community hospital is effective at the start 
of the cost reporting period for which it sought exemption from the cost 
limits.
    (B) If the hospital's application for sole community hospital status 
was filed on or after October 1, 1983, the effective date is 30 days 
after the date of CMS's original written notification of denial.
    (iii) When a hospital is granted retroactive approval of sole 
community hospital status by a court order or a PRRB decision and the 
hospital wishes its sole community hospital status terminated before the 
date of the court order or PRRB determination, it must submit written 
notice to the CMS regional office within 90 days of the court order or 
PRRB decision. A written request received after the 90-day period is 
effective no later than 30 days after the request is submitted.
    (iv) A hospital classified as a sole community hospital receives a 
payment djustment, as described in paragraph (d) of this section, 
effective with discharges occurring on or after 30 days after the date 
of CMS's approval of the classification.
    (3) Duration of classification. An approved classification as a sole 
community hospital remains in effect without need for reapproval unless 
there is a

[[Page 413]]

change in the circumstances under which the classification was approved.
    (4) Cancellation of classification. (i) A hospital may at any time 
request cancellation of its classification as a sole community hospital, 
and be paid at rates determined under subparts D and E of this part, as 
appropriate.
    (ii) The cancellation becomes effective no later than 30 days after 
the date the hospital submits its request.
    (iii) If a hospital requests that its sole community hospital 
classification be cancelled, it may not be reclassified as a sole 
community hospital unless it meets the following conditions:
    (A) At least one full year has passed since the effective date of 
its cancellation.
    (B) The hospital meets the qualifying criteria set forth in 
paragraph (a) of this section in effect at the time it reapplies.
    (5) Automatic classification as a sole community hospital. A 
hospital that has been granted an exemption from the hospital cost 
limits before October 1, 1983, or whose request for the exemption was 
received by the appropriate intermediary before October 1, 1983, and was 
subsequently approved, is automatically classified as a sole community 
hospital unless that classification has been cancelled under paragraph 
(b)(3) of this section, or there is a change in the circumstances under 
which the classification was approved.
    (c) Terminology. As used in this section--
    (1) The term miles means the shortest distance in miles measured 
over improved roads. An improved road for this purpose is any road that 
is maintained by a local, State, or Federal government entity and is 
available for use by the general public. An improved road includes the 
paved surface up to the front entrance of the hospital.
    (2) The term like hospital means a hospital furnishing short-term, 
acute care. Effective with cost reporting periods beginning on or after 
October 1, 2002, for purposes of a hospital seeking sole community 
hospital designation, CMS will not consider the nearby hospital to be a 
like hospital if the total inpatient days attributable to units of the 
nearby hospital that provides a level of care characteristic of the 
level of care payable under the acute care hospital inpatient 
prospective payment system are less than or equal to 8 percent of the 
similarly calculated total inpatient days of the hospital seeking sole 
community hospital designation.
    (3) The term service area means the area from which a hospital draws 
at least 75 percent of its inpatients during the most recent 12-month 
cost reporting period ending before it applies for classification as a 
sole community hospital.
    (d) Determining prospective payment rates for inpatient operating 
costs for sole community hospitals. (1) General rule. For cost reporting 
periods beginning on or after April 1, 1990, a sole community hospital 
is paid based on whichever of the following amounts yields the greatest 
aggregate payment for the cost reporting period:
    (i) The Federal payment rate applicable to the hospitals as 
determined under Sec. 412.63.
    (ii) The hospital-specific rate as determined under Sec. 412.73.
    (iii) The hospital-specific rate as determined under Sec. 412.75.
    (iv) For cost reporting periods beginning on or after October 1, 
2000, the hospital-specific rate as determined under Sec. 412.77 
(calculated under the transition schedule set forth in paragraph (d)(2) 
of this section).
    (2) Transition of FY 1996 hospital-specific rate. The intermediary 
calculates the hospital-specific rate determined on the basis of the 
fiscal year 1996 base period rate as follows:
    (i) For Federal fiscal year 2001, the hospital-specific rate is the 
sum of 75 percent of the greater of the amounts specified in paragraph 
(d)(1)(i), (d)(1)(ii), or (d)(1)(iii) of this section, plus 25 percent 
of the hospital-specific rate as determined under Sec. 412.77.
    (ii) For Federal fiscal year 2002, the hospital-specific rate is the 
sum of 50 percent of the greater of the amounts specified in paragraph 
(d)(1)(i), (d)(1)(ii), or (d)(1)(iii) of this section, plus 50 percent 
of the hospital-specific rate as determined under Sec. 412.77.
    (iii) For Federal fiscal year 2003, the hospital-specific rate is 
the sum of 25 percent of the greater of the amounts specified in 
paragraph (d)(1)(i), (d)(1)(ii), or (d)(1)(iii) of this section,

[[Page 414]]

plus 75 percent of the hospital-specific rate as determined under 
Sec. 412.77.
    (iv) For Federal fiscal year 2004 and any subsequent fiscal years, 
the hospital-specific rate is 100 percent of the hospital-specific rate 
specified in paragraph (d)(1)(iv) of this section.
    (3) Adjustments to payments. A sole community hospital may receive 
an adjustment to its payments to take into account a significant 
decrease in number of discharges or a significant increase in inpatient 
operating costs, as described in paragraphs (e) and (g) of this section 
respectively.
    (e) Additional payments to sole community hospitals experiencing a 
significant volume decrease. (1) For cost reporting periods beginning on 
or after October 1, 1983, the intermediary provides for a payment 
adjustment for a sole community hospital for any cost reporting period 
during which the hospital experiences, due to circumstances as described 
in paragraph (e)(2) of this section a more than five percent decrease in 
its total discharges of inpatients as compared to its immediately 
preceding cost reporting period. If either the cost reporting period in 
question or the immediately preceding cost reporting period is other 
than a 12-month cost reporting period, the intermediary must convert the 
discharges to a monthly figure and multiply this figure by 12 to 
estimate the total number of discharges for a 12-month cost reporting 
period.
    (2) To qualify for a payment adjustment on the basis of a decrease 
in discharges, a sole community hospital must submit its request no 
later than 180 days after the date on the intermediary's Notice of 
Amount of Program Reimbursement--
    (i) Submit to the intermediary documentation demonstrating the size 
of the decrease in discharges, and the resulting effect on per discharge 
costs; and
    (ii) Show that the decrease is due to circumstances beyond the 
hospital's control.
    (3) The intermediary determines a lump sum adjustment amount not to 
exceed the difference between the hospital's Medicare inpatient 
operating costs and the hospital's total DRG revenue for inpatient 
operating costs based on DRG-adjusted prospective payment rates for 
inpatient operating costs (including outlier payments for inpatient 
operating costs determined under subpart F of this part and additional 
payments made for inpatient operating costs for hospitals that serve a 
disproportionate share of low-income patients as determined under 
Sec. 412.106 and for indirect medical education costs as determined 
under Sec. 412.105).
    (i) In determining the adjustment amount, the intermediary 
considers--
    (A) The individual hospital's needs and circumstances, including the 
reasonable cost of maintaining necessary core staff and services in view 
of minimum staffing requirements imposed by State agencies;
    (B) The hospital's fixed (and semi-fixed) costs, other than those 
costs paid on a reasonable cost basis under part 413 of this chapter; 
and
    (C) The length of time the hospital has experienced a decrease in 
utilization.
    (ii) The intermediary makes its determination within 180 days from 
the date it receives the hospital's request and all other necessary 
information.
    (iii) The intermediary determination is subject to review under 
subpart R of part 405 of this chapter.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 31496, Sept. 3, 1986; 
51 FR 34793, Sept. 30, 1986; 52 FR 30367, Aug. 14, 1987; 52 FR 33057, 
Sept. 1, 1987; 53 FR 38529, Sept. 30, 1988; 54 FR 36494, Sept. 1, 1989; 
55 FR 14283, Apr. 17, 1990; 55 FR 15174, Apr. 20, 1990; 55 FR 36070, 
Sept. 4, 1990; 56 FR 25487, June 4, 1991; 57 FR 39823, Sept. 1, 1992; 60 
FR 45848, Sept. 1, 1995; 65 FR 47107, Aug. 1, 2000; 66 FR 32193, June 
13, 2001; 66 FR 39933, Aug. 1, 2001; 67 FR 50111, Aug. 1, 2002]



Sec. 412.96  Special treatment: Referral centers.

    (a) Criteria for classification as a referral center: Basic rule. 
CMS classifies a hospital as a referral center only if the hospital is a 
Medicare participating acute care hospital and meets the applicable 
criteria of paragraph (b) or (c) of this section.
    (b) Criteria for cost reporting periods beginning on or after 
October 1, 1983. The hospital meets either of the following criteria:
    (1) The hospital is located in a rural area (as defined in 
Sec. 412.63(b)) and has

[[Page 415]]

the following number of beds, as determined under the provisions of 
Sec. 412.105(b), available for use:
    (i) Effective for discharges occurring before April 1, 1988, the 
hospital has 500 or more beds.
    (ii) Effective for discharges occurring on or after April 1, 1988, 
the hospital has 275 or more beds during its most recently completed 
cost reporting period unless the hospital submits written documentation 
with its application that its bed count has changed since the close of 
its most recently completed cost reporting period for one or more of the 
following reasons:
    (A) Merger of two or more hospitals.
    (B) Reopening of acute care beds previously closed for renovation.
    (C) Transfer to the prospective payment system of acute care beds 
previously classified as part of an excluded unit.
    (D) Expansion of acute care beds available for use and permanently 
maintained for lodging inpatients, excluding beds in corridors and other 
temporary beds.
    (2) The hospital shows that--(i) At least 50 percent of its Medicare 
patients are referred from other hospitals or from physicians not on the 
staff of the hospital; and
    (ii) At least 60 percent of the hospital's Medicare patients live 
more than 25 miles from the hospital, and at least 60 percent of all the 
services that the hospital furnishes to Medicare beneficiaries are 
furnished to beneficiaries who live more than 25 miles from the 
hospital.
    (c) Alternative criteria. For cost reporting periods beginning on or 
after October 1, 1985, a hospital that does not meet the criteria of 
paragraph (b) of this section is classified as a referral center if it 
is located in a rural area (as defined in Sec. 412.62(f)) and meets the 
criteria specified in paragraphs (c)(1) and (c)(2) of this section and 
at least one of the three criteria specified in paragraphs (c)(3), 
(c)(4), and (c)(5) of this section.
    (1) Case-mix index. CMS sets forth national and regional case-mix 
index values in each year's annual notice of prospective payment rates 
published under Sec. 412.8(b). The methodology CMS uses to calculate 
these criteria is described in paragraph (g) of this section. The case-
mix index value to be used for an individual hospital in the 
determination of whether it meets the case-mix index criteria is that 
calculated by CMS from the hospital's own billing records for Medicare 
discharges as processed by the fiscal intermediary and submitted to CMS. 
The hospital's case-mix index for discharges (not including discharges 
from units excluded from the prospective payment system under subpart B 
of this part) during the most recent Federal fiscal year that ended at 
least one year prior to the beginning of the cost reporting period for 
which the hospital is seeking referral center status must be at least 
equal to-
    (i) For hospitals applying for rural referral center status for cost 
reporting periods beginning on or after October 1, 1985 and before 
October 1, 1986, the national or regional case-mix index value; or
    (ii) For hospitals applying for rural referral center status for 
cost--reporting periods beginning on or after October 1, 1986, the 
national case-mix index value as established by CMS or the median case-
mix index value for urban hospitals located in each region. In 
calculating the median case-mix index for each region, CMS excludes the 
case-mix indexes of hospitals receiving indirect medical education 
payments as provided in Sec. 412.105.
    (2) Number of discharges. (i) CMS sets forth the national and 
regional numbers of discharges in each year's annual notice of 
prospective payment rates published under Sec. 412.8(b). The methodology 
CMS uses to calculate these criteria is described in paragraph (h) of 
this section. Except as provided in paragraph (c)(2)(ii) of this section 
for an osteopathic hospital, for the hospital's most recently completed 
cost reporting period, its number of discharges (not including 
discharges from units excluded from the prospective payment system under 
subpart B of this part or from newborn units) is at least equal to--
    (A) For hospitals applying for rural referral center status for cost 
reporting periods beginning on or after October 1, 1985 and before 
October 1, 1986, the number of discharges under either the national or 
regional criterion; or

[[Page 416]]

    (B) For hospitals applying for rural referral center status for cost 
reporting periods beginning on or after October 1, 1986, 5,000 
discharges or, if less, the median number of discharges for urban 
hospitals located in each region.
    (ii) For cost reporting periods beginning on or after January 1, 
1986, an osteopathic hospital, recognized by the American Osteopathic 
Healthcare Association (or any successor organization), that is located 
in a rural area must have at least 3,000 discharges during its most 
recently completed cost reporting period to meet the number of 
discharges criterion. The 3,000 discharches benchmark is also used in 
evaluating an osteopathic hospital for purposes of the triennial review.
    (3) Medical staff. More than 50 percent of the hospital's active 
medical staff are specialists who meet one of the following conditions:
    (i) Are certified as specialists by one of the Member Boards of the 
American Board of Medical Specialties or the Advisory Board of 
Osteopathic Specialists.
    (ii) Have completed the current training requirements for admission 
to the certification examination of one of the Member Boards of the 
American Board of Medical Specialties or the Advisory Board of 
Osteopathic Specialists.
    (iii) Have successfully completed a residency program in a medical 
specialty accredited by the Accreditation Council of Graduate Medical 
Education or the American Osteopathic Association.
    (4) Source of inpatients. At least 60 percent of all its discharges 
are for inpatients who reside more than 25 miles from the hospital.
    (5) Volume of referrals. At least 40 percent of all inpatients 
treated at the hospital are referred from other hospitals or from 
physicians not on the hospital's staff.
    (d) Payment to rural referral centers. Effective for discharges 
occurring on or after April 1, 1988, and before October 1, 1994, a 
hospital that is located in a rural area and meets the criteria of 
paragraphs (b)(1), (b)(2) or (c) of this section is paid prospective 
payments for inpatient operating costs per discharge based on the 
applicable other urban payment rates as determined in accordance with 
Sec. 412.63, as adjusted by the hospital's area wage index.
    (e)-(f) [Reserved]
    (g) Hospital cancellation of referral center status. (1) A hospital 
may at any time request cancellation of its status as a referral center 
and be paid prospective payments per discharge based on the applicable 
rural rate as determined in accordance with Sec. 412.63, as adjusted by 
the hospital's area wage index value.
    (2) The cancellation becomes effective no later than 30 days after 
the date the hospital submits its request.
    (3) If a hospital requests that its referral center status be 
canceled, it may not be reclassified as a referral center unless it 
meets the qualifying criteria set forth in paragraph (a) of this section 
in effect at the time it reapplies.
    (h) Methodology for calculating case-mix index criteria. CMS 
calculates the national and regional case-mix index value criteria as 
described in paragraphs (g)(1) through (g)(4) of this section.
    (1) Updating process. CMS updates the national and regional case-mix 
index standards using the latest available data from hospitals subject 
to the prospective payment system for the Federal fiscal year.
    (2) Source of data. In making the calculations described in 
paragraph (g)(1) of this section, CMS uses all inpatient hospital bills 
received for discharges subject to prospective payment during the 
Federal fiscal year being monitored.
    (3) Effective date. CMS sets forth the national and regional 
criteria in the annual notice of prospective payment rates published 
under Sec. 412.8(b). These criteria are used to determine if a hospital 
qualifies for referral center status for cost reporting periods 
beginning on or after October 1 of the Federal fiscal year to which the 
notice applies.
    (4) Applicability of criteria to CMS review of referral center 
status. For purposes of the triennial CMS review of a referral center's 
status as described in paragraph (f) of this section, the referral 
center's case-mix index value for a Federal fiscal year is evaluated 
using the appropriate case-mix value criteria

[[Page 417]]

published in the annual notice of prospective payment rates.
    (i) Methodology for calculating number of discharges criteria. For 
purposes of determining compliance with the national or regional number 
of discharges criterion under paragraph (c)(2) of this section, CMS 
calculates the criteria as follows:
    (1) Updating process. CMS updates the national and regional number 
of discharges using the latest available data for levels of admissions 
or discharges or both.
    (2) Source of data. In making the calculations described in 
paragraph (h)(1) of this section, CMS uses the most recent hospital 
admissions or discharge data available.
    (3) Annual notice. CMS sets forth the national and regional criteria 
in the annual notice of prospective payment rates published under 
Sec. 412.8(b). These criteria are compared to an applying hospital's 
number of discharges for its most recently completed cost reporting 
period in determining if the hospital qualifies for referral center 
status for cost reporting periods beginning on or after October 1 of the 
Federal fiscal year to which the notice applies.
    (4) Applicability of criteria to CMS review of referral center 
status. For purposes of the triennial review of a referral center's 
status as described in paragraph (f) of this section, the referral 
center's number of discharges for its most recently completed cost 
reporting period is evaluated using the appropriate discharge criteria 
published in the annual notice of prospective payment rates.

[50 FR 12741, Mar. 29, 1985]

    Editorial Note: For Federal Register citations affecting 
Sec. 412.96, see the List of Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.



Sec. 412.98  [Reserved]



Sec. 412.100  Special treatment: Renal transplantation centers.

    (a) Adjustments for renal transplantation centers. (1) CMS adjusts 
the prospective payment rates for inpatient operating costs determined 
under subparts D and E of this part for hospitals approved as renal 
transplantation centers (described at Secs. 405.2170 and 405.2171 of 
this chapter) to remove the estimated net expenses associated with 
kidney acquisition.
    (2) Kidney acquisition costs are treated apart from the prospective 
payment rate for inpatient operating costs, and payment to the hospital 
is adjusted in each reporting period to reflect an amount necessary to 
compensate the hospital for reasonable expenses of kidney acquisition.
    (b) Costs of kidney acquisition. Expenses recognized under this 
section include costs of acquiring a kidney, from a live donor or a 
cadaver, irrespective of whether the kidney was obtained by the hospital 
or through an organ procurement agency. These costs include--
    (1) Tissue typing, including tissue typing furnished by independent 
laboratories;
    (2) Donor and recipient evaluation;
    (3) Other costs associated with excising kidneys, such as donor 
general routine and special care services;
    (4) Operating room and other inpatient ancillary services applicable 
to the donor;
    (5) Preservation and perfusion costs;
    (6) Charges for registration of recipient with a kidney transplant 
registry;
    (7) Surgeons' fees for excising cadaver kidneys;
    (8) Transportation;
    (9) Costs of kidneys acquired from other providers or kidney 
procurement organizations;
    (10) Hospital costs normally classified as outpatient costs 
applicable to kidney excisions (services include donor and donee tissue 
typing, work-up, and related services furnished prior to admission);
    (11) Costs of services applicable to kidney excisions which are 
rendered by residents and interns not in approved teaching programs; and
    (12) All pre-admission physicians services, such as laboratory, 
electroencephalography, and surgeon fees for cadaver excisions, 
applicable to kidney excisions including the costs of physicians 
services.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39824, Sept. 1, 1992]

[[Page 418]]



Sec. 412.102  Special treatment: Hospitals located in areas that are reclassified from urban to rural as a result of a geographic redesignation.

    Effective on or after October 1, 1983, a hospital reclassified as 
rural, as defined in Sec. 412.62(f), may receive an adjustment to its 
rural Federal payment amount for operating costs for two successive 
fiscal years.
    (a) First year adjustment. The hospital's rural average standardized 
amount and disproportionate share payments as described in Sec. 412.106 
are adjusted on the basis of an additional amount that equals two-thirds 
of the difference between the urban standardized amount and 
disproportionate share payments applicable to the hospital before its 
reclassification and the rural standardized amount and disproportionate 
share payments otherwise applicable to the Federal fiscal year for which 
the adjustment is made.
    (b) Second year adjustment. If a hospital continues to be 
reclassified as rural, its rural average standardized amount and 
disproportionate share payments are adjusted on the basis of an 
additional amount that equals one-third of the difference between the 
urban standardized amount and disproportionate share payments applicable 
to the hospital before its reclassification and the rural standardized 
amounts and disproportionate share payments otherwise applicable to the 
Federal fiscal year for which the adjustment is made.

[58 FR 46338, Sept. 1, 1993, as amended at 65 FR 47047, Aug. 1, 2000]



Sec. 412.103  Special treatment: Hospitals located in urban areas and that apply for reclassification as rural.

    (a) General criteria. A prospective payment hospital that is located 
in an urban area (as defined in Sec. 412.62(f)(1)(ii)) may be 
reclassified as a rural hospital if it submits an application in 
accordance with paragraph (b) of this section and meets any of the 
following conditions:
    (1) The hospital is located in a rural census tract of a 
Metropolitan Statistical Area (MSA) as determined under the most recent 
version of the Goldsmith Modification as determined by the Office of 
Rural Health Policy (ORHP) of the Health Resources and Services 
Administration which is available via the ORHP website at http://
www.nal.usda.gov/orph or from the U.S. Department of Health and Human 
Services, Health Resources and Services Administration, Office of Rural 
Health Policy, 5600 Fishers Lane, Room 9-05, Rockville, MD 20857.
    (2) The hospital is located in an area designated by any law or 
regulation of the State in which it is located as a rural area, or the 
hospital is designated as a rural hospital by State law or regulation.
    (3) The hospital would qualify as a rural referral center as set 
forth in Sec. 412.96, or as a sole community hospital as set forth in 
Sec. 412.92, if the hospital were located in a rural area.
    (b) Application requirements. (1) Written application. A hospital 
seeking reclassification under this section must submit a complete 
application in writing to CMS in accordance with paragraphs (b)(2) and 
(b)(3) of this section.
    (2) Contents of application. An application is complete if it 
contains an explanation of how the hospital meets the condition that 
constitutes the basis of the request for reclassification set forth in 
paragraph (a) of this section, including data and documentation 
necessary to support the request.
    (3) Mailing of application. An application must be mailed to the CMS 
Regional Office by the requesting hospital and may not be submitted by 
facsimile or other electronic means.
    (4) Notification by CMS. Within 5 business days after receiving the 
hospital's application, the CMS Regional Office will send the hospital a 
letter acknowledging receipt, with a copy to the CMS Central Office.
    (5) Filing date. The filing date of the application is the date CMS 
receives the application.
    (c) CMS review. The CMS Regional Office will review the application 
and notify the hospital of its approval or disapproval of the request 
within 60 days of the filing date.
    (d) Effective dates of reclassification. (1) Except as specified in 
paragraph (d)(2) of this section, CMS will consider a hospital that 
satisfies any of the criteria set forth in paragraph (a) of this section 
as being located in the rural

[[Page 419]]

area of the State in which the hospital is located as of that filing 
date.
    (2) If a hospital's complete application is received in CMS by 
September 1, 2000, and satisfies any of the criteria set forth in 
paragraph (a) of this section, CMS will consider the filing date to be 
January 1, 2000.
    (e) Withdrawal of application. A hospital may withdraw an 
application at any time prior to the date of CMS's decision as set forth 
in paragraph (c) of this section.
    (f) Duration of classification. An approved reclassification under 
this section remains in effect without need for reapproval unless there 
is a change in the circumstances under which the classification was 
approved.
    (g) Cancellation of classification. (1) A hospital may cancel its 
rural reclassification by submitting a written request to the CMS 
Regional Office not less than 120 days prior to the end of its current 
cost reporting period.
    (2) The hospital's cancellation of the classification is effective 
beginning with the hospital's next full cost reporting period following 
the date of its request for cancellation.

[65 FR 47048, Aug. 1, 2000]



Sec. 412.104  Special treatment: Hospitals with high percentage of ESRD discharges.

    (a) Criteria for classification. Effective with cost reporting 
periods that begin on or after October 1, 1984, CMS provides an 
additional payment to a hospital for inpatient dialysis provided to ESRD 
beneficiaries if the hospital has established that ESRD beneficiary 
discharges, excluding discharges classified into DRG No. 302 (Kidney 
Transplant), DRG No. 316 (Renal Failure) or DRG No. 317 (Admit for Renal 
Dialysis), constitute ten percent or more of its total Medicare 
discharges.
    (b) Additional payment. A hospital that meets the criteria of 
paragraph (a) of this section is paid an additional payment for each 
ESRD beneficiary discharge except those excluded under paragraph (a) of 
this section.
    (1) The payment is based on the estimated weekly cost of dialysis 
and the average length of stay of ESRD beneficiaries for the hospital.
    (2) The estimated weekly cost of dialysis is the average number of 
dialysis sessions furnished per week during the 12-month period that 
ended June 30, 1983 multiplied by the average cost of dialysis for the 
same period.
    (3) The average cost of dialysis includes only those costs 
determined to be directly related to the dialysis service. (These costs 
include salary, employee health and welfare, drugs, supplies, and 
laboratory services.)
    (4) The average cost of dialysis is reviewed and adjusted, if 
appropriate, at the time the composite rate reimbursement for outpatient 
dialysis is reviewed.
    (5) The payment to a hospital equals the average length of stay of 
ESRD beneficiaries in the hospital, expressed as a ratio to one week, 
times the estimated weekly cost of dialysis multiplied by the number of 
ESRD beneficiary discharges except for those excluded under paragraph 
(a) of this section. This payment is made only on the Federal portion of 
the payment rate.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39824, Sept. 1, 1992]



Sec. 412.105  Special treatment: Hospitals that incur indirect costs for graduate medical education programs.

    CMS makes an additional payment to hospitals for indirect medical 
education costs using the following procedures:
    (a) Basic data. CMS determines the following for each hospital:
    (1) The hospital's ratio of full-time equivalent residents (except 
as limited under paragraph (f) of this section) to the number of beds 
(as determined under paragraph (b) of this section).
    (i) Except for the special circumstances for affiliated groups and 
new programs described in paragraphs (f)(1)(vi) and (f)(1)(vii) of this 
section for cost reporting periods beginning on or after October 1, 
1997, and for the special circumstances for closed hospitals or closed 
programs described in paragraph (f)(1)(ix) of this section for cost 
reporting periods beginning on or after October 1, 2002, this ratio may 
not exceed the ratio for the hospital's most recent prior cost reporting 
period after accounting for the cap on the number of allopathic and 
osteopathic full-time

[[Page 420]]

equivalent residents as described in paragraph (f)(1)(iv) of this 
section, and adding to the capped numerator any dental and podiatric 
full-time equivalent residents.
    (ii) The exception for new programs described in paragraph 
(f)(1)(vii) of this section applies to each new program individually for 
which the full-time equivalent cap may be adjusted based on the period 
of years equal to the minimum accredited length of each new program.
    (iii) The exception for closed hospitals and closed programs 
described in paragraph (f)(1)(ix) of this section applies only through 
the end of the first 12-month cost reporting period in which the 
receiving hospital trains the displaced full-time equivalent residents.
    (iv) In the cost reporting period following the last year the 
receiving hospital's full-time equivalent cap is adjusted for the 
displaced resident(s), the resident-to-bed ratio cap in paragraph (a)(1) 
of this section is calculated as if the displaced full-time equivalent 
residents had not trained at the receiving hospital in the prior year.
    (2) The hospital's DRG revenue for inpatient operating costs based 
on DRG-adjusted prospective payment rates for inpatient operating costs, 
excluding outlier payments for inpatient operating costs determined 
under subpart F of this part and additional payments made under the 
provisions of Sec. 412.106 .
    (b) Determination of number of beds. For purposes of this section, 
the number of beds in a hospital is determined by counting the number of 
available bed days during the cost reporting period, not including beds 
or bassinets in the healthy newborn nursery, custodial care beds, or 
beds in excluded distinct part hospital units, and dividing that number 
by the number of days in the cost reporting period.
    (c) Measurement for teaching activity. The factor representing the 
effect of teaching activity on inpatient operating costs equals .405 for 
discharges occurring on or after May 1, 1986.
    (d) Determination of education adjustment factor. Each hospital's 
education adjustment factor is calculated as follows:
    (1) Step one. A factor representing the sum of 1.00 plus the 
hospital's ratio of full-time equivalent residents to beds, as 
determined under paragraph (a)(1) of this section, is raised to an 
exponential power equal to the factor set forth in paragraph (c) of this 
section.
    (2) Step two. The factor derived from step one is reduced by 1.00.
    (3) Step three. The factor derived from completing steps one and two 
is multiplied by 'c', and where `c' is equal to the following:
    (i) For discharges occurring on or after October 1, 1988, and before 
October 1, 1997, 1.89.
    (ii) For discharges occurring during fiscal year 1998, 1.72.
    (iii) For discharges occurring during fiscal year 1999, 1.6.
    (iv) For discharges occurring during fiscal year 2000, 1.47.
    (A) Each hospital receives an amount that is equal in the aggregate 
to the difference between the amount of payments made to the hospital if 
``c'' equaled 1.6, rather than 1.47.
    (B) The payment of this amount will not affect any other payments, 
determinations, or budget neutrality adjustments.
    (v) For fiscal year 2001--
    (A) For discharges occurring on or after October 1, 2000 and before 
April 1, 2001, 1.54.
    (B) For discharges occurring on or after April 1, 2001 and before 
October 1, 2001, the adjustment factor is determined as if ``c'' equaled 
1.66, rather than 1.54. This payment increase will not apply to 
discharges occurring after fiscal year 2001 and will not be taken into 
account in calculating the payment amounts applicable for discharges 
occurring after fiscal year 2001.
    (vi) For discharges occurring during fiscal year 2002, 1.6.
    (vii) For discharges occurring on or after October 1, 2002, 1.35.
    (e) Determination of payment amount. Each hospital's indirect 
medical education payment under the prospective payment system for 
inpatient operating costs is determined by multiplying the total DRG 
revenue for inpatient operating costs, as determined under paragraph 
(a)(2) of this section, by the applicable education adjustment

[[Page 421]]

factor derived in paragraph (d) of this section.
    (f) Determining the total number of full-time equivalent residents 
for cost reporting periods beginning on or after July 1, 1991. (1) For 
cost reporting periods beginning on or after July 1, 1991, the count of 
full-time equivalent residents for the purpose of determining the 
indirect medical education adjustment is determined as follows:
    (i) The resident must be enrolled in an approved teaching program. 
An approved teaching program is one that meets one of the following 
requirements:
    (A) Is approved by one of the national organizations listed in 
Sec. 415.200(a) of this chapter.
    (B) May count towards certification of the participant in a 
specialty or subspecialty listed in the current edition of either of the 
following publications:
    (1) The Directory of Graduate Medical Education Programs published 
by the American Medical Association.
    (2) The Annual Report and Reference Handbook published by the 
American Board of Medical Specialties.
    (C) Is approved by the Accreditation Council for Graduate Medical 
Education (ACGME) as a fellowship program in geriatric medicine.
    (D) Is a program that would be accredited except for the accrediting 
agency's reliance upon an accreditation standard that requires an entity 
to perform an induced abortion or require, provide, or refer for 
training in the performance of induced abortions, or make arrangements 
for such training, regardless of whether the standard provides 
exceptions or exemptions.
    (ii) In order to be counted, the resident must be assigned to one of 
the following areas:
    (A) The portion of the hospital subject to the prospective payment 
system.
    (B) The outpatient department of the hospital.
    (C) Effective for discharges occurring on or after October 1, 1997, 
the time spent by a resident in a nonhospital setting in patient care 
activities under an approved medical residency training program is 
counted towards the determination of full-time equivalency if the 
criteria set forth in Sec. 413.86(f)(3) or Sec. 413.86(f)(4) of this 
subchapter, as applicable, are met.
    (iii)(A) Full-time equivalent status is based on the total time 
necessary to fill a residency slot. No individual may be counted as more 
than one full-time equivalent. If a resident is assigned to more than 
one hospital, the resident counts as a partial full-time equivalent 
based on the proportion of time worked in any areas of the hospital 
listed in paragraph (f)(1)(ii) of this section to the total time worked 
by the resident. A hospital cannot claim the time spent by residents 
training at another hospital. A part-time resident or one working in an 
area of the hospital other than those listed under paragraph (f)(1)(ii) 
of this section (such as a freestanding family practice center or an 
excluded hospital unit) would be counted as a partial full-time 
equivalent based on the proportion of time assigned to an area of the 
hospital listed in paragraph (f)(1)(ii) of this section, compared to the 
total time necessary to fill a full-time residency slot.
    (B) The time spent by a resident in research that is not associated 
with the treatment or diagnosis of a particular patient is not 
countable.
    (iv) Effective for discharges occurring on or after October 1, 1997, 
the total number of FTE residents in the fields of allopathic and 
osteopathic medicine in either a hospital or a nonhospital setting that 
meets the criteria listed in paragraph (f)(1)(ii) of this section may 
not exceed the number of such FTE residents in the hospital (or, in the 
case of a hospital located in a rural area, effective for discharges 
occurring on or after April 1, 2000, 130 percent of that number) with 
respect to the hospital's most recent cost reporting period ending on or 
before December 31, 1996.
    (v) For a hospital's cost reporting periods beginning on or after 
October 1, 1997, and before October 1, 1998, the total number of full-
time equivalent residents for payment purposes is equal to the average 
of the actual full-time equivalent resident counts (subject to the 
requirements listed in paragraphs (f)(1)(ii)(C) and (f)(1)(iv) of this 
section) for that cost reporting period and the preceding cost reporting 
period. For a

[[Page 422]]

hospital's cost reporting periods beginning on or after October 1, 1998, 
the total number of full-time equivalent residents for payment purposes 
is equal to the average of the actual full-time equivalent resident 
count (subject to the requirements set forth in paragraphs (f)(1)(ii)(C) 
and (f)(1)(iv) of this section) for that cost reporting period and the 
preceding two cost reporting periods. If a hospital qualified for an 
adjustment to the limit established under paragraph (f)(1)(iv) of this 
section for new medical residency programs created under paragraph 
(f)(1)(vii) of this section, the count of residents participating in new 
medical residency training programs above the number included in the 
hospital's FTE count for the cost reporting period ending during 
calendar year 1996 is added after applying the averaging rules in this 
paragraph (f)(l)(v) for a period of years. Residents participating in 
new medical residency training programs are included in the hospital's 
FTE count before applying the averaging rules after the period of years 
has expired. For purposes of this paragraph, for each new program 
started, the period of years equals the minimum accredited length for 
each new program. The period of years for each new program begins when 
the first resident begins training in each new program. Subject to the 
provisions of paragraph (f)(1)(ix) of this section, FTE residents that 
are displaced by the closure of either another hospital or another 
hospital's program are added to the FTE count after applying the 
averaging rules in this paragraph (f)(l)(v) for the receiving hospital 
for the duration of time that the displaced residents are training at 
the receiving hospital.
    (vi) Hospitals that are part of the same affiliated group (as 
defined in Sec. 413.86(b) of this subchapter) may elect to apply the 
limit at paragraph (f)(1)(iv) of this section on an aggregate basis, as 
specified in Sec. 413.86(g)(7) of this chapter.
    (vii) If a hospital establishes a new medical residency training 
program, as defined in Sec. 413.86(g)(13) of this subchapter, the 
hospital's full-time equivalent cap may be adjusted in accordance with 
the provisions of Secs. 413.86(g)(6)(i) through (iv) of this subchapter.
    (viii) A hospital that began construction of its facility prior to 
August 5, 1997, and sponsored new medical residency training programs on 
or after January 1, 1995 and on or before August 5, 1997, that either 
received initial accreditation by the appropriate accrediting body or 
temporarily trained residents at another hospital(s) until the facility 
was completed, may receive an adjustment to its full-time equivalent cap 
in accordance with the provisions of Sec. 413.86(g)(8) of this 
subchapter.
    (ix) A hospital may receive a temporary adjustment to its full-time 
equivalent cap to reflect residents added because of another hospital's 
closure if the hospital meets the criteria specified in 
Secs. 413.86(g)(9)(i) and (g)(9)(ii) of this subchapter. If a hospital 
that closes its residency training program agrees to temporarily reduce 
its FTE cap according to the criteria specified in Secs. 413.86(g)(9)(i) 
and (g)(9)(iii)(B) of this subchapter, another hospital(s) may receive a 
temporary adjustment to its FTE cap to reflect residents added because 
of the closure of the residency training program if the criteria 
specified in Secs. 413.86(g)(9)(i) and (g)(9)(iii)(A) of this subchapter 
are met.
    (x) Effective for discharges occurring on or after April 1, 2000, an 
urban hospital that establishes a new residency program (as defined in 
Sec. 413.86(g)(13) of this subchapter), or has an existing residency 
program, with a rural track (or an integrated rural track) may include 
in its FTE count residents in those rural tracks in accordance with the 
provisions of Secs. 413.86(g)(12) of this subchapter.
    (xi) Effective for discharges occurring in cost reporting periods 
beginning on or after November 29, 1999, a hospital may receive an 
adjustment to its FTE cap of up to three additional FTEs to the extent 
that the additional residents would have been counted as primary care 
residents for purposes of the hospital's FTE cap but for the fact that 
the additional residents were on maternity or disability leave or a 
similar approved leave of absence, in accordance with the provisions of 
Sec. 413.86(g)(10) of this subchapter.

[[Page 423]]

    (xii) For discharges occurring on or after October 1, 1997, a non-
Veterans Affairs (VA) hospital may receive a temporary adjustment to its 
FTE cap to reflect residents who had been previously trained at a VA 
hospital and were subsequently transferred to the non-VA hospital, if 
the hospital meets the criteria and other provisions of 
Sec. 413.86(g)(11) of this subchapter.
    (2) To include a resident in the full-time equivalent count for a 
particular cost reporting period, the hospital must furnish the 
following information. The information must be certified by an official 
of the hospital and, if different, an official responsible for 
administering the residency program.
    (i) A listing, by specialty, of all residents assigned to the 
hospital and providing services to the hospital during the cost 
reporting period.
    (ii) The name and social security number of each resident.
    (iii) The dates the resident is assigned to the hospital.
    (iv) The dates the resident is assigned to other hospitals or other 
freestanding providers and any nonprovider setting during the cost 
reporting period.
    (v) The proportion of the total time necessary to fill a residency 
slot that the resident is assigned to an area of the hospital listed 
under paragraph (f)(1)(ii) of this section.
    (3) Fiscal intermediaries must verify the correct count of 
residents.
    (g) Indirect medical education payment for managed care enrollees. 
For portions of cost reporting periods occurring on or after January 1, 
1998, a payment is made to a hospital for indirect medical education 
costs, as determined under paragraph (e) of this section, for discharges 
associated with individuals who are enrolled under a risk-sharing 
contract with an eligible organization under section 1876 of the Act or 
with a Medicare+Choice organization under title XVIII, Part C of the Act 
during the period, according to the applicable payment percentages 
described in Secs. 413.86(d)(3)(i) through (d)(3)(v) of this subchapter.

[50 FR 12741, Mar. 29, 1985. Redesignated at 56 FR 43241, Aug. 30, 1991]

    Editorial Note: For Federal Register citations affecting 
Sec. 412.105, see the List of Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.



Sec. 412.106  Special treatment: Hospitals that serve a disproportionate share of low-income patients.

    (a) General considerations. (1) The factors considered in 
determining whether a hospital qualifies for a payment adjustment 
include the number of beds, the number of patient days, and the 
hospital's location.
    (i) The number of beds in a hospital is determined in accordance 
with Sec. 412.105(b).
    (ii) The number of patient days includes only those days 
attributable to areas of the hospital that are subject to the 
prospective payment system and excludes all others.
    (iii) The hospital's location, in an urban or rural area, is 
determined in accordance with the definitions in Sec. 412.62(f).
    (2) The payment adjustment is applied to the hospital's DRG revenue 
for inpatient operating costs based on DRG-adjusted prospective payment 
rates for inpatient operating costs, excluding outlier payments for 
inpatient operating costs under subpart F of this part and additional 
payments made under the provisions of Sec. 412.105.
    (b) Determination of a hospital's disproportionate patient 
percentage. (1) General rule. A hospital's disproportionate patient 
percentage is determined by adding the results of two computations and 
expressing that sum as a percentage.
    (2) First computation: Federal fiscal year. For each month of the 
Federal fiscal year in which the hospital's cost reporting period 
begins, CMS--
    (i) Determines the number of covered patient days that--
    (A) Are associated with discharges occurring during each month; and
    (B) Are furnished to patients who during that month were entitled to 
both Medicare Part A and SSI, excluding those patients who received only 
State supplementation;
    (ii) Adds the results for the whole period; and
    (iii) Divides the number determined under paragraph (b)(2)(ii) of 
this section by the total number of patient days that--

[[Page 424]]

    (A) Are associated with discharges that occur during that period; 
and
    (B) Are furnished to patients entitled to Medicare Part A.
    (3) First computation: Cost reporting period. If a hospital prefers 
that CMS use its cost reporting period instead of the Federal fiscal 
year, it must furnish to CMS, through its intermediary, a written 
request including the hospital's name, provider number, and cost 
reporting period end date. This exception will be performed once per 
hospital per cost reporting period, and the resulting percentage becomes 
the hospital's official Medicare Part A[sol]SSI percentage for that 
period.
    (4) Second computation. The fiscal intermediary determines, for the 
same cost reporting period used for the first computation, the number of 
the hospital's patient days of service for which patients were eligible 
for Medicaid but not entitled to Medicare Part A, and divides that 
number by the total number of patient days in the same period. For 
purposes of this second computation, the following requirements apply:
    (i) A patient is deemed eligible for Medicaid on a given day if the 
patient is eligible for medical assistance under an approved State 
Medicaid plan on such day, regardless of whether particular items or 
services were covered or paid under the State plan.
    (ii) Effective with discharges occurring on or after January 20, 
2000, for purposes of counting days under paragraph (b)(4)(i) of this 
section, hospitals may include all days attributable to populations 
eligible for Title XIX matching payments through a waiver approved under 
section 1115 of the Social Security Act.

    (iii) The hospital has the burden of furnishing data adequate to 
prove eligibility for each Medicaid patient day claimed under this 
paragraph, and of verifying with the State that a patient was eligible 
for Medicaid during each claimed patient hospital day.
    (5) Disproportionate patient percentage. The intermediary adds the 
results of the first computation made under either paragraph (b)(2) or 
(b)(3) of this section and the second computation made under paragraph 
(b)(4) of this section and expresses that sum as a percentage. This is 
the hospital's disproportionate patient percentage, and is used in 
paragraph (c) of this section.
    (c) Criteria for classification. A hospital is classified as a 
``disproportionate share'' hospital under any of the following 
circumstances:
    (1) The hospital's disproportionate patient percentage, as 
determined under paragraph (b)(5) of this section, is at least equal to 
one of the following:
    (i) 15 percent, if the hospital is located in an urban area, and has 
100 or more beds, or is located in a rural area and has 500 or more 
beds.
    (ii) 30 percent for discharges occurring before April 1, 2001, and 
15 percent for discharges occurring on or after April 1, 2001, if the 
hospital is located in a rural area and either has more than 100 beds 
and fewer than 500 beds or is classified as a sole community hospital 
under Sec. 412.92.
    (iii) 40 percent for discharges before April 1, 2001, and 15 percent 
for discharges occurring on or after April 1, 2001, if the hospital is 
located in an urban area and has fewer than 100 beds.
    (iv) 45 percent for discharges before April 1, 2001, and 15 percent 
for discharges occurring on or after April 1, 2001, if the hospital is 
located in a rural area and has 100 or fewer beds.
    (2) The hospital is located in an urban area, has 100 or more beds, 
and can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to indigent patients.
    (d) Payment adjustment. (1) Method of adjustment. Subject to the 
reduction factor set forth in paragraph (e) of this section, if a 
hospital serves a disproportionate number of low-income patients, its 
DRG revenues for inpatient operating costs are increased by an 
adjustment factor as specified in paragraph (d)(2) of this section.
    (2) Payment adjustment factors. (i) If the hospital meets the 
criteria of paragraph (c)(1)(i) of this section, the payment adjustment 
factor is equal to one of the following:
    (A) If the hospital's disproportionate patient percentage is greater 
than 20.2 percent, the applicable payment adjustment factor is as 
follows:

[[Page 425]]

    (1) For discharges occurring on or after April 1, 1990, and before 
January 1, 1991, 5.62 percent plus 65 percent of the difference between 
20.2 percent and the hospital's disproportionate patient percentage.
    (2) For discharges occurring on or after January 1, 1991, and before 
October 1, 1993, 5.62 percent plus 70 percent of the difference between 
20.2 percent and the hospital's disproportionate patient percentage.
    (3) For discharges occurring on or after October 1, 1993, and before 
October 1, 1994, 5.88 percent plus 80 percent of the difference between 
20.2 percent and the hospital's disproportionate patient percentage.
    (4) For discharges occurring on or after October 1, 1994, 5.88 
percent plus 82.5 percent of the difference between 20.2 percent and the 
hospital's disproportionate patient percentage.
    (B) If the hospital's disproportionate patient percentage is less 
than 20.2 percent, the applicable payment adjustment factor is as 
follows:
    (1) For discharges occurring on or after April 1, 1990, and before 
October 1, 1993, 2.5 percent plus 60 percent of the difference between 
15 percent and the hospital's disproportionate patient percentage.
    (2) For discharges occurring on or after October 1, 1993, 2.5 
percent plus 65 percent of the difference between 15 percent and the 
hospital's disproportionate patient percentage.
    (ii) If the hospital meets the criteria of paragraph (c)(1)(ii) of 
this section, the payment adjustment factor is equal to one of the 
following:
    (A) If the hospital is classified as a rural referral center, for 
discharges prior to April 1, 2001, the payment adjustment factor is 4 
percent plus 60 percent of the difference between the hospital's 
disproportionate patient percentage and 30 percent. For discharges 
occurring on or after April 1, 2001, the following applies:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between 15 percent and the 
hospital's disproportionate patient percentage.
    (2) If the hospital's disproportionate patient percentage is greater 
than 19.3 percent and less than 30 percent, the payment adjustment 
factor is 5.25 percent.
    (3) If the hospital's disproportionate patient percentage is greater 
than or equal to 30 percent, the applicable payment adjustment factor is 
5.25 percent plus 60 percent of the difference between 30 percent and 
the hospital's disproportionate patient percentage.
    (B) If the hospital is classified as a sole community hospital, for 
discharges prior to April 1, 2001, the payment adjustment factor is 10 
percent. For discharges occurring on or after April 1, 2001, the 
following applies:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the adjustment factor is 2.5 percent plus 65 percent 
of the difference between 15 percent and the hospital's disproportionate 
patient percentage.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent and less than 30 percent, the payment 
adjustment factor is 5.25 percent.
    (3) If the hospital's disproportionate patient percentage is equal 
to or greater than 30 percent the applicable payment adjustment factor 
is 10 percent.
    (C) If the hospital is classified as both a rural referral center 
and a sole community hospital, the payment adjustment factor is:
    (1) For discharges occurring before April 1, 2001, the greater of--
    (i) 10 percent; or
    (ii) 4 percent plus 60 percent of the difference between the 
hospital's disproportionate patient percentage and 30 percent.
    (2) For discharges occurring on or after April 1, 2001, the greater 
of the adjustments determined under paragraph (d)(2)(ii)(A) or 
(d)(2)(ii)(B) of this section.
    (D) If the hospital is classified as a rural hospital and is not 
classified as either a sole community hospital or a rural referral 
center, and has 100 or more beds, for discharges prior to April 1, 2001, 
the payment adjustment factor is 4 percent. For discharges occurring on 
or after April 1, 2001, the following applies:

[[Page 426]]

    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between the hospital's 
disproportionate patient percentage and 15 percent.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent the applicable payment adjustment factor 
is 5.25 percent.
    (iii) If the hospital meets the criteria of paragraph (c)(1)(iii) of 
this section, the payment adjustment factor is as follows:
    (A) For discharges occurring before April 1, 2001, 5 percent.
    (B) For discharges occurring on or after April 1, 2001:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between the hospital's 
disproportionate patient percentage and 15 percent.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent, the applicable payment adjustment 
factor is 5.25 percent.
    (iv) If the hospital meets the criteria of paragraph (c)(1)(iv) of 
this section, the payment adjustment factor is as follows:
    (A) For discharges occurring before April 1, 2001, 4 percent.
    (B) For discharges occurring on or after April 1, 2001:
    (1) If the hospital's disproportionate patient percentage is less 
than 19.3 percent, the applicable payment adjustment factor is 2.5 
percent plus 65 percent of the difference between the hospital's 
disproportionate patient percentage and 15 percent.
    (2) If the hospital's disproportionate patient percentage is equal 
to or greater than 19.3 percent, the applicable payment adjustment 
factor is 5.25 percent.
    (e)  Reduction in payments beginning FY 1998. The amounts otherwise 
payable to a hospital under paragraph (d) of this section are reduced by 
the following:
    (1) For FY 1998, 1 percent.
    (2) For FY 1999, 2 percent.
    (3) For FY 2000, 3 percent.
    (4) For FY 2001:
    (i) For discharges occurring on or after October 1, 2000 and before 
April 1, 2001, 3 percent.
    (ii) For discharges occurring on or after April 1, 2001 and before 
October 1, 2001, 1 percent.
    (5) For FY 2002, 3 percent.
    (6) For FYs 2003 and thereafter, 0 percent.

[54 FR 36494, Sept. 1, 1989, as amended at 55 FR 14283, Apr. 17, 1990; 
55 FR 15174, Apr. 20, 1990; 55 FR 32088, Aug. 7, 1990; 56 FR 573, Jan. 
7, 1991; 56 FR 9633, Mar. 7, 1991; 57 FR 39824, Sept. 1, 1992; 60 FR 
45848, Sept. 1, 1995; 62 FR 46029, Aug. 29, 1997; 63 FR 41004, July 31, 
1998; 65 FR 3139, Jan. 20. 2000; 65 FR 47108, Aug. 1, 2000; 66 FR 32193, 
June 13, 2001; 66 FR 39934, Aug. 1, 2001; 67 FR 50112, Aug. 1, 2002]



412.107  Special treatment: Hospitals that receive an additional update for FYs 1998 and 1999.

    (a) Additional payment update. A hospital that meets the criteria 
set forth in paragraph (b) of this section receives the following 
increase to its applicable percentage amount set forth in Sec. 412.63 
(p) and (q):
    (1) For FY 1998, 0.5 percent.
    (2) For FY 1999, 0.3 percent.
    (b) Criteria for classification. A hospital is eligible for the 
additional payment update set forth in paragraph (a) of this section if 
it meets all of the following criteria:
    (1) Definition. The hospital is not a Medicare-dependent, small 
rural hospital as defined in Sec. 412.108(a) and does not receive any 
additional payment under the following provisions:
    (i) The indirect medical education adjustment made under 
Sec. 412.105.
    (ii) The disproportionate share adjustment made under Sec. 412.106.
    (2) State criteria. The hospital is located in a State in which the 
aggregate payment made under Sec. 412.112 (a) and (c) for hospitals 
described in paragraph (b)(1) of this section for their cost reporting 
periods beginning in FY 1995 is less than the allowable operating costs 
described in Sec. 412.2(c) for those hospitals.
    (3) Hospital criteria. The aggregate payment made to the hospital 
under Sec. 412.112 (a) and (c) for the hospital's cost reporting period 
beginning in the fiscal year in which the additional payment update 
described in paragraph (a)

[[Page 427]]

of this section is made is less than the allowable operating cost 
described in Sec. 412.2(c) for that hospital.

[62 FR 46030, Aug. 29, 1997]



Sec. 412.108  Special treatment: Medicare-dependent, small rural hospitals.

    (a) Criteria for classification as a Medicare-dependent, small rural 
hospital. (1) General considerations. For cost reporting periods 
beginning on or after April 1, 1990 and ending before October 1, 1994, 
or beginning on or after October 1, 1997 and ending before October 1, 
2006, a hospital is classified as a Medicare-dependent, small rural 
hospital if it is located in a rural area (as defined in Sec. 412.63(b)) 
and meets all of the following conditions:
    (i) The hospital has 100 or fewer beds as defined in Sec. 412.105(b) 
during the cost reporting period.
    (ii) The hospital is not also classified as a sole community 
hospital under Sec. 412.92.
    (iii) At least 60 percent of the hospital's inpatient days or 
discharges were attributable to individuals receiving Medicare Part A 
benefits during the hospital's cost reporting period or periods as 
follows, subject to the provisions of paragraph (a)(1)(iv) of this 
section:
    (A) The hospital's cost reporting period ending on or after 
September 30, 1987 and before September 30, 1988.
    (B) If the hospital does not have a cost reporting period that meets 
the criterion set forth in paragraph (a)(1)(iii)(A) of this section, the 
hospital's cost reporting period beginning on or after October 1, 1986, 
and before October 1, 1987.
    (C) At least two of the last three most recent audited cost 
reporting periods for which the Secretary has a settled cost report.
    (iv) If the cost reporting period determined under paragraph 
(a)(1)(iii) of this section is for less than 12 months, the hospital's 
most recent 12-month or longer cost reporting period before the short 
period is used.
    (2) Counting days and discharges. In counting inpatient days and 
discharges for purposes of meeting the criteria in paragraph (a)(1)(iii) 
of this section, only days and discharges from acute care inpatient 
hospital stays are counted (including days and discharges from swing 
beds when used for acute care inpatient hospital services), but not 
including days and discharges from units excluded from the prospective 
payment system under Secs. 412.25 through 412.30 or from newborn nursery 
units. For purposes of this section, a transfer as defined in 
Sec. 412.4(b) is considered to be a discharge.
    (b) Classification procedures. (1) The fiscal intermediary 
determines whether a hospital meets the criteria specified in paragraph 
(a) of this section.
    (2) A hospital must submit a written request along with qualifying 
documentation to its fiscal intermediary to be considered for MDH status 
based on the criterion under paragraph (a)(1)(iii)(C) of this section.
    (3) The fiscal intermediary will make its determination and notify 
the hospital within 90 days from the date that it receives the 
hospital's request and all of the required documentation.
    (4) A determination of MDH status made by the fiscal intermediary is 
effective 30 days after the date the fiscal intermediary provides 
written notification to the hospital. An approved MDH status 
determination remains in effect unless there is a change in the 
circumstances under which the status was approved.
    (5) The fiscal intermediary will evaluate on an ongoing basis, 
whether or not a hospital continues to qualify for MDH status. This 
evaluation includes an ongoing review to ensure that the hospital 
continues to meet all of the criteria specified in paragraph (a) of this 
section.
    (6) If the fiscal intermediary determines that a hospital no longer 
qualifies for MDH status, the change in status will become effective 30 
days after the date the fiscal intermediary provides written 
notification to the hospital.
    (7) A hospital may reapply for MDH status following its 
disqualification only after it has completed another cost reporting 
period that has been audited and settled. The hospital must reapply for 
MDH status in writing to its fiscal intermediary and submit the required 
documentation.

[[Page 428]]

    (8) If a hospital disagrees with an intermediary's determination 
regarding the hospital's initial or ongoing MDH status, the hospital may 
notify its fiscal intermediary and submit other documentable evidence to 
support its claim that it meets the MDH qualifying criteria.
    (9) The fiscal intermediary's initial and ongoing determination is 
subject to review under subpart R of Part 405 of this chapter. The time 
required by the fiscal intermediary to review the request is considered 
good cause for granting an extension of the time limit for the hospital 
to apply for that review.
    (c) Payment methodology. A hospital that meets the criteria in 
paragraph (a) of this section is paid for its inpatient operating costs 
the sum of paragraphs (c)(1) and (c)(2) of this section.
    (1) The Federal payment rate applicable to the hospital as 
determined under Sec. 412.63, subject to the regional floor defined in 
Sec. 412.70(c)(6).
    (2) The amount, if any, determined as follows:
    (i) For discharges occurring during the first three 12-month cost 
reporting periods that begin on or after April 1, 1990, 100 percent of 
the amount that the Federal rate determined under paragraph (c)(1) of 
this section is exceeded by the higher of the following:
    (A) The hospital-specific rate as determined under Sec. 412.73.
    (B) The hospital-specific rate as determined under Sec. 412.75.
    (ii) For discharges occurring during any subsequent cost reporting 
period (or portion thereof) and before October 1, 1994, and for 
discharges occurring on or after October 1, 1997 and before October 1, 
2006, 50 percent of the amount that the Federal rate determined under 
paragraph (c)(1) of this section is exceeded by the higher of the 
following:
    (A) The hospital-specific rate as determined under Sec. 412.73.
    (B) The hospital-specific rate as determined under Sec. 412.75.
    (d) Additional payments to hospitals experiencing a significant 
volume decrease. (1) CMS provides for a payment adjustment for a 
Medicare-dependent, small rural hospital for any cost reporting period 
during which the hospital experiences, due to circumstances as described 
in paragraph (d)(2) of this section, a more than 5 percent decrease in 
its total inpatient discharges as compared to its immediately preceding 
cost reporting period. If either the cost reporting period in question 
or the immediately preceding cost reporting period is other than a 12-
month cost reporting period, the intermediary must convert the 
discharges to a monthly figure and multiply this figure by 12 to 
estimate the total number of discharges for a 12-month cost reporting 
period.
    (2) To qualify for a payment adjustment on the basis of a decrease 
in discharges, a Medicare-dependent, small rural hospital must submit 
its request no later than 180 days after the date on the intermediary's 
Notice of Amount of Program Reimbursement and it must--
    (i) Submit to the intermediary documentation demonstrating the size 
of the decrease in discharges and the resulting effect on per discharge 
costs; and
    (ii) Show that the decrease is due to circumstances beyond the 
hospital's control.
    (3) The intermediary determines a lump sum adjustment amount not to 
exceed the difference between the hospital's Medicare inpatient 
operating costs and the hospital's total DRG revenue for inpatient 
operating costs based on DRG-adjusted prospective payment rates for 
inpatient operating costs (including outlier payments for inpatient 
operating costs determined under subpart F of this part and additional 
payments made for inpatient operating costs hospitals that serve a 
disproportionate share of low-income patients as determined under 
Sec. 412.106 and for indirect medical education costs as determined 
under Sec. 412.105).
    (i) In determining the adjustment amount, the intermediary 
considers--
    (A) The individual hospital's needs and circumstances, including the 
reasonable cost of maintaining necessary core staff and services in view 
of minimum staffing requirements imposed by State agencies;
    (B) The hospital's fixed (and semi-fixed) costs, other than those 
costs paid on a reasonable cost basis under part 413 of this chapter; 
and

[[Page 429]]

    (C) The length of time the hospital has experienced a decrease in 
utilization.
    (ii) The intermediary makes its determination within 180 days from 
the date it receives the hospital's request and all other necessary 
information.
    (iii) The intermediary determination is subject to review under 
subpart R of part 405 of this chapter. The time required by the 
intermediary to review the request is considered good cause for granting 
an extension of the time limit for the hospital to apply for that 
review.

[55 FR 15175, Apr. 20, 1990; 55 FR 32088, Aug. 7, 1990, as amended at 55 
FR 36070, Sept. 4, 1990; 57 FR 39824, Sept. 1, 1992; 58 FR 46339, Sept. 
1, 1993; 58 FR 67350, Dec. 21, 1993; 59 FR 45400, Sept. 1, 1994; 62 FR 
46030, Aug. 29, 1997; 62 FR 52034, Oct. 6, 1997; 65 FR 47048, Aug. 1, 
2000; 66 FR 32194, June 13, 2001; 66 FR 39932, Aug. 1, 2001; 67 FR 
50112, Aug. 1, 2002]



Sec. 412.109  Special treatment: Essential access community hospitals (EACHs).

    (a) General rule. For payment purposes, CMS treats as a sole 
community hospital any hospital that is located in a rural area as 
described in paragraph (b) of this section and that CMS designated as an 
EACH under section 1820(i)(1) of the Act as in effect on September 30, 
1997, for as long as the hospital continues to comply with the terms, 
conditions, and limitations that were applicable at the time CMS 
designated the hospital as an EACH. The payment methodology for sole 
community hospitals is set forth at Sec. 412.92(d).
    (b) Location in a rural area. For purposes of this section, a 
hospital is located in a rural area if it--
    (1) Is located outside any area that is a Metropolitan Statistical 
Area as defined by the Office of Management and Budget or that has been 
recognized as urban under Sec. 412.62;
    (2) Is not deemed to be located in an urban area under Sec. 412.63;
    (3) Is not classified as an urban hospital for purposes of the 
standardized payment amount by CMS or the Medicare Geographic 
Classification Review Board; or
    (4) Is not located in a rural county that has been redesignated to 
an adjacent urban area under Sec. 412.232.
    (c) Adjustment to the hospital-specific rate for rural EACH's 
experiencing increased costs. (1) General rule. CMS increases the 
applicable hospital-specific rate of an EACH that it treats as a sole 
community hospital if, during a cost reporting period, the hospital 
experiences an increase in its Medicare inpatient operating costs per 
discharge that is directly attributable to activities related to its 
membership in a rural health network.
    (2) Request and documentation. In order for a hospital to qualify 
for an increase in its hospital-specific rate, it must meet the 
following criteria:
    (i) The hospital must submit its request to its intermediary no 
later than 180 days after the date on the intermediary's notice of 
program reimbursement.
    (ii) The request must include documentation specifically identifying 
the increased costs resulting from the hospital's participation in a 
rural health network and show that the increased costs during the cost 
reporting period will result in increased costs in subsequent cost 
reporting periods that are not already accounted for under the 
prospective payment system payment.
    (iii) The hospital must show that the cost increases are incremental 
costs that would not have been incurred in the absence of the hospital's 
membership in a rural health network.
    (iv) The hospital must show that the cost increases do not include 
amounts for start-up and one-time, nonrecurring costs attributable to 
its membership in a rural health network.
    (3) Intermediary recommendation. The intermediary forwards the 
following material to CMS within 60 days of receipt from the hospital:
    (i) The hospital's documentation and the intermediary's verification 
of that documentation.
    (ii) The intermediary's analysis and recommendation of the request.
    (iii) The hospital's Medicare cost report for the year in which the 
increase in costs occurred and the prior year.
    (4) CMS determination. CMS determines, within 120 days of receiving 
all necessary information from the intermediary, whether an increase in 
the hospital-specific rate is warranted and, if it is, the amount of the 
increase.

[[Page 430]]

CMS grants an adjustment only if a hospital's Medicare inpatient 
operating costs per discharge exceed the hospital's hospital-specific 
rate. The adjusted hospital-specific rate cannot exceed the hospital's 
Medicare inpatient operating costs per discharge for the cost reporting 
period.
    (d) Termination of EACH designation. If CMS determines that a 
hospital no longer complies with the terms, conditions, and limitations 
that were applicable at the time CMS designated the hospital as an EACH, 
CMS will terminate the EACH designation of the hospital, effective with 
discharges occurring on or after 30 days after the date of the 
determination.
    (e) Review of CMS determination. A determination by CMS that a 
hospital's EACH designation should be terminated, is subject to review 
under part 405, subpart R of this chapter, including the time limits for 
filing requests for hearings as specified in Secs. 405.1811(a) and 
405.1841(a)(1) and (b) of this chapter.

[58 FR 30669, May 26, 1993, as amended at 59 FR 45398, Sept. 1, 1994; 60 
FR 45848, Sept. 1, 1995; 61 FR 21972, May 13, 1996; 62 FR 46030, Aug. 
29, 1997]



 Subpart H--Payments to Hospitals Under the Prospective Payment Systems



Sec. 412.110  Total Medicare payment.

    Under the prospective payment systems, Medicare's total payment for 
inpatient hospital services furnished to a Medicare beneficiary by a 
hospital will equal the sum of the payments listed in Secs. 412.112 
through 412.115, reduced by the amounts specified in Sec. 412.120.

[50 FR 12741, Mar. 29, 1985, as amended at 57 FR 39824, Sept. 1, 1992]



Sec. 412.112  Payments determined on a per case basis.

    A hospital is paid the following amounts on a per case basis:
    (a) The appropriate prospective payment rate for inpatient operating 
costs for each discharge as determined in accordance with subparts D, E, 
and G of this part.
    (b) Effective for cost reporting periods beginning on or after 
October 1, 1991, the appropriate prospective payment rate for capital-
related costs for each discharge as determined in accordance with 
subpart M of this part.
    (c) The appropriate outlier payment amounts determined under subpart 
F of this part.

[56 FR 43448, Aug. 30, 1991, as amended at 57 FR 39824, Sept. 1, 1992]



Sec. 412.113  Other payments.

    (a) Capital-related costs. (1) Payment. Subject to the reductions 
described in paragraph (a)(2) of this section, payment for capital-
related costs (as described in Sec. 413.130 of this chapter) for cost 
reporting periods beginning before October 1, 1991 is determined on a 
reasonable cost basis.
    (2) Reduction to capital-related payments. (i) Except for sole 
community hospitals as defined in Sec. 412.92, the amount of capital-
related payments for cost-reporting periods beginning before October 1, 
1991 (including a return on equity capital as provided under 
Sec. 413.157 of this chapter) is reduced by--
    (A) Three and one-half percent for payments attributable to portions 
of cost reporting periods occurring during Federal FY 1987;
    (B) Seven percent for payments attributable to portions of cost 
reporting periods or discharges (as the case may be) occurring during 
fiscal year 1988 and before January 1, 1988;
    (C) Twelve percent for payments attributable to portions of cost 
reporting periods or discharges (as the case may be) in fiscal year 1988 
occurring on or after January 1, 1988;
    (D) Fifteen percent for payments attributable to portions of cost 
reporting periods or discharges (as the case may be) occurring during 
fiscal year 1989 and beginning on or after January 1, 1990 and ending on 
or before September 30, 1991; and
    (E) Ten percent for payments attributable to portions of cost-
reporting periods occurring on or after October 1, 1991 and before the 
beginning of the hospital's first cost-reporting period beginning on or 
after October 1, 1991.
    (ii) If a hospital's cost reporting period encompasses more than one 
Federal fiscal year, the reductions to capital-related payments are 
determined on a prorated monthly basis.

[[Page 431]]

    (3) For cost-reporting periods beginning on or after October 1, 
1991, a hospital with a hospital-specific rate above the Federal capital 
rate is paid a hold-harmless payment for old capital determined in 
accordance with subpart M of this part.
    (b) Direct medical education costs. (1) Payment for the direct 
medical education costs of interns and residents in approved programs 
for cost reporting periods beginning prior to July 1, 1985, and for 
approved education activities of nurses and paramedical health 
professionals is made as described in Sec. 413.85 of this chapter.
    (2) For cost reporting periods beginning on or after July 1, 1985, 
payment for the direct medical education costs of interns and residents 
in approved programs is made as described in Sec. 413.86 of this 
chapter.
    (3) Except as provided in Sec. 413.86(c) of this chapter, for cost 
reporting periods during the prospective payment transition period, the 
costs of medical education must be determined in a manner that is 
consistent with the treatment of these costs for purposes of determining 
the hospital-specific portion of the payment rate as provided in subpart 
E of this part.
    (c) Anesthesia services furnished by hospital or CAH employed 
nonphysician anesthetists or obtained under arrangements. (1) For cost 
reporting periods beginning on or after October 1, 1984 through any part 
of a cost reporting period occurring before January 1, 1989, payment is 
determined on a reasonable cost basis for anesthesia services provided 
in the hospital or CAH by qualified nonphysician anesthetists (certified 
registered nurse anesthetists and anesthesiologist's assistants) 
employed by the hospital or CAH or obtained under arrangements.
    (2)(i) For cost reporting periods, or any part of a cost reporting 
period, beginning on or after January 1, 1989, through any part of a 
cost reporting period occurring before January 1, 1990, payment is 
determined on a reasonable cost basis for anesthesia services provided 
in a hospital or CAH by qualified nonphysician anesthetists employed by 
the hospital or CAH or obtained under arrangement, if the hospital or 
CAH demonstrates to its intermediary prior to April 1, 1989 that it 
meets the following criteria:
    (A) The hospital or CAH is located in a rural area as defined in 
Sec. 412.62(f) and is not deemed to be located in an urban area under 
the provisions of Sec. 412.64(b)(3).
    (B) The hospital or CAH must have employed or contracted with a 
qualified nonphysician anesthetist, as defined in Sec. 410.66 of this 
chapter, as of January 1, 1988 to perform anesthesia services in that 
hospital or CAH. The hospital or CAH may employ or contract with more 
than one anesthetist; however, the total number of hours of service 
furnished by the anesthetists may not exceed 2,080 hours per year.
    (C) The hospital or CAH must provide data for its entire patient 
population to demonstrate that, during calendar year 1987, its volume of 
surgical procedures (inpatient and outpatient) requiring anesthesia 
services did not exceed 250 procedures. For purposes of this section, a 
surgical procedure requiring anesthesia services means a surgical 
procedure in which the anesthesia is administered and monitored by a 
qualified nonphysician anesthetist, a physician other than the primary 
surgeon, or an intern or resident.
    (D) Each qualified nonphysician anesthetist employed by or under 
contract with the hospital or CAH has agreed in writing not to bill on a 
reasonable charge basis for his or her patient care to Medicare 
beneficiaries in that hospital or CAH.
    (ii) To maintain its eligibility for reasonable cost payment under 
paragraph (c)(2)(i) of this section in calendar years after 1989, a 
qualified hospital or CAH must demonstrate prior to January 1 of each 
respective year that for the prior year its volume of surgical 
procedures requiring anesthesia service did not exceed 500 procedures; 
or, effective October 1, 2002, did not exceed 800 procedures.
    (iii) A hospital or CAH that did not qualify for reasonable cost 
payment for nonphysician anesthetist services furnished in calendar year 
1989 can qualify in subsequent years if it meets the criteria in 
paragraphs (c)(2)(i)(A), (B), and (D) of this section, and demonstrates 
to its intermediary prior to the start of

[[Page 432]]

the calendar year that it met these criteria. The hospital or CAH must 
provide data for its entire patient population to demonstrate that, 
during calendar year 1987 and the year immediately preceding its 
election of reasonable cost payment, its volume of surgical procedures 
(inpatient and outpatient) requiring anesthesia services did not exceed 
500 procedures, or, effective October 1, 2002, did not exceed 800 
procedures.
    (iv) For administrative purposes for the calendar years after 1990, 
the volume of surgical procedures for the immediately preceding year is 
the sum of the surgical procedures for the nine month period ending 
September 30, annualized for the twelve month period.
    (d) Organ acquisition. Payment for organ acquisition costs incurred 
by hospitals with approved transplantation centers is made on a 
reasonable cost basis. The term ``Organs'' is defined in Sec. 486.302 of 
this chapter.

[50 FR 12741, Mar. 29, 1985]

    Editorial Note: For Federal Register citations affecting 
Sec. 412.113, see the List of CFR Sections Affected, which appears in 
the Finding Aids section of the printed volume and on GPO Access.



Sec. 412.115  Additional payments.

    (a) Bad debts. An additional payment is made to each hospital in 
accordance with Sec. 413.80 of this chapter for bad debts attributable 
to deductible and coinsurance amounts related to covered services 
received by beneficiaries.
    (b) Administration of blood clotting factor. For discharges 
occurring on or after June 19, 1990, and before October 1, 1994, and for 
discharges occurring on or after October 1, 1997, an additional payment 
is made to a hospital for each unit of blood clotting factor furnished 
to a Medicare inpatient who is a hemophiliac.
    (c) QIO photocopy and mailing costs. An additional payment is made 
to a hospital in accordance with Sec. 466.78 of this chapter for the 
costs of photocopying and mailing medical records requested by a QIO.

[50 FR 12741, Mar. 29, 1985, as amended at 51 FR 34793, Sept. 30, 1986; 
55 FR 15175, Apr. 20, 1990; 56 FR 43448, Aug. 30, 1991; 57 FR 39825, 
Sept. 1, 1992; 57 FR 47787, Oct. 20, 1992; 58 FR 46339, Sept. 1, 1993; 
62 FR 46030, Aug. 29, 1997]



Sec. 412.116  Method of payment.

    (a) General rules. (1) Unless the provisions of paragraphs (b) and 
(c) of this section apply, hospitals are paid for hospital inpatient 
operating costs and capital-related costs for each discharge based on 
the submission of a discharge bill.
    (2) Payments for inpatient hospital services furnished by an 
excluded psychiatric unit of a hospital (or by an excluded 
rehabilitation unit of a hospital for cost reporting periods beginning 
before January 1, 2002) are made as described in Secs. 413.64(a), (c), 
(d), and (e) of this chapter.
    (3) For cost reporting periods beginning on or after January 1, 
2002, payments for inpatient hospital services furnished by a 
rehabilitation hospital or a rehabilitation unit that meets the 
conditions of Sec. 412.604 are made as described in Sec. 412.632.
    (4) For cost reporting periods beginning on or after October 1, 
2002, payments for inpatient hospital services furnished by a long-term 
care hospital that meets the conditions for payment of Secs. 412.505 
through 412.511 are made as described in Sec. 412.521.
    (b) Periodic interim payments--(1) Criteria for receiving periodic 
interim payments. Effective with claims received on or after July 1, 
1987, a hospital that meets the criteria in Sec. 413.64(h) of this 
chapter may request in writing to receive periodic interim payments as 
described in this paragraph. A hospital that is receiving periodic 
interim payments also receives payment on this basis for inpatient 
hospital services furnished by its excluded psychiatric or 
rehabilitation unit.
    (i) Failure of intermediary to make prompt payment. Beginning with 
claims received in April 1987, the hospital's fiscal intermediary does 
not meet the requirements of section 1816(c)(2) of the

[[Page 433]]

Act, which provides for prompt payment of claims under Medicare Part A, 
for three consecutive calendar months. The hospital may continue to 
receive periodic interim payments until the intermediary meets the 
requirements of section 1816 (c)(2) of the Act for three consecutive 
calendar months. For purposes of this paragraph, a hospital that is 
receiving periodic interim payments as of June 30, 1987 and meets the 
requirements of Sec. 413.64(h) of this chapter may continue to receive 
payment on this basis until the hospital's intermediary meets the 
requirements of section 1816(c)(2) of the Act for three consecutive 
calendar months beginning with April 1987.
    (ii) Hospitals that serve a disproportionate share of low-income 
patients. The hospital is receiving periodic interim payments as of June 
30, 1987 and has a disproportionate share payment adjustment factor of 
at least 5.1 percent as determined under Sec. 412.106(c) for purposes of 
establishing the average standardized amounts for discharges occurring 
on or after October 1, 1986 and before October 1, 1987. The hospital's 
request must be made by a date prior to July 1, 1987, specified by the 
intermediary.
    (iii) Small rural hospitals. The hospital is receiving periodic 
interim payments as of June 30, 1987, makes its request by a date prior 
to July 1, 1987, specified by the intermediary, and, on July 1, 1987, 
the hospital--
    (A) Is located in a rural area as defined in Sec. 412.62(f); and
    (B) Has 100 or fewer beds available for use.
    (2) Frequency of payment. The intermediary estimates a hospital's 
prospective payments as described in paragraph (b)(3) of this section 
and makes biweekly payments equal to 1/26 of the total estimated amount 
of payment for the year. Each payment is made two weeks after the end of 
a biweekly period of service, as described in Sec. 413.64(h)(5) of this 
chapter. These payments are subject to final settlement.
    (3) Amount of payment. (i) The biweekly interim payment amount is 
based on the total estimated Medicare discharges for the reporting 
period multiplied by the hospital's estimated average prospective 
payment amount as described in paragraph (b)(3)(ii) of this paragraph. 
These interim payments are reviewed at least twice during the reporting 
period and adjusted if necessary. Fewer reviews may be necessary if a 
hospital receives interim payments for less than a full reporting 
period.
    (ii) For purposes of determining periodic interim payments under 
this paragraph, a hospital's estimated average prospective payment 
amount is computed as follows:
    (A) If a hospital has no payment experience under the prospective 
payment system for operating costs, the intermediary computes the 
hospital's estimated average prospective payment amount for operating 
costs by multiplying its payment rates as determined under 
Sec. 412.70(c), but without adjustment by a DRG weighting factor, by the 
hospital's case-mix index, and subtracting from this amount estimated 
deductibles and coinsurance.
    (B) Effective for cost-reporting periods beginning on or after 
October 1, 1991, the intermediary computes a hospital's estimated 
average prospective payment amount for capital-related costs by 
multiplying its prospective payment rate as determined under 
Sec. 412.340 or Sec. 412.344(a), as applicable, and under Sec. 412.308 
for cost reporting periods beginning on or after October 1, 2001 but 
without adjustment by a DRG weighting factor, by the hospital's case-mix 
index. The intermediary may take into account estimated additional 
payments per discharge under Sec. 412.348. If the hospital is paid under 
Sec. 412.344(a)(1), the intermediary includes an estimated payment for 
old capital costs per discharge.
    (C) If a hospital has payment experience under the prospective 
payment system for operating costs, and, for cost reporting periods 
beginning on or after October 1, 1991, for inpatient capital-related 
costs, the intermediary computes a hospital's estimated average 
prospective payment amount for operating costs and capital-related costs 
based on that payment experience, adjusted for projected changes, and 
subtracts from this amount estimated deductibles and coinsurance.

[[Page 434]]

    (4) Termination of periodic interim payments--(i) Request by the 
hospital. A hospital receiving periodic interim payments may convert to 
payments on a per discharge basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates 
periodic interim payments if--
    (A) A hospital no longer meets the requirements of Sec. 413.64(h);
    (B) A hospital is receiving payment under the criterion in paragraph 
(b)(1)(i) of this section and the intemediary meets the prompt payment 
requirements of section 1816(c)(2) of the Act for three consecutive 
calendar months; or
    (C) A hospital that is receiving payment under the criterion set 
forth in paragraph (b)(1)(iii) of this section no longer meets the 
criterion.
    (iii) Limitation on reelection. If a hospital that is receiving 
periodic interim payments under the criterion set forth in paragraph 
(b)(1)(ii) or (b)(1)(iii) of this section is removed from that method of 
payment at its own request, it may reelect to receive periodic interim 
payments only under the criterion set forth in paragraph (b)(1)(i) of 
this section. However, if the hospital is removed from that method of 
payment by its intermediary because it no longer meets the requirements 
of Sec. 413.64(h) of this chapter, that hospital may subsequently 
reelect to receive periodic interim payments if it qualifies under the 
provisions of paragraph (b)(1)(ii) or (b)(1)(iii) of this section, 
subject to the requirements in Sec. 413.64(h) of this chapter.
    (c) Special interim payments for certain costs. For capital-related 
costs for cost-reporting periods beginning before October 1, 1991 and 
the direct costs of medical education, which are not included in 
prospective payments but are reimbursed as specified in Secs. 413.130 
and 413.85 of this chapter, respectively, interim payments are made 
subject to final cost settlement. Interim payments for capital-related 
items for cost-reporting periods beginning before October 1, 1991 and 
the estimated cost of approved medical education programs (applicable to 
inpatient costs payable under Medicare Part A and for kidney acquisition 
costs in hospitals approved as renal transplantation centers) are 
determined by estimating the reimbursable amount for the year based on 
the previous year's experience and on substantiated information for the 
current year and divided into 26 equal biweekly payments. Each payment 
is made two weeks after the end of a biweekly period of services, as 
described in Sec. 413.64(h)(5) of this chapter. The interim payments are 
reviewed by the intermediary at least twice during the reporting period 
and adjusted if necessary.
    (d) Special interim payment for unusually long lengths of stay--(1) 
First interim payment. A hospital that is not receiving periodic interim 
payments under paragraph (b) of this section may request an interim 
payment after a Medicare beneficiary has been in the hospital at least 
60 days. Payment for the interim bill is determined as if the bill were 
a final discharge bill and includes any outlier payment determined as of 
the last day for which services have been billed.
    (2) Additional interim payments. A hospital may request additional 
interim payments at intervals of at least 60 days after the date of the 
first interim bill submitted under paragraph (d)(1) of this section. 
Payment for these additional interim bills, as well as the final bill, 
is determined as if the bill were the final bill with appropriate 
adjustments made to the payment amount to reflect any previous interim 
payment made under the provisions of this paragraph (d).
    (e) Outlier payments. Payments for outlier cases (described in 
subpart F of this part) are not made on an interim basis. The outlier 
payments are made based on submitted bills and represent final payment.
    (f) Accelerated payments--(1) General rule. Upon request, an 
accelerated payment may be made to a hospital that is not receiving 
periodic interim payments under paragraph (b) of this section if the 
hospital is experiencing financial difficulties because of the 
following:
    (i) There is a delay by the intermediary in making payment to the 
hospital.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the hospital's preparation and submittal of

[[Page 435]]

bills to the intermediary beyond its normal billing cycle.
    (2) Approval of payment. A hospital's request for an accelerated 
payment must be approved by the intermediary and CMS.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is made 
by recoupment as hospital bills are processed or by direct payment by 
the hospital.

[53 FR 1627, Jan. 21, 1988, as amended at 53 FR 38532, Sept. 30, 1988; 
54 FR 36495, Sept. 1, 1989; 56 FR 43449, Aug. 30, 1991; 57 FR 3016, Jan. 
27, 1992; 59 FR 36712, July 19, 1994; 59 FR 45400, Sept. 1, 1994; 66 FR 
41387, Aug. 7, 2001; 67 FR 56049, Aug. 30, 2002]



Sec. 412.120  Reductions to total payments.

    (a) Deductible and coinsurance. Subject to paragraph (a)(2) of this 
section, the total Medicare payments otherwise payable to a hospital are 
reduced by the applicable deductible and coinsurance amounts related to 
inpatient hospital services as determined in accordance with 
Secs. 409.82, 409.83, and 409.87 of this chapter.
    (b) Payment by workers' compensation, automobile medical, no-fault 
or liability insurance or an employer group health plan primary to 
Medicare. If workers' compensation, automobile medical, no-fault, or 
liability insurance or an employer group health plan which is primary to 
Medicare pays in full or in part, the Medicare payment is determined in 
accordance with the following guidelines:
    (1) If workers' compensation pays, in accordance with the applicable 
provisions of Secs. 405.316 through 405.321 of this chapter.
    (2) If automobile medical, no-fault, or liability insurance pays, in 
accordance with the applicable provisions of Secs. 405.322 through 
405.325 of this chapter.
    (3) If an employer group health plan which is primary to Medicare 
pays for services to ESRD beneficiaries, in accordance with the 
applicable provisions of Secs. 405.326 through 405.329 of this chapter.
    (4) If an employer group health plan which is primary to Medicare 
pays for services to employees age 65-69 and their spouses age 65-69, in 
accordance with the applicable provisions of Secs. 405.340 through 
405.344 of this chapter.

[50 FR 12741, Mar. 29, 1985, as amended at 55 FR 36071, Sept. 4, 1990; 
56 FR 573, Jan. 7, 1991; 57 FR 39825, Sept. 1, 1992]



Sec. 412.125  Effect of change of ownership on payments under the prospective payment systems.

    When a hospital's ownership changes, as described in Sec. 489.18 of 
this chapter, the following rules apply:
    (a) Payment for the operating and capital-related costs of inpatient 
hospital services for each patient, including outlier payments, as 
provided in Sec. 412.112, and payments for hemophilia clotting factor 
costs under Sec. 412.115(b), are made to the entity that is the legal 
owner on the date of discharge. Payments are not prorated between the 
buyer and seller.
    (1) The owner on the date of discharge is entitled to submit a bill 
for all inpatient hospital services furnished to a beneficiary 
regardless of when the beneficiary's coverage began or ended during a 
stay, or of how long the stay lasted.
    (2) Each bill submitted must include all information necessary for 
the intermediary to compute the payment amount, whether or not some of 
that information is attributable to a period during which a different 
party legally owned the hospital.
    (b) Other payments under Sec. 412.113 and payments for bad debts as 
described in Sec. 412.115(a), are made to each owner or operator of the 
hospital (buyer and seller) in accordance with the principles of 
reasonable cost reimbursement.

[50 FR 12741, Mar. 29, 1985, as amended at 56 FR 43449, Aug. 30, 1991]



Sec. 412.130  Retroactive adjustments for incorrectly excluded hospitals and units.

    (a) Hospitals for which adjustment is made. The intermediary makes 
the payment adjustment described in paragraph (b) of this section for 
the following hospitals:

[[Page 436]]

    (1) A hospital that was excluded from the prospective payment 
systems specified in Sec. 412.1(a)(1) or paid under the prospective 
payment system specified in Sec. 412.1(a)(2), as a new rehabilitation 
hospital for a cost reporting period beginning on or after October 1, 
1991 based on a certification under Sec. 412.23(b)(8) of this part 
regarding the inpatient population the hospital planned to treat during 
that cost reporting period, if the inpatient population actually treated 
in the hospital during that cost reporting period did not meet the 
requirements of Sec. 412.23(b)(2).
    (2) A hospital that has a unit excluded from the prospective payment 
systems specified in Sec. 412.1(a)(1) or paid under the prospective 
payment system specified in Sec. 412.1(a)(2), as a new rehabilitation 
unit for a cost reporting period beginning on or after October 1, 1991, 
based on a certification under Sec. 412.30(a) regarding the inpatient 
population the hospital planned to treat in that unit during the period, 
if the inpatient population actually treated in the unit during that 
cost reporting period did not meet the requirements of 
Sec. 412.23(b)(2).
    (3) A hospital that added new beds to its existing rehabilitation 
unit for a cost reporting period beginning on or after October 1, 1991 
based on a certification under Sec. 412.30(c) regarding the inpatient 
population the hospital planned to treat in these new beds during that 
cost reporting period, if the inpatient population actually treated in 
the new beds during that cost reporting period did not meet the 
requirements of Sec. 412.23(b)(2).
    (b) Adjustment of payment. (1) For cost reporting periods beginning 
before January 1, 2002, the intermediary adjusts the payment to the 
hospitals described in paragraph (a) of this section as follows:
    (i) The intermediary calculates the difference between the amounts 
actually paid during the cost reporting period for which the hospital, 
unit, or beds were first excluded as a new hospital, new unit, or newly 
added beds under subpart B of this part, and the amount that would have 
been paid under the prospective payment systems specified in 
Sec. 412.1(a)(1) for services furnished during that period.
    (ii) The intermediary makes a retroactive adjustment for the 
difference between the amount paid to the hospital based on the 
exclusion and the amount that would have been paid under the prospective 
payment systems specified in Sec. 412.1(a)(1).
    (2) For cost reporting periods beginning on or after January 1, 
2002, the intermediary adjusts the payment to the hospitals described in 
paragraph (a) of this section as follows:
    (i) The intermediary calculates the difference between the amounts 
actually paid under subpart P of this part during the cost reporting 
period for which the hospital, unit, or beds were first classified as a 
new hospital, new unit, or newly added beds under subpart B of this 
part, and the amount that would have been paid under the prospective 
payment systems specified in Sec. 412.1(a)(1) for services furnished 
during that period.
    (ii) The intermediary makes a retroactive adjustment for the 
difference between the amount paid to the hospital under subpart P of 
this part and the amount that would have been paid under the prospective 
payment systems specified in Sec. 412.1(a)(1).

[56 FR 43241, Aug. 30, 1991, as amended at 57 FR 39825, Sept. 1, 1992; 
59 FR 45400, Sept. 1, 1994; 60 FR 45848, Sept. 1, 1995; 66 FR 41387, 
Aug. 7, 2001]

Subparts I-J [Reserved]



Subpart K--Prospective Payment System for Inpatient Operating Costs for 
                    Hospitals Located in Puerto Rico

    Source: 52 FR 33058, Sept. 1, 1987, unless otherwise noted.



Sec. 412.200  General provisions.

    Beginning with discharges occurring on or after October 1, 1987, 
hospitals located in Puerto Rico are subject to the rules governing the 
prospective payment system for inpatient operating costs. Except as 
provided in this subpart, the provisions of subparts A, B, C, F, G, and 
H of this part apply to hospitals located in Puerto Rico. Except

[[Page 437]]

for Sec. 412.60, which deals with DRG classification and weighting 
factors, the provisions of subparts D and E, which describe the 
methodology used to determine prospective payment rates for inpatient 
operating costs for hospitals, do not apply to hospitals located in 
Puerto Rico. Instead, the methodology for determining prospective 
payment rates for inpatient operating costs for these hospitals is set 
forth in Secs. 412.204 through 412.212.

[57 FR 39825, Sept. 1, 1992]



Sec. 412.204   Payment to hospitals located in Puerto Rico.

    (a) FY 1988 through FY 1997. For discharges occurring on or after 
October 1, 1997, payments for inpatient operating costs to hospitals 
located in Puerto Rico that are paid under the prospective payment 
system are equal to the sum of--
    (1) 75 percent of the Puerto Rico prospective payment rate for 
inpatient operating costs, as determined under Sec. 412.208 or 
Sec. 412.210; and
    (2) 25 percent of a national prospective payment rate for inpatient 
operating costs, as determined under Sec. 412.212.
    (b) FY 1998 and thereafter. For discharges occurring on or after 
October 1, 1997, payments for inpatient operating costs to hospitals 
located in Puerto Rico that are paid under the prospective payment 
system are equal to the sum of--
    (1) 50 percent of the Puerto Rico prospective payment rate for 
inpatient operating costs, as determined under Sec. 412.208 or 
Sec. 412.210; and
    (2) 50 percent of a national prospective payment rate for inpatient 
operating costs, as determined under Sec. 412.212.

[62 FR 46030, Aug. 29, 1997]



Sec. 412.208  Puerto Rico rates for Federal fiscal year 1988.

    (a) General rule. CMS determines the Puerto Rico adjusted DRG 
prospective payment rate for inpatient operating costs for each 
inpatient hospital discharge occurring in Federal fiscal year 1988 for a 
prospective payment hospital. These rates are determined as described in 
paragraphs (b) through (i) of this section.
    (b) Determining target amounts. For each hospital subject to the 
prospective payment system for inpatient operating costs, CMS determines 
the Medicare target amount, as described in Sec. 413.40(c) of this 
chapter, for the hospital's cost reporting period beginning in fiscal 
year 1987. Revisions in the target amounts made subsequent to 
establishment of the standardized amounts under paragraph (d) of this 
section do not affect the standardized amounts.
    (c) Updating the target amounts for fiscal year 1988. CMS updates 
each target amount determined under paragraph (b) of this section for 
fiscal year 1988 by prorating the applicable percentage increase (as 
defined in Sec. 412.63(f) of this chapter) for fiscal year 1988 to the 
midpoint of fiscal year 1988 (April 1, 1988).
    (d) Standardizing amounts. CMS standardizes the amount updated under 
paragraph (c) of this section for each hospital by--
    (1) Adjusting for variations in case mix among hospitals;
    (2) Excluding an estimate of indirect medical education costs;
    (3) Adjusting for area variations in hospital wage levels; and
    (4) Excluding an estimate of the payments for hospitals that serve a 
disproportionate share of low-income patients.
    (e) Computing urban and rural averages. CMS computes separate 
discharge-weighted averages of the standardized amounts determined under 
paragraph (d) of this section for urban and rural hospitals in Puerto 
Rico.
    (f) Geographic classification. (1) For purposes of this paragraph 
(e) of this section, the following definitions apply:
    (i) The term urban area means a Metropolitan Statistical Area (MSA), 
as defined by the Executive Office of Management and Budget.
    (ii) The term large urban area means an MSA with a population of 
more than 1,000,000.
    (iii) The term rural area means any area outside an urban area.
    (2) A hospital classified as rural is deemed to be urban and 
receives the urban Puerto Rico payment amount if

[[Page 438]]

the county in which it is located meets the following criteria:
    (i) At least 95 percent of the perimeter of the rural county is 
contiguous with urban counties.
    (ii) The county was reclassified from an urban area to a rural area 
after April 20, 1983, as described in Sec. 412.62(f)(1)(iv).
    (iii) At least 15 percent of employed workers in the county commute 
to the central county of one of the adjacent MSAs.
    (g) Reducing for value of outlier payments. CMS reduces each of the 
average standardized amounts determined under paragraphs (c) through (e) 
of this section by a proportion equal to the proportion (estimated by 
CMS) of the total amount of payments based on DRG prospective payment 
rates that are additional payments to hospitals located in Puerto Rico 
for outlier cases under subpart F of this part.
    (h) Computing Puerto Rico rates established under the prospective 
payment system for inpatient operating costs for urban and rural 
hospitals. For each discharge classified within a DRG, CMS establishes a 
Puerto Rico prospective payment rate, as follows:
    (1) For hospitals located in an urban area, the rate equals the 
product of--
    (i) The average standardized amount (computed under paragraphs (c) 
through (g) of this section) for hospitals located in an urban area; and
    (ii) The weighting factor determined under Sec. 412.60(b) for that 
DRG.
    (2) For hospitals located in a rural area, the rate equals the 
product of--
    (i) The average standardized amount (computed under paragraphs (c) 
through (g) of this section) for hospitals located in a rural area; and
    (ii) The weighting factor determined under Sec. 412.60(b) for that 
DRG.
    (i) Adjusting for different area wage levels. CMS adjusts the 
proportion (as estimated by CMS from time to time) of Puerto Rico rates 
computed under paragraph (h) of this section that are attributable to 
wages and labor-related costs, for area differences in hospital wage 
levels, by a factor (established by CMS) reflecting the relative 
hospital wage level in the geographic area (that is, urban or rural area 
as determined under the provisions of paragraph (f) of this section) of 
the hospital compared to the national average hospital wage level.

[52 FR 33058, Sept. 1, 1987; 52 FR 35350, Sept. 18, 1987, as amended at 
53 FR 38533, Sept. 30, 1988; 57 FR 39825, Sept. 1, 1992]



Sec. 412.210  Puerto Rico rates for fiscal years after Federal fiscal year 1988.

    (a) General rule. (1) CMS determines the Puerto Rico adjusted 
prospective payment rate for inpatient operating costs for each 
inpatient hospital discharge occurring in a Federal fiscal year after 
fiscal year 1988 that involves inpatient hospital services of a hospital 
in Puerto Rico subject to the prospective payment system for which 
payment may be made under Medicare Part A.
    (2) The rate is determined for hospitals located in large urban, 
other urban, or rural areas within Puerto Rico, as described in 
paragraphs (b) through (e) of this section.
    (b) Geographic classifications. (1) For purposes of this section, 
the definitions set forth in Sec. 412.208(f)(1) apply.
    (2) For discharges occurring on or after October 1, 1988, a hospital 
located in a rural county adjacent to one or more urban areas is deemed 
to be located in an urban area and receives the Federal payment amount 
for the urban area to which the greatest number of workers in the county 
commute if the rural county would otherwise be considered part of an 
urban area, under the standards for designating MSAs if the commuting 
rates used in determining outlying counties were determined on the basis 
of the aggregate number of resident workers who commute to (and, if 
applicable under the standards, from) the central county or central 
counties of all adjacent MSAs.

These EOMB standards are set forth in the notice of final standards for 
classification of MSAs published in the Federal Register on January 3, 
1980 (45 FR 956), and available from CMS, East High Rise Building, Room 
132, 6325 Security Boulevard, Baltimore, Maryland 21207.
    (3) For discharges occurring on or after October 1, 1988, for 
hospitals that consist of two or more separately located inpatient 
hospital facilities, the national adjusted prospective payment

[[Page 439]]

rate for inpatient operating costs is based on the geographic location 
of the hospital at which the discharge occurs.
    (c) Updating previous standardized amounts. CMS computes separate 
average standardized amounts for hospitals in large urban, other urban, 
and rural areas within Puerto Rico equal to the respective average 
standardized amount computed for fiscal year 1988 under Sec. 412.208(e)-
-
    (1) Increased by the applicable percentage changes determined under 
Sec. 412.63 (g) and (h); and
    (2) Reduced by a proportion equal to the proportion (estimated by 
CMS) of the total amount of prospective payments that are additional 
payment amounts to hospitals located in Puerto Rico attributable to 
outlier cases under subpart F of this part.
    (d) Computing Puerto Rico rates for large urban, other urban, and 
rural hospitals. For each discharge classified within a DRG, CMS 
establishes for the fiscal year a Puerto Rico prospective payment rate 
for inpatient operating costs as follows:
    (1) For hospitals located in a large urban or other urban area in 
Puerto Rico, the rate equals the product of--
    (i) The average standardized amount (computed under paragraph (c) of 
this section) for the fiscal year for hospitals located in a large urban 
or other urban area; and
    (ii) The weighting factor determined under Sec. 412.60(b) for that 
DRG.
    (2) For hospitals located in a rural area in Puerto Rico, the rate 
equals the product of--
    (i) The average standardized amount (computed under paragraph (c) of 
this section) for the fiscal year for hospitals located in a rural area; 
and
    (ii) The weighting factor (determined under Sec. 412.60(b)) for that 
DRG.
    (e) Adjusting for different area wage levels. CMS adjusts the 
proportion (as estimated by CMS from time to time) of Puerto Rico rates 
computed under paragraph (d) of this section that is attributable to 
wages and labor-related costs for area differences in hospital wage 
levels by a factor (established by CMS) reflecting the relative hospital 
wage level in the geographic area (that is, urban or rural area as 
determined under the provisions of paragraph (b) of this section) of the 
hospital compared to the Peurto Rico average hospital wage level.

[52 FR 33058, Sept. 1, 1987, as amended at 53 FR 38533, Sept. 30, 1988; 
57 FR 39825, Sept. 1, 1992; 62 FR 46030, Aug. 29, 1997]



Sec. 412.212  National rate.

    (a) General rule. For purposes of payment to hospitals located in 
Puerto Rico, the national prospective payment rate for inpatient 
operating costs is determined as described in paragraphs (b) through (d) 
of this section.
    (b) Computing a national average standardized amount. CMS computes a 
discharge-weighted average of the--
    (1) National urban adjusted standardized amount determined under 
Sec. 412.63(j)(1)(i); and
    (2) National rural adjusted average standardized amount determined 
under Sec. 412.63(j)(2)(i).
    (c) Computing a national rate. For each discharge classified within 
a DRG, the national rate equals the product of--
    (1) The national average standardized amount computed under 
paragraph (b) of this section; and
    (2) The weighting factor (determined under Sec. 412.60(b)) for that 
DRG.
    (d) Adjusting for different area wage levels. CMS adjusts the 
proportion (as estimated by CMS from time to time) of the national rate 
computed under paragraph (c) of this section that is attributable to 
wages and labor-related costs for area differences in hospital wage 
levels by a factor (established by CMS) reflecting the relative hospital 
wage level in the geographic area of the hospital compared to the 
national average hospital wage level.

[52 FR 33058, Sept. 1, 1987, as amended at 53 FR 38533, Sept. 30, 1988; 
57 FR 39825, Sept. 1, 1992]



Sec. 412.220  Special treatment of certain hospitals located in Puerto Rico.

    Subpart G of this part sets forth rules for special treament of 
certain facilities under the prospective payment system for inpatient 
operating costs. The following sections in subpart G of this part do not 
apply to hospitals located in Puerto Rico:
    (a) Section 412.92, sole community hospitals.

[[Page 440]]

    (b) Section 412.96, referral centers.

[52 FR 33058, Sept. 1, 1987, as amended at 57 FR 39825, Sept. 1, 1992]



     Subpart L--The Medicare Geographic Classification Review Board

    Source: 55 FR 36766, Sept. 6, 1990, unless otherwise noted.

                Criteria and Conditions for Redesignation



Sec. 412.230  Criteria for an individual hospital seeking redesignation to another rural area or an urban area.

    (a) General. (1) Purpose. Except as provided in paragraph (a)(5) of 
this section, an individual hospital may be redesignated from a rural 
area to an urban area, from a rural area to another rural area, or from 
an urban area to another urban area for the purposes of using the other 
area's standardized amount for inpatient operating costs, wage index 
value, or both.
    (2) Proximity. Except as provided in paragraph (a)(3) of this 
section, to be redesignated to another rural area or an urban area, a 
hospital must demonstrate a close proximity to the area to which it 
seeks redesignation by meeting the criteria in paragraph (b) of this 
section, and submitting data requested under paragraph (c) of this 
section.
    (3) Special rules for sole community hospitals and rural referral 
centers. To be redesignated under the special rules in this paragraph, a 
hospital must be a sole community hospital or a rural referral center as 
of the date of the MGCRB's review.
    (i) A hospital that is a rural referral center, a sole community 
hospital, or both does not have to demonstrate a close proximity to the 
area to which it seeks redesignation.
    (ii) If a hospital that is a rural referral center, a sole community 
hospital, or both qualifies for urban redesignation, it is redesignated 
to the urban area that is closest to the hospital. If the hospital is 
closer to another rural area than to any urban area, it may seek 
redesignation to either the closest rural or the closest urban area.
    (iii) If a sole community hospital or rural referral center loses 
its special status as a result of redesignation, the hospital is 
considered to retain its special status for the purpose of applicability 
of the special rules in paragraph (a)(3) of this section.
    (iv) A hospital that is redesignated under paragraph (a)(3) of this 
section may not be redesignated in the same fiscal year under paragraph 
(a)(2) of this section.
    (4) Application of criteria. In applying the numeric criteria 
contained in Secs. 412.230(b)(1) and (2), (d)(2), (e)(1)(iii), and 
(e)(l)(iv) (A) and (B), rounding of numbers to meet the mileage or 
qualifying percentage standard is not permitted.
    (5) Limitations on redesignation. The following limitations apply to 
redesignation:
    (i) An individual hospital may not be redesignated to another area 
for purposes of the wage index if the pre-reclassified average hourly 
wage for that area is lower than the pre-reclassified average hourly 
wage for the area in which the hospital is located.
    (ii) For redesignations effective in fiscal years 1997 and 1998 and 
2002 and thereafter, a hospital may not be redesignated for purposes of 
the standardized amount if the area to which the hospital seeks 
redesignation does not have a higher standardized amount than the 
standardized amount the hospital currently receives.
    (iii) A hospital may not be redesignated to more than one area.
    (iv) An urban hospital that has been granted redesignation as rural 
under Sec. 412.103 cannot receive an additional reclassification by the 
MGCRB based on this acquired rural status as long as such redesignation 
is in effect.
    (v) Beginning with wage index reclassification applications for FY 
2003, if a hospital is already reclassified to a given geographic area 
for wage index purposes for a 3-year period, and submits an application 
for reclassification to the same area for either the second or third 
year of the 3-year period, that application will not be approved.
    (b) Proximity criteria. A hospital demonstrates a close proximity 
with the area to which it seeks redesignation if one of the following 
conditions applies:

[[Page 441]]

    (1) The distance from the hospital to the area is no more than 15 
miles for an urban hospital and no more than 35 miles for a rural 
hospital.
    (2) At least 50 percent of the hospital's employees reside in the 
area.
    (c) Appropriate proximity data. For redesignation to an area, the 
hospital must submit appropriate data relating to its proximity to that 
area.
    (1) To demonstrate proximity to the area, the hospital must submit 
evidence of the shortest route over improved roads to the area and the 
distance of that route.
    (2) For employee address data, the hospital must submit current 
payroll records that include information that establishes the home 
addresses by zip code of its employees.
    (d) Use of an area's standardized amount for inpatient operating 
costs. (1) Criteria. To receive an area's standardized amount for 
inpatient operating costs, a hospital must demonstrate that its incurred 
costs are more comparable to the amount it would be paid if it were 
reclassified than the amount it would be paid under its current 
classification, and that it has the necessary geographic relationship 
(as specified in paragraphs (a) and (b) of this section) with the area 
to which it seeks redesignation.
    (2) Demonstrating comparable costs. A hospital demonstrates that its 
costs are more comparable to the amount it would be paid if it were 
reclassified if the hospital's case mix adjusted cost per discharge is 
at least equal to its current rate plus 75 percent of the difference 
between that rate and the rate it would receive if it were reclassified.
    (3) Appropriate cost data. For a standardized amount for inpatient 
operating costs change, the hospital must submit appropriate data as 
follows:
    (i) For hospital-specific data, the hospital must provide data from 
its most recently settled and most recently filed cost report.
    (ii) For data on other hospitals, the hospital must base its 
application on the most recent revisions to the prospective payment 
rates for inpatient operating costs, as published in the Federal 
Register.
    (e) Use of urban or other rural area's wage index--(1) Criteria for 
use of area's wage index. Except as provided in paragraphs (e)(3) and 
(e)(4) of this section, to use an area's wage index, a hospital must 
demonstrate the following:
    (i) The hospital's incurred wage costs are comparable to hospital 
wage costs in an urban or other rural area;
    (ii) The hospital has the necessary geographic relationship as 
specified in paragraphs (a) and (b) of this section;
    (iii) One of the following conditions apply:
    (A) With respect to redesignations for Federal fiscal year 1994 
through 2001, the hospital's average hourly wage is at least 108 percent 
of the average hourly wage of hospitals in the area in which the 
hospital is located; or
    (B) With respect to redesignations for Federal fiscal year 2002 and 
later years, the hospital's average hourly wage is, in the case of a 
hospital located in a rural area, at least 106 percent, and, in the case 
of a hospital located in an urban area, at least 108 percent of the 
average hourly wage of hospitals in the area in which the hospital is 
located; and
    (iv) One of the following conditions apply:
    (A) For redesignations effective before fiscal year 1999, the 
hospital's average hourly wage weighted for occupational categories is 
at least 90 percent of the average hourly wages of hospitals in the area 
to which it seeks redesignation.
    (B) With respect to redesignations for fiscal year 1994 through 
2001, the hospital's average hourly wage is equal to at least 84 percent 
of the average hourly wage of hospitals in the area to which it seeks 
redesignation.
    (C) With respect to redesignations for fiscal year 2002 and later 
years, the hospital's average hourly wage is equal to, in the case of a 
hospital located in a rural area, at least 82 percent, and in the case 
of a hospital located in an urban area, at least 84 percent of the 
average hourly wage of hospitals in the area to which it seeks 
redesignation.
    (2) Appropriate wage data. For a wage index change, the hospital 
must submit appropriate wage data as follows:
    (i) For redesignations effective through FY 2002:
    (A) For hospital-specific data, the hospital must provide data from 
the

[[Page 442]]

CMS hospital wage survey used to construct the wage index in effect for 
prospective payment purposes during the fiscal year prior to the fiscal 
year for which the hospital requests reclassification.
    (B) For data for other hospitals, the hospital must provide data 
concerning the average hourly wage in the area in which the hospital is 
located and the average hourly wage in the area to which the hospital 
seeks reclassification. The wage data are taken from the CMS hospital 
wage survey used to construct the wage index in effect for prospective 
payment purposes during the fiscal year prior to the fiscal year for 
which the hospital requests reclassification.
    (C) If the hospital is requesting reclassification under paragraph 
(e)(1)(iv)(B) of this section, the hospital must provide occupational-
mix data to demonstrate the average occupational mix for each employment 
category in the area to which it seeks reclassification. Occupational-
mix data can be obtained from surveys conducted by the American Hospital 
Association.
    (ii) For redesignations effective beginning FY 2003:
    (A) For hospital-specific data, the hospital must provide a weighted 
3-year average of its average hourly wages using data from the CMS 
hospital wage survey used to construct the wage index in effect for 
prospective payment purposes.
    (B) For data for other hospitals, the hospital must provide a 
weighted 3-year average of the average hourly wage in the area in which 
the hospital is located and a weighted 3-year average of the average 
hourly wage in the area to which the hospital seeks reclassification. 
The wage data are taken from the CMS hospital wage survey used to 
construct the wage index in effect for prospective payment purposes.
    (iii) For purposes of this paragraph (e)(2), if a new owner does not 
accept assignment of the existing hospital's provider agreement in 
accordance with Sec. 489.18 of this chapter, the hospital will be 
treated as a new provider with a new provider number. In this case, the 
wage data associated with the previous hospital's provider number cannot 
be used in calculating the new hospital's 3-year average hourly wage. 
Once a new hospital has accumulated at least 1 year of wage data, it is 
eligible to apply for reclassification on the basis of those data.
    (3) Rural referral center exception. If a hospital was ever a rural 
referral center, it does not have to demonstrate that it meets the 
criterion set forth in paragraph (e)(1)(iii) of this section concerning 
its average hourly wage.
    (4) Special dominating hospital exception. The requirements of 
paragraph (e)(1)(i) and (e)(1)(iii) of this section do not apply if a 
hospital meets the following criteria:
    (i) Its average hourly wage is at least 108 percent of the average 
hourly wage of all other hospitals in the area in which the hospital is 
located.
    (ii) It pays at least 40 percent of the adjusted uninflated wages in 
the MSA.
    (iii) It was approved for redesignation under this paragraph (e) for 
each year from fiscal year 1992 through fiscal year 1997.

[55 FR 36766, Sept. 6, 1990, as amended at 56 FR 25488, June 4, 1991; 57 
FR 39825, Sept. 1, 1992; 59 FR 45399, Sept. 1, 1994; 60 FR 45848, Sept. 
1, 1995; 62 FR 46031, Aug. 29, 1997; 63 FR 26357, May 12, 1998; 65 FR 
47108, Aug. 1, 2000; 66 FR 39934, Aug. 1, 2001]



Sec. 412.232  Criteria for all hospitals in a rural county seeking urban redesignation.

    (a) Criteria. For all hospitals in a rural county to be redesignated 
to an urban area, the following conditions must be met:
    (1) The county in which the hospitals are located must be adjacent 
to the MSA or NECMA to which they seek redesignation.
    (2) All hospitals in a rural county must apply for redesignation as 
a group.
    (3) The hospitals must demonstrate that the rural county in which 
they are located currently meets the criteria for metropolitan character 
under paragraph (b) of this section and the wage criteria under 
paragraph (c) of this section.
    (4) The hospitals may be redesignated only if one of the following 
conditions is met:
    (i) The pre-reclassified average hourly wage for the area to which 
they seek

[[Page 443]]

redesignation is higher than the pre-reclassified average hourly wage 
for the area in which they are currently located.
    (ii) The standardized amount for the area to which they seek 
redesignation is higher than the standardized amount for the area in 
which they are located.
    (b) Metropolitan character. The group of hospitals must demonstrate 
that the county in which the hospitals are located meets the standards 
for redesignation to an MSA or an NECMA as an outlying county that were 
published in the Federal Register on March 30, 1990 (55 FR 12154) using 
Bureau of the Census data or Bureau of Census estimates made after 1990.
    (c) Wage criteria. In applying the following numeric criteria, 
rounding of numbers to meet the qualifying percentages is not permitted.
    (1) Aggregate hourly wage. The aggregate average hourly wage for all 
hospitals in the rural county must be equal to at least 85 percent of 
the average hourly wage in the adjacent urban area; or
    (2) Aggregate hourly wage weighted for occupational mix. For 
redesignations effective before fiscal year 1999, the aggregate hourly 
wage for all hospitals in the rural county, weighted for occupational 
categories, is at least 90 percent of the average hourly wage in the 
adjacent urban area.
    (d) Appropriate data. (1) Metropolitan character. (i) To meet the 
criteria in paragraph (b) of this section, the hospitals may submit 
data, estimates, or projections, made by the Bureau of the Census 
concerning population density or growth, or changes in designation of 
urban areas.
    (ii) The MGCRB only considers data developed by the Bureau of the 
Census.
    (2) Appropriate wage data. The hospitals must submit appropriate 
data as follows:
    (i) For redesignations effective through FY 2002:
    (A) For hospital-specific data, the hospitals must provide data from 
the CMS wage survey used to construct the wage index in effect for 
prospective payment purposes during the fiscal year prior to the fiscal 
year for which the hospitals request reclassification.
    (B) For data for other hospitals, the hospitals must provide the 
following:
    (1) The average hourly wage in the adjacent area, which is taken 
from the CMS hospital wage survey used to construct the wage index in 
effect for prospective payment purposes during the fiscal year prior to 
the fiscal year for which the hospitals request reclassification.
    (2) Occupational-mix data to demonstrate the average occupational 
mix for each employment category in the adjacent area. Occupational-mix 
data can be obtained from surveys conducted by the American Hospital 
Association.
    (ii) For redesignations effective beginning FY 2003:
    (A) For hospital-specific data, the hospital must provide a weighted 
3-year average of its average hourly wages using data from the CMS 
hospital wage survey used to construct the wage index in effect for 
prospective payment purposes.
    (B) For data for other hospitals, the hospital must provide a 
weighted 3-year average of the average hourly wage in the area in which 
the hospital is located and a weighted 3-year average of the average 
hourly wage in the area to which the hospital seeks reclassification. 
The wage data are taken from the CMS hospital wage survey used to 
construct the wage index in effect for prospective payment purposes.

[55 FR 36766, Sept. 6, 1990, as amended at 57 FR 39826, Sept. 1, 1992; 
58 FR 46339, Sept. 1, 1993; 59 FR 45399, Sept. 1, 1994; 60 FR 45849, 
Sept. 1, 1995; 62 FR 46031, Aug. 29, 1997; 66 FR 39934, Aug. 1, 2001]



Sec. 412.234  Criteria for all hospitals in an urban county seeking redesignation to another urban area.

    (a) General criteria. For all prospective payment hospitals in an 
.urban county to be redesignated to another urban area, the following 
conditions must be met:
    (1) All hospitals in an urban county must apply for redesignation as 
a group.
    (2) The county in which the hospitals are located must be adjacent 
to the urban area to which they seek redesignation.

[[Page 444]]

    (3) The county in which the hospitals are located must be part of 
the Consolidated Metropolitan Statistical Area (CMSA) that includes the 
urban area to which they seek redesignation.
    (4) The hospitals may be redesignated only if one of the following 
conditions is met.
    (i) The pre-reclassified average hourly wage for the area to which 
they seek redesignation is higher than the pre-reclassified average 
hourly wage for the area in which they are currently located.
    (ii) The standardized amount for the area to which they seek 
redesignation is higher than the standardized amount for the area in 
which they are currently located.
    (b) Wage criteria. In applying the following numeric criteria, 
rounding of numbers to meet the qualifying percentages is not permitted.
    (1) Aggregate hourly wage. The aggregate average hourly wage of all 
hospitals in the urban county must be at least 85 percent of the average 
hospital hourly wage in the MSA or NECMA to which the hospitals in the 
county seek reclassification; or
    (2) Aggregate hourly wage weighted for occupational mix. For 
redesignations effective before fiscal year 1999, the aggregate average 
hourly wage for all hospitals in the county, weighted for occupational 
categories, is at least 90 percent of the average hourly wage in the 
adjacent urban area.
    (c) Standardized amount inpatient operating costs--(1) Criteria. The 
urban hospitals must demonstrate that their average incurred costs are 
more comparable to the amount the hospitals would be paid if they were 
reclassified than the amount they would be paid under their current 
classification.
    (2) Demonstrating comparable costs. The urban hospitals demonstrate 
that their costs are more comparable to the average amount they would be 
paid if they were reclassified if, on average, each hospital's case-mix 
adjusted cost per case is at least equal to the amount it would be paid 
under its current classification plus 75 percent of the difference 
between that amount and the amount the hospital would receive if it were 
reclassified.
    (d) Appropriate data. (1) Wage data. The hospitals must submit 
appropriate wage data as provided for in Sec. 412.230(e)(2).
    (2) Cost data. The hospitals must submit appropriate data as 
provided for in Sec. 412.230(d)(3).

[56 FR 25488, June 4, 1991, as amended at 57 FR 39826, Sept. 1, 1992; 58 
FR 46339, Sept. 1, 1993; 60 FR 45849, Sept. 1, 1995; 62 FR 46031, Aug. 
29, 1997]



Sec. 412.235  Criteria for all hospitals in a State seeking a statewide wage index redesignation.

    (a) General criteria. For all prospective payment system hospitals 
in a State to be redesignated to a statewide wage index, the following 
conditions must be met:
    (1) All prospective payment system hospitals in the State must apply 
as a group for reclassification to a statewide wage index through a 
signed single application.
    (2) All prospective payment system hospitals in the State must agree 
to the reclassification to a statewide wage index through a signed 
affidavit on the application.
    (3) All prospective payment system hospitals in the State must 
agree, through an affidavit, to withdrawal of an application or to 
termination of an approved statewide wage index reclassification.
    (4) All hospitals in the State must waive their rights to any wage 
index classification that they would otherwise receive absent the 
statewide wage index classification, including a wage index that any of 
the hospitals might have received through individual geographic 
reclassification.
    (5) New hospitals that open within the State prior to the deadline 
for submitting an application for a statewide wage index 
reclassification (September 1), regardless of whether a group 
application has already been filed, must agree to the use of the 
statewide wage index as part of the group application. New hospitals 
that open within the State after the deadline for submitting a statewide 
wage index reclassification application or during the approved 
reclassification period will be considered a party to the statewide wage 
index application and reclassification.

[[Page 445]]

    (b) Effect on payments.
    (1) An individual hospital within the State may receive a wage index 
that could be higher or lower under the statewide wage index 
reclassification in comparison to its otherwise redesignated wage index.
    (2) Any new prospective payment system hospital that opens in the 
State during the effective period of an approved statewide wage index 
reclassification will be designated to receive the statewide wage index 
for the duration of that period.
    (c) Terms of the decision.
    (1) A decision by the MGCRB on an application for a statewide wage 
index reclassification will be effective for 3 years beginning with 
discharges occurring on the first day (October 1) of the second Federal 
fiscal year following the Federal fiscal year in which the hospitals 
filed a complete application.
    (2) The procedures and timeframes specified in Sec. 412.273 apply to 
withdrawals of applications for redesignation to a statewide wage index 
and terminations of approved statewide wage index reclassifications, 
including the requirement that, to withdraw an application or terminate 
an approved reclassification, the request must be made in writing by all 
hospitals that are party to the application, except hospitals 
reclassified into the State for purposes of receiving the statewide wage 
index.

[66 FR 39935, Aug. 1, 2001]



Sec. 412.236  Alternative criteria for hospitals located in an NECMA.

    (a) General. (1) An urban hospital whose designation is affected by 
the implementation of NECMAs may qualify for redesignation by meeting 
either the criteria in Sec. 412.230 or the criterion in paragraph (b) of 
this section.
    (2) All the hospitals in a NECMA may qualify for redesignation by 
meeting the criteria in either Sec. 412.234 or in paragraph (c) of this 
section.
    (b) Criterion applicable to an individual urban hospital in a NECMA. 
The hospital demonstrates that it would have been designated in a 
different urban area under the criteria for designating MSAs in New 
England.
    (c) Criteria applicable to a group of hospitals in a NECMA. (1) All 
prospective payment hospitals in a NECMA must apply for redesignation.
    (2) The hospitals must demonstrate that the NECMA to which they are 
designated would be combined as part of the NECMA to which they seek 
redesignation if the criteria for combining NECMAs were the same as the 
criteria used for combining MSAs.
    (d) Appropriate data. (1) The MGCRB only considers population and 
commuting data developed by the Bureau of the Census.
    (2) To meet the criterion in paragraph (b) of this section or the 
criteria in paragraph (c) of this section, hospitals must submit data 
from the Bureau of the Census.

[55 FR 36766, Sept. 6, 1990. Redesignated and amended at 56 FR 25488, 
June 4, 1991]

                       Composition and Procedures



Sec. 412.246  MGCRB members.

    (a) Composition. The Medicare Geographical Classification Review 
Board (MGCRB) consists of five members, including a Chairman, all of 
whom are appointed by the Secretary. The members include two members who 
are representative of prospective payment system hospitals located in 
rural areas, and at least one individual who is knowledgeable in 
analyzing the costs of inpatient hospital services.
    (b) Term of office. The term of office for an MGCRB member may not 
exceed 3 years. A member may serve more than one term. The Secretary may 
terminate a member's tenure prior to its full term.

[55 FR 36766, Sept. 6, 1990, as amended at 61 FR 46224, Aug. 30, 1996; 
61 FR 51217, Oct. 1, 1996]



Sec. 412.248  Number of members needed for a decision or a hearing.

    (a) A quorum. A quorum, consisting of at least a majority of the 
MGCRB members, one of whom is representative of rural hospitals if 
possible, is required for making MGCRB decisions.
    (b) Number of members for a hearing. If less than a quorum is 
present for an oral hearing, the chairman with the consent of the 
hospital may allow those members present to conduct the hearing and to 
prepare a recommended

[[Page 446]]

decision, which is then submitted to a quorum.



Sec. 412.250  Sources of MGCRB's authority.

    (a) Compliance. The MGCRB, in issuing decisions under section 
1886(d)(10)(C) of the Act, complies with all the provisions of title 
XVIII and related provisions of the Act and implementing regulations, 
including the criteria and conditions located at Sec. 412.230 through 
Sec. 412.236, issued by the Secretary under the authority of section 
1886(d)(10)(D) of the Act; and CMS Rulings issued under the authority of 
the Administrator.
    (b) Affords great weight. The MGCRB affords great weight to other 
interpretive rules, general statements of policy and rules of agency 
organization, procedure, and practice established by CMS.

[55 FR 36766, Sept. 6, 1990, as amended at 56 FR 25488, June 4, 1991]



Sec. 412.252  Applications.

    (a) By one hospital. An individual prospective payment system 
hospital seeking redesignation to a different rural or urban area has 
the right to submit an application to the MGCRB.
    (b) By a group of hospitals. A group of hospitals has the right to 
submit an application to the MGCRB requesting redesignation of all 
prospective payment hospitals in a county if all prospective payment 
hospitals located in a county or in a NECMA agree to the request.



Sec. 412.254  Proceedings before MGCRB.

    (a) On-the-record decision. The MGCRB will ordinarily issue an on-
the-record decision without conducting an oral hearing. The MGCRB will 
issue a decision based upon all documents, data, and other written 
evidence and comments submitted timely to the MGCRB by the parties.
    (b) Oral hearing. The MGCRB may hold an oral hearing on its own 
motion or if a party demonstrates to the MGCRB's satisfaction that an 
oral hearing is necessary.



Sec. 412.256  Application requirements.

    (a) Written application. A request for reclassification must be in 
writing and must constitute a complete application in accordance with 
paragraph (b) of this section.
    (1) An application must be mailed or delivered to the MGCRB, with a 
copy to CMS, and may not be submitted through the facsimile (FAX) 
process or by other electronic means.
    (2) A complete application must be received not later than the first 
day of the 13-month period preceding the Federal fiscal year for which 
reclassification is requested.
    (3) The filing date of an application is the date the application is 
received by the MGCRB.
    (b) Criteria for a complete application. An application is complete 
if the application from an individual hospital or from all hospitals in 
a county includes the following information:
    (1) The Federal fiscal year for which the hospital is applying for 
redesignation.
    (2) Which criteria constitute the basis of the request for 
reclassification.
    (3) An explanation of how the hospital or hospitals meet the 
relevant criteria in Secs. 412.230 through 412.236, including any 
necessary data to support the application.
    (c) Opportunity to complete a submitted application. (1) The MGCRB 
will review an application within 15 days of receipt to determine if the 
application is complete. If the MGCRB determines that an application is 
incomplete, the MGCRB will notify the hospital, with a copy to CMS, 
within the 15 day period, that it has determined that the application is 
incomplete and may dismiss the application if a complete application is 
not filed by September 1.
    (2) At the request of the hospital, the MGCRB may, for good cause, 
grant a hospital that has submitted an application by September 1, an 
extension beyond September 1 to complete its application.
    (d) Appeal of MGCRB dismissal. (1) The hospital may appeal the MGCRB 
dismissal to the Administrator within 15 days of the date of the notice 
of dismissal.
    (2) Within 20 days of receipt of the hospital's request for appeal, 
the Administrator will affirm the dismissal or reverse the dismissal and 
remand the

[[Page 447]]

case to the MGCRB to determine whether reclassification is appropriate.
    (e) Notification of complete application. When the MGCRB determines 
that the hospital's application contains all the necessary elements for 
a complete application, it notifies the hospital in writing, with a copy 
to CMS, that the application is complete and that the case may proceed 
to an MGCRB decision.

[55 FR 36766, Sept. 6, 1990, as amended at 56 FR 25488, June 4, 1991; 62 
FR 46031, Aug. 29, 1997; 63 FR 26357, May 12, 1998; 64 FR 41541, July 
30, 1999]



Sec. 412.258  Parties to MGCRB proceeding.

    (a) The party or parties to an MGCRB proceeding are the hospital or 
group of hospitals requesting a change in geographic designation.
    (b) CMS has 30 days from the date of receipt of notice of a complete 
application to submit written comments and recommendations (with a copy 
to the hospital) for consideration by the MGCRB.
    (c) The hospital has 15 days from the date of receipt of CMS's 
comments to submit written comments to the MGCRB, with a copy to CMS, 
for the purpose of responding to CMS's comments.



Sec. 412.260  Time and place of the oral hearing.

    If the MGCRB decides that an oral hearing is necessary, it sets the 
time and place for the hearing and notifies the parties in writing, with 
a copy to CMS, not less than 10 days before the time scheduled for the 
hearing. The MGCRB may reschedule, adjourn, postpone, or reconvene the 
hearing provided that reasonable written notice is given to the parties, 
with a copy to CMS.



Sec. 412.262  Disqualification of an MGCRB member.

    (a) Grounds for disqualification. An MGCRB member may not 
participate in any decision in a case in which he or she may be 
prejudiced or partial with respect to a party or has any other interest 
in the case.
    (b) Request for disqualification. If a party believes that an MGCRB 
member should not participate in a decision, the party submits the 
objection in writing to the MGCRB at its earliest opportunity, 
explaining the grounds for the request. CMS may also submit such a 
suggestion to the MGCRB.
    (c) Consideration by the MGCRB member. The MGCRB member will 
consider the objection and, at his or her discretion, either will 
proceed or withdraw.
    (d) Consideration by the MGCRB If the member does not withdraw, a 
party may petition the MGCRB for withdrawal and the MGCRB will consider 
the objection and rule on whether the member may participate in the 
decision before it decides the case.



Sec. 412.264  Evidence and comments in MGCRB proceeding.

    (a) Submission by the parties. Before a decision is issued and 
during an oral hearing, the parties may present evidence or comments to 
the MGCRB regarding the matters at issue in the case.
    (b) Content of evidence and comments. The MGCRB may receive evidence 
and comments without regard for the rules of evidence applicable to 
court procedures.
    (c) Ex parte communications. (1) The members of the MGCRB and its 
staff may not consult or be consulted by an individual representing the 
interests of an applicant hospital or by any other individual on any 
matter in issue before the MGCRB without notice to the hospital or CMS. 
If such communication occurs, the MGCRB will disclose it to the hospital 
or CMS, as appropriate, and make it part of the record after the 
hospital or CMS has had an opportunity to comment. MGCRB members and 
staff may not consider any information outside the record about matters 
concerning a hospital's application for reclassification.
    (2) The provisions in paragraph (c)(1) of this section do not apply 
to the following:
    (i) Communications among MGCRB members and staff.
    (ii) Communications concerning the MGCRB's administrative functions 
or procedures.
    (iii) Requests from the MGCRB to a party or CMS for a document.

[[Page 448]]

    (iv) Material that the MGCRB includes in the record after notice and 
an opportunity to comment.
    (d) MGCRB rulings on evidence and comments. The MGCRB rules upon the 
admissibility of evidence and comments and excludes irrelevant, 
immaterial, or unduly repetitious evidence and comments.



Sec. 412.266  Availability of wage data.

    A hospital may obtain the average hourly wage data necessary to 
prepare its application to the MGCRB from Federal Register documents 
published in accordance with the provisions of Sec. 412.8(b).

[60 FR 45849, Sept. 1, 1995]



Sec. 412.268  Subpoenas.

    (a) In general. When reasonably necessary for the full presentation 
of a case, and only after a pre-decision request for information or data 
has failed to produce the necessary evidence, either upon its own motion 
or upon the request of a party, the MGCRB may issue subpoenas for the 
attendance and testimony of witnesses, for an oral hearing or the 
production of books, records, correspondence, papers, or other documents 
that are relevant and material to any matter at issue.
    (b) Content of request. The request must designate which witnesses 
or documents are to be produced, and describe addresses or locations 
with sufficient particularly to permit these witnesses or documents to 
be found. The request for a subpoena must state the pertinent facts that 
the party expects to establish by the requested witnesses or documents 
and whether these facts could be established by other evidence without 
the use of a subpoena.
    (c) Issuance. Subpoenas are issued as provided in section 205(d) of 
the Act.
    (d) Payment for subpoena cost. CMS pays for the cost of issuing 
subpoenas and the fees and mileage of any witness who is subpoenaed, as 
provided in section 205(d) of the Act.



Sec. 412.270  Witnesses.

    Witnesses at an oral hearing testify under oath or affirmation, 
unless excused by the MGCRB for cause. The MGCRB may examine the 
witnesses and may allow the parties or their representatives to also 
examine any witnesses called.



Sec. 412.272  Record of proceedings before the MGCRB.

    A complete record of the proceedings before the MGCRB is made in all 
cases. The record will not be closed until a decision has been issued by 
the MGCRB. A transcription of an oral hearing will be made at a party's 
request, at the expense of the requesting party.



Sec. 412.273  Withdrawing an application, terminating an approved 3-year reclassification, or canceling a previous withdrawal or termination.

    (a) Timing of a withdrawal. The MGCRB allows a hospital, or group of 
hospitals, to withdraw its application if the request for withdrawal is 
submitted to the MGCRB during the following time periods:
    (1) At any time before the MGCRB issues a decision on the 
application; or
    (2) After the MGCRB issues a decision, provided that the request for 
withdrawal is received by the MGCRB within 45 days of publication of 
CMS's annual notice of proposed rulemaking concerning changes to the 
inpatient hospital prospective payment system and proposed payment rates 
for the fiscal year for which the application has been filed.
    (b) Request for termination of approved 3-year wage index 
reclassifications.
    (1) A hospital, or a group of hospitals, that has been issued a 
decision on its application for a 3-year reclassification for wage index 
purposes only or for redesignation to a statewide wage index and has not 
withdrawn that application under the procedures specified in paragraph 
(a) of this section may request termination of its approved 3-year wage 
index reclassification under the following conditions:
    (i) The request to terminate must be received by the MGCRB within 45 
days of the publication of the annual notice of proposed rulemaking 
concerning changes to the inpatient hospital prospective payment system 
and proposed payment rates for the fiscal year for which the termination 
is to apply.

[[Page 449]]

    (ii) A request to terminate a 3-year reclassification will be 
effective only for the full fiscal year(s) remaining in the 3-year 
period at the time the request is received. Requests for terminations 
for part of a fiscal year will not be considered.
    (2) Reapplication within the approved 3-year period.
    (i) If a hospital elects to withdraw its wage index application 
after the MGCRB has issued its decision, it may cancel its withdrawal in 
a subsequent year and request the MGCRB to reinstate its wage index 
reclassification for the remaining fiscal year(s) of the 3-year period.
    (ii) A hospital may apply for reclassification for purposes of the 
wage index to a different area (that is, an area different from the one 
to which it was originally reclassified for the 3-year period). If the 
application is approved, the reclassification will be effective for 3 
years. Once a 3-year reclassification becomes effective, a hospital may 
no longer cancel a withdrawal or termination of another 3-year 
reclassification, regardless of whether the withdrawal or termination 
request is made within 3 years from the date of the withdrawal or 
termination.
    (iii) In a case in which a hospital with an existing 3-year wage 
index reclassification applies to be reclassified to another area, its 
existing 3-year reclassification will be terminated when a second 3-year 
wage index reclassification goes into effect for payments for discharges 
on or after the following October 1.
    (c) Written request only. A request to withdraw an application or 
terminate an approved reclassification must be made in writing to the 
MGCRB by all hospitals that are party to the application or 
reclassification.
    (d) Process for canceling a previous withdrawal or termination. A 
hospital may cancel a previous withdrawal or termination by submitting 
written notice of its intent to the MGCRB no later than the deadline for 
submitting reclassification applications for the following fiscal year, 
as specified in Sec. 412.256(a)(2).
    (e) Appeal of the MGCRB's denial of a hospital's request for 
withdrawal. (1) A hospital may file an appeal of the MGCRB's denial of 
its request for withdrawal of an application to the Administrator. The 
appeal must be received within 15 days of the date of the notice of the 
denial.
    (2) Within 20 days of receipt of the hospital's request for appeal, 
the Administrator affirms or reverses the denial.

[56 FR 25489, June 4, 1991, as amended at 56 FR 43241, Aug. 30, 1991; 57 
FR 39826, Sept. 1, 1992; 66 FR 39935, Aug. 1, 2001; 67 FR 50113, Aug. 1, 
2002]



Sec. 412.274  Scope and effect of an MGCRB decision.

    (a) Scope of decision. The MGCRB may affirm or change a hospital's 
geographic designation. The MGCRB's decision is based upon the evidence 
of record, including the hospital's application and other evidence 
obtained or received by the MGCRB.
    (b) Effective date and term of the decision.
    (1) A standardized amount classification change is effective for one 
year beginning with discharges occurring on the first day (October 1) of 
the second Federal fiscal year following the Federal fiscal year in 
which the complete application is filed and ending effective at the end 
of that Federal fiscal year (the end of the next September 30).
    (2) A wage index classification change is effective for 3 years 
beginning with discharges occurring on the first day (October 1) of the 
second Federal fiscal year in which the complete application is filed.

[55 FR 36766, Sept. 6, 1990, as amended at 62 FR 46031, Aug. 29, 1997; 
66 FR 39935, Aug. 1, 2001]



Sec. 412.276  Timing of MGCRB decision and its appeal.

    (a) Timing. The MGCRB notifies the parties in writing, with a copy 
to CMS, and issues a decision within 180 days after the first day of the 
13-month period preceding the Federal fiscal year for which a hospital 
has filed a complete application. The hospital has 15 days from the date 
of the decision to request Administrator review.
    (b) Appeal. The decision of the MGCRB is final and binding upon the 
parties unless it is reviewed by the Administrator and the decision is 
changed

[[Page 450]]

by the Administrator in accordance with Sec. 412.278.

[55 FR 36766, Sept. 6, 1990, as amended at 64 FR 41541, July 30, 1999]



Sec. 412.278  Administrator's review.

    (a) Hospitals requests for review. A hospital or group of hospitals 
dissatisfied with the MGCRB's decision regarding its geographic 
designation may request the Administrator to review the MGCRB decision. 
(A hospital or group of hospitals may also request that the 
Administrator review the MGCRB's dismissal of an application as untimely 
filed or incomplete, as provided in Sec. 412.256(d).)
    (b) Procedures for hospital's request for review. (1) The hospital's 
request for review must be in writing and sent to the Administrator, in 
care of the Office of the Attorney Advisor. The request must be received 
by the Administrator within 15 days after the date the MGCRB issues its 
decision. A request for Administrator review filed by facsimile (FAX) or 
other electronic means will not be accepted. The hospital must also mail 
a copy of its request for review to CMS's Office of Payment Policy.
    (2) The request for review may contain proposed findings of fact and 
conclusions of law, exceptions to the MGCRB's decision, and supporting 
reasons therefor.
    (3) Within 15 days of receipt of the hospital's request for review, 
CMS may submit to the Administrator, in writing, with a copy to the 
party, comments and recommendations concerning the hospital's 
submission.
    (4) Within 10 days of receipt of CMS's submission, the hospital may 
submit in writing, with a copy to CMS, a response to the Administrator.
    (c) Discretionary review by the Administrator. (1) The Administrator 
may, at his or her discretion, review any final decision of the MGCRB.
    (2) The Administrator promptly notifies the hospital that he or she 
has decided to review a decision of the MGCRB. The notice of review 
indicates the particular issues to be considered and includes copies of 
any comments submitted to the Administrator by CMS staff concerning the 
MGCRB decision.
    (3) Within 15 days of the receipt of the Administrator's notice of 
review, the hospital may submit a response in writing to the 
Administrator, with a copy of CMS.
    (d) Criteria for discretionary review. In deciding whether to review 
an MGCRB decision, the Administrator normally considers whether it 
appears that any of the following situations apply:
    (1) The MGCRB made an erroneous interpretation of law, regulation, 
or CMS Ruling.
    (2) The MGCRB's decision is not supported by substantial evidence.
    (3) The case presents a significant policy issue having a basis in 
law and regulations, and review is likely to lead to issuance of a CMS 
Ruling or other directive needed to clarify a provision in the law or 
regulations.
    (4) The decision of the MGCRB requires clarification, amplication, 
or an alternative legal basis.
    (5) The MGCRB has incorrectly extended its authority to a degree not 
provided for by law, regulation, or CMS Ruling.
    (e) Communication procedures. All communications between CMS staff 
and the Administrator concerning the Administrator's review of an MGCRB 
decision must be in writing. As specified in paragraphs (b) and (c) of 
this section, copies of comments by CMS staff are sent to applicant 
hospitals within 15 days of receipt of a hospital's request for review, 
or, in cases in which the Administrator decides to review a case at his 
or her discretion, are included with the Administrator's notice of 
review. In the event there are additional communications between CMS 
staff and the Administrator concerning MGCRB decisions reviewed by the 
Administrator under paragraphs (b) or (c) of this section, CMS furnishes 
copies of the communications to the hospital or group of hospitals.
    (f) Administrator's decision. (1) The Administrator may not receive 
or consider any new evidence and must issue a decision based only upon 
the record as it appeared before the MGCRB and comments submitted under 
paragraphs (b)(2), (b)(3), (b)(4), (c)(2), and (c)(3) of this section.

[[Page 451]]

    (2) The Administrator issues a decision in writing to the party with 
a copy to CMS--
    (i) Not later than 90 days following receipt of the party's request 
for review; or
    (ii) Not later than 105 days following issuance of the MGCRB 
decision in the case of review at the discretion of the Administrator.
    (3) The Administrator's decision issued under Sec. 412.278 (a) or 
(c) is the final Departmental decision, unless it is amended under 
Sec. 412.278(g). The final Departmental decision is not subject to 
judicial review.
    (4) The Administrator's decision is not subject to judicial review.
    (g) Amendment of Administrator decision--(1) Hospital's request for 
amendment. The hospital may request the Administrator to amend the 
decision for the limited purpose of correcting mathematical or 
computational errors, or to correct the decision if the evidence that 
was considered in making the decision clearly shows on its face that an 
error was made. The following procedure is followed:
    (i) The hospital's request for amendment must be received by the 
Administrator within 10 days after the date the Administrator issues a 
decision. The request for amendment must be in writing, with a copy to 
CMS.
    (ii) The Administrator promptly reviews the hospital's request and 
amends the decision, if necessary, within 5 days following receipt of 
the hospital's request for amendment.
    (2) Discretionary review by the Administrator. Within 15 days 
following the issuance of the Administrator's decision, the 
Administrator, at his or her discretion, may amend the decision to 
correct mathematical or computational errors, or to correct the decision 
if the evidence that was considered in making the decision clearly shows 
on its face that an error was made. The Administrator's amended decision 
is final and is not subject to judicial review.

[55 FR 36766, Sept. 6, 1990, as amended at 56 FR 25489, June 4, 1991; 57 
FR 39826, Sept. 1, 1992]



Sec. 412.280  Representation.

    (a) General. A party may be represented by legal counsel or by any 
other person appointed to act as its representative at any proceeding 
before the MGCRB or the Administrator.
    (b) Rights of a representative. A representative appointed by a 
party may accept or give on behalf of the party any request or notice 
connected with any proceeding before the MGCRB or the Administrator. A 
representative is entitled to present evidence and argument as to facts 
and law in any MGCRB proceeding affecting the party represented and to 
obtain information to the same extent as the party represented. Notice 
of any action or decision sent to the representative of a party has the 
same effect as if it had been sent to the party itself.



  Subpart M--Prospective Payment System for Inpatient Hospital Capital 
                                  Costs

    Source: 56 FR 43449, Aug. 30, 1991, unless otherwise noted.

                           General Provisions



Sec. 412.300  Scope of subpart and definition.

    (a) Purpose. This subpart implements section 1886(g)(1)(A) of the 
Act by establishing a prospective payment system for inpatient hospital 
capital-related costs. Under this system, payment is made on the basis 
described in Sec. 412.304 through Sec. 412.374 for inpatient hospital 
capital-related costs furnished by hospitals subject to the prospective 
payment system under subpart B of this part.
    (b) Definition. For purposes of this subpart, a new hospital means a 
hospital that has operated (under previous or present ownership) for 
less than 2 years. The following hospitals are not new hospitals:
    (1) A hospital that builds new or replacement facilities at the same 
or another location even if coincidental with a change of ownership, a 
change in management, or a lease arrangement.
    (2) A hospital that closes and subsequently reopens.

[[Page 452]]

    (3) A hospital that has been in operation for more than 2 years but 
has participated in the Medicare program for less than 2 years.
    (4) A hospital that changes its status from a hospital that is 
excluded from the prospective payment systems to a hospital that is 
subject to the capital prospective payment systems.

[56 FR 43449, Aug. 30, 1991, as amended at 57 FR 39827, Sept. 1, 1992]



Sec. 412.302  Introduction to capital costs.

    (a) New capital costs. New capital costs are allowable Medicare 
inpatient hospital capital-related costs under subpart G of part 413 of 
this chapter that are related to assets that were first put in use for 
patient care after December 31, 1990 (except for such costs deemed to be 
old capital costs based on prior obligations as described in paragraph 
(c) of this section) and those allowable capital-related costs related 
to assets in use prior to December 31, 1990 that are excluded from the 
definition of old capital costs described in paragraphs (b) (2) through 
(5) of this section, or are betterment or improvement costs related to 
those old capital assets.
    (b) Old capital costs. Except as provided in paragraph (c) of this 
section with respect to capital obligations that qualify for recognition 
as old capital, old capital costs are allowable capital-related costs 
for land and depreciable assets that were put in use for patient care on 
or before December 31, 1990. However, for a new hospital as defined in 
Sec. 412.300(b), old capital costs are defined as those allowable 
capital-related costs for land and depreciable assets that were put in 
use for patient care on or before the later of December 31, 1990 or the 
last day of the hospital's base year cost reporting period under 
Sec. 412.328(a)(2). Old capital costs include the following:
    (1) Allowable depreciation on assets based on the useful life 
guidelines used to determine depreciation expense in the hospital's base 
period.
    (2) Allowable capital-related interest expense. Except as provided 
below, the amount of allowable capital-related interest expense that 
will be recognized as old capital is limited to the amount the hospital 
was legally obligated to pay as of December 31, 1990. Any allowable 
interest expense in excess of this limitation will be recognized as new 
capital.
    (i) An increase in interest expense is recognized if the increase is 
due to periodic fluctuations of rates in variable interest rate loans or 
at the time of conversion from a variable rate loan to a fixed rate loan 
when no other changes in the terms of the loan are made.
    (ii) If the terms of a debt instrument are revised after December 
31, 1990, the amount of interest that will be recognized as old capital 
during the transition cannot exceed the amount that would have been 
recognized during the same period prior to the revision of the debt 
instrument.
    (iii) If short-term financing was used to acquire old capital assets 
and the debt is extended or ``rolled-over'', a portion of the extended 
debt will be recognized as old capital. The portion will equal the ratio 
of the net book value as of the beginning of the applicable cost 
reporting period for depreciable assets that were in use in the base 
year, to the net book value as of the beginning of the base year cost 
reporting period for those assets. The net book value for the base year 
will not be adjusted to exclude assets that have been fully depreciated 
or removed from service since the base year. If the debt is related to 
specific assets, the ratio will be determined based on the values for 
those assets. The ratio will exclude assets that were acquired with 
other identifiable debt instruments. For purposes of this paragraph, 
short term financing is a debt that becomes due in no later than the 
earlier of 5 years or half of the average useful life of the assets to 
which the debt is related.
    (iv) If old capital indebtedness is commingled with new capital 
debt, the allowable interest expense will be apportioned to old capital 
costs based on the ratio of the portion of the loan principal related to 
old capital indebtedness to the total loan principal.
    (v) Investment income, excluding income from funded depreciation 
accounts, is used to reduce old capital interest expense based on the 
ratio of total old capital interest expense to

[[Page 453]]

total allowable interest expense in each cost reporting period.
    (3) Allowable capital-related lease and rental costs for land and 
depreciable assets that were obligated as of December 31, 1990.
    (i) Lease renewals up to the annual lease payment level obligated as 
of December 31, 1990 are recognized provided the same asset remains in 
use, the asset has a useful life of at least 3 years, and the annual 
lease payment is $1,000 or more for each item or service.
    (ii) If a hospital-owned asset is sold or given to another party and 
that same asset is then leased back by the hospital, the amount of 
allowable capital-related costs recognized as old capital costs is 
limited to the amount allowed for that asset in the last cost reporting 
period that it was owned by the hospital.
    (iii) If an entire hospital is leased without assumption of the 
hospital's asset costs after December 31, 1990, the amount of allowable 
capital-related costs recognized as old capital costs is limited to the 
amount allowed for old capital costs in the base year or the last cost 
reporting period these costs were recognized under this subpart, 
whichever is later.
    (4) The portion of allowable costs for other capital-related 
expenses (including but not limited to, taxes, insurance, license and 
royalty fees on depreciable assets) resulting from applying the ratio of 
the hospital's gross old asset value to total asset value in each cost 
reporting period.
    (5) The appropriate portion of the capital-related costs of related 
organizations under Sec. 413.17 that would be recognized as old capital 
costs if these costs had been incurred directly by the hospital.
    (6) Obligated capital costs that are recognized as old capital costs 
in accordance with paragraph (c) of this section.
    (7) If a hospital had nonreimbursable costs applicable to an old 
capital asset as of December 31, 1990 that subsequently become allowable 
inpatient capital-related costs, the allowable costs for such an asset 
that are attributable to inpatient hospital services are recognized as 
old capital costs if a portion of the asset was in use for inpatient 
hospital care on December 31, 1990 and the costs meet all other 
provisions for recognition of old capital costs contained in this 
section.
    (c) Obligated capital costs--(1) General rule. Under the conditions 
described below, capital-related costs attributable to assets that are 
put in use after December 31, 1990 may be recognized as old capital 
costs. Any allowable capital-related costs for these assets that are not 
recognized as old capital costs are recognized as new capital costs.
    (i) Fixed assets. The costs of capital-related items and services 
defined in subpart G of part 413 for which there was a contractual 
obligation entered into by a hospital or related party with an outside, 
unrelated party for the construction, reconstruction, lease, rental, or 
financing of a fixed asset may be recognized as old capital costs if all 
the following conditions are met:
    (A) The obligation must arise from a binding written agreement that 
was executed on or before December 31, 1990 and that obligates the 
hospital on or before December 31, 1990.
    (B) The capital asset must be put in use for patient care before 
October 1, 1994 except as provided in paragraph (c)(1)(iv) of this 
section.
    (C) The hospital notifies the intermediary of the existence of 
obligated capital costs as provided in paragraph (c)(1)(v) of this 
section.
    (D) The amount that is recognized as old capital cost is limited to 
the lesser of the actual allowable costs when the asset is put in use or 
the estimated costs of the capital expenditure at the time it was 
obligated as provided in paragraph (c)(1)(vi) of this section.
    (ii) Moveable equipment. Moveable equipment is recognized as old 
capital only if all of the conditions specified in paragraphs (c)(1)(i) 
(B) through (D) of this section are met and one of the following 
conditions is met:
    (A) There was a binding contractual agreement that was executed on 
or before December 31, 1990 and obligates the hospital on or before 
December 31, 1990 for the lease or purchase of the item of equipment on 
or before December 31, 1990.

[[Page 454]]

    (B) There was a binding contractual agreement that was executed on 
or before December 31, 1990 and obligates the hospital on or before 
December 31, 1990 for financing the acquisition of the equipment; the 
item of equipment costs at least $100,000; and the item was specifically 
listed in an equipment purchase plan approved by the Board of Directors 
on or before December 31, 1990.
    (iii) Agreements not recognized. Agreements for planning, design or 
feasibility that do not commit the hospital to undertake a project are 
not recognized as obligating capital expenditures for purposes of this 
subsection.
    (iv) Extension of deadline. CMS may extend the deadline in paragraph 
(c)(1)(i)(B) of this section, under which an asset must be put in use 
for patient care before October 1, 1994, to no later than September 30, 
1996 for extraordinary circumstances beyond the hospital's control. 
Extraordinary circumstances include, but are not limited to, a 
construction strike or atypically severe weather that significantly 
delayed completion of a construction project. Normal construction delays 
do not constitute extraordinary circumstances.
    (A) The hospital must submit its request for an extended deadline 
with documentation of the extraordinary circumstances by the later of 
January 1, 1993 or 180 days after the extraordinary circumstance.
    (B) The intermediary reviews the request and verifies the hospital's 
documentation, and forwards the request to CMS within 60 days. Within 90 
days, CMS notifies the intermediary of its decision and, if an extension 
is granted, of the revised deadline for putting the asset in use for 
patient care service.
    (v) The hospital must submit to its intermediary the binding 
agreement and supporting documents that relate to the obligated capital 
expenditure by the later of October 1, 1992, or within 90 days after the 
start of the hospital's first cost reporting period beginning on or 
after October 1, 1991. This documentation must include a project 
description (including details of any phased construction or financing) 
and an estimate of costs that were prepared no later than December 31, 
1990.
    (vi) Cost limitation--(A) Leases, Rentals or Purchases. The amount 
of obligated capital costs recognized as old capital costs cannot exceed 
the amount specified in the lease, rental, or purchase agreement. If 
moveable equipment is recognized as old capital under paragraph 
(c)(1)(ii)(B) of this section, the amount recognized as old capital 
costs cannot exceed the estimated cost identified in the equipment 
purchase plan approved by the hospital's Board of Directors.
    (B) Construction contracts. The amount of obligated capital costs 
recognized as old capital costs cannot exceed the estimated construction 
costs for the project as of December 31, 1990. Additional costs will be 
recognized as old capital costs only if the additional costs are 
directly attributable to changes in life safety codes or other building 
requirements established by government ordinance that occurred after the 
project was obligated.
    (C) Financing costs. The amount of obligated interest expense that 
will be recognized as old capital costs cannot exceed the amount for 
which the hospital was legally obligated as of December 31, 1990 or, in 
the case of financing that is arranged after December 31, 1990 for a 
capital acquisition that was legally obligated as of December 31, 1990, 
the amount specified in a detailed financing plan approved by the 
hospital's Board of Directors prior to January 1, 1991.
    (vii) Determining old capital costs. (A) The intermediary determines 
whether the applicable criteria are met for recognition of obligated 
capital costs as old capital costs and the maximum allowable cost that 
will be recognized as old capital costs.
    (B) The intermediary advises the hospital of its determination by 
the later of the end of the hospital's first cost reporting period 
subject to the capital prospective payment system or 9 months after the 
receipt of the hospital's notification under paragraph (c)(1)(v) of this 
section.
    (C) The actual amount that will be recognized as old capital costs 
is based on the lesser of the allowable costs for the asset when it is 
put into patient use or the amounts determined under paragraph 
(c)(1)(vi) of this section.

[[Page 455]]

    (viii) Multi-phase project. If the hospital has a multi-phase 
capital project, the provisions of paragraphs (c)(1) (i) through (vii) 
of this section apply independently to each phase of the project.
    (2) Lengthy certificate-of-need process. (i) If a hospital does not 
meet the criteria under paragraph (c)(1)(i) or paragraph (c)(1)(ii) of 
this section, but meets all of the following criteria, the estimated 
cost for the project as of December 31, 1990 may be recognized as old 
capital costs:
    (A) The hospital is required under State law to obtain preapproval 
of the capital project or acquisition by a designated State or local 
planning authority in the State in which it is located.
    (B) The hospital filed an initial application for a certificate of 
need on or before December 31, 1989 that includes a detailed description 
of the project and its estimated cost and had not received approval or 
disapproval on or before September 30, 1990. If the hospital received 
conditional approval on or before September 30, 1990, the hospital's 
intermediary assesses the nature of the conditions. The hospital will be 
considered to have received approval for the project as of September 30, 
1990 if the intermediary determines that the hospital received 
sufficient approval for the project to proceed without significant 
delay.
    (C) The hospital expended the lesser of $750,000 or 10 percent of 
the estimated cost of the project on or before December 31, 1990; and
    (D) The hospital put the asset into patient use on or before the 
later of September 30, 1996 or 4 years from the date the certificate of 
need was approved.
    (ii) The provisions of paragraphs (c)(1) (iv) through (viii) of this 
section apply to projects that meet the criteria in paragraph (c)(2)(i) 
of this section.
    (3) Construction in process. (i) If a hospital that initiates 
construction on a capital project does not meet the requirements of 
paragraphs (c)(1)(i) or (ii) or (c)(2)(i) of this section, the project 
costs may be recognized as old capital costs if all the following 
conditions are met:
    (A) The hospital received any required certificate of need approval 
on or before December 31, 1990.
    (B) The hospital's Board of Directors formally authorized the 
project with a detailed description of its scope and costs on or before 
December 31, 1990.
    (C) The estimated cost of the project as of December 31, 1990 
exceeds 5 percent of the hospital's total patient revenues during its 
base year.
    (D) The capitalized cost that had been incurred for the project as 
of December 31, 1990 exceeded the lesser of $750,000 or 10 percent of 
the estimated project cost.
    (E) The hospital began actual construction or renovation 
(``groundbreaking'') on or before March 31, 1991.
    (F) The project is completed before October 1, 1994.
    (ii) The provisions of paragraphs (c)(1) (iv) through (viii) of this 
section apply to projects that meet the criteria in paragraph (c)(3)(i) 
of this section.
    (d) Consistency in cost reporting--(1) General rule. For cost 
reporting periods beginning on or after October 1, 1991, and before 
October 1, 2001, the hospital must follow consistent cost finding 
methods for classifying and allocating capital-related costs, except as 
otherwise provided in paragraph (d)(4) of this section.
    (2) Old capital costs. Unless there is a change of ownership, the 
hospital must continue the same cost finding methods for old capital 
costs, including its practices for the direct assignment of capital-
related costs and its cost allocation bases, that were in effect in the 
hospital's last cost reporting period ending on or before October 1, 
1991. If there is a change of ownership, the new owners may request that 
the intermediary approve a change in order to be consistent with their 
established cost finding practices.
    (3) New capital costs. If a hospital desires to change its cost 
finding methods for new capital costs, the request for change must be 
made in writing to the intermediary prior to the beginning of the cost 
reporting period for which the change is to apply. The request must 
include justification as to why the change will result in more accurate 
and more appropriate cost finding. The intermediary will not approve the 
change unless it determines that

[[Page 456]]

there is reasonable justification for the change.
    (4) Hospitals may elect the simplified cost allocation methodology 
under the terms and conditions provided in the instructions for CMS Form 
2552.

[56 FR 43449, Aug. 30, 1991, as amended at 57 FR 3016, Jan. 27, 1992; 57 
FR 39827, Sept. 1, 1992; 57 FR 46510, Oct. 9, 1992; 59 FR 45399, Sept. 
1, 1994; 61 FR 46224, Aug. 30, 1996; 61 FR 51217, Oct. 1, 1996]



Sec. 412.304  Implementation of the capital prospective payment system.

    (a) General rule. As described in Secs. 412.312 through 412.370, 
effective with cost reporting periods beginning on or after October 1, 
1991, CMS pays an amount determined under the capital prospective 
payment system for each inpatient hospital discharge as defined in 
Sec. 412.4. This amount is in addition to the amount payable under the 
prospective payment system for inpatient hospital operating costs as 
determined under Sec. 412.63.
    (b) Cost reporting periods beginning on or after October 1, 1991 and 
before October 1, 2001. For cost reporting periods beginning on or after 
October 1, 1991 and before October 1, 2001, the capital payment amount 
is based on either a combination of payments for old capital costs and 
new capital costs or a fully prospective rate, as determined under 
Sec. 412.324 through Sec. 412.348.
    (c) Cost reporting periods beginning on or after October 1, 2001.-- 
(1) General. Except as provided in paragraph (c)(2) of this section, for 
cost reporting periods beginning on or after October 1, 2001, the 
capital payment amount is based solely on the Federal rate determined 
under Secs. 412.308(a) and (b) and updated under Sec. 412.308(c).
    (2) Payment to new hospitals. For cost reporting periods beginning 
on or after October 1, 2002--
    (i) A new hospital, as defined under Sec. 412.300(b), is paid 85 
percent of its allowable Medicare inpatient hospital capital-related 
costs through its cost report ending at least 2 years after the hospital 
accepts its first patient, unless the new hospital elects to be paid 
under the capital prospective payment system based on 100 percent of the 
Federal rate.
    (A) If the new hospital elects to be paid based on 100 percent of 
the Federal rate, the new hospital must submit a written request to the 
fiscal intermediary by the later of December 1, 2002 or 60 days before 
the beginning of its cost reporting period.
    (B) Once a new hospital elects to be paid based on 100 percent of 
the Federal rate, it may not revert to payment at 85 percent of its 
allowable Medicare inpatient hospital capital-related costs.
    (ii) For the third year and subsequent years, the hospital is paid 
based on the Federal rate as described under Sec. 412.312.
    (d) Interim payments. Interim payments are made to the hospital as 
provided in Sec. 412.116.

[56 FR 43449, Aug. 30, 1991, as amended at 67 FR 50113, Aug. 1, 2002]

 Basic Methodology for Determining the Federal Rate for Capital-Related 
                                  Costs



Sec. 412.308  Determining and updating the Federal rate.

    (a) FY 1992 national average cost per discharge. CMS determines the 
FY 1992 estimated national average cost per discharge by updating the 
discharge weighted national average Medicare inpatient hospital capital-
related cost per discharge for FY 1989 by the estimated increase in 
Medicare inpatient hospital capital costs per discharge.
    (b) Standard Federal rate. The standard Federal rate is used to 
determine the Federal rate for each fiscal year in accordance with the 
formula specified in paragraph (c) of this section.
    (1) CMS determines the standard Federal rate by adjusting the FY 
1992 updated national average cost per discharge by a factor so that 
estimated aggregate payments based on the standard Federal rate adjusted 
by the payment adjustments described in Sec. 412.312(b) equal estimated 
aggregate payments based solely on the national average cost per 
discharge.
    (2) Effective FY 1994, the standard Federal rate used to determine 
the Federal rate each year under paragraph (c) of this section is 
reduced by 7.4 percent.
    (3) Effective FY 1996, the standard Federal rate used to determine 
the

[[Page 457]]

Federal rate each year under paragraph (c) of this section is reduced by 
0.28 percent to account for the effect of the revised policy for payment 
of transfers under Sec. 412.4(d).
    (4) Effective FY 1998, the unadjusted standard Federal capital 
payment rate in effect on September 30, 1997, used to determine the 
Federal rate each year under paragraph (c) of this section is reduced by 
15.68 percent.
    (5) For discharges occurring on or after October 1, 1997 through 
September 30, 2002, the unadjusted standard Federal capital payment rate 
as in effect on September 30, 1997, used to determine the Federal rate 
each year under paragraph (c) of this section is further reduced by 2.1 
percent.
    (6) For discharges occurring on or after October 1, 2002, the 2.1 
percent reduction provided for under paragraph (b)(5) of this section is 
eliminated from the unadjusted standard Federal rate in effect on 
September 30, 2002, used to determine the Federal rate each year under 
paragraph (c) of this section.
    (c) The Federal rate. CMS determines the Federal rate each year by 
adjusting the standard Federal rate by the following factors.
    (1) Update factor. After FY 1992, CMS updates the standard Federal 
rate as follows:
    (i) FY 1993 through FY 1995. For FY 1993 through FY 1995, the 
standard Federal rate is updated based on a moving two-year average of 
actual increases in capital-related costs per discharge for the period 
three and four years before the fiscal year in question, excluding the 
portion of the increase attributable to changes in case mix.
    (ii) Effective FY 1996. Effective FY 1996, the standard Federal rate 
is updated based on an analytical framework. The framework includes a 
capital input price index, which measures the annual change in the 
prices associated with capital-related costs during the year. CMS 
adjusts the capital input price index rate of change to take into 
account forecast errors, changes in the case mix index, the effect of 
changes to DRG classification and relative weights, and allowable 
changes in the intensity of hospital services.
    (2) Outlier payment adjustment factor. CMS reduces the updated 
standard Federal rate by an adjustment factor equal to the estimated 
additional payments under the Federal rate for outlier cases under 
subpart F of this part, determined as a proportion of total capital 
payments under the Federal rate.
    (3) Exceptions payment adjustment factor. CMS reduces the updated 
standard Federal rate by an adjustment factor equal to the estimated 
additional payments for exceptions under Sec. 412.348 determined as a 
proportion of total payments under the hospital-specific rate and 
Federal rate.
    (4) Budget neutrality adjustment factor. (i) For FY 1992 through FY 
1995, CMS adjusts the updated standard Federal rate by a budget 
neutrality factor determined under Sec. 412.352.
    (ii) CMS makes an adjustment to the Federal rate so that estimated 
aggregate payments for the fiscal year based on the Federal rate after 
any changes resulting from the annual reclassification and recalibration 
of the DRG weight in accordance with Sec. 412.60(e) and in the 
geographic adjustment factors described in Sec. 412.312(b)(2) equal 
estimated aggregate payments based on the Federal rate that would have 
been made without such changes.

[56 FR 43449, Aug. 30, 1991; 57 FR 3016, Jan. 27, 1992, as amended at 58 
FR 46339, Sept. 1, 1993; 59 FR 45399, Sept. 1, 1994; 60 FR 45849, Sept. 
1, 1995; 62 FR 46031, Aug. 29, 1997; 67 FR 50113, Aug. 1, 2002]



Sec. 412.312  Payment based on the Federal rate.

    (a) General. The payment amount for each discharge based on the 
Federal rate determined under Sec. 412.308(c) is determined under the 
following formula: [Federal rate X DRG weight X Geographic adjustment 
factor X Large urban add-on X (1 + Capital disproportionate share 
adjustment factor + capital indirect medical education adjustment 
factor) X (for hospitals located in Alaska and Hawaii, a cost-of-living 
adjustment factor)] + (Any applicable outlier payment).
    (b) Payment adjustments--(1) DRG weights. The relative resource 
requirements of the discharge are taken into account by applying the DRG 
weighting factor that is assigned to the discharge under Sec. 412.60.

[[Page 458]]

    (2) Geographic adjustment factors--(i) Local cost variation. A 
geographic adjustment factor is applied that takes into account 
geographic variation in costs.
    (ii) Large urban add-on. An additional adjustment is made for 
hospitals located in a large urban area to reflect the higher costs 
incurred by hospitals located in those areas.
    (iii) Cost-of-living adjustment. An additional adjustment is made 
for hospitals located in Alaska and Hawaii to account for the higher 
cost-of-living in those States.
    (3) Disproportionate share adjustment. For hospitals with at least 
100 beds located in an urban area and serving low-income patients, a 
disproportionate share adjustment factor is applied that reflects the 
higher costs attributable to furnishing services to low income patients.
    (4) Indirect medical education adjustment. An additional adjustment 
is made based on the ratio of residents to the average daily patient 
census of the hospital to account for the indirect costs of medical 
education.
    (c) Additional payment for outlier cases. Payment is made for day 
outlier cases as provided for in Sec. 412.82 and for cost outlier cases 
if both capital-related and operating-related costs exceed the cost 
outlier threshold as provided for in Sec. 412.84.
    (d) Payment for transfer cases. Payment is made for transfer cases 
as provided for in Sec. 412.4.
    (e) Payment for extraordinary circumstances. Payment for 
extraordinary circumstances is made as provided for in Sec. 412.348(f) 
for cost reporting periods beginning on or after October 1, 2001.

[56 FR 43449, Aug. 30, 1991, as amended at 67 FR 50113, Aug. 1, 2002]



Sec. 412.316  Geographic adjustment factors.

    (a) Local cost variation. CMS adjusts for local cost variation based 
on the hospital wage index value that is applicable to the hospital 
under Sec. 412.63(k). The adjustment factor equals the hospital wage 
index value applicable to the hospital raised to the .6848 power and is 
applied to 100 percent of the Federal rate.
    (b) Large urban location. CMS provides an additional payment to a 
hospital located, for purposes of receiving payment under 
Sec. 412.63(a), in a large urban area equal to 3.0 percent of what would 
otherwise be payable to the hospital based on the Federal rate.
    (c) Cost-of-living adjustment. CMS provides an additional payment to 
a hospital located in Alaska and Hawaii equal to [.3152 X (the cost-of-
living adjustment factor used to determine payments under Sec. 412.115 - 
1)] percent.



Sec. 412.320  Disproportionate share adjustment factor.

    (a) Criteria for classification. A hospital is classified as a 
``disproportionate share hospital'' for the purposes of capital 
prospective payments if either of the following conditions is met:
    (1) The hospital is located, for purposes of receiving payment under 
Sec. 412.63(a), in an urban area, has 100 or more beds as determined in 
accordance with Sec. 412.105(b) and serves low-income patients, as 
determined under Sec. 412.106(b).
    (2) The hospital meets the criteria in Sec. 412.106(c)(2).
    (b) Payment adjustment factor. (1) If a hospital meets the criteria 
in paragraph (a)(1) of this section for a disproportionate share 
hospital for purposes of capital prospective payments, the 
disproportionate share payment adjustment factor equals [e raised to the 
power of (.2025 x the hospital's disproportionate patient percentage as 
determined under Sec. 412.106(b)(5)), -1], where e is the natural 
antilog of 1.
    (2) If a hospital meets the criteria in Sec. 412.106(c)(2) for 
purposes of hospital inpatient operating prospective payments, the 
disproportionate share adjustment factor is the factor that results from 
deeming the hospital to have the same disproportionate share patient 
percentage that would yield its operating disproportionate share 
adjustment.

[56 FR 43449, Aug. 30, 1991; 57 FR 3016, Jan. 27, 1992, as amended at 58 
FR 46339, Sept. 1, 1993]



Sec. 412.322  Indirect medical education adjustment factor.

    (a) Basic data. CMS determines the following for each hospital:

[[Page 459]]

    (1) The hospital's number of full-time equivalent residents as 
determined under Sec. 412.105(f).
    (2) The hospital's average daily census is determined by dividing 
the total number of inpatient days in the acute inpatient area of the 
hospital by the number of days in the cost reporting period.
    (3) The measurement of teaching activity is the ratio of the 
hospital's full-time equivalent residents to average daily census. This 
ratio cannot exceed 1.5.
    (b) Payment adjustment factor. The indirect teaching adjustment 
factor equals [e (raised to the power of .2822xthe ratio of residents to 
average daily census)-1].

[56 FR 43449, Aug. 30, 1991, as amended at 63 FR 26357, May 12, 1998; 63 
FR 41004, July 31, 1998]

  Determination of Transition Period Payment Rates for Capital-Related 
                                  Costs



Sec. 412.324  General description.

    (a) Hospitals under Medicare in FY 1991. During the ten-year 
transition period, payments to a hospital with a hospital-specific rate 
below the Federal rate are based on the fully prospective payment 
methodology under Sec. 412.340 or for a hospital with a hospital-
specific rate above the Federal rate, the hold-harmless payment 
methodology under Sec. 412.344.
    (b) New hospitals. (1) A new hospital, as defined under 
Sec. 412.300(b), is paid 85 percent of its allowable Medicare inpatient 
hospital capital-related costs through its cost reporting period ending 
at least 2 years after the hospital accepts its first patient.
    (2) For the third year through the remainder of the transition 
period, the hospital is paid based on the fully prospective payment 
methodology or the hold-harmless payment methodology using the base 
period determined under Sec. 412.328(a)(2).
    (3) If the hospital is paid under the hold-harmless methodology 
described in Sec. 412.344, the hold-harmless payment for old capital 
costs described in Sec. 412.344(a)(1) is payable for up to and including 
8 years and may continue beyond the first cost reporting period 
beginning on or after October 1, 2000.
    (c) Hospitals with 52-53 week fiscal years ending September 25 
through September 29. For purposes of this subpart, a hospital with a 
52-53 week fiscal year period beginning September 26 through September 
30, 1992 is deemed to have the same beginning date for all cost 
reporting periods beginning before October 1, 2000 (unless the hospital 
later changes its cost reporting period).

[56 FR 43449, Aug. 30, 1991; 57 FR 3016, Jan. 27, 1992]



Sec. 412.328  Determining and updating the hospital-specific rate.

    (a) Base-year cost reporting period. (1) Last 12 month cost 
reporting period ending on or before December 31, 1990. For each 
hospital, the intermediary uses the hospital's latest 12-month or longer 
cost reporting period ending on or before December 31, 1990 as the base 
period to determine a hospital's hospital-specific rate.
    (2) New hospitals. The base-year cost reporting period for a new 
hospital is its 12-month cost reporting period (or a combination of cost 
reporting periods covering at least 12 months) that begins at least 1 
year after the hospital accepts its first patient.
    (3) Other hospitals. For other than a new hospital as defined in 
Sec. 412.300(b), if a hospital does not have a 12-month cost reporting 
period or does not have adequate Medicare utilization to file a cost 
report in a period ending on or before December 31, 1990, the hospital-
specific rate is based on the hospital's old capital costs (per 
discharge) in its first 12-month cost reporting period (or combination 
of cost reporting periods covering at least 12 months) ending after 
December 31, 1990.
    (b) Base-year costs per discharge. (1) Base period allowable 
inpatient capital costs per discharge. (i) Determination. The 
intermediary determines the base period allowable inpatient capital 
costs per discharge for the hospital by dividing the hospital's total 
allowable Medicare inpatient hospital capital-related cost in the base 
period by the number of Medicare discharges in the base period.

[[Page 460]]

    (ii) Disposal of assets in the base year. When a depreciable asset 
has been disposed of in the base year, only that portion of the gain or 
loss that is allocated to the base-year cost reporting period is 
reflected in the hospital-specific rate.
    (iii) Disposal of assets subsequent to the base year. If an asset 
for which the Medicare program had recognized depreciation during the 
base year is disposed of subsequent to the base year, the hospital-
specific rate will not be revised to recognize the portion of the gain 
or loss allocated to the base year.
    (2) Discharges. For the purpose of determining a hospital's base 
period capital costs per discharge, a discharge includes discharges as 
defined in Sec. 412.4(a) and transfers as defined in Sec. 412.4(b)(2), 
adjusted by the transfer adjustment factor that is determined under 
paragraph (b)(3) of this section.
    (3) Transfer adjustment factor. (i) For base year cost reporting 
periods ending on or before December 31, 1990, CMS uses the base year 
MEDPAR data received as of June 30, 1991 to develop an adjustment to 
discharges to account for transfers. CMS divides the length of stay for 
each transfer case by the geometric mean length of stay for the DRG (but 
in no case using a number greater than 1.0) and assigns each nontransfer 
case a value of 1.0. To determine the transfer adjustment factor, CMS 
adds together the adjusted discharges and divides the result by total 
discharges including transfers.
    (ii) For base year cost reporting periods ending after December 31, 
1990 but beginning before October 1, 1991, CMS determines a transfer 
adjustment factor as described in paragraph (b)(3)(i) of this section 
for a hospital using the applicable base year MEDPAR data on file as of 
the December 31 or June 30 occurring at least 6 months after the close 
of the approved base year.
    (iii) For base year cost reporting periods beginning on or after 
October 1, 1991, the intermediary determines the transfer adjustment 
factor in place of CMS as described in paragraph (b)(3)(i) of this 
section based on the most recent billing data available as of the date 
of the final determination of the hospital-specific rate.
    (c) Case-mix adjustment. (1) Determining transfer-adjusted case mix 
value. Step 1: For base year cost reporting periods ending on or before 
December 31, 1990, CMS uses the base year MEDPAR data received as of 
June 30, 1991 to determine the hospital's transfer-adjusted case-mix 
value. For base year cost reporting periods ending after December 31, 
1990 and beginning before October 1, 1991, CMS determines a transfer-
adjusted case-mix value for a hospital using the applicable base year 
MEDPAR data on file as of the December 31 or June 30 occurring at least 
6 months after the close of the base year. For base year cost reporting 
periods beginning on or after October 1, 1991, the intermediary 
determines the transfer-adjusted case-mix value based on the most recent 
billing data available as of the date of the final determination of the 
hospital-specific rate. CMS or the intermediary, as appropriate, 
multiplies the DRG weight for each case by one of the following factors:
    (i) If the case is not a transfer, the factor equals 1.0.
    (ii) If the case is a transfer, the factor equals the lesser of 1.0 
or the ratio of the length of stay for the case divided by the geometric 
mean length of stay for the DRG.

Step 2: The products derived for all cases under Step 1 are added 
together and the result is divided by the adjusted discharges used to 
calculate the transfer adjustment factor determined under paragraph 
(b)(3) of this section.
    (2) Adjusting base period capital costs per discharge by the 
hospital's transfer-adjusted case-mix value. The intermediary divides 
the base period capital costs per discharge for each hospital as 
determined in paragraph (b) of this section by the hospital's transfer-
adjusted case mix value for the cost reporting period determined under 
paragraph (c)(1) of this section.
    (d) Updatinq to FY 1992. The intermediary updates the case-mix 
adjusted base period costs per discharge to FY 1992 based on the 
national average increase in Medicare inpatient capital costs per 
discharge as estimated by CMS, excluding the portion of the increase in 
capital costs per discharge attributable to changes in case mix.

[[Page 461]]

    (e) Hospital-specific rate. The intermediary determines the 
hospital-specific rate each year by adjusting the amount determined 
under paragraph (d) of this section by the following factors:
    (1) Update factor. After FY 1992, the intermediary updates the 
hospital-specific rate in accordance with Sec. 412.308(c)(1).
    (2) Exceptions payment adjustment factor. For FY 1992 through FY 
2001, the intermediary reduces the updated amount determined in 
paragraph (d) of this section by an adjustment factor equal to the 
estimated additional payments for capital-related costs for exceptions 
under Sec. 412.348, determined as a proportion of the total amount of 
payments under the hospital-specific rate and Federal rate.
    (3) Budget neutrality adjustment factor. For FY 1992 through FY 
1995, the intermediary adjusts the updated amount determined in 
paragraph (d) of this section by a budget neutrality adjustment factor 
determined under Sec. 412.352.
    (4) Payment for transfer cases. Effective FY 1996, the intermediary 
reduces the updated amount determined in paragraph (d) of this section 
by 0.28 percent to account for the effect of the revised policy for 
payment of transfers under Sec. 412.4(d).
    (5) Reduction of rate: FY 1998. Effective FY 1998, the unadjusted 
hospital-specific rate as in effect on September 30, 1997 described in 
paragraph (e)(1) of this section is reduced by 15.68 percent.
    (6) Reduction of rate: FY 1998 through FY 2002. For discharges 
occurring on or after October 1, 1997 through September 30, 2002, the 
unadjusted hospital-specific rate in effect on September 30, 1997, 
described in paragraph (e)(1) of this section is further reduced by 2.1 
percent.
    (f) Redetermination of hospital-specific rate. (1) General. (i) Upon 
request by a hospital, the intermediary redetermines the hospital-
specific rate to reflect an increase in old capital costs as determined 
in a cost reporting period subsequent to the base year. An increase in 
Medicare old capital cost per discharge that is related solely to a 
decline in utilization is not recognized as an increase in old capital 
costs for purposes of this section. New capital costs are excluded from 
the redetermination of the hospital-specific rate.
    (ii) The hospital may request redetermination for any cost reporting 
period beginning subsequent to the base period but no later than the 
later of the hospital's cost reporting period beginning in FY 1994 or 
the cost reporting period beginning after obligated capital that is 
recognized as old capital under Sec. 412.302(b) is put in use.
    (iii) The hospital must request a redetermination in writing no 
later than the date the cost report must be filed with the hospital's 
intermediary for the first cost reporting period beginning on or after 
October 1, 1991 or the cost reporting period that will serve as the new 
base period, whichever is later. The hospital's redetermination request 
must include the cost report for the new base period and an estimate of 
the revised hospital-specific rate indicating that the new rate exceeds 
the hospital's current hospital-specific rate.
    (2) Determination of old capital costs. The intermediary determines 
the hospital's old capital costs for the subsequent cost reporting 
period that will serve as the new base period. The intermediary includes 
the costs of obligated capital that are recognized as old capital costs 
under Sec. 412.302(b), excludes the costs of assets disposed of 
subsequent to the initial base year, and reflects changes in allowable 
old capital costs occurring subsequent to the initial base period.
    (3) Redetermined hospital-specific rate. The intermediary 
redetermines the hospital-specific rate based on the old capital costs 
that are determined under paragraph (f)(2) of this section for the new 
base period. The intermediary--
    (i) Divides the hospital's old capital costs for the new base period 
by the number of Medicare discharges in that cost reporting period 
(consistent with paragraph (b) of this section);
    (ii) Divides the old capital costs per discharge by the hospital's 
transfer adjusted case-mix value for the new base period (consistent 
with paragraph (c) of this section);
    (iii) Applies an update factor, if appropriate, to account for 
inflation occurring subsequent to the new base

[[Page 462]]

year, an exceptions payment adjustment factor, and a budget neutrality 
adjustment factor (consistent with paragraphs (d) and (e) of this 
section).
    (4) Denial by intermediary. If the intermediary determines, after 
audit, that the revised hospital-specific rate is lower than the current 
hospital-specific rate, it advises the hospital that its request is 
denied and explains the basis for the denial.
    (5) Implementation date. The redetermined hospital-specific rate 
applies to discharges occurring on or after the beginning date of the 
new base period.
    (g) Review and revision of the hospital-specific rate. (1) Interim 
determination. The intermediary makes an interim determination of the 
hospital-specific rate based on the best data available and notifies the 
hospital at least 30 days before the beginning of the hospital's first 
cost reporting period beginning on or after October 1, 1991.
    (2) Final determination. (i) The intermediary makes a final 
determination of the hospital-specific rate based on the final 
settlement of the base period cost report.
    (ii) The final determination of the hospital-specific rate is 
effective retroactively to the beginning of the hospital's first cost 
reporting period beginning on or after October 1, 1991 or, in the case 
of a redetermination of the hospital-specific rate under 
Sec. 412.328(f), to the beginning of the new base period.
    (iii) The final determination of the hospital-specific rate is 
subject to administrative and judicial review in accordance with subpart 
R of part 405 of this chapter, governing provider reimbursement 
determinations and appeals.
    (iv) The intermediary adjusts the hospital-specific rate to reflect 
any revisions that result from administrative or judicial review of the 
final determination of hospital-specific rate. The revised determination 
is effective retroactively to the same extent as in paragraph (g)(2)(ii) 
of this section.

[56 FR 43449, Aug. 30, 1991; 57 FR 3016, 3017, Jan. 27, 1992; 57 FR 
39828, Sept. 1, 1992; 60 FR 45849, Sept. 1, 1995; 62 FR 46031, Aug. 29, 
1997]



Sec. 412.331  Determining hospital-specific rates in cases of hospital merger, consolidation, or dissolution.

    (a) New hospital merger or consolidation. If, after a new hospital 
accepts its first patient but before the end of its base year, it merges 
with one or more existing hospitals, and two or more separately located 
hospital campuses are maintained, the hospital-specific rate and payment 
determination for the merged entity are determined as follows--
    (1) Post-merger base year payment methodology. The new campus is 
paid based on reasonable costs until the end of its base year. The 
existing campus remains on its previous payment methodology until the 
end of the new campus' base year. Effective with the first cost 
reporting period beginning after the the end of the new campus' base 
year, the intermediary determines a hospital-specific rate applicable to 
the new campus in accordance with Sec. 412.328, and then determines a 
revised hospital-specific rate for the merged entity in accordance with 
paragraph (a)(2) of this section.
    (2) Revised hospital-specific rate. Using each hospital's base 
period data, the intermediary determines a combined average discharge-
weighted hospital-specific rate.
    (3) Post-base year payment determination. To determine the 
applicable payment methodology under Sec. 412.336 and for payment 
purposes under Sec. 412.340 or Sec. 412.344, the discharge-weighted 
hospital-specific rate determined by the intermediary is compared to the 
Federal rate. The revised payment methodology is effective on the first 
day of the cost reporting period beginning after the end of the new 
campus' base year.
    (b) Hospital merger or consolidation. If, after the base year, two 
or more hospitals merge or consolidate into one hospital as provided for 
under Sec. 413.134(k) of this chapter and the provisions of paragraph 
(a) of this section do not apply, the intermediary determines a revised 
hospital-specific rate applicable to the combined facility under 
Sec. 412.328, which is effective beginning with the date of merger or 
consolidation. The following rules apply to the revised hospital-
specific rate and payment determination:

[[Page 463]]

    (1) Revised hospital-specific rate. Using each hospital's base 
period data, the intermediary determines a combined average discharge 
weighted hospital-specific rate.
    (2) Payment determination. The discharge-weighted hospital-specific 
rate determined by the intermediary is compared to the Federal rate to 
establish the appropriate payment methodology under Sec. 412.336 and for 
payment purposes under Secs. 412.340 or 412.344. The revised payment 
methodology is effective as of the date of merger or consolidation.
    (3) Old capital cost determination. The capital-related costs 
related to the assets of each merged or consolidated hospital as of 
December 31, 1990 are recognized as old capital costs during the 
transition period. If the hospital is paid under the hold-harmless 
methodology after merger or consolidation, only that original base year 
old capital is eligible for hold-harmless payments.
    (c) Hospital dissolution. If a hospital separates into two or more 
hospitals that are subject to capital payments under this subpart after 
the base year, the intermediary determines new hospital-specific rates 
for each separate hospital under the provisions of Sec. 412.328 
effective as of the date of the dissolution. The new hospital-specific 
rates are determined as follows:
    (1) Hospital-specific rate--(i) Adequate base year data. The 
intermediary determines whether the base year capital-related cost data 
and necessary statistical records are adequate to reconstruct the cost 
and other data required under Sec. 412.328 from the former hospital's 
financial records to determine the hospital-specific rates for each 
facility. If the data are adequate, the intermediary uses the former 
hospital's base period to determine the hospital-specific rate for each 
separate hospital.
    (ii) Inadequate original base year data. If the intermediary 
determines that the base period data for the former hospital is 
inadequate to establish separate hospital-specific rates, the 
intermediary establishes a new base period for each hospital. The new 
base period is each hospital's first 12-month or longer cost reporting 
period (or combination of cost reporting periods covering at least 12 
months) immediately following separation of the hospitals. The 
intermediary determines the hospital-specific rate for each hospital 
using the new base period under Sec. 412.328.
    (2) Payment determinations. The intermediary applies the payment 
methodology provisions of Sec. 412.336. The revised payment 
determination is effective as of the date of the hospital's dissolution.
    (3) Old capital cost determination. In determining the old capital 
costs for each hospital, the amount recognized as old capital is limited 
to the allowable capital-related costs attributable to assets that were 
in use for patient care as of December 31, 1990, and the hospitals are 
subject to all other transition period rules of this subpart.

[57 FR 39828, Sept. 1, 1992, as amended at 63 FR 41004, July 31, 1998]



Sec. 412.332  Payment based on the hospital-specific rate.

    The payment amount for each discharge (as defined in Sec. 412.4(a)) 
based on the hospital-specific rate determined under Sec. 412.328 (e) or 
(f) is determined by multiplying the applicable hospital-specific rate 
by the DRG weighting factor applicable to the discharge under 
Sec. 412.60 and the applicable hospital-specific rate percentage for the 
pertinent cost reporting period under Sec. 412.340.



Sec. 412.336  Transition period payment methodologies.

    (a) General. For discharges occurring in cost reporting periods 
beginning on or after October 1, 1991 and before October 1, 2001, a 
hospital is paid under one of two payment methodologies described in 
Sec. 412.340 and Sec. 412.344. Except as provided under paragraph (b) of 
this section, a hospital is paid under the same methodology throughout 
the transition period.
    (1) Hospital-specific rate below the Federal rate. A hospital with a 
hospital-specific rate below the Federal rate (after taking into account 
the estimated effect of the payment adjustments and outlier payments) is 
paid under the fully prospective payment methodology as described in 
Sec. 412.340.
    (2) Hospital-specific rate above the Federal rate. A hospital with a 
hospital-specific rate that is above the Federal

[[Page 464]]

rate (after taking into account the estimated effect of the payment 
adjustments and outlier payments) is paid under the hold-harmless 
payment methodology as described in Sec. 412.344.
    (b) Special rule for revised hospital-specific rate. If a hospital 
with a hospital-specific rate below the Federal rate requests that its 
hospital-specific rate be redetermined, the redetermined hospital-
specific rate is compared to the Federal rate that is applicable to the 
new base period (after taking into account the estimated effect of the 
payment adjustments and outlier payments). If the redetermined hospital-
specific rate is higher than the Federal rate, the hospital is paid 
under the hold-harmless methodology effective with the beginning of the 
new base period and continuing throughout the remainder of the 
transition.
    (c) Interim and final determinations of applicable payment 
methodology--(1) Interim determination. The intermediary makes an 
interim determination of the applicable payment methodology based on the 
best data available and notifies the hospital of its determination at 
least 30 days before the beginning of the hospital's first cost 
reporting period beginning on or after October 1, 1991.
    (2) Final determination. (i) The intermediary makes a final 
determination of the applicable payment methodology based on its final 
determination of the hospital's hospital-specific rate. The final 
determination of the applicable payment methodology is effective 
retroactively to the beginning of the hospital's first cost reporting 
period beginning on or after October 1, 1991.
    (ii) If the hospital-specific rate is redetermined in accordance 
with Sec. 412.328(f), the intermediary makes a new determination of the 
applicable payment methodology. The new determination is effective 
retroactively to the beginning of the new base period.
    (iii) If the hospital-specific rate is revised under Sec. 412.328(g) 
as a result of administrative or judicial review, the intermediary makes 
a new determination of the applicable payment methodology. The new 
determination is effective retroactively to the beginning of the 
hospital's first cost reporting period beginning on or after October 1, 
1991 or to the beginning of the new base period.
    (d) Special Rule for Redetermination of Hospital Payment 
Methodology. For cost reporting periods beginning on or after October 1, 
1993, the intermediary redetermines the hospital payment methodologies 
to take into account the reduction to the standard Federal rate provided 
in Sec. 412.308(b)(2):
    (1) For a hospital paid under the fully prospective payment 
methodology in the last hospital cost reporting period beginning before 
October 1, 1993, the intermediary compares the hospital's FY 1994 
hospital-specific rate with the hospital's FY 1994 Federal rate (after 
taking into account the estimated effect of the payment adjustments and 
outlier payments).
    (i) A hospital with a FY 1994 hospital-specific rate that is above 
the FY 1994 adjusted Federal rate is paid under the hold-harmless 
payment methodology described in Sec. 412.344.
    (ii) Subject to the provisions of Sec. 412.328(f), a hospital with a 
FY 1994 hospital-specific rate that is below the FY 1994 adjusted 
Federal rate continues to be paid under the fully prospective payment 
methodology as described in Sec. 412.340.
    (iii) The intermediary notifies the hospital of the new 
determination of the hospital's payment methodology within 90 days of 
the hospital's first cost reporting period beginning on or after October 
1, 1993. The new determination is effective to the beginning of the 
hospital's first cost reporting period beginning on or after October 1, 
1993.
    (2) A hospital paid under the hold-harmless payment methodology in 
the last cost reporting period beginning before October 1, 1993, will 
continue to be paid in accordance with the provisions of Sec. 412.344.

[56 FR 43449, Aug. 30, 1991; 57 FR 3017, Jan. 27, 1992, as amended at 58 
FR 46340, Sept. 1, 1993]



Sec. 412.340  Fully prospective payment methodology.

    A hospital paid under the fully prospective payment methodology 
receives a payment per discharge based on a proportion of the hospital-
specific rate and the Federal rate as follows:

[[Page 465]]



------------------------------------------------------------------------
                                                              Hospital-
                                                  Federal      specific
 Cost reporting periods beginning on or after:      rate         rate
                                                 percentage   percentage
------------------------------------------------------------------------
October 1, 1991...............................           10           90
October 1, 1992...............................           20           80
October 1, 1993...............................           30           70
October 1, 1994...............................           40           60
October 1, 1995...............................           50           50
October 1, 1996...............................           60           40
October 1, 1997...............................           70           30
October 1, 1998...............................           80           20
October 1, 1999...............................           90           10
October 1, 2000...............................          100            0
------------------------------------------------------------------------



Sec. 412.344  Hold-harmless payment methodology.

    (a) General. A hospital paid under the hold-harmless payment 
methodology receives a payment per discharge based on the higher of:
    (1) 85 percent of reasonable costs for old capital costs (100 
percent for sole community hospitals) plus an amount for new capital 
costs based on a proportion of the Federal rate. The proportion is equal 
to the ratio of the hospital's Medicare inpatient costs for new capital 
to total Medicare inpatient capital costs; or
    (2) 100 percent of the Federal rate.
    (3) Exceptions. (i) A hospital that would receive higher payment 
under paragraph (a)(1) of this section may elect payment based on 100 
percent of the Federal rate under paragraph (a)(2) of this section.
    (ii) A hospital that does not maintain records that are adequate to 
identify its old capital costs is deemed to have elected payment per 
discharge based on 100 percent of the Federal rate.
    (b) Continued basis of payment. A hospital paid based on 100 percent 
of the Federal rate during the later of its cost reporting period 
beginning in FY 1994 or its first cost reporting period beginning after 
obligated capital that is recognized as old capital under 
Sec. 412.302(b) is put in use continues to be paid on that basis in 
subsequent cost reporting periods during the transition period and does 
not receive a reasonable cost payment for old capital costs under 
paragraph (a)(1) of this section.
    (c) Basis of determination. The determination under paragraph (a) of 
this section regarding which payment alternative is applicable is made 
without regard to additional payments under the exceptions process under 
Sec. 412.348.
    (d) Interim and final payment determinations. (1) Using the best 
data available, the intermediary makes an interim payment determination 
under paragraph (a) of this section concerning the applicable payment 
alternative, and, in the case of payment under paragraph (a)(1) of this 
section, the payment amounts for old and new capital. The intermediary 
notifies the hospital of its determination at least 30 days before the 
beginning of the hospital's first cost reporting period beginning on or 
after October 1, 1991. The intermediary may revise its determination 
based on additional information submitted by the hospital and make 
appropriate adjustments retroactively.
    (2) The final determination of the amount payable under paragraph 
(a) of this section is based on final settlement of the Medicare cost 
report for the applicable cost reporting period and is effective 
retroactively to the beginning of that cost reporting period. This final 
determination is subject to administrative and judicial review in 
accordance with subpart R of part 405 of this chapter, governing 
provider reimbursement determinations and appeals.

[56 FR 43449, Aug. 30, 1991; 57 FR 3017, Jan. 27, 1992]



Sec. 412.348  Exception payments.

    (a) Definitions. As used in this section--
    Annual operating expenses. Annual operating expenses means the sum 
of net expenses for all reimbursable cost centers for a 12 month cost 
reporting period. Annual operating expenses are obtained from the 
Medicare cost report.
    Average age of fixed assets. The average age of fixed assets is the 
ratio of accumulated depreciation for buildings and fixed equipment to 
current depreciation expense for buildings and fixed equipment. The 
average age of fixed assets is determined from information on the 
Medicare cost report.
    Fixed assets. Fixed assets mean buildings and fixed equipment.
    (b) Criterion for additional payment during the transition period. 
An additional payment is made to a hospital paid under either the fully 
prospective payment methodology or the hold-

[[Page 466]]

harmless payment methodology as determined under paragraph (c) of this 
section for cost reporting periods beginning on or after October 1, 1991 
and before October 1, 2001.
    (c) Minimum payment level by class of hospital. (1) CMS establishes 
a minimum payment level by class of hospital. The minimum payment level 
for a hospital will equal a fixed percentage of the hospital's capital-
related costs. The minimum payment levels may be no greater than the 
percentages of allowable capital-related costs that follow:
    (i) 90 percent for sole community hospitals.
    (ii) 80 percent for hospitals located in an urban area for purposes 
of Sec. 412.63(a) with at least 100 beds, as determined under 
Sec. 412.105(b), that have a disproportionate share patient percentage 
of at least 20.2 percent as determined under Sec. 412.106(b), and for 
hospitals located in an urban area for purposes of Sec. 412.63(a) with 
at least 100 beds that qualify for disproportionate share payments under 
Sec. 412.106(c)(2).
    (iii) 70 percent for all other hospitals.
    (2) When it is necessary to adjust the minimum payment levels set by 
class of hospitals specified in paragraphs (c)(1)(i) and (g)(6) of this 
section, CMS will adjust those levels for each class of hospitals in one 
percentage point increments as necessary to satisfy the requirement 
specified in paragraph (h) of this section that total estimated payments 
under the exception process not exceed 10 percent of the total estimated 
capital prospective payments (exclusive of hold-harmless payments for 
old capital) for the same fiscal year.
    (d) Additional payments. A hospital is entitled to an additional 
payment if its capital payments for the cost reporting period would 
otherwise be less than the applicable minimum payment level. The 
additional payment equals the difference between the applicable minimum 
payment level and the capital payments that the hospital would otherwise 
receive minus any offset amount determined under paragraph (e)(2) of 
this section.
    (e) Determining a hospital's exception payment amount--(1) 
Cumulative comparison. For each cost reporting period beginning before 
October 1, 2001, the hospital's exception payment is determined by 
comparing the cumulative payments made to the hospital under the capital 
prospective payment system to the cumulative minimum payment levels 
applicable to the hospital for each cost reporting period subject to the 
prospective payment system.
    (2) Offsetting amounts. Any amount by which the hospital's 
cumulative payments exceed its cumulative minimum payment levels is 
deducted from the additional payment that would otherwise be payable for 
a cost reporting period.
    (f) Additional payment exception for extraordinary circumstances. 
(1) A hospital may request an additional payment if the hospital incurs 
unanticipated capital expenditures in excess of $5 million (net of 
proceeds from other payment sources such as insurance, litigation 
decisions and other State, local or Federal government funding programs) 
due to extraordinary circumstances beyond the hospital's control. 
Extraordinary circumstances include, but are not limited to, a flood, 
fire, or earthquake.
    (2) A hospital must apply to its CMS Regional Office by the later of 
October 1, 1992 or 180 days after the extraordinary circumstance causing 
the unanticipated expenditures for a determination by CMS of whether the 
hospital is eligible for an additional payment based on the nature of 
the circumstances and the amount of financial loss documented by the 
hospital.
    (3) Except for sole community hospitals, the additional payment is 
based on a minimum payment amount of 85 percent for Medicare's share of 
allowable capital-related costs attributable to the extraordinary 
circumstances. For sole community hospitals, the minimum payment amount 
is 100 percent.
    (4) The minimum payment level applicable under paragraph (c)(1) of 
this section is adjusted to take into account the 85 percent minimum 
payment level (100 percent for sole community hospitals) under paragraph 
(f)(3) of this section for the unanticipated capital-related costs. The 
additional payment for the cost reporting period equals the difference 
between the adjusted minimum payment level and the

[[Page 467]]

capital payments the hospital would otherwise receive less any offset 
amount determined under paragraph (e)(2) of this section.
    (g) Special exceptions process. For eligible hospitals that meet a 
project need requirement, a project size requirement, and, in the case 
of certain urban hospitals, meet an excess capacity test, an additional 
payment may be made for up to 10 years beyond the end of the capital 
prospective payment system transition period.
    (1) Eligible hospitals. The following classes of hospitals are 
eligible to receive exceptions payments under this special exceptions 
provision:
    (i) Sole community hospitals.
    (ii) Hospitals located in an urban area under Sec. 412.63(a) with at 
least 100 beds, as determined under Sec. 412.105(b), that either have a 
disproportionate share of at least 20.2 percent as determined under 
Sec. 412.106(b) or qualify for disproportionate share payments under 
Sec. 412.106(c)(2).
    (iii) Hospitals with a combined inpatient Medicare and Medicaid 
utilization of at least 70 percent.
    (2) Project need requirement. A hospital must show that it has 
obtained any required approval from a State or local planning authority. 
If a hospital is not required to obtain approval from a planning 
authority, it must satisfy the age of asset test specified in paragraph 
(g)(3) of this section and, in the case of an urban hospital, the excess 
capacity test under paragraph (g)(4) of this section.
    (3) Age of assets test. A hospital must show that its average age of 
fixed assets is at or above the 75th percentile for the hospital's first 
cost reporting period beginning on or after October 1, 1991.
    (4) Excess capacity test for urban hospitals. Urban hospitals that 
are not required to receive approval from a State or local planning 
authority must demonstrate that either--
    (i) The overall average occupancy rate in its metropolitan 
statistical area is at least 80 percent; or
    (ii) After completion of the project, its capacity is no more than 
80 percent of its prior capacity (in terms of bed size).
    (5) Project size requirement. A hospital must complete, during the 
period from the beginning of its first cost reporting period beginning 
on or after October 1, 1991 to the end of its last cost reporting period 
beginning before October 1, 2001, a project whose costs for replacement 
and/or renovation of fixed assets related to patient care are at least:
    (i) $200 million; or
    (ii) 100 percent of its operating cost during the first 12 month 
cost reporting period beginning on or after October 1, 1991.
    (6) Minimum payment level.
    (i) The minimum payment level for qualifying hospitals will be 70 
percent.
    (ii) CMS will adjust the minimum payment level in one percentage 
point increments as necessary to satisfy the requirement specified in 
paragraph (h) of this section that total estimated payments under the 
exceptions process not exceed 10 percent of the total estimated capital 
prospective payment system payments for the same fiscal year.
    (7) Limitation on the period for exception payments. A qualifying 
hospital may receive an exceptions payment for up to 10 years from the 
year in which it completes a project for replacement or renovation of 
capital assets that meets project need and project size requirements 
(and, if applicable, excess capacity test), provided that it completes 
the project no later than the end of the hospital's last cost reporting 
period beginning before October 1, 2001. A project is considered to be 
completed when the assets are put into use for patient care.
    (8) Determining a hospital's exception payment amount--(i) 
Cumulative comparison. For each cost reporting period, the hospital's 
exception payment is determined by comparing the cumulative payments 
made to the hospital under the capital prospective payment system to the 
cumulative minimum payment levels applicable to the hospital for each 
cost reporting period subject to the prospective payment system.
    (ii) Offsetting amounts. Offsetting amounts are applied in the 
following order--(A) Any amount by which the hospital's cumulative 
payments exceed its cumulative minimum payment levels is deducted from 
the additional

[[Page 468]]

payment that would otherwise be payable for a cost reporting period.
    (B) Any amount by which the hospital's current year Medicare 
inpatient operating and capital prospective payment system payments 
(excluding, if applicable, 75 percent of the hospital's operating 
prospective payment system disproportionate share payments) exceed its 
Medicare inpatient operating and capital costs is deducted from the 
additional payment that would otherwise be payable for the cost 
reporting period. For purposes of calculating the offset, the costs and 
payments for services that are not subject to the hospital inpatient 
prospective payment system are excluded.
    (9) Notification requirement. Eligible hospitals must submit 
documentation to the intermediary indicating the completion date of a 
project that meets the project need requirement under paragraph (g)(2) 
of this section, the project size requirement under paragraph (g)(5) of 
this section, and, in the case of certain urban hospitals, an excess 
capacity test under paragraph (g)(4) of this section, by the later of 
October 1, 2001 or within 3 months of the end of the hospital's last 
cost reporting period beginning before October 1, 2001, during which a 
qualifying project was completed.
    (h) Limit on exception payments. Total estimated payments under the 
exception process may not exceed 10 percent of the total estimated 
capital prospective payments (exclusive of hold-harmless payments for 
old capital) for the same fiscal year.

[59 FR 45399, Sept. 1, 1994, as amended at 62 FR 46031, Aug. 29. 1997; 
66 FR 39936, Aug. 1, 2001]



Sec. 412.352  Budget neutrality adjustment.

    For FY 1992 through FY 1995, CMS will determine an adjustment to the 
hospital-specific rate and the Federal rate proportionately so that the 
estimated aggregate payments under this subpart for inpatient hospital 
capital costs each fiscal year will equal 90 percent of what CMS 
estimates would have been paid for capital-related costs on a reasonable 
cost basis under Sec. 413.130 of this chapter.

                 Special Rules for Puerto Rico Hospitals



Sec. 412.370  General provisions for hospitals located in Puerto Rico.

    Except as provided in Sec. 412.374, hospitals located in Puerto Rico 
are subject to the rules in this subpart governing the prospective 
payment system for inpatient hospital capital-related costs.



Sec. 412.374  Payments to hospitals located in Puerto Rico.

    (a) Payments for capital-related costs to hospitals located in 
Puerto Rico that are paid under the prospective payment system are equal 
to the sum of the following:
    (1) 50 percent of a Puerto Rico capital rate based on data from 
Puerto Rico hospitals only, which is determined in accordance with 
procedures for developing the Federal rate; and
    (2) 50 percent of the Federal rate, as determined under 
Sec. 412.308.
    (b) Effective for fiscal year 1998, the Puerto Rico capital rate 
described in paragraph (a) of this section in effect on September 30, 
1997, is reduced by 15.68 percent.
    (c) For discharges occurring on or after October 1, 1997 through 
September 30, 2002, the Puerto Rico capital rate described in paragraph 
(a) of this section in effect on September 30, 1997 is further reduced 
by 2.1 percent.

[62 FR 46032, Aug. 29, 1997]

Subparts N [Reserved]



   Subpart O--Prospective Payment System for Long-Term Care Hospitals

    Source: 67 FR 56049, Aug. 30, 2002, unless otherwise noted.



Sec. 412.500  Basis and scope of subpart.

    (a) Basis. This subpart implements section 123 of Public Law 106-
113, which provides for the implementation of a prospective payment 
system for long-term care hospitals described in section 
1886(d)(1)(B)(iv) of the Act. This subpart also reflects the provisions 
of section 307 of Public Law 106-554, which state that the Secretary 
shall examine

[[Page 469]]

and may provide for appropriate adjustments to that system, including 
adjustments to DRG weights, area wage adjustments, geographic 
reclassification, outliers, updates, and disproportionate share 
adjustments consistent with section 1886(d)(5)(F) of the Act.
    (b) Scope. This subpart sets forth the framework for the prospective 
payment system for long-term care hospitals, including the methodology 
used for the development of payment rates and associated adjustments and 
related rules. Under this system, for cost reporting periods beginning 
on or after October 1, 2002, payment for the operating and capital-
related costs of inpatient hospital services furnished by long-term care 
hospitals is made on the basis of prospectively determined rates and 
applied on a per discharge basis.



Sec. 412.503  Definitions.

    As used in this subpart--
    CMS stands for the Centers for Medicare & Medicaid Services.
    Discharge. A Medicare patient in a long-term care hospital is 
considered discharged when--
    (1) For purposes of the long-term care hospital qualification 
calculation, as described in Sec. 412.23(e)(3), the patient is formally 
released;
    (2) For purposes of payment, as described in Sec. 412.521(b), the 
patient stops receiving Medicare-covered long-term care services; or
    (3) The patient dies in the long-term care facility.
    LTC-DRG stands for the diagnosis-related group used to classify 
patient discharges from a long-term care hospital based on clinical 
characteristics and average resource use, for prospective payment 
purposes.
    Outlier payment means an additional payment beyond the standard 
Federal prospective payment for cases with unusually high costs.
    QIO (formerly PRO or Peer Review Organization) stands for the 
Quality Improvement Organization.



Sec. 412.505  Conditions for payment under the prospective payment system for long-term care hospitals.

    (a) Long-term care hospitals subject to the prospective payment 
system. To be eligible to receive payment under the prospective payment 
system specified in this subpart, a long-term care hospital must meet 
the criteria to be classified as a long-term care hospital set forth in 
Sec. 412.23(e) for exclusion from the acute care hospital inpatient 
prospective payment systems specified in Sec. 412.1(a)(1). This 
condition is subject to the special payment provisions of 
Sec. 412.22(c), the provisions on change in hospital status of 
Sec. 412.22(d), the provisions related to hospitals-within-hospitals 
under Sec. 412.22(e), and the provisions related to satellite facilities 
under Sec. 412.22(h).
    (b) General requirements. (1) Effective for cost reporting periods 
beginning on or after October 1, 2002, a long-term care hospital must 
meet the conditions for payment of this section, Sec. 412.22(e)(6) and 
(h)(5), and Secs. 412.507 through Sec. 412.511 to receive payment under 
the prospective payment system described in this subpart for inpatient 
hospital services furnished to Medicare beneficiaries.
    (2) If a long-term care hospital fails to comply fully with these 
conditions for payment with respect to inpatient hospital services 
furnished to one or more Medicare beneficiaries, CMS may withhold (in 
full or in part) or reduce Medicare payment to the hospital.



Sec. 412.507  Limitation on charges to beneficiaries.

    (a) Prohibited charges. Except as provided in paragraph (b) of this 
section, a long-term care hospital may not charge a beneficiary for any 
covered services for which payment is made by Medicare, even if the 
hospital's costs of furnishing services to that beneficiary are greater 
than the amount the hospital is paid under the prospective payment 
system. If Medicare has paid the full LTC-DRG payment, that payment 
applies to the hospital's costs for services furnished until the high-
cost outlier threshold is met. If Medicare pays less than the full LTC-
DRG payment, that payment only applies to the hospital's costs for those 
costs or days used to calculate the Medicare payment.
    (b) Permitted charges. (1) A long-term care hospital that receives a 
full LTC-DRG payment under this subpart for

[[Page 470]]

covered days in a hospital stay may charge the Medicare beneficiary only 
for the applicable deductible and coinsurance amounts under 
Secs. 409.82, 409.83, and 409.87 of this subchapter, and for items and 
services as specified under Sec. 489.20(a) of this chapter.
    (2) A long-term care hospital that receives less than the full LTC-
DRG payment for a short-stay case, in accordance with Sec. 412.529, may 
only charge the Medicare beneficiary for the applicable deductible and 
coinsurance under Secs. 409.82, 409.83, and 409.87 of this subchapter, 
for items and services as specified under Sec. 489.20(a) of this 
chapter, and for services provided during the stay that were not the 
basis for the short-stay payment.



Sec. 412.508  Medical review requirements.

    (a) Admission and quality review. A long-term care hospital must 
have an agreement with a QIO to have the QIO review, on an ongoing 
basis, the following:
    (1) The medical necessity, reasonableness, and appropriateness of 
hospital admissions and discharges.
    (2) The medical necessity, reasonableness, and appropriateness of 
inpatient hospital care for which additional payment is sought under the 
outlier provisions of Secs. 412.523(d)(1) and 412.525(a).
    (3) The validity of the hospital's diagnostic and procedural 
information.
    (4) The completeness, adequacy, and quality of the services 
furnished in the hospital.
    (5) Other medical or other practices with respect to beneficiaries 
or billing for services furnished to beneficiaries.
    (b) Physician acknowledgement. Payment under the long-term care 
hospital prospective payment system is based in part on each patient's 
principal and secondary diagnoses and major procedures performed, as 
evidenced by the physician's entries in the patient's medical record. 
The hospital must assure that physicians complete an acknowledgement 
statement to this effect in accordance with paragraphs (b)(1) and (b)(2) 
of this section.
    (1) Content of physician acknowledgement statement. When a claim is 
submitted, the hospital must have on file a signed and dated 
acknowledgement from the attending physician that the physician has 
received the following notice:
    Notice to Physicians:
    Medicare payment to hospitals is based in part on each patient's 
principal and secondary diagnoses and the major procedures performed on 
the patient, as attested to by the patient's attending physician by 
virtue of his or her signature in the medical record. Anyone who 
misrepresents, falsifies, or conceals essential information required for 
payment of Federal funds, may be subject to fine, imprisonment, or civil 
penalty under applicable Federal laws.
    (2) Completion of acknowledgement. The acknowledgement must be 
completed by the physician at the time that the physician is granted 
admitting privileges at the hospital, or before or at the time the 
physician admits his or her first patient. Existing acknowledgements 
signed by physicians already on staff remain in effect as long as the 
physician has admitting privileges at the hospital.
    (c) Denial of payment as a result of admissions and quality review.
    (1) If CMS determines, on the basis of information supplied by a 
QIO, that a hospital has misrepresented admissions, discharges, or 
billing information, or has taken an action that results in the 
unnecessary admission or unnecessary multiple admissions of an 
individual entitled to benefits under Part A, or other inappropriate 
medical or other practices with respect to beneficiaries or billing for 
services furnished to beneficiaries, CMS may, as appropriate--
    (i) Deny payment (in whole or in part) under Part A with respect to 
inpatient hospital services provided for an unnecessary admission or 
subsequent readmission of an individual; or
    (ii) Require the hospital to take other corrective action necessary 
to prevent or correct the inappropriate practice.
    (2) When payment with respect to admission of an individual patient 
is denied by a QIO under paragraph (c)(1) of this section, and liability 
is not waived in accordance with Secs. 411.400 through 411.402 of this 
chapter, notice and appeals are provided under procedures established by 
CMS to implement the

[[Page 471]]

provisions of section 1155 of the Act, Right to Hearing and Judicial 
Review.
    (3) A determination under paragraph (c)(1) of this section, if it is 
related to a pattern of inappropriate admissions and billing practices 
that has the effect of circumventing the prospective payment system, is 
referred to the Department's Office of Inspector General for handling in 
accordance with Sec. 1001.301 of this title.



Sec. 412.509  Furnishing of inpatient hospital services directly or under arrangement.

    (a) Subject to the provisions of Sec. 412.521(b), the applicable 
payments made under this subpart are payment in full for all inpatient 
hospital services, as defined in Sec. 409.10 of this chapter. Inpatient 
hospital services do not include the following:
    (1) Physicians' services that meet the requirements of 
Sec. 415.102(a) of this subchapter for payment on a fee schedule basis.
    (2) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (3) Nurse practitioners and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (4) Certified nurse midwife services, as defined in section 1861(gg) 
of the Act.
    (5) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (6) Services of an anesthetist, as defined in Sec. 410.69 of this 
subchapter.
    (b) Medicare does not pay any provider or supplier other than the 
long-term care hospital for services furnished to a Medicare beneficiary 
who is an inpatient of the hospital except for services described in 
paragraphs (a)(1) through (a)(6) of this section.
    (c) The long-term care hospital must furnish all necessary covered 
services to the Medicare beneficiary who is an inpatient of the hospital 
either directly or under arrangements (as defined in Sec. 409.3 of this 
subchapter).



Sec. 412.511  Reporting and recordkeeping requirements.

    A long-term care hospital participating in the prospective payment 
system under this subpart must meet the recordkeeping and cost reporting 
requirements of Secs. 412.22(e)(6), 412.22(h)(5), 413.20, and 413.24 of 
this subchapter.



Sec. 412.513  Patient classification system.

    (a) Classification methodology. CMS classifies specific inpatient 
hospital discharges from long-term care hospitals by long-term care 
diagnosis-related groups (LTC-DRGs) to ensure that each hospital 
discharge is appropriately assigned based on essential data abstracted 
from the inpatient bill for that discharge.
    (b) Assignment of discharges to LTC-DRGs.
    (1) The classification of a particular discharge is based, as 
appropriate, on the patient's age, sex, principal diagnosis (that is, 
the diagnosis established after study to be chiefly responsible for 
causing the patient's admission to the hospital), secondary diagnoses, 
procedures performed, and the patient's discharge status.
    (2) Each discharge from a long-term care hospital is assigned to 
only one LTC-DRG (related, except as provided in paragraph (b)(3) of 
this section, to the patient's principal diagnosis), regardless of the 
number of conditions treated or services furnished during the patient's 
stay.
    (3) When the discharge data submitted by a hospital show a surgical 
procedure unrelated to a patient's principal diagnosis, the bill is 
returned to the hospital for validation and reverification. The LTC-DRG 
classification system provides a LTC-DRG, and an appropriate weighting 
factor, for those cases for which none of the surgical procedures 
performed are related to the principal diagnosis.
    (c) Review of LTC-DRG assignment.
    (1) A hospital has 60 days after the date of the notice of the 
initial assignment of a discharge to a LTC-DRG to request a review of 
that assignment. The hospital may submit additional information as a 
part of its request.
    (2) The intermediary reviews that hospital's request and any 
additional information and decides whether a change in the LTC-DRG 
assignment is appropriate. If the intermediary decides that a different 
LTC-DRG should be assigned, the case will be reviewed by the appropriate 
QIO as specified in Sec. 476.71(c)(2) of this chapter.

[[Page 472]]

    (3) Following the 60-day period described in paragraph (c)(1) of 
this section, the hospital may not submit additional information with 
respect to the DRG assignment or otherwise revise its claim.



Sec. 412.515  LTC-DRG weighting factors.

    For each LTC-DRG, CMS assigns an appropriate weight that reflects 
the estimated relative cost of hospital resources used within that group 
compared to discharges classified within other groups.



Sec. 412.517  Revision of LTC-DRG group classifications and weighting factors.

    CMS adjusts the classifications and weighting factors annually to 
reflect changes in--
    (a) Treatment patterns;
    (b) Technology;
    (c) Number of discharges; and
    (d) Other factors affecting the relative use of hospital resources.



Sec. 412.521  Basis of payment.

    (a) Method of payment.
    (1) Under the prospective payment system, long-term care hospitals 
receive a predetermined payment amount per discharge for inpatient 
services furnished to Medicare beneficiaries.
    (2) The amount of payment under the prospective payment system is 
based on the Federal payment rate established in accordance with 
Sec. 412.523, including adjustments described in Sec. 412.525, and, if 
applicable during a transition period, on a blend of the Federal payment 
rate and the cost-based reimbursement rate described in Sec. 412.533.
    (b) Payment in full.
    (1) The payment made under this subpart represents payment in full 
(subject to applicable deductibles and coinsurance described in subpart 
G of part 409 of this subchapter) for covered inpatient operating costs 
as described in Sec. 412.2(c) and capital-related costs described in 
subpart G of part 413 of this subchapter associated with furnishing 
Medicare covered services in long-term care hospitals.
    (2) In addition to payment based on prospective payment rates, long-
term care hospitals may receive payments separate from payments under 
the prospective payment system for the following:
    (i) The costs of approved medical education programs described in 
Secs. 413.85, 413.86, and 413.87 of this subchapter.
    (ii) Bad debts of Medicare beneficiaries, as provided in Sec. 413.80 
of this subchapter.
    (iii) A payment amount per unit for blood clotting factor provided 
to Medicare inpatients who have hemophilia.
    (iv) Anesthesia services furnished by hospital employed nonphysician 
anesthetists or obtained under arrangements, as specified in 
Sec. 412.113(c)(2).
    (v) The costs of photocopying and mailing medical records requested 
by a QIO, in accordance with Sec. 476.78(c) of this chapter.
    (c) Payment by workers' compensation, automobile medical, no-fault 
or liability insurance or an employer group health plan primary to 
Medicare. If workers' compensation, automobile medical, no-fault, or 
liability insurance or an employer group health plan that is primary to 
Medicare pays in full or in part, payment is determined in accordance 
with the guidelines specified in Sec. 412.120(b).
    (d) Effect of change of ownership on payments under the prospective 
payment system. When a hospital's ownership changes, as described in 
Sec. 489.18 of this chapter, the following rules apply:
    (1) Payment for the operating and capital-related costs of inpatient 
hospital services for each patient, including outlier payments as 
provided in Sec. 412.525 and payments for hemophilia clotting factor 
costs as provided in paragraph (b)(2)(iii) of this section, are made to 
the entity that is the legal owner on the date of discharge. Payments 
are not prorated between the buyer and seller.
    (i) The owner on the date of discharge is entitled to submit a bill 
for all inpatient hospital services furnished to a beneficiary 
regardless of when the beneficiary's coverage began or ended during a 
stay, or of how long the stay lasted.
    (ii) Each bill submitted must include all information necessary for 
the intermediary to compute the payment

[[Page 473]]

amount, whether or not some of that information is attributable to a 
period during which a different party legally owned the hospital.
    (2) Other payments for the direct costs of approved medical 
education programs, bad debts, anesthesia services furnished by hospital 
employed nonphysician anesthetists, and costs of photocopying and 
mailing medical records to the QIO as provided for under paragraphs 
(b)(2)(i), (ii), (iv), and (v) of this section are made to each owner or 
operator of the hospital (buyer and seller) in accordance with the 
principles of reasonable cost reimbursement.



Sec. 412.523  Methodology for calculating the Federal prospective payment rates.

    (a) Data used. To calculate the initial prospective payment rates 
for inpatient hospital services furnished by long-term care hospitals, 
CMS uses--
    (1) The best Medicare data available; and
    (2) A rate of increase factor to adjust for the most recent estimate 
of increases in the prices of an appropriate market basket of goods and 
services included in covered inpatient long-term care hospital services.
    (b) Determining the average costs per discharge for FY 2003. CMS 
determines the average inpatient operating and capital-related costs per 
discharge for which payment is made to each inpatient long-term care 
hospital using the available data under paragraph (a)(1) of this 
section. The cost per discharge is adjusted to FY 2003 by a rate of 
increase factor, described in paragraph (a)(2) of this section, under 
the update methodology described in section 1886(b)(3)(B)(ii) of the Act 
for each year.
    (c) Determining the Federal prospective payment rates.
    (1) General. The Federal prospective payment rates will be 
established using a standard payment amount referred to as the standard 
Federal rate. The standard Federal rate is a standardized payment amount 
based on average costs from a base year that reflects the combined 
aggregate effects of the weighting factors and other adjustments.
    (2) Update the cost per discharge. CMS applies the increase factor 
described in paragraph (a)(2) of this section to each hospital's cost 
per discharge determined under paragraph (b) of this section to compute 
the cost per discharge for FY 2003. Based on the updated cost per 
discharge, CMS estimates the payments that would have been made to each 
hospital for FY 2003 under Part 413 of this chapter without regard to 
the prospective payment system implemented under this subpart.
    (3) Computation of the standard Federal rate. The standard Federal 
rate is computed as follows:
    (i) For FY 2003. Based on the updated costs per discharge and 
estimated payments for FY 2003 determined in paragraph (c)(2) of this 
section, CMS computes a standard Federal rate for FY 2003 that reflects, 
as appropriate, the adjustments described in paragraph (d) of this 
section.
    (ii) For fiscal years after FY 2003. The standard Federal rate for 
fiscal years after FY 2003 will be the standard Federal rate for the 
previous fiscal year, updated by the increase factor described in 
paragraph (a)(2) of this section, and adjusted as appropriate as 
described in paragraph (d) of this section.
    (4) Determining the Federal prospective payment rate for each LTC-
DRG. The Federal prospective payment rate for each LTC-DRG is the 
product of the weighting factors described in Sec. 412.515 and the 
standard Federal rate described in paragraph (c)(3) of this section.
    (d) Adjustments to the standard Federal rate. The standard Federal 
rate described in paragraph (c)(3) of this section will be adjusted for-
-
    (1) Outlier payments. CMS adjusts the standard Federal rate by a 
reduction factor of 8 percent, the estimated proportion of outlier 
payments under the long-term care hospital prospective payment system, 
as described in Sec. 412.525(a).
    (2) Budget neutrality. CMS adjusts the Federal prospective payment 
rates for FY 2003 so that aggregate payments under the prospective 
payment system are estimated to equal the amount that would have been 
paid to long-term care

[[Page 474]]

hospitals under Part 413 of this subchapter without regard to the 
prospective payment system implemented under this subpart, excluding the 
effects of sections 1886(b)(2) and (b)(3) of the Act.
    (3) The Secretary will review payments under this prospective 
payment system and may make a one-time prospective adjustment to the 
LTCH prospective payment system rates by October 1, 2006, so that the 
effect of any significant difference between actual payments and 
estimated payments for the first year of the LTCH prospective payment 
system is not perpetuated in the prospective payment rates for future 
years.
    (e) Calculation of the adjusted Federal prospective payment. For 
each discharge, a long-term care hospital's Federal prospective payment 
is computed on the basis of the Federal prospective payment rate 
multiplied by the relative weight of the LTC-DRG assigned for that 
discharge. A hospital's Federal prospective payment rate will be 
adjusted, as appropriate, to account for outliers and other factors as 
specified in Sec. 412.525.



Sec. 412.525  Adjustments to the Federal prospective payment.

    (a) Adjustments for high-cost outliers. CMS provides for an 
additional payment to a long-term care hospital if its estimated costs 
for a patient exceed the adjusted LTC-DRG payment plus a fixed-loss 
amount. For each fiscal year, CMS determines a fix-loss amount that is 
the maximum loss that a hospital can incur under the prospective payment 
system for a case with unusually high costs. The additional payment 
equals 80 percent of the difference between the estimated cost of the 
patient case (determined by multiplying the hospital-specific cost-to-
charge ratio by the Medicare allowable covered charge) and the sum of 
the adjusted Federal prospective payment for the LTC-DRG prospective 
payment system payment and the fixed-loss amount. No retroactive 
adjustments will be made to the outlier payments upon cost report 
settlement to account for differences between the estimated cost-to-
charge-ratios and the actual cost-to-charge-ratios of the case.
    (b) Adjustments for Alaska and Hawaii. CMS adjusts the Federal 
prospective payment for the effects of a higher cost of living for 
hospitals located in Alaska and Hawaii.
    (c) Adjustments for area levels. The labor portion of a facility's 
Federal prospective payment is adjusted to account for geographical 
differences in the area wage levels using an appropriate wage index. The 
application of the wage index is made on the basis of the location of 
the facility in an urban or rural area as defined in 
Sec. 412.62(f)(1)(ii) and (f)(1)(iii), respectively.
    (d) Special payment provisions. CMS adjusts the Federal prospective 
payment to account for--
    (1) Short-stay outliers, as provided for in Sec. 412.529; and
    (2) Interruption of a stay, as provided for in Sec. 412.531.



Sec. 412.529  Special payment provision for short-stay outliers.

    (a) Short-stay outlier defined. ``Short-stay outlier'' means a 
discharge with a length of stay in a long-term care hospital that is up 
to and including five-sixths of the geometric average length of stay for 
each LTC-DRG.
    (b) Adjustment to payment. CMS adjusts the hospital's Federal 
prospective payment to account for any case that is determined to be a 
short-stay outlier, as defined in paragraph (a) of this section, under 
the methodology specified in paragraph (c) of this section.
    (c) Method for determining the payment amount.
    (1) The adjusted payment amount for a short-stay outlier is the 
least of the following amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (c)(2) of this section multiplied by the length of stay 
of the discharge;
    (ii) 120 percent of the cost of the case determined under paragraph 
(c)(3) of this section; or
    (iii) The Federal prospective payment for the LTC-DRG.
    (2) CMS calculates a per diem amount for short-stay outliers for 
each LTC-DRG by dividing the product of the standard Federal payment 
rate and

[[Page 475]]

the LTC-DRG weight by the geometric mean length of stay of the specific 
LTC-DRG.
    (3) To determine the cost of a case, CMS uses the hospital-specific 
cost-to-charge ratio and the Medicare allowable charges for the case.
    (4) CMS will not make any retroactive adjustments to the payments 
for short-stay outliers to account for changes made to the LTCH's 
hospital-specific cost-to-charge ratio.



Sec. 412.531  Special payment provisions when an interruption of a stay occurs in a long-term care hospital.

    (a) Interruption of a stay defined. ``Interruption of a stay'' means 
a stay at a long-term care hospital during which a Medicare inpatient is 
transferred upon discharge to an acute care hospital, an IRF, or a SNF 
for treatment or services that are not available in the long-term care 
hospital and returns to the same long-term care hospital within the 
applicable fixed day period specified in paragraphs (a)(1) through 
(a)(3) of this section.
    (1) For a discharge to an acute care hospital, the applicable fixed 
day period is 9 days. The counting of the days begins on the day of 
discharge from the long-term care hospital and ends on the 9th day after 
the discharge.
    (2) For a discharge to an IRF, the applicable fixed day period is 27 
days. The counting of the days begins on the day of discharge from the 
long-term care hospital and ends on the 27th day after the discharge.
    (3) For a discharge to a SNF, the applicable fixed day period is 45 
days. The counting of the days begins on the day of discharge from the 
long-term care hospital and ends on the 45th day after the discharge.
    (b) Methods of determining payments.
    (1) For purposes of determining a Federal prospective payment, any 
stay in a long-term care hospital that involves an interruption of the 
stay will be paid as a single discharge from the long-term care 
hospital. The number of days that a beneficiary spends in an acute care 
hospital, an IRF, or a SNF during an interruption of stay at a long-term 
care hospital is not included in determining the length of stay of the 
patient at the long-term care hospital. CMS will make only one LTC-DRG 
payment for all portions of a long-term care stay that involves an 
interruption of a stay. In accordance with Sec. 412.513(b), payment will 
be based on the patient's LTC-DRG that would be determined by the 
principal diagnosis, which is the condition established after study to 
be chiefly responsible for occasioning the first admission of the 
patient to the hospital for care.
    (2) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a stay 
is up to and including five-sixths of the geometric average length of 
stay of the LTC-DRG, CMS will make a Federal prospective payment for a 
short-stay outlier in accordance with Sec. 412.529(c).
    (3) If the total number of days of a patient's length of stay in a 
long-term care hospital prior to and following an interruption of a stay 
exceeds five-sixths of the geometric average length of stay for the LTC-
DRG, CMS will make one full Federal LTC-DRG prospective payment for the 
case. An additional payment will be made if the patient's stay qualifies 
as a high-cost outlier, as set forth in Sec. 412.525(a).
    (4) Notwithstanding the provisions of paragraph (a) of this section, 
if a patient who has been discharged from a long-term care hospital to 
another facility and is readmitted to the long-term care hospital for 
additional treatment or services in the long-term care hospital 
following the stay at the other facility, the subsequent admission to 
the long-term care hospital is considered a new stay, even if the case 
is determined to fall into the same LTC-DRG, and the long-term care 
hospital will receive two separate Federal prospective payments if one 
of the following conditions are met:
    (i) The patient has a length of stay in the acute care hospital that 
exceeds 9 days from the day of discharge from the long-term care 
hospital;
    (ii) The patient has a length of stay in the IRF that exceeds 27 
days from the day of discharge from the long-term care hospital; or
    (iii) The patient has a length of stay in the SNF that exceeds 45 
days from

[[Page 476]]

the day of discharge from the long-term care hospital.
    (c) Payments to an acute care hospital, an IRF, or a SNF during an 
interruption of a stay.
    (1) Payment to the acute care hospital for the acute care hospital 
stay following discharge from the long-term care hospital will be paid 
in accordance with the acute care hospital inpatient prospective payment 
systems specified in Sec. 412.1(a)(1).
    (2) Payment to an IRF for the IRF stay following a discharge from 
the long-term care hospital will be paid in accordance with the IRF 
prospective payment system specified in Sec. 412.624 of Subpart P of 
this part.
    (3) Payment to a SNF for the SNF stay following a discharge from the 
long-term care hospital will be paid in accordance with the SNF 
prospective payment system specified in subpart J of Part 413 of this 
subchapter.



Sec. 412.532  Special payment provisions for patients who are transferred to onsite providers and readmitted to a long-term care hospital.

    (a) The policies set forth in this section apply in the following 
situations:
    (1) A long-term care hospital (including a satellite facility) that 
is co-located within an onsite acute care hospital, an onsite IRF, or an 
onsite psychiatric facility or unit that meets the definition of a 
hospital-within-a-hospital under Sec. 412.22(e).
    (2) A satellite facility, as defined in Sec. 412.22(f), that is co-
located with the long-term care hospital.
    (3) A SNF, as defined in section 1819(a) of the Act, that is co-
located with the long-term care hospital.
    (b) As used in this section, ``co-located'' or ``onsite'' facility 
means a hospital or unit that occupies space in a building also used by 
another hospital or unit or in one or more buildings on the same campus, 
as defined in Sec. 413.65(a)(2) of this subchapter, as buildings used by 
another hospital or unit.
    (c) If, during a cost reporting period, a long-term care hospital 
(including a satellite facility) discharges patients to an acute care 
hospital co-located with the long-term care hospital, as described in 
paragraph (a) of this section, and subsequently directly readmits more 
than 5 percent (that is, in excess of 5.0 percent) of the total number 
of its Medicare inpatients discharged from that acute care hospital, all 
such discharges to the co-located acute care hospital and the 
readmissions to the long-term care hospital will be treated as one 
discharge for that cost reporting period and one LTC-DRG payment will be 
made on the basis of each patient's initial principal diagnosis.
    (d) If, during a cost reporting period, a long-term care hospital 
(including a satellite facility) discharges patients to an onsite IRF, 
an onsite psychiatric hospital or unit, or an onsite SNF, as described 
in paragraph (a) of this section, and subsequently directly readmits 
more than 5 percent (that is, in excess of 5.0 percent) of the total 
number of its Medicare inpatients discharged from the onsite IRF, the 
onsite psychiatric hospital or unit, or the onsite SNF, all such 
discharges to any of these providers and the readmissions to the LTCH 
will be treated as one discharge for that cost reporting period and one 
LTC-DRG payment will be made on the basis of the patient's initial 
principal diagnosis.
    (e) For purposes of calculating the payment per discharge, payment 
for the entire stay at the long-term care hospital will be paid as a 
full LTC-DRG payment under Sec. 412.523 or a short-stay outlier under 
Sec. 412.529, depending on the duration of the entire stay.
    (f) If the long-term care hospital does not meet the 5-percent 
thresholds specified under paragraph (c) or (d) of this section for 
discharges to the specified onsite providers and readmissions to the 
long-term care hospital during a cost reporting period, payment under 
the long-term care prospective payment system will be made, where 
applicable, under the policies on interruption of a stay as specified in 
Sec. 412.531.
    (g) Payment to the onsite acute care hospital, the onsite IRF, the 
onsite psychiatric hospital or unit, and the onsite SNF for a 
beneficiary's stay in the specified onsite providers is subject to the 
applicable payment policies, including outliers and transfers, under

[[Page 477]]

the acute care hospital inpatient prospective payment system, the IRF 
prospective payment system, the SNF prospective payment system, or the 
excluded psychiatric hospital or unit cost-based reimbursement payment 
system, as appropriate.
    (h) In determining whether a patient has previously been discharged 
and then admitted, all prior discharges are considered, even if the 
discharge occurs late in one cost reporting period and the readmission 
occurs late in next cost reporting period.
    (i) A long-term care hospital or a satellite of a long-term care 
hospital that occupies space in a building used by another hospital, or 
in one or more entire buildings located on the same campus as buildings 
used by another hospital and that meets the criteria of paragraphs 
(h)(1) through (h)(4) of this section must notify its fiscal 
intermediary and CMS in writing of its co-location within 60 days 
following the effective date of these regulations and within 60 days of 
a change in this co-located status.



Sec. 412.533  Transition payments.

    (a) Duration of transition periods. Except for a long-term care 
hospital that makes an election under paragraph (c) of this section or 
for a long-term care hospital that is defined as new under 
Sec. 412.23(e)(4), for cost reporting periods beginning on or after 
October 1, 2002, and before October 1, 2006, a long-term care hospital 
receives a payment comprised of a blend of the adjusted Federal 
prospective payment as determined under Sec. 412.523, and the payment 
determined under the cost-based reimbursement rules under Part 413 of 
this subchapter.
    (1) For cost reporting periods beginning on or after October 1, 2002 
and before October 1, 2003, payment is based on 20 percent of the 
Federal prospective payment rate and 80 percent of the cost-based 
reimbursement rate.
    (2) For cost reporting periods beginning on or after October 1, 2003 
and before October 1, 2004, payment is based on 40 percent of the 
Federal prospective payment rate and 60 percent of the cost-based 
reimbursement rate.
    (3) For cost reporting periods beginning on or after October 1, 2004 
and before October 1, 2005, payment is based on 60 percent of the 
Federal prospective payment rate and 40 percent of the cost-based 
reimbursement rate.
    (4) For cost reporting periods beginning on or after October 1, 2005 
and before October 1, 2006, payment is based on 80 percent of the 
Federal prospective payment rate and 20 percent of the cost-based 
reimbursement rate.
    (5) For cost reporting periods beginning on or after October 1, 
2006, payment is based entirely on the adjusted Federal prospective 
payment rate.
    (b) Adjustments based on reconciliation of cost reports. The cost-
based percentage of the provider's total Medicare payment under 
paragraphs (a)(1) through (a)(4) of this section are subject to 
adjustments based on reconciliation of cost reports.
    (c) Election not to be paid under the transition period methodology. 
A long-term care hospital may elect to be paid based on 100 percent of 
the Federal prospective rate at the start of any of its cost reporting 
periods during the 5-year transition periods specified in paragraph (a) 
of this section. Once a long-term care hospital elects to be paid based 
on 100 percent of the Federal prospective payment rate, it may not 
revert to the transition blend.
    (1) General requirement. A long-term care hospital must notify its 
fiscal intermediary of its intent to elect to be paid based on 100 
percent of the Federal prospective rate at the start of any of its cost 
reporting periods during the 5-year transition period specified in 
paragraph (a) of this section.
    (2) Notification requirement to make election.
    (i) The request by the long-term care hospital to make the election 
under paragraph (c)(1) of this section must be made in writing to the 
Medicare fiscal intermediary.
    (ii) For cost reporting periods that begin on or after October 1, 
2002 through November 30, 2002, the fiscal intermediary must receive the 
notification of the election before November 1, 2002.
    (iii) For cost reporting periods that begin on or after December 1, 
2002 through September 30, 2006, the fiscal intermediary must receive 
the notification of the election on or before the

[[Page 478]]

30th day before the applicable cost reporting period begins.
    (iv) The fiscal intermediary must receive the notification by the 
dates specified in paragraphs (c)(2)(ii) and (c)(2)(iii) of this 
section, regardless of any postmarks or anticipated delivery dates. 
Requests received, postmarked, or delivered by other means after the 
dates specified in paragraphs (c)(2)(ii) and (c)(2)(iii) of this section 
will not be accepted. If the date specified in paragraphs (c)(2)(ii) and 
(c)(2)(iii) of this section falls on a day that the postal service or 
other delivery sources are not open for business, the long-term care 
hospital is responsible for allowing sufficient time for the delivery of 
the notification before the deadline.
    (v) If a long-term care hospital's notification is not received by 
the dates specified in paragraphs (c)(2)(ii) and (c)(2)(iii) of this 
section, payment will be based on the transition period rates specified 
in paragraphs (a)(1) through (a)(5) of this section.
    (d) Payments to new long-term care hospitals. A new long-term care 
hospital, as defined in Sec. 412.23(e)(4), will be paid based on 100 
percent of the standard Federal rate, as described in Sec. 412.523, with 
no transition payments, as described in Sec. 412.533(a)(1) through 
(a)(5).



Sec. 412.535  Publication of the Federal prospective payment rates.

    CMS publishes information pertaining to the long-term care hospital 
prospective payment system effective for each fiscal year in the Federal 
Register. This information includes the unadjusted Federal payment 
rates, the LTC-DRG classification system and associated weighting 
factors, and a description of the methodology and data used to calculate 
the payment rates. This information is published on or before August 1 
prior to the beginning of each fiscal year.



Sec. 412.541  Method of payment under the long-term care hospital prospective payment system.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, long-term care hospitals receive payment under this 
subpart for inpatient operating costs and capital-related costs for each 
discharge only following submission of a discharge bill.
    (b) Periodic interim payments.
    (1) Criteria for receiving periodic interim payments.
    (i) A long-term care hospital receiving payment under this subpart 
may receive periodic interim payments (PIP) for Part A services under 
the PIP method subject to the provisions of Sec. 413.64(h) of this 
subchapter.
    (ii) To be approved for PIP, the long-term care hospital must meet 
the qualifying requirements in Sec. 413.64(h)(3) of this subchapter.
    (iii) As provided in Sec. 413.64(h)(5) of this subchapter, 
intermediary approval is conditioned upon the intermediary's best 
judgment as to whether payment can be made under the PIP method without 
undue risk of the PIP resulting in an overpayment to the provider.
    (2) Frequency of payment.
    (i) For long-term care hospitals approved for PIP and paid solely 
under Federal prospective payment system rates under Sec. 412.533(b), 
the intermediary estimates the long-term care hospital's Federal 
prospective payments net after estimated beneficiary deductibles and 
coinsurance and makes biweekly payments equal to \1/26\ of the total 
estimated amount of payment for the year.
    (ii) For long-term care hospitals approved for PIP and paid using 
the blended payment schedule specified in Sec. 412.533(a) for cost 
reporting periods beginning on or after October 1, 2002, and before 
October 1, 2006, the intermediary estimates the hospital's portion of 
the Federal prospective payments net and the hospital's portion of the 
reasonable cost-based reimbursement payments net, after beneficiary 
deductibles and coinsurance, in accordance with the blended transition 
percentages specified in Sec. 412.533(a), and makes biweekly payments 
equal to \1/26\ of the total estimated amount of both portions of 
payments for the year.
    (iii) If the long-term care hospital has payment experience under 
the long-term care hospital prospective payment system, the intermediary 
estimates PIP based on that payment experience, adjusted for projected 
changes supported by substantiated information for the current year.

[[Page 479]]

    (iv) Each payment is made 2 weeks after the end of a biweekly period 
of service as described in Sec. 413.64(h)(6) of this subchapter.
    (v) The interim payments are reviewed at least twice during the 
reporting period and adjusted if necessary. Fewer reviews may be 
necessary if a hospital receives interim payments for less than a full 
reporting period. These payments are subject to final settlement.
    (3) Termination of PIP. (i) Request by the hospital. Subject to 
paragraph (b)(1)(iii) of this section, a long-term care hospital 
receiving PIP may convert to receiving prospective payments on a non-PIP 
basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the long-term care hospital no longer meets the requirements of 
Sec. 413.64(h) of this subchapter.
    (c) Interim payments for Medicare bad debts and for Part A costs not 
paid under the prospective payment system. For Medicare bad debts and 
for the costs of an approved education program, blood clotting factors, 
anesthesia services furnished by hospital-employed nonphysician 
anesthetists or obtained under arrangement, and photocopying and mailing 
medical records to a QIO, which are costs paid outside the prospective 
payment system, the intermediary determines the interim payments by 
estimating the reimbursable amount for the year based on the previous 
year's experience, adjusted for projected changes supported by 
substantiated information for the current year, and makes biweekly 
payments equal to \1/26\ of the total estimated amount. Each payment is 
made 2 weeks after the end of the biweekly period of service as 
described in Sec. 413.64(h)(6) of this subchapter. The interim payments 
are reviewed at least twice during the reporting period and adjusted if 
necessary. Fewer reviews may be necessary if a long-term care hospital 
receives interim payments for less than a full reporting period. These 
payments are subject to final cost settlement.
    (d) Special interim payment for unusually long lengths of stay.
    (1) First interim payment. A hospital that is not receiving periodic 
interim payments under paragraph (b) of this section may request an 
interim payment 60 days after a Medicare beneficiary has been admitted 
to the hospital. Payment for the interim bill is determined as if the 
bill were a final discharge bill.
    (2) Additional interim payments. A hospital may request additional 
interim payments at intervals of at least 60 days after the date of the 
first interim bill submitted under paragraph (d)(1) of this section. 
Payment for these additional interim bills, as well as the final bill, 
is determined as if the bill were the final bill with appropriate 
adjustments made to the payment amount to reflect any previous interim 
payment made under the provisions of this paragraph.
    (e) Outlier payments. Additional payments for outliers are not made 
on an interim basis. The outlier payments are made based on the 
submission of a discharge bill and represent final payment.
    (f) Accelerated payments. (1) General rule. Upon request, an 
accelerated payment may be made to a long-term care hospital that is 
receiving payment under this subpart and is not receiving PIP under 
paragraph (b) of this section if the hospital is experiencing financial 
difficulties because of the following:
    (i) There is a delay by the intermediary in making payment to the 
long-term care hospital.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the hospital's preparation and submittal of bills to the intermediary 
beyond its normal billing cycle.
    (2) Approval of payment. A request by a long-term care hospital for 
an accelerated payment must be approved by the intermediary and by CMS.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is made 
by recoupment as long-term care hospital bills are processed or by 
direct payment by the long-term care hospital.

[[Page 480]]



 Subpart P--Prospective Payment for Inpatient Rehabilitation Hospitals 
                        and Rehabilitation Units

    Source: 66 FR 41388, Aug. 7, 2001, unless otherwise noted.



Sec. 412.600  Basis and scope of subpart.

    (a) Basis. This subpart implements section 1886(j) of the Act, which 
provides for the implementation of a prospective payment system for 
inpatient rehabilitation hospitals and rehabilitation units (in this 
subpart referred to as ``inpatient rehabilitation facilities'').
    (b) Scope. This subpart sets forth the framework for the prospective 
payment system for inpatient rehabilitation facilities, including the 
methodology used for the development of payment rates and associated 
adjustments, the application of a transition phase, and related rules. 
Under this system, for cost reporting periods beginning on or after 
January 1, 2002, payment for the operating and capital costs of 
inpatient hospital services furnished by inpatient rehabilitation 
facilities to Medicare Part A fee-for-service beneficiaries is made on 
the basis of prospectively determined rates and applied on a per 
discharge basis.



Sec. 412.602  Definitions.

    As used in this subpart--
    Assessment reference date means the specific calendar day in the 
patient assessment process that sets the designated endpoint of the 
common patient observation period, with most patient assessment items 
usually referring back in time from this endpoint.
    CMS stands for the Centers for Medicare & Medicaid Services.
    Comorbidity means a specific patient condition that is secondary to 
the patient's principal diagnosis that is the primary reason for the 
inpatient rehabilitation stay.
    Discharge. A Medicare patient in an inpatient rehabilitation 
facility is considered discharged when--
    (1) The patient is formally released;
    (2) The patient stops receiving Medicare-covered Part A inpatient 
rehabilitation services, unless the patient qualifies for continued 
hospitalization under Sec. 424.13(b) of this chapter; or
    (3) The patient dies in the inpatient rehabilitation facility.
    Encode means entering data items into the fields of the computerized 
patient assessment software program.
    Functional-related groups refers to the distinct groups under which 
inpatients are classified using proxy measurements of inpatient 
rehabilitation relative resource usage.
    Interrupted stay means a stay at an inpatient rehabilitation 
facility during which a Medicare inpatient is discharged from the 
inpatient rehabilitation facility and returns to the same inpatient 
rehabilitation facility within 3 consecutive calendar days. The duration 
of the interruption of the stay of 3 consecutive calendar days begins 
with the day of discharge from the inpatient rehabilitation facility and 
ends on midnight of the third day.
    Outlier payment means an additional payment beyond the standard 
Federal prospective payment for cases with unusually high costs.
    Patient assessment instrument refers to a document that contains 
clinical, demographic, and other information on a patient.
    Rural area means an area as defined in Sec. 412.62(f)(1)(iii).
    Transfer means the release of a Medicare inpatient from an inpatient 
rehabilitation facility to another inpatient rehabilitation facility, a 
short-term, acute-care prospective payment hospital, a long-term care 
hospital as described in Sec. 412.23(e), or a nursing home that 
qualifies to receive Medicare or Medicaid payments.
    Urban area means an area as defined in Sec. 412.62(f)(1)(ii).

[66 FR 41388, Aug. 7, 2001, as amended at 67 FR 44077, July 1, 2002]



Sec. 412.604  Conditions for payment under the prospective payment system for inpatient rehabilitation facilities.

    (a) General requirements. (1) Effective for cost reporting periods 
beginning on or after January 1, 2002, an inpatient rehabilitation 
facility must meet the conditions of this section to receive payment 
under the prospective payment system described in this subpart

[[Page 481]]

for inpatient hospital services furnished to Medicare Part A fee-for-
service beneficiaries.
    (2) If an inpatient rehabilitation facility fails to comply fully 
with these conditions with respect to inpatient hospital services 
furnished to one or more Medicare Part A fee-for-service beneficiaries, 
we may, as appropriate--
    (i) Withhold (in full or in part) or reduce Medicare payment to the 
inpatient rehabilitation facility until the facility provides adequate 
assurances of compliance; or
    (ii) Classify the inpatient rehabilitation facility as an inpatient 
hospital that is subject to the conditions of subpart C of this part and 
is paid under the prospective payment systems specified in 
Sec. 412.1(a)(1).
    (b) Inpatient rehabilitation facilities subject to the prospective 
payment system. Subject to the special payment provisions of 
Sec. 412.22(c), an inpatient rehabilitation facility must meet the 
general criteria set forth in Sec. 412.22 and the criteria to be 
classified as a rehabilitation hospital or rehabilitation unit set forth 
in Secs. 412.23(b), 412.25, and 412.29 for exclusion from the inpatient 
hospital prospective payment systems specified in Sec. 412.1(a)(1).
    (c) Completion of patient assessment instrument. For each Medicare 
Part A fee-for-service patient admitted to or discharged from an IRF on 
or after January 1, 2002, the inpatient rehabilitation facility must 
complete a patient assessment instrument in accordance with 
Sec. 412.606.
    (d) Limitation on charges to beneficiaries--(1) Prohibited charges. 
Except as provided in paragraph (d)(2) of this section, an inpatient 
rehabilitation facility may not charge a beneficiary for any services 
for which payment is made by Medicare, even if the facility's costs of 
furnishing services to that beneficiary are greater than the amount the 
facility is paid under the prospective payment system.
    (2) Permitted charges. An inpatient rehabilitation facility 
receiving payment under this subpart for a covered hospital stay (that 
is, a stay that includes at least one covered day) may charge the 
Medicare beneficiary or other person only for the applicable deductible 
and coinsurance amounts under Secs. 409.82, 409.83, and 409.87 of this 
subchapter and for items or services as specified under Sec. 489.20(a) 
of this chapter.
    (e) Furnishing of inpatient hospital services directly or under 
arrangement. (1) Subject to the provisions of Sec. 412.622(b), the 
applicable payments made under this subpart are payment in full for all 
inpatient hospital services, as defined in Sec. 409.10 of this 
subchapter. Inpatient hospital services do not include the following:
    (i) Physicians' services that meet the requirements of 
Sec. 415.102(a) of this subchapter for payment on a fee schedule basis.
    (ii) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (iii) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (iv) Certified nurse midwife services, as defined in section 
1861(gg) of the Act.
    (v) Qualified psychologist services, as defined in section 1861(ii) 
of the Act.
    (vi) Services of an anesthetist, as defined in Sec. 410.69 of this 
chapter.
    (2) Medicare does not pay any provider or supplier other than the 
inpatient rehabilitation facility for services furnished to a Medicare 
beneficiary who is an inpatient of the inpatient rehabilitation 
facility, except for services described in paragraphs (e)(1)(i) through 
(e)(1)(vi) of this section.
    (3) The inpatient rehabilitation facility must furnish all necessary 
covered services to the Medicare beneficiary either directly or under 
arrangements (as defined in Sec. 409.3 of this subchapter).
    (f) Reporting and recordkeeping requirements. All inpatient 
rehabilitation facilities participating in the prospective payment 
system under this subpart must meet the recordkeeping and cost reporting 
requirements of Secs. 413.20 and 413.24 of this subchapter.

[66 FR 41388, Aug. 7, 2001, as amended at 67 FR 44077, July 1, 2002]



Sec. 412.606  Patient assessments.

    (a) Admission orders. At the time that each Medicare Part A fee-for-
service patient is admitted, the inpatient rehabilitation facility must 
have physician

[[Page 482]]

orders for the patient's care during the time the patient is 
hospitalized.
    (b) Patient assessment instrument. An inpatient rehabilitation 
facility must use the CMS inpatient rehabilitation facility patient 
assessment instrument to assess Medicare Part A fee-for-service 
inpatients who--
    (1) Are admitted on or after January 1, 2002; or
    (2) Were admitted before January 1, 2002, and are still inpatients 
as of January 1, 2002.
    (c) Comprehensive assessments. (1) A clinician of the inpatient 
rehabilitation facility must perform a comprehensive, accurate, 
standardized, and reproducible assessment of each Medicare Part A fee-
for-service inpatient using the inpatient rehabilitation facility 
patient assessment instrument specified in paragraph (b) of this section 
as part of his or her patient assessment in accordance with the schedule 
described in Sec. 412.610.
    (2) A clinician employed or contracted by an inpatient 
rehabilitation facility who is trained on how to perform a patient 
assessment using the inpatient rehabilitation facility patient 
assessment instrument specified in paragraph (b) of the section must 
record appropriate and applicable data accurately and completely for 
each item on the patient assessment instrument.
    (3) The assessment process must include--
    (i) Direct patient observation and communication with the patient; 
and
    (ii) When appropriate and to the extent feasible, patient data from 
the patient's physician(s), family, someone personally knowledgeable 
about the patient's clinical condition or capabilities, the patient's 
clinical record, and other sources.



Sec. 412.608  Patients' rights regarding the collection of patient assessment data.

    (a) Before performing an assessment using the patient assessment 
instrument, a clinician of the IRF must inform the Medicare Part A fee-
for-service inpatient of the following patient rights:
    (1) The right to be informed of the purpose of the collection of the 
patient assessment data;
    (2) The right to have the patient assessment information collected 
be kept confidential and secure;
    (3) The right to be informed that the patient assessment information 
will not be disclosed to others, except for legitimate purposes allowed 
by the Federal Privacy Act and Federal and State regulations;
    (4) The right to refuse to answer patient assessment questions; and
    (5) The right to see, review, and request changes on his or her 
patient assessment.
    (b) The inpatient rehabilitation facility must ensure that a 
clinician documents in the Medicare Part A fee-for-service inpatient's 
clinical record that the patient was informed of the patient rights 
specified in paragraph (a) of this section.
    (c) The patient rights specified in paragraph (a) of this section 
are in addition to the patient rights specified under the conditions of 
participation for hospitals in Sec. 482.13 of this chapter.



Sec. 412.610  Assessment schedule.

    (a) General. For each Medicare Part A fee-for-service inpatient, an 
inpatient rehabilitation facility must complete a patient assessment 
instrument as specified in Sec. 412.606 that covers a time period that 
is in accordance with the assessment schedule specified in paragraph (c) 
of this section.
    (b) Starting the assessment schedule day count. The first day that 
the Medicare Part A fee-for-service inpatient is furnished Medicare-
covered services during his or her current inpatient rehabilitation 
facility hospital stay is counted as day one of the patient assessment 
schedule.
    (c) Assessment schedules and reference dates. The inpatient 
rehabilitation facility must complete a patient assessment instrument 
upon the Medicare Part A fee-for-service patient's admission and 
discharge as specified in paragraphs (c)(1) and (c)(2) of this section.
    (1) Admission assessment.
    (i) General rule. The admission assessment--
    (A) Time period is a span of time that covers calendar days 1 
through 3 of the

[[Page 483]]

patient's current Medicare Part A fee-for-service hospitalization;
    (B) Has an admission assessment reference date that is the third 
calendar day of the span of time specified in paragraph (c)(1)(i)(A) of 
this section; and
    (C) Must be completed on the calendar day that follows the admission 
assessment reference day.
    (ii) Exception to the general rule. We may specify in the patient 
assessment instrument item-by-item guide and in other issued 
instructions, items that have a different admission assessment time 
period to most appropriately capture patient information for payment and 
quality of care monitoring objectives.
    (2) Discharge assessment.
    (i) General rule. The discharge assessment--
    (A) Time period is a span of time that covers 3 calendar days, and 
is the discharge assessment reference date itself specified in paragraph 
(c)(2)(ii) of this section and the 2 calendar days prior to the 
discharge assessment reference date; and
    (B) Must be completed on the 5th calendar day that follows the 
discharge assessment reference date specified in paragraph (c)(2)(ii) of 
this section with the discharge assessment reference date itself being 
counted as the first day of the 5 calendar day time span.
    (ii) Discharge assessment reference date. The discharge assessment 
reference date is the actual day that the first of either of the 
following two events occurs:
    (A) The patient is discharged from the inpatient rehabilitation 
facility; or
    (B) The patient stops being furnished Medicare Part A fee-for-
service inpatient rehabilitation services.
    (iii) Exception to the general rule. We may specify in the patient 
assessment instrument item-by-item guide and in other issued 
instructions, items that have a different discharge assessment time 
period to most appropriately capture patient information for payment and 
quality of care monitoring objectives.
    (d) Encoding dates. The admission and discharge patient assessments 
must be encoded by the 7th calendar day from the completion dates 
specified in paragraph (c) of this section.
    (e) Accuracy of the patient assessment data. The encoded patient 
assessment data must accurately reflect the patient's clinical status at 
the time of the patient assessment.
    (f) Patient assessment instrument record retention. An inpatient 
rehabilitation facility must maintain all patient assessment data sets 
completed on Medicare Part A fee-for-service patients within the 
previous 5 years either in a paper format in the patient's clinical 
record or in an electronic computer file format that the inpatient 
rehabilitation facility can easily obtain.

[66 FR 41388, Aug. 7, 2001, as amended at 67 FR 44077, July 1, 2002]



Sec. 412.612  Coordination of the collection of patient assessment data.

    (a) Responsibilities of the clinician. A clinician of an inpatient 
rehabilitation facility who has participated in performing the patient 
assessment must have responsibility for--
    (1) The accuracy and thoroughness of the specific data recorded by 
that clinician on the patient's assessment instrument; and
    (2) The accuracy of the assessment reference date inserted on the 
patient assessment instrument completed under Sec. 412.610(c).
    (b) Penalty for falsification.
    (1) Under Medicare, an individual who knowingly and willfully--
    (i) Completes a material and false statement in a patient assessment 
is subject to a civil money penalty of not more than $1,000 for each 
assessment; or
    (ii) Causes another individual to complete a material and false 
statement in a patient assessment is subject to a civil money penalty of 
not more than $5,000 for each assessment.
    (2) Clinical disagreement does not constitute a material and false 
statement.



Sec. 412.614  Transmission of patient assessment data.

    (a) Data format. The inpatient rehabilitation facility must encode 
and transmit data for each Medicare Part A fee-for-service inpatient--

[[Page 484]]

    (1) Using the computerized version of the patient assessment 
instrument available from us; or
    (2) Using a computer program(s) that conforms to our standard 
electronic record layout, data specifications, and data dictionary, 
includes the required patient assessment instrument data set, and meets 
our other specifications.
    (b) How to transmit data. The inpatient rehabilitation facility 
must--
    (1) Electronically transmit complete, accurate, and encoded data 
from the patient assessment instrument for each Medicare Part A fee-for-
service inpatient to our patient data system in accordance with the data 
format specified in paragraph (a) of this section; and
    (2) Transmit data using electronic communications software that 
provides a direct telephone connection from the inpatient rehabilitation 
facility to the our patient data system.
    (c) Transmission dates. The inpatient rehabilitation facility must 
transmit both the admission patient assessment and the discharge patient 
assessments at the same time to the our patient data system by the 7th 
calendar day in the period beginning with the applicable patient 
assessment instrument encoding date specified in Sec. 412.610(d).
    (d) Late transmission penalty. (1) We assess a penalty when an 
inpatient rehabilitation facility does not transmit the required data 
from the patient assessment instrument to the our patient data system in 
accordance with the transmission timeframe in paragraph (c) of this 
section.
    (2) If the actual patient assessment data transmission date is later 
than 10 calendar days from the transmission date specified in paragraph 
(c) of this section, the patient assessment data is considered late and 
the inpatient rehabilitation facility receives a payment rate that is 25 
percent less than the payment rate associated with a case-mix group.



Sec. 412.616  Release of information collected using the patient assessment instrument.

    (a) General. An inpatient rehabilitation facility may release 
information from the patient assessment instrument only as specified in 
Sec. 482.24(b)(3) of this chapter.
    (b) Release to the inpatient rehabilitation facility's agent. An 
inpatient rehabilitation facility may release information that is 
patient-identifiable to an agent only in accordance with a written 
contract under which the agent agrees not to use or disclose the 
information except for the purposes specified in the contract and only 
to the extent the facility itself is permitted to do so under paragraph 
(a) of this section.



Sec. 412.618  Assessment process for interrupted stays.

    For purposes of the patient assessment process, if a Medicare Part A 
fee-for-service patient has an interrupted stay, as defined under 
Sec. 412.602, the following applies:
    (a) Assessment requirements. (1) The initial case-mix group 
classification from the admission assessment remains in effect (that is, 
no new admission assessment is performed).
    (2) When the patient has completed his or her entire rehabilitation 
episode stay, a discharge assessment must be performed.
    (b) Recording and encoding of data. The clinician must record the 
interruption of the stay on the patient assessment instrument.
    (c) If the interruption in the stay occurs during the admission 
assessment time period, the assessment reference date, completion date, 
and encoding date for the admission assessment are advanced by the same 
number of calendar days as the length of the patient's interruption in 
the stay.

[66 FR 41388, Aug. 7, 2001, as amended at 67 FR 44077, July 1, 2002]



Sec. 412.620  Patient classification system.

    (a) Classification methodology.
    (1) A patient classification system is used to classify patients in 
inpatient rehabilitation facilities into mutually exclusive case-mix 
groups.
    (2) For purposes of this subpart, case-mix groups are classes of 
Medicare patient discharges by functional-related groups that are based 
on a patient's impairment, age, comorbidities, functional capabilities, 
and other factors that may improve the ability of the

[[Page 485]]

functional-related groups to estimate variations in resource use.
    (3) Data from admission assessments under Sec. 412.610(c)(1) are 
used to classify a Medicare patient into an appropriate case-mix group.
    (4) Data from the discharge assessment under Sec. 412.610(c)(2) are 
used to determine the weighting factors under paragraph (b)(4) of this 
section.
    (b) Weighting factors.
    (1) General. An appropriate weight is assigned to each case-mix 
group that measures the relative difference in facility resource 
intensity among the various case-mix groups.
    (2) Short-stay outliers. We will determine a weighting factor or 
factors for patients that are discharged and not transferred (as defined 
in Sec. 412.602) within a number of days from admission as specified by 
us.
    (3) Patients who expire. We will determine a weighting factor or 
factors for patients who expire within a number of days from admission 
as specified by us.
    (4) Comorbidities. We will determine a weighting factor or factors 
to account for the presence of a comorbidity, as defined in 
Sec. 412.602, that is relevant to resource use in the classification 
system.
    (c) Revision of case-mix group classifications and weighting 
factors. We may periodically adjust the case-mix groups and weighting 
factors to reflect changes in--
    (1) Treatment patterns;
    (2) Technology;
    (3) Number of discharges; and
    (4) Other factors affecting the relative use of resources.



Sec. 412.622  Basis of payment.

    (a) Method of payment.
    (1) Under the prospective payment system, inpatient rehabilitation 
facilities receive a predetermined amount per discharge for inpatient 
services furnished to Medicare Part A fee-for-service beneficiaries.
    (2) The amount of payment under the prospective payment system is 
based on the Federal payment rate, including adjustments described in 
Sec. 412.624 and, if applicable, during a transition period, on a blend 
of the Federal payment rate and the facility-specific payment rate 
described in Sec. 412.626.
    (b) Payment in full. (1) The payment made under this subpart 
represents payment in full (subject to applicable deductibles and 
coinsurance as described in subpart G of part 409 of this subchapter) 
for inpatient operating and capital-related costs associated with 
furnishing Medicare covered services in an inpatient rehabilitation 
facility, but not for the cost of an approved medical education program 
described in Secs. 413.85 and 413.86 of this chapter.
    (2) In addition to payments based on prospective payment rates, 
inpatient rehabilitation facilities receive payments for the following:
    (i) Bad debts of Medicare beneficiaries, as provided in Sec. 413.80 
of this chapter; and
    (ii) A payment amount per unit for blood clotting factor provided to 
Medicare inpatients who have hemophilia.



Sec. 412.624  Methodology for calculating the Federal prospective payment rates.

    (a) Data used. To calculate the prospective payment rates for 
inpatient hospital services furnished by inpatient rehabilitation 
facilities, we use--
    (1) The most recent Medicare data available, as of the date of 
establishing the inpatient rehabilitation facility prospective payment 
system, to estimate payments for inpatient operating and capital-related 
costs made under part 413 of this subchapter;
    (2) An appropriate wage index to adjust for area wage differences;
    (3) An increase factor to adjust for the most recent estimate of 
increases in the prices of an appropriate market basket of goods and 
services included in covered inpatient rehabilitation services; and
    (4) Patient assessment data described in Sec. 412.606 and other data 
that account for the relative resource utilization of different patient 
types.
    (b) Determining the average costs per discharge for fiscal year 
2001. We determine the average inpatient operating and capital costs per 
discharge for which payment is made to each inpatient rehabilitation 
facility using the available data specified under paragraph (a)(1) of 
this section. The cost per discharge is adjusted to fiscal year 2001 by 
an increase factor, described in

[[Page 486]]

paragraph (a)(3) of this section, under the update methodology described 
in section 1886(b)(3)(B)(ii) of the Act for each year through the 
midpoint of fiscal year 2001.
    (c) Determining the Federal prospective payment rates. (1) General. 
The Federal prospective payment rates will be established using a 
standard payment amount referred to as the budget neutral conversion 
factor. The budget neutral conversion factor is a standardized payment 
amount based on average costs from a base year which reflects the 
combined aggregate effects of the weighting factors, various facility 
and case level adjustments, and other adjustments.
    (2) Update the cost per discharge. We apply the increase factor 
described in paragraph (a)(3) of this section to the facility's cost per 
discharge determined under paragraph (b) of this section to compute the 
cost per discharge for fiscal year 2002. Based on the updated cost per 
discharge, we estimate the payments that would have been made to the 
facility for fiscal year 2002 under part 413 of this chapter without 
regard to the prospective payment system implemented under this subpart.
    (3) Computation of the budget neutral conversion factor. The budget 
neutral conversion factor is computed as follows:
    (i) For fiscal year 2002. Based on the updated costs per discharge 
and estimated payments for fiscal year 2002 determined in paragraph 
(c)(2) of this section, we compute a budget neutral conversion factor 
for fiscal year 2002, as specified by us, that reflects, as appropriate, 
the adjustments described in paragraph (d) of this section.
    (ii) For fiscal years after 2002. The budget neutral conversion 
factor for fiscal years after 2002 will be the standardized payments for 
the previous fiscal year updated by the increase factor described in 
paragraph (a)(3) of this section, including adjustments described in 
paragraph (d) of this section as appropriate.
    (4) Determining the Federal prospective payment rate for each case-
mix group. The Federal prospective payment rates for each case-mix group 
are the product of the weighting factors described in Sec. 412.620(b) 
and the budget neutral conversion factor described in paragraph (c)(3) 
of this section.
    (d) Adjustments to the budget neutral conversion factor. The budget 
neutral conversion factor described in paragraph (c)(3) of this section 
will be adjusted for the following:
    (1) Outlier payments. We determine a reduction factor equal to the 
estimated proportion of additional outlier payments described in 
paragraph (e)(4) of this section.
    (2) Budget neutrality. We adjust the Federal prospective payment 
rates for fiscal year 2002 so that aggregate payments under the 
prospective payment system, excluding any additional payments associated 
with elections not to be paid under the transition period methodology 
under Sec. 412.626(b), are estimated to equal the amount that would have 
been made to inpatient rehabilitation facilities under part 413 of this 
subchapter without regard to the prospective payment system implemented 
under this subpart.
    (3) Coding and classification changes. We adjust the budget neutral 
conversion factor for a given year if we determine that revisions in 
case-mix classifications or weighting factors for a previous fiscal year 
(or estimates that such revisions for a future fiscal year) did result 
in (or would otherwise result in) a change in aggregate payments that 
are a result of changes in the coding or classification of patients that 
do not reflect real changes in case-mix.
    (e) Calculation of the adjusted Federal prospective payment. For 
each discharge, an inpatient rehabilitation facility's Federal 
prospective payment is computed on the basis of the Federal prospective 
payment rate that is in effect for its cost reporting period that begins 
in a Federal fiscal year specified under paragraph (c) of this section. 
A facility's Federal prospective payment rate will be adjusted, as 
appropriate, to account for area wage levels, payments for outliers and 
transfers, and for other factors as follows:
    (1) Adjustment for area wage levels. The labor portion of a 
facility's Federal prospective payment is adjusted to account for 
geographical differences in the area wage levels using an appropriate 
wage index. The application of the wage index is made on the basis of

[[Page 487]]

the location of the facility in an urban or rural area as defined in 
Sec. 412.602.
    (2) Adjustments for low-income patients. We adjust the Federal 
prospective payment, on a facility basis, for the proportion of low-
income patients that receive inpatient rehabilitation services as 
determined by us.
    (3) Adjustments for rural areas. We adjust the Federal prospective 
payment by a factor, as specified by us for facilities located in rural 
areas, as defined in Sec. 412.602.
    (4) Adjustment for high-cost outliers. We provide for an additional 
payment to a facility if its estimated costs for a patient exceed a 
fixed dollar amount (adjusted for area wage levels and factors to 
account for treating low-income patients and for rural locations) as 
specified by us. The additional payment equals 80 percent of the 
difference between the estimated cost of the patient and the sum of the 
adjusted Federal prospective payment computed under this section and the 
adjusted fixed dollar amount.
    (5) Adjustments related to the patient assessment instrument. An 
adjustment to a facility's Federal prospective payment amount for a 
given discharge will be made, as specified under Sec. 412.614(d), if the 
transmission of data from a patient assessment instrument is late.
    (f) Special payment provision for patients that are transferred.
    (1) A facility's Federal prospective payment will be adjusted to 
account for a discharge of a patient who--
    (i) Is transferred from the inpatient rehabilitation facility to 
another site of care, as defined in Sec. 412.602; and
    (ii) Stays in the facility for a number of days that is less than 
the average length of stay for nontransfer cases in the case-mix group 
to which the patient is classified.
    (2) We calculate the adjusted Federal prospective payment for 
patients who are transferred in the following manner:
    (i) By dividing the Federal prospective payment by the average 
length of stay for nontransfer cases in the case-mix group to which the 
patient is classified to equal the payment per day.
    (ii) By multiplying the payment per day under paragraph (f)(2)(i) of 
this section by the number of days the patient stayed in the facility 
prior to being discharged to equal the per day payment amount.
    (iii) By multiplying the payment per day under paragraph (f)(2)(i) 
by 0.5 to equal an additional one half day payment for the first day of 
the stay before the discharge.
    (iv) By adding the per day payment amount under paragraph (f)(2)(ii) 
and the additional one-half day payment under paragraph (f)(2)(iii) to 
equal the unadjusted payment amount.
    (v) By applying the adjustments described in paragraphs (e)(1), 
(e)(2), and (e)(3) of this section to the unadjusted payment amount 
determined in paragraph (f)(2)(iv) of this section to equal the adjusted 
transfer payment amount.
    (g) Special payment provision for interrupted stays. When a patient 
in an inpatient rehabilitation facility has one or more interruptions in 
the stay, as defined in Sec. 412.602 and as indicated on the patient 
assessment instrument in accordance with Sec. 412.618(b), we will make 
payments in the following manner:
    (1) Patient is discharged and returns on the same day. Payment for a 
patient who is discharged and returns to the same inpatient 
rehabilitation facility on the same day will be the adjusted Federal 
prospective payment under paragraph (e) of this section that is based on 
the patient assessment data specified in Sec. 412.618(a)(1). Payment for 
a patient who is discharged and returns to the same inpatient 
rehabilitation facility on the same day will only be made to the 
inpatient rehabilitation facility.
    (2) Patient is discharged and does not return by the end of the same 
day. Payment for a patient who is discharged and does not return on the 
same day but does return to the same inpatient rehabilitation facility 
by or on midnight of the third day, defined as an interrupted stay under 
Sec. 412.602, will be--
    (i) The adjusted Federal prospective payment under paragraph (e) of 
this section that is based on the patient assessment data specified in 
Sec. 412.618(a)(1) made to the inpatient rehabilitation facility; and
    (ii) If the reason for the interrupted patient stay is to receive 
inpatient acute care hospital services, an amount

[[Page 488]]

based on the prospective payment systems described in Sec. 412.1(a)(1) 
made to the acute care hospital.

[66 FR 41388, Aug. 7, 2001, as amended at 67 FR 44077, July 1, 2002]



Sec. 412.626  Transition period.

    (a) Duration of transition period and proportion of the blended 
transition rate. (1) Except for a facility that makes an election under 
paragraph (b) of this section, for cost reporting periods beginning on 
or after January 1, 2002 and before October 1, 2002, an inpatient 
rehabilitation facility receives a payment comprised of a blend of the 
adjusted Federal prospective payment, as determined under 
Sec. 412.624(e) or Sec. 412.624(f) and a facility-specific payment as 
determined under paragraph (a)(2) of this section.
    (i) For cost reporting periods beginning on or after January 1, 2002 
and before October 1, 2002, payment is based on 33\1/3\ percent of the 
facility-specific payment and 66\2/3\ percent of the adjusted FY 2002 
Federal prospective payment.
    (ii) For cost reporting periods beginning on or after October 1, 
2002, payment is based entirely on the adjusted Federal prospective 
payment.
    (2) Calculation of the facility-specific payment. The facility-
specific payment is equal to the payment for each cost reporting period 
in the transition period that would have been made without regard to 
this subpart. The facility's Medicare fiscal intermediary calculates the 
facility-specific payment for inpatient operating costs and capital-
related costs in accordance with part 413 of this chapter.
    (b) Election not to be paid under the transition period methodology. 
An inpatient rehabilitation facility may elect a payment that is based 
entirely on the adjusted Federal prospective payment for cost reporting 
periods beginning before fiscal year 2003 without regard to the 
transition period percentages specified in paragraph (a)(1)(i) of this 
section.
    (1) General requirement. An inpatient rehabilitation facility will 
be required to request the election under this paragraph (b) within 30 
days of its first cost reporting period for which payment is based on 
the inpatient rehabilitation facility prospective payment system for 
cost reporting periods beginning on or after January 1, 2002 and before 
October 1, 2002.
    (2) Notification requirement to make election. The request by the 
inpatient rehabilitation facility to make the election under this 
paragraph (b) must be made in writing to the Medicare fiscal 
intermediary. The intermediary must receive the request on or before the 
30th day before the applicable cost reporting period begins, regardless 
of any postmarks or anticipated delivery dates. Requests received, 
postmarked, or delivered by other means after the 30th day before the 
cost reporting period begins will not be approved. If the 30th day 
before the cost reporting period begins falls on a day that the postal 
service or other delivery sources are not open for business, the 
inpatient rehabilitation facility is responsible for allowing sufficient 
time for the delivery of the request before the deadline. If an 
inpatient rehabilitation facility's request is not received timely or is 
otherwise not approved, payment will be based on the transition period 
rate specified in paragraph (a)(1)(i) of this section.

[66 FR 41388, Aug. 7, 2001, as amended at 67 FR 44077, July 1, 2002]



Sec. 412.628  Publication of the Federal prospective payment rates.

    We publish information pertaining to the inpatient rehabilitation 
facility prospective payment system effective for each fiscal year in 
the Federal Register. This information includes the unadjusted Federal 
payment rates, the patient classification system and associated 
weighting factors, and a description of the methodology and data used to 
calculate the payment rates. This information is published on or before 
August 1 prior to the beginning of each fiscal year.



Sec. 412.630  Limitation on review.

    Administrative or judicial review under sections 1869 or 1878 of the 
Act, or otherwise, is prohibited with regard to the establishment of the 
methodology to classify a patient into the case-mix groups and the 
associated

[[Page 489]]

weighting factors, the unadjusted Federal per discharge payment rates, 
additional payments for outliers and special payments, and the area wage 
index.



Sec. 412.632  Method of payment under the inpatient rehabilitation facility prospective payment system.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, an inpatient rehabilitation facility receives 
payment under this subpart for inpatient operating costs and capital-
related costs for each discharge only following submission of a 
discharge bill.
    (b) Periodic interim payments.
    (1) Criteria for receiving periodic interim payments.
    (i) An inpatient rehabilitation facility receiving payment under 
this subpart may receive periodic interim payments (PIP) for Part A 
services under the PIP method subject to the provisions of 
Sec. 413.64(h) of this subchapter.
    (ii) To be approved for PIP, the inpatient rehabilitation facility 
must meet the qualifying requirements in Sec. 413.64(h)(3) of this 
subchapter.
    (iii) Payments to a rehabilitation unit are made under the same 
method of payment as the hospital of which it is a part as described in 
Sec. 412.116.
    (iv) As provided in Sec. 413.64(h)(5) of this chapter, intermediary 
approval is conditioned upon the intermediary's best judgment as to 
whether payment can be made under the PIP method without undue risk of 
its resulting in an overpayment to the provider.
    (2) Frequency of payment. For facilities approved for PIP, the 
intermediary estimates the inpatient rehabilitation facility's Federal 
prospective payments net of estimated beneficiary deductibles and 
coinsurance and makes biweekly payments equal to 1/26 of the total 
estimated amount of payment for the year. If the inpatient 
rehabilitation facility has payment experience under the prospective 
payment system, the intermediary estimates PIP based on that payment 
experience, adjusted for projected changes supported by substantiated 
information for the current year. Each payment is made 2 weeks after the 
end of a biweekly period of service as described in Sec. 413.64(h)(6) of 
this subchapter. The interim payments are reviewed at least twice during 
the reporting period and adjusted if necessary. Fewer reviews may be 
necessary if an inpatient rehabilitation facility receives interim 
payments for less than a full reporting period. These payments are 
subject to final settlement.
    (3) Termination of PIP. (i) Request by the inpatient rehabilitation 
facility. Subject to the provisions of paragraph (b)(1)(iii) of this 
section, an inpatient rehabilitation facility receiving PIP may convert 
to receiving prospective payments on a non-PIP basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the inpatient rehabilitation facility no longer meets the requirements 
of Sec. 413.64(h) of this chapter.
    (c) Interim payments for Medicare bad debts and for Part A costs not 
paid under the prospective payment system. For Medicare bad debts and 
for costs of an approved education program and other costs paid outside 
the prospective payment system, the intermediary determines the interim 
payments by estimating the reimbursable amount for the year based on the 
previous year's experience, adjusted for projected changes supported by 
substantiated information for the current year, and makes biweekly 
payments equal to 1/26 of the total estimated amount. Each payment is 
made 2 weeks after the end of a biweekly period of service as described 
in Sec. 413.64(h)(6) of this chapter. The interim payments are reviewed 
at least twice during the reporting period and adjusted if necessary. 
Fewer reviews may be necessary if an inpatient rehabilitation facility 
receives interim payments for less than a full reporting period. These 
payments are subject to final cost settlement.
    (d) Outlier payments. Additional payments for outliers are not made 
on an interim basis. The outlier payments are made based on the 
submission of a discharge bill and represent final payment.
    (e) Accelerated payments. (1) General rule. Upon request, an 
accelerated payment may be made to an inpatient rehabilitation facility 
that is receiving payment under this subpart and is not

[[Page 490]]

receiving PIP under paragraph (b) of this section if the inpatient 
rehabilitation facility is experiencing financial difficulties because 
of the following:
    (i) There is a delay by the intermediary in making payment to the 
inpatient rehabilitation facility.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the inpatient rehabilitation facility's preparation and submittal of 
bills to the intermediary beyond its normal billing cycle.
    (2) Approval of payment. An inpatient rehabilitation facility's 
request for an accelerated payment must be approved by the intermediary 
and us.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is made 
by recoupment as inpatient rehabilitation facility bills are processed 
or by direct payment by the inpatient rehabilitation facility.



PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT RATES FOR SKILLED NURSING 
FACILITIES--Table of Contents




                Subpart A--Introduction and General Rules

Sec.
413.1  Introduction.
413.5  Cost reimbursement: General.
413.9  Cost related to patient care.
413.13  Amount of payment if customary charges for services furnished 
          are less than reasonable costs.
413.17  Cost to related organizations.

                Subpart B--Accounting Records and Reports

413.20  Financial data and reports.
413.24  Adequate cost data and cost finding.

                 Subpart C--Limits on Cost Reimbursement

413.30  Limitations on payable costs.
413.35  Limitations on coverage of costs: Charges to beneficiaries if 
          cost limits are applied to services.
413.40  Ceiling on the rate of increase in hospital inpatient costs.

                        Subpart D--Apportionment

413.50  Apportionment of allowable costs.
413.53  Determination of cost of services to beneficiaries.
413.56  [Reserved]

                    Subpart E--Payments to Providers

413.60  Payments to providers: General.
413.64  Payments to providers: Specific rules.
413.65  Requirements for a determination that a facility or an 
          organization has provider-based status.
413.70  Payment for services of a CAH.
413.74  Payment to a foreign hospital.

                 Subpart F--Specific Categories of Costs

413.80  Bad debts, charity, and courtesy allowances.
413.85  Cost of approved nursing and allied health education activities.
413.86  Direct graduate medical education payments.
413.87  Payments for Medicare+Choice nursing and allied health education 
          programs.
413.88  Incentive payments under plans for voluntary reduction in number 
          of medical residents.
413.90  Research costs.
413.92  Costs of surety bonds.
413.94  Value of services of nonpaid workers.
413.98  Purchase discounts and allowances, and refunds of expenses.
413.100  Special treatment of certain accrued costs.
413.102  Compensation of owners.
413.106  Reasonable cost of physical and other therapy services 
          furnished under arrangements.
413.114  Payment for posthospital SNF care furnished by a swing-bed 
          hospital.
413.118  Payment for facility services related to covered ASC surgical 
          procedures performed in hospitals on an outpatient basis.
413.122  Payment for hospital outpatient radiology services and other 
          diagnostic procedures.
413.123  Payment for screening mammography performed by hospitals on an 
          outpatient basis.
413.124  Reduction to hospital outpatient operating costs.
413.125  Payment for home health agency services.

                    Subpart G--Capital-Related Costs

413.130  Introduction to capital-related costs.
413.134  Depreciation: Allowance for depreciation based on asset costs.
413.139  Depreciation: Optional allowance for depreciation based on a 
          percentage of operating costs.

[[Page 491]]

413.144  Depreciation: Allowance for depreciation on fully depreciated 
          or partially depreciated assets.
413.149  Depreciation: Allowance for depreciation on assets financed 
          with Federal or public funds.
413.153  Interest expense.
413.157  Return on equity capital of proprietary providers.

Subpart H--Payment for End-Stage Renal Disease (ESRD) Services and Organ 
                            Procurement Costs

413.170  Scope.
413.172  Principles of prospective payment.
413.174  Prospective rates for hospital-based and independent ESRD 
          facilities.
413.176  Amount of payments.
413.178  Bad debts.
413.180  Procedures for requesting exceptions to payment rates.
413.182  Criteria for approval of exception requests.
413.184  Payment exception: Atypical service intensity (patient mix).
413.186  Payment exception: Isolated essential facility.
413.188  Payment exception: Extraordinary circumstances.
413.190  Payment exception: Self-dialysis training costs.
413.192  Payment exception: Frequency of dialysis.
413.194  Appeals.
413.196  Notification of changes in rate-setting methodologies and 
          payment rates.
413.198  Recordkeeping and cost reporting requirements for outpatient 
          maintenance dialysis.
413.200  Payment of independent organ procurement organizations and 
          histocompatibility laboratories.
413.202  Organ procurement organization (OPO) cost for kidneys sent to 
          foreign countries or transplanted in patients other than 
          Medicare beneficiaries.
413.203  Transplant center costs for organs sent to foreign countries or 
          transplanted in patients other than Medicare beneficiaries.

Subpart I--Prospectively Determined Payment Rates for Low-Volume Skilled 
 Nursing Facilities, for Cost Reporting Periods Beginning Prior to July 
                                 1, 1998

413.300  Basis and scope.
413.302  Definitions.
413.304  Eligibility for prospectively determined payment rates.
413.308  Rules governing election of prospectively determined payment 
          rates.
413.310  Basis of payment.
413.312  Methodology for calculating rates.
413.314  Determining payment amounts: Routine per diem rate.
413.316  Determining payment amounts: Ancillary services.
413.320  Publication of prospectively determined payment rates or 
          amounts.
413.321  Simplified cost reports for SNFs.

      Subpart J--Prospective Payment for Skilled Nursing Facilities

413.330  Basis and scope.
413.333  Definitions.
413.335  Basis of payment.
413.337  Methodology for calculating the prospective payment rates.
413.340  Transition period.
413.343  Resident assessment data.
413.345  Publication of Federal prospective payment rates.
413.348  Limitation on review.
413.350  Periodic interim payments for skilled nursing facilities 
          receiving payment under the skilled nursing facility 
          prospective payment system for Part A services.

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1871, 1881, 1883, and 1886 of the Social Security Act (42 U.S.C. 
1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 1395hh, 1395rr, 
1395tt, and 1395ww).

    Source: 51 FR 34793, Sept. 30, 1986, unless otherwise noted.



                Subpart A--Introduction and General Rules



Sec. 413.1  Introduction.

    (a) Basis, scope, and applicability--(1) Statutory basis--(i) Basic 
provisions. (A) Section 1815 of the Act requires that the Secretary make 
interim payments to providers and periodically determine the amount that 
should be paid under Part A of Medicare to each provider for the 
services it furnishes.
    (B) Section 1814(b) of the Act (for Part A) and section 1833(a) (for 
Part B) provide for payment on the basis of the lesser of a provider's 
reasonable costs or customary charges.
    (C) Section 1861(v) of the Act defines ``reasonable cost''.
    (ii) Additional provisions. (A) Section 1138(b) of the Act specifies 
the conditions for Medicare payment for organ procurement costs.
    (B) Section 1814(j) of the Act provides for exceptions to the 
``lower of costs or charges'' provisions.

[[Page 492]]

    (C) Sections 1815(a) and 1833(e) of the Act provide the Secretary 
with authority to request information from providers to determine the 
amount of Medicare payment due providers.
    (D) Section 1833(a)(4) and (i)(3) of the Act provide for payment of 
a blended amount for certain surgical services furnished in a hospital's 
outpatient department.
    (E) Section 1833(n) of the Act provides for payment of a blended 
amount for outpatient hospital diagnostic procedures such as radiology.
    (F) Section 1834(c)(1)(C) of the Act establishes the method for 
determining Medicare payment for screening mammograms performed by 
hospitals.
    (G) Section 1834(g) of the Act provides that payment for critical 
access hospital (CAH) outpatient services is the reasonable costs of the 
CAH in providing these services, as determined in accordance with 
section 1861(v)(1)(A) of the Act and the applicable principles of cost 
reimbursement in this part and in part 415 of this chapter.
    (H) Section 1881 of the Act authorizes payment for services 
furnished to ESRD patients.
    (I) Section 1883 of the Act provides for payment for post-hospital 
SNF care furnished by a rural hospital that has swing-bed approval.
    (J) Sections 1886(a) and (b) of the Act impose a ceiling on the rate 
of increase in hospital inpatient costs.
    (K) Section 1886(h) of the Act provides for payment to a hospital 
for the services of interns and residents in approved teaching programs 
on the basis of a ``per resident'' amount.
    (2) Scope. This part sets forth regulations governing Medicare 
payment for services furnished to beneficiaries by--
    (i) Hospitals and critical access hospitals (CAHs);
    (ii) Skilled nursing facilities (SNFs);
    (iii) Home health agencies (HHAs);
    (iv) Comprehensive outpatient rehabilitation facilities (CORFs);
    (v) End-stage renal disease (ESRD) facilities;
    (vi) Providers of outpatient physical therapy and speech pathology 
services (OPTs); and
    (vii) Organ procurement agencies (OPAs) and histocompatibility 
laboratories.
    (3) Applicability. The payment principles and related policies set 
forth in this part are binding on CMS and its fiscal intermediaries, on 
the Provider Reimbursement Review Board, and on the entities listed in 
paragraph (a)(2) of this section.
    (b) Reasonable cost reimbursement. Except as provided under 
paragraphs (c) through (h) of this section, Medicare is generally 
required, under section 1814(b) of the Act (for services covered under 
Part A) and under section 1833(a)(2) of the Act (for services covered 
under Part B) to pay for services furnished by providers on the basis of 
reasonable costs as defined in section 1861(v) of the Act, or the 
provider's customary charges for those services, if lower. Regulations 
implementing section 1861(v) are found generally in this part beginning 
at Sec. 413.5.
    (c) Outpatient maintenance dialysis and related services. Section 
1881 of the Act authorizes special rules for the coverage of and payment 
for services furnished to ESRD patients. Sections 413.170 and 413.174 
implement various provisions of section 1881. In particular, 
Sec. 413.170 establishes a prospective payment method for outpatient 
maintenance dialysis services that applies both to hospital-based and 
independent ESRD facilities, and under which Medicare pays for both home 
and infacility dialysis services furnished on or after August 1, 1983.
    (d) Payment for inpatient hospital services. (1) For cost reporting 
periods beginning before October 1, 1983, the amount paid for inpatient 
hospital services is determined on a reasonable cost basis.
    (2) Payment to short-term general hospitals located in the 50 States 
and the District of Columbia for the operating costs of hospital 
inpatient services for cost reporting periods beginning on or after 
October 1, 1983, and for the capital-related costs of inpatient services 
for cost reporting periods beginning on or after October 1, 1991, are 
determined prospectively on a per discharge basis under part 412 of this 
chapter except as follows:
    (i) Payment for capital-related costs for cost reporting periods 
beginning before October 1, 1991, medical education costs, kidney 
acquisition costs, and the

[[Page 493]]

costs of certain anesthesia services, is described in Sec. 412.113 of 
this chapter.
    (ii) Payment to children's and psychiatric hospitals (as well as 
separate psychiatric units (distinct parts) of short-term general 
hospitals) that are excluded from the prospective payment systems under 
subpart B of Part 412 of this subchapter and hospitals outside the 50 
states and the District of Columbia is on a reasonable cost basis, 
subject to the provisions of Sec. 413.40.
    (iii) Payment to hospitals subject to a State reimbursement control 
system is described in paragraph (e) of this section.
    (iv) For cost reporting periods beginning before January 1, 2002, 
payment to rehabilitation hospitals (as well as separate rehabilitation 
units (distinct parts) of short-term general hospitals), that are 
excluded under subpart B of part 412 of this subchapter from the 
prospective payment systems is made on a reasonable cost basis, subject 
to the provisions of Sec. 413.40.
    (v) For cost reporting periods beginning on or after January 1, 
2002, payment to rehabilitation hospitals (as well as separate 
rehabilitation units (distinct parts) of short-term general hospitals) 
that meet the conditions of Sec. 412.604 of this chapter is based on 
prospectively determined rates under subpart P of part 412 of this 
subchapter.
    (vi) For cost reporting periods beginning before October 1, 2002, 
payment to long-term care hospitals that are excluded under subpart B of 
Part 412 of this subchapter from the prospective payment systems is on a 
reasonable cost basis, subject to the provisions of Sec. 413.40.
    (vii) For cost reporting periods beginning on or after October 1, 
2002, payment to the long-term hospitals that meet the condition for 
payment of Secs. 412.505 through 412.511 of this subchapter is based on 
prospectively determined rates under subpart O of Part 412 of this 
subchapter.
    (e) State reimbursement control systems. Beginning October 1, 1983, 
Medicare reimbursement for inpatient hospital services may be made in 
accordance with a State reimbursement control system rather than under 
the Medicare reimbursement principles set forth in this part, if the 
State system is approved by CMS. Regulations implementing this 
alternative reimbursement authority are set forth in subpart C of part 
403 of this chapter.
    (f) Services of qualified nonphysician anesthetists. For cost 
reporting periods, or any part of a cost reporting period, beginning on 
or after January 1, 1989, costs incurred for the services of qualified 
nonphysician anesthetists are not paid on a reasonable cost basis unless 
the provisions of Sec. 412.113(c)(2) of this chapter apply. These 
services are paid under the special rules set forth in Sec. 405.553 of 
this chapter.
    (g) Payment for services furnished in SNFs. (1) Except as specified 
in paragraph (g)(2)(ii) of this section, the amount paid for services 
furnished in cost reporting periods beginning before July 1, 1998, is 
determined on a reasonable cost basis or, where applicable, in 
accordance with the prospectively determined payment rates for low-
volume SNFs established under section 1888(d) of the Act, as set forth 
in subpart I of this part.
    (2) The amount paid for services (other than those described in 
Sec. 411.15(p)(2) of this chapter)--
    (i) That are furnished in cost reporting periods beginning on or 
after July 1, 1998, to a resident who is in a covered Part A stay, is 
determined in accordance with the prospectively determined payment rates 
for SNFs established under section 1888(e) of the Act, as set forth in 
subpart J of this part.
    (ii) That are furnished on or after July 1, 1998, to a resident who 
is not in a covered Part A stay, is determined in accordance with any 
applicable Part B fee schedule or, for a particular item or service to 
which no fee schedule applies, by using the existing payment methodology 
utilized under Part B for such item or service.
    (h) Payment for services furnished by HHAs. The amount paid for home 
health services as defined in section 1861(m) of the Act (except durable 
medical equipment and the covered osteoporosis drug as provided for in 
that section) that are furnished beginning on or after October 1, 2000 
to an eligible beneficiary under a home health plan of care is 
determined according to the prospectively determined payment

[[Page 494]]

rates for HHAs set forth in part 484, subpart E of this chapter.

[51 FR 34793, Sept. 30, 1986, as amended at 57 FR 33898, July 31, 1992; 
57 FR 39829, Sept. 1, 1992; 58 FR 30670, May 26, 1993; 59 FR 6578, Feb. 
11, 1994; 60 FR 33136, June 27, 1995; 60 FR 37594, July 21, 1995; 60 FR 
50441, Sept. 29, 1995; 62 FR 31, Jan. 2, 1997; 62 FR 46032, 46037, Aug. 
29, 1997; 63 FR 26309, May 12, 1998; 65 FR 18537, Apr. 7, 2000; 65 FR 
40535, June 30, 2000; 65 FR 41211, July 3, 2000; 65 FR 46796, July 31, 
2000; 66 FR 41394, Aug. 7, 2001; 67 FR 44077, July 1, 2002; 67 FR 56055, 
Aug. 30, 2002]



Sec. 413.5  Cost reimbursement: General.

    (a) In formulating methods for making fair and equitable 
reimbursement for services rendered beneficiaries of the program, 
payment is to be made on the basis of current costs of the individual 
provider, rather than costs of a past period or a fixed negotiated rate. 
All necessary and proper expenses of an institution in the production of 
services, including normal standby costs, are recognized. Furthermore, 
the share of the total institutional cost that is borne by the program 
is related to the care furnished beneficiaries so that no part of their 
cost would need to be borne by other patients. Conversely, costs 
attributable to other patients of the institution are not to be borne by 
the program. Thus, the application of this approach, with appropriate 
accounting support, will result in meeting actual costs of services to 
beneficiaries as such costs vary from institution to institution. 
However, payments to providers of services for services furnished 
Medicare beneficiaries are subject to the provisions of Secs. 413.13 and 
413.30.
    (b) Putting these several points together, certain tests have been 
evolved for the principles of reimbursement and certain goals have been 
established that they should be designed to accomplish. In general 
terms, these are the tests or objectives:
    (1) That the methods of reimbursement should result in current 
payment so that institutions will not be disadvantaged, as they 
sometimes are under other arrangements, by having to put up money for 
the purchase of goods and services well before they receive 
reimbursement.
    (2) That, in addition to current payment, there should be 
retroactive adjustment so that increases in costs are taken fully into 
account as they actually occurred, not just prospectively.
    (3) That there be a division of the allowable costs between the 
beneficiaries of this program and the other patients of the provider 
that takes account of the actual use of services by the beneficiaries of 
this program and that is fair to each provider individually.
    (4) That there be sufficient flexibility in the methods of 
reimbursement to be used, particularly at the beginning of the program, 
to take account of the great differences in the present state of 
development of recordkeeping.
    (5) That the principles should result in the equitable treatment of 
both nonprofit organizations and profit-making organizations.
    (6) That there should be a recognition of the need of hospitals and 
other providers to keep pace with growing needs and to make 
improvements.
    (c) As formulated herein, the principles given recognition to such 
factors as depreciation, interest, bad debts, educational costs, 
compensation of owners, and an allowance for a reasonable return on 
equity capital (in the case of certain proprietary providers). With 
respect to allowable costs some items of inclusion and exclusion are:
    (1) An appropriate part of the net cost of approved educational 
activities will be included.
    (2) Costs incurred for research purposes, over and above usual 
patient care, will not be included.
    (3) [Reserved]
    (4) The value of services provided by nonpaid workers, as members of 
an organization (including services of members of religious orders) 
having an agreement with the provider to furnish such services, is 
includable in the amount that would be paid others for similar work.
    (5) Discounts and allowances received on the purchase of goods or 
services are reductions of the cost to which they relate.
    (6) Bad debts growing out of the failure of a beneficiary to pay the 
deductible, or the coinsurance, will be reimbursed (after bona fide 
efforts at collection).
    (7) Charity and courtesy allowances are not includable, although 
``fringe

[[Page 495]]

benefit'' allowances for employees under a formal plan will be 
includable as part of their compensation.
    (8) A reasonable allowance of compensation for the services of 
owners in profitmaking organizations will be allowed providing their 
services are actually performed in a necessary function.
    (9) Reasonable cost of physicians' direct medical and surgical 
services (including supervision of interns and residents in the care of 
individual patients) furnished in a teaching hospital may be reimbursed 
as a provider cost (as described in Sec. 415.162 of this chapter) if 
elected as provided for in Sec. 415.160 of this chapter.
    (d) In developing these principles of reimbursement for the Medicare 
program, all of the considerations inherent in allowances for 
depreciation were studied. The principles, as presented, provide options 
to meet varied situations. Depreciation will essentially be on an 
historical cost basis but since many institutions do not have adequate 
records of old assets, the principles provide an optional allowance in 
lieu of such depreciation for assets acquired before 1966. For assets 
acquired after 1965, the historical cost basis must be used. All assets 
actually in use for production of services for Medicare beneficiaries 
will be recognized even though they may have been fully or partially 
depreciated for other purposes. Assets financed with public funds may be 
depreciated. Although funding of depreciation is not required, there is 
an incentive for it since income from funded depreciation is not 
considered as an offset which must be taken to reduce the interest 
expense that is allowable as a program cost.
    (e) A return on the equity capital of proprietary facilities, as 
described in Sec. 413.157, is an allowance in addition to the reasonable 
cost of covered services furnished to beneficiaries.
    (f) Renal dialysis items and services furnished under the ESRD 
provision are reimbursed and reported under Secs. 413.170 and 413.174 
respectively. For special rules concerning health maintenance 
organizations (HMOs), and providers of services and other health care 
facilities that are owned or operated by an HMO, or related to an HMO by 
common ownership or control, see Secs. 417.242(b)(14) and 417.250(c) of 
this chapter.

[51 FR 34793, Sept. 30, 1986; 51 FR 37398, Oct. 22, 1986, as amended at 
52 FR 21225, June 4, 1987; 52 FR 23398, June 19, 1987; 57 FR 39829, 
Sept. 1, 1992; 60 FR 63189, Dec. 8, 1995; 61 FR 63748, Dec. 2, 1996]



Sec. 413.9  Cost related to patient care.

    (a) Principle. All payments to providers of services must be based 
on the reasonable cost of services covered under Medicare and related to 
the care of beneficiaries. Reasonable cost includes all necessary and 
proper costs incurred in furnishing the services, subject to principles 
relating to specific items of revenue and cost. However, for cost 
reporting periods beginning after December 31, 1973, payments to 
providers of services are based on the lesser of the reasonable cost of 
services covered under Medicare and furnished to program beneficiaries 
or the customary charges to the general public for such services, as 
provided for in Sec. 413.13.
    (b) Definitions--(1) Reasonable cost. Reasonable cost of any 
services must be determined in accordance with regulations establishing 
the method or methods to be used, and the items to be included. The 
regulations in this part take into account both direct and indirect 
costs of providers of services. The objective is that under the methods 
of determining costs, the costs with respect to individuals covered by 
the program will not be borne by individuals not so covered, and the 
costs with respect to individuals not so covered will not be borne by 
the program. These regulations also provide for the making of suitable 
retroactive adjustments after the provider has submitted fiscal and 
statistical reports. The retroactive adjustment will represent the 
difference between the amount received by the provider during the year 
for covered services from both Medicare and the beneficiaries and the 
amount determined in accordance with an accepted method of cost 
apportionment to be the actual cost of services furnished to 
beneficiaries during the year.
    (2) Necessary and proper costs. Necessary and proper costs are costs 
that are appropriate and helpful in developing and maintaining the 
operation of

[[Page 496]]

patient care facilities and activities. They are usually costs that are 
common and accepted occurrences in the field of the provider's activity.
    (c) Application. (1) It is the intent of Medicare that payments to 
providers of services should be fair to the providers, to the 
contributors to the Medicare trust funds, and to other patients.
    (2) The costs of providers' services vary from one provider to 
another and the variations generally reflect differences in scope of 
services and intensity of care. The provision in Medicare for payment of 
reasonable cost of services is intended to meet the actual costs, 
however widely they may vary from one institution to another. This is 
subject to a limitation if a particular institution's costs are found to 
be substantially out of line with other institutions in the same area 
that are similar in size, scope of services, utilization, and other 
relevant factors.
    (3) The determination of reasonable cost of services must be based 
on cost related to the care of Medicare beneficiaries. Reasonable cost 
includes all necessary and proper expenses incurred in furnishing 
services, such as administrative costs, maintenance costs, and premium 
payments for employee health and pension plans. It includes both direct 
and indirect costs and normal standby costs. However, if the provider's 
operating costs include amounts not related to patient care, 
specifically not reimbursable under the program, or flowing from the 
provision of luxury items or services (that is, those items or services 
substantially in excess of or more expensive than those generally 
considered necessary for the provision of needed health services), such 
amounts will not be allowable. The reasonable cost basis of 
reimbursement contemplates that the providers of services would be 
reimbursed the actual costs of providing quality care however widely the 
actual costs may vary from provider to provider and from time to time 
for the same provider.

[51 FR 34795, Sept. 30, 1986; 51 FR 37398, Oct. 22, 1986]



Sec. 413.13  Amount of payment if customary charges for services furnished are less than reasonable costs.

    (a) Definitions. As used in this section--
    Customary charges means the regular rates that providers charge both 
beneficiaries and other paying patients for the services furnished to 
them.
    Fair compensation means the reasonable cost of covered services.
    Nominal charge means a charge equal to 60 percent or less of the 
reasonable cost of a service.
    Public provider means a provider operated by a Federal, State, 
county, city, or other local government agency or instrumentality.
    Reasonable cost means cost actually incurred, to the extent that 
cost is necessary for the efficient delivery of the service, and subject 
to the exclusions specified in paragraph (d) of this section.
    (b) Application of the lesser of costs or charges (LCC) principle.--
(1) General rule. Except as provided in paragraph (c) of this section, 
CMS pays providers the lesser of the reasonable cost or the customary 
charges for services furnished to Medicare beneficiaries. Reasonable 
cost and customary charges are compared separately for Part A services 
and Part B services.
    (2) Example. (i) A provider's reasonable cost for covered services 
furnished to Medicare beneficiaries during a cost reporting period is 
$125,000.
    (ii) The provider's customary charges for those services is 
$110,000.
    (iii) CMS pays the provider $110,000 less the deductible and 
coinsurance amounts for which the beneficiaries are responsible.
    (c) Exceptions to the LCC principle. (1) Providers not subject to 
the LCC principle.
    CMS pays the following providers the fair compensation for the 
services they furnish:
    (i) CORFs.
    (ii) Public providers that furnish services free of charge or at a 
nominal charge.
    (iii) Any provider that requests payment of fair compensation and 
can demonstrate to its intermediary that a significant portion of its 
patients are

[[Page 497]]

low income and that its charges are less than costs because its 
customary practice is to charge patients on the basis of their ability 
to pay.
    (2) Services not subject to the LCC principle. The following 
services are not subject to the LCC principle:
    (i) Part A inpatient hospital services. Inpatient hospital services 
are not subject to the LCC principle if they are subject to either of 
the following:
    (A) The prospective payment system under part 412 of this chapter.
    (B) The rate of increase limits set forth in Sec. 413.40.
    (ii) Facility services related to ambulatory surgical procedures 
performed in outpatient hospital departments. Facility services related 
to ambulatory surgical procedures performed in hospital outpatient 
departments are subject to the payment methodology set forth in 
Sec. 413.118.
    (iii) Services furnished by a critical access hospital (CAH). 
Inpatient and outpatient services furnished by a CAH are subject to the 
payment methodology set forth in Sec. 413.70.
    (iv) Hospital outpatient radiology services. Hospital outpatient 
radiology services are subject to the payment methodology set forth in 
Sec. 413.122.
    (v) Other diagnostic procedures performed by a hospital on an 
outpatient basis. Other outpatient diagnostic procedures are subject to 
the payment methodology set forth in Sec. 413.122.
    (vi) Skilled nursing facility services. Skilled nursing facility 
services subject to the payment methodology set forth in Secs. 413.330 
et seq.
    (d) Exclusions from reasonable cost. For purposes of comparison with 
customary charges under this section, reasonable cost does not include 
the following:
    (1) Payments made to a provider as reimbursement for bad debts 
arising from noncollection of Medicare deductible and coinsurance 
amounts, as provided in Sec. 413.80.
    (2) Amounts that represent the recovery of excess depreciation 
resulting from termination from the Medicare program or a decrease in 
Medicare utilization applicable to prior cost reporting periods, as 
provided in Sec. 413.134.
    (3) Amounts that result from disposition of depreciable assets, 
applicable to prior cost reporting periods, as provided in Sec. 413.134.
    (4) Payments to funds for the donated services of teaching 
physicians, as provided in Sec. 413.85.
    (5) Except as provided in paragraph (f)(2)(iii) of this section for 
making nominal charge determinations in special situations, graduate 
medical education costs.
    (e) Reductions in customary charges. Customary charges are reduced 
in proportion to the ratio of the aggregate amount actually collected 
from charge-paying non-Medicare patients to the amount that would have 
been realized had customary charges been paid, if the provider--
    (1) Did not actually impose charges on most of the patients liable 
for payment for its services on a charge basis; or
    (2) Failed to make a reasonable effort to collect those charges.
    (f) Nominal charge determinations. In determining whether a 
provider's customary charges equal 60 percent or less of its reasonable 
costs, the following rules apply:
    (1) General rule. The determination is based on charges actually 
billed to charge-paying, non-Medicare patients, and (except for clinical 
diagnostic laboratory tests that are paid under section 1833(h) of the 
Act) is made separately for Part A services and Part B services.
    (2) Determination in special situations. (i) Charges based on 
ability to pay. For providers that have a sliding scale or discounted 
charges based on patients' ability to pay, the determination--
    (A) Is based on charges billed to all charge-paying patients;
    (B) Uses the ratio of the sliding scale charges to the provider's 
full customary charges; and
    (C) Applies the ratio to the discounted charges to equate those 
charges to customary charges.
    (ii) HHA services. In determining nominal charges for HHAs, all Part 
A and Part B services, with the exception of DME, are considered 
together.
    (iii) Graduate medical education. When making the nominal charge 
determination, graduate medical education payments (or the provider's 
reasonable costs for that education, if supported

[[Page 498]]

by appropriate data) are included in reasonable costs.

[65 FR 8661, Feb. 22, 2000]



Sec. 413.17  Cost to related organizations.

    (a) Principle. Except as provided in paragraph (d) of this section, 
costs applicable to services, facilities, and supplies furnished to the 
provider by organizations related to the provider by common ownership or 
control are includable in the allowable cost of the provider at the cost 
to the related organization. However, such cost must not exceed the 
price of comparable services, facilities, or supplies that could be 
purchased elsewhere.
    (b) Definitions. (1) Related to the provider. Related to the 
provider means that the provider to a significant extent is associated 
or affiliated with or has control of or is controlled by the 
organization furnishing the services, facilities, or supplies.
    (2) Common ownership. Common ownership exists if an individual or 
individuals possess significant ownership or equity in the provider and 
the institution or organization serving the provider.
    (3) Control. Control exists if an individual or an organization has 
the power, directly or indirectly, significantly to influence or direct 
the actions or policies of an organization or institution.
    (c) Application. (1) Individuals and organizations associate with 
others for various reasons and by various means. Some deem it 
appropriate to do so to assure a steady flow of supplies or services, to 
reduce competition, to gain a tax advantage, to extend influence, and 
for other reasons. These goals may be accomplished by means of ownership 
or control, by financial assistance, by management assistance, and other 
ways.
    (2) If the provider obtains items of services, facilities, or 
supplies from an organization, even though it is a separate legal 
entity, and the organization is owned or controlled by the owner(s) of 
the provider, in effect the items are obtained from itself. An example 
would be a corporation building a hospital or a nursing home and then 
leasing it to another corporation controlled by the owner. Therefore, 
reimbursable cost should include the costs for these items at the cost 
to the supplying organization. However, if the price in the open market 
for comparable services, facilities, or supplies is lower than the cost 
to the supplier, the allowable cost to the provider may not exceed the 
market price.
    (d) Exception. (1) An exception is provided to this general 
principle if the provider demonstrates by convincing evidence to the 
satisfaction of the fiscal intermediary (or, if the provider has not 
nominated a fiscal intermediary, CMS), that--
    (i) The supplying organization is a bona fide separate organization;
    (ii) A substantial part of its business activity of the type carried 
on with the provider is transacted with others than the provider and 
organizations related to the supplier by common ownership or control and 
there is an open, competitive market for the type of services, 
facilities, or supplies furnished by the organization;
    (iii) The services, facilities, or supplies are those that commonly 
are obtained by institutions such as the provider from other 
organizations and are not a basic element of patient care ordinarily 
furnished directly to patients by such institutions; and
    (iv) The charge to the provider is in line with the charge for such 
services, facilities, or supplies in the open market and no more than 
the charge made under comparable circumstances to others by the 
organization for such services, facilities, or supplies.
    (2) In such cases, the charge by the supplier to the provider for 
such services, facilities, or supplies is allowable as cost.



                Subpart B--Accounting Records and Reports



Sec. 413.20  Financial data and reports.

    (a) General. The principles of cost reimbursement require that 
providers maintain sufficient financial records and statistical data for 
proper determination of costs payable under the program. Standardized 
definitions, accounting, statistics, and reporting practices that are 
widely accepted in the hospital and related fields are followed. Changes 
in these practices and

[[Page 499]]

systems will not be required in order to determine costs payable under 
the principles of reimbursement. Essentially the methods of determining 
costs payable under Medicare involve making use of data available from 
the institution's basis accounts, as usually maintained, to arrive at 
equitable and proper payment for services to beneficiaries.
    (b) Frequency of cost reports. Cost reports are required from 
providers on an annual basis with reporting periods based on the 
provider's accounting year. In the interpretation and application of the 
principles of reimbursement, the fiscal intermediaries will be an 
important source of consultative assistance to providers and will be 
available to deal with questions and problems on a day-to-day basis.
    (c) Recordkeeping requirements for new providers. A newly 
participating provider of services (as defined in Sec. 400.202 of this 
chapter) must make available to its selected intermediary for 
examination its fiscal and other records for the purpose of determining 
such provider's ongoing recordkeeping capability and inform the 
intermediary of the date its initial Medicare cost reporting period 
ends. This examination is intended to assure that--
    (1) The provider has an adequate ongoing system for furnishing the 
records needed to provide accurate cost data and other information 
capable of verification by qualified auditors and adequate for cost 
reporting purposes under section 1815 of the Act; and
    (2) No financial arrangements exist that will thwart the commitment 
of the Medicare program to reimburse providers the reasonable cost of 
services furnished beneficiaries. The data and information to be 
examined include cost, revenue, statistical, and other information 
pertinent to reimbursement including, but not limited to, that described 
in paragraph (d) of this section and in Sec. 413.24.
    (d) Continuing provider recordkeeping requirements. (1) The provider 
must furnish such information to the intermediary as may be necessary 
to--
    (i) Assure proper payment by the program, including the extent to 
which there is any common ownership or control (as described in 
Sec. 413.17(b)(2) and (3)) between providers or other organizations, and 
as may be needed to identify the parties responsible for submitting 
program cost reports;
    (ii) Receive program payments; and
    (iii) Satisfy program overpayment determinations.
    (2) The provider must permit the intermediary to examine such 
records and documents as are necessary to ascertain information 
pertinent to the determination of the proper amount of program payments 
due. These records include, but are not limited to, matters pertaining 
to--
    (i) Provider ownership, organization, and operation;
    (ii) Fiscal, medical, and other recordkeeping systems;
    (iii) Federal income tax status;
    (iv) Asset acquisition, lease, sale, or other action;
    (v) Franchise or management arrangements;
    (vi) Patient service charge schedules;
    (vii) Costs of operation;
    (viii) Amounts of income received by source and purpose; and
    (ix) Flow of funds and working capital.
    (3) The provider, upon request, must furnish the intermediary copies 
of patient service charge schedules and changes thereto as they are put 
into effect. The intermediary will evaluate such charge schedules to 
determine the extent to which they may be used for determining program 
payment.
    (e) Suspension of program payments to a provider. If an intermediary 
determines that a provider does not maintain or no longer maintains 
adequate records for the determination of reasonable cost under the 
Medicare program, payments to such provider will be suspended until the 
intermediary is assured that adequate records are maintained. Before 
suspending payments to a provider, the intermediary will, in accordance 
with the provisions in Sec. 405.372(a) of this chapter, send written 
notice to such provider of its intent to suspend payments. The notice 
will explain the basis for the intermediary's determination with respect 
to the provider's records and will identify the provider's recordkeeping 
deficiencies. The provider must be given the opportunity, in accordance 
with Sec. 405.372(b)

[[Page 500]]

of this chapter, to submit a statement (including any pertinent 
evidence) as to why the suspension must not be put into effect.

[51 FR 34793, Sept. 30, 1986, as amended at 61 FR 63749, Dec. 2, 1996]



Sec. 413.24  Adequate cost data and cost finding.

    (a) Principle. Providers receiving payment on the basis of 
reimbursable cost must provide adequate cost data. This must be based on 
their financial and statistical records which must be capable of 
verification by qualified auditors. The cost data must be based on an 
approved method of cost finding and on the accrual basis of accounting.

However, if governmental institutions operate on a cash basis of 
accounting, cost data based on such basis of accounting will be 
acceptable, subject to appropriate treatment of capital expenditures.
    (b) Definitions. (1) Cost finding. Cost finding is the process of 
recasting the data derived from the accounts ordinarily kept by a 
provider to ascertain costs of the various types of services furnished. 
It is the determination of these costs by the allocation of direct costs 
and proration of indirect costs.
    (2) Accrual basis of accounting. As used in this part, the term 
accrual basis of accounting means that revenue is reported in the period 
in which it is earned, regardless of when it is collected; and an 
expense is reported in the period in which it is incurred, regardless of 
when it is paid. (See Sec. 413.100 regarding limitations on allowable 
accrued costs in situations in which the related liabilities are not 
liquidated timely.)
    (c) Adequacy of cost information. Adequate cost information must be 
obtained from the provider's records to support payments made for 
services furnished to beneficiaries. The requirement of adequacy of data 
implies that the data be accurate and in sufficient detail to accomplish 
the purposes for which it is intended. Adequate data capable of being 
audited is consistent with good business concepts and effective and 
efficient management of any organization, whether it is operated for 
profit or on a nonprofit basis. It is a reasonable expectation on the 
part of any agency paying for services on a cost-reimbursement basis. In 
order to provide the required cost data and not impair comparability, 
financial and statistical records should be maintained in a manner 
consistent from one period to another. However, a proper regard for 
consistency need not preclude a desirable change in accounting 
procedures if there is reason to effect such change.
    (d) Cost finding methods. After the close of the accounting period, 
providers must use one of the following methods of cost finding to 
determine the actual costs of services furnished during that period. 
(These provisions do not apply to SNFs that elect and qualify for 
prospectively determined payment rates under subpart I of this part for 
cost reporting periods beginning on or after October 1, 1986. For the 
special rules that are applicable to those SNFs, see Sec. 413.321.) For 
cost reporting periods beginning after December 31, 1971, providers 
using the departmental method of cost apportionment must use the step-
down method described in paragraph (d)(1) of this section or an ``other 
method'' described in paragraph (d)(2) of this section. For cost 
reporting periods beginning after December 31, 1971, providers using the 
combination method of cost apportionment must use the modified cost 
finding method described in paragraph (d)(3) of this section. Effective 
for cost reporting periods beginning on or after October 1, 1980, HHAs 
not based in hospitals or SNFs must use the step-down method described 
in paragraph (d)(1) of this section. (HHAs based in hospitals or SNFs 
must use the method applicable to the parent institution.) However, an 
HHA not based in a hospital or SNF that received less than $35,000 in 
Medicare payment for the immediately preceding cost reporting period, 
and for whom this payment represented less than 50 percent of the total 
operating cost of the agency, may use a simplified version of the step-
down method, as specified in instructions for the cost report issued by 
CMS.
    (1) Step-down Method. This method recognizes that services furnished 
by certain nonrevenue-producing departments or centers are utilized by 
certain other nonrevenue-producing centers as

[[Page 501]]

well as by the revenue-producing centers. All costs of nonrevenue-
producing centers are allocated to all centers that they serve, 
regardless of whether or not these centers produce revenue. The cost of 
the nonrevenue-producing center serving the greatest number of other 
centers, while receiving benefits from the least number of centers, is 
apportioned first. Following the apportionment of the cost of the 
nonrevenue-producing center, that center will be considered ``closed'' 
and no further costs are apportioned to that center. This applies even 
though it may have received some service from a center whose cost is 
apportioned later. Generally, if two centers furnish services to an 
equal number of centers while receiving benefits from an equal number, 
that center which has the greatest amount of expense should be allocated 
first.
    (2) Other methods. (i) The double-apportionment method. The double-
apportionment method may be used by a provider upon approval of the 
intermediary. This method also recognizes that the nonrevenue-producing 
departments or centers furnish services to other nonrevenue-producing 
centers as well as to revenue-producing centers. A preliminary 
allocation of the costs of non-revenue-producing centers is made. These 
centers or departments are not ``closed'' after this preliminary 
allocation. Instead, they remain ``open,'' accumulating a portion of the 
costs of all other centers from which services are received. Thus, after 
the first or preliminary allocation, some costs will remain in each 
center representing services received from other centers. The first or 
preliminary allocation is followed by a second or final apportionment of 
expenses involving the allocation of all costs remaining in the 
nonrevenue-producing functions directly to revenue-producing centers.
    (ii) More sophisticated methods. A more sophisticated method 
designed to allocate costs more accurately may be used by the provider 
upon approval of the intermediary. However, having elected to use the 
double-apportionment method, the provider may not thereafter use the 
step-down method without approval of the intermediary. Written request 
for the approval must be made on a prospective basis and must be 
submitted before the end of the fourth month of the prospective 
reporting period. Likewise, once having elected to use a more 
sophisticated method, the provider may not thereafter use either the 
double-apportionment or step-down methods without similar request and 
approval.
    (3) Modified cost finding for providers using the Combination Method 
for reporting periods beginning after December 31, 1971. This method 
differs from the step-down method in that services furnished by 
nonrevenue-producing departments or centers are allocated directly to 
revenue-producing departments or centers even though these services may 
be utilized by other nonrevenue-producing departments or centers. In the 
application of this method the cost of nonrevenue-producing centers 
having a common basis of allocation are combined and the total 
distributed to revenue-producing centers. All nonrevenue-producing 
centers having significant percentages of cost in relation to total 
costs will be allocated this way. The combined total costs of remaining 
nonrevenue-producing costs centers will be allocated to revenue-
producing cost centers in the proportion that each bears to total costs, 
direct and indirect, already allocated. The bases which are to be used 
and the centers which are to be combined for allocation are not optional 
but are identified and incorporated in the cost report forms developed 
for this method. Providers using this method must use the program cost 
report forms devised for it. Alternative forms may not be used without 
prior approval by CMS based upon a written request by the provider 
submitted through the intermediary.
    (4) Temporary method for initial period. If the provider is unable 
to use either cost-finding method when it first participates in the 
program, it may apply to the intermediary for permission to use some 
other acceptable method that would accurately identify costs by 
department or center, and appropriately segregate inpatient and 
outpatient costs. Such other method may be used for cost reports 
covering periods ending before January 1, 1968.

[[Page 502]]

    (5) Simplified optional reimbursement method for small, rural 
hospitals with distinct parts for cost reporting periods beginning on or 
after July 20, 1982. (i) A rural hospital with a Medicare-certified 
distinct part SNF may elect to be reimbursed for services furnished in 
its hospital general routine service area and distinct part SNF using 
the reimbursement method specified in Sec. 413.53 for swing-bed 
hospitals, if it meets the following conditions:
    (A) The institution is located in a rural area as defined in 
Sec. 482.66 of this chapter.
    (B) On the first day of the cost reporting period, the hospital and 
distinct part SNF have fewer than 50 beds in total (with the exception 
of beds for newborns and beds in intensive care type inpatient units).
    (ii) In applying the optional reimbursement method, only those beds 
located in the hospital general routine service area and in the distinct 
part SNF certified by Medicare are combined into a single cost center 
for purposes of cost finding.
    (iii) The reasonable cost of the routine extended care services is 
determined in accordance with Sec. 413.114(c). The reasonable cost of 
the hospital general routine services is determined in accordance with 
Sec. 413.53(a)(2).
    (iv) The hospital must make its election to use the optional swing-
bed reimbursement method in writing to the intermediary before the 
beginning of the hospital's cost reporting year. The hospital must make 
any request to revoke the election in writing before the beginning of 
the affected cost reporting period.
    (v) The intermediary must approve requests to terminate use of the 
optional swing-bed reimbursement method. If a hospital terminates use of 
this optional method, no further elections may be made by the facility 
to use the optional method.
    (6) Provider-based entities and departments: Preventing duplication 
of cost. In some situations, the main provider in a provider-based 
complex may purchase services for a provider-based entity or for a 
department of the provider through a contract for services (for example, 
a management contract), directly assigning the costs to the provider-
based entity or department and reporting the costs directly in the cost 
center for that entity or department. In any situation in which costs 
are directly assigned to a cost center, there is a risk of excess cost 
in that cost center resulting from the directly assigned costs plus a 
share of overhead improperly allocated to the cost center which 
duplicates the directly assigned costs. This duplication could result in 
improper Medicare payment to the provider. Where a provider has 
purchased services for a provider-based entity or for a provider 
department, like general service costs of the provider (for example, 
like costs in the administrative and general cost center) must be 
separately identified to ensure that they are not improperly allocated 
to the entity or the department. If the like costs of the main provider 
cannot be separately identified, the costs of the services purchased 
through a contract must be reclassified to the main provider and 
allocated among the main provider's benefiting cost centers.

    Example: A provider-based complex is composed of a hospital and a 
hospital-based rural health clinic (RHC). The hospital furnishes the 
entirety of its own administrative and general costs internally. The 
RHC, however, is managed by an independent contractor through a 
management contract. The management contract provides a full array of 
administrative and general services, with the exception of patient 
billing. The hospital directly assigns the costs of the RHC's management 
contract to the RHC cost center (for example, Form CMS 2552-96, 
Worksheet A, Line 71). A full allocation of the hospital's 
administrative and general costs to the RHC cost center would duplicate 
most of the RHC's administrative and general costs. However, an 
allocation of the hospital's cost (included in hospital administrative 
and general costs) of its patient billing function to the RHC would be 
appropriate. Therefore, the hospital must include the costs of the 
patient billing function in a separate cost center to be allocated to 
the benefiting cost centers, including the RHC cost center. The 
remaining hospital administrative and general costs would be allocated 
to all cost centers, excluding the RHC cost center. If the hospital is 
unable to isolate the costs of the patient billing function, the costs 
of the RHC's management contract must be reclassified to the hospital 
administrative and general cost center to be allocated among all cost 
centers, as appropriate.


[[Page 503]]


    (7) Costs of services furnished to free-standing entities. The costs 
that a provider incurs to furnish services to free-standing entities 
with which it is associated are not allowable costs of that provider. 
Any costs of services furnished to a free-standing entity must be 
identified and eliminated from the allowable costs of the servicing 
provider, to prevent Medicare payment to that provider for those costs. 
This may be done by including the free-standing entity on the cost 
report as a nonreimbursable cost center for the purpose of allocating 
overhead costs to that entity. If this method would not result in an 
accurate allocation of costs to the entity, the provider must develop 
detailed work papers showing how the cost of services furnished by the 
provider to the entity were determined. These costs are removed from the 
applicable cost centers of the servicing provider.
    (e) Accounting basis. The cost data submitted must be based on the 
accrual basis of accounting which is recognized as the most accurate 
basis for determining costs. However, governmental institutions that 
operate on a cash basis of accounting may submit cost data on the cash 
basis subject to appropriate treatment of capital expenditures.
    (f) Cost reports. For cost reporting purposes, the Medicare program 
requires each provider of services to submit periodic reports of its 
operations that generally cover a consecutive 12-month period of the 
provider's operations. Amended cost reports to revise cost report 
information that has been previously submitted by a provider may be 
permitted or required as determined by CMS.
    (1) Cost reports--Terminated providers and changes of ownership. A 
provider that voluntarily or involuntarily ceases to participate in the 
Medicare program or experiences a change of ownership must file a cost 
report for that period under the program beginning with the first day 
not included in a previous cost reporting period and ending with the 
effective date of termination of its provider agreement or change of 
ownership.
    (2) Due dates for cost reports. (i) Cost reports are due on or 
before the last day of the fifth month following the close of the period 
covered by the report. For cost reports ending on a day other than the 
last day of the month, cost reports are due 150 days after the last day 
of the cost reporting period.
    (ii) Extensions of the due date for filing a cost report may be 
granted by the intermediary only when a provider's operations are 
significantly adversely affected due to extraordinary circumstances over 
which the provider has no control, such as flood or fire.
    (3) Changes in cost reporting periods. A provider may change its 
cost reporting period if a change in ownership is experienced or if the-
-
    (i) Provider requests the change in writing from its intermediary;
    (ii) Intermediary receives the request at least 120 days before the 
close of the new reporting period requested by the provider; and
    (iii) Intermediary determines that good cause for the change exists. 
Good cause would not be found to exist if the effect is to change the 
initial date that a hospital would be affected by the rate of increase 
ceiling (see Sec. 413.40), or be paid under the prospective payment 
systems (see part 412 of this chapter).
    (4) Electronic submission of cost reports. (i) As used in this 
paragraph, ``provider'' means a hospital, skilled nursing facility, or 
home health agency.
    (ii) Effective for cost reporting periods beginning on or after 
October 1, 1989, for hospitals, and cost reporting periods ending on or 
after February 1, 1997, for skilled nursing facilities and home health 
agencies, a provider is required to submit cost reports in a 
standardized electronic format. The provider's electronic program must 
be capable of producing the CMS standardized output file in a form that 
can be read by the fiscal intermediary's automated system. This 
electronic file, which must contain the input data required to complete 
the cost report and the data required to pass specified edits, is 
forwarded to the fiscal intermediary for processing through its system.
    (iii) The fiscal intermediary stores the provider's as-filed 
electronic cost report and may not alter that file for any reason. The 
fiscal intermediary makes a ``working copy'' of the as-filed

[[Page 504]]

electronic cost report to be used, as necessary, throughout the 
settlement process (that is, desk review, processing audit adjustments, 
final settlement, etc). The provider's electronic program must be able 
to disclose if any changes have been made to the as-filed electronic 
cost report after acceptance by the intermediary. If the as-filed 
electronic cost report does not pass all specified edits, the fiscal 
intermediary rejects the cost report and returns it to the provider for 
correction. For purposes of the requirements in paragraph (f)(2) of this 
section concerning due dates, an electronic cost report is not 
considered to be filed until it is accepted by the intermediary.
    (iv) Effective for cost reporting periods ending on or after 
September 30, 1994, for hospitals, and cost reporting periods ending on 
or after, February 1, 1997, for skilled nursing facilities and home 
health agencies, a provider must submit a hard copy of a settlement 
summary, a statement of certain worksheet totals found within the 
electronic file, and a statement signed by its administrator or chief 
financial officer certifying the accuracy of the electronic file or the 
manually prepared cost report. During a transition period, skilled 
nursing facilities and home health agencies must submit a hard copy of 
the completed cost report forms in addition to the electronic file. The 
following statement must immediately precede the dated signature of the 
provider's administrator or chief financial officer:

    I hereby certify that I have read the above certification statement 
and that I have examined the accompanying electronically filed or 
manually submitted cost report and the Balance Sheet Statement of 
Revenue and Expenses prepared by -------- (Provider Name(s) and 
Number(s)) for the cost reporting period beginning -------- and ending 
-------- and that to the best of my knowledge and belief, this report 
and statement are true, correct, complete and prepared from the books 
and records of the provider in accordance with applicable instructions, 
except as noted. I further certify that I am familiar with the laws and 
regulations regarding the provision of health care services, and that 
the services identified in this cost report were provided in compliance 
with such laws and regulations.

    (v) A provider may request a delay or waiver of the electronic 
submission requirement in paragraph (f)(4)(ii) of this section if this 
requirement would cause a financial hardship or if the provider 
qualifies as a low or no Medicare utilization provider. The provider 
must submit a written request for delay or waiver with necessary 
supporting documentation to its intermediary no later than 30 days after 
the end of its cost reporting period. The intermediary reviews the 
request and forwards it, with a recommendation for approval or denial, 
to CMS central office within 30 days of receipt of the request. CMS 
central office either approves or denies the request and notifies the 
intermediary within 60 days of receipt of the request.
    (5) An acceptable cost report submission is defined as follows:
    (i) All providers--The provider, must complete and submit the 
required cost reporting forms, including all necessary signatures. A 
cost report is rejected for lack of supporting documentation only if it 
does not include the Provider Cost Reimbursement Questionnaire. 
Additionally, a cost report for a teaching hospital is rejected for lack 
of supporting documentation if the cost report does not include a copy 
of the Intern and Resident Information System diskette.
    (ii) For providers that are required to file electronic cost 
reports--In addition to the requirements of paragraphs (f)(4) and 
(f)(5)(i) of this section, the provider must submit its cost reports in 
an electronic cost report format in conformance with the requirements 
contained in the Electronic Cost Report (ECR) Specifications Manual 
(unless the provider has received an exemption from CMS).
    (iii) The intermediary makes a determination of acceptability within 
30 days of receipt of the provider's cost report. If the cost report is 
considered unacceptable, the intermediary returns the cost report with a 
letter explaining the reasons for the rejection. When the cost report is 
rejected, it is deemed an unacceptable submission and treated as if a 
report had never been filed.
    (g) Exception from full cost reporting for lack of program 
utilization. If a provider does not furnish any covered

[[Page 505]]

services to Medicare beneficiaries during a cost reporting period, it is 
not required to submit a full cost report. It must, however, submit an 
abbreviated cost report, as prescribed by CMS.
    (h) Waiver of full or simplified cost reporting for low program 
utilization. (1) If the provider has had low utilization of covered 
services by Medicare beneficiaries (as determined by the intermediary) 
and has received correspondingly low interim payments for the cost 
reporting period, the intermediary may waive a full cost report or the 
simplified cost report described in Sec. 413.321 if it decides that it 
can determine, without a full or simplified report, the reasonable cost 
of covered services provided during that period.
    (2) If a full or simplified cost report is waived, the provider must 
submit within the same time period required for full or simplified cost 
reports:
    (i) The cost reporting forms prescribed by CMS for this situation; 
and
    (ii) Any other financial and statistical data the intermediary 
requires.

[51 FR 34793, Sept. 30, 1986, as amended at 57 FR 39829, Sept. 1, 1992; 
59 FR 26964, May 25, 1994; 60 FR 33125, 33136, 33143, June 27, 1995; 60 
FR 37594, July 21, 1995; 62 FR 31, Jan. 2, 1997; 65 FR 18537, Apr. 7, 
2000; 66 FR 59920, Nov. 30, 2001]



                 Subpart C--Limits on Cost Reimbursement



Sec. 413.30  Limitations on payable costs.

    (a) Introduction--(1) Scope. This section implements section 
1861(v)(1)(A) of the Act by setting forth the general rules under which 
CMS may establish limits on SNF and HHA costs recognized as reasonable 
in determining Medicare program payments. It also sets forth rules 
governing exemptions and exceptions to limits established under this 
section that CMS may make as appropriate in considering special needs or 
situations of particular providers.
    (2) General principle. Reimbursable provider costs may not exceed 
the costs CMS estimates to be necessary for the efficient delivery of 
needed health care services. CMS may establish estimated cost limits for 
direct or indirect overall costs or for costs of specific services or 
groups of services. CMS imposes these limits prospectively and may 
calculate them on a per admission, per discharge, per diem, per visit, 
or other basis.
    (b) Procedure for establishing limits. (1) In establishing limits 
under this section, CMS may classify SNFs and HHAs by factors that CMS 
finds appropriate and practical, including the following:
    (i) Type of services furnished.
    (ii) Geographical area where services are furnished, allowing for 
grouping of noncontiguous areas having similar demographic and economic 
characteristics.
    (iii) Size of institution.
    (iv) Nature and mix of services furnished.
    (v) Type and mix of patients treated.
    (2) CMS bases its estimates of the costs necessary for efficient 
delivery of health services on cost reports or other data providing 
indicators of current costs. CMS adjusts current and past period data to 
arrive at estimated costs for the prospective periods to which limits 
are applied.
    (3) Before the beginning of a cost period to which revised limits 
will be applied, CMS publishes a notice in the Federal Register, 
establishing cost limits and explaining the basis on which they are 
calculated.
    (4) In establishing limits under paragraph (b)(1) of this section, 
CMS may find it inappropriate to apply particular limits to a class of 
SNFs or HHAs due to the characteristics of the SNF or HHA class, the 
data on which CMS bases those limits, or the method by which CMS 
determines the limits. In these cases, CMS may exclude that class of 
SNFs or HHAs from the limits, explaining the basis of the exclusion in 
the notice setting forth the limits for the appropriate cost reporting 
periods.
    (c) Requests regarding applicability of cost limits. For cost 
reporting periods beginning before July 1, 1998, a SNF may request an 
exception or exemption to the cost limits imposed under this section. An 
HHA may request only an exception to the cost limits. The SNF or HHA 
must make its request to its fiscal intermediary within 180 days of the 
date on the intermediary's notice of program reimbursement.

[[Page 506]]

    (1) Home health agencies. The intermediary makes a recommendation on 
the HHA's request to CMS, which makes the decision. CMS responds to the 
request within 180 days from the date CMS receives the request from the 
intermediary. The intermediary notifies the HHA of CMS's decision. The 
time required by CMS to review the request is considered good cause for 
the granting of an extension of the time limit for the HHA to apply for 
a PRRB review, as specified in Sec. 405.1841 of this chapter. CMS's 
decision is subject to review under subpart R of part 405 of this 
chapter.
    (2) Skilled nursing facility exception. The intermediary makes the 
final determination on the SNF's exception request and notifies the SNF 
of its determination within 90 days from the date that the intermediary 
receives the request from the SNF. If the intermediary determines that 
the SNF did not provide adequate documentation from which a proper 
determination can be made, the intermediary notifies the SNF that the 
request is denied. The intermediary also notifies the SNF that it has 45 
days from the date on the intermediary's denial letter to submit a new 
exception request with the complete documentation and that otherwise, 
the denial is the final determination. The time required by the 
intermediary to review the request is considered good cause for the 
granting of an extension of the time limit for the SNF to apply for a 
PRRB review, as specified in Sec. 405.1841 of this chapter. The 
intermediary's determination is subject to review under subpart R of 
part 405 of this chapter.
    (d) Exemptions. Exemptions from the limits imposed under this 
section may be granted to a new SNF with cost reporting periods 
beginning before July 1, 1998 as stated in Sec. 413.1(g)(1). The 
intermediary makes a recommendation on the provider's request to CMS, 
which makes the decision. A new SNF is a provider of inpatient services 
that has operated as a SNF (or the equivalent) for which it is certified 
for Medicare, under present and previous ownership, for less than 3 full 
years. An exemption granted under this paragraph expires at the end of 
the SNF's first cost reporting period beginning at least 2 years after 
the provider accepts its first inpatient.
    (e) Exceptions. Limits established under this section may be 
adjusted upward for a SNF or HHA under the circumstances specified in 
paragraphs (e)(1) through (e)(5) of this section. An adjustment is made 
only to the extent that the costs are reasonable, attributable to the 
circumstances specified, separately identified by the SNF or HHA, and 
verified by the intermediary.
    (1) Atypical services. The SNF or HHA can show that the--
    (i) Actual cost of services furnished by a SNF or HHA exceeds the 
applicable limit because the services are atypical in nature and scope, 
compared to the services generally furnished by SNFs or HHAs similarly 
classified; and
    (ii) Atypical services are furnished because of the special needs of 
the patients treated and are necessary in the efficient delivery of 
needed health care.
    (2) Extraordinary circumstances. The SNF or HHA can show that it 
incurred higher costs due to extraordinary circumstances beyond its 
control. These circumstances include, but are not limited to, strikes, 
fire, earthquake, flood, or other unusual occurrences with substantial 
cost effects.
    (3) Areas with fluctuating populations. The SNF meets the following 
conditions:
    (i) Is located in an area (for example, a resort area) that has a 
population that varies significantly during the year.
    (ii) Is furnishing similar services in an area for which the 
appropriate health planning agency has determined does not have a 
surplus of beds or similar services and has certified that the beds or 
similar services furnished by the SNF are necessary.
    (iii) Meets occupancy or capacity standards established by the 
Secretary.
    (4) Medical and paramedical education. The SNF or HHA can 
demonstrate that, if compared to other SNFs or HHAs in its group, it 
incurs increased costs for services covered by limits under this section 
because of its operation of an approved education program specified in 
Sec. 413.85.
    (5) Unusual labor costs. The SNF or HHA has a percentage of labor 
costs that varies more than 10 percent from

[[Page 507]]

that included in the promulgation of the limits.
    (f) Operational review. Any SNF or HHA that applies for an exception 
to the limits established under paragraph (e) of this section must agree 
to an operational review at the discretion of CMS. The findings from 
this review may be the basis for recommendations for improvements in the 
efficiency and economy of the SNF's or the HHA's operations. If 
recommendations are made, any future exceptions are contingent on the 
SNF's or HHA's implementation of these recommendations.

[64 FR 42612, Aug. 5, 1999; 65 FR 60104, Oct. 10, 2000; as amended at 67 
FR 48802, July 26, 2002]



Sec. 413.35  Limitations on coverage of costs: Charges to beneficiaries if cost limits are applied to services.

    (a) Principle. A provider of services that customarily furnishes an 
individual items or services that are more expensive than the items or 
services determined to be necessary in the efficient delivery of needed 
health services described in Sec. 413.30, may charge an individual 
entitled to benefits under Medicare for such more expensive items or 
services even though not requested by the individual. The charge, 
however, may not exceed the amount by which the cost of (or, if less, 
the customary charges for) such more expensive items or services 
furnished by such provider in the second cost reporting period 
immediately preceding the cost reporting period in which such charges 
are imposed exceeds the applicable limit imposed under the provisions of 
Sec. 413.30. This charge may be made only if--
    (1) The intermediary determines that the charges have been 
calculated properly in accordance with the provisions of this section;
    (2) The services are not emergency services as defined in paragraph 
(d) of this section;
    (3) The admitting physician has no direct or indirect financial 
interest in such provider;
    (4) CMS has provided notice to the public through notice in a 
newspaper of general circulation servicing the provider's locality and 
such other notice as the Secretary may require, of any charges the 
provider is authorized to impose on individuals entitled to benefits 
under Medicare on account of costs in excess of the costs determined to 
be necessary in the efficient delivery of needed health services under 
Medicare; and
    (5) The provider has, in the manner described in paragraph (e) of 
this section, identified such charges to such individual or person 
acting on his behalf as charges to meet the costs in excess of the costs 
determined to be necessary in the efficient delivery of needed health 
services under Medicare.
    (b) Provider request to charge beneficiaries for costs in excess of 
limits. (1) If a provider's actual costs (or, if less, the customary 
charges) in the second preceding cost period exceed the prospective 
limits established for such costs, the intermediary will, at the 
provider's request, validate in advance the charges that may be made to 
the beneficiaries for the excess.
    (2) If a provider does not have a second preceding cost period and 
is a new provider as defined in Sec. 413.30(e), the provider, subject to 
validation by the intermediary, will estimate the current cost of the 
service to which a limit is being applied. Such amount will be adjusted 
to an amount equivalent to costs in the second preceding year by use of 
a factor to be developed based on estimates of cost increases during the 
preceding two years and published by SSA or CMS. The amount thus derived 
will be used in lieu of the second preceding cost period amount in 
determining the charge to the beneficiary.
    (3) To obtain consideration of such a request, the provider must 
submit to the intermediary a statement indicating the chagre for which 
it is seeking validation and providing the data and method used to 
determine the amount. Such statement should include the--
    (i) Provider's name and number;
    (ii) Identity of class and prospective cost limit for the class in 
which the provider has been included;
    (iii) Amount of charge and cost period in which the charge is to be 
imposed;
    (iv) Cost and customary charge for items and services furnished to 
beneficiaries; and

[[Page 508]]

    (v) Cost period ending date of the second reporting period 
immediately preceding the cost period in which the charge is to be 
imposed. The intermediary may request such additional information as it 
finds necessary with respect to the request.
    (c) Provider charges.-- (1) Establishing the charges. If the actual 
cost incurred (or, if less, the customary charges) in the prior period 
determined under paragraph (a) of this section exceeds the limits 
applicable to the pertinent period, the provider may charge the 
beneficiary to the extent costs in the second preceding cost reporting 
period (or the equivalent when there is no second preceding period) 
exceed the current cost limits. (Data from the most recently submitted 
appropriate cost report will be used in determining the actual cost.) 
For example, if a limit of $58 per day is applied to the cost of general 
routine services for the provider's cost reporting period starting in 
calendar year 1975 and if the provider's actual general routine cost in 
the second preceding reporting period, that is, the reporting period 
starting in calendar year 1973, was $60 per day, the provider (after 
first having obtained intermediary validation and subject to the 
considerations and requirements specified in paragraph (a) of this 
section) may charge Medicare Part A beneficiaries up to $2 per day for 
general routine services.
    (2) Adjusting cost. Program reimbursement for the costs to which 
limits imposed under Sec. 413.30 are applied in any cost reporting 
period will not exceed the lesser of the provider's actual cost or the 
limits imposed under Sec. 413.30. If program reimbursement for items or 
services to which such limits are applied plus the charges to 
beneficiaries for such items or services imposed under this section 
exceed the provider's actual cost for such items or services, program 
payment to the provider will be reduced to the extent program payment 
plus charges to the beneficiaries exceed actual cost. If the provider's 
actual cost for general routine services in 1975 was $57,000, the cost 
limit was $58,000, and billed charges to Medicare Part A beneficiaries 
were $2,000, the provider would receive $55,000 from the program 
($57,000 actual cost minus the $2,000 in charges to the beneficiaries).
    (d) Definition of emergency services. For purposes of paragraph 
(a)(2) of this section, emergency services are those hospital services 
that are necessary to prevent the death or serious impairment of the 
health of the individual, and which, because of the threat to the life 
or health of the individual, necessitate the use of the most accessible 
hospital (as determined under Sec. 424.106 of this chapter) available 
and equipped to furnish such services. If an individual has been 
admitted to such hospital as an inpatient because of an emergency, the 
emergency will be deemed to continue until it is safe from a medical 
standpoint to move the individual to another hospital or other 
institution or to discharge him.
    (e) Identification of charges to individual. For purposes of 
paragraph (a)(5) of this section, a provider must give or send to the 
individual or his representative, a schedule of all items and services 
that the individual might need and for which the provider imposes 
charges under this section, and the charge for each. Such schedule must 
specify that the charges are necessary to meet the costs in excess of 
the costs determined to be necessary in the efficient delivery of needed 
health services under Medicare and include such other information as CMS 
considers necessary to protect the individual's rights under this 
section. The provider, in arranging for the individual's admission, 
first service, or start of care, must give or send this schedule to the 
individual or his representative when arrangements are being made for 
such services or if this is not feasible, as soon thereafter as is 
practicable but no later than at the initiation of services.

[51 FR 34793, Sept. 30, 1986, as amended at 53 FR 6648, Mar. 20, 1988; 
60 FR 45849, Sept. 1, 1995]



Sec. 413.40  Ceiling on the rate of increase in hospital inpatient costs.

    (a) Introduction--(1) Scope. This section implements section 1886(b) 
of the Act, establishing a ceiling on the rate of increase in operating 
costs per case for hospital inpatient services furnished to Medicare 
beneficiaries that will be recognized as reasonable for

[[Page 509]]

purposes of determining the amount of Medicare payment. This rate-of-
increase ceiling applies to hospital cost reporting periods beginning on 
or after October 1, 1982. This section also sets forth rules governing 
exemptions from and adjustments to the ceiling.
    (2) Applicability. (i) This section is not applicable to--
    (A) Hospitals reimbursed in accordance with section 1814(b)(3) of 
the Act or under State reimbursement control systems that have been 
approved under section 1886(c) of the Act and subpart C of part 403 of 
this chapter; or
    (B) Hospitals that are paid under the prospective payment systems 
for inpatient hospital services in accordance with section 1886 (d) and 
(g) of the Act and part 412 of this chapter.
    (C) Rehabilitation hospitals and rehabilitation units that are paid 
under the prospective payment system for inpatient hospital services in 
accordance with section 1886(j) of the Act and subpart P of part 412 of 
this subchapter for cost reporting periods beginning on or after January 
1, 2002.
    (D) Long-term care hospitals, as defined in section 
1886(d)(1)(B)(iv) of the Act, that are paid based on 100 percent of the 
Federal prospective payment rate for inpatient hospital services in 
accordance with section 123 of Public Law 106-113 and section 307 of 
Public Law 106-554 and Sec. 412.533(b) and (c) of subpart O of Part 412 
of this subchapter for cost reporting periods beginning on or after 
October 1, 2002.
    (ii) For cost reporting periods beginning on or after October 1, 
1983, this section applies to--
    (A) Hospitals excluded from the prospective payment systems 
described in Sec. 412.1(a)(1) of this subchapter;
    (B) Psychiatric and rehabilitation units excluded from the 
prospective payment systems, as described in Sec. 412.1(a)(1) of this 
chapter and in accordance with Secs. 412.25 through 412.30 of this 
chapter, except as limited by paragraph (a)(2)(iii) of this section with 
respect to rehabilitation hospitals and rehabilitation units specified 
in Secs. 412.23(b), 412.27, and 412.29 of this subchapter; and
    (C) Long-term care hospitals excluded from the prospective payment 
systems described in Sec. 412.1(a)(1) of this subchapter and in 
accordance with Sec. 412.23 of this subchapter, except as limited by 
paragraph (a)(2)(iv) of this section with respect to long-term care 
hospitals specified in Sec. 412.23(e) of this subchapter.
    (iii) For cost reporting periods beginning on or after October 1, 
1983 and before January 1, 2002, this section applies to rehabilitation 
hospitals and rehabilitation units that are excluded from the 
prospective payment systems described in Sec. 412.1(a)(1) of this 
subchapter.
    (iv) For cost reporting periods beginning on or after October 1, 
1983 and before October 1, 2002, this section applies to long-term care 
hospitals that are excluded from the prospective payment systems 
described in Sec. 412.1(a)(1) of this subchapter. For cost reporting 
periods beginning on or after October 1, 2002, and before October 1, 
2006, this section also applies to long-term care hospitals, subject to 
paragraph (a)(2)(i)(D) of this section.
    (3) Definitions. As used in this section--
    Ceiling is the aggregate upper limit on the amount of a hospital's 
net Medicare inpatient operating costs that the program will recognize 
for payment purposes. For each cost reporting period, the ceiling is 
determined by multiplying the updated target amount, as defined in this 
paragraph, for that period by the number of Medicare discharges during 
that period. For a hospital-within-a-hospital, as described in 
Sec. 412.22(e) of this chapter, the number of Medicare discharges in a 
cost reporting period does not include discharges of a patient to 
another hospital in the same building on or on the same campus, if--
    (A) The patient is subsequently readmitted to the hospital-within-a-
hospital directly from the other hospital; and
    (B) The hospital-within-a-hospital has discharged to the other 
hospital and subsequently readmitted more than 5 percent (that is, in 
excess of 5.0 percent) of the total number of Medicare inpatients 
discharged from the hospital-within-a-hospital in that cost reporting 
period.
    Date of discharge is the earliest of the following dates:

[[Page 510]]

    (A) The date the patient has exhausted Medicare Part A hospital 
inpatient benefits (including the election to use lifetime reserve days) 
during his or her spell of illness.
    (B) The date the patient is formally released as specified in 
Sec. 412.4(a)(1) of this chapter.
    (C) The date the patient is transferred to another facility.
    (D) The date the patient dies.
    Market basket index is CMS's projection of the annual percentage 
increase in hospital inpatient operating costs. The market basket index 
is a wage and price index that incorporates weighted indicators of 
changes in wages and prices that are representative of the mix of goods 
and services included in the most common categories of hospital 
inpatient operating costs subject to the ceiling, as described in 
paragraph (c)(1) of this section.
    Net inpatient operating costs include the costs of certain 
preadmission services as specified in Sec. 413.40(c)(2), the costs of 
routine services, ancillary services, and intensive care services (as 
defined in Sec. 413.53(b)) incurred by a hospital in furnishing covered 
inpatient services to Medicare beneficiaries. Net inpatient operating 
costs exclude capital-related costs as described in Sec. 413.130, the 
costs of approved medical education programs as described in 
Secs. 413.85 and 413.86, and heart, kidney, and liver acquisition costs 
incurred by approved transplantation centers. These costs are identified 
and excluded from inpatient operating costs before the application of 
the ceiling.
    Rate-of-increase percentage is the percentage by which each 
hospital's target amount from the preceding Federal fiscal year is 
increased.
    Target amount is the per discharge (case) limitation, derived from 
the hospital's allowable net Medicare inpatient operating costs in the 
hospital's base year, and updated for each subsequent hospital cost 
reporting period by the appropriate annual rate-of-increase percentage.
    Update adjustment percentage is the percentage by which a hospital's 
allowable inpatient operating service costs for the 12-month cost 
reporting period beginning in Federal fiscal year 1990 exceeds the 
hospital's ceiling for that period.
    Update factor is the decimal equivalent of the rate-of-increase 
percentage. The update factor is the value by which a hospital's target 
amount for the preceding year is multiplied in order to determine the 
target amount for the following year. For example, if the rate-of-
increase percentage for a year is 2.7 percent, the update factor for 
that year is 1.027.
    (b) Cost reporting periods subject to the rate-of-increase ceiling. 
(1) Base period. Each hospital's target amount is based on its allowable 
net inpatient operating costs per case from the cost reporting period of 
at least 12 months immediately preceding the first cost reporting period 
subject to the rate-of-increase ceiling established under this section. 
If the immediately preceding cost reporting period is a short reporting 
period (fewer than 12 months), the first period of at least 12 months 
subsequent to that short period is the base period.
    (i) The target amount established under this provision remains 
applicable to a hospital or excluded hospital unit, as described in 
Secs. 412.25 through 412.30 of this chapter, despite intervening cost 
reporting periods during which the hospital or excluded hospital unit is 
not subject to the ceiling as a result of other provisions of the law or 
regulations, or nonparticipation in the Medicare program, unless the 
hospital or excluded hospital unit qualifies as a new hospital or 
excluded part hospital unit under the provisions of paragraph (f) of 
this section.
    (ii) The base period for a newly established excluded unit is the 
first cost reporting period of at least 12 months following the unit's 
certification to participate in the Medicare program.
    (iii) When the operational structure of a hospital or unit changes 
(that is, a freestanding hospital becomes an excluded unit or an 
excluded unit becomes a freestanding hospital, or an entity of a 
multicampus hospital becomes a newly created hospital or unit or a 
hospital or unit becomes a part of a multicampus hospital), the base 
period for the hospital or unit that changed its operational structure 
is the first cost reporting period of at

[[Page 511]]

least 12 months effective with the revised Medicare certification 
classification.
    (iv) Request for rebased target amount for the cost reporting period 
beginning on or after October 1, 1997 and on or before September 30, 
1998. Except for qualified long-term care hospitals as defined in 
paragraph (b)(1)(v) of this section, each hospital or unit under present 
or previous ownership that received payment under section 1886(b) of the 
Act during cost reporting periods beginning before October 1, 1990, may 
submit a request to its fiscal intermediary to rebase its target amount. 
The request must be received by the fiscal intermediary by the later of 
November 1, 1997 or 60 days before the beginning of its cost reporting 
period beginning during fiscal year 1998. The rebased target amount for 
the cost reporting period beginning during fiscal year 1998 is 
determined as follows:
    (A) Determine the hospital's inpatient operating costs per case for 
each of the five most recent settled cost reports as of August 5, 1997.
    (B) For each of the five cost reports, update the operating costs 
per case by the applicable update factors up to the hospital's cost 
reporting period beginning during FY 1998.
    (C) Exclude the highest and lowest of the five updated amounts 
determined under paragraph (b)(1)(iv)(B) of this section.
    (D) Compute the average for the remaining three updated amounts for 
operating cost per case.
    (v) Request by qualified long-term care hospital. A qualified long-
term care hospital may file a request to its fiscal intermediary for a 
rebased FY 1998 target amount. The request must be received by the 
fiscal intermediary by the later of November 1, 1997 or 60 days before 
the beginning of its cost reporting period beginning during fiscal year 
1998. The rebased FY 1998 target amount is the hospital's FY 1996 
inpatient operating costs updated to FY 1997. A qualified long-term care 
hospital means a long-term care hospital that meets the following two 
conditions for its two most recent settled cost reports as of August 5, 
1997:
    (A) Its Medicare inpatient operating costs exceed 115 percent of the 
ceiling.
    (B) The hospital would have had a disproportionate patient 
percentage (as defined in Sec. 412.106) equal to or greater than 70 
percent if it were a prospective payment hospital.
    (2) Periods subject to the ceiling. The ceiling established under 
this section applies to all cost reporting periods that--
    (i) Begin on or after October 1, 1982; and
    (ii) Immediately follow the base period established under paragraph 
(b)(1) of this section unless the exception in paragraph (b)(3) of this 
section is applicable.
    (3) Periods of other than 12 months. The ceiling established under 
this section does not apply to cost reporting periods of fewer than 12 
months that occur in conjunction with a change in operation of the 
facility, as defined in paragraph (b)(1)(iii) of this section, as a 
result of changes in ownership, merger, or consolidation. However, the 
ceiling applies to cost reporting periods of fewer than 12 months that 
result solely from the approval of a hospital's request for a change in 
accounting cycle, as specified in Sec. 413.24(f)(3).
    (c) Costs subject to the ceiling--(1) Applicability. The ceiling 
established under this section applies to net operating costs incurred 
by a hospital in furnishing inpatient hospital services to Medicare 
beneficiaries.
    (2) Preadmission services otherwise payable under Medicare Part B 
furnished to a beneficiary during the calendar day immediately preceding 
the date of the beneficiary's admission to the hospital that meet the 
following conditions:
    (i) The services are furnished by the hospital or any entity wholly 
owned or operated by the hospital. An entity is wholly owned by the 
hospital if the hospital is the sole owner of the entity. An entity is 
wholly operated by a hospital if the hospital has exclusive 
responsibility for conducting and overseeing the entity's routine 
perations, regardless of whether the hospital also has policymaking 
authority over the entity.
    (ii) For services furnished after January 1, 1991, the services are 
diagnostic (including clinical diagnostic laboratory tests).

[[Page 512]]

    (iii) For services furnished on or after October 1, 1991, the 
services are furnished in connection with the principal diagnosis that 
requires the beneficiary to be admitted as an inpatient and are not the 
following:
    (A) Ambulance services.
    (B) Maintenance renal dialysis.
    (3) Rate-of-increase percentages and update factors. The applicable 
rate-of-increase percentages and update factors are determined as 
follows:
    (i) Federal fiscal year 1986. The applicable rate-of-increase 
percentage for cost reporting periods beginning on or after October 1, 
1985 and before September 30, 1986 is five twenty-fourths of one 
percent, and the update factor is 1.00208333. For purposes of 
determining the target amount for cost reporting periods beginning on or 
after October 1, 1986, the applicable percentage increase for cost 
reporting periods beginning during Federal fiscal year 1986 is deemed to 
have been one-half percent, and the update factor is 1.005.
    (ii) Federal fiscal year 1987. The applicable rate-of-increase 
percentage for cost reporting periods beginning on or after October 1, 
1986 and before September 30, 1987 is 1.15 percent; the update factor is 
1.0115.
    (iii) Federal fiscal year 1988. The applicable rate-of-increase 
percentage for cost reporting periods beginning on or after October 1, 
1987 and before October 1, 1988 is 2.3238 percent; the update factor is 
1.023238. For purposes of updating the target amount for cost reporting 
periods beginning on or after October 1, 1988, the rate-of-increase 
percentage for cost reporting periods beginning during FY 1988 is deemed 
to have been 2.7 percent; the update factor is deemed to have been 
1.027.
    (iv) Federal fiscal year 1989 through Federal fiscal year 1993. The 
applicable rate-of-increase percentage for cost reporting periods 
beginning on or after October 1, 1988, and before October 1, 1993, is 
the percentage increase projected by the hospital market basket index 
(as defined in paragraph (a)(3) of this section).
    (v) Federal fiscal year 1994 through Federal fiscal year 1997. The 
applicable rate-of-increase percentage for cost reporting periods 
beginning on or after October 1, 1993, and before October 1, 1998, is 
the market basket percentage increase minus the lesser of, 1 percentage 
point, or the percentage point difference between 10 percent and the 
hospital's ``update adjustment percentage'' (as defined in paragraph 
(a)(3) of this section); for hospitals with an ``update adjustment 
percentage'' of at least 10 percent, the applicable rate-of-increase 
percentage is the market basket percentage increase. The ``update 
adjustment percentage'' is increased in each Federal fiscal year by the 
sum of the hospital's applicable reductions applied to the market basket 
percentage increase for previous Federal fiscal years.
    (vi) Federal fiscal year 1998. The applicable rate-of-increase 
percentage for cost reporting periods beginning on or after October 1, 
1997 is 0 percent.
    (vii) Federal fiscal year 1999 through Federal fiscal year 2002. The 
applicable rate-of-increase percentage for cost reporting periods 
beginning on or after October 1, 1998, and before October 1, 2002, based 
n data from the most recent available cost report, is:
    (A) The percentage increase in the market basket, if inpatient 
operating costs are equal to or exceed the ceiling amount by 10 percent 
or more of the ceiling.
    (B) The percentage increase in the market basket minus .25 
percentage points for each percentage point by which inpatient operating 
costs are less than 10 percent over the ceiling (but not less than 0), 
if inpatient operating costs exceed the ceiling by less than 10 percent 
of the ceiling.
    (C) The greater of the percentage increase in the market basket 
minus 2.5 percentage points or 0 percent, if inpatient operating costs 
are equal to or less than the ceiling but greater than 66.7 percent of 
the ceiling.
    (D) 0 percent, if inpatient operating costs do not exceed 66.7 
percent of the ceiling.
    (viii) Federal fiscal year 2003 and following. The applicable rate-
of-increase percentage for cost reporting periods beginning on or after 
October 1, 2002, is the percentage increase projected by the hospital 
market basket index.
    (4) Target amounts. The intermediary will establish a target amount 
for each hospital. The target amount for a cost

[[Page 513]]

reporting period is determined as follows:
    (i) Except as provided in paragraph (c)(4)(iv) of this section, and 
subject to the provisions of paragraph (c)(4)(iii) of this section, for 
the first cost reporting period to which this ceiling applies, the 
target amount equals the hospital's allowable net inpatient operating 
costs per case for the hospital's base period increased by the update 
factor for the subject period.
    (ii) Subject to the provisions of paragraph (c)(4)(iii) of this 
section, for subsequent cost reporting periods, the target amount equals 
the hospital's target amount for the previous cost reporting period 
increased by the update factor for the subject cost reporting period, 
unless the provisions of paragraph (c)(5)(ii) of this section apply.
    (iii) In the case of a psychiatric hospital or unit, rehabilitation 
hospital or unit, or long-term care hospital, the target amount is the 
lower of the amounts specified in paragraph (c)(4)(iii)(A) or 
(c)(4)(iii)(B) of this section.
    (A) The hospital-specific target amount.
    (1) In the case of all hospitals and units, except long-term care 
hospitals for cost reporting periods beginning on or after October 1, 
2001, the hospital-specific target amount is the net allowable costs in 
a base period increased by the applicable update factors.
    (2) In the case of long-term care hospitals, for cost reporting 
periods beginning on or after October 1, 2000, the hospital-specific 
target amount is the net allowable costs in a base period increased by 
the applicable update factors multiplied by 1.25.
    (B) One of the following for the applicable cost reporting period--
    (1) For cost reporting periods beginning during fiscal year 1998, 
the 75th percentile of target amounts for hospitals in the same class 
(psychiatric hospital or unit, rehabilitation hospital or unit, or long-
term care hospital) for cost reporting periods ending during FY 1996, 
increased by the applicable market basket percentage up to the first 
cost reporting period beginning on or after October 1, 1997.
    (2) For cost reporting periods beginning during fiscal year 1999, 
the amount determined under paragraph (c)(4)(iii)(B)(1) of this section, 
increased by the market basket percentage up through the subject period, 
subject to the provisions of paragraph (c)(4)(iv) of this section.
    (3) For cost reporting periods beginning during fiscal year 2000--
    (i) The labor-related portion and the nonlabor-related portion of 
the wage-neutralized 75th percentile of target amounts for hospitals in 
the same class (psychiatric hospital or unit, rehabilitation hospital or 
unit, or long-term care hospital) for cost reporting periods ending 
during FY 1996, are increased by the applicable market basket percentage 
up to the first cost reporting period beginning on or after October 1, 
1999.
    (ii) The labor-related portion of the wage-neutralized 75th 
percentile target amounts under paragraph (c)(4)(iii)(B)(4)(i) of this 
section is wage adjusted by multiplying it by the hospital's FY 2000 
hospital inpatient prospective payment system wage index.
    (iii) The wage-adjusted 75th percentile target amounts for hospitals 
in the same class is determined by adding the nonlabor-related portion 
of the wage-neutralized 75th percentile target amounts under paragraph 
(c)(4)(iii)(B)(3)(i) of this section and the hospital's wage-adjusted 
labor-related portion of the wage-neutralized 75th percentile target 
amounts determined under paragraph (c)(4)(iii)(B)(3)(ii) of this 
section, subject to the provisions of paragraph (c)(4)(iv) of this 
section.
    (4) For cost reporting periods beginning during fiscal years 2001 
and 2002--
    (i) The amounts determined under paragraph (c)(4)(iii)(B) (3) (i) of 
this section are: increased by the market basket percentage up through 
the subject period; or in the case of a long-term care hospital, for 
cost reporting periods beginning on or after October 1, 2001, the 
amounts determined under paragraph (c)(4)(iii)(B)(3)(i) of this section 
increased by the market basket percentage up through the subject period 
and further increased by 2 percent.
    (ii) The labor-related portion of the wage-neutralized 75th 
percentile target amounts under paragraph (c)(4)(iii)(B)(4)(i) of this 
section is wage-adjusted by multiplying by the

[[Page 514]]

hospital's FY 2001 hospital inpatient prospective payment system wage 
index, for cost reporting periods beginning during fiscal year 2001 and 
the hospital's FY 2002 hospital inpatient prospective payment system 
wage index for cost reporting periods beginning during fiscal year 2002.
    (iii) The wage-adjusted 75th percentile target amounts for hospitals 
in the same class are determined by adding the nonlabor-related portion 
of the wage-neutralized 75th percentile target amounts under paragraph 
(c)(4)(iii)(B)(4)(i) of this section and the hospital's wage-adjusted 
labor-related portion of the wage-neutralized 75th percentile target 
amounts determined under paragraph (c)(4)(iii)(B)(4)(ii) of this 
section, subject to the provisions of paragraph (c)(4)(iv) of this 
section.
    (iv) For purposes of the limits on target amounts established under 
paragraph (c)(4)(iii) of this section, each hospital or unit that 
qualifies for exclusion as a member of only one class of excluded 
facility (psychiatric hospital or unit, rehabilitation hospital or unit, 
or long-term care hospital) will be subject to the limit applicable to 
that class. If a hospital or unit qualifies to be classified in more 
than one way under the exclusion criteria in subpart B of part 412 of 
this chapter, the hospital's or unit's target amount may not exceed the 
lowest applicable limit.
    (v) In the case of a hospital that received payments under paragraph 
(f)(2)(ii) of this section as a newly created hospital or unit, to 
determine the hospital's target amount for the hospital's third 12-month 
cost reporting period, the payment amount determined under paragraph 
(f)(2)(ii)(A) of this section for the preceding cost reporting period is 
updated to the third cost reporting period.
    (5) Applicable update factor. (i) The applicable update factor is 
derived from the prospectively determined rate-of-increase percentage 
published by CMS. The update factor for each Federal fiscal year is 
applied prospectively to the target amount for each cost reporting 
period beginning during the Federal fiscal year.
    (ii) In the case of cost reporting periods of less than 12 months, 
the target amount determined for a hospital's first cost reporting 
period beginning in a Federal fiscal year applies to subsequent periods 
beginning in the same Federal fiscal year.
    (d) Application of the target amount in determining the amount of 
payment. (1) General process. (i) At the end of each cost reporting 
period subject to this section, the hospital's intermediary will compare 
a hospital's allowable net inpatient operating costs with that 
hospital's ceiling (as defined in paragraph (a)(3) of this section) for 
that period.
    (ii) The hospital's actual allowable costs will be determined 
without regard to the lesser of cost or charges provisions of 
Sec. 413.13, and in accordance with the provisions of paragraphs (d)(2) 
or (d)(3) of this section, as applicable.
    (2) Net inpatient operating costs are less than or equal to the 
ceiling.(i) For cost reporting periods beginning on or after October 1, 
1997, if a hospital's allowable net inpatient operating costs do not 
exceed the hospital's ceiling, payment to the hospital will be 
determined on the basis of the lower of the--
    (A) Net inpatient operating costs plus 15 percent of the difference 
between inpatient operating costs and the ceiling; or
    (B) Net inpatient operating costs plus 2 percent of the ceiling.
    (ii) For psychiatric hospitals and units, for cost reporting periods 
beginning on or after October 1, 2000 and before October 1, 2001, if a 
hospital's allowable net inpatient operating costs do not exceed the 
hospital's ceiling, payment to the hospital will be determined on the 
basis of the lower of the--
    (A) Net inpatient operating costs plus 15 percent of the difference 
between inpatient operating costs and the ceiling; or
    (B) Net inpatient costs plus 3 percent of the ceiling.
    (3) Net inpatient operating costs are greater than the ceiling. For 
cost reporting periods beginning on or after October 1, 1997--
    (i) If a hospital's allowable net inpatient operating costs do not 
exceed 110 percent of the ceiling (or the adjusted ceiling, if 
applicable), payment will be the ceiling (or the adjusted ceiling, if 
applicable);

[[Page 515]]

    (ii) If a hospital's allowable net inpatient operating costs are 
greater than 110 percent of the ceiling (or the adjusted ceiling, if 
applicable), payment will be the ceiling (or the adjusted ceiling, if 
applicable) plus the lesser of:
    (A) 50 percent of the allowable net inpatient operating costs in 
excess of 110 percent of the ceiling (or the adjusted ceiling, if 
applicable); or
    (B) 10 percent of the ceiling (or the adjusted ceiling, if 
applicable).
    (4) Continuous improvement bonus payments. (i) For cost reporting 
periods beginning on or after October 1, 1997 and ending before October 
1, 2000, eligible hospitals (as defined in paragraph (d)(5) of this 
section) receive payments in addition to those in paragraph (d)(2) of 
this section, as applicable. These payments are equal to the lesser of--
    (A) 50 percent of the amount by which the operating costs are less 
than the expected costs for the period; or
    (B) 1 percent of the ceiling.
    (ii) For cost reporting periods beginning on or after October 1, 
2000, and ending before September 30, 2001, eligible psychiatric 
hospitals and units and long-tern care hospitals (as defined in 
paragraph (d)(5) of this section) receive payments in addition to those 
in paragraph (d)(2) of this section, as applicable. These payments are 
equal to the lesser of--
    (A) 50 percent of the amount by which the operating costs are less 
than the expected costs for the period; or
    (B) 1.5 percent of the ceiling.
    (iii) For cost reporting periods beginning on or after October 1, 
2001, and before September 30, 2002, eligible psychiatric hospitals and 
units and long-term care hospitals receive payments in addition to those 
in paragraph (d)(5) of this section, as applicable. These payments are 
equal to the lesser of--
    (A) 50 percent of the amount by which the operating costs are less 
than the expected costs for the periods; or
    (B) 2 percent of the ceiling.
    (5) Eligibility requirements for continuous improvement bonus 
payments. To qualify, a hospital must have been paid as a prospective 
payment excluded hospital for at least three full cost reporting periods 
prior to the applicable period, and the hospital's operating costs per 
discharge for the period must be less than the least of the following:
    (i) The hospital's target amount.
    (ii) The hospital's trended costs.
    (A) For a hospital for which its cost reporting period ending during 
fiscal year 1996 was its third or subsequent full cost reporting period, 
trended costs are the lesser of the allowable inpatient operating costs 
per discharge or the target amount for the cost reporting period ending 
in fiscal year 1996, increased in a compounded manner for each 
succeeding fiscal year by the market basket percentage increase;
    (B) For all other hospitals, trended costs are the allowable 
inpatient operating costs per discharge for its third full cost 
reporting period increased in a compounded manner for each succeeding 
fiscal year by the market basket increase.
    (iii) The hospital's expected costs. The hospital's expected costs 
are the lesser of its allowable inpatient operating costs per discharge 
or the target amount for the previous cost reporting period, updated by 
the market basket percentage increase for the fiscal year.
    (e) Hospital requests regarding adjustments to the payment allowed 
under the rate-of-increase ceiling. (1) Timing of application. A 
hospital may request an adjustment to the rate-of-increase ceiling 
imposed under this section. The hospital's request must be received by 
the hospital's fiscal intermediary no later than 180 days after the date 
on the intermediary's initial notice of amount of program reimbursement 
(NPR) for the cost reporting period for which the hospital requests an 
adjustment.
    (2) Intermediary recommendation. Unless CMS has authorized the 
intermediary to make the decision, the intermediary makes a 
recommendation on the hospital's request to CMS, which makes the 
decision. CMS issues a decision to the intermediary no later than 180 
days after receipt of the completed application and the intermediary's 
recommendation.
    (3) Intermediary decision. If CMS has authorized the intermediary to 
make the decision, the intermediary issues a decision no later than 180 
days after receipt of the completed application.
    (4) Notification and review. (i) The intermediary notifies the 
hospital of

[[Page 516]]

the decision, including a full explanation of the grounds for the 
decision. A decision issued under paragraph (e)(2) or (e)(3) of this 
section is considered final unless the hospital submits additional 
information and requests a review of the decision no later than 180 days 
after the date on the intermediary's notice of the decision.
    (ii) The final decision is subject to review under the provider 
reimbursement determination and appeal procedures in subpart R of part 
405 of this chapter, provided the hospital has received an NPR for the 
cost reporting period in question, and the NPR disallows costs for which 
the hospital had requested an adjustment (see the definitions in 
Sec. 405.1801(a) of this chapter and the provisions regarding a 
provider's right to a Board hearing in Sec. 405.1835 of this chapter).
    (5) Extending time limit for PRRB review of NPR. The time required 
to review the request is considered good cause for the granting of an 
extension of the time limit to apply for review of the notice of amount 
of program reimbursement by the Provider Reimbursement Review Board, as 
specified in Sec. 405.1841(b) of this chapter.
    (6) Applicability. The provisions in paragraphs (e)(1) through 
(e)(5) of this section apply to a hospital's initial request for an 
adjustment and to a request for a review of the original decision based 
on additional data.
    (f) Comparison to the target amount for new hospitals and units--(1) 
New hospitals and units--(i) New hospitals. For purposes of this 
section, a new hospital is a provider of hospital inpatient services 
that--
    (A) Has operated as the type of hospital for which CMS granted it 
approval to participate in the Medicare program, under present or 
previous ownership (or both), for less than 2 full years; and
    (B) Has provided the type of hospital inpatient services for which 
CMS granted it approval to participate in the Medicare program, for less 
than 2 years.
    (ii) New units. A newly established unit that is excluded from the 
prospective payments system under the provisions of Secs. 412.25 through 
412.30 of this chapter does not qualify for the exemption afforded to a 
new hospital under paragraph (f)(2)(i) of this section unless the unit 
is located in an acute care hospital that, if it were subject to the 
provisions of this section, would qualify as a new hospital under 
paragraph (f)(1)(i) of this section.
    (2) Comparison--(i) Exemptions. (A) A new children's hospital is 
exempt from the rate-of-increase ceiling imposed under this section. The 
exemption begins when the hospital accepts its first patient and ends at 
the end of the first cost reporting period ending at least 2 years after 
the hospital accepts its first patient. The first cost reporting period 
of at least 12 months beginning at least 1 year after the hospital 
accepts its first patient is the base year, in accordance with paragraph 
(b) of this section.
    (B) Within 180 days of the date a hospital is excluded from the 
prospective payment system, the intermediary determines whether the 
hospital is exempt from the rate-of-increase ceiling. The intermediary 
notifies the hospital of its determination and the hospital's base 
period.
    (C) A decision issued under paragraph (f)(2)(ii)(B) of this section 
is considered final unless the hospital submits additional information 
and requests a review of the decision no later than 180 days after the 
date on the intermediary's notice of the decision. The final decision is 
subject to review under subpart R of part 405 of this chapter, provided 
the hospital has received a notice of program reimbursement (NPR) for 
the cost reporting period in question and the NPR does not reflect an 
exemption (see the definitions in Sec. 405.1801(a) of this chapter and 
the provisions regarding a provider's right to a Board hearing in 
Sec. 405.1835 of this chapter).
    (ii) Median target amount. (A) For cost reporting periods beginning 
on or after October 1, 1997, the amount of payment for a new psychiatric 
hospital or unit, a new rehabilitation hospital or unit, or a new long-
term care hospital that was not paid as an excluded hospital prior to 
October 1, 1997, is the lower of the hospital's net inpatient operating 
cost per case or 110 percent of the national median of the target 
amounts for the class of excluded hospitals and

[[Page 517]]

units (psychiatric, rehabilitation, long-term care) as adjusted for 
differences in wage levels and updated to the first cost reporting 
period in which the hospital receives payment. The second cost reporting 
period is subject to the same target amount as the first cost reporting 
period.
    (B) The national median of the target amounts is the FY 1996 median 
target amount--
    (1) Adjusted to account for differences in area wage levels;
    (2) Updated by the market basket percentage increase to the fiscal 
year in which the hospital first received payments as an excluded 
provider.
    (3) Risk-basis HMOs. Items or services that are furnished to 
beneficiaries enrolled in an HMO by a hospital that is either owned or 
operated by a risk-basis HMO or related to a risk-basis HMO by common 
ownership or control are exempt from the rate-of-increase ceiling (see 
the definition of an entity with a risk sharing contract in Sec. 417.401 
of this chapter).
    (g) Adjustments--(1) General rules. (i) CMS adjusts the amount of 
the operating costs considered in establishing the rate-of-increase 
ceiling for one or more cost reporting periods, including both periods 
subject to the ceiling and the hospital's base period, under the 
circumstances specified in paragraphs (g)(2), (g)(3), and (g)(4) of this 
section.
    (ii) When the hospital requests an adjustment, CMS makes an 
adjustment only to the extent that the hospital's operating costs are 
reasonable, attributable to the circumstances specified separately, 
identified by the hospital, and verified by the intermediary.
    (iii) When the hospital requests an adjustment, CMS makes an 
adjustment only if the hospital's operating costs exceed the rate-of-
increase ceiling imposed under this section.
    (iv) In the case of a psychiatric hospital or unit, rehabilitation 
hospital or unit, or long-term care hospital, the amount of payment 
under paragraph (g)(3) of this section may not exceed the payment amount 
based on the target amount determined under paragraph (c)(4)(iii) of 
this section.
    (v) In the case of a hospital or unit that received a revised FY 
1998 target amount under the rebasing provisions of paragraph (b)(1)(iv) 
of this section, the amount of an adjustment payment for a cost 
reporting period is based on a comparison of the hospital's operating 
costs for the cost reporting period to the average costs and statistics 
for the cost reporting periods used to determine the FY 1998 rebased 
target amount.
    (2) Extraordinary circumstances. CMS may make an adjustment to take 
into account unusual costs (in either a cost reporting period subject to 
the ceiling or the hospital's base period) due to extraordinary 
circumstances beyond the hospital's control. These circumstances 
include, but are not limited to, strikes, fire, earthquakes, floods, or 
similar unusual occurrences with substantial cost effects.
    (3) Comparability of cost reporting periods--(i) Adjustment for 
distortion. CMS may make an adjustment to take into account factors that 
would result in a significant distortion in the operating costs of 
inpatient hospital services between the base year and the cost reporting 
period subject to the limits.
    (ii) Factors. The adjustments described in paragraph (g)(3)(i) of 
this section, include, but are not limited to, adjustments to take into 
account:
    (A) FICA taxes (if the hospital did not incur costs for FICA taxes 
in its base period).
    (B) Services billed under part B of Medicare during the base period, 
but paid under part A during the subject cost reporting period.
    (C) Malpractice insurance costs (if malpractice costs were not 
included in the base year operating costs).
    (D) Increases in service intensity or length of stay attributable to 
changes in the type of patient served.
    (E) A change in the inpatient hospital services that a hospital 
provides, and that are customarily provided directly by similar 
hospitals, such as an addition or discontinuation of services or 
treatment programs.
    (F) The manipulation of discharges to increase reimbursement.
    (iii) Adjusting operating costs. Without a formal request from a 
hospital, CMS may adjust the amount of operating costs determined under 
paragraph (c)(1) of this section to take into account

[[Page 518]]

certain adjustments. These adjustments include, but are not limited to, 
adjustments under paragraphs (g)(3)(ii)(A), (B), (C), (E), and (F) of 
this section.
    (4) Significant wage increase. (i) Criteria. CMS may make an 
adjustment to take into account a significant increase in wages 
occurring between the base period and the cost reporting period subject 
to the ceiling if there is a significant increase in the average hourly 
wage for the geographic area in which the hospital is located 
(determined by reference to the wage index for prospective payment 
hospitals without regard to geographic reclassifications under sections 
1886(d)(8) and (10) of the Act). For this purpose, there is a 
significant wage increase if the wage index value based on wage survey 
data collected for the cost reporting period subject to the ceiling is 
at least 8.0 percent higher than the wage index value based on survey 
data collected for the base year cost reporting period. If survey data 
are not available for the cost reporting periods used in the comparison, 
the wage index value based on the latest available survey data collected 
prior to that cost reporting period is used.
    (ii) Amount of the adjustment. The adjustment for a significant wage 
increase equals the amount by which the lesser of the following 
calculations exceeds 108 percent of the increase in the national average 
hourly earnings for hospital workers:
    (A) The rate of increase in the average hourly wage in the 
geographic area (determined by applying the applicable increase in the 
area wage index value to the rate of increase in the national average 
hourly earnings for hospital workers).
    (B) The rate of increase in the hospital's average hourly wage.
    (5) Adjustment limitations. For cost reporting periods beginning on 
or after October 1, 1993, and before October 1, 2003, the payment 
reductions under paragraph (c)(3)(v) through (c)(3)(vii) of this section 
will not be considered when determining adjustments under this 
paragraph.
    (h) [Reserved]
    (i) Assignment of a new base period. (1) General rule. (i) Effective 
with cost reporting periods beginning on or after April 1, 1990, CMS may 
assign a new base period to establish a revised ceiling if the new base 
period is more representative of the reasonable and necessary cost of 
furnishing inpatient services and all the following conditions apply:
    (A) The actual allowable inpatient costs of the hospital in the cost 
reporting period that would be affected by the revised ceiling exceed 
the target amount established under paragraph (c) of this section.
    (B) The hospital documents that the higher costs are the result of 
substantial and permanent changes in furnishing patient care services 
since the base period. In making this determination, CMS takes into 
consideration the following factors:
    (1) Changes in the services provided by the hospital.
    (2) Changes in applicable technologies and medical practices.
    (3) Differences in the severity of illness among patients or types 
of patients served.
    (C) The adjustments described in paragraph (g) of this section would 
not result in recognition of the reasonable and necessary costs of 
providing inpatient services.
    (ii) The revised ceiling is based on the necessary and proper costs 
incurred during the new base period.
    (A) Increases in overhead costs (for example, administrative and 
general costs and housekeeping costs) are not taken into consideration 
unless the hospital documents that these increases result from 
substantial and permanent changes in furnishing patient care services.
    (B) In determining whether wage increases are necessary and proper, 
CMS takes into consideration whether increases in wages and wage-related 
costs for hospitals in the labor market area exceed the national average 
increase.
    (2) New base period. The new base period is the first cost reporting 
period that is 12 months or longer that reflects the substantial and 
permanent change.
    (3) New applicable rate-of-increase percentages and update factors. 
The revised

[[Page 519]]

target amount resulting from the assignment of a new base period is 
increased by the applicable rate-of-increase percentages (update 
factors) described in paragraph (c)(3) of this section.
    (j) Reduction to capital-related costs. For psychiatric hospital and 
units, rehabilitation hospitals and units, and long-term care hospitals, 
the amount otherwise payable for capital-related costs for hospital 
inpatient services is reduced by 15 percent for portions of cost 
reporting periods occurring on or after October 1, 1997 through 
September 30, 2002.

[58 FR 46340, Sept. 1, 1993, as amended at 59 FR 1659, Jan. 12, 1994; 59 
FR 45401, Sept. 1, 1994; 60 FR 45849, Sept. 1, 1995; 61 FR 2725, Jan. 
29, 1996; 61 FR 46225, Aug. 30, 1996; 62 FR 46032, Aug. 29, 1997; 63 FR 
6868, Feb. 11, 1998; 63 FR 26358, May 12, 1998; 63 FR 41004, July 31, 
1998; 64 FR 41541, July 30, 1999; 65 FR 47049, 47108, Aug. 1, 2000; 66 
FR 32194, June 13, 2001; 66 FR 41394, Aug. 7, 2001; 67 FR 50114, Aug. 1, 
2002]



                        Subpart D--Apportionment



Sec. 413.50  Apportionment of allowable costs.

    (a) Consistent with prevailing practice in which third-party 
organizations pay for health care on a cost basis, reimbursement under 
the Medicare program involves a determination of--
    (1) Each provider's allowable costs for producing services; and
    (2) The share of these costs which is to be borne by Medicare. The 
provider's costs are to be determined in accordance with the principles 
reviewed in the preceding discussion relating to allowable costs. The 
share to be borne by Medicare is to be determined in accordance with 
principles relating to apportionment of cost.
    (b) In the study and consideration devoted to the method of 
apportioning costs, the objective has been to adopt methods for use 
under Medicare that would, to the extent reasonably possible, result in 
the program's share of a provider's total allowable costs being the same 
as the program's share of the provider's total services. This result is 
essential for carrying out the statutory directive that the program's 
payments to providers should be such that the costs of covered services 
for beneficiaries would not be passed on to nonbeneficiaries, nor would 
the cost of services for nonbeneficiaries be borne by the program.
    (c) A basic factor bearing upon apportionment of costs is that 
Medicare beneficiaries are not a cross section of the total population. 
Nor will they constitute a cross section of all patients receiving 
services from most of the providers that participate in the program. 
Available evidence shows that the use of services by persons age 65 and 
over differs significantly from other groups. Consequently, the 
objective sought in the determination of the Medicare share of a 
provider's total costs means that the methods used for apportionment 
must take into account the differences in the amount of services 
received by patients who are beneficiaries and other patients serviced 
by the provider.
    (d) The method of cost reimbursement most widely used at the present 
time by third-party purchasers of inpatient hospital care apportions a 
provider's total costs among groups served on the basis of the relative 
number of days of care used. This method, commonly referred to as 
average-per-diem cost, does not take into account, variations in the 
amount of service which a day of care may represent and thereby assumes 
that the patients for whom payment is made on this basis are average in 
their use of service.
    (e) In considering the average-per-diem method of apportioning cost 
for use under the program, the difficulty encountered is that the 
preponderance of presently available evidence strongly indicates that 
the over-age 65 patient is not typical from the standpoint of average-
per-diem cost. On the average this patient stays in the hospital twice 
as long and therefore the ancillary services that he uses are averaged 
over the longer period of time, resulting in an average-per-diem cost 
for the aged alone, significantly below the average-per-diem for all 
patients.
    (f) Moreover, the relative use of services by aged patients as 
compared to other patients differs significantly

[[Page 520]]

among institutions. Consequently, considerations of equity among 
institutions are involved as well as that of effectiveness of the 
apportionment method under the program in accomplishing the objective of 
paying each provider fully, but only for services to beneficiaries.
    (g) A further consideration of long-range importance is that the 
relative use of services by aged and other patients can be expected to 
change, possibly to a significant extent in future years. The ability of 
apportionment methods used under the program to reflect such change is 
an element of flexibility which has been regarded as important in the 
formulation of the cost reimbursement principles.
    (h) An alternative to the relative number of days of care as a basis 
for apportioning costs is the relative amount of charges billed by the 
provider for services to patients. The amount of charges is the basis 
upon which the cost of hospital care is distributed among patients who 
pay directly for the services they receive. Payment for services on the 
basis of charges applies generally under insurance programs in which 
individuals are indemnified for incurred expenses, a form of health 
insurance widely held throughout the United States. Also, charges to 
patients are commonly a factor in determining the amount of payment to 
hospitals under insurance programs providing service benefits, many of 
which pay ``costs or charges, whichever is less'' and some of which pay 
exclusively on the basis of charges. In all of these instances, the 
provider's own charge structure and method of itemizing services for the 
purpose of assessing charges is utilized as a measure of the amount of 
services received and as the basis for allocating responsibility for 
payment among those receiving the provider's services.
    (i) An increasing number of third-party purchasers who pay for 
services on the basis of cost are developing methods that utilize 
charges to measure the amount of services for which they have 
responsibility for payment. In this approach, the amount of charges for 
such services as a proportion of the provider's total charges to all 
patients is used to determine the proportion of the provider's total 
costs for which the third-party purchaser assumes responsibility. The 
approach is subject to numerous variations. It can be applied to the 
total of charges for all services combined or it can be applied to 
components of the provider's activities for which the amount of costs 
and charges are ascertained through a breakdown of data from the 
provider's accounting records.
    (j) For the application of the approach to components, which 
represent types of services, the breakdown of total costs is 
accomplished by ``cost-finding'' techniques under which indirect costs 
and nonrevenue activities are allocated to revenue producing components 
for which charges are made as services are furnished.



Sec. 413.53  Determination of cost of services to beneficiaries.

    (a) Principle. Total allowable costs of a provider will be 
apportioned between program beneficiaries and other patients so that the 
share borne by the program is based upon actual services received by 
program beneficiaries. The methods of apportionment are defined as 
follows:
    (1) Departmental method--(i) Methodology. Except as provided in 
paragraph (a)(1)(ii) of this section with respect to the treatment of 
the private room cost differential for cost reporting periods starting 
on or after October 1, 1982, the ratio of beneficiary charges to total 
patient charges for the services of each ancillary department is applied 
to the cost of the department; to this is added the cost of routine 
services for program beneficiaries, determined on the basis of a 
separate average cost per diem for general routine patient care areas as 
defined in paragraph (b) of this section, taking into account, in 
hospitals, a separate average cost per diem for each intensive care 
unit, coronary care unit, and other intensive care type inpatient 
hospital units.
    (ii) Exception: Indirect cost of private rooms. For cost reporting 
periods starting on or after October 1, 1982, except with respect to a 
hospital receiving payment under part 412 of this chapter (relating to 
the prospective payment

[[Page 521]]

system), the additional cost of furnishing services in private room 
accommodations is apportioned to Medicare only if these accommodations 
are furnished to program beneficiaries, and are medically necessary. To 
determine routine service cost applicable to beneficiaries--
    (A) Multiply the average cost per diem (as defined in paragraph (b) 
of this section) by the total number of Medicare patient days (including 
private room days whether or not medically necessary);
    (B) Add the product of the average per diem private room cost 
differential (as defined in paragraph (b) of this section) and the 
number of medically necessary private room days used by beneficiaries; 
and
    (C) Effective October 1, 1990, do not include private rooms 
furnished for SNF-type and NF-type services under the swing-bed 
provision in the number of days in paragraphs (a)(1)(ii)(A) and (B) of 
this section.
    (2) Carve-out out method--(i) The carve-out out method is used to 
allocate hospital inpatient general routine service costs in a 
participating swing-bed hospital, as defined in Sec. 413.114(b). Under 
this method, effective for services furnished on or after October 1, 
1990, the reasonable costs attributable to the inpatient routine SNF-
type and NF-type services furnished to all classes of patients are 
subtracted from total inpatient routine service costs before computing 
the average cost per diem for inpatient routine hospital care.
    (ii) The cost per diem attributable to the routine SNF-type services 
covered by Medicare is based on the regional Medicare swing-bed SNF rate 
in effect for a given calendar year, as described in Sec. 413.114(c). 
The Medicare SNF rate applies only to days covered and paid as Medicare 
days. When Medicare coverage runs out, the Medicare rate no longer 
applies.
    (iii) The cost per diem attributable to all non-Medicare swing-bed 
days is based on the average statewide Medicaid NF rate for the prior 
calendar year, adjusted to approximate the average NF rate for the 
current calendar year.
    (iv) The sum of total Medicare SNF-type days multiplied by the cost 
per diem attributable to Medicare SNF-type services and the total NF-
type days multiplied by the cost per diem attributable to all non-
Medicare days is subtracted from total inpatient general routine service 
costs. The cost per diem for inpatient routine hospital care is computed 
based on the remaining inpatient routine service costs.
    (3) Cost per visit by type-of-service method--HHAs. For cost 
reporting periods beginning on or after October 1, 1980, all HHAs must 
use the cost per visit by type-of-service method of apportioning costs 
between Medicare and non-Medicare beneficiaries. Under this method, the 
total allowable cost of all visits for each type of service is divided 
by the total number of visits for that type of service. Next, for each 
type of service, the number of Medicare covered visits is multiplied by 
the average cost per visit just computed. This represents the cost 
Medicare will recognize as the cost for that service, subject to cost 
limits published by CMS (see Sec. 413.30).
    (b) Definitions. As used in this section--
    Ancillary services means the services for which charges are 
customarily made in addition to routine services.
    Apportionment means an allocation or distribution of allowable cost 
between the beneficiaries of the Medicare program and other patients.
    Average cost per diem for general routine services means the 
following:
    (1) For cost reporting periods beginning on or after October 1, 
1982, subject to the provisions on swing-bed hospitals, the average cost 
of general routine services net of the private room cost differential. 
The average cost per diem is computed by the following methodology:
    (i) Determine the total private room cost differential by 
multiplying the average per diem private room cost differential 
determined in paragraph (c) of this section by the total number of 
private room patient days.
    (ii) Determine the total inpatient general routine service costs net 
of the total private room cost differential by subtracting the total 
private room cost differential from total inpatient general routine 
service costs.

[[Page 522]]

    (iii) Determine the average cost per diem by dividing the total 
inpatient general routine service cost net of private room cost 
differential by all inpatient general routine days, including total 
private room days.
    (2) For swing-bed hospitals, the amount computed by--(i) Subtracting 
the routine costs associated with Medicare SNF-type days and non-
Medicare NF-type days from the total allowable inpatient cost for 
routine services (excluding the cost of services provided in intensive 
care units, coronary care units, and other intensive care type inpatient 
hospital units and nursery costs); and
    (ii) Dividing the remainder (excluding the total private room cost 
differential) by the total number of inpatient hospital days of care 
(excluding Medicare SNF-type days and non-Medicare NF-type days of care, 
days of care in intensive care units, coronary care units, and other 
intensive care type inpatient hospital units; and newborn days; but 
including total private room days).
    Average cost per diem for hospital intensive care type units means 
the amount computed by dividing the total allowable costs for routine 
services in each of these units by the total number of inpatient days of 
care furnished in each of these units.
    Average per diem private room cost differential means the difference 
in the average per diem cost of furnishing routine services in a private 
room and in a semi-private room. (This differential is not applicable to 
hospital intensive care type units.) (The method for computing this 
differential is described in paragraph (c) of this section.)
    Charges means the regular rates for various services that are 
charged to both beneficiaries and other paying patients who receive the 
services. Implicit in the use of charges as the basis for apportionment 
is the objective that charges for services be related to the cost of the 
services.
    Intensive care type inpatient hospital unit means a hospital unit 
that furnishes services to critically ill inpatients. Examples of 
intensive care type units include, but are not limited to, intensive 
care units, trauma units, coronary care units, pulmonary care units, and 
burn units. Excluded as intensive care type units are postoperative 
recovery rooms, postanesthesia recovery rooms, maternity labor rooms, 
and subintensive or intermediate care units. (The unit must also meet 
the criteria of paragraph (d) of this section.)
    Nursing facility (NF)-type services, formerly known as ICF and SNF-
type services, are routine services furnished by a swing-bed hospital to 
Medicaid and other non-Medicare patients. Under the Medicaid program, 
effective October 1, 1990, facilities are no longer certified as SNFs or 
ICFs but instead are certified only as NFs and can provide services as 
defined in section 1919(a)(1) of the Act.
    Skilled nursing facility (SNF)-type services are routine services 
furnished by a swing-bed hospital that would constitute extended care 
services if furnished by an SNF. SNF-type services include routine SNF 
services furnished in the distinct part SNF of a hospital complex that 
is combined with the hospital general routine service area cost center 
under Sec. 413.24(d)(5). Effective October 1, 1990, only Medicare 
covered services are included in the definition of SNF-type services.
    Ratio of beneficiary charges to total charges on a departmental 
basis means the ratio of charges to beneficiaries of the Medicare 
program for services of a revenue-producing department or center to the 
charges to all patients for that center during an accounting period. 
After each revenue-producing center's ratio is determined, the cost of 
services furnished to beneficiaries of the Medicare program is computed 
by applying the individual ratio for the center to the cost of the 
related center for the period.
    Routine services means the regular room, dietary, and nursing 
services, minor medical and surgical supplies, and the use of equipment 
and facilities for which a separate charge is not customarily made.
    (c) Method for computing the average per diem private room cost 
differential. Compute the average per diem private room cost 
differential as follows:
    (1) Determine the average per diem private room charge differential 
by subtracting the average per diem

[[Page 523]]

charge for all semi-private room accommodations from the average per 
diem charge for all private room accommodations. The average per diem 
charge for private room accommodations is determined by dividing the 
total charges for private room accommodations by the total number of 
days of care furnished in private room accommodations. The average per 
diem charge for semi-private accommodations is determined by dividing 
the total charges for semi-private room accommodations by the total 
number of days of care furnished in semi-private accommodations.
    (2) Determine the inpatient general routine cost to charge ratio by 
dividing total inpatient general routine service cost by the total 
inpatient general routine service charges.
    (3) Determine the average per diem private room cost differential by 
multiplying the average per diem private room charge differential 
determined in paragraph (c)(1) of this section by the ratio determined 
in paragraph (c)(2) of this section.
    (d) Criteria for identifying intensive care type units. For purposes 
of determining costs under this section, a unit will be identified as an 
intensive care type inpatient hospital unit only if the unit--
    (1) Is in a hospital;
    (2) Is physically and identifiably separate from general routine 
patient care areas, including subintensive or intermediate care units, 
and ancillary service areas. There cannot be a concurrent sharing f 
nursing staff between an intensive care type unit and units or areas 
furnishing different levels or types of care. However, two or more 
intensive care type units that concurrently share nursing staff can be 
reimbursed as one combined intensive care type unit if all other 
criteria are met. Float nurses (nurses who work in different units on an 
as-needed basis) can be utilized in the intensive care type unit. If a 
float nurse works in two different units during the same eight hour 
shift, then the costs must be allocated to the appropriate units 
depending upon the time spent in those units. The hospital must maintain 
adequate records to support the allocation. If such records are not 
available, then the costs must be allocated to the general routine 
services cost areas;
    (3) Has specific written policies that include criteria for 
admission to, and discharge from, the unit;
    (4) Has registered nursing care available on a continuous 24-hour 
basis with at least one registered nurse present in the unit at all 
times;
    (5) Maintains a minimum nurse-patient ratio of one nurse to two 
patients per patient day. Included in the calculation of this nurse-
patient ratio are registered nurses, licensed vocational nurses, 
licensed practical nurses, and nursing assistants who provide patient 
care. Not included are general support personnel such as ward clerks, 
custodians, and housekeeping personnel; and
    (6) Is equipped, or has available for immediate use, life-saving 
equipment necessary to treat the critically ill patients for which it is 
designed. This equipment may include, but is not limited to, respiratory 
and cardiac monitoring equipment, respirators, cardiac defibrillators, 
and wall or canister oxygen and compressed air.
    (e) Application--(1) Departmental method; Cost reporting periods 
beginning on or after October 1, 1982.
    (i) The following example illustrates how costs would be determined, 
using only inpatient data, for cost reporting periods beginning on or 
after October 1, 1982, based on apportionment of--
    (A) The average cost per diem for general routine services (subject 
to the private room differential provisions of paragraph (a)(1)(iii) of 
this section);
    (B) The average cost per diem for each intensive care type unit;
    (C) The ratio of beneficiary charges to total charges applied to 
cost by department.

[[Page 524]]



                                                   Hospital Y
----------------------------------------------------------------------------------------------------------------
                                                                             Ratio of
                                                 Charges to                beneficiary                 Cost of
                  Department                      program        Total      charges to   Total cost  beneficiary
                                               beneficiaries    charges       total                    services
                                                                             charges
----------------------------------------------------------------------------------------------------------------
                                                                            Percent
 
                                              ------------------------------------------------------------------
Operating rooms..............................       $20,000       $70,000      28\4/7\      $77,000      $22,000
Delivery rooms...............................             0        12,000            0       30,000            0
Pharmacy.....................................        20,000        60,000      33\1/3\       45,000       15,000
X-ray........................................        24,000       100,000           24       75,000       18,000
Laboratory...................................        40,000       140,000      28\4/7\       98,000       28,000
Others.......................................         6,000        30,000           20       25,000        5,000
                                              ------------------------------------------------------------------
      Total..................................       110,000       412,000  ...........      350,000       88,000
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                    Total                    Average     Program in    Cost of
                                                  inpatient    Total cost    cost per     patient    beneficiary
                                                     days                      diem         days       services
----------------------------------------------------------------------------------------------------------------
General routine................................       30,000     $630,000          $21        8,000     $168,000
Coronary care unit.............................          500       20,000           40          200        8,000
Intensive care unit............................        3,000      108,000           36        1,000       36,000
                                                ----------------------------------------------------------------
                                                      33,500      758,000  ...........        9,200      212,000
                                                ----------------------------------------------------------------
      Total....................................  ...........  ...........  ...........  ...........      300,000
----------------------------------------------------------------------------------------------------------------

    (ii) The following illustrates how apportionment based on an average 
cost per diem for general routine services is determined.

                                                   Hospital E
----------------------------------------------------------------------------------------------------------------
                                                                       Private        Semi-private
                              Facts                                accommodations    accommodations      Total
----------------------------------------------------------------------------------------------------------------
Total charges...................................................           $20,000          $175,000    $195,000
Total days......................................................               100             1,000       1,100
Programs days...................................................                70               400         470
Medically necessary for program beneficiaries...................                20  ................          20
    Total general routine service costs.........................  ................  ................    165,000
Average private room per diem charge ($20,000 private room charges / 100 days)......................    \1\ $200
Average semi-private room per diem charge ($175,000 semi-private charge / 1,000 days)...............   \1\ $175
----------------------------------------------------------------------------------------------------------------
\1\ Per diem.
    Average per diem private room cost differential.
1. Average per diem private room charge differential ($200 private room per diem--$175, semi-private room per
  diem), $25.
2. Inpatient general routine cost/charge ratio ($165,000 total costs / $195,000 total charges), 0.8461538.
3. Average per diem private room cost differential ($25 charge differential x .8461538 cost/charge ratio),
  $21.15.
    Average cost per diem for inpatient general routine services.
4. Total private room cost differential ($21.15 average per diem cost differential x 100 private room days),
  $2,115.
5. Total inpatient general routine service costs net of private room cost differential ($165,000 total routine
  cost -$2,115 private room cost differential), $162,885.
6. Average cost per diem for inpatient general routine services ($162,885 routine cost net of private room cost
  differential / 1,100 patient days), $148.08.
    Medicare general routine service cost.
7. Total routine per diem cost applicable to Medicare ($148.08 average cost per diem x 470 Medicare private and
  semi-private patient days), $69,598.
8. Total private room cost differential applicable to Medicare ($21.15 average per diem private room cost
  differential x 20 medically necessary private room days), $423.
9. Medicare inpatient general routine service cost ($423 Medicare private room cost differential + $69,598
  Medicare cost of general routine inpatient services), $70,021.


[[Page 525]]

    (2) Carve out method. The following illustrates how apportionment is 
determined in a hospital reimbursed under the carve out method (subject 
to the private room differential provisions of paragraph (a)(1)(ii) of 
this section):

                               Hospital K
  [Determination of cost of routine SNF-type and ICF-type services and
                  general routine hospital services\1\]
------------------------------------------------------------------------
                                                   Days of care
                                        --------------------------------
                 Facts                    General
                                          routine    SNF-type   ICF-type
                                          hospital
------------------------------------------------------------------------
Total days of care.....................      2,000        400        100
Medicare days of care..................        600        300  .........
Average Medicaid rate..................        N/A        $35        $20
  Total inpatient general routine service costs: $250,000...............
------------------------------------------------------------------------


 
 
 
Calculation of cost of routine SNF-type services applicable to Medicare:
      $35 x 300 = $10,500
Calculation of cost of general routine hospital services:
    Cost of SNF-type services: $35 x 400....................     $14,000
    Cost of ICF-type services: $20 x 100....................       2,000
 
                                                             -----------
      Total.................................................     $16,000
Average cost per diem of general routine hospital services:
  $250,000 -- $16,000 / 2,000 days = $117
Medicare general routine hospital cost:
    $117 x 600 = $70,200
Total Medicare reasonable cost for general routine inpatient days:
      $10,500 + $70,200 = $80,700
 


[51 FR 34793, Sept. 30, 1986, as amended at 59 FR 45401, Sept. 1, 1994; 
61 FR 51616, Oct. 3, 1996; 61 FR 58631, Nov. 18, 1996]



Sec. 413.56  [Reserved]



                    Subpart E--Payments to Providers



Sec. 413.60  Payments to providers: General.

    (a) The fiscal intermediaries will establish a basis for interim 
payments to each provider. This may be done by one of several methods. 
If an intermediary is already paying the provider on a cost basis, the 
intermediary may adjust its rate of payment to an estimate of the result 
under the Medicare principles of reimbursement. If no organization is 
paying the provider on a cost basis, the intermediary may obtain the 
previous year's financial statement from the provider and, by applying 
the principles of reimbursement, compute or approximate an appropriate 
rate of payment. The interim payment may be related to the last year's 
average per diem, or to charges, or to any other ready basis of 
approximating costs.
    (b) At the end of the period, the actual apportionment, based on the 
cost finding and apportionment methods selected by the provider, 
determines the Medicare reimbursement for the actual services provided 
to beneficiaries during the period.
    (c) Basically, therefore, interim payments to providers will be made 
for services throughout the year, with final settlement on a retroactive 
basis at the end of the accounting period. Interim payments will be made 
as often as possible and in no event less frequently than once a month. 
The retroactive payments will take fully into account the costs that 
were actually incurred and settle on an actual, rather than on an 
estimated basis.



Sec. 413.64  Payments to providers: Specific rules.

    (a) Reimbursement on a reasonable cost basis. Providers of services 
paid on the basis of the reasonable cost of services furnished to 
beneficiaries will receive interim payments approximating the actual 
costs of the provider. These payments will be made on the most 
expeditious schedule administratively feasible but not less often than 
monthly. A retroactive adjustment based on actual costs will be made at 
the end of a reporting period.
    (b) Amount and frequency of payment. Medicare states that providers 
of services will be paid the reasonable cost of services furnished to 
beneficiaries. Since actual costs of services cannot be determined until 
the end of the accounting period, the providers must be paid on an 
estimated cost basis during the year. While Medicare provides that 
interim payments will be made no less often than monthly, intermediaries 
are expected to make payments on the most expeditious basis 
administratively feasible. Whatever estimated cost basis is used for 
determining interim payments during the year, the intent is that the 
interim payments shall approximate actual costs as nearly as is 
practicable so that the retroactive adjustment based on actual costs 
will be as small as possible.

[[Page 526]]

    (c) Interim payments during initial reporting period. At the 
beginning of the program or when a provider first participates in the 
program, it will be necessary to establish interim rates of payment to 
providers of services. Once a provider has filed a cost report under the 
Medicare program, the cost report may be used as a basis for determining 
the interim rate of reimbursement for the following period. However, 
since initially there is no previous history of cost under the program, 
the interim rate of payment must be determined by other methods, 
including the following:
    (1) If the intermediary is already paying the provider on a cost or 
cost-related basis, the intermediary will adjust its rate of payment to 
the program's principles of reimbursement. This rate may be either an 
amount per inpatient day, or a percent of the provider's charges for 
services furnished to the program's beneficiaries.
    (2) If an organization other than the intermediary is paying the 
provider for services on a cost or cost-related basis, the intermediary 
may obtain from that organization or from the provider itself the rate 
of payment being used and other cost information as may be needed to 
adjust that rate of payment to give recognition to the program's 
principles of reimbursement.
    (3) It no organization is paying the provider on a cost or cost-
related basis, the intermediary will obtain the previous year's 
financial statement from the provider. By analysis of such statement in 
light of the principles of reimbursement, the intermediary will compute 
an appropriate rate of payment.
    (4) After the initial interim rate has been set, the provider may at 
any time request, and be allowed, an appropriate increase in the 
computed rate, upon presentation of satisfactory evidence to the 
intermediary that costs have increased. Likewise, the intermediary may 
adjust the interim rate of payment if it has evidence that actual costs 
may fall significantly below the computed rate.
    (d) Interim payments for new providers. (1) Newly-established 
providers will not have cost experience on which to base a determination 
of an interim rate of payment. In such cases, the intermediary will use 
the following methods to determine an appropriate rate:
    (i) If there is a provider or providers comparable in substantially 
all relevant factors to the provider for which the rate is needed, the 
intermediary will base an interim rate of payment on the costs of the 
comparable provider.
    (ii) If there are no substantially comparable providers from whom 
data are available, the intermediary will determine an interim rate of 
payment based on the budgeted or projected costs of the provider.
    (2) Under either method, the intermediary will review the provider's 
cost experience after a period of three months. If need for an 
adjustment is indicated, the interim rate of payment will be adjusted in 
line with the provider's cost experience.
    (e) Interim payments after initial reporting period. Interim rates 
of payment for services provided after the initial reporting period will 
be established on the basis of the cost report filed for the previous 
year covering Medicare services. The current rate will be determined--
whether on a per diem or percentage of charges basis--using the previous 
year's costs of covered services and making any appropriate adjustments 
required to bring, as closely as possible, the current year's rate of 
interim payment into agreement with current year's costs. This interim 
rate of payment may be adjusted by the intermediary during an accounting 
period if the provider submits appropriate evidence that its actual 
costs are or will be significantly higher than the computed rate. 
Likewise, the intermediary may adjust the interim rate of payment if it 
has evidence that actual costs may fall significantly below the computed 
rate.
    (f) Retroactive adjustment. (1) Medicare provides that providers of 
services will be paid amounts determined to be due, but not less often 
than monthly, with necessary adjustments due to previously made 
overpayments or underpayments. Interim payments are made on the basis of 
estimated costs. Actual costs reimbursable to a provider cannot be 
determined until the cost reports are filed and costs are verified. 
Therefore, a retroactive adjustment

[[Page 527]]

will be made at the end of the reporting period to bring the interim 
payments made to the provider during the period into agreement with the 
reimbursable amount payable to the provider for the services furnished 
to program beneficiaries during that period.
    (2) In order to reimburse the provider as quickly as possible, an 
initial retroactive adjustment will be made as soon as the cost report 
is received. For this purpose, the costs will be accepted as reported, 
unless there are obvious errors or inconsistencies, subject to later 
audit. When an audit is made and the final liability of the program is 
determined, a final adjustment will be made.
    (3) To determine the retroactive adjustment, the amount of the 
provider's total allowable cost apportioned to the program for the 
reporting year is computed. This is the total amount of reimbursement 
the provider is due to receive from the program and the beneficiaries 
for covered services furnished during the reporting period. The total of 
the interim payments made by the program in the reporting year and the 
deductibles and coinsurance amounts receivable from beneficiaries is 
computed. The difference between the reimbursement due and the payments 
made is the amount of the retroactive adjustment.
    (g) Accelerated payments to providers. Upon request, an accelerated 
payment may be made to a provider of services that is not receiving 
periodic interim payments under paragraph (h) of this section if the 
provider has experienced financial difficulties due to a delay by the 
intermediary in making payments or in exceptional situations, in which 
the provider has experienced a temporary delay in preparing and 
submitting bills to the intermediary beyond its normal billing cycle. 
Any such payment must be approved first by the intermediary and then by 
CMS. The amount of the payment is computed as a percentage of the net 
reimbursement for unbilled or unpaid covered services. Recovery of the 
accelerated payment may be made by recoupment as provider bills are 
processed or by direct payment.
    (h) Periodic interim payment method of reimbursement--(1) Covered 
services furnished before July 1, 1987. In addition to the regular 
methods of interim payment on individual provider billings for covered 
services, the periodic interim payment (PIP) method is available for 
Part A hospital and SNF inpatient services.
    (2) Covered services furnished on or after July 1, 1987. Effective 
with claims received on or after July 1, 1987, the periodic interim 
payment (PIP) method is available for the following:
    (i) Part A inpatient services furnished in hospitals that are 
excluded from the prospective payment systems described in 
Sec. 412.1(a)(1) of this chapter, under subpart B of Part 412 of this 
subchapter or are paid under the prospective payment systems described 
in subparts O and P of Part 412 of this subchapter.
    (ii) Part A services furnished in hospitals receiving payment in 
accordance with a demonstration project authorized under section 402(a) 
of Public Law 90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 
92-603 (42 U.S.C. 1395b-1 (note)), or a State reimbursement control 
system approved under section 1886(c) of the Act and subpart C of part 
403 of this chapter, if that type of payment is specifically approved by 
CMS as an integral part of the demonstration or control system. If that 
type of payment is not an integral part of the demonstration or control 
system, PIP is available for the hospital under paragraph (h)(1)(i) of 
this section for hospitals excluded from the prospective payment systems 
or under Sec. 412.116(b) of this chapter for prospective payment 
hospitals.
    (iii) Part A SNF services furnished in cost reporting periods 
beginning before July 1, 1998. (For services furnished in subsequent 
cost reporting periods, see Sec. 413.350 regarding periodic interim 
payments for skilled nursing facilities).
    (iv) Part A services furnished in hospitals paid under the 
prospective payment system, including distinct part psychiatric or 
rehabilitation units, as described in Sec. 412.116(b) of this chapter.
    (v) Services furnished in a hospice as specified in part 418 of this 
chapter. Payment on a PIP basis is described in Sec. 418.307 of this 
chapter.

[[Page 528]]

    (3) Any participating provider furnishing the services described in 
paragraphs (h)(1) and (h)(2) of this section that establishes to the 
satisfaction of the intermediary that it meets the following 
requirements may elect to be reimbursed under the PIP method, beginning 
with the first month after its request that the intermediary finds 
administratively feasible:
    (i) The provider's estimated total Medicare reimbursement for 
inpatient services is at least $25,000 a year computed under the PIP 
formula or, in the case of an HHA, either its estimated--
    (A) Total Medicare reimbursement for Part A and Part B services is 
at least $25,000 a year computed under the PIP formula; or
    (B) Medicare reimbursement computed under the PIP formula is at 
least 50 percent of estimated total allowable cost.
    (ii) The provider has filed at least one completed Medicare cost 
report accepted by the intermediary as providing an accurate basis for 
computation of program payment (except in the case of a provider 
requesting reimbursement under the PIP method upon first entering the 
Medicare program).
    (iii) The provider has the continuing capability of maintaining in 
its records the cost, charge, and statistical data needed to accurately 
complete a Medicare cost report on a timely basis.
    (iv) The provider has repaid or agrees to repay any outstanding 
current financing payment in full, such payment to be made before the 
effective date of its requested conversion from a regular interim 
payment method to the PIP method.
    (4) No conversion to the PIP method may be made with respect to any 
provider until after that provider has repaid in full its outstanding 
current financing payment.
    (5) The intermediary's approval of a provider's request for 
reimbursement under the PIP method will be conditioned upon the 
intermediary's best judgment as to whether payment can be made to the 
provider under the PIP method without undue risk of its resulting in an 
overpayment because of greatly varying or substantially declining 
Medicare utilization, inadequate billing practices, or other 
circumstances. The intermediary may terminate PIP reimbursement to a 
provider at any time it determines that the provider no longer meets the 
qualifying requirements or that the provider's experience under the PIP 
method shows that proper payment cannot be made under this method.
    (6) Payment will be made biweekly under the PIP method unless the 
provider requests a longer fixed interval (not to exceed one month) 
between payments. The payment amount will be computed by the 
intermediary to approximate, on the average, the cost of covered 
inpatient or home health services furnished by the provider during the 
period for which the payment is to be made, and each payment will be 
made two weeks after the end of such period of services. Upon request, 
the intermediary will, if feasible, compute the provider's payments to 
recognize significant seasonal variation in Medicare utilization of 
services on a quarterly basis starting with the beginning of the 
provider's reporting year.
    (7) A provider's PIP amount may be appropriately adjusted at any 
time if the provider presents or the intermediary otherwise obtains 
evidence relating to the provider's costs or Medicare utilization that 
warrants such adjustment. In addition, the intermediary will recompute 
the payment immediately upon completion of the desk review of a 
provider's cost report and also at regular intervals not less often than 
quarterly. The intermediary may make a retroactive lump sum interim 
payment to a provider, based upon an increase in its PIP amount, in 
order to bring past interim payments for the provider's current cost 
reporting period into line with the adjusted payment amount. The 
objective of intermediary monitoring of provider costs and utilization 
is to assure payments approximating, as closely as possible, the 
reimbursement to be determined at settlement for the cost reporting 
period. A significant factor in evaluating the amount of the payment in 
terms of the realization of the projected Medicare utilization of 
services is the timely submittal to the intermediary of completed 
admission and

[[Page 529]]

billing forms. All providers must complete billings in detail under this 
method as under regular interim payment procedures.
    (i) Bankruptcy or insolvency of provider. If on the basis of 
reliable evidence, the intermediary has a valid basis for believing 
that, with respect to a provider, proceedings have been or will shortly 
be instituted in a State or Federal court for purposes of determining 
whether such provider is insolvent or bankrupt under an appropriate 
State or Federal law, any payments to the provider will be adjusted by 
the intermediary, notwithstanding any other regulation or program 
instruction regarding the timing or manner of such adjustments, to a 
level necessary to insure that no overpayment to the provider is made.
    (j) Interest payments resulting from judicial review--(1) 
Application. If a provider of services seeks judicial review by a 
Federal court (see Sec. 405.1877 of this chapter) of a decision 
furnished by the Provider Reimbursement Review Board or subsequent 
reversal, affirmation, or modification by the Secretary, the amount of 
any award of such Federal court will be increased by interest payable by 
the party against whom the judgment is made (see Sec. 413.153 for 
treatment of interest). The interest is payable for the period beginning 
on the first day of the first month following the 180-day period which 
began on either the date the intermediary made a final determination or 
the date the intermediary would have made a final determination had it 
been done on a timely basis (see Secs. 405.1835(b) and 405.1841(a) of 
this chapter).
    (2) Amount due. Section 1878(f) of the Act, 42 U.S.C. 1395oo(f), 
authorizes a court to award interest in favor of the prevailing party on 
any amount due as a result of the court's decision. If the intermediary 
withheld any portion of the amount in controversy prior to the date the 
provider seeks judicial review by a Federal court, and the Medicare 
program is the prevailing party, interest is payable by the provider 
only on the amount not withheld. Similarly, if the Medicare program 
seeks to recover amounts previously paid to a provider, and the provider 
is the prevailing party, interest on the amounts previously paid to a 
provider is not payable by the Medicare program since that amount had 
been paid and is not due the provider.
    (3) Rate. The amount of interest to be paid is equal to the rate of 
return on equity capital (see Sec. 413.157) in effect for the month in 
which the civil action is commenced.

    Example: An intermediary made a final determinaton on the amount of 
Medicare program reimbursement on June 15, 1974, and the provider 
appealed that determination to the Provider Reimbursement Review Board. 
The Board heard the appeal and rendered a decision adverse to the 
provider. On October 28, 1974, the provider commenced civil action to 
have such decision reviewed. The rate of return on equity capital for 
the month of October 1974 was 11.625 percent. The period for which 
interest is computed begins on January 1, 1975, and the interest 
beginning January 1, 1975, would be at the rate of 11.625 percent per 
annum.

[51 FR 34793, Sept. 30, 1986, as amended at 51 FR 42238, Nov. 24, 1986; 
53 FR 1628, Jan. 21, 1988; 57 FR 39830, Sept. 1, 1992; 59 FR 36713, July 
19, 1994; 64 FR 41682, July 30, 1999; 65 FR 41211, July 3, 2000; 66 FR 
41394, Aug. 7, 2001; 67 FR 56056, Aug. 30, 2002]



Sec. 413.65  Requirements for a determination that a facility or an organization has provider-based status.

    (a) Scope and definitions.  (1) Scope. (i) This section applies to 
all facilities for which provider-based status is sought, including 
remote locations of hospitals, as defined in paragraph (a)(2) of this 
section and satellite facilities as defined in Sec. 412.22(h)(1) and 
Sec. 412.25(e)(1) of this chapter, other than facilities described in 
paragraph (a)(1)(ii) of this section.
    (ii) The determinations of provider-based status for payment 
purposes described in this section are not made as to whether the 
following facilities are provider-based:
    (A) Ambulatory surgical centers (ASCs).
    (B) Comprehensive outpatient rehabilitation facilities (CORFs).
    (C) Home health agencies (HHAs).
    (D) Skilled nursing facilities (SNFs).
    (E) Hospices.
    (F) Inpatient rehabilitation units that are excluded from the 
inpatient PPS for acute hospital services.
    (G) Independent diagnostic testing facilities furnishing only 
services paid

[[Page 530]]

under a fee schedule, such as facilities that furnish only screening 
mammography services (as defined in section 1861(jj) of the Act), 
facilities that furnish only clinical diagnostic laboratory tests, or 
facilities that furnish only some combination of these services.
    (H) Facilities, other than those operating as parts of CAHs, 
furnishing only physical, occupational, or speech therapy to ambulatory 
patients, for as long as the $1,500 annual cap on coverage of physical, 
occupational, or speech therapy, as described in section 1833(g)(2) of 
the Act, remains suspended by the action of subsequent legislation.
    (I) ESRD facilities (determinations for ESRD facilities are made 
under Sec. 413.174 of this chapter).
    (J) Departments of providers that perform functions necessary for 
the successful operation of the providers but do not furnish services of 
a type for which separate payment could be claimed under Medicare or 
Medicaid (for example, laundry or medical records departments).
    (K) Ambulances.
    (2) Definitions. In this subpart E, unless the context indicates 
otherwise--
    Campus means the physical area immediately adjacent to the 
provider's main buildings, other areas and structures that are not 
strictly contiguous to the main buildings but are located within 250 
yards of the main buildings, and any other areas determined on an 
individual case basis, by the CMS regional office, to be part of the 
provider's campus.
    Department of a provider means a facility or organization that is 
either created by, or acquired by, a main provider for the purpose of 
furnishing health care services of the same type as those furnished by 
the main provider under the name, ownership, and financial and 
administrative control of the main provider, in accordance with the 
provisions of this section. A department of a provider comprises both 
the specific physical facility that serves as the site of services of a 
type for which payment could be claimed under the Medicare or Medicaid 
program, and the personnel and equipment needed to deliver the services 
at that facility. A department of a provider may not by itself be 
qualified to participate in Medicare as a provider under Sec. 489.2 of 
this chapter, and the Medicare conditions of participation do not apply 
to a department as an independent entity. For purposes of this part, the 
term ``department of a provider'' does not include an RHC or, except as 
specified in paragraph (n) of this section, an FQHC.
    Free-standing facility means an entity that furnishes health care 
services to Medicare beneficiaries and that is not integrated with any 
other entity as a main provider, a department of a provider, remote 
location of a hospital, satellite facility, or a provider-based entity.
    Main provider means a provider that either creates, or acquires 
ownership of, another entity to deliver additional health care services 
under its name, ownership, and financial and administrative control.
    Provider-based entity means a provider of health care services, or 
an RHC as defined in Sec. 405.2401(b) of this chapter, that is either 
created by, or acquired by, a main provider for the purpose of 
furnishing health care services of a different type from those of the 
main provider under the name, ownership, and administrative and 
financial control of the main provider, in accordance with the 
provisions of this section. A provider-based entity comprises both the 
specific physical facility that serves as the site of services of a type 
for which payment could be claimed under the Medicare or Medicaid 
program, and the personnel and equipment needed to deliver the services 
at that facility. A provider-based entity may, by itself, be qualified 
to participate in Medicare as a provider under Sec. 489.2 of this 
chapter, and the Medicare conditions of participation do apply to a 
provider-based entity as an independent entity.
    Provider-based status means the relationship between a main provider 
and a provider-based entity or a department of a provider, remote 
location of a hospital, or satellite facility, that complies with the 
provisions of this section.
    Remote location of a hospital means a facility or an organization 
that is either created by, or acquired by, a hospital that is a main 
provider for the

[[Page 531]]

purpose of furnishing inpatient hospital services under the name, 
ownership, and financial and administrative control of the main 
provider, in accordance with the provisions of this section. A remote 
location of a hospital comprises both the specific physical facility 
that serves as the site of services for which separate payment could be 
claimed under the Medicare or Medicaid program, and the personnel and 
equipment needed to deliver the services at that facility. The Medicare 
conditions of participation do not apply to a remote location of a 
hospital as an independent entity. For purposes of this part, the term 
``remote location of a hospital'' does not include a satellite facility 
as defined in Sec. 412.22(h)(1) and Sec. 412.25(e)(1) of this chapter.
    (b) Provider-based determinations.--(1) A facility or organization 
is not entitled to be treated as provider-based simply because it or the 
main provider believe it is provider-based.
    (2) If a facility was treated as provider-based in relation to a 
hospital or CAH on October 1, 2000, it will continue to be considered 
provider-based in relation to that hospital or CAH until the start of 
the hospital's first cost reporting period beginning on or after July 1, 
2003. The requirements, limitations, and exclusions specified in 
paragraphs (d), (e), (f), (h), and (i) of this section will not apply to 
that hospital or CAH until the start of the hospital's first cost 
reporting period beginning on or after July 1, 2003. For purposes of 
this paragraph (b)(2), a facility is considered as provider-based on 
October 1, 2000 if, on that date, it either had a written determination 
from CMS that it was provider-based, or was billing and being paid as a 
provider-based department or entity of the hospital.
    (3)(i) Except as specified in paragraphs (b)(2) and (b)(5) of this 
section, if a potential main provider seeks a determination of provider-
based status for a facility that is located on the campus of the 
potential main provider, the provider would be required to submit an 
attestation stating that the facility meets the criteria in paragraph 
(d) of this section and if it is a hospital, also attest that it will 
fulfill the obligations of hospital outpatient departments and hospital-
based entities described in paragraph (g) of this section. The provider 
seeking such a determination would also be required to maintain 
documentation of the basis for its attestations and to make that 
documentation available to CMS and to CMS contractors upon request.
    (ii) If the facility is not located on the campus of the potential 
main provider, the provider seeking a determination would be required to 
submit an attestation stating that the facility meets the criteria in 
paragraphs (d) and (e) of this section, and if the facility is operated 
as a joint venture or under a management contract, the requirements of 
paragraph (f) or paragraph (h) of this section, as applicable. If the 
potential main provider is a hospital, the hospital also would be 
required to attest that it will fulfill the obligations of hospital 
outpatient departments and hospital-based entities described in 
paragraph (g) of this section. The provider would be required to supply 
documentation of the basis for its attestations to CMS at the time it 
submits its attestations.
    (iii) Whenever a provider submits an attestation of provider-based 
status for an on-campus facility or organization, as described in 
paragraph (b)(3)(i) of this section, CMS will send the provider written 
acknowledgment of receipt of the attestation, review the attestation for 
completeness, consistency with the criteria in this section, and 
consistency with information in the possession of CMS at the time the 
attestation is received, and make a determination as to whether the 
facility or organization is provider-based.
    (iv) Whenever a provider submits an attestation of provider-based 
status for an off-campus facility or organization, as described in 
paragraph (b)(3)(ii) of this section, CMS will send the provider written 
acknowledgment of receipt of the attestation, review the attestation for 
completeness, consistency with the criteria in this section, consistency 
with the documentation submitted with the attestation and consistency 
with information in the possession of CMS at the time the attestation is 
received, and make a determination as to whether the facility or 
organization is provider-based.

[[Page 532]]

    (4) A facility that is not located on the campus of a hospital and 
that is used as a site where physician services of the kind ordinarily 
furnished in physician offices are furnished is presumed as a free-
standing facility, unless CMS determines the facility has provider-based 
status.
    (5) A facility that has requested provider-based status in relation 
to a hospital or CAH on or after October 1, 2000 and before October 1, 
2002 will be treated as provider-based in relation to the hospital or 
CAH from the first date on or after October 1, 2000 on which the 
facility was licensed (to the extent required by the State), staffed and 
equipped to treat patients until the date on which CMS determines that 
the facility does not qualify for provider-based status.
    (c) Reporting of material changes in relationships. A main provider 
that has had one or more facilities or organizations considered 
provider-based also may report to CMS any material change in the 
relationship between it and any provider-based facility or organization, 
such as a change in ownership of the facility or organization or entry 
into a new or different management contract that would affect the 
provider-based status of the facility or organization.
    (d) Requirements applicable to all facilities or organizations. Any 
facility or organization for which provider-based status is sought, 
whether located on or off the campus of a potential main provider, must 
meet all of the following requirements to be determined by CMS to have 
provider-based status:
    (1) Licensure. The department of the provider, the remote location 
of a hospital, or the satellite facility and the main provider are 
operated under the same license, except in areas where the State 
requires a separate license for the department of the provider, the 
remote location of a hospital, or the satellite facility, or in States 
where State law does not permit licensure of the provider and the 
prospective department of the provider, the remote location of a 
hospital, or the satellite facility under a single license. If a State 
health facilities' cost review commission or other agency that has 
authority to regulate the rates charged by hospitals or other providers 
in a State finds that a particular facility or organization is not part 
of a provider, CMS will determine that the facility or organization does 
not have provider-based status.
    (2) Clinical services. The clinical services of the facility or 
organization seeking provider-based status and the main provider are 
integrated as evidenced by the following:
    (i) Professional staff of the facility or organization have clinical 
privileges at the main provider.
    (ii) The main provider maintains the same monitoring and oversight 
of the facility or organization as it does for any other department of 
the provider.
    (iii) The medical director of the facility or organization seeking 
provider-based status maintains a reporting relationship with the chief 
medical officer or other similar official of the main provider that has 
the same frequency, intensity, and level of accountability that exists 
in the relationship between the medical director of a department of the 
main provider and the chief medical officer or other similar official of 
the main provider, and is under the same type of supervision and 
accountability as any other director, medical or otherwise, of the main 
provider.
    (iv) Medical staff committees or other professional committees at 
the main provider are responsible for medical activities in the facility 
or organization, including quality assurance, utilization review, and 
the coordination and integration of services, to the extent practicable, 
between the facility or organization seeking provider-based status and 
the main provider.
    (v) Medical records for patients treated in the facility or 
organization are integrated into a unified retrieval system (or cross 
reference) of the main provider.
    (vi) Inpatient and outpatient services of the facility or 
organization and the main provider are integrated, and patients treated 
at the facility or organization who require further care have full 
access to all services of the main provider and are referred where 
appropriate to the corresponding inpatient or outpatient department or 
service of the main provider.

[[Page 533]]

    (3) Financial integration. The financial operations of the facility 
or organization are fully integrated within the financial system of the 
main provider, as evidenced by shared income and expenses between the 
main provider and the facility or organization. The costs of a facility 
or organization that is a hospital department are reported in a cost 
center of the provider, costs of a provider-based facility or 
organization other than a hospital department are reported in the 
appropriate cost center or cost centers of the main provider, and the 
financial status of any provider-based facility or organization is 
incorporated and readily identified in the main provider's trial 
balance.
    (4) Public awareness. The facility or organization seeking status as 
a department of a provider, a remote location of a hospital, or a 
satellite facility is held out to the public and other payers as part of 
the main provider. When patients enter the provider-based facility or 
organization, they are aware that they are entering the main provider 
and are billed accordingly.
    (5) Obligations of hospital outpatient departments and hospital-
based entities. In the case of a hospital outpatient department or a 
hospital-based entity, the facility or organization must fulfill the 
obligations of hospital outpatient departments and hospital-based 
entities described in paragraph (g) of this section.
    (e) Additional requirements applicable to off-campus facilities or 
organizations. Except as described in paragraphs (b)(2) and (b)(5) of 
this section, any facility or organization for which provider-based 
status is sought that is not located on the campus of a potential main 
provider must meet both the requirements in paragraph (d) of this 
section and all of the following additional requirements, in order to be 
determined by CMS to have provider-based status.
    (1) Operation under the ownership and control of the main provider. 
The facility or organization seeking provider-based status is operated 
under the ownership and control of the main provider, as evidenced by 
the following:
    (i) The business enterprise that constitutes the facility or 
organization is 100 percent owned by the provider.
    (ii) The main provider and the facility or organization seeking 
status as a department of the provider, a remote location of a hospital, 
or a satellite facility have the same governing body.
    (iii) The facility or organization is operated under the same 
organizational documents as the main provider. For example, the facility 
or organization seeking provider-based status must be subject to common 
bylaws and operating decisions of the governing body of the provider 
where it is based.
    (iv) The main provider has final responsibility for administrative 
decisions, final approval for contracts with outside parties, final 
approval for personnel actions, final responsibility for personnel 
policies (such as fringe benefits or code of conduct), and final 
approval for medical staff appointments in the facility or organization.
    (2) Administration and supervision. The reporting relationship 
between the facility or organization seeking provider-based status and 
the main provider must have the same frequency, intensity, and level of 
accountability that exists in the relationship between the main provider 
and one of its existing departments, as evidenced by compliance with all 
of the following requirements:
    (i) The facility or organization is under the direct supervision of 
the main provider.
    (ii) The facility or organization is operated under the same 
monitoring and oversight by the provider as any other department of the 
provider, and is operated just as any other department of the provider 
with regard to supervision and accountability. The facility or 
organization director or individual responsible for daily operations at 
the entity--
    (A) Maintains a reporting relationship with a manager at the main 
provider that has the same frequency, intensity, and level of 
accountability that exists in the relationship between the main provider 
and its existing departments; and
    (B) Is accountable to the governing body of the main provider, in 
the same manner as any department head of the provider.

[[Page 534]]

    (iii) The following administrative functions of the facility or 
organization are integrated with those of the provider where the 
facility or organization is based: billing services, records, human 
resources, payroll, employee benefit package, salary structure, and 
purchasing services. Either the same employees or group of employees 
handle these administrative functions for the facility or organization 
and the main provider, or the administrative functions for both the 
facility or organization and the entity are--
    (A) Contracted out under the same contract agreement; or
    (B) Handled under different contract agreements, with the contract 
of the facility or organization being managed by the main provider.
    (3) Location. The facility or organization is located within a 35-
mile radius of the campus of the hospital or CAH that is the potential 
main provider, except when the requirements in paragraph (e)(3)(i), 
(e)(3)(ii), or (e)(3)(iii) of this section are met:
    (i) The facility or organization is owned and operated by a hospital 
or CAH that has a disproportionate share adjustment (as determined under 
Sec. 412.106 of this chapter) greater than 11.75 percent or is described 
in Sec. 412.106(c)(2) of this chapter implementing section 
1886(e)(5)(F)(i)(II) of the Act and is--
    (A) Owned or operated by a unit of State or local government;
    (B) A public or nonprofit corporation that is formally granted 
governmental powers by a unit of State or local government; or
    (C) A private hospital that has a contract with a State or local 
government that includes the operation of clinics located off the main 
campus of the hospital to assure access in a well-defined service area 
to health care services for low-income individuals who are not entitled 
to benefits under Medicare (or medical assistance under a Medicaid State 
plan).
    (ii) The facility or organization demonstrates a high level of 
integration with the main provider by showing that it meets all of the 
other provider-based criteria and demonstrates that it serves the same 
patient population as the main provider, by submitting records showing 
that, during the 12-month period immediately preceding the first day of 
the month in which the application for provider-based status is filed 
with CMS, and for each subsequent 12-month period--
    (A) At least 75 percent of the patients served by the facility or 
organization reside in the same zip code areas as at least 75 percent of 
the patients served by the main provider;
    (B) At least 75 percent of the patients served by the facility or 
organization who required the type of care furnished by the main 
provider received that care from that provider (for example, at least 75 
percent of the patients of an RHC seeking provider-based status received 
inpatient hospital services from the hospital that is the main 
provider); or
    (C) If the facility or organization is unable to meet the criteria 
in paragraph (e)(3)(ii)(A) or paragraph (e)(3)(ii)(B) of this section 
because it was not in operation during all of the 12-month period 
described in paragraph (e)(3)(ii) of this section, the facility or 
organization is located in a zip code area included among those that, 
during all of the 12-month period described in paragraph (e)(3)(ii) of 
this section, accounted for at least 75 percent of the patients served 
by the main provider.
    (iv) A facility or organization may qualify for provider-based 
status under this section only if the facility or organization and the 
main provider are located in the same State or, when consistent with the 
laws of both States, in adjacent States.
    (v) An RHC that is otherwise qualified as a provider-based entity of 
a hospital that is located in a rural area, as defined in 
Sec. 412.62(f)(1)(iii) of this chapter, and has fewer than 50 beds, as 
determined under Sec. 412.105(b) of this chapter, is not subject to the 
criteria in paragraphs (e)(3)(i) through (e)(3)(iii) of this section.
    (f) Provider-based status for joint ventures. In order for a 
facility or organization operated as a joint venture to be considered 
provider-based, the facility or organization must--
    (1) Be partially owned by at least one provider'
    (2) Be located on the main campus of a provider who is a partial 
owner;

[[Page 535]]

    (3) Be provider-based to that one provider whose campus on which the 
facility or organization is located; and
    (4) Also meet all the requirements applicable to all provider-based 
facilities and organizations in paragraph (d) of this section. For 
example, where a provider has jointly purchased or jointly created a 
facility under joint venture arrangements with one or more other 
providers, and the facility is not located on the campus of the provider 
or the campus of any other provider engaged in the joint venture 
arrangement, no party to the joint venture arrangement can claim the 
facility as provider-based.
    (g) Obligations of hospital outpatient departments and hospital-
based entities.
    (1) Hospital outpatient departments located either on or off the 
campus of the hospital that is the main provider must comply with the 
antidumping rules in Secs. 489.20 (l), (m), (q), and (r) and Sec. 489.24 
of this chapter.
    (2) Physician services furnished in hospital outpatient departments 
or hospital-based entities (other than RHCs) must be billed with the 
correct site-of-service so that appropriate physician and practitioner 
payment amounts can be determined under the rules of Part 414 of this 
chapter.
    (3) Hospital outpatient departments must comply with all the terms 
of the hospital's provider agreement.
    (4) Physicians who work in hospital outpatient departments or 
hospital-based entities are obligated to comply with the non-
discrimination provisions in Sec. 489.10(b) of this chapter.
    (5) Hospital outpatient departments (other than RHCs) must treat all 
Medicare patients, for billing purposes, as hospital outpatients. The 
department must not treat some Medicare patients as hospital outpatients 
and others as physician office patients.
    (6) In the case of a patient admitted to the hospital as an 
inpatient after receiving treatment in the hospital outpatient 
department or hospital-based entity, payments for services in the 
hospital outpatient department or hospital-based entity are subject to 
the payment window provisions applicable to PPS hospitals and to 
hospitals and units excluded from PPS set forth at Sec. 412.2(c)(5) of 
this chapter and at Sec. 413.40(c)(2), respectively.
    (7) When a Medicare beneficiary is treated in a hospital outpatient 
department or hospital-based entity (other than an RHC) that is not 
located on the main provider's campus, and the treatment is not required 
to be provided by the antidumping rules in Sec. 489.24 of this chapter, 
the hospital must provide written notice to the beneficiary, before the 
delivery of services, of the amount of the beneficiary's potential 
financial liability (that is, that the beneficiary will incur a 
coinsurance liability for an outpatient visit to the hospital as well as 
for the physician service, and of the amount of that liability).
    (i) The notice must be one that the beneficiary can read and 
understand.
    (ii) If the exact type and extent of care needed is not known, the 
hospital may furnish a written notice to the patient that explains that 
the beneficiary will incur a coinsurance liability to the hospital that 
he or she would not incur if the facility were not provider-based.
    (iii) The hospital may furnish an estimate based on typical or 
average charges for visits to the facility, while stating that the 
patient's actual liability will depend upon the actual services 
furnished by the hospital.
    (iv) If the beneficiary is unconscious, under great duress, or for 
any other reason unable to read a written notice and understand and act 
on his or her own rights, the notice must be provided, before the 
delivery of services, to the beneficiary's authorized representative.
    (v) In cases where a hospital outpatient department provides 
examination or treatment that is required to be provided by the 
antidumping rules of Sec. 489.24 of this chapter, notice, as described 
in this paragraph (g)(7), must be given as soon as possible after the 
existence of an emergency has been ruled out or the emergency condition 
has been stabilized.
    (8) Hospital outpatient departments must meet applicable hospital 
health and safety rules for Medicare-participating hospitals in part 482 
of this chapter.
    (h) Management contracts. A facility or organization that is not 
located on

[[Page 536]]

the campus of the potential main provider and otherwise meets the 
requirements of paragraphs (d) and (e) of this section, but is operated 
under management contracts, must also meet all of the following 
criteria:
    (1) The main provider (or an organization that also employs the 
staff of the main provider and that is not the management company) 
employs the staff of the facility or organization who are directly 
involved in the delivery of patient care, except for management staff 
and staff who furnish patient care services of a type that would be paid 
for by Medicare under a fee schedule established by regulations at part 
414 of this chapter. Other than staff that may be paid under such a 
Medicare fee schedule, the main provider may not utilize the services of 
``leased'' employees (that is, personnel who are actually employed by 
the management company but provide services for the provider under a 
staff leasing or similar agreement) that are directly involved in the 
delivery of patient care.
    (2) The administrative functions of the facility or organization are 
integrated with those of the main provider, as determined under criteria 
in paragraph (e)(2)(iii) of this section.
    (3) The main provider has significant control over the operations of 
the facility or organization as determined under criteria in paragraph 
(e)(2)(ii) of this section.
    (4) The management contract is held by the main provider itself, not 
by a parent organization that has control over both the main provider 
and the facility or organization.
    (i) Furnishing all services under arrangement. A facility or 
organization may not qualify for provider-based status if all patient 
care services furnished at the facility or organization are furnished 
under arrangements.
    (j) Inappropriate treatment of a facility or organization as 
provider-based.--(1) Determination and review. If CMS learns that a 
provider has treated a facility or organization as provider-based and 
the provider did not request a determination of provider-based status 
from CMS under paragraph (b)(3) of this section and CMS determines that 
the facility or organization did not meet the requirements for provider-
based status under paragraphs (d) through (i) of this section, as 
applicable (or, in any period before the effective date of these 
regulations, the provider-based requirements in effect under Medicare 
program regulations or instructions), CMS will--
    (i) Issue notice to the provider in accordance with paragraph (j)(3) 
of this section, adjust the amount of future payments to the provider 
for services of the facility or organization in accordance with 
paragraph (j)(4) of this section, and continue payments to the provider 
for services of the facility or organization only in accordance with 
paragraph (j)(5) of this section; and
    (ii) Except as otherwise provided in paragraphs (b)(2), (b)(5), or 
(j)(2) of this section, recover the difference between the amount of 
payments that actually was made and the amount of payments that CMS 
estimates should have been made, in the absence of compliance with the 
provider-based requirements, to that provider for services at the 
facility or organization for all cost reporting periods subject to 
reopening in accordance with Secs. 405.1885 and 405.1889 of this 
chapter.
    (2) Exception for good faith effort. CMS will not recover any 
payments for any period before the beginning of the hospital's first 
cost reporting period beginning on or after January 10, 2001, if, during 
all of that period--
    (i) The requirements regarding licensure and public awareness in 
paragraphs (d)(1) and (d)(4) of this section were met;
    (ii) All facility services were billed as if they had been furnished 
by a department of a provider, a remote location of a hospital, a 
satellite facility, or a provider-based entity of the main provider; and
    (iii) All professional services of physicians and other 
practitioners were billed with the correct site-of-service indicator, as 
described in paragraph (g)(2) of this section.
    (3) Notice to provider. If CMS determines that a facility or 
organization was inappropriately treated as provider-based, CMS will 
issue written notice to the provider that payments for past cost 
reporting periods may be reviewed and recovered as described in 
paragraph (j)(1)(ii) of this section, and

[[Page 537]]

that future payments for services in or of the facility or organization 
will be adjusted as described in paragraph (j)(4) of this section.
    (4) Adjustment of payments. If CMS determines that a facility or 
organization was inappropriately treated as provider-based, CMS will 
adjust future payments to the provider or the facility or organization, 
or both, to estimate the amounts that would be paid for the same 
services furnished by a freestanding facility.
    (5) Continuation of payment. (i) The notice of denial of provider-
based status sent to the provider will ask the provider to notify CMS in 
writing, within 30 days of the date the notice is issued, of whether the 
provider intends to seek a determination of provider-based status for 
the facility or organization under this section or whether the facility 
or organization (or, where applicable, the practitioners who staff the 
facility or organization) will be seeking to enroll and meet other 
requirements to bill for services in a freestanding facility.
    (ii) If the provider indicates that it will not be seeking a 
determination for the facility or organization under this section or 
that the facility or organization or its practitioners will not be 
seeking to enroll, or if CMS does not receive a response within 30 days 
of the date the notice was issued, all payment under this paragraph 
(j)(5) will end as of the 30th day after the date of notice.
    (iii) If the provider indicates that it will be seeking a 
determination for the facility or organization under this section or 
that the facility or organization or its practitioners will be seeking 
to meet enrollment and other requirements for billing for services in a 
freestanding facility, payment for services of the facility or 
organization will continue, at the adjusted amounts described in 
paragraph (j)(4) of this section, for as long as is required for all 
billing requirements to be met (but not longer than 6 months) if the 
provider or the facility or organization or its practitioners--
    (A) Submits, as applicable, a complete request for a determination 
of provider-based status or a complete enrollment application and 
provide all other required information within 90 days after the date of 
notice; and
    (B) Furnishes all other information needed by CMS to make a 
determination regarding provider-based status or process the enrollment 
application, as applicable, and verifies that other billing requirements 
are met.
    (iv) If the necessary applications or information are not provided, 
CMS will terminate all payment to the provider, facility, or 
organization as of the date CMS issues notice that necessary 
applications or information have not been submitted.
    (k) Temporary treatment as provider-based. If a provider submits a 
complete attestation of compliance with the requirements for provider-
based status for a facility or organization that has not previously been 
found by CMS to have been inappropriately treated as provider-based 
under paragraph (j) of this section, the provider may bill and be paid 
for services of the facility or organization as provider-based from the 
date it submits the attestation and any required supporting 
documentation until the date that CMS determines that the facility or 
organization does not meet the provider-based rules. If CMS subsequently 
determines that the requirements for provider-based status are not met, 
CMS will recover the difference between the amount of payments that 
actually was made since the date the complete attestation of compliance 
with provider-based requirements was submitted and the amount of 
payments that CMS estimates should have been made in the absence of 
compliance with the provider-based requirements. For purposes of this 
paragraph (k), a complete attestation of compliance with provider-based 
requirements is one that includes all information needed to permit CMS 
to make a determination under paragraph (b)(3) of this section.
    (l) Correction of errors. (1) If CMS determines that a facility or 
organization that had previously been determined to be provider-based 
under this section no longer qualifies for provider-based status, and 
the failure to qualify for provider-based status resulted from a 
material change in the relationship between the provider and the 
facility or

[[Page 538]]

organization that the provider did report to CMS under paragraph (c) of 
this section, treatment of the facility or organization as provider-
based ceases with the date that CMS determines that the facility or 
organization no longer qualifies for provider-based status.
    (2) If CMS determines that a facility or organization that had 
previously been determined to be provider-based under this section no 
longer qualifies for provider-based status, and if the failure to 
qualify for provider-based status resulted from a material change in the 
relationship between the provider and the facility or organization that 
the provider did not report to CMS under paragraph (c) of this section, 
CMS will take the actions with respect to notice to the provider, 
adjustment of payments, and continuation of payment described in 
paragraphs (j)(3), (j)(4), and (j)(5) of this section, and will recover 
past payments to the provider to the extent described in paragraph 
(j)(1)(ii) of this section.
    (m) Status of Indian Health Service and Tribal facilities and 
organizations. Facilities and organizations operated by the Indian 
Health Service or Tribes will be considered to be departments of 
hospitals operated by the Indian Health Service or Tribes if, on or 
before April 7, 2000, they furnished only services that were billed as 
if they had been furnished by a department of a hospital operated by the 
Indian Health Service or a Tribe and they are:
    (1) Owned and operated by the Indian Health Service;
    (2) Owned by the Tribe but leased from the Tribe by the IHS under 
the Indian Self-Determination Act (Pub. L. 93-638) in accordance with 
applicable regulations and policies of the Indian Health Service in 
consultation with Tribes: or
    (3) Owned by the Indian Health Service but leased and operated by 
the Tribe under the Indian Self-Determination Act (Pub. L. 93-638) in 
accordance with applicable regulations and policies of the Indian Health 
Service in consultation with Tribes.
    (n) FQHCs and ``look alikes.'' A facility that has, since April 7, 
1995, furnished only services that were billed as if they had been 
furnished by a department of a provider will continue to be treated, for 
purposes of this section, as a department of the provider without regard 
to whether it complies with the criteria for provider-based status in 
this section, if the facility--
    (1) Received a grant on or before April 7, 2000 under section 330 of 
the Public Health Service Act and continues to receive funding under 
such a grant, or is receiving funding from a grant made on or before 
April 7, 2000 under section 330 of the Public Health Service Act under a 
contract with the recipient of such a grant, and continues to meet the 
requirements to receive a grant under section 330 of the Public Health 
Service Act; or
    (2) Based on the recommendation of the Public Health Service, was 
determined by CMS on or before April 7, 2000 to meet the requirements 
for receiving a grant under section 330 of the Public Health Service 
Act, and continues to meet such requirements.
    (o) Effective date of provider-based status.--(1) General rule. 
Provider-based status for a facility or organization is effective on the 
earliest date all of the requirements of this part have been met.
    (2) Inappropriate treatment as provider-based or not reporting 
material change. Effective for any period on or after October 1, 2002 
(or, in the case of facilities or organizations described in paragraph 
(b)(2) of this section, for cost reporting periods starting on or after 
July 1, 2003), if a facility or organization is found by CMS to have 
been inappropriately treated as provider-based under paragraph (j) of 
this section for those periods, or previously was determined by CMS to 
be provider-based but no longer qualifies as provider-based because of a 
material change occurring during those periods that was not reported to 
CMS under paragraph (c) of this section, CMS will not treat the facility 
or organization as provider-based for payment purposes until CMS has 
determined, based on documentation

[[Page 539]]

submitted by the provider, that the facility or organization meets all 
requirements for provider-based status under this part

[65 FR 18538, Apr. 7, 2000, as amended at 65 FR 58920, Oct. 3, 2000; 66 
FR 1599, Jan. 9, 2001; 66 FR 59920, Nov. 30, 2001; 67 FR 50114, Aug. 1, 
2002]



Sec. 413.70  Payment for services of a CAH.

    (a) Payment for inpatient services furnished by a CAH.
    (1) Payment for inpatient services of a CAH is the reasonable costs 
of the CAH in providing CAH services to its inpatients, as determined in 
accordance with section 1861(v)(1)(A) of the Act and the applicable 
principles of cost reimbursement in this part and in Part 415 of this 
chapter, except that the following payment principles are excluded when 
determining payment for CAH inpatient services:
    (iv) The payment window provisions for preadmission services, 
specified in Sec. 412.2(c)(5) of this subchapter and Sec. 413.40(c)(2).
    (2) Except as specified in paragraph (a)(3) of this section, payment 
to a CAH for inpatient services does not include any costs of physician 
services or other professional services to CAH inpatients, and is 
subject to the Part A hospital deductible and coinsurance, as determined 
under subpart G of part 409 of this chapter.
    (3) If a CAH meets the criteria in Sec. 412.113(c) of this 
subchapter for pass-through of costs of anesthesia services furnished by 
qualified nonphysician anesthetists employed by the CAH or obtained 
under arrangements, payment to the CAH for the costs of those services 
is made in accordance with Sec. 412.113(c).
    (b) Payment for outpatient services furnished by CAH.
    (1) General.
    (i) Unless the CAH elects to be paid for services to its outpatients 
under the method specified in paragraph (b)(3) of this section, the 
amount of payment for outpatient services of a CAH is the amount 
determined under paragraph (b)(2) of this section.
    (ii) Except as specified in paragraph (b)(6) of this section, 
payment to a CAH for outpatient services does not include any costs of 
physician services or other professional services to CAH outpatients.
    (2) Reasonable costs for facility services. (i) Payment for 
outpatient services of a CAH is the reasonable costs of the CAH in 
providing CAH services to its outpatients, as determined in accordance 
with section 1861(v)(1)(A) of the Act and the applicable principles of 
cost reimbursement in this part and in Part 415 of this chapter, except 
that the following payment principles are excluded when determining 
payment for CAH outpatient services:
    (A) Lesser of costs or charges;
    (B) RCE limits;
    (C) Any type of reduction to operating or capital costs under 
Sec. 413.124 or Sec. 413.130(j).
    (D) Blended payment amounts for ambulatory surgical services, 
radiology services, and other diagnostic services;
    (ii) Payment to a CAH under paragraph (b)(2) of this section does 
not include any costs of physician services or other professional 
services to CAH outpatients and, other than for clinical diagnostic 
laboratory tests, is subject to the Part B deductible and coinsurance 
amounts as determined under Secs. 410.152(k), 410.160, and 410.161 of 
this chapter.
    (iii) Payment for outpatient clinical diagnostic laboratory tests is 
not subject to the Medicare Part B deductible and coinsurance amounts. 
Payment to a CAH for clinical diagnostic laboratory tests will be made 
on a reasonable cost basis under this section only if the individuals 
are outpatients of the CAH, as defined in Sec. 410.2 of this chapter, at 
the time the specimens are collected. Clinical diagnostic laboratory 
tests performed for persons who are not patients of the CAH when the 
specimens are collected will be made in accordance with the provisions 
of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Social Security Act.
    (A) The amount paid is equal to 100 percent of the least of--
    (1) Charges determined under the fee schedule as set forth in 
section 1833(h)(1) or section 1834(d)(1) of the Act;
    (2) The limitation amount for that test determined under section

[[Page 540]]

1833(h)(4)(B) of the Act or the amount of the charges billed for the 
test; or
    (3) A negotiated rate established under section 1833(h)(6) of the 
Act.
    (B) Payment for outpatient clinical diagnostic laboratory tests is 
not subject to the Medicare Part B deductible and coinsurance amounts, 
as specified in Sec. 410.152(k) of this chapter.
    (3) Election to be paid reasonable costs for facility services plus 
fee schedule for professional services. (i) A CAH may elect to be paid 
for outpatient services in any cost reporting period under the method 
described in paragraphs (b)(3)(ii) and (b)(3)(iii) of this section. This 
election must be made in writing, made on an annual basis, and delivered 
to the fiscal intermediary servicing the CAH at least 30 days before the 
start of each affected cost reporting period. An election of this 
payment method, once made for a cost reporting period, remains in effect 
for all of that period and applies to all services furnished to 
outpatients during that period.
    (ii) If the CAH elects payment under this method, payment to the CAH 
for each outpatient visit will be the sum of the following amounts:
    (A) For facility services, not including any services for which 
payment may be made under paragraph (b)(3)(ii)(B) of this section, the 
reasonable costs of the services as determined under paragraph (b)(2)(i) 
of this section; and
    (B) For professional services otherwise payable to the physician or 
other practitioner, 115 percent of the amounts that otherwise would be 
paid for the services if the CAH had not elected payment under this 
method.
    (iii) Payment to a CAH, other than for clinical diagnostic 
laboratory tests, is subject to the Part B deductible and coinsurance 
amounts, as determined under Secs. 410.152(k), 410.160, and 410.161 of 
this chapter.
    (4) Costs of emergency room on-call physicians.
    (i) Effective for cost reporting periods beginning on or after 
October 1, 2001, the reasonable costs of outpatient CAH services under 
paragraph (b) of this section may include amounts for reasonable 
compensation and related costs for an emergency room physician who is on 
call but who is not present on the premises of the CAH involved, is not 
otherwise furnishing physicians' services, and is not on call at any 
other provider or facility.
    (ii) For purposes of this paragraph (b)(4)--
    (A) ``Amounts for reasonable compensation and related costs'' means 
all allowable costs of compensating emergency room physicians who are on 
call to the extent the costs are found to be reasonable under the rules 
specified in paragraph (b)(2) of this section and the applicable 
sections of Part 413. Costs of compensating emergency room physicians 
are allowable only if the costs are incurred under written contracts 
that require the physician to come to the CAH when the physician's 
presence is medically required.
    (B) An ``emergency room physician who is on call' means a doctor of 
medicine or osteopathy with training or experience in emergency care who 
is immediately available by telephone or radio contact, and is available 
on site within the timeframes specified in Sec. 485.618(d) of this 
chapter.
    (5) Costs of ambulance services.
    (i) Effective for services furnished on or after December 21, 2000, 
payment for ambulance services furnished by a CAH or an entity that is 
owned and operated by a CAH is the reasonable costs of the CAH or the 
entity in furnishing those services, but only if the CAH or the entity 
is the only provider or supplier of ambulance services located within a 
35-mile drive of the CAH or the entity.
    (ii) For purposes of paragraph (b)(5) of this section, the distance 
between the CAH or the entity and the other provider or supplier of 
ambulance services will be determined as the shortest distance in miles 
measured over improved roads between the CAH or the entity and the site 
at which the vehicles of the closest provider or supplier of ambulance 
services are garaged. An improved road for this purpose is any road that 
is maintained by a local, State, or Federal government entity and is 
available for use by the general public. An improved road will be 
considered to include the paved surface up to the front entrance of the 
hospital and the front entrance of the garage.
    (6) If a CAH meets the criteria in Sec. 412.113(c) of this 
subchapter for pass-

[[Page 541]]

through of costs of anesthesia services furnished by nonphysician 
anesthetists employed by the CAH or obtained under arrangement, payment 
to the CAH for the costs of those services is made in accordance with 
Sec. 412.113(c) of this chapter.
    (c) Final payment based on cost report. Final payment to the CAH for 
CAH facility services to inpatients and outpatients furnished during a 
cost reporting is based on a cost report for that period, as required 
under Sec. 413.20(b).

[65 FR 47109, Aug. 1, 2000, as amended at 66 FR 32195, June 13, 2001; 66 
FR 39936, Aug. 1, 2001; 67 FR 50118, Aug. 1, 2002]



Sec. 413.74  Payment to a foreign hospital.

    (a) Principle. Section 1814(f) of the Act provides for the payment 
of emergency and nonemergency inpatient hospital services furnished by 
foreign hospitals to Medicare beneficiaries. Subpart H of part 424 of 
this chapter, together with this section, specify the conditions for 
payment. These conditions may result in payments only to Canadian and 
Mexican hospitals.
    (b) Amount of payment. Effective with admissions on or after January 
1, 1980, the reasonable cost for services covered under the Medicare 
program furnished to beneficiaries by a foreign hospital will be equal 
to 100 percent of the hospital's customary charges (as defined in 
Sec. 413.13(b)) for the services.
    (c) Submittal of claims. The hospital must establish its customary 
charges for the services by submitting an itemized bill with each claim 
it files in accordance with its election under Sec. 424.104 of this 
chapter.
    (d) Exchange rate. Payment to the hospital will be subject to the 
official exchange rate on the date the patient is discharged and to the 
applicable deductible and coinsurance amounts described in Secs. 409.80 
through 409.83.

[51 FR 34793, Sept. 30, 1986, as amended at 51 FR 41351, Nov. 14, 1986; 
53 FR 6648, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



                 Subpart F--Specific Categories of Costs



Sec. 413.80  Bad debts, charity, and courtesy allowances.

    (a) Principle. Bad debts, charity, and courtesy allowances are 
deductions from revenue and are not to be included in allowable cost; 
however, except for anesthetists' services described under paragraph (h) 
of this section, bad debts attributable to the deductibles and 
coinsurance amounts are reimbursable under the program.
    (b) Definitions--(1) Bad debts. Bad debts are amounts considered to 
be uncollectible from accounts and notes receivable that were created or 
acquired in providing services. ``Accounts receivable'' and ``notes 
receivable'' are designations for claims arising from the furnishing of 
services, and are collectible in money in the relatively near future.
    (2) Charity allowances. Charity allowances are reductions in charges 
made by the provider of services because of the indigence or medical 
indigence of the patient. Cost of free care (uncompensated services) 
furnished under a Hill-Burton obligation are considered as charity 
allowances.
    (3) Courtesy allowances. Courtesy allowances indicate a reduction in 
charges in the form of an allowance to physicians, clergy, members of 
religious orders, and others as approved by the governing body of the 
provider, for services received from the provider. Employee fringe 
benefits, such as hospitalization and personnel health programs, are not 
considered to be courtesy allowances.
    (c) Normal accounting treatment: Reduction in revenue. Bad debts, 
charity, and courtesy allowances represent reductions in revenue. The 
failure to collect charges for services furnished does not add to the 
cost of providing the services. Such costs have already been incurred in 
the production of the services.

[[Page 542]]

    (d) Requirements for Medicare. Under Medicare, costs of covered 
services furnished beneficiaries are not to be borne by individuals not 
covered by the Medicare program, and conversely, costs of services 
provided for other than beneficiaries are not to be borne by the 
Medicare program. Uncollected revenue related to services furnished to 
beneficiaries of the program generally means the provider has not 
recovered the cost of services covered by that revenue. The failure of 
beneficiaries to pay the deductible and coinsurance amounts could result 
in the related costs of covered services being borne by other than 
Medicare beneficiaries. To assure that such covered service costs are 
not borne by others, the costs attributable to the deductible and 
coinsurance amounts that remain unpaid are added to the Medicare share 
of allowable costs. Bad debts arising from other sources are not 
allowable costs.
    (e) Criteria for allowable bad debt. A bad debt must meet the 
following criteria to be allowable:
    (1) The debt must be related to covered services and derived from 
deductible and coinsurance amounts.
    (2) The provider must be able to establish that reasonable 
collection efforts were made.
    (3) The debt was actually uncollectible when claimed as worthless.
    (4) Sound business judgment established that there was no likelihood 
of recovery at any time in the future.
    (f) Charging of bad debts and bad debt recoveries. The amounts 
uncollectible from specific beneficiaries are to be charged off as bad 
debts in the accounting period in which the accounts are deemed to be 
worthless. In some cases an amount previously written off as a bad debt 
and allocated to the program may be recovered in a subsequent accounting 
period; in such cases the income therefrom must be used to reduce the 
cost of beneficiary services for the period in which the collection is 
made.
    (g) Charity allowances. Charity allowances have no relationship to 
beneficiaries of the Medicare program and are not allowable costs. These 
charity allowances include the costs of uncompensated services furnished 
under a Hill-Burton obligation. (Note: In accordance with section 106(b) 
of Pub. L. 97-248 (enacted September 3, 1982), this sentence is 
effective with respect to any costs incurred under Medicare except that 
it does not apply to costs which have been allowed prior to September 3, 
1982, pursuant to a final court order affirmed by a United States Court 
of Appeals.) The cost to the provider of employee fringe-benefit 
programs is an allowable element of reimbursement.
    (h) Limitations on bad debts. In determining reasonable costs for 
hospitals, the amount of bad debts otherwise treated as allowable costs 
(as defined in paragraph (e) of this section) is reduced--
    (1) For cost reporting periods beginning during fiscal year 1998, by 
25 percent;
    (2) For cost reporting periods beginning during fiscal year 1999, by 
40 percent; and
    (3) For cost reporting periods beginning during fiscal year 2000, by 
45 percent.
    (4) For cost reporting periods beginning during a subsequent fiscal 
year, by 30 percent.
    (i) Exception. Bad debts arising from services for anesthetists paid 
under a fee schedule are not reimbursable under the program.

[51 FR 34793, Sept. 30, 1986, as amended at 57 FR 33898, July 31, 1992; 
60 FR 63189, Dec. 8, 1995; 63 FR 41005, July 31, 1998; 66 FR 32195, June 
13, 2001]



Sec. 413.85  Cost of approved nursing and allied health education activities.

    (a) Statutory basis. This section implements section 1861(v)(1)(A) 
of the Act and section 4004(b) of the Omnibus Budget Reconciliation Act 
of 1990 (Public Law 101-508) by establishing the methodology for 
Medicare payment of the costs of approved nursing and allied health 
education activities.
    (b) Scope. (1) This section sets forth the rules for determining 
Medicare payments to hospitals for the costs of nursing and allied 
health education activities.
    (2) This section does not address Medicare payments for the direct 
and

[[Page 543]]

indirect costs of graduate medical education (that is, approved 
residency programs in medicine, osteopathy, dentistry, and podiatry). 
Medicare payment for these costs is determined as provided in 
Sec. 412.105 of this subchapter and Sec. 413.86.
    (3) The rules under this section do not apply to activities that are 
specified in paragraph (h) of this section and identified as normal 
operating costs.
    (c) Definitions. For purposes of this section, the following 
definitions apply:
    Approved educational activities means formally organized or planned 
programs of study of the type that:
    (1) Are operated by providers as specified in paragraph (f) of this 
section;
    (2) Enhance the quality of inpatient care at the provider; and
    (3) Meet the requirements of paragraph (e) of this section for State 
licensure or accreditation.
    Classroom instruction costs are those costs associated with formal, 
didactic instruction on a specific topic or subject in a class that 
meets at regular, scheduled intervals over a specific time period (for 
example, semester or quarter), and for which a student receives a grade.
    Clinical training costs means costs of training for the acquisition 
and use of the skills of a nursing or allied health profession or trade 
in the actual environment in which these skills will be used by the 
student upon graduation. Clinical training may involve occasional or 
periodic meetings to discuss or analyze cases, critique performance, or 
discuss specific skills or techniques; it involves no classroom 
instruction.
    Community support means funding that is provided by the community 
and generally includes all non-Medicare sources of funding (other than 
payments made for furnishing services to individual patients), including 
State and local government appropriations. Community support does not 
include grants, gifts, and endowments of the kind that are not to be 
offset in accordance with section 1134 of the Act.
    Redistribution of costs means an attempt by a provider to increase 
the amount, or to expand the types, of the costs of educational 
activities that are allowed for Medicare payment purposes by claiming 
costs that previously were not claimed by the provider and were 
considered costs of an educational institution. For example, costs for a 
school of nursing or allied health education or a medical school that 
were incurred by an educational institution and were not allowable to 
the provider in its prospective payment or rate-of-increase limit base 
year cost report, or graduate medical education per resident amount 
calculated under Sec. 413.86, are not allowable costs in subsequent 
fiscal years.
    (d) General payment rules. (1) Payment for a provider's net cost of 
nursing and allied health education activities is determined on a 
reasonable cost basis, subject to the following conditions and 
limitations:
    (i) An approved educational activity--
    (A) Is recognized by a national approving body or State licensing 
authority as specified in paragraph (e) of this section;
    (B) Meets the criteria specified in paragraph (f) of this section 
for identification as an operator of an approved education program.
    (C) Enhances the quality of inpatient care at the provider.
    (ii) The cost for certain nonprovider-operated programs are 
reimbursable on a reasonable cost basis if the programs meet the 
criteria specified in paragraph (g)(2) of this section.
    (2) Determination of net cost. (i) Subject to the provisions of 
paragraph (d)(2)(iii) of this section, the net cost of approved 
educational activities is determined by deducting the revenues that a 
provider receives from tuition and student fees from the provider's 
total allowable educational costs that are directly related to approved 
educational activities.
    (ii) A provider's total allowable educational costs are those costs 
incurred by the provider for trainee stipends, compensation of teachers, 
and other costs of the activities as determined under the Medicare cost-
finding principles in Sec. 413.24. These costs do not include patient 
care costs, costs incurred by a related organization, or costs that 
constitute a redistribution of costs from an educational institution to 
a provider or costs that have been or are

[[Page 544]]

currently being provided through community support.
    (iii) The net costs of approved certified registered nurse 
anesthetist (CRNA) education programs that are determined on a 
reasonable cost basis are subject to the additional condition that 
allowable compensation costs for faculty members who are CRNAs are 
limited to the compensation costs for administrative activities related 
to the educational program, the compensation costs directly related to 
hours spent in classroom instruction, and the costs related to the 
clinical training of students for which the CRNA may not receive payment 
under the CRNA fee schedule. No pass-through compensation costs are 
allowable for the time a CRNA spends in the clinical training of a 
student anesthetist during a surgical procedure in the operating room 
for which the CRNA may receive payment under the CRNA fee schedule. As 
specified at Sec. 414.46 of this chapter, if the CRNA continuously 
supervises the services of a single student nurse anesthetist, or where 
the medical direction rules allow a CRNA to bill for the service, 
payment can be made under the CRNA fee schedule.
    (iv) Net costs are subject to apportionment for Medicare utilization 
as described in Sec. 413.50.
    (e) Approved nursing and allied health education programs. CMS will 
consider an activity an approved nursing and allied health education 
program if the program is a planned program of study that is licensed by 
State law, or if licensing is not required, is accredited by the 
recognized national professional organization for the particular 
activity. Such national accrediting bodies include, but are not limited 
to, the Commission on Accreditation of Allied Health Education Programs, 
the National League of Nursing Accrediting Commission, the Association 
for Clinical Pastoral Education Inc., and the American Dietetic 
Association.
    (f) Criteria for identifying programs operated by a provider. (1) 
Except as provided in paragraph (f)(2) of this section, for cost 
reporting periods beginning on or after October 1, 1983, in order to be 
considered the operator of an approved nursing or allied health 
education program, a provider must meet all of the following 
requirements:
    (i) Directly incur the training costs.
    (ii) Have direct control of the program curriculum. (A provider may 
enter into an agreement with an educational institution to furnish basic 
academic courses required for completion of the program, but the 
provider must provide all of the courses relating to the theory and 
practice of the nursing or allied health profession involved that are 
required for the degree, diploma, or certificate awarded at the 
completion of the program.)
    (iii) Control the administration of the program, including 
collection of tuition (where applicable), control the maintenance of 
payroll records of teaching staff or students, or both (where 
applicable), and be responsible for day-to-day program operation. (A 
provider may contract with another entity to perform some administrative 
functions, but the provider must maintain control over all aspects of 
the contracted functions.)
    (iv) Employ the teaching staff.
    (v) Provide and control both classroom instruction and clinical 
training (where classroom instruction is a requirement for program 
completion), subject to the parenthetical sentence in paragraph 
(f)(1)(ii) of this section.
    (2) Absent evidence to the contrary, the provider that issues the 
degree, diploma, or other certificate upon successful completion of an 
approved education program is assumed to meet all of the criteria set 
forth in paragraph (f)(1) of this section and to be the operator of the 
program.
    (g) Payment for certain nonprovider-operated programs. (1) Payment 
rule. Costs incurred by a provider, or by an educational institution 
that is related to the provider by common ownership or control (that is, 
a related organization as defined in Sec. 413.17(b)), for the clinical 
training of students enrolled in an approved nursing or allied health 
education program that is not operated by the provider, are paid on a 
reasonable cost basis if the conditions specified in paragraph (g)(2) of 
this section are met.

[[Page 545]]

    (2) Criteria for identification of nonprovider-operated education 
programs. Payment for the incurred costs of educational activities 
identified in paragraph (g)(1) of this section will be made if the 
following conditions are met:
    (i) The clinical training must occur on the premises of the 
provider, that is, in the hospital itself or in the physical area 
immediately adjacent to the provider's main buildings, or in other areas 
and structures that are not strictly contiguous to the main buildings 
but are located within 250 yards of the main buildings.
    (ii) The provider must have claimed and been paid for clinical 
training costs on a reasonable cost basis during the most recent cost 
reporting period that ended on or before October 1, 1989. This condition 
is met if a notice of program reimbursement (NPR) was issued for that 
cost reporting period by November 5, 1990, and the clinical training 
costs were included as pass-through costs. If an NPR was not issued by 
that date, or an NPR was issued but did not treat the clinical training 
costs as pass-through costs, the condition is met if--
    (A) The intermediary included the clinical training costs in the 
allowable costs used to determine the interim rate for the most recent 
cost reporting period ending on or before October 1, 1989; or
    (B) The provider claimed the clinical training costs as pass-through 
costs when the cost report for the most recent cost reporting period 
ending on or before October 1, 1989, was initially submitted.
    (iii) In any cost reporting period, the percentage of total 
allowable provider cost attributable to allowable clinical training cost 
does not exceed the percentage of total cost for clinical training in 
the provider's most recent cost reporting period ending on or before 
October 1, 1989.
    (iv) The students in the educational program must provide a benefit 
to the provider through the provision of clinical services to patients 
of the provider.
    (v) The clinical training costs must be incurred by the provider or 
by an educational institution related to the provider by common control 
or ownership as defined in Sec. 413.17(b) (``Cost to related 
organizations.'') Costs incurred by a third-party, regardless of its 
relationship to either the provider or the educational institution, are 
not allowed.
    (vi) The costs incurred by a provider does not exceed the costs the 
provider would have incurred if it was the sole operator of the program.
    (h) Cost of educational activities treated as normal operating 
costs. The costs of the following educational activities incurred by a 
provider but not operated by that provider are recognized only as normal 
operating costs and paid in accordance with the reimbursement principles 
specified in Part 412 of this subchapter. They include:
    (1) Orientation and on-the-job training.
    (2) Part-time education for bona fide full-time employees at 
properly accredited academic or technical institutions (including other 
providers) devoted to undergraduate or graduate work.
    (3) Educational seminars, workshops, and continuing education 
programs in which the employees participate that enhance the quality of 
medical care or operating efficiency of the provider.
    (4) Maintenance of a medical library.
    (5) Training of a patient or patient's family in the use of medical 
appliances or other treatments.
    (6) Except as provided in paragraph (g) of this section, clinical 
training and classroom instruction of students enrolled in an 
educational program that is not operated by the provider. The following 
are clinical training and classroom instruction costs that are allowable 
as normal operating costs:
    (i) Costs incurred in the clinical training of students, including 
the clinical training or clerkship of undergraduate medical school 
students that takes place in a provider.
    (ii) Classroom instruction costs incurred by a provider that meet 
the following criteria:
    (A) The provider's support does not constitute a redistribution of 
nonprovider costs to the provider. The support must be in addition to 
the costs already being incurred by the nonprovider-operated program. If 
the nonprovider entity reduces its costs due to receiving provider 
support, this reduction constitutes a redistribution of

[[Page 546]]

costs from an educational institution to a patient care institution and 
is a nonallowable provider cost.
    (B) The provider receives a benefit for the support it furnishes.
    (C) The cost of the provider's support is less than the cost the 
provider would incur were it to operate the program.
    (7) Other activities that do not involve the actual operation of an 
approved educational program.

[66 FR 3374, Jan. 12, 2001, as amended at 66 FR 14342, Mar. 12, 2001]



Sec. 413.86  Direct graduate medical education payments.

    (a) Statutory basis and scope--(1) Basis. This section implements 
section 1886(h) of the Act by establishing the methodology for Medicare 
payment of the cost of direct graduate medical educational activities.
    (2) Scope. This section applies to Medicare payments to hospitals 
and hospital-based providers for the costs of approved residency 
programs in medicine, osteopathy, dentistry, and podiatry for cost 
reporting periods beginning on or after July 1, 1985.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    Affiliated group means--
    (1) Two or more hospitals that are located in the same urban or 
rural area (as those terms are defined in Sec. 412.62(f) of this 
subchapter) or in contiguous area and meet the rotation requirement in 
paragraph (g)(7)(ii) of this section.
    (2) Two or more hospitals that are not located in the same or in a 
contiguous urban or rural area, but meet the rotation requirement in 
paragraph (g)(7)(ii) of this section, and are jointly listed--
    (i) As the sponsor, primary clinical site or major participating 
institution for one or more programs as these terms are used in the most 
current publication of the Graduate Medical Education Directory; or
    (ii) As the sponsor or is listed under ``affiliations and outside 
rotations'' for one or more programs in operation in Opportunities, 
Directory of Osteopathic Postdoctoral Education Programs.
    (3) Two or more hospitals that are under common ownership and, 
effective for all affiliation agreements beginning July 1, 2003, meet 
the rotation requirement in paragraph (g)(7)(ii) of this section.
    Affiliation agreement means a written, signed, and dated agreement 
by responsible representatives of each respective hospital in an 
affiliated group, as defined in this section, that specifies--
    (1) The term of the agreement (which, at a minimum is one year), 
beginning on July 1 of a year;
    (2) Each participating hospital's direct and indirect GME FTE caps 
in effect prior to the affiliation;
    (3) The total adjustment to each hospital's FTE caps in each year 
that the affiliation agreement is in effect, for both direct GME and 
IME, that reflects a positive adjustment to one hospital's direct and 
indirect FTE caps that is offset by a negative adjustment to the other 
hospital's (or hospitals') direct and indirect FTE caps of at least the 
same amount;
    (4) The adjustment to each participating hospitals' FTE counts 
resulting from the FTE resident's (or residents') participation in a 
shared rotational arrangement at each hospital participating in the 
affiliated group for each year the affiliation agreement is in effect. 
This adjustment to each participating hospital's FTE count is also 
reflected in the total adjustment to each hospital's FTE caps (in 
accordance with paragraph (3) of this definition); and
    (5) The names of the participating hospitals and their Medicare 
provider numbers.
    All or substantially all of the costs for the training program in 
the nonhospital setting means the residents' salaries and fringe 
benefits (including travel and lodging where applicable) and the portion 
of the cost of teaching physicians' salaries and fringe benefits 
attributable to direct graduate medical education.
    Approved geriatric program means a fellowship program of one or more 
years in length that is approved by one of the national organizations 
listed in Sec. 415.152 of this chapter under that respective 
organization's criteria for geriatric fellowship programs.

[[Page 547]]

    Approved medical residency program means a program that meets one of 
the following criteria:
    (1) Is approved by one of the national organizations listed in 
Sec. 415.152 of this chapter.
    (2) May count towards certification of the participant in a 
specialty or subspecialty listed in the current edition of either of the 
following publications:
    (i) The Directory of Graduate Medical Education Programs published 
by the American Medical Association, and available from American Medical 
Association, Department of Directories and Publications, 515 North State 
Street, Chicago, Illinois 60610; or
    (ii) The Annual Report and Reference Handbook published by the 
American Board of Medical Specialties, and available from American Board 
of Medical Specialties, One Rotary Center, suite 805, Evanston, Illinois 
60201.
    (3) Is approved by the Accreditation Council For Graduate Medical 
Education (ACGME) as a fellowship program in geriatric medicine.
    (4) Is a program that would be accredited except for the accrediting 
agency's reliance upon an accreditation standard that requires an entity 
to perform an induced abortion or require, provide, or refer for 
training in the performance of induced abortions, or make arrangements 
for such training, regardless of whether the standard provides 
exceptions or exemptions.
    Base period means a cost reporting period that began on or after 
October 1, 1983 but before October 1, 1984.
    CPI--U stands for the Consumer Price Index for All Urban Consumers 
as compiled by the Bureau of Labor Statistics.
    Foreign medical graduate means a resident who is not a graduate of a 
medical, osteopathy, dental, or podiatry school, respectively, 
accredited or approved as meeting the standards necessary for 
accreditation by one of the following organizations:
    (1) The Liaison Committee on Medical Education of the American 
Medical Association.
    (2) The American Osteopathic Association.
    (3) The Commission on Dental Accreditation.
    (4) The Council on Podiatric Medical Education.
    FMGEMS stands for the Foreign Medical Graduate Examination in the 
Medical Sciences (Part I and Part II).
    FTE stands for full-time equivalent.
    Medicare patient load means, with respect to a hospital's cost 
reporting period, the total number of hospital inpatient days during the 
cost reporting period that are attributable to patients for whom payment 
is made under Medicare Part A divided by total hospital inpatient days. 
In calculating inpatient days, inpatient days in any distinct part of 
the hospital furnishing a hospital level of care are included and 
nursery days are excluded.
    Primary care resident is a resident enrolled in an approved medical 
residency training program in family medicine, general internal 
medicine, general pediatrics, preventive medicine, geriatric medicine or 
osteopathic general practice.
    Resident means an intern, resident, or fellow who participates in an 
approved medical residency program, including programs in osteopathy, 
dentistry, and podiatry, as required in order to become certified by the 
appropriate specialty board.
    Rural track FTE limitation means the maximum number of residents (as 
specified in paragraph (g)(11) of this section) training in a rural 
track residency program that an urban hospital may include in its FTE 
count and that is in addition to the number of FTE residents already 
included in the hospital's FTE cap.
    Rural track or integrated rural track means an approved medical 
residency training program established by an urban hospital in which 
residents train for a portion of the program at the urban hospital and 
then rotate for a portion of the program to a rural hospital(s) or a 
rural nonhospital site(s).
    Shared rotational arrangement means a residency training program 
under which a resident(s) participates in training at two or more 
hospitals in that program.
    (c) Payment for graduate medical education costs--General rule. 
Beginning with cost reporting periods starting on or after July 1, 1985, 
hospitals, including hospital-based providers, are paid

[[Page 548]]

for the costs of approved graduate medical education programs as 
described in paragraph (d) through (h) of this section.
    (d) Calculating payment for graduate medical education costs. A 
hospital's Medicare payment for the costs of an approved residency 
program is calculated as follows:
    (1) Step one. The hospital's updated per resident amount (as 
determined under paragraph (e) of this section) is multipled by the 
actual number of FTE residents (as determined under paragraph (g) of 
this section). This result is the aggregate approved amount for the cost 
reporting period.
    (2) Step two. The product derived in step one is multipled by the 
hospital's Medicare patient load.
    (3) Step Three. For portions of cost reporting periods occurring on 
or after January 1, 1998, the product derived in step one is multiplied 
by the proportion of the hospital's inpatient days attributable to 
individuals who are enrolled under a risk-sharing contract with an 
eligible organization under section 1876 of the Act and who are entitled 
to Medicare Part A or with a Medicare+Choice organization under Title 
XVIII, Part C of the Act. This amount is multiplied by an applicable 
payment percentage equal to--
    (i) 20 percent for 1998;
    (ii) 40 percent for 1999;
    (iii) 60 percent in 2000;
    (iv) 80 percent in 2001; and
    (v) 100 percent in 2002 and subsequent years.
    (4) Step four. Effective for portions of cost reporting periods 
occurring on or after January 1, 2000, the product derived from step 
three is reduced by a percentage equal to the ratio of the 
Medicare+Choice nursing and allied health payment ``pool'' for the 
current calendar year as described atSec. 413.87(f), to the projected 
total Medicare+Choice direct GME payments made to all hospitals for the 
current calendar year.
    (5) Step five. (i) For portions of cost reporting periods beginning 
on or after January 1, 1998 and before January 1, 2000, add steps two 
and three.
    (ii) Effective for portions of cost reporting periods beginning on 
or after January 1, 2000, add the results of steps two and four.
    (6) Step six. The product derived in step two is apportioned between 
Part A and Part B of Medicare based on the ratio of Medicare's share of 
reasonable costs excluding graduate medical education costs attributable 
to each part as determined through the Medicare cost report.
    (e) Determining per resident amounts for the base period--(1) For 
the base period. (i) Except as provided in paragraph (e)(4) of this 
section, the intermediary determines a base-period per resident amount 
for each hospital as follows:
    (A) Determine the allowable graduate medical education costs for the 
cost reporting period beginning on or after October 1, 1983 but before 
October 1, 1984. In determining these costs, graduate medical education 
costs allocated to the nursery cost center, research and other 
nonreimbursable cost centers, and hospital-based providers that are not 
participating in Medicare are excluded and graduate medical education 
costs allocated to distinct-part hospital units and hospital-based 
providers that participate in Medicare are included.
    (B) Divide the costs calculated in paragraph (e)(1)(i)(A) of this 
section by the average number of FTE residents working in all areas of 
the hospital complex (including those areas whose costs were excluded 
under paragraph (e)(1)(i)(A) of this section) for its cost reporting 
period beginning on or after October 1, 1983 but before October 1, 1984.
    (ii) In determining the base-period per resident amount under 
paragraph (e)(1)(i) of this section, the intermediary--
    (A) Verifies the hospital's base-period graduate medical education 
costs and the hospital's average number of FTE residents;
    (B) Excludes from the base-period graduate medical education costs 
any nonallowable or misclassified costs, including those previously 
allowed under Sec. 412.113(b)(3) of this chapter; and
    (C) Upon a hospital's request, includes graduate medical education 
costs that were misclassified as operating costs during the hospital's 
prospective payment base year and were not allowable under 
Sec. 412.113(b)(3) of

[[Page 549]]

this chapter during the graduate medical education base period. These 
costs may be included only if the hospital requests an adjustment of its 
prospective payment hospital-specific rate or target amount as described 
in paragraph (k)(1) of this section.
    (iii) If the hospital's cost report for its GME base period is no 
longer subject to reopening under Sec. 405.1885 of this chapter, the 
intermediary may modify the hospital's base-period costs solely for 
purposes of computing the per resident amount.
    (iv) If the intermediary modifies a hospital's base-period graduate 
medical education costs as described in paragraph (e)(1)(ii)(B) of this 
section, the hospital may request an adjustment of its prospective 
payment hospital-specific rate or target amount as described in 
paragraph (k)(1) of this section.
    (v) The intermediary notifies each hospital that either had direct 
graduate medical education costs or received indirect education payment 
in its cost reporting period beginning on or after October 1, 1984 and 
before October 1, 1985 of its base-period average per resident amount. A 
hospital may appeal this amount within 180 days of the date of that 
notice.
    (2) For cost reporting periods beginning on or after July 1, 1985 
and before July 1, 1986. For cost reporting periods beginning on or 
after July 1, 1985 and before July 1, 1986, a hospital's base-period per 
resident amount is adjusted as follows:
    (i) If a hospital's base period began on or after October 1, 1983 
and before July 1, 1984, the amount is adjusted by the percentage change 
in the CPI-U that occurred between the hospital's base period and the 
first cost reporting period to which the provisions of this section 
apply. The adjusted amount is then increased by one percent.
    (ii) If a hospital's base period began on or after July 1, 1984 and 
before October 1, 1984, the amount is increased by one percent.
    (3) For cost reporting periods beginning on or after July 1, 1986. 
Subject to the provisions of paragraph (e)(4) of this section, for cost 
reporting periods beginning on or after July 1, 1986, a hospital's base-
period per resident amount is adjusted as follows:
    (i) Except as provided in paragraph (e)(3)(ii) of this section, each 
hospital's per resident amount for the previous cost reporting is 
adjusted by the projected change in the CPI-U for the 12-month cost 
reporting period. This adjustment is subject to revision during the 
settlement of the cost report to reflect actual changes in the CPI-U 
that occurred during the cost reporting period.
    (ii) For cost reporting periods beginning on or after October 1, 
1993 through September 30, 1995, each hospital's per resident amount for 
the previous cost reporting period will not be adjusted for any resident 
FTEs who are not either a primary care resident or an obstetrics and 
gynecology resident.
    (4) For cost reporting periods beginning on or after October 1, 2000 
and ending on or before September 30, 2005. For cost reporting periods 
beginning on or after October 1, 2000 and ending on or before September 
30, 2005, a hospital's per resident amount for each fiscal year is 
adjusted in accordance with the following provisions:
    (i) General provisions. For purposes of Sec. 413.86(e)(4)--
    (A) Weighted average per resident amount. The weighted average per 
resident amount is established as follows:
    (1) Using data from hospitals' cost reporting periods ending during 
FY 1997, CMS calculates each hospital's single per resident amount by 
adding each hospital's primary care and non-primary care per resident 
amounts, weighted by its respective FTEs, and dividing by the sum of the 
FTEs for primary care and non-primary care residents.
    (2) Each hospital's single per resident amount calculated under 
paragraph (e)(4)(i)(A)(1) of this section is standardized by the 1999 
geographic adjustment factor for the physician fee schedule area (as 
determined under Sec. 414.26 of this chapter) in which the hospital is 
located.
    (3) CMS calculates an average of all hospitals' standardized per 
resident amounts that are determined under paragraph (e)(4)(i)(A)(2) of 
this section. The resulting amount is the weighted average per resident 
amount.
    (B) Primary care/obstetrics and gynecology and non-primary care per 
resident

[[Page 550]]

amounts. A hospital's per resident amount is an amount inclusive of any 
CPI-U adjustments that the hospital may have received since the 
hospital's base year, including any CPI-U adjustments the hospital may 
have received because the hospital trains primary care/obstetrics and 
gynecology residents and non-primary care residents as specified under 
paragraph (e)(3)(ii) of this section.
    (ii) Adjustment beginning in FY 2001 and ending in FY 2005. For cost 
reporting periods beginning on or after October 1, 2000 and ending on or 
before September 30, 2005, a hospital's per resident amount is adjusted 
in accordance with paragraphs (e)(4)(ii)(A) through (e)(4)(ii)(C) of 
this section, in that order:
    (A) Updating the weighted average per resident amount for inflation. 
The weighted average per resident amount (as determined under paragraph 
(e)(4)(i)(A) of this section) is updated by the estimated percentage 
increase in the CPI-U during the period beginning with the month that 
represents the midpoint of the cost reporting periods ending during FY 
1997 (that is, October 1, 1996) and ending with the midpoint of the 
hospital's cost reporting period that begins in FY 2001.
    (B) Adjusting for locality. The updated weighted average per 
resident amount determined under paragraph (e)(4)(ii)(A) of this section 
(the national average per resident amount) is adjusted for the locality 
of each hospital by multiplying the national average per resident amount 
by the 1999 geographic adjustment factor for the physician Fee schedule 
area in which each hospital is located, established in accordance with 
Sec. 414.26 of this subchapter.
    (C) Determining necessary revisions to the per resident amount. The 
locality-adjusted national average per resident amount, as calculated in 
accordance with paragraph (e)(4)(ii)(B) of this section, is compared to 
the hospital's per resident amount is revised, if appropriate, according 
to the following three categories:
    (1) Floor. (i) For cost reporting periods beginning on or after 
October 1, 2000, and before October 1, 2001, if the hospital's per 
resident amount would otherwise be less than 70 percent of the locality-
adjusted national average per resident amount for FY 2001 (as determined 
under paragraph (e)(4)(ii)(B) of this section), the per resident amount 
is equal to 70 percent of the locality-adjusted national average per 
resident amount for FY 2001.
    (ii) For cost reporting periods beginning on or after October 1, 
2001, and before October 1, 2002, if the hospital's per resident amount 
would otherwise be less than 85 percent of the locality-adjusted 
national average per resident amount for FY 2002 (as determined under 
paragraph (e)(4)(ii)(B) of this section), the per resident amount is 
equal to 85 percent of the locality-adjusted national average per 
resident amount for FY 2002.
    (iii) For subsequent cost reporting periods beginning on or after 
October 1, 2002, the hospital's per resident amount is updated using the 
methodology specified under paragraph (e)(3)(i) of this section.
    (2) Ceiling. If the hospital's per resident amount is greater than 
140 percent of the locality-adjusted national average per resident 
amount, the per resident amount is adjusted as follows for FY 2001 
through FY 2005:
    (i) FY 2001. For cost reporting periods beginning on or after 
October 1, 2000 and on or before September 30, 2001, if the hospital's 
FY 2000 per resident amount exceeds 140 percent of the FY 2001 locality-
adjusted national average per resident amount (as calculated under 
paragraph (e)(4)(ii)(B) of this section), then, subject to the provision 
stated in paragraph (e)(4)(ii)(C)(2)(iv) of this section, the hospital's 
per resident amount is frozen at the FY 2000 per resident amount and is 
not updated for FY 2001 by the CPI-U factor.
    (ii) FY 2002. For cost reporting periods beginning on or after 
October 1, 2001 and on or before September 30, 2002, if the hospital's 
FY 2001 per resident amount exceeds 140 percent of the FY 2002 locality-
adjusted national average per resident amount, then, subject to the 
provision stated in paragraph (e)(4)(ii)(C)(2)(iv) of this section, the 
hospital's per resident amount is frozen at the FY 2001 per resident 
amount and is not updated for FY 2002 by the CPI-U factor.

[[Page 551]]

    (iii) FY 2003 through FY 2005. For cost reporting periods beginning 
on or after October 1, 2002 and on or before September 30, 2005, if the 
hospital's per resident amount for the previous cost reporting period is 
greater than 140 percent of the locality-adjusted national average per 
resident amount for that same previous cost reporting period (for 
example, for cost reporting periods beginning in FY 2003, compare the 
hospital's per resident amount from the FY 2002 cost report to the 
hospital's locality-adjusted national average per resident amount from 
FY 2002), then, subject to the provision stated in paragraph 
(e)(4)(ii)(C)(2)(iv) of this section, the hospital's per resident amount 
is adjusted using the methodology specified in paragraph (e)(3)(i) of 
this section, except that the CPI-U applied for a 12-month period is 
reduced (but not below zero) by 2 percentage points.
    (iv) General rule for hospitals that exceed the ceiling. For cost 
reporting periods beginning on or after October 1, 2000 and on or before 
September 30, 2005, if a hospital's per resident amount exceeds 140 
percent of the hospital's locality-adjusted national average per 
resident amount and it is adjusted under any of the criteria 
(e)(4)(ii)(C)(2)(i) through (iii) of this section, the current year per 
resident amount cannot be reduced below 140 percent of the locality-
adjusted national average per resident amount.
    (3) Per resident amounts greater than or equal to the floor and less 
than or equal to the ceiling. For cost reporting periods beginning on or 
after October 1, 2000 and on or before September 30, 2005, if a 
hospital's per esident amount is greater than or equal to 70 percent and 
less than or equal to 140 percent of the hospital's locality-adjusted 
national average per resident amount for each respective fiscal year, 
the hospital's per resident amount is updated using the methodology 
specified in paragraph (e)(3)(i) of this section.
    (5) Exceptions--(i) Base period for certain hospitals. If a hospital 
did not have any approved medical residency training programs or did not 
participate in Medicare during the base period, but either condition 
changes in a cost reporting period beginning on or after July 1, 1985, 
the intermediary establishes a per resident amount for the hospital 
using the information from the first cost reporting period during which 
the hospital participates in Medicare and the residents are on duty 
during the first month of that period. Any graduate medical education 
program costs incurred by the hospital before that cost reporting period 
are reimbursed on a reasonable cost basis. The per resident amount is 
based on the lower of the amount specified in paragraph (e)(5)(i)(A) or 
in paragraph (e)(5)(i)(B) of this section, subject to the provisions of 
paragraph (e)(5)(i)(C) of this section.
    (A) The hospital's actual costs, incurred in connection with the 
graduate medical education program for the hospital's first cost 
reporting period in which residents were on duty during the first month 
of the cost reporting period.
    (B) Except as specified in paragraph (e)(5)(i)(C) of this section--
    (1) For base periods that begin before October 1, 2002, the updated 
weighted mean value of per resident amounts of all hospitals located in 
the same geographic wage area, as that term is used in the prospective 
payment system under part 412 of this chapter.
    (2) For base periods beginning on or after October 1, 2002, the 
updated weighted mean value of per resident amounts of all hospitals 
located in the same geographic wage area is calculated using all per 
resident amounts (including primary care and obstetrics and gynecology 
and nonprimary care) and FTE resident counts from the most recently 
settled cost reports of those teaching hospitals.
    (C) If, under paragraph (e)(5)(i)(B)(1) or (e)(5)(i)(B)(2) of this 
section, there are fewer than three existing teaching hospitals with per 
resident amounts that can be used to calculate the weighted mean value 
per resident amount, for base periods beginning on or after October 1, 
1997, the per resident amount equals the updated weighted mean value of 
per resident amounts of all hospitals located in the same census region 
as that term is used in Sec. 412.62(f)(1)(i) of this chapter.

[[Page 552]]

    (ii) Short or long base-period cost reporting periods. If a 
hospital's base-period cost reporting period reflects graduate medical 
education costs for a period that is shorter than 50 weeks or longer 
than 54 weeks, the intermediary converts the allowable costs for the 
base period into a daily figure. The daily figure is then multiplied by 
365 or 366, as appropriate, to derive the approved per resident amount 
for a 12-month base-period cost reporting period. If a hospital has two 
cost reporting periods beginning in the base period, the later period 
serves as the base-period cost reporting period.
    (iii) Short or long cost reporting periods beginning on or after 
July 1, 1985. If a hospital's cost reporting period is shorter than 50 
weeks or longer than 54 weeks, the hospital's intermediary should 
contact CMS Central Office to receive a special CPI-U adjustment factor.
    (f) Determining the total number of FTE residents. Subject to the 
weighting factors in paragraphs (g) and (h) of this section, the count 
of FTE residents is determined as follows:
    (1) Residents in an approved program working in all areas of the 
hospital complex may be counted.
    (2) No individual may be counted as more than one FTE. A hospital 
cannot claim the time spent by residents training at another hospital. 
Except as provided in paragraphs (f)(3) and (f)(4) of this section, if a 
resident spends time in more than one hospital or in a nonprovider 
setting, the resident counts as partial FTE based on the proportion of 
time worked at the hospital to the total time worked. A part-time 
resident counts as a partial FTE based on the proportion of allowable 
time worked compared to the total time necessary to fill a full-time 
internship or residency slot.
    (3) On or after July, 1, 1987 and for portions of cost reporting 
periods occurring before January 1, 1999, the time residents spend in 
nonprovider settings such as freestanding clinics, nursing homes, and 
physicians' offices in connection with approved programs is not excluded 
in determining the number of FTE residents in the calculation of a 
hospital's resident count if the following conditions are met--
    (i) The resident spends his or her time in patient care activities.
    (ii) There is a written agreement between the hospital and the 
outside entity that states that the resident's compensation for training 
time spent outside of the hospital setting is to be paid by the 
hospital.
    (4) For portions of cost reporting periods occurring on or after 
January 1, 1999, the time residents spend in nonprovider settings such 
as freestanding clinics, nursing homes, and physicians' offices in 
connection with approved programs may be included in determining the 
number of FTE residents in the calculation of a hospital's resident 
count if the following conditions are met--
    (i) The resident spends his or her time in patient care activities.
    (ii) The written agreement between the hospital and the nonhospital 
site must indicate that the hospital will incur the cost of the 
resident's salary and fringe benefits while the resident is training in 
the nonhospital site and the hospital is providing reasonable 
compensation to the nonhospital site for supervisory teaching 
activities. The agreement must indicate the compensation the hospital is 
providing to the nonhospital site for supervisory teaching activities.
    (iii) The hospital must incur all or substantially all of the costs 
for the training program in the nonhospital setting in accordance with 
the definition in paragraph (b) of this section.
    (g) Determining the weighted number of FTE residents. Subject to the 
provisions in paragraph (h) of this section, CMS determines a hospital's 
number of FTE residents by applying a weighting factor to each resident 
and then summing the resulting numbers that represent each resident. The 
weighting factor is determined as follows:
    (1) Generally, for purposes of this section, effective July 1, 1995, 
an initial residency period is defined as the minimum number of years 
required for board eligibility. Prior to July 1, 1995, the initial 
residency period equals the minimum number of years required for board 
eligibility in a specialty or subspecialty plus 1 year. An initial 
residency period may not exceed 5 years in

[[Page 553]]

order to be counted toward determining FTE status except in the case of 
fellows in an approved geriatric program whose initial residency period 
may last up to 2 additional years. Effective July 1, 2000, for residency 
programs that began before, on, or after November 29, 1999, the period 
of board eligibility and the initial residency period for a resident in 
an approved child neurology program is the period of board eligibility 
for pediatrics plus 2 years. Effective August 10, 1993, residents or 
fellows in an approved preventive medicine residency or fellowship 
program also may be counted as a full FTE resident for up to 2 
additional years beyond the initial residency period limitations. For 
combined residency programs, an initial residency period is defined as 
the time required for individual certification in the longer of the 
programs. If the resident is enrolled in a combined medical residency 
training program in which all of the individual programs (that are 
combined) are for training primary care residents (as defined in 
paragraph (b) of this section) or obstetrics and gynecology residents, 
the initial residency period is the time required for individual 
certification in the longer of the programs plus 1 year.
    (i) For residency programs other than those specified in paragraphs 
(g)(1)(ii) and (g)(1)(iii) of this section, the initial residency period 
is the minimum number of years of formal training necessary to satisfy 
the requirements for initial board eligibility in the particular 
specialty for which the resident is training, as specified in the most 
recently published edition of the Graduate Medical Education Directory.
    (ii) For residency programs in osteopathy, dentistry, and podiatry, 
the minimum requirement for certification in a specialty or subspecialty 
is the minimum number of years of formal training necessary to satisfy 
the requirements of the appropriate approving body listed in 
Sec. 415.152 of this chapter.
    (iii) For residency programs in geriatric medicine, accredited by 
the appropriate approving body listed in 415.152 of this chapter, these 
programs are considered approved programs on the later of--
    (A) The starting date of the program within a hospital; or
    (B) The hospital's cost reporting periods beginning on or after July 
1, 1985.
    (iv) The time spent in residency programs that do not lead to 
certification in a specialty or subspecialty, but that otherwise meet 
the definition of approved programs, as described in paragraph (b) of 
this section, is counted toward the initial residency period limitation.
    (2) If the resident is in an initial residency period, the weighting 
factor is one.
    (3) If the resident is not in an initial residency period, the 
weighting factor is 1.00 during the period beginning on or after July 1, 
1985 and before July 1, 1986, .75 during the period beginning on or 
after July 1, 1986 and before July 1, 1987 and is .50 thereafter without 
regard to the hospital's cost reporting period.
    (4) For purposes of determining direct graduate medical education 
payments--
    (i) For cost reporting periods beginning on or after October 1, 
1997, a hospital's unweighted FTE count for residents in allopathic and 
osteopathic medicine may not exceed the hospital's unweighted FTE count 
(or, effective for cost reporting periods beginning on or after April 1, 
2000, 130 percent of the unweighted FTE count for a hospital located in 
a rural area) for these residents for the most recent cost reporting 
period ending on or before December 31, 1996.
    (ii) If a hospital's number of FTE residents in a cost reporting 
period beginning on or after October 1, 1997, and before October 1, 
2001, exceeds the limit described in this paragraph (g), the hospital's 
total weighted FTE count (before application of the limit) will be 
reduced in the same proportion that the number of FTE residents for that 
cost reporting period exceeds the number of FTE residents for the most 
recent cost reporting period ending on or before December 31, 1996.
    (iii) If the hospital's number of FTE residents in a cost reporting 
period beginning on or after October 1, 2001 exceeds the limit described 
in this paragraph (g), the hospital's weighted FTE count (before 
application of the limit),

[[Page 554]]

for primary care and obstetrics and gynecology residents and nonprimary 
care residents, respectively, will be reduced in the same proportion 
that the number of FTE residents for that cost reporting period exceeds 
the number of FTE residents for the most recent cost reporting period 
ending on or before December 31, 1996.
    (iv) Hospitals that are part of the same affiliated group (as 
described under paragraph (b) of this section) may elect to apply the 
limit on an aggregate basis as described under paragraph (g)(7) of this 
section.
    (v) The fiscal intermediary may make appropriate modifications to 
apply the provisions of this paragraph (g)(4) based on the equivalent of 
a 12-month cost reporting period.
    (5) For purposes of determining direct graduate medical education 
payment--
    (i) For the hospital's first cost reporting period beginning on or 
after October 1, 1997, the hospital's weighted FTE count is equal to the 
average of the weighted FTE count for the payment year cost reporting 
period and the preceding cost reporting period.
    (ii) For cost reporting periods beginning on or after October 1, 
1998, and before October 1, 2001, the hospital's weighted FTE count is 
equal to the average of the weighted FTE count for the payment year cost 
reporting period and the preceding two cost reporting periods.
    (iii) For cost reporting periods beginning on or after October 1, 
2001, the hospital's weighted FTE count for primary care and obstetrics 
and gynecology residents is equal to the average of the weighted primary 
care and obstetrics and gynecology counts for the payment year cost 
reporting period and the preceding two cost reporting periods, and the 
hospital's weighted FTE count for nonprimary care residents is equal to 
the average of the weighted nonprimary care FTE counts for the payment 
year cost reporting period and the preceding two cost reporting periods.
    (iv) The fiscal intermediary may make appropriate modifications to 
apply the provisions of this paragraph (g)(5) based on the equivalent of 
12-month cost reporting periods.
    (v) If a hospital qualifies for an adjustment to the limit 
established under paragraph (g)(4) of this section for new medical 
residency programs created under paragraph (g)(6) of this section, the 
count of the residents participating in new medical residency training 
programs above the number included in the hospital's FTE count for the 
cost reporting period ending during calendar year 1996 is added after 
applying the averaging rules in this paragraph (g)(5) for a period of 
years. Residents participating in new medical residency training 
programs are included in the hospital's FTE count before applying the 
averaging rules after the period of years has expired. For purposes of 
this paragraph (g)(5), for each new program started, the period of years 
equals the minimum accredited length for each new program. The period of 
years begins when the first resident begins training in each new 
program.
    (vi) Subject to the regulations at paragraph (g)(9) of this section, 
FTE residents that are displaced by the closure of either another 
hospital or another hospital's program are added to the FTE count after 
applying the averaging rules in this paragraph (g)(5) for the receiving 
hospital for the duration of the time that the displaced residents are 
training at the receiving hospital.
    (6) If a hospital establishes a new medical residency training 
program as defined in paragraph (g)(13) of this section on or after 
January 1, 1995, the hospital's FTE cap described under paragraph (g)(4) 
of this section may be adjusted as follows:
    (i) If a hospital had no allopathic or osteopathic residents in its 
most recent cost reporting period ending on or before December 31, 1996, 
and it establishes a new medical residency training program on or after 
January 1, 1995, the hospital's unweighted FTE resident cap under 
paragraph (g)(4) of this section may be adjusted based on the product of 
the highest number of residents in any program year during the third 
year of the first program's existence for all new residency training 
programs and the number of years in which residents are expected to 
complete the program based on the minimum accredited length for the type 
of program. The adjustment to the cap

[[Page 555]]

may not exceed the number of accredited slots available to the hospital 
for the new program.
    (A) If the residents are spending an entire program year (or years) 
at one hospital and the remainder of the program at another hospital, 
the adjustment to each respective hospital's cap is equal to the product 
of the highest number of residents in any program year during the third 
year of the first program's existence and the number of years the 
residents are training at each respective hospital.
    (B) Prior to the implementation of the hospital's adjustment to its 
FTE cap beginning with the fourth year of the hospital's residency 
program(s), the hospital's cap may be adjusted during each of the first 
3 years of the hospital's new residency program using the actual number 
of residents participating in the new program. The adjustment may not 
exceed the number of accredited slots available to the hospital for each 
program year.
    (C) Except for rural hospitals, the cap will not be adjusted for new 
programs established more than 3 years after the first program begins 
training residents.
    (D) An urban hospital that qualifies for an adjustment to its FTE 
cap under paragraph (g)(6)(i) of this section is not permitted to be 
part of an affiliated group for purposes of establishing an aggregate 
FTE cap.
    (E) A rural hospital that qualifies for an adjustment to its FTE cap 
under paragraph (g)(6)(i) of this section is permitted to be part of an 
affiliated group for purposes of establishing an aggregate FTE cap.
    (ii) If a hospital had allopathic or osteopathic residents in its 
most recent cost reporting period ending on or before December 31, 1996, 
the hospital's unweighted FTE cap may be adjusted for new medical 
residency training programs established on or after January 1, 1995 and 
on or before August 5, 1997. The adjustment to the hospital's FTE 
resident limit for the new program is based on the product of the 
highest number of residents in any program year during the third year of 
the newly established program and the number of years in which residents 
are expected to complete each program based on the minimum accredited 
length for the type of program.
    (A) If the residents are spending an entire program year (or years) 
at one hospital and the remainder of the program at another hospital, 
the adjustment to each respective hospital's cap is equal to the product 
of the highest number of residents in any program year during the third 
year of the first program's existence and the number of years the 
residents are training at each respective hospital.
    (B) Prior to the implementation of the hospital's adjustment to its 
FTE cap beginning with the fourth year of the hospital's residency 
program, the hospital's cap may be adjusted during each of the first 3 
years of the hospital's new residency program, using the actual number 
of residents in the new programs. The adjustment may not exceed the 
number of accredited slots available to the hospital for each program 
year.
    (iii) If a hospital with allopathic or osteopathic residents in its 
most recent cost reporting period ending on or before December 31, 1996, 
is located in a rural area (or other hospitals located in rural areas 
that added residents under paragraph (g)(6)(i) of this section), the 
hospital's unweighted FTE limit may be adjusted in the same manner 
described in paragraph (g)(6)(ii) of this section to reflect the 
increase for residents in the new medical residency training programs 
established after August 5, 1997. For these hospitals, the limit will be 
adjusted for additional new programs but not for expansions of existing 
or previously existing programs.
    (iv) A hospital seeking an adjustment to the limit on its unweighted 
resident count policy must provide documentation to its fiscal 
intermediary justifying the adjustment.
    (7) A hospital may receive a temporary adjustment to its FTE cap, 
which is subject to the averaging rules under paragraph (g)(5)(iii) of 
this section, to reflect residents added or subtracted because the 
hospital is participating in an affiliated group (as defined under 
paragraph (b) of this section). Under this provision--
    (i) Each hospital in the affiliated group must submit the 
affiliation

[[Page 556]]

agreement, as defined under paragraph (b) of this section, to the CMS 
fiscal intermediary servicing the hospital and send a copy to CMS's 
Central Office no later than July 1 of the residency program year during 
which the affiliation agreement will be in effect.
    (ii) Each hospital in the affiliated group must have a shared 
rotational arrangement, as defined in paragraph (b) of this section, 
with at least one other hospital within the affiliated group, and all of 
the hospitals within the affiliated group must be connected by a series 
of such shared rotational arrangements.
    (iii) During the shared rotational arrangements under an affiliation 
agreement, as defined in paragraph (b) of this section, more than one of 
the hospitals in the affiliated group must count the proportionate 
amount of the time spent by the resident(s) in its FTE resident counts. 
No resident may be counted in the aggregate as more than one FTE.
    (iv) The net effect of the adjustments (positive or negative) on the 
affiliated hospitals' aggregate FTE cap for each affiliation agreement 
must not exceed zero.
    (v) If the affiliation agreement terminates for any reason, the FTE 
cap of each hospital in the affiliated group will revert to the 
individual hospital's pre-affiliation FTE cap that is determined under 
the provisions of paragraph (g)(4) of this section.
    (8) A hospital that began construction of its facility prior to 
August 5, 1997, and sponsored new medical residency training programs on 
or after January 1, 1995 and on or before August 5, 1997, that either 
received initial accreditation by the appropriate accrediting body or 
temporarily trained residents at another hospital(s) until the facility 
was completed, may receive an adjustment to its FTE cap.
    (i) The newly constructed hospital's FTE cap is equal to the lesser 
of:
    (A) The product of the highest number of residents in any program 
year during the third year of the newly established program and the 
number of years in which residents are expected to complete the programs 
based on the minimum accredited length for each type of program; or
    (B) The number of accredited slots available to the hospital for 
each year of the programs.
    (ii) If the new medical residency training programs sponsored by the 
newly constructed hospital have been in existence for 3 years or more by 
the time the residents begin training at the newly constructed hospital, 
the newly constructed hospital's cap will be based on the number of 
residents training in the third year of the programs begun at the 
temporary training site.
    (iii) If the new medical residency training programs sponsored by 
the newly constructed hospital have been in existence for less than 3 
years by the time the residents begin training at the newly constructed 
hospital, the newly constructed hospital's cap will be based on the 
number of residents training at the newly constructed hospital in the 
third year of the programs (including the years at the temporary 
training site).
    (iv) A hospital that qualifies for an adjustment to its FTE cap 
under paragraph (g)(8) of this section may be part of an affiliated 
group for purposes of establishing an aggregate FTE cap.
    (v) The provisions of this paragraph (g)(8) are applicable during 
portions of cost reporting periods occurring on or after October 1, 
1999.
    (9) Closure of hospital or hospital residency program.
    (i) Definitions. For purposes of this paragraph (g)(9)--
    (A) ``Closure of a hospital'' means the hospital terminates its 
Medicare agreement under the provisions of Sec. 489.52 of this chapter.
    (B) ``Closure of a hospital residency training program'' means the 
hospital ceases to offer training for residents in a particular approved 
medical residency training program.
    (ii) Closure of a hospital. A hospital may receive a temporary 
adjustment to its FTE cap to reflect residents added because of another 
hospital's closure if the hospital meets the following criteria:
    (A) The hospital is training additional residents from a hospital 
that closed on or after July 1, 1996.
    (B) No later than 60 days after the hospital begins to train the 
residents,

[[Page 557]]

the hospital submits a request to its fiscal intermediary for a 
temporary adjustment to its FTE cap, documents that the hospital is 
eligible for this temporary adjustment by identifying the residents who 
have come from the closed hospital and have caused the hospital to 
exceed its cap, and specifies the length of time the adjustment is 
needed.
    (iii) Closure of a hospital's residency training program. If a 
hospital that closes its residency training program voluntarily agrees 
to temporarily reduce its FTE cap according to the criteria specified in 
paragraph (g)(9)(iii)(B) of this section, another hospital(s) may 
receive a temporary adjustment to its FTE cap to reflect residents added 
because of the closure of the residency training program if the criteria 
specified in paragraph (g)(9)(iii)(A) of this section are met.
    (A) Receiving hospital(s). A hospital may receive a temporary 
adjustment to its FTE cap to reflect residents added because of the 
closure of another hospital's residency training program if--
    (1) The hospital is training additional residents from the residency 
training program of a hospital that closed a program; and
    (2) No later than 60 days after the hospital begins to train the 
residents, the hospital submits to its fiscal intermediary a request for 
a temporary adjustment to its FTE cap, documents that it is eligible for 
this temporary adjustment by identifying the residents who have come 
from another hospital's closed program and have caused the hospital to 
exceed its cap, specifies the length of time the adjustment is needed, 
and submits to its fiscal intermediary a copy of the FTE reduction 
statement by the hospital that closed its program, as specified in 
paragraph (g)(9)(iii)(B)(2) of this section.
    (B) Hospital that closed its program(s). A hospital that agrees to 
train residents who have been displaced by the closure of another 
hospital's program may receive a temporary FTE cap adjustment only if 
the hospital with the closed program--
    (1) Temporarily reduces its FTE cap based on the FTE residents in 
each program year training in the program at the time of the program's 
closure. This yearly reduction in the FTE cap will be determined based 
on the number of those residents who would have been training in the 
program during that year had the program not closed; and
    (2) No later than 60 days after the residents who were in the closed 
program begin training at another hospital, submit to its fiscal 
intermediary a statement signed and dated by its representative that 
specifies that it agrees to the temporary reduction in its FTE cap to 
allow the hospital training the displaced residents to obtain a 
temporary adjustment to its cap; identifies the residents who were in 
training at the time of the program's closure; identifies the hospitals 
to which the residents are transferring once the program closes; and 
specifies the reduction for the applicable program years.
    (10) Effective for cost reporting periods beginning on or after 
November 29, 1999, a hospital may receive an adjustment to its FTE cap 
of up to three additional resident FTEs, if the hospital meets the 
following criteria:
    (i) The additional residents are residents of a primary care program 
that would have been counted by the hospital as residents for purposes 
of the hospital's FTE cap but for the fact that the additional residents 
were on maternity or disability leave or a similar approved leave of 
absence during the hospital's most recent cost reporting period ending 
on or before December 31, 1996;
    (ii) The leave of absence was approved by the residency program 
director to allow the residents to be absent from the program and return 
to the program after the leave of absence; and
    (iii) No later than 6 months after August 1, 2000, the hospital 
submits to the fiscal intermediary a request for an adjustment to its 
FTE cap, and provides contemporaneous documentation of the approval of 
the leave of absence by the residency director, specific to each 
additional resident that is to be counted for purposes of the 
adjustment.
    (11) For cost reporting periods beginning on or after October 1, 
1997, a non-Veterans Affairs (VA) hospital may receive a temporary 
adjustment to its FTE cap to reflect residents who had

[[Page 558]]

previously trained at a VA hospital and were subsequently transferred to 
the non-VA hospital, if that hospital meets the following criteria:
    (i) The transferred residents had been training previously at a VA 
hospital in a program that would have lost its accreditation by the 
ACGME if the residents continued to train at the VA hospital;
    (ii) The residents were transferred to the hospital from the VA 
hospital on or after January 1, 1997, and before July 31, 1998; and
    (iii) The hospital submits a request to its fiscal intermediary for 
a temporary adjustment to its FTE cap, documents that it is eligible for 
this temporary adjustment by identifying the residents who have come 
from the VA hospital, and specifies the length of time those residents 
will be trained at the hospital.
    (12) For cost reporting periods beginning on or after April 1, 2000, 
an urban hospital that establishes a new residency program, or has an 
existing residency program, with a rural track (or an integrated rural 
track) may include in its FTE count residents in those rural tracks, in 
addition to the residents subject to its FTE cap specified under 
paragraph (g)(4) of this section. An urban hospital with a rural track 
residency program may count residents in those rural tracks up to a 
rural track FTE limitation if the hospital complies with the conditions 
specified in paragraphs (g)(12)(i) through (g)(12)(vi) of this section.
    (i) If an urban hospital rotates residents to a separately 
accredited rural track program at a rural hospital(s) for two-thirds of 
the duration of the program, the urban hospital may include those 
residents in its FTE count for the time the rural track residents spend 
at the urban hospital. The urban hospital may include in its FTE count 
those residents in the rural track training at the urban hospital, not 
to exceed its rural track FTE limitation, determined as follows:
    (A) For the first 3 years of the rural track's existence, the rural 
track FTE limitation for each urban hospital will be the actual number 
of FTE residents training in the rural track at the urban hospital.
    (B) Beginning with the fourth year of the rural track's existence, 
the rural track FTE limitation is equal to the product of the highest 
number of residents in any program year, who during the third year of 
the rural track's existence are training in the rural track at the urban 
hospital or the rural hospital(s) and are designated at the beginning of 
their training to be rotated to the rural hospital(s) for at least two-
thirds of the duration of the program, and the number of years those 
residents are training at the urban hospital.
    (ii) If an urban hospital rotates residents to a separately 
accredited rural track program at a rural nonhospital site(s) for two-
thirds of the duration of the program, the urban hospital may include 
those residents in its FTE count, subject to the requirements under 
paragraph (f)(4) of this section. The urban hospital may include in its 
FTE count those residents in the rural track, not to exceed its rural 
track FTE limitation, determined as follows:
    (A) For the first 3 years of the rural track's existence, the rural 
track FTE limitation for each urban hospital will be the actual number 
of FTE residents training at the urban hospital and the rural 
nonhospital site(s).
    (B) Beginning with the fourth year of the rural track's existence, 
the rural track FTE limitation is equal to the product of--
    (1) The highest number of residents in any program year who, during 
the third year of the rural track's existence, are training in the rural 
track at--
    (i) The urban hospital and are designated at the beginning of their 
training to be rotated to a rural nonhospital site(s) for at least two-
thirds of the duration of the program; and
    (ii) The rural nonhospital site(s); and
    (2) The number of years in which the residents are expected to 
complete each program based on the minimum accredited length for the 
type of program.
    (iii) If an urban hospital rotates residents in the rural track 
program to a rural hospital(s) for periods of time that are less than 
two-thirds of the duration of the program, the rural hospital may not 
include those residents

[[Page 559]]

in its FTE count (if the urban hospital's FTE count exceeds that 
hospital's FTE cap), nor may the urban hospital include those residents 
when calculating its rural track FTE limitation.
    (iv) If an urban hospital rotates residents in the rural track 
program to a rural nonhospital site(s) for periods of time that are less 
than two-thirds of the duration of the program, the urban hospital may 
include those residents in its FTE count, subject to the requirements 
under paragraph (f)(4) of this section. The urban hospital may include 
in its FTE count those residents in the rural track, not to exceed its 
rural track FTE limitation, determined as follows:
    (A) For the first 3 years of the rural track's existence, the rural 
track FTE limitation for the urban hospital will be the actual number of 
FTE residents training in the rural track at the rural nonhospital 
site(s).
    (B) Beginning with the fourth year of the rural track's existence, 
the rural track FTE limitation is equal to the product of--
    (1) The highest number of residents in any program year who, during 
the third year of the rural track's existence, are training in the rural 
track at the rural nonhospital site(s) or are designated at the 
beginning of their training to be rotated to the rural nonhospital 
site(s) for a period that is less than two-thirds of the duration of the 
program; and
    (2) The length of time in which the residents are being training at 
the rural nonhospital site(s) only.
    (v) All urban hospitals that wish to count FTE residents in rural 
tracks, not to exceed their respective rural track FTE limitation, must 
also comply with all of the following conditions:
    (A) An urban hospital may not include in its rural track FTE 
limitation or (assuming the urban hospital's FTE count exceeds its FTE 
cap) FTE count residents who are training in a rural track residency 
program that were already included as part of the hospital's FTE cap.
    (B) The hospital must base its count of residents in a rural track 
on written contemporaneous documentation that each resident enrolled in 
a rural track program at the hospital intends to rotate for a portion of 
the residency program to a rural area.
    (C) All residents that are included by the hospital as part of its 
rural track FTE count (not to exceed its rural track FTE limitation) 
must train in the rural area. However, where a resident begins to train 
in the rural track program at the urban hospital but leaves the program 
before completing the total required portion of training in the rural 
area, the urban hospital may count the time the resident trained in the 
urban hospital if another resident fills the vacated FTE slot and 
completes the training in the rural portion of the rural track program. 
An urban hospital may not receive graduate medical education payment for 
the time the resident trained at the urban hospital if another resident 
fills the vacated FTE slot and first begins to train at the urban 
hospital.
    (vi) If CMS finds that residents who are included by the urban 
hospital as part of its FTE count did not actually complete the training 
in the rural area, CMS will reopen the urban hospital's cost report 
within the 3-year reopening period as specified in Sec. 405.1885 of this 
chapter and adjust the hospital's Medicare GME payments (and, where 
applicable, the hospital's rural track FTE limitation).
    (13) For purposes of paragraph (g) of this section, a new medical 
residency training program means a medical residency that receives 
initial accreditation by the appropriate accrediting body or begins 
training residents on or after January 1, 1995.
    (h) Determination of weighting factors for foreign medical 
graduates. (1) The weighting factor for a foreign medical graduate is 
determined under the provisions of paragraph (g) of this section if the 
foreign medical graduate--
    (i) Has passed FMGEMS; or
    (ii) Before July 1, 1986, received certification from, or passed an 
examination of, the Educational Committee for Foreign Medical Graduates.
    (2) Before July 1, 1986, the weighting factor for a foreign medical 
graduate is 1.0 times the weight determined under the provisions of 
paragraph (g) of this section. On or after July 1, 1986, and before July 
1, 1987, the weighting factor

[[Page 560]]

for a graduate of a foreign medical school who was in a residency 
program both before and after July 1, 1986 but who does not meet the 
requirements set forth in paragraph (h)(1) of this section is .50 times 
the weight determined under the provisions of paragraph (g) of this 
section.
    (3) On or after July 1, 1987, these foreign medical graduates are 
not counted in determining the number of FTE residents.
    (4) During the cost reporting period in which a foreign medical 
graduate passes FMGEMS, the weighting factor for that resident is 
determined under the provisions of paragraph (g) of this section for the 
part of the cost reporting period beginning with the month the resident 
passes the test.
    (5) On or after September 1, 1989, the National Board of Medical 
Examiners Examination, Parts I and II, may be substituted for FMGEMS for 
purposes of the determination made under paragraphs (h)(1) and (h)(4) of 
this section.
    (6) On or after June 1, 1992, the United States Medical Licensing 
Examination may be substituted for the FMGEMS for purposes of the 
determination made under paragraphs (h)(1) and (h)(4) of this section. 
On or after July 1, 1993 only the results of steps I and II of the 
United States Medical Licensing Examination shall be accepted for 
purposes of making this determination.
    (i) To include a resident in the FTE count for a particular cost 
reporting period, the hospital must furnish the following information.

The information must be certified by an official of the hospital and, if 
different, an official responsible for administering the residency 
program.
    (1) The name and social security number of the resident.
    (2) The type of residency program in which the individual 
participates and the number of years the resident has completed in all 
types of residency programs.
    (3) The dates the resident is assigned to the hospital and any 
hospital-based providers.
    (4) The dates the resident is assigned to other hospitals, or other 
freestanding providers, and any nonprovider setting during the cost 
reporting period, if any.
    (5) The name of the medical, osteopathic, dental, or podiatric 
school from which the resident graduated and the date of graduation.
    (6) If the resident is an FMG, documentation concerning whether the 
resident has satisfied the requirements of paragraph (h) of this 
section.
    (7) The name of the employer paying the resident's salary.
    (j) Special rules for States that formerly had a waiver from 
Medicare reimbursement principles. (1) Effective for cost reporting 
periods beginning on or after January 1, 1986, hospitals in States that, 
prior to becoming subject to the prospective payment system, had a 
waiver for the operation of a State reimbursement control system under 
section 1886(c) of the Act, section 402 of the Social Security 
Amendments of 1967 (42 U.S.C. 1395b-1 or section 222(a) of the Social 
Security Amendment of 1972 (42 U.S.C. 1395b-1 (note)) are permitted to 
change the order in which they allocate administrative and general costs 
to the order specified in the instructions for the Medicare cost report.
    (2) For hospitals making this election, the base-period costs for 
the purpose of determining the per resident amount are adjusted to take 
into account the change in the order by which they allocate 
administrative and general costs to interns and residents in approved 
program cost centers.
    (3) Per resident amounts are determined for the base period and 
updated as described in paragraph (e) of this section. For cost 
reporting periods beginning on or after January 1, 1986, payment is made 
based on the methodology described in paragraph (d) of this section.
    (k) Adjustment of a hospital's target amount or prospective payment 
hospital-specific rate--(1) Misclassified operating costs--(i) General 
rule. If a hospital has its base-period graduate medical education costs 
reduced under paragraph (e)(1) of this section because those costs 
included misclassified operating costs, the hospital may request that 
the intermediary review the classification of the affected costs in its 
rate-of-

[[Page 561]]

increase ceiling or prospective payment base year for purposes of 
adjusting the hospital's target amount or hospital-specific rate. For 
those cost reports that are not subject to reopening under Sec. 405.1885 
of this chapter, the hospital's reopening request must explicitly state 
that the review is limited to this one issue.
    (ii) Request for review. The hospital must request review of the 
classification of its rate of increase ceiling or prospective payment 
base year costs no later than 180 days after the date of the notice by 
the intermediary of the hospital's base-period average per resident 
amount. A hospital's request for review must include sufficient 
documentation to demonstrate to the intermediary that adjustment of the 
hospital's hospital-specific rate or target amount is warranted.
    (iii) Effect of intermediary's review. If the intermediary, upon 
review of the hospital's costs, determines that the hospital's hospital-
specific rate or target amount should be adjusted, the adjustment of the 
hospital-specific rate or the target amount is effective for the 
hospital's cost reporting periods subject to the prospective payment 
system or the rate-of-increase ceiling that are still subject to 
reopening under Sec. 405.1885 of this chapter.
    (2) Misclassification of graduate medical education costs--(i) 
General rule. If costs that should have been classified as graduate 
medical education costs were treated as operating costs during both the 
graduate medical education base period and the rate-of-increase ceiling 
base year or prospective payment base year and the hospital wishes to 
receive benefit for the appropriate classification of these costs as 
graduate medical education costs in the graduate medical education base 
period, the hospital must request that the intermediary review the 
classification of the affected costs in the rate-of-increase ceiling or 
prospective payment base year for purposes of adjusting the hospital's 
target amount or hospital-specific rate. For those cost reports that are 
not subject to reopening under Sec. 405.1885 of this chapter, the 
hospital's reopening request must explicitly state that the review is 
limited to this one issue.
    (ii) Request for review. The hospital must request review of the 
classification of its costs no later than 180 days after the date of the 
intermediary's notice of the hospital's base-period average per resident 
amount. A hospital's request for review must include sufficient 
documentation to demonstrate to the intermediary that modification of 
the adjustment of the hospital's hospital-specific rate or target amount 
is warranted.
    (iii) Effect of intermediary's review. If the intermediary, upon 
review of the hospital's costs, determines that the hospital's hospital-
specific rate or target amount should be adjusted, the adjustment of the 
hospital-specific rate and the adjustment of the target amount is 
effective for the hospital's cost reporting periods subject to the 
prospective payment system or the rate-of-increase ceiling that are 
still subject to reopening under Sec. 405.1885 of this chapter.

[54 FR 40316, Sept. 29, 1989; 55 FR 290, Jan. 4, 1990, as amended at 56 
FR 43243, Aug. 30, 1991; 57 FR 39830, Sept. 1, 1992; 58 FR 46343, Sept. 
1, 1993; 59 FR 45401, Sept. 1, 1994; 60 FR 63189, Dec. 8, 1995; 61 FR 
46225, Aug. 30, 1996; 62 FR 46034, Aug. 29, 1997; 63 FR 26358, May 12, 
1998; 63 FR 41005, July 31, 1998; 64 FR 41542, July 30, 1999; 65 FR 
47049, 47109, Aug. 1, 2000; 66 FR 32195, June 13, 2001; 66 FR 39932, 
39937, Aug. 1, 2001; 67 FR 50119, Aug. 1, 2002]



Sec. 413.87  Payments for Medicare+Choice nursing and allied health education programs.

    (a) Statutory basis. This section implements section 1886(l) of the 
Act, which provides for additional payments to hospitals that operate 
and receive Medicare reasonable cost reimbursement for approved nursing 
and allied health education programs and the methodology for determining 
the additional payments.
    (b) Scope. This section sets forth the rules for determining an 
additional payment amount to hospitals that receive payments for the 
costs of operating approved nursing or allied health education programs 
under Sec. 413.85.
    (c) Qualifying conditions for payment.
    (1) For portions of cost reporting periods occurring on or after 
January 1,

[[Page 562]]

2000 and before January 1, 2001, a hospital that operates and receives 
payment for a nursing or allied health education program under 
Sec. 413.85 may receive an additional payment amount associated with 
Medicare+Choice utilization. The hospital may receive the additional 
payment amount, which is calculated in accordance with the provisions of 
paragraph (d) of this section, if both of the conditions specified in 
paragraphs (c)(1)(i) and (c)(1)(ii) of this section are met.
    (i) The hospital must have received Medicare reasonable cost payment 
for an approved nursing or allied health education program under 
Sec. 413.85 in its cost reporting period(s) ending in the fiscal year 
that is 2 years prior to the current calendar year. (For example, if the 
current year is calendar year 2000, the fiscal year that is 2 years 
prior to calendar year 2000 is FY 1998.) For a hospital that first 
establishes a nursing or allied health education program after FY 1998 
and receives reasonable cost payment for the program as specified under 
Sec. 413.85 after FY 1998, the hospital is eligible to receive an 
additional payment amount in a calendar year that is 2 years after the 
respective fiscal year so long as the hospital also meets the condition 
under paragraph (c)(1(ii) of this section.
    (ii) The hospital must be receiving reasonable cost payment for an 
approved nursing or allied health education program under Sec. 413.85 in 
the current calendar year.
    (2) For portions of cost reporting periods occurring on or after 
January 1, 2001, in addition to meeting the conditions specified in 
paragraphs (c)(1)(i) and (c)(1)(ii) of this section, the hospital must 
have had a Medicare+Choice utilization greater than zero in its cost 
reporting period(s) ending in the fiscal year that is 2 years prior to 
the current calendar year.
    (d) Calculating the additional payment amount for portions of cost 
reporting periods occurring on or after January 1, 2000 and before 
January 1, 2001. For portions of cost reporting periods occurring on or 
after January 1, 2000 and before January 1, 2001, subject to the 
provisions of Sec. 413.86(d)(4) relating to calculating a proportional 
reduction in Medicare+Choice direct GME payments, the additional payment 
amount specified in paragraph (c) of this section is calculated 
according to the following steps:
    (1) Step one. Each calendar year, determine the hospital's total 
nursing and allied health education program payments from its cost 
reporting period(s) ending in the fiscal year that is 2 years prior to 
the current calendar year.
    (2) Step two. Determine the ratio of the hospital's payments from 
step one to the total of all nursing and allied health education program 
payments across all hospitals for all cost reporting periods ending in 
the fiscal year that is 2 years prior to the current calendar year.
    (3) Step three. Multiply the ratio calculated in step two by the 
Medicare+Choice nursing and allied health payment ``pool'' determined in 
accordance with paragraph (f) of this section for the current calendar 
year. The resulting product is each respective hospital's additional 
payment amount.
    (e) Calculating the additional payment amount for portions of cost 
reporting periods occurring on or after January 1, 2001. For portions of 
cost reporting periods occurring on or after January 1, 2001, subject to 
the provisions of Sec. 413.86(d)(4) relating to calculating a 
proportional reduction in Medicare+Choice direct GME payments, the 
additional payment amount specified in paragraph (c) of this section is 
calculated according to the following steps:
    (1) Step one. Each calendar year, determine for each eligible 
hospital the total--
    (i) Medicare payments received for approved nursing or allied health 
education programs based on data from the settled cost reports for the 
period(s) ending in the fiscal year that is 2 years prior to the current 
calendar year; and
    (ii) Inpatient days for that same cost reporting period.
    (iii) Medicare+Choice inpatient days for that same cost reporting 
period.
    (2) Step two. Using the data from step one, determine the ratio of 
the individual hospital's total nursing or allied health payments, to 
its total inpatient

[[Page 563]]

days. Multiply this ratio by the hospital's total Medicare+Choice 
inpatient days.
    (3) Step three. CMS will determine, using the best available data, 
for all eligible hospitals the total of all--
    (i) Nursing and allied health education program payments made to all 
hospitals for all cost reporting periods ending in the fiscal year that 
is 2 years prior to the current calendar year;
    (ii) Inpatient days from those same cost reporting periods; and
    (iii) Medicare+Choice inpatient days for those same cost reporting 
periods.
    (4) Step four. Using the data from step three, CMS will determine 
the ratio of the total of all nursing and allied health education 
program payments made to all hospitals for all cost reporting periods 
ending in the fiscal year that is 2 years prior to the current calendar 
year, to the total of all inpatient days from those same cost reporting 
periods. CMS will multiply this ratio by the total of all 
Medicare+Choice inpatient days for those same cost reporting periods.
    (5) Step 5. Calculate the ratio of the product determined in step 
two to the product determined in step four.
    (6) Step 6. Multiply the ratio calculated in step five by the amount 
determined in accordance with paragraph (f) of this section for the 
current calendar year. The resulting product is each respective 
hospital's additional payment amount.
    (f)  Calculation of the payment ``pool.''
    (1) Subject to paragraph (f)(3) of this section, each calendar year, 
CMS will calculate a Medicare+Choice nursing and allied health payment 
``pool'' according to the following steps:
    (i) Determine the ratio of projected total Medicare+Choice direct 
GME payments made in accordance with the provisions of Sec. 413.86(d)(3) 
across all hospitals in the current calendar year to projected total 
direct GME payments made across all hospitals in the current calendar 
year.
    (ii) Multiply the ratio calculated in paragraph (f)(1)(i) of this 
section by projected total Medicare nursing and allied health education 
reasonable cost payments made to all hospitals in the current calendar 
year.
    (2) The resulting product of the steps under paragraphs (f)(1)(i) 
and (f)(1)(ii) of this section is the Medicare+Choice nursing and allied 
health payment ``pool'' for the current calendar year.
    (3) The payment pool may not exceed $60 million in any calendar 
year.

[65 FR 47051, Aug. 1, 2000, as amended at 66 FR 32195, June 13, 2001]



Sec. 413.88  Incentive payments under plans for voluntary reduction in number of medical residents.

    (a) Statutory basis. This section implements section 1886(h)(6) of 
the Act, which establishes a program under which incentive payments may 
be made to qualifying entities that develop and implement approved plans 
to voluntarily reduce the number of residents in medical residency 
training.
    (b) Qualifying entity defined. ``Qualifying entity'' means:
    (1) An individual hospital that is operating one or more approved 
medical residency training programs as defined in Sec. 413.86(b) of this 
chapter; or
    (2) Two or more hospitals that are operating approved medical 
residency training programs as defined in Sec. 413.86(b) of this chapter 
and that submit a residency reduction application as a single entity.
    (c) Conditions for payments. (1) A qualifying entity must submit an 
application for a voluntary residency reduction plan that meets the 
requirements and conditions of this section in order to receive 
incentive payments for reducing the number of residents in its medical 
residency training programs.
    (2) The incentive payments will be determined as specified under 
paragraph (g) of this section.
    (d) Requirements for voluntary plans. In order for a qualifying 
entity to receive incentive payments under a voluntary residency 
reduction plan, the qualifying entity must submit an application that 
contains the following information, documents, and agreements--
    (1) A description of the operation of a plan for reducing the full-
time equivalent (FTE) residents in its approved medical residency 
training programs, consistent with the percentage reduction requirements 
specified in paragraphs (g)(2) and (g)(3) of this section;

[[Page 564]]

    (2) An election of the period of residency training years during 
which the reductions will occur. The reductions must be fully 
implemented by not later than the fifth residency training year in which 
the plan is effective;
    (3) FTE counts for the base number of residents, as defined in 
paragraph (g)(1) of this section, with a breakdown of the number of 
primary care residents compared to the total number of residents; and 
the direct and indirect FTE counts of the entity on June 30, 1997. For 
joint applicants, these counts must be provided individually and 
collectively;
    (4) Data on the annual and cumulative targets for reducing the 
number of FTE residents and the ratios of the number of primary care 
residents to the total number of residents for the base year and for 
each year in the 5-year reduction period. For joint applicants, these 
data must be provided individually and collectively;
    (5) An agreement to not reduce the proportion of its primary care 
residents to its total number of residents below the proportion that 
exists in the base year, as specified in paragraph (g)(1) of this 
section;
    (6) An agreement to comply with data submission requirements deemed 
necessary by CMS to make annual incentive payments during the 5-year 
residency reduction plan, and to fully cooperate with additional audit 
and monitoring activities deemed necessary by CMS;
    (7) For a qualifying entity that is a member of an affiliated group 
as defined in Sec. 413.86(b), a statement that all members of the group 
agree to an aggregate FTE cap that reflects--
    (i) The reduction in the qualifying entity's FTE count as specified 
in the plan during each year of the plan; and
    (ii) The 1996 FTE count of the other hospital(s) in the affiliated 
group.
    (8) A statement indicating voluntary participation in the plan under 
the terms of this section, signed by each hospital that is part of the 
applying entity.
    (e) Deadline for applications. A qualifying entity must submit an 
application that meets the requirements of paragraph (d) of this section 
at least one day prior to the first day of the period to which the plan 
would be effective but no later than November 1, 1999. The application 
must be submitted to the fiscal intermediary, with a copy to CMS.
    (f) Effective dates of plans. Residency reduction plans that are 
submitted to the fiscal intermediary on or after September 17, 1999 but 
on or before November 1, 1999, may be effective for portions of cost 
reporting periods beginning no earlier than the day after the date of 
the application.
    (g) Residency reduction requirements--(1) Base number of residents 
defined. (i) ``Base number of residents'' means the lesser of--
    (A) The number of FTE residents in all approved medical residency 
training programs of the qualifying entity (before application of 
weighting factors under Sec. 413.86(g)) for the most recent residency 
training year ending June 30, 1996; or
    (B) The number of FTE residents in all approved medical residency 
training programs of the qualifying entity (before application of 
weighting factors under Sec. 413.86(g)) for any subsequent residency 
training year that ends before the date the entity submits its plan to 
the fiscal intermediary and CMS.
    (ii) The residency training year used to determine the base number 
of residents is the ``base year'' for determining reduction 
requirements.
    (iii) The qualifying entity's base number of residents may not be 
adjusted to reflect adjustments that may otherwise be made to the 
entity's FTE caps for new medical residency training programs.
    (2) Qualifying entity consisting of individual hospital. The base 
number of FTE residents in all the approved medical residency training 
programs operated by or through a qualifying entity consisting of an 
individual hospital must be reduced as follows:
    (i) If the base number of residents exceeds 750, residents, by at 
least 20 percent of the base number.
    (ii) If the base number of residents exceeds 600 but is less than or 
equal to 750 residents--
    (A) By 150 residents; or
    (B) By 20 percent, if the qualifying entity increases the number of 
primary

[[Page 565]]

care residents included in the base number by at least 20 percent.
    (iii) If the base number of residents is 600 or less residents--
    (A) By 25 percent; or
    (B) By 20 percent, if the qualifying entity increases the number of 
primary care residents included in the base number of residents by at 
least 20 percent.
    (3) Qualifying entity consisting of two or more hospitals. The base 
number of FTE residents in the aggregate for all the approved medical 
residency training programs operated by or through a qualifying entity 
consisting of two or more hospitals must be reduced--
    (i) By 25 percent; or
    (ii) By 20 percent, if the qualifying entity increases the number of 
primary care residents included in the base number of residents by at 
least 20 percent.
    (4) Treatment of rotating residents. A qualifying entity will not be 
eligible for incentive payments for a reduction in the base number of 
residents if the reduction is a result of the entity rotating residents 
to another hospital that is not a part of its voluntary residency 
reduction plan.
    (5) Updates to annual and cumulative targets (i) Except as provided 
in paragraph (g)(5)(ii) of this section an entity with an approved 
voluntary residency reduction plan may not change the annual and 
cumulative reduction targets that are specified in its plan in 
accordance with paragraphs (g)(2) and (g)(3) of this section.
    (ii) An entity may update annual reduction targets specified in its 
plan only if--
    (A) It has failed to meet a specified annual target for a plan year 
in the 5-year period; and
    (B) It wishes to adjust future annual targets for the remaining 
years of the plan in order to comply with its cumulative target.
    (iii) An updated plan allowed under paragraph (g)(5)(ii) of this 
section must be submitted prior to the beginning of each July 1 medical 
residency training year during the plan years.
    (h) Computation of incentive payment amount. (1) Incentive payments 
to qualifying entities that meets the requirements and conditions of 
paragraphs (d) and (g) of this section will be computed as follows:
    (i) Step 1. Determine the amount (if any) by which the payment 
amount that would have been made under Sec. 413.86(d) if there had been 
a 5-percent reduction in the number of FTE residents in the approved 
medical education training programs of the hospital as of June 30, 1997, 
exceeds the amount of payment that would have been made under 
Sec. 413.86(d) in each year under the voluntary residency reduction 
plan, taking into account the reduction in the number of FTE residents 
under the plan.
    (ii) Step 2. Determine the amount (if any) by which the payment 
amount that would have been made under Sec. 412.105 of this chapter if 
there had been a 5-percent reduction in the number of FTE residents in 
the approved medical education training programs of the hospital as of 
June 30, 1997, exceeds the payment amount made under Sec. 412.105 of 
this chapter in each year under the voluntary residency reduction plan, 
taking into account the actual reduction in the number of FTE residents.
    (iii) Step 3. Determine the amount (if any) by which the payment 
amount that would have been made under Sec. 412.322 of this chapter if 
there had been a 5-percent reduction in the number of FTE residents in 
the approved medical education training programs of the hospital as of 
June 30, 1997, exceeds the payment amount made under Sec. 412.322 of 
this chapter in each year under the voluntary residency reduction plan, 
taking into account the actual reduction in the number of FTE residents.
    (iv) Step 4. Multiply the sum of the amounts determined under 
paragraph (h)(i), (ii), and (iii) of this section by the applicable hold 
harmless percentages specified in paragraph (i) of this section.
    (2) The determination of the amounts under paragraph (h)(1) of this 
section for any year is based on the applicable Medicare statutory 
provisions in effect on the application deadline date for the voluntary 
reduction plan specified under paragraph (e) of this section.

[[Page 566]]

    (i) Applicable hold-harmless percentage. The applicable hold-
harmless percentages for each year in which the residency reduction plan 
is in effect are as follows:
    (1) 100 percent for the first and second residency training years;
    (2) 75 percent for the third year;
    (3) 50 percent for the fourth year; and
    (4) 25 percent for the fifth year.
    (j) Payments to qualifying entities. Annual incentive payments 
through cost reports will be made to each hospital that is or is part of 
a qualifying entity over the 5-year reduction period if the qualifying 
entity meets the annual and cumulative reduction targets specified in 
its voluntary reduction plan.
    (k) Penalty for noncompliance--(1) Nonpayment. No incentive payment 
may be made to a qualifying entity for a residency training year if the 
qualifying entity has failed to reduce the number of FTE residents 
according to its voluntary residency reduction plan.
    (2) Repayment of incentive amounts. The qualifying entity is liable 
for repayment of the total amount of incentive payments it has received 
if the qualifying entity--
    (i) Fails to reduce the base number of residents by the percentages 
specified in paragraphs (g)(2) and (g)(3) of this section by the end of 
the fifth residency training year; or
    (ii) Increases the number of FTE residents above the number of 
residents permitted under the voluntary residency reduction plan as of 
the completion date of the plan.
    (l) Postplan determination of FTE caps for qualifying entities--(1) 
No penalty imposed. Upon completion of a voluntary residency reduction 
plan, if no penalty is imposed, the qualifying entity's 1996 FTE count 
is permanently adjusted to equal the unweighted FTE count used for 
direct GME payments for the last residency training year in which a 
qualifying entity participates.
    (2) Penalty imposed. Upon completion of the voluntary residency 
reduction plan--
    (i) During repayment period. If a penalty is imposed under paragraph 
(k)(2) of this section, during the period of repayment, the qualifying 
entity's FTE count is as specified in paragraph (l)(1) of this section.
    (ii) After repayment period. Once the penalty repayment is 
completed, the qualifying entity's FTE reverts back to its original 1996 
FTE cap.

[64 FR 44855, Aug. 18, 1999]



Sec. 413.90  Research costs.

    (a) Principle. Costs incurred for research purposes, over and above 
usual patient care, are not includable as allowable costs.
    (b) Application. (1) There are numerous sources of financing for 
health-related research activities. Funds for this purpose are provided 
under many Federal programs and by other tax-supported agencies. Also, 
many foundations, voluntary health agencies, and other private 
organizations, as well as individuals, sponsor or contribute to the 
support of medical and related research. Funds available from such 
sources are generally ample to meet basic medical and hospital research 
needs. A further consideration is that quality review should be assured 
as a condition of governmental support for research. Provisions for such 
review would introduce special difficulties in the Medicare programs.
    (2) If research is conducted in conjunction with, and as a part of, 
the care of patients, the costs of usual patient care and studies, 
analyses, surveys, and related activities to serve the provider's 
administrative and program needs are allowable costs in the 
determination of payment under Medicare.

[51 FR 34793, Sept. 30, 1986, as amended at 61 FR 63748, Dec. 2, 1996]



Sec. 413.92  Costs of surety bonds.

    Costs incurred by a provider to obtain a surety bond required by 
part 489, subpart F of this chapter are not included as allowable costs.

[63 FR 310, Jan. 5, 1998]



Sec. 413.94  Value of services of nonpaid workers.

    (a) Principle. The value of services in positions customarily held 
by full-time employees performed on a regular, scheduled basis by 
individuals as nonpaid members of organizations

[[Page 567]]

under arrangements between such organizations and a provider for the 
performance of such services without direct remuneration from the 
provider to such individuals is allowable as an operating expense for 
the determination of allowable cost subject to the limitation contained 
in paragraph (b) of this section. The amounts allowed are not to exceed 
those paid others for similar work. Such amounts must be identifiable in 
the records of the institutions as a legal obligation for operating 
expenses.
    (b) Limitations: Services of nonpaid workers. The services must be 
performed on a regular, scheduled basis in positions customarily held by 
full-time employees and necessary to enable the provider to carry out 
the functions of normal patient care and operation of the institution. 
The value of services of a type for which providers generally do not 
remunerate individuals performing such services is not allowable as a 
reimbursable cost under the Medicare program. For example, donated 
services of individuals in distributing books and magazines to patients, 
or in serving in a provider canteen or cafeteria or in a provider gift 
shop, would not be reimbursable.
    (c) Application. The following illustrates how a provider would 
determine an amount to be allowed under this principle: The prevailing 
salary for a lay nurse working in Hospital A is $5,000 for the year. The 
lay nurse receives no maintenance or special perquisites. A sister 
working as a nurse engaged in the same activities in the same hospital 
receives maintenance and special perquisites which cost the hospital 
$2,000 and are included in the hospital's allowable operating costs. The 
hospital would then include in its records an additional $3,000 to bring 
the value of the services rendered to $5,000. The amount of $3,000 would 
be allowable if the provider assumes obligation for the expense under a 
written agreement with the sisterhood or other religious order covering 
payment by the provider for the services.



Sec. 413.98  Purchase discounts and allowances, and refunds of expenses.

    (a) Principle. Discounts and allowances received on purchases of 
goods or services are reductions of the costs to which they relate. 
Similarly, refunds of previous expense payments are reductions of the 
related expense.
    (b) Definitions--(1) Discounts. Discounts, in general, are 
reductions granted for the settlement of debts.
    (2) Allowances. Allowances are deductions granted for damage, delay, 
shortage, imperfection, or other causes, excluding discounts and 
returns.
    (3) Refunds. Refunds are amounts paid back or a credit allowed on 
account of an overcollection.
    (c) Normal accounting treatment--Reduction of costs. All discounts, 
allowances, and refunds of expenses are reductions in the cost of goods 
or services purchased and are not income. If they are received in the 
same accounting period in which the purchases were made or expenses were 
incurred, they will reduce the purchases or expenses of that period. 
However, if they are received in a later accounting period, they will 
reduce the comparable purchases or expenses in the period in which they 
are received.
    (d) Application. (1) Purchase discounts have been classified as 
cash, trade, or quantity discounts. Cash discounts are reductions 
granted for the settlement of debts before they are due. Trade discounts 
are reductions from list prices granted to a class of customers before 
consideration of credit terms. Quantity discounts are reductions from 
list prices granted because of the size of individual or aggregate 
purchase transactions. Whatever the classification of purchase 
discounts, like treatment in reducing allowable costs is required. In 
the past, purchase discounts were considered as financial management 
income. However, modern accounting theory holds that income is not 
derived from a purchase but rather from a sale or an exchange and that 
purchase discounts are reductions in the cost of whatever was purchased. 
The true cost of the goods or services is the net amount actually paid 
for them. Treating purchase discounts as income would result in an 
overstatement of costs to the extent of the discount.
    (2) As with discounts, allowances, and rebates received from 
purchases of goods or services, refunds of previous

[[Page 568]]

expense payments are clearly reductions in costs and must be reflected 
in the determination of allowable costs. This treatment is equitable and 
is in accord with that generally followed by other governmental programs 
and third-party payment organizations paying on the basis of cost.



Sec. 413.100  Special treatment of certain accrued costs.

    (a) Principle. As described in Sec. 413.24(b)(2), under the accrual 
basis of accounting, revenue is reported in the period in which it is 
earned and expenses are reported in the period in which they are 
incurred. In the case of accrued costs described in this section, for 
Medicare payment purposes the costs are allowable in the year in which 
the costs are accrued and claimed for Medicare payment only under the 
conditions set forth in paragraph (c) of this section.
    (b) Definitions--(1) All-inclusive paid days off benefit. An all-
inclusive paid days off benefit replaces other vacation and sick pay 
plans. It is a formal plan under which, based on actual hours worked, 
all employees accrue vested leave or payment in lieu of vested leave for 
any combination of types of leave, such as illness, medical 
appointments, holidays, and vacations.
    (2) Self-insurance. Self-insurance is a means by which a provider 
independently or as part of a group undertakes the risk of protecting 
itself against anticipated liabilities by providing funds in an amount 
equal to anticipated liabilities, rather than by purchasing insurance 
coverage.
    (c) Recognition of accrued costs--(1) General. Although Medicare 
recognizes, in the year of accrual, the accrual of costs for which a 
provider has not actually expended funds during the current cost 
reporting period, for purposes of payment Medicare does not recognize 
the accrual of costs unless the related liabilities are liquidated 
timely.
    (2) Requirements for liquidation of liabilities. For accrued costs 
to be recognized for Medicare payment in the year of the accrual, the 
requirements set forth below must be met with respect to the liquidation 
of related liabilities. If liquidation does not meet these requirements, 
the cost is disallowed, generally in the year of accrual, except as 
specified in paragraph (c)(2)(ii) of this section.
    (i) A short-term liability. (A) Except as provided in paragraph 
(c)(2)(i)(B) of this section, a short-term liability, including the 
current portion of a long-term liability (for example, mortgage interest 
payments due to be paid in the current year), must be liquidated within 
1 year after the end of the cost reporting period in which the liability 
is incurred.
    (B) If, within the 1-year time limit, the provider furnishes to the 
intermediary sufficient written justification (based upon documented 
evidence) for nonpayment of the liability , the intermediary may grant 
an extension for good cause. The extension may not exceed 3 years beyond 
the end of the cost reporting year in which the liability was incurred.
    (ii) Vacation pay and all-inclusive paid days off. (A) If the 
provider's vacation policy, or its policy for all-inclusive paid days 
off, is consistent for all employees, liquidation of the liability must 
be made within the period provided for by that policy.
    (B) If the provider's vacation policy, or its policy for all-
inclusive paid days off, is not consistent for all employees, 
liquidation of the liability must be made within 2 years after the close 
of the cost reporting period in which the liability is accrued.
    (C) If payment is not made within the required time period or if 
benefits are forfeited by the employee, an adjustment to disallow the 
accrued cost is made in the current period (that is, the latest year in 
which payment should have been made or the year in which the benefits 
are forfeited) rather than in the period in which the cost was accrued 
and claimed for Medicare payment. However, an intermediary may choose to 
require the adjustment in the period in which the cost was accrued and 
claimed for Medicare payment if the cost report for that period is open 
or can be reopened as provided in Sec. 405.1885 of this chapter, and if 
the intermediary believes the adjustment is more appropriate in that 
period.

[[Page 569]]

    (iii) Sick pay. (A) If sick leave is vested and funded in a deferred 
compensation plan, liabilities related to the contributions to the fund 
must be liquidated, generally within 1 year after the end of the cost 
reporting period in which the liability is incurred. If, within the 1-
year time limit, the provider furnishes to the intermediary sufficient 
written justification (based upon documented evidence) for nonpayment of 
the liability, the intermediary may grant an extension for good cause. 
The extension may not exceed 3 years beyond the end of the cost 
reporting year in which the liability was incurred. Contributions to the 
deferred compensation plan must be reduced to reflect estimated 
forfeitures. Actual forfeitures above or below estimated forfeitures 
must be used to adjust annual contributions to the fund.
    (B) If the sick leave plan grants employees the nonforfeitable right 
to demand cash payment for unused sick leave at the end of each year, 
sick pay is includable in allowable costs, without funding, in the cost 
reporting period in which it is earned.
    (C) Sick pay paid on any basis other than that specified in 
paragraphs (c)(2)(iii) (A) or (B) of this section can be claimed for 
Medicare payment only on a cash basis for the year in which the benefits 
are paid.
    (iv) Compensation of owners. Accrued liability related to 
compensation of owners other than sole proprietors and partners must be 
liquidated within 75 days after the close of the cost reporting period 
in which the liability occurs.
    (v) Nonpaid workers. Obligations incurred under a legally-
enforceable agreement to remunerate an organization of nonpaid workers 
must be discharged no later than the end of the provider's cost 
reporting period following the period in which the services were 
furnished.
    (vi) FICA and other payroll taxes--(A) General rule. The provider's 
share of FICA and other payroll taxes that the provider becomes 
obligated to remit to governmental agencies is included in allowable 
costs only during the cost reporting period in which payment (upon which 
the payroll taxes are based) is actually made to the employee. For 
example, payroll taxes applicable to vacation benefits are not to be 
accrued in the period in which the vacation benefits themselves are 
accrued but rather are allowable only in the period in which the 
employee takes the vacation.
    (B) Exception. If payment would be made to an employee during a cost 
reporting period but for the fact the regularly scheduled payment date 
is after the end of the period, costs of accrued payroll taxes related 
to the portion of payroll accrued through the end of the period, but 
paid to the employee after the beginning of the new period, are 
allowable costs in the year of accrual, subject to the liquidation 
requirements specified in paragraph (c)(2)(i) of this section.
    (vii) Deferred compensation. (A) Reasonable provider payments made 
under unfunded deferred compensation plans are included in allowable 
costs only during the cost reporting period in which actual payment is 
made to the participating employee.
    (B) Accrued liability related to contributions to a funded deferred 
compensation plan must be liquidated within 1 year after the end of the 
cost reporting period in which the liability is incurred. An extension, 
not to exceed 3 years beyond the end of the cost reporting year in which 
the liability was incurred, may be granted by the intermediary for good 
cause if the provider, within the 1-year time limit, furnishes to the 
intermediary sufficient written justification for non-payment of the 
liability.
    (C) Postretirement benefit plans (including those addressed in 
Statement of Financial Accounting Standards No. 106 (December 1990)) are 
deferred compensation arrangements and thus are subject to the 
provisions of this section regarding deferred compensation and to 
applicable program instructions for determining Medicare payment for 
deferred compensation.
    (viii) Self-insurance. Accrued liability related to contributions to 
a self-insurance program that are systematically made to a funding 
agency and that cover malpractice and comprehensive general liability, 
unemployment compensation, workers' compensation insurance losses, or 
employee health benefits, must be liquidated within 75 days

[[Page 570]]

after the close of the cost reporting period.

[60 FR 33136, June 27, 1995, as amended at 64 FR 51909, Sept. 27, 1999]



Sec. 413.102  Compensation of owners.

    (a) Principle. A reasonable allowance of compensation for services 
of owners is an allowable cost provided that the services are actually 
performed in a necessary function.
    (b) Definitions. (1) Compensation. Compensation means the total 
benefit received by the owner for the services he furnishes to the 
institution. It includes the following items:
    (i) Salary amounts paid for managerial, administrative, 
professional, and other services.
    (ii) Amounts paid by the institution for the personal benefit of the 
proprietor.
    (iii) The cost of assets and services that the proprietor receives 
from the institution.
    (iv) Deferred compensation.
    (2) Reasonableness. Reasonableness requires that the compensation 
allowance--
    (i) Be such an amount as would ordinarily be paid for comparable 
services by comparable institutions; and
    (ii) Depend upon the facts and circumstances of each case.
    (3) Necessary. Necessary requires that the function be--
    (i) Such that had the owner not furnished the services, the 
institution would have had to employ another person to perform the 
services; and
    (ii) Pertinent to the operation and sound conduct of the 
institution.
    (c) Application. (1) Owners of provider organizations often furnish 
services as managers, administrators, or in other capacities. In such 
cases, it is equitable that reasonable compensation for the services 
furnished to be an allowable cost. To do otherwise would disadvantage 
such owners in comparison with corporate providers or providers 
employing persons to perform similar services.
    (2) Ordinarily, compensation paid to proprietors is a distribution 
of profits. However, if a proprietor furnishes necessary services for 
the institution, the institution is in effect employing his services, 
and a reasonable compensation for these services is an allowable cost. 
In corporate providers, the salaries of owners who are also employees 
are subject to the same requirements of reasonableness. If the services 
are furnished on less than a full-time basis, the allowable compensation 
should reflect an amount proportionate to a full-time basis. 
Reasonableness of compensation may be determined by reference to, or in 
comparison with, compensation paid for comparable services and 
responsibilities in comparable institutions; or it may be determined by 
other appropriate means.



Sec. 413.106  Reasonable cost of physical and other therapy services furnished under arrangements.

    (a) Principle. The reasonable cost of the services of physical, 
occupational, speech, and other therapists, and services of other health 
specialists (other than physicians), furnished under arrangements (as 
defined in section 1861(w) of the Act) with a provider of services, a 
clinic, a rehabilitation agency or a public health agency, may not 
exceed an amount equivalent to the prevailing salary and additional 
costs that would reasonably have been incurred by the provider or other 
organization had such services been performed by such person in an 
employment relationship, plus the cost of other reasonable expenses 
incurred by such person in furnishing services under such an 
arrangement. However, if the services of a therapist are required on a 
limited part-time basis, or to perform intermittent services, payment 
may be made on the basis of a reasonable rate per unit of service, even 
though this rate may be greater per unit of time than salary-related 
amounts, if the greater payment is, in the aggregate, less than the 
amount that would have been paid had a therapist been employed on a 
full-time or regular part-time salaried basis. Pursuant to section 17(a) 
of Public Law 93-233 (87 Stat. 967), the provisions of this section are 
effective for cost reporting periods beginning after March, 1975.
    (b) Definitions--(1) Prevailing salary. The prevailing salary is the 
hourly salary rate based on the 75th percentile of salary ranges paid by 
providers in the geographical area, by type of therapy,

[[Page 571]]

to therapists working full time in an employment relationship.
    (2) Fringe benefit and expense factor. The standard fringe benefit 
and expense factor is an amount that takes account of fringe benefits, 
such as vacation pay, insurance premiums, pension payments, allowances 
for job-related training, meals, etc., generally received by an employee 
therapist, as well as expenses, such as maintaining an office, 
appropriate insurance, etc., an individual not working as an employee 
might incur in furnishing services under arrangements.
    (3) Adjusted hourly salary equivalency amount. The adjusted hourly 
salary equivalency amount is the prevailing hourly salary rate plus the 
standard fringe benefit and expense factor. This amount is determined on 
a periodic basis for appropriate geographical areas.
    (4) Travel allowance. A standard travel allowance is an amount that 
is recognized, in addition to the adjusted hourly salary equivalency 
amount.
    (5) Limited part-time or intermittent services. Therapy services are 
considered to be on a limited part-time or intermittent basis if the 
provider or other organization furnishing the services under 
arrangements requires the services of a therapist or therapists on an 
average of less than 15 hours per week. This determination is made by 
dividing the total hours of services furnished during the cost reporting 
period by the number of weeks in which the services were furnished in 
the cost reporting period regardless of the number of days in each week 
in which services were performed.
    (6) Guidelines. Guidelines are the amounts published by CMS 
reflecting the application of paragraphs (b) (1) through (4) of this 
section to an individual therapy service and a geographical area. Other 
statistically valid data may be used to establish guidelines for a 
geographical area, provided that the study designs, questionnaires and 
instructions, as well as the resultant survey data for determining the 
guidelines are submitted to and approved in advance by CMS. Such data 
must be arrayed so as to permit the determination of the 75th percentile 
of the range of salaries paid to full-time employee therapists.
    (7) Administrative responsibility. Administrative responsibility is 
the performance of those duties that normally fall within the purview of 
a department head or other supervisor. This term does not apply to 
directing aides or other assistants in furnishing direct patient care.
    (c) Application. (1) Under this provision, CMS will establish 
criteria for use in determining the reasonable cost of physical, 
occupational, speech, and other therapy services and the services of 
other health specialists (other than physicians) furnished by 
individuals under arrangements with a provider of services, a clinic, a 
rehabilitation agency, or public health agency. It is recognized that 
providers have a wide variety of arrangements with such individuals. 
These individuals may be independent practitioners or employees of 
organizations furnishing various health care specialists. This provision 
does not require change in the substance of these arrangements.
    (2) If therapy services are performed under arrangements at a 
provider site on a full-time or regular part-time basis, the reasonable 
cost of such services may not exceed the amount determined by taking 
into account the total number of hours of services furnished by the 
therapist, the adjusted hourly salary equivalency amount appropriate for 
the particular therapy in the geographical area in which the services 
are furnished and a standard travel allowance.
    (3) If therapy services are performed under arrangements on a 
limited part-time or intermittent basis at the provider site, the 
reasonable cost of such services is evaluated on a reasonable rate per 
unit of service basis, except that payment for these services, in the 
aggregate, during the cost reporting period, may not exceed the amount 
that would be determined to be reasonable under paragraph (c)(2) of this 
section, had a therapist furnished the provider or other organization 
furnishing the services under arrangements 15 hours of service per week 
on a regular part-time basis for the weeks in which services were 
furnished by the non-employee therapist.

[[Page 572]]

    (4) If an HHA furnishes services under arrangements at the patient's 
residence or in other situations in which therapy services are not 
performed at the provider's site, the reasonable cost of such services 
is evaluated as follows:
    (i) Time records available. If time records of HHA visits are 
maintained by the provider, the reasonable cost of such services is 
evaluated on a unit-of-time basis, by taking into account the total 
number of hours of service furnished by the therapist, the adjusted 
hourly salary equivalency amount appropriate for the particular therapy 
in the geographical area in which the services are furnished, and a 
standard travel allowance for each visit. However, if the travel time of 
the therapist is accurately recorded by the therapist, and approved and 
maintained by the provider, the reasonable cost of such services may be 
evaluated, at the option of the provider, by taking into account the 
total number of hours of service furnished by the therapist, including 
travel time, and the adjusted hourly salary equivalency amount 
appropriate for the particular therapy in the geographical area in which 
the services are furnished. This option does not apply to services 
furnished by HHAs under arrangements with providers other than HHAs.
    (ii) No time records available. If time records are unavailable or 
found to be inaccurate, each HHA visit is considered the equivalent of 
one hour of service. In such cases, the reasonable cost of such services 
is determined by taking into account the number of visits made by the 
therapist under arrangements with such agency, the adjusted hourly 
salary equivalency amount appropriate for the particular therapy in the 
geographical area in which the services are furnished, and a standard 
travel allowance.
    (iii) Limited part-time or intermittent services. If under paragraph 
(c)(4) (i) or (ii) of this section, the provider required therapy 
services on an average of less than 15 hours per week, the services are 
considered limited part-time or intermittent services, and the 
reasonable cost of such services is evaluated on a reasonable rate per 
unit of service basis as described in paragraph (c)(3) of this section.
    (5) If therapy services are performed in situations where 
compensation to a therapist employed by the provider is based, at least 
in part, on a fee-for-service or on a percentage of income (or 
commission), the guidelines will apply. The entire compensation will be 
subject to the guidelines in cases where the nature of the arrangements 
is most like an under ``arrangement'' situation, although technically 
the provider may treat the therapists as employees. The intent of this 
section is to prevent an employment relationship from being used to 
circumvent the guidelines.
    (6) These provisions are applicable to individual therapy services 
or disciplines by means of separate guidelines by geographical area and 
apply to costs incurred after issuance of the guidelines but no earlier 
than the beginning of the provider's cost reporting period described in 
paragraph (a) of this section. Until a guideline is issued for a 
specific therapy or discipline, costs are evaluated so that such costs 
do not exceed what a prudent and cost-conscious buyer would pay for the 
given service.
    (d) Notice of guidelines to be imposed. Prior to the beginning of a 
period to which a guideline will be applied, a notice will be published 
in the Federal Register establishing the guideline amounts to be applied 
to each geographical area by type of therapy.
    (e) Additional allowances. (1) If a therapist supervises other 
therapists or has administrative responsibility for operating a 
provider's therapy department, a reasonable allowance may be added to 
the adjusted hourly salary equivalency amount by the intermediary based 
on its knowledge of the differential between therapy supervisors' and 
therapists' salaries in similar provider settings in the area.
    (2) If a therapist performing services under arrangements furnishes 
equipment and supplies used in furnishing therapy services, the 
guideline amount may be supplemented by the cost of the equipment and 
supplies, provided the cost does not exceed the amount the provider, as 
a prudent and cost-conscious buyer, would have been able to include as 
allowable cost.

[[Page 573]]

    (f) Exceptions. The following exceptions may be granted but only 
upon the provider's demonstration that the conditions indicated are 
present:
    (1) Exception because of unique circumstances or special labor 
market conditions. An exception may be granted under this section by the 
intermediary if a provider demonstrates that the costs for therapy 
services established by the guideline amounts are inappropriate to a 
particular provider because of some unique circumstances or special 
labor market conditions in the area.
    (2) Exception for services furnished by risk-basis HMO providers. 
For special rules concerning services furnished to an HMO's enrollees 
who are Medicare beneficiaries by a provider owned or operated by a 
risk-basis HMO (see Sec. 417.201(b) of this chapter) or related to a 
risk-basis HMO by common ownership or control (see Sec. 417.250(c) of 
this chapter).
    (3) Exception for inpatient hospital services. Effective with cost 
reporting periods beginning on or after October 1, 1983, the costs of 
therapy services furnished under arrangements to a hospital inpatient 
are excepted from the guidelines issued under this section if such costs 
are subject to the provisions of Sec. 413.40 or part 412 of this 
chapter. The intermediary will grant the exception without request from 
the provider.
    (g) Appeals. A request by a provider for a hearing on the 
determination of an intermediary concerning the therapy costs determined 
to be allowable based on the provisions of this section, including a 
determination with respect to an exception under paragraph (f) of this 
section, is made to the intermediary only after submission of its cost 
report and receipt of the notice of amount of program reimbursement 
reflecting such determination, in accordance with the provisions of 
subpart R of part 405 of this chapter.

[51 FR 34793, Sept. 30, 1986, as amended at 63 FR 5139, Jan. 30, 1998]



Sec. 413.114  Payment for posthospital SNF care furnished by a swing-bed hospital.

    (a) Purpose and basis. This section implements section 1883 of the 
Act, which provides for payment for posthospital SNF care furnished by 
rural hospitals and CAHs having a swing-bed approval.
    (1) Services furnished in cost reporting periods beginning prior to 
July 1, 2002. Posthospital SNF care furnished in general routine 
inpatient beds in rural hospitals and CAHs is paid in accordance with 
the special rules in paragraph (c) of this section for determining the 
reasonable cost of this care. When furnished by rural and CAH swing-bed 
hospitals approved after March 31, 1988 with more than 49 beds (but 
fewer than 100), these services must also meet the additional payment 
requirements set forth in paragraph (d) of this section.
    (2) Services furnished in cost reporting periods beginning on and 
after July 1, 2002. Posthospital SNF care furnished in general routine 
inpatient beds in rural hospitals (other than CAHs) is paid in 
accordance with the provisions of the prospective payment system for 
SNFs described in subpart J of this part, except that for purposes of 
this paragraph, the requirements of Sec. 413.343(a) must be met using 
the specific assessment instrument and data designated by CMS for this 
purpose. Posthospital SNF care furnished in general routine inpatient 
beds in CAHs is paid based on reasonable cost, in accordance with the 
provisions of subparts A through G of this part (other than paragraphs 
(c) and (d) of this section).
    (b) Definitions. For purposes of this section--
    Availability date means with respect to a posthospital SNF care 
patient in a swing-bed hospital, the later of--
    (i) Any date on which a bed is available for the patient in a 
Medicare-participating SNF located within the hospital's geographic 
region;
    (ii) The date that a hospital learns that a bed is available in a 
Medicare-participating SNF; or
    (iii) If the notice is prospective, the date that a bed will become 
available in a Medicare-participating SNF.
    Geographic region means an area that includes the SNFs with which a 
hospital has traditionally arranged transfers and all other SNFs within 
the same proximity to the hospital. In the case of a hospital without 
existing transfer practices upon which to base a

[[Page 574]]

determination, the geographic region is an area that includes all the 
SNFs within 50 miles (as defined in Sec. 412.92(c)(1) of this chapter) 
of the hospital unless the hospital can demonstrate that the SNFs are 
inaccessible to its patients. In the event of a dispute as to whether an 
SNF is within a hospital's geographic region or the SNF is inaccessible 
to hospital patients, the CMS Regional Office makes a determination.
    Swing-bed hospital means a hospital or CAH participating in Medicare 
that has an approval from CMS to provide posthospital SNF care as 
defined in Sec. 409.20 of this chapter, and meets the requirements 
specified in Sec. 482.66 or Sec. 485.645 of this chapter, respectively.
    (c) Special rules for determining the reasonable cost of 
posthospital SNF care furnished in cost reporting periods beginning 
prior to July 1, 2002. The reasonable cost of posthospital SNF care 
furnished by a swing-bed hospital is determined as follows:
    (1) The reasonable cost of routine SNF services is based on the 
average Medicare rate per patient day for routine services provided in 
freestanding SNFs in the region where the swing-bed hospital is located. 
The rates are calculated using the regions as defined in section 
1886(d)(2)(D) of the Social Security Act. The rates are based on the 
most recent year for which settled cost reporting period data are 
available, increased in a compounded manner, using the increase 
applicable to the SNF routine cost limits, up to and including the 
calendar year for which the rates are in effect. If the current Medicare 
swing-bed rate for routine extended care services furnished by a swing-
bed hospital during a calendar year is less than the rate for the prior 
calendar year, payment is made based on the prior calendar year's rate.
    (2) The reasonable cost of ancillary services furnished as 
posthospital SNF care is determined in the same manner as the reasonable 
cost of other ancillary services furnished by the hospital in accordance 
with Sec. 413.55(a)(1).
    (d) Additional requirements--(1) General rule. For services 
furnished in cost reporting periods beginning prior to July 1, 2002, in 
order for Medicare payment to be made to a swing-bed hospital with more 
than 49 beds (but fewer than 100), the following payment requirements 
must be met:
    (i) If there is an available SNF bed in the geographic region, a 
posthospital SNF care patient must be transferred within 5 days 
(excluding weekends and holidays) of the availability date, unless the 
patient's physician certifies within the 5-day period that transfer is 
not medically appropriate.
    (ii) The number of patient days for posthospital SNF care in a cost 
reporting period does not exceed 15 percent of the product of the number 
of days in the period and the average number of licensed beds in the 
hospital in the period. In those States that do not license their 
hospital beds, the hospitals must use the total number of hospital beds 
reported on their most recent Certificate of Need (CON), excluding 
bassinets. If during the cost reporting period, there is an increase or 
decrease in the number of ``licensed'' beds, the number of ``licensed'' 
beds for each part of the period is to be multiplied by the number of 
days for which that number of ``licensed'' beds was available. After 
totalling the results, compute 15 percent of the total available 
``licensed'' bed days to determine the payment limitation.
    (2) Payment restrictions. (i) The hospital must not seek payment for 
posthospital SNF care after the end of the 5 day period (excluding 
weekends and holidays) beginning on the availability date of a SNF bed 
unless the patient's physician has certified, within that 5 day period, 
that the transfer of the patient to the SNF was not medically 
appropriate.
    (ii) The hospital must not seek payment for posthospital SNF care in 
a cost reporting period to the extent that they exceed 15 percent of the 
product of the number of days in the period and the average number of 
licensed beds in the period. In those States that do not license 
hospital beds, the hospital must use the average number of hospital beds 
reported on its most recent CON, excluding bassinets.
    (3) Payment exception. Payment will continue to be made during the 
cost reporting period in which the 15 percent limit specified in 
paragraph (d)(1)(ii) of

[[Page 575]]

this section is reached for those patients who are receiving 
posthospital SNF care at the time the hospital reaches the limit.

[51 FR 34793, Sept. 30, 1986, as amended at 54 FR 37274, Sept. 7, 1989; 
56 FR 54545, Oct. 22, 1991; 58 FR 30671, May 26, 1993; 61 FR 51616, Oct. 
3, 1996; 62 FR 46037, Aug. 29, 1997; 66 FR 39600, July 31, 2001]



Sec. 413.118  Payment for facility services related to covered ASC surgical procedures performed in hospitals on an outpatient basis.

    (a) Basis and scope. This section implements section 1833(a)(4) and 
(i)(3) of the Act and establishes the method for determining Medicare 
payments for services related to covered ambulatory surgical center 
(ASC) procedures performed in a hospital on an outpatient basis. It does 
not apply to services furnished by an ASC operated by a hospital that 
has an agreement with CMS to be paid in accordance with Sec. 416.30 of 
this chapter. (For regulations governing ASCs see part 416 of this 
chapter.)
    (b) Definitions. For purposes of this section--
    Facility services are those items and services, as specified in 
Sec. 416.61 of this chapter, that are furnished by a hospital on an 
outpatient basis in connection with covered ASC surgical procedures, as 
described in Sec. 416.65 of this chapter.
    Standard overhead amount means an amount equal to the prospectively 
determined payment rate that would be paid for the procedure if it had 
been furnished by an ASC in the same geographic area.
    (c) Payment principle. The aggregate amount of payments for facility 
services, furnished in a hospital on an outpatient basis, that are 
related to covered ASC surgical procedures (covered under Sec. 416.65 of 
this chapter) is equal to the lesser of--
    (1) The hospital's reasonable cost or customary charges, as 
determined in accordance with Sec. 413.13, reduced by deductibles and 
coinsurance; or
    (2) The blended payment amount as described in paragraph (d) of this 
section, which is based on hospital-specific cost and charge data and 
rates paid to free-standing ASCs.
    (d) Blended payment amount. (1) For cost reporting periods beginning 
on or after October 1, 1987 but before October 1, 1988, the blended 
payment amount is equal to the sum of--
    (i) 75 percent of the hospital-specific amount (the lesser of the 
hospital's reasonable cost or customary charges, reduced by deductibles 
and coinsurance); and
    (ii) 25 percent of the ASC payment amount (that is, 80 percent of 
the result obtained by subtracting the deductibles from the sum of the 
standard overhead amounts.)
    (2) For the period of time beginning with the first day of a 
hospital's cost reporting period that begins on or after October 1, 1988 
and ends on December 31, 1990, the blended payment amount is equal to 50 
percent of the hospital-specific amount and 50 percent of the ASC 
payment amount.
    (3) For portions of cost reporting periods beginning on or after 
January 1, 1991, the blended payment amount is equal to 42 percent of 
the hospital-specific amount and 58 percent of the ASC payment amount.
    (4) For cost reporting periods beginning on or after October 1, 1988 
and before January 1, 1995, the blended payment amount is equal to the 
sum of 75 percent of the hospital-specific amount and 25 percent of the 
ASC payment amount for a hospital that makes an application to its 
fiscal intermediary and meets the following requirements.
    (i) More than 60 percent of the hospital's inpatient hospital 
discharges, as described in Sec. 412.60 of this chapter, occurring 
during its cost reporting period beginning on or after October 1, 1986 
and before October 1, 1987, are classified in diagnosis related groups 
36 through 74.
    (ii) During its cost reporting period beginning on or after October 
1, 1986 and before October 1, 1987, more than 30 percent of the 
hospital's total revenues is derived from outpatient services.
    (5) For portions of cost reporting periods beginning on or after 
October 1, 1997, for purposes of calculating the blended payment amount 
under paragraph (d)(4) of this section, the ASC payment amount is the 
sum of the standard overhead amounts reduced by

[[Page 576]]

deductibles and coinsurance as defined in section 1866(a)(2)(ii) of the 
Act.
    (e) Aggregation of cost, charges, and the blended amount. For 
purposes of determining the correct payment amount under paragraphs (c) 
and (d) of this section, all reasonable costs and customary charges 
attributable to facility services furnished during a cost reporting 
period are aggregated and treated separately from the reasonable costs 
and customary charges attributable to all other services furnished in 
the hospital.

[52 FR 36773, Oct. 1, 1987; 52 FR 37715, Oct. 8, 1987, as amended at 55 
FR 33699, Aug. 17, 1990; 55 FR 34797, Aug. 24, 1990; 57 FR 36017, Aug. 
12, 1992; 57 FR 45113, Sept. 30, 1992; 65 FR 18541, Apr. 7, 2000]



Sec. 413.122  Payment for hospital outpatient radiology services and other diagnostic procedures.

    (a) Basis and purpose. (1) This section implements section 1833(n) 
of the Act and establishes the method for determining Medicare payments 
for radiology services and other diagnostic procedures performed by a 
hospital on an outpatient basis.
    (2) For purposes of this section--
    (i) Radiology services include diagnostic and therapeutic radiology, 
nuclear medicine, CAT scan procedures, magnetic resonance imaging, 
ultrasound and other imaging services; and
    (ii) Other diagnostic procedures are those identified by CMS, and do 
not include diagnostic radiology procedures or diagnostic laboratory 
tests.
    (b) Payment for hospital outpatient radiology services. (1) The 
aggregate payment for hospital outpatient radiology services furnished 
on or after October 1, 1988 is equal to the lesser of the following:
    (i) The hospital's reasonable cost or customary charges, as 
determined in accordance with Sec. 413.13, reduced by the applicable 
Part B annual deductible and coinsurance amounts.
    (ii) The blended payment amount described in paragraph (b)(2) of 
this section.
    (2) The blended payment amount for hospital outpatient radiology 
services furnished on or after October 1, 1988, but before October 1, 
1989, is equal to the sum of--
    (i) 65 percent of the hospital-specific amount (the hospital's 
reasonable cost or customary charges, whichever is less, reduced by the 
applicable Part B annual deductible and coinsurance amounts); and
    (ii) 35 percent of a prevailing charge or fee schedule amount that 
is calculated as 80 percent of the amount determined by subtracting the 
applicable Part B annual deductible from 62 percent of the prevailing 
charges (or for services furnished on or after January 1, 1989, the fee 
schedule amount established) for the same services when furnished by 
participating physicians in their offices in the same locality.
    (3) For hospital outpatient radiology services furnished on or after 
October 1, 1989, the blended payment amount is equal to the sum of 50 
percent of the hospital-specific amount and 50 percent of the fee 
schedule amount.
    (4) For hospital outpatient radiology services furnished on or after 
January 1, 1991, the blended payment amount is equal to the sum of 42 
percent of the hospital-specific amount and 58 percent of the fee 
schedule amount.
    (5) For hospital outpatient radiology services furnished on or after 
October 1, 1997, the blended payment amount is equal to the sum of--
    (i) 42 percent of the hospital-specific amount; and
    (ii) 58 percent of the fee schedule amount calculated as 62 percent 
of the sum of the fee schedule amounts payable for the same services 
when furnished by participating physicians in their offices in the same 
locality, less deductible and coinsurance as defined in section 
1866(a)(2)(A)(ii) of the Act.
    (c) Payment for other diagnostic procedures. (1) The aggregate 
payment for other diagnostic procedures performed by a hospital on an 
outpatient basis on or after October 1, 1989 is equal to the lesser of 
the following:
    (i) The hospital's reasonable cost or customary charges, as 
determined in accordance with Sec. 414.13, reduced by the applicable 
Part B annual deductible and coinsurance amounts.
    (ii) The blended payment described in paragraph (c)(2) of this 
section.

[[Page 577]]

    (2) The blended payment amount for other diagnostic procedures 
furnished on or after October 1, 1989, but before October 1, 1990, is 
equal to the sum of--
    (i) 65 percent of the hospital-specific amount (the hospital's 
reasonable cost or customary charges, whichever is less, reduced by the 
applicable Part B annual deductible and coinsurance amounts); and
    (ii) 35 percent of a prevailing charge amount that is calculated as 
80 percent of the amount determined by subtracting the applicable Part B 
annual deductible from 42 percent of the prevailing charges for the same 
services furnished by participating physicians in their offices in the 
same locality.
    (3) For other diagnostic procedures performed by a hospital on or 
after October 1, 1990, the blended payment is equal to 50 percent of the 
hospital-specific amount and 50 percent of the prevailing charge amount.
    (4) For other diagnostic services furnished on or after October 1, 
1997, the blended payment amount is equal to the sum of--
    (i) 50 percent of the hospital-specific amount; and
    (ii) 50 percent of the fee schedule amount calculated as 42 percent 
of the sum of the fee schedule amounts payable for the same services 
when furnished by participating physicians in their offices in the same 
locality less deductible and coinsurance as defined in section 
1866(a)(2)(A)(ii) of the Act.

[56 FR 8842, Mar. 1, 1991, as amended at 57 FR 36017, Aug. 12, 1992; 65 
FR 18542, Apr. 7, 2000]



Sec. 413.123  Payment for screening mammography performed by hospitals on an outpatient basis.

    (a) Basis and scope. This section implements section 1834(c)(1)(C) 
of the Act and establishes the method for determining Medicare payment 
for screening mammographies performed by hospitals.
    (b) Payment to hospitals for outpatient services. Payment to 
hospitals for screening mammography services performed on an outpatient 
basis is determined in accordance with the technical component billing 
requirements in Sec. 405.534(d) of this chapter.

[55 FR 53522, Dec. 31, 1990, as amended at 59 FR 49834, Sept. 30, 1994]



Sec. 413.124  Reduction to hospital outpatient operating costs.

    (a) Except for sole community hospitals, as defined in Sec. 412.92 
of this chapter, and critical access hospitals, the reasonable costs of 
outpatient hospital services (other than capital-related costs of these 
services) are reduced by 5.8 percent for services furnished during 
portions of cost reporting periods occurring on or after October 1, 1990 
and until the first date that the prospective payment system under part 
419 of this chapter is implemented.
    (b) For purposes of determining the blended payment amounts of 
ambulatory surgical center approved surgical procedures performed in the 
hospital outpatient setting under Sec. 413.118 and hospital outpatient 
radiology services and other diagnostic procedures under Sec. 413.122, 
the reduction is applicable only to the hospital-specific portion of the 
blended payment amounts.

[57 FR 36017, Aug. 12, 1992, as amended at 59 FR 26960, May 25, 1994; 62 
FR 46037, Aug. 29, 1997; 65 FR 18542, Apr. 07, 2000]



Sec. 413.125  Payment for home health agency services.

    (a) For additional rules on the allowability of certain costs 
incurred by home health agencies, see Secs. 409.46 and 409.49(b) of this 
chapter.
    (b) The reasonable cost of outpatient rehabilitation services 
furnished by a home health agency to homebound patients who are not 
entitled to home health benefits may not exceed the amounts payable 
under the physician fee schedule for comparable services effective 
January 1, 1999.

[59 FR 65497, Dec. 20, 1994, as amended at 63 FR 58910, Nov. 2, 1998]



                    Subpart G--Capital-Related Costs



Sec. 413.130  Introduction to capital-related costs.

    (a) General rule. Capital-related costs and an allowance for return 
on equity are limited to the following:
    (1) Net depreciation expense as determined under Secs. 413.134, 
413.144, and 413.149, adjusted by gains and losses realized from the 
disposal of depreciable assets under Sec. 413.134(f).

[[Page 578]]

    (2) Taxes on land or depreciable assets used for patient care.
    (3) Leases and rentals, including license and royalty fees, for the 
use of depreciable assets or land, as described in paragraph (b) of this 
section.
    (4) The costs of betterments and improvements as described in 
paragraph (c) of this section.
    (5) The costs of minor equipment that are capitalized, rather than 
expensed, as described in paragraph (d) of this section.
    (6) Insurance expense on depreciable assets, as described in 
paragraph (e) of this section.
    (7) Interest expense as determined under Sec. 413.153, subject to 
the qualifications of paragraph (f) of this section.
    (8) For certain proprietary providers, return on equity capital, as 
determined under Sec. 413.157.
    (9) The capital-related costs of related organizations (as described 
in Sec. 413.17), as determined in accordance with paragraph (g) of this 
section.
    (10) Debt issuance costs, debt discounts, and debt redemption costs, 
if the associated debt was incurred to acquire land or depreciable 
assets used for patient care or to refinance existing debt for which the 
original purpose was to acquire land or depreciable assets used for 
patient care.
    (11) The apportionment of the capital-related costs of jointly owned 
assets among the owners must be on a basis that reflects the relative 
use by each owner, rather than the ownership share or the amount of time 
the asset is located at each owners site.
    (b) Leases and rentals. (1) Subject to the qualifications of 
paragraphs (b) (2), (4), (5), and (8) of this section, leases and 
rentals, including licenses and royalty fees, are includable in capital-
related costs if they relate to the use of assets that would be 
depreciable if the provider owned them outright or they relate to land, 
which is neither depreciable nor amortizable if owned outright. The 
terms ``leases'' and ``rentals of assets'' signify that a provider has 
possession, use, and enjoyment of the assets.
    (2) For sale and leaseback agreements for hospitals and SNFs entered 
into before October 23, 1992 and for sale and leaseback agreements for 
other providers entered into at any time, a provider may include 
incurred rental charges in its capital-related costs, as specified in a 
sale and leaseback agreement with a nonrelated purchaser (including 
shared service organizations not related within the meaning of 
Sec. 413.17) involving plant facilities or equipment only if the 
following conditions are met:
    (i) The rental charges are reasonable based on the following--
    (A) Consideration of rental charges of comparable facilities and 
market conditions in the area;
    (B) The type, expected life, condition, and value of the facilities 
or equipment rented; and
    (C) Other provisions of the rental agreements.
    (ii) Adequate alternative facilities or equipment that would serve 
the purpose are not or were not available at lower cost.
    (iii) The leasing was based on economic and technical 
considerations.
    (3) If the conditions of paragraph (b)(2) of this section are not 
met, the amount a provider may include in its capital-related costs as 
rental or lease expense under a sale and leaseback agreement may not 
exceed the amount that the provider would have included in its capital-
related costs had the provider retained legal title to the facilities or 
equipment, such as interest on mortgage, taxes, depreciation, and 
insurance costs.
    (4) For sale and leaseback agreements for hospitals and SNFs entered 
into on or after October 23, 1992, the amount a provider may include in 
its capital-related costs as rental or lease expense may not exceed the 
amount that the provider would have included in its capital-related 
costs had the provider retained legal title to the facilities or 
equipment, such as interest expense on mortgages, taxes, depreciation, 
and insurance costs (the costs of ownership). This limitation applies 
both on an annual basis and over the useful life of the asset.
    (i) If in the early years of the lease, the annual rental or lease 
costs are less than the annual costs of ownership, but in the later 
years of the lease the annual rental or lease costs are more than the 
annual costs of ownership, in

[[Page 579]]

the years that the annual rental or lease costs are more than the annual 
costs of ownership, the provider may include in capital-related costs 
annually the actual amount of rental or lease costs. The aggregate 
rental or lease costs included in capital-related costs may not exceed 
the aggregate costs of ownership that would have been included in 
capital-related costs over the useful life of the asset had the provider 
retained legal title to the asset.
    (ii) If in the early years of the lease, the annual rental or lease 
costs exceed the annual costs of ownership, but in the later years of 
the lease the annual rental or lease costs are less than the annual 
costs of ownership, the provider may carry forward amounts of rental or 
lease costs that were not included in capital-related costs in the early 
years of the lease due to the costs of ownership limitation, and include 
these amounts in capital-related costs in the years of the lease when 
the annual rental or lease costs are less than the annual costs of 
ownership.
    (iii) In any given year the amount of actual annual rental or lease 
costs plus the amount carried forward to that year may not exceed the 
amount of the costs of ownership for that year.
    (iv) In the aggregate, the amount of rental or lease costs included 
in capital-related costs may not exceed the amount of the costs of 
ownership that the provider could have included in capital-related costs 
had the provider retained legal title to the asset.
    (5) For lease purchase transactions entered into before October 23, 
1992, a lease that meets the following conditions establishes a virtual 
purchase:
    (i) The rental charge exceeds rental charges of comparable 
facilities or equipment in the area.
    (ii) The term of the lease is less than the useful life of the 
facilities or equipment.
    (iii) The provider has the option to renew the lease at a 
significantly reduced rental, or the provider has the right to purchase 
the facilities or equipment at a price that appears to be significantly 
less than what the fair market value of the facilities or equipment 
would be at the time acquisition by the provider is permitted.
    (6)(i) If a lease is a virtual purchase under paragraph (b)(5) of 
this section, the rental charge is includable in capital-related costs 
only to the extent that it does not exceed the amount that the provider 
would have included in capital-related costs if it had legal title to 
the asset (the cost of ownership), such as straight-line depreciation, 
insurance, and interest. A provider may not include in its capital-
related costs accelerated depreciation in this situation.
    (ii) The difference between the amount of rent paid and the amount 
of rent allowed as capital-related costs is considered a deferred charge 
and is capitalized as part of the historical cost of the asset when the 
asset is purchased.
    (iii) If an asset is returned to the owner, instead of being 
purchased, the deferred charge may be included in capital-related costs 
in the year the asset is returned.
    (iv) If the term of the lease is extended for an additional period 
of time at a reduced lease cost and the option to purchase still exists, 
the deferred charge may be included in capital-related costs to the 
extent of increasing the reduced rental to an amount not in excess of 
the cost of ownership.
    (v) If the term of the lease is extended for an additional period of 
time at a reduced lease cost and the option to purchase no longer 
exists, the deferred charge may be included in the capital-related costs 
to the extent of increasing the reduced rental to a fair rental value.
    (7) Amounts included in lease or rental payments for repair or 
maintenance agreements are excluded from capital-related costs. If no 
amount is identified in the lease or rental agreement for maintenance, 
the entire lease payment is considered a capital-related cost subject to 
the provisions of paragraph (b)(1) of this section.
    (8) For lease purchase transactions entered into on or after October 
23, 1992, a lease that meets any one of the following conditions 
establishes a virtual purchase:
    (i) The lease transfers title of the facilities or equipment to the 
lessee during the lease term.

[[Page 580]]

    (ii) The lease contains a bargain purchase option.
    (iii) The lease term is at least 75 percent of the useful life of 
the facilities or equipment. This provision is not applicable if the 
lease begins in the last 25 percent of the useful life of the facilities 
or equipment.
    (iv) The present value of the minimum lease payments (payments to be 
made during the lease term including bargain purchase option, guaranteed 
residual value, and penalties for failure to renew) equals at least 90 
percent of the fair market value of the leased property. This provision 
is not applicable if the lease begins in the last 25 percent of the 
useful life of the facilities or equipment. Present value is computed 
using the lessee's incremental borrowing rate, unless the interest rate 
implicit in the lease is known and is less than the lessee's incremental 
borrowing rate, in which case the interest rate implicit in the lease is 
used.
    (9)(i) If a lease establishes a virtual purchase under paragraph 
(b)(8) of this section, the rental charge is includable in capital-
related costs to the extent that it does not exceed the amount that the 
provider would have included in capital-related costs if it had legal 
title to the asset (the cost of ownership). The cost of ownership 
includes straight-line depreciation, insurance, and interest. For 
purposes of computing the limitation on allowable rental cost in this 
paragraph, a provider may not include accelerated depreciation.
    (ii) The difference between the amount of rent paid and the amount 
of rent allowed as capital-related costs is considered a deferred charge 
and is capitalized as part of the historical cost of the asset when the 
asset is purchased.
    (iii) If an asset is returned to the owner instead of being 
purchased, the deferred charge may be included in capital-related costs 
in the year the asset is returned.
    (iv) If the term of the lease is extended for an additional period 
of time at a reduced lease cost and the option to purchase still exists, 
the deferred charge may be included in capital-related costs to the 
extent of increasing the reduced rental to an amount not in excess of 
the cost of ownership.
    (v) If the term of the lease is extended for an additional period of 
time at a reduced lease cost and the option to purchase no longer 
exists, the deferred charge may be included in capital-related costs to 
the extent of increasing the reduced rental to a fair rental value.
    (vi) If the lessee becomes the owner of the leased asset (either by 
operation of the lease or by other means), the amount considered as 
depreciation, for the purpose of having computed the limitation on 
rental charges in paragraph (b)(9)(i) of this section, must be used in 
calculating the limitation on adjustments for the purpose of determining 
any gain or loss under Sec. 413.134(f) upon disposal of an asset.
    (c) Betterments and improvements. (1) Betterments and improvements 
are changes which extend the estimated useful life of an asset at least 
two years beyond its original estimated useful life, or increase the 
productivity of an asset significantly over its original productivity.
    (2) A provider must capitalize and prorate the costs of betterments 
and improvements over the remaining estimated useful life of the asset, 
as modified by the betterment or improvement.
    (d) Minor equipment. A provider must include in its capital-related 
costs the costs of minor equipment that are capitalized rather than 
charged off to expense if--
    (1) The net book value of minor equipment at the time the provider 
enters the program is prorated over three years (that is, one-third of 
the net book value is written off each year), and new purchases are also 
prorated over a 3-year period; or
    (2) The cost of minor equipment is prorated over their actual useful 
lives.
    (e) Insurance. (1) A provider must include in its capital-related 
costs the costs of insurance on depreciable assets used for patient care 
or insurance that provides for the payment of capital-related costs 
during business interruption.
    (2) If an insurance policy also provides protection for other than 
the replacement of depreciable assets or to

[[Page 581]]

pay capital-related costs in the case of business interruption 
insurance, only that portion of the premium related to the replacement 
of depreciable assets or to pay capital-related costs in the case of 
business interruption insurance is includable in capital-related costs.
    (f) Debt premiums and debt discounts. Debt premiums or debt discount 
are applied as adjustments to capital-related costs if the associated 
debt is incurred for acquiring land or depreciable assets used for 
patient care or for refinancing existing debt for which the original 
purpose was to acquire land or depreciable assets used for patient care.
    (g) Interest expense. (1) A provider must include in its capital-
related costs interest expense, as described in Sec. 413.153, if such 
expense is incurred in--
    (i) Acquiring land or depreciable assets (either through purchase or 
lease) used for patient care; or
    (ii) Refinancing existing debt, if the original purpose of the 
refinanced debt was to acquire land or depreciable assets used for 
patient care.
    (2) If investment income offset is required under 
Sec. 413.153(b)(2)(iii), only that portion of investment income that 
bears the same relationship to total investment income, as the portion 
of capital-related interest expense bears to total interest expense, is 
offset against capital-related costs.
    (h) Costs of supplying organizations--(1) Supplying organizations 
related to the provider. (i) If the supplying organization is related to 
the provider within the meaning of Sec. 413.17, except as provided in 
paragraph (g)(1)(ii) of this section, a provider's capital-related costs 
include the capital-related costs of the supplying organization.
    (ii) If the costs of the services, facilities or supplies being 
furnished exceed the open market price, or if the provisions of 
Sec. 413.17(d) apply, no part of the cost to the provider of the 
services, facilities, or supplies are considered capital-related costs, 
unless the services, facilities, or supplies would otherwise be 
considered capital-related.
    (2) Supplying organizations not related to the provider. If the 
supplying organization is not related to the provider within the meaning 
of Sec. 413.17, no part of the charge to the provider may be considered 
a capital-related cost (unless the services, facilities, or supplies are 
capital-related in nature) unless--
    (i) The capital-related equipment is leased or rented (as described 
in paragraph (b) of this section) by the provider;
    (ii) The capital-related equipment is located on the provider's 
premises, or is located offsite and is on real estate owned, leased or 
rented by the provider; and
    (iii) The capital-related portion of the charge is separately 
specified in the charge to the provider.
    (i) Costs excluded from capital-related costs. The following costs 
are not capital-related costs. To the extent that they are allowable, 
they must be included in determining each provider's operating costs:
    (1) Costs incurred for the repair or maintenance of equipment or 
facilities.
    (2) Amounts included in rentals or lease payments for repair or 
maintenance agreements.
    (3) Interest expense incurred to borrow working capital (for 
operating expenses).
    (4) General liability insurance or any other form of insurance to 
provide protection other than for the replacement of depreciable assets 
or to pay capital-related costs in the case of business interruption.
    (5) Taxes other than those assessed on the basis of some valuation 
of land or depreciable assets used for patient care. (Taxes not related 
to patient care, such as income taxes, are not allowable, and are 
therefore not included among either capital-related or operating costs.)
    (6) The costs of minor equipment that are charged off to expense 
rather than capitalized as described in paragraph (d) of this section.
    (7) The costs incurred for maintenance and repair insurance 
agreements (commonly referred to as maintenance agreements).
    (j) Reduction to capital-related costs. (1) Except for sole 
community hospitals and critical access hospitals, the amount of 
capital-related costs of all hospital outpatient services is reduced by-
-
    (i) 15 percent for portions of cost reporting periods occurring on 
or after

[[Page 582]]

October 1, 1989, through September 30, 1991; and
    (ii) 10 percent for portions of cost reporting periods occurring on 
or after October 1, 1991 and until the first date that the prospective 
payment system under part 419 of this chapter is implemented.
    (2) For purposes of determining the blended payment amounts for 
hospital outpatient services under Sec. 413.118 and Sec. 413.122, the 
reduction is applicable only to the hospital-specific portion of the 
blended amounts.

[51 FR 34793, Sept. 30, 1986, as amended at 52 FR 21225, June 4, 1987; 
56 FR 43456, Aug. 30, 1991; 57 FR 3017, Jan. 27, 1992; 57 FR 36017, Aug. 
12, 1992; 57 FR 43917, Sept. 23, 1992; 58 FR 17528, Apr. 5, 1993; 59 FR 
26960, May 25, 1994; 62 FR 46037, Aug. 29, 1997; 65 FR 18542, Apr. 7, 
2000]



Sec. 413.134  Depreciation: Allowance for depreciation based on asset costs.

    (a) Principle. An appropriate allowance for depreciation on 
buildings and equipment used in the provision of patient care is an 
allowable cost. The depreciation must be--
    (1) Identifiable and recorded in the provider's accounting records;
    (2) Based on the historical cost of the asset, except as specified 
in paragraph (j) of this section regarding donated assets; and
    (3) Prorated over the estimated useful life of the asset using--
    (i) The straight-line method; or
    (ii) Accelerated depreciation under a declining balance method (not 
to exceed double the straight-line rate) or the sum-of-the-years' digits 
method in the following situations:
    (A) Depreciable assets for which accelerated depreciation was used 
for Medicare purposes before August 1, 1970, including those assets for 
which a timely request to change from straight-line depreciation to 
accelerated depreciation was received by an intermediary before August 
1, 1970;
    (B) Depreciable assets acquired before August 1, 1970, if no 
election to use straight-line or accelerated depreciation was in effect 
on August 1, 1970, and the provider was participating in the program on 
August 1, 1970;
    (C) Depreciable assets of a provider if construction of such 
depreciable asset began before February 5, 1970, and the provider was 
participating in the program on February 5, 1970; or
    (D) Depreciable assets of a provider if a valid written contract was 
entered into by a provider participating in the program before February 
5, 1970, for construction, acquisition, or for the permanent financing 
thereof, and such contract was binding on a provider on February 5, 
1970, and at all times thereafter; or
    (iii) A declining balance method, not to exceed 150 percent of the 
straight-line rate, for a depreciable asset acquired after July 31, 
1970; however, this declining balance method may be used only if the 
cash flow from depreciation on the total assets of the institution 
during the reporting period, including straight-line depreciation on the 
assets in question, is insufficient (assuming funding of available 
capital not required currently for amortization and assuming reasonable 
interest income on such funds) to supply the funds required to meet the 
reasonable principal amortization schedules on the capital debts related 
to the provider's total depreciable assets. For each depreciable asset 
for which a provider requests authorization to use a declining balance 
method for Medicare reimbursement purposes, but not to exceed 150 
percent of the straight-line rate, the provider must demonstrate to the 
intermediary's satisfaction that the required cash flow need exists. For 
each depreciable asset in which a provider justifies the use of 
accelerated depreciation, the intermediary must give written approval 
for the use of a depreciation method other than straight-line before 
basing any interim payment on this accelerated depreciation or making 
its reasonable cost determination which includes an allowance for such 
depreciation.
    (b) General rules--(1) Historical cost. Historical cost is the cost 
incurred by the present owner in acquiring the asset.
    (i) All providers--(A) Depreciable assets acquired after July 31, 
1970 and before December 1, 1997. For depreciable assets acquired after 
July 31, 1970 and before December 1, 1997, and for a hospital or an SNF, 
acquired before July 18, 1984, the historical cost may not exceed the

[[Page 583]]

lower of current reproduction cost adjusted for straight-line 
depreciation over the life of the asset to the time of the purchase or 
the fair market value of the asset at the time of its purchase.
    (B) Depreciable assets acquired on or after December 1, 1997. For 
depreciable assets acquired on or after December 1, 1997, the historical 
cost of the asset that will be recognized under this program must not 
exceed the historical cost less depreciation allowed to the owner of 
record as of August 5, 1997 (or if an asset did not exist as of August 
5, 1997, the first owner of record after August 5, 1997). For this 
paragraph (b)(1)(i)(B), the following apply:
    (1) An asset that was not in existence as of August 5, 1997 includes 
an asset that physically existed but was not owned by a provider 
participating in the Medicare program as of that date.
    (2) The acquisition cost to the owner of record is subject to the 
limitation on historical costs described in paragraphs (g) (1), (2), and 
(3) of this section, and is reduced by any depreciation taken by the 
owner of record. The limitation on historical cost is also applied to 
the purchase of land, which is a capital asset that is neither 
depreciable nor amortizable under any circumstances. (See 
Secs. 413.153(d) and 413.157(b) for application of the limitation to the 
cost of land for purposes of determining the allowable interest 
expense.)
    (3) Acquisition cost to the owner of record includes the costs of 
betterment or improvements that extend the estimated useful life of an 
asset at least 2 years beyond its original estimated useful life or that 
increase the productivity of an asset significantly over its original 
productivity.
    (4) For assets acquired prior to a provider's entrance into the 
Medicare program, the acquisition cost to the owner of record is the 
historical cost when acquired, rather than when the provider entered the 
program.
    (5) For assets subject to the optional depreciation allowance as 
described in Sec. 413.139, the acquisition cost to the owner of record 
is the historical cost established for those assets when the provider 
changed to actual depreciation as described in Sec. 413.139(e). If the 
provider did not change to actual depreciation, as described in 
Sec. 413.139(e), for optional allowance assets, the acquisition cost to 
the owner of record is based on the provider's recorded historical cost 
of the asset when acquired. If the provider has no historical cost 
records for optional allowance assets, the acquisition cost to the owner 
of record is established by appraisal.
    (6) The historical cost of an asset acquired on or after July 18, 
1984 may not include costs attributable to the negotiation or settlement 
of the sale or purchase (by acquisition, merger, or consolidation) of 
any capital asset for which any payment was previously made under the 
Medicare program. The costs to be excluded include, but are not limited 
to, appraisal costs (except those incurred at the request of the 
intermediary under paragraph (f)(2)(iv) of this section), legal fees, 
accounting and administrative costs, travel costs, and the costs of 
feasibility studies.
    (ii) Hospitals and SNFs only. (A) For assets acquired on or after 
July 18, 1984 and before December 1, 1997 and not subject to an 
enforceable agreement entered into before July 18, 1984, historical cost 
may not exceed the lowest of the following:
    (1) The allowable acquisition cost of the asset to the owner of 
record as of July 18, 1984 (or, in the case of an asset not in existence 
as of July 18, 1984, the first owner of record of the asset after that 
date);
    (2) The acquisition cost of the asset to the new owner; or
    (3) The fair market value of the asset on the date of acquisition.
    (B) For purposes of applying paragraph (b)(1)(ii)(A) of this 
section, an asset not in existence as of July 18, 1984 includes any 
asset that physically existed, but was not owned by a hospital or SNF 
participating in the Medicare program as of July 18, 1984.
    (C) The acquisition cost to the owner of record is subject to any 
limitation on historical costs described in paragraphs (b)(1)(i) or 
(g)(1) and (2) of this section, and is not reduced by any depreciation 
taken by the owner of record. This limitation on historical cost is also 
applied to the purchase of land, a capital asset that is neither 
depreciable nor amortizable under any circumstances. (See 
Secs. 413.153(d) and

[[Page 584]]

413.157(b) for application of the limitation to the cost of land for 
purposes of determining allowable interest expense and return on equity 
capital or proprietary providers.)
    (D) Acquisition cost to the owner of record includes the costs of 
betterments or improvements that extend the estimated useful life of an 
asset at least two years beyond its original estimated useful life or 
increase the productivity of an asset significantly over its original 
productivity.
    (E) For assets acquired prior to a hospital's or SNF's entrance into 
the Medicare program, the acquisition cost to the owner of record is the 
historical cost of the asset when acquired, rather than when the 
hospital or SNF entered the program.
    (F) For assets subject to the optional depreciation allowance as 
described in Sec. 413.139, the acquisition cost to the owner of record 
is the historical cost established for those assets when the hospital or 
SNF changed to actual depreciation as described in Sec. 413.139(e). If 
the hospital or SNF did not change to actual depreciation, as described 
in Sec. 413.139(e), for optional allowance assets, the acquisition cost 
to the owner of record is established by reference to the hospital's or 
SNF's recorded historical cost of the asset when acquired. If the 
hospital or SNF has no historical cost records for optional allowance 
assets, the acquisition cost to the owner of record is established by 
appraisal.
    (G) The historical cost of an asset acquired on or after July 18, 
1984 may not include costs attributable to the negotiation or settlement 
of the sale or purchase (by acquisition, merger, or consolidation) of 
any capital asset for which any payment was previously made under the 
Medicare program. The costs to be excluded include, but are not limited 
to, appraisal costs (except those incurred at the request of the 
intermediary under paragraph (f)(2)(iv) of this section), legal fees, 
accounting and administrative costs, travel costs, and the costs of 
feasibility studies.
    (iii) Hospital-based providers other than SNFs and SNF-based 
providers. For changes of ownership that involve assets of a hospital-
based provider other than a SNF, or assets of a SNF-based provider, the 
provisions of paragraph (b)(1)(ii) of this section are not applicable. A 
reasonable allocation of the purchase price must be made, so that the 
hospital-based provider other than a SNF, or a SNF-based provider, is 
not affected by the limitations described in paragraph (b)(1)(ii) of 
this section. The historical cost of assets of providers other than 
hospitals and SNFs is governed by paragraph (b)(1)(i) of this section.
    (2) Fair market value. Fair market value is the price that the asset 
would bring by bona fide bargaining between well-informed buyers and 
sellers at the date of acquisition. Usually the fair market price is the 
price that bona fide sales have been consummated for assets of like 
type, quality, and quantity in a particular market at the time of 
acquisition.
    (3) The straight-line method. Under the straight-line method of 
depreciation, the cost or other basis (for example, fair market value in 
the case of donated assets) of the asset, less its estimated salvage 
value, if any, is determined first. Then this amount is distributed in 
equal amounts over the period of the estimated useful life of the asset.
    (4) Declining balance method. Under the declining balance method, 
the annual depreciation allowance is computed by multiplying the 
undepreciated cost of the asset each year by a uniform rate up to double 
the straight-line rate or 150 percent, as the case may be (see paragraph 
(a)(3) of this section for limitations on use of accelerated methods of 
depreciation).
    (5) Sum-of-the-years' digits method. Under the sum-of-the-years' 
digits method, the annual depreciation allowance is computed by 
multiplying the depreciable cost basis (cost less salvage value) by a 
constantly decreasing fraction. The numerator of the fraction is 
represented by the remaining years of useful life of the asset at the 
beginning of each year, and the denominator is always represented by the 
sum of the years' digits of useful life at the time of acquisition.
    (6) Current reproduction cost. Current reproduction cost is the cost 
at current prices, in a particular locality or market area, of 
reproducing an item of property or a group of assets. Where

[[Page 585]]

depreciable assets are concerned, this means the reasonable cost to have 
built, reproduce in kind, or, in the case of equipment or similar 
assets, to purchase in the competitive market.
    (7) Useful life. The estimated useful life of a depreciable asset is 
its normal operating or service life to the provider, subject to the 
provisions in paragraph (b)(7)(i) of this section. Factors to be 
considered in determining useful life include normal wear and tear; 
obsolescence due to normal economic and technological changes; climatic 
and other local conditions; and the provider's policy for repairs and 
replacement.
    (i) Initial selection of useful life. In selecting a proper useful 
life for computing depreciation under the Medicare program, providers 
must use the useful life guidelines published by CMS. If CMS has not 
published applicable useful life guidelines, providers must use--
    (A) The edition of the American Hospital Association useful life 
guidelines, as specified in CMS Medicare program manuals; or
    (B) A different useful life specifically requested by the provider 
and approved by the intermediary. A different useful life may be 
approved by the intermediary if the provider's request is properly 
supported by acceptable factors that affect the determination of useful 
life. However, such factors as an expected early sale, retirement, 
demolition or abandonment of an asset, or termination of the provider 
from the Medicare program may not be used.
    (ii) Application of guidelines. The provisions concerning the 
selection of useful life guidelines described in paragraph (b)(7)(i) of 
this section apply to assets acquired on or after January 1, 1981. For 
assets acquired before January 1, 1981, providers must use the useful 
life guidelines published by the American Hospital Association in its 
1973 edition of Chart of Accounts for Hospitals, or those published by 
the Internal Revenue Service, or those approved for use by 
intermediaries as provided in paragraph (b)(7)(i)(B) of this section.
    (iii) Changing useful life. A change in the estimated useful life 
may be made if clear and convincing evidence justifies a redetermination 
of the useful life used by the provider. Such a change must be approved 
by the intermediary in writing, and the factors cited in paragraphs 
(b)(7) and (b)(7)(i) of this section are applicable in making such 
redeterminations of useful life. If the request is approved, the change 
is effective with the reporting period immediately following the period 
in which the provider's request is submitted for approval.
    (8) Donated asset. An asset is considered donated when the provider 
acquires the asset without making payment in the form of cash, new debt, 
assumed debt, property or services. Except as provided in paragraph 
(j)(3) of this section, if a provider makes payment in any form to 
acquire an asset, the payment is considered the purchase price for the 
purpose of determining allowable historical cost.
    (9) Net book value. The net book value of an asset is the 
depreciable basis used for the Medicare program by the asset's last 
participating owner less depreciation recognized under the Medicare 
program.
    (c) Recording of depreciation. Appropriate recording of depreciation 
includes the identification of the depreciable assets in use, the 
assets' historical costs, the assets' dates of acquisition, the method 
of depreciation, estimated useful lives, and the assets' accumulated 
depreciation.
    (d) Depreciation methods--(1) General. Proration of the cost of an 
asset over its useful life is allowed on the straight-line method, or, 
when permitted under paragraph (a)(3) of this section, the declining 
balance or the sum-of-the-years' digits methods. One method may be used 
on a single asset or group of assets and another method on others. In 
applying the declining balance or sum-of-the-years' digits method to an 
asset that is not new, the undepreciated cost of the asset is treated as 
the cost of a new asset in computing depreciation.
    (2) Change in method. Prior to August 1, 1970, a provider may change 
from the straight-line method to an accelerated method or vice versa, 
upon advance approval from the intermediary on a prospective basis with 
the request being made before the end of the first month of the 
prospective reporting period.

[[Page 586]]

Only one such change with respect to a particular asset may be made by a 
provider. Effective with August 1, 1970, a provider may only change from 
an accelerated method or optional method (see Sec. 413.139) to the 
straight-line method. Such a change may be made without intermediary 
approval and the basis for depreciation is the undepreciated cost 
reduced by the salvage value. Thereafter, once straight-line 
depreciation is selected for a particular asset, an accelerated method 
may not be established for that asset.
    (3) Recovery of accelerated depreciation--(i) General. If a provider 
who has used an accelerated method of depreciation for any of its assets 
terminates participation in the program, or if the Medicare proportion 
of its allowable costs decreases so that cumulatively substantially more 
depreciation was paid than would have been paid using the straight-line 
method of depreciation, the excess of reimbursable cost determined by 
using accelerated depreciation methods and paid under the program over 
the reimbursable cost that would have been determined and paid under the 
program by using the straight-line method of depreciation, will be 
recovered as an offset to current reimbursement due or, if the provider 
has terminated participation in the program, as an overpayment. In this 
determination of excess payment, recognition will be given to the 
effects the adjustment to straight-line depreciation would have on the 
return on equity capital and on the allowance in lieu of specific 
recognition of other costs in the respective years.
    (ii) Transaction between related organizations--(A) General. If the 
termination of the provider agreement is due to a change in provider 
ownership, as defined in Sec. 489.18 of this chapter, resulting from a 
transaction between related organizations, as defined in Sec. 413.17, 
and the criteria in paragraph (b) of this section are met, the excess of 
reimbursable cost, as determined in paragraph (d)(3)(i) of this section 
may not be recovered if there is a continuation of participation by the 
facility in the Medicare program.
    (B) Criteria. The following criteria must be met if the recovery of 
excess reimbursable cost is not to be made:
    (1) The termination of the provider agreement is due to a change in 
ownership of the provider resulting from a transaction between related 
organizations.
    (2) The successor provider continues to participate in the Medicare 
program.
    (3) Control and the extent of the financial interest of the owners 
of the provider before and after the termination remain the same; that 
is, the successor owners acquire the same per-centage of control or 
financial investment as the transferors had.
    (4) All assets and liabilities of the terminated provider are 
transferred to the related successor participating provider.
    (C) Effect of transaction. In transactions meeting the criteria 
specified in paragraph (d)(3)(ii)(B) of this section, the provision 
concerning recovery of excess reimbursable cost (Sec. 413.134(d)(3)(i)) 
is not applied, and the transaction is treated as follows:
    (1) The successor provider must record the historical cost and 
accumulated depreciation and the method of depreciation recognized under 
the Medicare program, and these are considered as incurred by the 
successor provider for Medicare purposes.
    (2) The Medicare program's utilization of the terminated provider is 
considered as having been incurred by the successor provider for 
Medicare purposes.
    (3) The equity capital of the terminated provider as of the closing 
of its final cost reporting period must be wholly contained in the 
equity capital of the successor provider as of the beginning of its 
first cost reporting period.
    (e) Funding of depreciation. Although funding of depreciation is not 
required, it is strongly recommended that providers use this mechanism 
as a means of conserving funds for replacement of depreciable assets. 
Funded depreciation account funds must be placed in readily marketable 
investments of the type that assures the availability and conservation 
of the funds. Additions to the funded depreciation account must remain 
in the account for at least 6 months to be considered valid funding 
transactions.

[[Page 587]]

    (1) Incentive. As an incentive for funding, investment income on 
funded depreciation is not treated as a reduction of allowable interest 
expense provided such investment income is deposited in, and becomes 
part of, the funded depreciation account at the time of receipt by the 
provider. Investment income earned on deposits before the 6-month period 
elapses are not offset unless the deposits are withdrawn for an improper 
purpose during this period. If a provider transfers assets of the funded 
depreciation account to a related organization (for example, pooling of 
several chain organization providers' funded depreciation accounts at 
the chain home office for investment purposes), these assets shall be 
treated as the provider's funds and are subject to all the requirements 
specified in paragraph (e) of this section.
    (2) Availability of funded depreciation. (i) CMS considers funded 
depreciation available for use in the acquisition or replacement of 
depreciable assets related to patient care unless the funded 
depreciation funds have been committed by contract for the acquisition 
of depreciable assets related to the furnishing of patient care or for 
other capital purposes related to patient care.
    (ii) Borrowing for a purpose for which funded depreciation account 
funds should have been used makes the borrowing unnecessary to the 
extent that funded depreciation account funds were available at the time 
of the borrowing. Available funds in the funded depreciation account, to 
the extent of the unnecessary borrowing, are called ``tainted'' funds. 
Interest expense incurred on borrowing for a capital purpose is not an 
allowable cost to the extent that funded depreciation account funds were 
available at the time of the borrowing.
    (iii) A provider can remove the ``unnecessary'' characterization of 
borrowing, and thereby cure tainted funded depreciation, by using the 
tainted funds for a proper purpose described in paragraph (e)(3)(i) of 
this section. However, any funded depreciation that existed at the time 
of the unnecessary borrowing and is not classified as tainted must be 
used before any of the tainted funds.
    (iv) When only a portion of the borrowing is considered unnecessary 
under paragraph (e)(2)(ii) of this section, subsequent repayments of 
such borrowing from general funds are applied first to the allowable 
portion of the borrowing and then, when all of the allowable borrowing 
is repaid, to the unallowable portion of the borrowing. When funds from 
the funded depreciation account are used for the repayment of the 
unnecessary borrowing, an equivalent amount of tainted funds is cured 
without regard to the provisions of paragraphs (e)(2)(ii) and 
(e)(3)(i)(C) of this section. Similarly, where general funds are used to 
pay for the unallowable borrowing after the necessary borrowing has been 
repaid, an equivalent amount of tainted funded depreciation is cured 
without regard to the provisions of paragraphs (e)(2)(ii) and 
(e)(3)(i)(C) of this section.
    (3) Withdrawals of funded depreciation--(i) Proper withdrawals. (A) 
Withdrawals from funded depreciation are considered proper if made 
either for the acquisition or replacement of depreciable assets related 
to the furnishing of patient care or for other capital purposes related 
to patient care.
    (B) First-in, first-out basis. Proper withdrawals from funded 
depreciation are made on a first-in, first-out basis.
    (C) Exception. If CMS determines that a borrowing is unnecessary 
because of the existence of available funded depreciation, and 
additional deposits have been made to funded depreciation after the 
occurrence of the unnecessary borrowing, withdrawals made after the date 
of the additional deposits are deemed to be made on a last-in, first-out 
basis.
    (ii) Improper withdrawals. (A) Withdrawals from funded depreciation 
that do not meet the requirements for proper withdrawals under the 
provisions in paragraph (e)(3)(i)(A) of this section are considered 
improper withdrawals.
    (B) Improper withdrawals from funded depreciation are made on a 
last-in, first-out basis. If improper withdrawals are made, interest 
expense is reduced in accordance with section Sec. 413.153(c)(3).

[[Page 588]]

    (C) Improper withdrawals will result in the offset of otherwise 
allowable interest expense under the offset provisions in 
Sec. 413.153(c)(3).
    (4) Loans from funded depreciation. (i) When the general fund of the 
provider borrows from the funded depreciation to obtain working capital 
for normal operating expenses to furnish patient care, interest incurred 
by the general fund is an allowable operating cost only if the interest 
expense is supported by documents that evidence that the funds were 
borrowed and that payment of interest and repayment of the funds are 
required, is separately identified in the provider's accounting records, 
and meets the necessary and proper tests described in 
Secs. 413.153(b)(2) and (b)(3). However, if the general fund of the 
provider borrows from the funded depreciation account to acquire 
depreciable assets used in furnishing patient care, or for other capital 
purposes related to patient care, interest expense paid by the general 
fund to the funded depreciation account is not an allowable cost. 
Providers are expected to use the funded depreciation for these 
purposes.
    (ii) Loans from funded depreciation to the general fund are 
considered investments of funded depreciation, but do not have to meet 
the readily marketable test described in paragraph (e) of this section. 
Loans made from funded depreciation are subject to the requirement that 
funded depreciation must be available for the acquisition of depreciable 
assets used to furnish patient care, or for other capital purposes 
related to patient care. Costs incurred to secure lines of credit from 
lending institutions to ensure such availability are not allowable 
costs.
    (iii) Funding of depreciation from general funds will not be 
recognized to the extent of any outstanding loans from the funded 
depreciation account to the general fund. Deposits from the general fund 
into the funded depreciation account must be first applied to reduce any 
loans outstanding from the funded depreciation to the general fund. When 
the loans are repaid in full, general funds deposited in the funded 
depreciation account are considered as repayments of the general fund. 
Therefore, any subsequent interest expense of the general fund paid to 
the funded depreciation fund is not an allowable cost.
    (iv) A provider may loan its funded depreciation to a related 
organization for any purpose subject to the following conditions:
    (A) Authorization for such a loan by the provider's appropriate 
managing body of the provider, such as Board of Trustees or Board of 
Directors, must be on file.
    (B) The funded depreciation loaned must remain available, as 
specified in paragraph (e)(2) of this section, to the provider making 
the loan. Costs incurred for lines of credit to assure such availability 
are not allowable costs. During the period of time that the loan is 
outstanding, if the provider making the loan resorts to outside 
borrowing for a purpose for which its funded depreciation should have 
been used, interest expense on an amount of the outside borrowing up to 
the amount of the funded depreciation that should have been available 
would be disallowed as unnecessary.
    (C) Such loans shall be considered investments of the provider's 
funded depreciation, but the requirement that funded depreciation be 
invested in readily marketable investments as required in paragraph (e) 
of this section is waived for such loans.
    (D) The funded depreciation account must earn interest on such loans 
at a rate that does not exceed the rate that would be charged for a 
comparable loan from an independent lending institution. This investment 
income will not be used to reduce the provider's interest expense if all 
the other conditions in paragraph (e) of this section are met. If the 
entity borrowing the funds is another provider participating in the 
Medicare program, the interest expense incurred on such loans would be 
allowable if the loan meets all of the interest expense requirements 
specified in Sec. 413.153. (For purposes of Sec. 413.153(b)(3)(ii), such 
loans are not considered to be with a related lender.)
    (f) Gains and losses on disposal of assets--(1) General. Depreciable 
assets may be disposed of through sale, scrapping, trade-in, exchange, 
demolition, abandonment, condemnation, fire, theft, or other casualty. 
If disposal of a

[[Page 589]]

depreciable asset, including the sale or scrapping of an asset before 
December 1, 1997, results in a gain or loss, an adjustment is necessary 
in the provider's allowable cost. (No gain or loss is recognized on 
either the sale or the scrapping of an asset that occurs on or after 
December 1, 1997.) The amount of a gain included in the determination of 
allowable cost is limited to the amount of depreciation previously 
included in Medicare allowable costs. The amount of a loss to be 
included is limited to the undepreciated basis of the asset permitted 
under the program. The treatment of the gain or loss depends upon the 
manner of disposition of the asset, as specified in paragraphs (f)(2) 
through (6) of this section. The gain or loss on the disposition of 
depreciable assets has no retroactive effect on a proprietary provider's 
equity capital for years prior to the year of disposition.
    (2) Bona fide sale or scrapping before December 1, 1997. For the 
bona fide sale or scrapping of depreciable assets before December 1, 
1997, the following apply:
    (i) Except as specified in paragraph (f)(3) of this section, gains 
and losses realized from the bona fide sale or scrapping of depreciable 
assets are included in the determination of allowable cost only if the 
sale or scrapping occurs while the provider is participating in 
Medicare. The extent to which such gains and losses are included is 
calculated by prorating the basis for depreciation of the asset in 
accordance with the proportion of the asset's useful life for which the 
provider participated in Medicare. For purposes of this paragraph 
(f)(2)(i), scrapping refers to the physical removal from the provider's 
premises of tangible personal properties that are no longer useful for 
their intended purpose and are only salable for their scrap or junk 
value.
    (ii) If the total amount of gains or losses realized from bona fide 
sales or scrapping does not exceed $5,000 within the cost reporting 
period or if the provider's cumulative utilization under the Medicare 
program is less than 5 percent, the net amount of gains or losses 
realized from sale or scrapping will be allowed as a depreciation 
adjustment in the period of disposal. For purposes of this paragraph 
(f)(2)(ii), the provider's cumulative Medicare utilization precentage is 
determined by comparing the cumulative total of the Medicare inpatient 
days for all reporting periods in which depreciation on the asset 
disposed of was claimed under the Medicare program to the cumulative 
total of inpatient days of the participating provider for the same 
reporting periods.
    (iii) If the conditions specified in paragraph (f)(2)(ii) of this 
section are not met, the adjustment to reimbursable cost in the 
reporting period of asset disposition is calculated as follows:
    (A) The total amount of gains or losses shall be allocated to all 
reporting periods under the Medicare program, based on the ratio of the 
depreciation allowed on the assets in each reporting period to the total 
depreciation allowed under the Medicare program.
    (B) The results of this allocation are multiplied by the ratio of 
Medicare reimbursable cost to total allowable cost for each reporting 
period.
    (C) The results of this multiplication are then added.
    (D) Effective for cost reporting periods beginning on or after 
October 1, 1991, no adjustment will be made for the portion of gains or 
losses allocated to inpatient hospital services for which the hospital 
was paid under the fully prospective payment methodology as described in 
Sec. 412.340 of this chapter or under the hold-harmless methodology 
based on the Federal rate as described in Sec. 412.344(a)(1) of this 
chapter for new capital costs or in Sec. 412.344(a)(2) of this chapter.
    (iv) If a provider sells more than one asset for a lump sum sales 
price, the gain or loss on the sale of each depreciable asset must be 
determined by allocating the lump sum sales price among all the assets 
sold, in accordance with the fair market value of each asset as it was 
used by the provider at the time of sale. If the buyer and seller cannot 
agree on an allocation of the sales price, or if they do agree but there 
is insufficient documentation of the current fair market value of each 
asset, the intermediary for the selling provider will require an 
appraisal by an

[[Page 590]]

independent appraisal expert to establish the fair market value of each 
asset and will make an allocation of the sales price in accordance with 
the appraisal.
    (3) Sale within 1 year after termination. Gains and losses realized 
from a bona fide sale of depreciable assets within 1 year immediately 
following the date on which the provider terminates participation in the 
Medicare program are also included in the determination of allowable 
cost, in accordance with the procedure specified in paragraph (f)(2) of 
this section. However, if several assets are sold for a lump sum sales 
price, the determination of fair market value must be based on the 
appraised value of the assets as they were last used by the provider 
while participating in the Medicare program.
    (4) Exchange, trade-in or donation. Gains or losses realized from 
the exchange, trade-in, or donation of depreciable assets are not 
included in the determination of allowable cost. When the disposition of 
an asset is by means of exchange or trade-in, the historical cost of the 
new asset is the sum of the undepreciated cost of the asset disposed of 
and the additional cash or other assets transferred (or to be 
transferred) to acquire the new asset. However, if the asset disposed of 
was acquired by the provider before its participation in the Medicare 
program and the sum of the undepreciated cost and the cash or other 
assets transferred (or to be transferred) exceed the list price or fair 
market value of the new asset, the historical cost of the new asset is 
limited to the lower of its list price or fair market value.
    (5) Demolition or abandonment. (i) For purposes of this section, the 
term ``abandonment'' means the permanent retirement of an asset for any 
future purpose, not merely the provider's ceasing to use the asset for 
patient care purposes. To claim an abandonment under the Medicare 
program, the provider must have relinquished all rights, title, claim, 
and possession of the asset with the intention of never reclaiming it or 
resuming its ownership, possession, or enjoyment.
    (ii) If losses resulting from the demolition or abandonment of 
depreciable assets do not exceed $5,000 within the cost-reporting 
period, the losses are to be allowed in the period of disposal.
    (iii) If losses exceed $5,000 and, at the date of disposition, the 
demolished or abandoned assets are at least 80 percent depreciated as 
computed under the straight-line method, such losses are includable in 
the determination of allowable cost under the Medicare program in the 
period of disposal and the procedure provided in paragraph (f)(2)(iii) 
of this section must be used in determining the adjustment to 
reimbursable cost.
    (iv) Losses in excess of $5,000 resulting from the demolition or 
abandonment of assets, which at the date of disposition are not 80 
percent depreciated as computed under the straight-line method, must be 
capitalized as a deferred charge and amortized as follows:
    (A) If the State Health Planning and Development Agency (SHPDA) 
designated under section 1521 of the Public Health Service Act approves 
the demolition or abandonment of a depreciable asset as being consistent 
with the health systems plan of the health service area in which the 
provider is located, the net loss realized shall be capitalized as a 
deferred charge and amortized over the remaining life of the demolished 
or abandoned asset, or at the rate of $5,000 per year, whichever is 
greater. If no SHPDA exists or if such agency is unable or unwilling to 
perform this function, the provider must submit a request for approval 
to the intermediary. The intermediary, after reviewing this request and 
before issuing the approval, will submit the request along with its 
recommendation to the appropriate Regional Office for its approval.
    (B) If a provider fails to obtain approval as specified in paragraph 
(f)(5)(iv)(A) of this section, a loss is not allowable unless the 
demolished or abandoned asset is replaced. If the asset is replaced, the 
loss resulting from the unapproved demolition or abandonment must be 
capitalized as a deferred charge and amortized over the estimated useful 
life of the replacement asset or at the rate of $5,000 per year, 
whichever is greater.
    (v) If a loss resulting from the demolition or abandonment is 
deferred and

[[Page 591]]

amortized and the provider terminates its participation in the Medicare 
program or ceases to use a replacement asset in the provision of patient 
care services, the unamortized deferred charge remaining at that time 
must not be included in determining allowable cost under the Medicare 
program.
    (vi) Losses on demolition must include the demolition cost incurred 
by the provider for razing and removal of the asset, less any salvage 
value recovered by the provider. However, if a provider demolishes a 
depreciable asset for the purpose of preparing land for future sale, the 
net demolition cost incurred by the provider (razing and removal costs 
less salvage recovered) is considered a capital expenditure and added to 
the historical basis of the land.
    (vii) If a provider purchases land on which there is a building, no 
depreciation will be allowed under the Medicare program unless the 
building is used in providing patient care. If the building is 
demolished, the entire purchase price and demolition cost shall be 
considered the historical cost of the land. If the building is used for 
patient care, but demolished within 5 years of purchase, the entire 
purchase price, less allowed depreciation, plus demolition cost will be 
considered the historical cost of the land.
    (6) Involuntary conversion. (i) Losses resulting from the 
involuntary conversion of depreciable assets, such as condemnation, 
fire, theft, or other casualty, are generally included in the 
determination of allowable cost on a deferred basis if the asset is 
restored or replaced. However, losses resulting from a provider's 
imprudent management of its depreciable assets, such as the failure to 
obtain proper insurance coverage, are not included in the determination 
of allowable cost.
    (ii) The net allowable loss from involuntary conversion must consist 
of the undepreciated cost of unrecovered book value of the asset, less 
amounts received from insurance proceeds gifts, and grants received from 
local, State, or Federal government, or any other source as a result of 
the involuntary conversion.
    (iii) If the asset is replaced and the net allowable loss in any 
cost-reporting period does not exceed $5,000, the entire amount must be 
included in allowable cost in the period in which the loss is incurred. 
If the asset is replaced and the net allowable loss in any cost-
reporting period exceeds $5,000, the loss must be capitalized as a 
deferred charge and amortized over the useful life of the replacement or 
restored asset. If a replaced or restored asset ceases to be used in the 
provision of patient care services or the provider terminates its 
participation in the Medicare program, the unamortized deferred charge 
remaining at that time will not be included in determining allowable 
cost under the Medicare program.
    (iv) If the provider fails to replace or restore an involuntarily 
converted asset, the loss is not included in determining allowable cost. 
However, if the provider intends to replace or restore the asset but is 
unable to do so because the designated SHPDA finds such replacement or 
restoration to be inconsistent with the health systems plan of the 
provider's health service area, the loss is allowable so long as the 
provider continues to participate in Medicare. In this case, the loss 
must be capitalized as a deferred charge and amortized over the 
remaining life of the involuntarily converted asset, or at the rate of 
$5,000 per year, whichever is greater.
    (v) If a gain is realized from an involuntary conversion of 
depreciable assets, the net amount realized reduces the basis of the 
restored or replacement asset. If the asset is not restored or replaced, 
the gain is to be treated in accordance with paragraph (f)(2) of this 
section.
    (7) Effect on equity capital. The unrecovered loss entered on the 
books of the provider as a deferred charge, in accordance with 
paragraphs (f) (5) and (6) of this section, is not includable in the 
computation of equity capital under Sec. 413.157.
    (8) Sale of replacement or restored assets. If a provider sells a 
replacement or restored asset while participating in the Medicare 
program or within 1 year immediately following the date on which it 
terminates its participation in the Medicare program, the unrecovered 
loss entered on the books of the provider as a deferred charge in 
accordance with paragraphs (f) (5) and (6) of

[[Page 592]]

this section will not be included in determining the gain or loss 
realized from the sale of the replacement or restored asset. However, if 
the sale of such asset is made to a related organization, as defined in 
Sec. 413.17, and the purchasing organization continues as a provider in 
the Medicare program, the remaining deferred charge representing the 
unrecovered depreciable basis of the demolished, abandoned or destroyed 
asset must continue to be amortized over the remaining expected useful 
life of the replacement or restored asset. If the sale is made to an 
unrelated organization, further amortization of the deferred charge is 
not allowed.
    (g) Establishment of cost basis on purchase of facility as an 
ongoing operation--(1) Assets acquired after July 1, 1966 and before 
August 1, 1970. The cost basis for the assets of a facility purchased as 
an ongoing operation after July 1, 1966, and before August 1, 1970, is 
the lowest of the--
    (i) Total price paid for the facility by the purchaser, as allocated 
to the individual assets of the facility;
    (ii) Total fair market value of the facility at the time of the 
sale, as allocated to the individual assets; or
    (iii) Combined fair market value of the individually identified 
assets at the time of the sale.
    (2) Assets acquired after July 31, 1970 and, for hospitals and SNFs, 
before July 18, 1984. For depreciable assets acquired after July 31, 
1970 and, for hospitals and SNFs, before July 18, 1984, in addition to 
the limitations specified in paragraph (g)(1) of this section, the cost 
basis of the depreciable assets may not exceed the current reproduction 
cost depreciated on a straight-line basis over the life of the asset to 
the time of the sale.
    (3) Assets acquired by hospitals and SNFs on or after July 18, 1984 
and not subject to an enforceable agreement entered into before that 
date. Subject to paragraphs (b)(1)(ii) (B) through (G) and (b)(1)(iii) 
of this section, historical cost may not exceed the lowest of the 
following:
    (i) The allowable acquisition cost of the asset to the owner of 
record as of July 18, 1984 (or, in the case of an asset not in existence 
as of July 18, 1984, the first owner of record of the asset);
    (ii) The acquisition cost to the new owner; or
    (iii) The fair market value of the asset on the date of acquisition.
    (4) Assets acquired by all providers on or after December 1, 1997. 
Subject to the provisions of paragraph (b)(1)(i)(A) of this section, the 
historical cost may not exceed the historical cost of the asset, as 
recognized under the Medicare program, less depreciation allowed, to the 
owner of record as of August 5, 1997 (or for an asset not in existence 
as of August 5, 1997, the first owner of record after August 5, 1997).
    (5) Transactions other than bona fide. If the purchaser cannot 
demonstrate that the sale was bona fide, in addition to the limitations 
specified in paragraph (g)(1), (2), and (3) of this section, the 
purchaser's cost basis may not exceed the seller's cost basis, less 
accumulated depreciation.
    (h) Sale and leaseback agreements and other lease transactions. (1) 
For sale and leaseback agreements for all providers, and for sale and 
leaseback agreements for hospitals and SNFs entered into before October 
23, 1992, a provider may include in its allowable costs incurred rental 
charges, as specified in a sale and leaseback agreement with a 
nonrelated purchaser involving plant facilities or equipment, only if--
    (i) The rental charges are reasonable based on consideration of 
rental charges of comparable facilities and market conditions in the 
area; the type, expected life, condition, and value of the facilities or 
equipment rented; and other provisions of the rental agreement;
    (ii) Adequate alternate facilities or equipment that would serve the 
purpose are not or were not available at lower cost; and
    (iii) The leasing was based on economic and technical 
considerations.
    (2) If the conditions of paragraph (h)(1) of this section are not 
met, the amount a provider may include in its allowable costs as rental 
or lease expense under a sale and leaseback agreement may not exceed the 
amount that the provider would have included in its allowable costs had 
the provider retained legal title to the facilities or

[[Page 593]]

equipment such as interest expense on mortgages, taxes, depreciation, 
and insurance costs.
    (3) For hospitals and SNFs entering into sale and leaseback 
agreements on or after October 23, 1992, the amount a provider may 
include in its allowable costs as rental or lease expense may not exceed 
the amount that the provider would have included in its allowable costs 
had the provider retained legal title to the facilities or equipment, 
such as interest expense on mortgages, taxes, depreciation, and 
insurance costs (the costs of ownership). This limitation applies both 
on an annual basis and over the useful life of the asset.
    (i) If in the early years of the lease, the annual rental or lease 
costs are less than the annual costs of ownership, but in the later 
years of the lease the annual rental or lease costs are more than the 
annual costs of ownership, in the years that the annual rental or lease 
costs are more than the costs of ownership the provider may include in 
allowable costs annually the actual amount of rental or lease costs. The 
aggregate rental or lease costs included in allowable costs may not 
exceed the aggregate costs of ownership that would have been included in 
allowable costs over the useful life of the asset had the provider 
retained legal title to the asset.
    (ii) If in the early years of the lease, the annual rental or lease 
costs exceed the annual costs of ownership, but in the later years of 
the lease the annual rental or lease costs are less than the annual 
costs of ownership, the provider may carry forward amounts of rental or 
lease costs that were not included in allowable costs in the early years 
of the lease due to the costs of ownership limitation, and include these 
amounts in allowable costs in the years of the lease when the annual 
rental or lease costs are less than the annual costs of ownership. In 
any given year the amount of actual annual rental or lease costs plus 
the amount carried forward to that year may not exceed the amount of the 
costs of ownership for that year.
    (iii) In the aggregate, the amount of rental or lease costs included 
in allowable costs may not exceed the amount of the costs of ownership 
that the provider could have included in allowable costs had the 
provider retained legal title to the asset.
    (4) For lease transactions of all providers entered into before 
October 23, 1992, a lease that meets the following conditions 
establishes a virtual purchase:
    (i) The rental charge exceeds rental charges of comparable 
facilities or equipment in the area.
    (ii) The term of the lease is less than the useful life of the 
facilities or equipment.
    (iii) The provider has the option to renew the lease at a 
significantly reduced rental, or the provider has the right to purchase 
the facilities or equipment at a price that appears to be significantly 
less than what the fair market value of the facilities or equipment 
would be at the time acquisition by the provider is permitted.
    (5)(i) If a lease is a virtual purchase under paragraph (h)(4) of 
this section, the rental charge is includable in allowable costs only to 
the extent that it does not exceed the amount that the provider would 
have included in allowable costs if it had legal title to the asset (the 
cost of ownership), such as straight-line depreciation, insurance, and 
interest. For purposes of computing the limitation on allowable rental 
cost in this paragraph, a provider may not include accelerated 
depreciation.
    (ii) The difference between the amount of rent paid and the amount 
of rent allowed as rental expense is considered a deferred charge and 
must be capitalized as part of the historical cost of the asset when the 
asset is purchased.
    (iii) If an asset is returned to the owner instead of being 
purchased, the deferred charge may be expensed in the year the asset is 
returned.
    (iv) If the term of the lease is extended for an additional period 
of time at a reduced lease cost and the option to purchase still exists, 
the deferred charge may be expensed to the extent of increasing the 
reduced rental to an amount not in excess of the cost of ownership.
    (v) If the term of the lease is extended for an additional period of 
time

[[Page 594]]

at a reduced lease cost and the option to purchase no longer exists, the 
deferred charge may be expensed to the extent of increasing the reduced 
rental to a fair rental value.
    (6) For lease transactions entered into on or after October 23, 
1992, a lease that meets any one of the following conditions establishes 
a virtual purchase:
    (i) The lease transfers title of the facilities or equipment to the 
lessee during the lease term.
    (ii) The lease contains a bargain purchase option.
    (iii) The lease term is 75 percent or more of the useful life of the 
facilities or equipment. This provision is not applicable if the lease 
begins in the last 25 percent of the useful life of the facilities or 
equipment.
    (iv) The present value of the minimum lease payments (that is, 
payments to be made during the lease term, including bargain purchase 
option, guaranteed residual value, or penalties for failure to renew) 
equals 90 percent or more of the fair market value of the leased 
property. This provision is not applicable if the lease begins in the 
last 25 percent of the useful life of the facilities or equipment. The 
present value is computed using the lessee's incremental borrowing rate, 
unless the interest rate implicit in the lease is known and is less than 
the lessee's incremental borrowing rate, in which case, the interest 
rate implicit in the lease is used.
    (7)(i) If a lease is a virtual purchase under paragraph (h)(6) of 
this section, the rental charge is includable in allowable costs only to 
the extent that it does not exceed the amount that the provider would 
have included in allowable costs if it had legal title to the asset (the 
costs of ownership), such as straight-line depreciation, insurance, and 
interest. For purposes of computing the limitation on allowable rental 
cost as described in this paragraph, a provider may not include 
accelerated depreciation in its allowable costs.
    (ii) The difference between the amount of rent paid and the amount 
of rent allowed as rental expense is considered a deferred charge and is 
capitalized as part of the historical cost of the asset when the asset 
is purchased.
    (iii) If an asset is returned to the owner instead of being 
purchased, the deferred charge may be expensed in the year the asset is 
returned.
    (iv) If the term of the lease is extended for an additional period 
of time at a reduced lease cost and the option to purchase still exists, 
the deferred charge may be expensed to the extent of increasing the 
reduced rental to an amount not in excess of the cost of ownership.
    (v) If the term of the lease is extended for an additional period of 
time at a reduced lease cost and the option to purchase no longer 
exists, the deferred charge may be expensed to the extent of increasing 
the reduced rental to a fair rental value.
    (vi) If the lessee becomes the owner of the leased asset (either by 
operation of the lease or by other means), the amount considered as 
depreciation, for the purpose of having computed the limitation 
expressed in paragraph (h)(7)(i) of this section, must be used in 
calculating the limitation on adjustments to depreciation for the 
purpose of determining any gain or loss upon disposal of an asset under 
paragraph (f) of this section.
    (i) Intergovernmental transfer of facilities. The basis for 
depreciation of assets transferred under appropriate legal authority 
from one governmental entity to another is as follows:
    (1) The historical cost incurred by the present owner in acquiring 
the asset under a bona fide sale. The historical cost may not exceed the 
lower of current reproduction cost adjusted for straight-line 
depreciation over the life of the asset to the time of the purchase of 
fair market value at the time of the purchase.
    (2) The fair market value at the time of donation under a bona fide 
donation of the asset (subject to the limitations set forth under 
paragraph (i) of this section). An asset is considered donated when a 
governmental entity acquires the asset without assuming the functions 
for which the transferor used the asset or making any payment for it in 
the form of cash, property, or services.

[[Page 595]]

    (3) If neither paragraph (h) (1) nor (2) of this section applies, 
for example, the transfer was solely to facilitate administration or to 
reallocate jurisdictional responsibility, or the transfer constituted a 
taking over in whole or in part of the function of one governmental 
entity by another governmental entity, the basis for depreciation is--
    (i) With respect to an asset on which the transferor has claimed 
depreciation under the Medicare program, the transferor's basis under 
the Medicare program prior to the transfer. The method of depreciation 
used by the transferee may be the same as that used by the transferor, 
or the transferee may change the method, as permitted under paragraph 
(d)(2) of this section; or
    (ii) With respect to an asset on which the transferor has not 
claimed depreciation under the Medicare program, the cost incurred by 
the transferor in acquiring the asset (not to exceed the basis that 
would have been recognized had the transferor participated in the 
Medicare program) less depreciation calculated on the straight-line 
basis over the life of the asset to the time of transfer.
    (j) Basis of assets donated to a provider--(1) Assets not used or 
depreciated under the Medicare program. If an asset has never been used 
or depreciated under the Medicare program and is donated to a provider, 
the basis for the purpose of calculating depreciation and equity capital 
(if applicable) is the fair market value of the asset at the time of 
donation.
    (2) Assets used or depreciated under the Medicare program. If an 
asset has been used or depreciated under the Medicare program and is 
donated to a provider, the basis for the purpose of calculating 
depreciation and equity capital (if applicable) is the lesser of--
    (i) The fair market value at the time of donation; or
    (ii) The net book value in the hands of the owner last participating 
in the Medicare program.
    (3) Transfers of State hospitals to nonprofit corporations without 
monetary consideration. If a State transfers a hospital to a nonprofit 
corporation without monetary consideration on or after July 18, 1984, 
the depreciable basis of the assets to the new owner is the net book 
value of the assets as recorded on the State's books at the time of the 
transfer. For purposes of this section, monetary consideration includes 
cash, new debt, and assumed debt.
    (k) Transactions involving a provider's capital stock--(1) 
Acquisition of capital stock of a provider. If the capital stock of a 
provider is acquired, the provider's assets may not be revalued. For 
example, if Corporation A purchases the capital stock of Corporation B, 
the provider, Corporation B continues to be the provider after the 
purchase and Corporation A is merely the stockholder. Corporation B's 
assets may not be revalued.
    (2) Statutory merger. A statutory merger is a combination of two or 
more corporations under the corporation laws of the State, with one of 
the corporations surviving. The surviving corporation acquires the 
assets and liabilities of the merged corporation(s) by operation of 
State law. The effect of a statutory merger upon Medicare reimbursement 
is as follows:
    (i) Statutory merger between unrelated parties. If the statutory 
merger is between two or more corporations that are unrelated (as 
specified in Sec. 413.17), the assets of the merged corporation(s) 
acquired by the surviving corporation may be revalued in accordance with 
paragraph (g) of this section. If the merged corporation was a provider 
before the merger, then it is subject to the provisions of paragraphs 
(d)(3) and (f) of this section concerning recovery of accelerated 
depreciation and the realization of gains and losses. The basis of the 
assets owned by the surviving corporation are unaffected by the 
transaction. An example of this type of transaction is one in which 
Corporation A, a nonprovider, and Corporation B, the provider, are 
combined by a statutory merger, with Corporation A being the surviving 
corporation. In such a case the assets of Corporation B acquired by 
Corporation A may be revalued in accordance with paragraph (g) of this 
section.
    (ii) Statutory merger between related parties. If the statutory 
merger is between two or more related corporations (as specified in 
Sec. 413.17), no revaluation of assets is permitted for those assets

[[Page 596]]

acquired by the surviving corporation. An example of this type of 
transaction is one in which Corporation A purchase the capital stock of 
Corporation B, the provider. Immediately after the acquisition of the 
capital stock of Corporation B, there is a statutory merger of 
Corporation B and Corporation A, with Corporation A being the surviving 
corporation. Under these circumstances, at the time of the merger the 
transaction is one between related parties and is not a basis for 
revaluation of the provider's assets.
    (3) Consolidation. A consolidation is the combination of two or more 
corporations resulting in the creation of a new corporate entity. If at 
least one of the original corporations is a provider, the effect of a 
consolidation upon Medicare reimbursement for the provider is as 
follows:
    (i) Consolidation between unrelated parties. If the consolidation is 
between two or more corporations that are unrelated (as specified in 
Sec. 413.17), the assets of the provider corporation(s) may be revalued 
in accordance with paragraph (g) of this section.
    (ii) Consolidation between related parties. If the consolidation is 
between two or more related corporations (as specified in Sec. 413.17), 
no revaluation of provider assets is permitted.

[51 FR 34793, Sept. 30, 1986, as amended at 56 FR 43456, Aug. 30, 1991; 
57 FR 3017, Jan. 27, 1992; 57 FR 39830, Sept. 1, 1992; 57 FR 43919, 
Sept. 23, 1992; 58 FR 17528, Apr. 5, 1993; 59 FR 45401, Sept. 1, 1994; 
63 FR 1382, Jan. 9, 1998; 65 FR 8662, Feb. 22, 2000]



Sec. 413.139  Depreciation: Optional allowance for depreciation based on a percentage of operating costs.

    (a) Principle. With respect to all assets acquired before 1966, the 
provider, at its option, may choose an allowance for depreciation based 
on a percentage of operating costs. The operating costs to be used are 
the provider's 1965 operating costs or the provider's current year's 
allowable costs, whichever are the lower. The percentage to be applied 
is 5 percent starting with the year 1966-67, with such percentage being 
uniformly reduced by one-half percent each succeeding year. The 
allowance based on operating costs is in addition to regular 
depreciation on assets acquired after 1965; however, if the optional 
allowance is selected, the combined amount of such allowance on pre-1966 
assets and the straight-line depreciation on assets acquired after 1965 
(including the estimated depreciation on assets held on a rental basis 
during the current year) may not exceed 6 percent of the provider's 
allowable cost for the current year.
    (b) Definitions--(1) Operating costs. Operating costs are the total 
costs incurred by the provider in operating the institution or facility.
    (2) Allowable costs. Allowable costs are the costs of a provider 
that are includable under the principles for cost reimbursement. Through 
application of apportionment methods to the total amount of such 
allowable costs, the share of a provider's total cost that is 
attributable to covered services for beneficiaries is determined.
    (c) Application. If a provider has inadequate historical cost 
records for pre-1966 depreciable assets, the provider may elect to 
receive an allowance for depreciation on such assets based on a 
percentage of operating costs. The optional allowance for depreciation 
for such assets may be used, however, whether or not a provider has 
records of the cost of pre-1966 depreciable assets currently in use.
    (d) Allowance based on a percentage of operating costs. (1) The 
allowance for depreciation based on a percentage of operating costs is 
to be computed by applying a specified percentage to a base amount equal 
to the provider's 1965 total operating costs, without adjustments to 
these principles or the current year's allowable operating costs, 
whichever is lower. The percentage to be applied is five for the 
reporting period that starts before or during 1966-67, four and one-half 
for the reporting period that begins during 1967-68, and continues to 
decline annually by equal amounts to become zero in 1976-77.
    (2) If used as a base for determining the optional allowance for 
depreciation, neither the 1965 operating costs nor the current year's 
allowable costs are to include any actual depreciation, estimated 
depreciation on rented depreciable-type assets, allowance in lieu of 
specific recognition of other costs,

[[Page 597]]

or return on equity capital. Such exclusions are to be made only for the 
purpose of computing the allowance for depreciation based on operating 
costs. For other purposes, the excluded amounts are recognized in 
determining allowable costs and for computing the costs of services 
furnished to Medicare beneficiaries during the reporting period.
    (e) Change to actual depreciation. (1) A provider that elects this 
allowance may at any time before 1976 change to actual depreciation on 
all pre-1966 depreciable assets. In such case, this option is eliminated 
and the provider can no longer elect to receive an allowance for 
depreciation based on a percentage of operating costs.
    (2) If the provider desires to change to actual depreciation but 
either has no historical cost records or has incomplete records, the 
determination of historical cost may be made through appropriate means 
involving expert consultation with the determination being subject to 
review and approval by the intermediary.
    (f) Determination of optional allowance based on percentage of 
operating costs illustrated. The following illustrates how the provider 
would determine the optional allowance for depreciation based on 
operating costs.

    Example No. 1. The provider keeps its records on a calendar year 
basis. The current year's actual allowable cost and the actual operating 
cost for 1965 do not include any actual depreciation or rentals on 
depreciable-type assets. The current year's allowable cost also does not 
include any allowance in lieu of specific recognition of other costs or 
return on equity capital.

                                Year 1966
Current year's allowable cost.............................    $1,100,000
                                                           =============
Operating cost for 1965\1\................................    $1,000,000
Percent for determining the allowance.....................             5
                                                           -------------
      Allowance...........................................       $50,000
 
\1\ 1965 Operating cost was used in computing the allowance for
  depreciation based on a percentage of operating costs because it was
  lower than 1966 allowable cost.


                                Year 1967
Current year's allowable cost.............................    $1,200,000
                                                           =============
Operating cost for 1965\1\................................    $1,000,000
Percent for determining the allowance\2\..................             5
                                                           -------------
      Allowance...........................................       $50,000
 
\1\ 1965 Operating cost was used in computing the allowance for
  depreciation based on a percentage of operating costs because it was
  lower than 1967 allowable cost.
\2\ Since the reporting period began during the year 1966-1967 (July 1,
  1966-June 30, 1967) 5 percent is the percentage to be used.


                                Year 1968
Operating cost for 1965...................................    $1,000,000
                                                           =============
Current year's allowable cost \1\.........................      $900,000
Percent for determining the allowance\2\..................        4\1/2\
                                                           -------------
      Allowance...........................................       $40,500
 
\1\ The current year's allowable cost was used in computing the
  allowance for depreciation based on percentage of operating costs
  because it was lower than 1965 operating cost.
\2\ Since the reporting period began during the year 1967-1968 (July 1,
  1967-June 30, 1968) 4\1/2\ percent is the percentage to be used.

    Example No. 2. When the provider pays rent for depreciable-type 
assets rented prior to 1966, the estimated depreciation on such assets 
must be deducted from the allowance. The following illustration 
demonstrates how the allowance is determined.
    The provider keeps its records on a calendar year basis. The current 
year's actual allowable cost and the actual operating cost for 1965 did 
not include any actual depreciation, allowance in lieu of specific 
recognition of other costs, or return on equity capital. However, such 
costs have been adjusted to exclude estimated depreciation on rented 
depreciable-type assets.

                                Year 1966
Adjusted current year's allowable cost....................    $1,100,000
                                                           =============
Adjusted operating cost for 1965\1\.......................    $1,000,000
Percent for determining the allowance.....................             5
                                                           -------------
      Allowance...........................................       $50,000
Less estimated depreciation for depreciable-type assets           $3,000
 rented prior to 1966 on which rental is paid in 1966.....
                                                           -------------
      Adjusted allowance..................................       $47,000
 
\1\ 1965 operating cost was used in computing the allowance for
  depreciation based on a percentage of operating costs because it was
  lower than 1966 allowable cost.


    (g) Limitation on depreciation if optional allowance is used. This 
optional allowance only is subject to a limitation based on the 
provider's total allowable operating cost for the current year. To 
determine this limitation, compute the sum of the actual depreciation 
claimed, the allowance based on a percentage of operating costs, and the 
estimated straight-line depreciation on depreciable-type assets rented 
after 1965. If this sum exceeds six percent of the provider's current 
year's allowable cost (exclusive of any actual

[[Page 598]]

depreciation claimed, estimated depreciation on rented depreciable-type 
assets, allowance in lieu of specific recognition of other costs, and 
return on equity capital), the allowance for depreciation based on a 
percentage of operating costs is reduced by the amount of excess. In 
applying this limitation, if the actual depreciation claimed is on an 
accelerated basis, it must be converted to a straight-line basis only 
for use in calculating this limitation. It is presumed that pre-1966 
assets will not be retired at a greater than normal rate, and the 
limitation of six percent, as it affects the availability of the 
allowance, is designed as a safeguard if the presumption is not borne 
out. If the provider does not elect to use the optional allowance, the 
combined allowance for depreciation based on costs of pre-1966 assets 
and those subsequently acquired is not subject to the six percent 
limitation.

    Example No. 1. The following illustration demonstrates how this 
limitation would be determined.

                                Year 1966
  [The provider keeps its records on a calendar year basis. The current
year's actual allowable cost and the actual operating cost for 1965 have
been adjusted to exclude actual depreciation, the estimated depreciation
    on rented depreciable-type assets, allowance in lieu of specific
       recognition of other costs, and return on equity capital.]
Adjusted operating cost for 1965..........................    $1,000,000
Percent for determining the allowance.....................             5
In 1966 assets were acquired which produce a straight-line       $18,000
 depreciation of..........................................
Estimated depreciation on assets rented in 1966...........        $2,000
Adjusted allowable operating cost for 1966................    $1,100,000
 
   calculation of allowance for depreciation based on a percentage of
                             operating costs
 
                      Gross allowance
 
5 percent times adjusted 1965 operating costs ($1,000,000)       $50,000
Estimated depreciation on assets rented in 1966...........         2,000
Straight-line depreciation on post-1965 assets............        18,000
                                                           -------------
      Total...............................................        70,000
6 percent of adjusted 1966 allowable operating cost.......        66,000
                                                           -------------
      Reduction in allowance..............................         4,000
                                                           =============
Allowance.................................................        50,000
Reduction.................................................         4,000
                                                           -------------
      Adjusted allowance..................................        46,000
                                                           =============
      Total depreciation allowance for 1966 ($18,000              64,000
       actual depreciation plus $46,000 allowance based on
       operating cost)....................................
 

    Assume in this illustration that the provider had elected to use the 
declining balance method in computing its allowable depreciation and the 
rental expense for depreciable-type assets was $3,500. In that case, it 
would include in its 1966 allowable cost not only the $46,000 allowance 
based on operating costs but also $36,000 (in this instance 2xstraight-
line rate is used) in actual depreciation and the rental expense of 
$3,500--or a total of $85,500 covering all its depreciable assets.



Sec. 413.144  Depreciation: Allowance for depreciation on fully depreciated or partially depreciated assets.

    (a) Principle. Depreciation on assets being used by a provider at 
the time it enters into the Medicare program is allowed. This principle 
applies even though such assets may be fully or partially depreciated on 
the provider's books.
    (b) Application. Depreciation is allowable on assets being used at 
the time the provider enters into the program. This applies even though 
such assets may be fully depreciated on the provider's books or fully 
depreciated with respect to other third-party payers. So long as an 
asset is being used, its useful life is considered not to have ended, 
and consequently the asset is subject to depreciation based upon a 
revised estimate of the asset's useful life as determined by the 
provider and approved by the intermediary. Correction of prior years' 
depreciation to reflect revision of estimated useful life should be made 
in the first year of participation in the program unless the provider 
has used the optional method (Sec. 413.139), in which case the 
correction should be made at the time of discontinuing the use of that 
method. If an asset has become fully depreciated under Medicare, further 
depreciation is not appropriate or allowable, even though the asset may 
continue in use.
    (c) Example of an allowance for a fully-depreciated asset. For 
example, if a 50-year-old building is in use at the time the provider 
enters into the program, depreciation is allowable on the building even 
though it has been fully depreciated on the provider's books. Assuming 
that a reasonable estimate of the asset's continued life is 20 years (70 
years from the date of acquisition), the provider may claim depreciation 
over the next 20 years--if the asset is in use

[[Page 599]]

that long--or a total depreciation of as much as twenty-seventieths of 
the asset's historical cost.
    (d) Corrections to depreciation. If the asset is disposed of before 
the expiration of its estimated useful life, the depreciation would be 
adjusted to the actual useful life. Likewise, a provider may not have 
fully depreciated other assets it is using and finds that it has 
incorrectly estimated the useful lives of those assets. In such cases, 
the provider may use the corrected useful lives in determining the 
amount of depreciation, provided such corrections have been approved by 
the intermediary.



Sec. 413.149  Depreciation: Allowance for depreciation on assets financed with Federal or public funds.

    (a) Principle. Depreciation is allowed on assets financed with Hill-
Burton or other Federal or public funds.
    (b) Application. Like other assets (including other donated 
depreciable assets), assets financed with Hill-Burton or other Federal 
or public funds become a part of the provider institution's plant and 
equipment to be used in furnishing services. It is the function of 
payment of depreciation to provide funds that make it possible to 
maintain the assets and preserve the capital employed in the production 
of services. Therefore, irrespective of the source of financing of an 
asset, if it is used in the providing of services for beneficiaries of 
the program, payment for depreciation of the asset is, in fact, a cost 
of the production of those services. Moreover, recognition of this cost 
is necessary to maintain productive capacity for the future. An 
incentive for funding of depreciation is provided in these principles by 
the provision that investment income on funded depreciation is not 
treated as a reduction of allowable interest expense under 
Sec. 413.153(a).



Sec. 413.153  Interest expense.

    (a)(1) Principle. Necessary and proper interest on both current and 
capital indebtedness is an allowable cost. However, interest costs are 
not allowable if incurred as a result of--
    (i) Judicial review by a Federal court (as described in 
Sec. 413.64(j));
    (ii) An interest assessment on a determined overpayment (as 
described in Sec. 405.377 of this chapter); or
    (iii) Interest on funds borrowed to repay an overpayment (as 
described in Sec. 413.64(j) or Sec. 405.378 of this chapter), up to the 
amount of the overpayment, unless the provider had made a prior 
commitment to borrow funds for other purposes (for example, capital 
improvements).
    (2) Exception. In those cases of administrative or judicial 
reversal, interest paid on funds borrowed to repay an overpayment is an 
allowable cost, in accordance with this section.
    (b) Definitions--(1) Interest. Interest is the cost incurred for the 
use of borrowed funds. Interest on current indebtedness is the cost 
incurred for funds borrowed for a relatively short term. This is usually 
for such purposes as working capital for normal operating expenses. 
Interest on capital indebtedness is the cost incurred for funds borrowed 
for capital purposes, such as acquisition of facilities and equipment, 
and capital improvements. Generally, loans for capital purposes are 
long-term loans.
    (2) Necessary. Necessary interest is interest that meets the 
following requirements:
    (i) It is incurred on a loan made to satisfy a financial need of the 
provider. Loans that result in excess funds or investments are not 
considered necessary.
    (ii) It is incurred on a loan made for a purpose reasonably related 
to patient care.
    (iii) It is reduced by investment income except income from--
    (A) Gifts, grants, and endowments, whether held separately or pooled 
with other funds;
    (B) Funded depreciation that meets the program's qualifying 
criteria;
    (C) The provider's qualified pension funds;
    (D) The provider's deferred compensation funds that meet the 
program's qualifying criteria; and
    (E) The provider's self-insurance trust funds that meet the 
program's qualifying criteria.
    (iv) It is not reduced by interest received as a result of judicial 
review by

[[Page 600]]

a Federal court (as described in Sec. 413.64(j)).
    (3) Proper. Proper requires that interest be--
    (i) Incurred at a rate not in excess of what a prudent borrower 
would have had to pay in the money market existing at the time the loan 
was made; and
    (ii) Paid to a lender not related through control or ownership, or 
personal relationship to the borrowing organization. However, interest 
is allowable if paid on loans from the provider's donor-restricted 
funds, the funded depreciation account, or the provider's qualified 
pension fund.
    (4) Zero coupon bonds. Zero coupon bonds are issued by government 
agencies, corporations, and banks at a price substantially below the 
face value. The difference between the purchase price and the face value 
reflects the actual amount of interest and is neither a discount nor an 
adjustment to the interest rate as with other bonds. Interest is paid at 
maturity when the bond is redeemed at face value.
    (c) Borrower-lender relationship. (1) Except as described in 
paragraph (c)(2) of this section, to be allowable, interest expense must 
be incurred on indebtedness established with lenders or lending 
organizations not related through control, ownership, or personal 
relationship to the borrower. Presence of any of these factors could 
affect the ``bargaining'' process that usually accompanies the making of 
a loan, and could thus be suggestive of an agreement on higher rates of 
interest or of unnecessary loans. Loans should be made under terms and 
conditions that a prudent borrower would make in armslength transactions 
with lending institutions. The intent of this provision is to assure 
that loans are legitimate and needed, and that the interest rate is 
reasonable. Thus, interest paid by the provider to partners, 
stockholders, or related organizations of the provider would not be 
allowable. If the owner uses his own funds in a business, it is 
reasonable to treat the funds as invested funds or capital, rather than 
borrowed funds. Therefore, if interest on loans by partners, 
stockholders, or related organizations is disallowed as a cost solely 
because of the relationship factor, the principal of such loans is 
treated as invested funds in the computation of the provider's equity 
capital under Sec. 413.157.
    (2) Exceptions to the general rule regarding interest on loans from 
controlled sources of funds are made in the following circumstances. 
Interest on loans to providers by partners, stockholders, or related 
organizations made prior to July 1, 1966, is allowable as cost, provided 
that the terms and conditions of payment of such loans have been 
maintained in effect without modification subsequent to July 1, 1966. If 
the general fund of a provider ``borrows'' from a donor-restricted fund 
and pays interest to the restricted fund, this interest expense is an 
allowable cost. The same treatment is accorded interest paid by the 
general fund on money ``borrowed'' from the funded depreciation account 
of the provider or from the provider's qualified pension fund. In 
addition, if a provider operated by members of a religious order borrows 
from the order, interest paid to the order is an allowable cost.
    (3) If funded depreciation is used for purposes other than 
improvement, replacement, or expansion of facilities or equipment 
related to patient care, allowable interest expense is reduced to adjust 
for offsets not made in prior years for earnings on funded depreciation. 
A similar treatment is accorded deposits in the provider's qualified 
pension fund if such deposits are used for other than the purpose for 
which the fund was established.
    (d) Loans not reasonably related to patient care. (1) The following 
types of loans are not considered to be for a purpose reasonably related 
to patient care:
    (i) For loans made to finance acquisition of a facility, that 
portion of the cost that exceeds--
    (A) Historical cost as determined under Sec. 413.134(b); or
    (B) The cost basis determined under Sec. 413.134(g); and
    (ii) Loans made to finance capital stock acquisitions, mergers, or 
consolidations for which revaluation of assets is not allowed under 
Sec. 413.134(k).
    (2) In determining whether a loan was made for the purpose of 
acquiring

[[Page 601]]

a facility, we apply any owner's investment or funds first to the 
tangible assets, then to the intangible assets other than goodwill, and 
lastly to the goodwill. If the owner's investment or funds are not 
sufficient to cover the cost allowed for tangible assets, we apply funds 
borrowed to finance the acquisition to the portion of the allowed cost 
of the tangible assets not covered by the owner's investment, then to 
the intangible assets other than goodwill, and lastly to the goodwill. 
Repayments of the funds borrowed are applied first to the borrowing 
related to the tangible assets, then to the borrowing related to the 
intangible assets other than goodwill, and lastly to the borrowing 
related to the goodwill.
    (3) When a provider borrows funds, but only some of the funds are 
necessary, repayments of the loan (principal and interest portions) are 
applied first to pay for the necessary portion of the loan. Only after 
all of the necessary portion of the loan (principal and interest) has 
been repaid are any repayments applied to the unnecessary portion of the 
loan. Repayments toward non-allowable borrowing pertaining to assets or 
activities not related to patient care are considered investments, and 
the provisions of paragraph (b)(2)(iii) of this section are applied.
    (e) Zero coupon bonds--(1) Interest on bonds issued on or after 
August 15, 1996. For zero coupon bonds issued on or after August 15, 
1996, interest expense incurred to provide funds for patient care-
related costs is an allowable expense, and interest income earned for 
investment purposes is an allowable offset, in the cost reporting period 
in which the interest accrues.
    (2) Interest income offset. Interest income from zero coupon bonds 
must be offset against allowable interest expense as prescribed in 
paragraph (b)(2) of this section and in Sec. 413.130(g)(2). If zero 
coupon bonds are purchased with the proceeds of an advanced refunding of 
debt, offset of the investment income is required under 
Sec. 413.153(b)(2)(iii), but the investment income is not prorated under 
Sec. 413.130(g)(2).
    (3) Use of effective interest method. (i) Interest expense and 
interest income from zero coupon bonds that are reported as they accrue 
must be amortized using the effective interest method. This method 
recognizes the actual accrual of interest expense or income for each 
interest computation period (as specified by the bond instrument) 
throughout the life of the bond.
    (ii) A constant effective yield rate is determined and applied to 
the book value (outstanding loan balance including prior accrued 
interest) of the bond at the beginning of each period to determine the 
total interest for the period.
    (iii) If the interest computation period involves portions of more 
than one cost reporting period, the amount of interest for that 
computation period shall be apportioned to each cost reporting period.
    (iv) An example of the computation of interest using the effective 
interest method follows:

                                  Facts

    Life of zero coupon bond: 15 years.
    Value at maturity: $50,000.
    Bondholder pays $6,996 for the bond.
    Annual interest rate is 13.5506% compounded semi-annually.
    From the table below, interest for the first year would be $980.11 
($474.00 plus $506.11).

------------------------------------------------------------------------
                                                                Col. 4
                                         Col 2                Book value
                                      Book value    Col. 3      end of
      Col 1  Six-month periods         beginning   Effective    period
                                       of period   interest*  (columns 2
                                                                 + 3)
------------------------------------------------------------------------
1                                      $6,996.00     $474.00   $7,470.00
2                                       7,470.00      506.11    7,976.11
3                                       7,976.11      540.40    8,516.51
4                                       8,516.51      577.02    9,093.53
29                                     43,855.94    2,971.37   46,827.31
30                                     46,827.31    3,172.69  50,000.00
------------------------------------------------------------------------
*Computed by multiplying the book value at the beginning of each period
  (Column 2) by 6.7753% (the annual interest rate of 13.5506% 2 =
  6.7753%).


[51 FR 34793, Sept. 30, 1986, as amended at 56 FR 43457, Aug. 30, 1991; 
59 FR 45402, Sept. 1, 1994; 61 FR 37014, July 16, 1996; 61 FR 63748, 
63479, Dec. 2, 1996; 65 FR 8662, Feb. 22, 2000]



Sec. 413.157  Return on equity capital of proprietary providers.

    (a) Definitions. For purposes of this section--
    Proprietary provider means a provider that is organized and operated 
with the expectation of earning a profit for its

[[Page 602]]

owners (as distinguished from a provider that is organized and operated 
on a nonprofit basis). Proprietary providers may be sole 
proprietorships, partnerships, or corporations. Effective for cost 
reporting periods beginning on or after July 6, 1987, the term applies 
only to proprietary hospitals and SNFs.
    (b) General rule. A reasonable return on equity capital invested and 
used in the provision of patient care is paid as an allowance in 
addition to the reasonable cost of covered services furnished to 
beneficiaries by proprietary providers.
    (1) Rate of return applicable to proprietary providers for cost 
reporting periods beginning before July 6, 1987. Except as provided in 
paragraphs (b)(2), (b)(3), and (b)(4) of this section, the amount 
allowable on an annual basis, for cost reporting periods beginning 
before July 6, 1987, is determined by multiplying the provider's equity 
capital by a percentage equal to one and one-half times the average of 
the rates of interest on special issues of public debt obligations 
issued for purchase by the Medicare Part A Trust Fund for each of the 
months during the provider's reporting period or portion thereof covered 
under the program.
    (2) Rate of return for inpatient hospital services furnished by 
proprietary hospitals. The rate used in determining the return for 
inpatient hospital services is a percentage of the average of the rates 
of interest described in paragraph (b)(1) of this section. The 
percentages applicable to inpatient hospital services are as follows:
    (i) 150 percent for cost reporting periods beginning before April 
20, 1983.
    (ii) 100 percent for cost reporting periods beginning on or after 
April 20, 1983 and before October 1, 1986.
    (iii) 75 percent for cost reporting periods beginning on or after 
October 1, 1986 and before October 1, 1987.
    (iv) 50 percent for cost reporting periods beginning on or after 
October 1, 1987 and before October 1, 1988.
    (v) 25 percent for cost reporting periods beginning on or after 
October 1, 1988 and before October 1, 1989.
    (vi) Zero percent for cost reporting periods beginning on or after 
October 1, 1989.
    (3) Rate of return related to proprietary SNFs. (i) For cost 
reporting periods beginning on or after October 1, 1985, the rate used 
in determining the return for SNF services furnished before October 1, 
1993, is a percentage equal to the average of the rates of interest 
described in paragraph (b)(1) of this section.
    (ii) There is no allowance for return for SNF services furnished on 
or after October 1, 1993.
    (4) Rate of return related to outpatient hospital services. (i) For 
cost reporting periods beginning on or after October 1, 1985, the rate 
used in determining the return for outpatient hospital services 
furnished before January 1, 1988 is a percentage equal to the average of 
the rates of interest described in paragraph (b)(1) of this section.
    (ii) There is no allowance for return for outpatient hospital 
services furnished on or after January 1, 1988.
    (5) Rate of return for proprietary services of all nonhospital and 
non-SNF providers. (i) For cost reporting periods beginning on or after 
October 1, 1985, but before July 6, 1987, the rate used in determining 
the return for services of all nonhospital and non-SNF providers is a 
percentage equal to the average of the rates of interest described in 
paragraph (b)(1) of this section.
    (ii) For cost reporting periods beginning on or after July 6, 1987, 
there is no allowance for return on equity capital for nonhospital and 
non-SNF providers.
    (c) Application--(1) Computation of equity capital. For purposes of 
computing the allowable return, the provider's equity capital means--
    (i) The provider's investment in plant, property, and equipment 
related to patient care (net of depreciation) and funds deposited by a 
provider who leases plant, property, or equipment related to patient 
care and is required by the terms of the lease to deposit such funds 
(net of noncurrent debt related to such investment or deposited funds); 
and
    (ii) Net working capital maintained for necessary and proper 
operation of patient care activities. However, debt representing loans 
from partners, stockholders, or related organizations on which interest 
payments would be

[[Page 603]]

allowable as costs but for the provisions of Sec. 413.153(b)(3)(ii), is 
not subtracted in computing the amount of equity capital in order that 
the proceeds from such loans be treated as part of the provider's equity 
capital. In computing the amount of equity capital upon which a return 
is allowable, investment in facilities is recognized on the basis of the 
historical cost, or other basis, used for depreciation and other 
purposes under Part A of Medicare.
    (2) Acquisitions after July 1970. With respect to a facility or any 
tangible assets of a facility acquired on or after August 1, 1970, the 
excess of the price paid for such facility or such tangible assets over 
the historical cost, as defined in Sec. 413.134(b), or the cost basis, 
as determined under Sec. 413.134(g) (whichever is appropriate), is not 
includable in equity capital, and loans made to finance such excess 
portion of the cost of such acquisitions (see Sec. 413.153(d)) are 
excluded in computing equity capital.
    (3) Acquisitions prior to August 1970. With respect to a facility or 
any tangible assets of a facility acquired before August 1970, the 
excess of the price paid for such facility or assets over the fair 
market value of tangible assets at the time of purchase is includable in 
equity capital to the extent that it is reasonable except that the 
cumulative allowable return for such excess may not exceed 100 percent 
of such excess. For purposes of this section, the cumulative allowable 
return means the sum of the allowable rate of return on equity capital 
for all months starting from August 1, 1970. For example, if the 
allowable rates of return on equity capital for a provider are 9 percent 
for the first year (and such year started August 1, 1970), 8.5 percent 
for the second year, and 10.5 percent for the third year, the cumulative 
allowable return at the end of the third year would be 28 percent. After 
the cumulative allowable return equals 100 percent, the inclusion in 
equity capital of the excess is no longer allowable.
    (4) Computation of return on equity capital. For purposes of 
computing the allowable return, the amount of equity capital is the 
average investment during the reporting period. The rate of return 
allowed, as derived from time to time based upon interest rates in 
accordance with this principle, is determined by CMS and communicated 
through intermediaries. Return on investment as an element of allowable 
costs is subject to apportionment in the same manner as other elements 
of allowable costs.

    Example of calculation of cumulative allowable return. X purchased a 
provider on July 1, 1969, paying $100,000 in excess f the fair market 
value of the assets acquired. Provider X files its cost report on a 
calendar-year basis. The allowable rate of return on equity capital for 
August 1, 1970-December 31, 1970 (4.538 percent), is obtained by 
multiplying the allowable rate of return for the period ending December 
31, 1970 (10.891) by \5/12\ (a fraction of which the numerator is the 
number of months from August 1, 1970, to the end of the cost-reporting 
period and the denominator is the number of months in the cost-reporting 
period). The cumulative allowable return for Provider X for the period 
August 1, 1970-December 31, 1973, (32.367 percent) is computed as 
follows:

------------------------------------------------------------------------
                                                                Rate of
                                                               return on
                  Cost reporting year ending                     equity
                                                                capital
                                                               (percent)
------------------------------------------------------------------------
Dec. 31, 1970................................................      4.538
Dec. 31, 1971................................................      8.969
Dec. 31, 1972................................................      8.891
Dec. 31, 1973................................................      9.969
                                                              ----------
      Total..................................................     32.367
------------------------------------------------------------------------

(The $100,000 paid in excess of the fair market value of the assets 
acquired is included in equity capital until the sum of the allowable 
rate of return on equity capital equals 100 percent. Of course, no 
portion of the $100,000 may be amortized as an allowable cost or is 
otherwise allowable for any program reimbursement purposes other than 
for determining the provider's equity capital.

[51 FR 34793, Sept. 30, 1986, as amended at 52 FR 21225, June 4, 1987; 
52 FR 23398, June 19, 1987; 52 FR 32921, Sept. 1, 1987; 53 FR 12017, 
Apr. 12, 1988; 57 FR 39830, Sept. 1, 1992; 59 FR 26960, May 25, 1994]



Subpart H--Payment for End-Stage Renal Disease (ESRD) Services and Organ 
                            Procurement Costs

    Source: 62 FR 43668, Aug. 15, 1997, unless otherwise noted.

[[Page 604]]



Sec. 413.170  Scope.

    This subpart implements sections 1881 (b)(2) and (b)(7) of the Act 
by--
    (a) Setting forth the principles and authorities under which CMS is 
authorized to establish a prospective payment system for outpatient 
maintenance dialysis furnished in or under the supervision of an ESRD 
facility approved under subpart U of part 405 of this chapter (referred 
to as ``facility'' in this section). For purposes of this section and 
Sec. 413.172 through Sec. 413.198, ``outpatient maintenance dialysis'' 
means outpatient dialysis, home dialysis, self-dialysis, and home 
dialysis training, as defined in Sec. 405.2102 (f)(2)(ii), (f)(2)(iii), 
and (f)(3) of this chapter, and includes all items and services 
specified in Secs. 410.50 and 410.52 of this chapter.
    (b) Providing procedures and criteria under which a facility may 
receive an exception to the prospective payment rates; and
    (c) Establishing procedures that a facility must follow to appeal 
its payment amount under the prospective payment system.



Sec. 413.172  Principles of prospective payment.

    (a) Payments for outpatient maintenance dialysis are based on rates 
set prospectively by CMS.
    (b) All approved ESRD facilities must accept the prospective payment 
rates established by CMS as payment in full for covered outpatient 
maintenance dialysis.
    (c) CMS publishes the methodology used to establish payment rates 
and the changes specified in Sec. 413.196(b) in the Federal Register.



Sec. 413.174  Prospective rates for hospital-based and independent ESRD facilities.

    (a) Establishment of rates. CMS establishes prospective payment 
rates for ESRD facilities using a methodology that--
    (1) Differentiates between hospital-based facilities and independent 
ESRD facilities;
    (2) Effectively encourages efficient delivery of dialysis services; 
and
    (3) Provides incentives for increasing the use of home dialysis.
    (b) Determination of independent facility. For purposes of rate-
setting and payment under this section, CMS considers any facility that 
does not meet all of the criteria of a hospital-based facility to be an 
independent facility. A determination under this paragraph (b) is an 
initial determination under Sec. 498.3 of this chapter.
    (c) Determination of hospital-based facility. A determination under 
this paragraph (c) is an initial determination under Sec. 498.3 of this 
chapter. For purposes of rate-setting and payment under this section, 
CMS determines that a facility is hospital-based if the--
    (1) Facility and hospital are subject to the bylaws and operating 
decisions of a common governing board. This governing board, which has 
final administrative responsibility, approves all personnel actions, 
appoints medical staff, and carries out similar management functions;
    (2) Facility's director or administrator is under the supervision of 
the hospital's chief executive officer and reports through him or her to 
the governing board;
    (3) Facility personnel policies and practices conform to those of 
the hospital;
    (4) Administrative functions of the facility (for example, records, 
billing, laundry, housekeeping, and purchasing) are integrated with 
those of the hospital; and
    (5) Facility and hospital are financially integrated, as evidenced 
by the cost report, which reflects allocation of overhead to the 
facility through the required step-down methodology.
    (d) Nondetermination of hospital-based facility. In determining 
whether a facility is hospital-based, CMS does not consider--
    (1) An agreement between a facility and a hospital concerning 
patient referral;
    (2) A shared service arrangement between a facility and a hospital; 
or
    (3) The physical location of a facility on the premises of a 
hospital.
    (e) Add-on amounts. If all the physicians furnishing services to 
patients in an ESRD facility elect the initial method of payment (as 
described in Sec. 414.313(c) of this chapter), the prospective rate (as 
described in paragraph (a)

[[Page 605]]

of this section) paid to that facility is increased by an add-on amount 
as described in Sec. 414.313.
    (f) Erythropoietin/Epoietin (EPO). (1) When EPO is furnished to an 
ESRD patient by a Medicare-approved ESRD facility or a supplier of home 
dialysis equipment and supplies, payment is based on the amount 
specified in paragraph (f)(3) of this section.
    (2) The payment is made only on an assignment basis, that is, 
directly to the facility or supplier, which must accept, as payment in 
full, the amount that CMS determines.
    (3) CMS determines the payment amount in accordance with the 
following rules:
    (i) The amount is prospectively determined, as specified in section 
1881(b)(11)(B)(ii) of the Act, reviewed and adjusted by CMS, as 
necessary, and paid to hospital-based and independent dialysis 
facilities and to suppliers of home dialysis equipment and supplies, 
regardless of the location of the facility, supplier, or patient.
    (ii) If CMS determines that an adjustment to the payment amount is 
necessary, CMS publishes a Federal Register notice proposing a revision 
to the EPO payment amount and requesting public comment.
    (iii) Any increase in this amount for a year does not exceed the 
percentage increase (if any) in the implicit price deflator for gross 
national product (as published by the Department of Commerce) for the 
second quarter of the preceding year over the implicit price deflator 
for the second quarter of the second preceding year.
    (iv) The Medicare payment amount is subject to the Part B deductible 
and coinsurance.
    (g) Additional payment for certain drugs. In addition to the 
prospective payment described in this section, CMS makes an additional 
payment for certain drugs furnished to ESRD patients by a Medicare-
approved ESRD facility. CMS makes this payment directly to the ESRD 
facility. The facility must accept the allowance determined by CMS as 
payment in full. Payment for these drugs is made as follows:
    (1) Hospital-based facilities. CMS makes payments in accordance with 
the cost reimbursement rules set forth in this part.
    (2) Independent facilities. CMS makes payment in accordance with the 
methodology set forth in Sec. 405.517 of this chapter for paying for 
drugs that are not paid on a cost or prospective payment basis.



Sec. 413.176  Amount of payments.

    (a) If the beneficiary has incurred the full deductible applicable 
under Part B of Medicare before the dialysis treatment, the intermediary 
pays the facility 80 percent of its prospective payment rate.
    (b) If the beneficiary has not incurred the full deductible 
applicable under Part B of Medicare before the dialysis treatment, the 
intermediary subtracts the amount applicable to the deductible from the 
facility's prospective rate and pays the facility 80 percent of the 
remainder, if any.



Sec. 413.178  Bad debts.

    (a) CMS will reimburse each facility its allowable Medicare bad 
debts, as defined in Sec. 413.80(b), up to the facility's costs, as 
determined under Medicare principles, in a single lump sum payment at 
the end of the facility's cost reporting period.
    (b) A facility must attempt to collect deductible and coinsurance 
amounts owed by beneficiaries before requesting reimbursement from CMS 
for uncollectible amounts. Section 413.80 specifies the collection 
efforts facilities must make.
    (c) A facility must request payment for uncollectible deductible and 
coinsurance amounts owed by beneficiaries by submitting an itemized list 
that specifically enumerates all uncollectable amounts related to 
covered services under the composite rate.



Sec. 413.180  Procedures for requesting exceptions to payment rates.

    (a) Outpatient maintenance dialysis payments. All payments for 
outpatient maintenance dialysis furnished at or by facilities are made 
on the basis of prospective payment rates.
    (b) Criteria for requesting an exception. If a facility projects on 
the basis of prior year costs and utilization trends that it will have 
an allowable cost per

[[Page 606]]

treatment higher than its prospective rate set under Sec. 413.174, and 
if these excess costs are attributable to one or more of the factors in 
Sec. 413.182, the facility may request, in accordance with paragraph (d) 
of this section, that CMS approve an exception to that rate and set a 
higher prospective payment rate. However, a facility may only request an 
exception or seek to retain its previously approved exception rate when 
authorized under the conditions specified in paragraphs (d) and (e) of 
this section.
    (c) Application of deductible and coinsurance. The higher payment 
rate is subject to the application of deductible and coinsurance in 
accordance with Sec. 413.176.
    (d) Payment rate exception request. A facility must request an 
exception to its payment rate within 180 days of--
    (1) The effective date of its new composite payment rate(s);
    (2) The effective date that CMS opens the exceptions process; or
    (3) The date on which an extraordinary cost-increasing event occurs, 
as specified (or provided for) in Secs. 413.182(c) and 413.188.
    (e) Criteria for retaining a previously approved exception rate. A 
facility may elect to retain its previously approved exception rate in 
lieu of any composite rate increase or any other exception amount if--
    (1) The conditions under which the exception was granted have not 
changed;
    (2) The facility files a request to retain the rate with its fiscal 
intermediary during the 30-day period before the opening of an exception 
cycle; and
    (3) The request is approved by the fiscal intermediary.
    (f) Documentation for a payment rate exception request. If the 
facility is requesting an exception to its payment rate, it must submit 
to CMS its most recently completed cost report as required under 
Sec. 413.198 and whatever statistics, data, and budgetary projections as 
determined by CMS to be needed to adjudicate each type of exception. CMS 
may audit any cost report or other information submitted. The materials 
submitted to CMS must--
    (1) Separately identify elements of cost contributing to costs per 
treatment in excess of the facility's payment rate;
    (2) Show that the facility's costs, including those costs that are 
not directly attributable to the exception criteria, are allowable and 
reasonable under the reasonable cost principles set forth in this part;
    (3) Show that the elements of excessive cost are specifically 
attributable to one or more conditions specified in Sec. 413.182;
    (4) Specify the amount of additional payment per treatment the 
facility believes is required for it to recover its justifiable excess 
costs; and
    (5) Specify that the facility has compared its most recently 
completed cost report with cost reports from (at least 2) prior years. 
The facility must explain any material statistical data or cost changes, 
or both, and include an explanation with the documentation supporting 
the exception request.
    (g) Completion of requirements and criteria. The facility must 
demonstrate to CMS's satisfaction that the requirements of this section 
and the criteria in Sec. 413.182 are fully met. The burden of proof is 
on the facility to show that one or more of the criteria are met and 
that the excessive costs are justifiable under the reasonable cost 
principles set forth in this part.
    (h) Approval of an exception request. An exception request is deemed 
approved unless it is disapproved within 60 working days after it is 
filed with its intermediary.
    (i) Determination of an exception request. In determining the 
facility's payment rate under the exception process, CMS excludes all 
costs that are not reasonable or allowable under the reasonable cost 
principles set forth in this part.
    (j) Period of approval: Payment exception request. Except for 
exceptions approved under Secs. 413.180(e), 413.180(k), 413.182(c), and 
413.188, a prospective exception payment rate approved by CMS applies 
for the period from the date the complete exception request was filed 
with its intermediary until the earlier of the--
    (1) Date the circumstances justifying the exception rate no longer 
exist; or

[[Page 607]]

    (2) End of the period during which the announced rate was to apply.
    (k) Period of approval: Payment exception request under 
Secs. 413.182(c) and 413.188. A prospective exception payment rate 
approved by CMS under Secs. 413.182(c) and 413.188 applies from the date 
of the extraordinary event until the end of the period during which the 
prospective announced rate was to apply, unless CMS determines that 
another date is more appropriate. If CMS does not extend the exception 
period and the facility believes that it continues to require an 
exception to its rate, the facility must reapply in accordance with the 
procedures in this section.
    (l) Denial of an exception request. CMS denies exception requests 
submitted without the documentation specified in Sec. 413.182 and the 
applicable regulations cited there.
    (m) Criteria for refiling a denied exception request. A facility 
that has been denied an exception request during the 180 days may file 
another exception request if all required documentation is filed with 
the intermediary by the 180th day.



Sec. 413.182  Criteria for approval of exception requests.

    CMS may approve exceptions to an ESRD facility's prospective payment 
rate if the facility demonstrates, by convincing objective evidence, 
that its total per treatment costs are reasonable and allowable under 
the relevant cost reimbursement principles of part 413 and that its per 
treatment costs in excess of its payment rate are directly attributable 
to any of the following criteria:
    (a) Atypical service intensity (patient mix), as specified in 
Sec. 413.184.
    (b) Isolated essential facility, as specified in Sec. 413.186.
    (c) Extraordinary circumstances, as specified in Sec. 413.188.
    (d) Self-dialysis training costs, as specified in Sec. 413.190.
    (e) Frequency of dialysis, as specified in Sec. 413.192.



Sec. 413.184  Payment exception: Atypical service intensity (patient mix).

    (a) To qualify for an exception to the prospective payment rate 
based on atypical service intensity (patient mix)--
    (1) A facility must demonstrate that a substantial proportion of the 
facility's outpatient maintenance dialysis treatments involve atypically 
intense dialysis services, special dialysis procedures, or supplies that 
are medically necessary to meet special medical needs of the facility's 
patients. Examples that may qualify under this criterion are more 
intense dialysis services that are medically necessary for patients such 
as--
    (i) Patients who have been referred from other facilities on a 
temporary basis for more intense care during a period of medical 
instability and who return to the original facility after stabilization;
    (ii) Pediatric patients who require a significantly higher staff-to-
patient ratio than typical adult patients; or
    (iii) Patients with medical conditions that are not commonly treated 
by ESRD facilities and that complicate the dialysis procedure.
    (2) The facility must demonstrate clearly that these services, 
procedures, or supplies and its per treatment costs are prudent and 
reasonable when compared to those of facilities with a similar patient 
mix.
    (3) A facility must demonstrate that--
    (i) Its nursing personnel costs have been allocated properly between 
each mode of care; and
    (ii) The additional nursing hours per treatment are not the result 
of an excess number of employees.
    (b) Documentation. (1) A facility must submit a listing of all 
outpatient dialysis patients (including all home patients) treated 
during the most recently completed fiscal or calendar year showing--
    (i) Patients who received transplants, including the date of 
transplant;
    (ii) Patients awaiting a transplant who are medically able, have 
given consent, and are on an active transplant list, and projected 
transplants;
    (iii) Home patients;
    (iv) In-facility patients, staff-assisted, or self-dialysis;
    (v) Individual patient diagnosis;
    (vi) Diabetic patients;

[[Page 608]]

    (vii) Patients isolated because of contagious disease;
    (viii) Age of patients;
    (ix) Mortality rate, by age and diagnosis;
    (x) Number of patient transfers, reasons for transfers, and any 
related information; and
    (xi) Total number of hospital admissions for the facility's 
patients, reason for, and length of stay of each session.
    (2) The facility also must--
    (i) Submit documentation on costs of nursing personnel (registered 
nurses, licensed practical nurses, technicians, and aides) incurred 
during the most recently completed fiscal year cost report showing--
    (A) Amount each employee was paid;
    (B) Number of personnel;
    (C) Amount of time spent in the dialysis unit; and
    (D) Staff-to-patient ratio based on total hours, with an analysis of 
productive and nonproductive hours.
    (ii) Submit documentation on supply costs incurred during the most 
recently completed fiscal or calendar year cost report showing--
    (A) By modality, a complete list of supplies used routinely in a 
dialysis treatment;
    (B) The make and model number of each dialyzer and its component 
cost; and
    (C) That supplies are prudently purchased (for example, that bulk 
discounts are used when available).
    (iii) Submit documentation on overhead costs incurred during the 
most recently completed fiscal or calendar year cost reporting year 
showing--
    (A) The basis of the higher overhead costs;
    (B) The impact on the specific cost components; and
    (C) The effect on per treatment costs.



Sec. 413.186  Payment exception: Isolated essential facility.

    (a) Qualifications. To qualify for an exception to the prospective 
payment rate based on being an isolated essential facility--
    (1) The facility must be the only supplier of dialysis in its 
geographical area;
    (2) The facility's patients must be unable to obtain dialysis 
services elsewhere without substantial additional hardship; and
    (3) The facility's excess costs must be justifiable.
    (b) Criteria for determining qualifications. In determining whether 
a facility qualifies for an exception based on its being an isolated 
essential facility, CMS considers--
    (1) Local, permanent residential population density;
    (2) Typical local commuting distances from medical services;
    (3) Volume of treatments; and
    (4) The extent that other dialysis facilities are used by area 
residents (other than the applying facility's patients).
    (c) Documentation. (1) Isolated. Generally, to be considered 
isolated, the facility must document that it is located outside an 
established Metropolitan Statistical Area and provides dialysis to a 
permanent patient population, as opposed to a transient patient 
population.
    (2) Essential. To be considered essential, the facility must 
document--
    (i) That a substantial number of its patients cannot obtain dialysis 
services elsewhere without additional hardship; and
    (ii) The additional hardship the patients will incur in travel time 
and cost.
    (3) Cost per treatment. The facility must--
    (i) Document that its cost per treatment is reasonable; and
    (ii) Explain how the facility's cost per treatment in excess of its 
composite rate relates to the isolated essential facility criteria 
specified in paragraph (b) of this section.
    (4) Additional information. The facility must also furnish the 
following information in a format that concisely explains the facility's 
cost and patient data to support its request:
    (i) A list of current and requested payment rates for each modality.
    (ii) An explanation of how the facility's costs in excess of its 
composite rate payment are attributable to its being an isolated 
essential facility.
    (iii) An explanation of any unusual geographic conditions in the 
area surrounding the facility.

[[Page 609]]

    (iv) A copy of the latest filed cost report and a budget estimate 
for the next 12 months prepared on cost report forms.
    (v) An explanation of unusual costs reported on the facility's 
actual or budgeted cost reports and any significant changes in budgeted 
costs and data compared to actual costs and data reported on the latest 
filed cost report.
    (vi) The name, location of, and distance to the nearest renal 
dialysis facility.
    (vii) A list of patients by modality showing commuting distance and 
time to the current and the next nearest renal dialysis facility.
    (viii) The historical and projected patient-to-staff ratios and 
number of machines used for maintenance dialysis treatments.
    (ix) A computation showing the facility's treatment capacity, 
arrived at by taking the total stations multiplied by the number of 
hours of operation for the year divided by the average length of a 
dialysis treatment.
    (x) The geographic boundaries and population size of the facility's 
service area.



Sec. 413.188  Payment exception: Extraordinary circumstances.

    (a) To qualify for an exception to the prospective payment rate 
based on extraordinary circumstances, the facility must substantiate 
that it incurs excess costs beyond its control due to a fire, 
earthquake, flood, or other natural disaster.
    (b) CMS will not grant an exception based on increased costs if a 
facility has chosen not to--
    (1) Maintain adequate insurance protection against such losses 
(through the purchase of insurance, the maintenance of a self-insurance 
program, or other equivalent alternative); or
    (2) File a claim for losses covered by insurance or utilize its 
self-insurance program.



Sec. 413.190  Payment exception: Self-dialysis training costs.

    (a) Qualifications. To qualify for an exception to the prospective 
payment rate based on self-dialysis training costs, the facility must 
establish that it incurs per treatment costs for furnishing self-
dialysis and home dialysis training that exceed the facility's payment 
rate for such training sessions.
    (b) Justification. To justify its exception request, a facility 
must--
    (1) Separately identify those elements contributing to its costs in 
excess of the composite training rate; and
    (2) Demonstrate that its per treatment costs are reasonable and 
allowable.
    (c) Criteria for determining proper cost reporting. CMS considers 
the facility's total costs, cost finding and apportionment, including 
its allocation of costs, to determine if costs are properly reported by 
treatment modality.
    (d) Limitation of exception requests. Exception requests for a 
higher training rate are limited to those cost components relating to 
training such as technical staff, medical supplies, and the special 
costs of education (manuals and education materials). These requests may 
include overhead and other indirect costs to the extent that these costs 
are directly attributable to the additional training costs.
    (e) Documentation. The facility must provide the following 
information to support its exception request:
    (1) A copy of the facility's training program.
    (2) Computation of the facility's cost per treatment for maintenance 
sessions and training sessions including an explanation of the cost 
difference between the two modalities.
    (3) Class size and patients' training schedules.
    (4) Number of training sessions required, by treatment modality, to 
train patients.
    (5) Number of patients trained for the current year and the prior 2 
years on a monthly basis.
    (6) Projection for the next 12 months of future training candidates.
    (7) The number and qualifications of staff at training sessions.
    (f) Accelerated training exception. (1) An ESRD facility may bill 
Medicare for a dialysis training session only when a patient receives a 
dialysis treatment (normally three times a week for hemodialysis). 
Continuous cycling peritoneal dialysis (CCPD) and

[[Page 610]]

continuous ambulatory peritoneal dialysis (CAPD) are daily treatment 
modalities; ESRD facilities are paid the equivalent of three 
hemodialysis treatments for each week that CCPD and CAPD treatments are 
provided.
    (2) If an ESRD facility elects to train all its patients using a 
particular treatment modality more often than during each dialysis 
treatment and, as a result, the number of billable training dialysis 
sessions is less than the number of actual training sessions, the 
facility may request a composite rate exception, limited to the lesser 
of the--
    (i) Facility's projected training cost per treatment; or
    (ii) Cost per treatment the facility would have received in training 
a patient if it had trained patients only during a dialysis treatment, 
that is, three times per week.
    (3) An ESRD facility may bill a maximum of 25 training sessions per 
patient for hemodialysis training and 15 sessions for CCPD and CAPD 
training.
    (4) In computing the payment amount under an accelerated training 
exception, CMS uses a minimum number of training sessions per patient 
(15 for hemodialysis and 5 for CAPD and CCPD) when the facility actually 
provides fewer than the minimum number of training sessions.
    (5) To justify an accelerated training exception request, an ESRD 
facility must document that a significant number of training sessions 
for a particular modality are provided during a shorter but more 
condensed period.
    (6) The facility must submit with the exception request a list of 
patients, by modality, trained during the most recent cost report 
period. The list must include each beneficiary's--
    (i) Name;
    (ii) Age; and
    (iii) Training status (completed, not completed, being retrained, or 
in the process of being trained).
    (7) The total treatments from the patient list must be the same as 
the total treatments reported on the cost report filed with the request.



Sec. 413.192  Payment exception: Frequency of dialysis.

    (a) Qualification. To qualify for an exception to the prospective 
payment rate based on frequency of dialysis, the facility must establish 
that it has a substantial portion of outpatient maintenance dialysis 
treatments furnished to patients who dialyze less frequently than three 
times per week.
    (b) Definition. For purposes of this section, ``substantial'' means 
the number of treatments furnished by the facility is at least 15 
percent lower than the number would be if all patients dialyzed three 
times a week.
    (c) Limitation for per treatment payment rates. Per treatment 
payment rates granted under this exception may not exceed the amount 
that produces weekly payments per patient equal to three times the 
facility's prospective composite rate, exclusive of any exception 
amounts.
    (d) Documentation. To document that an ESRD facility furnishes a 
substantial number of dialysis treatments at a frequency less than three 
times per week per patient, the facility must submit the following 
information:
    (1) A list of patients receiving outpatient dialysis treatments for 
the cost report that is filed with the request. The list must indicate--
    (i) Whether the patients are permanent, transient, or temporary;
    (ii) The medically prescribed frequency of dialysis; and
    (iii) The number of dialysis treatments that each patient received 
on a weekly and yearly basis and an explanation of any discrepancy 
between that calculation and the number of treatments reported on the 
facility's cost report.
    (2) A list of patients used to project treatments. The list must 
indicate--
    (i) Whether the patients are permanent, transient, or temporary;
    (ii) The medically prescribed frequency of dialysis;
    (iii) The number of dialysis treatments that each patient is 
projected to receive on a weekly and yearly basis, an explanation of any 
discrepancy between that calculation and the number of treatments 
reported on the facility's projected cost report, and an explanation for 
any change among prior, actual, and projected data.
    (3) A schedule showing the number of treatments to be furnished 
twice a week and the number of treatments

[[Page 611]]

that would have been furnished if each patient were dialyzed three times 
a week.
    (4) A computation of the facility's projected costs per treatment 
using the--
    (i) Projected number of treatments furnished twice a week; and
    (ii) Number of treatments if patients dialyze three times a week.
    (5) A schedule showing the computation of the percentage decrease in 
the number of treatments.



Sec. 413.194  Appeals.

    (a) Appeals under section 1878 of the Act. (1) A facility that 
disputes the amount of its allowable Medicare bad debts reimbursed by 
CMS under Sec. 413.178 may request review by the intermediary or the 
Provider Reimbursement Review Board (PRRB) in accordance with subpart R 
of part 405 of this chapter.
    (2) A facility must request and obtain a final agency decision prior 
to seeking judicial review of a dispute regarding the amount of 
allowable Medicare bad debts.
    (b) Other appeals. (1) A facility that has requested higher payment 
per treatment in accordance with Sec. 413.180 may request review from 
the intermediary or the PRRB if CMS has denied the request in whole or 
in part. In such a case, the procedure in subpart R of part 405 of this 
chapter is followed to the extent that it is applicable.
    (2) The PRRB has the authority to review the action taken by CMS on 
the facility's requests. However, the PRRB's decision is subject to 
review by the Administrator under Sec. 405.1875 of this chapter.
    (3) A facility must request and obtain a final agency decision, in 
accordance with paragraph (b)(1) of this section, prior to seeking 
judicial review of the denial, in whole or in part, of the exception 
request.
    (c) Procedure. (1) The facility must request review within 180 days 
of the date of the decision on which review is sought.
    (2) The facility may not submit to the reviewing entity, whether it 
is the intermediary or the PRRB, any additional information or cost data 
that had not been submitted to CMS at the time CMS evaluated the 
exception request.
    (d) Determining amount in controversy. For purposes of determining 
PRRB jurisdiction under subpart R of part 405 of this chapter for the 
appeals described in paragraph (b) of this section--
    (1) The amount in controversy per treatment is determined by 
subtracting the amount of program payment from the amount the facility 
requested under Sec. 413.180; and
    (2) The total amount in controversy is calculated by multiplying the 
amount in controversy per treatment by the projected number of 
treatments for the exception request period.



Sec. 413.196  Notification of changes in rate-setting methodologies and payment rates.

    (a) CMS or the facility's intermediary notifies each facility of 
changes in its payment rate. This notice includes changes in individual 
facility payment rates resulting from corrections or revisions of 
particular geographic labor cost adjustment factors.
    (b) Changes in payment rates resulting from incorporation of updated 
cost data or general revisions of geographic labor cost adjustment 
factors are announced by notice published in the Federal Register 
without opportunity for prior comment. Revisions of the rate-setting 
methodology are published in the Federal Register in accordance with the 
Department's established rulemaking procedures.



Sec. 413.198  Recordkeeping and cost reporting requirements for outpatient maintenance dialysis.

    (a) Purpose and Scope. This section implements section 
1881(b)(2)(B)(i) of the Act by specifying recordkeeping and cost 
reporting requirements for ESRD facilities approved under subpart U of 
part 405 of this chapter. The records and reports will enable CMS to 
determine the costs incurred in furnishing outpatient maintenance 
dialysis as defined in Sec. 413.170(a).
    (b) Recordkeeping and reporting requirements. (1) Each facility must 
keep

[[Page 612]]

adequate records and submit the appropriate CMS-approved cost report in 
accordance with Secs. 413.20 and 413.24, which provide rules on 
financial data and reports, and adequate cost data and cost finding, 
respectively.
    (2) The cost reimbursement principles set forth in this part 
(beginning with Sec. 413.134, Depreciation, and excluding the principles 
listed in paragraph (b)(4) of this section), apply in the determination 
and reporting of the allowable cost incurred in furnishing outpatient 
maintenance dialysis treatments to patients dialyzing in the facility, 
or incurred by the facility in furnishing home dialysis service, 
supplies, and equipment.
    (3) Allowable cost is the reasonable cost related to dialysis 
treatments. Reasonable cost includes all necessary and proper expenses 
incurred by the facility in furnishing the dialysis treatments, such as 
administrative costs, maintenance costs, and premium payments for 
employee health and pension plans. It includes both direct and indirect 
costs and normal standby costs. Reasonable cost does not include costs 
that--
    (i) Are not related to patient care for outpatient maintenance 
dialysis;
    (ii) Are for services or items specifically not reimbursable under 
the program;
    (iii) Flow from the provision of luxury items or servicess (items or 
services substantially in excess of or more expensive than those 
generally considered necessary for the provision of needed health 
services); or
    (iv) Are found to be substantially out of line with other 
institutions in the same area that are similar in size, scope of 
services, utilization, and other relevant factors.
    (4) The following principles of this part do not apply in 
determining adjustments to allowable costs as reported by ESRD 
facilities:
    (i) Section 413.157, Return on equity capital of proprietary 
providers;
    (ii) Section 413.200, Reimbursement of OPAs and histocompatibility 
laboratories;
    (iii) Section 413.9, Cost related to patient care (except for the 
principles stated in paragraph (b)(3) of this section); and
    (iv) Sections 413.64, Payments to providers, and Secs. 413.13, 
413.30, 413.35, 413.40, 413.74, and Secs. 415.55 through 415.70, 
Sec. 415.162, and Sec. 415.164 of this chapter, Principles of 
reimbursement for services by hospital-based physicians.



Sec. 413.200  Payment of independent organ procurement organizations and histocompatibility laboratories.

    (a) Principle. Covered services furnished after September 30, 1978 
by organ procurement organizations (OPOs) and histocompatibility 
laboratories in connection with kidney acquisition and transplantation 
will be reimbursed under the principles for determining reasonable cost 
contained in this part. Services furnished by freestanding OPOs and 
histocompatibility laboratories, that have an agreement with the 
Secretary in accordance with paragraph (c) of this section, will be 
reimbursed by making an interim payment to the transplant hospitals 
using these services and by making a retroactive adjustment, directly 
with the OPO or laboratory, based upon a cost report filed by the OPO or 
laboratory. (The reasonable costs of services furnished by hospital 
based OPOs or laboratories will be reimbursed in accordance with the 
principles contained in Secs. 413.60 and 413.64.)
    (b) Definitions. For purposes of this section:
    Freestanding refers to an OPO or a histocompatibility laboratory 
that is not--
    (1) Subject to the control of the hospital with respect to the 
hiring, firing, training, and paying of employees; and
    (2) Considered as a department of the hospital for insurance 
purposes (including malpractice insurance, general liability insurance, 
worker's compensation insurance, and employee retirement insurance).
    Histocompatibility laboratory means a laboratory meeting the 
standards and providing the services for kidneys or other organs set 
forth in Sec. 413.2171(d) of this chapter.
    OPO means an organization defined in Sec. 486.302 of this chapter.
    (c) Agreements with independent OPOs and laboratories. (1) Any 
freestanding OPO or histocompatibility laboratory that wishes to have 
the cost of its

[[Page 613]]

pretransplant services reimbursed under the Medicare program must file 
an agreement with CMS under which the OPO or laboratory agrees--
    (i) To file a cost report in accordance with Sec. 413.24(f) within 
three months after the end of each fiscal year;
    (ii) To permit CMS to designate an intermediary to determine the 
interim reimbursement rate payable to the transplant hospitals for 
services provided by the OPO or laboratory and to make a determination 
of reasonable cost based upon the cost report filed by the OPO or 
laboratory;
    (iii) To provide such budget or cost projection information as may 
be required to establish an initial interim reimbursement rate;
    (iv) To pay to CMS amounts that have been paid by CMS to transplant 
hospitals and that are determined to be in excess of the reasonable cost 
of the services provided by the OPO or laboratory; and
    (v) Not to charge any individual for items or services for which 
that individual is entitled to have payment made under section 1861 of 
the Act.
    (2) The initial cost report due from an OPO or laboratory is for its 
first fiscal year during any portion of which it had an agreement with 
the Secretary under paragraphs (c) (1) and (2) of this section. The 
initial cost report covers only the period covered by the agreement.
    (d) Interim reimbursement. (1) Hospitals eligible to receive 
Medicare reimbursement for renal transplantation will be paid for the 
pretransplantation services of a freestanding OPO or histocompatibility 
laboratory that has an agreement with the Secretary under paragraph (c) 
of this section, on the basis of an interim rate established by an 
intermediary for that OPO or laboratory.
    (2) The interim rate will be based on the average cost per service 
incurred by an OPO or laboratory, during its previous fiscal year, 
associated with procuring a kidney for transplantation. This interim 
rate may be adjusted if necessary for anticipated cost changes. If there 
is not adequate cost data to determine the initial interim rate, it will 
be determined according to the OPO's or laboratory's estimate of its 
projected costs for the fiscal year.
    (3) Payments made on the basis of the interim rate will be 
reconciled directly with the OPO or laboratory after the close of its 
fiscal year, in accordance with paragraph (e) of this section.
    (4) Information on the interim rate for all freestanding OPOs and 
histocompatibility laboratories shall be disseminated to all transplant 
hospitals and intermediaries.
    (e) Retroactive adjustment. (1) Cost reports. Information provided 
in cost reports by freestanding OPOs and histocompatibility laboratories 
must meet the requirements for cost data and cost finding specified in 
paragraphs (a) through (e) of Sec. 413.24. These cost reports must 
provide a complete accounting of the cost incurred by the agency or 
laboratory in providing covered services, the total number of Medicare 
beneficiaries who received those services, and any other data necessary 
to enable the intermediary to make a determination of the reasonable 
cost of covered services provided to Medicare beneficiaries.
    (2) Audit and adjustment. A cost report submitted by a freestanding 
OPO or histocompatibility laboratory will be reviewed by the 
intermediary and a new interim reimbursement rate for the succeeding 
fiscal year will be established based upon this review. A retroactive 
adjustment in the amount paid under the interim rate will be made in 
accordance with Sec. 413.64(f). If the determination of reasonable cost 
reveals an overpayment or underpayment resulting from the interim 
reimbursement rate paid to transplant hospitals, a lump sum adjustment 
will be made directly between that intermediary and the OPO or 
laboratory.
    (f) For services furnished on or after April 1, 1988, no payment may 
be made for services furnished by an OPO that does not meet the 
requirements of part 485, subpart D of this chapter.
    (g) Appeals. Any OPO or histocompatibility laboratory that disagrees 
with an intermediary's cost determination under this section is entitled 
to an intermediary hearing, in accordance with the procedures contained 
in Secs. 405.1811 through 405.1833, if

[[Page 614]]

the amount in controversy is $1,000 or more.



Sec. 413.202  Organ procurement organization (OPO) cost for kidneys sent to foreign countries or transplanted in patients other than Medicare beneficiaries.

    An OPO's total costs for all kidneys is reduced by the costs 
associated with procuring kidneys sent to foreign transplant centers or 
transplanted in patients other than Medicare beneficiaries. OPOs, as 
defined in Sec. 435.302 of this chapter, must separate costs for 
procuring kidneys that are sent to foreign transplant centers and 
kidneys transplanted in patients other than Medicare beneficiaries from 
Medicare allowable costs prior to final settlement by the Medicare 
fiscal intermediaries. Medicare costs are based on the ratio of the 
number of usable kidneys transplanted into Medicare beneficiaries to the 
total number of usable kidneys applied to reasonable costs. Certain 
long-standing arrangements that existed before March 3, 1988 (for 
example, an OPO that procures kidneys at a military transplant hospital 
for transplant at that hospital), will be deemed to be Medicare kidneys 
for cost reporting statistical purposes. The OPO must submit a request 
to the fiscal intermediary for review and approval of these 
arrangements.



Sec. 413.203  Transplant center costs for organs sent to foreign countries or transplanted in patients other than Medicare beneficiaries.

    (a) A transplant center's total costs for all organs is reduced by 
the costs associated with procuring organs sent to foreign transplant 
centers or transplanted in patients other than Medicare beneficiaries. 
Organs are defined in Sec. 486.302 (only covered organs will be paid for 
on a reasonable cost basis).
    (b) Transplant center hospitals must separate costs for procuring 
organs that are sent to foreign transplant centers and organs 
transplanted in patients other than Medicare beneficiaries from Medicare 
allowable costs prior to final cost settlement by the Medicare fiscal 
intermediaries.
    (c) Medicare costs are based on the ratio of the number of usable 
organs transplanted into Medicare beneficiaries to the total number of 
usable organs applied to reasonable costs.



Subpart I--Prospectively Determined Payment Rates for Low-Volume Skilled 
 Nursing Facilities, for Cost Reporting Periods Beginning Prior to July 
                                 1, 1998

    Source: 60 FR 37594, July 21, 1995, unless otherwise noted.



Sec. 413.300  Basis and scope.

    (a) Basis. This subpart implements section 1888(d) of the Act, which 
provides for optional prospectively determined payment rates for 
qualified SNFs.
    (b) Scope. This subpart sets forth the eligibility criteria an SNF 
must meet to qualify, the process governing election of prospectively 
determined payment rates, and the basis and methodology for determining 
prospectively determined payment rates.



Sec. 413.302  Definitions.

    For purposes of this subpart--
    Area wage level means the average wage per hour for all 
classifications of employees as reported by health care facilities 
within a specified area.
    Census region means one of the 9 census divisions, comprising the 50 
States and the District of Columbia, established by the Bureau of the 
Census for statistical and reporting purposes.
    Routine capital-related costs means the capital-related costs, 
allowable for Medicare purposes (as described in Subpart G of this 
Part), that are allocated to the SNF participating inpatient routine 
service cost center as reported on the Medicare cost report.
    Routine operating costs means the cost of regular room, dietary, and 
nursing services, and minor medical and surgical supplies for which a 
separate charge is not customarily made. It does not include the costs 
of ancillary services, capital-related costs, or, where appropriate, 
return on equity.
    Rural area means any area outside an urban area in a census region.
    Urban area means a Metropolitan Statistical Area (MSA) or New 
England County Metropolitan Area (NECMA),

[[Page 615]]

as defined by the Office of Management and Budget, or a New England 
county deemed to be an urban area, as listed in Sec. 412.62(f)(1)(ii)(B) 
of this chapter.



Sec. 413.304  Eligibility for prospectively determined payment rates.

    (a) General rule. An SNF is eligible to receive a prospectively 
determined payment rate for a cost reporting period if it had fewer than 
1,500 Medicare covered inpatient days as reported on a Medicare cost 
report in its immediately preceding cost reporting period. This 
criterion applies even if the SNF received a prospectively determined 
payment rate during the preceding cost reporting period.
    (b) Less than a full cost reporting period. If the cost reporting 
period that precedes an SNF's request for prospectively determined 
payment is not a full cost reporting period, the SNF is eligible to 
receive prospectively determined payment rates only if the average daily 
Medicare census for the period (Medicare inpatient days divided by the 
total number of days in the cost reporting period) is not greater than 
4.1.
    (c) Newly-participating SNFs. An SNF is eligible to receive 
prospectively determined payment rates for its first cost reporting 
period for which it is approved to participate in Medicare.



Sec. 413.308  Rules governing election of prospectively determined payment rates.

    (a) Requirements. An SNF must notify its intermediary at least 30 
calendar days before the beginning of the cost reporting period for 
which it requests to receive such payment that it elects prospectively 
determined payment rates. A separate request must be made for each cost 
reporting period for which an SNF seeks prospectively determined 
payment. A newly participating SNF with no preceding cost reporting 
period must make its election within 30 days of its notification of 
approval to participate in Medicare.
    (b) Intermediary notice. After evaluating an SNF's request for 
prospectively determined payment rates, the intermediary notifies the 
SNF in writing as to whether the SNF meets any of the eligibility 
criteria described in Sec. 413.304 and the timely election requirements 
under Sec. 413.308(a). The intermediary must notify the SNF of its 
initial and final determinations within 10 working days after it 
receives all the data necessary to make each determination. The 
intermediary's determination is limited to one cost reporting period.
    (c) Prohibition against revocation. An SNF may not revoke its 
request after it has received the initial determination of eligibility 
from the intermediary and the cost reporting period has begun.
    (d) Revocation by intermediary. If an SNF is given tentative 
approval to receive a prospectively determined payment rate, and, after 
the start of the applicable cost reporting period, the intermediary 
determines that the SNF does not meet the eligibility criteria, the 
intermediary must revoke the prospectively determined payment option.



Sec. 413.310  Basis of payment.

    (a) Method of payment. Under the prospectively determined payment 
rate system, a qualified SNF receives a per diem payment of a 
predetermined rate for inpatient services furnished to Medicare 
beneficiaries. Each SNF's routine per diem payment rate is determined 
according to the methodology described in Sec. 413.312 and is based on 
various components of SNF costs.
    (b) Payment in full. The payment rate represents payment in full for 
routine services as described in Sec. 413.314 (subject to applicable 
coinsurance as described in Subpart G of Part 409 of this title), and 
for routine capital costs. Payment is made in lieu of payment on a 
reasonable cost basis for routine services and for routine capital 
costs.



Sec. 413.312  Methodology for calculating rates.

    (a) Data used. (1) To calculate the prospectively determined payment 
rates, CMS uses:
    (i) The SNF cost data that were used to develop the applicable 
routine service cost limits;
    (ii) A wage index to adjust for area wage differences; and
    (iii) The most recent projections of increases in the costs from the 
SNF market basket index.

[[Page 616]]

    (2) In the annual schedule of rates published in the Federal 
Register under the authority of Sec. 413.320, CMS announces the wage 
index and the annual percentage increases in the market basket used in 
the calculation of the rates.
    (b) Calculation of per diem rate. (1) Routine operating component of 
rate--(i) Adjusting cost report data. The SNF market basket index is 
used to adjust the routine operating cost from the SNF cost report to 
reflect cost increases occurring between cost reporting periods 
represented in the data collected and the midpoint of the initial cost 
reporting period to which the payment rates apply.
    (ii) Calculating a per diem cost. For each SNF, an adjusted routine 
operating per diem cost is computed by dividing the adjusted routine 
operating cost (see paragraph (b)(1)(i) of this section) by the SNF's 
total patient days.
    (iii) Adjusting for wage levels. (A) The SNF's adjusted per diem 
routine operating cost calculated under paragraph (b)(1)(ii) of this 
section is then divided into labor-related and nonlabor-related 
portions.
    (B) The labor-related portion is obtained by multiplying the SNF's 
adjusted per diem routine operating cost by a percentage that represents 
the labor-related portion of cost from the market basket. This 
percentage is published when the revised rates are published as 
described in Sec. 413.320.
    (C) The labor-related portion of each SNF's per diem cost is divided 
by the wage index applicable to the SNF's geographic location to arrive 
at the adjusted labor-related portion of routine cost.
    (iv) Group means. SNFs are grouped by urban or rural location by 
census region. Separate means of adjusted labor-related and nonlabor 
routine operating costs for each SNF group are established in accordance 
with the SNF's region and urban or rural location. For each group, the 
mean labor-related and mean nonlabor-related per diem routine operating 
costs are multiplied by 105 percent.
    (2) Computation of routine capital-related cost.
    (i) The SNF routine capital-related cost for both direct and 
indirect capital costs allocated to routine services, as reported on the 
Medicare cost report, is obtained for each SNF in the data base.
    (ii) For each SNF, the per diem capital-related cost is calculated 
by dividing the SNF's routine capital costs by its inpatient days.
    (iii) SNFs are grouped by urban and rural location by census region, 
and mean per diem routine capital-related cost is determined for each 
group.
    (iv) Each group mean per diem capital-related cost is multiplied by 
105 percent.
    (3) Computation of return on owner's equity for services furnished 
before October 1, 1993. (i) Each proprietary SNF's Medicare return on 
equity is obtained from its cost report and the portion attributable to 
the routine service cost is determined as described in Sec. 413.157.
    (ii) For each proprietary SNF, per diem return on equity is 
calculated by dividing the routine cost related return on equity 
determined under paragraph (b)(3)(i) of this section by the SNF's total 
Medicare inpatient days.
    (iii) Separate group means are computed for per diem return on 
equity of proprietary SNFs, based on regional and urban or rural 
classification.
    (iv) Each group mean is multiplied by 105 percent.



Sec. 413.314  Determining payment amounts: Routine per diem rate.

    (a) General rule. An SNF that elects to be paid under the 
prospectively determined payment rate system, and qualifies for such 
payment, is paid a per diem rate for inpatient routine services. This 
rate is adjusted to reflect area wage differences and the cost reporting 
period beginning date (if necessary) and is subject to the limitation 
specified in paragraph (d) of this section.
    (b) Per diem rate. The prospectively determined payment rate for 
each urban and rural area in each census region is comprised of the 
following:
    (1) A routine operating component, which is divided into:
    (i) A labor-related portion adjusted by the appropriate wage index; 
and
    (ii) A nonlabor-related portion.
    (2) A routine capital-related cost portion.

[[Page 617]]

    (3) For proprietary SNFs only, a portion that is based on the return 
on owner's equity related to routine cost, applicable only for services 
furnished before October 1, 1993.
    (c) Adjustment for cost reporting period. (1) If a facility has a 
cost reporting period beginning after the beginning of the Federal 
fiscal year, the intermediary increases the labor-related and nonlabor-
related portions of the prospective payment rate that would otherwise 
apply to the SNF by an adjustment factor. Each factor represents the 
projected increase in the market basket index for a specific 12-month 
period. The factors are used to account for inflation in costs for cost 
reporting periods beginning after October 1. Adjustment factors are 
published in the annual notice of prospectively determined payment rates 
described in Sec. 413.320.
    (2) If a facility uses a cost reporting period that is not 12 months 
in duration, the intermediary must obtain a special adjustment factor 
from CMS for the specific period.
    (d) Limitation of prospectively determined payment rate. The per 
diem prospectively determined payment rate for an SNF, excluding 
capital-related costs and excluding return on equity for services 
furnished prior to October 1, 1993, may not exceed the individual SNF's 
routine service cost limit. Under Sec. 413.30, the routine service cost 
limit is the limit determined without regard to exemptions, exceptions, 
or retroactive adjustments, and is the actual limit in effect when the 
provider elects to be paid a prospectively determined payment rate.



Sec. 413.316  Determining payment amounts: Ancillary services.

    Ancillary services are paid on the basis of reasonable cost in 
accordance with section 1861(v)(1) of the Act and Sec. 413.53.



Sec. 413.320  Publication of prospectively determined payment rates or amounts.

    At least 90 days before the beginning of a Federal fiscal year to 
which revised prospectively determined payment rates are to be applied, 
CMS publishes a notice in the Federal Register:
    (a) Establishing the prospectively determined payment rates for 
routine services; and
    (b) Explaining the basis on which the prospectively determined 
payment rates are calculated.



Sec. 413.321  Simplified cost report for SNFs.

    SNFs electing to be paid under the prospectively determined payment 
rate system may file a simplified cost report. The cost report contains 
a simplified method of cost finding to be used in lieu of cost methods 
described in Sec. 413.24(d). This method is specified in the 
instructions for Form CMS-2540S, contained in sections 3000-3027.3 of 
Part 2 of the Provider Reimbursement Manual. This form may not be used 
by hospital-based SNFs or SNFs that are part of a health care complex. 
Those SNFs must file a cost report that reflects the shared services and 
administrative costs of the hospital and any other related facilities in 
the health care complex.



      Subpart J--Prospective Payment for Skilled Nursing Facilities

    Source: 63 FR 26309, May 12, 1998, unless otherwise noted.



Sec. 413.330  Basis and scope.

    (a) Basis. This subpart implements section 1888(e) of the Act, which 
provides for the implementation of a prospective payment system for SNFs 
for cost reporting periods beginning on or after July 1, 1998.
    (b) Scope. This subpart sets forth the framework for the prospective 
payment system for SNFs, including the methodology used for the 
development of payment rates and associated adjustments, the application 
of a transition phase, and related rules.



Sec. 413.333  Definitions.

    As used in this subpart--
    Case-mix index means a scale that measures the relative difference 
in resource intensity among different groups in the resident 
classification system.

[[Page 618]]

    Market basket index means an index that reflects changes over time 
in the prices of an appropriate mix of goods and services included in 
covered skilled nursing services.
    Resident classification system means a system for classifying SNF 
residents into mutually exclusive groups based on clinical, functional, 
and resource-based criteria. For purposes of this subpart, this term 
refers to the current version of the Resource Utilization Groups, as set 
forth in the annual publication of Federal prospective payment rates 
described in Sec. 413.345.
    Rural area means any area outside of an urban area.
    Urban area means a metropolitan statistical area (MSA) or New 
England County Metropolitan Area (NECMA), as defined by the Office of 
Management and Budget, or a New England county deemed to be an urban 
area, as listed in Sec. 412.62(f)(1)(ii)(B) of this chapter.

[63 FR 26309, May 12, 1998; 63 FR 53307, Oct. 5, 1998]



Sec. 413.335  Basis of payment.

    (a) Method of payment. Under the prospective payment system, SNFs 
receive a per diem payment of a predetermined rate for inpatient 
services furnished to Medicare beneficiaries. The per diem payments are 
made on the basis of the Federal payment rate described in Sec. 413.337 
and, during a transition period, on the basis of a blend of the Federal 
rate and the facility-specific rate described in Sec. 413.340. These per 
diem payment rates are determined according to the methodology described 
in Sec. 413.337 and Sec. 413.340.
    (b) Payment in full. The payment rates represent payment in full 
(subject to applicable coinsurance as described in subpart G of part 409 
of this chapter) for all costs (routine, ancillary, and capital-related) 
associated with furnishing inpatient SNF services to Medicare 
beneficiaries other than costs associated with operating approved 
educational activities as described in Sec. 413.85.



Sec. 413.337  Methodology for calculating the prospective payment rates.

    (a) Data used. (1) To calculate the prospective payment rates, CMS 
uses--
    (i) Medicare data on allowable costs from freestanding and hospital-
based SNFs for cost reporting periods beginning in fiscal year 1995. 
SNFs that received ``new provider'' exemptions under Sec. 413.30(e)(2) 
are excluded from the data base used to compute the Federal payment 
rates. In addition, allowable costs related to exceptions payments under 
Sec. 413.30(f) are excluded from the data base used to compute the 
Federal payment rates;
    (ii) An appropriate wage index to adjust for area wage differences;
    (iii) The most recent projections of increases in the costs from the 
SNF market basket index;
    (iv) Resident assessment and other data that account for the 
relative resource utilization of different resident types; and
    (v) Medicare Part B SNF claims data reflecting amounts payable under 
Part B for covered SNF services (other than those services described in 
Sec. 411.15(p)(2) of this chapter) furnished during SNF cost reporting 
periods beginning in fiscal year 1995 to individuals who were residents 
of SNFs and receiving Part A covered services.
    (b) Methodology for calculating the per diem Federal payment rates--
(1) Determining SNF costs. In calculating the initial unadjusted Federal 
rates applicable for services provided during the period beginning July 
1, 1998 through September 30, 1999, CMS determines each SNF's costs by 
summing its allowable costs for the cost reporting period beginning in 
fiscal year 1995 and its estimate of Part B payments (described in 
paragraphs (a)(1)(i) and (a)(1)(v) of this section).
    (2) Use of market basket index. The SNF market basket index is used 
to adjust the SNF cost data to reflect cost increases occurring between 
cost reporting periods represented in the data and the initial period 
(beginning July 1, 1998 and ending September 30, 1999) to which the 
payment rates apply. For each year, the cost data are updated by a 
factor equivalent to the annual market basket index percentage minus 1 
percentage point.
    (3) Calculation of the per diem cost. For each SNF, the per diem 
cost is computed by dividing the cost data for

[[Page 619]]

each SNF by the corresponding number of Medicare days.
    (4) Standardization of data for variation in area wage levels and 
case-mix. The cost data described in paragraph (b)(2) of this section 
are standardized to remove the effects of geographic variation in wage 
levels and facility variation in case-mix. The cost data are 
standardized for geographic variation in wage levels using the wage 
index. The cost data are standardized for facility variation in case-mix 
using the case-mix indices and other data that indicate facility case-
mix.
    (5) Calculation of unadjusted Federal payment rates. CMS calculates 
the national per diem unadjusted payment rates by urban and rural 
classification in the following manner:
    (i) By computing the average per diem standardized cost of 
freestanding SNFs weighted by Medicare days.
    (ii) By computing the average per diem standardized cost of 
freestanding and hospital-based SNFs combined weighted by Medicare days.
    (iii) By computing the average of the amounts determined under 
paragraphs (b)(5)(i) and (b)(5)(ii) of this section.
    (c) Calculation of adjusted Federal payment rates for case-mix and 
area wage levels. The Federal rate is adjusted to account for facility 
case-mix using a resident classification system and associated case-mix 
indices that account for the relative resource utilization of different 
patient types. This classification system utilizes the resident 
assessment instrument completed by SNFs as described at Sec. 483.20 of 
this chapter, according to the assessment schedule described in 
Sec. 413.343(b). The Federal rate is also adjusted to account for 
geographic differences in area wage levels using an appropriate wage 
index.
    (d) Annual updates of Federal unadjusted payment rates. CMS updates 
the unadjusted Federal payment rates on a fiscal year basis.
    (1) For fiscal years 2000 through 2002, the unadjusted Federal rate 
is equal to the rate for the previous period or fiscal year increased by 
a factor equal to the SNF market basket index percentage minus 1 
percentage point.
    (2) For subsequent fiscal years, the unadjusted Federal rate is 
equal to the rate for the previous fiscal year increased by the 
applicable SNF market basket index amount.
    (e) Pursuant to section 101 of the Medicare, Medicaid, and SCHIP 
Balanced Budget Refinement Act of 1999 (BBRA) as revised by section 314 
of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (BIPA), using the best available data, the Secretary will 
issue a new regulation with a newly refined case-mix classification 
system to better account for medically complex patients. Upon issuance 
of the new regulation, the temporary increases in payment for certain 
high cost patients will no longer be applicable.

[63 FR 26309, May 12, 1998, as amended at 66 FR 39600, July 31, 2001]



Sec. 413.340  Transition period.

    (a) Duration of transition period and proportions for the blended 
transition rate. Beginning with an SNF's first cost reporting period 
beginning on or after July 1, 1998, there is a transition period 
covering three cost reporting periods. During this transition phase, 
SNFs receive a payment rate comprising a blend of the adjusted Federal 
rate and a facility-specific rate. For the first cost reporting period 
beginning on or after July 1, 1998, payment is based on 75 percent of 
the facility-specific rate and 25 percent of the Federal rate. For the 
subsequent cost reporting period, the rate is comprised of 50 percent of 
the facility-specific rate and 50 percent of the Federal rate. In the 
final cost reporting period of the transition, the rate is comprised of 
25 percent of the facility-specific rate and 75 percent of the Federal 
rate. For all subsequent cost reporting periods, payment is based 
entirely on the Federal rate.
    (b) Calculation of facility-specific rate for the first cost 
reporting period. The facility-specific rate is computed based on the 
SNF's Medicare allowable costs from its fiscal year 1995 cost report 
plus an estimate of the amounts payable under Part B for covered SNF 
services (other than those services described in Sec. 411.15(p)(2) of 
this chapter) furnished during fiscal year 1995 to individuals who were 
residents of SNFs and receiving Part A covered services.

[[Page 620]]

Allowable costs associated with exceptions, as described in 
Sec. 413.30(f), are included in the calculation of the facility-specific 
rate. Allowable costs associated with exemptions, as described in 
Sec. 413.30(e)(2), are included in the calculation of the facility-
specific rate but only to the extent that they do not exceed 150 percent 
of the routine cost limit. Low Medicare volume SNFs that were paid a 
prospectively determined rate under Sec. 413.300 for their cost 
reporting period beginning in fiscal year 1995 will utilize that rate as 
the basis for the allowable costs of routine (operating and capital-
related) expenses in determining the facility-specific rate. Each SNF's 
allowable costs are updated to the first cost reporting period to which 
the payment rates apply using annual factors equal to the SNF market 
basket percentage minus 1 percentage point.
    (c) SNFs participating in the Multistate Nursing Home Case-Mix and 
Quality Demonstration. SNFs that participated in the Multistate Nursing 
Home Case-Mix and Quality Demonstration in a cost reporting period that 
began in calendar year 1997 will utilize their allowable costs from that 
cost reporting period, including prospective payment amounts determined 
under the demonstration payment methodology.
    (d) Update of facility-specific rates for subsequent cost reporting 
periods. The facility-specific rate for a cost reporting period that is 
subsequent to the first cost reporting period is equal to the facility-
specific rate for the first cost reporting period (described in 
paragraph (a) of this section) updated by the market basket index.
    (1) For a subsequent cost reporting period beginning in fiscal years 
1998 and 1999, the facility-specific rate is equal to the facility-
specific rate for the previous cost reporting period updated by the 
applicable market basket index percentage minus one percentage point.
    (2) For a subsequent cost reporting period beginning in fiscal year 
2000, the facility-specific rate is equal to the facility-specific rate 
for the previous cost reporting period updated by the applicable market 
basket index percentage.
    (e) SNFs excluded from the transition period. SNFs that received 
their first payment from Medicare, under present or previous ownership, 
on or after October 1, 1995, are excluded from the transition period, 
and payment is made according to the Federal rates only.



Sec. 413.343  Resident assessment data.

    (a) Submission of resident assessment data. SNFs are required to 
submit the resident assessment data described at Sec. 483.20 of this 
chapter in the manner necessary to administer the payment rate 
methodology described in Sec. 413.337. This provision includes the 
frequency, scope, and number of assessments required.
    (b) Assessment schedule. In accordance with the methodology 
described in Sec. 413.337(c) related to the adjustment of the Federal 
rates for case-mix, SNFs must submit assessments according to an 
assessment schedule. This schedule must include performance of patient 
assessments on the 5th, 14th, 30th, 60th, and 90th days of posthospital 
SNF care and such other assessments that are necessary to account for 
changes in patient care needs.
    (c) Noncompliance with assessment schedule. CMS pays a default rate 
for the Federal rate when a SNF fails to comply with the assessment 
schedule in paragraph (b) of this section. The default rate is paid for 
the days of a patient's care for which the SNF is not in compliance with 
the assessment schedule.

[63 FR 26309, May 12, 1998, as amended at 64 FR 41682, July 30, 1999]



Sec. 413.345  Publication of Federal prospective payment rates.

    CMS publishes information pertaining to each update of the Federal 
payment rates in the Federal Register. This information includes the 
tandardized Federal rates, the resident classification system that 
provides the basis for case-mix adjustment (including the designation of 
those specific Resource Utilization Groups under the resident 
classification system that represent the required SNF level of care, as 
provided in Sec. 409.30 of this chapter), and the wage index. This 
information is published before May 1 for the fiscal

[[Page 621]]

year 1998 and before August 1 for the fiscal years 1999 and after.



Sec. 413.348  Limitation on review.

    Judicial or administrative review under sections 1869 or 1878 of the 
Act or otherwise is prohibited with regard to the establishment of the 
Federal rates. This prohibition includes the methodology used in the 
computation of the Federal standardized payment rates, the case-mix 
methodology, and the development and application of the wage index. This 
prohibition on judicial and administrative review also extends to the 
methodology used to establish the facility-specific rates but not to 
determinations related to reasonable cost in the fiscal year 1995 cost 
reporting period used as the basis for these rates.



Sec. 413.350  Periodic interim payments for skilled nursing facilities receiving payment under the skilled nursing facility prospective payment system for Part 
          A services.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, SNFs receiving payment under the PPS for Part A 
services do not receive interim payments during the cost reporting year, 
and receive payment only following submission of a bill. Paragraph (d) 
of this section provides for accelerated payments in certain 
circumstances.
    (b) Periodic interim payments. (1) An SNF receiving payment under 
the prospective payment system may receive periodic interim payments 
(PIP) for Part A SNF services under the PIP method subject to the 
provisions of Sec. 413.64(h). To be approved for PIP, the SNF must meet 
the qualifying requirements in Sec. 413.64(h)(3). Moreover, as provided 
in Sec. 413.64(h)(5), intermediary approval is conditioned upon the 
intermediary's best judgment as to whether payment can be made under the 
PIP method without undue risk of its resulting in an overpayment to the 
provider.
    (2) Frequency of payment. The intermediary estimates an SNF's 
prospective payments net of estimated beneficiary coinsurance and makes 
biweekly payments equal to \1/26\ of the total estimated amount of 
payment for the year. If an SNF has payment experience under the 
prospective payment system, the intermediary estimates PIP based on that 
payment experience, adjusted for projected changes supported by 
substantiated information for the current year. Each payment is made 2 
weeks after the end of a biweekly period of service as described in 
Sec. 413.64(h)(6). The interim payments are reviewed at least twice 
during the reporting period and adjusted if necessary. Fewer reviews may 
be necessary if an SNF receives interim payments for less than a full 
reporting period. These payments are subject to final settlement.
    (3) Termination of PIP--(i) Request by the SNF. An SNF receiving PIP 
may convert to receiving prospective payments on a non-PIP basis at any 
time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the SNF no longer meets the requirements of Sec. 413.64(h).
    (c) Interim payments for Medicare bad debts and for Part A costs not 
paid under the prospective payment system. For Medicare bad debts and 
for costs of an approved education program and other costs paid outside 
the prospective payment system, the intermediary determines the interim 
payments by estimating the reimbursable amount for the year based on the 
previous year's experience, adjusted for projected changes supported by 
substantiated information for the current year, and makes biweekly 
payments equal to \1/26\ of the total estimated amount. Each payment is 
made 2 weeks after the end of a biweekly period of service as described 
in Sec. 413.64(h)(6). The interim payments are reviewed at least twice 
during the reporting period and adjusted if necessary. Fewer reviews may 
be necessary if an SNF receives interim payments for less than a full 
reporting period. These payments are subject to final cost settlement.
    (d) Accelerated payments--(1) General rule. Upon request, an 
accelerated payment may be made to an SNF that is receiving payment 
under the prospective payment system and is not receiving PIP under 
paragraph (b) of this section if the SNF is experiencing financial 
difficulties because of the following:

[[Page 622]]

    (i) There is a delay by the intermediary in making payment to the 
SNF.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the SNF's preparation and submittal of bills to the intermediary beyond 
its normal billing cycle.
    (2) Approval of payment. An SNF's request for an accelerated payment 
must be approved by the intermediary and CMS.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is made 
by recoupment as SNF bills are processed or by direct payment by the 
SNF.

[64 FR 41682, July 30, 1999]



PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES--Table of Contents




                      Subpart A--General Provisions

Sec.
414.1  Basis and scope.
414.2  Definitions.
414.4  Fee schedule areas.

              Subpart B--Physicians and Other Practitioners

414.20  Formula for computing fee schedule amounts.
414.21  Medicare payment basis.
414.22  Relative value units (RVUs).
414.24  Review, revision, and addition of RVUs for physician services.
414.26  Determining the GAF.
414.28  Conversion factors.
414.30  Conversion factor update.
414.32  Determining payments for certain physicians' services furnished 
          in facility settings.
414.34  Payment for services and supplies incident to a physician's 
          service.
414.36  Payment for drugs incident to a physician's service.
414.38  Special rules for payment of low osmolar contrast media.
414.39  Special rules for payment of care plan oversight.
414.40  Coding and ancillary policies.
414.42  Adjustment for first 4 years of practice.
414.44  Transition rules.
414.46  Additional rules for payment of anesthesia services.
414.48  Limits on actual charges of nonparticipating suppliers.
414.50  Physician billing for purchased diagnostic tests.
414.52  Payment for physician assistants' services.
414.54  Payment for certified nurse-midwives' services.
414.56  Payment for nurse practitioners' and clinical nurse specialists' 
          services.
414.58  Payment of charges for physician services to patients in 
          providers.
414.60  Payment for the services of CRNAs.
414.62  Fee schedule for clinical psychologist services.
414.63  Payment for outpatient diabetes self-management training.
414.64   Payment for medical nutrition therapy.
414.65   Payment for office or other outpatient visits, consultation, 
          individual psychotherapy, and pharmacologic management via 
          interactive telecommunications systems.

  Subpart C--Fee Schedules for Parenteral and Enteral Nutrition (PEN) 
                    Nutrients, Equipment and Supplies

414.100  Purpose.
414.102  General payment rules.
414.104  PEN Items and Services.

  Subpart D--Payment for Durable Medical Equipment and Prosthetic and 
                            Orthotic Devices

414.200  Purpose.
414.202  Definitions.
414.210  General payment rules.
414.220  Inexpensive or routinely purchased items.
414.222  Items requiring frequent and substantial servicing.
414.224  Customized items.
414.226  Oxygen and oxygen equipment.
414.228  Prosthetic and orthotic devices.
414.229  Other durable medical equipment--capped rental items.
414.230  Determining a period of continuous use.
414.232  Special payment rules for transcutaneous electrical nerve 
          stimulators (TENS).

  Subpart E--Determination of Reasonable Charges Under the ESRD Program

414.300  Scope of subpart.
414.310  Determination of reasonable charges for physician services 
          furnished to renal dialysis patients.
414.313  Initial method of payment.
414.314  Monthly capitation payment method.

[[Page 623]]

414.316  Payment for physician services to patients in training for 
          self-dialysis and home dialysis.
414.320  Determination of reasonable charges for physician renal 
          transplantation services.
414.330  Payment for home dialysis equipment, supplies, and support 
          services.
414.335  Payment for EPO furnished to a home dialysis patient for use in 
          the home.

Subparts F-G [Reserved]

             Subpart H--Fee Schedule for Ambulance Services

414.601  Purpose.
414.605  Definitions.
414.610  Basis of payment.
414.615  Transition to the ambulance fee schedule.
414.620  Publication of the ambulance fee schedule.
414.625  Limitation on review.

    Authority: Secs. 1102, 1871, and 1881(b)(l) of the Social Security 
Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(l)).

    Source: 55 FR 23441, June 8, 1990, unless otherwise noted.

    Editorial Note: Nomenclature changes affecting this part appear at 
60 FR 50442, Sept. 29, 1995, and 60 FR 53877, Oct. 18, 1995.



                      Subpart A--General Provisions



Sec. 414.1  Basis and scope.

    This part implements the following provisions of the Act:

    1802--Rules for private contracts by Medicare beneficiaries.
    1833--Rules for payment for most Part B services.
    1834(a) and (h)--Amounts and frequency of payments for durable 
medical equipment and for prosthetic devices and orthotics and 
prosthetics.
    1834(l)--Establishment of a fee schedule for ambulance services.
    1834(m)--Rules for Medicare reimbursement for telehealth services.
    1848--Fee schedule for physician services.
    1881(b)--Rules for payment for services to ESRD beneficiaries.
    1887--Payment of charges for physician services to patients in 
providers.

[67 FR 9132, Feb. 27, 2002]



Sec. 414.2  Definitions.

    As used in this part, unless the context indicates otherwise--
    AA stands for anesthesiologist assistant.
    AHPB stands for adjusted historical payment basis.
    CF stands for conversion factor.
    CRNA stands for certified registered nurse anesthetist.
    CY stands for calendar year.
    FY stands for fiscal year.
    GAF stands for geographic adjustment factor.
    GPCI stands for geographic practice cost index.
    HCPCS stands for CMS Common Procedure Coding System.
    Physician services means the following services to the extent that 
they are covered by Medicare:
    (1) Professional services of doctors of medicine and osteopathy 
(including osteopathic practitioners), doctors of optometry, doctors of 
podiatry, doctors of dental surgery and dental medicine, and 
chiropractors.
    (2) Supplies and services covered ``incident to'' physician services 
(excluding drugs as specified in Sec. 414.36).
    (3) Outpatient physical and occupational therapy services if 
furnished by a person or an entity that is not a Medicare provider of 
services as defined in Sec. 400.202 of this chapter.
    (4) Diagnostic x-ray tests and other diagnostic tests (excluding 
diagnostic laboratory tests paid under the fee schedule established 
under section 1833(h) of the Act).
    (5) X-ray, radium, and radioactive isotope therapy, including 
materials and services of technicians.
    (6) Antigens, as described in section 1861(s)(2)(G) of the Act.
    (7) Bone mass measurement.
    RVU stands for relative value unit.
    (8) Screening mammography services.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, Sept. 15, 1992; 
58 FR 63686, Dec. 2, 1993; 59 FR 63463, Dec. 8, 1994; 60 FR 63177, Dec. 
8, 1995; 63 FR 34328, June 24, 1998; 66 FR 55322, Nov. 1, 2001]



Sec. 414.4  Fee schedule areas.

    (a) General. CMS establishes physician fee schedule areas that 
generally conform to the geographic localities in existence before 
January 1, 1992.
    (b) Changes. CMS announces proposed changes to fee schedule areas in 
the

[[Page 624]]

Federal Register and provides an opportunity for public comment. After 
considering public comments, CMS publishes the final changes in the 
Federal Register.

[59 FR 63463, Dec. 8, 1994]



              Subpart B--Physicians and Other Practitioners

    Source: 56 FR 59624, Nov. 25, 1991; 57 FR 42492, Sept. 15, 1992, 
unless otherwise noted.



Sec. 414.20  Formula for computing fee schedule amounts.

    (a) Participating supplier. The fee schedule amount for a 
participating supplier for a physician service as defined in Sec. 414.2 
is computed as the product of the following amounts:
    (1) The RVUs for the service.
    (2) The GAF for the fee schedule area.
    (3) The CF.
    (b) Nonparticipating supplier. The fee schedule amount for a 
nonparticipating supplier for a physician service as defined in 
Sec. 414.2 is 95 percent of the fee schedule amount as calculated in 
paragraph (a) of this section.

[62 FR 59101, Oct. 31, 1997]



Sec. 414.21  Medicare payment basis.

    Medicare payment is based on the lesser of the actual charge or the 
applicable fee schedule amount.

[62 FR 59101, Oct. 31, 1997]



Sec. 414.22  Relative value units (RVUs).

    CMS establishes RVUs for physicians' work, practice expense, and 
malpractice insurance.
    (a) Physician work RVUs--(1) General rule. Physician work RVUs are 
established using a relative value scale in which the value of physician 
work for a particular service is rated relative to the value of work for 
other physician services.
    (2) Special RVUs for anesthesia and radiology services)--(i) 
Anesthesia services. The rules for determining RVUs for anesthesia 
services are set forth in Sec. 414.46.
    (ii) Radiology services. CMS bases the RVUs for all radiology 
services on the relative value scale developed under section 
1834(b)(1)(A) of the Act, with appropriate modifications to ensure that 
the RVUs established for radiology services that are similar or related 
to other physician services are consistent with the RVUs established for 
those similar or related services.
    (b) Practice expense RVUs. (1) Practice expense RVUs are computed 
for each service or class of service by applying average historical 
practice cost percentages to the estimated average allowed charge during 
the 1991 base period.
    (2) The average practice expense percentage for a service or class 
of services is computed as follows:
    (i) Multiply the average practice expense percentage for each 
specialty by the proportion of a particular service or class of service 
performed by that specialty.
    (ii) Add the products for all specialties.
    (3) For services furnished beginning calendar year (CY) 1994, for 
which 1994 practice expense RVUs exceed 1994 work RVUs and that are 
performed in office settings less than 75 percent of the time, the 1994, 
1995, and 1996 practice expense RVUs are reduced by 25 percent of the 
amount by which they exceed the number of 1994 work RVUs. Practice 
expense RVUs are not reduced to less than 128 percent of 1994 work RVUs.
    (4) For services furnished beginning January 1, 1998, practice 
expense RVUs for certain services are reduced to 110 percent of the work 
RVUs for those services. The following two categories of services are 
excluded from this limitation:
    (i) The service is provided more than 75 percent of the time in an 
office setting; or
    (ii) The service is one described in section 1848(c)(2)(G)(v) of the 
Act, codified at 42 U.S.C. 1395w-4(c)(2)(G). Section 1848(c)(2)(G)(v) of 
the Act refers to the 1998 proposed resource-based practice expense RVUs 
(as specified in the June 18, 1997 physician fee schedule proposed rule 
(62 FR 33158)) for the specific site, either in-office or out-of-office, 
increased from its 1997 practice expense RVUs.)
    (5) For services furnished beginning January 1, 1999, the practice 
expense RVUs are based on 75 percent of the

[[Page 625]]

practice expense RVUs applicable to services furnished in 1998 and 25 
percent of the relative practice expense resources involved in 
furnishing the service. For services furnished in 2000, the practice 
expense RVUs are based on 50 percent of the practice expense RVUs 
applicable to services furnished in 1998 and 50 percent of the relative 
practice expense resources involved in furnishing the service. For 
services furnished in 2001, the practice expense RVUs are based on 25 
percent of the practice expense RVUs applicable to services furnished in 
1998 and 75 percent of the relative practice expense resources involved 
in furnishing the service. For services furnished in 2002 and subsequent 
years, the practice expense RVUs are based entirely on relative practice 
expense resources.
    (i) Usually there are two levels of practice expense RVUs that 
correspond to each code.
    (A) Facility practice expense RVUs. The lower facility practice 
expense RVUs apply to services furnished to patients in the hospital, 
skilled nursing facility, community mental health center, or in an 
ambulatory surgical center when the physician performs procedures on the 
ASC approved procedures list. (The facility practice expense RVUs for a 
particular code may not be greater than the non-facility RVUs for the 
code.)
    (B) Non-facility practice expense RVUs. The higher non-facility 
practice expense RVUs apply to services performed in a physician's 
office, a patient's home, an ASC if the physician is performing a 
procedure not on the ASC approved procedures list, a nursing facility, 
or a facility or institution other than a hospital or skilled nursing 
facility, community mental health center, or ASC performing an ASC 
approved procedure.
    (C) Outpatient therapy services. Outpatient therapy services billed 
under the physician fee schedule are paid using the non-facility 
practice expense RVU component.
    (ii) Only one practice expense RVU per code can be applied for each 
of the following services: services that have only technical component 
practice expense RVUs or only professional component practice expense 
RVUs; evaluation and management services, such as hospital or nursing 
facility visits, that are furnished exclusively in one setting; and 
major surgical services.
    (6)(i) CMS establishes criteria for supplemental surveys regarding 
specialty practice expenses submitted to CMS that may be used in 
determining practice expense RVUs.
    (ii) Any CMS-designated specialty group may submit a supplemental 
survey.
    (iii) CMS will consider for use in determining practice expense RVUs 
for the physician fee schedule survey data and related materials 
submitted to CMS by August 1, 2002 to determine CY 2003 practice expense 
RVUs and by August 1, 2003 to determine CY 2004 practice expense RVUs.
    (c) Malpractice insurance RVUs. (1) Malpractice insurance RVUs are 
computed for each service or class of services by applying average 
malpractice insurance historical practice cost percentages to the 
estimated average allowed charge during the 1991 base period.
    (2) The average historical malpractice insurance percentage for a 
service or class of services is computed as follows:
    (i) Multiply the average malpractice insurance percentage for each 
specialty by the proportion of a particular service or class of services 
performed by that specialty.
    (ii) Add all the products for all the specialties.
    (3) For services furnished in the year 2000 and subsequent years, 
the malpractice RVUs are based on the relative malpractice insurance 
resources.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42493, Sept. 15, 1992; 
58 FR 63687, Dec. 2, 1993; 62 FR 59102, Oct. 31, 1997; 63 FR 58910, Nov. 
2, 1998; 64 FR 59441, Nov. 2, 1999; 65 FR 25668, May 3, 2000; 65 FR 
65440, Nov. 1, 2000; 67 43558, June 28, 2002]



Sec. 414.24  Review, revision, and addition of RVUs for physician services.

    (a) Interim values for new and revised HCPCS level 1 and level 2 
codes. (1) CMS establishes interim RVUs for new services and for codes 
for which definitions have changed.

[[Page 626]]

    (2) CMS publishes a notice in the Federal Register to announce 
interim RVUs and seek public comment on them. The RVUs are effective 
prospectively for services furnished beginning on the effective date 
specified in the notice.
    (3) After considering public comments, CMS revises, if necessary, 
the interim RVUs and announces those revisions in a final notice 
published in the Federal Register. Any revisions in the RVUs are 
effective prospectively for services furnished beginning on the 
effective date specified in the final notice.
    (b) Revision of RVUs for established HCPCS level 1 and level 2 
codes. (1) CMS publishes a proposed notice in the Federal Register to 
announce changes in RVUs for established codes and provides an 
opportunity for public comment no less often than every 5 years.
    (2) After considering public comments, CMS publishes a final notice 
in the Federal Register to announce revisions to RVUs.
    (3) The RVU revisions are effective prospectively for services 
furnished beginning on the effective date specified in the final notice.
    (c) Values for local codes (HCPCS Level 3). (1) Carriers establish 
relative values for local codes for services not included in HCPCS 
levels 1 or 2.
    (2) Carriers must obtain prior approval from CMS to establish local 
codes for services that meet the definition of ``physician services'' in 
Sec. 414.2.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, Sept. 15, 1992]



Sec. 414.26  Determining the GAF.

    CMS establishes a GAF for each service in each fee schedule area.
    (a) Geographic indices. CMS uses the following indices to establish 
the GAF:
    (1) An index that reflects one-fourth of the difference between the 
relative value of physicians' work effort in each of the different fee 
schedule areas as determined under Sec. 414.22(a) and the national 
average of that work effort.
    (2) An index that reflects the relative costs of the mix of goods 
and services comprising practice expenses (other than malpractice 
expenses) in each of the different fee schedule areas as determined 
under Sec. 414.22(b) compared to the national average of those costs.
    (3) An index that reflects the relative costs of malpractice 
expenses in each of the different fee schedule areas as determined under 
Sec. 414.22(c) compared to the national average of those costs.
    (b) Class-specific practice cost indices. If the application of a 
single index to different classes of services would be substantially 
inequitable because of differences in the mix of goods and services 
comprising practice expenses for the different classes of services, more 
than one index may be established under paragraph (a)(2) of this 
section.
    (c) Computation of GAF. The GAF for each fee schedule area is the 
sum of the physicians' work adjustment factor, the practice expense 
adjustment factor, and the malpractice cost adjustment factor, as 
defined in this section:
    (1) The geographic physicians' work adjustment factor for a service 
is the product of the proportion of the total relative value for the 
service that reflects the RVUs for the work component and the geographic 
physicians' work index value established under paragraph (a)(1) of this 
section.
    (2) The geographic practice expense adjustment factor for a service 
is the product of the proportion of the total relative value for the 
service that reflects the RVUs for the practice expense component, 
multiplied by the geographic practice cost index (GPCI) value 
established under paragraph (a)(2) of this section.
    (3) The geographic malpractice adjustment factor for a service is 
the product of the proportion of the total relative value for the 
service that reflects the RVUs for the malpractice component, multiplied 
by the GPCI value established under paragraph (a)(3) of this section.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, Sept. 15, 1992]



Sec. 414.28  Conversion factors.

    CMS establishes CFs in accordance with section 1848(d) of the Act.
    (a) Base-year CFs. CMS established the CF for 1992 so that had 
section 1848 of the Act applied during 1991, it would have resulted in 
the same aggregate amount of payments for physician

[[Page 627]]

services as the estimated aggregate amount of these payments in 1991, 
adjusted by the update for 1992 computed as specified in Sec. 414.30.
    (b) Subsequent CFs. For calendar years 1993 through 1995, the CF for 
each year is equal to the CF for the previous year, adjusted in 
accordance with Sec. 414.30. Beginning January 1, 1996, the CF for each 
calendar year may be further adjusted so that adjustments to the fee 
schedule in accordance with section 1848(c)(2)(B)(ii) of the Act do not 
cause total expenditures under the fee schedule to differ by more than 
$20 million from the amount that would have been spent if these 
adjustments had not been made.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, Sept. 15, 1992; 
60 FR 53877, Oct. 18, 1995; 60 FR 63177, Dec. 8, 1995]



Sec. 414.30  Conversion factor update.

    Unless Congress acts in accordance with section 1848(d)(3) of the 
Act--
    (a) General rule. The CF update for a CY equals the Medicare 
Economic Index increased or decreased by the number of percentage points 
by which the percentage increase in expenditures for physician services 
(or for a particular category of physician services, such as surgical 
services) in the second preceding FY over the third preceding FY exceeds 
the performance standard rate of increase established for the second 
preceding FY.
    (b) Downward adjustment. The downward adjustment may not exceed the 
following:
    (1) For CYs 1992 and 1993, 2 percentage points.
    (2) For CY 1994, 2.5 percentage points.
    (3) For CYs 1995 and thereafter, 5 percentage points.

[55 FR 23441, June 8, 1990, as amended at 60 FR 63177, Dec. 8, 1995; 61 
FR 42385, Aug. 15, 1996]



Sec. 414.32  Determining payments for certain physicians' services furnished in facility settings.

    (a) Definition. As used in this section, facility settings include 
the following facilities:
    (1) Hospital outpatient departments, including clinics and emergency 
rooms.
    (2) Hospital inpatient departments.
    (3) Comprehensive outpatient rehabilitation facilities.
    (4) Comprehensive inpatient rehabilitation facilities.
    (5) Inpatient psychiatric facilities.
    (6) Skilled nursing facilities.
    (b) General rule. If physicians' services of the type routinely 
furnished in physicians' offices are furnished in facility settings 
before January 1, 1999, the physician fee schedule amount for those 
services is determined by reducing the practice expense RVUs for the 
services by 50 percent. For services furnished on or after January 1, 
1999, the practice expense RVUs are determined in accordance with 
Sec. 414.22(b)(5).
    (c) Services covered by the reduction. CMS establishes a list of 
services routinely furnished in physicians' offices nationally. Services 
furnished at least 50 percent of the time in physicians' offices are 
subject to this reduction.
    (d) Services excluded from the reduction. The reduction established 
under this section does not apply to the following:
    (1) Rural health clinic services.
    (2) Surgical services not on the ambulatory surgical center covered 
list of procedures published under Sec. 416.65(c) of this chapter when 
furnished in an ambulatory surgical center.
    (3) Anesthesiology services and diagnostic and therapeutic radiology 
services.

[58 FR 63687, Dec. 2, 1993, as amended at 60 FR 63177, Dec. 8, 1995; 62 
FR 59102, Oct. 31, 1997; 63 FR 58911, Nov. 2, 1998; 64 FR 25457, May 12, 
1999]



Sec. 414.34  Payment for services and supplies incident to a physician's service.

    (a) Medical supplies. (1) Except as otherwise specified in this 
paragraph, office medical supplies are considered to be part of a 
physician's practice expense, and payment for them is included in the 
practice expense portion of the payment to the physician for the medical 
or surgical service to which they are incidental.
    (2) If physician services of the type routinely furnished in 
provider settings are furnished in a physician's office, separate 
payment may be made for certain supplies furnished incident to that

[[Page 628]]

physician service if the following requirements are met:
    (i) It is a procedure that can safely be furnished in the office 
setting in appropriate circumstances.
    (ii) It requires specialized supplies that are not routinely 
available in physicians' offices and that are generally disposable.
    (iii) It is furnished before January 1, 1999.
    (3) For the purpose of paragraph (a)(2) of this section, provider 
settings include only the following settings:
    (i) Hospital inpatient and outpatient departments.
    (ii) Ambulatory surgical centers.
    (4) For the purpose of paragraph (a)(2) of this section, ``routinely 
furnished in provider settings'' means furnished in inpatient or 
outpatient hospital settings or ambulatory surgical centers more than 50 
percent of the time.
    (5) CMS establishes a list of services for which a separate supply 
payment may be made under this section.
    (6) The fee schedule amount for supplies billed separately is not 
subject to a GPCI adjustment.
    (b) Services of nonphysicians that are incident to a physician's 
service. Services of nonphysicians that are covered as incident to a 
physician's service are paid as if the physician had personally 
furnished the service.

[56 FR 59624, Nov. 25, 1991; 57 FR 42492, Sept. 15, 1992, as amended at 
63 FR 58911, Nov. 2, 1998]



Sec. 414.36  Payment for drugs incident to a physician's service.

    Payment for drugs incident to a physician's service is made in 
accordance with Sec. 405.517 of this chapter.



Sec. 414.38  Special rules for payment of low osmolar contrast media.

    (a) General. Payment for low osmolar contrast media is included in 
the technical component payment for diagnostic procedures except as 
specified in paragraph (b) of this section.
    (b) Conditions for separate payment. For diagnostic procedures 
furnished to beneficiaries who are neither inpatients nor outpatients of 
any hospital, separate payment is made for low osmolar contrast media 
used in all intrathecal injections and in intravenous, and intra-
arterial injections, if it is used for patients with one or more of the 
following characteristics:
    (1) A history of a previous adverse reaction to contrast material, 
with the exception of a sensation of heat, flushing, or a single episode 
of nausea or vomiting.
    (2) A history of asthma or allergy.
    (3) Significant cardiac dysfunction including recent or imminent 
cardiac decompensation, severe arrhythmias, unstable angina pectoris, 
recent myocardial infarction, and pulmonary hypertension.
    (4) Generalized severe debilitation.
    (5) Sickle cell disease.
    (c) Method of payment. If one of the conditions of paragraph (b) of 
this section is met, payment is made for low osmolar contrast media as 
set forth in Sec. 414.36 as a drug furnished incident to a physician's 
service, subject to paragraph (d) of this section.
    (d) Drug payment reduction. If separate payment is made for low 
osmolar contrast media, the payment amount calculated in accordance with 
Sec. 414.36 is reduced by 8 percent to account for the allowance for 
contrast media already included in the technical component of the 
diagnostic procedure code.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, 42493, Sept. 15, 
1992]



Sec. 414.39  Special rules for payment of care plan oversight.

    (a) General. Except as specified in paragraph (b) of this section, 
payment for care plan oversight is included in the payment for visits 
and other services under the physician fee schedule.
    (b) Exception. Separate payment is made under the following 
conditions for physician care plan oversight services furnished to 
beneficiaries who receive HHA and hospice services that are covered by 
Medicare:
    (1) The care plan oversight services require recurrent physician 
supervision of therapy involving 30 or more minutes of the physician's 
time per month.
    (2) Payment is made to only one physician per patient for services 
furnished during a calendar month period. The physician must have 
furnished a service requiring a face-to-face encounter with the patient 
at least once during

[[Page 629]]

the 6-month period before the month for which care plan oversight 
payment is first billed. The physician may not have a significant 
ownership interest in, or financial or contractual relationship with, 
the HHA in accordance with Sec. 424.22(d) of this chapter. The physician 
may not be the medical director or employee of the hospice and may not 
furnish services under an arrangement with the hospice.
    (3) If a physician furnishes care plan oversight services during a 
postoperative period, payment for care plan oversight services is made 
if the services are documented in the patient's medical record as 
unrelated to the surgery.

[59 FR 63463, Dec. 8, 1994; 60 FR 49, Jan. 3, 1995; 60 FR 36733, July 
18, 1995]



Sec. 414.40  Coding and ancillary policies.

    (a) General rule. CMS establishes uniform national definitions of 
services, codes to represent services, and payment modifiers to the 
codes.
    (b) Specific types of policies. CMS establishes uniform national 
ancillary policies necessary to implement the fee schedule for physician 
services. These include, but are not limited to, the following policies:
    (1) Global surgery policy (for example, post- and pre-operative 
periods and services, and intra-operative services).
    (2) Professional and technical components (for example, payment for 
services, such as an EEG, which typically comprise a technical component 
(the taking of the test) and a professional component (the 
interpretation)).
    (3) Payment modifiers (for example, assistant-at-surgery, multiple 
surgery, bilateral surgery, split surgical global services, team 
surgery, and unusual services).



Sec. 414.42  Adjustment for first 4 years of practice.

    (a) General rule. For services furnished during CYs 1992 and 1993, 
except as specified in paragraph (b) of this section, the fee schedule 
payment amount or prevailing charge must be phased in as specified in 
paragraph (d) of this section for physicians, physical therapists (PTs), 
occupational therapists (OTs), and all other health care practitioners 
who are in their first through fourth years of practice.
    (b) Exception. The reduction required in paragraph (d) of this 
section does not apply to primary care services or to services furnished 
in a rural area as defined in section 1886(d)(2)(D) of the Act that is 
designated under section 332(a)(1)(A) of the Public Health Service Act 
as a Health Professional Shortage Area.
    (c) Definition of years of practice. (1) The ``first year of 
practice`` is the first full CY during the first 6 months of which the 
physician, PT, OT, or other health care practitioner furnishes 
professional services for which payment may be made under Medicare Part 
B, plus any portion of the prior CY if that prior year does not meet the 
first 6 months test.
    (2) The ``second, third, and fourth years of practice`` are the 
first, second, and third CYs following the first year of practice, 
respectively.
    (d) Amounts of adjustment. The fee schedule payment for the service 
of a new physician, PT, OT, or other health care practitioner is limited 
to the following percentages for each of the indicated years:
    (1) First year--80 percent
    (2) Second year--85 percent
    (3) Third year--90 percent
    (4) Fourth year--95 percent

[57 FR 42493, Sept. 15, 1992, as amended at 58 FR 63687, Dec. 2, 1993]



Sec. 414.44  Transition rules.

    (a) Adjusted historical payment basis--(1) All services other than 
radiology and nuclear medicine services. For all physician services 
other than radiology services, furnished in a fee schedule area, the 
adjusted historical payment basis (AHPB) is the estimated weighted 
average prevailing charge applied in the fee schedule area for the 
service in CY 1991, as determined by CMS without regard to physician 
specialty and as adjusted to reflect payments for services below the 
prevailing charge, adjusted by the update established for CY 1992.
    (2) Radiology services. For radiology services, the AHPB is the 
amount paid for the service in the fee schedule area in CY 1991 under 
the fee schedule established under section 1834(b), adjusted by the 
update established for CY 1992.

[[Page 630]]

    (3) Nuclear medicine services. For nuclear medicine services, the 
AHPB is the amount paid for the service in the fee schedule area in CY 
1991 under the fee schedule established under section 6105(b) of Public 
Law 101-239 and section 4102(g) of Public Law 101-508, adjusted by the 
update established for CY 1992.
    (4) Transition adjustment. CMS adjusts the AHPB for all services by 
5.5 percent to produce budget-neutral payments for 1992.
    (b) Adjustment of 1992 payments for physician services other than 
radiology services. For physician services furnished during CY 1992 the 
following rules apply:
    (1) If the AHPB determined under paragraph (a) of this section is 
from 85 percent to 115 percent of the fee schedule amount for the area 
for services furnished in 1992, payment is at the fee schedule amount.
    (2) If the AHPB determined under paragraph (a) of this section is 
less than 85 percent of the fee schedule amount for the area for 
services furnished in 1992, an amount equal to the AHPB plus 15 percent 
of the fee schedule amount is substituted for the fee schedule amount.
    (3) If the AHPB determined under paragraph (a) of this section is 
greater than 115 percent of the fee schedule amount for the area for 
services furnished in 1992, an amount equal to the AHPB minus 15 percent 
of the fee schedule amount is substituted for the fee schedule amount.
    (c) Adjustment of 1992 payments for radiology services. For 
radiology services furnished during CY 1992 the following rules apply:
    (1) If the AHPB determined under paragraph (a) of this section is 
from 85 percent to 109 percent of the fee schedule amount for the area 
for services furnished in 1992, payment is at the fee schedule amount.
    (2) If the AHPB determined under paragraph (a) of this section is 
less than 85 percent of the fee schedule amount for the area for 
services furnished in 1992, an amount equal to the AHPB plus 15 percent 
of the fee schedule amount is substituted for the fee schedule amount.
    (3) If the AHPB determined under paragraph (a) of this section is 
greater than 109 percent of the fee schedule amount for the area for 
services furnished in 1992, an amount equal to the AHPB minus 9 percent 
of the fee schedule amount is substituted for the fee schedule amount.
    (d) Computation of payments for CY 1993. For physician services 
subject to the transition rules in CY 1992 and furnished during CY 1993, 
the fee schedule is equal to 75 percent of the amount that would have 
been paid in the fee schedule area under the 1992 transition rules, 
adjusted by the amount of the 1993 update, plus 25 percent of the 1993 
fee schedule amount.
    (e) Computation of payments for CY 1994. For physician services 
subject to the transition rules in CY 1993, and furnished during CY 
1994, the fee schedule is equal to 67 percent of the amount that would 
have been paid in the fee schedule area under the 1993 transition rules, 
adjusted by the amount of the 1994 update, plus 33 percent of the 1994 
fee schedule amount.
    (f) Computation of payments for CY 1995. For physician services 
subject to the transition rules in CY 1994 and furnished during CY 1995, 
the fee schedule is equal to 50 percent of the amount that would have 
been paid in the fee schedule area under the 1994 transition rules, 
adjusted by the amount of the 1995 update, plus 50 percent of the 1995 
fee schedule amount.



Sec. 414.46  Additional rules for payment of anesthesia services.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Base unit means the value for each anesthesia code that reflects 
all activities other than anesthesia time. These activities include 
usual preoperative and postoperative visits, the administration of 
fluids and blood incident to anesthesia care, and monitoring services.
    (2) Anesthesia practitioner, for the purpose of anesthesia time, 
means a physician who performs the anesthesia service alone, a CRNA who 
is not medically directed who performs the anesthesia service alone, or 
a medically directed CRNA.

[[Page 631]]

    (3) Anesthesia time means the time during which an anesthesia 
practitioner is present with the patient. It starts when the anesthesia 
practitioner begins to prepare the patient for anesthesia services and 
ends when the anesthesia practitioner is no longer furnishing anesthesia 
services to the beneficiary, that is, when the beneficiary may be placed 
safely under postoperative care. Anesthesia time is a continuous time 
period from the start of anesthesia to the end of an anesthesia service. 
In counting anesthesia time, the anesthesia practitioner can add blocks 
of anesthesia time around an interruption in anesthesia time as long as 
the anesthesia practitioner is furnishing continuous anesthesia care 
within the time periods around the interruption.
    (b) Determinations of payment amount--Basic rule. For anesthesia 
services performed, medically directed, or medically supervised by a 
physician, CMS pays the lesser of the actual charge or the anesthesia 
fee schedule amount.
    (1) The carrier bases the fee schedule amount for an anesthesia 
service on the product of the sum of allowable base and time units and 
an anesthesia-specific CF. The carrier calculates the time units from 
the anesthesia time reported by the anesthesia practitioner for the 
anesthesia procedure. The physician who fulfills the conditions for 
medical direction in Sec. 415.110 (Conditions for payment: 
Anesthesiology services) reports the same anesthesia time as the 
medically-directed CRNA.
    (2) CMS furnishes the carrier with the base units for each 
anesthesia procedure code. The base units are derived from the 1988 
American Society of Anesthesiologists' Relative Value Guide except that 
the number of base units recognized for anesthesia services furnished 
during cataract or iridectomy surgery is four units.
    (3) Modifier units are not allowed. Modifier units include 
additional units charged by a physician or a CRNA for patient health 
status, risk, age, or unusual circumstances.
    (c) Physician personally performs the anesthesia procedure.
    (1) CMS considers an anesthesia service to be personally performed 
under any of the following circumstances:
    (i) The physician performs the entire anesthesia service alone.
    (ii) The physician establishes an attending physician relationship 
in one or two concurrent cases involving an intern or resident and the 
service was furnished before January 1, 1994.
    (iii) The physician establishes an attending physician relationship 
in one case involving an intern or resident and the service was 
furnished on or after January 1, 1994 but prior to January 1, 1996. For 
services on or after January 1, 1996, the physician must be the teaching 
physician as defined in Secs. 415.170 through 415.184 of this chapter.
    (iv) The physician and the CRNA or AA are involved in a single case 
and the services of each are found to be medically necessary.
    (v) The physician is continuously involved in a single case 
involving a student nurse anesthetist.
    (vi) The physician is continuously involved in a single case 
involving a CRNA or AA and the service was furnished prior to January 1, 
1998.
    (2) CMS determines the fee schedule amount for an anesthesia service 
personally performed by a physician on the basis of an anesthesia-
specific fee schedule CF and unreduced base units and anesthesia time 
units. One anesthesia time unit is equivalent to 15 minutes of 
anesthesia time, and fractions of a 15-minute period are recognized as 
fractions of an anesthesia time unit.
    (d) Anesthesia services medically directed by a physician. (1) CMS 
considers an anesthesia service to be medically directed by a physician 
if:
    (i) The physician performs the activities described in Sec. 415.110 
of this chapter.
    (ii) The physician directs qualified individuals involved in two, 
three, or four concurrent cases.
    (iii) Medical direction can occur for a single case furnished on or 
after January 1, 1998 if the physician performs the activities described 
in Sec. 415.110 of this chapter and medically directs a single CRNA or 
AA.

[[Page 632]]

    (2) The rules for medical direction differ for certain time periods 
depending on the nature of the qualified individual who is directed by 
the physician. If more than two procedures are directed on or after 
January 1, 1994, the qualified individuals could be AAs, CRNAs, interns, 
or residents. The medical direction rules apply to student nurse 
anesthetists only if the physician directs two concurrent cases, each of 
which involves a student nurse anesthetist or the physician directs one 
case involving a student nurse anesthetist and the other involving a 
CRNA, AA, intern, or resident.
    (3) Payment for medical direction is based on a specific percentage 
of the payment allowance recognized for the anesthesia service 
personally performed by a physician alone. The following percentages 
apply for the years specified:
    (i) CY 1994--60 percent of the payment allowance for personally 
performed procedures.
    (ii) CY 1995--57.5 percent of the payment allowance for personally 
performed services.
    (iii) CY 1996--55 percent of the payment allowance for personally 
performed services.
    (iv) CY 1997--52.5 percent of the payment allowance for personally 
performed services.
    (v) CY 1998 and thereafter--50 percent of the payment allowance for 
personally performed services.
    (e) Physician medically supervises anesthesia services. If the 
physician medically supervises more than four concurrent anesthesia 
services, CMS bases the fee schedule amount on an anesthesia-specific CF 
and three base units. This represents payment for the physician's 
involvement in the pre-surgical anesthesia services.
    (f) Payment for medical or surgical services furnished by a 
physician while furnishing anesthesia services. (1) CMS allows separate 
payment under the fee schedule for certain reasonable and medically 
necessary medical or surgical services furnished by a physician while 
furnishing anesthesia services to the patient. CMS makes payment for 
these services in accordance with the general physician fee schedule 
rules in Sec. 414.20. These services are described in program operating 
instructions.
    (2) CMS makes no separate payment for other medical or surgical 
services, such as the pre-anesthetic examination of the patient, pre- or 
post-operative visits, or usual monitoring functions, that are 
ordinarily included in the anesthesia service.
    (g) Physician involved in multiple anesthesia services. If the 
physician is involved in multiple anesthesia services for the same 
patient during the same operative session, the carrier makes payment 
according to the base unit associated with the anesthesia service having 
the highest base unit value and anesthesia time that encompasses the 
multiple services.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, Sept. 15, 1992; 
58 FR 63687, Dec. 2, 1993; 60 FR 63177, Dec. 8, 1995; 64 FR 59441, Nov. 
2, 1999]



Sec. 414.48  Limits on actual charges of nonparticipating suppliers.

    (a) General rule. A supplier, as defined in Sec. 400.202 of this 
chapter, who is nonparticipating and does not accept assignment may 
charge a beneficiary an amount up to the limiting charge described in 
paragraph (b) of this section.
    (b) Specific limits. For items or services paid under the physician 
fee schedule, the limiting charge is 115 percent of the fee schedule 
amount for nonparticipating suppliers. For items or services CMS 
excludes from payment under the physician fee schedule (in accordance 
with section 1848 (j)(3) of the Act), the limiting charge is 115 percent 
of 95 percent of the payment basis applicable to participating suppliers 
as calculated in Sec. 414.20(b).

[58 FR 63687, Dec. 2, 1993, as amended at 62 FR 59102, Oct. 31, 1997]



Sec. 414.50  Physician billing for purchased diagnostic tests.

    (a) General rule. For services covered under section 1861(s)(3) of 
the Act and paid for under this part 414 subpart A, if a physician bills 
for a diagnostic test performed by an outside supplier, the payment to 
the physician less the applicable deductibles and coinsurance may not 
exceed the lowest of the following amounts:

[[Page 633]]

    (1) The supplier's net charge to the physician.
    (2) The physician's actual charge.
    (3) The fee schedule amount for the test that would be allowed if 
the supplier billed directly.
    (b) Restriction on payment. The physician must identify the supplier 
and indicate the supplier's net charge for the test. If the physician 
fails to provide this information, CMS makes no payment to the physician 
and the physician may not bill the beneficiary.
    (1) Physicians who accept Medicare assignment may bill beneficiaries 
for only the applicable deductibles and coinsurance.
    (2) Physicians who do not accept Medicare assignment may not bill 
the beneficiary more than the payment amount described in paragraph (a) 
of this section.

[56 FR 59624, Nov. 25, 1991; 57 FR 42492, Sept. 15, 1992, as amended at 
63 FR 34328, June 24, 1998]



Sec. 414.52  Payment for physician assistants' services.

    Allowed amounts for the services of a physician assistant furnished 
beginning January 1, 1992 and ending December 31, 1997, may not exceed 
the limits specified in paragraphs (a) through (c) of this section. 
Allowed amounts for the services of a physician assistant furnished 
beginning January 1, 1998, may not exceed the limits specified in 
paragraph (d) of this section.
    (a) For assistant-at-surgery services, 65 percent of the amount that 
would be allowed under the physician fee schedule if the assistant-at-
surgery service was furnished by a physician.
    (b) For services (other than assistant-at-surgery services) 
furnished in a hospital, 75 percent of the physician fee schedule amount 
for the service.
    (c) For all other services, 85 percent of the physician fee schedule 
amount for the service.
    (d) For services (other than assistant-at-surgery services) 
furnished beginning January 1, 1998, 85 percent of the physician fee 
schedule amount for the service. For assistant-at-surgery services, 85 
percent of the physician fee schedule amount that would be allowed under 
the physician fee schedule if the assistant-at-surgery service were 
furnished by a physician.

[56 FR 59624, Nov. 25, 1991; 57 FR 42492, Sept. 15, 1992, as amended at 
63 FR 58911, Nov. 2, 1998]



Sec. 414.54  Payment for certified nurse-midwives' services.

    For services furnished after December 31, 1991, allowed amounts 
under the fee schedule established under section 1833(a)(1)(K) of the 
Act for the payment of certified nurse-midwife services may not exceed 
65 percent of the physician fee schedule amount for the service.



Sec. 414.56  Payment for nurse practitioners' and clinical nurse specialists' services.

    (a) Rural areas. For services furnished beginning January 1, 1992 
and ending December 31, 1997, allowed amounts for the services of a 
nurse practitioner or a clinical nurse specialist in a rural area (as 
described in section 1861(s)(2)(K)(iii) of the Act) may not exceed the 
following limits:
    (1) For services furnished in a hospital (including assistant-at-
surgery services), 75 percent of the physician fee schedule amount for 
the service.
    (2) For all other services, 85 percent of the physician fee schedule 
amount for the service.
    (b) Non-rural areas. For services furnished beginning January 1, 
1992 and ending December 31, 1997, allowed amounts for the services of a 
nurse practitioner or a clinical nurse specialist in a nursing facility 
may not exceed 85 percent of the physician fee schedule amount for the 
service.
    (c) Beginning January 1, 1998. For services (other than assistant-
at-surgery services) furnished beginning January 1, 1998, allowed 
amounts for the services of a nurse practitioner or clinical nurse 
specialist may not exceed 85 percent of the physician fee schedule 
amount for the service. For assistant-at-surgery services, allowed 
amounts for the services of a nurse practitioner or clinical nurse 
specialist may not exceed 85 percent of the physician fee schedule 
amount that would be allowed under the physician fee schedule if the 
assistant-at-surgery service were furnished by a physician.

[63 FR 58911, Nov. 2, 1998]

[[Page 634]]



Sec. 414.58  Payment of charges for physician services to patients in providers.

    (a) Payment under the physician fee schedule. In addition to the 
special conditions for payment in Secs. 415.100 through 415.130, and 
Sec. 415.190 of this chapter, CMS establishes payment for physician 
services to patients in providers under the physician fee schedule in 
accordance with Secs. 414.1 through 414.48.
    (b) Teaching hospitals. Services furnished by physicians in teaching 
hospitals may be made on a reasonable cost basis set forth in 
Sec. 415.162 of this chapter if the hospital exercises the election 
described in Sec. 415.160 of this chapter.

[56 FR 59624, Nov. 25, 1991, as amended at 57 FR 42492, Sept. 15, 1992; 
60 FR 63189, Dec. 8, 1995]



Sec. 414.60  Payment for the services of CRNAs.

    (a) Basis for payment. The allowance for the anesthesia service 
furnished by a CRNA, medically directed or not medically directed, is 
based on allowable base and time units as defined in Sec. 414.46(a). 
Beginning with CY 1994--
    (1) The allowance for an anesthesia service furnished by a medically 
directed CRNA is based on a fixed percentage of the allowance recognized 
for the anesthesia service personally performed by the physician alone, 
as specified in Sec. 414.46(d)(3); and
    (2) The CF for an anesthesia service furnished by a CRNA not 
directed by a physician may not exceed the CF for a service personally 
performed by a physician.
    (b) To whom payment may be made. Payment for an anesthesia service 
furnished by a CRNA may be made to the CRNA or to any individual or 
entity (such as a hospital, critical access hospital, physician, group 
practice, or ambulatory surgical center) with which the CRNA has an 
employment or contract relationship that provides for payment to be made 
to the individual or entity.
    (c) Condition for payment. Payment for the services of a CRNA may be 
made only on an assignment related basis, and any assignment accepted by 
a CRNA is binding on any other person presenting a claim or request for 
payment for the service.

[60 FR 63178, Dec. 8, 1995, as amended at 62 FR 46037, Aug. 29, 1997; 64 
FR 59441, Nov. 2, 1999]



Sec. 414.62  Fee schedule for clinical psychologist services.

    The fee schedule for clinical psychologist services is set at 100 
percent of the amount determined for corresponding services under the 
physician fee schedule.

[62 FR 59102, Oct. 31, 1997]



Sec. 414.63  Payment for outpatient diabetes self-management training.

    (a) Payment under the physician fee schedule. Except as provided in 
paragraph (d) of this section, payment for outpatient diabetes self-
management training is made under the physician fee schedule in 
accordance with Secs. 414.1 through 414.48.
    (b) To whom payment may be made. Payment may be made to an entity 
approved by CMS to furnish outpatient diabetes self-management training 
in accordance with part 410, subpart H of this chapter.
    (c) Limitation on payment. Payment may be made for training sessions 
actually attended by the beneficiary and documented on attendance 
sheets.
    (d) Payments made to those not paid under the physician fee 
schedule. Payments may be made to other entities not routinely paid 
under the physician fee schedule, such as hospital outpatient 
departments, ESRD facilities, and DME suppliers. The payment equals the 
amounts paid under the physician fee schedule.
    (e) Other conditions for fee-for-service payment. The beneficiary 
must meet the following conditions:
    (1) Has not previously received initial training for which Medicare 
payment was made under this benefit.
    (2) Is not receiving services as an inpatient in a hospital, SNF, 
hospice, or nursing home.
    (3) Is not receiving services as an outpatient in an RHC or FQHC.

[65 FR 83153, Dec. 29, 2000]

[[Page 635]]



Sec. 414.64  Payment for medical nutrition therapy.

    (a) Payment under the physician fee schedule. Medicare payment for 
medical nutrition therapy is made under the physician fee schedule in 
accordance with subpart B of this part. Payment to non-physician 
professionals, as specified in paragraph (b) of this section, is the 
lesser of the actual charges or 80 percent of 85 percent of the 
physician fee schedule amount.
    (b) To whom payment may be made. Payment may be made to a registered 
dietician or nutrition professional qualified to furnish medical 
nutrition therapy in accordance with part 410, subpart G of this 
chapter.
    (c) Effective date of payment. Medicare pays suppliers of medical 
nutrition therapy on or after the effective date of enrollment of the 
supplier at the carrier.
    (d) Limitation on payment. Payment is made only for documented 
nutritional therapy sessions actually attended by the beneficiary.
    (e) Other conditions for fee-for-service payment. Payment is made 
only if the beneficiary:
    (1) Is not an inpatient of a hospital, SNF, nursing home, or 
hospice.
    (2) Is not receiving services in an RHC, FQHC or ESRD dialysis 
facility.

[66 FR 55332, Nov. 1, 2001]



Sec. 414.65  Payment for office or other outpatient visits, consultation, individual psychotherapy, and pharmacologic management via interactive 
          telecommunications systems.

    (a) Professional service. Medicare payment for the professional 
service via an interactive telecommunications system is made according 
to the following limitations:
    (1) The Medicare payment amount for office or other outpatient 
visits, consultation, individual psychotherapy, and pharmacologic 
management via an interactive telecommunications system is equal to the 
current fee schedule amount applicable to services of the physician or 
practitioner.
    (2) Only the physician or practitioner at the distant site may bill 
and receive payment for the professional service via an interactive 
telecommunications system.
    (3) Payments made to the physician or practitioner at the distant 
site, including deductible and coinsurance, for the professional service 
may not be shared with the referring practitioner or telepresenter.
    (b) Originating site facility fee. For office or other outpatient 
visits, consultation, individual psychotherapy, or pharmacologic 
management services delivered via an interactive telecommunications 
system furnished on or after October 1, 2001:
    (1) For services furnished on or after October 1, 2001 through 
December 31, 2002, the payment amount to the originating site is the 
lesser of the actual charge or the originating site facility fee of $20. 
For services furnished on or after January 1 of each subsequent year, 
the facility fee for the originating site will be updated by the 
Medicare Economic Index (MEI) as defined in section 1842(i)(3) of the 
Act.
    (2) Only the originating site may bill for the originating site 
facility fee and only on an assignment-related basis. The distant site 
physician or practitioner may not bill for or receive payment for 
facility fees associated with the professional service furnished via an 
interactive telecommunications system.
    (c) Deductible and coinsurance apply. The payment for the 
professional service and originating site facility fee is subject to the 
coinsurance and deductible requirements of sections 1833(a)(1) and (b) 
of the Act.
    (d) Assignment required for physicians, practitioners, and 
originating sites. Payment to physicians, practitioners, and originating 
sites is made only on an assignment-related basis.
    (e) Sanctions. A distant site practitioner or originating site 
facility may be subject to the applicable sanctions provided for in 
chapter IV, part 402 and chapter V, parts 1001, 1002, and 1003 of this 
title if he or she does any of the following:
    (1) Knowingly and willfully bills or collects for services in 
violation of the limitation of this section.
    (2) Fails to timely correct excess charges by reducing the actual 
charge billed for the service in an amount that does not exceed the 
limiting charge for

[[Page 636]]

the service or fails to timely refund excess collections.
    (3) Fails to submit a claim on a standard form for services provided 
for which payment is made on a fee schedule basis.
    (4) Imposes a charge for completing and submitting the standard 
claims form.

[66 FR 55332, Nov. 1, 2001]



  Subpart C--Fee Schedules for Parenteral and Enteral Nutrition (PEN) 
                    Nutrients, Equipment and Supplies

    Source: 66 FR 45176, Aug. 28, 2001, unless otherwise noted.



Sec. 414.100  Purpose.

    This subpart implements fee schedules for PEN items and services as 
authorized by section 1842(s) of the Act.



Sec. 414.102  General payment rules.

    (a) General rule. For items and services furnished on or after 
January 1, 2002, Medicare pays for the items and services as described 
in paragraph (b) of this section on the basis of 80 percent of the 
lesser of----
    (1) The actual charge for the item or service; or
    (2) The fee schedule amount for the item or service, as determined 
in accordance with Secs. 414.104.
    (b) Payment classification. (1) CMS or the carrier determines fee 
schedules for Parenteral and enteral nutrition (PEN) nutrients, 
equipment, and supplies, as specified in Sec. 414.104.
    (2) CMS designates the specific items and services in each category 
through program instructions.
    (c) Updating the fee schedule amounts. For each year subsequent to 
2002, the fee schedule amounts of the preceding year are updated by the 
percentage increase in the CPI-U for the 12-month period ending with 
June of the preceding year.



Sec. 414.104  PEN Items and Services.

    (a) Payment Rules. Payment for PEN items and services is made in a 
lump sum for nutrients and supplies that are purchased and on a monthly 
basis for equipment that is rented.
    (b) Fee schedule amount. The fee schedule amount for payment for an 
item or service furnished in 2002 is the lesser of--
    (i) The reasonable charge from 1995; or
    (ii) The reasonable charge that would have been used in determining 
payment for 2002.



  Subpart D--Payment for Durable Medical Equipment and Prosthetic and 
                            Orthotic Devices



Sec. 414.200  Purpose.

    This subpart implements sections 1834 (a) and (h) of the Act by 
specifying how payments are made for the purchase or rental of new and 
used durable medical equipment and prosthetic and orthotic devices for 
Medicare beneficiaries.

[57 FR 57689, Dec. 7, 1992]



Sec. 414.202  Definitions.

    For purposes of this subpart, the following definitions apply:
    Covered item update means the percentage increase in the consumer 
price index for all urban consumers (U.S. city average) (CPI-U) for the 
12-month period ending with June of the previous year.
    Durable medical equipment means equipment, furnished by a supplier 
or a home health agency that--
    (1) Can withstand repeated use;
    (2) Is primarily and customarily used to serve a medical purpose;
    (3) Generally is not useful to an individual in the absence of an 
illness or injury; and
    (4) Is appropriate for use in the home. (See Sec. 410.38 of this 
chapter for a description of when an institution qualifies as a home.)
    Prosthetic and orthotic devices means--
    (1) Devices that replace all or part of an internal body organ, 
including ostomy bags and supplies directly related to ostomy care, and 
replacement of such devices and supplies;
    (2) One pair of conventional eyeglasses or contact lenses furnished 
subsequent to each cataract surgery with insertion of an intraocular 
lens; and

[[Page 637]]

    (3) Leg, arm, back, and neck braces, and artificial legs, arms, and 
eyes, including replacements if required because of a change in the 
beneficiary's physical condition.

The following are neither prosthetic nor orthotic devices--
    (1) Parenteral and enteral nutrients, supplies, and equipment;
    (2) Intraocular lenses;
    (3) Medical supplies such as catheters, catheter supplies, ostomy 
bags, and supplies related to ostomy care that are furnished by an HHA 
as part of home health services under Sec. 409.40(e) of this chapter;
    (4) Dental prostheses.
    Region means those carrier service areas administered by CMS 
regional offices.

[57 FR 57689, Dec. 7, 1992]



Sec. 414.210  General payment rules.

    (a) General rule. For items furnished on or after January 1, 1989, 
except as provided in paragraphs (c) and (d) of this section, Medicare 
pays for durable medical equipment, prosthetics and orthotics, including 
a separate payment for maintenance and servicing of the items as 
described in paragraph (e) of this section, on the basis of 80 percent 
of the lesser of--
    (1) The actual charge for the item;
    (2) The fee schedule amount for the item, as determined in 
accordance with the provisions of Secs. 414.220 through 414.232.
    (b) Payment classification. (1) The carrier determines fee schedules 
for the following classes of equipment and devices:
    (i) Inexpensive or routinely purchased items, as specified in 
Sec. 414.220.
    (ii) Items requiring frequent and substantial servicing, as 
specified in Sec. 414.222.
    (iii) Certain customized items, as specified in Sec. 414.224.
    (iv) Oxygen and oxygen equipment, as specified in Sec. 414.226.
    (v) Prosthetic and orthotic devices, as specified in Sec. 414.228.
    (vi) Other durable medical equipment (capped rental items), as 
specified in Sec. 414.229.
    (vii) Transcutaneous electrical nerve stimulators (TENS), as 
specified in Sec. 414.232.
    (2) CMS designates the items in each class of equipment or device 
through its program instructions.
    (c) Exception for certain HHAs. Public HHAs and HHAs that furnish 
services or items free-of-charge or at nominal prices to a significant 
number of low-income patients, as defined in Sec. 413.13(a) of this 
chapter, are paid on the basis of 80 percent of the fee schedule amount 
determined in accordance with the provision of Secs. 414.220 through 
414.230.
    (d) Prohibition on special limits. For items furnished on or after 
January 1, 1989 and before January 1, 1991, neither CMS nor a carrier 
may establish a special reasonable charge for items covered under this 
subpart on the basis of inherent reasonableness as described in 
Sec. 405.502(g) of this chapter.
    (e) Maintenance and servicing. (1) General rule. Except as provided 
in paragraph (e)(2) of this section, the carrier pays the reasonable and 
necessary charges for maintenance and servicing of purchased equipment. 
Reasonable and necessary charges are those made for parts and labor not 
otherwise covered under a manufacturer's or supplier's warranty. Payment 
is made, as needed, in a lump sum based on the carrier's consideration 
of the item. Payment is not made for maintenance and servicing of a 
rented item other than the maintenance and servicing fee for other 
durable medical equipment, as described in Sec. 414.229(e).
    (2) Exception. For items purchased on or after June 1, 1989, no 
payment is made under the provisions of paragraph (e)(1) of this section 
for the maintenance and servicing of:
    (i) Items requiring frequent and substantial servicing, as defined 
in Sec. 414.222(a);
    (ii) Capped rental items, as defined in Sec. 414.229(a), that are 
not purchased in accordance with Sec. 414.229(d); and
    (iii) Oxygen equipment, as defined in Sec. 414.226.
    (f) Replacement of equipment. Except as provided in Sec. 414.229(g), 
if a purchased item of DME or a prosthetic or orthotic device paid for 
under this subpart has been in continuous use by the patient for the 
equipment's reasonable

[[Page 638]]

useful lifetime or if the carrier determines that the item is lost or 
irreparably damaged, the patient may elect to obtain a new piece of 
equipment.
    (1) The reasonable useful lifetime of DME or prosthetic and orthotic 
devices is determined through program instructions. In the absence of 
program instructions, carriers may determine the reasonable useful 
lifetime of equipment but in no case can it be less than 5 years. 
Computation is based on when the equipment is delivered to the 
beneficiary, not the age of the equipment.
    (2) If the beneficiary elects to obtain replacement equipment, 
payment is made on a purchase basis.

[57 FR 57689, Dec. 7, 1992]



Sec. 414.220  Inexpensive or routinely purchased items.

    (a) Definitions. (1) Inexpensive equipment means equipment the 
average purchase price of which did not exceed $150 during the period 
July 1986 through June 1987.
    (2) Routinely purchased equipment means equipment that was acquired 
by purchase on a national basis at least 75 percent of the time during 
the period July 1986 through June 1987.
    (3) Accessories. Effective January 1, 1994, accessories used in 
conjunction with a nebulizer, aspirator, or ventilator excluded from 
Sec. 414.222 meet the definitions of ``inexpensive equipment'' and 
``routinely purchased equipment'' in paragraphs (a)(1) and (a)(2) of 
this section, respectively.
    (b) Payment rules. (1) Subject to the limitation in paragraph (b)(3) 
of this section, payment for inexpensive and routinely purchased items 
is made on a rental basis or in a lump sum amount for purchase of the 
item based on the applicable fee schedule amount.
    (2) Effective January 1, 1994, payment for ostomy supplies, 
tracheostomy supplies, urologicals, and surgical dressings not furnished 
as incident to a physician's professional service or furnished by an HHA 
is made using the methodology for the inexpensive and routinely 
purchased class.
    (3) The total amount of payments made for an item may not exceed the 
fee schedule amount recognized for the purchase of that item.
    (c) Fee schedule amount for 1989 and 1990. The fee schedule amount 
for payment of purchase or rental of inexpensive or routinely purchased 
items furnished in 1989 and 1990 is the local payment amount determined 
as follows:
    (1) The carrier determines the average reasonable charge for 
inexpensive or routinely purchased items that were furnished during the 
period July 1, 1986 through June 30, 1987 based on the mean of the 
carrier's allowed charges for the item. A separate determination of an 
average reasonable charge is made for rental equipment, new purchased 
equipment, and used purchased equipment.
    (2) The carrier adjusts the amount determined under paragraph (c)(1) 
of this section by the change in the level of the CPI-U for the 6-month 
period ending December 1987.
    (d) Updating the local payment amounts for years after 1990. For 
each year subsequent to 1990, the local payment amounts of the preceding 
year are increased or decreased by the covered item update. For 1991 and 
1992, the covered item update is reduced by 1 percentage point.
    (e) Calculating the fee schedule amounts for years after 1990. For 
years after 1990, the fee schedule amounts are equal to the national 
limited payment amount.
    (f) Calculating the national limited payment amount. The national 
limited payment amount is computed as follows:
    (1) The 1991 national limited payment amount is equal to:
    (i) 100 percent of the local payment amount if the local payment 
amount is neither greater than the weighted average nor less than 85 
percent of the weighted average of all local payment amounts;
    (ii) The sum of 67 percent of the local payment amount plus 33 
percent of the weighted average of all local payment amounts if the 
local payment amount exceeds the weighted average of all local payment 
amounts; or
    (iii) The sum of 67 percent of the local payment amount plus 33 
percent of 85 percent of the weighted average of all local payment 
amounts if the local payment amount is less than 85 percent of the 
weighted average of all local payment amounts.

[[Page 639]]

    (2) The 1992 national limited payment amount is equal to:
    (i) 100 percent of the local payment amount if the local payment 
amount is neither greater than the weighted average nor less than 85 
percent of the weighted average of all local payment amounts;
    (ii) The sum of 33 percent of the local payment amount plus 67 
percent of the weighted average of all local payment amounts if the 
local payment amount exceeds the weighted average; or
    (iii) The sum of 33 percent of the local payment amount plus 67 
percent of 85 percent of the weighted average of all local payment 
amounts if the local payment amount is less than 85 percent of the 
weighted average.
    (3) For 1993, the national limited payment amount is equal to one of 
the following:
    (i) 100 percent of the local payment amount if the local payment 
amount is neither greater than the weighted average nor less than 85 
percent of the weighted average of all local payment amounts.
    (ii) 100 percent of the weighted average of all local payment 
amounts if the local payment amount exceeds the weighted average of all 
local payment amounts.
    (iii) 85 percent of the weighted average of all local payment 
amounts if the local payment amount is less than 85 percent of the 
weighted average of all local payment amounts.
    (4) For 1994 and subsequent years, the national limited payment 
amount is equal to one of the following:
    (i) If the local payment amount is not in excess of the median, nor 
less than 85 percent of the median, of all local payment amounts--100 
percent of the local payment amount.
    (ii) If the local payment amount exceeds the median--100 percent of 
the median of all local payment amounts.
    (iii) If the local payment amount is less than 85 percent of the 
median--85 percent of the median of all local payment amounts.
    (g) Payment for surgical dressings. For surgical dressings furnished 
after December 31, 1993, the national limited payment amount is computed 
based on local payment amounts using average reasonable charges for the 
12-month period ending December 31, 1992, increased by the covered item 
updates for 1993 and 1994.

[57 FR 57689, Dec. 7, 1992, as amended at 60 FR 35497, July 10, 1995]



Sec. 414.222  Items requiring frequent and substantial servicing.

    (a) Definition. Items requiring frequent and substantial servicing 
in order to avoid risk to the beneficiary's health are the following:
    (1) Ventilators (except those that are either continuous airway 
pressure devices or intermittent assist devices with continuous airway 
pressure devices).
    (2) Continuous and intermittent positive pressure breathing 
machines.
    (3) Continuous passive motion machines.
    (4) Other items specified in CMS program instructions.
    (5) Other items identified by the carrier.
    (b) Payment rule. Rental payments for items requiring frequent and 
substantial servicing are made on a monthly basis, and continue until 
medical necessity ends.
    (c) Fee schedule amount for 1989 and 1990. The fee schedule amount 
for items requiring frequent and substantial servicing is the local 
payment amount determined as follows:
    (1) The carrier determines the average reasonable charge for rental 
of items requiring frequent and substantial servicing that were 
furnished during the period July 1, 1986 through June 30, 1987 based on 
the mean of the carrier's allowed charges for the item.
    (2) The carrier adjusts the amounts determined under paragraph 
(c)(1) of this section by the change in the level of the CPI-U for the 
6-month period ending December 1987.
    (d) Updating the fee schedule amounts for years after 1990. For 
years after 1990, the fee schedules are determined using the methodology 
contained in paragraphs (d), (e), and (f) of Sec. 414.220.
    (e) Transition to other payment classes. For purposes of calculating 
the 15-month rental period, beginning January 1, 1994, if an item has 
been paid for under the frequent and substantial servicing class and is 
subsequently paid for under another payment class, the

[[Page 640]]

rental period begins with the first month of continuous rental, even if 
that period began before January 1, 1994. For example, if the rental 
period began on July 1, 1993, the carrier must use this date as 
beginning the first month of rental. Likewise, for purposes of 
calculating the 10-month purchase option, the rental period begins with 
the first month of continuous rental without regard to when that period 
started. For example, if the rental period began in August 1993, the 10-
month purchase option must be offered to the beneficiary in May 1994, 
the tenth month of continuous rental.

[57 FR 57690, Dec. 7, 1992, as amended at 60 FR 35497, July 10, 1995]



Sec. 414.224  Customized items.

    (a) Criteria for a customized item. To be considered a customized 
item for payment purposes under paragraph (b) of this section, a covered 
item (including a wheelchair) must be uniquely constructed or 
substantially modified for a specific beneficiary according to the 
description and orders of a physician and be so different from another 
item used for the same purpose that the two items cannot be grouped 
together for pricing purposes.
    (b) Payment rule. Payment is made on a lump sum basis for the 
purchase of a customized item based on the carrier's individual 
consideration and judgment of a reasonable payment amount for each 
customized item. The carrier's individual consideration takes into 
account written documentation on the costs of the item including at 
least the cost of labor and materials used in customizing an item.

[56 FR 65998, Dec. 20, 1991, as amended at 58 FR 34919, June 30, 1993]



Sec. 414.226  Oxygen and oxygen equipment.

    (a) Payment rules. (1) Payment for rental of oxygen equipment and 
purchase of oxygen contents is made based on a monthly fee schedule 
amount.
    (2) Monthly fee schedule payments continue until medical necessity 
ends.
    (b) Monthly fee schedule amount. (1) Monthly fee schedule amounts 
are separately calculated for the following items:
    (i) Stationary oxygen equipment and oxygen contents (stationary and 
portable oxygen contents).
    (ii) Portable oxygen equipment only.
    (iii) Stationary and portable oxygen contents only.
    (iv) Portable oxygen contents only.
    (2) For 1989 and 1990, the monthly fee schedule amounts are the 
local payment amounts determined as follows:
    (i) The carrier determines the base local average monthly payment 
rate equal to the total reasonable charges for the item for the 12-month 
period ending December 1986 divided by the total number of months for 
all beneficiaries receiving the item for the same period. In determining 
the local average monthly payment rate, the following limitations apply:
    (A) Purchase charges for oxygen systems are not included as items 
classified under paragraph (b)(1)(i) of this section.
    (B) Purchase charges for portable equipment are not included as 
items classified under paragraph (b)(1)(ii) of this section.
    (ii) The carrier determines the local monthly payment amount equal 
to 0.95 times the base local average monthly payment amount adjusted by 
the change in the CPI-U for the six-month period ending December 1987.
    (3) For years after 1990, the fee schedule amounts are determined 
using the methodology contained in Sec. 414.220 (d), (e), and (f).
    (c) Application of monthly fee schedule amounts. (1) The fee 
schedule amount for items described in paragraph (b)(1)(i) of this 
section is paid when the beneficiary rents a stationary oxygen system.
    (2) Subject to the limitation set forth in paragraph (d)(2) of this 
section, the fee schedule amount for items described in paragraph 
(b)(1)(ii) of this section is paid when the beneficiary rents a portable 
oxygen system.
    (3) The fee schedule amount for items described in paragraph 
(b)(1)(iii) of this section is paid when the beneficiary owns a 
stationary gaseous or liquid oxygen system.
    (4) The fee schedule amount for items described in paragraph 
(b)(1)(iv) of this section is paid when the beneficiary owns or rents a 
portable gaseous or

[[Page 641]]

portable liquid oxygen system and uses either a stationary oxygen 
concentrator or no stationary oxygen system.
    (d) Volume adjustments: (1) The fee schedule amount for an item 
described in paragraph (b)(1)(i) of this section is adjusted as follows:
    (i) If the attending physician prescribes an oxygen flow rate 
exceeding four liters per minute, the fee schedule amount is increased 
by 50 percent, subject to the limit in paragraph (d)(2) of this section.
    (ii) If the attending physician prescribes an oxygen flow rate of 
less than one liter per minute, the fee schedule amount is decreased by 
50 percent.
    (2) If portable oxygen equipment is used and the prescribed oxygen 
flow rate exceeds four liters per minute, the total fee schedule amount 
recognized for payment is limited to the higher of--
    (i) The sum of the monthly fee schedule amount for the items 
described in paragraphs (b)(1)(i) and (ii) of this section; or
    (ii) The adjusted fee schedule amount described in paragraph 
(d)(1)(i) of this section.
    (3) In establishing the volume adjustment for those beneficiaries 
whose physicians prescribe varying flow rates, the following rules 
apply:
    (i) If the prescribed flow rate is different for stationary oxygen 
equipment than for portable oxygen equipment, the flow rate for the 
stationary equipment is used.
    (ii) If the prescribed flow rate is different for the patient at 
rest than for the patient at exercise, the flow rate for the patient at 
rest is used.
    (iii) If the prescribed flow rate is different for nighttime use and 
daytime use, the average of the two flow rates is used.

[57 FR 57690, Dec. 7, 1992]



Sec. 414.228  Prosthetic and orthotic devices.

    (a) Payment rule. Payment is made on a lump-sum basis for prosthetic 
and orthotic devices subject to this subpart.
    (b) Fee schedule amounts. The fee schedule amount for prosthetic and 
orthotic devices is determined as follows:
    (1) The carrier determines a base local purchase price equal to the 
average reasonable charge for items purchased during the period July 1, 
1986 through June 30, 1987 based on the mean of the carrier's allowed 
charges for the item.
    (2) The carrier determines a local purchase price equal to the 
following:
    (i) For 1989 and 1990, the base local purchase price is adjusted by 
the change in the level of the CPI-U for the 6-month period ending 
December 1987.
    (ii) For 1991 through 1993, the local purchase price for the 
preceding year is adjusted by the applicable percentage increase for the 
year. The applicable percentage increase is equal to 0 percent for 1991. 
For 1992 and 1993, the applicable percentage increase is equal to the 
percentage increase in the CPI-U for the 12-month period ending with 
June of the previous year.
    (iii) For 1994 and 1995, the applicable percentage increase is 0 
percent.
    (iv) For all subsequent years the applicable percentage increase is 
equal to the percentage increase in the CPI-U for the 12-month period 
ending with June of the previous year.
    (3) CMS determines the regional purchase price equal to the 
following:
    (i) For 1992, the average (weighted by the relative volume of all 
claims among carriers) of the local purchase prices for the carriers in 
the region.
    (ii) For 1993 and subsequent years, the regional purchase price for 
the preceding year adjusted by the applicable percentage increase for 
the year.
    (4) CMS determines a purchase price equal to the following:
    (i) For 1989, 1990 and 1991, 100 percent of the local purchase 
price.
    (ii) For 1992, 75 percent of the local purchase price plus 25 
percent of the regional purchase price.
    (iii) For 1993, 50 percent of the local purchase price plus 50 
percent of the regional purchase price.
    (iv) For 1994 and subsequent years, 100 percent of the regional 
purchase price.
    (5) For 1992 and subsequent years, CMS determines a national average 
purchase price equal to the unweighted average of the purchase prices 
determined under paragraph (b)(4) of this section for all carriers.

[[Page 642]]

    (6) CMS determines the fee schedule amount equal to 100 percent of 
the purchase price determined under paragraph (b)(4) of this section, 
subject to the following limitations:
    (i) For 1992, the amount cannot be greater than 125 percent nor less 
than 85 percent of the national average purchase price determined under 
paragraph (b)(5) of this section.
    (ii) For 1993 and subsequent years, the amount cannot be greater 
than 120 percent of the national average nor less than 90 percent of the 
national average purchase price determined under paragraph (b)(5) of 
this section.

[57 FR 57691, Dec. 7, 1992, as amended at 60 FR 35498, July 10, 1995]



Sec. 414.229  Other durable medical equipment--capped rental items.

    (a) General payment rule. Subject to the limitation set forth in 
paragraph (b) of this section, payment is made on a rental or purchase 
option basis for other durable medical equipment that is not subject to 
the payment provisions set forth in Secs. 414.220 through 414.228.
    (b) Fee schedule amounts for rental. (1) For 1989 and 1990, the 
monthly fee schedule amount for rental of other covered durable medical 
equipment equals 10 percent of the purchase price recognized as 
determined under paragraph (c) of this section subject to the following 
limitation: For 1989 and 1990, the fee schedule amount cannot be greater 
than 115 percent nor less than 85 percent of the prevailing charge, as 
determined under Sec. 405.504 of this chapter, established for rental of 
the item in January 1987, as adjusted by the change in the level of the 
CPI-U for the 6-month period ending December 1987.
    (2) For 1991 and subsequent years, the monthly fee schedule amount 
for rental of other covered durable medical equipment equals 10 percent 
of the purchase price recognized as determined under paragraph (c) of 
this section for each of the first 3 months and 7.5 percent of the 
purchase price for each of the remaining months.
    (c) Determination of purchase price. The purchase price of other 
covered durable medical equipment is determined as follows:
    (1) For 1989 and 1990. (i) The carrier determines a base local 
purchase price amount equal to the average of the purchase prices 
submitted on an assignment-related basis of new items supplied during 
the 6-month period ending December 1986.
    (ii) The purchase price is equal to the base local purchase price 
adjusted by the change in the level of the CPI-U for the 6-month period 
ending December 1987.
    (2) For 1991. (i) The local payment amount is the purchase price for 
the preceding year adjusted by the covered item update for 1991 and 
decreased by the percentage by which the average of the reasonable 
charges for claims paid for all other items described in Sec. 414.229, 
is lower than the average of the purchase prices submitted for such 
items during the final 9 months of 1988.
    (ii) The purchase price for 1991 is the national limited payment 
amount as determined using the methodology contained in Sec. 414.220(f).
    (3) For years after 1991. The purchase price is determined using the 
methodology contained in paragraphs (d) through (f) of Sec. 414.220.
    (d) Purchase option. Suppliers must offer a purchase option to 
beneficiaries during the 10th continuous rental month and, for power-
driven wheelchairs, the purchase option must also be made available at 
the time the equipment is initially furnished.
    (1) Suppliers must offer beneficiaries the option of purchasing 
power-driven wheelchairs at the time the supplier first furnishes the 
item. Payment must be on a lump-sum fee schedule purchase basis if the 
beneficiary chooses the purchase option. The purchase fee is the amount 
established in Sec. 414.229(c).
    (2) Suppliers must offer beneficiaries the option of converting 
capped rental items (including power-driven wheelchairs not purchased 
when initially furnished) to purchased equipment during their 10th 
continuous rental month. Beneficiaries have one month from the date the 
supplier makes the offer to accept the purchase option.
    (i) If the beneficiary does not accept the purchase option, payment 
continues on a rental basis not to exceed a period of continuous use of 
longer than 15 months. After 15 months of rental

[[Page 643]]

payments have been paid, the supplier must continue to provide the item 
without charge, other than a charge for maintenance and servicing fees, 
until medical necessity ends or Medicare coverage ceases. A period of 
continuous use is determined under the provisions in Sec. 414.230.
    (ii) If the beneficiary accepts the purchase option, payment 
continues on a rental basis not to exceed a period of continuous use of 
longer than 13 months. On the first day after 13 continuous rental 
months during which payment is made, the supplier must transfer title to 
the equipment to the beneficiary.
    (e) Payment for maintenance and servicing. (1) The carrier 
establishes a reasonable fee for maintenance and servicing for each 
rented item of other durable medical equipment. The fee may not exceed 
10 percent of the purchase price recognized as determined under 
paragraph (c) of this section.
    (2) Payment of the fee for maintenance and servicing of other 
durable medical equipment that is rented is made only for equipment that 
continues to be used after 15 months of rental payments have been made 
and is limited to the following:
    (i) For the first 6-month period, no payments are to be made.
    (ii) For each succeeding 6-month period, payment may be made during 
the first month of that period.
    (3) Payment for maintenance and servicing DME purchased in 
accordance with paragraphs (d)(1) and (d)(2)(ii) of this section, is 
made on the basis of reasonable and necessary charges.
    (f) Transition to the fee schedules. For purposes of computing the 
10-month or 15-month period of continuous use for other durable medical 
equipment, as described in Sec. 414.230, the carrier counts the first 
month that the beneficiary continuously rented the equipment without 
regard to whether that month occurred before January 1, 1989 or after. 
If a beneficiary's 15-month rental period ends prior to January 1, 1989, 
no further purchase or rental payments are to be made except for 
maintenance and servicing of equipment as described in paragraph (e) of 
this section.
    (g) Replacement of equipment. If the item of equipment has been in 
continuous use by the patient on either a rental or purchase basis for 
the equipment's useful lifetime, or if the carrier determines that the 
item is lost or irreparably damaged, the patient may elect to obtain a 
new piece of equipment.
    (1) The reasonable useful lifetime of DME or prosthetic and orthotic 
devices is determined through program instructions. In the absence of 
program instructions, carriers may determine the reasonable useful 
lifetime of equipment but in no case can it be less than 5 years. 
Computation is based on when the equipment is delivered to the 
beneficiary, not the age of the equipment.
    (2) If the beneficiary elects to obtain replacement equipment, 
payment is made on a rental or purchase basis in accordance with 
paragraph (a) of this section or on a lump-sum purchase basis if a 
purchase agreement had been entered into in accordance with paragraph 
(d) of this section.

[57 FR 57691, Dec. 7, 1992, as amended at 60 FR 35498, July 10, 1995]



Sec. 414.230  Determining a period of continuous use.

    (a) Scope. This section sets forth the rules that apply in 
determining a period of continuous use for rental of durable medical 
equipment.
    (b) Continuous use. A period of continuous use begins with the first 
month of medical need and lasts until a beneficiary's medical need for a 
particular item of durable medical equipment ends.
    (c) Temporary interruption. (1) A period of continuous use allows 
for temporary interruptions in the use of equipment.
    (2) An interruption of not longer than 60 consecutive days plus the 
days remaining in the rental month in which use ceases is temporary, 
regardless of the reason for the interruption.
    (3) Unless there is a break in medical necessity that lasts lnnger 
than 60 consecutive days plus the days remaining in the rental month in 
which use ceases, medical necessity is presumed to continue.
    (d) Criteria for a new rental period. If an interruption in the use 
of equipment

[[Page 644]]

continues for more than 60 consecutive days plus the days remaining in 
the rental month in which use ceases, a new rental period begins if the 
supplier submits all of the following information--
    (1) A new prescription.
    (2) New medical necessity documentation.
    (3) A statement describing the reason for the interruption and 
demonstrating that medical necessity in the prior episode ended.
    (e) Beneficiary moves. A permanent or temporary move made by a 
beneficiary does not constitute an interruption in the period of 
continuous use.
    (f) New equipment. If a beneficiary changes equipment or requires 
additional equipment based on a physician's prescription, and the new or 
additional equipment is found to be necessary, a new period of 
continuous use begins for the new or additional equipment. A new period 
of continuous use does not begin for base equipment that is modified by 
an addition.
    (g) New supplier. If a beneficiary changes suppliers, a new period 
of continuous use does not begin.

[56 FR 50823, Oct. 9, 1991, as amended at 57 FR 57111, Dec. 3, 1992]



Sec. 414.232  Special payment rules for transcutaneous electrical nerve stimulators (TENS).

    (a) General payment rule. Except as provided in paragraph (b) of 
this section, payment for TENS is made on a purchase basis with the 
purchase price determined using the methodology for purchase of 
inexpensive or routinely purchased items as described in Sec. 414.220. 
The payment amount for TENS computed under Sec. 414.220(c)(2) is reduced 
according to the following formula:
    (1) Effective April 1, 1990--the original payment amount is reduced 
by 15 percent.
    (2) Effective January 1, 1991--the reduced payment amount in 
paragraph (a)(1) is reduced by 15 percent.
    (3) Effective January 1, 1994--the reduced payment amount in 
paragraph (a)(1) is reduced by 45 percent.
    (b) Exception. In order to permit an attending physician time to 
determine whether the purchase of the TENS is medically appropriate for 
a particular patient, two months of rental payments may be made in 
addition to the purchase price. The rental payments are equal to 10 
percent of the purchase price.

[57 FR 57692, Dec. 7, 1992, as amended at 60 FR 35498, July 10, 1995]



  Subpart E--Determination of Reasonable Charges Under the ESRD Program



Sec. 414.300  Scope of subpart.

    This subpart sets forth criteria and procedures for payment of the 
following services furnished to ESRD patients:
    (a) Physician services related to renal dialysis.
    (b) Physician services related to renal transplantation.
    (c) Home dialysis equipment, supplies, and support services.
    (d) Epoetin (EPO) furnished by a supplier of home dialysis equipment 
and supplies to a home dialysis patient for use in the home.

[55 FR 23441, June 8, 1990, as amended at 56 FR 43710, Sept. 4, 1991; 59 
FR 1285, Jan. 10, 1994]



Sec. 414.310  Determination of reasonable charges for physician services furnished to renal dialysis patients.

    (a) Principle. Physician services furnished to renal dialysis 
patients are subject to payment if the services are otherwise covered by 
the Medicare program and if they are considered reasonable and medically 
necessary in accordance with section 1862(a)(1)(A) of the Act.
    (b) Scope and applicability--(1) Scope. This section pertains to 
physician services furnished to the following patients:
    (i) Outpatient maintenance dialysis patients who dialyze--
    (A) In an independent or hospital-based ESRD facility, or
    (B) At home.
    (ii) Hospital inpatients for which the physician elects to continue 
payment under the monthly capitation payment (MCP) method described in 
Sec. 414.314.
    (2) Applicability. These provisions apply to routine professional 
services

[[Page 645]]

of physicians. They do not apply to administrative services performed by 
physicians, which are paid for as part of a prospective payment for 
dialysis services made to the facility under Sec. 413.170 of this 
chapter.
    (c) Definitions. For purposes of this section, the following 
definitions apply:
    Administrative services are physician services that are 
differentiated from routine professional services and other physician 
services because they are supervision, as described in the definition of 
``supervision of staff'' of this section, or are not related directly to 
the care of an individual patient, but are supportive of the facility as 
a whole and of benefit to patients in general. Examples of 
administrative services include supervision of staff, staff training, 
participation in staff conferences and in the management of the 
facility, and advising staff on the procurement of supplies.
    Dialysis session is the period of time that begins when the patient 
arrives at the facility and ends when the patient departs from the 
facility. In the case of home dialysis, the period begins when the 
patient prepares for dialysis and generally ends when the patient is 
disconnected from the machine. In this context, a dialysis facility 
includes only those parts of the building used as a facility. It does 
not include any areas used as a physician's office.
    Medical direction, in contrast to supervision of staff, is a routine 
professional service that entails substantial direct involvement and the 
physical presence of the physician in the delivery of services directly 
to the patient.
    Routine professional services include all physicians' services 
furnished during a dialysis session and all services listed in paragraph 
(d) of this section that meet the following requirements:
    (1) They are personally furnished by a physician to an individual 
patient.
    (2) They contribute directly to the diagnosis or treatment of an 
individual patient.
    (3) They ordinarily must be performed by a physician.
    Supervision of staff, in contrast to medical direction, is an 
administrative service that does not necessarily require the physician 
to be present at the dialysis session. It is a general activity 
primarily concerned with monitoring performance of and giving guidance 
to other health care personnel (such as nurses and dialysis technicians) 
who deliver services to patients.
    (d) Types of routine professional services. Routine professional 
services include at least all of the following services when medically 
appropriate:
    (1) Visits to the patient during dialysis, and review of laboratory 
test results, nurses' notes and any other medical documentation, as a 
basis for--
    (i) Adjustment of the patient's medication or diet, or the dialysis 
procedure;
    (ii) Prescription of medical supplies; and
    (iii) Evaluation of the patient's psychosocial status and the 
appropriateness of the treatment modality.
    (2) Medical direction of staff in delivering services to a patient 
during a dialysis session.
    (3) Pre-dialysis and post-dialysis examinations, or examinations 
that could have been furnished on a pre-dialysis or post-dialysis basis.
    (4) Insertion of catheters for patients who are on peritoneal 
dialysis and do not have indwelling catheters.
    (e) Payment for routine professional services. Beginning August 7, 
1990, routine professional services furnished by physicians may be paid 
under either the ``initial method'' of payment described in 
Sec. 414.313, (if all of the physicians at the facility elect the 
initial method) or under the ``physician MCP method'' described in 
Sec. 414.314. Physician services furnished after July 31, 1983 and 
before August 6, 1990, are payable only under the MCP method described 
in Sec. 414.314.



Sec. 414.313  Initial method of payment.

    (a) Basic rule. Under this method, the intermediary pays the 
facility for routine professional services furnished by physicians. 
Payment is in the form of an add-on to the facility's composite rate 
payment, which is described in part 413, subpart H of this subchapter.
    (b) Services for which payment is not included in the add-on 
payment. (1) Physician administrative services are considered to be 
facility services and are

[[Page 646]]

paid for as part of the facility's composite rate.
    (2) The carrier pays the physician or the beneficiary (as 
appropriate) under the reasonable charge criteria set forth in subpart E 
of part 405 of this chapter for the following services:
    (i) Physician services that must be furnished at a time other than 
during the dialysis session (excluding pre-dialysis and post-dialysis 
examinations and examinations that could have been furnished on a pre-
dialysis or post-dialysis basis), such as monthly and semi-annual 
examinations to review health status and treatment.
    (ii) Physician surgical services other than insertion of catheters 
for patients who are on peritoneal dialysis and do not have indwelling 
catheters.
    (iii) Physician services furnished to hospital inpatients who were 
not admitted solely to receive maintenance dialysis.
    (iv) Administration of hepatitis B vaccine.
    (c) Physician election of the initial method. (1) Each physician in 
a facility must submit to the appropriate carrier and intermediary that 
serve the facility a statement of election of the initial method of 
payment for all the ESRD facility patients that he or she attends.
    (2) The initial method of payment applies to dialysis services 
furnished beginning with the second calendar month after the month in 
which all physicians in the facility elect the initial method and 
continues until the effective date of a termination of the election 
described in paragraph (d) of this section.
    (d) Termination of the initial method. (1) Physicians may terminate 
the initial method of payment by written notice to the carrier(s) that 
serves each physician and to the intermediary that serves the facility.
    (2) If the notice terminating the initial method is received by the 
carrier(s) and intermediary--
    (i) On or before November 1, the effective date of the termination 
is January 1 of the year following the calendar year in which the 
termination notice is received by the carrier(s) and intermediary; or
    (ii) After November 1, the effective date of the termination is 
January 1 of the second year after the calendar year in which the notice 
is received by the carrier(s) and intermediary.
    (e) Determination of payment amount. The factors used in determining 
the add-on amount are related to program experience. They are re-
evaluated periodically and may be adjusted, as determined necessary by 
CMS, to maintain the payment at a level commensurate with the prevailing 
charges of other physicians for comparable services.
    (f) Publication of payment amount. Revisions to the add-on amounts 
are published in the Federal Register in accordance with the 
Department's established rulemaking procedures.

[55 FR 23441, June 8, 1990, as amended at 62 FR 43674, Aug. 15, 1997]



Sec. 414.314  Monthly capitation payment method.

    (a) Basic rules. (1) Under the monthly capitation payment (MCP) 
method, the carrier pays an MCP amount for each patient, to cover all 
professional services furnished by the physician, except those listed in 
paragraph (b) of this section.
    (2) The carrier pays the MCP amount, subject to the deductible and 
coinsurance provisions, either to the physician if the physician accepts 
assignment or to the beneficiary if the physician does not accept 
assignment.
    (3) The MCP method recognizes the need of maintenance dialysis 
patients for physician services furnished periodically over relatively 
long periods of time, and the capitation amounts are consistent with 
physicians' charging patterns in their localities.
    (4) Payment of the capitation amount for any particular month is 
contingent upon the physician furnishing to the patient all physician 
services required by the patient during the month, except those listed 
in paragraph (b) of this section.
    (5) Payment for physician administrative services (Sec. 414.310) is 
made to the dialysis facility as part of the facility's composite rate 
(part 413, subpart H of this subchapter) and not to the physician under 
the MCP.
    (b) Services not included in the MCP. (1) Services that are not 
included in

[[Page 647]]

the MCP and which may be paid in accordance with the reasonable charge 
rules set forth in subpart E of part 405 of this chapter are limited to 
the following:
    (i) Administration of hepatitis B vaccine.
    (ii) Covered physician services furnished by another physician when 
the patient is not available to receive, or the attending physician is 
not available to furnish, the outpatient services as usual (see 
paragraph (b)(3) of this section).
    (iii) Covered physician services furnished to hospital inpatients, 
including services related to inpatient dialysis, by a physician who 
elects not to continue to receive the MCP during the period of inpatient 
stay.
    (iv) Surgical services, including declotting of shunts, other than 
the insertion of catheters for patients on maintenance peritoneal 
dialysis who do not have indwelling catheters.
    (v) Needed physician services that are--
    (A) Furnished by the physician furnishing renal care or by another 
physician;
    (B) Not related to the treatment of the patient's renal condition; 
and
    (C) Not furnished during a dialysis session or an office visit 
required because of the patient's renal condition.
    (2) For the services described in paragraph (b)(1)(v) of this 
section, the following rules apply:
    (i) The physician must provide documentation to show that the 
services are not related to the treatment of the patient's renal 
condition and that additional visits are required.
    (ii) The carrier's medical staff, acting on the basis of the 
documentation and appropriate medical consultation obtained by the 
carrier, determines whether additional payment for the additional 
services is warranted.
    (3) The MCP is reduced in proportion to the number of days the 
patient is--
    (i) Hospitalized and the physician elects to bill separately for 
services furnished during hospitalization; or
    (ii) Not attended by the physician or his or her substitute for any 
reason, including when the physician is not available to furnish patient 
care or when the patient is not available to receive care.
    (c) Determination of payment amount. The amount of payment for the 
MCP is determined under the Medicare physician fee schedule described in 
this part 414.

[55 FR 23441, June 8, 1990, as amended at 59 FR 63463, Dec. 8, 1994; 62 
FR 43674, Aug. 15, 1997]



Sec. 414.316  Payment for physician services to patients in training for self-dialysis and home dialysis.

    (a) For each patient, the carrier pays a flat amount that covers all 
physician services required to create the capacity for self-dialysis and 
home dialysis.
    (b) CMS determines the amount on the basis of program experience and 
reviews it periodically.
    (c) The payment is made at the end of the training course, is 
subject to the deductible and coinsurance provisions, and is in addition 
to any amounts payable under the initial or MCP methods set forth in 
Secs. 414.313 and 414.314, respectively.
    (d) If the training is not completed, the payment amount is 
proportionate to the time spent in training.



Sec. 414.320  Determination of reasonable charges for physician renal transplantation services.

    (a) Comprehensive payment for services furnished during a 60-day 
period. (1) The comprehensive payment is subject to the deductible and 
coinsurance provisions and is for all surgeon services furnished during 
a period of 60 days in connection with a renal transplantation, 
including the usual preoperative and postoperative care, and for 
immunosuppressant therapy if supervised by the transplant surgeon.
    (2) Additional sums, in amounts established on the basis of program 
experience, may be included in the comprehensive payment for other 
surgery performed concurrently with the transplant operation.
    (3) The amount of the comprehensive payment may not exceed the lower 
of the following:
    (i) The actual charges made for the services.
    (ii) Overall national payment levels established under the ESRD 
program

[[Page 648]]

and adjusted to give effect to variations in physician's charges 
throughout the nation. (These adjusted amounts are the maximum 
allowances in a carrier's service area for renal transplantation surgery 
and related services by surgeons.)
    (4) Maximum allowances computed under these instructions are revised 
at the beginning of each calendar year to the extent permitted by the 
lesser of the following:
    (i) Changes in the economic index as described in 
Sec. 405.504(a)(3)(i) of this chapter.
    (ii) Percentage changes in the weighted average of the carrier's 
prevailing charges (before adjustment by the economic index) for--
    (A) A unilateral nephrectomy; or
    (B) Another medical or surgical service designated by CMS for this 
purpose.
    (b) Other payments. Payments for covered medical services furnished 
to the transplant recipient by other specialists, as well as for 
services by the transplant surgeon after the 60-day period covered by 
the comprehensive payment, are made under the reasonable charge criteria 
set forth in Sec. 405.502 (a) through (d) of this chapter. The payments 
for physicians' services in connection with renal transplantations are 
changed on the basis of program experience and the expected advances in 
the medical art for this operation.



Sec. 414.330  Payment for home dialysis equipment, supplies, and support services.

    (a) Equipment and supplies--(1) Basic rule. Except as provided in 
paragraph (a)(2) of this section, Medicare pays for home dialysis 
equipment and supplies only under the prospective payment rates 
established at Sec. 413.170.
    (2) Exception. If the conditions in subparagraphs (a)(2) (i) through 
(iv) of this section are met, Medicare pays for home analysis equipment 
and supplies on a reasonable charge basis in accordance with subpart E 
(Criteria for Determination of Reasonable Charges; Reimbursement for 
Services of Hospital Interns, Residents, and Supervising Physicians) of 
part 405, but the amount of payment may not exceed the limit for 
equipment and supplies in paragraph (c)(2) of this section.
    (i) The patient elects to obtain home dialysis equipment and 
supplies from a supplier that is not a Medicare approved dialysis 
facility.
    (ii) The patient certifies to CMS that he or she has only one 
supplier for all home dialysis equipment and supplies. This 
certification is made on CMS Form 382 (the ``ESRD Beneficiary 
Selection'' form).
    (iii) In writing, the supplier--
    (A) Agrees to receive Medicare payment for home dialysis supplies 
and equipment only on an assignment-related basis; and
    (B) Certifies to CMS that it has a written agreement with one 
Medicare approved dialysis facility or, if the beneficiary is also 
entitled to military or veteran's benefits, one military or Veterans 
Administration hospital, for each patient. (See subpart U of part 405 of 
this chapter for the requirements for a Medicare approved dialysis 
facility.) Under the agreement, the facility or military or VA hospital 
agrees to the following:
    (1) To furnish all home dialysis support services for each patient 
in accordance with subpart U (Conditions for Coverage of Suppliers of 
ESRD Services) of this chapter. (Sec. 410.52 sets forth the scope and 
conditions of Medicare Part B coverage of home dialysis services, 
supplies, and equipment.)
    (2) To furnish institutional dialysis services and supplies. 
(Sec. 410.50 sets forth the scope and conditions for Medicare Part B 
coverage of institutional dialysis services and supplies.)
    (3) To furnish dialysis-related emergency services.
    (4) To arrange for a Medicare approved laboratory to perform 
dialysis-related laboratory tests that are covered under the composite 
rate established at Sec. 413.170 and to arrange for the laboratory to 
seek payment from the facility. The facility then includes these 
laboratory services in its claim for payment for home dialysis support 
services.
    (5) To arrange for a Medicare approved laboratory to perform 
dialysis-related laboratory tests that are not covered under the 
composite rate established at Sec. 413.170 and for which the laboratory 
files a Medicare claim directly.

[[Page 649]]

    (6) To furnish all other necessary dialysis services and supplies 
(that is, those which are not home dialysis equipment and supplies).
    (7) To satisfy all documentation, recordkeeping and reporting 
requirements in subpart U (Conditions for Coverage of Suppliers of ESRD 
Services) of this chapter. This includes maintaining a complete medical 
record of ESRD related items and services furnished by other parties. 
The facility must report, on the forms required by CMS or the ESRD 
network, all data for each patient in accordance with subpart U.
    (iv) The facility with which the agreement is made must be located 
within a reasonable distance from the patient's home (that is, located 
so that the facility can actually furnish the needed services in a 
practical and timely manner, taking into account variables like the 
terrain, whether the patient's home is located in an urban or rural 
area, the availability of transportation, and the usual distances 
traveled by patients in the area to obtain health care services).
    (b) Support services--(1) Basic rule. Except as provided in 
paragraph (b)(2) of this section, Medicare pays for support services 
only under the prospective payment rates established in Sec. 413.170 of 
this chapter.
    (2) Exceptions. If the patient elects to obtain home dialysis 
equipment and supplies from a supplier that is not an approved ESRD 
facility, Medicare pays for support services, other than support 
services furnished by military or VA hospitals referred to in paragraph 
(a)(2)(iii)(B) of this section, under paragraphs (b)(2) (i) and (ii) of 
this section but in no case may the amount of payment exceed the limit 
for support services in paragraph (c)(1) of this section:
    (i) For support services furnished by a hospital-based ESRD 
facility, Medicare pays on a reasonable cost basis in accordance with 
part 413 of this chapter.
    (ii) For support services furnished by an independent ESRD facility, 
Medicare pays on the basis of reasonable charges that are related to 
costs and allowances that are reasonable when the services are furnished 
in an effective and economical manner.
    (c) Payment limits--(1) Support services. The amount of payment for 
home dialysis support services is limited to the national average 
Medicare-allowed charge per patient per month for home dialysis support 
services, as determined by CMS, plus the median cost per treatment for 
all dialysis facilities for laboratory tests included under the 
composite rate, as determined by CMS, multiplied by the national average 
number of treatments per month.
    (2) Equipment and supplies. Payment for home dialysis equipment and 
supplies is limited to an amount equal to the result obtained by 
subtracting the support services payment limit in paragraph (c)(1) of 
this section from the amount (or, in the case of continuous cycling 
peritoneal dialysis, 130 percent) of the national median payment as 
determined by CMS that would have been made under the prospective 
payment rates established in Sec. 413.170 of this chapter for hospital-
based facilities.
    (3) Notification of changes to the payment limits. Updated data are 
incorporated into the payment limits when the prospective payment rates 
established at Sec. 413.170 of this chapter are updated, and changes are 
announced by notice in the Federal Register without a public comment 
period. Revisions of the methodology for determining the limits are 
published in the Federal Register in accordance with the Department's 
established rulemaking procedures.

[57 FR 54187, Nov. 17, 1992]



Sec. 414.335  Payment for EPO furnished to a home dialysis patient for use in the home.

    (a) Payment for EPO used at home by a home dialysis patient is made 
only to either a Medicare approved ESRD facility or a supplier of home 
dialysis equipment and supplies.
    (b) Payment is made in accordance with the rules set forth in 
Sec. 413.170 of this chapter.

[56 FR 43710, Sept. 4, 1991]

Subparts F-G [Reserved]

[[Page 650]]



             Subpart H--Fee Schedule for Ambulance Services

[67 FR 9132, Feb. 27, 2002]



Sec. 414.601  Purpose.

    This subpart implements section 1834(l) of the Act by establishing a 
fee schedule for the payment of ambulance services. Section 1834(l) of 
the Act requires that, except for services furnished by certain critical 
access hospitals (see Sec. 413.70(b)(5) of this chapter), payment for 
all ambulance services, otherwise previously payable on a reasonable 
charge basis or retrospective reasonable cost basis, be made under a fee 
schedule.



Sec. 414.605  Definitions.

    As used in this subpart, the following definitions apply to both 
land and water (hereafter collectively referred to as ``ground'') 
ambulance services and to air ambulance services unless otherwise 
specified:
    Advanced life support (ALS) assessment is an assessment performed by 
an ALS crew as part of an emergency response that was necessary because 
the patient's reported condition at the time of dispatch was such that 
only an ALS crew was qualified to perform the assessment. An ALS 
assessment does not necessarily result in a determination that the 
patient requires an ALS level of service.
    Advanced life support (ALS) intervention means a procedure that is, 
in accordance with State and local laws, beyond the scope of authority 
of an emergency medical technician-basic (EMT-Basic).
    Advanced life support, level 1 (ALS1) means transportation by ground 
ambulance vehicle, medically necessary supplies and services and either 
an ALS assessment by ALS personnel or the provision of at least one ALS 
intervention.
    Advanced life support, level 2 (ALS2) means either transportation by 
ground ambulance vehicle, medically necessary supplies and services, and 
the administration of at least three medications by intravenous push/
bolus or by continuous infusion excluding crystalloid, hypotonic, 
isotonic, and hypertonic solutions (Dextrose, Normal Saline, Ringer's 
Lactate); or transportation, medically necessary supplies and services, 
and the provision of at least one of the following ALS procedures:
    (1) Manual defibrillation/cardioversion.
    (2) Endotracheal intubation.
    (3) Central venous line.
    (4) Cardiac pacing.
    (5) Chest decompression.
    (6) Surgical airway.
    (7) Intraosseous line.
    Advanced life support (ALS) personnel means an individual trained to 
the level of the emergency medical technician-intermediate (EMT-
Intermediate) or paramedic. The EMT-Intermediate is defined as an 
individual who is qualified, in accordance with State and local laws, as 
an EMT-Basic and who is also qualified in accordance with State and 
local laws to perform essential advanced techniques and to administer a 
limited number of medications. The EMT-Paramedic is defined as 
possessing the qualifications of the EMT-Intermediate and also, in 
accordance with State and local laws, as having enhanced skills that 
include being able to administer additional interventions and 
medications.
    Basic life support (BLS) means transportation by ground ambulance 
vehicle and medically necessary supplies and services, plus the 
provision of BLS ambulance services. The ambulance must be staffed by an 
individual who is qualified in accordance with State and local laws as 
an emergency medical technician-basic (EMT-Basic). These laws may vary 
from State to State. For example, only in some States is an EMT-Basic 
permitted to operate limited equipment on board the vehicle, assist more 
qualified personnel in performing assessments and interventions, and 
establish a peripheral intravenous (IV) line.
    Conversion factor (CF) is the dollar amount established by CMS that 
is multiplied by relative value units to produce ground ambulance 
service base rates.
    Emergency response means responding immediately at the BLS or ALS1 
level of service to a 911 call or the equivalent in areas without a 911 
call system. An

[[Page 651]]

immediate response is one in which the ambulance supplier begins as 
quickly as possible to take the steps necessary to respond to the call.
    Fixed wing air ambulance (FW) means transportation by a fixed wing 
aircraft that is certified as a fixed wing air ambulance and such 
services and supplies as may be medically necessary.
    Geographic adjustment factor (GAF) means the practice expense (PE) 
portion of the geographic practice cost index (GPCI) from the physician 
fee schedule as applied to a percentage of the base rate. For ground 
ambulance services, the PE portion of the GPCI is applied to 70 percent 
of the base rate for each level of service. For air ambulance services, 
the PE portion of the GPCI is applied to 50 percent of the applicable 
base rate.
    Goldsmith modification means the recognition of rural areas within 
certain Standard Metropolitan Statistical Areas wherein a census tract 
is deemed to be rural when located within a large metropolitan county of 
at least 1,225 square miles, but is so isolated from the metropolitan 
core of that county by distance or physical features as to be more rural 
than urban in character.
    Loaded mileage means the number of miles the Medicare beneficiary is 
transported in the ambulance vehicle.
    Paramedic ALS intercept (PI) means EMT-Paramedic services furnished 
by an entity that does not furnish the ground ambulance transport, 
provided the services meet the requirements specified in Sec. 410.40(c) 
of this chapter.
    Point of pick-up means the location of the beneficiary at the time 
he or she is placed on board the ambulance.
    Relative value units (RVUs) means a value assigned to a ground 
ambulance service.
    Rotary wing air ambulance (RW) means transportation by a helicopter 
that is certified as an ambulance and such services and supplies as may 
be medically necessary.
    Rural adjustment factor (RAF) means an adjustment applied to the 
base payment rate when the point of pick-up is located in a rural area.
    Rural area means an area located outside a Metropolitan Statistical 
Area (MSA), or a New England County Metropolitan Area (NECMA), or an 
area within an MSA that is identified as rural by the Goldsmith 
modification.
    Specialty care transport (SCT) means interfacility transportation of 
a critically injured or ill beneficiary by a ground ambulance vehicle, 
including medically necessary supplies and services, at a level of 
service beyond the scope of the EMT-Paramedic. SCT is necessary when a 
beneficiary's condition requires ongoing care that must be furnished by 
one or more health professionals in an appropriate specialty area, for 
example, nursing, emergency medicine, respiratory care, cardiovascular 
care, or a paramedic with additional training.



Sec. 414.610  Basis of payment.

    (a) Method of payment. Medicare payment for ambulance services is 
based on the lesser of the actual charge or the applicable fee schedule 
amount. The fee schedule payment for ambulance services equals a base 
rate for the level of service plus payment for mileage and applicable 
adjustment factors. Except for services furnished by certain critical 
access hospitals or entities owned and operated by them, as described in 
Sec. 413.70(b) of this chapter, all ambulance services are paid under 
the fee schedule specified in this subpart (regardless of the vehicle 
furnishing the service).
    (b) Mandatory assignment. Effective with implementation of the 
ambulance fee schedule described in Sec. 414.601 (that is, for services 
furnished on or after April 1, 2002), all payments made for ambulance 
services are made only on an assignment-related basis. Ambulance 
suppliers must accept the Medicare allowed charge as payment in full and 
may not bill or collect from the beneficiary any amount other than the 
unmet Part B deductible and Part B coinsurance amounts. Violations of 
this requirement may subject the provider or supplier to sanctions, as 
provided by law (part 402 of this chapter).
    (c) Formula for computation of payment amounts. The fee schedule 
payment amount for ambulance services is computed according to the 
following provisions:
    (1) Ground ambulance service levels. The CF is multiplied by the 
applicable RVUs for each level of service to

[[Page 652]]

produce a service-level base rate. The service-level base rate is then 
adjusted by the GAF. Compare this amount to the actual charge. The 
lesser of the charge or the GAF adjusted base rate amount is added to 
the payment rate per mile, multiplied by the number of miles that the 
beneficiary was transported. When applicable, the appropriate RAF is 
applied to the ground mileage rate to determine the appropriate payment 
rates. The RVU scale for the ambulance fee schedule is as follows:

------------------------------------------------------------------------
                                                               Relative
                                                                 value
                        Service level                            units
                                                                (RVUs)
------------------------------------------------------------------------
BLS.........................................................        1.00
BLS-Emergency...............................................        1.60
ALS1........................................................        1.20
ALS1-Emergency..............................................        1.90
ALS2........................................................        2.75
SCT.........................................................        3.25
PI..........................................................        1.75
------------------------------------------------------------------------

    (2) Air ambulance service levels. The base payment rate for the 
applicable type of air ambulance service is adjusted by the GAF and, 
when applicable, by the appropriate RAF to determine the amount of 
payment. Air ambulance services have no CF or RVUs. This amount is 
compared to the actual charge. The lesser of the charge or the adjusted 
GAF rate amount is added to the payment rate per mile, multiplied by the 
number of miles that the beneficiary was transported. When applicable, 
the appropriate RAF is also applied to the air mileage rate.
    (3) Loaded mileage. Payment is made for each loaded mile. Air 
mileage is based on loaded miles flown as expressed in statute miles. 
There are three mileage payment rates: a rate for FW services, a rate 
for RW services, and a rate for all levels of ground transportation.
    (4) Geographic adjustment factor (GAF). For ground ambulance 
services, the PE portion of the GPCI from the physician fee schedule is 
applied to 70 percent of the base rate for ground ambulance services. 
For air ambulance services, the PE portion of the physician fee schedule 
GPCI is applied to 50 percent of the base rate for air ambulance 
services.
    (5) Rural adjustment factor (RAF). For ground ambulance services 
where the point of pickup is in a rural area, the mileage rate is 
increased by 50 percent for each of the first 17 miles and by 25 percent 
for miles 18 through 50. The standard mileage rate applies to every mile 
over 50 miles. For air ambulance services where the point of pickup is 
in a rural area, the total payment is increased by 50 percent; that is, 
the rural adjustment factor applies to the sum of the base rate and the 
mileage rate.
    (6) Multiple patients. The allowable amount per beneficiary for a 
single ambulance transport when more than one patient is transported 
simultaneously is based on the total number of patients (both Medicare 
and non-Medicare) on board. If two patients are transported 
simultaneously, then the payment allowance for the beneficiary (or for 
each of them if both patients are beneficiaries) is equal to 75 percent 
of the service payment allowance applicable for the level of care 
furnished to the beneficiary, plus 50 percent of the applicable mileage 
payment allowance. If three or more patients are transported 
simultaneously, the payment allowance for the beneficiary (or each of 
them) is equal to 60 percent of the service payment allowance applicable 
for the level of care furnished to the beneficiary, plus the applicable 
mileage payment allowance divided by the number of patients on board.
    (d) Payment. Payment, in accordance with this subpart, represents 
payment in full (subject to applicable Medicare Part B deductible and 
coinsurance requirements as described in subpart G of part 409 of this 
chapter or in subpart I of part 410 of this chapter) for all services, 
supplies, and other costs for an ambulance service furnished to a 
Medicare beneficiary. No direct payment will be made under this subpart 
if billing for the ambulance service is required to be consolidated with 
billing for another benefit for which payment may be made under this 
chapter.
    (e) Point of pick-up. The zip code of the point of pick-up must be 
reported on each claim for ambulance services so that the correct GAF 
and RAF may be applied, as appropriate.
    (f) Updates. The CF, the air ambulance base rates, and the mileage 
rates are updated annually by an inflation factor established by law. 
The inflation

[[Page 653]]

factor is based on the consumer price index for all urban consumers 
(CPI-U) (U.S. city average) for the 12-month period ending with June of 
the previous year.
    (g) Adjustments. The Secretary will annually review rates and will 
adjust the CF and air ambulance rates if actual experience under the fee 
schedule is significantly different from the assumptions used to 
determine the initial CF and air ambulance rates. The CF and air 
ambulance rates will not be adjusted solely because of changes in the 
total number of ambulance transports.



Sec. 414.615  Transition to the ambulance fee schedule.

    The fee schedule for ambulance services will be phased in over 5 
years beginning April 1, 2002. Subject to the first sentence in 
Sec. 414.610(a), payment for services furnished during the transition 
period is made based on a combination of the fee schedule payment for 
ambulance services and the amount the program would have paid absent the 
fee schedule for ambulance services, as follows:
    (a) 2002 Payment. For services furnished in 2002, the payment for 
the service component, the mileage component and, if applicable, the 
supply component is based on 80 percent of the reasonable charge for 
independent suppliers or on 80 percent of reasonable cost for providers, 
plus 20 percent of the ambulance fee schedule amount for the service and 
mileage components. The reasonable charge or reasonable cost portion of 
payment in CY 2002 is equal to the supplier's reasonable charge 
allowance or provider's reasonable cost allowance for CY 2001, 
multiplied by the statutory inflation factor for ambulance services.
    (b) 2003 Payment. For services furnished in CY 2003, payment is 
based on 60 percent of the reasonable charge or reasonable cost, as 
applicable, plus 40 percent of the ambulance fee schedule amount. The 
reasonable charge and reasonable cost portion in CY 2003 is equal to the 
supplier's reasonable charge or provider's reasonable cost for CY 2002, 
multiplied by the statutory inflation factor for ambulance services.
    (c) 2004 Payment. For services furnished in CY 2004, payment is 
based on 40 percent of the reasonable charge or reasonable cost, as 
applicable, plus 60 percent of the ambulance fee schedule amount. The 
reasonable charge and reasonable cost portion in CY 2004 is equal to the 
supplier's reasonable charge or provider's reasonable cost for CY 2003, 
multiplied by the statutory inflation factor for ambulance services.
    (d) 2005 Payment. For services furnished in CY 2005, payment is 
based on 20 percent of the reasonable charge or reasonable cost, as 
applicable, plus 80 percent of the ambulance fee schedule amount. The 
reasonable charge and reasonable cost portion in CY 2005 is equal to the 
supplier's reasonable charge or provider's reasonable cost for CY 2004, 
multiplied by the statutory inflation factor for ambulance services.
    (e) 2006 and Beyond Payment. For services furnished in CY 2006 and 
thereafter, the payment is based solely on the ambulance fee schedule 
amount.
    (f) Updates. The portion of the transition payment that is based on 
the existing payment methodology (that is, the non-fee-schedule portion) 
is updated annually for inflation by a factor equal to the percentage 
increase in the CPI-U (U.S. city average) for the 12-month period ending 
with June of the previous year. The CY 2002 inflation update factor used 
to update the 2001 payment amounts is applied to the annualized 
(average) payment amounts for CY 2001. For the period January 1, 2001 
through June 30, 2001, the inflation update factor is 2.7 percent. For 
the period July 1, 2001 through December 31, 2001, the inflation update 
factor is 4.7 percent. The average for the year is 3.7 percent. Thus, 
the annualized (average) CY 2001 payment amounts used to derive the CY 
2002 payment amounts are equivalent to the CY 2001 payment amounts that 
would have been determined had the inflation update factor for the 
entire CY 2001 been 3.7 percent. Both portions of the transition payment 
(that is, the portion that is based on reasonable charge or reasonable 
cost and the portion that is based on the ambulance fee schedule) are 
updated annually for inflation by the inflation factor described in 
Sec. 414.610(f).

[[Page 654]]

    (g) Exception. There will be no blended payment allowance as 
described in paragraphs (a), (b), (c), and (d) of this section for 
ground mileage in those States where the Medicare carrier paid 
separately for all out-of-county ground ambulance mileage, but did not, 
before the implementation of the Medicare ambulance fee schedule, make a 
separate payment for any ground ambulance mileage within the county in 
which the beneficiary was transported. Payment for ground ambulance 
mileage in that State will be made based on the full ambulance fee 
schedule amount for ground mileage. This exception applies only to 
carrier-processed claims and only in those States in which the carrier 
paid separately for out-of-county ambulance mileage, but did not make 
separate payment for any in-county mileage throughout the entire State.



Sec. 414.620  Publication of the ambulance fee schedule.

    Changes in payment rates resulting from incorporation of the annual 
inflation factor described in Sec. 414.610(f) will be announced by 
notice in the Federal Register without opportunity for prior comment. 
CMS will follow applicable rulemaking procedures in publishing revisions 
to the fee schedule for ambulance services that result from any factors 
other than the inflation factor.



Sec. 414.625  Limitation on review.

    There will be no administrative or judicial review under section 
1869 of the Act or otherwise of the amounts established under the fee 
schedule for ambulance services, including the following:
    (a) Establishing mechanisms to control increases in expenditures for 
ambulance services.
    (b) Establishing definitions for ambulance services that link 
payments to the type of services provided.
    (c) Considering appropriate regional and operational differences.
    (d) Considering adjustments to payment rates to account for 
inflation and other relevant factors.
    (e) Phasing in the application of the payment rates under the fee 
schedule in an efficient and fair manner.



PART 415--SERVICES FURNISHED BY PHYSICIANS IN PROVIDERS, SUPERVISING PHYSICIANS IN TEACHING SETTINGS, AND RESIDENTS IN CERTAIN SETTINGS--Table of Contents




                      Subpart A--General Provisions

Sec.
415.1  Basis and scope.

   Subpart B--Fiscal Intermediary Payments to Providers for Physician 
                                Services

415.50  Scope.
415.55  General payment rules.
415.60  Allocation of physician compensation costs.
415.70  Limits on compensation for physician services in providers.

      Subpart C--Part B Carrier Payments for Physician Services to 
                       Beneficiaries in Providers

415.100  Scope.
415.102  Conditions for fee schedule payment for physician services to 
          beneficiaries in providers.
415.105  Amounts of payment for physician services to beneficiaries in 
          providers.
415.110  Conditions for payment: Medically directed anesthesia services.
415.120  Conditions for payment: Radiology services.
415.130  Conditions for payment: Physician pathology services.

           Subpart D--Physician Services in Teaching Settings

415.150  Scope.
415.152  Definitions.
415.160  Election of reasonable cost payment for direct medical and 
          surgical services of physicians in teaching hospitals: General 
          provisions.
415.162  Determining payment for physician services furnished to 
          beneficiaries in teaching hospitals.
415.164  Payment to a fund.
415.170  Conditions for payment on a fee schedule basis for physician 
          services in a teaching setting.
415.172  Physician fee schedule payment for services of teaching 
          physicians.
415.174  Exception: Evaluation and management services furnished in 
          certain centers.
415.176  Renal dialysis services.
415.178  Anesthesia services.
415.180  Teaching setting requirements for the interpretation of 
          diagnostic radiology and other diagnostic tests.
415.184  Psychiatric services.

[[Page 655]]

415.190  Conditions of payment: Assistants at surgery in teaching 
          hospitals.

                    Subpart E--Services of Residents

415.200  Services of residents in approved GME programs.
415.202  Services of residents not in approved GME programs.
415.204  Services of residents in skilled nursing facilities and home 
          health agencies.
415.206  Services of residents in nonprovider settings.
415.208  Services of moonlighting residents.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 60 FR 63178, Dec. 8, 1995, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 415.1  Basis and scope.

    (a) Basis. This part is based on the provisions of the following 
sections of the Act: Section 1848 establishes a fee schedule for payment 
for physician services. Section 1861(q) specifies what is included in 
the term ``physician services'' covered under Medicare. Section 
1862(a)(14) sets forth the exclusion of nonphysician services furnished 
to hospital patients under Part B of Medicare. Section 1886(d)(5)(B) 
provides for a payment adjustment under the prospective payment system 
for the operating costs of inpatient hospital services furnished to 
Medicare beneficiaries in cost reporting periods beginning on or after 
October 1, 1983, to account for the indirect costs of medical education. 
Section 1886(h) establishes the methodology for Medicare payment of the 
cost of direct GME activities.
    (b) Scope. This part sets forth rules for fiscal intermediary 
payments to providers for physician services, Part B carrier payments 
for physician services to beneficiaries in providers, physician services 
in teaching settings, and services of residents.



   Subpart B--Fiscal Intermediary Payments to Providers for Physician 
                                Services



Sec. 415.50  Scope.

    This subpart sets forth rules for payment by fiscal intermediaries 
to providers for services furnished by physicians. Payment for covered 
services is made either under the prospective payment system (PPS) to 
PPS-participating providers in accordance with part 412 of this chapter 
or under the reasonable cost method to non-PPS participating providers 
in accordance with part 413 of this chapter.



Sec. 415.55  General payment rules.

    (a) Allowable costs. Except as specified otherwise in Secs. 413.102 
of this chapter (concerning compensation of owners), 415.60 (concerning 
allocation of physician compensation costs), and 415.162 (concerning 
payment for physician services furnished to beneficiaries in teaching 
hospitals), costs a provider incurs for services of physicians are 
allowable only if the following conditions are met:
    (1) The services do not meet the conditions in Sec. 415.102(a) 
regarding fee schedule payment for services of physicians to a 
beneficiary in a provider.
    (2) The services include a surgeon's supervision of services of a 
qualified anesthetist, but do not include physician availability 
services, except for reasonable availability services furnished for 
emergency rooms and the services of standby surgical team physicians.
    (3) The provider has incurred a cost for salary or other 
compensation it furnished the physician for the services.
    (4) The costs incurred by the provider for the services meet the 
requirements in Sec. 413.9 of this chapter regarding costs related to 
patient care.
    (5) The costs do not include supervision of interns and residents 
unless the provider elects reasonable cost payment as specified in 
Sec. 415.160, or any other costs incurred in connection with an approved 
GME program that are payable under Sec. 413.86 of this chapter.
    (b) Allocation of allowable costs. The provider must follow the 
rules in Sec. 415.60 regarding allocation of physician compensation 
costs to determine its costs of services.
    (c) Limits on allowable costs. The intermediary must apply the 
limits on compensation set forth in Sec. 415.70 to determine its 
payments to a provider for the costs of services.

[[Page 656]]



Sec. 415.60  Allocation of physician compensation costs.

    (a) Definition. For purposes of this subpart, physician compensation 
costs means monetary payments, fringe benefits, deferred compensation, 
and any other items of value (excluding office space or billing and 
collection services) that a provider or other organization furnishes a 
physician in return for the physician services. Other organizations are 
entities related to the provider within the meaning of Sec. 413.17 of 
this chapter or entities that furnish services for the provider under 
arrangements within the meaning of the Act.
    (b) General rule. Except as provided in paragraph (d) of this 
section, each provider that incurs physician compensation costs must 
allocate those costs, in proportion to the percentage of total time that 
is spent in furnishing each category of services, among--
    (1) Physician services to the provider (as described in 
Sec. 415.55);
    (2) Physician services to patients (as described in Sec. 415.102); 
and
    (3) Activities of the physician, such as funded research, that are 
not paid under either Part A or Part B of Medicare.
    (c) Allowable physician compensation costs. Only costs allocated to 
payable physician services to the provider (as described in Sec. 415.55) 
are allowable costs to the provider under this subpart.
    (d) Allocation of all compensation to services to the provider. 
Generally, the total physician compensation received by a physician is 
allocated among all services furnished by the physician, unless--
    (1) The provider certifies that the compensation is attributable 
solely to the physician services furnished to the provider; and
    (2) The physician bills all patients for the physician services he 
or she furnishes to them and personally receives the payment from or on 
behalf of the patients. If returned directly or indirectly to the 
provider or an organization related to the provider within the meaning 
of Sec. 413.17 of this chapter, these payments are not compensation for 
physician services furnished to the provider.
    (e) Assumed allocation of all compensation to beneficiary services. 
If the provider and physician agree to accept the assumed allocation of 
all the physician services to direct services to beneficiaries as 
described under Sec. 415.102(a), CMS does not require a written 
allocation agreement between the physician and the provider.
    (f) Determination and payment of allowable physician compensation 
costs. (1) Except as provided under paragraph (e) of this section, the 
intermediary pays the provider for these costs only if--
    (i) The provider submits to the intermediary a written allocation 
agreement between the provider and the physician that specifies the 
respective amounts of time the physician spends in furnishing physician 
services to the provider, physician services to patients, and services 
that are not payable under either Part A or Part B of Medicare; and
    (ii) The compensation is reasonable in terms of the time devoted to 
these services.
    (2) In the absence of a written allocation agreement, the 
intermediary assumes, for purposes of determining reasonable costs of 
the provider, that 100 percent of the physician compensation cost is 
allocated to services to beneficiaries as specified in paragraph (b)(2) 
of this section.
    (g) Recordkeeping requirements. Except for services furnished in 
accordance with the assumed allocation under paragraph (e) of this 
section, each provider that claims payment for services of physicians 
under this subpart must meet all of the following requirements:
    (1) Maintain the time records or other information it used to 
allocate physician compensation in a form that permits the information 
to be validated by the intermediary or the carrier.
    (2) Report the information on which the physician compensation 
allocation is based to the intermediary or the carrier on an annual 
basis and promptly notify the intermediary or carrier of any revisions 
to the compensation allocation.
    (3) Retain each physician compensation allocation, and the 
information on which it is based, for at least 4 years after the end of 
each cost reporting period to which the allocation applies.

[[Page 657]]



Sec. 415.70  Limits on compensation for physician services in providers.

    (a) Principle and scope. (1) Except as provided in paragraphs (a)(2) 
and (a)(3) of this section, CMS establishes reasonable compensation 
equivalency limits on the amount of compensation paid to physicians by 
providers. These limits are applied to a provider's costs incurred in 
compensating physicians for services to the provider, as described in 
Sec. 415.55(a).
    (2) Limits established under this section do not apply to costs of 
physician compensation attributable to furnishing inpatient hospital 
services that are paid for under the prospective payment system 
implemented under part 412 of this chapter or to costs of physician 
compensation attributable to approved GME programs that are payable 
under Sec. 413.86 of this chapter.
    (3) Compensation that a physician receives for activities that may 
not be paid for under either Part A or Part B of Medicare is not 
considered in applying these limits.
    (b) Methodology for establishing limits. CMS establishes a 
methodology for determining annual reasonable compensation equivalency 
limits and, to the extent possible, considers average physician incomes 
by specialty and type of location using the best available data.
    (c) Application of limits. If the level of compensation exceeds the 
limits established under paragraph (b) of this section, Medicare payment 
is based on the level established by the limits.
    (d) Adjustment of the limits. The intermediary may adjust limits 
established under paragraph (b) of this section to account for costs 
incurred by the physician or the provider related to malpractice 
insurance, professional memberships, and continuing medical education.
    (1) For the costs of membership in professional societies and 
continuing medical education, the intermediary may adjust the limit by 
the lesser of--
    (i) The actual cost incurred by the provider or the physician for 
these activities; or
    (ii) Five percent of the appropriate limit.
    (2) For the cost of malpractice expenses incurred by either the 
provider or the physician, the intermediary may adjust the reasonable 
compensation equivalency limit by the cost of the malpractice insurance 
expense related to the physician service furnished to patients in 
providers.
    (e) Exception to limits. An intermediary may grant a provider an 
exception to the limits established under paragraph (b) of this section 
only if the provider can demonstrate to the intermediary that it is 
unable to recruit or maintain an adequate number of physicians at a 
compensation level within these limits.
    (f) Notification of changes in methodologies and payment limits. (1) 
Before the start of a cost reporting period to which limits established 
under this section will be applied, CMS publishes a notice in the 
Federal Register that sets forth the amount of the limits and explains 
how it calculated the limits.
    (2) If CMS proposes to revise the methodology for establishing 
payment limits under this section, CMS publishes a notice, with 
opportunity for public comment, in the Federal Register. The notice 
explains the proposed basis and methodology for setting limits, 
specifies the limits that would result, and states the date of 
implementation of the limits.
    (3) If CMS updates limits by applying the most recent economic index 
data without revising the limit methodology, CMS publishes the revised 
limits in a notice in the Federal Register without prior publication of 
a proposal or public comment period.



      Subpart C--Part B Carrier Payments for Physician Services to 
                       Beneficiaries in Providers



Sec. 415.100  Scope.

    This subpart implements section 1887(a)(1)(A) of the Act by 
providing general conditions that must be met in order for services 
furnished by physicians to beneficiaries in providers to be paid for on 
the basis of the physician fee schedule under part 414 of this chapter. 
Section 415.102 sets forth the conditions for fee schedule payment for 
physician services to beneficiaries in providers. Section 415.105 sets 
forth general requirements for determining the amounts of payment for 
services

[[Page 658]]

that meet the conditions of this section. Sections 415.120 and 415.130 
set forth additional conditions for payment for physician services in 
the specialties of radiology and pathology (laboratory services).



Sec. 415.102  Conditions for fee schedule payment for physician services to beneficiaries in providers.

    (a) General rule. If the physician furnishes services to 
beneficiaries in providers, the carrier pays on a fee schedule basis 
provided the following requirements are met:
    (1) The services are personally furnished for an individual 
beneficiary by a physician.
    (2) The services contribute directly to the diagnosis or treatment 
of an individual beneficiary.
    (3) The services ordinarily require performance by a physician.
    (4) In the case of radiology or laboratory services, the additional 
requirements in Sec. 415.120 or Sec. 415.130, respectively, are met.
    (b) Exception. If a physician furnishes services in a provider that 
do not meet the requirements in paragraph (a) of this section, but are 
related to beneficiary care furnished by the provider, the intermediary 
pays for those services, if otherwise covered. The intermediary follows 
the rules in Secs. 415.55 and 415.60 for payment on the basis of 
reasonable cost or PPS, as appropriate.
    (c) Effect of billing charges for physician services to a provider.
    (1) If a physician furnishes services that may be paid under the 
reasonable cost rules in Sec. 415.55 or Sec. 415.60, and paid by the 
intermediary, or would be paid under those rules except for the PPS 
rules in part 412 of this chapter, and under the payment rules for GME 
established by Sec. 413.86 of this chapter, neither the provider nor the 
physician may seek payment from the carrier, beneficiary, or another 
insurer.
    (2) If a physician furnishes services to an individual beneficiary 
that do not meet the applicable conditions in Secs. 415.120 (concerning 
conditions for payment for radiology services) and 415.130 (concerning 
conditions for payment for physician pathology services), the carrier 
does not pay on a fee schedule basis.
    (3) If the physician, the provider, or another entity bills the 
carrier or the beneficiary or another insurer for physician services 
furnished to the provider, as described in Sec. 415.55(a), CMS considers 
the provider to which the services are furnished to have violated its 
provider participation agreement, and may terminate that agreement. See 
part 489 of this chapter for rules governing provider agreements.
    (d) Effect of physician assumption of operating costs. If a 
physician or other entity enters into an agreement (such as a lease or 
concession) with a provider, and the physician (or entity) assumes some 
or all of the operating costs of the provider department in which the 
physician furnishes physician services, the following rules apply:
    (1) If the conditions set forth in paragraph (a) of this section are 
met, the carrier pays for the physician services under the physician fee 
schedule in part 414 of this chapter.
    (2) To the extent the provider incurs a cost payable on a reasonable 
cost basis under part 413 of this chapter, the intermediary pays the 
provider on a reasonable cost basis for the costs associated with 
producing these services, including overhead, supplies, equipment costs, 
and services furnished by nonphysician personnel.
    (3) The physician (or other entity) is treated as being related to 
the provider within the meaning of Sec. 413.17 of this chapter 
(concerning cost to related organizations).
    (4) The physician (or other entity) must make its books and records 
available to the provider and the intermediary as necessary to verify 
the nature and extent of the costs of the services furnished by the 
physician (or other entity).



Sec. 415.105  Amounts of payment for physician services to beneficiaries in providers.

    (a) General rule. The carrier determines amounts of payment for 
physician services to beneficiaries in providers in accordance with the 
general rules governing the physician fee schedule payment in part 414 
of this chapter, except as provided in paragraph (b) of this section.

[[Page 659]]

    (b) Application in certain settings--(1) Teaching hospitals. The 
carrier applies the rules in subpart D of this part (concerning 
physician services in teaching settings), in addition to those in this 
section, in determining whether fee schedule payment should be made for 
physician services to individual beneficiaries in a teaching hospital.
    (2) Hospital-based ESRD facilities. The carrier applies 
Secs. 414.310 through 414.314 of this chapter, which set forth 
determination of reasonable charges under the ESRD program, to determine 
the amount of payment for physician services furnished to individual 
beneficiaries in a hospital-based ESRD facility approved under part 405 
subpart U.



Sec. 415.110  Conditions for payment: Medically directed anesthesia services.

    (a) General payment rule. Medicare pays for the physician's medical 
direction of anesthesia services for one service or two through four 
concurrent anesthesia services furnished after December 31, 1998, only 
if each of the services meets the condition in Sec. 415.102(a) and the 
following additional conditions:
    (1) For each patient, the physician--
    (i) Performs a pre-anesthetic examination and evaluation;
    (ii) Prescribes the anesthesia plan;
    (iii) Personally participates in the most demanding aspects of the 
anesthesia plan including, if applicable, induction and emergence;
    (iv) Ensures that any procedures in the anesthesia plan that he or 
she does not perform are performed by a qualified individual as defined 
in operating instructions;
    (v) Monitors the course of anesthesia administration at frequent 
intervals;
    (vi) Remains physically present and available for immediate 
diagnosis and treatment of emergencies; and
    (vii) Provides indicated post-anesthesia care.
    (2) The physician directs no more than four anesthesia services 
concurrently and does not perform any other services while he or she is 
directing the single or concurrent services so that one or more of the 
conditions in paragraph (a)(1) of this section are not violated.
    (3) If the physician personally performs the anesthesia service, the 
payment rules in Sec. 414.46(c) of this chapter apply (Physician 
personally performs the anesthesia procedure).
    (b) Medical documentation. The physician alone inclusively documents 
in the patient's medical record that the conditions set forth in 
paragraph (a)(1) of this section have been satisfied, specifically 
documenting that he or she performed the pre-anesthetic exam and 
evaluation, provided the indicated post-anesthesia care, and was present 
during the most demanding procedures, including induction and emergence 
where applicable.

[63 FR 58912, Nov. 2, 1998]



Sec. 415.120  Conditions for payment: Radiology services.

    (a) Services to beneficiaries. The carrier pays for radiology 
services furnished by a physician to a beneficiary on a fee schedule 
basis only if the services meet the conditions for fee schedule payment 
in Sec. 415.102(a) and are identifiable, direct, and discrete diagnostic 
or therapeutic services furnished to an individual beneficiary, such as 
interpretation of x-ray plates, angiograms, myelograms, pyelograms, or 
ultrasound procedures. The carrier pays for interpretations only if 
there is a written report prepared for inclusion in the patient's 
medical record maintained by the hospital.
    (b) Services to providers. The carrier does not pay on a fee 
schedule basis for physician services to the provider (for example, 
administrative or supervisory services) or for provider services needed 
to produce the x-ray films or other items that are interpreted by the 
radiologist. However, the intermediary pays the provider for these 
services in accordance with Sec. 415.55 for provider costs; 
Sec. 415.102(d)(2) for costs incurred by a physician, such as under a 
lease or concession agreement; or part 412 of this chapter for payment 
under PPS.



Sec. 415.130  Conditions for payment: Physician pathology services.

    (a) Definitions. The following definitions are used in this section.

[[Page 660]]

    (1) Covered hospital means, with respect to an inpatient or an 
outpatient, a hospital that had an arrangement with an independent 
laboratory that was in effect as of July 22, 1999, under which a 
laboratory furnished the technical component of physician pathology 
services to fee-for-service Medicare beneficiaries who were hospital 
inpatients or outpatients, and submitted claims for payment for this 
technical component directly to a Medicare carrier.
    (2) Fee-for-service Medicare beneficiaries means those beneficiaries 
who are entitled to benefits under Part A or are enrolled under Part B 
of Title XVIII of the Act or both and are not enrolled in any of the 
following:
    (i) A Medicare+Choice plan under Part C of Title XVIII of the Act.
    (ii) A plan offered by an eligible organization under section 1876 
of the Act;
    (iii) A program of all-inclusive care for the elderly (PACE) under 
1894 of the Act; or
    (iv) A social health maintenance organization (SHMO) demonstration 
project established under section 4018(b) of the Omnibus Budget 
Reconciliation Act of 1987.
    (b) Physician pathology services. The carrier pays for pathology 
services furnished by a physician to an individual beneficiary on a fee 
schedule basis only if the services meet the conditions for payment in 
Sec. 415.102(a) and are one of the following services:
    (1) Surgical pathology services.
    (2) Specific cytopathology, hematology, and blood banking services 
that have been identified to require performance by a physician and are 
listed in program operating instructions.
    (3) Clinical consultation services that meet the requirements in 
paragraph (c) of this section.
    (4) Clinical laboratory interpretative services that meet the 
requirements of paragraphs (c)(1), (c)(3), and (c)(4) of this section 
and that are specifically listed in program operating instructions.
    (c) Clinical consultation services. For purposes of this section, 
clinical consultation services must meet the following requirements:
    (1) Be requested by the beneficiary's attending physician.
    (2) Relate to a test result that lies outside the clinically 
significant normal or expected range in view of the condition of the 
beneficiary.
    (3) Result in a written narrative report included in the 
beneficiary's medical record.
    (4) Require the exercise of medical judgment by the consultant 
physician.
    (d) Physician pathology services furnished by an independent 
laboratory. The technical component of physician pathology services 
furnished by an independent laboratory to a hospital inpatient or 
outpatient before January 1, 2001 may be paid to the laboratory on a fee 
schedule basis. After December 31, 2000 but before January 1, 2003, if 
an independent laboratory furnishes the technical component of a 
physician pathology service to a fee-for-service Medicare beneficiary 
who is an inpatient or outpatient of a covered hospital, the carrier 
will treat the technical component as a service for which payment will 
be made to the laboratory under the physician fee schedule. For these 
two years the service will not be treated as an inpatient hospital 
service for which payment is made to the hospital under section 1886(d) 
of the Act or as an outpatient hospital service for which payment is 
made to the hospital under section 1833(t) of the Act. After December 
31, 2002, the technical component for physician pathology services 
furnished by an independent laboratory to a hospital inpatient or 
outpatient is paid only to the hospital.

[60 FR 63178, Dec. 8, 1995, as amended at 64 FR 59442, Nov. 2, 1999; 66 
FR 55332, Nov. 1, 2001]



           Subpart D--Physician Services in Teaching Settings



Sec. 415.150  Scope.

    This subpart sets forth the rules governing payment for the services 
of physicians in teaching settings and the criteria for determining 
whether the payments are made as one of the following:
    (a) Services to the hospital under the reasonable cost election in 
Secs. 415.160 through 415.164.
    (b) Provider services through the direct GME payment mechanism in 
Sec. 413.86 of this chapter.

[[Page 661]]

    (c) Physician services to beneficiaries under the physician fee 
schedule as set forth in part 414 of this chapter.



Sec. 415.152  Definitions.

    As used in this subpart--
    Approved graduate medical education (GME) program means one of the 
following:
    (1) A residency program approved by the Accreditation Council for 
Graduate Medical Education of the American Medical Association, by the 
Committee on Hospitals of the Bureau of Professional Education of the 
American Osteopathic Association, by the Commission on Dental 
Accreditation of the American Dental Association, or by the Council on 
Podiatric Medicine Education of the American Podiatric Medical 
Association.
    (2) A program otherwise recognized as an ``approved medical 
residency program'' under Sec. 413.86(b) of this chapter.
    Direct medical and surgical services means services to individual 
beneficiaries that are either personally furnished by a physician or 
furnished by a resident under the supervision of a physician in a 
teaching hospital making the cost election described in Secs. 415.160 
through 415.162.
    Nonprovider setting means a setting other than a hospital, skilled 
nursing facility, home health agency, or comprehensive outpatient 
rehabilitation facility in which residents furnish services. These 
include, but are not limited to, family practice or multispecialty 
clinics and physician offices.
    Resident means one of the following:
    (1) An individual who participates in an approved GME program, 
including programs in osteopathy, dentistry, and podiatry.
    (2) A physician who is not in an approved GME program, but who is 
authorized to practice only in a hospital, for example, individuals with 
temporary or restricted licenses, or unlicensed graduates of foreign 
medical schools. For purposes of this subpart, the term resident is 
synonymous with the terms intern and fellow.
    Teaching hospital means a hospital engaged in an approved GME 
residency program in medicine, osteopathy, dentistry, or podiatry.
    Teaching physician means a physician (other than another resident) 
who involves residents in the care of his or her patients.
    Teaching setting means any provider, hospital-based provider, or 
nonprovider settings in which Medicare payment for the services of 
residents is made under the direct GME payment provisions of 
Sec. 413.86, or on a reasonable-cost basis under the provisions of 
Sec. 409.26 or Sec. 409.40(f) for resident services furnished in skilled 
nursing facilities or home health agencies, respectively.

[60 FR 63178, Dec. 8, 1995, as amended at 61 FR 59554, Nov. 22, 1996; 63 
FR 26359, May 12, 1998]



Sec. 415.160  Election of reasonable cost payment for direct medical and surgical services of physicians in teaching hospitals: General provisions.

    (a) Scope. A teaching hospital may elect to receive payment on a 
reasonable cost basis for the direct medical and surgical services of 
its physicians in lieu of fee schedule payments that might otherwise be 
made for these services.
    (b) Conditions. A teaching hospital may elect to receive these 
payments only if--
    (1) The hospital notifies its intermediary in writing of the 
election and meets the conditions of either paragraph (b)(2) or 
paragraph (b)(3) of this section;
    (2) All physicians who furnish services to Medicare beneficiaries in 
the hospital agree not to bill charges for these services; or
    (3) All physicians who furnish services to Medicare beneficiaries in 
the hospital are employees of the hospital and, as a condition of 
employment, are precluded from billing for these services.
    (c) Effect of election. If a teaching hospital elects to receive 
reasonable cost payment for physician direct medical and surgical 
services furnished to beneficiaries--
    (1) Those services and the supervision of interns and residents 
furnishing care to individual beneficiaries are covered as hospital 
services, and
    (2) The intermediary pays the hospital for those services on a 
reasonable

[[Page 662]]

cost basis under the rules in Sec. 415.162. (Payment for other physician 
compensation costs related to approved GME programs is made as described 
in Sec. 413.86 of this chapter.)
    (d) Election declined. If the teaching hospital does not make this 
election, payment is made--
    (1) For physician services furnished to beneficiaries on a fee 
schedule basis as described in part 414 subject to the rules in this 
subpart, and
    (2) For the supervision of interns and residents as described in 
Sec. 413.86.



Sec. 415.162  Determining payment for physician services furnished to beneficiaries in teaching hospitals.

    (a) General rule. Payments for direct medical and surgical services 
of physicians furnished to beneficiaries and supervision of interns and 
residents furnishing care to beneficiaries is made by Medicare on the 
basis of reasonable cost if the hospital exercises the election as 
provided for in Sec. 415.160. If this election is made, the following 
occurs:
    (1) Physician services furnished to beneficiaries and supervision of 
interns and residents furnishing care to beneficiaries are paid on a 
reasonable-cost basis, as provided for in paragraph (b) of this section.
    (2) Payment for certain medical school costs may be made as provided 
for in paragraph (c) of this section.
    (3) Payments for services donated by volunteer physicians to 
beneficiaries are made to a fund designated by the organized medical 
staff of the teaching hospital or medical school as provided for in 
paragraph (d) of this section.
    (b) Reasonable cost of physician services and supervision of interns 
and residents.
    (1) Physician services furnished to beneficiaries and supervision of 
interns and residents furnishing care to beneficiaries in a teaching 
hospital are payable as provider services on a reasonable-cost basis.
    (2) For purposes of this paragraph, reasonable cost is defined as 
the direct salary paid to these physicians, plus applicable fringe 
benefits.
    (3) The costs must be allocated to the services as provided by 
paragraph (j) of this section and apportioned to program beneficiaries 
as provided by paragraph (g) of this section.
    (4) Other allowable costs incurred by the provider related to the 
services described in this paragraph are payable subject to the 
requirements applicable to all other provider services.
    (c) Reasonable costs for the services furnished by a medical school 
or related organization in a hospital. An amount is payable to the 
hospital by CMS under the Medicare program provided that the costs would 
be payable if incurred directly by the hospital rather than under the 
arrangement. The amount must not be in excess of the reasonable costs 
(as defined in paragraphs (c)(1) and (c)(2) of this section) incurred by 
a teaching hospital for services furnished by a medical school or 
organization as described in Sec. 413.17 of this chapter for certain 
costs to the medical school (or a related organization) in furnishing 
services in the hospital.
    (1) Reasonable costs of physician services.
    (i) When the medical school and the hospital are related 
organizations. If the medical school (or organization related to the 
medical school) and the hospital are related by common ownership or 
control as described in Sec. 413.17 of this chapter--
    (A) The costs of these services are allowable costs to the hospital 
under the provisions of Sec. 413.17 of this chapter; and
    (B) The reimbursable costs to the hospital are determined under the 
provisions of this section in the same manner as the costs incurred for 
physicians on the hospital staff and without regard to payments made to 
the medical school by the hospital.
    (ii) When the medical school and the hospital are not related 
organizations.
    (A) If the medical school and the hospital are not related 
organizations under the provisions of Sec. 413.17 of this chapter and 
the hospital makes payment to the medical school for the costs of those 
services furnished to all patients, payment is made by Medicare to the 
hospital for the reasonable cost incurred by the hospital for its 
payments to the medical school for services furnished to beneficiaries.
    (B) Costs incurred under an arrangement must be allocated to the 
full

[[Page 663]]

range of services furnished to the hospital by the medical school 
physicians on the same basis as provided for under paragraph (j) of this 
section, and costs allocated to direct medical and surgical services 
furnished to hospital patients must be apportioned to beneficiaries as 
provided for under paragraph (g) of this section.
    (C) If the medical school and the hospital are not related 
organizations under the provisions of Sec. 413.17 of this chapter and 
the hospital makes payment to the medical school only for the costs of 
those services furnished to beneficiaries, costs of the medical school 
not to exceed 105 percent of the sum of physician direct salaries, 
applicable fringe benefits, employer's portion of FICA taxes, Federal 
and State unemployment taxes, and workmen's compensation paid by the 
medical school or an organization related to the medical school may be 
recognized as allowable costs of the medical school.
    (D) These allowable medical school costs must be allocated to the 
full range of services furnished by the physicians of the medical school 
or organization related as provided by paragraph (j) of this section.
    (E) Costs allocated to direct medical and surgical services 
furnished to hospital patients must be apportioned to beneficiaries as 
provided by paragraph (g) of this section.
    (2) Reasonable costs of other than direct medical and surgical 
services. These costs are determined in accordance with paragraph (c)(1) 
of this section except that--
    (i) If the hospital makes payment to the medical school for other 
than direct medical and surgical services furnished to beneficiaries and 
supervision of interns and residents furnishing care to beneficiaries, 
these payments are subject to the required cost-finding and 
apportionment methods applicable to the cost of other hospital services 
(except for direct medical and surgical services furnished to 
beneficiaries); or
    (ii) If the hospital makes payment to the medical school only for 
these services furnished to beneficiaries, the cost of these services is 
not subject to cost-finding and apportionment as otherwise provided by 
this subpart, and the reasonable cost paid by Medicare must be 
determined on the basis of the health insurance ratio(s) used in the 
apportionment of all other provider costs (excluding physician direct 
medical and surgical services furnished to beneficiaries) applied to the 
allowable medical school costs incurred by the medical school for the 
services furnished to all patients of the hospital.
    (d) ``Salary equivalent'' payments for direct medical and surgical 
services furnished by physicians on the voluntary staff of the hospital.
    (1) CMS makes payments under the Medicare program to a fund as 
defined in Sec. 415.164 for direct medical and surgical services 
furnished to beneficiaries on a regularly scheduled basis by physicians 
on the unpaid voluntary medical staff of the hospital (or medical school 
under arrangement with the hospital).
    (i) These payments represent compensation for contributed medical 
staff time which, if not contributed, would have to be obtained through 
employed staff on a payable basis.
    (ii) Payments for volunteer services are determined by applying to 
the regularly scheduled contributed time an hourly rate not to exceed 
the equivalent of the average direct salary (exclusive of fringe 
benefits) paid to all full-time, salaried physicians (other than interns 
and residents) on the hospital staff or, if the number of full-time 
salaried physicians is minimal in absolute terms or in relation to the 
number of physicians on the voluntary staff, to physicians at like 
institutions in the area.
    (iii) This ``salary equivalent'' is a single hourly rate covering 
all physicians regardless of specialty and is applied to the actual 
regularly scheduled time contributed by the physicians in furnishing 
direct medical and surgical services to beneficiaries including 
supervision of interns and residents in that care.
    (iv) A physician who receives any compensation from the hospital or 
a medical school related to the hospital by common ownership or control 
(within the meaning of Sec. 413.17 of this chapter) for direct medical 
and surgical services furnished to any patient in the hospital is not 
considered an unpaid

[[Page 664]]

voluntary physician for purposes of this paragraph.
    (v) If, however, a physician receives compensation from the hospital 
or related medical school or organization only for services that are 
other than direct medical and surgical services, a salary equivalent 
payment for the physician's regularly scheduled direct medical and 
surgical services to beneficiaries in the hospital may be imputed. 
However, the sum of the imputed value for volunteer services and the 
physician's actual compensation from the hospital and the related 
medical school (or organization) may not exceed the amount that would 
have been imputed if all of the physician's hospital and medical school 
services (compensated and volunteer) had been volunteer services, or 
paid at the rate of $30,000 per year, whichever is less.
    (2) The following examples illustrate how the allowable imputed 
value for volunteer services is determined. In each example, it has been 
assumed that the average salary equivalent hourly rate is equal to the 
hourly rate for the individual physician's compensated services.

    Example No: 1. Dr. Jones received $3,000 a year from Hospital X for 
services other than direct medical services to all patients, for 
example, utilization review and administrative services. Dr. Jones also 
voluntarily furnished direct medical services to beneficiaries. The 
imputed value of the volunteer services amounted to $10,000 for the cost 
reporting period. The full imputed value of Dr. Jones' volunteer direct 
medical services would be allowed since the total amount of the imputed 
value ($10,000) and the compensated services ($3,000) does not exceed 
$30,000.
    Example No: 2. Dr. Smith received $25,000 from Hospital X for 
services as a department head in a teaching hospital. Dr. Smith also 
voluntarily furnished direct medical services to beneficiaries. The 
imputed value of the volunteer services amounted to $10,000. Only $5,000 
of the imputed value of volunteer services would be allowed since the 
total amount of the imputed value ($10,000) and the compensated services 
($25,000) exceeds the $30,000 maximum amount allowable for all of Dr. 
Smith's services.

                              Computation:

Maximum amount allowable for all services performed by Dr.       $30,000
 Smith for purposes of this computation......................
Less compensation received from Hospital X for other than        $25,000
 direct medical services to individual patients..............
Allowable amount of imputed value for the volunteer services      $5,000
 furnished by Dr. Smith......................................
 

    Example No. 3. Dr. Brown is not compensated by Hospital X for any 
services furnished in the hospital. Dr. Brown voluntarily furnished 
direct surgical services to beneficiaries for a period of 6 months, and 
the imputed value of these services amounted to $20,000. The allowable 
amount of the imputed value for volunteer services furnished by Dr. 
Brown would be limited to $15,000 ($30,000 x 6/12).

    (3) The amount of the imputed value for volunteer services 
applicable to beneficiaries and payable to a fund is determined in 
accordance with the aggregate per diem method described in paragraph (g) 
of this section.
    (4) Medicare payments to a fund must be used by the fund solely for 
improvement of care of hospital patients or for educational or 
charitable purposes (which may include but are not limited to medical 
and other scientific research).
    (i) No personal financial gain, either direct or indirect, from 
benefits of the fund may inure to any of the hospital staff physicians, 
medical school faculty, or physicians for whom Medicare imputes costs 
for purposes of payment into the fund.
    (ii) Expenses met from contributions made to the hospital from a 
fund are not included as a reimbursable cost when expended by the 
hospital, and depreciation expense is not allowed with respect to 
equipment or facilities donated to the hospital by a fund or purchased 
by the hospital from monies in a fund.
    (e) Requirements for payment--(1) Physicians on the hospital staff. 
The requirements under which the costs of physician direct medical and 
surgical services (including supervision of interns and residents) to 
beneficiaries are the same as those applicable to the cost of all other 
covered provider services except that the costs of these services are 
separately determined as provided by this section and are not subject to

[[Page 665]]

cost-finding as described in Sec. 413.24 of this chapter.
    (2) Physicians on the medical school faculty. Payment is made to a 
hospital for the costs of services of physicians on the medical school 
faculty, provided that if the medical school is not related to the 
hospital (within the meaning of Sec. 413.17 of this chapter, concerning 
cost to related organizations), the hospital does not make payment to 
the medical school for services furnished to all patients and the 
following requirements are met: If the hospital makes payment to the 
medical school for services furnished to all patients, these 
requirements do not apply. (See paragraph (c)(1)(ii) of this section.)
    (i) There is a written agreement between the hospital and the 
medical school or organization, specifying the types and extent of 
services to be furnished by the medical school and specifying that the 
hospital must pay to the medical school an amount at least equal to the 
reasonable cost (as defined in paragraph (c) of this section) of 
furnishing the services to beneficiaries.
    (ii) The costs are paid to the medical school by the hospital no 
later than the date on which the cost report covering the period in 
which the services were furnished is due to CMS.
    (iii) Payment for the services furnished under an arrangement would 
have been made to the hospital had the services been furnished directly 
by the hospital.
    (3) Physicians on the voluntary staff of the hospital (or medical 
school under arrangement with the hospital). If the conditions for 
payment to a fund outlined in Sec. 415.164 are met, payments are made on 
a ``salary equivalent'' basis (as defined in paragraph (d) of this 
section) to a fund.
    (f) Requirements for payment for medical school faculty services 
other than physician direct medical and surgical services. If the 
requirements for payment for physician direct medical and surgical 
services furnished to beneficiaries in a teaching hospital described in 
paragraph (e) of this section are met, payment is made to a hospital for 
the costs of medical school faculty services other than physician direct 
medical and surgical services furnished in a teaching hospital.
    (g) Aggregate per diem methods of apportionment--(1) For the costs 
of physician direct medical and surgical services. The cost of physician 
direct medical and surgical services furnished in a teaching hospital to 
beneficiaries is determined on the basis of an average cost per diem as 
defined in paragraph (h)(1) of this section for physician direct medical 
and surgical services to all patients (see Secs. 415.172 through 
415.184) for each of the following categories of physicians:
    (i) Physicians on the hospital staff.
    (ii) Physicians on the medical school faculty.
    (2) For the imputed value of physician volunteer direct medical and 
surgical services. The imputed value of physician direct medical and 
surgical services furnished to beneficiaries in a teaching hospital is 
determined on the basis of an average per diem, as defined in paragraph 
(h)(1) of this section, for physician direct medical and surgical 
services to all patients except that the average per diem is derived 
from the imputed value of the physician volunteer direct medical and 
surgical services furnished to all patients.
    (h) Definitions. (1) Average cost per diem for physician direct 
medical and surgical services (including supervision of interns and 
residents) furnished in a teaching hospital to patients in each category 
of physician services described in paragraph (g)(1) of this section 
means the amount computed by dividing total reasonable costs of these 
services in each category by the sum of--
    (i) Inpatient days (as defined in paragraph (h)(2) of this section); 
and
    (ii) Outpatient visit days (as defined in paragraph (h)(3) of this 
section).
    (2) Inpatient days are determined by counting the day of admission 
as 3.5 days and each day after a patient's day of admission, except the 
day of discharge, as 1 day.
    (3) Outpatient visit days are determined by counting only one visit 
day for each calendar day that a patient visits an outpatient department 
or multiple outpatient departments.
    (i) Application. (1) The following illustrates how apportionment 
based on the aggregate per diem method for costs of physician direct 
medical and surgical

[[Page 666]]

services furnished in a teaching hospital to patients is determined.

                           Teaching Hospital Y

                     Statistical and financial data:

Total inpatient days as defined in paragraph (h)(2) of this       75,000
 section and outpatient visit days as defined in paragraph
 (h)(3) of this section....................................
Total inpatient Part A days................................       20,000
Total inpatient Part B days where Part A coverage is not           1,000
 available.................................................
Total outpatient Part B visit days.........................        5,000
Total cost of direct medical and surgical services            $1,500,000
 furnished to all patients by physicians on the hospital
 staff as determined in accordance with paragraph (i) of
 this section..............................................
Total cost of direct medical and surgical services            $1,650,000
 furnished to all patients by physicians on the medical
 school faculty as determined in accordance with paragraph
 (i) of this section.......................................
 


    Computation of cost applicable to program for physicians on the 
hospital staff:
    Average cost per diem for direct medical and surgical services to 
patients by physicians on the hospital staff: $1,500,000 / 75,000 = $20 
per diem.

Cost of physician direct medical and surgical services          $400,000
 furnished to inpatient beneficiaries covered under Part A:
 $20 per diem x 20,000.....................................
Cost of physician direct medical and surgical services           $20,000
 furnished to inpatient beneficiaries covered under Part B:
 $20 per diem x 1,000......................................
Cost of physician direct medical and surgical services          $100,000
 furnished to outpatient beneficiaries covered under Part
 B: $20 per diem x 5,000...................................
 

    Computation of cost applicable to program for physicians on the 
medical school faculty:
    Average cost per diem for direct medical and surgical services to 
patients by physicians on the medical school faculty: $1,650,000 / 
75,000 = $22 per diem.

Cost of physician direct medical and surgical services          $440,000
 furnished to inpatient beneficiaries covered under Part A:
 $22 per diem x 20,000.....................................
Cost of physician direct medical and surgical services           $22,000
 furnished to inpatient beneficiaries covered under Part B:
 $20 per diem x 1,000......................................
Cost of physician direct medical and surgical services          $110,000
 furnished to outpatient beneficiaries covered under Part
 B: $22 per diem x 5,000...................................
 

    (2) The following illustrates how the imputed value of physician 
volunteer direct medical and surgical services furnished in a teaching 
hospital to beneficiaries is determined.
    Example: The physicians on the medical staff of Teaching Hospital Y 
donated a total of 5,000 hours in furnishing direct medical and surgical 
services to patients of the hospital during a cost reporting period and 
did not receive any compensation from either the hospital or the medical 
school. Also, the imputed value for any physician volunteer services did 
not exceed the rate of $30,000 per year per physician.

                     Statistical and financial data:

Total salaries paid to the full-time salaried physicians by     $800,000
 the hospital (excluding interns and residents)............
Total physicians who were paid for an average of 40 hours             20
 per week or 2,080 (52 weeks x 40 hours per week) hours per
 year......................................................
Average hourly rate equivalent: $800,000 / 41,600 (2,080 x        $19.23
 20).......................................................
 

    Computation of total imputed value of physician volunteer services 
applicable to all patients:

(Total donated hours x average hourly rate equivalent):          $96,150
 5,000 x $19.23............................................

[[Page 667]]

 
Total inpatient days (as defined in paragraph (h)(2) of           75,000
 this section) and outpatient visit days (as defined in
 paragraph (h)(3) of this section).........................
Total inpatient Part A days................................       20,000
Total inpatient Part B days if Part A coverage is not              1,000
 available.................................................
Total outpatient Part B visit days.........................        5,000
 

    Computation of imputed value of physician volunteer direct medical 
and surgical services furnished to Medicare beneficiaries:
    Average per diem for physician direct medical and surgical services 
to all patients: $96,150 / 75,000 = $1.28 per diem

Imputed value of physician direct medical and surgical           $25,600
 services furnished to inpatient beneficiaries covered
 under Part A: $1.28 per diem x 20,000.....................
Imputed value of physician direct medical and surgical            $1,280
 services furnished to inpatient beneficiaries covered
 under Part B: $1.28 per diem x 1,000......................
Imputed value of physician direct medical and surgical            $6,400
 services furnished to outpatient beneficiaries covered
 under Part B: $1.28 per diem x 5,000......................
Total......................................................      $33,280
 


    (j) Allocation of compensation paid to physicians in a teaching 
hospital.
    (1) In determining reasonable cost under this section, the 
compensation paid by a teaching hospital, or a medical school or related 
organization under arrangement with the hospital, to physicians in a 
teaching hospital must be allocated to the full range of services 
implicit in the physician compensation arrangements. (However, see 
paragraph (d) of this section for the computation of the ``salary 
equivalent'' payments for volunteer services furnished to patients.)
    (2) This allocation must be made and must be capable of 
substantiation on the basis of the proportion of each physician's time 
spent in furnishing each type of service to the hospital or medical 
school.



Sec. 415.164  Payment to a fund.

    (a) General rules. Payment for certain voluntary services by 
physicians in teaching hospitals (as these services are described in 
Sec. 415.160) is made on a salary equivalent basis (as described in 
Sec. 415.162(d)) subject to the conditions and limitations contained in 
parts 405 and 413 of this chapter and this part 415, to a single fund 
(as defined in paragraph (b) of this section) designated by the 
organized medical staff of the hospital (or, if the services are 
furnished in the hospital by the faculty of a medical school, to a fund 
as may be designated by the faculty), if the following conditions are 
met:
    (1) The hospital (or medical school furnishing the services under 
arrangement with the hospital) incurs no actual cost in furnishing the 
services.
    (2) The hospital has an agreement with CMS under part 489 of this 
chapter.
    (3) The intermediary, or CMS as appropriate, has received written 
assurances that--
    (i) The payment is used solely for the improvement of care of 
hospital patients or for educational or charitable purposes; and
    (ii) Neither the individuals who are furnished the services nor any 
other persons are charged for the services (and if charged, provision is 
made for the return of any monies incorrectly collected).
    (b) Definition of a fund. For purposes of paragraph (a) of this 
section, a fund is an organization that meets either of the following 
requirements:
    (1) The organization has and retains exemption, as a governmental 
entity or under section 501(c)(3) of the Internal Revenue Code 
(nonprofit educational, charitable, and similar organizations), from 
Federal taxation.
    (2) The organization is an organization of physicians who, under the 
terms of their employment by an entity that meets the requirements of 
paragraph (b)(1) of this section, are required to turn over to that 
entity all income that the physician organization derives from the 
physician services.
    (c) Status of a fund. A fund approved for payment under paragraph 
(a) of this section has all the rights and responsibilities of a 
provider under Medicare

[[Page 668]]

except that it does not enter into an agreement with CMS under part 489 
of this chapter.



Sec. 415.170  Conditions for payment on a fee schedule basis for physician services in a teaching setting.

    Services meeting the conditions for payment in Sec. 415.102(a) 
furnished in teaching settings are payable under the physician fee 
schedule if--
    (a) The services are personally furnished by a physician who is not 
a resident; or
    (b) The services are furnished by a resident in the presence of a 
teaching physician except as provided in Sec. 415.172 (concerning 
physician fee schedule payment for services of teaching physicians), 
Sec. 415.174 (concerning an exception for services furnished in hospital 
outpatient and certain other ambulatory settings), Sec. 415.176 
(concerning renal dialysis services), and Sec. 415.184 (concerning 
psychiatric services), as applicable.



Sec. 415.172  Physician fee schedule payment for services of teaching physicians.

    (a) General rule. If a resident participates in a service furnished 
in a teaching setting, physician fee schedule payment is made only if a 
teaching physician is present during the key portion of any service or 
procedure for which payment is sought.
    (1) In the case of surgical, high-risk, or other complex procedures, 
the teaching physician must be present during all critical portions of 
the procedure and immediately available to furnish services during the 
entire service or procedure.
    (i) In the case of surgery, the teaching physician's presence is not 
required during opening and closing of the surgical field.
    (ii) In the case of procedures performed through an endoscope, the 
teaching physician must be present during the entire viewing.
    (2) In the case of evaluation and management services, the teaching 
physician must be present during the portion of the service that 
determines the level of service billed. (However, in the case of 
evaluation and management services furnished in hospital outpatient 
departments and certain other ambulatory settings, the requirements of 
Sec. 415.174 apply.)
    (b) Documentation. Except for services furnished as set forth in 
Secs. 415.174 (concerning an exception for services furnished in 
hospital outpatient and certain other ambulatory settings), 415.176 
(concerning renal dialysis services), and 415.184 (concerning 
psychiatric services), the medical records must document the teaching 
physician was present at the time the service is furnished. The presence 
of the teaching physician during procedures may be demonstrated by the 
notes in the medical records made by a physician, resident, or nurse. In 
the case of evaluation and management procedures, the teaching physician 
must personally document his or her participation in the service in the 
medical records.
    (c) Payment level. In the case of services such as evaluation and 
management for which there are several levels of service codes available 
for reporting purposes, the appropriate payment level must reflect the 
extent and complexity of the service when fully furnished by the 
teaching physician.



Sec. 415.174  Exception: Evaluation and management services furnished in certain centers.

    (a) In the case of certain evaluation and management codes of lower 
and mid-level complexity (as specified by CMS in program instructions), 
carriers may make physician fee schedule payment for a service furnished 
by a resident without the presence of a teaching physician. For the 
exception to apply, all of the following conditions must be met:
    (1) The services must be furnished in a center that is located in an 
outpatient department of a hospital or another ambulatory care entity in 
which the time spent by residents in patient care activities is included 
in determining intermediary payments to a hospital under Sec. 413.86.
    (2) Any resident furnishing the service without the presence of a 
teaching physician must have completed more than 6 months of an approved 
residency program.

[[Page 669]]

    (3) The teaching physician must not direct the care of more than 
four residents at any given time and must direct the care from such 
proximity as to constitute immediate availability. The teaching 
physician must--
    (i) Have no other responsibilities at the time;
    (ii) Assume management responsibility for those beneficiaries seen 
by the residents;
    (iii) Ensure that the services furnished are appropriate;
    (iv) Review with each resident during or immediately after each 
visit, the beneficiary's medical history, physical examination, 
diagnosis, and record of tests and therapies; and
    (v) Document the extent of the teaching physician's participation in 
the review and direction of the services furnished to each beneficiary.
    (4) The range of services furnished by residents in the center 
includes all of the following:
    (i) Acute care for undifferentiated problems or chronic care for 
ongoing conditions.
    (ii) Coordination of care furnished by other physicians and 
providers.
    (iii) Comprehensive care not limited by organ system, or diagnosis.
    (5) The patients seen must be an identifiable group of individuals 
who consider the center to be the continuing source of their health care 
and in which services are furnished by residents under the medical 
direction of teaching physicians.
    (b) Nothing in paragraph (a) of this section may be construed as 
providing a basis for the coverage of services not determined to be 
covered under Medicare, such as routine physical checkups.

[60 FR 63178, Dec. 8, 1995, as amended at 61 FR 59554, Nov. 22, 1996]



Sec. 415.176  Renal dialysis services.

    In the case of renal dialysis services, physicians who are not paid 
under the physician monthly capitation payment method (as described in 
Sec. 414.314 of this chapter) must meet the requirements of 
Secs. 415.170 and 415.172 (concerning physician fee schedule payment for 
services of teaching physicians).



Sec. 415.178  Anesthesia services.

    (a) General rule. An unreduced physician fee schedule payment may be 
made if a physician is involved in a single anesthesia procedure 
involving an anesthesia resident. In the case of anesthesia services, 
the teaching physician must be present during all critical portions of 
the procedure and immediately available to furnish services during the 
entire service or procedure. The teaching physician cannot receive an 
unreduced fee if he or she performs services involving other patients 
during the period the anesthesia resident is furnishing services in a 
single case. For additional rules for payment of anesthesia services 
involving residents, see Sec. 414.46(c)(1)(iii)).
    (b) Documentation. Documentation must indicate the physician's 
presence or participation in the administration of the anesthesia.

[60 FR 63178, Dec. 8, 1995; 61 FR 42385, Aug. 15, 1996]



Sec. 415.180  Teaching setting requirements for the interpretation of diagnostic radiology and other diagnostic tests.

    (a) General rule. Physician fee schedule payment is made for the 
interpretation of diagnostic radiology and other diagnostic tests if the 
interpretation is performed or reviewed by a physician other than a 
resident.
    (b) Documentation. Documentation must indicate that the physician 
personally performed the interpretation or reviewed the resident's 
interpretation with the resident.



Sec. 415.184  Psychiatric services.

    To qualify for physician fee schedule payment for psychiatric 
services furnished under an approved GME program, the physician must 
meet the requirements of Secs. 415.170 and 415.172, including 
documentation, except that the requirement for the presence of the 
teaching physician during the service in which a resident is involved 
may be met by observation of the service by use of a one-way mirror, 
video equipment, or similar device.

[[Page 670]]



Sec. 415.190  Conditions of payment: Assistants at surgery in teaching hospitals.

    (a) Basis, purpose, and scope. This section describes the conditions 
under which Medicare pays on a fee schedule basis for the services of an 
assistant at surgery in a teaching hospital. This section is based on 
section 1842(b)(7)(D)(I) of the Act and applies only to hospitals with 
an approved GME residency program. Except as specified in paragraph (c) 
of this section, fee schedule payment is not available for assistants at 
surgery in hospitals with--
    (1) A training program relating to the medical specialty required 
for the surgical procedure; and
    (2) A resident in a training program relating to the specialty 
required for the surgery available to serve as an assistant at surgery.
    (b) Definition. Assistant at surgery means a physician who actively 
assists the physician in charge of a case in performing a surgical 
procedure.
    (c) Conditions for payment for assistants at surgery. Payment on a 
fee schedule basis is made for the services of an assistant at surgery 
in a teaching hospital only if the services meet one of the following 
conditions:
    (1) Are required as a result of exceptional medical circumstances.
    (2) Are complex medical procedures performed by a team of 
physicians, each performing a discrete, unique function integral to the 
performance of a complex medical procedure that requires the special 
skills of more than one physician.
    (3) Constitute concurrent medical care relating to a medical 
condition that requires the presence of, and active care by, a physician 
of another specialty during surgery.
    (4) Are medically required and are furnished by a physician who is 
primarily engaged in the field of surgery, and the primary surgeon does 
not use interns and residents in the surgical procedures that the 
surgeon performs (including preoperative and postoperative care).
    (5) Are not related to a surgical procedure for which CMS determines 
that assistants are used less than 5 percent of the time.



                    Subpart E--Services of Residents



Sec. 415.200  Services of residents in approved GME programs.

    (a) General rules. Services furnished in hospitals by residents in 
approved GME programs are specifically excluded from being paid as 
``physician services'' defined in Sec. 414.2 of this chapter and are 
payable as hospital services. This exclusion applies whether or not the 
resident is licensed to practice under the laws of the State in which he 
or she performs the service. The payment methodology for services of 
residents in hospitals and hospital-based providers is set forth in 
Sec. 413.86 of this chapter.
    (b) Exception. For low and mid-level evaluation and management 
services furnished under certain conditions in centers located in 
hospital outpatient departments and other ambulatory settings, see 
Sec. 415.174.
    (c) Definitions. See Sec. 415.152 for definitions of terms used in 
this subpart E.



Sec. 415.202  Services of residents not in approved GME programs.

    (a) General rules. For services of a physician employed by a 
hospital who is authorized to practice only in a hospital setting and 
for the services of a resident who is not in any approved GME program, 
payment is made to the hospital on a Part B reasonable cost basis 
regardless of whether the services are furnished to hospital inpatients 
or outpatients.
    (b) Payment. For services described in paragraph (a) of this 
section, payment is made under Part B by reducing the reasonable costs 
of furnishing the services by the beneficiary deductible and paying 80 
percent of the remaining amount. No payment is made for other costs of 
unapproved programs, such as administrative costs related to teaching 
activities of physicians.



Sec. 415.204  Services of residents in skilled nursing facilities and home health agencies.

    (a) Medicare Part A payment. Payment is made under Medicare Part A 
for interns' and residents' services furnished in the following settings 
that meet the specified requirements:

[[Page 671]]

    (1) Skilled nursing facility. Payment to a participating skilled 
nursing facility may include the cost of services of an intern or 
resident who is in an approved GME program in a hospital with which the 
skilled nursing facility has a transfer agreement that provides, in 
part, for the transfer of patients and the interchange of medical 
records.
    (2) Home health agency. A participating home health agency may 
receive payment for the cost of the services of an intern or resident 
who is under an approved GME program of a hospital with which the home 
health agency is affiliated or under common control if these services 
are furnished as part of the home health visits for a Medicare 
beneficiary. (Nevertheless, see Sec. 413.86 of this chapter for the 
costs of approved GME programs in hospital-based providers.)
    (b) Medicare Part B payment. Medical services of a resident of a 
hospital that are furnished by a skilled nursing facility or home health 
agency are paid under Medicare Part B if payment is not provided under 
Medicare Part A. Payment is made under Part B for a resident's services 
by reducing the reasonable costs of furnishing the services by the 
beneficiary deductible and paying 80 percent of the remaining amount.



Sec. 415.206  Services of residents in nonprovider settings.

    Patient care activities of residents in approved GME programs that 
are furnished in nonprovider settings are payable in one of the 
following two ways:
    (a) Direct GME payments. If the conditions in Sec. 413.86(f)(1)(iii) 
regarding patient care activities and training of residents are met, the 
time residents spend in nonprovider settings such as clinics, nursing 
facilities, and physician offices in connection with approved GME 
programs is included in determining the number of full-time equivalency 
residents in the calculation of a teaching hospital's resident count. 
The teaching physician rules on carrier payments in Secs. 415.170 
through 415.184 apply in these teaching settings.
    (b) Physician fee schedule. (1) Services furnished by a resident in 
a nonprovider setting are covered as physician services and payable 
under the physician fee schedule if the following requirements are met:
    (i) The resident is fully licensed to practice medicine, osteopathy, 
dentistry, or podiatry in the State in which the service is performed.
    (ii) The time spent in patient care activities in the nonprovider 
setting is not included in a teaching hospital's full-time equivalency 
resident count for the purpose of direct GME payments.
    (2) Payment may be made regardless of whether a resident is 
functioning within the scope of his or her GME program in the 
nonprovider setting.
    (3) If fee schedule payment is made for the resident's services in a 
nonprovider setting, payment must not be made for the services of a 
teaching physician.
    (4) The carrier must apply the physician fee schedule payment rules 
set forth in subpart A of part 414 of this chapter to payments for 
services furnished by a resident in a nonprovider setting.



Sec. 415.208  Services of moonlighting residents.

    (a) Definition. For purposes of this section, the term services of 
moonlighting residents refers to services that licensed residents 
perform that are outside the scope of an approved GME program.
    (b) Services in GME program hospitals. (1) The services of residents 
to inpatients of hospitals in which the residents have their approved 
GME program are not covered as physician services and are payable under 
Sec. 413.86 regarding direct GME payments.
    (2) Services of residents that are not related to their approved GME 
programs and are performed in an outpatient department or emergency 
department of a hospital in which they have their training program are 
covered as physician services and payable under the physician fee 
schedule if all of the following criteria are met:
    (i) The services are identifiable physician services and meet the 
conditions for payment of physician services to beneficiaries in 
providers in Sec. 415.102(a).

[[Page 672]]

    (ii) The resident is fully licensed to practice medicine, 
osteopathy, dentistry, or podiatry by the State in which the services 
are performed.
    (iii) The services performed can be separately identified from those 
services that are required as part of the approved GME program.
    (3) If the criteria specified in paragraph (b)(2) of this section 
are met, the services of the moonlighting resident are considered to 
have been furnished by the individual in his or her capacity as a 
physician, rather than in the capacity of a resident. The carrier must 
review the contracts and agreements for these services to ensure 
compliance with the criteria specified in paragraph (b)(2) of this 
section.
    (4) No payment is made for services of a ``teaching physician'' 
associated with moonlighting services, and the time spent furnishing 
these services is not included in the teaching hospital's full-time 
equivalency count for the indirect GME payment (Sec. 412.105 of this 
chapter) and for the direct GME payment (Sec. 413.86 of this chapter).
    (c) Other settings. Moonlighting services of a licensed resident in 
an approved GME program furnished outside the scope of that program in a 
hospital or other setting that does not participate in the approved GME 
program are payable under the physician fee schedule as set forth in 
Sec. 415.206(b)(1).



PART 416--AMBULATORY SURGICAL SERVICES--Table of Contents




              Subpart A--General Provisions and Definitions

Sec.
416.1  Basis and scope.
416.2  Definitions.

             Subpart B--General Conditions and Requirements

416.25  Basic requirements.
416.26  Qualifying for an agreement.
416.30  Terms of agreement with CMS.
416.35  Termination of agreement.

               Subpart C--Specific Conditions for Coverage

416.40  Condition for coverage--Compliance with State licensure law.
416.41  Condition for coverage--Governing body and management.
416.42  Condition for coverage--Surgical services.
416.43  Condition for coverage--Evaluation of quality.
416.44  Condition for coverage--Environment.
416.45  Condition for coverage--Medical staff.
416.46  Condition for coverage--Nursing services.
416.47  Condition for coverage--Medical records.
416.48  Condition for coverage--Pharmaceutical services.
416.49  Condition for coverage--Laboratory and radiologic services.

                      Subpart D--Scope of Benefits

416.60  General rules.
416.61  Scope of facility services.
416.65  Covered surgical procedures.
416.75  Performance of listed surgical procedures on an inpatient 
          hospital basis.

                Subpart E--Payment for Facility Services

416.120  Basis for payment.
416.125  ASC facility services payment rate.
416.130  Publication of revised payment methodologies.
416.140  Surveys.
416.150  Beneficiary appeals.

Subpart F--Adjustment in Payment Amounts for New Technology Intraocular 
             Lenses Furnished by Ambulatory Surgical Centers

416.180  Definitions.
416.185  Payment review process.
416.190  Who may request a review.
416.195  A request to review.
416.200  Application of the payment adjustment.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 47 FR 34094, Aug. 5, 1982, unless otherwise noted.



              Subpart A--General Provisions and Definitions



Sec. 416.1  Basis and scope.

    (a) Statutory basis. (1) Section 1832(a)(2)(F)(i) of the Act 
provides for Medicare Part B coverage of facility services furnished in 
connection with surgical procedures specified by the Secretary under 
section 1833(i)(1) of the Act.
    (2) Section 1833(i)(1)(A) of the Act requires the Secretary to 
specify the surgical procedures that can be performed

[[Page 673]]

safely on an ambulatory basis in an ambulatory surgical center, or a 
hospital outpatient department.
    (3) Section 1833(i) (2)(A) and (3) specify the amounts to be paid 
for facility services furnished in connection with the specified 
surgical procedures when they are performed, respectively, in an ASC, or 
in a hospital outpatient department.
    (b) Scope. This part sets forth--
    (1) The conditions that an ASC must meet in order to participate in 
the Medicare program;
    (2) The scope of covered services; and
    (3) The conditions for Medicare payment for facility services.

[56 FR 8843, Mar. 1, 1991; 56 FR 23022, May 20, 1991]



Sec. 416.2  Definitions.

    As used in this part:
    Ambulatory surgical center or ASC means any distinct entity that 
operates exclusively for the purpose of providing surgical services to 
patients not requiring hospitalization, has an agreement with CMS to 
participate in Medicare as an ASC, and meets the conditions set forth in 
subparts B and C of this part.
    ASC services means facility services that are furnished in an ASC.
    Covered surgical procedures means those surgical and other medical 
procedures that meet the criteria specified in Sec. 416.65 and are 
published by CMS in the Federal Register.
    Facility services means services that are furnished in connection 
with covered surgical procedures performed in an ASC, or in a hospital 
on an outpatient basis.

[56 FR 8843, Mar. 1, 1991; 56 FR 23022, May 20, 1991]



             Subpart B--General Conditions and Requirements



Sec. 416.25  Basic requirements.

    Participation as an ASC is limited to facilities that--
    (a) Meet the definition in Sec. 416.2; and
    (b) Have in effect an agreement obtained in accordance with this 
subpart.

[56 FR 8843, Mar. 1, 1991]



Sec. 416.26  Qualifying for an agreement.

    (a) Deemed compliance. CMS may deem an ASC to be in compliance with 
any or all of the conditions set forth in subpart C of this part if--
    (1) The ASC is accredited by a national accrediting body, or 
licensed by a State agency, that CMS determines provides reasonable 
assurance that the conditions are met;
    (2) In the case of deemed status through accreditation by a national 
accrediting body, where State law requires licensure, the ASC complies 
with State licensure requirements; and
    (3) The ASC authorizes the release to CMS, of the findings of the 
accreditation survey.
    (b) Survey of ASCs. (1) Unless CMS deems the ASC to be in compliance 
with the conditions set forth in subpart C of this part, the State 
survey agency must survey the facility to ascertain compliance with 
those conditions, and report its findings to CMS.
    (2) CMS surveys deemed ASCs on a sample basis as part of CMS's 
validation process.
    (c) Acceptance of the ASC as qualified to furnish ambulatory 
surgical services. If CMS determines, after reviewing the survey agency 
recommendation and other evidence relating to the qualification of the 
ASC, that the facility meets the requirements of this part, it sends to 
the ASC--
    (1) Written notice of the determination; and
    (2) Two copies of the ASC agreement.
    (d) Filing of agreement by the ASC. If the ASC wishes to participate 
in the program, it must--
    (1) Have both copies of the ASC agreement signed by its authorized 
representative; and
    (2) File them with CMS.
    (e) Acceptance by CMS. If CMS accepts the agreement filed by the 
ASC, returns to the ASC one copy of the agreement, with a notice of 
acceptance specifying the effective date.
    (f) Appeal rights. If CMS refuses to enter into an agreement or if 
CMS terminates an agreement, the ASC is entitled to a hearing in 
accordance with part 498 of this chapter.

[56 FR 8843, Mar. 1, 1991]

[[Page 674]]



Sec. 416.30  Terms of agreement with CMS.

    As part of the agreement under Sec. 416.26 the ASC must agree to the 
following:
    (a) Compliance with coverage conditions. The ASC agrees to meet the 
conditions for coverage specified in subpart C of this part and to 
report promptly to CMS any failure to do so.
    (b) Limitation on charges to beneficiaries.1 The ASC 
agrees to charge the beneficiary or any other person only the applicable 
deductible and coinsurance amounts for facility services for which the 
beneficiary--
---------------------------------------------------------------------------

    \1\ For facility services furnished before July 1987, the ASC had to 
agree to make no charge to the beneficiary, since those services were 
not subject to the part B deductible and coinsurance provisions.
---------------------------------------------------------------------------

    (1) Is entitled to have payment made on his or her behalf under this 
part; or
    (2) Would have been so entitled if the ASC had filed a request for 
payment in accordance with Sec. 410.165 of this chapter.
    (c) Refunds to beneficiaries. (1) The ASC agrees to refund as 
promptly as possible any money incorrectly collected from beneficiaries 
or from someone on their behalf.
    (2) As used in this section, money incorrectly collected means sums 
collected in excess of those specified in paragraph (b) of this section. 
It includes amounts collected for a period of time when the beneficiary 
was believed not to be entitled to Medicare benefits if--
    (i) The beneficiary is later determined to have been entitled to 
Medicare benefits; and
    (ii) The beneficiary's entitlement period falls within the time the 
ASC's agreement with CMS is in effect.
    (d) Furnishing information. The ASC agrees to furnish to CMS, if 
requested, information necessary to establish payment rates specified in 
Secs. 416.120-416.130 in the form and manner that CMS requires.
    (e) Acceptance of assignment. The ASC agrees to accept assignment 
for all facility services furnished in connection with covered surgical 
procedures. For purposes of this section, assignment means an assignment 
under Sec. 424.55 of this chapter of the right to receive payment under 
Medicare Part B and payment under Sec. 424.64 of this chapter (when an 
individual dies before assigning the claim).
    (f) ASCs operated by a hopsital. In an ASC operated by a hospital--
    (1) The agreement is made effective on the first day of the next 
Medicare cost reporting period of the hospital that operates the ASC; 
and
    (2) The ASC participates and is paid only as an ASC, without the 
option of converting to or being paid as a hospital outpatient 
department, unless CMS determines there is good cause to do otherwise.
    (3) Costs for the ASC are treated as a non-reimbursable cost center 
on the hopsital's cost report.
    (g) Additional provisions. The agreement may contain any additional 
provisions that CMS finds necessary or desirable for the efficient and 
effective administration of the Medicare program.

[47 FR 34094, Aug. 5, 1982, as amended at 51 FR 41351, Nov. 14, 1986; 56 
FR 8844, Mar. 1, 1991]



Sec. 416.35  Termination of agreement.

    (a) Termination by the ASC--(1) Notice to CMS. An ASC that wishes to 
terminate its agreement must send CMS written notice of its intent.
    (2) Date of termination. The notice may state the intended date of 
termination which must be the first day of a calendar month.
    (i) If the notice does not specify a date, or the date is not 
acceptable to CMS, CMS may set a date that will not be more than 6 
months from the date on the ASC's notice of intent.
    (ii) CMS may accept a termination date that is less than 6 months 
after the date on the ASC's notice if it determines that to do so would 
not unduly disrupt services to the community or otherwise interfere with 
the effective and efficient administration of the Medicare program.
    (3) Voluntary termination. If an ASC ceases to furnish services to 
the community, that shall be deemed to be a voluntary termination of the 
agreement by the ASC, effective on the last day of business with 
Medicare beneficiaries.

[[Page 675]]

    (b) Termination by CMS--(1) Cause for termination. CMS may terminate 
an agreement if it determines that the ASC--
    (i) No longer meets the conditions for coverage as specified under 
Sec. 416.26; or
    (ii) Is not in substantial compliance with the provisions of the 
agreement, the requirements of this subpart, and other applicable 
regulations of subchapter B of this chapter, or any applicable 
provisions of title XVIII of the Act.
    (2) Notice of termination. CMS sends notice of termination to the 
ASC at least 15 days before the effective date stated in the notice.
    (3) Appeal by the ASC. An ASC may appeal the termination of its 
agreement in accordance with the provisions set forth in part 498 of 
this chapter.
    (c) Effect of termination. Payment is not available for ASC services 
furnished on or after the effective date of termination.
    (d) Notice to the public. Prompt notice of the date and effect of 
termination is given to the public, through publication in local 
newspapers by--
    (1) The ASC, after CMS has approved or set a termination date; or
    (2) CMS, when it has terminated the agreement.
    (e) Conditions for reinstatement after termination of agreement by 
CMS. When an agreement with an ASC is terminated by CMS, the ASC may not 
file another agreement to participate in the Medicare program unless 
CMS--
    (1) Finds that the reason for the termination of the prior agreement 
has been removed; and
    (2) Is assured that the reason for the termination will not recur.

[47 FR 34094, Aug. 5, 1982, as amended at 52 FR 22454, June 12, 1987; 56 
FR 8844, Mar. 1, 1991; 61 FR 40347, Aug. 2, 1996]



               Subpart C--Specific Conditions for Coverage



Sec. 416.40  Condition for coverage--Compliance with State licensure law.

    The ASC must comply with State licensure requirements.



Sec. 416.41  Condition for coverage--Governing body and management.

    The ASC must have a governing body, that assumes full legal 
responsibility for determining, implementing, and monitoring policies 
governing the ASC's total operation and for ensuring that these policies 
are administered so as to provide quality health care in a safe 
environment. When services are provided through a contract with an 
outside resource, the ASC must assure that these services are provided 
in a safe and effective manner. Standard: Hospitalization. The ASC must 
have an effective procedure for the immediate transfer to a hospital, of 
patients requiring emergency medical care beyond the capabilities of the 
ASC. This hospital must be a local, Medicare participating hospital or a 
local, nonparticipating hospital that meets the requirements for payment 
for emergency services under Sec. 482.2 of this chapter. The ASC must 
have a written transfer agreement with such a hospital, or all 
physicians performing surgery in the ASC must have admitting privileges 
at such a hospital.

[47 FR 34094, Aug. 5, 1982, as amended at 51 FR 22041, June 17, 1986]



Sec. 416.42  Condition for coverage--Surgical services.

    Surgical procedures must be performed in a safe manner by qualified 
physicians who have been granted clinical privileges by the governing 
body of the ASC in accordance with approved policies and procedures of 
the ASC.
    (a) Standard: Anesthetic risk and evaluation. A physician must 
examine the patient immediately before surgery to evaluate the risk of 
anesthesia and of the procedure to be performed. Before discharge from 
the ASC, each patient must be evaluated by a physician for proper 
anesthesia recovery.
    (b) Standard: Administration of anesthesia. Anesthetics must be 
administered by only--
    (1) A qualified anesthesiologist; or
    (2) A physician qualified to administer anesthesia, a certified 
registered nurse anesthetist (CRNA) or an anesthesiologist's assistant 
as defined in Sec. 410.69(b) of this chapter, or a supervised trainee in 
an approved educational program. In those cases in

[[Page 676]]

which a non-physician administers the anesthesia, unless exempted in 
accordance with paragraph (d) of this section, the anesthetist must be 
under the supervision of the operating physician, and in the case of an 
anesthesiologist's assistant, under the supervision of an 
anesthesiologist.
    (c) Standard: Discharge. All patients are discharged in the company 
of a responsible adult, except those exempted by the attending 
physician.
    (d) Standard: State exemption. (1) An ASC may be exempted from the 
requirement for physician supervision of CRNAs as described in paragraph 
(b)(2) of this section, if the State in which the ASC is located submits 
a letter to CMS signed by the Governor, following consultation with the 
State's Boards of Medicine and Nursing, requesting exemption from 
physician supervision of CRNAs. The letter from the Governor must attest 
that he or she has consulted with State Boards of Medicine and Nursing 
about issues related to access to and the quality of anesthesia services 
in the State and has concluded that it is in the best interests of the 
State's citizens to opt-out of the current physician supervision 
requirement, and that the opt-out is consistent with State law.
    (2) The request for exemption and recognition of State laws, and the 
withdrawal of the request may be submitted at any time, and are 
effective upon submission.

[57 FR 33899, July 31, 1992, as amended at 66 FR 56768, Nov. 13, 2001.]



Sec. 416.43  Condition for coverage--Evaluation of quality.

    The ASC, with the active participation of the medical staff, must 
conduct an ongoing, comprehensive self-assessment of the quality of care 
provided, including medical necessity of procedures performed and 
appropriateness of care, and use findings, when appropriate, in the 
revision of center policies and consideration of clinical privileges.



Sec. 416.44  Condition for coverage--Environment.

    The ASC must have a safe and sanitary environment, properly 
constructed, equipped, and maintained to protect the health and safety 
of patients.
    (a) Standard: Physical environment. The ASC must provide a 
functional and sanitary environment for the provision of surgical 
services.
    (1) Each operating room must be designed and equipped so that the 
types of surgery conducted can be performed in a manner that protects 
the lives and assures the physical safety of all individuals in the 
area.
    (2) The ASC must have a separate recovery room and waiting area.
    (3) The ASC must establish a program for identifying and preventing 
infections, maintaining a sanitary environment, and reporting the 
results to appropriate authorities.
    (b) Standard: Safety from fire. (1) Except as provided in paragraphs 
(b) (2) and (3) of this section, the ASC must meet the provisions of the 
1985 edition of the Life Safety Code of the National Fire Protection 
Association (which is incorporated by reference)1 that are 
applicable to ambulatory surgical centers.
---------------------------------------------------------------------------

    \1\ See footnote to Sec. 405.1134(a) of this chapter.
---------------------------------------------------------------------------

    (2) In consideration of a recommendation by the State survey agency, 
CMS may waive, for periods deemed appropriate, specific provisions of 
the Life Safety Code which, if rigidly applied, would result in 
unreasonable hardship upon an ASC, but only if the waiver will not 
adversely affect the health and safety of the patients.
    (3) Any ASC that, on May 9, 1988, complies with the requirements of 
the 1981 edition of the Life Safety Code, with or without waivers, will 
be considered to be in compliance with this standard, so long as the ASC 
continues to remain in compliance with that edition of the Life Safety 
Code.
    (c) Standard: Emergency equipment. Emergency equipment available to 
the operating rooms must include at least the following:
    (1) Emergency call system.
    (2) Oxygen.
    (3) Mechanical ventilatory assistance equipment including airways, 
manual breathing bag, and ventilator.
    (4) Cardiac defibrillator.
    (5) Cardiac monitoring equipment.

[[Page 677]]

    (6) Tracheostomy set.
    (7) Laryngoscopes and endotracheal tubes.
    (8) Suction equipment.
    (9) Emergency medical equipment and supplies specified by the 
medical staff.
    (d) Standard: Emergency personnel. Personnel trained in the use of 
emergency equipment and in cardiopulmonary resuscitation must be 
available whenever there is a patient in the ASC.

[47 FR 34094, Aug. 5, 1982, amended at 53 FR 11508, Apr. 7, 1988; 54 FR 
4026, Jan. 27, 1989]



Sec. 416.45  Condition for coverage--Medical staff.

    The medical staff of the ASC must be accountable to the governing 
body.
    (a) Standard: Membership and clinical privileges. Members of the 
medical staff must be legally and professionally qualified for the 
positions to which they are appointed and for the performance of 
privileges granted. The ASC grants privileges in accordance with 
recommendations from qualified medical personnel.
    (b) Standard: Reappraisals. Medical staff privileges must be 
periodically reappraised by the ASC. The scope of procedures performed 
in the ASC must be periodically reviewed and amended as appropriate.
    (c) Standard: Other practitioners. If the ASC assigns patient care 
responsibilities to practitioners other than physicians, it must have 
established policies and procedures, approved by the governing body, for 
overseeing and evaluating their clinical activities.



Sec. 416.46  Condition for coverage--Nursing services.

    The nursing services of the ASC must be directed and staffed to 
assure that the nursing needs of all patients are met.
    (a) Standard: Organization and staffing. Patient care 
responsibilities must be delineated for all nursing service personnel. 
Nursing services must be provided in accordance with recognized 
standards of practice. There must be a registered nurse available for 
emergency treatment whenever there is a patient in the ASC.
    (b) [Reserved]



Sec. 416.47  Condition for coverage--Medical records.

    The ASC must maintain complete, comprehensive, and accurate medical 
records to ensure adequate patient care.
    (a) Standard: Organization. The ASC must develop and maintain a 
system for the proper collection, storage, and use of patient records.
    (b) Standard: Form and content of record. The ASC must maintain a 
medical record for each patient. Every record must be accurate, legible, 
and promptly completed. Medical records must include at least the 
following:
    (1) Patient identification.
    (2) Significant medical history and results of physical examination.
    (3) Pre-operative diagnostic studies (entered before surgery), if 
performed.
    (4) Findings and techniques of the operation, including a 
pathologist's report on all tissues removed during surgery, except those 
exempted by the governing body.
    (5) Any allergies and abnormal drug reactions.
    (6) Entries related to anesthesia administration.
    (7) Documentation of properly executed informed patient consent.
    (8) Discharge diagnosis.



Sec. 416.48  Condition for coverage--Pharmaceutical services.

    The ASC must provide drugs and biologicals in a safe and effective 
manner, in accordance with accepted professional practice, and under the 
direction of an individual designated responsible for pharmaceutical 
services.
    (a) Standard: Administration of drugs. Drugs must be prepared and 
administered according to established policies and acceptable standards 
of practice.
    (1) Adverse reactions must be reported to the physician responsible 
for the patient and must be documented in the record.
    (2) Blood and blood products must be administered by only physicians 
or registered nurses.
    (3) Orders given orally for drugs and biologicals must be followed 
by a written order, signed by the prescribing physician.
    (b) [Reserved]

[[Page 678]]



Sec. 416.49  Condition for coverage--Laboratory and radiologic services.

    If the ASC performs laboratory services, it must meet the 
requirements of part 493 of this chapter. If the ASC does not provide 
its own laboratory services, it must have procedures for obtaining 
routine and emergency laboratory services from a certified laboratory in 
accordance with part 493 of this chapter. The referral laboratory must 
be certified in the appropriate specialties and subspecialties of 
service to perform the referred tests in accordance with the 
requirements of part 493 of this chapter. The ASC must have procedures 
for obtaining radiologic services from a Medicare approved facility to 
meet the needs of patients.

[57 FR 7135, Feb. 28, 1992]



                      Subpart D--Scope of Benefits



Sec. 416.60  General rules.

    (a) The services payable under this part are facility services 
furnished to Medicare beneficiaries, by a participating facility, in 
connection with covered surgical procedures specified in Sec. 416.65.
    (b) The surgical procedures, including all preoperative and post-
operative services that are performed by a physician, are covered as 
physician services under part 410 of this chapter.

[56 FR 8844, Mar. 1, 1991]



Sec. 416.61  Scope of facility services.

    (a) Included services. Facility services include, but are not 
limited to--
    (1) Nursing, technician, and related services;
    (2) Use of the facilities where the surgical procedures are 
performed;
    (3) Drugs, biologicals, surgical dressings, supplies, splints, 
casts, and appliances and equipment directly related to the provision of 
surgical procedures;
    (4) Diagnostic or therapeutic services or items directly related to 
the provision of a surgical procedure;
    (5) Administrative, recordkeeping and housekeeping items and 
services; and
    (6) Materials for anesthesia.
    (7) Intra-ocular lenses (IOLs).
    (8) Supervision of the services of an anesthetist by the operating 
surgeon.
    (b) Excluded services. Facility services do not include items and 
services for which payment may be made under other provisions of part 
405 of this chapter, such as physicians' services, laboratory, X-ray or 
diagnostic procedures (other than those directly related to performance 
of the surgical procedure), prosthetic devices (except IOLs), ambulance 
services, leg, arm, back and neck braces, artificial limbs, and durable 
medical equipment for use in the patient's home. In addition, they do 
not include anesthetist services furnished on or after January 1, 1989.

[56 FR 8844, Mar. 1, 1991, as amended at 57 FR 33899, July 31, 1992]



Sec. 416.65  Covered surgical procedures.

    Covered surgical procedures are those procedures that meet the 
standards described in paragraphs (a) and (b) of this section and are 
included in the list published in accordance with paragraph (c) of this 
section.
    (a) General standards. Covered surgical procedures are those 
surgical and other medical procedures that--
    (1) Are commonly performed on an inpatient basis in hospitals, but 
may be safely performed in an ASC;
    (2) Are not of a type that are commonly performed, or that may be 
safely performed, in physicians' offices;
    (3) Are limited to those requiring a dedicated operating room (or 
suite), and generally requiring a post-operative recovery room or short-
term (not overnight) convalescent room; and
    (4) Are not otherwise excluded under Sec. 405.310 of this chapter.
    (b) Specific standards. (1) Covered surgical procedures are limited 
to those that do not generally exceed--
    (i) A total of 90 minutes operating time; and
    (ii) A total of 4 hours recovery or convalescent time.
    (2) If the covered surgical procedures require anesthesia, the 
anesthesia must be--
    (i) Local or regional anesthesia; or
    (ii) General anesthesia of 90 minutes or less duration.
    (3) Covered surgical procedures may not be of a type that--

[[Page 679]]

    (i) Generally result in extensive blood loss;
    (ii) Require major or prolonged invasion of body cavities;
    (iii) Directly involve major blood vessels; or
    (iv) Are generally emergency or life-threatening in nature.
    (c) Publication of covered procedures. CMS will publish in the 
Federal Register a list of covered surgical procedures and revisions as 
appropriate.



Sec. 416.75  Performance of listed surgical procedures on an inpatient hospital basis.

    The inclusion of any procedure as a covered surgical procedure under 
Sec. 416.65 does not preclude its coverage in an inpatient hospital 
setting under Medicare.



                Subpart E--Payment for Facility Services



Sec. 416.120  Basis for payment.

    The basis for payment depends on where the services are furnished.
    (a) Hospital outpatient department. Payment is in accordance with 
part 413 of this chapter.
    (b) [Reserved]
    (c) ASC--(1) General rule. Payment is based on a prospectively 
determined rate. This rate covers the cost of services such as supplies, 
nursing services, equipment, etc., as specified in Sec. 416.61. The rate 
does not cover physician services or other medical services covered 
under part 410 of this chapter (for example, X-ray services or 
laboratory services) which are not directly related to the performance 
of the surgical procedures. Those services may be billed separately and 
paid on a reasonable charge basis.
    (2) Single and multiple surgical procedures. (i) If one covered 
surgical procedure is furnished to a beneficiary in an operative 
session, payment is based on the prospectively determined rate for that 
procedure.
    (ii) If more than one surgical procedure is furnished in a single 
operative session, payment is based on--
    (A) The full rate for the procedure with the highest prospectively 
determined rate; and
    (B) One half of the prospectively determined rate for each of the 
other procedures.
    (3) Deductibles and coinsurance. Part B deductible and coinsurance 
amounts apply as specified in Sec. 410.152 (a) and (i) of this chapter.

[56 FR 8844, Mar. 1, 1991; 56 FR 23022, May 20, 1991]



Sec. 416.125  ASC facility services payment rate.

    (a) The payment rate is based on a prospectively determined standard 
overhead amount per procedure derived from an estimate of the costs 
incurred by ambulatory surgical centers generally in providing services 
furnished in connection with the performance of that procedure.
    (b) The payment must be substantially less than would have been paid 
under the program if the procedure had been performed on an inpatient 
basis in a hospital.

[56 FR 8844, Mar. 1, 1991]



Sec. 416.130  Publication of revised payment methodologies.

    Whenever CMS proposes to revise the payment rate for ASCs, CMS 
publishes a notice in the Federal Register describing the revision. The 
notice also explains the basis on which the rates were established. 
After reviewing public comments, CMS publishes a notice establishing the 
rates authorized by this section. In setting these rates, CMS may adopt 
reasonable classifications of facilities and may establish different 
rates for different types of surgical procedures.

[47 FR 34094, Aug. 5, 1982, as amended at 56 FR 8844, Mar. 1, 1991]



Sec. 416.140  Surveys.

    (a) Timing, purpose, and procedures. (1) No more often than once a 
year, CMS conducts a survey of a randomly selected sample of 
participating ASCs to collect data for analysis or reevaluation of 
payment rates.
    (2) CMS notifies the selected ASCs by mail of their selection and of 
the form and content of the report the ASCs are required to submit 
within 60 days of the notice.

[[Page 680]]

    (3) If the facility does not submit an adequate report in response 
to CMS's survey request, CMS may terminate the agreement to participate 
in the Medicare program as an ASC.
    (4) CMS may grant a 30-day postponement of the due date for the 
survey report if it determines that the facility has demonstrated good 
cause for the delay.
    (b) Requirements for ASCs. ASCs must--
    (1) Maintain adequate financial records, in the form and containing 
the data required by CMS, to allow determination of the payment rates 
for covered surgical procedures furnished to Medicare beneficiaries 
under this subpart.
    (2) Within 60 days of a request from CMS submit, in the form and 
detail as may be required by CMS, a report of--
    (i) Their operations, including the allowable costs actually 
incurred for the period and the actual number and kinds of surgical 
procedures furnished during the period; and
    (ii) Their customary charges for each surgical procedure furnished 
for the period.

[47 FR 34094, Aug. 5, 1982, as amended at 56 FR 8845, Mar. 1, 1991]



Sec. 416.150  Beneficiary appeals.

    A beneficiary (or ASC as his or her assignee) may request a hearing 
by a carrier (subject to the limitations and conditions set forth in 
part 405, subpart H of this chapter) if the beneficiary or the ASC--
    (a) Is dissatisfied with a carrier's denial of a request for payment 
made on his or her behalf by an ASC;
    (b) Is dissatisfied with the amount of payment; or
    (c) Believes the request for payment is not being acted upon with 
reasonable promptness.



Subpart F--Adjustment in Payment Amounts for New Technology Intraocular 
             Lenses Furnished by Ambulatory Surgical Centers

    Source: 64 FR 32205, June 16, 1999, unless otherwise noted.



Sec. 416.180  Definitions.

    As used in this subpart, the following definitions apply:
    Class of new technology intraocular lenses (IOLs) means all of the 
IOLs, collectively, that CMS determines meet the definition of ``new 
technology IOL'' under the provisions of this subpart.
    Interested party means any individual, partnership, corporation, 
association, society, scientific or academic establishment, professional 
or trade organization, or any other legal entity.
    New technology IOL means an IOL that CMS determines has been 
approved by the FDA for use in labeling and advertising the IOL's claims 
of specific clinical advantages and superiority over existing IOLs with 
regard to reduced risk of intraoperative or postoperative complication 
or trauma, accelerated postoperative recovery, reduced induced 
astigmatism, improved postoperative visual acuity, more stable 
postoperative vision, or other comparable clinical advantages.
    New technology subset means a group of IOLs that CMS determines meet 
the criterion for being treated as new technology IOLs and that share a 
common feature or features that distinguish them from other IOLs.For 
example, all new technology IOLs that are made of a particular 
bioengineered material could comprise one subset, while all that rely on 
a particular optical innovation could comprise another.



Sec. 416.185  Payment review process.

    (a) CMS publishes a Federal Register notice announcing the deadline 
and requirements for submitting a request for CMS to review payment for 
an IOL.
    (b) CMS receives a request to review the appropriateness of the 
payment amount for an IOL.
    (c) CMS compiles a list of the requests it receives and identifies 
the IOL manufacturer's name, the model number of the IOL to be reviewed, 
the interested party or parties that submit requests, and a summary of 
the interested party's grounds for requesting review of the 
appropriateness of the IOL payment amount.
    (d) CMS publishes the list of requests in a Federal Register notice 
with comment period, giving the public 30

[[Page 681]]

days to comment on the IOLs for which review was requested.
    (e) CMS reviews the information submitted with the request to 
review, any timely public comments that are submitted regarding the list 
of IOLs published in the Federal Register, and any other timely 
information that CMS deems relevant to decide whether to provide a 
payment adjustment as specified in Sec. 416.200. CMS makes a 
determination of whether the IOL meets the definition of a new 
technology IOL in Sec. 416.180.
    (f) If CMS determines that a lens is a new technology IOL, CMS 
establishes a payment adjustment as follows:
    (1) Before July 16, 2002--$50.
    (2) After July 16, 2002--$50 or the amount announced through 
proposed and final rulemaking in connection with ambulatory surgical 
center services.
    (g) CMS designates a predominant characteristic of a new technology 
IOL that both sets it apart from other IOLs and links it with other 
similar IOLs with the same characteristic to establish a specific subset 
of new technology within the ``class of new technology IOLs.''
    (h) Within 90 days of the end of the comment period following the 
Federal Register notice identified in paragraph (d) of this section, CMS 
publishes in the Federal Register its determinations with regard to IOLs 
that it has determined are ``new technology'' lenses that qualify for a 
payment adjustment.
    (i) Payment adjustments are effective beginning 30 days after the 
publication of CMS's determinations in the Federal Register.



Sec. 416.190  Who may request a review.

    Any party who is able to furnish the information required in 
Sec. 416.195 may request that CMS review the appropriateness of the 
payment amount provided under section 1833(i)(2)(A)(iii) of the Act with 
respect to an IOL that meets the definition of a new technology IOL in 
Sec. 416.180.



Sec. 416.195  A request to review.

    (a) Content of a request. The request must include all of the 
following information:
    (1) The name of the manufacturer, the model number, and the trade 
name of the IOL.
    (2) A copy of the FDA's summary of the IOL's safety and 
effectiveness.
    (3) A copy of the labeling claims of specific clinical advantages 
approved by the FDA for the IOL.
    (4) A copy of the IOL's original FDA approval notification.
    (5) Reports of modifications made after the original FDA approval.
    (6) Other information that CMS finds necessary for identification of 
the IOL.
    (b) Confidential information. To the extent that information 
received from an IOL manufacturer can reasonably be characterized as a 
trade secret or as privileged or confidential commercial or financial 
information, CMS maintains the confidentiality of the information and 
protects it from disclosure not otherwise authorized or required by 
Federal law as allowed under Exemption 4 of the Freedom of Information 
Act (5 U.S.C. 552(b)(4)) and, with respect to trade secrets, the Trade 
Secrets Act (18 U.S.C. 1905).



Sec. 416.200  Application of the payment adjustment.

    (a) CMS recognizes the IOL(s) that define a new technology subset 
for purposes of this subpart as belonging to the class of new technology 
IOLs for a period of 5 years effective from the date that CMS recognizes 
the first new technology IOL for a payment adjustment.
    (b) Any IOL that CMS subsequently recognizes as belonging to a new 
technology subset receives the new technology payment adjustment for the 
remainder of the 5-year period established with CMS's recognition of the 
first IOL in the subset.
    (c) Beginning 5 years after the effective date of CMS's initial 
recognition of a new technology subset, payment adjustments cease for 
all IOLs that CMS designates as belonging to that subset and payment 
reverts to the standard payment rate set under section 
1833(i)(2)(A)(iii) of the Act for IOL insertion procedures performed in 
ASCs.
    (d) ASCs that furnish an IOL designated by CMS as belonging to the

[[Page 682]]

class of new technology IOLs must submit claims using specific billing 
codes to receive the new technology IOL payment adjustment.



PART 417--HEALTH MAINTENANCE ORGANIZATIONS, COMPETITIVE MEDICAL PLANS, AND HEALTH CARE PREPAYMENT PLANS--Table of Contents




                      Subpart A--General Provisions

Sec.
417.1  Definitions.
417.2  Basis and scope.

     Subpart B--Qualified Health Maintenance Organizations: Services

417.101  Health benefits plan: Basic health services.
417.102  Health benefits plan: Supplemental health services.
417.103  Providers of basic and supplemental health services.
417.104  Payment for basic health services.
417.105  Payment for supplemental health services.
417.106  Quality assurance program; Availability, accessibility, and 
          continuity of basic and supplemental health services.

Subpart C--Qualified Health Maintenance Organizations: Organization and 
                                Operation

417.120  Fiscally sound operation and assumption of financial risk.
417.122  Protection of enrollees.
417.124  Administration and management.
417.126  Recordkeeping and reporting requirements.

            Subpart D--Application for Federal Qualification

417.140  Scope.
417.142  Requirements for qualification.
417.143  Application requirements.
417.144  Evaluation and determination procedures.

 Subpart E--Inclusion of Qualified Health Maintenance Organizations in 
                     Employee Health Benefits Plans

417.150  Definitions.
417.151  Applicability.
417.153  Offer of HMO alternative.
417.155  How the HMO option must be included in the health benefits 
          plan.
417.156  When the HMO must be offered to employees.
417.157  Contributions for the HMO alternative.
417.158  Payroll deductions.
417.159  Relationship of section 1310 of the Public Health Service Act 
          to the National Labor Relations Act and the Railway Labor Act.

     Subpart F--Continued Regulation of Federally Qualified Health 
                        Maintenance Organizations

417.160  Applicability.
417.161  Compliance with assurances.
417.162  Reporting requirements.
417.163  Enforcement procedures.
417.164  Effect of revocation of qualification on inclusion in 
          employee's health benefit plans.
417.165  Reapplication for qualification.
417.166  Waiver of assurances.

Subparts G-I [Reserved]

         Subpart J--Qualifying Conditions for Medicare Contracts

417.400  Basis and scope.
417.401  Definitions.
417.402  Effective date of initial regulations.
417.404  General requirements.
417.406  Application and determination.
417.407  Requirements for a Competitive Medical Plan (CMP).
417.408  Contract application process.
417.410  Qualifying conditions: General rules.
417.412  Qualifying condition: Administration and management.
417.413  Qualifying condition: Operating experience and enrollment.
417.414  Qualifying condition: Range of services.
417.416  Qualifying condition: Furnishing of services.
417.418  Qualifying condition: Quality assurance program.

  Subpart K--Enrollment, Entitlement, and Disenrollment Under Medicare 
                                Contract

417.420  Basic rules on enrollment and entitlement.
417.422  Eligibility to enroll in an HMO or CMP.
417.423  Special rules: ESRD and hospice patients.
417.424  Denial of enrollment.
417.426  Open enrollment requirements.
417.428  Marketing activities.
417.430  Application procedures.
417.432  Conversion of enrollment.
417.434  Reenrollment.
417.436  Rules for enrollees.
417.440  Entitlement to health care services from an HMO or CMP.
417.442  Risk HMO's and CMP's: Conditions for provision of additional 
          benefits.
417.444  Special rules for certain enrollees of risk HMOs and CMPs.
417.446  [Reserved]

[[Page 683]]

417.448  Restriction on payments for services received by Medicare 
          enrollees of risk HMOs or CMPs.
417.450  Effective date of coverage.
417.452  Liability of Medicare enrollees.
417.454  Charges to Medicare enrollees.
417.456  Refunds to Medicare enrollees.
417.458  Recoupment of uncollected deductible and coinsurance amounts.
417.460  Disenrollment of beneficiaries by an HMO or CMP.
417.461  Disenrollment by the enrollee.
417.464  End of CMS's liability for payment: Disenrollment of 
          beneficiaries and termination or default of contract.

                Subpart L--Medicare Contract Requirements

417.470  Basis and scope.
417.472  Basic contract requirements.
417.474  Effective date and term of contract.
417.476  Waived conditions.
417.478  Requirements of other laws and regulations.
417.479  Requirements for physician incentive plans.
417.480  Maintenance of records: Cost HMOs and CMPs.
417.481  Maintenance of records: Risk HMOs or CMPs.
417.482  Access to facilities and records.
417.484  Requirement applicable to related entities.
417.486  Disclosure of information and confidentiality.
417.488  Notice of termination and of available alternatives: Risk 
          contract.
417.490  Renewal of contract.
417.492  Nonrenewal of contract.
417.494  Modification or termination of contract.
417.500  Sanctions against HMOs and CMPs.

  Subpart M--Change of Ownership and Leasing of Facilities: Effect on 
                            Medicare Contract

417.520  Effect on HMO and CMP contracts.

       Subpart N--Medicare Payment to HMOs and CMPs: General Rules

417.524  Payment to HMOs or CMPs: General.
417.526  Payment for covered services.
417.528  Payment when Medicare is not primary payer.

                 Subpart O--Medicare Payment: Cost Basis

417.530  Basis and scope.
417.531  Hospice care services.
417.532  General considerations.
417.533  Part B carrier responsibilities.
417.534  Allowable costs.
417.536  Cost payment principles.
417.538  Enrollment and marketing costs.
417.540  Enrollment costs.
417.542  Reinsurance costs.
417.544  Physicians' services furnished directly by the HMO or CMP.
417.546  Physicians' services and other Part B supplier services 
          furnished under arrangements.
417.548  Provider services through arrangements.
417.550  Special Medicare program requirements.
417.552  Cost apportionment: General provisions.
417.554  Apportionment: Provider services furnished directly by the HMO 
          or CMP.
417.556  Apportionment: Provider services furnished by the HMO or CMP 
          through arrangements with others.
417.558  Emergency, urgently needed, and out-of-area services for which 
          the HMO or CMP accepts financial responsibility.
417.560  Apportionment: Part B physician and supplier services.
417.564  Apportionment and allocation of administrative and general 
          costs.
417.566  Other methods of allocation and apportionment.
417.568  Adequate financial records, statistical data, and cost finding.
417.570  Interim per capita payments.
417.572  Budget and enrollment forecast and interim reports.
417.574  Interim settlement.
417.576  Final settlement.

                 Subpart P--Medicare Payment: Risk Basis

417.580  Basis and scope.
417.582  Definitions.
417.584  Payment to HMOs or CMPs with risk contracts.
417.585  Special rules: Hospice care.
417.588  Computation of adjusted average per capita cost (AAPCC).
417.590  Computation of the average of the per capita rates of payment.
417.592  Additional benefits requirement.
417.594  Computation of adjusted community rate (ACR).
417.596  Establishment of a benefit stabilization fund.
417.597  Withdrawal from a benefit stabilization fund.
417.598  Annual enrollment reconciliation.

                     Subpart Q--Beneficiary Appeals

417.600  Basis and scope.
417.602  Definitions.
417.604  General provisions.
417.605  Immediate QIO review of a determination of noncoverage of 
          inpatient hospital care.
417.606  Organization determinations.
417.608  Notice of adverse organization determination.
417.609  Expediting certain organization determinations.

[[Page 684]]

417.610  Parties to the organization determination.
417.612  Effect of organization determination.
417.614  Right to reconsideration.
417.616  Request for reconsideration.
417.617  Expediting certain reconsiderations.
417.618  Opportunity to submit evidence.
417.620  Responsibility for reconsiderations; time limits.
417.622  Reconsidered determination.
417.624  Notice of reconsidered determination.
417.626  Effect of reconsidered determination.
417.630  Right to a hearing.
417.632  Request for hearing.
417.634  Departmental Appeals Board (DAB) review.
417.636  Court review.
417.638  Reopening determinations and decisions.

                  Subpart R--Medicare Contract Appeals

417.640  Determinations subject to appeal.
417.642  Administrative actions that are not initial determinations.
417.644  Notice of initial determination.
417.646  Effect of initial determination.
417.648  Reconsideration: Applicability.
417.650  Request for reconsideration.
417.652  Opportunity to submit evidence.
417.654  Reconsidered determination.
417.656  Notice of reconsidered determination.
417.658  Effect of reconsidered determination.
417.660  Right to a hearing.
417.662  Request for hearing.
417.664  Postponement of effective date of initial determination.
417.666  Designation of hearing officer.
417.668  Disqualification of hearing officer.
417.670  Time and place of hearing.
417.672  Appointment of representatives.
417.674  Authority of representatives.
417.676  Conduct of hearing.
417.678  Evidence.
417.680  Witnesses.
417.682  Discovery.
417.684  Prehearing.
417.686  Record of hearing.
417.688  Authority of hearing officer.
417.690  Notice and effect of hearing decision.
417.692  Reopening of initial or reconsidered determination or decision 
          of a hearing officer.
417.694  Effect of revised determination.

Subparts S-T [Reserved]

                 Subpart U--Health Care Prepayment Plans

417.800  Payment to HCPPs: Definitions and basic rules.
417.801  Agreements between CMS and health care prepayment plans.
417.802  Allowable costs.
417.804  Cost apportionment.
417.806  Financial records, statistical data, and cost finding.
417.808  Interim per capita payments.
417.810  Final settlement.
417.830  Scope of regulations on beneficiary appeals.
417.832  Applicability of requirements and procedures.
417.834  Responsibility for establishing administrative review 
          procedures.
417.836  Written description of administrative review procedures.
417.838  Organization determinations.
417.840  Administrative review procedures.

   Subpart V--Administration of Outstanding Loans and Loan Guarantees

417.910  Applicability.
417.911  Definitions.
417.920  Planning and initial development.
417.930  Initial costs of operation.
417.931  [Reserved]
417.934  Reserve requirement.
417.937  Loan and loan guarantee provisions.
417.940  Civil action to enforce compliance with assurances.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh), secs. 1301, 1306, and 1310 of the Public Health 
Service Act (42 U.S.C. 300e, 300e-5, and 300e-9), and 31 U.S.C. 9701.

    Editorial Note: Nomenclature changes to part 417 appear at 58 FR 
38083, July 15, 1993, and 59 FR 59941, Nov. 21, 1994.



                      Subpart A--General Provisions



Sec. 417.1  Definitions.

    As used in this part, unless the context indicates otherwise--
    Basic health services means health services described in 
Sec. 417.101(a).
    Community rating system means a system of fixing rates of payments 
for health services that meets the requirements of Sec. 417.104(a)(3).
    Comprehensive health services means as a minimum the following 
services which may be limited as to time and cost:
    (1) Physician services (Sec. 417.101(a)(1));
    (2) Outpatient services and inpatient hospital services 
(Sec. 417.101(a)(2));
    (3) Medically necessary emergency health services 
(Sec. 417.101(a)(3)); and
    (4) Diagnostic laboratory and diagnostic and therapeutic radiologic 
services (Sec. 417.101(a)(6)).

[[Page 685]]

    Direct service contract means a contract for the provision of basic 
or supplemental health services or both between an HMO and (1) a health 
professional other than a member of the staff of the HMO, or (2) an 
entity other than a medical group or an IPA.
    Enrollee means an individual for whom an HMO, CMP, or HCPP assumes 
the responsibility, under a contract or agreement, for the furnishing of 
health care services on a prepaid basis.
    Full-time student means a student who is enrolled for a sufficient 
number of credit hours in a semester or other academic term to enable 
the student to complete the course of study within not more than the 
number of semesters or other academic terms normally required to 
complete that course of study on a full-time basis at the school in 
which the student is enrolled.
    Furnished, when used in connection with prepaid health care 
services, means services that are maid available to an enrollee either 
dierctly by, or under arrangements made by, the HMO, CMP, or HCPP.
    Health maintenance organization (HMO) means a legal entity that 
provides or arranges for the provision of basic and supplemental health 
services to its enrollees in the manner prescribed by, is organized and 
operated in the manner prescribed by, and otherwise meets the 
requirements of, section 1301 of the PHS Act and the regulations in 
subparts B and C of this part.
    Health professionals means physicians (doctors of medicine and 
doctors of osteopathy), dentists, nurses, podiatrists, optometrists, 
physicians' assistants, clinical psychologists, social workers, 
pharmacists, nutritionists, occupational therapists, physical 
therapists, and other professionals engaged in the delivery of health 
services who are licensed, practice under an institutional license, are 
certified, or practice under authority of the HMO, a medical group, 
individual practice association, or other authority consistent with 
State law.
    Individual practice association (IPA) means a partnership, 
association, corporation, or other legal entity that delivers or 
arranges for the delivery of health services and which has entered into 
written services arrangement or arrangements with health professionals, 
a majority of whom are licensed to practice medicine or osteopathy. The 
written services arrangement must provide:
    (1) That these health professionals will provide their professional 
services in accordance with a compensation arrangement established by 
the entity; and
    (2) To the extent feasible, for the sharing by these health 
professionals of health (including medical) and other records, 
equipment, and professional, technical, and administrative staff.
    Medical group means a partnership, association, corporation, or 
other group:
    (1) That is composed of health professionals licensed to practice 
medicine or osteopathy and of such other licensed health professionals 
(including dentists, optometrists, and podiatrists) as are necessary for 
the provision of health services for which the group is responsible;
    (2) A majority of the members of which are licensed to practice 
medicine or osteopathy; and
    (3) The members of which:
    (i) After the end of the 48 month period beginning after the month 
in which the HMO for which the group provides health services becomes a 
qualified HMO, as their principal professional activity (over 50 percent 
individually) engage in the coordinated practice of their profession and 
as a group responsibility have substantial responsibility (over 35 
percent in the aggregate of their professional activity) for the 
delivery of health services to enrollees of an HMO;
    (ii) Pool their income from practice as members of the group and 
distribute it among themselves according to a prearranged salary or 
drawing account or other similar plan unrelated to the provision of 
specific health services;
    (iii) Share health (including medical) records and substantial 
portions of major equipment and of professional, technical, and 
administrative staff;
    (iv) Establish an arrangement whereby an enrollee's enrollment 
status is not known to the health professional who provides health 
services to the enrollee.

[[Page 686]]

    Medical group members means (1) a health professional engaged as a 
partner, associate, or shareholder in the medical group, or (2) any 
other health professional employed by the group who may be designated as 
a medical group member by the medical group.
    Medically underserved population means the population of an urban or 
rural area as described in Sec. 417.912(d).
    Nonmetropolitan area means an area no part of which is within a 
standard metropolitan statistical area as designated by the Office of 
Management and Budget and which does not contain a city whose population 
exceeds 50,000 individuals.
    Party in interest means: (1) Any director, officer, partner, or 
employee responsible for management or administration of an HMO, any 
person who is directly or indirectly the beneficial owner of more than 5 
percent of the equity of the HMO, any person who is the beneficial owner 
of a mortgage, deed of trust, note, or other interest secured by, and 
valuing more than 5 percent of the assets of the HMO, and, in the case 
of an HMO organized as a nonprofit corporation, an incorporator or 
member of the corporation under applicable State corporation law;
    (2) Any entity in which a person described in paragraph (1):
    (i) Is an officer or director;
    (ii) Is a partner (if the entity is organized as a partnership);
    (iii) Has directly or indirectly a beneficial interest of more than 
5 percent of the equity; or
    (iv) Has a mortgage, deed of trust, note, or other interest valuing 
more than 5 percent of the assets of such entity;
    (3) Any spouse, child, or parent of an individual described in 
paragraph (1).
    Policymaking body of an HMO means a board of directors, governing 
body, or other body of individuals that has the authority to establish 
policy for the HMO.
    Qualified HMO means an HMO found by CMS to be qualified within the 
meaning of section 1310 of the PHS Act and subpart D of this part.
    Rural area means any area not listed as a place having a population 
of 2,500 or more in Document PC(1)A, ``Number of Inhabitants,'' 
Table VI, ``Population of Places,'' and not listed as an urbanized area 
in Table XI, ``Population of Urbanized Areas'' of the same document 
(1970 Census or most recent update of this document, Bureau of Census, 
U.S. Department of Commerce).
    Secretary means the Secretary of Health and Human Services and any 
other officer or employee of the Department of Health and Human Services 
to whom the authority involved has been delegated.
    Service area means a geographic area, defined through zip codes, 
census tracts, or other geographic measurements, that is the area, as 
determined by CMS, within which the HMO furnishes basic and supplemental 
health services and makes them available and accessible to all its 
enrollees in accordance with Sec. 417.106(b).
    Significant business transaction means any business transaction or 
series of transactions during any one fiscal year of the HMO, the total 
value of which exceeds the lesser of $25,000 or 5 percent of the total 
operating expenses of the HMO.
    Staff of the HMO means health professionals who are employees of the 
HMO and who--
    (1) Provide services to HMO enrollees at an HMO facility subject to 
the staff policies and operational procedures of the HMO;
    (2) Engage in the coordinated practice of their profession and 
provide to enrollees of the HMO the health services that the HMO has 
contracted to provide;
    (3) Share medical and other records, equipment, and professional, 
technical, and administrative staff of the HMO; and
    (4) Provide their professional services in accordance with a 
compensation arrangement, other than fee-for-service, established by the 
HMO. This arrangement may include, but is not limited to, fee-for-time, 
retainer or salary.
    Subscriber means an enrollee who has entered into a contractual 
relationship with the HMO or who is responsible for making payments for 
basic health services (and contracted for supplemental health services) 
to the HMO or on whose behalf these payments are made.

[[Page 687]]

    Supplemental health services means the health services described in 
Sec. 417.102(a).
    Unusual or infrequently used health services means:
    (1) Those health services that are projected to involve fewer than 1 
percent of the encounters per year for the entire HMO enrollment, or,
    (2) Those health services the provision of which, given the 
enrollment projection of the HMO and generally accepted staffing 
patterns, is projected will require less than 0.25 full time equivalent 
health professionals.

[45 FR 72528, Oct. 31, 1980, as amended at 47 FR 19338, May 5, 1982; 52 
FR 22321, June 11, 1987. Redesignated at 52 FR 36746, Sept. 30, 1987. 
Redesignated and amended at 56 FR 51985, Oct. 17, 1991; 58 FR 38067, 
July 15, 1993; 60 FR 34887, July 5, 1995; 60 FR 45674, Sept. 1, 1995]



Sec. 417.2  Basis and scope.

    (a) Subparts B through F of this part pertain to the Federal 
qualification of HMOs under title XIII of the Public Health Service 
(PHS) Act.
    (b) Subparts G through R of this part set forth the rules for 
Medicare contracts with, and payment to, HMOs and competitive medical 
plans (CMPs) under section 1876 of the Act.
    (c) Subpart U of this part pertains to Medicare payment to health 
care prepayment plans under section 1833(a)(1)(A) of the Act.
    (d) Subpart V of this part applies to the administration of 
outstanding loans and loan guarantees previously granted under title 
XIII of the PHS Act.

[56 FR 51985, Oct. 17, 1991, as amended at 60 FR 45675, Sept. 1, 1995]



     Subpart B--Qualified Health Maintenance Organizations: Services



Sec. 417.101  Health benefits plan: Basic health services.

    (a) An HMO must provide or arrange for the provision of basic health 
services to its enrollees as needed and without limitations as to time 
and cost other than those prescribed in the PHS Act and these 
regulations, as follows:
    (1) Physician services (including consultant and referral services 
by a physician), which must be provided by a licensed physician, or if a 
service of a physician may also be provided under applicable State law 
by other health professionals, an HMO may provide the service through 
these other health professionals;
    (2)(i) Outpatient services, which must include diagnostic services, 
treatment services and x-ray services, for patients who are ambulatory 
and may be provided in a non-hospital based health care facility or at a 
hospital;
    (ii) Inpatient hospital services, which must include but not be 
limited to, room and board, general nursing care, meals and special 
diets when medically necessary, use of operating room and related 
facilities, use of intensive care unit and services, x-ray services, 
laboratory, and other diagnostic tests, drugs, medications, biologicals, 
anesthesia and oxygen services, special duty nursing when medically 
necessary, radiation therapy, inhalation therapy, and administration of 
whole blood and blood plasma;
    (iii) Outpatient services and inpatient hospital services must 
include short-term rehabilitation services and physical therapy, the 
provision of which the HMO determines can be expected to result in the 
significant improvement of a member's condition within a period of two 
months;
    (3) Instructions to its enrollees on procedures to be followed to 
secure medically necessary emergency health services both in the service 
area and out of the service area;
    (4) Twenty outpatient visits per enrollee per year, as may be 
necessary and appropriate for short-term evaluative or crisis 
intervention mental health services, or both;
    (5) Diagnosis, medical treatment and referral services (including 
referral services to appropriate ancillary services) for the abuse of or 
addiction to alcohol and drugs:
    (i) Diagnosis and medical treatment for the abuse of or addiction to 
alcohol and drugs must include detoxification for alcoholism or drug 
abuse on either an outpatient or inpatient basis, whichever is medically 
determined to be appropriate, in addition to the other required basic 
health services for the treatment of other medical conditions;

[[Page 688]]

    (ii) Referral services may be either for medical or for nonmedical 
ancillary services. Medical services must be a part of basic health 
services; nonmedical ancillary services (such as vocational 
rehabilitation and employment counseling) and prolonged rehabilitation 
services in a specialized inpatient or residential facility need not be 
a part of basic health services;
    (6) Diagnostic laboratory and diagnostic and therapeutic radiologic 
services in support of basic health services;
    (7) Home health services provided at an enrollee's home by health 
care personnel, as prescribed or directed by the responsible physician 
or other authority designated by the HMO; and
    (8) Preventive health services, which must be made available to 
members and must include at least the following:
    (i) A broad range of voluntary family planning services;
    (ii) Services for infertility;
    (iii) Well-child care from birth;
    (iv) Periodic health evaluations for adults;
    (v) Eye and ear examinations for children through age 17, to 
determine the need for vision and hearing correction; and
    (vi) Pediatric and adult immunizations, in accord with accepted 
medical practice.
    (b) In addition, an HMO may include a health service described in 
Sec. 417.102 as a supplemental health service in the basic health 
services that it provides or arranges for its enrollees for a basic 
health services payment.
    (c) To the extent that a natural disaster, war, riot, civil 
insurrection, epidemic or any other emergency or similar event not 
within the control of an HMO results in the facilities, personnel, or 
financial resources of an HMO being unavailable to provide or arrange 
for the provision of a basic or supplemental health service in 
accordance with the requirements of Secs. 417.101 through 417.106 and 
Secs. 417.168 and 417.169, the HMO is required only to make a good-faith 
effort to provide or arrange for the provision of the service, taking 
into account the impact of the event. For purposes of this paragraph, an 
event is not within the control of an HMO if the HMO cannot exercise 
influence or dominion over its occurrence.
    (d) The following are not required to be provided as basic health 
services:
    (1) Corrective appliances and artificial aids;
    (2) Mental health services, except as required under section 
1302(1)(D) of the PHS Act and paragraph (a)(4) of this section;
    (3) Cosmetic surgery, unless medically necessary;
    (4) Prescribed drugs and medicines incidental to outpatient care;
    (5) Ambulance services, unless medically necessary;
    (6) Care for military service connected disabilities for which the 
enrollee is legally entitled to services and for which facilities are 
reasonably available to this enrollee;
    (7) Care for conditions that State or local law requires be treated 
in a public facility;
    (8) Dental services;
    (9) Vision and hearing care except as required by sections 
1302(1)(A) and 1302(1)(H)(vi) of the PHS Act and paragraphs (a)(1) and 
(a)(8) of this section;
    (10) Custodial or domiciliary care;
    (11) Experimental medical, surgical, or other experimental health 
care procedures, unless approved as a basic health service by the 
policymaking body of the HMO;
    (12) Personal or comfort items and private rooms, unless medically 
necessary during inpatient hospitalization;
    (13) Whole blood and blood plasma;
    (14) Long-term physical therapy and rehabilitation;
    (15) Durable medical equipment for home use (such as wheel chairs, 
surgical beds, respirators, dialysis machines); and
    (16) Health services that are unusual and infrequently provided and 
not necessary for the protection of individual health, as approved by 
CMS upon application by the HMO.
    (e) An HMO may not offer to provide or arrange for the provision of 
basic health services on a prepayment basis that do not include all the 
basic health services set forth in paragraph (a) of this section or that 
are limited as to

[[Page 689]]

time and cost except in a manner prescribed by this subpart.

[45 FR 72528, Oct. 31, 1980. Redesignated at 52 FR 36746, Sept. 30, 
1987, and amended at 58 FR 38077, July 15, 1993]



Sec. 417.102  Health benefits plan: Supplemental health services.

    (a) An HMO may provide to its enrollees any health service that is 
not included as a basic health service under Sec. 417.101(a). These 
health services may be limited as to time and cost.
    (b) An HMO must determine the level and scope of supplemental health 
services included with basic health services provided to its enrollees 
for a basic health services payment or those services offered to its 
enrollees as supplemental health services.

[45 FR 72528, Oct. 31, 1980, as amended at 47 FR 19339, May 5, 1982. 
Redesignated at 52 FR 36746, Sept. 30, 1987, as amended at 58 FR 38082, 
38083, July 15, 1993]



Sec. 417.103  Providers of basic and supplemental health services.

    (a)(1) The HMO must provide that the services of health 
professionals that are provided as basic health services will, except as 
provided in paragraph (c) of this section, be provided or arranged for 
through (i) health professionals who are staff of the HMO, (ii) a 
medical group or groups, (iii) an IPA or IPAs, (iv) physicians or other 
health professionals under direct service contracts with the HMO for the 
provision of these services, or (v) any combination of staff, medical 
group or groups, IPA or IPAs, or physicians or other health 
professionals under direct service contracts with the HMO.
    (2) A staff or medical group model HMO may have as providers of 
basic health services physicians who have also entered into written 
services arrangements with an IPA or IPAs, but only if either (i) these 
physicians number less than 50 percent of the physicians who have 
entered into arrangements with the IPA or IPAs, or (ii) if the sharing 
is 50 percent or greater, CMS approves the sharing as being consistent 
with the purposes of section 1310(b) of the PHS Act.
    (3) After the 4 year period beginning with the month following the 
month in that an HMO becomes a qualified HMO, an entity that meets the 
requirements of the definition of medical group in Sec. 417.100, except 
for subdivision (3)(i) of that definition, may be considered a medical 
group if CMS determines that the principal professional activity (over 
50 percent individually) of the entity's members is the coordinated 
practice of their profession, and if the HMO has demonstrated to the 
satisfaction of CMS that the entity is committed to the delivery of 
medical services on a prepaid group practice basis by either:
    (i) Presenting a reasonable time-phased plan for the entity to 
achieve compliance with the ``substantial responsibility'' requirement 
of subdivision (3)(i) of the definition of ``medical group'' in 
Sec. 417.100. The HMO must update the plan annually and must demonstrate 
to the satisfaction of CMS that the entity is making continuous efforts 
and progress towards compliance with the requirements of the definition 
of ``medical group,'' or
    (ii) Demonstrating that compliance by the entity with the 
``substantial responsibility'' requirement is unreasonable or 
impractical because (A) the HMO serves a non-metropolitan or rural area 
as defined in Sec. 417.100, or (B) the entity is a multi-speciality 
group that provides medical consultation upon referral on a regional or 
national basis, or (C) the majority of the residents of the HMO's 
service area are not eligible for employer-employee health benefits 
plans and the HMO has an insufficient number of enrollees to require 
utilization of at least 35 percent of the entity's services.
    (b) HMOs must have effective procedures to monitor utilization and 
to control cost of basic and supplemental health services and to achieve 
utilization goals, which may include mechanisms such as risk sharing, 
financial incentives, or other provisions agreed to by providers.
    (c) Paragraph (a) of this section does not apply to the provision of 
the services of a physician:
    (1) Which the HMO determines are unusual or infrequently used 
services; or
    (2) Which, because of an emergency, it was medically necessary to 
provide to the enrollee other than as required by paragraph (a) of this 
section; or

[[Page 690]]

    (3) Which are provided as part of the inpatient hospital services by 
employees or staff of a hospital or provided by staff of other entities 
such as community mental health centers, home health agencies, visiting 
nurses' associations, independent laboratories, or family planning 
agencies.
    (d) Supplemental health services must be provided or arranged for by 
the HMO and need not be provided by providers of basic health services 
under contract with the HMO.
    (e) Each HMO must:
    (1) Pay the provider, or reimburse its enrollees for the payment of 
reasonable charges for basic health services (or supplemental health 
services that the HMO agreed to provide on a prepayment basis) for which 
its enrollees have contracted, which were medically necessary and 
immediately required to be obtained other than through the HMO because 
of an unforeseen illness, injury, or condition, as determined by the 
HMO;
    (2) Adopt procedures to review promptly all claims from enrollees 
for reimbursement for the provision of health services described in 
paragraph (e)(1) of this section, including a procedure for the 
determination of the medical necessity for obtaining the services other 
than through the HMO; and
    (3) Provide instructions to its enrollees on procedures to be 
followed to secure these health services.

(Sec. 215 of the Public Health Service Act, as amended, 58 Stat. 690, 67 
Stat. 631 (42 U.S.C. 216); secs. 1301-1318, as amended, Pub. L. 97-35, 
95 Stat. 572-578 (42 U.S.C. 300e-300e-17)

[45 FR 72528, Oct. 31, 1980; 45 FR 77031, Nov. 21, 1980, as amended at 
47 FR 19339, May 5, 1982; 50 FR 6174, Feb. 14, 1985. Redesignated at 52 
FR 36746, Sept. 30, 1987, as amended at 58 FR 38082, 38083, July 15, 
1993]



Sec. 417.104  Payment for basic health services.

    (a) Basic health services payment. Each HMO must provide or arrange 
for the provision of basic health services for a basic health services 
payment that:
    (1) Is to be paid on a periodic basis without regard to the dates 
these services are provided;
    (2) Is fixed without regard to the frequency, extent, or kind of 
basic health services actually furnished;
    (3) Except as provided in paragraph (c) of this section, is fixed 
under a community rating system, as described in paragraph (b) of this 
section; and
    (4) May be supplemented by nominal copayments which may be required 
for the provision of specific basic health services. Each HMO may 
establish one or more copayment options calculated on the basis of a 
community rating system.
    (i) An HMO may not impose copayment charges that exceed 50 percent 
of the total cost of providing any single service to its enrollees, nor 
in the aggregate more than 20 percent of the total cost of providing all 
basic health services.
    (ii) To insure that copayments are not a barrier to the utilization 
of health services or enrollment in the HMO, an HMO may not impose 
copayment charges on any subscriber (or enrollees covered by the 
subscriber's contract with the HMO) in any calendar year, when the 
copayments made by the subscriber (or enrollees) in that calendar year 
total 200 percent of the total annual premium cost which that subscriber 
(or enrollees) would be required to pay if he (or they) were enrolled 
under an option with no copayments. This limitation applies only if the 
subscriber (or enrollees) demonstrates that copayments in that amount 
have been paid in that year.
    (b) Community rating system. Under a community rating system, rates 
of payment for health services may be determined on a per person or per 
family basis, as described in paragraph (b)(1) of this section or on a 
per group basis as described in paragraph (b)(2) of this section. An HMO 
may fix its rates of payment under the system described in paragraph 
(b)(1) or (b)(2) of this section or under both such systems, but an HMO 
may use only one such system for fixing its rates of payment for any one 
group.
    (1) A system of fixing rates of payment for health services may 
provide that the rates will be fixed on a per person or per family basis 
and may vary with the number of persons in a family. Except as otherwise 
authorized in this paragraph, these rates must be equivalent for all 
individuals and for all families of similar composition.

[[Page 691]]

Rates of payment may be based on either a schedule of rates charged to 
each subscriber group or on a per-enrollee-per-month (or per-subscriber-
per-month) revenue requirement for the HMO. In the former event, rates 
may vary from group to group if the projected total revenue from each 
group is substantially equivalent to the revenue that would be derived 
if the schedule of rates were uniform for all groups. In the latter 
event, the payments from each group of subscribers must be calculated to 
yield revenues substantially equivalent to the product of the total 
number of enrollees (or subscribers) expected to be enrolled from the 
group and the per-enrollee-per-month (or per-subscriber-per-month) 
revenue requirement for the HMO. Under the system described in this 
paragraph, rates of payment may not vary because of actual or 
anticipated utilization of services by individuals associated with any 
specific group of subscribers. These provisions do not preclude changes 
in the rates of payment that are established for new enrollments or re-
enrollments and that do not apply to existing contracts until the 
renewal of these contracts.
    (2) A system of fixing rates of payment for health services may 
provide that the rates will be fixed for individuals and families by 
groups. Except as otherwise authorized in this paragraph, such rates 
must be equivalent for all individuals in the same group and for all 
families of similar composition in the same group. If an HMO is to fix 
rates of payment for individuals and families by groups, it must:
    (i) Classify all of the enrollees of the organization into classes 
based on factors that the HMO determines predict the differences in the 
use of health services by the individuals or families in each class and 
which have not been disapproved by CMS,
    (ii) Determine its revenue requirements for providing services to 
the enrollees of each class established under paragraph (b)(2)(i) of 
this section, and
    (iii) Fix the rates of payment for the individuals and families of a 
group on the basis of a composite of the organization's revenue 
requirements determined under paragraph (b)(2)(ii) of this section for 
providing services to them as members of the classes established under 
paragraph (b)(2)(i) of this section. CMS will review the factors used by 
each HMO to establish classes under paragraph (b)(2)(i) of this section. 
If CMS determines that any such factor may not reasonably be used to 
predict the use of the health services by individuals and families, CMS 
will disapprove the factor for that purpose.
    (3)(i) Nominal differentials in rates may be established to reflect 
differences in marketing costs and the different administrative costs of 
collecting payments from the following categories of potential 
subscribers:
    (A) Individual (non-group) subscribers (including their families).
    (B) Small groups of subscribers (100 subscribers or fewer).
    (C) Large groups of subscribers (over 100 subscribers).
    (ii) Differentials in rates may be established for subscribers 
enrolled in an HMO: (A) Under a contract with a governmental authority 
under section 1079 (``Contracts for Medical Care for Spouses and 
Children: Plans'') or section 1086 (``Contracts for Health Benefits for 
Certain Members, Former Members and their Dependents'') of title 10 
(``Armed Forces''), United States Code; or (B) under any other 
governmental program (other than the health benefits program authorized 
by chapter 89 (``Health Insurance'') of title 5 (``Government 
Organization and Employees''), United States Code; or (C) under any 
health benefits program for employees of States, political subdivisions 
of states, and other public entities.
    (4) An HMO may establish a separate community rate for separate 
regional components of the organization upon satisfactory demonstration 
to CMS of the following:
    (i) Each regional component is geographically distinct and separate 
from any other regional component; and
    (ii) Each regional component provides substantially the full range 
of basic health services to its enrollees, without extensive referral 
between components of the organization for these services, and without 
substantial utilization by any two components of the same health care 
facilities. The separate community rate for each regional component of 
the HMO must be

[[Page 692]]

based on the different costs of providing health services in the 
respective regions.
    (c) Exceptions to community rating requirement. (1) In the case of 
an HMO that provided comprehensive health services on a prepaid basis 
before it became a qualifed HMO, the requirement of community rating 
shall not apply to the HMO during the forty-eight month period beginning 
with the month following the month in which it became a qualifed HMO.
    (2) The requirement of community rating does not apply to the basic 
health services payment for basic health services provided an enrollee 
who is a full-time student at an accredited institution of higher 
education.
    (d) Late payment penalty. HMOs may charge a late payment penalty on 
accounts receivable that are in arrears.
    (e) Review procedures for evaluating the community rating by class 
system under paragraph (b)(2).1 An HMO may establish a 
community rating system under paragraph (b)(2) of this section or 
revised factors used to establish classes after it receives written 
approval of the factors from CMS. CMS will give approval if it concludes 
that the factors can reasonably be used to predict the use of health 
services by individuals and families.
---------------------------------------------------------------------------

    \1\ Further information entitled ``Guidelines for Rating by Class'' 
may be obtained from the Office of Prepaid Health Care, Division of 
Qualification Analysis, HHS Cohen Bldg., room 4360, 330 Independence 
Ave. SW., Washington, DC 20201.
---------------------------------------------------------------------------

    (1) An HMO must make a written request to CMS, listing the factors 
to be used in the community rating by class system under paragraph 
(b)(2) of this section.
    (2) CMS will notify each HMO within 30 days of receipt of the 
request and application of one of the following:
    (i) The application is approved;
    (ii) Additional information or data are required and CMS will notify 
the HMO of its decision within 30 days from the date of receipt of this 
information or data; or
    (iii) CMS needs additional time to review the written request and 
the HMO will be notified of CMS's decision within 90 days.

(Approved by the Office of Management and Budget under control number 
0915-0051)

(Sec. 215 of the Public Health Service Act, as amended, 58 Stat. 690, 67 
Stat. 631 (42 U.S.C. 216); secs. 1301-1318, as amended, Pub. L. 97-35, 
95 Stat. 572-578 (42 U.S.C. 300e-300e-17)

[45 FR 72528, Oct. 31, 1980, as amended at 47 FR 19339, May 5, 1982; 50 
FR 6175, Feb. 14, 1985. Redesignated at 52 FR 36746, Sept. 30, 1987, as 
amended at 56 FR 8853, Mar. 1, 1991; 58 FR 38082, 38083, July 15, 1993]



Sec. 417.105  Payment for supplemental health services.

    (a) An HMO may require supplemental health services payments, in 
addition to the basic health services payments, for the provision of 
each health service included in the supplemental health services set 
forth in Sec. 417.102 for which subscribers have contracted, or it may 
include supplemental health services in the basic health services 
provided its enrollees for a basic health services payment.
    (b) Supplemental health services payments may be made in any agreed 
upon manner, such as prepayment or fee-for-service. Supplemental health 
services payments that are fixed on a prepayment basis, however, must be 
fixed under a community rating system, unless the supplemental health 
services payment is for a supplemental health service provided an 
enrollee who is a full-time student at an accredited institution of 
higher education. In the case of an HMO that provided comprehensive 
health services on a prepaid basis before it became a qualifed HMO, the 
community rating requirement shall not apply to that HMO during the 
forty-eight month period beginning with the month following the month in 
which it became a qualifed HMO.

(Sec. 215 of the Public Health Service Act, as amended, 58 Stat. 690, 67 
Stat. 631 (42 U.S.C. 216); secs. 1301-1318, as amended, Pub. L. 97-35, 
95 Stat. 572-578 (42 U.S.C. 300e-300e-17)

[45 FR 72528, Oct. 31, 1980, as amended at 50 FR 6175, Feb. 14, 1985. 
Redesignated at 52 FR 36746, Sept. 30, 1987, as amended at 58 FR 38082, 
38083, July 15, 1993]

[[Page 693]]



Sec. 417.106  Quality assurance program; Availability, accessibility, and continuity of basic and supplemental health services.

    (a) Quality assurance program. Each HMO or CMP must have an ongoing 
quality assurance program for its health services that meets the 
following conditions:
    (1) Stresses health outcomes to the extent consistent with the state 
of the art.
    (2) Provides review by physicians and other health professionals of 
the process followed in the provision of health services.
    (3) Uses systematic data collection of performance and patient 
results, provides interpretation of these data to its practitioners, and 
institutes needed change.
    (4) Includes written procedures for taking appropriate remedial 
action whenever, as determined under the quality assurance program, 
inappropriate or substandard services have been provided or services 
that ought to have been furnished have not been provided.
    (b) Availability and accessibility of health care services. Basic 
health services and those supplemental health services for which 
enrollees have contracted must be provided or arranged for by the HMO in 
accordance with the following rules:
    (1) Except as provided in paragraph (b)(2) of this section, the 
services must be available to each enrollee within the HMO's service 
area.
    (2) Exception. If the HMO's service area is located wholly within a 
nonmetropolitan area, the HMO may make available outside its service 
area any basic health service that is not a primary care or emergency 
care service, if the number of providers of that basic health service 
who will provide the service to the HMO's enrollees is insufficient to 
meet the demand. As used in this paragraph, primary care includes 
general practice, family practice, general internal medicine, general 
pediatrics, and general obstetrics and gynecology. An HMO that provides 
the services covered by these fields through at least a general or 
family practitioner, or a pediatrician and a general internist, is 
considered to be providing primary care.
    (3) The services must be available and accessible with reasonable 
promptness to each of the HMO's enrollees as ensured through--
    (i) Staffing patterns within generally accepted norms for meeting 
the projected enrollment needs; and
    (ii) Geographic location, hours of operation, and arrangements for 
after-hours services. (Medically necessary emergency services must be 
available 24 hours a day, 7 days a week.)
    (c) Continuity of care. The HMO must ensure continuity or care 
through arrangements that include but are not limited to the following:
    (1) Use of a health professional who is primarily responsible for 
coordinating the enrollee's overall health care.
    (2) A system of health and medical records that accumulates 
pertinent information about the enrollee's health care and makes it 
available to appropriate professionals.
    (3) Arrangements made directly or through the HMO's providers to 
ensure that the HMO or the health professional who coordinates the 
enrollee's overall health care is kept informed about the services that 
the referral resources furnish to the enrollee.
    (d) Confidentiality of health records. Each HMO must establish 
adequate procedures to ensure the confidentiality of the health and 
medical records of its enrollees.

[58 FR 38068, July 15, 1993]



Subpart C--Qualified Health Maintenance Organizations: Organization and 
                                Operation

    Source: 58 FR 38068, July 15, 1993, unless otherwise noted.



Sec. 417.120  Fiscally sound operation and assumption of financial risk.

    (a) Fiscally sound operation--(1) General requirements. Each HMO 
must have a fiscally sound operation, as demonstrated by the following:
    (i) Total assets greater than total unsubordinated liabilities. In 
evaluating assets and liabilities, loan funds awarded or guaranteed 
under section

[[Page 694]]

1306 of the PHS Act are not included as liabilities.
    (ii) Sufficient cash flow and adequate liquidity to meet obligations 
as they become due.
    (iii) A net operating surplus, or a financial plan that meets the 
requirements of paragraph (a)(2) of this section.
    (iv) An insolvency protection plan that meets the requirements of 
Sec. 417.122(b) for protection of enrollees.
    (v) A fidelity bond or bonds, procured and maintained by the HMO, in 
an amount fixed by its policymaking body but not less than $100,000 per 
individual, covering each officer and employee entrusted with the 
handling of its funds. The bond may have reasonable deductibles, based 
upon the financial strength of the HMO.
    (vi) Insurance policies or other arrangements, secured and 
maintained by the HMO and approved by CMS to insure the HMO against 
losses arising from professional liability claims, fire, theft, fraud, 
embezzlement, and other casualty risks.
    (2) Financial plan requirement. (i) If an HMO has not earned a 
cumulative net operating surplus during the three most recent fiscal 
years, did not earn a net operating surplus during the most recent 
fiscal year or does not have positive net worth, the HMO must submit a 
financial plan satisfactory to CMS to achieve net operating surplus 
within available fiscal resources.
    (ii) This plan must include--
    (A) A detailed marketing plan;
    (B) Statements of revenue and expense on an accrual basis;
    (C) Sources and uses of funds statements; and
    (D) Balance sheets.
    (b) Assumption of financial risk. Each HMO must assume full 
financial risk on a prospective basis for the provision of basic health 
services, except that it may obtain insurance or make other arrangements 
as follows:
    (1) For the cost of providing to any enrollee basic health services 
with an aggregate value of more than $5,000 in any year.
    (2) For the cost of basic health services obtained by its enrollees 
from sources other than the HMO because medical necessity required that 
they be furnished before they could be secured through the HMO.
    (3) For not more than 90 percent of the amount by which its costs 
for any of its fiscal years exceed 115 percent of its income for that 
fiscal year.
    (4) For physicians or other health professionals, health care 
institutions, or any other combination of such individuals or 
institutions to assume all or part of the financial risk on a 
prospective basis for their furnishing of basic health services to the 
HMO's enrollees.



Sec. 417.122  Protection of enrollees.

    (a) Liability protection. (1) Each HMO must adopt and maintain 
arrangements satisfactory to CMS to protect its enrollees from incurring 
liability for payment of any fees that are the legal obligation of the 
HMO. These arrangements may include any of the following:
    (i) Contractual arrangements that prohibit health care providers 
used by the enrollees from holding any enrollee liable for payment of 
any fees that are the legal obligation of the HMO.
    (ii) Insurance, acceptable to CMS.
    (iii) Financial reserves, acceptable to CMS, that are held for the 
HMO and restricted for use only in the event of insolvency.
    (iv) Any other arrangements acceptable to CMS.
    (2) The requirements of this paragraph do not apply to an HMO if CMS 
determines that State law protects the HMO enrollees from liability for 
payment of any fees that are the legal obligation of the HMO.
    (b) Protection against loss of benefits if the HMO becomes 
insolvent. The insolvency protection plan required under Sec. 417.120(a) 
must provide for continuation of benefits as follows:
    (1) For all enrollees, for the duration of the contract period for 
which payment has been made.
    (2) For enrollees who are in an inpatient facility on the date of 
insolvency, until they are discharged from the facility.



Sec. 417.124  Administration and management.

    (a) General requirements. Each HMO must have administrative and 
managerial arrangements satisfactory to CMS,

[[Page 695]]

as demonstrated by at least the following:
    (1) A policymaking body that exercises oversight and control over 
the HMO's policies and personnel to ensure that management actions are 
in the best interest of the HMO and its enrollees.
    (2) Personnel and systems sufficient for the HMO to organize, plan, 
control and evaluate the financial, marketing, health services, quality 
assurance program, administrative and management aspects of the HMO.
    (3) At a minimum, management by an executive whose appointment and 
removal are under the control of the HMO's policymaking body.
    (b) Full and fair disclosure--(1) Basic rule. Each HMO must prepare 
a written description of the following:
    (i) Benefits (including limitations and exclusions).
    (ii) Coverage (including a statement of conditions on eligibility 
for benefits).
    (iii) Procedures to be followed in obtaining benefits and a 
description of circumstances under which benefits may be denied.
    (iv) Rates.
    (v) Grievance procedures.
    (vi) Service area.
    (vii) Participating providers.
    (viii) Financial condition including at least the following most 
recently audited information: Current assets, other assets, total 
assets; current liabilities, long term liabilities; and net worth.
    (2) Requirements for the description. (i) The description must be 
written in a way that can be easily understood by the average person who 
might enroll in the HMO.
    (ii) The description of benefits and coverage may be in general 
terms if reference is made to a detailed statement of benefits and 
coverage that is available without cost to any person who enrolls in the 
HMO or to whom the opportunity for enrollment is offered.
    (iii) The HMO must provide the description to any enrollee or person 
who is eligible to elect the HMO option and who requests the material 
from the HMO or the administrator of a health benefits plan. For 
purposes of this requirement, ``administrator'' (of a health benefits 
plan) has the meaning it is given in the Employment Retirement Income 
Security Act of 1974 (ERISA) at 29 U.S.C. 1002(16)(A).
    (iv) If the HMO provides health services through individual practice 
associations (IPAs), the HMO must specify the number of member 
physicians by specialty, and a listing of the hospitals where HMO 
enrollees will receive basic and supplemental health services.
    (v) If the HMO provides health services other than through IPAs, the 
HMO must specify, for each ambulatory care facility, the facility's 
address, days and hours of operation, and the number of physicians by 
specialty, and a listing of the hospitals where HMO enrollees will 
receive basic and supplemental health services.
    (c) Broadly representative enrollment. (1) Each HMO must offer 
enrollment to persons who are broadly representative of the various age, 
social, and income groups within its service area.
    (2) If an HMO has a medically underserved population located in its 
service area, not more than 75 percent of its enrollees may be from the 
medically underserved population unless the area in which that 
population resides is a rural area.
    (d) Health status and enrollment. (1) The HMO may not, on the basis 
of health status, health care needs, or age of the individual--
    (i) Expel or refuse to reenroll any enrollee; or
    (ii) Refuse to enroll individual members of a group.
    (2) For purposes of this paragraph, a ``group'' is composed of 
individuals who enroll in the HMO under a contract or other arrangement 
that covers two or more subscribers. Examples of groups are employees 
who enroll under a contract between their employer and the HMO, or 
members of an organization that arranges coverage for its membership.
    (3) Nothing in this subpart prohibits an HMO from requiring that, as 
a condition for continued eligibility for enrollment, enrolled dependent 
children, upon reaching a specified age, convert to individual 
enrollment, consistent with paragraph (e) of this section.

[[Page 696]]

    (e) Conversion of enrollment. (1) Each HMO must offer individual 
enrollment to the following:
    (i) Each enrollee (and his or her enrolled dependents) leaving a 
group.
    (ii) Each enrollee who would otherwise cease to be eligible for HMO 
enrollment because of his or her age, or the death or divorce of an 
enrollee.
    (2) The individual enrollment offered must meet the conditions of 
subpart B of this part and this subpart C.
    (3) The HMO is not required to offer individual enrollment except to 
the enrollees specified in this paragraph.
    (4) The HMO must offer the enrollment on the same terms and 
conditions that it makes available to other nongroup enrollees.
    (f) [Reserved]
    (g) Grievance procedures. Each HMO must have and use meaningful 
procedures for hearing and resolving grievances between the HMO's 
enrollees and the HMO, including the HMO staff and medical groups and 
IPAs that furnish services. These procedures must ensure that:
    (1) Grievances and complaints are transmitted in a timely manner to 
appropriate HMO decisionmaking levels that have authority to take 
corrective action; and
    (2) Appropriate action is taken promptly, including a full 
investigation if necessary and notification of concerned parties as to 
the results of the HMO's investigation.
    (h) Certification of institutional providers. Each HMO must ensure 
that its affiliated institutional providers meet one of the following 
conditions:
    (1) In the case of hospitals, are either accredited by the Joint 
Commission on Accreditation of Health Care Organizations, or certified 
by Medicare.
    (2) In the case of laboratories, are either CLIA-exempt, or have in 
effect a valid certificate of one of the following types, issued by CMS 
in accordance with section 353 of the PHS Act and part 493 of this 
chapter:
    (i) Registration certificate.
    (ii) Certificate.
    (iii) Certificate of waiver.
    (iv) Certificate of accreditation.
    (3) In the case of other affiliated institutional providers, are 
certified for participation in Medicare and Medicaid in accordance with 
part 405, 416, 418, 488, or 491 of this chapter, as appropriate.

[58 FR 38068, July 15, 1993, as amended at 59 FR 49843, Sept. 30, 1994]



Sec. 417.126  Recordkeeping and reporting requirements.

    (a) General reporting and disclosure requirements. Each HMO must 
have an effective procedure to develop, compile, evaluate, and report to 
CMS, to its enrollees, and to the general public, at the times and in 
the manner that CMS requires, and while safeguarding the confidentiality 
of the doctor-patient relationship, statistics and other information 
with respect to the following:
    (1) The cost of its operations.
    (2) The patterns of utilization of its services.
    (3) The availability, accessibility, and acceptability of its 
services.
    (4) To the extent practical, developments in the health status of 
its enrollees.
    (5) Information demonstrating that the HMO has a fiscally sound 
operation.
    (6) Other matters that CMS may require.
    (b) Significant business transactions. Each HMO must report to CMS 
annually, within 120 days of the end of its fiscal year (unless for good 
cause shown, CMS authorizes an extension of time), the following:
    (1) A description of significant business transactions (as defined 
in paragraph (c) of this section) between the HMO and a party in 
interest.
    (2) With respect to those transactions--
    (i) A showing that the costs of the transactions listed in paragraph 
(c) of this section do not exceed the costs that would be incurred if 
these transactions were with someone who is not a party in interest; or
    (ii) If they do exceed, a justification that the higher costs are 
consistent with prudent management and fiscal soundness requirements.
    (3) A combined financial statement for the HMO and a party in 
interest if either of the following conditions is met:

[[Page 697]]

    (i) Thirty-five percent or more of the costs of operation of the HMO 
go to a party in interest.
    (ii) Thirty-five percent or more of the revenue of a party in 
interest is from the HMO.
    (c) ``Significant business transaction'' defined. As used in 
paragraph (b) of this section--
    (1) Business transaction means any of the following kinds of 
transactions:
    (i) Sale, exchange or lease of property.
    (ii) Loan of money or extension of credit.
    (iii) Goods, services, or facilities furnished for a monetary 
consideration, including management services, but not including--
    (A) Salaries paid to employees for services performed in the normal 
course of their employment; or
    (B) Health services furnished to the HMO's enrollees by hospitals 
and other providers, and by HMO staff, medical groups, or IPAs, or by 
any combination of those entities.
    (2) Significant business transaction means any business transaction 
or series of transactions of the kind specified in paragraph (c)(1) of 
this section that, during any fiscal year of the HMO, have a total value 
that exceeds $25,000 or 5 percent of the HMO's total operating expenses, 
whichever is less.
    (d) Requirements for combined financial statements. (1) The combined 
financial statements required by paragraph (b)(3) of this section must 
display in separate columns the financial information for the HMO and 
each of these parties in interest.
    (2) Inter-entity transactions must be eliminated in the consolidated 
column.
    (3) These statements must have been examined by an independent 
auditor in accordance with generally accepted accounting principles, and 
must include appropriate opinions and notes.
    (4) Upon written request from an HMO showing good cause, CMS may 
waive the requirement that its combined financial statement include the 
financial information required in this paragraph (d) with respect to a 
particular entity.
    (e) Reporting and disclosure under ERISA. (1) For any employees' 
health benefits plan that includes an HMO in its offerings, the HMO must 
furnish, upon request, the information the plan needs to fulfill its 
reporting and disclosure obligations (with respect to the particular 
HMO) under the Employee Retirement Income Security Act of 1974 (ERISA).
    (i) The HMO must furnish the information to the employer or the 
employer's designee, or to the plan administrator, as the term 
``administrator'' is defined in ERISA.
    (ii) Loan of money or extension of credit.
    (iii) Goods, services, or facilities furnished for a monetary 
consideration, including management services, but not including--
    (A) Salaries paid to employees for services performed in the normal 
course of their employment; or
    (B) Health services furnished to the HMO's enrollees by hospitals 
and other providers, and by HMO staff, medical groups, or IPAs, or by 
any combination of those entities.
    (2) Significant business transaction means any business transaction 
or series of transactions of the kind specified in paragraph (c)(1) of 
this section that, during any fiscal year of the HMO, have a total value 
that exceeds $25,000 or 5 percent of the HMO's total operating expenses, 
whichever is less.
    (d) Requirements for combined financial statements. (1) The combined 
financial statements required by paragraph (b)(3) of this section must 
display in separate columns the financial information for the HMO and 
each of these parties in interest.
    (2) Inter-entity transactions must be eliminated in the consolidated 
column.
    (3) These statements must have been examined by an independent 
auditor in accordance with generally accepted accounting principles, and 
must include appropriate opinions and notes.
    (4) Upon written request from an HMO showing good cause, CMS may 
waive the requirement that its combined financial statement include the 
financial information required in this paragraph (d) with respect to a 
particular entity.
    (e) Reporting and disclosure under ERISA. (1) For any employees' 
health benefits plan that includes an HMO in its offerings, the HMO must 
furnish,

[[Page 698]]

upon request, the information the plan needs to fulfill its reporting 
and disclosure obligations (with respect to the particular HMO) under 
the Employee Retirement Income Security Act of 1974 (ERISA).
    (2) The HMO must furnish the information to the employer or the 
employer's designee, or to the plan administrator, as the term 
``administrator'' is defined in ERISA.



            Subpart D--Application for Federal Qualification



Sec. 417.140  Scope.

    This subpart sets forth--
    (a) The requirements for--
    (1) Entities that seek qualification as HMOs under title XIII of the 
PHS Act; and
    (2) HMOs that seek--
    (i) Qualification for their regional components; or
    (ii) Expansion of their service areas;
    (b) The procedures that CMS follows to make determinations; and
    (c) Other related provisions, including application fees.

[59 FR 49836, Sept. 30, 1994]



Sec. 417.142  Requirements for qualification.

    (a) General rules. (1) An entity seeking qualification as an HMO 
must meet the requirements and provide the assurances specified in 
paragraphs (b) through (f) of this section, as appropriate.
    (2) CMS determines whether the entity is an HMO on the basis of the 
entity's application and any additional information and investigation 
(including site visits) that CMS may require.
    (3) CMS may determine that an entity is any of the following:
    (i) An operational qualified HMO.
    (ii) A preoperational qualified HMO.
    (iii) A transitional qualified HMO.
    (b) Operational qualified HMO. CMS determines that an entity is an 
operational qualified HMO if--
    (1) CMS finds that the entity meets the requirements of subparts B 
and C of this part.
    (2) The entity, within 30 days of CMS's determination, provides 
written assurances, satisfactory to CMS, that it--
    (i) Provides and will provide basic health services (and any 
supplemental health services included in any contract) to its enrollees;
    (ii) Provides and will provide these services in the manner 
prescribed in sections 1301(b) and 1301(c) of the PHS Act and subpart B 
of this part;
    (iii) Is organized and operated and will continue to be organized 
and operated in the manner prescribed in section 1301(c) of the PHS Act 
and subpart C of this part;
    (iv) Under arrangements that safeguard the confidentiality of 
patient information and records, will provide access to CMS and the 
Comptroller General or any of their duly authorized representatives for 
the purpose of audit, examination or evaluation to any books, documents, 
papers, and records of the entity relating to its operation as an HMO, 
and to any facilities that it operates; and
    (v) Will continue to comply with any other assurances that it has 
given to CMS.
    (c) Preoperational qualified HMO. (1) CMS may determine that an 
entity is a preoperational qualified HMO if it provides, within 30 days 
of CMS's determination, satisfactory assurances that it will become 
operational within 60 days following that determination and will, when 
it becomes operational, meet the requirements of subparts B and C of 
this part.
    (2) Within 30 days after receiving notice that the entity has begun 
operation, CMS determines whether it is an operational qualified HMO. In 
the absence of this determination, the entity is not an operational 
qualified HMO even though it becomes operational.
    (d) Transitional qualified HMO: General rules--(1) Basic 
requirements. CMS may determine that an entity is a transitional 
qualified HMO if the entity--
    (i) Meets the requirements of paragraph (d)(2) through (d)(4) of 
this section; and
    (ii) Provides the assurances specified in paragraphs (d)(5) through 
(d)(7) of this section within 30 days of CMS's determination.

[[Page 699]]

    (2) Organization and operation. The entity is organized and operated 
in accordance with subpart C of this part, except that it need not--
    (i) Assume full financial risk for the provision of basic health 
services as required by Sec. 417.120(b); or
    (ii) Comply with the limitations that are imposed on insurance by 
Sec. 417.120(b)(1).
    (3) Range of services. The entity is currently providing the 
following services on a prepaid basis:
    (i) Physician services.
    (ii) Outpatient services and inpatient hospital services. (The 
entity need not provide or pay for hospital inpatient or outpatient 
services that it can show are being provided directly, through 
insurance, or under arrangements, by other entities.)
    (iii) Medically necessary emergency services.
    (iv) Diagnostic laboratory services and diagnostic and therapeutic 
radiologic services.

These services must meet the requirement of Sec. 417.101, but may be 
limited in time and cost without regard to the constraints imposed by 
Sec. 417.101(a).
    (4) Payment for services--(i) General rule. The entity pays for 
basic health services in accordance with Sec. 417.104, except that it 
need not comply with the copayments limitations imposed by 
Sec. 417.104(a)(4).
    (ii) Determination of payment rates. In determining payment rates, 
the entity need not comply with the community rating requirements of 
Secs. 417.104(b) and 417.105(b).
    (5) Contracts in effect on the date of CMS's determination. The 
entity gives assurances that it will meet the following conditions with 
respect to its group and individual contracts that are in effect on the 
date of CMS's determination, and which are renewed or renegotiated 
during the period approved by CMS under paragraph (d)(6) of this 
section:
    (i) Continue to provide services in accordance with paragraph (d)(3) 
of this section.
    (ii) Continue to be organized and operated and to pay for basic 
health services in accordance with paragraphs (d)(2) and (d)(4) of this 
section, respectively.
    (6) Time-phased plan. The entity gives assurances as follows:
    (i) It will implement a time-phased plan acceptable to CMS that--
    (A) May not extend for more than 3 years from the date of CMS's 
determination; and
    (B) Specifies definite steps for meeting, at the time of renewal of 
each group or individual contract, all the requirements of subparts B 
and C of this part.
    (ii) Upon completion of this time-phased plan, it will--
    (A) Provide basic and supplemental services to all of its enrollees; 
and
    (B) Be organized and operated, and provide services, in accordance 
with subparts B and C of this part.
    (7) Contracts entered into after the date of CMS's determination. 
The entity gives assurances that, with respect to any group or 
individual contract entered into after the date of CMS's determination, 
it will--
    (i) Be organized and operated in accordance with subpart C of this 
part; and
    (ii) Provide basic health services and any supplemental health 
services included in the contract, in accordance with subpart B of this 
part.
    (e) Failure to sign assurances timely. If CMS determines that an 
entity meets the requirements for qualification and the entity fails to 
sign its assurances within 30 days following the date of the 
determination, CMS gives the entity written notice that its application 
is considered withdrawn and that it is not a qualified HMO.
    (f) Qualification of regional components. An HMO that has more than 
one regional component is considered qualified for those regional 
components for which assurances have been signed in accordance with this 
section.
    (g) Special rules: Enrollees entitled to Medicare or Medicaid. For 
an HMO that accepts enrollees entitled to Medicare or Medicaid, the 
following rules apply:
    (1) The requirements of titles XVIII and XIX of the Act, as 
appropriate, take precedence over conflicting requirements of sections 
1301(b) and 1301(c) of the PHS Act.

[[Page 700]]

    (2) The HMO must, with respect to its enrollees entitled to Medicare 
or Medicaid, comply with the applicable requirement of title XVIII or 
XIX, including those that pertain to--
    (i) Deductibles and coinsurance;
    (ii) Enrollment mix and enrollment practices;
    (iii) State plan rules on copayment options; and
    (iv) Grievance procedures.
    (3) An HMO that complies with paragraph (g)(2) of this section may 
obtain and retain Federal qualification if, for its other enrollees, the 
HMO meets the requirements of sections 1301(b) and 1301(c) of the PHS 
Act and implementing regulations in this subpart D and in subparts B and 
C of this part.
    (h) Special rules: Enrollees under the Federal employee health 
benefits program (FEHBP). An HMO that accepts enrollees under the FEHBP 
(Chapter 89 of title 5 of the U.S.C.) may obtain and retain Federal 
qualification if, for its other enrollees, it complies with the 
requirements of section 1301(b) and 1301(c) of the PHS Act and 
implementing regulations in this subpart D and subparts B and C of this 
part.

[59 FR 49836, Sept. 30, 1994]



Sec. 417.143  Application requirements.

    (a) General requirements. This section sets forth application 
requirements for entities that seek qualification as HMOs; HMOs that 
seek expansion of their service areas; and HMOs that seek qualification 
of their regional components as HMOs.
    (b) Completion of an application form. (1) In order to receive a 
determination concerning whether an entity is a qualified HMO, an 
individual authorized to act for the entity (the applicant) must 
complete an application form provided by CMS.
    (2) The authorized individual must describe thoroughly how the 
entity meets, or will meet, the requirements for qualified HMOs 
described in the PHS Act and in subparts B and C of this part, this 
subpart D, and 417.168 and 417.169 of subpart F.
    (c) Collection of an application fee. In accordance with the 
requirements of 31 U.S.C. 9701, Fees and charges for Government services 
and things of value, CMS determines the amount of the application fee 
that must be submitted with each type of application.
    (1) The fee is reasonably related to the Federal government's cost 
of qualifying an entity and may vary based on the type of application.
    (2) Each type of application has one set fee rather than a charge 
based on the specific cost of each determination. (For example, each 
Federally qualified HMO applicant seeking Federal qualification of one 
of its regional components as an HMO is charged the same amount, unless 
the amount of the fee has been changed under paragraph (f) of this 
section.)
    (d) Application fee amounts. The application fee amounts for 
applications completed on or after July 13, 1987 are as follows:
    (1) $18,400 for an entity seeking qualification as an HMO or 
qualification of a regional component of an HMO.

If, in the case of an HMO seeking qualification of a regional component, 
CMS determines that there is no need for a site visit, $8,000 will be 
returned to the applicant.
    (2) $6,900 for an HMO seeking expansion of its service area.
    (3) $3,100 for a CMP seeking qualification as an HMO.
    (e) Refund of an application fee. CMS refunds an application fee 
only if the entity withdraws its application within 10 working days 
after receipt by CMS. Application fees are not returned in any other 
circumstance, even if qualification or certification is denied.
    (f) Procedure for changing the amount of an application fee. If CMS 
determines that a change in the amount of a fee is appropriate, CMS 
issues a notice of proposed rulemaking in the Federal Register to 
announce the proposed new amount.
    (g) New application after denial. An entity may not submit another 
application under this subpart for the same type of determination for 
four full months after the date of the notice in which CMS denied the 
application.
    (h) Disclosure of application information under the Freedom of 
Information Act. An applicant submitting material that he or she 
believes is protected from disclosure under 5 U.S.C. 552, the Freedom of 
Information Act, or because of exceptions provided in 45 CFR

[[Page 701]]

part 5, the Department's regulations providing exceptions to disclosure, 
should label the material ``privileged'' and include an explanation of 
the applicability of an exception described in 45 CFR part 5.

[52 FR 22321, June 11, 1987. Redesignated at 52 FR 36746, Sept. 30, 
1987, as amended at 58 FR 38077, July 15, 1993]



Sec. 417.144  Evaluation and determination procedures.

    (a) Basis for evaluation and determination. (1) CMS evaluates an 
application for Federal qualification on the basis of information 
contained in the application itself and any additional information that 
CMS obtains through on-site visits, public hearings, and any other 
appropriate procedures.
    (2) If the application is incomplete, CMS notifies the entity and 
allows 60 days from the date of the notice for the entity to furnish the 
missing information.
    (3) After evaluating all relevant information, CMS determines 
whether the entity meets the applicable requirements of Secs. 417.142 
and 417.143.
    (b) Notice of determination. CMS notifies each entity that applies 
for qualification under this subpart of its determination and the basis 
for the determination. The determination may be granting of 
qualification, intent to deny, or denial.
    (c) Intent to deny. (1) If CMS finds that the entity does not appear 
to meet the requirements for qualification and appears to be able to 
meet those requirements within 60 days, CMS gives the entity notice of 
intent to deny qualification and a summary of the basis for this 
preliminary finding.
    (2) Within 60 days from the date of the notice, the entity may 
respond in writing to the issues or other matters that were the basis 
for CMS's preliminary finding, and may revise its application to remedy 
any defects identified by CMS.
    (d) Denial and reconsideration of denial. (1) If CMS denies an 
application for qualification under this subpart, CMS gives the entity 
written notice of the denial and an opportunity to request 
reconsideration of that determination.
    (2) A request for reconsideration must--
    (i) Be submitted in writing, within 60 days following the date of 
the notice of denial;
    (ii) Be addressed to the CMS officer or employee who denied the 
application; and
    (iii) Set forth the grounds upon which the entity requests 
reconsideration, specifying the material issues of fact and of law upon 
which the entity relies.
    (3) CMS bases its reconsideration upon the record compiled during 
the qualification review proceedings, materials submitted in support of 
the request for reconsideration, and other relevant materials available 
to CMS.
    (4) CMS gives the entity written notice of the reconsidered 
determination and the basis for the determination.
    (e) Information on qualified HMOs--(1) Federal Register notices. In 
quarterly Federal Register notices, CMS gives the names, addresses, and 
service areas of newly qualified HMOs and describes the expanded service 
areas of other qualified HMOs.
    (2) Listings. A cumulative list of qualified HMOs is available from 
the following office, which is open from 8:30 a.m. to 5 p.m., Monday 
through Friday: Office of Managed Care, room 4360, Cohen Building, 400 
Independence Avenue SW., Washington, DC 20201.

[59 FR 49837, Sept. 30, 1994]



 Subpart E--Inclusion of Qualified Health Maintenance Organizations in 
                     Employee Health Benefits Plans

    Source: 45 FR 72517, Oct. 31, 1980, unless otherwise noted. 
Redesignated at 52 FR 36746, Sept. 30, 1987.



Sec. 417.150  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Agreement means a collective bargaining agreement.
    Bargaining representative means an individual or entity designated 
or selected, under any applicable Federal, State, or local law, or 
public entity collective bargaining agreement, to

[[Page 702]]

represent employees in collective bargaining, or any other employee 
representative designated or selected under any law.
    Carrier means a voluntary association, corporation, partnership, or 
other organization that is engaged in providing, paying for, or 
reimbursing all or part of the cost of health benefits under group 
insurance policies or contracts, medical or hospital service agreements, 
enrollment or subscription contracts, or similar group arrangements, in 
consideration of premiums or other periodic charges payable to the 
carrier.
    Collective bargaining agreement means an agreement entered into 
between an employing entity and the bargaining representative of its 
employees.
    Contract means an employer-employee or public entity-employee 
contract, or a contract for health benefits.
    Designee means any person or entity authorized to act on behalf of 
an employing entity or a group of employing entities to offer the option 
of enrollment in a qualified health maintenance organization to their 
eligible employees.
    Eligible employee means an employee who meets the employer's 
requirements for participation in the health benefits plan.
    Employee means any individual employed by an employer or public 
entity on a full-time or part-time basis.
    Employer has the meaning given that term in section 3(d) of the Fair 
Labor Standards Act of 1938, except that it--
    (1) Includes non-appropriated fund instrumentalities of the United 
States Government; and
    (2) Excludes the following:
    (i) The governments of the United States, the District of Columbia 
and the territories and possessions of the United States, the 50 States 
and their political subdivisions, and any agencies or instrumentalities 
of any of the foregoing, including the United States Postal Service and 
Postal Rate Commission.
    (ii) Any church, or convention or association of churches, and any 
organization operated, supervised, or controlled by a church, or 
convention or association of churches that meets the following 
conditions:
    (A) Is an organization that is described in section 501(c)(3) of the 
Internal Revenue Code of 1954.
    (B) Does not discriminate, in the employment, compensation, 
promotion or termination of employment of any personnel, or in the 
granting of staff and other privileges to physicians or other health 
personnel, on the grounds that the individuals obtain health care 
through HMOs, or participate in furnishing health care through HMOs.
    Employing entity means an employer or public entity.
    Employing entity-employee contract means a legally enforceable 
agreement (other than a collective bargaining agreement) between an 
employing entity and its employees for the provision of, or payment for, 
health benefits for its employees, or for its employees and their 
eligible dependents.
    Group enrollment period means the period of at least 10 working days 
each calendar year during which each eligible employee is given the 
opportunity to select among the alternatives included in a health 
benefits plan.
    Health benefits means health benefits and services.
    Health benefits contract means a contract or other agreement between 
an employing entity or a designee and a carrier for the provision of, or 
payment for, health benefits to eligible employees or to eligible 
employees and their eligible dependents.
    Health benefits plan means any arrangement, to provide or pay for 
health services, that is offered to eligible employees, or to eligible 
employees and their eligible dependents, by or on behalf of an employing 
entity.
    Public entity means the 50 states, Puerto Rico, Guam, the Virgin 
Islands, the Northern Mariana Islands and American Samoa and their 
political subdivisions, the District of Columbia, and any agency or 
instrumentality of the foregoing, and political subdivisions include 
counties, parishes, townships, cities, municipalities, towns, villages, 
and incorporated villages.
    Qualified HMO means an HMO that has in effect a determination, made 
under subpart D of this part, that the HMO is an operational, 
preoperational, or transitional qualified HMO.

[[Page 703]]

    To offer a health benefits plan means to make participation in a 
health benefits plan available to eligible employees, or to eligible 
employees and their eligible dependents regardless of whether the 
employing entity makes a financial contribution to the plan on behalf of 
these employees, directly or indirectly, for example, through payments 
on any basis into a health and welfare trust fund.

[45 FR 72517, Oct. 31, 1980, as amended at 47 FR 19341, May 5, 1982. 
Redesignated at 52 FR 36746, Sept. 30, 1987, as amended at 58 FR 38077, 
July 15, 1993; 59 FR 49837, 49843, Sept. 30, 1994]



Sec. 417.151  Applicability.

    (a) Basic rule. Effective October 24, 1995 1, this 
subpart applies to any employing entity that offers a health benefits 
plan to its employees, meets the conditions specified in paragraphs (b) 
through (e) of this section, and elects to include one or more qualified 
HMOs in the health plan alternatives it offers its employees.
---------------------------------------------------------------------------

    \1\ Before October 24, 1995, an employing entity that met the 
conditions specified in Sec. 417.151 was required to include one or more 
qualified HMOs, if it received from at least one qualified HMO a written 
request for inclusion and that request met the timing, content, and 
procedural requirements specified in Sec. 417.152.
---------------------------------------------------------------------------

    (b) Number of employees. During any calendar quarter of the 
preceding calendar year, the employer or public entity employed an 
average of not less than 25 employees.
    (c) Minimum wage. During any calendar quarter of the preceding 
calendar year, the employer was required to pay the minimum wage 
specified in section 6 of the Fair Labor Standards Act of 1938, or would 
have been required to pay that wage but for section 13(a) of that Act.
    (d) Federal assistance under section 317 of the PHS Act. The public 
entity has a pending application for, or is receiving, assistance under 
section 317 of the PHS Act.
    (e) Employees in HMO's service area. At least 25 of the employing 
entity's employees reside within the HMO's service area.

[59 FR 49838, Sept. 30, 1994, as amended at 61 FR 27287, May 31, 1996]



Sec. 417.153  Offer of HMO alternative.

    (a) Basic rule. An employing entity that is subject to this subpart 
and that elects to include one or more qualified HMOs must offer the HMO 
alternative in accordance with this section.
    (b) Employees to whom the HMO option must be offered. Each employing 
entity must offer the option of enrollment in a qualified HMO to each 
eligible employee and his or her eligible dependents who reside in the 
HMO's service area.
    (c) Manner of offering the HMO option. (1) For employees who are 
represented by a bargaining representative, the option of enrollment in 
a qualified HMO--
    (i) Must first be presented to the bargaining representative; and
    (ii) If the representative accepts the option, must then be offered 
to each represented employee.
    (2) For employees not represented by a bargaining representative, 
the option must be offered directly to those employees.

[59 FR 49839, Sept. 30, 1994, as amended at 61 FR 27287, May 31, 1996]



Sec. 417.155  How the HMO option must be included in the health benefits plan.

    (a) HMO access to employees--(1) Purpose and timing.
    (i) Purpose. The employing entity must provide each HMO included in 
its health benefits plan fair and reasonable access to all employees 
specified in Sec. 417.153(b), so that the HMO can explain its program in 
accordance with Sec. 417.124(b).
    (ii) Timing. The employing entity must provide access beginning at 
least 30 days before, and continuing during, the group enrollment 
period.
    (2) Nature of access. (i) Access must include, at a minimum, 
opportunity to distribute educational literature, brochures, 
announcements of meetings, and other relevant printed materials that 
meet the requirements of Sec. 417.124(b).
    (ii) Access may not be more restrictive or less favorable than the 
access

[[Page 704]]

the employing entity provides to other offerors of options included in 
the health benefits plan, whether or not those offerors elect to avail 
themselves of that access.
    (b) Review of HMO offering materials. (1) The HMO must give the 
employing entity or designee opportunity to review, revise, and approve 
HMO educational and offering materials before distribution.
    (2) Revisions must be limited to correcting factual errors and 
misleading or ambiguous statements, unless--
    (i) The HMO and the employing entity agree otherwise; or
    (ii) Other revisions are required by law.
    (3) The employing entity or designee must complete revision of the 
materials promptly so as not to delay or otherwise interfere with their 
use during the group enrollment period.
    (c) Group enrollment period; prohibition of restrictions; effective 
date of HMO coverage--(1) Prohibition of restrictions. If an employing 
entity or designee includes the option of enrollment in a qualified HMO 
in the health benefits plan offered to its eligible employees, it must 
provide a group enrollment period before the effective date of HMO 
coverage. The employing entity may not impose waiting periods as a 
condition of enrollment in the HMO or of transfer from HMO to non-HMO 
coverage, or exclusions, or limitations based on health status.
    (2) Effective date of coverage. Unless otherwise agreed to by the 
employing entity, or designee, and the HMO, coverage under the HMO 
contract for employees selecting the HMO option begins on the day the 
non-HMO contract expires or is renewed without lapse.
    (3) Coordination of benefits. Nothing in this subpart precludes the 
uniform application of coordination of benefits agreements between the 
HMOs and the other carriers that are included in the health benefits 
plan.
    (d) Continued eligibility for ``free-standing'' health benefits--(1) 
Basic requirement. At the request of a qualified HMO, the employing 
entity or its designee must provide that employees selecting the option 
of HMO membership will not, because of this selection, lose their 
eligibility for free-standing dental, optical, or prescription drug 
benefits for which they were previously eligible or would be eligible if 
selecting a non-HMO option and that are not included in the services 
provided by the HMO to its enrollees as part of the HMO prepaid benefit 
package.
    (2) ``Free-standing'' defined. For purposes of this paragraph, the 
term ``free-standing'' refers to a benefit that--
    (i) Is not integrated or incorporated into a basic health benefits 
package or major medical plan, and
    (ii) Is--
    (A) Offered by a carrier other than the one offering the basic 
health benefits package or major medical plan; or
    (B) Subject to a premium separate from the premium for the basic 
health benefits package or major medical plan.
    (3) Examples of the employing entity's obligation with respect to 
the continued eligibility. (i) The health benefits plan includes a free-
standing dental benefit. The HMO does not offer any dental coverage as 
part of its health services provided to members on a prepaid basis. The 
employing entity must provide that employees who select the HMO option 
continue to be eligible for dental coverage. (If the dental coverage is 
not optional for employees selecting the non-HMO option, nothing in this 
regulation requires that the coverage be made optional for employees 
selecting the HMO option. Conversely, if this coverage is optional for 
employees selecting the non-HMO option, nothing in this regulation 
requires that the coverage be mandatory for employees selecting the non-
HMO option.) -
    (ii) The non-HMO option provides free-standing coverage for optical 
services (such as refraction and the provision of eyeglasses), and the 
HMO does not. The employing entity must provide that employees who 
select the HMO option continue to be eligible for optical coverage.
    (iii) The non-HMO option includes dental coverage in its major 
medical package, with a common deductible applied to dental as well as 
non-dental benefits. The HMO provides no dental coverage as part of its 
pre-paid health services. Because the dental coverage

[[Page 705]]

is not free-standing, the employing entity is not required to provide 
that employees who select the HMO option continue to be eligible for 
dental coverage, but is free to do so.
    (e) Opportunity to select among coverage options: Requirement for 
affirmative written selection--(1) Opportunity other than during a group 
enrollment period. The employing entity or designee must provide 
opportunity (in addition to the group enrollment period) for selection 
among coverage options, by eligible employees who meet any of the 
following conditions:
    (i) Are new employees.
    (ii) Have been transferred or have changed their place of residence, 
resulting in--
    (A) Eligibility for enrollment in a qualified HMO for which they 
were not previously eligible by place of residence; or
    (B) Residence outside the service area of a qualified HMO in which 
they were previously enrolled.
    (iii) Are covered by any coverage option that ceases operation.
    (2) Prohibition of restrictions. When the employees specified in 
paragraph (e)(1) of this section are eligible to participate in the 
health benefits plan, the employing entity or designee must make 
available, without waiting periods or exclusions based on health status 
as a condition, the opportunity to enroll in an HMO, or transfer from 
HMO coverage to non-HMO coverage.
    (3) Affirmative written selection. The employing entity or designee 
must require that the eligible employee make an affirmative written 
selection in any of the following circumstances:
    (i) Enrollment in a particular qualified HMO is offered for the 
first time.
    (ii) The eligible employee elects to change from one option to 
another.
    (iii) The eligible employee is one of those specified in paragraph 
(e)(1) of this section.
    (f) Determination of copayment levels and supplemental health 
services. The selection of a copayment level and of supplemental health 
services to be contracted for must be made as follows:
    (1) For employees represented by a collective bargaining 
representative, the selection of copayment levels and supplemental 
health services is subject to the collective bargaining process.
    (2) For employees not represented by a bargaining representative, 
the selection of copayment levels and supplemental health services is 
subject to the same decisionmaking process used by the employing entity 
with respect to the non-HMO option in its health benefits plan.
    (3) In all cases, the HMO has the right to include, with the basic 
benefits package it provides to its enrollees for a basic health 
services payment, on a non-negotiable basis, those supplemental health 
services that meet the following conditions:
    (i) Are required to be offered under State law.
    (ii) Are included uniformly by the HMO in its prepaid benefit 
package.
    (iii) Are available to employees who select the non-HMO option but 
not available to those who select the HMO option.

[59 FR 49840, Sept. 30, 1994, as amended at 61 FR 27288, May 31, 1996]



Sec. 417.156  When the HMO must be offered to employees.

    (a) General rules. (1) The employing entity or designee must offer 
eligible employees the option of enrollment in a qualified HMO at the 
earliest date permitted under the terms of existing agreements or 
contracts.
    (2) If the HMO's request for inclusion in a health benefits plan is 
received at a time when existing contracts or agreements do not provide 
for inclusion, the employing entity must include the HMO option in the 
health benefits plan at the time that new agreements or contracts are 
offered or negotiated.
    (b) Specific requirements. Unless mutually agreed otherwise, the 
following rules apply:
    (1) Collective bargaining agreement. The employing entity or 
designee must raise the HMO's request during the collective bargaining 
process--
    (i) When a new agreement is negotiated;
    (ii) At the time prescribed, in an agreement with a fixed term of 
more than 1 year, for discussion of change in health benefits; or

[[Page 706]]

    (iii) In accordance with a specific process for review of HMO 
offers.
    (2) Contracts. For employees not covered by a collective bargaining 
agreement, the employing entity or designee must include the HMO option 
in any health benefits plan offered to eligible employees when the 
existing contract is renewed or when a new health benefits contract or 
other arrangement is negotiated.
    (i) If a contract has no fixed term or has a term in excess of 1 
year, the contract must be treated as renewable on its earliest 
anniversary date.
    (ii) If the employing entity or designee is self-insured, the budget 
year must be treated as the term of the existing contract.
    (3) Multiple arrangements. In the case of a health benefits plan 
that includes multiple contracts or other arrangements with varying 
expiration or renewal dates, the employing entity must include the HMO 
option, in accordance with paragraphs (b)(1) and (b)(2) of this 
section,--
    (i) At the time each contract or arrangement is renewed or reissued; 
or
    (ii) The benefits provided under the contract or arrangement are 
offered to employees.

[59 FR 49841, Sept. 30, 1994]



Sec. 417.157  Contributions for the HMO alternative.

    (a) General principles--(1) Nondiscrimination. The employer 
contribution to an HMO must be in an amount that does not discriminate 
financially against an employee who enrolls in an HMO. A contribution 
does not discriminate financially if the method of determining the 
contribution is reasonable and is designed to ensure that employees have 
a fair choice among health benefits plan alternatives.
    (2) Effect of agreements or contracts. The employing entity or 
designee is not required to pay more for health benefits as a result of 
offering the HMO alternative than it would otherwise be required to pay 
under a collective bargaining agreement or contract that provides for 
health benefits and is in effect at the time the HMO alternative is 
included.
    (3) Examples of acceptable employer contributions. The following are 
methods that are considered nondiscriminatory:
    (i) The employer contribution to the HMO is the same, per employee, 
as the contribution to non-HMO alternatives.
    (ii) The employer contribution reflects the composition of the HMO's 
enrollment in terms of enrollee attributes that can reasonably be used 
to predict utilization, experience, costs, or risk. For each enrollee in 
a given class established on the basis of those attributes, the employer 
contributes an equal amount, regardless of the health benefits plan 
chosen by the employee.
    (iii) The employer contribution is a fixed percentage of the premium 
for each of the alternatives offered.
    (iv) The employer contribution is determined under a mutually 
acceptable arrangement negotiated by the HMO and the employer. In 
negotiating the arrangement, the employer may not insist on terms that 
would cause the HMO to violate any of the requirements of this part.
    (4) Adjustment of employer contribution. An employer contribution 
determined by an acceptable method may in some cases be adjusted if it 
would result in a nominal payment or no payment at all by HMO enrollees 
(because the HMO premium is lower than the premiums for the other 
alternatives offered). If, for example the employer has a policy of 
requiring all employees to contribute to their health benefits plan, the 
employer may require HMO enrollees who would otherwise pay little or 
nothing at all, to make a payment that does not exceed 50 percent of the 
employee contribution to the principal non-HMO alternative. The 
principal non-HMO alternative is the one that covers the largest number 
of enrollees from the particular employer.
    (b) Administrative expenses. (1) In determining the amount of its 
contribution to the HMO, the employing entity or designee may not 
consider administrative expenses incurred in connection with offering 
any alternative in the health benefits plan.
    (2) However, if the employing entity or designee has special 
requirements for other than standard solicitation brochures and 
enrollment literature, it

[[Page 707]]

must, in the case of the HMO alternative, determine and distribute any 
administrative costs attributable to those requirements in a manner 
consistent with its method of determining and distributing those costs 
for the non-HMO alternatives.
    (c) Exclusion for contribution for certain benefits. In determining 
the amount of the employing entity's contribution or the designee's cost 
for the HMO alternative, the employing entity or designee may exclude 
those portions of the contribution allocable to benefits (such as life 
insurance or insurance for supplemental health benefits)--
    (1) For which eligible employees and their eligible dependents are 
covered notwithstanding selection of the HMO alternative; and
    (2) That are not offered on a prepayment basis by the HMO to the 
employing entity's employees.
    (d) Contributions determined by agreements or contracts or by law. 
If the specific amount of the employing entity's contribution for health 
benefits is fixed by an agreement or contract, or by law, that amount 
constitutes the employing entity's obligation for contribution toward 
the HMO premiums.
    (e) Allocation of portion of a contribution determined by an 
agreement. In some cases, the employing entity's contribution for health 
benefits is determined by an agreement that also provides for benefits 
other than health benefits. In that case, the employing entity must 
determine, or instruct its designee to determine, what portion of its 
contribution is applicable to health benefits.
    (f) Retention and availability of data. Each employing entity or 
designee must retain the following data for three years and make it 
available to CMS upon request:
    (1) The data used to compute the level of contribution for each of 
the plans offered to employees.
    (2) Related data about the employees who are eligible to enroll in a 
plan.
    (3) A description of the methodology for computation.
    (g) CMS review of data. (1) CMS may request and review the data 
specified in paragraph (f) of this section on its own initiative or in 
response to requests from HMOs or employees.
    (2) The purpose of CMS's review is to determine whether the 
methodology and the level of contribution comply with the requirements 
of this subpart.
    (3) HMOs and employees that request CMS to review must set forth 
reasonable grounds for making the request.

[61 FR 27287, May 31, 1996]



Sec. 417.158  Payroll deductions.

    Each employing entity that provides payroll deductions as a means of 
paying employees' contributions for health benefits or provides a health 
benefits plan that does not require an employee contribution must, with 
the consent of an employee who selects the HMO option, arrange for the 
employee's contribution, if any, to be paid through payroll deductions.

[59 FR 49841, Sept. 30, 1994]



Sec. 417.159  Relationship of section 1310 of the Public Health Service Act to the National Labor Relations Act and the Railway Labor Act.

    The decision of an employing entity subject to this subpart to 
include the HMO alternative in any health benefits plan offered to its 
eligible employees must be carried out consistently with the obligations 
imposed on that employing entity under the National Labor Relations Act, 
the Railway Labor Act, and other laws of similar effect.

[59 FR 49841, Sept. 30, 1994, as amended at 61 FR 27288, May 31, 1996]



     Subpart F--Continued Regulation of Federally Qualified Health 
                        Maintenance Organizations

    Source: 43 FR 32255, July 25, 1978, unless otherwise noted. 
Redesignated at 52 FR 36746, Sept. 30, 1987.



Sec. 417.160  Applicability.

    This subpart applies to any entity that has been determined to be a 
qualified HMO under subpart D of this part.

[59 FR 49841, Sept. 30, 1994]



Sec. 417.161  Compliance with assurances.

    Any entity subject to this subpart must comply with the assurances 
that

[[Page 708]]

it provided to CMS, unless compliance is waived under Sec. 417.166.

[58 FR 38071, July 15, 1993]



Sec. 417.162  Reporting requirements.

    Entities subject to this subpart must submit:
    (a) The reports that may be required by CMS under Sec. 417.126, and
    (b) Any additional reports CMS may reasonably require.

[58 FR 38071, July 15, 1993]



Sec. 417.163  Enforcement procedures.

    (a) Complaints. Any person, group, association, corporation, or 
other entity may file with CMS a written complaint with respect to an 
HMO's compliance with assurances it gave under subpart D of this part. A 
complaint must--
    (1) State the grounds and underlying facts of the complaint;
    (2) Give the names of all persons involved; and
    (3) Assure that all appropriate grievance and appeals procedures 
established by the HMO and available to the complainant have been 
exhausted.
    (b) Investigations. (1) CMS may initiate investigations when, based 
on a report, a complaint, or any other information, CMS has reason to 
believe that a Federally qualified HMO is not in compliance with any of 
the assurances it gave under subpart D of this part.
    (2) When CMS initiates an investigation, it gives the HMO written 
notice that includes a full statement of the pertinent facts and of the 
matters being investigated and indicates that the HMO may submit, within 
30 days of the date of the notice, a written report concerning these 
matters.
    (3) CMS obtains any information it considers necessary to resolve 
issues related to the assurances, and may use site visits, public 
hearings, or any other procedures that CMS considers appropriate in 
seeking this information.
    (c) Determination and notice by CMS--(1) Determination. (i) On the 
basis of the investigation, CMS determines whether the HMO has failed to 
comply with any of the assurances it gave under subpart D of this part.
    (ii) CMS publishes in the Federal Register a notice of each 
determination of non-compliance.
    (2) Notice of determination: Corrective action. (i) CMS gives the 
HMO written notice of the determination.
    (ii) The notice specifies the manner in which the HMO has not 
complied with its assurances and directs the HMO to initiate the 
corrective action that CMS considers necessary to bring the HMO into 
compliance.
    (iii) The HMO must initiate this corrective action within 30 days of 
the date of the notice from CMS, or within any longer period that CMS 
determines to be reasonable and specifies in the notice. The HMO must 
carry out the corrective action within the time period specified by CMS 
in the notice.
    (iv) The notice may provide the HMO an opportunity to submit, for 
CMS's approval, proposed methods for achieving compliance.
    (d) Remedy: Revocation of qualification. If CMS determines that a 
qualified HMO has failed to initiate or to carry out corrective action 
in accordance with paragraph (c)(2) of this section--(1) CMS revokes the 
HMO's qualification and notifies the HMO of this action.
    (2) In the notice, CMS provides the HMO with an opportunity for 
reconsideration of the revocation, including, at the HMO's election, a 
fair hearing.
    (3) The revocation of qualification is effective on the tenth 
calendar day after the day of the notice unless CMS receives a request 
for reconsideration by that date.
    (4) If after reconsideration CMS again determines to revoke the 
HMO's qualification, this revocation is effective on the tenth calendar 
day after the date of the notice of reconsidered determination.
    (5) CMS publishes in the Federal Register each determination it 
makes under this paragraph (d).
    (6) A revocation under this paragraph (d) has the effect described 
in Sec. 417.164.
    (e) Notice by the HMO. Within 15 days after the date CMS issues a 
notice of revocation, the HMO must prepare a notice that explains, in 
readily understandable language, the reasons for the determination that 
it is not a qualified

[[Page 709]]

HMO, and send the notice to the following:
    (1) The HMO's enrollees.
    (2) Each employer or public entity that has offered enrollment in 
the HMO in accordance with subpart E of this part.
    (3) Each lawfully recognized collective bargaining representative or 
other representative of the employees of the employer or public entity.
    (f) Reimbursement of enrollees for services improperly denied, or 
for charges improperly imposed. (1) If CMS determines, under paragraph 
(c)(1) of this section, that an HMO is out of compliance, CMS may 
require the HMO to reimburse its enrollees for the following--
    (i) Expenses for basic or supplemental health services that the 
enrollee obtained from other sources because the HMO failed to provide 
or arrange for them in accordance with its assurances.
    (ii) Any amounts the HMO charged the enrollee that are inconsistent 
with its assurances. (Rules applicable to charges for all enrollees are 
set forth in Secs. 417.104 and 417.105. The additional rules applicable 
to Medicare enrollees are in Sec. 415.454.)
    (2) This paragraph applies regardless of when the HMO failed to 
comply with the appropriate assurances.
    (g) Remedy: Civil suit--(1) Applicability. This paragraph applies to 
any HMO or other entity to which a grant, loan, or loan guarantee was 
awarded, as set forth in subpart V of this part, on the basis of its 
assurances regarding the furnishing of basic and supplemental services 
or its operation and organization, as the case may be.
    (2) Basis for action. If CMS determines that the HMO or other entity 
has failed to initiate or refuses to carry out corrective action in 
accordance with paragraph (c)(2) of this section, CMS may bring civil 
action in the U.S. district court for the district in which the HMO or 
other entity is located, to enforce compliance with the assurances it 
gave in applying for the grant, loan, or loan guarantee.

[59 FR 49841, Sept. 30, 1994]



Sec. 417.164  Effect of revocation of qualification on inclusion in employee's health benefit plans.

    When an HMO's qualification is revoked under Sec. 417.163(d), the 
following rules apply:
    (a) The HMO may not seek inclusion in employees health benefits 
plans under subpart E of this part.
    (b) Inclusion of the HMO in an employer's health benefits plan--
    (1) Is disregarded in determining whether the employer is subject to 
the requirements of subpart E of this part; and
    (2) Does not constitute compliance with subpart E of this part by 
the employer.

[59 FR 49842, Sept. 30, 1994, as amended at 61 FR 27288, May 31, 1996]



Sec. 417.165  Reapplication for qualification.

    An entity whose qualification as an HMO has been revoked by CMS for 
purposes of section 1310 of the PHS Act may, after completing the 
corrective action required under Sec. 417.163(c)(2), reapply for a 
determination of qualification in accordance with the procedures 
specified in subpart D of this part.

[43 FR 32255, July 25, 1978. Redesignated at 52 FR 36746, Sept. 30, 
1987, and amended at 58 FR 38078, July 15, 1993]



Sec. 417.166  Waiver of assurances.

    (a) General rule. CMS may release an HMO from compliance with any 
assurances the HMO gives under subpart D of this part if--
    (1) The qualification requirements are changed by Federal law; or
    (2) The HMO shows good cause, consistent with the purposes of title 
XIII of the PHS Act.
    (b) Basis for finding of good cause. (1) Grounds upon which CMS may 
find good cause include but are not limited to the following:
    (i) The HMO has filed for reorganization under Federal bankruptcy 
provisions and the reorganization can only be approved with the waiver 
of the assurances.
    (ii) State laws governing the entity have been changed after it 
signed the assurances so as to prohibit the HMO from being organized and 
operated in a

[[Page 710]]

manner consistent with the signed assurances.
    (2) Changes in State laws do not constitute good cause to the extent 
that the changes are preempted by Federal law under section 1311 of the 
PHS Act.
    (c) Consequences of waiver. If CMS waives any assurances regarding 
compliance with section 1301 of the PHS Act, CMS concurrently revokes 
the HMO's qualification unless the waiver is based on paragraph (a)(1) 
of this section.

[59 FR 49842, Sept. 30, 1994, as amended at 61 FR 27288, May 31, 1996]

Subparts G-I [Reserved]



         Subpart J--Qualifying Conditions for Medicare Contracts

    Source: 50 FR 1346, Jan. 10, 1985, unless otherwise noted.



Sec. 417.400  Basis and scope.

    (a) Statutory basis. The regulations in this subpart implement 
section 1876 of the Act, which authorizes Medicare payment to HMOs and 
CMPs that contract with CMS to furnish covered services to Medicare 
beneficiaries.
    (b) Scope. (1) This subpart sets forth the requirements an HMO or 
CMP must meet in order to enter into a contract with CMS under section 
1876 of the Act. It also specifies the procedures that CMS follows to 
evaluate applications and make determinations.
    (2) The rules for payment to HMOs and CMPs are set forth in subparts 
N, O, and P of this part.
    (3) The rules for HCPP participation in Medicare under section 
1833(a)(1)(A) of the Act are set forth in subpart U of this part.

[60 FR 45675, Sept. 1, 1995]



Sec. 417.401  Definitions.

    As used in this subpart and subparts K through R of this part, 
unless the context indicates otherwise--
    Adjusted average per capita cost (AAPCC) means an actuarial estimate 
made by CMS in advance of an HMO's or CMP's contract period that 
represents what the average per capita cost to the Medicare program 
would be for each class of the HMO's or CMP's Medicare enrollees if they 
had received covered services other than through the HMO or CMP in the 
same geographic area or in a similar area.
    Adjusted community rate (ACR) is the equivalent of the premium that 
a risk HMO or CMP would charge Medicare enrollees independently of 
Medicare payments if the HMO or CMP used the same rates it charges non-
Medicare enrollees for a benefit package limited to covered Medicare 
services.
    Arrangement means a written agreement between an HMO or CMP and 
another entity, under which--
    (1) The other entity agrees to furnish specified services to the 
HMO's or CMP's Medicare enrollees;
    (2) The HMO or CMP retains responsibility for the services; and
    (3) Medicare payment to the HMO or CMP discharges the beneficiary's 
obligation to pay for the services.
    Benefit stabilization fund means a fund established by CMS, at the 
request of a risk HMO or CMP, to withhold a portion of the per capita 
payments available to the HMO or CMP and pay that portion in a 
subsequent contract period for the purpose of stabilizing fluctuations 
in the availability of the additional benefits the HMO or CMP provides 
to its Medicare enrollees.
    Cost contract means a Medicare contract under which CMS pays the HMO 
or CMP on a reasonable cost basis.
    Cost HMO or CMP means an HMO or CMP that has in effect a cost 
contract with CMS under section 1876 of the Act and subpart L of this 
part.
    Demonstration project means a demonstration project under section 
402 of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (42 U.S.C. 
1395b-1 (note)), relating to the provision of services for which payment 
is made under Medicare on a prospectively determined basis.
    Emergency services means covered inpatient or outpatient services 
that are furnished by an appropriate source other than the HMO or CMP 
and that meet the following conditions:
    (1) Are needed immediately because of an injury or sudden illness.
    (2) Are such that the time required to reach the HMO's or CMP's 
providers or suppliers (or alternatives authorized by

[[Page 711]]

the HMO or CMP) would mean risk of permanent damage to the enrollee's 
health.

Once initiated, the services continue to be considered emergency 
services as long as transfer of the enrollee to the HMO's or CMP's 
source of health care or authorized alternative is precluded because of 
risk to the enrollee's health or because transfer would be unreasonable, 
given the distance and the nature of the medical condition.
    Geographic area means the area found by CMS to be the area within 
which the HMO or CMP furnishes, or arranges for furnishing, the full 
range of services that it offers to its Medicare enrollees.
    Medicare enrollee means a Medicare beneficiary who has been 
identified on CMS records as an enrollee of an HMO or CMP that has a 
contract with CMS under section 1876 of the Act and subpart L of this 
part.
    New Medicare enrollee means a Medicare beneficiary who--
    (1) Enrolls with an HMO or CMP after the date on which the HMO or 
CMP first enters into a risk contract under subpart L of this part; and
    (2) Was not enrolled with the HMO or CMP at the time he or she 
became entitled to benefits under Part A or eligible to enroll in Part B 
of Medicare.
    Risk contract means a Medicare contract under which CMS pays the HMO 
or CMP on a risk basis for Medicare covered services.
    Risk HMO or CMP means an HMO or CMP that has in effect a risk 
contract with CMS under section 1876 of the Act and subpart L of this 
part.
    Urgently needed services means covered services that are needed by 
an enrollee who is temporarily absent from the HMO's or CMP's geographic 
area and that--
    (1) Are required in order to prevent serious deterioration of the 
enrollee's health as a result of unforeseen injury or illness; and
    (2) Cannot be delayed until the enrollee returns to the HMO's or 
CMP's geographic area.

[50 FR 1346, Jan. 10, 1985, as amended at 56 FR 51986, Oct. 17, 1991; 58 
FR 38072, July 15, 1993; 60 FR 45675, Sept. 1, 1995]



Sec. 417.402  Effective date of initial regulations.

    (a) The changes made to section 1876 of the Act by section 114 of 
the Tax Equity and Fiscal Responsibility Act of 1982 became effective on 
February 1, 1985, the effective date of the initial implementing 
regulations.
    (b) The changes made to section 1876 of the Act by section 4002 of 
the Balanced Budget Act of 1997 (BBA) are incorporated in part 422 of 
this chapter, except for changes affecting section 1876 cost contracts, 
which are incorporated in subpart L of this part. Upon enactment of the 
BBA (August 5, 1998), no new cost contracts are accepted by CMS, except 
for current Health Care Prepayment Plans that may convert to section 
1876 cost contracts. Section 1876 cost contracts may not be extended or 
renewed beyond December 31, 2004. CMS must accept and approve 
applications to modify the cost contracts in order to expand the service 
area, provided they are submitted on or before September 1, 2003 and CMS 
determines that the organization continues to meet the regulatory 
requirements and the requirements in its cost contract.

[63 FR 35066, June 26, 1998, as amended at 65 FR 40314, June 29, 2000; 
67 FR 13288, Mar. 22, 2002]



Sec. 417.404  General requirements.

    (a) In order to contract with CMS under the Medicare program, an 
entity must--
    (1) Be determined by CMS to be an HMO or CMP (in accordance with 
Secs. 117.142 and 417.407, respectively); and
    (2) Comply with the contract requirements set forth in subpart L of 
this part.
    (b) CMS enters into or renews a contract only if it determines that 
action would be consistent with the effective and efficient 
implementation of section 1876 of the Act.

[60 FR 45675, Sept. 1, 1995]



Sec. 417.406  Application and determination.

    (a) Responsibility for making determinations. CMS is responsible for 
determining whether an entity meets the requirements to be an HMO or 
CMP.

[[Page 712]]

    (b) Application requirements. (1) The application requirements for 
HMOs are set forth in Sec. 417.143.
    (2) The requirements of Sec. 417.143 also apply to CMPs except that 
there are no application fees.
    (c) Determination. CMS uses the procedures set forth in 
Sec. 417.144(a) through (d) to determine whether an entity is an HMO or 
CMP.
    (d) Oversight of continuing compliance. (1) CMS oversees an entity's 
continued compliance with the requirements for an HMO as defined in 
Sec. 417.1 or for a CMP as set forth in Sec. 417.407.
    (2) If an entity no longer meets those requirements, CMS terminates 
the contract of that entity in accordance with Sec. 417.494.

[60 FR 45675, Sept. 1, 1995]



Sec. 417.407  Requirements for a Competitive Medical Plan (CMP).

    (a) General rule. To qualify as a CMP, an entity must be organized 
under the laws of a State and must meet the requirements of paragraphs 
(b) through (f) of this section.
    (b) Required services. (1) Basic rule. Except as provided in 
paragraph (b)(2) of this section, the entity furnishes to its enrollees 
at least the following services:
    (i) Physicians' services performed by physicians.
    (ii) Laboratory, x-ray, emergency, and preventive services.
    (iii) Out-of-area coverage.
    (iv) Inpatient hospital services.
    (2) Exception for Medicaid prepayment risk contracts. An entity that 
had, before 1970, a Medicaid prepayment risk contract that did not 
include provision of inpatient hospital services is not required to 
provide those services.
    (c) Compensation for services. The entity receives compensation 
(except for deductibles, coinsurance, and copayments) for the health 
care services it provides to enrollees on a periodic, prepaid capitation 
basis regardless of the frequency, extent, or kind of services provided 
to any enrollee.
    (d) Source of physicians' services. The entity provides physicians' 
services primarily through--
    (1) Physicians who are employees or partners of the entity; or
    (2) Physicians or groups of physicians (organized on a group or 
individual practice basis) under contract with the entity to provide 
physicians' services.
    (e) Assumption of financial risk. The rules set forth in 
Sec. 417.120(b) for HMOs apply also to CMPs except that reference to 
``basic services'' must be read as reference to the required services 
listed in paragraph (b) of this section.
    (f) Protection of enrollees. The entity provides adequately against 
the risk of insolvency by meeting the requirements of Secs. 417.120(a) 
and 417.122 for protection of enrollees against loss of benefits and 
liability for payment of any fees that are the legal responsibility of 
the entity.

[60 FR 45675, Sept. 1, 1995]



Sec. 417.408  Contract application process.

    (a) Contents of application. (1) The application for a contract must 
include supporting information in the form and detail required by CMS. 
(2) Whenever feasible, CMS exempts the HMO or CMP from resubmittal of 
information it has already submitted to CMS in connection with a 
determination made under the provisions of Sec. 417.406.
    (b) Approval of application. (1) If CMS approves the application, it 
gives written notice to the HMO or CMP, indicating that it meets the 
requirements for either a risk or reasonable cost contract or only for a 
reasonable cost contract.
    (2) If the HMO or CMP is dissatisfied with a determination that it 
meets the requirements only for a reasonable cost contract, it may 
request reconsideration in accordance with the procedures specified in 
subpart R of this part.
    (c) Denial of application. If CMS denies the application, it gives 
written notice to the HMO or CMP indicating--
    (1) That it does not meet the contract requirements under section 
1876 of the Act;
    (2) The reasons why the HMO or CMP does not meet the contract 
requirements; and
    (3) The HMO's or CMP's right to request reconsideration in 
accordance

[[Page 713]]

with the procedures specified in subpart R of this part.

[50 FR 1346, Jan. 10, 1985, as amended at 56 FR 8853, Mar. 1, 1991; 58 
FR 38078, July 15, 1993; 60 FR 45676, Sept. 1, 1995]



Sec. 417.410  Qualifying conditions: General rules.

    (a) Basic requirement. In order to qualify for a contract with CMS 
under this subpart, an HMO or CMP must demonstrate its ability to enroll 
Medicare beneficiaries and other individuals and groups and to deliver a 
specified comprehensive range of high quality services efficiently, 
effectively, and economically to its Medicare enrollees.
    (b) Other qualifying conditions. An HMO or CMP must meet qualifying 
conditions that pertain to operating experience, enrollment, range of 
services, furnishing of services, and a quality assurance program.
    (c) Standards. Generally, each qualifying condition is interpreted 
by a series of standards that are used in surveying an HMO or CMP to 
determine its qualifications for a Medicare contract.
    (d) Application of standards. Application of the standards enables 
the surveyor to determine--
    (1) The HMO's or CMP's activities;
    (2) The extent to which the HMO or CMP complies with each condition;
    (3) The nature and extent of any deficiencies; and
    (4) The need for improvement if CMS should enter into a contract 
with the HMO or CMP.
    (e) Requirements for a risk contract. An HMO or CMP may enter into a 
risk contract with CMS if it--
    (1) Meets all the applicable requirements in the statute and 
regulations;
    (2) Has at least 5,000 enrollees or 1,500 enrollees if it serves a 
primarily rural area as defined in Sec. 417.413(b)(3);
    (3) Has at least 75 Medicare enrollees or has an acceptable plan to 
achieve this Medicare membership within 2 years;
    (4) Satisfies CMS that it can bear the potential losses of a risk 
contract; and
    (5) Has not previously terminated or failed to renew a risk contract 
within the preceding 5 years, unless CMS determines that circumstances 
warrant special consideration.
    (f) Requirements for a reasonable cost sontract. An HMO or CMP may 
enter into a reasonable cost contract if it meets one of the following:
    (1) The HMO or CMP qualifies for a risk contract, but chooses a 
reasonable cost contract.
    (2) The HMO or CMP meets the conditions for entering into a risk 
contract specified in paragraph (e) of this section except that CMS does 
not judge the HMO or CMP capable of bearing the potential losses of a 
risk contract.
    (g) Regulations on reasonable cost and risk reimbursement are set 
forth in subparts O and P of this part.

[50 FR 20570, May 17, 1985, as amended at 58 FR 38078, July 15, 1993; 60 
FR 45676, Sept. 1, 1995]



Sec. 417.412  Qualifying condition: Administration and management.

    The HMO or CMP must demonstrate that it--
    (a) Has sufficient administrative capability to carry out the 
requirements of the contract; and
    (b) Does not have any agents or management staff or persons with 
ownership or control interests who have been convicted of criminal 
offenses related to their involvement in Medicaid, Medicare, or social 
service programs under title XX of the Act.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45676, Sept. 1, 1995]



Sec. 417.413  Qualifying condition: Operating experience and enrollment.

    (a) Condition. The HMO or CMP must demonstrate that it has operating 
experience and an enrolled population sufficient to provide a reasonable 
basis for establishing a prospective per capita reimbursement rate or a 
reasonable cost reimbursement rate, as appropriate.
    (b) Standard: Enrollment and operating experience for HMOs or CMPs 
to contract on a risk basis. To be eligible to contract on a risk basis-
-
    (1) A nonrural HMO or CMP must currently have the following:
    (i) At least 5,000 enrollees; and
    (ii) At least 75 Medicare enrollees or a plan acceptable to CMS for 
achieving a Medicare enrollment of 75 within 2

[[Page 714]]

years from the beginning of its initial contract period.
    (2) A rural HMO or CMP must currently have--
    (i) At least 1,500 enrollees; and
    (ii) At least 75 Medicare enrollees or a plan acceptable to CMS for 
achieving a Medicare enrollment of 75 within 2 years from the beginning 
of its initial contract period.
    (3) For purposes of this paragraph, an HMO or CMP is considered 
rural if at least 50 percent of its enrollees reside in nonmetropolitan 
areas. A nonmetropolitan area is an area--
    (i) No part of which is within a metropolitan statistical area (MSA) 
as designated by the Executive Office of Management and Budget; and
    (ii) That does not contain a city whose population exceeds 50,000 
individuals.
    (4) A subdivision or subsidiary of an HMO or CMP that meets the 
requirements of paragraph (b)(1) or (b)(2) of this section need not 
demonstrate that it meets those requirements as an independent unit if 
the HMO or CMP assumes responsibility for the financial risk, and 
adequate management and supervision of health care services furnished by 
its subdivision or subsidiary.
    (c) Standard: Enrollment and operating experience for HMOs or CMPs 
to contract on a cost basis. To be eligible to contract on a reasonable 
cost basis, an HMO or CMP must currently have enrollees sufficient in 
number to provide a reasonable basis for entering into a contract, as 
follows:
    (1) At least 1,500 enrollees.
    (2) At least 75 Medicare enrollees, or a plan acceptable to CMS for 
achieving--
    (i) A Medicare enrollment of 75 within 2 years from the beginning of 
its initial contract period; and
    (ii) At least 250 Medicare enrollees by the beginning of its fourth 
contract period.
    (d) Standard: Composition of enrollment--(1) Requirement. Except as 
specified in paragraphs (d)(2) and (e) of this section, not more than 50 
percent of an HMO's or CMP's enrollment may be Medicare beneficiaries.
    (2) Waiver of composition of enrollment standard. CMS may waive 
compliance with the requirements of paragraph (d)(1) of this section if 
the HMO or CMP has made and is making reasonable efforts to enroll 
individuals who are not Medicare beneficiaries and it meets one of the 
following requirements:
    (i) The HMO or CMP serves a geographic area in which Medicare 
beneficiaries and Medicaid recipients constitute more than 50 percent of 
the population. (CMS does not grant a waiver that would permit the 
percentage of Medicare and Medicaid enrollees to exceed the percentage 
of Medicare beneficiaries and Medicaid recipients in the population of 
the geographic area.)
    (ii) The HMO or CMP is owned and operated by a government entity. 
The waiver may be for a period up to three years after the date the HMO 
or CMP first enters into a contract under this subpart, and may not be 
extended.
    (iii) The HMO or CMP requests waiver of the composition rule because 
it is in the public interest. The organization provides documentation 
that supports one of the following:
    (A) The organization serves a medically underserved rural or urban 
area.
    (B) The organization demonstrates a long-term business and community 
service commitment to the area.
    (C) The organization believes that a waiver is necessary to promote 
managed care choices in an area with limited or no managed care choices.
    (3) Waiver granted on or before October 21, 1986. An HMO or CMP (or 
a successor HMO or CMP) that as of October 21, 1986, had been granted an 
exception, waiver, or modification of the requirements of paragraph 
(d)(1) of this section, but that does not meet the requirements of 
paragraph (d)(2) of this section, must make (and throughout the period 
of the exception, waiver, or modification continue to make) reasonable 
efforts to meet scheduled enrollment goals, consistent with a schedule 
of compliance approved by CMS.
    (i) If CMS determines that the HMO or CMP has complied, or made 
significant progress toward compliance, with the approved schedule, and 
that an extension is in the best interest of the Medicare program, CMS 
may extend the waiver of modification.

[[Page 715]]

    (ii) If CMS determines that the HMO or CMP has not complied with the 
approved schedule, CMS may apply the sanctions described in paragraphs 
(d)(6) and (d)(7) of this section.
    (4) Basis for application of sanctions. CMS may, as an alternative 
to contract termination, apply the sanctions specified in paragraph 
(d)(6) of this section if CMS determines that the HMO or CMP is not 
complying with the requirements in paragraphs (d)(1), (d)(2), or (d)(3) 
of this section, as applicable.
    (5) Notice of sanction. Before applying the sanctions specified in 
paragraph (d)(6) of this section, CMS sends a written notice to the HMO 
or CMP stating the proposed action and its basis. CMS gives the HMO or 
CMP 15 days after the date of the notice to provide evidence 
establishing the HMO's or CMP's compliance with the requirements in 
paragraph (d)(1), (d)(2), or (d)(3) of this section, as applicable.
    (6) Sanctions. If, following review of the HMO's or CMP's timely 
response to CMS's notice, CMS determines that an HMO or CMP does not 
comply with the requirements of paragraphs (d)(1), (d)(2), or (d)(3) of 
this section, CMS may apply either of the following sanctions:
    (i) Require the HMO or CMP to stop accepting new enrollment 
applications after a date specified by CMS.
    (ii) Deny payment for individuals who are formally added or 
``accreted'' to CMS's records as Medicare enrollees after a date 
specified by CMS.
    (7) Termination by CMS. In addition to the sanctions described in 
paragraph (d)(6) of this section. CMS may decline to renew an HMO's or 
CMP's contract in accordance with Sec. 417.492(b), or terminate its 
contract in accordance with Sec. 417.494(b) if CMS determines that the 
HMO or CMP no longer substantially meets the requirements of paragraphs 
(d)(1), (d)(2), or (d)(3) of this section.
    (8) Termination of composition standard. The 50 percent composition 
of Medicare beneficiaries terminates for all managed care plans on 
December 31, 1998.
    (e) Standard: Open enrollment. (1) Except as specified in paragraph 
(e)(2) of this section, an HMO or CMP must enroll Medicare beneficiaries 
on a first-come, first-served basis to the limit of its capacity and 
provide annual open enrollment periods of at least 30 days duration for 
Medicare beneficiaries.
    (2) CMS may waive the requirement of paragraph (e)(1) of this 
section if compliance would prevent compliance with the limitation on 
enrollment of Medicare beneficiaries and Medicaid recipients (paragraph 
(d) of this section) or result in an enrollment substantially 
nonrepresentative of the population of the HMO's or CMP's geographic 
area. The enrollment would be ``substantially nonrepresentative'' if the 
proportion of a subgroup to the total enrollment exceeded, by 10 percent 
or more, its proportion of the population in the HMO's or CMP's 
geographic area, as shown by census data or other data acceptable to 
CMS. For purposes of this paragraph, a subgroup means a class of 
Medicare enrollees as defined in Sec. 417.582.

[50 FR 1346, Jan. 10, 1985, as amended at 56 FR 46570, Sept. 13, 1991; 
58 FR 38082, July 15, 1993; 60 FR 45676, Sept. 1, 1995; 63 FR 35066, 
June 26, 1998]



Sec. 417.414  Qualifying condition: Range of services.

    (a) Condition. The HMO or CMP must demonstrate that it is capable of 
delivering to Medicare enrollees the range of services required in 
accordance with this section.
    (b) Standard: Range of services furnished by eligible HMOs or CMPs. 
(1) Basic requirement. Except as specified in paragraph (b)(3) of this 
section, an HMO or CMP must furnish to its Medicare enrollees (directly 
or through arrangements with others) all the Medicare services to which 
those enrollees are entitled to the extent that they are available to 
Medicare beneficiaries who reside in the HMO's or CMP's geographic area 
but are not enrolled in the HMO or CMP.
    (2) Criteria for availability. The services are considered available 
if--
    (i) The sources are located within the HMO's or CMP's geographic 
area; or
    (ii) It is common practice to refer patients to sources outside that 
geographic area.
    (3) Exception for hospice care. An HMO or CMP is not required to 
furnish hospice care as described in part 418 of this chapter. However, 
HMOs or CMPs must

[[Page 716]]

inform their Medicare enrollees about the availability of hospice care 
if--
    (i) A hospice participating in Medicare is located within the HMO's 
or CMP's geographic area; or
    (ii) It is common practice to refer patients to hospices outside the 
geographic area.
    (c) Standard: Financial responsibility for services furnished 
outside the HMO or CMP. (1) An HMO or CMP must assume financial 
responsibility and provide reasonable reimbursement for emergency 
services and urgently needed services (as defined in Sec. 417.401) that 
are obtained by its Medicare enrollees from providers and suppliers 
outside the HMO or CMP even in the absence of the HMO's or CMP's prior 
approval.
    (2) An HMO or CMP must assume financial responsibility for services 
that the Medicare enrollee attempted to obtain from the HMO or CMP, but 
that the HMO or CMP failed to furnish or unreasonably denied, and that 
are found, upon appeal by the enrollee under subpart Q of this part, to 
be services that the enrollee was entitled to have furnished to him or 
her by the HMO or CMP.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38078, July 15, 1993; 60 
FR 45677, Sept. 1, 1995]



Sec. 417.416  Qualifying condition: Furnishing of services.

    (a) Condition. The HMO or CMP must furnish the required services to 
its Medicare enrollees through providers and suppliers that meet 
applicable Medicare statutory definitions and implementing regulations. 
The HMO or CMP must also ensure that the required services, additional 
services, and any other supplemental services for which the Medicare 
enrollee has contracted are available and accessible and are furnished 
in a manner that ensures continuity.
    (b) Standard: Conformance with conditions of participation, 
conditions for coverage, and conditions for certification. (1) 
Hospitals, SNFs, HHAs, CORFs, and providers of outpatient physical 
therapy or speech-language pathology services must meet the applicable 
conditions of participation in Medicare, as set forth elsewhere in this 
chapter.
    (2) Suppliers must meet the conditions for coverage or conditions 
for certification of their services, as set forth elsewhere in this 
chapter.
    (3) If more than one type of practitioner is qualified to furnish a 
particular service, the HMO or CMP may select the type of practitioner 
to be used.
    (c) Standard: Physician supervision. The HMO or CMP must provide for 
supervision by a physician of other health care professionals who are 
directly involved in the provision of health care as generally 
authorized under section 1861 of the Act. Except as specified in 
paragraph (d) of this section, with respect to medical services 
furnished in an HMO's or CMP's clinic or the office of a physician with 
whom the HMO or CMP has a service agreement, the HMO or CMP must ensure 
that--
    (1) Services furnished by paramedical, ancillary, and other 
nonphysician personnel are furnished under the direct supervision of a 
physician;
    (2) A physician is present to perform medical (as opposed to 
administrative) services whenever the clinics or offices are open; and
    (3) Each patient is under the care of a physician.
    (d) Exceptions to physician supervision requirement. The following 
services may be furnished without the direct personal supervision of a 
physician:
    (1) Services of physician assistants and nurse practitioners (as 
defined in Sec. 491.2 of this chapter), and the services and supplies 
incident to their services. The conditions for payment, as set forth in 
Secs. 405.2414 and 405.2415 of this chapter for services furnished by 
rural health clinics and Federally qualified health centers, 
respectively, also apply when those services are furnished by an HMO or 
CMP.
    (2) When furnished by an HMO or CMP, services of clinical 
psychologists who meet the qualifications specified in Sec. 410.71(d) of 
this chapter, and the services and supplies incident to their 
professional services.
    (3) When an HMO or CMP contracts on--
    (i) A risk basis, the services of a clinical social worker (as 
defined at Sec. 410.73 of this chapter) and the services and

[[Page 717]]

supplies incident to their professional services; or
    (ii) A cost basis, the services of a clinical social worker (as 
defined in Sec. 410.73 of this chapter). Services incident to the 
professional services of a clinical social worker furnished by an HMO or 
CMP contracting on a cost basis are not covered by Medicare and payment 
will not be made for these services.
    (e) Standard: Accessibility and continuity. (1) The HMO or CMP must 
ensure that the required services and any other services for which 
Medicare enrollees have contracted are accessible, with reasonable 
promptness, to the enrollees with respect to geographic location, hours 
of operation, and provision of after hours service. Medically necessary 
emergency services must be available twenty-four hours a day, seven days 
a week.
    (2) The HMO or CMP must maintain a health (including medical) 
recordkeeping system through which pertinent information relating to the 
health care of its Medicare enrollees is accumulated and is readily 
available to appropriate professionals.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45677, Sept. 1, 1995; 63 FR 20130, Apr. 23, 1998]



Sec. 417.418  Qualifying condition: Quality assurance program.

    (a) Condition. The HMO or CMP must make arrangements for a quality 
assurance program that meets the requirements of this section.
    (b) Standard. An HMO or CMP must have an ongoing quality assurance 
program that meets the requirements set forth in Sec. 417.106(a).

[58 FR 38072, July 15, 1993]



  Subpart K--Enrollment, Entitlement, and Disenrollment under Medicare 
                                Contract

    Source: 50 FR 1346, Jan. 10, 1985, unless otherwise noted.



Sec. 417.420  Basic rules on enrollment and entitlement.

    (a) Enrollment. Individuals who are entitled to benefits under both 
Part A and Part B of Medicare or only Part B may elect to receive those 
benefits through an HMO or CMP that has in effect a contract with CMS 
under subpart L of this part.
    (b) Entitlement. If a Medicare beneficiary enrolls with an HMO or 
CMP, CMS pays the HMO or CMP on his or her behalf for the services to 
which he or she is entitled.
    (c) Beneficiary liability. (1) The HMO or CMP may require payment, 
in the form of premiums or otherwise, from individuals for services not 
covered under Medicare, as well as deductible and coinsurance amounts 
attributable to Medicare covered services.
    (2) As described in Sec. 417.448, Medicare enrollees of risk HMOs or 
CMPs are liable for services that they obtain from sources other than 
the HMO or CMP, unless the services are--
    (i) Emergency or urgently needed; or
    (ii) Determined, on appeal under subpart Q of this part, to be 
services that should have been furnished by the HMO or CMP.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38078, July 15, 1993; 60 
FR 45677, Sept. 1, 1995]



Sec. 417.422  Eligibility to enroll in an HMO or CMP.

    Except as specified in Secs. 417.423 and 417.424, an HMO or CMP must 
enroll, either for an indefinite period or for a specified period of at 
least 12 months, any individual who--
    (a) Is entitled to Medicare benefits under Parts A and B or under 
Part B only;
    (b) Lives within the geographic area served by the HMO or CMP;
    (c) Is not enrolled in any other HMO or CMP that has entered into a 
contract under subpart L of this part;
    (d) During an enrollment period of the HMO or CMP, completes and 
signs the HMO's or CMP's application form and gives whatever information 
is required for enrollment;
    (e) Agrees to abide by the HMO's or CMP's rules after they are 
disclosed to him or her in connection with the enrollment process;
    (f) Is not denied enrollment by the HMO or CMP under a selection 
policy, if any, that has been approved by CMS under Sec. 417.424(b); and

[[Page 718]]

    (g) Is not denied enrollment by the HMO or CMP on the basis of any 
of the administrative criteria concerning denial of enrollment in 
Sec. 417.424(a).

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38078, July 15, 1993; 60 
FR 45677, Sept. 1, 1995]



Sec. 417.423  Special rules: ESRD and hospice patients.

    (a) ESRD patients. (1) A Medicare beneficiary who has been medically 
determined to have end-stage renal disease is not eligible to enroll in 
an HMO or CMP.
    (2) However, if a beneficiary is already enrolled in an HMO or CMP 
when he or she is determined to have end-stage renal disease, the HMO or 
CMP--
    (i) Must reenroll the beneficiary as required by Sec. 417.434; and
    (ii) May not disenroll the beneficiary except as provided in 
Sec. 417.460.
    (b) Hospice patients. A Medicare beneficiary who elects hospice care 
under Sec. 418.24 of this chapter is not eligible to enroll in an HMO or 
CMP as long as the hospice election remains in effect.

[60 FR 45677, Sept. 1, 1995]



Sec. 417.424  Denial of enrollment.

    (a) Basis for denial. An HMO or CMP may deny enrollment to an 
individual who meets the criteria of Sec. 417.422 if acceptance would--
    (1) Cause the number of enrollees who are Medicare or Medicaid 
beneficiaries to exceed 50 percent of the HMO's or CMP's total 
enrollment;
    (2) Prevent the HMO or CMP from complying with any of the other 
contract qualifying conditions set forth in subpart J of this part;
    (3) Require the HMO or CMP to exceed its enrollment capacity; or
    (4) Cause the enrollment to become substantially nonrepresentative 
of the general population in the HMO's or CMP's geographic area.
    (b) Selection policies. (1) Denial under paragraph (a)(4) of this 
section must be in accordance with written selection policies approved 
by CMS. (2) Enrollment of individuals will not be considered to make the 
enrollment of the HMO or CMP substantially nonrepresentative of the 
general population in the HMO's or CMP's geographic area unless, as a 
result of the enrollment, the proportion of the subgroup of enrollees to 
which the enrollee belongs as compared to the HMO's or CMP's total 
enrollment exceeds by at least ten percent the subgroup's proportion of 
the general population in the geographic area of the HMO or CMP. (A 
subgroup is a class of Medicare enrollees of an HMO or CMP that CMS 
constructs on the basis of actuarial factors.)

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 58 
FR 38078, July 15, 1993; 60 FR 45677, Sept. 1, 1995]



Sec. 417.426  Open enrollment requirements.

    (a) Basic requirements. (1) HMOs or CMPs must provide open 
enrollment for Medicare beneficiaries for at least 30 consecutive days 
during each contract year.
    (2) During open enrollment, the HMO or CMP must enroll eligible 
Medicare beneficiaries in the order in which their applications are 
received and until its enrollment capacity is reached.
    (3) The HMO or CMP may accept applications from Medicare 
beneficiaries after it has reached capacity if it places those 
individuals on a waiting list and enrolls them in chronological order as 
vacancies occur.
    (4) An HMO or CMP with a risk contract must accept applications from 
eligible Medicare beneficiaries during the month of November 1998.
    (b) Capacity to accept new enrollees. (1) If an HMO or CMP chooses 
to limit enrollments because of its capacity, it must notify CMS at 
least 90 days before the beginning of its open enrollment period and, at 
that time, provide CMS with its reasons for limiting enrollment.
    (2) CMS evaluates the HMO's or CMP's submittal under paragraph 
(b)(1) of this section.
    (3) The HMO or CMP must promptly notify CMS if there is any change 
in its enrollment capacity.
    (c) Reserved vacancies. (1) Subject to CMS's approval, an HMO or CMP 
may set aside a reasonable number of vacancies for an anticipated new 
group contract or for anticipated new enrollees under an existing group 
contract that will have its enrollment period after

[[Page 719]]

the Medicare open enrollment period during the contract year.
    (2) Any set aside vacancies that are not filled within a reasonable 
time after the beginning of the group contract enrollment period must be 
made available to Medicare beneficiaries and other nongroup applicants 
under the requirements of this subpart.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38079, July 15, 1993; 60 
FR 45677, Sept. 1, 1995; 63 FR 35066, June 26, 1998]



Sec. 417.428  Marketing activities.

    (a) Required marketing activities. An HMO or CMP must meet the 
following requirements:
    (1) Offer its plan to Medicare beneficiaries and provide to those 
interested in enrolling, adequate written descriptions of the HMO's or 
CMP's rules, procedures, benefits, fees and other charges, services, and 
other information necessary for beneficiaries to make an informed 
decision about enrollment.
    (2) Notify the general public of its enrollment period (whether time 
limited or continuous) in an appropriate manner through appropriate 
media, throughout its enrollment area.
    (3) Submit all marketing materials to CMS at least 45 days before 
their planned distribution.
    (4) Include in the HMO's or CMP's written materials provided to 
prospective enrollees prior to enrollment, notice that the HMO or CMP is 
authorized by law to terminate or refuse to renew its contract with CMS, 
that CMS may also choose to terminate or refuse to renew its contact 
with the HMO or CMP and that termination or nonrenewal may result in 
termination of the individual's enrollment in the HMO or CMP.
    (b) Prohibited marketing activities--general. In offering its plan 
to Medicare beneficiaries, an HMO or CMP may not engage in any of the 
following practices or activities:
    (1) Practices that are discriminatory. For example, the HMO or CMP 
may not engage in any activity intended to recruit Medicare 
beneficiaries from higher income areas (usually an indicator of better 
health) without making a comparable effort to enroll Medicare 
beneficiaries from lower income areas.
    (2) Activities that could mislead or confuse Medicare beneficiaries, 
or misrepresent the HMO or CMP its marketing representatives, or CMS. 
For example, the HMO or CMP may not claim that it is recommended or 
endorsed by CMS or that CMS recommends that the beneficiary enroll in 
the HMO or CMP. It may, however, explain that the entity is approved as 
an HMO or CMP for purposes of participation in Medicare.
    (3) Offers of gifts or payment as an inducement to enroll in the HMO 
or CMP. This does not prohibit the explanation of any legitimate 
benefits the beneficiary might obtain as an enrollee of the HMO or CMP 
such as eligibility to enroll in a supplemental benefit plan that covers 
deductibles and coinsurance or preventive services.
    (4) Door-to-door solicitation of Medicare beneficiaries.
    (5) Distribution of marketing materials if, before the expiration of 
the 45-day period described in paragraph (a)(3) of this section, the HMO 
or CMP receives written notice from CMS that CMS has disapproved the 
material because it is inaccurate or misleading or it misrepresents the 
HMO or CMP, its marketing representatives or CMS.
    (c) Marketing activities of risk HMOs or CMPs In addition to the 
generally permitted or prohibited marketing activities described in 
paragraphs (a) and (b) of this section, a risk HMO or CMP must provide 
potential Medicare enrollees with adequate written descriptions of the 
additional benefits or services, or reductions in premiums, deductible 
or copayments that may pertain under payment on a risk basis.

[50 FR 1346, Jan. 10, 1985, as amended at 52 FR 8901, Mar. 20, 1987; 56 
FR 46570, Sept. 13, 1991; 58 FR 38082, July 15, 1993; 60 FR 45677, Sept. 
1, 1995]



Sec. 417.430  Application procedures.

    (a) Application forms. (1) The application form must comply with CMS 
instructions regarding format and content and must include the 
beneficiary's signature and authorization for disclosure and exchange of 
necessary information between CMS and the HMO or CMP.
    (2) The HMO or CMP must file and retain application forms for the 
period specified in CMS instructions.

[[Page 720]]

    (b) Handling of applications. An HMO or CMP must have an effective 
system for receiving, controlling, and processing applications from 
Medicare beneficiaries. The system must meet the following conditions 
and requirements:
    (1) Each application is dated as of the day it is received.
    (2) Applications are processed in chronological order by date of 
receipt.
    (3) The HMO or CMP gives the beneficiary prompt written notice of 
acceptance or rejection of the application.
    (4) The notice of acceptance--
    (i) Specifies the date on which the HMO or CMP will request CMS to 
make the enrollment effective; or
    (ii) If the HMO or CMP is currently enrolled to capacity, explains 
the procedures that will be followed when vacancies occur.
    (5) The notice of denial explains the reason for denial.
    (6) The HMO or CMP transmits the information necessary for CMS to 
add the beneficiary to its records of the HMO's or CMP's Medicare 
enrollees--
    (i) Within 30 days from the date of application or from the date a 
vacancy occurs for an applicant who was accepted (for future enrollment) 
while there were no vacancies; or
    (ii) Within an additional period of time approved by CMS on a 
showing by the HMO or CMP that it needs more time.
    (7) The HMO or CMP promptly notifies the beneficiary of the 
effective month of his or her enrollment as a Medicare enrollee, when it 
receives that information from CMS.
    (8) If the HMO or CMP accepts applications while it is enrolled to 
capacity, its procedures ensure that vacancies are filled in 
chronological order by date of application of beneficiaries who are 
still eligible to enroll, unless that would result in failure to comply 
with any of the qualifying conditions set forth in Sec. 417.413.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45677, Sept. 1, 1995]



Sec. 417.432  Conversion of enrollment.

    (a) Basic rule. An HMO or CMP must accept as a Medicare enrollee any 
individual who is enrolled in the HMO or CMP for the month immediately 
before the month in which he or she is entitled to both Medicare Parts A 
and B or Part B only.
    (b) Effective date of conversion. Unless the individual chooses to 
disenroll from the HMO or CMP the individual's conversion to a Medicare 
enrollee is effective the month in which he or she is entitled to both 
Medicare Parts A and B or Part B only.
    (c) Prohibition against disenrollment. An HMO or CMP may not 
disenroll an individual who is converting under the provisions of 
paragraph (a) of this section unless one of the conditions specified in 
Sec. 417.460 is met.
    (d) Application form. The individual who is converting must sign an 
application form as described in Sec. 417.430(a).
    (e) Expedited submittal of information to CMS. The HMO or CMP must 
notify CMS, within the following time frames, of the enrollee's 
authorization for disclosure and exchange of information and the 
information necessary for CMS to include the enrollee in its records as 
a Medicare enrollee of the HMO or CMP:
    (1) At least 30, but no earlier than 90, days before the enrollee--
    (i) Attains age 65; or
    (ii) Reaches his or her 25th month of entitlement to social security 
disability benefits under title II of the Act or railroad retirement 
disability benefits under section 7(d) of the Railroad Retirement Act of 
1974.
    (2) Within 30 days after the enrollee initiates a course of renal 
dialysis, or on or before the day he or she enters a hospital in 
anticipation of a kidney transplant.

[50 FR 1346, Jan. 10, 1985, as amended at 56 FR 46570, Sept. 13, 1991; 
58 FR 38082, July 15, 1993; 60 FR 45677, Sept. 1, 1995]



Sec. 417.434  Reenrollment.

    If an HMO or CMP requires periodic reenrollment, it must reenroll 
Medicare enrollees unless there is a basis for disenrollment as set 
forth in Sec. 417.460.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]

[[Page 721]]



Sec. 417.436  Rules for enrollees.

    (a) Maintaining rules. An HMO or CMP must maintain written rules 
that deal with, but need not be limited to the following:
    (1) All benefits provided under the contract, as described in 
Sec. 417.440.
    (2) How and where to obtain services from or through the HMO or CMP.
    (3) The restrictions on coverage for services furnished from sources 
outside a risk HMO or CMP, other than emergency services and urgently 
needed services (as defined in Sec. 417.401).
    (4) The obligation of the HMO or CMP to assume financial 
responsibility and provide reasonable reimbursement for emergency 
services and urgently needed services as required by Sec. 417.414(c).
    (5) Any services other than the emergency or urgently needed 
services that the HMO or CMP chooses to provide as permitted by this 
part, from sources outside the HMO or CMP. A cost HMO or CMP must 
disclose that the enrollee may receive services through any Medicare 
providers and suppliers.
    (6) Premium information, including the amount (or if the amount 
cannot be included, the telephone number of the source from which this 
information may be obtained) and the procedures for paying premiums and 
other charges for which enrollees may be liable.
    (7) Grievance and appeal procedures.
    (8) Disenrollment rights.
    (9) The obligation of an enrollee who is leaving the HMO's or CMP's 
geographic area for more than 90 days to notify the HMO or CMP of the 
move or extended absence and the HMO's or CMP's policies concerning 
retention of enrollees who leave the geographic area for more than 90 
days, as described in Sec. 417.460(a)(2).
    (10) The expiration date of the Medicare contract with CMS and 
notice that both CMS and the HMO or CMP are authorized by law to 
terminate or refuse to renew the contract, and that termination or 
nonrenewal of the contract may result in termination of the individual's 
enrollment in the HMO or CMP.
    (11) Advance directives as specified in paragraph (d) of this 
section.
    (12) Any other matters that CMS may prescribe.
    (b) Availability of rules. The HMO or CMP must furnish a copy of the 
rules to each Medicare enrollee at the time of enrollment and at least 
annually thereafter.
    (c) Changes in rules. If an HMO or CMP changes its rules, it must 
submit the changes to CMS in accordance with Sec. 417.428(a)(3), and 
notify its Medicare enrollees of the changes at least 30 days before the 
effective date of the changes.
    (d) Advance directives. (1) An HMO or CMP must maintain written 
policies and procedures concerning advance directives, as defined in 
Sec. 489.100 of this chapter, with respect to all adult individuals 
receiving medical care by or through the HMO or CMP and are required to:
    (i) Provide written information to those individuals concerning--
    (A) Their rights under the law of the State in which the 
organization furnishes services (whether statutory or recognized by the 
courts of the State) to make decisions concerning such medical care, 
including the right to accept or refuse medical or surgical treatment 
and the right to formulate, at the individual's option, advance 
directives. Providers are permitted to contract with other entities to 
furnish this information but are still legally responsible for ensuring 
that the requirements of this section are met. Such information must 
reflect changes in State law as soon as possible, but no later than 90 
days after the effective date of the State law; and
    (B) The HMO's or CMP's written policies respecting the 
implementation of those rights, including a clear and precise statement 
of limitation if the HMO or CMP cannot implement an advance directive as 
a matter of conscience. At a minimum, this statement should:
    (1) Clarify any differences between institution-wide conscience 
objections and those that may be raised by individual physicians;
    (2) Identify the state legal authority permitting such objection; 
and
    (3) Describe the range of medical conditions or procedures affected 
by the conscience objection.
    (ii) Provide the information specified in paragraphs (d)(1)(i) of 
this section to

[[Page 722]]

each enrollee at the time of initial enrollment. If an enrollee is 
incapacitated at the time of initial enrollment and is unable to receive 
information (due to the incapacitating condition or a mental disorder) 
or articulate whether or not he or she has executed an advance 
directive, the HMO or CMP may give advance directive information to the 
enrollee's family or surrogate in the same manner that it issues other 
materials about policies and procedures to the family of the 
incapacitated enrollee or to a surrogate or other concerned persons in 
accordance with State law. The HMO or CMP is not relieved of its 
obligation to provide this information to the enrollee once he or she is 
no longer incapacitated or unable to receive such information. Follow-up 
procedures must be in place to ensure that the information is given to 
the individual directly at the appropriate time.
    (iii) Document in the individual's medical record whether or not the 
individual has executed an advance directive;
    (iv) Not condition the provision of care or otherwise discriminate 
against an individual based on whether or not the individual has 
executed an advance directive;
    (v) Ensure compliance with requirements of State law (whether 
statutory or recognized by the courts of the State) regarding advance 
directives;
    (vi) Provide for education of staff concerning its policies and 
procedures on advance directives; and
    (vii) Provide for community education regarding advance directives 
that may include material required in paragraph (d)(1)(i)(A) of this 
section, either directly or in concert with other providers or entities. 
Separate community education materials may be developed and used, at the 
discretion of the HMO or CMP. The same written materials are not 
required for all settings, but the material should define what 
constitutes an advance directive, emphasizing that an advance directive 
is designed to enhance an incapacitated individual's control over 
medical treatment, and describe applicable State law concerning advance 
directives. An HMO or CMP must be able to document its community 
education efforts.
    (2) The HMO or CMP--(i) Is not required to provide care that 
conflicts with an advance directive.
    (ii) Is not required to implement an advance directive if, as a 
matter of conscience, the HMO or CMP cannot implement an advance 
directive and State law allows any health care provider or any agent of 
such provider to conscientiously object.
    (3) The HMO or CMP must inform individuals that complaints 
concerning non-compliance with the advance directive requirements may be 
filed with the State survey and certification agency.

[58 FR 38072, July 15, 1993, as amended at 59 FR 49843, Sept. 30, 1994; 
60 FR 33292, June 27, 1995]



Sec. 417.440  Entitlement to health care services from an HMO or CMP.

    (a) Basic rules. (1) Subject to the conditions and limitations set 
forth in this subpart, a Medicare enrollee of an HMO or CMP is entitled 
to receive health care services and supplies directly from, or through 
arrangements made by, the HMO or CMP as specified in this section and 
Secs. 417.442-417.446.
    (2) A Medicare enrollee is also entitled to receive timely and 
reasonable payment directly (or have payment made on his or her behalf) 
for services he or she obtained from a provider or supplier outside the 
HMO or CMP if those services are--
    (i) Emergency services or urgently needed services as defined 
Sec. 417.401;
    (ii) Services denied by the HMO or CMP and found (upon appeal under 
subpart Q of this part) to be services the enrollee was entitled to have 
furnished by the HMO or CMP.
    (b) Scope of services. (1) Part A and Part B services. Except as 
specified in paragraphs (c), (d), and (e) of this section, a Medicare 
enrollee is entitled to receive from an HMO or CMP all the Medicare-
covered services that are available to individuals residing in the HMO's 
or CMP's geographic area, as follows:
    (i) Medicare Part A and Part B services if the enrollee is entitled 
to benefits under both programs.
    (ii) Medicare Part B services if the enrollee is entitled only under 
that program.

[[Page 723]]

    (2) Supplemental services elected by enrollee. A Medicare enrollee 
of an HMO or CMP may elect to pay for optional services that are offered 
by the HMO or CMP in addition to the covered Part A and Part B services, 
and, for risk HMOs or CMPs, in addition to the additional benefits 
required under Sec. 417.442. The HMO or CMP may not set health status 
standards for those enrollees whom it will accept for these optional 
supplemental services.
    (3) Supplemental services imposed by a risk HMO or CMP. (i) Subject 
to CMS's approval, a risk HMO or CMP may require Medicare enrollees to 
accept and pay for services in addition to those covered by Medicare. 
(ii) If the HMO or CMP elects this option, it must impose the 
requirement on all Medicare enrollees, without regard to health status. 
(iii) CMS approves supplemental benefits of this type if CMS determines 
that imposition of the requirements will not discourage other Medicare 
beneficiaries from enrolling in the risk HMO or CMP.
    (4) Additional benefits from risk HMOs or CMPs required by statute. 
Subject to the conditions stated in Sec. 417.442, a new Medicare 
enrollee or a current nonrisk Medicare enrollee who converts to risk 
reimbursement under Sec. 417.444 is eligible to receive, in addition to 
the covered Part A and Part B benefits for which he or she is eligible, 
benefits consisting of one or both of the following:
    (i) A reduction in the HMO's or CMP's premium rate or in other 
charges for services furnished to Medicare enrollees.
    (ii) Provision of health benefits or services beyond the required 
Part A and Part B coverage.
    (5) Special supplemental benefits. Under conditions described in 
Sec. 417.444(c), current nonrisk Medicare enrollees who are not 
converted to the risk portion of the contract, may enroll in a special 
supplemental plan, if offered by the HMO or CMP, for some or all of the 
additional benefits described in paragraph (b)(4) of this section.
    (c) Limitation on hospice care. (1) Extent of limitation. (i) Basic 
rule. Except as provided in paragraph (c)(1)(ii) of this section, a 
Medicare enrollee who elects to receive hospice care under Sec. 418.24 
of this chapter waives the right to receive from the HMO or CMP any 
Medicare services (including services equivalent to hospice care) that 
are related to the terminal condition for which the enrollee elected 
hospice care, or to a related condition.
    (ii) Exception. An enrollee who elects hospice care retains the 
right to services furnished by his or her attending physician if that 
physician--
    (A) Is an employee or contractor of the HMO or CMP; and
    (B) Is not an employee of the designated hospice and does not 
receive compensation from the hospice for those services.
    (2) Effective date of limitation. The limitation in paragraph (c)(1) 
of this section begins on the effective date of the beneficiary's 
election of hospice care and remains in effect until the earlier of the 
following:
    (i) The effective date of the enrollee's revocation of the election 
of hospice care as described in Sec. 418.28 of this chapter.
    (ii) The date the enrollee exhausts his or her hospice benefits.
    (3) Payment to HMO or CMP. For the period that the Medicare 
enrollee's election of hospice care is in effect, CMS pays a cost HMO or 
CMP only as described in Sec. 417.585.
    (d) Limitation on provision of inpatient hospital services. If a 
beneficiary's effective date of coverage, as specified in Sec. 417.450, 
in a risk HMO or CMP occurs during an inpatient stay in a hospital paid 
for under part 412 of this chapter, the HMO or CMP--
    (1) Is not responsible for the provision of any of the inpatient 
hospital services under Part A during the stay and is not required to 
pay for those services;
    (2) Must assume responsibility for payment for or provision of 
inpatient hospital services under Part A on the day after the day of 
discharge from the inpatient stay; and
    (3) Is responsible for the full scope of services under paragraph 
(b) of this section, other than inpatient hospital services under Part 
A, beginning on the effective date of enrollment.
    (e) Extension of provision of inpatient hospital services. If an 
enrollee's effective date of disenrollment, as defined

[[Page 724]]

by Sec. 417.460, occurs during an inpatient stay in a hospital paid for 
under part 412 of this chapter and the stay is provided or arranged for 
by the HMO or CMP, or the HMO or CMP is financially responsible for the 
hospitalization under paragraph (a)(2) of this section, the HMO or CMP--
    (1) Is financially responsible for payment of the inpatient services 
under Part A through the date the beneficiary is discharged from the 
inpatient stay; and
    (2) Is not responsible for the provision of services, furnished on 
or after the effective date of disenrollment, other than inpatient 
hospital services under Part A.
    (f) Notice of noncoverage of inpatient hospital care. (1) If an 
enrollee is an inpatient of a hospital, entitlement to inpatient 
hospital care continues until he or she receives notice of noncoverage 
of that care.
    (2) Before giving notice of noncoverage, the HMO or CMP must obtain 
the concurrence of its affiliated physician responsible for the hospital 
care of the enrollee, or other physician as authorized by the HMO or 
CMP.
    (3) The HMO or CMP must give the enrollee written notice that 
includes the following:
    (i) The reason why inpatient hospital care is no longer needed.
    (ii) The effective date of the enrollee's liability for continued 
inpatient care.
    (iii) The enrollee's appeal rights.
    (4) If the HMO or CMP delegates to the hospital the determination of 
noncoverage of inpatient care, the hospital obtains the concurrence of 
the HMO- or CMP-affiliated physician responsible for the hospital care 
of the enrollee, or other physician as authorized by the HMO or CMP, and 
sends notice, following the procedures set forth in Sec. 412.42(c)(3) of 
this chapter.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 52 
FR 8901, Mar. 20, 1987; 58 FR 38079, July 15, 1993; 59 FR 59941, Nov. 
21, 1994; 60 FR 45678, Sept. 1, 1995]



Sec. 417.442  Risk HMO's and CMP's: Conditions for provision of additional benefits.

    (a) General rule. Except as provided in paragraph (b) of this 
section, a risk HMO or CMP must, during any contract period, provide to 
its Medicare enrollees the additional benefits described in 
Sec. 417.440(b)(4) if its ACRs (calculated in accordance with 
Sec. 417.594) are less than the average per capita rates that CMS pays 
for the Medicare enrollees during the contract period.
    (b) Exceptions. (1) Reduced payment election. An HMO or CMP is not 
obligated to furnish additional services under paragraph (a) of this 
section if it has requested a reduction in its monthly payment from CMS 
under Sec. 417.592(e), and it--
    (i) Elects to receive reduced payment so that there is no difference 
between the average of its per capita rates of payment and its ACR; or
    (ii) Elects to receive partially reduced payment and furnish 
Medicare enrollees with additional benefits described in Sec. 417.440 
(b)(4) so that the combined value of benefits and reduced payment is 
equivalent to the difference between the average of its per capita rates 
of payment and its ACR.
    (2) Benefit stabilization fund. An HMO or CMP may elect to have a 
part of the value of the additional benefits it must provide under 
paragraph (a) of this section withheld in a benefit stabilization fund 
as described in Sec. 417.596.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985; 58 FR 38082, July 
15, 1993; 60 FR 45678, Sept. 1, 1995]



Sec. 417.444  Special rules for certain enrollees of risk HMOs and CMPs.

    (a) Applicability. This section applies to any Medicare enrollee of 
a risk HMO or CMP who meets the following conditions:
    (1) On February 1, 1985, was enrolled--
    (i) In an HMO or CMP that had in effect a cost contract entered into 
under section 1876 of the Act in accordance with regulations in effect 
before February 1, 1985; or
    (ii) In an HCPP that was being reimbursed on a reasonable cost basis 
under section 1833(a)(1)(A) of the Act.
    (2) Has continued enrollment in the same entity without interruption 
or disenrolled after February 1, 1985, and later reenrolled in the same 
entity.

[[Page 725]]

    (b) Retention of nonrisk status--(1) A ``nonrisk'' enrollee is a 
Medicare beneficiary who meets the conditions of paragraph (a) of this 
section and is enrolled in an entity that enters into a risk contract as 
an HMO or CMP. A ``nonrisk'' enrollee may retain nonrisk status 
indefinitely unless CMS determines under paragraph (c)(1) of this 
section, that the enrollee's status must be changed, or the enrollee 
requests the change, as provided in paragraph (c)(2) of this section.
    (2) A nonrisk enrollee of a risk HMO or CMP is not entitled to 
additional benefits under Sec. 417.442.
    (c) Conversion to risk status--(1) Conversion based on CMS 
determination. If CMS determines that, for administrative reasons or 
because there are fewer than 75 current nonrisk Medicare enrollees 
remaining in the HMO or CMP, all of its nonrisk Medicare enrollees must 
be covered under the risk provisions of the contract, the conversion 
process is as follows:
    (i) CMS notifies each affected enrollee of the decision at least 90 
days prior to the effective date.
    (ii) The nonrisk Medicare enrollees complete and sign forms stating 
that they understand and accept the new rules and benefits that will be 
applicable to them.
    (iii) The HMO or CMP notifies each affected enrollee, in writing, at 
least 30 days in advance, of the date upon which his or her coverage 
under the risk portion of the contract takes effect.
    (2) Conversion based on enrollee's request. A nonrisk Medicare 
enrollee requests, using a form identical or similar to the form 
described in paragraph (c)(1) of this section, that he or she be covered 
under the risk portion of the contract.
    (d) Notification. An HMO or CMP converting from a cost contract to a 
risk contract must, within 60 days of signing the risk contract, inform 
nonrisk enrollees of their right to remain nonrisk Medicare enrollees or 
to convert to risk enrollment at any time in accordance with paragraph 
(c)(2) of this section.

[58 FR 38073, July 15, 1993]



Sec. 417.446  [Reserved]



Sec. 417.448  Restriction on payments for services received by Medicare enrollees of risk HMOs or CMPs.

    (a) Basic rule. Except for emergency and urgently needed services as 
defined in Sec. 417.401, risk HMOs or CMPs are not required to make 
payments to or on behalf of certain Medicare enrollees, for any services 
received by the enrollees that are not provided--
    (1) Directly by the HMO or CMP; or
    (2) Through arrangements made by the HMO or CMP.
    (b) Application. The restriction on payments for services imposed by 
paragraph (a) of this section applies to services received by--
    (1) New Medicare enrollees;
    (2) Nonrisk Medicare enrollees who convert to risk reimbursement; 
and
    (3) Nonrisk Medicare enrollees who elect special supplemental 
benefit plans.
    (c) End of restriction. The restriction of payments imposed by 
paragraph (a) of this section ends when a Medicare enrollee leaves the 
HMO's or CMP's geographic area for an extended period as defined in 
Sec. 471.460(a)(2) and the HMO or CMP and the enrollee make arrangements 
for enrollment to continue as provided in Sec. 417.460(a)(2)(iv).
    (d) Timing. The effective date for the end of the restriction on 
payments, as discussed in paragraph (c) of this section is the first day 
of the first month following the month in which the enrollee notifies 
the HMO or CMP as required in Sec. 417.436(a)(9), that he or she has 
left the HMO's or CMP's geographic area for an extended period.

[51 FR 28573, Aug. 8, 1986, as amended at 56 FR 46571, Sept. 13, 1991; 
58 FR 38079, July 15, 1993]



Sec. 417.450  Effective date of coverage.

    (a) Basic rules. Except as specified in paragraph (b) of this 
section, and notwithstanding the provisions of Sec. 417.440(d).
    (1) CMS's liability for payments to an HMO or CMP on behalf of a 
Medicare beneficiary begins on the first day of the month in which he or 
she is--
    (i) Entitled to Medicare benefits; and
    (ii) Enrolled in an HMO or CMP; and

[[Page 726]]

    (2) The effective month of coverage may not be earlier than the 
first month after, nor later than the third month after the month in 
which CMS receives the information necessary to include the beneficiary 
as a Medicare enrollee of the HMO or CMP in CMS records.
    (b) Exceptions. (1) CMS may approve a later month if it is requested 
by the HMO or CMP and the beneficiary.
    (2) If an individual becomes an HMO or CMP enrollee before becoming 
entitled to Medicare Part B benefits, the effective month of coverage is 
the first month for which he or she becomes entitled to Medicare Part B 
benefits.
    (c) Notice of effective date of coverage. For each beneficiary added 
to CMS's records as an enrollee of an HMO or CMP, CMS gives the HMO or 
CMP prompt written notice of the month with which CMS's liability 
begins.

[50 FR 1346, Jan. 10, 1985, as amended at 52 FR 8901, Mar. 20, 1987; 58 
FR 38079, July 15, 1993; 60 FR 45678, Sept. 1, 1995]



Sec. 417.452  Liability of Medicare enrollees.

    (a) Deductibles and coinsurance. (1) A Medicare enrollee of an HMO 
or CMP is responsible for applicable Medicare deductible and coinsurance 
amounts, unless the HMO's or CMP's charges for these amounts are reduced 
under the additional benefits provision of Sec. 417.442.
    (2) The deductible and coinsurance amounts may be paid by or on 
behalf of the enrollee in the form of a premium, membership fee, charge 
per unit, or other similar charge.
    (3) The sum of the amounts the HMO or CMP charges its Medicare 
enrollees for Medicare deductibles and coinsurance may not exceed, on 
the average, the actuarial value of the deductible and coinsurance the 
Medicare enrollees otherwise would have been liable for had they not 
enrolled in the HMO or CMP or in another HMO or CMP.
    (b) Services not covered under Medicare. Unless the services are 
provided as additional benefits under Sec. 417.442, a Medicare enrollee 
of an HMO or CMP is liable for payment for--
    (1) All services that are not covered under Medicare Part A or Part 
B; or
    (2) If entitled only to Medicare Part B benefits, all services that 
are not covered under Medicare Part B.
    (c) Services for which Medicare is not primary payer. A Medicare 
enrollee of an HMO or CMP is liable for payments made to the enrollee 
for all covered services for which Medicare is not the primary payer as 
provided in Sec. 417.528.
    (d) Optional supplemental benefits plan. (1) The HMO or CMP may 
offer its Medicare enrollees a supplemental benefit plan to cover 
deductible and coinsurance amounts, or services not covered under 
Medicare, or both.
    (2) If a supplemental benefit plan premium includes charges for both 
noncovered services and the deductible and coinsurance amounts 
applicable to covered services, the portion of the premium that is for 
deductibles and coinsurance must be computed separately and must be 
disclosed to the beneficiary during the enrollment process and before he 
or she elects coverage options.
    (3) The sum of the amounts an HMO or CMP charges its Medicare 
enrollees for services that are not covered under Part A or Part B may 
not exceed the ACR for these services.
    (e) Coverage of Part A services for Part B-only Medicare enrollees. 
If an HMO or CMP furnishes coverage of Medicare Part A services to a 
Medicare enrollee entitled to Part B only, the HMO's or CMP's premium 
(or other payment method) for these services may not exceed the ACR for 
these services. In addition, if a risk HMO or CMP furnishes these 
services and supplemental services, which are the same as the additional 
benefits furnished Medicare enrollees of the HMO or CMP who are entitled 
to benefits under both Parts A and B, the HMO's or CMP's combined 
premium for both these groups of services that the Part B enrollee must 
pay may not exceed 95 percent of the weighted average AAPCC for Part A 
services (or the Medicare payment for Part A services, if it is less) 
for the Medicare enrollee of the HMO or CMP.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38079, July 15, 1993; 60 
FR 45678, Sept. 1, 1995]

[[Page 727]]



Sec. 417.454  Charges to Medicare enrollees.

    (a) Limits on charges. The HMO or CMP must agree to charge its 
Medicare enrollees only for the--
    (1) Deductible and coinsurance amounts applicable to furnished 
covered services;
    (2) Charges for noncovered services or services for which the 
enrollee is liable as described in Sec. 417.452; and
    (3) Services for which Medicare is not the primary payor as provided 
in Sec. 417.528.
    (b) Limit on charges for inpatient hospital care. If a Medicare 
enrollee who is an inpatient of a hospital requests immediate QIO review 
(as provided in Sec. 417.605) of any determination by the hospital 
furnishing services or the HMO or CMP that the inpatient hospital 
services will no longer be covered, the HMO or CMP may not charge the 
enrollee for any inpatient care costs incured before noon of the first 
working day after the QIO issues its review decision.
    (c) Reporting requirements. A risk HMO or CMP must report, within 90 
days after the end of the contract period, all premiums, enrollment 
fees, and other charges collected from its Medicare enrollees during 
that period.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 59 
FR 59941, Nov. 21, 1994; 60 FR 45678, Sept. 1, 1995]



Sec. 417.456  Refunds to Medicare enrollees.

    (a) Definitions. As used in this section--
    Amounts incorrectly collected means amounts collected that are in 
excess of those specified in Sec. 417.452. It includes amounts collected 
when the enrollee was believed not entitled to Medicare benefits if the 
enrollee is later determined to have been entitled to Medicare benefits 
and CMS is liable for payments as specified in Sec. 417.450.
    Other amounts due means amounts due a Medicare enrollee for services 
obtained outside the HMO or CMP if they were--
    (1) Emergency services;
    (2) Urgently needed services for which the HMO or CMP has assumed 
financial responsibility; or
    (3) On appeal under subpart Q of this part, found to be services the 
enrollee was entitled to have furnished by the HMO or CMP.
    (b) Basic commitment. An HMO or CMP must agree to refund all amounts 
incorrectly collected from its Medicare enrollees, or from others on 
behalf of the enrollees, and any other amounts due the enrollees or 
others on their behalf.
    (c) Refund by lump sum payment. An HMO or CMP must make refunds to 
its current and former Medicare enrollees, or to others who have made 
payments on behalf of enrollees, by lump sum payment for the following:
    (1) Incorrectly collected amounts that were not collected as 
premiums.
    (2) Other amounts due.
    (3) All amounts due, if the HMO or CMP is going out of business.
    (d) Refund by premium adjustment or lump sum payment or both. An HMO 
or CMP may make refund by adjustment of future premiums, by lump sum 
payment, or by a combination of both methods, for amounts that were 
incorrectly collected in the form of premiums or through a combination 
of premium payments and other charges.
    (e) Refund when enrollee has died or cannot be located. If an 
enrollee has died or cannot be located after reasonable effort by the 
HMO or CMP, the HMO or CMP must make the refund in accordance with State 
law.
    (f) Reduction by CMS. If the HMO or CMP does not make refund in 
accordance with paragraphs (b) through (d) of this section by the end of 
the contract period following the contract period during which an amount 
was determined to be due an enrollee, CMS reduces its payment to the HMO 
or CMP by the amounts incorrectly collected or otherwise due, and 
arranges for those amounts to be paid to the Medicare enrollee.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38079, July 15, 1993; 60 
FR 45678, Sept. 1, 1995]



Sec. 417.458  Recoupment of uncollected deductible and coinsurance amounts.

    An HMO or CMP agrees not to recoup deductible and coinsurance 
amounts

[[Page 728]]

for which Medicare enrollees were liable in a previous contract period 
except in the following circumstances:
    (a) The HMO or CMP failed to collect the deductible and coinsurance 
amounts during the contract period in which they were due because of--
    (1) Underestimation of the actuarial value of the deductible and 
coinsurance amounts; or
    (2) A billing error.
    (b) The HMO or CMP has identified the amounts and obtained advance 
CMS approval of the recoupment and the method and timing of recoupment.
    (c) The HMO or CMP collects these amounts no later than the end of 
the contract period following the contract period during which they were 
found to be due.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45678, Sept. 1, 1995]



Sec. 417.460  Disenrollment of beneficiaries by an HMO or CMP.

    (a) General rule. Except as provided in paragraphs (b) through (i) 
of this section, an HMO or CMP may not--
    (1) Disenroll a Medicare beneficiary; or
    (2) Orally or in writing, or by any action or inaction, request or 
encourage a Medicare enrollee to disenroll.
    (b) Bases for disenrollment: Overview. (1) Optional disenrollment. 
Generally, an HMO or CMP may disenroll a Medicare enrollee if he or she-
-
    (i) Fails to pay the required premiums or other charges;
    (ii) Commits fraud or permits abuse of his or her enrollment card; 
or
    (iii) Behaves in a manner that seriously impairs the HMO's or CMP's 
ability to furnish health care services to the particular enrollee or to 
other enrollees.
    (2) Required disenrollment. Generally, an HMO or CMP must disenroll 
a Medicare enrollee if he or she--
    (i) Moves out of the HMO's or CMP's geographic area;
    (ii) Fails to convert to the risk provisions of the HMO's or CMP's 
Medicare contract;
    (iii) Loses entitlement to Medicare Part B benefits; or
    (iv) Dies.
    (3) Related provisions. Specific requirements, limitations, and 
exceptions are set forth in paragraphs (c) through (i) of this section.
    (c) Failure to pay premiums or other charges. (1) Basic rule. Except 
as specified in paragraph (c)(2) of this section, an HMO or CMP may 
disenroll a Medicare enrollee who fails to pay premiums or other charges 
imposed by the HMO or CMP for deductible and coinsurance amounts for 
which the enrollee is liable, if the HMO or CMP--
    (i) Can demonstrate to CMS that it made reasonable efforts to 
collect the unpaid amount;
    (ii) Gives the enrollee written notice of disenrollment, including 
an explanation of the enrollee's right to a hearing under the HMO's or 
CMP's grievance procedures; and
    (iii) Sends the notice of disenrollment to the enrollee before it 
notifies CMS.
    (2) Exception. If the enrollee fails to pay the premium for optional 
supplemental benefits (that is, a package of benefits that an enrollee 
is not required to accept), but pays the basic premium and other 
charges, the HMO or CMP may discontinue the optional benefits but may 
not disenroll the beneficiary.
    (d) Enrollee commits fraud or permits abuse of the enrollment card. 
(1) Basis for disenrollment. An HMO or CMP may disenroll a Medicare 
beneficiary if the beneficiary--
    (i) Knowingly provides, on the application form, fraudulent 
information that materially affects the beneficiary's eligibility to 
enroll in the HMO or CMP; or
    (ii) Intentionally permits others to use his or her enrollment card 
to obtain services from the HMO or CMP.
    (2) Notice requirement. If disenrollment is for either of the 
reasons specified in paragraph (d)(1) of this section, the HMO or CMP 
must give the beneficiary a written notice of termination of enrollment.
    (i) The notice must be mailed to the enrollee before submission of 
the disenrollment notice to CMS.
    (ii) The notice must include an explanation of the enrollee's right 
to have the disenrollment heard under the

[[Page 729]]

grievance procedures established in accordance with Sec. 417.436.
    (3) Report to the Inspector General. The HMO or CMP must report to 
the Office of the Inspector General of the Department any disenrollment 
based on fraud or abuse by the enrollee.
    (e) Disenrollment for cause. (1) Basis for disenrollment. An HMO or 
CMP may disenroll a Medicare enrollee for cause if the enrollee's 
behavior is disruptive, unruly, abusive, or uncooperative to the extent 
that his or her continuing enrollment in the HMO or CMP seriously 
impairs the HMO's or CMP's ability to furnish services to either the 
particular enrollee or other enrollees.
    (2) Effort to resolve the problem. The HMO or CMP must make a 
serious effort to resolve the problem presented by the enrollee, 
including the use (or attempted use) of internal grievance procedures.
    (3) Consideration of extenuating circumstances. The HMO or CMP must 
ascertain that the enrollee's behavior is not related to the use of 
medical services or to mental illness.
    (4) Documentation. The HMO or CMP must document the problems, 
efforts, and medical conditions as described in paragraphs (e)(1) 
through (e)(3) of this section.
    (5) CMS review of an HMO's or CMP's proposed disenrollment for 
cause. (i) CMS decides on the basis of review of the documentation 
submitted by the HMO or CMP, whether disenrollment requirements have 
been met.
    (ii) CMS makes this decision within 20 working days after receipt of 
the documentation material, and notifies the HMO or CMP within 5 working 
days after making its decision.
    (6) Effective date of disenrollment. If CMS permits an HMO or CMP to 
disenroll an enrollee for cause, the disenrollment takes effect on the 
first day of the calendar month after the month in which the HMO or CMP 
gives the enrollee a written notice of disenrollment that meets the 
requirements set forth in paragraphs (d)(2)(i) and (d)(2)(ii) of this 
section.
    (f) Enrollee moves out of the HMO's or CMP's geographic area. (1) 
Basic rules. (i) Disenrollment. Except as provided in paragraph (f)(2) 
of this section, an HMO or CMP must disenroll a Medicare enrollee who 
moves out of its geographic area if the HMO or CMP establishes, on the 
basis of a written statement from the enrollee, or other evidence 
acceptable to CMS, that the enrollee has permanently moved out of its 
geographic area.
    (ii) Notice requirement. The HMO or CMP must comply with the notice 
requirements set forth in paragraph (d)(2) of this section.
    (iii) Effect on geographic area. Failure to disenroll an enrollee 
who has moved out of the HMO's or CMP's geographic area does not expand 
that area to encompass the location of the enrollee's new residence.
    (2) Exception. An HMO or CMP may retain a Medicare enrollee who is 
absent from its geographic area for an extended period, but who remains 
within the United States as defined in Sec. 400.200 of this chapter if 
the enrollee agrees. For purposes of this exception, the following 
provisions apply:
    (i) An absence for an extended period means an uninterrupted absence 
from the HMO's or CMP's geographic area for more than 90 days but less 
than 1 year.
    (ii) The HMO or CMP and the enrollee may mutually agree upon 
restrictions for obtaining services while the enrollee is absent for an 
extended period from the HMO's or CMP's geographic area. However, 
restrictions may not be imposed on the scope of services described in 
Sec. 417.440.
    (iii) HMOs and CMPs that choose to exercise this exception must make 
the option available to all Medicare enrollees who are absent for an 
extended period from their geographic areas. However, HMOs and CMPs may 
limit this option to enrollees who go to a geographic area served by an 
affiliated HMO or CMP.
    (iv) As used in this paragraph, ``affiliated HMO or CMP'' means an 
HMO or CMP that--
    (A) Is under common ownership or control of the HMO or CMP that 
seeks to retain the absent enrollees; or
    (B) Has in effect an agreement to furnish services to enrollees who 
are on an extended absence from the geographic area of the HMO or CMP 
that seeks to retain them.

[[Page 730]]

    (v) When the enrollee returns to the HMO's or CMP's geographic area 
(even temporarily), the restrictions of Sec. 417.448(a) (which limit 
payment for services not provided or arranged for by the HMO or CMP) 
apply again immediately.
    (vi) If the enrollee fails to return to the HMO's or CMP's 
geographic area within 1 year from the date he or she left that area, 
the HMO or CMP must disenroll the beneficiary on the first day of the 
month following the anniversary of the date the enrollee left that area 
in accordance with paragraph (f)(1) of this section.
    (g) Failure to convert to risk provisions of Medicare contract. (1) 
Basis for disenrollment. A risk HMO or CMP must disenroll a nonrisk 
Medicare enrollee who refuses to convert to the risk provisions of the 
Medicare contract after CMS determines that all of the HMO's or CMP's 
nonrisk Medicare enrollees must convert.
    (2) Advance notice requirement. At least 30 days before it gives CMS 
notice of disenrollment, the HMO or CMP must give the enrollee written 
notice of the fact that failure to convert will result in disenrollment.
    (h) Loss of entitlement to Medicare benefits. (1) Loss of 
entitlement to Part A benefits. If an enrollee loses entitlement to 
benefits under Part A of Medicare but remains entitled to benefits under 
Part B, the enrollee automatically continues as a Medicare enrollee of 
the HMO or CMP and is entitled to receive and have payment made for Part 
B services, beginning with the month immediately following the last 
month of his or her entitlement to Part A benefits.
    (2) Loss of entitlement to Part B benefits. If a Medicare enrollee 
loses entitlement to Part B benefits, the HMO or CMP must disenroll him 
or her as a Medicare enrollee effective with the month following the 
last month of entitlement to Part B benefits. However, the HMO or CMP 
may continue to enroll the individual under its regular plan if the 
individual so chooses.
    (i) Death of the enrollee. Disenrollment is effective with the month 
following the month of death.

[60 FR 45678, Sept. 1, 1995]



Sec. 417.461  Disenrollment by the enrollee.

    (a) Request for disenrollment. (1) A Medicare enrollee who wishes to 
disenroll may at any time give the HMO or CMP a signed, dated request in 
the form and manner prescribed by CMS.
    (2) The enrollee may request a certain disenrollment date but it may 
be no earlier than the first day of the month following the month in 
which the HMO or CMP receives the request.
    (b) Responsibilities of the HMO or CMP. The HMO or CMP must--
    (1) Submit a disenrollment notice to CMS promptly;
    (2) Provide the enrollee with a copy of the request for 
disenrollment; and
    (3) In the case of a risk HMO or CMP, also provide the enrollee with 
a statement explaining that he or she--
    (i) Remains enrolled until the effective date of disenrollment; and
    (ii) Until that date, is subject to the restrictions of 
Sec. 417.448(a) under which neither the HMO or CMP nor CMS pays for 
services not provided or arranged for by the HMO or CMP.
    (c) Effect of failure to submit disenrollment notice to CMS 
promptly. If the HMO or CMP fails to submit timely the correct and 
complete notice required in paragraph (b)(1) of this section, the HMO or 
CMP must reimburse CMS for any capitation payments received after the 
month in which payments would have ceased if the requirement had been 
met timely.

[60 FR 45679, Sept. 1, 1995]



Sec. 417.464  End of CMS's liability for payment: Disenrollment of beneficiaries and termination or default of contract.

    (a) Effect of disenrollment: General rule. (1) CMS's liability for 
monthly capitation payments to the HMO or CMP generally ends as of the 
first day of the month following the month in which disenrollment is 
effective, as shown on CMS's records.
    (2) Disenrollment is effective no earlier than the month immediately 
after, and no later than the third month after, the month in which CMS 
receives the disenrollment notice in acceptable form.

[[Page 731]]

    (b) Effect of disenrollment: Special rules. (1) Fraud or abuse by 
the enrollee. If disenrollment is on the basis of fraud committed or 
abuse permitted by the enrollee, CMS's liability ends as of the first 
day of the month in which disenrollment is effective.
    (2) Loss of entitlement to Part B benefits. If disenrollment is on 
the basis of loss of entitlement to Part B benefits, CMS's liability 
ends as of the first day of the month following the last month of Part B 
entitlement.
    (3) Death of enrollee. If the enrollee dies, CMS's liability ends as 
of the first day of the month following the month of death.
    (4) Disenrollment at enrollee's request. If disenrollment is in 
response to the enrollee's request, CMS's liability ends as of the first 
day of the month following the month of termination requested by the 
enrollee.
    (c) Effect of termination or default of contract. (1) Termination of 
contract. If the contract between CMS and the HMO or CMP is terminated 
by mutual consent or by unilateral action of either party, CMS's 
liability for payments ends as of the first day of the month after the 
last month for which the contract is in effect.
    (2) Default of contract. If the HMO or CMP defaults on the contract 
before the end of the contract year because of bankruptcy or other 
reasons, CMS--
    (i) Determines the month in which its liability for payments ends; 
and
    (ii) Notifies the HMO or CMP and all affected Medicare enrollees as 
soon as practicable.

[60 FR 45680, Sept. 1, 1995]



                Subpart L--Medicare Contract Requirements

    Source: 50 FR 1346, Jan. 10, 1985, unless otherwise noted.



Sec. 417.470  Basis and scope.

    (a) Basis. This subpart implements those portions of section 
1857(e)(2) of the Act pertaining to cost sharing in enrollment-related 
costs and section 1876(c), (g), (h), and (i) of the Act that pertain to 
the contract between CMS and an HMO or CMP for participation in the 
Medicare program.
    (b) Scope. This subpart sets forth--
    (1) Specific contract requirements; and
    (2) Procedures for renewal, nonrenewal, or termination of a 
contract.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38079, July 15, 1993; 62 
FR 63673, Dec. 2, 1997]



Sec. 417.472  Basic contract requirements.

    (a) Submittal of contract. An HMO or CMP that wishes to contract 
with CMS to furnish services to Medicare beneficiaries must submit a 
signed contract that meets the requirements of this subpart and any 
other requirements established by CMS.
    (b) Agreement to comply with regulations and instructions. The 
contract must provide that the HMO or CMP agrees to comply with all the 
applicable requirements and conditions set forth in this subpart and in 
general instructions issued by CMS.
    (c) Other contract provisions. In addition to the requirements set 
forth in Secs. 417.474 through 417.488, the contract must contain any 
other terms and conditions that CMS requires to implement section 1876 
of the Act.
    (d) Exemption from Federal procurement regulations. The Federal 
Acquisition Regulations and HHS Acquisition Regulations contained in 
title 48 of the Code of Federal Regulations do not apply to Medicare 
contracts under section 1876 of the Act.
    (e) Compliance with civil rights laws. The HMO or CMP must comply 
with title VI of the Civil Rights Act of 1964 (regulations at 45 CFR 
part 80), section 504 of the Rehabilitation Act of 1973 (regulations at 
45 CFR part 84), and the Age Discrimination Act of 1975 (regulations at 
45 CFR part 91).
    (f) Requirements for advance directives. The HMO or CMP must meet 
all the requirements for advance directives at Sec. 417.436(d).
    (g) Authority to waive conflicting contract requirements. Under 
section 1876(i)(5) of the Act, CMS is authorized to administer the terms 
of this subpart without regard to provisions of law or other regulations 
relating to the making, performance, amendment, or modification of 
contracts of the United

[[Page 732]]

States if it determines that those provisions are inconsistent with the 
efficient and effective administration of the Medicare program.
    (h) Collection of fees from risk HMOs and CMPs. (1) The rules set 
forth in Sec. 422.10 of this chapter for M+C plans also apply to 
collection of fees from risk HMOs and CMPs.
    (2) In applying the part 422 rules, references to ``M+C 
organizations'' or ``M+C plans'' must be read as references to ``risk 
HMOs and CMPs''.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 57 
FR 8202, Mar. 6, 1992; 58 FR 38079, July 15, 1993; 60 FR 45680, Sept. 1, 
1995; 63 FR 35067, June 26, 1998]



Sec. 417.474  Effective date and term of contract.

    (a) Effective date. The contract must specify its effective date, 
which may not be earlier than the date it is signed by both CMS and the 
HMO or CMP.
    (b) Term. The contract must specify the duration of its term as 
follows:
    (1) For the initial term, at least 12 months, but no more than 23 
months.
    (2) For any subsequent term, 12 months.

[60 FR 45680, Sept. 1, 1995]



Sec. 417.476  Waived conditions.

    If CMS waives any of the qualifying conditions required under 
subpart J of this part, the contract must specify the following 
information for each waived condition:
    (a) The specific terms of the waiver.
    (b) The expiration date of the waiver.
    (c) Any other information required by CMS.

[60 FR 45680, Sept. 1, 1995]



Sec. 417.478  Requirements of other laws and regulations.

    The contract must provide that the HMO or CMP agrees to comply with-
-
    (a) The requirements for QIO review of services furnished to 
Medicare enrollees as set forth in subchapter D of this chapter;
    (b) Sections 1318(a) and (c) of the PHS Act, which pertain to 
disclosure of certain financial information;
    (c) Section 1301(c)(8) of the PHS Act, which relates to liability 
arrangements to protect enrollees of the HMO or CMP; and
    (d) The reporting requirements in Sec. 417.126(a), which pertain to 
the monitoring of an HMO's or CMP's continued compliance.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 56 
FR 8853, Mar. 1, 1991; 58 FR 38079, 38082, July 15, 1993]



Sec. 417.479  Requirements for physician incentive plans.

    (a) The contract must specify that an HMO or CMP may operate a 
physician incentive plan only if--
    (1) No specific payment is made directly or indirectly under the 
plan to a physician or physician group as an inducement to reduce or 
limit medically necessary services furnished to an individual enrollee; 
and
    (2) The stop-loss protection, enrollee survey, and disclosure 
requirements of this section are met.
    (b) Applicability. The requirements in this section apply to 
physician incentive plans between HMOs and CMP and individual physicians 
or physician groups with which they contract to provide medical services 
to enrollees. The requirements in this section also apply to 
subcontracting arrangements as specified in Sec. 417.479(i). These 
requirements apply only to physician incentive plans that base 
compensation (in whole or in part) on the use or cost of services 
furnished to Medicare beneficiaries or Medicaid recipients.
    (c) Definitions. For purposes of this section:
    Bonus means a payment an HMO or CMP makes to a physician or 
physician group beyond any salary, fee-for-service payments, capitation, 
or returned withhold.
    Capitation means a set dollar payment per patient per unit of time 
(usually per month) that an organization pays a physician or physician 
group to cover a specified set of services and administrative costs 
without regard to the actual number of services provided. The services 
covered may include the physician's own services, referral services, or 
all medical services.
    Payments means any amounts the HMO or CMP pays physicians or 
physician groups for services they furnish

[[Page 733]]

directly, plus amounts paid for administration and amounts paid (in 
whole or in part) based on use and costs of referral services (such as 
withhold amounts, bonuses based on referral levels, and any other 
compensation to the physician or physician group to influence the use of 
referral services). Bonuses and other compensation that are not based on 
referral levels (such as bonuses based solely on quality of care 
furnished, patient satisfaction, and participation on committees) are 
not considered payments for purposes of this section.
    Physician group means a partnership, association, corporation, 
individual practice association, or other group that distributes income 
from the practice among members. An individual practice association is a 
physician group only if it is composed of individual physicians and has 
no subcontracts with physician groups.
    Physician incentive plan means any compensation arrangement between 
an HMO or CMP and a physician or physician group that may directly or 
indirectly have the effect of reducing or limiting services furnished to 
Medicare beneficiaries or Medicaid recipients enrolled in the HMO or 
CMP.
    Referral services means any specialty, inpatient, outpatient, or 
laboratory services that a physician or physician group orders or 
arranges, but does not furnish directly.
    Risk threshold means the maximum risk, if the risk is based on 
referral services, to which a physician or physician group may be 
exposed under a physician incentive plan without being at substantial 
financial risk.
    Withhold means a percentage of payments or set dollar amounts that 
an HMO or CMP deducts from a physician's service fee, capitation, or 
salary payment, and that may or may not be returned to the physician, 
depending on specific predetermined factors.
    (d) Prohibited physician payments. No specific payment of any kind 
may be made directly or indirectly under the incentive plan to a 
physician or physician group as an inducement to reduce or limit covered 
medically necessary services covered under the HMO's or CMP's contract 
furnished to an individual enrollee. Indirect payments include offerings 
of monetary value (such as stock options or waivers of debt) measured in 
the present or future.
    (e) General rule: Determination of substantial financial risk. 
Substantial financial risk occurs when the incentive arrangements place 
the physician or physician group at risk for amounts beyond the risk 
threshold, if the risk is based on the use or costs of referral 
services. Amounts at risk based solely on factors other than a 
physician's or physician group's referral levels do not contribute to 
the determination of substantial financial risk. The risk threshold is 
25 percent.
    (f) Arrangements that cause substantial financial risk. For purposes 
of this paragraph, potential payments means the maximum anticipated 
total payments (based on the most recent year's utilization and 
experience and any current or anticipated factors that may affect 
payment amounts) that could be received if use or costs of referral 
services were low enough. The following physician incentive plans cause 
substantial financial risk if risk is based (in whole or in part) on use 
or costs of referral services and the patient panel size is not greater 
than 25,000 patients:
    (1) Withholds greater than 25 percent of potential payments.
    (2) Withholds less than 25 percent of potential payments if the 
physician or physician group is potentially liable for amounts exceeding 
25 percent of potential payments.
    (3) Bonuses that are greater than 33 percent of potential payments 
minus the bonus.
    (4) Withholds plus bonuses if the withholds plus bonuses equal more 
than 25 percent of potential payments. The threshold bonus percentage 
for a particular withhold percentage may be calculated using the 
formula--
Withhold = 0.75 (Bonus %) + 25%.
    (5) Capitation, arrangements, if--
    (i) The difference between the maximum potential payments and the 
minimum potential payments is more than 25 percent of the maximum 
potential payments; or
    (ii) The maximum and minimum potential payments are not clearly 
explained in the physician's or physician group's contract.

[[Page 734]]

    (6) Any other incentive arrangements that have the potential to hold 
a physician or physician group liable for more than 25 percent of 
potential payments.
    (g) Requirements for physician incentive plans that place physicians 
at substantial financial risk. HMOs and CMPs that operate incentive 
plans that place physicians or physician groups at substantial financial 
risk must do the following:
    (1) Conduct enrollee surveys. These surveys must--
    (i) Include either all current Medicare/Medicaid enrollees in the 
HMO or CMP and those who have disenrolled (other than because of loss of 
eligibility in Medicaid or relocation outside the HMO's or CMP's service 
area) in the past 12 months, or a sample of these same enrollees and 
disenrollees;
    (ii) Be designed, implemented, and analyzed in accordance with 
commonly accepted principles of survey design and statistical analysis;
    (iii) Address enrollees/disenrollees satisfaction with the quality 
of the services provided and their degree of access to the services; and
    (iv) Be conducted no later than 1 year after the effective date of 
the Medicare contract and at least annually thereafter.
    (2) Ensure that all physicians and physician groups at substantial 
financial risk have either aggregate or per-patient stop-loss protection 
in accordance with the following requirements:
    (i) If aggregate stop-loss protection is provided, it must cover 90 
percent of the costs of referral services (beyond allocated amounts) 
that exceed 25 percent of potential payments.
    (ii) If the stop-loss protection provided is based on a per-patient 
limit, the stop-loss limit per patient must be determined based on the 
size of the patient panel and may be a single combined limit or consist 
of separate limits for professional services and institutional services. 
In determining patient panel size, the patients may be pooled in 
accordance with paragraph (h)(1)(v) of this section. Stop-loss 
protection must cover 90 percent of the costs of referral services that 
exceed the per patient limit. The per-patient stop-loss limit is as 
follows:

------------------------------------------------------------------------
                                   Single       Separate      Separate
          Panel size              combined   institutional  professional
                                   limit         limit          limit
------------------------------------------------------------------------
1-1000........................       $6,000       $10,000         $3,000
1,001-5000....................       30,000        40,000         10,000
5,001-8,000...................       40,000        60,000         15,000
8,001-10,000..................       75,000       100,000         20,000
10,001-25,000.................      150,000       200,000         25,000
25,000.............         none          none           none
------------------------------------------------------------------------

    (h) Disclosure requirements for organizations with physician 
incentive plans--(1) Disclosure to CMS. Each HMO or CMP must provide to 
CMS information concerning its physician incentive plans as required or 
requested. The disclosure must contain the following information in 
detail sufficient to enable CMS to determine whether the incentive plan 
complies with the requirements specified in this section:
    (i) Whether services not furnished by the physician or physician 
group are covered by the incentive plan. If only the services furnished 
by the physician or physician group are covered by the incentive plan, 
disclosure of other aspects of the plan need not be made.
    (ii) The type of incentive arrangement; for example, withhold, 
bonus, capitation.
    (iii) If the incentive plan involves a withhold or bonus, the 
percent of the withhold or bonus.
    (iv) Proof that the physician or physician group has adequate stop-
loss protection, including the amount and type of stop-loss protection.
    (v) The panel size and, if patients are pooled, the method used. 
Pooling is permitted only if: it is otherwise consistent with the 
relevant contracts governing the compensation arrangements for the 
physician or physician group; the physician or physician group is at 
risk for referral services with respect to each of the categories

[[Page 735]]

of patients being pooled; the terms of the compensation arrangements 
permit the physician or physician group to spread the risk across the 
categories of patients being pooled; the distribution of payments to 
physicians from the risk pool is not calculated separately by patient 
category; and the terms of the risk borne by the physician or physician 
group are comparable for all categories of patients being pooled. If 
these conditions are met, the physician or physician group may use 
either or both of the following methods to pool patients:
    (A) Pooling any combination of commercial, Medicare, or Medicaid 
patients enrolled in a specific HMO or CMP in the calculation of the 
panel size.
    (B) Pooling together, by a physician group that contracts with more 
than one HMO, CMP, health insuring organization (as defined in 
Sec. 434.2 of this chapter), or prepaid health plan (as defined in 
Sec. 434.2 of this chapter) the patients of each of those entities.
    (vi) In the case of capitated physicians or physician groups, 
capitation payments paid to primary care physicians for the most recent 
year broken down by percent for primary care services, referral services 
to specialists, and hospital and other types of provider (for example, 
nursing home and home health agency) services.
    (vii) In the case of those prepaid plans that are required to 
conduct beneficiary surveys, the survey results.
    (2) When disclosure must be made to CMS. (i) CMS will not approve an 
HMO's or CMP's application for a contract unless the HMO or CMP has 
provided to it the information required by paragraphs (h)(1)(i) through 
(h)(1)(v) of this section. In addition, an HMO or CMP must provide this 
information to CMS upon the effective date of its contract renewal.
    (ii) An HMO or CMP must provide the capitation data required under 
paragraph (h)(1)(vi) for the previous calendar year to CMS by April 1 of 
each year.
    (3) Disclosure to Medicare beneficiaries. An HMO or CMP must provide 
the following information to any Medicare beneficiary who requests it:
    (i) Whether the prepaid plan uses a physician incentive plan that 
affects the use of referral services.
    (ii) The type of incentive arrangement.
    (iii) Whether stop-loss protection is provided.
    (iv) If the prepaid plan was required to conduct a survey, a summary 
of the survey results.
    (i) Requirements related to subcontracting arrangements--(1) 
Physician groups. An HMO or CMP that contracts with a physician group 
that places the individual physician members at substantial financial 
risk for services they do not furnish must do the following:
    (i) Disclose to CMS any incentive plan between the physician group 
and its individual physicians that bases compensation to the physician 
on the use or cost of services furnished to Medicare beneficiaries or 
Medicaid recipients. The disclosure must include the information 
specified in paragraphs (h)(1)(i) through (h)(1)(vii) of this section 
and be made at the times specified in paragraph (h)(2) of this section.
    (ii) Provide adequate stop-loss protection to the individual 
physicians.
    (iii) Conduct enrollee surveys as specified in paragraph (g)(1) of 
this section.
    (2) Intermediate entities. An HMO or CMP that contracts with an 
entity (other than a physician group) for the provision of services to 
Medicare beneficiaries must do the following:
    (i) Disclose to CMS any incentive plan between the entity and a 
physician or physician group that bases compensation to the physician or 
physician group on the use or cost of services furnished to Medicare 
beneficiaries or Medicaid recipients. The disclosure must include the 
information required to be disclosed under paragraphs (h)(1)(i) through 
(h)(1)(vii) of this section and be made at the times specified in 
paragraph (h)(2) of this section.
    (ii) If the physician incentive plan puts a physician or physician 
group at substantial financial risk for the cost of services the 
physician or physician group does not furnish--
    (A) Meet the stop-loss protection requirements of this subpart; and
    (B) Conduct enrollee surveys as specified in paragraph (g)(1) of 
this section.

[[Page 736]]

    (3) For purposes of paragraph (i)(2) of this section, an entity 
includes, but is not limited to, an individual practice association that 
contracts with one or more physician groups and a physician hospital 
organization.
    (j) Sanctions against the HMO or CMP. CMS may apply intermediate 
sanctions, or the Office of Inspector General may apply civil money 
penalties described at Sec. 417.500, if CMS determines that an HMO or 
CMP fails to comply with the requirements of this section.

[61 FR 13446, Mar. 27, 1996; 61 FR 46385, Sept. 3, 1996, as amended at 
61 FR 69049, Dec. 31, 1996]



Sec. 417.480  Maintenance of records: Cost HMOs and CMPs.

    A reasonable cost contract must provide that the HMO or CMP agrees 
to maintain books, records, documents, and other evidence of accounting 
procedures and practices that--
    (a) Are sufficient to--
    (1) Ensure an audit trail; and
    (2) Properly reflect all direct and indirect costs claimed to have 
been incurred under the contract; and
    (b) Include at least records of the following:
    (1) Ownership, HMO or CMP, and operation of the HMO's or CMP's 
financial, medical, and other recordkeeping systems.
    (2) Financial statements for the current contract period and three 
prior periods.
    (3) Federal income tax or information returns for the current 
contract period and three prior periods.
    (4) Asset acquisition, lease, sale, or other action.
    (5) Agreements, contracts, and subcontracts.
    (6) Franchise, marketing, and management agreements.
    (7) Schedules of charges for the HMO's or CMP's fee-for-service 
patients.
    (8) Matters pertaining to costs of operations.
    (9) Amounts of income received by source and payment.
    (10) Cash flow statements.
    (11) Any financial reports filed with other Federal programs or 
State authorities.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45680, Sept. 1, 1995]



Sec. 417.481  Maintenance of records: Risk HMOs and CMPs.

    A risk contract must provide that the HMO or CMP agrees to maintain 
and make available to CMS upon request, books, records, documents, and 
other evidence of acounting procedures and practices that--
    (a) Are sufficient to--
    (1) Establish component rates of the ACR for determining additional 
and supplementary benefits; and
    (2) Determine the rates utilized in setting premiums for State 
insurance agency purposes; and
    (b) Include at least any records or financial reports filed with 
other Federal agencies or State authorities.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45680, Sept. 1, 1995]



Sec. 417.482  Access to facilities and records.

    The contract must provide that the HMO or CMP agrees to the 
following:
    (a) HHS may evaluate, through inspection or other means, the 
quality, appropriateness, and timeliness of services furnished under the 
contract to its Medicare enrollees.
    (b) HHS may evaluate, through inspection or other means, the 
facilities of the HMO or CMP when there is reasonable evidence of some 
need for that inspection.
    (c) HHS, the Comptroller General, or their designees may audit or 
inspect any books and records of the HMO or CMP or its transferee that 
pertain to any aspect of services performed, reconciliation of benefit 
liabilities, and determination of amounts payable under the contract.
    (d) HHS may evaluate, through inspection or other means, the 
enrollment and disenrollment records for the current contract period and 
three prior periods, when there is reasonable evidence of some need for 
that inspection.
    (e) In the case of a reasonable cost HMO or CMP to make available 
for the

[[Page 737]]

purposes specified in paragraphs (a), (b), (c), and (d) of this section, 
its premises, physical facilities, and equipment, its records relating 
to its Medicare enrollees, the records specified in Sec. 417.480 and any 
additional relevant information that CMS may require.
    (f) That the right to inspect, evaluate, and audit, will extend 
through three years from the date of the final settlement for any 
contract period unless--
    (1) CMS determines there is a special need to retain a particular 
record or group of records for a longer period and notifies the HMO or 
CMP at least 30 days before the normal disposition date;
    (2) There has been a termination, dispute, fraud, or similar fault 
by the HMO or CMP, in which case the retention may be extended to three 
years from the date of any resulting final settlement; or
    (3) CMS determines that there is a reasonable possibility of fraud, 
in which case it may reopen a final settlement at any time.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.484  Requirement applicable to related entities.

    (a) Definition. As used in this section, related entity means any 
entity that is related to the HMO or CMP by common ownership or control 
and--
    (1) Performs some of the HMO's or CMP's management functions under 
contract or delegation;
    (2) Furnishes services to Medicare enrollees under an oral or 
written agreement; or
    (3) Leases real property or sells materials to the HMO or CMP at a 
cost of more than $2,500 during a contract period.
    (b) Requirement. The contract must provide that the HMO or CMP 
agrees to require all related entities to agree that--
    (1) HHS, the Comptroller General, or their designees have the right 
to inspect, evaluate, and audit any pertinent books, documents, papers, 
and records of the subcontractor involving transactions related to the 
subcontract; and
    (2) The right under paragraph (b)(1) of this section to information 
for any particular contract period will exist for a period equivalent to 
that specified in Sec. 417.482(f).

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.486  Disclosure of information and confidentiality.

    The contract must provide that the HMO or CMP agrees to the 
following:
    (a) To submit to CMS--
    (1) All financial information required under subpart O of this part 
and for final settlement; and
    (2) Any other information necessary for the administration or 
evaluation of the Medicare program.
    (b) To comply with the requirements set forth in part 420, subpart 
C, of this chapter pertaining to the disclosure of ownership and control 
information.
    (c) To comply with the requirements of the Privacy Act, as 
implemented by 45 CFR part 5b and subpart B of part 401 of this chapter, 
with respect to any system of records developed in performing carrier or 
intermediary functions under Secs. 417.532 and 417.533.
    (d) To meet the confidentiality requirements of Sec. 482.24(b)(3) of 
this chapter for medical records and for all other enrollee information 
that is--
    (1) Contained in its records or obtained from CMS or other sources; 
and
    (2) Not covered under paragraph (c) of this section.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 45680, Sept. 1, 1995]



Sec. 417.488  Notice of termination and of available alternatives: Risk contract.

    A risk contract must provide that the HMO or CMP agrees to give 
notice as follows if the contract is terminated:
    (a) At least 60 days before the effective date of termination, to 
give its Medicare enrollees a written notice that--
    (1) Specifies the termination date; and
    (2) Describes the alternatives available for obtaining Medicare 
services after termination.

[[Page 738]]

    (b) To pay the cost of the written notices.

[60 FR 45680, Sept. 1, 1995]



Sec. 417.490  Renewal of contract.

    A contract with an HMO or CMP is renewed automatically for the next 
12-month period unless CMS or the HMO or CMP decides not to renew, in 
accordance with Sec. 417.492.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.492  Nonrenewal of contract.

    (a) Nonrenewal by the HMO or CMP. (1) If an HMO or CMP does not 
intend to renew its contract, it must--
    (i) Give written notice to CMS at least 90 days before the end of 
the current contract period;
    (ii) Notify each Medicare enrollee by mail at least 60 days before 
the end of the contract period; and
    (iii) Notify the general public at least 30 days before the end of 
the contract period, by publishing a notice in one or more newspapers of 
general circulation in each community or county located in the HMO's or 
CMP's geographic area.
    (2) CMS may accept a nonrenewal notice submitted less than 90 days 
before the end of a contract period if--
    (i) The HMO or CMP notifies its Medicare enrollees and the public in 
accordance with paragraph (a)(1) of this section; and
    (ii) Acceptance would not otherwise jeopardize the effective and 
efficient administration of the Medicare program.
    (b) Nonrenewal by CMS. (1) Notice of nonrenewal. If CMS decides not 
to renew a contract, it gives written notice of nonrenewal as follows:
    (i) To the HMO or CMP at least 90 days before the end of the 
contract period.
    (ii) To the HMO's or CMP's Medicare enrollees at least 60 days 
before the end of the contract period.
    (iii) To the general public at least 30 days before the end of the 
contract period.
    (2) Notice of appeal rights. CMS gives the HMO or CMP written notice 
of its right to appeal the nonrenewal decision, in accordance with 
subpart R of this part, if CMS's decision was based on any of the 
reasons specified in Sec. 417.494(b).

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38079, July 15, 1993; 60 
FR 45681, Sept. 1, 1995]



Sec. 417.494  Modification or termination of contract.

    (a) Modification or termination by mutual consent. (1) CMS and an 
HMO or CMP may modify or terminate a contract at any time by written 
mutual consent.
    (2) If the contract is modified, the HMO or CMP must notify its 
Medicare enrollees of any changes that CMS determines are appropriate 
for notification.
    (3) If the contract is terminated, the HMO or CMP must notify its 
Medicare enrollees, and CMS notifies the general public, at least 30 
days before the termination date.
    (b) Termination by CMS. (1) CMS may terminate a contract for any of 
the following reasons:
    (i) The HMO or CMP has failed substantially to carry out the terms 
of the contract.
    (ii) The HMO or CMP is carrying out the contract in a manner that is 
inconsistent with the effective and efficient implementation of section 
1876 of the Act.
    (iii) The HMO or CMP has failed substantially to comply with the 
composition of enrollment requirements specified in Sec. 417.413(d).
    (iv) CMS determines that the HMO or CMP no longer meets the 
requirements of section 1876 of the Act and this subpart for being an 
HMO or CMP.
    (2) If CMS decides to terminate a contract, it sends a written 
notice informing the HMO or CMP of its right to appeal the termination 
in accordance with subpart R of this part.
    (3) An HMO or CMP with a risk contract must notify its Medicare 
enrollees of the termination as described in Sec. 417.488.
    (4) CMS notifies the HMO's or CMP's Medicare enrollees and the 
general public of the termination at least 30 days before the effective 
date of termination.
    (c) Termination by the HMO or CMP. The HMO or CMP may terminate the

[[Page 739]]

contract if CMS has failed substantially to carry out the terms of the 
contract.
    (1) The HMO or CMP must notify CMS at least 90 days before the 
effective date of the termination and must include in its notice the 
reasons for the termination.
    (2) The HMO or CMP must notify its Medicare enrollees of the 
termination at least 60 days before the termination date. Risk HMOs or 
CMPs must also provide a written description of alternatives available 
for obtaining Medicare services after termination of the contract. The 
HMO or CMP is responsible for the cost of these notices.
    (3) The HMO or CMP must notify the general public of the termination 
at least 30 days before the termination date.
    (4) The contract is terminated effective 60 days after the HMO or 
CMP mails the notice to Medicare enrollees as required in paragraph 
(c)(2) of this section.
    (5) CMS's liability for payment ends as of the first day of the 
month after the last month for which the contract is in effect.

[50 FR 1346, Jan. 10, 1985, as amended at 52 FR 22322, June 11, 1987; 56 
FR 46571, Sept. 13, 1991; 58 FR 38079, 38082, July 15, 1993; 60 FR 
45681, Sept. 1, 1995]



Sec. 417.500  Sanctions against HMOs and CMPs.

    (a) Basis for imposition of sanctions. CMS may impose the 
intermediate sanctions specified in paragraph (d) of this section, as an 
alternative to termination of contract, if CMS determines that an HMO or 
CMP does one or more of the following:
    (1) Fails substantially to provide the medically necessary services 
required to be provided to a Medicare enrollee and the failure adversely 
affects (or has a substantial likelihood of adversely affecting) the 
enrollee.
    (2) Requires Medicare enrollees to pay amounts in excess of premiums 
permitted.
    (3) Acts, in violation of the provisions of subpart K of this part, 
to expel or to refuse to reenroll an individual.
    (4) Engages in any practice that could reasonably be expected to 
have the effect of denying or discouraging enrollment (except as 
permitted by subpart K of this part) by eligible individuals whose 
medical conditions or histories indicate a need for substantial future 
medical services.
    (5) Misrepresents or falsifies information that it furnishes under 
this part to CMS, an individual, or to any other entity.
    (6) Fails to comply with the requirements of section 1876(g)(6)(A) 
of the Act relating to the prompt payment of claims.
    (7) Fails to meet the requirement in section 1876(f)(1) of the Act 
that not more than 50 percent of the organization's enrollment be 
Medicare beneficiaries and Medicaid recipients.
    (8) Has a Medicare risk contract and--
    (i) Employs or contracts with individuals or entities excluded from 
participation in Medicare under section 1128 or section 1128A of the Act 
for the provision of health care, utilization review, medical social 
work, or administrative services; or
    (ii) Employs or contracts with any entity for the provision of those 
services (directly or indirectly) through an excluded individual or 
entity.
    (9) Fails to comply with the requirements of Secs. 417.479(d) 
through (i) relating to physician incentive plans.
    (b) Notice of sanction and opportunity to respond. (1) Notice of 
sanction. Before imposing the intermediate sanctions specified in 
paragraph (d) of this section, CMS--
    (i) Sends a written notice to the HMO or CMP stating the nature and 
basis of the proposed sanction; and
    (ii) Sends the OIG a copy of the notice (other than a notice 
regarding the restriction on Medicare and Medicaid enrollees as 
described in paragraph (a)(7) of this section), once the sanction has 
been confirmed following the notice period or the reconsideration.
    (2) Opportunity to respond. CMS allows the HMO or CMP 15 days from 
receipt of the notice to provide evidence that it has not committed an 
act or failed to comply with a requirement described in paragraph (a) of 
this section, as applicable. CMS may allow a 15-day addition to the 
original 15 days upon receipt of a written request from the HMO or CMP. 
To be approved, the

[[Page 740]]

request must provide a credible explanation of why additional time is 
necessary and be received by CMS before the end of the 15-day period 
following the date of receipt of the sanction notice. CMS does not grant 
an extension if it determines that the HMO's or CMP's conduct poses a 
threat to an enrollee's health and safety.
    (c) Informal reconsideration. If, consistent with paragraph (b)(2) 
of this section, the HMO or CMP submits a timely response to CMS's 
notice of sanction, CMS conducts an informal reconsideration that:
    (1) Consists of a review of the evidence by a CMS official who did 
not participate in the initial decision to impose a sanction; and
    (2) Gives the HMO or CMP a concise written decision setting forth 
the factual and legal basis for the decision that affirms or rescinds 
the original determination.
    (d) Specific sanctions. If CMS determines that an HMO or CMP has 
acted or failed to act as specified in paragraph (a) of this section and 
affirms this determination in accordance with paragraph (c) of this 
section, CMS may--
    (1) Require the HMO or CMP to suspend acceptance of applications for 
enrollment made by Medicare beneficiaries during the sanction period;
    (2) Suspend payments to the HMO or CMP for Medicare beneficiaries 
enrolled during the sanction period; and
    (3) Require the HMO or CMP to suspend all marketing activities to 
Medicare enrollees.
    (e) Effective date and duration of sanctions--(1) Effective date. 
Except as provided in paragraph (e)(2) of this section, a sanction is 
effective 15 days after the date that the organization is notified of 
the decision to impose the sanction or, if the HMO or CMP timely seeks 
reconsideration under paragraph (c) of this section, on the date 
specified in the notice of CMS's reconsidered determination.
    (2) Exception. If CMS determines that the HMO's or CMP's conduct 
poses a serious threat to an enrollee's health and safety, CMS may make 
the sanction effective on a date before issuance of CMS's reconsidered 
determination.
    (3) Duration of sanction. The sanction remains in effect until CMS 
notifies the HMO or CMP that CMS is satisfied that the basis for 
imposing the sanction has been corrected and is not likely to recur.
    (f) Termination by CMS. In addition to or as an alternative to the 
sanctions described in paragraph (d) of this section, CMS may decline to 
renew a HMO's or CMP's contract in accordance with Sec. 417.492(b), or 
terminate the contract in accordance with Sec. 417.494(b).
    (g) Civil money penalties. If CMS determines that a HMO or CMP has 
committed an act or failed to comply with a requirement described in 
paragraph (a) of this section (with the exception of the requirement to 
limit the percentage of Medicare and Medicaid enrollees described in 
paragraph (a)(7) of this section), CMS notifies the OIG of that 
determination. CMS also conveys to the OIG information when it reverses 
or terminates a sanction imposed under this subpart. In accordance with 
the provisions of 42 CFR part 1003, the OIG may impose civil money 
penalties on the HMO or CMP in addition to or in place of the sanctions 
that CMS may impose under paragraph (d) of this section.

[59 FR 36083, July 15, 1994, as amended at 60 FR 45681, Sept. 1, 1995; 
61 FR 13448, Mar. 27, 1996]



  Subpart M--Change of Ownership and Leasing of Facilities: Effect on 
                            Medicare Contract



Sec. 417.520  Effect on HMO and CMP contracts.

    (a) The provisions set forth in subpart L of part 422 of this 
chapter also apply to Medicare contracts with HMOs and CMPs under 
section 1876 of the Act.
    (b) In applying these provisions, references to ``M+C 
organizations'' must be read as references to ``HMOs and CMPs''.
    (c) In Sec. 422.550, reference to ``subpart K of this part'' must be 
read as reference to ``subpart L of part 417 of this chapter''.

[[Page 741]]

    (d) In Sec. 422.553, reference to ``subpart K of this part'' must be 
read as reference to ``subpart J of part 417 of this chapter''.

[63 FR 35067, June 26, 1998]



       Subpart N--Medicare Payment to HMOs and CMPs: General Rules



Sec. 417.524  Payment to HMOs or CMPs: General.

    (a) Basic rule. The payments that CMS makes to an HMO or CMP under 
this subpart and subparts O and P of this part for furnishing covered 
Medicare services are in place of any payment that CMS would otherwise 
make to a beneficiary or the HMO or CMP under sections 1814(b) and 
1833(a) of the Act.
    (b) Basis of payment. (1) CMS pays the HMOs or CMPs on either a 
reasonable cost basis or a risk basis depending on the type of contract 
the HMO or CMP has with CMS.
    (2) In certain cases a risk HMO or CMP also receives payments on a 
reasonable cost basis for certain Medicare enrollees who retain nonrisk 
status, as provided in Sec. 417.444, after the HMO or CMP enters into a 
risk contract.

[60 FR 46229, Sept. 6, 1995]



Sec. 417.526  Payment for covered services.

    Subpart O of this part set forth the principles that CMS follows in 
determining Medicare payment to an HMO or CMP that has a reasonable cost 
contract. Subpart P of this part describes the per capita method of 
Medicare payment to HMOs or CMPs that contract on a risk basis.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985; as amended at 58 
FR 38080, July 15, 1993; 60 FR 46229, Sept. 6, 1995]



Sec. 417.528  Payment when Medicare is not primary payer.

    (a) Limits on payments and charges. (1) CMS may not pay for services 
to the extent that Medicare is not the primary payer under section 
1862(b) of the Act and part 411 of this chapter.
    (2) The circumstances under which an HMO or CMP may charge, or 
authorize a provider to charge, for covered Medicare services for which 
Medicare is not the primary payer are stated in paragraphs (b) and (c) 
of this section.
    (b) Charge to other insurers or the enrollee. If a Medicare enrollee 
receives from an HMO or CMP covered services that are also covered under 
State or Federal worker's compensation, automobile medical, or any no-
fault insurance, or any liability insurance policy or plan, including a 
self-insured plan, the HMO or CMP may charge, or authorize a provider 
that furnished the service to charge--
    (1) The insurance carrier, employer, or other entity that is liable 
to pay for these services; or
    (2) The Medicare enrollee, to the extent that he or she has been 
paid by the carrier, employer, or other entity.
    (c) Charge to group health plans (GHPs) or large group health plans 
(LGHPs). An HMO or CMP may charge a GHP or LGHP for covered services it 
furnished to a Medicare enrollee and may charge the Medicare enrollee to 
the extent that he or she has been paid by the GHP or LGHP for these 
covered services if--
    (1) The Medicare enrollee is covered under the plan; and
    (2) Under section 1862(b) of the Act, CMS is precluded from paying 
for the covered services .
    (d) Responsibilities of HMO or CMP. An HMO or CMP must--
    (1) Identify payers that are primary to Medicare under section 
1862(b) of the Act;
    (2) Determine the amounts payable by these payers; and
    (3) Coordinate the benefits of its Medicare enrollees with these 
payers.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38080, July 15, 1993; 60 
FR 46229, Sept. 6, 1995]



                 Subpart O--Medicare Payment: Cost Basis

    Source: 50 FR 1346, Jan. 10, 1985, unless otherwise noted.



Sec. 417.530  Basis and scope.

    This subpart sets forth the principles that CMS follows to determine 
the amount it pays for services furnished by a cost HMO or CMP to its 
Medicare enrollees. These principles are based on sections 1861(v) and 
1876 of the Act and

[[Page 742]]

are, for the most part, the same as those set forth--
    (a) In part 412 of this chapter, for paying the costs of inpatient 
hospital services which, for cost HMOs and CMPs, are considered 
``reasonable'' only if they do not exceed the amounts allowed under the 
prospective payment system; and
    (b) In part 413 of this chapter, for the costs of all other covered 
services.

[60 FR 46230, Sept. 6, 1995]



Sec. 417.531  Hospice care services.

    (a) If a Medicare enrollee of an HMO or CMP with a reasonable cost 
contract makes an election under Sec. 418.24 of this chapter to receive 
hospice care services, payment for these services is made to the hospice 
that furnishes the services in accordance with part 418 of this chapter.
    (b) While the enrollee's hospice election is in effect, CMS pays the 
HMO or CMP on a reasonable cost basis for only the following covered 
Medicare services furnished to the Medicare enrollee:
    (1) Services of the enrollee's attending physician if the physician 
is an employee or contractor of the HMO or CMP and is not employed by or 
under contract to the enrollee's hospice.
    (2) Services not related to the treatment of the terminal condition 
for which hospice care was elected or a condition related to the 
terminal condition.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46230, Sept. 6, 1995]



Sec. 417.532  General considerations.

    (a) Conditions and criteria for payment. (1) The costs incurred by 
the HMO or CMP to furnish services covered by Medicare are reimbursable 
if they are--
    (i) Proper and necessary;
    (ii) Reasonable in amount; and
    (iii) Except as provided in Sec. 417.550, appropriately apportioned 
among the HMO's or CMP's Medicare enrollees, other enrollees, and 
nonenrolled patients.
    (2) In determining fair and equitable payment for the HMOs or CMPs, 
CMS generally applies the cost payment principles set forth in 
Sec. 413.5 of this chapter.
    (3) In judging whether costs are reasonable, CMS applies the 
weighted average of the AAPCCs of each class of the HMO's or CMP's 
Medicare enrollees (as defined in Sec. 417.582) for the HMO's or CMP's 
geographic area as an absolute limitation on the total amount payable.
    (b) Method and amount of payment to the HMO or CMP. (1) CMS makes 
interim per capita payments each month for each Medicare enrollee, 
equivalent to the interim per capita cost rate determined in accordance 
with Sec. 417.570.
    (2) CMS adjusts the interim per capita rate as necessary during the 
contract period and makes final adjustments at the end of the contract 
period.
    (3) In determining the amount due the HMO or CMP, CMS deducts from 
the reasonable cost actually incurred by the HMO or CMP for covered 
services furnished to its Medicare enrollees, an amount equal to the 
actuarial value of the applicable Medicare Part A and Part B deductible 
and coinsurance amounts that would have applied to the covered services 
for which payment is being made if these enrollees had not enrolled in 
the HMO or CMP or another HMO or CMP.
    (c) Election by HMO or CMP. An HMO or CMP must elect, on an 
individual provider basis, one of the following methods for payment for 
hospital and SNF services it furnishes to Medicare enrollees:
    (1) Direct payment by CMS.
    (2) Direct payment by the HMO or CMP.
    (d) Notice of election. The election must be made in writing before 
the beginning of the contract period and is binding for that period.
    (e) Payment by HMO or CMP. If the HMO or CMP elects to pay providers 
directly, as provided in paragraph (c) of this section, it must--
    (1) Determine the eligibility of its Medicare enrollees to receive 
covered services through the HMO or CMP;
    (2) Make proper coverage decisions and appropriate payments, in 
accordance with Secs. 421.100 and 421.200 of this chapter, for the 
services furnished to its Medicare enrollees;

[[Page 743]]

    (3) Ensure that providers maintain and furnish appropriate 
documentation of physician certification and recertification, to the 
extent required under subpart B of part 424 of this chapter; and
    (4) Carry out any other procedures required by CMS.
    (f) Review of HMO's or CMP's bill processing capabilities. If the 
HMO or CMP elects to pay providers directly, CMS determines whether the 
HMO or CMP has the experience and capability to carry out the 
responsibilities specified in paragraph (e) of this section in an 
efficient and effective manner.
    (g) Direct payment by CMS. (1) If the HMO or CMP elects to have CMS 
pay for provider services, CMS pays each provider on a reasonable cost 
basis or under the PPS system, whichever is appropriate for the 
particular provider under part 412 or part 413 of this chapter.
    (2) In computing the Medicare payment to the HMO or CMP, CMS deducts 
these payments and any other payments made by the Medicare intermediary 
or carrier on behalf of the HMO or CMP (such as payment for emergency or 
urgently needed services under Sec. 417.558).
    (h) Payment for services furnished to Medicare beneficiaries not 
enrolled in the HMO or CMP. CMS pays the HMO or CMP for services it 
furnishes to Medicare beneficiaries who are not its enrollees through 
the HMO's or CMP's Medicare intermediary or carrier, as appropriate.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 53 
FR 6648, Mar. 2, 1988; 58 FR 38082, July 15, 1993; 60 FR 46230, Sept. 6, 
1995]



Sec. 417.533  Part B carrier responsibilities.

    In paying for Part B services furnished to its enrollees by 
suppliers, the HMO or CMP must--
    (a) Determine the eligibility of individuals to receive those 
services through the HMO or CMP;
    (b) Make proper coverage decisions and appropriate payment as 
authorized under Sec. 421.200 of this chapter for the services for which 
its Medicare enrollees are eligible; and
    (c) Carry out any other procedures that CMS may require.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46230, Sept. 6, 1995]



Sec. 417.534  Allowable costs.

    (a) Definition--Allowable costs means the direct and indirect costs, 
including normal standby costs incurred by the HMO or CMP, that are 
proper and necessary for efficient delivery of needed health care 
services. They include the costs of furnishing services to the HMO's or 
CMP's Medicare enrollees, other enrollees, and nonenrolled patients, 
which are typical ``provider'' costs, and costs (such as marketing, 
enrollment, membership, and operation of the HMO or CMP) that are 
peculiar to health care prepayment organizations.
    (b) Basic rules. (1) The allowability of an HMO's or CMP's costs for 
furnishing services is generally determined in accordance with 
principles applicable to provider costs, as set forth in Sec. 417.536.
    (2) The allowability of other costs is determined in accordance with 
principles set forth in Secs. 417.538 through 417.550.
    (3) Costs for covered services for which Medicare is not the primary 
payor, as described in Sec. 417.528, are not allowable.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.536  Cost payment principles.

    (a) Applicability. Unless otherwise specified in this subpart, the 
principles set forth in parts 412 and 413 of this chapter are applicable 
to the costs incurred by an HMO or CMP or by providers and other 
facilities owned or operated by the HMO or CMP or related to it by 
common ownership or control. The most common examples of these costs are 
set forth in this section.
    (b) Depreciation. An appropriate allowance for depreciation on 
buildings and equipment is an allowable cost, in accordance with 
Secs. 413.134, 413.144, and 413.149 of this chapter.
    (c) Interest expense. Necessary and proper interest on both current 
and capital indebtedness is an allowable

[[Page 744]]

cost, in accordance with Sec. 413.153 of this chapter.
    (d) Cost of educational activities. An appropriate part of the net 
cost of approved educational activities of a provider or other health 
care facility owned or operated by an HMO or CMP is an allowable cost in 
accordance with Sec. 413.85 of this chapter.
    (e) Compensation of owners. An appropriate amount of compensation 
for services of owners is an allowable cost, if the services are 
actually performed and are necessary, as specified in Sec. 413.102 of 
this chapter.
    (f) Bad debts. (1) In accordance with Sec. 413.80 of this chapter, 
bad debts are deductions from revenue and may be included as allowable 
costs only if--
    (i) They are attributable to Medicare deductible and coinsurance 
amounts for which the Medicare enrollee is liable; and
    (ii) The HMO or CMP has made a reasonable, but unsuccessful, effort 
to collect those amounts.
    (2) If all or part of the deductible and coinsurance amounts is 
payable through a monthly premium or other periodic payment, the amount 
allowed as a bad debt may not exceed three times the monthly rate for 
the actuarial value of the deductible and coinsurance amounts, or its 
equivalent, if the periodic payment is on other than a monthly basis.
    (3) Any bad debt related to a service furnished to a Medicare 
enrollee of the HMO or CMP, and claimed on a cost report submitted for 
payment by a provider or other facility reimbursed on a cost basis, may 
not be claimed as a bad debt by the HMO or CMP.
    (g) Charity and courtesy allowances. As specified in Sec. 413.80 of 
this chapter, charity and courtesy allowances are deductions from 
revenue and may not be included as allowable costs.
    (h) Research costs. As specified in Sec. 413.90 of this chapter, 
costs incurred for research purposes, over and above patient care, are 
not allowable costs.
    (i) Value of services of nonpaid workers. The value of services of 
nonpaid workers of an organization is not an allowable cost, except as 
provided in Sec. 413.94 of this chapter.
    (j) Purchase discounts and allowances and refund of expenses. 
Discounts and allowances that an HMO or CMP receives on purchases of 
goods and services and refunds of previous expense payments must be 
deducted from the costs to which they relate, in accordance with 
Sec. 413.98 of this chapter.
    (k) Cost to related entities. (1) The costs of services, facilities, 
or supplies furnished to an HMO or CMP by a related entity are allowable 
at the cost to the related entity in accordance with Sec. 413.17 of this 
chapter.
    (2) An entity is not considered related to the HMO or CMP merely 
because--
    (i) It has a risk or incentive agreement under which the HMO or CMP 
reimburses or compensates the entity for services it furnishes to the 
HMOs' or CMPs' enrollees; or
    (ii) Substantially all the services the entity furnishes are 
furnished to the HMO's or CMP's enrollees.
    (3) However, an entity described in paragraph (k)(2) of this section 
and an HMO or CMP are considered related if either of them is in a 
position to exercise significant management or ownership influence or 
control over the other.
    (l) Return on equity capital of proprietary providers owned by the 
HMO or CMP. An allowance for a reasonable return on equity capital 
invested and used in providing services is allowable in addition to the 
reasonable cost of services furnished by a proprietary provider owned by 
the HMO or CMP. The amount of the allowance is determined in accordance 
with Sec. 413.157 of this chapter.
    (m) Limitations on payment. Medicare payment for covered services 
furnished by entities owned by or operated by, or related to, an HMO or 
CMP paid on a reasonable cost basis is subject to certain provisions of 
parts 412 and 413 of this chapter that pertain to reasonable cost and 
reasonable charge. Those provisions include, but are not necessarily 
limited to, the following:
    (1) For ESRD treatment, the limitations authorized under 
Sec. 413.170 of this chapter.
    (2) For services of physical, occupational, and speech therapists 
and other therapists and nonphysician health specialists, the 
limitations set forth in Sec. 413.106 of this chapter.

[[Page 745]]

    (3) For drugs, the allowable cost as determined under Secs. 405.517 
and 410.29 of this chapter.
    (4) The overall cost limits established in accordance with 
Sec. 413.30 of this chapter.
    (5) The limitation to the lesser of reasonable cost or customary 
charges, as set forth in Sec. 413.13 of this chapter.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 51 
FR 34832, Sept. 30, 1986; 51 FR 37398, Oct. 22, 1986; 58 FR 38080, July 
15, 1993; 60 FR 46230, Sept. 6, 1995]



Sec. 417.538  Enrollment and marketing costs.

    (a) Principle. Costs incurred by an HMO or CMP in performing the 
enrollment and marketing activities described in subpart k of this part 
are allowable.
    (b) Included costs. Allowable enrollment and marketing costs are 
those necessary and proper costs incurred in offering the HMO's or CMP's 
plan to potential enrollees in accordance with this part. Those costs 
include selling, advertising, promotional, and other marketing costs and 
may not exceed an amount that would be incurred by a prudent and cost-
conscious management.
    (c) Application. Enrollment and marketing costs are allowable, 
whether incurred directly by HMO or CMP staff or under contract with 
marketing specialists or other outside consultants.
    (d) Limitation on payment. The relatively higher costs that an HMO 
or CMP is likely to incur in initially offering its plan to Medicare 
beneficiaries are taken into account in determining whether enrollment 
and marketing costs are reasonable in amount. However, if those costs 
exceed amounts that would be paid by prudent management, the excess is 
not allowable.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46230, Sept. 6, 1995]



Sec. 417.540  Enrollment costs.

    (a) Principle. Enrollment costs are allowable if incurred in 
maintaining and servicing subscriber contracts for prepayment enrollees.
    (b) Kind of costs included. Enrollment costs include, but are not 
limited to, reasonable costs incurred in connection with maintaining 
statistical, financial, and other data on enrollees.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.542  Reinsurance costs.

    Reinsurance costs are not allowable.



Sec. 417.544  Physicians' services furnished directly by the HMO or CMP.

    (a) Principles. (1) Compensation paid by an HMO or CMP to physicians 
is an allowable cost to the extent that it is commensurate with the 
compensation paid for similar services performed by similar physicians 
practicing in the same or a similar locality.
    (2) Physician compensation may take various forms, but the aggregate 
compensation allowable must be reasonable in relation to the services 
personally furnished.
    (3) If aggregate physician compensation costs exceed what is 
normally incurred, the excess is not a reasonable cost.
    (b) Application. (1) In determining the allowability of the costs of 
physicians' services, the cost of personal services (for example, 
expenses attributable to salaries, wages, incentive payments, fringe 
benefits) must be distinguished from the cost of nonpersonal services 
(for example, expenses attributable to facilities, equipment, support 
personnel, supplies).
    (2) To be allowable, compensation must be reasonable in relation to 
the personal services furnished.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46230, Sept. 6, 1995]



Sec. 417.546  Physicians' services and other Part B supplier services furnished under arrangements.

    General principle. The amount paid by an HMO or CMP for physicians' 
services and other Part B supplier services furnished under arrangements 
is an allowable cost to the extent it is reasonable. Costs are 
considered reasonable if they--
    (a) Do not exceed those that a prudent and cost-conscious buyer 
would incur to purchase those services; and

[[Page 746]]

    (b) Are comparable to costs incurred for similar services furnished 
by similar physicians or other suppliers in the same or a similar 
geographic area.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 34887, July 5, 1995; 60 FR 45372, Aug. 31, 1995]



Sec. 417.548  Provider services through arrangements.

    (a) Principle. The cost incurred by an HMO or CMP for covered 
services furnished under arrangement with a provider is allowable to the 
extent that it would be allowable and payable under parts 412 and 413 of 
this chapter, unless the HMO or CMP petitions CMS and demonstrates to 
HFCA's satisfaction that payment in excess of the amount authorized 
under parts 412 and 413 of this chapter is justified on the basis of 
advantages gained by the HMO or CMP.
    (b) Application. An advantage gained must represent a real and 
tangible benefit received by the HMO or CMP for the excess cost 
incurred, and any excess payment is subject to other applicable 
requirements of parts 405, 412 and 413 of this chapter, including tests 
of reasonableness.
    (c) Example. In the case of an arrangement an HMO or CMP has with a 
provider that is located outside the HMO's or CMP's geographic area and 
that is not related to the HMO or CMP by common ownership or control, 
payment of the provider's charges to the HMO or CMP (rather than the 
payment amounts determined under part 412 or part 413 of this chapter) 
may be justified in exchange for the advantages of not having to incur 
the administrative costs of determining the provider's reasonable cost 
and of making a more timely final settlement with the HMO or CMP. 
However, repayment of the provider's charges would be acceptable only 
if--
    (1) The provider furnishes services to the HMO's or CMP's enrollees 
infrequently;
    (2) The charges represent an insignificant portion of total Medicare 
reimbursement to the HMO or CMP; and
    (3) The charges do not exceed the customary charges by the provider 
to its other patients for similar services.

[50 FR 1346, Jan. 10, 1985, as amended at 51 FR 34832, Sept. 30, 1986; 
58 FR 38080, July 15, 1993; 60 FR 46230, Sept. 6, 1995]



Sec. 417.550  Special Medicare program requirements.

    (a) Principle. CMS pays the full reasonable cost incurred by an HMO 
or CMP for activities that are solely for Medicare purposes and unique 
to Medicare contracts under section 1876 of the Act.
    (b) Application. CMS pays the full reasonable cost of the following 
activities:
    (1) Reporting increases and decreases in the number of Medicare 
enrollees.
    (2) Obtaining independent certification of the HMO's or CMP's cost 
report to the extent that it is for Medicare purposes.
    (3) Reporting special data that CMS requires solely for program 
planning and evaluation.
    (c) Prior approval requirement. The costs specified in paragraph (b) 
of this section must be separately budgeted and approved by CMS before 
the contract period begins.
    (d) Limit on full payment. Full payment is limited to the costs 
specified in paragraph (b) of this section. All other administrative 
costs must be apportioned in accordance with Sec. 417.552.

[60 FR 46230, Sept. 6, 1995]



Sec. 417.552  Cost apportionment: General provisions.

    (a) Basic rule. The HMO or CMP must apportion its total allowable 
direct and indirect costs among its Medicare enrollees, its other 
enrollees, and its nonenrolled patients--
    (1) In accordance with this subpart; and
    (2) Using methods approved by CMS.
    (b) Purpose of apportionment. The purpose of apportionment is to 
ensure that--
    (1) The cost of services furnished to Medicare enrollees is not 
borne by other enrollees and nonenrolled patients; and

[[Page 747]]

    (2) The cost of the services furnished to other enrollees and 
nonenrolled patients is not borne by Medicare.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46230, Sept. 6, 1995]



Sec. 417.554  Apportionment: Provider services furnished directly by the HMO or CMP.

    The Medicare share of the cost of covered services furnished to 
Medicare enrollees by providers that are owned or operated by the HMO or 
CMP or are related to the HMO or CMP by common ownership or control must 
be determined in accordance with the apportionment methods set forth in 
part 412, Secs. 413.24, 413.55, and 415.55 of this chapter.

[51 FR 28574, Aug. 8, 1986, as amended at 51 FR 34832, Sept. 30, 1986; 
58 FR 38082, July 15, 1993; 60 FR 46231, Sept. 6, 1995; 60 FR 63189, 
Dec. 8, 1995]



Sec. 417.556  Apportionment: Provider services furnished by the HMO or CMP through arrangements with others.

    The Medicare share of the cost of covered services furnished to 
Medicare enrollees through arrangements with providers other than those 
specified in Sec. 417.554 must be determined as follows:
    (a) The Medicare share must be based on the cost the HMO or CMP pays 
the provider under their arrangement, to the extent that cost is 
reasonable and within the limits established by Secs. 417.534 through 
417.548.
    (b) Except as specified in paragraph (c) of this section, 
apportionment must be on the same approved basis that is used by the 
provider for Medicare beneficiaries who are not Medicare enrollees of 
the HMO or CMP, subject to the conditions and limitations set forth in 
Sec. 417.548.
    (c) If, because of the special nature or terms of the HMO's or CMP's 
arrangement with the provider, apportionment on the basis specified in 
paragraph (b) of this section would result in Medicare's bearing the 
costs of furnishing services to individuals other than the HMO's or 
CMP's Medicare enrollees, apportionment must be on another basis that is 
approved by CMS and that will ensure that Medicare does not pay any of 
the cost of furnishing services to individuals who are not Medicare 
enrollees of the HMO or CMP.
    (d) If the HMO or CMP elects to have providers reimbursed by the 
HMO's or CMP's Medicare intermediary, the Medicare share is the amount 
the intermediary paid the provider.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.558  Emergency, urgently needed, and out-of-area services for which the HMO or CMP accepts responsibility.

    (a) Source of payment. Either CMS or the HMO or CMP may pay a 
provider for emergency or urgently needed services or other covered out-
of-area services for which the HMO or CMP accepts responsibility.
    (b) Limits on payment. If the HMO or CMP pays, the payment amount 
may not exceed the amount that is allowable under part 412 or part 413 
of this chapter.
    (c) Exception to limit on payment. Payment in excess of the limit 
imposed by paragraph (b) of this section is allowable only if the HMO or 
CMP demonstrates to CMS's satisfaction that it is justified on the basis 
of advantages gained by the HMO or CMP, as set forth in Sec. 417.548.

[60 FR 46231, Sept. 6, 1995]



Sec. 417.560  Apportionment: Part B physician and supplier services.

    (a) Medical services furnished directly by the HMO or CMP. The total 
allowable cost of Part B physician and supplier services furnished by 
employees or partners of the HMO or CMP or by a related entity of the 
HMO or CMP must be apportioned on the basis of the ratio of covered Part 
B services furnished to Medicare enrollees to total services furnished 
to all the HMO's or CMP's enrollees and nonenrolled patients. The HMO or 
CMP must use a method for reporting costs that is approved by CMS. CMS 
bases its approval on a finding that the method--
    (1) Results in an accurate and equitable allocation of allowable 
costs; and
    (2) Is justifiable from an administrative and cost efficiency 
standpoint.
    (b) Medical services furnished under arrangements made by the HMO or 
CMP.

[[Page 748]]

When the HMO or CMP pays for Part B physician and supplier services on 
some basis other than fee-for-service, the reasonable cost the HMO or 
CMP pays under its financial arrangement with the physician or supplier 
must be apportioned between Medicare enrollees and others based on the 
ratio of covered services furnished to Medicare enrollees to the total 
services furnished to all enrollees and nonenrolled patients. If 
apportionment on this basis would result in Medicare bearing the cost of 
furnishing services to individuals who are not Medicare enrollees, the 
Medicare share must be determined on another basis (approved by CMS) to 
ensure that Medicare pays only for services furnished to Medicare 
enrollees.
    (c) Medical services furnished under an arrangement that provides 
for the HMO or CMP to pay on a fee-for-service basis. The Medicare share 
of the cost of Part B physician and supplier services furnished to 
Medicare enrollees under arrangements, and paid for by the HMO or CMP on 
a fee-for-service basis, is determined by multiplying the total amount 
for all such services by the ratio of charges for covered services 
furnished to Medicare enrollees to the total charges for all such 
services.
    (d) Emergency services, urgently needed services, and other covered 
medical services for which the HMO or CMP assumes financial 
responsibility. The Medicare share of the cost of Part B emergency or 
urgently needed services or other Part B services that are not furnished 
by a provider and for which the HMO or CMP accepts financial 
responsibility is determined in accordance with paragraphs (b) and (c) 
of this section.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 34888, July 5, 1995]



Sec. 417.564  Apportionment and allocation of administrative and general costs.

    (a) Costs not directly associated with providing medical care. 
Enrollment, marketing, and other administrative and general costs that 
benefit the total enrollment of the HMO or CMP and are not directly 
associated with furnishing medical care must be apportioned on the basis 
of a ratio of Medicare enrollees to the total HMO or CMP enrollment.
    (b) Costs significantly related to providing medical services. (1) 
The following administrative and general costs, which bear a significant 
relationship to the services furnished, are not apportioned to Medicare 
directly; they must be allocated or distributed to the HMO or CMP 
components and then apportioned to Medicare in accordance with 
Secs. 417.552 through 417.560:
    (i) Facility costs.
    (ii) Interest expense.
    (iii) Medical record costs.
    (iv) Centralized purchasing costs.
    (v) Accounting and data processing costs.
    (vi) Other administrative and general costs that are not included in 
paragraph (a) of this section.
    (2) The allocation or distribution process must be as follows:
    (i) If a separate entity or department of an HMO or CMP performs 
administrative functions the benefit of which can be quantitatively 
measured (such as centralized purchasing and data processing), the total 
allowable costs of this entity or department must be allocated or 
distributed to the components of the HMO or CMP in reasonable proportion 
to the benefits received by these components.
    (ii) If a separate entity or department of an HMO or CMP performs 
administrative functions the benefit of which cannot be quantitatively 
measured (such as facility costs), the total allowable costs of this 
entity or department must be allocated or distributed to the components 
of the HMO or CMP on the basis of a ratio of total incurred and 
distributed costs per component to the total incurred and distributed 
costs for all components.

[60 FR 46231, Sept. 6, 1995]



Sec. 417.566  Other methods of allocation and apportionment.

    (a) Justification. A method of apportionment or allocation of costs, 
other than the methods prescribed in this subpart may be used if it 
results in a more accurate and equitable apportionment of allowable 
costs and is justifiable from an administrative and cost standpoint.

[[Page 749]]

    (b) Required approval. (1) An HMO or CMP that desires to use an 
alternative method must submit a written request for CMS approval at 
least 90 days before the beginning of the period for which the different 
method is to be used.
    (2) If CMS approves use of a different method, the HMO or CMP may 
not revert to another method without first obtaining CMS's approval.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.568  Adequate financial records, statistical data, and cost finding.

    (a) Maintenance of records. (1) An HMO or CMP must maintain 
sufficient financial records and statistical data for proper 
determination of costs payable by CMS for covered services the HMO or 
CMP furnished to its Medicare enrollees either directly or under 
arrangements with others. These include accurate and sufficient detail 
of incurred costs and enrollment data.
    (2) Unless otherwise provided for in this subpart, the HMO or CMP 
must follow standardized definitions and accounting, statistics, and 
reporting practices that are widely accepted in the health care 
industry.
    (b) Provision of data. (1) The HMO or CMP must provide adequate cost 
and statistical data, based on its financial and statistical records, 
that can be verified by qualified auditors.
    (2) The cost data must be based on an approved method of cost 
finding and, except as provided in paragraph (b)(3) of this section, on 
the accrual method of accounting.
    (3) For governmental institutions that use a cash basis of 
accounting, cost data developed on this basis is acceptable. However, 
only depreciation on capital assets, rather than the expenditure for the 
capital asset, is allowable.
    (c) Provider services furnished directly by the HMO or CMP. If the 
HMO or CMP furnishes provider services directly, the provider is subject 
to the cost-finding and cost-reporting requirements set forth in parts 
412 and 413 of this chapter. The provider must use an approved cost-
finding method described in Sec. 413.24 of this chapter to determine the 
actual cost of these covered services.
    (d) Supplier services furnished directly by the HMO or CMP. If the 
HMO or CMP furnishes Part B physician and supplier services directly, it 
must furnish statistics that indicate the frequency and type of service 
provided, in the form and detail prescribed by CMS.
    (e) Part B physician and supplier services furnished through 
arrangement. If the HMO or CMP furnishes Part B physician and supplier 
services under arrangements with others, it must furnish to CMS 
statistical, financial, and other information with respect to those 
services in the form and detail prescribed by CMS.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46231, Sept. 6, 1995]



Sec. 417.570  Interim per capita payments.

    (a) Principle of payment. (1) CMS makes monthly advance payments 
equivalent to the HMO's or CMP's interim per capita rate for each 
beneficiary who is registered in CMS records as a Medicare enrollee of 
the HMO or CMP.
    (2) Additional lump-sum payments may be made at other times during 
the contract period, at CMS's discretion, to adjust the total amounts 
paid during the contract period to the level of incurred costs.
    (b) Determination of rate. The interim per capita rate of payment is 
equal to the estimated per capita cost of providing covered services to 
the HMO's or CMP's Medicare enrollees, based upon the types and 
components of costs that are reimbursable under this part. The interim 
per capita rate is determined annually by CMS on the basis of the HMO's 
or CMP's annual operating and enrollment forecast (as set forth in 
Sec. 417.572) and may be revised during the contract period as explained 
in paragraphs (c) and (d) of this section.
    (c) Adjustments of payments. In order to maintain the interim 
payments at the level of current reasonable costs, CMS will adjust the 
interim per capita rate, to the extent necessary, on the basis of 
adequate data supplied by the HMO or CMP in its interim estimated cost 
and enrollment reports or on other evidence showing that the rate based

[[Page 750]]

on actual costs is more or less than the current rate. Adjustments may 
also be made if there is--
    (1) A change in the number of Medicare enrollees that affects the 
per capita rate;
    (2) A material variation from the costs estimated when the annual 
operating budget was prepared; or
    (3) A significant change in the use of covered services by the HMO's 
or CMP's Medicare enrollees.
    (d) Reduction of interim payments. If the HMO or CMP does not 
submit, on time, the reports and other data required to determine the 
proper amount of payment, CMS may reduce interim payments to the extent 
appropriate, or may take any other action authorized under this part. An 
interim payment reduction remains in effect until CMS can make a 
reasonable estimate of per capita costs.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.572  Budget and enrollment forecast and interim reports.

    (a) Annual submittal. The HMO or CMP must submit an annual operating 
budget and enrollment forecast, in the form and detail required by CMS, 
at least 90 days before the beginning of each contract period. The 
forecast must be based on financial and statistical data and records 
that can be verified if CMS requires a detailed review of supporting 
records. The data and records include, but are not limited to, all 
ledgers, books, records, and original evidence of costs, and statistical 
data used in the determination of reasonable cost.
    (b) Effect of failure to submit on time. If the HMO or CMP does not 
submit the budget and enrollment forecast on time, CMS may--
    (1) Establish an interim per capita rate of payment on the basis of 
the best available data and adjust payments on the basis of that rate 
until the required reports are submitted and a new interim per capita 
rate can be established; or
    (2) If there is not enough data on which to base an interim per 
capita rate, inform the HMO or CMP that interim payments will not be 
made until the required reports are submitted.
    (c) Interim cost reports. (1) An HMO or CMP must submit interim cost 
reports on a quarterly basis in the form and detail prescribed by CMS. 
These interim cost reports must be submitted no later than 60 days after 
the close of each quarter of the contract period.
    (2) CMS may reduce the frequency of the reports required under 
paragraph (c)(1) of this section if CMS determines that, on the basis of 
the HMO's or CMP's reporting experience, there is good cause to do so.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.574  Interim settlement.

    (a) Determination. Within 30 days following the receipt of the HMO's 
or CMP's final interim cost and enrollment reports, CMS will make an 
interim determination of the estimated amount payable to the HMO or CMP 
for the reasonable cost of covered services furnished to its Medicare 
enrollees during the contract period. CMS will base the determination on 
the interim cost report and enrollment data submitted by the HMO or CMP, 
and any other relevant data CMS finds appropriate. For this purpose, CMS 
will accept costs as reported, subject to later review or audit, unless 
there are obvious errors or inconsistencies.
    (b) Payment. Any difference between the total amount of interim 
payments and the amount found payable on the basis of the interim 
determination under paragraph (a) of this section, must be paid by the 
HMO or CMP or will be paid by CMS, whichever is appropriate, no later 
than 30 days after CMS's determination.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993]



Sec. 417.576  Final settlement.

    (a) General rule. Final settlement and payment of amounts due the 
HMO or CMP or the appropriate Medicare trust funds are made following 
the HMO's or CMP's submission and CMS's review of an independently 
certified cost report and supporting documents as described in paragraph 
(b) of this section.
    (b) Certified cost report as basis for final settlement--(1) Timing 
of cost report. The HMO or CMP must submit to CMS

[[Page 751]]

an independently certified cost report and supporting documents, in the 
form and detail required by CMS, no later than 180 days after the end of 
each contract period, unless CMS extends the period for good cause shown 
by the HMO or CMP.
    (2) Content of cost report. The cost report and supporting documents 
must include the following:
    (i) The per capita costs incurred in furnishing covered services to 
its Medicare enrollees, determined in accordance with subpart O of this 
part and including--
    (A) The costs incurred by entities related to the HMO or CMP by 
common ownership or control; and
    (B) For reports for cost-reporting periods that begin on or after 
January 1, 1996, the costs of hospital and SNF services paid by 
Medicare's intermediaries under the option provided by Sec. 417.532(d).
    (ii) The HMO's or CMP's methods of apportioning cost among Medicare 
enrollees, and nonenrolled patients, in accordance with the payment 
procedures specified in this subpart (as, applicable, in parts 412 and 
413 of this chapter); and
    (iii) Any other information required by CMS.
    (3) Failure to report required financial information. If the HMO or 
CMP fails to submit the required cost report and supporting documents 
within 180 days (or an extended period approved by CMS under paragraph 
(b)(1) of this section), CMS may--
    (i) Consider the failure to report as evidence of likely 
overpayment; and
    (ii) Initiate recovery of amounts previously paid, or reduce interim 
payments, or both.
    (c) Final determination and adjustment. (1) After receipt of 
acceptable reports as specified in paragraph (b) of this section, CMS 
determines the total payment due the HMO or CMP for furnishing covered 
services to its Medicare enrollees (which is subject to the audit 
provisions of this subpart) and makes a retroactive adjustment to bring 
interim payments into agreement with the payable amount due the HMO or 
CMP.
    (2) A final settlement may be made with the HMO or CMP even though a 
provider that is not owned or operated by the HMO or CMP or related to 
the HMO or CMP by common ownership or control and that provides services 
to the HMO's or CMP's Medicare enrollees has not had a final settlement 
with CMS under parts 412 and 413 of this chapter for services furnished 
by the provider to Medicare beneficiaries who are not enrolled in the 
HMO or CMP. In this situation--
    (i) CMS must be satisfied that the costs of covered services 
furnished to the HMO's or CMP's Medicare enrollees, as shown in the 
reports specified in paragraph (b) of this section, are reasonable and 
that the interest of the Medicare program would best be served by not 
delaying final settlement with the HMO or CMP until there is a final 
settlement with the provider for services furnished to Medicare 
beneficiaries not enrolled in the HMO or CMP; and
    (ii) Prompt settlement with the HMO or CMP would be in the best 
interest of the Medicare program if, for instance, the provider's costs 
represent an insignificant portion of total payment due to the HMO or 
CMP; or if CMS is satisfied that the provider's costs, as shown in the 
reports specified in paragraph (b) of this section, will not be 
modified, to any significant extent, by the final settlement with the 
provider under parts 412 and 413 of this chapter.
    (d) Notice of amount of payment. The notice of amount of Medicare 
payment--
    (1) Explains CMS's determination regarding total Medicare payment 
due the HMO or CMP for the contract period covered by the financial 
information specified in paragraph (b) of this section;
    (2) Relates this determination to the HMO's or CMP's claimed total 
payable cost for that period;
    (3) Explains the amounts and reasons, by appropriate reference to 
law, regulations, and Medicare program policy and procedures, if the 
determined amounts differ from the HMO's or CMP's claim; and
    (4) Informs the HMO or CMP of its right to a hearing in accordance 
with subpart R of part 405 of this chapter.
    (e) Basis for retroactive adjustment.

[[Page 752]]

    (1) CMS's determination (as contained in the notice of amount of 
Medicare payment) constitutes the basis for making retroactive 
adjustments to any Medicare payment made to the HMO or CMP during the 
period to which the determination applies.
    (2) Further payments to the HMO or CMP may be withheld or offset in 
order to recover, or to aid in the recovery of, any overpayment 
identified in the determination as having been made to the HMO or CMP, 
even if the HMO or CMP requests a hearing under subpart R of part 405 of 
this chapter.
    (3) Any withholding continues until the earliest of the following 
occurs:
    (i) The overpayment is liquidated.
    (ii) The HMO or CMP enters into an agreement with CMS to refund the 
overpaid amount.
    (iii) CMS, on the basis of subsequently acquired information, 
determines that there was no overpayment.
    (iv) The decision of a hearing specified in paragraph (d)(4) of this 
section is that there was no overpayment.

[50 FR 1346, Jan. 10, 1985, as amended at 51 FR 34833, Sept. 30, 1986; 
58 FR 38082, July 15, 1993; 60 FR 34888, July 5, 1995; 60 FR 46231, 
Sept. 6, 1995]



                 Subpart P--Medicare Payment: Risk Basis

    Source: 50 FR 1346, Jan. 10, 1985, unless otherwise noted.



Sec. 417.580  Basis and scope.

    (a) Basis. This subpart implements those portions of section 1876 
(a), (e), and (g) of the Act that pertain to the amount CMS pays an 
organization for its Medicare enrollees who are enrolled on a risk 
basis.
    (b) Scope. This subpart sets forth--
    (1) Method of payment;
    (2) Procedures for determining the HMO's or CMP's payment rate; and
    (3) Procedures for determining the additional benefits (and their 
value) the HMO or CMP must provide to its Medicare enrollees.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 58 
FR 38080, July 15, 1993; 60 FR 46231, Sept. 6, 1995]



Sec. 417.582  Definitions.

    As used in this subpart--
    AAPCC stands for adjusted average per capita cost.
    ACR stands for adjusted community rate.
    Actuarial factors means factors such as the age, sex, and disability 
level distribution of the population and any other relevant factors that 
CMS determines have a significant effect on the level of utilization and 
cost of health services.
    APCRP stands for average of per capita rates of payment.
    Class of Medicare enrollees means a group of Medicare enrollees of 
an HMO or CMP that CMS constructs on the basis of actuarial factors.
    Similar area means an area similar to the HMO's or CMP's geographic 
area but free from special characteristics that would distort the 
determination of the AAPCC.
    U.S. per capita incurred cost means the average per capita cost, 
including intermediary or carrier administrative costs, incurred by 
Medicare, as determined on an accrual basis, for covered services 
furnished to Medicare beneficiaries nationwide during the most recent 
period for which CMS has complete data.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 58 
FR 38080, July 15, 1993; 60 FR 46232, Sept. 6, 1995]



Sec. 417.584  Payment to HMOs or CMPs with risk contracts.

    Except in the circumstances specified in Sec. 417.440(d) for 
inpatient hospital care, and as provided in Sec. 417.585 for hospice 
care, CMS makes payment for covered services only to the HMO or CMP.
    (a) Principle of payment. CMS makes monthly advance payments 
equivalent to the HMO's or CMP's per capita rate of payment for each 
beneficiary who is registered in CMS records as a Medicare enrollee of 
the HMO or CMP.
    (b) Determination of rate. (1) The annual per capita rate of payment 
for each class of Medicare enrollees is equal to 95 percent of the AAPCC 
(as determined under the provisions of Sec. 417.588) for that class of 
Medicare enrollees.

[[Page 753]]

    (2) CMS furnishes each HMO or CMP with its per capita rate of 
payment for each class of Medicare enrollees not later than 90 days 
before the beginning of the HMO's or CMP's contract period.
    (c) Adjustments to payments. If the actual number of Medicare 
enrollees differs from the estimated number on which the amount of 
advance monthly payment was based, CMS adjusts subsequent monthly 
payments to take account of the difference.
    (d) Reduction of payments. If an HMO or CMP requests a reduction in 
its monthly payment in accordance with Sec. 417.592(b)(2), CMS reduces 
the amount of payment by the appropriate amount.
    (e) Determination of rate for calendar year 1998. For calendar year 
1998, HMOs or CMPs with risk contracts will be paid in accordance with 
principles contained in subpart F of part 422 of this chapter.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 52 
FR 8901, Mar. 20, 1987; 58 FR 38082, July 15, 1993; 60 FR 46232, Sept. 
6, 1995; 63 FR 35067, June 26, 1998]



Sec. 417.585  Special rules: Hospice care.

    (a) No payment is made to an HMO or CMP on behalf of a Medicare 
enrollee who has elected hospice care under Sec. 418.24 of this chapter 
except for the portion of the payment applicable to the additional 
benefits described in Sec. 417.592. This no-payment rule is effective 
from the first day of the month following the month of election to 
receive hospice care, until the first day of the month following the 
month in which the enrollee resumes normal Medicare coverage.
    (b) During the time the election is in effect, the HMO or CMP may 
bill CMS on a fee-for-service basis (subject to the usual Medicare rules 
of payment) but only for the following covered Medicare services:
    (1) Services of the enrollee's attending physician if the physician 
is an employee or contractor of the HMO or CMP and is not employed by or 
under contract to the enrollee's hospice.
    (2) Services not related to the treatment of the terminal condition 
for which the enrollee elected hospice care or a condition related to 
the terminal condition.
    (3) Services furnished after the revocation or expiration of the 
enrollee's hospice election until the full monthly capitation payments 
begin again.
    (c) Payment for hospice care services furnished to Medicare 
enrollees of an HMO or CMP is made to the Medicare-participating hospice 
elected by the enrollee.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38082, July 15, 1993; 60 
FR 46232, Sept. 6, 1995]



Sec. 417.588  Computation of adjusted average per capita cost (AAPCC).

    (a) Basic data. In computing the AAPCC, CMS uses the U.S. per capita 
incurred cost and adjusts it by the factors specified in paragraph (c) 
of this section to establish an AAPCC for each class of Medicare 
enrollees.
    (b) Advance notice to the HMO or CMP. Before the beginning of a 
contract period, CMS informs the HMO or CMP of the specific adjustment 
factors it will use in computing the AAPCC.
    (c) Adjustment factors. (1) Geographic. CMS makes an adjustment to 
reflect the relative level of Medicare expenditures for beneficiaries 
who reside in the HMO's or CMP's geographic area (or a similar area). 
This adjustment is based on reimbursement for Medicare covered services 
and uses the most accurate and timely data that pertain to the HMO's or 
CMP's geographic area and that is available to CMS when it makes the 
determination.
    (2) Enrollment. CMS makes a further adjustment to remove the cost 
effect of all area Medicare beneficiaries who are enrolled in the HMO or 
CMP or another HMO or CMP.
    (3) Age, sex, and disability status. CMS makes adjustments to 
reflect the age and sex distribution and the disability status of the 
HMO's or CMP's enrollees based on Medicare program experience and 
available data that indicate cost differences that result from those 
factors.
    (4) Other relevant factors. If accurate data are available and 
appropriate, CMS makes adjustments to reflect welfare and institutional 
status and other relevant factors.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38083, July 15, 1993; 60 
FR 46232, Sept. 6, 1995]

[[Page 754]]



Sec. 417.590  Computation of the average of the per capita rates of payment.

    (a) Computation by the HMO or CMP. As indicated in Sec. 417.584(b), 
before an HMO's or CMP's contract period begins, CMS determines a per 
capita rate of payment for each class of the HMO's or CMP's Medicare 
enrollees. In order to determine the additional benefits required under 
Sec. 417.592, weighted averages of those per capita rates must be 
computed separately for enrollees entitled to Part A and Part B, and for 
enrollees entitled only to Part B. Except as provided in paragraph (b) 
of this section, the HMO or CMP must make the computations.
    (b) Computation by CMS. If the HMO or CMP claims to have 
insufficient enrollment experience to make the computations required by 
paragraph (a) of this section, and CMS agrees with the claim, CMS makes 
the computations, using the best available information, which may 
include the enrollment experience of other risk HMOs and CMPs.

[58 FR 38075, July 15, 1993]



Sec. 417.592  Additional benefits requirement.

    (a) General rules. (1) An HMO or CMP that has an APCRP (as 
determined under Sec. 417.590) greater than its ACR (as determined under 
Sec. 417.594) must elect one of the options specified in paragraph (b) 
of this section.
    (2) The dollar value of the elected option must, over the course of 
a contract period, be at least equal to the difference between the APCRP 
and the proposed ACR.
    (b) Options. (1) Additional benefits. Provide its Medicare enrollees 
with additional benefits in accordance with paragraph (c) of this 
section.
    (2) Payment reduction. Request CMS to reduce its monthly payments.
    (3) Combination of additional benefits and payment reduction. 
Provide fewer than the additional benefits required under paragraph 
(b)(1) of this section and request CMS to reduce the monthly payments by 
the remaining difference between the APCRP and the ACR.
    (4) Combination of additional benefits and withholding in a 
stabilization fund. Provide fewer than the additional benefits required 
under paragraph (b)(1) of this section, and request CMS to withhold in a 
stabilization fund (as provided in Sec. 417.596) the remaining 
difference between the APCRP and the ACR.
    (c) Special rules: Additional benefits option. (1) The HMO or CMP 
must determine additional benefits separately for enrollees entitled to 
both Part A and Part B benefits and those entitled only to Part B.
    (2) The HMO or CMP may elect to provide additional benefits in any 
of the following forms--
    (i) A reduction in the HMO's or CMP's premium or in other charges it 
imposes in the form of deductibles or coinsurance.
    (ii) Health benefits in addition to the required Part A and Part B 
covered services.
    (iii) A combination of reduced charges and additional benefits.
    (d) Notification to CMS. (1) The HMO or CMP must give CMS notice of 
its ACR and its weighted APCRP at least 45 days before its contract 
period begins.
    (2) An HMO or CMP that elects the option of providing additional 
benefits must include in its submittal--
    (i) A description of the additional benefits it will provide to its 
Medicare enrollees; and
    (ii) Supporting evidence to show that the selected benefits meet the 
requirements of paragraph (a)(2) of this section with respect to dollar 
value equivalence.

[60 FR 46232, Sept. 6, 1995]



Sec. 417.594  Computation of adjusted community rate (ACR).

    (a) Basic rule. Each HMO or CMP must compute its basic rate as 
follows:
    (1) Compute an initial rate in accordance with paragraph (b) of this 
section.
    (2) Adjust and reduce the initial rate in accordance with paragraphs 
(c) and (d) of this section.
    (b) Computation of initial rates. (1) The HMO or CMP must compute 
its initial rate using either of the following systems:
    (i) A community rating system as defined in Sec. 417.104(b); or
    (ii) A system, approved by CMS, under which the HMO or CMP develops

[[Page 755]]

an aggregate premium for all its enrollees and weights the aggregate by 
the size of the various enrolled groups that compose its enrollment.


(For purposes of this section, enrolled groups are defined as employee 
groups or other bodies of subscribers that enroll in the HMO or CMP 
through payment of premiums.)
    (2) Regardless of which method the HMO or CMP uses--
    (i) The initial rate must be equal to the premium it would charge 
its non-Medicare enrollees for the Medicare-covered services;
    (ii) The HMO or CMP must compute the rates separately for enrollees 
entitled to Medicare Part A and Part B and for those entitled only to 
Part B; and
    (iii) The HMO or CMP must identify and take into account anticipated 
revenue from health insurance payers for those services for which 
Medicare is not the primary payer as provided in Sec. 417.528.
    (3) Except as provided in paragraph (b)(4) of this section, the HMO 
or CMP must identify in its initial rate calculation, the following 
components whose rates must be consistent with rates used by the HMO or 
CMP in calculating premiums for non-Medicare enrollees:
    (i) Hospital services (services covered under Medicare Part A and 
Part B shown separately).
    (ii) Physicians' services.
    (iii) Other medical services (for example, X-ray and laboratory 
services).
    (iv) Home health services.
    (v) Out-of-plan claims for emergency services.
    (vi) Skilled nursing care services.
    (vii) Ambulance services.
    (viii) Other Medicare covered services.
    (ix) General and administrative.
    (x) Noncovered Medicare services (for example, eyeglasses).
    (xi) Services for which Medicare is the secondary payer.
    (xii) Enrollee liabilities (for example, deductibles, coinsurance, 
or copayments) for covered services.
    (4) An HMO or CMP that does not usually separate its premium 
components as described in paragraph (b)(3) of this section may 
calculate its initial rate with the methods it uses for its other 
enrolled groups if the HMO or CMP provides CMS with the documentation 
necessary to support any adjustments the HMO or CMP makes to the initial 
rate in accordance with paragraph (e) of this section.
    (5) The initial rate calculation must not carry forward any losses 
experienced by the HMO or CMP during prior contract periods. The HMO or 
CMP must submit supporting documentation to assure CMS that rates do not 
include past losses but only premiums for the price of additional 
benefits and services of the upcoming contract period.
    (c) Adjustment of initial rates. (1) Purpose of adjustment. The 
purpose of adjustment is to reflect the utilization characteristics of 
Medicare enrollees.
    (2) Adjustment by the HMO or CMP. The HMO or CMP may adjust the rate 
for a particular service using more than one of the following factors if 
they do not duplicate each other:
    (i) Unit of service. If the HMO or CMP purchases or identifies 
services on a unit of service basis and the unit of service is defined 
the same for all enrollees, the HMO or CMP may make an adjustment in its 
initial rate to reflect the number of units of services furnished to its 
Medicare enrollees in comparison to those furnished to other enrollees.
    (ii) Complexity or intensity of services. The HMO or CMP may make an 
adjustment to reflect the differences in the complexity or intensity of 
services furnished to its Medicare enrollees if the calculation of its 
initial rate includes the elements of this adjustment.
    (3) Support documentation. All adjustments made by the HMO or CMP 
must be accompanied by adequate supporting data. If an HMO or CMP does 
not have sufficient enrollment experience to develop this data, it may, 
during its initial contract period, use documented statistics from a 
nationally recognized statistical source.
    (4) Adjustment by CMS. If the HMO or CMP does not have adequate data 
to adjust the initial rate calculated under paragraph (b) of this 
section to reflect the utilization characteristics of its Medicare 
enrollees, CMS will, at the HMO's or CMP's request, adjust the initial 
rate. CMS adjusts the rate on

[[Page 756]]

the basis of differences in the utilization characteristics of--
    (i) Medicare and non-Medicare enrollees in other HMOs or CMPs; or
    (ii) Medicare beneficiaries (in the HMO's or CMP's area, or State, 
or the United States) who are eligible to enroll in an HMO or CMP and 
other individuals in that same area, or State, or the United States.
    (d) Reduction of adjusted rates. The HMO or CMP or CMS further 
reduces the adjusted rates by the actuarial value of applicable Medicare 
deductibles and coinsurance.
    (e) CMS review. (1) Submission of data. The HMO or CMP must submit 
its ACR and the methodology used to compute it for CMS review and 
approval, and must include adequate supporting data.
    (2) Appeals procedures. (i) If CMS determines that an HMO's or CMP's 
ACR computation is not acceptable, the HMO or CMP may, within 30 days 
after receipt of notice of the determination, file with CMS a request 
for a hearing.
    (ii) The request must state why the HMO or CMP believes the 
determination is incorrect, and include any supporting evidence the HMO 
or CMP considers pertinent.
    (iii) A hearing officer designated by CMS conducts the hearing in 
accordance with the hearing procedures set forth in Secs. 405.1819 
through 405.1833 of this chapter.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38080, July 15, 1993; 60 
FR 46232, Sept. 6, 1995]



Sec. 417.596  Establishment of a benefit stabilization fund.

    (a) General. If an HMO or CMP is required to provide its Medicare 
enrollees with additional benefits as described in Sec. 417.592, the 
organization may request that CMS withhold a part of its monthly per 
capita payment in a benefit stabilization fund. The fund will be used to 
prevent excessive fluctuation in the provision of those additional 
benefits in subsequent contract periods.
    (b) Notification to CMS. An HMO's or CMP's request to have monies 
withheld in a benefit stabilization fund must be made when the HMO or 
CMP notifies CMS under Sec. 417.592(d) of its ACR and its APCRP in 
preparation for its next contract period.
    (c) Limitations on the amounts withheld--(1) Limit per contract 
period. Except as provided in paragraph (c)(3) of this section, CMS does 
not withhold in a benefit stabilization fund more than 15 percent of the 
difference between an HMO's or CMP's ACR and its ACPRP for a given 
contract period.
    (2) Cumulative limit. If CMS has established a benefit stabilization 
fund for an HMO or CMP, it does not approve a request for withholding 
made by that HMO or CMP for a subsequent contract period that would 
cause the total value of the benefit stabilization fund to exceed 25 
percent of the difference between the HMO's or CMP's ACR and the average 
of its per capita rates of payment for that subsequent contract period.
    (3) Exception. CMS may grant an exception to the limit described in 
paragraph (c)(1) of this section if an HMO or CMP can demonstrate to 
CMS's satisfaction that the value of the additional benefits it provides 
to its Medicare enrollees fluctuates substantially in excess of 15 
percent from one contract period to another.
    (d) Financial management of benefit stabilization funds. (1) The 
amounts withheld by CMS to establish and maintain a benefit 
stabilization fund are in the custody of the Federal Health Insurance 
Trust Fund and the Federal Supplementary Medical Insurance Trust Fund.
    (2) The amounts withheld in a benefit stabilization fund are 
accounted for by CMS in accounts in which interest does not accrue to 
the HMO or CMP.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended by 56 
FR 46571, Sept. 13, 1991; 58 FR 38083, July 15, 1993; 60 FR 46233, Sept. 
6, 1995]



Sec. 417.597  Withdrawal from a benefit stabilization fund.

    (a) Notification to CMS. An HMO's or CMP's request to make a 
withdrawal from its benefit stabilization fund for use during a contract 
period must be made when the HMO or CMP notifies CMS of its ACR and its 
ACPRP for that contract period. In making its request, the HMO or CMP 
must--

[[Page 757]]

    (1) Indicate how it intends to use the withdrawn amounts;
    (2) Justify the need for the withdrawal in terms of stabilizing the 
additional benefits it provides to Medicare enrollees;
    (3) Document the HMO's or CMP's experience with fluctuations of 
revenue requirements relative to the additional benefits it provides to 
Medicare enrollees; and
    (4) Document its experience during the contract period previous to 
the one for which it requests withdrawal to ensure that the HMO or CMP 
will not be using the withdrawn amounts to refinance losses suffered 
during that previous contract period.
    (b) Criteria for CMS approval. CMS approves a request for a 
withdrawal from a benefit stabilization fund for use during the next 
contract period only if--
    (1) The HMO's or CMP's average of its per capita rates of payment 
for the next contract period is less than that of the previous contract 
period;
    (2) The HMO's or CMP's ACR for the next contract period is 
significantly higher than that of the previous contract period; or
    (3) The HMO's or CMP's revenue requirements for the next contract 
period for providing the additional benefits it provided during the 
previous contract period is significantly higher than the requirements 
for that previous period and the ACR for the next contract period 
results in an additional benefits package that is less in total value 
than that of the previous contract period.
    (c) Basis for denial. CMS does not approve a request for a 
withdrawal from a benefit stabilization fund if the withdrawal would 
allow the HMO or CMP to--
    (1) Offer without charge the supplemental services it provides to 
its Medicare enrollees under the provisions of Sec. 417.440 (b)(2) or 
(b)(3); or
    (2) Refinance prior contract period losses or to avoid losses in the 
upcoming contract period.
    (d) Form of payment. Payment of monies withdrawn from a benefit 
stabilization fund is made, in equal parts, as an additional amount to 
the monthly advance payment made to the HMO or CMP under Sec. 417.584 
during the period of the contract.

[58 FR 38075, July 15, 1993, as amended at 60 FR 46233, Sept. 6, 1995]



Sec. 417.598  Annual enrollment reconciliation.

    CMS's payment to an HMO or CMP may be subject to an enrollment 
reconciliation at least annually. CMS conducts this reconciliation as 
necessary to ensure that the payments made do not exceed or fall short 
of the appropriate per capita rate of payment for each Medicare enrollee 
of the HMO or CMP during the contract period. The HMO or CMP must submit 
any information or reports required by CMS to conduct the 
reconciliation.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38080, July 15, 1993; 60 
FR 46233, Sept. 6, 1995]



                     Subpart Q--Beneficiary Appeals



Sec. 417.600  Basis and scope.

    (a) Statutory basis. (1) Section 1869 of the Act provides the right 
to a hearing and to judicial review for any individual dissatisfied with 
a determination regarding his or her Medicare benefits.
    (2) Section 1876 of the Act provides for Medicare payments to HMOs 
and CMPs that contract with CMS to enroll Medicare beneficiaries and 
furnish Medicare-covered health care services to them. Section 
1876(c)(5) provides that--
    (i) An HMO or CMP must establish grievance and appeals procedures; 
and
    (ii) Medicare enrollees dissatisfied because they do not receive 
health care services to which they believe they are entitled, at no 
greater cost than they believe they are required to pay, have the 
following appeal rights:
    (A) The right to an ALJ hearing if the amount in controversy is $100 
or more.
    (B) The right to judicial review of the hearing decision if the 
amount in controversy is $1000 or more.
    (iii) The Medicare enrollee and the HMO or CMP are parties to the 
hearing and to the judicial review.
    (b) Scope. This subpart sets forth--

[[Page 758]]

    (1) The appeals procedures, as required by section 1876(c)(5)(B) of 
the Act for Medicare enrollees who are dissatisfied with an 
``organization determination'' as defined in Sec. 417.606;
    (2) The applicability of grievance procedures established by the HMO 
or CMP under section 1876(c)(5)(A) of the Act and Sec. 417.604(a) for 
complaints that do not involve an organization determination;
    (3) The responsibility of the HMO or CMP--
    (i) To develop and maintain procedures; and
    (ii) To ensure all Medicare enrollees have a complete written 
explanation of their grievance and appeal rights, the availability of 
expedited reviews, the steps to follow, and the time limits for each 
procedure; and
    (4) The special rules that apply when a beneficiary requests 
immediate QIO review of a determination that he or she no longer needs 
inpatient hospital care.

[60 FR 46233, Sept. 6, 1995, as amended at 62 FR 23374, Apr. 30, 1997]



Sec. 417.602  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    ALJ stands for administrative law judge.
    RRB stands for Railroad Retirement Board.

[50 FR 1346, Jan. 10, 1985, and amended at 58 FR 38080, July 15, 1993; 
60 FR 46233, Sept. 6, 1995]



Sec. 417.604  General provisions.

    (a) Responsibilities of the HMO or CMP. (1) The HMO or CMP must 
establish and maintain--
    (i) Appeals procedures that meet the requirements of this subpart 
for issues that involve organization determinations; and
    (ii) Grievance procedures for dealing with issues that do not 
involve organization determinations.
    (2) The HMO or CMP must ensure that all enrollees receive written 
information about the grievance and appeals procedures that are 
available to them.
    (b) Limits on applicability of this subpart. (1) If an enrollee 
requests immediate QIO review (as provided in Sec. 417.605) of a 
determination of noncoverage of inpatient hospital care--
    (i) The enrollee is not entitled to subsequent review of that issue 
under this subpart; and
    (ii) The QIO review decision is subject to the appeals procedures 
set forth in part 473 of this chapter.
    (2) Any determination regarding services that were furnished by the 
HMO or CMP, either directly or under arrangement, for which the enrollee 
has no further liability for payment are not subject to appeal.
    (3) Services included in an optional supplemental plan under 
(Sec. 417.440(b)(2)) are subject only to a grievance procedure.
    (4) Physicians and other individuals who furnish services under 
arrangement with an HMO or CMP have no right of appeal under this 
subpart, except as provided in Secs. 417.609(c)(4) and 417.617(c)(4), 
which allow physicians and other health professionals to act on behalf 
of an enrollee in time-sensitive situations when an organization 
determination or reconsideration is being requested.
    (c) Applicability of other regulations. Unless otherwise provided in 
this subpart, regulations at 20 CFR, part 404, subparts J and R, 
(pertaining respectively to conduct of hearings and representation of 
parties under title II of the Act) are applicable under this subpart.

[60 FR 46233, Sept. 6, 1995, as amended at 62 FR 23374, Apr. 30, 1997]



Sec. 417.605  Immediate QIO review of a determination of noncoverage of inpatient hospital care.

    (a) Right to review. A Medicare enrollee who disagrees with a 
determination made by an HMO, CMP, or a hospital that inpatient care is 
no longer necessary may remain in the hospital and may (directly or 
through his or her authorized representative) request immediate QIO 
review of the determination.
    (b) Procedures. For the immediate QIO review process, the following 
rules apply:
    (1) The enrollee or authorized representative must submit the 
request for immediate review--

[[Page 759]]

    (i) To the QIO that has an agreement with the hospital under 
Sec. 466.78 of this chapter;
    (ii) In writing or by telephone; and
    (iii) By noon of the first working day after receipt of the written 
notice of the determination that the hospital stay is no longer 
necessary.
    (2) On the date it receives the enrollee's request, the QIO must 
notify the HMO or CMP that a request for immediate review has been 
filed.
    (3) The HMO or CMP must supply any information that the QIO requires 
to conduct its review and must make it available, by phone or in 
writing, by the close of business of the first full working day 
immediately following the day the enrollee submits the request for 
review.
    (4) In response to a request from the HMO or CMP, the hospital must 
submit medical records and other pertinent information to the QIO by 
close of business of the first full working day immediately following 
the day the HMO or CMP makes its request.
    (5) The QIO must solicit the views of the enrollee who requested the 
immediate QIO review (or the enrollee's representative).
    (6) The QIO must make a determination and notify the enrollee, the 
hospital, and the HMO or CMP by close of business of the first working 
day after it receives the information from the hospital, or the HMO or 
CMP, or both.
    (c) Financial responsibility. (1) General rule. Except as provided 
in paragraph (c)(2) of this section, the HMO or CMP continues to be 
financially responsible for the costs of the hospital stay until noon of 
the calendar day following the day the QIO notifies the enrollee of its 
review determination.
    (2) Exception. The hospital may not charge the HMO or CMP (or the 
enrollee) if--
    (i) It was the hospital (acting on behalf of the enrollee) that 
filed the request for immediate QIO review; and
    (ii) The QIO upholds the noncoverage determination made by the HMO 
or CMP.

[59 FR 59941, Nov. 21, 1994]



Sec. 417.606  Organization determinations.

    (a) Actions that are organization determinations. An organization 
determination is any determination made by an HMO or CMP with respect to 
any of the following:
    (1) Payment for emergency or urgently needed services.
    (2) Any other health services furnished by a provider or supplier 
other than the HMO or CMP that the enrollee believes--
    (i) Are covered under Medicare; and
    (ii) Should have been furnished, arranged for, or reimbursed by the 
HMO or CMP.
    (3) The HMO's or CMP's refusal to provide services that the enrollee 
believes should be furnished or arranged for by the HMO or CMP and the 
enrollee has not received the services outside the HMO or CMP.
    (4) Discontinuation of a service (such as a skilled nursing facility 
discharge), if the enrollee disagrees with the determination that the 
service is no longer medically necessary.
    (b) Actions that are not organization determinations. The following 
are not organization determinations for purposes of this subpart:
    (1) A determination regarding services that were furnished by the 
HMO or CMP, either directly or under arrangement, for which the enrollee 
has no further obligation for payment.
    (2) A determination regarding services included in an optional 
supplemental plan (see Sec. 417.440(b)(2)).
    (c) Relation to grievances. A determination that is not an 
organization determination is subject only to a grievance procedure 
under Sec. 417.436(a)(2).

[59 FR 59942, Nov. 21, 1994, as amended at 62 FR 23374, Apr. 30, 1997]



Sec. 417.608  Notice of adverse organization determination.

    (a) If an HMO or CMP makes an organization determination that is 
partially or fully adverse to the enrollee, it must notify the enrollee 
of the determination--
    (1) Within 60 days of receiving the enrollee's request for payment 
for services; or
    (2) As specified in Sec. 417.609(c)(3) for expedited organization 
determinations.
    (b) The notice must--
    (1) State the specific reasons for the determination; and

[[Page 760]]

    (2) Inform the enrollee of his or her right to a reconsideration, 
including the right to and conditions for obtaining an expedited 
reconsidered determination.
    (c) The failure to provide the enrollee with timely notification of 
an adverse organization determination as specified in paragraph (a) of 
this section or in Sec. 417.609(b) (concerning time frames for 
expediting certain organization determinations) constitutes an adverse 
organization determination and may be appealed.

[50 FR 1346, Jan. 10, 1985, as amended at 59 FR 59942, Nov. 21, 1994; 62 
FR 23375, Apr. 30, 1997]



Sec. 417.609  Expediting certain organization determinations.

    (a) An enrollee, or an authorized representative of the enrollee, 
may request that an organization determination as defined in 
Secs. 417.606(a)(3) and (a)(4) be expedited. The request may be made 
orally to the HMO or CMP.
    (b) The HMO or CMP must maintain procedures for expediting 
organization determinations when, upon request from an enrollee or 
authorized representative of the enrollee, the organization decides that 
making the determination according to the procedures and time frames set 
forth in Sec. 417.608(a)(1) could seriously jeopardize the life or 
health of the enrollee or the enrollee's ability to regain maximum 
function.
    (c) The procedures must include the following:
    (1) Receipt of oral requests, followed by written documentation of 
the oral requests.
    (2) Prompt decision-making regarding whether the request will be 
expedited, or handled within the standard time frame set forth at 
Sec. 417.608(a)(1), including notification of the enrollee if the 
request is not expedited.
    (3) Notification of the enrollee, and the physician as appropriate, 
as expeditiously as the enrollee's health condition requires, but within 
72 hours of the request. An extension of up to 10 working days is 
permitted if requested by the enrollee or if the HMO or CMP finds that 
additional information is necessary and the delay is in the interest of 
the enrollee.
    (i) Notification must comply with Sec. 417.608(b), concerning the 
content of a notice of adverse organization determination.
    (ii) If the initial notification is not in writing, written 
confirmation must be mailed to the enrollee within 2 working days.
    (iii) In cases for which the HMO or CMP must receive medical 
information from a physician or provider not affiliated with the HMO or 
CMP, the time standard begins with receipt of the information.
    (4) Granting the request of a physician, regardless of whether the 
physician is affiliated with the organization or not, to expedite the 
enrollee's request.

[62 FR 23375, Apr. 30, 1997]



Sec. 417.610  Parties to the organization determination.

    The parties to the organization determination are--
    (a) The enrollee;
    (b) An assignee of the enrollee (that is, a physician or other 
supplier who has provided a service to the enrollee and formally agrees 
to waive any right to payment from the enrolee for that service);
    (c) The legal representative of a deceased enrollee's estate; or
    (d) Any other entity determined to have an appealable interest in 
the proceeding.

[50 FR 1346, Jan. 10, 1985, as amended at 59 FR 59942, Nov. 21, 1994]



Sec. 417.612  Effect of organization determination.

    The organization determination is binding on all parties unless it 
is reconsidered in accordance with Secs. 417.614 through 417.626, or 
revised in accordance with Sec. 417.638.

[50 FR 1346, Jan. 10, 1985, as amended at 59 FR 59941, Nov. 21, 1994; 62 
FR 25855, May 12, 1997]



Sec. 417.614  Right to reconsideration.

    Any party who is dissatisfied with an organization determination or 
with one that has been reopened and revised may request reconsideration 
of the determination in accordance with the

[[Page 761]]

procedures of Sec. 417.616, concerning a request for reconsideration, or 
Sec. 417.617, concerning certain expedited reconsiderations.

[62 FR 23375, Apr. 30, 1997]



Sec. 417.616  Request for reconsideration.

    (a) Method and place for filing a request. A request for 
reconsideration must be made in writing and filed with--(1) The HMO or 
CMP that made the organization determination;
    (2) An SSA office; or
    (3) In the case of a qualified railroad retirement beneficiary, an 
RRB office.
    (4) In the case of a request for an expedited reconsideration, as 
provided for in Sec. 417.617 (concerning certain expedited 
reconsiderations), the HMO or CMP.
    (b) Time for filing a request. Except as provided in paragraph (c) 
of this section, the request for reconsideration must be filed within 60 
days from the date of the notice of the organization determination.
    (c) Extension of time to file a request. (1) Rule. If good cause is 
shown, the HMO or CMP that made the organization determination may 
extend the time for filing the request for reconsideration.
    (2) Method of requesting an extension. If the time limit in 
paragraph (b) of this section has expired, a party to the organization 
determination may file a request for reconsideration with the HMO or 
CMP, CMS, SSA, or, in the case of qualified railroad retirement 
beneficiary, and RRB office. The request to extend the time limit must--
    (i) Be in writing; and
    (ii) State why the request for reconsideration was not filed timely.
    (d) Parties to the reconsideration. The parties to the 
reconsideration are the parties to the initial determination as 
described in Sec. 417.610, and any other person or entity whose rights 
with respect to the initial determination may be affected by the 
reconsideration, as determined by the entity that conducts the 
reconsideration.
    (e) Withdrawal of request. A request for reconsideration may be 
withdrawn by the party who filed the request. The request for withdrawal 
must be filed at one of the places specified in paragraph (c)(2) of this 
section.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 59 
FR 59942, Nov. 21, 1994; 62 FR 23375, Apr. 30, 1997]



Sec. 417.617  Expediting certain reconsiderations.

    (a) An enrollee, or an authorized representative of the enrollee, 
may request that a reconsideration be expedited. The request may be made 
orally to the HMO or CMP.
    (b) The HMO or CMP must maintain procedures for expediting 
reconsiderations when, upon request from an enrollee or an authorized 
representative of the enrollee, the organization decides that the longer 
time frames permitted in Sec. 417.620(c) could seriously jeopardize the 
life or health of the enrollee or the enrollee's ability to regain 
maximum function.
    (c) The procedures must comply with the requirements for 
reconsidered determinations set forth in Secs. 417.614 through 417.626 
and include the following items:
    (1) Receipt of oral requests, followed by written documentation of 
the oral requests.
    (2) Prompt decision-making regarding whether the request will be 
expedited or handled within the standard time frame of Sec. 417.620(c), 
including notification of the enrollee if the request is not expedited.
    (3) Notification of the enrollee, and the physician as appropriate, 
as expeditiously as the enrollee's health condition requires, but within 
72 hours of the request. An extension of up to 10 working days is 
permitted if requested by the enrollee or if the HMO or CMP finds that 
additional information is necessary and the delay is in the interest of 
the enrollee.
    (i) Notification must comply with Sec. 417.624(b), concerning the 
content of a notice of a reconsidered determination.
    (ii) If the initial notification is not in writing, written 
confirmation must be mailed to the enrollee within 2 working days.
    (iii) In cases for which the HMO or CMP must receive medical 
information from a physician or provider not affiliated with the HMO or 
CMP, the time

[[Page 762]]

standard begins with receipt of the information.
    (4) Granting the request of a physician, regardless of whether the 
physician is affiliated with the organization or not, to expedite the 
request.

[62 FR 23375, Apr. 30, 1997]



Sec. 417.618  Opportunity to submit evidence.

    The HMO or CMP must provide the parties to the reconsideration 
reasonable opportunity to present evidence and allegations of fact or 
law, related to the issue in dispute, in person as well as in writing. 
In the case of an expedited reconsideration, the opportunity to present 
evidence is limited by the short time frames for making decisions, and 
the organization must inform the enrollee, or the authorized 
representative of the enrollee, of the conditions for submitting the 
evidence.

[62 FR 23375, Apr. 30, 1997]



Sec. 417.620  Responsibility for reconsiderations; time limits.

    (a) If the HMO or CMP can make a reconsidered determination that is 
completely favorable to the enrollee, the HMO or CMP issues the 
reconsidered determination.
    (b) If the HMO or CMO recommends partial or complete affirmation of 
its adverse determination, the HMO or CMP must prepare a written 
explanation and send the entire case to HFCA. CMS makes the reconsidered 
datermination.
    (c) The HMO or CMP must issue the reconsidered determination to the 
enrollee, or submit the explanation and file to CMS within 60 calendar 
days from the date of receipt of the request for reconsideration. In the 
case of an expedited reconsideration, the HMO or CMP must issue the 
reconsidered determination as specified in Sec. 417.617(c)(3) or submit 
the explanation and file to CMS within 24 hours of its determination, 
the expiration of the 72-hour review period, or the expiration of the 
extension.
    (d) For good cause shown, CMS may allow extensions to the time limit 
set forth in paragraph (c) of this section.
    (e) Failure by the HMO or CMP to provide the enrollee with a 
reconsidered determination within the time limits described in paragraph 
(c) of this section or to obtain a good cause extension described in 
paragraph (d) of this section constitutes an adverse determination, and 
the HMO or CMP must submit the file to CMS.
    (f) If the HMO or CMP refers the matter to CMS, it must concurrently 
notify the beneficiary of that action.

[59 FR 59942, Nov. 21, 1994, as amended at 62 FR 23376, Apr. 30, 1997]



Sec. 417.622  Reconsidered determination.

    A reconsidered determination is a new determination that--
    (a) Is based on a review of the organization determination, the 
evidence and findings upon which it was based, and any other evidence 
submitted by the parties or obtained by CMS or the HMO or CMP; and
    (b) Is made by a person or persons who were not involved in making 
the organization determination.

[50 FR 1346, Jan. 10, 1985, as amended at 59 FR 59941, 59942, Nov. 21, 
1994]



Sec. 417.624  Notice of reconsidered determination.

    (a) Responsibility for notice. The entity that makes the 
reconsidered determination is responsible for mailing notice to the 
parties and, if that entity is not CMS, for sending a copy to CMS.
    (b) Content of notice. The notice must--
    (1) State the specific reasons for the reconsidered determination;
    (2) Inform the party of his or her right to a hearing if the amount 
in controversy is $100 or more; and
    (3) Describe the procedures that the party must follow to obtain a 
hearing.

[50 FR 1346, Jan. 10, 1985]



Sec. 417.626  Effect of reconsidered determination.

    A reconsidered determination is binding on all parties unless a 
request for a hearing is filed in accordance with the provisions of 
Sec. 417.632, or unless it is revised in accordance with Sec. 417.638.

[50 FR 1346, Jan. 10, 1985, as amended at 62 FR 25855, May 12, 1997]

[[Page 763]]



Sec. 417.630  Right to a hearing.

    If the amount remaining in controversy is $100 or more, any party to 
the reconsideration who is dissatisfied with the reconsidered 
determination has a right to a hearing. (The amount remaining in 
controversy, which can include any combination of Part A and Part B 
services, is computed in accordance with Sec. 405.740 of this chapter 
for Part A services and Sec. 405.820(b) of this chapter for Part B 
services. If the basis for the appeal is the refusal of services, the 
projected value of those services is used in computing the amount 
remaining in controversy.)

[59 FR 59942, Nov. 21, 1994]



Sec. 417.632  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be made in writing and filed at one of the places specified in 
Sec. 417.616(a).
    (b) Time for filing a request. Except when the time is extended by 
an ALJ as provided in 20 CFR 404.933(c), a request for a hearing must be 
filed within 60 days of the date of the notice of reconsidered 
determination.
    (c) Parties to a hearing. (1) The parties to a hearing must be the 
parties to the reconsideration and any other person or entity whose 
rights with respect to the reconsideration may be affected by the 
hearing, as determined by the ALJ.
    (2) The HMO or CMP must be made a party to the hearing but does not 
have a right to request a hearing.
    (d) ALJ action when the amount in controversy is less than $100. (1) 
If the request plainly shows that the amount in controversy is less than 
$100, the ALJ dismisses the request.
    (2) If, after a hearing is initiated, the ALJ finds that the amount 
in controversy is less than $100, he or she discontinues the hearing and 
does not rule on the substantive issues raised in the appeal.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 60 
FR 46234, Sept. 6, 1995; 62 FR 25855, May 12, 1997]



Sec. 417.634  Departmental Appeals Board (DAB) review.

    Any party to the hearing, including the HMO or CMP, who is 
dissatisfied with the hearing decision, may request the DAB to review 
the ALJ's decision or dismissal. Regulations beginning at 20 CFR 404.967 
regarding SSA Appeals Council Review are applicable to DAB review for 
matters addressed by this subpart.

[62 FR 25855, May 12, 1997]



Sec. 417.636  Court review.

    (a) Review of ALJ's decision. A party or the HMO or CMP may request 
judicial review of an ALJ's decision if--
    (1) The Departmental Appeals Board denied the party's or the HMO's 
or CMP's request for review; and
    (2) The amount in controversy is $1,000 or more.
    (b) Review of Departmental Appeals Board decision. A party or the 
HMO or CMP may request judicial review of the Departmental Appeals Board 
decision if--
    (1) It is the final decision of CMS; and
    (2) The amount in controversy is $1,000 or more.
    (c) Request for review. The civil action must be filed in a district 
court of the United States in accordance with section 205(g) of the Act 
(see 20 CFR 422.210 for a description of the procedures to follow in 
requesting judicial review).

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38083, July 15, 1993; 61 
FR 32348, June 24, 1996]



Sec. 417.638  Reopening determinations and decisions.

    An organization, reconsidered, or revised determination made by an 
HMO, CMP, or CMS, or a decision or revised decision of an ALJ or the 
Departmental Appeals Board, may be reopened in accordance with the 
provisions of Sec. 405.750 of this chapter.

[59 FR 59942, Nov. 21, 1994, as amended at 61 FR 32348, June 24, 1996]



                  Subpart R--Medicare Contract Appeals

    Source: 50 FR 1346, Jan. 10, 1985, unless otherwise noted.

[[Page 764]]



Sec. 417.640  Determinations subject to appeal.

    This subpart establishes the procedures for making and reviewing the 
following initial determinations:
    (a) A determination that an HMO or CMP is not qualified to enter 
into a contract with CMS under section 1876 of the Act.
    (b) A determination that an HMO or CMP is qualified only for a 
reasonable cost contract.
    (c) A determination to terminate, or to refuse to renew, a contract 
with an HMO or CMP because--
    (1) The HMO or CMP has failed substantially to carry out the terms 
of the contract;
    (2) The HMO or CMP is carrying out the contract in a manner that is 
inconsistent with the efficient and effective administration of section 
1876 of the Act;
    (3) The HMO or CMP no longer meets the applicable conditions 
necessary to qualify as an HMO or CMP under section 1876 of the Act and 
this subpart; or
    (4) The HMO or CMP has failed to comply with the composition of 
enrollment requirements specified in Sec. 417.413(d).

[50 FR 1346, Jan. 10, 1985, as amended at 56 FR 46572, Sept. 13, 1991; 
58 FR 38080, July 15, 1993]



Sec. 417.642  Administrative actions that are not initial determinations.

    Administrative actions that are not initial determinations under 
this subpart include, but are not limited to, CMS's refusal to renew a 
contract with an HMO or CMP when the refusal is not based on the causes 
specifed in Sec. 417.640(c).

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38080, July 15, 1993]



Sec. 417.644  Notice of initial determination.

    (a) When CMS makes an initial determination, it gives the HMO or CMP 
written notice.
    (b) The notice specifies--
    (1) The reasons for the determination; and
    (2) The HMO's or CMP's right to request reconsideration.
    (c) CMS mails the notice to the HMO or CMP at least 90 days before 
the end of the contract period, or in the case of termination, at least 
90 days before the effective date of the termination.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38083, July 15, 1993; 60 
FR 46234, Sept. 6, 1995]



Sec. 417.646  Effect of initial determination.

    The initial determination is final and binding on all parties 
unless--
    (a) It is reconsidered in accordance with Secs. 417.648 through 
417.658;
    (b) In the case of an initial determination described in 
Sec. 417.640(c), a request for a hearing is filed; or
    (c) It is revised as a result of a reopening under Sec. 417.692.



Sec. 417.648  Reconsideration: Applicability.

    (a) Reconsideration is the first step for appealing an organization 
determination specified in Sec. 417.640(a) or (b).
    (b) CMS reconsiders either of the specified determinations if the 
HMO or CMP files a written request in accordance with Sec. 417.650.

[60 FR 46234, Sept. 6, 1995]



Sec. 417.650  Request for reconsideration.

    (a) Method and place for filing a request. A request for 
reconsideration must be made in writing and filed with any CMS office.
    (b) Time for filing a request. Except as provided in paragraph (c) 
of this section, the request for reconsideration must be filed within 60 
days from the date of the notice of the initial determination.
    (c) Extension of time to file a request. CMS may, in response to a 
party's written petition showing good cause, accept a request for 
reconsideration after the expiration of the 60 day period.
    (d) Proper party to file a request. Only an authorized official of 
the entity that was a party to an initial determination may file the 
request for reconsideration.
    (e) Withdrawal of a request. A request for reconsideration may be 
withdrawn by the party who filed the request at any time before the 
notice of the reconsidered determination is mailed.

[[Page 765]]

The request for withdrawal must be in writing and filed with CMS. If CMS 
approves, the request for reconsideration is withdrawn.



Sec. 417.652  Opportunity to submit evidence.

    CMS provides the parties to the reconsideration reasonable 
opportunity to present as evidence any documents or written statements 
that are relevant and material to the matters at issue.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.654  Reconsidered determination.

    A reconsidered determination is a new determination that--
    (a) Is based on a review of the initial determination, the evidence 
and findings upon which that was based, and any other written evidence 
submitted before notice of the reconsidered determination is mailed, 
including facts relating to the status of the entity subsequent to the 
initial determination; and
    (b) Affirms, reverses, or modifies the initial determination.



Sec. 417.656  Notice of reconsidered determination.

    (a) CMS gives the parties written notice of the reconsidered 
determination.
    (b) The notice--
    (1) Contains findings with respect to the HMO's or CMP's 
qualifications to enter into a contract with CMS under section 1876 of 
the Act;
    (2) States the specific reasons for the reconsidered determination; 
and
    (3) Informs the party of its right to a hearing if it is 
dissatisfied with the determination.

[60 FR 46234, Sept. 6, 1995]



Sec. 417.658  Effect of reconsidered determination.

    A reconsidered determination is final and binding on all parties 
unless a request for a hearing is filed in accordance with Sec. 417.662 
or it is revised in accordance with Sec. 417.692.



Sec. 417.660  Right to a hearing.

    The following parties are entitled to a hearing:
    (a) An entity that has been determined in a reconsidered 
determination to be unqualified to enter into a contract with CMS under 
section 1876 of the Act.
    (b) An HMO or CMP that has been determined in a reconsidered 
determination to be qualified only for a reasonable cost contract.
    (c) An HMO or CMP whose contract with CMS has been terminated or has 
not been renewed as a result of an initial determination as provided in 
Sec. 417.640(c).

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38083, July 15, 1993]



Sec. 417.662  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be made in writing and filed by an authorized official of the 
entity or HMO or CMP that was the party to the determination under 
appeal. The request for a hearing must be filed with any CMS office.
    (b) Time for filing a request. Except as provided in paragraph (c) 
of this section, a request for a hearing must be filed within 60 days 
after the date of receipt of the notice of initial or reconsidered 
determination.
    (c) Extension of time to file a request. If good cause is shown, the 
60-day period to request a hearing may be extended by CMS.
    (d) Parties to a hearing. The parties to a hearing must be--
    (1) The parties described in Sec. 417.660;
    (2) At the discretion of the hearing officer, any interested parties 
who make a showing that their rights may be prejudiced by the decision 
to be rendered at the hearing; and
    (3) CMS.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38083, July 15, 1993]



Sec. 417.664  Postponement of effective date of initial determination.

    When a request for a hearing with respect to an initial 
determination is filed timely--
    (a) The effective date of the initial determination to terminate a 
contract with an HMO or CMP will be postponed until a hearing decision 
is reached; and

[[Page 766]]

    (b) The current contract will be extended at the end of the contract 
period (in the case of a determination not to renew) only--
    (1) If CMS finds that an extension of the contract will be 
consistent with the purpose of section 1876 of the Act; and
    (2) For such period as CMS and the HMO or CMP agree.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38083, July 15, 1993]



Sec. 417.666  Designation of hearing officer.

    CMS designates a hearing officer to conduct the hearing. The hearing 
officer need not be an ALJ.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.668  Disqualification of hearing officer.

    (a) A hearing officer may not conduct a hearing in a case in which 
he or she is prejudiced or partial to any party or has any interest in 
the matter pending for decision.
    (b) A party to the hearing who objects to the designated hearing 
officer must notify that officer in writing at the earliest opportunity.
    (c) The hearing officer must consider the objections, and may, at 
his or her discretion, either proceed with the hearing or withdraw.
    (1) If the hearing officer withdraws, CMS designates another hearing 
officer to conduct the hearing.
    (2) If the hearing officer does not withdraw, the objecting party 
may, after the hearing, present objections and request that the 
officer's decision be revised or a new hearing be held before another 
hearing officer. The objections must be submitted to CMS.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.670  Time and place of hearing.

    (a) The hearing officer fixes a time and place for the hearing and 
sends written notice to the parties. The notice also informs the parties 
of the general and specific issues to be resolved and information about 
the hearing procedure.
    (b) The hearing officer may, on his or her own motion, or at the 
request of a party, change the time and place for the hearing. The 
hearing officer may adjourn or postpone the hearing.
    (c) The hearing officer will give the parties reasonable notice of 
any change in the time or place of hearing, or of adjournment or 
postponement.

[50 FR 1346, Jan. 10, 1985, as amended at 58 FR 38081, July 15, 1993; 60 
FR 46234, Sept. 6, 1995]



Sec. 417.672  Appointment of representatives.

    A party may appoint as its representative at the hearing anyone not 
disqualified or suspended from acting as a representative before CMS or 
otherwise prohibited by law.



Sec. 417.674  Authority of representatives.

    (a) A representative appointed and qualified in accordance with 
Sec. 417.672 may, on behalf of the represented party--
    (1) Give or accept any notice or request pertinent to the 
proceedings set forth in this subpart;
    (2) Present evidence and allegations as to facts and law in any 
proceedings affecting that party; and
    (3) Obtain information to the same extent as the party.
    (b) A notice or request sent to the representative has the same 
force and effect as if it had been sent to the party.



Sec. 417.676  Conduct of hearing.

    (a) The hearing is open to the parties and to the public.
    (b) The hearing officer inquires fully into all the matters at issue 
and receives in evidence the testimony of witnesses and any documents 
that are relevant and material.
    (c) The hearing officer provides the parties an opportunity to enter 
any objection to the inclusion of any document.
    (d) The hearing officer decides the order in which the evidence and 
the arguments of the parties are presented and the conduct of the 
hearing.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]

[[Page 767]]



Sec. 417.678  Evidence.

    The hearing officer rules on the admissibility of evidence and may 
admit evidence that would be inadmissible under rules applicable to 
court procedures.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.680  Witnesses.

    (a) The hearing officer may examine the witnesses.
    (b) The parties or their representatives are permitted to examine 
their witnesses and cross-examine witnesses of other parties.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.682  Discovery.

    (a) Prehearing discovery is permitted upon timely request of a 
party.
    (b) A request is timely if it is made before the beginning of the 
hearing.
    (c) A reasonable time for inspection and reproduction of documents 
is provided by order of the hearing officer.
    (d) The hearing officer's order on all discovery matters is final.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.684  Prehearing.

    The hearing officer may schedule a prehearing conference if he or 
she believes that a conference would more clearly define the issues.



Sec. 417.686  Record of hearing.

    (a) A complete record of the proceedings at the hearing is made and 
transcribed and made available to all parties upon request.
    (b) The record may not be closed until a hearing decision has been 
issued.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.688  Authority of hearing officer.

    In exercising his or her authority, the hearing officer must comply 
with the provisions of title XVIII and related provisions of the Act, 
the regulations issued by CMS, and general instructions issued by CMS in 
implementing that Act.



Sec. 417.690  Notice and effect of hearing decision.

    (a) As soon as practical after the close of the hearing, the hearing 
officer issues a written decision that--
    (1) Is based upon the evidence of record; and
    (2) Contains separately numbered findings of fact and conclusions of 
law.
    (b) The hearing officer provides a copy of the hearing decision to 
each party.
    (c) The hearing decision is final and binding unless it is reopened 
and revised in accordance with Sec. 417.692.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.692  Reopening of initial or reconsidered determination or decision of a hearing officer.

    (a) Initial or reconsidered determination. An initial or 
reconsidered determination may be reopened and revised by CMS upon its 
own motion within one year of the date of the notice of determination.
    (b) Decision of hearing officer. A decision of a hearing officer 
that is unfavorable to any party and is otherwise final may be reopened 
and revised by the hearing officer upon the officer's own motion within 
one year of the notice of the hearing decision. It may be reopened and 
revised by another hearing officer designated by CMS if the hearing 
officer who issued the decision is unavailable.
    (c) Notices. (1) The notice of reopening and of any revisions 
following the reopening is mailed to the parties.
    (2) The notice of revision specifies the reasons for revisions.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]



Sec. 417.694  Effect of revised determination.

    The revision of an initial or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec. 417.662.

[50 FR 1346, Jan. 10, 1985, as amended at 60 FR 46234, Sept. 6, 1995]

Subparts S-T [Reserved]

[[Page 768]]



                 Subpart U--Health Care Prepayment Plans

    Source: 50 FR 1375, Jan. 10, 1985, unless otherwise noted.



Sec. 417.800  Payment to HCPPs: Definitions and basic rules.

    (a) Definitions. As used in this subpart, unless the context 
indicates otherwise--
    Covered Part B services means physicians' services, diagnostic X-ray 
tests, laboratory, other diagnostic tests, and any additional medical 
and other health services, that the HCPP furnishes to its Medicare 
enrollees.
    Health care prepayment plan (HCPP) means an organization that meets 
the following conditions:
    (1) Effective January 1, 1999, (or on the effective date of the HCPP 
agreement in the case of a 1998 applicant) either--
    (A) Is union or employer sponsored; or
    (B) Does not provide, or arrange for the provision of, any inpatient 
hospital services.
    (2) Is responsible for the organization, financing, and delivery of 
covered Part B services to a defined population on a prepayment basis.
    (3) Meets the conditions specified in paragraph (b) of this section.
    (4) Elects to be reimbursed on a reasonable cost basis.
    Medicare enrollee means a beneficiary under Part B of Medicare who 
has been identified on CMS records as an enrollee of the HCPP. Reporting 
period means the period specified by CMS for which an HCPP must report 
its costs and utilization.
    (b) Qualifying conditions. (1) Except as provided in paragraph 
(b)(2) of this section, an organization wishing to participate as an 
HCPP must--
    (i) Enter into a written agreement with CMS as specified in 
Sec. 417.801;
    (ii) Furnish physicians' services through its employees or under a 
formal arrangement with a medical group, independent practice 
association or individual physicians; and
    (iii) Furnish covered Part B services to its Medicare enrollees 
through institutions, entities, and persons that have qualified under 
the applicable requirements of title XVIII of the Social Security Act 
and section 353 of the PHS Act.
    (2) An organization that, as of January 31, 1983, was being 
reimbursed on a reasonable cost basis under section 1833(a)(1)(A) of the 
Act, and that would not otherwise meet the conditions specified in 
paragraph (b)(1) of this section, may receive reimbursement on a 
reasonable cost basis as an HCPP, provided it files an agreement with 
CMS as required by Sec. 417.801.
    (c) Payment of reasonable cost. (1) Except as otherwise provided in 
this subpart, CMS pays an HCPP on the basis of the reasonable cost it 
incurs, as specified in subpart O of this part, for the covered Part B 
services furnished to its Medicare enrollees.
    (2) Payment for Part B services: Basic rules. (i) Cost basis 
payment. Except as provided in paragraph (d) of this section, CMS pays 
an HCPP on the basis of the reasonable costs it incurs, as specified in 
subpart O of this part, for the covered Part B services furnished to its 
Medicare enrollees.
    (ii) Deductions. In determining the amount due an HCPP for covered 
Part B services furnished to its Medicare enrollees, CMS deducts, from 
the reasonable cost actually incurred by the HCPP, the following:
    (A) The actuarial value of the Part B deductible.
    (B) An amount equal to 20 percent of the cost incurred for any 
service that is subject to the Medicare coinsurance.
    (d) Covered services not reimbursed to an HCPP. (1) Services 
reimbursed under Part A are not reimbursable to an HCPP. CMS makes 
payment for these services directly to the hospital, or other provider 
of services, on a reasonable cost basis through the provider's Medicare 
fiscal intermediary (for more details, see parts 412 and 413 of this 
chapter).
    (2) Covered Part B services furnished by a provider of services to 
an HCPP's Medicare enrollees are not payable to the HCPP. CMS makes 
payment for these services to the provider on behalf of the Medicare 
enrollee through the provider's Medicare fiscal intermediary. This 
requirement does not affect Medicare payment to the HCPP for physicians' 
services furnished to its

[[Page 769]]

Medicare enrollees for which the physicians are compensated by the HCPP.
    (e) Payment for services to nonenrollees. CMS makes payment to an 
HCPP for covered Part B services furnished by the HCPP to a Medicare 
beneficiary who is not enrolled in the HCPP if the beneficiary assigns 
his rights to payment in accordance with Sec. 424.55 of this chapter. 
Payment is made on a reasonable charge basis through the HCPP's Medicare 
carrier.

[50 FR 1346, Jan. 10, 1985, as amended at 51 FR 34833, Sept. 30, 1986; 
53 FR 6648, Mar. 2, 1988; 57 FR 7135, Feb. 28, 1992; 58 FR 38081, July 
15, 1993; 60 FR 34888, July 5, 1995; 63 FR 35067, June 26, 1998; 63 FR 
52611, Oct. 1, 1998]



Sec. 417.801  Agreements between CMS and health care prepayment plans.

    (a) General requirement. (1) In order to participate and receive 
payment under the Medicare program as an HCPP as defined in 
Sec. 417.800, an organization must enter into a written agreement with 
CMS.
    (2) An existing group practice prepayment plan (GPPP) that continues 
as an HCPP under this subpart U must have entered into a written 
agreement with CMS within 60 days of January 31, 1983.
    (b) Terms. The agreement must provide that the HCPP agrees to--
    (1) Maintain compliance with the requirements for participation and 
reimbursement on a reasonable cost basis of HCPPs as specified in 
Sec. 417.800;
    (2) Not charge the Medicare enrollee or any other person for items 
or services for which that enrollee is entitled to have payment made 
under the provisions of this part, except for any deductible or 
coinsurance amounts for which the enrollee is liable;
    (3) Refund, as promptly as possible, any money incorrectly collected 
as charges or premiums, or in any other way from Medicare enrollees in 
the HCPP in accordance with the requirements specified in Sec. 417.456;
    (4) Not impose any limitations on the acceptance of Medicare 
enrollees or beneficiaries for care and treatment that it does not 
impose on all other individuals;
    (5) Meet the advance directives requirements specified in 
Sec. 417.436(d) of this part;
    (6) Establish administrative review procedures in accordance with 
Secs. 417.830 through 417.840 for Medicare enrollees who are 
dissatisfied with denied services or claims; and
    (7) Consider any additional requirements that CMS finds necessary or 
desirable for efficient and effective program administration.
    (c) Duration of agreement. Except for the term of the initial 
agreement, the agreement is for a term of one year and may be renewed 
annually by mutual consent. The term of the initial agreement is set by 
CMS.
    (d) Termination or nonrenewal of agreement by CMS. (1) CMS may 
terminate or not renew an agreement if it determines that--
    (i) The HCPP no longer meets the requirements for participation and 
reimbursement as an HCPP as specified in Sec. 417.800;
    (ii) The HCPP is not in substantial compliance with the provisions 
of the agreement, applicable CMS regulations, or applicable provisions 
of the Medicare law; or
    (iii) The HCPP undergoes a change in ownership as specified in 
subpart M of this part.
    (2) CMS will give notice of termination or nonrenewal to the HCPP at 
least 90 days before the effective date stated in the notice.
    (e) Termination or nonrenewal of agreement by HCPP. (1) If an HCPP 
does not wish to renew its agreement at the end of the term, it must 
give written notice to CMS at least 90 days before the end of the term 
of the agreement. If an HCPP wishes to terminate its agreement before 
the end of the term, it must file a written notice with CMS stating the 
intended effective date of termination.
    (2) CMS may approve the termination date proposed by the HCPP, or 
set a different date no later than 6 months after that date. CMS makes 
this decision based on a finding that termination on a specific date 
would not--
    (i) Unduly disrupt the furnishing of services to the community 
serviced by the HCPP; or

[[Page 770]]

    (ii) Otherwise interfere with the efficient administration of the 
Medicare program.

[50 FR 1375, Jan. 10, 1985, as amended at 57 FR 8202, Mar. 6, 1992; 58 
FR 38081, July 15, 1993; 59 FR 49843, Sept. 30, 1994; 59 FR 59943, Nov. 
21, 1994]



Sec. 417.802  Allowable costs.

    (a) General rule. The costs that are considered allowable for HCPP 
reimbursement are the same as those for reasonable cost HMOs and CMPs 
specified in subpart O of this part, except those in Secs. 417.531, 
417.532 (a)(3) and (c) through (g), 417.536 (l) and (m), 417.546, 
417.548, and 417.550(b)(2).
    (b) Physicians' services and other Part B supplier services 
furnished under arrangements--(1) Principle. The amount paid by an HCPP 
for physicians' services and other Part B supplier services furnished 
under arrangements is an allowable cost to the extent it is reasonable.
    (2) Application: Payment on other than a fee-for-service basis. If 
the HCPP pays for physicians' services and other Part B supplier 
services on other than a fee-for-service basis--
    (i) Except as specified in paragraph (b)(2)(ii) of this section, the 
costs incurred by the HCPP may be considered reasonable if they--
    (A) Do not exceed those that a prudent and cost-conscious buyer 
would incur to purchase those services; and
    (B) Are comparable to costs incurred for similar services furnished 
by similar physicians and other suppliers in the same or a similar 
locality.
    (ii)(A) If a physician group to whom the HCPP makes payment 
compensates its physicians on a fee-for-service basis, the HCPP's 
payment to the group may not exceed the reasonable charges for those 
services, as defined in subpart E of part 405 of this chapter.
    (B) Payment in excess of the limits specified in paragraph 
(b)(2)(ii)(A) of this section is allowable if the group has procedures 
under which members of the group accept effective incentives, such as 
risk-sharing, designed to avoid unnecessary or unduly costly utilization 
of health services. In such cases, the amount paid by the HCPP is 
considered reasonable if it meets the conditions specified in paragraph 
(b)(2)(i) of this section.
    (3) Application: Payment on a fee-for-service basis. If the HCPP 
pays for physicians' services and other Part B supplier services on a 
fee-for-service basis--
    (i) Except as specified in paragraph (b)(3)(ii) of this section, the 
costs incurred by the HCPP are considered reasonable if they do not 
exceed--
    (A) The reasonable charges for those services, as defined in subpart 
E of part 405 of this chapter; and
    (B) The amount that CMS would pay for those services if they were 
furnished to beneficiaries who are not enrolled in the HCPP and who 
receive the services from sources other than providers of services or 
other entities that are reimbursed on a reasonable cost basis.
    (ii) Payment to a physician group organized on an individual-
practice basis is not subject to the paragraph (b)(3)(i) of this section 
if the group pays its physicians on a fee-for-service basis and has 
procedures under which the members of the group accept effective 
incentives, such as risk-sharing, designed to avoid unnecessary or 
unduly costly utilization of health services. In these cases, the amount 
paid by an HCPP is considered reasonable if it meets the conditions 
specified in paragraph (b)(2)(i) of this section.

[50 FR 1375, Jan. 10, 1985, as amended at 58 FR 38081, July 15, 1993]



Sec. 417.804  Cost apportionment.

    (a) The HCPP follows the cost apportionment principles specified in 
Secs. 417.552 through 417.566, except for provisions on provider costs 
and provisions on departmental apportionment.
    (b) The HCPP may use a method for reporting costs that is approved 
by CMS. CMS bases its approval on a finding that the method--
    (1) Results in an accurate and equitable allocation of allowable 
costs; and
    (2) Is justifiable from an administrative and cost efficiency 
standpoint.



Sec. 417.806  Financial records, statistical data, and cost finding.

    (a) The principles specified in Sec. 417.568 apply to HCPPs, except 
those in paragraph (c) of that section.

[[Page 771]]

    (b) The HCPP may use a method for reporting costs that is approved 
by CMS. CMS bases its approval on a finding that the method--
    (1) Results in an accurate and equitable allocation of allowable 
costs; and
    (2) Is justifiable from an administrative and cost efficiency 
standpoint.
    (c) An HCPP must permit the Department and the Comptroller General 
to audit or inspect any books and records of the HCPP and of any related 
organization that pertain to the determination of amounts payable for 
covered Part B services furnished its Medicare enrollees. For purposes 
of this requirement, the principles specified in Sec. 417.486 apply to 
HCPPs.

[50 FR 1375, Jan. 10, 1985, as amended at 58 FR 38081, July 15, 1993]



Sec. 417.808  Interim per capita payments.

    The HCPP follows the principles specified in Secs. 417.570 and 
417.572 on interim per capita payments, except for the following:
    (a) When applying these principles to HCPPs, the term ``reporting 
period'' should be used instead of the term ``contract period'' 
contained in that section.
    (b) An HCPP must submit to CMS an annual operating budget and 
enrollment forecast, in the form and detail specified by CMS, at least 
60 days before the beginning of each reporting period. A reporting 
period must be 12 consecutive months, except that the HCPP's initial 
reporting period for participating in Medicare may be as short as 6 
months or as long as 18 months.
    (c) An HCPP must submit to CMS an interim cost report and enrollment 
data applicable to the first 6-month period of the HCPP's reporting 
period in the form and detail specified by CMS. The interim cost report 
must be submitted not later than 45 days after the close of the first 6-
month period of the HCPP's reporting period.
    (d) In lieu of an interim payment based on the actual monthly 
enrollment in an HCPP, CMS and the HCPP may agree to a uniform monthly 
interim reimbursement rate for a reporting period. This interim rate is 
based on the HCPP's budget and enrollment forecast, if CMS is satisfied 
that the rate is consistent with efficiency and economy, and will not 
result in excessive adjustment at the end of the reporting period.



Sec. 417.810  Final settlement.

    (a) General requirement. CMS and an HCPP must make a final 
settlement, and payment of amounts due either to the HCPP or to CMS, 
following the submission and review of the HCPP's annual cost report and 
the supporting documents specified in paragraph (b) of this section.
    (b) Annual cost report as basis for final settlement--(1) Form and 
due date. An HCPP must submit to CMS a cost report and supporting 
documents in the form and detail specified by CMS, no later than 120 
days following the close of a reporting period.
    (2) Contents. The report must include--
    (i) The HCPP's per capita incurred costs of providing covered Part B 
services to its Medicare enrollees during the reporting period, 
including any costs incurred by another organization related to the HCPP 
by common ownership or control;
    (ii) The HCPP's methods of apportioning costs among its Medicare 
enrollees, enrollees who are not Medicare beneficiaries, and other 
nonenrollees, including Medicare beneficiaries receiving health care 
services on a fee-for-service or other basis; and
    (iii) Information on enrollment and other data as specified by CMS.
    (3) Extension of time to submit cost report. CMS may grant an HCPP 
an extension of time to submit a cost report for good cause shown.
    (4) Failure to report required financial information. If an HCPP 
does not submit the required cost report and supporting documents within 
the time specified in paragraph (b)(1) of this section, and has not 
requested and received an extension of time for good cause shown, CMS 
may--
    (i) Regard the failure to report this information as evidence of 
likely overpayment and reduce or suspend interim payments to the HCPP; 
and
    (ii) Determine that amounts previously paid are overpayments, and 
make appropriate recovery.
    (c) Determination of final settlement. Following the HCPP's 
submission of

[[Page 772]]

the reports specified in paragraph (b) of this section in acceptable 
form, CMS makes a determination of the total reimbursement due the HCPP 
for the reporting period and the difference, if any, between this amount 
and the total interim payments made to the HCPP. CMS sends to the HCPP a 
notice of the amount of reimbursement by the Medicare program. This 
notice--
    (1) Explains CMS's determination of total reimbursement due the HCPP 
for the reporting period; and
    (2) Informs the HCPP of its right to have the determination reviewed 
at a hearing as provided in part 405, subpart R of this chapter.
    (d) Payment of amounts due. (1) Within 30 days of CMS's 
determination, CMS or the HCPP, as appropriate, will make payment of any 
difference between the total amount due and the total interim payments 
made to the HCPP by CMS.
    (2) If the HCPP does not pay CMS within 30 days of CMS's 
determination of any amounts the HCPP owes CMS, CMS may offset further 
payments to the HCPP to recover, or to aid in the recovery of, any 
overpayment identified in its determination.
    (3) Any offset of payments CMS makes under paragraph (d)(2) of this 
section will remain in effect even if the HCPP has requested a hearing 
on the determination under the provisions of part 405, subpart R of this 
chapter.
    (e) Tentative settlement. (1) If a final settlement cannot be made 
within 90 days after the HCPP submits the report specified in paragraph 
(b) of this section, CMS will make an interim settlement by estimating 
the amount payable to the HCPP.
    (2) CMS or the HCPP will make payment within 30 days of CMS's 
determination under the tentative settlement of any estimated amounts 
due.
    (3) The tentative settlement is subject to adjustment at the time of 
a final settlement.

[50 FR 1375, Jan. 10, 1985, as amended at 58 FR 38081, July 15, 1993]



Sec. 417.830  Scope of regulations on beneficiary appeals.

    Sections 417.832 through 417.840 establish procedures for the 
presentation and resolution of organization determinations, 
reconsiderations, hearings, Departmental Appeals Board review, court 
reviews, and finality of decisions that are applicable to Medicare 
enrollees of an HCPP.

[59 FR 59943, Nov. 21, 1994, as amended at 61 FR 32348, June 24, 1996]



Sec. 417.832  Applicability of requirements and procedures.

    (a) The administrative review rights and procedures specified in 
Secs. 417.834 through 417.840 pertain to disputes involving an 
organization determination, as defined in Sec. 417.838, with which the 
enrollee is dissatisfied.
    (b) Physicians and other individuals who furnish items or services 
under arrangements with an HCPP have no right of administrative review 
under Secs. 417.834 through 417.840.
    (c) The provisions of subpart R of 20 CFR part 404 dealing with 
representation of parties under title II of the Act are, unless 
otherwise provided, also applicable.

[59 FR 59943, Nov. 21, 1994]



Sec. 417.834  Responsibility for establishing administrative review procedures.

    The HCPP is responsible for establishing and maintaining the 
administrative review procedures that are specified in Secs. 417.830 
through 417.840.

[59 FR 59943, Nov. 21, 1994]



Sec. 417.836  Written description of administrative review procedures.

    Each HCPP is responsible for ensuring that all Medicare enrollees 
are informed in writing of the administrative review procedures that are 
available to them.

[59 FR 59943, Nov. 21, 1994]



Sec. 417.838  Organization determinations.

    (a) Actions that are organization determinations. For purposes of 
Secs. 417.830 through 417.840, an organization determination is a 
refusal to furnish or arrange for services, or reimburse the party for 
services provided to the beneficiary, on the grounds that the services 
are not covered by Medicare.
    (b) Actions that are not organization determinations. The following 
are not organization determinations for purposes of Secs. 417.830 
through 417.840:

[[Page 773]]

    (1) A determination regarding services that were furnished by the 
HCPP, either directly or under arrangement, for which the enrollee has 
no further obligation for payment.
    (2) A determination regarding services that are not covered under 
the HCPP's agreement with CMS.

[59 FR 59943, Nov. 21, 1994]



Sec. 417.840  Administrative review procedures.

    The HCPP must apply Secs. 417.608 through 417.638 to organization 
determinations that affect its Medicare enrollees, and to 
reconsideration, hearings, Departmental Appeals Board review, and 
judicial review of those organization determinations.

[59 FR 59943, Nov. 21, 1994, as amended at 61 FR 32348, June 24, 1996]



   Subpart V--Administration of Outstanding Loans and Loan Guarantees



Sec. 417.910  Applicability.

    The regulations in this subpart apply, as appropriate, to public and 
private entities that have loans or loan guarantees that--
    (a) Were awarded to them before October 1986 under section 1304 or 
section 1305 of the PHS Act; and
    (b) Are still outstanding.

[59 FR 49842, Sept. 30, 1994]



Sec. 417.911  Definitions.

    As used in this subpart--
    Any 12-month period means the 12-month period beginning on the first 
day of any month.
    Expansion of services means--(1) The addition of any health service 
not previously provided by or through the HMO, that requires an increase 
in the facilities, equipment, or health professionals of the HMO; or
    (2) The improvement or upgrading of existing facilities or 
equipment, or an increase in the number of categories of health 
professionals, of the HMO so that the HMO could provide directly 
services that it previously provided through contract or referral or 
which it could not previously provide with its existing facilities or 
equipment.
    First 60 months of operation or expansion means the 60-month period 
beginning on the first day of the month during which the HMO first 
provided services to enrollees, or in the case of significant expansion, 
first provided services in accordance with its expansion plan.
    Health system agency means an entity that has been designated in 
accordance with section 1515 of the PHS Act; and the term State health 
planning and development agency means an agency that has been designated 
in accordance with section 1521 of the PHS Act.
    Initial costs of operation means any cost incurred in the first 60 
months of an operation or expansion that met any of the following 
requirements:
    (1) Under generally accepted accounting principles or under 
accounting practices prescribed or permitted by State regulatory 
authority, was not a capital cost.
    (2) Was required by State regulatory authority to meet reserves or 
tangible net equity requirements.
    (3) Was for a payment made to reduce balance sheet liabilities 
existing at the beginning of the 60-month period, but only if--(i) The 
payment had been approved in writing by the Secretary; and
    (ii) The total of these payments did not exceed 20 percent of the 
amount of the loan.
    (4) Was for a small capital expenditure, but only if--(i) The cost 
had been approved in writing by the Secretary; and
    (ii) The total of these costs did not exceed $200,000 in any 12-
month period, and $400,000 during the first 60 months of operation or 
expansion.
    Nonprofit as applied to a private entity, means a private agency, 
institution, or organization, no part of the net earnings of which 
inures, or may lawfully inure, to the benefit of any private shareholder 
or individual.
    Significant expansion means--(1) A planned substantial increase in 
the enrollment of the HMO, that requires an increase in the number of 
health professionals serving enrollees of the HMO or an expansion of the 
physical capacity of the HMO's total health facilities; or
    (2) A planned expansion of the service area beyond the current 
service area,

[[Page 774]]

that would be made possible by the addition of health service delivery 
facilities and health professionals to serve enrollees at a new site or 
sites in areas previously without service sites.
    Small capital expenditure means expenditures for--(1) Equipment as 
defined in 45 CFR 74.132; or
    (2) Alterations and renovations required to change the interior 
arrangements or other physical characteristics of an existing facility 
or installed equipment, so that it may be more effectively used for its 
currently designated purpose, or adapted to a changed use.

[58 FR 38076, July 15, 1993, as amended at 59 FR 49842, Sept. 30, 1994]



Sec. 417.920  Planning and initial development.

    (a) Under section 1304 of the PHS Act, grants and loan guarantees 
were awarded for projects for planning and initial development of HMOs.
    (b) Planning projects included projects for any of the following:
    (1) Establishment of an HMO.
    (2) Significant expansion of the HMO's enrollment or geographic 
area.
    (c) Initial development projects included projects for any of the 
following:
    (1) Establishment of an HMO.
    (2) Significant expansion of the HMO's enrollment or geographic 
area.
    (3) Expansion of the range or amount of services furnished by the 
HMO.

[58 FR 38076, July 15, 1993]



Sec. 417.930  Initial costs of operation.

    Under section 1305 of the PHS, loans and loan guarantees were 
awarded for initial costs of operation of HMOs.

[58 FR 38077, July 15, 1993]



Sec. 417.931  [Reserved]



Sec. 417.934  Reserve requirement.

    (a) Timing. Unless the Secretary approved a longer period, an entity 
that received a loan or loan guarantee under section 1305 of the PHS Act 
was required to establish a restricted reserve account on the earlier of 
the following:
    (1) When the HMO's revenues and costs of operation reached the 
break-even point.
    (2) At the end of the 60-month period following the Secretary's 
endorsement of the loan or loan guarantee.
    (b) Purpose and amount of reserve. The reserve had to be constituted 
so as to accumulate, no later than 12 years after endorsement of the 
loan or loan guarantee, an amount equal to 1 year's principal and 
interest.

[59 FR 49842, Sept. 30, 1994]



Sec. 417.937  Loan and loan guarantee provisions.

    (a) Disbursement of loan proceeds. The principal amount of any loan 
made or guaranteed by the Secretary under this subpart was disbursed to 
the entity in accordance with an agreement entered into between the 
parties to the loan and approved by the Secretary.
    (b) Length and maturity of loans. The principal amount of each loan 
or loan guarantee, together with interest thereon, is repayable over a 
period of 22 years, beginning on the date of endorsement of the loan, or 
loan guarantee by the Secretary. The Secretary could approve a shorter 
repayment period if he or she determined that a repayment period of less 
than 22 years is more appropriate to an entity's total financial plan.
    (c) Repayment. The principal amount of each loan or loan guarantee, 
together with interest thereon is repayable in accordance with a 
repayment schedule that is agreed upon by the parties to the loan or 
loan guarantee and approved by the Secretary before or at the time of 
endorsement of the loan. Unless otherwise specifically authorized by the 
Secretary, each loan made or guaranteed by the Secretary is repayable in 
substantially level combined installments of principal and interest to 
be paid at intervals not less frequently than annually, sufficient in 
amount to amortize the loan through the final year of the life of the 
loan. Principal repayment during the first 60 months of operation could 
be deferred with payment of interest only during that period. The 
Secretary could set rates of interest for each disbursement at a rate 
comparable to the rate of interest prevailing on the date of 
disbursement for marketable obligations

[[Page 775]]

of the United States of comparable maturities, adjusted to provide for 
appropriate administrative charges.

[59 FR 49842, Sept. 30, 1994]



Sec. 417.940  Civil action to enforce compliance with assurances.

    The provisions of Sec. 417.163(g) apply to entities that have 
outstanding loans or loan guarantees administered under this subpart.

[59 FR 49843, Sept. 30, 1994]



PART 418--HOSPICE CARE--Table of Contents




              Subpart A--General Provision and Definitions

Sec.
418.1  Statutory basis.
418.2  Scope of part.
418.3  Definitions.

        Subpart B--Eligibility, Election and Duration of Benefits

418.20  Eligibility requirements.
418.21  Duration of hospice care coverage--Election periods.
418.22  Certification of terminal illness.
418.24  Election of hospice care.
418.28  Revoking the election of hospice care.
418.30  Change of the designated hospice.

     Subpart C--Conditions of Participation--General Provisions and 
                             Administration

418.50  Condition of participation--General provisions.
418.52  Condition of participation--Governing body.
418.54  Condition of participation--Medical director.
418.56  Condition of participation--Professional management.
418.58  Condition of participation--Plan of care.
418.60  Condition of participation--Continuation of care.
418.62  Condition of participation--Informed consent.
418.64  Condition of participation--Inservice training.
418.66  Condition of participation--Quality assurance.
418.68  Condition of participation--Interdisciplinary group.
418.70  Condition of participation--Volunteers.
418.72  Condition of participation--Licensure.
418.74  Condition of participation--Central clinical records.

          Subpart D--Conditions of Participation: Core Services

418.80  Condition of participation--Furnishing of core services.
418.82  Condition of participation--Nursing services.
418.83  Nursing services--Waiver of requirement that substantially all 
          nursing services be routinely provided directly by a hospice.
418.84  Condition of participation--Medical social services.
418.86  Condition of participation--Physician services.
418.88  Condition of participation--Counseling services.

         Subpart E--Conditions of Participation: Other Services

418.90  Condition of participation--Furnishing of other services.
418.92  Condition of participation--Physical therapy, occupational 
          therapy, and speech-language pathology.
418.94  Condition of participation--Home health aide and homemaker 
          services.
418.96  Condition of participation--Medical supplies.
418.98  Condition of participation--Short term inpatient care.
418.100  Condition of participation--Hospices that provide inpatient 
          care directly.

                       Subpart F--Covered Services

418.200  Requirements for coverage.
418.202  Covered services.
418.204  Special coverage requirements.

                   Subpart G--Payment for Hospice Care

418.301  Basic rules.
418.302  Payment procedures for hospice care.
418.304  Payment for physician services.
418.306  Determination of payment rates.
418.307  Periodic interim payments.
418.308  Limitation on the amount of hospice payments.
418.309  Hospice cap amount.
418.310  Reporting and recordkeeping requirements.
418.311  Administrative appeals.

                         Subpart H--Coinsurance

418.400  Individual liability for coinsurance for hospice care.
418.402  Individual liability for services that are not considered 
          hospice care.
418.405  Effect of coinsurance liability on Medicare payment.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

[[Page 776]]


    Source: 48 FR 56026, Dec. 16, 1983, unless otherwise noted.



              Subpart A--General Provision and Definitions



Sec. 418.1  Statutory basis.

    This part implements section 1861(dd) of the Social Security Act. 
Section 1861(dd) specifies services covered as hospice care and the 
conditions that a hospice program must meet in order to participate in 
the Medicare program. The following sections of the Act are also 
pertinent:
    (a) Sections 1812(a) (4) and (d) of the Act specify eligibility 
requirements for the individual and the benefit periods.
    (b) Section 1813(a)(4) of the Act specifies coinsurance amounts.
    (c) Sections 1814(a)(7) and 1814(i) of the Act contain conditions 
and limitations on coverage of, and payment for, hospice care.
    (d) Sections 1862(a) (1), (6) and (9) of the Act establish limits on 
hospice coverage.

[48 FR 56026, Dec. 16, 1983, as amended at 57 FR 36017, Aug. 12, 1992]



Sec. 418.2  Scope of part.

    Subpart A of this part sets forth the statutory basis and scope and 
defines terms used in this part. Subpart B specifies the eligibility 
requirements and the benefit periods. Subpart C specifies conditions of 
participation for hospices. Subpart D describes the covered services and 
specifies the limits on services covered as hospice care. Subpart E 
specifies the reimbursement methods and procedures. Subpart F specifies 
coinsurance amounts applicable to hospice care.



Sec. 418.3  Definitions.

    For purposes of this part--
    Attending physician means a physician who--
    (a) Is a doctor of medicine or osteopathy; and
    (b) Is identified by the individual, at the time he or she elects to 
receive hospice care, as having the most significant role in the 
determination and delivery of the individual's medical care.
    Bereavement counseling means counseling services provided to the 
individual's family after the individual's death.
    Cap period means the twelve-month period ending October 31 used in 
the application of the cap on overall hospice reimbursement specified in 
Sec. 418.309.
    Employee means an employee (defined by section 210(j) of the Act) of 
the hospice or, if the hospice is a subdivision of an agency or 
organization, an employee of the agency or organization who is 
appropriately trained and assigned to the hospice unit. ``Employee'' 
also refers to a volunteer under the jurisdiction of the hospice.
    Hospice means a public agency or private organization or subdivision 
of either of these that--is primarily engaged in providing care to 
terminally ill individuals.
    Physician means physician as defined in Sec. 410.20 of this chapter.
    Representative means an individual who has been authorized under 
State law to terminate medical care or to elect or revoke the election 
of hospice care on behalf of a terminally ill individual who is mentally 
or physically incapacitated.
    Social worker means a person who has at least a bachelor's degree 
from a school accredited or approved by the Council on Social Work 
Education.
    Terminally ill means that the individual has a medical prognosis 
that his or her life expectancy is 6 months or less if the illness runs 
its normal course.

[48 FR 56026, Dec. 16, 1983, as amended at 52 FR 4499, Feb. 12, 1987; 50 
FR 50834, Dec. 11, 1990]



        Subpart B--Eligibility, Election and Duration of Benefits



Sec. 418.20  Eligibility requirements.

    In order to be eligible to elect hospice care under Medicare, an 
individual must be--
    (a) Entitled to Part A of Medicare; and
    (b) Certified as being terminally ill in accordance with 
Sec. 418.22.



Sec. 418.21  Duration of hospice care coverage--Election periods.

    (a) Subject to the conditions set forth in this part, an individual 
may

[[Page 777]]

elect to receive hospice care during one or more of the following 
election periods:
    (1) An initial 90-day period.
    (2) A subsequent 90-day period.
    (3) A subsequent 30-day period.
    (4) A subsequent extension period of unlimited duration during the 
individual's lifetime.
    (b) The periods of care are available in the order listed and may be 
elected separately at different times.

[55 FR 50834, Dec. 11, 1990, as amended at 57 FR 36017, Aug. 12, 1992]



Sec. 418.22  Certification of terminal illness.

    (a) Timing of certification--(1) General rule. The hospice must 
obtain written certification of terminal illness for each of the periods 
listed in Sec. 418.21, even if a single election continues in effect for 
two, three, or four periods, as provided in Sec. 418.24(c).
    (2) Basic requirement. Except as provided in paragraph (a)(3) of 
this section, the hospice must obtain the written certification no later 
than two calendar days after the period begins.
    (3) Exception. For the initial 90-day period, if the hospice cannot 
obtain the written certifications within two calendar days, it must 
obtain oral certifications within two calendar days, and written 
certifications no later than eight calendar days after the period 
begins.
    (b) Content of certification. The certification must specify that 
the individual's prognosis is for a life expectancy of 6 months or less 
if the terminal illness runs its normal course.
    (c) Sources of certification. (1) For the initial 90-day period, the 
hospice must obtain written certification statements (and oral 
certification statements if required under paragraph (a)(3) of this 
section) from--
    (i) The medical director of the hospice or the physician member of 
the hospice interdisciplinary group; and
    (ii) The individual's attending physician if the individual has an 
attending physician.
    (2) For subsequent periods, the only requirement is certification by 
one of the physicians listed in paragraph (c)(1)(i) of this section.
    (d) Maintenance of records. Hospice staff must--
    (1) Make an appropriate entry in the patient's medical record as 
soon as they receive an oral certification; and
    (2) File written certifications in the medical record.

[55 FR 50834, Dec. 11, 1990, as amended at 57 FR 36017, Aug. 12, 1992]



Sec. 418.24  Election of hospice care.

    (a) Filing an election statement. An individual who meets the 
eligibility requirement of Sec. 418.20 may file an election statement 
with a particular hospice. If the individual is physically or mentally 
incapacitated, his or her representative (as defined in Sec. 418.3) may 
file the election statement.
    (b) Content of election statement. The election statement must 
include the following:
    (1) Identification of the particular hospice that will provide care 
to the individual.
    (2) The individual's or representative's acknowledgement that he or 
she has been given a full understanding of the palliative rather than 
curative nature of hospice care, as it relates to the individual's 
terminal illness.
    (3) Acknowledgement that certain Medicare services, as set forth in 
paragraph (d) of this section, are waived by the election.
    (4) The effective date of the election, which may be the first day 
of hospice care or a later date, but may be no earlier than the date of 
the election statement.
    (5) The signature of the individual or representative.
    (c) Duration of election. An election to receive hospice care will 
be considered to continue through the initial election period and 
through the subsequent election periods without a break in care as long 
as the individual--
    (1) Remains in the care of a hospice; and
    (2) Does not revoke the election under the provisions of 
Sec. 418.28.
    (d) Waiver of other benefits. For the duration of an election of 
hospice care, an individual waives all rights to Medicare payments for 
the following services:
    (1) Hospice care provided by a hospice other than the hospice 
designated by

[[Page 778]]

the individual (unless provided under arrangements made by the 
designated hospice).
    (2) Any Medicare services that are related to the treatment of the 
terminal condition for which hospice care was elected or a related 
condition or that are equivalent to hospice care except for services--
    (i) Provided by the designated hospice:
    (ii) Provided by another hospice under arrangements made by the 
designated hospice; and
    (iii) Provided by the individual's attending physician if that 
physician is not an employee of the designated hospice or receiving 
compensation from the hospice for those services.
    (e) Re-election of hospice benefits. If an election has been revoked 
in accordance with Sec. 418.28, the individual (or his or her 
representative if the individual is mentally or physically 
incapacitated) may at any time file an election, in accordance with this 
section, for any other election period that is still available to the 
individual.

[55 FR 50834, Dec. 11, 1990]



Sec. 418.28  Revoking the election of hospice care.

    (a) An individual or representative may revoke the individual's 
election of hospice care at any time during an election period.
    (b) To revoke the election of hospice care, the individual or 
representative must file a statement with the hospice that includes the 
following information:
    (1) A signed statement that the individual or representative revokes 
the individual's election for Medicare coverage of hospice care for the 
remainder of that election period.
    (2) The date that the revocation is to be effective. (An individual 
or representative may not designate an effective date earlier than the 
date that the revocation is made).
    (c) An individual, upon revocation of the election of Medicare 
coverage of hospice care for a particular election period--
    (1) Is no longer covered under Medicare for hospice care;
    (2) Resumes Medicare coverage of the benefits waived under 
Sec. 418.24(e)(2); and
    (3) May at any time elect to receive hospice coverage for any other 
hospice election periods that he or she is eligible to receive.



Sec. 418.30  Change of the designated hospice.

    (a) An individual or representative may change, once in each 
election period, the designation of the particular hospice from which 
hospice care will be received.
    (b) The change of the designated hospice is not a revocation of the 
election for the period in which it is made.
    (c) To change the designation of hospice programs, the individual or 
representative must file, with the hospice from which care has been 
received and with the newly designated hospice, a statement that 
includes the following information:
    (1) The name of the hospice from which the individual has received 
care and the name of the hospice from which he or she plans to receive 
care.
    (2) The date the change is to be effective.



     Subpart C--Conditions of Participation--General Provisions and 
                             Administration



Sec. 418.50  Condition of participation--General provisions.

    (a) Standard: Compliance. A hospice must maintain compliance with 
the conditions of this subpart and subparts D and E of this part.
    (b) Standard: Required services. A hospice must be primarily engaged 
in providing the care and services described in Sec. 418.202, must 
provide bereavement counseling and must--
    (1) Make nursing services, physician services, and drugs and 
biologicals routinely available on a 24-hour basis;
    (2) Make all other covered services available on a 24-hour basis to 
the extent necessary to meet the needs of individuals for care that is 
reasonable and necessary for the palliation and management of terminal 
illness and related conditions; and
    (3) Provide these services in a manner consistent with accepted 
standards of practice.
    (c) Standard: Disclosure of information. The hospice must meet the 
disclosure

[[Page 779]]

of information requirements at Sec. 420.206 of this chapter.

[48 FR 56026, Dec. 16, 1983, as amended at 55 FR 50834, Dec. 11, 1990]



Sec. 418.52  Condition of participation--Governing body.

    A hospice must have a governing body that assumes full legal 
responsibility for determining, implementing and monitoring policies 
governing the hospice's total operation. The governing body must 
designate an individual who is responsible for the day to day management 
of the hospice program. The governing body must also ensure that all 
services provided are consistent with accepted standards of practice.



Sec. 418.54  Condition of participation--Medical director.

    The medical director must be a hospice employee who is a doctor of 
medicine or osteopathy who assumes overall responsibility for the 
medical component of the hospice's patient care program.



Sec. 418.56  Condition of participation--Professional management.

    Subject to the conditions of participation pertaining to services in 
Secs. 418.80 and 418.90, a hospice may arrange for another individual or 
entity to furnish services to the hospice's patients. If services are 
provided under arrangement, the hospice must meet the following 
standards:
    (a) Standard: Continuity of care. The hospice program assures the 
continuity of patient/family care in home, outpatient, and inpatient 
settings.
    (b) Standard: Written agreement. The hospice has a legally binding 
written agreement for the provision of arranged services. The agreement 
includes at least the following:
    (1) Identification of the services to be provided.
    (2) A stipulation that services may be provided only with the 
express authorization of the hospice.
    (3) The manner in which the contracted services are coordinated, 
supervised, and evaluated by the hospice.
    (4) The delineation of the role(s) of the hospice and the contractor 
in the admission process, patient/family assessment, and the 
interdisciplinary group care conferences.
    (5) Requirements for documenting that services are furnished in 
accordance with the agreement.
    (6) The qualifications of the personnel providing the services.
    (c) Standard: Professional management responsibility. The hospice 
retains professional management responsibility for those services and 
ensures that they are furnished in a safe and effective manner by 
persons meeting the qualifications of this part, and in accordance with 
the patient's plan of care and the other requirements of this part.
    (d) Standard: Financial responsibility. The hospice retains 
responsibility for payment for services.
    (e) Standard: Inpatient care. The hospice ensures that inpatient 
care is furnished only in a facility which meets the requirements in 
Sec. 418.98 and its arrangement for inpatient care is described in a 
legally binding written agreement that meets the requirements of 
paragraph (b) and that also specifies, at a minimum--
    (1) That the hospice furnishes to the inpatient provider a copy of 
the patient's plan of care and specifies the inpatient services to be 
furnished;
    (2) That the inpatient provider has established policies consistent 
with those of the hospice and agrees to abide by the patient care 
protocols established by the hospice for its patients;
    (3) That the medical record includes a record of all inpatient 
services and events and that a copy of the discharge summary and, if 
requested, a copy of the medical record are provided to the hospice;
    (4) The party responsible for the implementation of the provisions 
of the agreement; and
    (5) That the hospice retains responsibility for appropriate hospice 
care training of the personnel who provide the care under the agreement.

[48 FR 56026, Dec. 16, 1983; 48 FR 57282, Dec. 29, 1983]



Sec. 418.58  Condition of participation--Plan of care.

    A written plan of care must be established and maintained for each 
individual admitted to a hospice program,

[[Page 780]]

and the care provided to an individual must be in accordance with the 
plan.
    (a) Standard: Establishment of plan. The plan must be established by 
the attending physician, the medical director or physician designee and 
interdisciplinary group prior to providing care.
    (b) Standard: Review of plan. The plan must be reviewed and updated, 
at intervals specified in the plan, by the attending physician, the 
medical director or physician designee and interdisciplinary group. 
These reviews must be documented.
    (c) Standard: Content of plan. The plan must include an assessment 
of the individual's needs and identification of the services including 
the management of discomfort and symptom relief. It must state in detail 
the scope and frequency of services needed to meet the patient's and 
family's needs.



Sec. 418.60  Condition of participation--Continuation of care.

    A hospice may not discontinue or diminish care provided to a 
Medicare beneficiary because of the beneficiary's inability to pay for 
that care.



Sec. 418.62  Condition of participation--Informed consent.

    A hospice must demonstrate respect for an individual's rights by 
ensuring that an informed consent form that specifies the type of care 
and services that may be provided as hospice care during the course of 
the illness has been obtained for every individual, either from the 
individual or representative as defined in Sec. 418.3.



Sec. 418.64  Condition of participation--Inservice training.

    A hospice must provide an ongoing program for the training of its 
employees.



Sec. 418.66  Condition of participation--Quality assurance.

    A hospice must conduct an ongoing, comprehensive, integrated, self-
assessment of the quality and appropriateness of care provided, 
including inpatient care, home care and care provided under 
arrangements. The findings are used by the hospice to correct identified 
problems and to revise hospice policies if necessary. Those responsible 
for the quality assurance program must--
    (a) Implement and report on activities and mechanisms for monitoring 
the quality of patient care;
    (b) Identify and resolve problems; and
    (c) Make suggestions for improving patient care.



Sec. 418.68  Condition of participation--Interdisciplinary group.

    The hospice must designate an interdisciplinary group or groups 
composed of individuals who provide or supervise the care and services 
offered by the hospice.
    (a) Standard: Composition of group. The hospice must have an 
interdisciplinary group or groups that include at least the following 
individuals who are employees of the hospice:
    (1) A doctor of medicine or osteopathy.
    (2) A registered nurse.
    (3) A social worker.
    (4) A pastoral or other counselor.
    (b) Standard: Role of group. The interdisciplinary group is 
responsible for--
    (1) Participation in the establishment of the plan of care;
    (2) Provision or supervision of hospice care and services;
    (3) Periodic review and updating of the plan of care for each 
individual receiving hospice care; and
    (4) Establishment of policies governing the day-to-day provision of 
hospice care and services.
    (c) If a hospice has more than one interdisciplinary group, it must 
designate in advance the group it chooses to execute the functions 
described in paragraph (b)(4) of this section.
    (d) Standard: Coordinator. The hospice must designate a registered 
nurse to coordinate the implementation of the plan of care for each 
patient.



Sec. 418.70  Condition of participation--Volunteers.

    The hospice in accordance with the numerical standards, specified in 
paragraph (e) of this section, uses volunteers, in defined roles, under 
the supervision of a designated hospice employee.
    (a) Standard: Training. The hospice must provide appropriate 
orientation

[[Page 781]]

and training that is consistent with acceptable standards of hospice 
practice.
    (b) Standard: Role. Volunteers must be used in administrative or 
direct patient care roles.
    (c) Standard: Recruiting and retaining. The hospice must document 
active and ongoing efforts to recruit and retain volunteers.
    (d) Standard: Cost saving. The hospice must document the cost 
savings achieved through the use of volunteers. Documentation must 
include--
    (1) The identification of necessary positions which are occupied by 
volunteers;
    (2) The work time spent by volunteers occupying those positions; and
    (3) Estimates of the dollar costs which the hospice would have 
incurred if paid employees occupied the positions identified in 
paragraph (d)(1) for the amount of time specified in paragraph (d)(2).
    (e) Standard: Level of activity. A hospice must document and 
maintain a volunteer staff sufficient to provide administrative or 
direct patient care in an amount that, at a minimum, equals 5 percent of 
the total patient care hours of all paid hospice employees and contract 
staff. The hospice must document a continuing level of volunteer 
activity. Expansion of care and services achieved through the use of 
volunteers, including the type of services and the time worked, must be 
recorded.
    (f) Standard: Availability of clergy. The hospice must make 
reasonable efforts to arrange for visits of clergy and other members of 
religious organizations in the community to patients who request such 
visits and must advise patients of this opportunity.



Sec. 418.72  Condition of participation--Licensure.

    The hospice and all hospice employees must be licensed in accordance 
with applicable Federal, State and local laws and regulations.
    (a) Standard: Licensure of program. If State or local law provides 
for licensing of hospices, the hospice must be licensed.
    (b) Standard: Licensure of employees. Employees who provide services 
must be licensed, certified or registered in accordance with applicable 
Federal or State laws.



Sec. 418.74  Condition of participation--Central clinical records.

    In accordance with accepted principles of practice, the hospice must 
establish and maintain a clinical record for every individual receiving 
care and services. The record must be complete, promptly and accurately 
documented, readily accessible and systematically organized to 
facilitate retrieval.
    (a) Standard: Content. Each clinical record is a comprehensive 
compilation of information. Entries are made for all services provided. 
Entries are made and signed by the person providing the services. The 
record includes all services whether furnished directly or under 
arrangements made by the hospice. Each individual's record contains--
    (1) The initial and subsequent assessments;
    (2) The plan of care;
    (3) Identification data;
    (4) Consent and authorization and election forms;
    (5) Pertinent medical history; and
    (6) Complete documentation of all services and events (including 
evaluations, treatments, progress notes, etc.).
    (b) Standard; Protection of information. The hospice must safeguard 
the clinical record against loss, destruction and unauthorized use.



          Subpart D--Conditions of Participation: Core Services



Sec. 418.80  Condition of participation--Furnishing of core services.

    Except as permitted in Sec. 418.83, a hospice must ensure that 
substantially all the core services described in this subpart are 
routinely provided directly by hospice employees. A hospice may use 
contracted staff if necessary to supplement hospice employees in order 
to meet the needs of patients during periods of peak patient loads or 
under extraordinary circumstances. If contracting is used, the hospice 
must maintain professional, financial, and administrative responsibility 
for the services and must assure that the

[[Page 782]]

qualifications of staff and services provided meet the requirements 
specified in this subpart.

[52 FR 7416, Mar. 11, 1987, as amended at 55 FR 50835, Dec. 11, 1990]



Sec. 418.82  Condition of participation--Nursing services.

    The hospice must provide nursing care and services by or under the 
supervision of a registered nurse.
    (a) Nursing services must be directed and staffed to assure that the 
nursing needs of patients are met.
    (b) Patient care responsibilities of nursing personnel must be 
specified.
    (c) Services must be provided in accordance with recognized 
standards of practice.



Sec. 418.83  Nursing services--Waiver of requirement that substantially all nursing services be routinely provided directly by a hospice.

    (a) CMS may approve a waiver of the requirement in Sec. 418.80 for 
nursing services provided by a hospice which is located in a non-
urbanized area. The location of a hospice that operates in several areas 
is considered to be the location of its central office. The hospice must 
provide evidence that it was operational on or before January 1, 1983, 
and that it made a good faith effort to hire a sufficient number of 
nurses to provide services directly. CMS bases its decision as to 
whether to approve a waiver application on the following:
    (1) The current Bureau of the Census designations for determining 
non-urbanized areas.
    (2) Evidence that a hospice was operational on or before January 1, 
1983 including:
    (i) Proof that the organization was established to provide hospice 
services on or before January 1, 1983;
    (ii) Evidence that hospice-type services were furnished to patients 
on or before January 1, 1983; and
    (iii) Evidence that the hospice care was a discrete activity rather 
than an aspect of another type of provider's patient care program on or 
before January 1, 1983.
    (3) Evidence that a hospice made a good faith effort to hire nurses, 
including:
    (i) Copies of advertisements in local newspapers that demonstrate 
recruitment efforts;
    (ii) Job descriptions for nurse employees;
    (iii) Evidence that salary and benefits are competitive for the 
area; and
    (iv) Evidence of any other recruiting activities (e.g., recruiting 
efforts at health fairs and contacts with nurses at other providers in 
the area);
    (b) Any waiver request is deemed to be granted unless it is denied 
within 60 days after it is received.
    (c) Waivers will remain effective for one year at a time.
    (d) CMS may approve a maximum of two one-year extensions for each 
initial waiver. If a hospice wishes to receive a one-year extension, the 
hospice must submit a certification to CMS, prior to the expiration of 
the waiver period, that the employment market for nurses has not changed 
significantly since the time the initial waiver was granted.

[52 FR 7416, Mar. 11, 1987]



Sec. 418.84  Condition of participation--Medical social services.

    Medical social services must be provided by a qualified social 
worker, under the direction of a physician.



Sec. 418.86  Condition of participation--Physician services.

    In addition to palliation and management of terminal illness and 
related conditions, physician employees of the hospice, including the 
physician member(s) of the interdisciplinary group, must also meet the 
general medical needs of the patients to the extent that these needs are 
not met by the attending physician.



Sec. 418.88  Condition of participation--Counseling services.

    Counseling services must be available to both the individual and the 
family. Counseling includes bereavement counseling, provided after the 
patient's death as well as dietary, spiritual and any other counseling 
services for the individual and family provided while the individual is 
enrolled in the hospice.
    (a) Standard: Bereavement counseling. There must be an organized 
program

[[Page 783]]

for the provision of bereavement services under the supervision of a 
qualified professional. The plan of care for these services should 
reflect family needs, as well as a clear delineation of services to be 
provided and the frequency of service delivery (up to one year following 
the death of the patient). A special coverage provision for bereavement 
counseling is specified Sec. 418.204(c).
    (b) Standard: Dietary counseling. Dietary counseling, when required, 
must be provided by a qualified individual.
    (c) Standard: Spiritual counseling. Spiritual counseling must 
include notice to patients as to the availability of clergy as provided 
in Sec. 418.70(f).
    (d) Standard: Additional counseling. Counseling may be provided by 
other members of the interdisciplinary group as well as by other 
qualified professionals as determined by the hospice.



         Subpart E--Conditions of Participation: Other Services



Sec. 418.90  Condition of participation--Furnishing of other services.

    A hospice must ensure that the services described in this subpart 
are provided directly by hospice employees or under arrangements made by 
the hospice as specified in Sec. 418.56.

[48 FR 56026, Dec. 16, 1983, as amended at 55 FR 50835, Dec. 11, 1990]



Sec. 418.92  Condition of participation--Physical therapy, occupational therapy, and speech-language pathology.

    (a) Physical therapy services, occupational therapy services, and 
speech-language patholgy services must be available, and when provided, 
offered in a manner consistent with accepted standards of practice.
    (b)(1) If the hospice engages in laboratory testing outside of the 
context of assisting an individual in self-administering a test with an 
appliance that has been cleared for that purpose by the FDA, such 
testing must be in compliance with all applicable requirements of part 
493 of this chapter.
    (2) If the hospice chooses to refer specimens for laboratory testing 
to another laboratory, the referral laboratory must be certified in the 
appropriate specialties and subspecialties of services in accordance 
with the applicable requirements of part 493 of this chapter.

[57 FR 7135, Feb. 28, 1992]



Sec. 418.94  Condition of participation-- Home health aide and homemaker services.

    Home health aide and homemaker services must be available and 
adequate in frequency to meet the needs of the patients. A home health 
aide is a person who meets the training, attitude and skill requirements 
specified in Sec. 484.36 of this chapter.
    (a) Standard: Supervision. A registered nurse must visit the home 
site at least every two weeks when aide services are being provided, and 
the visit must include an assessment of the aide services.
    (b) Standard: Duties. Written instructions for patient care are 
prepared by a registered nurse. Duties include, but may not be limited 
to, the duties specified in Sec. 484.36(c) of this chapter.

[48 FR 56026, Dec. 16, 1983, as amended at 55 FR 50835, Dec. 11, 1990]



Sec. 418.96  Condition of participation--Medical supplies.

    Medical supplies and appliances including drugs and biologicals, 
must be provided as needed for the palliation and management of the 
terminal illness and related conditions.
    (a) Standard: Administration. All drugs and biologicals must be 
administered in accordance with accepted standards of practice.
    (b) Standard: Controlled drugs in the patient's home. The hospice 
must have a policy for the disposal of controlled drugs maintained in 
the patient's home when those drugs are no longer needed by the patient.
    (c) Standard: Administration of drugs and biologicals. Drugs and 
biologicals are administered only by the following individuals:
    (1) A licensed nurse or physician.
    (2) An employee who has completed a State-approved training program 
in medication administration.
    (3) The patient if his or her attending physician has approved.
    (4) Any other individual in accordance with applicable State and 
local

[[Page 784]]

laws. The persons, and each drug and biological they are authorized to 
administer, must be specified in the patient's plan of care.



Sec. 418.98  Condition of participation--Short term inpatient care.

    Inpatient care must be available for pain control, symptom 
management and respite purposes, and must be provided in a participating 
Medicare or Medicaid facility.
    (a) Standard: Inpatient care for symptom control. Inpatient care for 
pain control and symptom management must be provided in one of the 
following:
    (1) A hospice that meets the condition of participation for 
providing inpatient care directly as specified in Sec. 418.100.
    (2) A hospital or an SNF that also meets the standards specified in 
Sec. 418.100 (a) and (e) regarding 24-hour nursing service and patient 
areas.
    (b) Standard: Inpatient care for respite purposes. Inpatient care 
for respite purposes must be provided by one of the following:
    (1) A provider specified in paragraph (a) of this section.
    (2) An ICF that also meets the standards specified in Sec. 418.100 
(a) and (e) regarding 24-hour nursing service and patient areas.
    (c) Standard: Inpatient care limitation. The total number of 
inpatient days used by Medicare beneficiaries who elected hospice 
coverage in any 12-month period preceding a certification survey in a 
particular hospice may not exceed 20 percent of the total number of 
hospice days for this group of beneficiaries.
    (d) Standard: Exemption from limitation. Until October 1, 1986, any 
hospice that began operation before January 1, 1975 is not subject to 
the limitation specified in paragraph (c).

[48 FR 56026, Dec. 16, 1983, as amended at 55 FR 50835, Dec. 11, 1990]



Sec. 418.100  Condition of participation  Hospices that provide inpatient care directly.

    A hospice that provides inpatient care directly must comply with all 
of the following standards.
    (a) Standard: Twenty-four-hour nursing services. (1) The facility 
provides 24-hour nursing services which are sufficient to meet total 
nursing needs and which are in accordance with the patient plan of care. 
Each patient receives treatments, medications, and diet as prescribed, 
and is kept comfortable, clean, well-groomed, and protected from 
accident, injury, and infection.
    (2) Each shift must include a registered nurse who provides direct 
patient care.
    (b) Standard: Disaster preparedness. The hospice has an acceptable 
written plan, periodically rehearsed with staff, with procedures to be 
followed in the event of an internal or external disaster and for the 
care of casualties (patients and personnel) arising from such disasters.
    (c) Standard: Health and safety laws. The hospice must meet all 
Federal, State, and local laws, regulations, and codes pertaining to 
health and safety, such as provisions regulating--
    (1) Construction, maintenance, and equipment for the hospice;
    (2) Sanitation;
    (3) Communicable and reportable diseases; and
    (4) Post mortem procedures.
    (d) Standard: Fire protection. (1) Except as provided in paragraphs 
(d) (2) and (3) of this section, the hospice must meet the provisions of 
the 1985 edition of the Life Safety Code of the National Fire Protection 
Association (which is incorporated by reference)1 that are 
applicable to hospices.
---------------------------------------------------------------------------

    \1\ See footnote to Sec. 405.1134(a) of this chapter.
---------------------------------------------------------------------------

    (2) In consideration of a recommendation by the State survey agency, 
CMS may waive, for periods deemed appropriate, specific provisions of 
the Life Safety Code which, if rigidly applied would result in 
unreasonable hardship for the hospice, but only if the waiver would not 
adversely affect the health and safety of the patients.
    (3) Any hospice that, on May 9, 1988, complies with the requirements 
of the 1981 edition of the Life Safety Code, with or without waivers, 
will be considered to be in compliance with this standard, as long as 
the hospice continues to remain in compliance with that edition of the 
Life Safety Code.

[[Page 785]]

    (4) Any facility of two or more stories that is not of fire 
resistive construction and is participating on the basis of a waiver of 
construction type or height, may not house blind, nonambulatory, or 
physically handicapped patients above the street-level floor unless the 
facility--
    (i) Is one of the following construction types (as defined in the 
Life Safety Code):
    (A) Type II (1, 1, 1)--protected non-combustible.
    (B) Fully sprinklered Type II (0, 0, 0)--non-combustible.
    (C) Fully sprinklered Type III (2, 1, 1)--protected ordinary.
    (D) Fully sprinklered Type V (1, 1, 1)--protected wood frame; or
    (ii) Achieves a passing score on the Fire Safety Evaluation System 
(FSES).
    (e) Standard: Patient areas. (1) The hospice must design and equip 
areas for the comfort and privacy of each patient and family members.
    (2) The hospice must have--
    (i) Physical space for private patient/family visiting;
    (ii) Accommodations for family members to remain with the patient 
throughout the night;
    (iii) Accommodations for family privacy after a patient's death; and
    (iv) Decor which is homelike in design and function.
    (3) Patients must be permitted to receive visitors at any hour, 
including small children.
    (f) Standard: Patient rooms and toilet facilities. Patient rooms are 
designed and equipped for adequate nursing care and the comfort and 
privacy of patients.
    (1) Each patient's room must--
    (i) Be equipped with or conveniently located near toilet and bathing 
facilities;
    (ii) Be at or above grade level;
    (iii) Contain a suitable bed for each patient and other appropriate 
furniture;
    (iv) Have closet space that provides security and privacy for 
clothing and personal belongings;
    (v) Contain no more than four beds;
    (vi) Measure at least 100 square feet for a single patient room or 
80 square feet for each patient for a multipatient room; and
    (vii) Be equipped with a device for calling the staff member on 
duty.
    (2) For an existing building, CMS may waive the space and occupancy 
requirements of paragraphs (f)(1) (v) and (vi) of this section for as 
long as it is considered appropriate if it finds that--
    (i) The requirements would result in unreasonable hardship on the 
hospice if strictly enforced; and
    (ii) The waiver serves the particular needs of the patients and does 
not adversely affect their health and safety.
    (g) Standard: Bathroom facilities. The hospice must--
    (1) Provide an adequate supply of hot water at all times for patient 
use; and
    (2) Have plumbing fixtures with control valves that automatically 
regulate the temperature of the hot water used by patients.
    (h) Standard: Linen. The hospice has available at all times a 
quantity of linen essential for proper care and comfort of patients. 
Linens are handled, stored, processed, and transported in such a manner 
as to prevent the spread of infection.
    (i) Standard: Isolation areas. The hospice must make provision for 
isolating patients with infectious diseases.
    (j) Standard: Meal service, menu planning, and supervision. The 
hospice must--
    (1) Serve at least three meals or their equivalent each day at 
regular times, with not more than 14 hours between a substantial evening 
meal and breakfast;
    (2) Procure, store, prepare, distribute, and serve all food under 
sanitary conditions;
    (3) Have a staff member trained or experienced in food management or 
nutrition who is responsible for--
    (i) Planning menus that meet the nutritional needs of each patient, 
following the orders of the patient's physician and, to the extent 
medically possible, the recommended dietary allowances of the Food and 
Nutrition Board of the National Research Council, National Academy of 
Sciences (Recommended Dietary Allowances (9th ed., 1981) is available 
from the Printing and Publications Office, National Academy of Sciences, 
Washington, DC 20418); and

[[Page 786]]

    (ii) Supervising the meal preparation and service to ensure that the 
menu plan is followed; and
    (4) If the hospice has patients who require medically prescribed 
special diets, have the menus for those patients planned by a 
professionally qualified dietitian and supervise the preparation and 
serving of meals to ensure that the patient accepts the special diet.
    (k) Standard: Pharmaceutical services. The hospice provides 
appropriate methods and procedures for the dispensing and administering 
of drugs and biologicals. Whether drugs and biologicals are obtained 
from community or institutional pharmacists or stocked by the facility, 
the facility is responsible for drugs and biologicals for its patients, 
insofar as they are covered under the program and for ensuring that 
pharmaceutical services are provided in accordance with accepted 
professional principles and appropriate Federal, State, and local laws. 
(See Sec. 405.1124(g), (h), and (i) of this chapter.)
    (1) Licensed pharmacist. The hospice must--
    (i) Employ a licensed pharmacist; or
    (ii) Have a formal agreement with a licensed pharmacist to advise 
the hospice on ordering, storage, administration, disposal, and 
recordkeeping of drugs and biologicals.
    (2) Orders for medications. (i) A physician must order all 
medications for the patient.
    (ii) If the medication order is verbal--
    (A) The physician must give it only to a licensed nurse, pharmacist, 
or another physician; and
    (B) The individual receiving the order must record and sign it 
immediately and have the prescribing physician sign it in a manner 
consistent with good medical practice.
    (3) Administering medications. Medications are administered only by 
one of the following individuals:
    (i) A licensed nurse or physician.
    (ii) An employee who has completed a State-approved training program 
in medication administration.
    (iii) The patient if his or her attending physician has approved.
    (4) Control and accountability. The pharmaceutical service has 
procedures for control and accountability of all drugs and biologicals 
throughout the facility. Drugs are dispensed in compliance with Federal 
and State laws. Records of receipt and disposition of all controlled 
drugs are maintained in sufficient detail to enable an accurate 
reconciliation. The pharmacist determines that drug records are in order 
and that an account of all controlled drugs is maintained and 
reconciled.
    (5) Labeling of drugs and biologicals. The labeling of drugs and 
biologicals is based on currently accepted professional principles, and 
includes the appropriate accessory and cautionary instructions, as well 
as the expiration date when applicable.
    (6) Storage. In accordance with State and Federal laws, all drugs 
and biologicals are stored in locked compartments under proper 
temperature controls and only authorized personnel have access to the 
keys. Separately locked compartments are provided for storage of 
controlled drugs listed in Schedule II of the Comprehensive Drug Abuse 
Prevention & Control Act of 1970 and other drugs subject to abuse, 
except under single unit package drug distribution systems in which the 
quantity stored is minimal and a missing dose can be readily detected. 
An emergency medication kit is kept readily available.
    (7) Drug disposal. Controlled drugs no longer needed by the patient 
are disposed of in compliance with State requirements. In the absence of 
State requirements, the pharmacist and a registered nurse dispose of the 
drugs and prepare a record of the disposal.

[48 FR 56026, Dec. 16, 1983; 48 FR 57282, Dec. 29, 1983; 49 FR 23010, 
June 1, 1984, as amended at 53 FR 11509, Apr. 7, 1988; 55 FR 50835, Dec. 
11, 1990]



                       Subpart F--Covered Services



Sec. 418.200  Requirements for coverage.

    To be covered, hospice services must meet the following 
requirements. They must be reasonable and necessary for the palliation 
or management of the terminal illness as well as related conditions. The 
individual must elect hospice care in accordance with Sec. 418.24 and a 
plan of care must be established as set forth in Sec. 418.58 before 
services

[[Page 787]]

are provided. The services must be consistent with the plan of care. A 
certification that the individual is terminally ill must be completed as 
set forth in Sec. 418.22.



Sec. 418.202  Covered services.

    All services must be performed by appropriately qualified personnel, 
but it is the nature of the service, rather than the qualification of 
the person who provides it, that determines the coverage category of the 
service. The following services are covered hospice services:
    (a) Nursing care provided by or under the supervision of a 
registered nurse.
    (b) Medical social services provided by a social worker under the 
direction of a physician.
    (c) Physicians' services performed by a physician as defined in 
Sec. 410.20 of this chapter except that the services of the hospice 
medical director or the physician member of the interdisciplinary group 
must be performed by a doctor of medicine or osteopathy.
    (d) Counseling services provided to the terminally ill individual 
and the family members or other persons caring for the individual at 
home. Counseling, including dietary counseling, may be provided both for 
the purpose of training the individual's family or other caregiver to 
provide care, and for the purpose of helping the individual and those 
caring for him or her to adjust to the individual's approaching death.
    (e) Short-term inpatient care provided in a participating hospice 
inpatient unit, or a participating hospital or SNF, that additionally 
meets the standards in Sec. 418.202 (a) and (e) regarding staffing and 
patient areas. Services provided in an inpatient setting must conform to 
the written plan of care. Inpatient care may be required for procedures 
necessary for pain control or acute or chronic symptom management.

Inpatient care may also be furnished as a means of providing respite for 
the individual's family or other persons caring for the individual at 
home. Respite care must be furnished as specified in Sec. 418.98(b). 
Payment for inpatient care will be made at the rate appropriate to the 
level of care as specified in Sec. 418.302.
    (f) Medical appliances and supplies, including drugs and 
biologicals. Only drugs as defined in section 1861(t) of the Act and 
which are used primarily for the relief of pain and symptom control 
related to the individual's terminal illness are covered. Appliances may 
include covered durable medical equipment as described in Sec. 410.38 of 
this chapter as well as other self-help and personal comfort items 
related to the palliation or management of the patient's terminal 
illness. Equipment is provided by the hospice for use in the patient's 
home while he or she is under hospice care. Medical supplies include 
those that are part of the written plan of care.
    (g) Home health aide services furnished by qualified aides as 
designated in Sec. 418.94 and homemaker services. Home health aides may 
provide personal care services as defined in Sec. 409.45(b) of this 
chapter. Aides may perform household services to maintain a safe and 
sanitary environment in areas of the home used by the patient, such as 
changing bed linens or light cleaning and laundering essential to the 
comfort and cleanliness of the patient. Aide services must be provided 
under the general supervision of a registered nurse. Homemaker services 
may include assistance in maintenance of a safe and healthy environment 
and services to enable the individual to carry out the treatment plan.
    (h) Physical therapy, occupational therapy and speech-language 
pathology services in addition to the services described in Sec. 409.33 
(b) and (c) of this chapter provided for purposes of symptom control or 
to enable the patient to maintain activities of daily living and basic 
functional skills.

[48 FR 56026, Dec. 16, 1983, as amended at 51 FR 41351, Nov. 14, 1986; 
55 FR 50835, Dec. 11, 1990; 59 FR 65498, Dec. 20, 1994]



Sec. 418.204  Special coverage requirements.

    (a) Periods of crisis. Nursing care may be covered on a continuous 
basis for as much as 24 hours a day during periods of crisis as 
necessary to maintain an individual at home. Either homemaker or home 
health aide services or both may be covered on a 24-hour continuous 
basis during periods of crisis but

[[Page 788]]

care during these periods must be predominantly nursing care. A period 
of crisis is a period in which the individual requires continuous care 
to achieve palliation or management of acute medical symptoms.
    (b) Respite care. (1) Respite care is short-term inpatient care 
provided to the individual only when necessary to relieve the family 
members or other persons caring for the individual.
    (2) Respite care may be provided only on an occasional basis and may 
not be reimbursed for more than five consecutive days at a time.
    (c) Bereavement counseling. Bereavement counseling is a required 
hospice service but it is not reimbursable.

[48 FR 56026, Dec. 16, 1983, as amended at 55 FR 50835, Dec. 11, 1990]



                   Subpart G--Payment for Hospice Care



Sec. 418.301  Basic rules.

    (a) Medicare payment for covered hospice care is made in accordance 
with the method set forth in Sec. 418.302.
    (b) Medicare reimbursement to a hospice in a cap period is limited 
to a cap amount specified in Sec. 418.309.

[48 FR 56026, Dec. 16, 1983, as amended at 56 FR 26919, June 12, 1991]



Sec. 418.302  Payment procedures for hospice care.

    (a) CMS establishes payment amounts for specific categories of 
covered hospice care.
    (b) Payment amounts are determined within each of the following 
categories:
    (1) Routine home care day. A routine home care day is a day on which 
an individual who has elected to receive hospice care is at home and is 
not receiving continuous care as defined in paragraph (b)(2) of this 
section.
    (2) Continuous home care day. A continuous home care day is a day on 
which an individual who has elected to receive hospice care is not in an 
inpatient facility and receives hospice care consisting predominantly of 
nursing care on a continuous basis at home. Home health aide or 
homemaker services or both may also be provided on a continuous basis. 
Continuous home care is only furnished during brief periods of crisis as 
described in Sec. 418.204(a) and only as necessary to maintain the 
terminally ill patient at home.
    (3) Inpatient respite care day. An inpatient respite care day is a 
day on which the individual who has elected hospice care receives care 
in an approved facility on a short-term basis for respite.
    (4) General inpatient care day. A general inpatient care day is a 
day on which an individual who has elected hospice care receives general 
inpatient care in an inpatient facility for pain control or acute or 
chronic symptom management which cannot be managed in other settings.
    (c) The payment amounts for the categories of hospice care are fixed 
payment rates that are established by CMS in accordance with the 
procedures described in Sec. 418.306. Payment rates are determined for 
the following categories:
    (1) Routine home care.
    (2) Continuous home care.
    (3) Inpatient respite care.
    (4) General inpatient care.
    (d) The intermediary reimburses the hospice at the appropriate 
payment amount for each day for which an eligible Medicare beneficiary 
is under the hospice's care.
    (e) The intermediary makes payment according to the following 
procedures:
    (1) Payment is made to the hospice for each day during which the 
beneficiary is eligible and under the care of the hospice, regardless of 
the amount of services furnished on any given day.
    (2) Payment is made for only one of the categories of hospice care 
described in Sec. 418.302(b) for any particular day.
    (3) On any day on which the beneficiary is not an inpatient, the 
hospice is paid the routine home care rate, unless the patient receives 
continuous care as defined in paragraph (b)(2) of this section for a 
period of at least 8 hours. In that case, a portion of the continuous 
care day rate is paid in accordance with paragraph (e)(4) of this 
section.
    (4) The hospice payment on a continuous care day varies depending on 
the number of hours of continuous services provided. The continuous home 
care rate is divided by 24 to yield an hourly rate. The number of hours 
of continuous care provided during a continuous

[[Page 789]]

home care day is then multiplied by the hourly rate to yield the 
continuous home care payment for that day. A minimum of 8 hours of care 
must be furnished on a particular day to qualify for the continuous home 
care rate.
    (5) Subject to the limitations described in paragraph (f) of this 
section, on any day on which the beneficiary is an inpatient in an 
approved facility for inpatient care, the appropriate inpatient rate 
(general or respite) is paid depending on the category of care 
furnished. The inpatient rate (general or respite) is paid for the date 
of admission and all subsequent inpatient days, except the day on which 
the patient is discharged. For the day of discharge, the appropriate 
home care rate is paid unless the patient dies as an inpatient. In the 
case where the beneficiary is discharged deceased, the inpatient rate 
(general or respite) is paid for the discharge day. Payment for 
inpatient respite care is subject to the requirement that it may not be 
provided consecutively for more than 5 days at a time. Payment for the 
sixth and any subsequent day of respite care is made at the routine home 
care rate.
    (f) Payment for inpatient care is limited as follows: (1) The total 
payment to the hospice for inpatient care (general or respite) is 
subject to a limitation that total inpatient care days for Medicare 
patients not exceed 20 percent of the total days for which these 
patients had elected hospice care.
    (2) At the end of a cap period, the intermediary calculates a 
limitation on payment for inpatient care to ensure that Medicare payment 
is not made for days of inpatient care in excess of 20 percent of the 
total number of days of hospice care furnished to Medicare patients.
    (3) If the number of days of inpatient care furnished to Medicare 
patients is equal to or less than 20 percent of the total days of 
hospice care to Medicare patients, no adjustment is necessary. Overall 
payments to a hospice are subject to the cap amount specified in 
Sec. 418.309.
    (4) If the number of days of inpatient care furnished to Medicare 
patients exceeds 20 percent of the total days of hospice care to 
Medicare patients, the total payment for inpatient care is determined in 
accordance with the procedures specified in paragraph (f)(5) of this 
section. That amount is compared to actual payments for inpatient care, 
and any excess reimbursement must be refunded by the hospice. Overall 
payments to the hospice are subject to the cap amount specified in 
Sec. 418.309.
    (5) If a hospice exceeds the number of inpatient care days described 
in paragraph (f)(4), the total payment for inpatient care is determined 
as follows:
    (i) Calculate the ratio of the maximum number of allowable inpatient 
days to the actual number of inpatient care days furnished by the 
hospice to Medicare patients.
    (ii) Multiply this ratio by the total reimbursement for inpatient 
care made by the intermediary.
    (iii) Multiply the number of actual inpatient days in excess of the 
limitation by the routine home care rate.
    (iv) Add the amounts calculated in paragraphs (f)(5)(ii) and (iii) 
of this section.

[48 FR 56026, Dec. 16, 1983, as amended at 56 FR 26919, June 12, 1991]



Sec. 418.304  Payment for physician services.

    (a) The following services performed by hospice physicians are 
included in the rates described in Sec. 418.302:
    (1) General supervisory services of the medical director.
    (2) Participation in the establishment of plans of care, supervision 
of care and services, periodic review and updating of plans of care, and 
establishment of governing policies by the physician member of the 
interdisciplinary group.
    (b) For services not described in paragraph (a) of this section, a 
specified Medicare contractor pays the hospice an amount equivalent to 
100 percent of the physician's reasonable charge for those physician 
services furnished by hospice employees or under arrangements with the 
hospice. Reimbursement for these physician services is included in the 
amount subject to the hospice payment limit described in Sec. 418.309. 
Services furnished voluntarily by physicians are not reimbursable.

[[Page 790]]

    (c) Services of the patient's attending physician, if he or she is 
not an employee of the hospice or providing services under arrangements 
with the hospice, are not considered hospice services and are not 
included in the amount subject to the hospice payment limit described in 
Sec. 418.309. These services are paid by the carrier under the 
procedures in subparts D or E, part 405 of this chapter.



Sec. 418.306  Determination of payment rates.

    (a) Applicability. CMS establishes payment rates for each of the 
categories of hospice care described in Sec. 418.302(b). The rates are 
established using the methodology described in section 1814(i)(1)(C) of 
the Act.
    (b) Payment rates. The payment rates for routine home care and other 
services included in hospice care are as follows:
    (1) The following rates, which are 120 percent of the rates in 
effect on September 30, 1989, are effective January 1, 1990 through 
September 30, 1990 and October 21, 1990 through December 31, 1990:

Routine home care.............................................    $75.80
Continuous home care:
  Full rate for 24 hours......................................    442.40
  Hourly rate.................................................     18.43
Inpatient respite care........................................     78.40
General inpatient care........................................    337.20
 

    (2) Except for the period beginning October 21, 1990, through 
December 31, 1990, the payment rates for routine home care and other 
services included in hospice care for Federal fiscal years 1991, 1992, 
and 1993 and those that begin on or after October 1, 1997, are the 
payment rates in effect under this paragraph during the previous fiscal 
year increased by the market basket percentage increase as defined in 
section 1886(b)(3)(B)(iii) of the Act, otherwise applicable to 
discharges occurring in the fiscal year. The payment rates for the 
period beginning October 21, 1990, through December 31, 1990, are the 
same as those shown in paragraph (b)(1) of this section.
    (3) For Federal fiscal years 1994 through 1997, the payment rate is 
the payment rate in effect during the previous fiscal year increased by 
a factor equal to the market basket percentage increase minus--
    (i) 2 percentage points in FY 1994;
    (ii) 1.5 percentage points in FYs 1995 and 1996; and
    (iii) 0.5 percentage points in FY 1997.
    (c) Adjustment for wage differences. CMS will issue annually, in the 
Federal Register, a hospice wage index based on the most current 
available CMS hospital wage data, including any changes to the 
definitions of Metropolitan Statistical Areas. The payment rates 
established by CMS are adjusted by the intermediary to reflect local 
differences in wages according to the revised wage index.
    (d) Federal Register notices. CMS publishes as a notice in the 
Federal Register any proposal to change the methodology for determining 
the payment rates.

[56 FR 26919, June 12, 1991, as amended at 59 FR 26960, May 25, 1994; 62 
FR 42882, Aug. 8, 1997]



Sec. 418.307  Periodic interim payments.

    Subject to the provisions of Sec. 413.64(h) of this chapter, a 
hospice may elect to receive periodic interim payments (PIP) effective 
with claims received on or after July 1, 1987. Payment is made biweekly 
under the PIP method unless the hospice requests a longer fixed interval 
(not to exceed one month) between payments. The biweekly interim payment 
amount is based on the total estimated Medicare payments for the 
reporting period (as described in Secs. 418.302-418.306). Each payment 
is made 2 weeks after the end of a biweekly period of service as 
described in Sec. 413.64(h)(5) of this chapter. Under certain 
circumstances that are described in Sec. 413.64(g) of this chapter, a 
hospice that is not receiving PIP may request an accelerated payment.

[59 FR 36713, July 19, 1994]



Sec. 418.308  Limitation on the amount of hospice payments.

    (a) Except as specified in paragraph (b) of this section, the total 
Medicare payment to a hospice for care furnished during a cap period is 
limited by the hospice cap amount specified in Sec. 418.309.

[[Page 791]]

    (b) Until October 1, 1986, payment to a hospice that began operation 
before January 1, 1975 is not limited by the amount of the hospice cap 
specified in Sec. 418.309.
    (c) The intermediary notifies the hospice of the determination of 
program reimbursement at the end of the cap year in accordance with 
procedures similar to those described in Sec. 405.1803 of this chapter.
    (d) Payments made to a hospice during a cap period that exceed the 
cap amount are overpayments and must be refunded.

[48 FR 56026, Dec. 16, 1983; 48 FR 57282, Dec. 29, 1983]



Sec. 418.309  Hospice cap amount.

    The hospice cap amount is calculated using the following procedures:
    (a) The cap amount is $6,500 per year and is adjusted for inflation 
or deflation for cap years that end after October 1, 1984, by using the 
percentage change in the medical care expenditure category of the 
Consumer Price Index (CPI) for urban consumers that is published by the 
Bureau of Labor Statistics. This adjustment is made using the change in 
the CPI from March 1984 to the fifth month of the cap year. The cap year 
runs from November 1 of each year until October 31 of the following 
year.
    (b) Each hospice's cap amount is calculated by the intermediary by 
multiplying the adjusted cap amount determined in paragraph (a) of this 
section by the number of Medicare beneficiaries who elected to receive 
hospice care from that hospice during the cap period. For purposes of 
this calculation, the number of Medicare beneficiaries includes--
    (1) Those Medicare beneficiaries who have not previously been 
included in the calculation of any hospice cap and who have filed an 
election to receive hospice care, in accordance with Sec. 418.24, from 
the hospice during the period beginning on September 28 (35 days before 
the beginning of the cap period) and ending on September 27 (35 days 
before the end of the cap period).
    (2) In the case in which a beneficiary has elected to receive care 
from more than one hospice, each hospice includes in its number of 
Medicare beneficiaries only that fraction which represents the portion 
of a patient's total stay in all hospices that was spent in that 
hospice. (The hospice can obtain this information by contacting the 
intermediary.)



Sec. 418.310  Reporting and recordkeeping requirements.

    Hospices must provide reports and keep records as the Secretary 
determines necessary to administer the program.



Sec. 418.311  Administrative appeals.

    A hospice that believes its payments have not been properly 
determined in accordance with these regulations may request a review 
from the intermediary or the Provider Reimbursement Review Board (PRRB) 
if the amount in controversy is at least $1,000 or $10,000, 
respectively. In such a case, the procedure in 42 CFR part 405, subpart 
R, will be followed to the extent that it is applicable. The PRRB, 
subject to review by the Secretary under Sec. 405.1874 of this chapter, 
shall have the authority to determine the issues raised. The methods and 
standards for the calculation of the payment rates by CMS are not 
subject to appeal.



                         Subpart H--Coinsurance



Sec. 418.400  Individual liability for coinsurance for hospice care.

    An individual who has filed an election for hospice care in 
accordance with Sec. 418.24 is liable for the following coinsurance 
payments. Hospices may charge individuals the applicable coinsurance 
amounts.
    (a) Drugs and biologicals. An individual is liable for a coinsurance 
payment for each palliative drug and biological prescription furnished 
by the hospice while the individual is not an inpatient. The amount of 
coinsurance for each prescription approximates 5 percent of the cost of 
the drug or biological to the hospice determined in accordance with the 
drug copayment schedule established by the hospice, except that the 
amount of coinsurance for each prescription may not exceed $5. The cost 
of the drug or biological may not exceed what a prudent buyer would pay 
in similar circumstances.

[[Page 792]]

The drug copayment schedule must be reviewed for reasonableness and 
approved by the intermediary before it is used.
    (b) Respite care. (1) The amount of coinsurance for each respite 
care day is equal to 5 percent of the payment made by CMS for a respite 
care day.
    (2) The amount of the individual's coinsurance liability for respite 
care during a hospice coinsurance period may not exceed the inpatient 
hospital deductible applicable for the year in which the hospice 
coinsurance period began.
    (3) The individual hospice coinsurance period--
    (i) Begins on the first day an election filed in accordance with 
Sec. 418.24 is in effect for the beneficiary; and
    (ii) Ends with the close of the first period of 14 consecutive days 
on each of which an election is not in effect for the beneficiary.



Sec. 418.402  Individual liability for services that are not considered hospice care.

    Medicare payment to the hospice discharges an individual's liability 
for payment for all services, other than the hospice coinsurance amounts 
described in Sec. 418.400, that are considered covered hospice care (as 
described in Sec. 418.202). The individual is liable for the Medicare 
deductibles and coinsurance payments and for the difference between the 
reasonable and actual charge on unassigned claims on other covered 
services that are not considered hospice care. Examples of services not 
considered hospice care include: Services furnished before or after a 
hospice election period; services of the individual's attending 
physician, if the attending physician is not an employee of or working 
under an arrangement with the hospice; or Medicare services received for 
the treatment of an illness or injury not related to the individual's 
terminal condition.



Sec. 418.405  Effect of coinsurance liability on Medicare payment.

    The Medicare payment rates established by CMS in accordance with 
Sec. 418.306 are not reduced when the individual is liable for 
coinsurance payments. Instead, when establishing the payment rates, CMS 
offsets the estimated cost of services by an estimate of average 
coinsurance amounts hospices collect.

[56 FR 26919, June 12, 1991]



PART 419--PROSPECTIVE PAYMENT SYSTEM FOR HOSPITAL OUTPATIENT DEPARTMENT SERVICES--Table of Contents




                      Subpart A--General Provisions

Sec.
419.1   Basis and scope.
419.2   Basis of payment.

Subpart B--Categories of Hospitals and Services Subject to and Excluded 
         From the Hospital Outpatient Prospective Payment System

419.20   Hospitals subject to the hospital outpatient prospective 
          payment system.
419.21   Hospital outpatient services subject to the outpatient 
          prospective payment system.
419.22   Hospital outpatient services excluded from payment under the 
          hospital outpatient prospective payment system.

 Subpart C--Basic Methodology for Determining Prospective Payment Rates 
                    for Hospital Outpatient Services

419.30   Base expenditure target for calendar year 1999.
419.31   Ambulatory payment classification (APC) system and payment 
          weights.
419.32   Calculation of prospective payment rates for hospital 
          outpatient services.

                    Subpart D--Payments to Hospitals

419.40   Payment concepts.
419.41   Calculation of national beneficiary copayment amounts and 
          national Medicare program payment amounts.
419.42   Hospital election to reduce copayment.
419.43   Adjustments to national program payment and beneficiary 
          copayment amounts.
419.44   Payment reductions for surgical procedures.

                           Subpart E--Updates

419.50   Annual updates.

                    Subpart F--Limitations on Review

419.60   Limitations on administrative and judicial review.

[[Page 793]]

              Subpart G--Transitional Pass-through Payments

419.62  Transitional pass-through payments: General rules.
419.64  Transitional pass-through payments: Drugs and biologicals.
419.66  Transitional pass-through payments: Medical devices.

                    Subpart H--Transitional Corridors

419.70   Transitional adjustment to limit decline in payment.

    Authority: Secs. 1102, 1833(t), and 1871 of the Social Security Act 
(42 U.S.C. 1302, 1395l(t), and 1395hh).

    Source: 65 FR 18542, Apr. 7, 2000, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 419.1  Basis and scope.

    (a) Basis. This part implements section 1833(t) of the Act by 
establishing a prospective payment system for services furnished on or 
after July 1, 2000 by hospital outpatient departments to Medicare 
beneficiaries who are registered on hospital records as outpatients.
    (b) Scope. This subpart describes the basis of payment for 
outpatient hospital services under the prospective payment system. 
Subpart B sets forth the categories of hospitals and services that are 
subject to the outpatient hospital prospective payment system and those 
categories of hospitals and services that are excluded from the 
outpatient hospital prospective payment system. Subpart C sets forth the 
basic methodology by which prospective payment rates for hospital 
outpatient services are determined. Subpart D describes Medicare payment 
amounts, beneficiary copayment amounts, and methods of payment to 
hospitals under the hospital outpatient prospective payment system. 
Subpart E describes how the hospital outpatient prospective payment 
system may be updated. Subpart F describes limitations on administrative 
and judicial review. Subpart G describes the transitional payment 
adjustments that are made before 2004 to limit declines in payment for 
outpatient services.



Sec. 419.2  Basis of payment.

    (a) Unit of payment. Under the hospital outpatient prospective 
payment system, predetermined amounts are paid for designated services 
furnished to Medicare beneficiaries. These services are identified by 
codes established under the Centers for Medicare & Medicaid Services 
Common Procedure Coding System (HCPCS). The prospective payment rate for 
each service or procedure for which payment is allowed under the 
hospital outpatient prospective payment system is determined according 
to the methodology described in subpart C of this part. The manner in 
which the Medicare payment amount and the beneficiary copayment amount 
for each service or procedure are determined is described in subpart D 
of this part.
    (b) Determination of hospital outpatient prospective payment rates: 
Included costs. The prospective payment system establishes a national 
payment rate, standardized for geographic wage differences, that 
includes operating and capital-related costs that are directly related 
and integral to performing a procedure or furnishing a service on an 
outpatient basis. In general, these costs include, but are not limited 
to--
    (1) Use of an operating suite, procedure room, or treatment room;
    (2) Use of recovery room;
    (3) Use of an observation bed;
    (4) Anesthesia, certain drugs, biologicals, and other 
pharmaceuticals; medical and surgical supplies and equipment; surgical 
dressings; and devices used for external reduction of fractures and 
dislocations;
    (5) Supplies and equipment for administering and monitoring 
anesthesia or sedation;
    (6) Intraocular lenses (IOLs);
    (7) Incidental services such as venipuncture;
    (8) Capital-related costs;
    (9) Implantable items used in connection with diagnostic X-ray 
tests, diagnostic laboratory tests, and other diagnostic tests;
    (10) Durable medical equipment that is implantable;
    (11) Implantable prosthetic devices (other than dental) which 
replace all or

[[Page 794]]

part of an internal body organ (including colostomy bags and supplies 
directly related to colostomy care), including replacement of these 
devices; and
    (12) Costs incurred to procure donor tissue other than corneal 
tissue.
    (c) Determination of hospital outpatient prospective payment rates: 
Excluded costs. The following costs are excluded from the hospital 
outpatient prospective payment system.
    (1) The costs of direct graduate medical education activities as 
described in Sec. 413.86 of this chapter.
    (2) The costs of nursing and allied health programs as described in 
Sec. 413.85 of this chapter.
    (3) The costs associated with interns and residents not in approved 
teaching programs as described in Sec. 415.202 of this chapter.
    (4) The costs of teaching physicians attributable to Part B services 
for hospitals that elect cost-based reimbursement for teaching 
physicians under Sec. 415.160.
    (5) The reasonable costs of anesthesia services furnished to 
hospital outpatients by qualified nonphysician anesthetists (certified 
registered nurse anesthetists and anesthesiologists' assistants) 
employed by the hospital or obtained under arrangements, for hospitals 
that meet the requirements under Sec. 412.113(c) of this chapter.
    (6) Bad debts for uncollectible deductibles and coinsurances as 
described in Sec. 413.80(b) of this chapter.
    (7) Organ acquisition costs paid under Part B.
    (8) Corneal tissue acquisition costs.

[65 FR 18542, Apr. 7, 2000, as amended at 66 FR 59922, Nov. 30, 2001]



Subpart B--Categories of Hospitals and Services Subject to and Excluded 
         From the Hospital Outpatient Prospective Payment System



Sec. 419.20  Hospitals subject to the hospital outpatient prospective payment system.

    (a) Applicability. The hospital outpatient prospective payment 
system is applicable to any hospital participating in the Medicare 
program, except those specified in paragraph (b) of this section, for 
services furnished on or after August 1, 2000.
    (b) Hospitals excluded from the outpatient prospective payment 
system. (1) Those services furnished by Maryland hospitals that are paid 
under a cost containment waiver in accordance with section 1814(b)(3) of 
the Act are excluded from the hospital outpatient prospective payment 
system.
    (2) Critical access hospitals (CAHs) are excluded from the hospital 
outpatient prospective payment system.
    (3) A hospital located outside one of the 50 States, the District of 
Columbia, and Puerto Rico is excluded from the hospital outpatient 
prospective payment system.
    (4) A hospital of the Indian Health Service.

[65 FR 18542, Apr. 7, 2000, as amended at 66 FR 59922, Nov. 30, 2001]



Sec. 419.21  Hospital outpatient services subject to the outpatient prospective payment system.

    Except for services described in Sec. 419.22, effective for services 
furnished on or after July 1, 2000, payment is made under the hospital 
outpatient prospective payment system for the following:
    (a) Medicare Part B services furnished to hospital outpatients 
designated by the Secretary under this part.
    (b) Services designated by the Secretary that are covered under 
Medicare Part B when furnished to hospital inpatients who are either not 
entitled to benefits under Part A or who have exhausted their Part A 
benefits but are entitled to benefits under Part B of the program.
    (c) Partial hospitalization services furnished by community mental 
health centers (CMHCs).
    (d) The following medical and other health services furnished by a 
comprehensive outpatient rehabilitation facility (CORF) when they are 
provided outside the patient's plan (of care); or by a home health 
agency (HHA) to patients who are not under an HHA plan or treatment; or 
by a hospice program

[[Page 795]]

furnishing services to patients outside the hospice benefit:
    (1) Antigens.
    (2) Splints and casts.
    (3) Pneumococcal vaccine, influenza vaccine, and hepatitis B 
vaccine.



Sec. 419.22  Hospital outpatient services excluded from payment under the hospital outpatient prospective payment system.

    The following services are not paid for under the hospital 
outpatient prospective payment system:
    (a) Physician services that meet the requirements of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (b) Nurse practitioner and clinical nurse specialist services, as 
defined in section 1861(s)(2)(K)(ii) of the Act.
    (c) Physician assistant services, as defined in section 
1861(s)(2)(K)(i) of the Act.
    (d) Certified nurse-midwife services, as defined in section 1861(gg) 
of the Act.
    (e) Services of qualified psychologists, as defined in section 
1861(ii) of the Act.
    (f) Services of an anesthetist as defined in Sec. 410.69 of this 
chapter.
    (g) Clinical social worker services as defined in section 
1861(hh)(2) of the Act.
    (h) Outpatient therapy services described in section 1833(a)(8) of 
the Act.
    (i) Ambulance services, as described in section 1861(v)(1)(U) of the 
Act, or, if applicable, the fee schedule established under section 
1834(l).
    (j) Except as provided in Sec. 419.22(b)(11), prosthetic devices, 
prosthetics, prosthetic supplies, and orthotic devices.
    (k) Except as provided in Sec. 419.2(b)(10), durable medical 
equipment supplied by the hospital for the patient to take home.
    (l) Clinical diagnostic laboratory services.
    (m) Services for patients with ESRD that are paid under the ESRD 
composite rate and drugs and supplies furnished during dialysis but not 
included in the composite rate.
    (n) Services and procedures that the Secretary designates as 
requiring inpatient care.
    (o) Hospital outpatient services furnished to SNF residents (as 
defined in Sec. 411.15(p) of this chapter) as part of the patient's 
resident assessment or comprehensive care plan (and thus included under 
the SNF PPS) that are furnished by the hospital ``under arrangements'' 
but billable only by the SNF, regardless of whether or not the patient 
is in a Part A SNF stay.
    (p) Services that are not covered by Medicare by statute.
    (q) Services that are not reasonable or necessary for the diagnosis 
or treatment of an illness or disease.
    (r) Services defined in Sec. 419.21(b) that are furnished to 
inpatients of hospitals that do not submit claims for outpatient 
services under Medicare Part B.

[65 FR 18542, Apr. 7, 2000, as amended at 66 FR 59922, Nov. 30, 2001]



 Subpart C--Basic Methodology for Determining Prospective Payment Rates 
                    for Hospital Outpatient Services



Sec. 419.30  Base expenditure target for calendar year 1999.

    (a) CMS estimates the aggregate amount that would be payable for 
hospital outpatient services in calendar year 1999 by summing--
    (1) The total amounts that would be payable from the Trust Fund for 
covered hospital outpatient services without regard to the outpatient 
prospective payment system described in this part; and
    (2) The total amounts of coinsurance that would be payable by 
beneficiaries to hospitals for covered hospital outpatient services 
without regard to the outpatient prospective payment system described in 
this part.
    (b) The estimated aggregate amount under paragraph (a) of this 
section is determined as though the deductible required under section 
1833(b) of the Act did not apply.



Sec. 419.31  Ambulatory payment classification (APC) system and payment weights.

    (a) APC groups. (1) CMS classifies outpatient services and 
procedures that are comparable clinically and in terms of resource use 
into APC groups. Except as specified in paragraph (a)(2)

[[Page 796]]

of this section, items and services within a group are not comparable 
with respect to the use of resources if the highest median cost for an 
item or service within the group is more than 2 times greater than the 
lowest median cost for an item or service within the group.
    (2) CMS may make exceptions to the requirements set forth in 
paragraph (a)(1) in unusual cases, such as low volume items and 
services, but may not make such an exception in the case of a drug or 
biological that has been designated as an orphan drug under section 526 
of the Federal Food, Drug and Cosmetic Act.
    (3) The payment rate determined for an APC group in accordance with 
Sec. 419.32, and the copayment amount and program payment amount 
determined for an APC group in accordance with subpart D of this part, 
apply to every HCPCS code classified within an APC group.
    (b) APC weighting factors. (1) Using hospital outpatient claims data 
from calendar year 1996 and data from the most recent available hospital 
cost reports, CMS determines the median costs for the services and 
procedures within each APC group.
    (2) CMS assigns to each APC group an appropriate weighting factor to 
reflect the relative median costs for the services within the APC group 
compared to the median costs for the services in all APC groups.
    (c) Standardizing amounts. (1) CMS determines the portion of costs 
determined in paragraph (b)(1) of this section that is labor-related. 
This is known as the ``labor-related portion'' of hospital outpatient 
costs.
    (2) CMS standardizes the median costs determined in paragraph (b)(1) 
of this section by adjusting for variations in hospital labor costs 
across geographic areas.



Sec. 419.32  Calculation of prospective payment rates for hospital outpatient services.

    (a) Conversion factor for 1999. CMS calculates a conversion factor 
in such a manner that payment for hospital outpatient services furnished 
in 1999 would have equaled the base expenditure target calculated in 
Sec. 419.30, taking into account APC group weights and estimated service 
frequencies and reduced by the amounts that would be payable in 1999 as 
outlier payments under Sec. 419.43(d) and transitional pass-through 
payments under Sec. 419.43(e).
    (b) Conversion factor for calendar year 2000 and subsequent years. 
(1) Subject to paragraph (b)(2) of this section, the conversion factor 
for a calendar year is equal to the conversion factor calculated for the 
previous year adjusted as follows:
    (i) For calendar year 2000, by the hospital inpatient market basket 
percentage increase applicable under section 1886(b)(3)(B)(iii) of the 
Act reduced by one percentage point.
    (ii) For calendar year 2001--
    (A) For services furnished on or after January 1, 2001 and before 
April 1, 2001, by the hospital inpatient market basket percentage 
increase applicable under section 1886(b)(3)(B)(iii) of the Act reduced 
by one percentage point; and
    (B) For services furnished on or after April 1, 2001 and before 
January 1, 2002, by the hospital inpatient market basket percentage 
increase applicable under section 1886(b)(3)(B)(iii) of the Act, and 
increased by a transitional percentage allowance equal to 0.32 percent.
    (iii) For the portion of calendar year 2002 that is affected by 
these rules, by the hospital inpatient market basket percentage increase 
applicable under section 1886(b)(3)(B)(iii) of the Act reduced by one 
percentage point, without taking into account the transitional 
percentage allowance referenced in Sec. 419.32(b)(ii)(B).
    (iv) For calendar year 2003 and subsequent years, by the hospital 
inpatient market basket percentage increase applicable under section 
1886(b)(3)(B)(iii) of the Act.
    (2) Beginning in calendar year 2000, CMS may substitute for the 
hospital inpatient market basket percentage in paragraph (b) of this 
section a market basket percentage increase that is determined and 
applied to hospital outpatient services in the same manner that the 
hospital inpatient market basket percentage increase is determined and 
applied to inpatient hospital services.

[[Page 797]]

    (c) Payment rates. The payment rate for services and procedures for 
which payment is made under the hospital outpatient prospective payment 
system is the product of the conversion factor calculated under 
paragraph (a) or paragraph (b) of this section and the relative weight 
determined under Sec. 419.31(b).
    (d) Budget neutrality. CMS adjusts the conversion factor as needed 
to ensure that updates and adjustments under Sec. 419.50(a) are budget 
neutral.

[65 FR 18542, Apr. 7, 2000, as amended at 66 FR 59922, Nov. 30, 2001; 67 
FR 9568, Mar. 1, 2002]

    Effective Date Note: At 66 FR 59922, Nov. 30, 2001, Sec. 41932 was 
amended by revising paragraph (b)(1), effective Jan. 1, 2002. At 66 FR 
67494, Dec. 31, 2001, paragraph (b)(1)(iii) was delayed indefinitely.



                    Subpart D--Payments to Hospitals



Sec. 419.40  Payment concepts.

    (a) In addition to the payment rate described in Sec. 419.32, for 
each APC group there is a predetermined beneficiary copayment amount as 
described in Sec. 419.41(a). The Medicare program payment amount for 
each APC group is calculated by applying the program payment percentage 
as described in Sec. 419.41(b).
    (b) For purposes of this section--
    (1) Coinsurance percentage is calculated as the difference between 
the program payment percentage and 100 percent. The coinsurance 
percentage in any year is thus defined for each APC group as the greater 
of the following: the ratio of the APC group unadjusted copayment amount 
to the annual APC group payment rate, or 20 percent.
    (2) Program payment percentage is calculated as the lower of the 
following: the ratio of the APC group payment rate minus the APC group 
unadjusted copayment amount, to the APC group payment rate, or 80 
percent.
    (3) Unadjusted copayment amount is calculated as 20 percent of the 
wage-adjusted national median of charges for services within an APC 
group furnished during 1996, updated to 1999 using an actuarial 
projection of charge increases for hospital outpatient department 
services during the period 1996 to 1999.
    (c) Limitation of copayment amount to inpatient hospital deductible 
amount. The copayment amount for a procedure performed in a year cannot 
exceed the amount of the inpatient hospital deductible established under 
section 1813(b) of the Act for that year.

[66 FR 59922, Nov. 30, 2001]



Sec. 419.41   Calculation of national beneficiary copayment amounts and national Medicare program payment amounts.

    (a) To calculate the unadjusted copayment amount for each APC group, 
CMS--
    (1) Standardizes 1996 hospital charges for the services within each 
APC group to offset variations in hospital labor costs across geographic 
areas;
    (2) Identifies the median of the wage-neutralized 1996 charges for 
each APC group; and
    (3) Determines the value equal to 20 percent of the wage-neutralized 
1996 median charge for each APC group and multiplies that value by an 
actuarial projection of increases in charges for hospital outpatient 
department services during the period 1996 to 1999. The result is the 
unadjusted beneficiary copayment amount for the APC group.
    (b) CMS calculates annually the program payment percentage for every 
APC group on the basis of each group's unadjusted copayment amount and 
its payment rate after the payment rate is adjusted in accordance with 
Sec. 419.32.
    (c) To determine payment amounts due for a service paid under the 
hospital outpatient prospective payment system, CMS makes the following 
calculations:
    (1) Makes the wage index adjustment in accordance with Sec. 419.43.
    (2) Subtracts the amount of the applicable Part B deductible 
provided under Sec. 410.160 of this chapter.
    (3) Multiplies the remainder by the program payment percentage for 
the group to determine the preliminary Medicare program payment amount.
    (4) Subtracts the program payment amount from the amount determined 
in paragraph (c)(2) of this section to determine the copayment amount.
    (i) The copayment amount for an APC cannot exceed the amount of the

[[Page 798]]

inpatient hospital deductible, established in accordance with 
Sec. 409.82 of this chapter, for that year. For purposes of this 
paragraph (c)--
    (A) Effective for drugs and biologicals furnished on or after 
January 1, 2001, the copayment amount for multiple APCs for a single 
drug or biological furnished on the same day will be aggregated and 
treated as the copayment amount for one APC.
    (B) Effective for drugs and biologicals furnished on or after July 
1, 2001, the copayment amount for the APC or APCs for a drug or 
biological furnished on the same day will be aggregated with the 
copayment amount for the APC that reflects the administration of the 
drug or biological furnished on that day and treated as the copayment 
amount for one APC.
    (ii) Effective for services furnished from April 1, 2001 through 
December 31, 2001, the national unadjusted coinsurance rate for an APC 
cannot exceed 57 percent of the prospective payment rate for that APC.
    (iii) The national unadjusted coinsurance rate for an APC cannot 
exceed 55 percent in calendar years 2002 and 2003; 50 percent in 
calendar year 2004; 45 percent in calendar year 2005; and 40 percent in 
calendar year 2006 and thereafter.
    (iv) The copayment amount is computed as if the adjustments under 
Sec. 419.43(d) and (e) (and any adjustment made under Sec. 419.43(f) in 
relation to these adjustments) had not been paid.
    (5) Adds the amount by which the copayment amount would have 
exceeded the inpatient hospital deductible for that year to the 
preliminary Medicare program payment amount determined in paragraph 
(c)(3) of this section to determine the final Medicare program payment 
amount.

[65 FR 18542, Apr. 7, 2000, as amended at 65 FR 67829, Nov. 13, 2000; 66 
FR 59923, Nov. 30, 2001]



Sec. 419.42  Hospital election to reduce coinsurance.

    (a) A hospital may elect to reduce coinsurance for any or all APC 
groups on a calendar year basis. A hospital may not elect to reduce 
copayment amounts for some, but not all, services within the same group.
    (b) A hospital must notify its fiscal intermediary of its election 
to reduce coinsurance no later than--
    (1) June 1, 2000, for coinsurance elections for the period July 1, 
2000 through December 31, 2000; or
    (2) December 1 preceding the beginning of each subsequent calendar 
year.
    (c) The hospital's election must be properly documented. It must 
specifically identify the APCs to which it applies and the copayment 
amount (within the limits identified below) that the hospital has 
selected for each group.
    (d) The election of reduced coinsurance remains in effect unchanged 
during the year for which the election was made.
    (e) In electing reduced coinsurance, a hospital may elect a 
copayment amount that is less than that year's wage-adjusted copayment 
amount for the group but not less than 20 percent of the APC payment 
rate as determined in Sec. 419.32.
    (f) The hospital may advertise and otherwise disseminate information 
concerning the reduced level of coinsurance that it has elected. All 
advertisements and information furnished to Medicare beneficiaries must 
specify that the coinsurance reductions advertised apply only to the 
specified services of that hospital and that coinsurance reductions are 
available only for hospitals that choose to reduce coinsurance for 
hospital outpatient services and are not allowed in any other ambulatory 
settings or physician offices.

[65 FR 18542, Apr. 7, 2000, as amended at 65 FR 67829, Nov. 13, 2000; 66 
FR 59923, Nov. 30, 2001]



Sec. 419.43  Adjustments to national program payment and beneficiary copayment amounts.

    (a) General rule. CMS determines national prospective payment rates 
for hospital outpatient department services and determines a wage 
adjustment factor to adjust the portion of the APC payment and national 
beneficiary copayment amount attributable to labor-related costs for 
relative differences in labor and labor-related costs across geographic 
regions in a budget neutral manner.

[[Page 799]]

    (b) Labor-related portion of payment and copayment rates for 
hospital outpatient services. CMS determines the portion of hospital 
outpatient costs attributable to labor and labor-related costs (known as 
the ``labor-related portion'' of hospital outpatient costs) in 
accordance with Sec. 419.31(c)(1).
    (c) Wage index factor. CMS uses the hospital inpatient prospective 
payment system wage index established in accordance with part 412 of 
this chapter to make the adjustment referred to in paragraph (a) of this 
section.
    (d) Outlier adjustment--(1) General rule. Subject to paragraph 
(d)(4) of this section, CMS provides for an additional payment for each 
hospital outpatient service (or group of services) for which a 
hospital's charges, adjusted to cost, exceed the following:
    (i) A fixed multiple of the sum of--
    (A) The applicable Medicare hospital outpatient payment amount 
determined under Sec. 419.32(c), as adjusted under Sec. 419.43 (other 
than for adjustments under this paragraph (d) or paragraph (e) of this 
section); and
    (B) Any transitional pass-through payment under paragraph (e) of 
this section.
    (ii) At the option of CMS, a fixed dollar amount.
    (2) Amount of adjustment. The amount of the additional payment under 
paragraph (d)(1) of this section is determined by CMS and approximates 
the marginal cost of care beyond the applicable cutoff point under 
paragraph (d)(1) of this section.
    (3) Limit on aggregate outlier adjustments--(i) In general. The 
total of the additional payments made under this paragraph (d) for 
covered hospital outpatient department services furnished in a year (as 
estimated by CMS before the beginning of the year) may not exceed the 
applicable percentage specified in paragraph (d)(3)(ii) of this section 
of the total program payments (sum of both the Medicare and beneficiary 
payments to the hospital) estimated to be made under this part for all 
hospital outpatient services furnished in that year. If this paragraph 
is first applied to less than a full year, the limit applies only to the 
portion of the year.
    (ii) Applicable percentage. For purposes of paragraph (d)(3)(i) of 
this section, the term ``applicable percentage'' means a percentage 
specified by CMS up to (but not to exceed)--
    (A) For a year (or portion of a year) before 2004, 2.5 percent; and
    (B) For 2004 and thereafter, 3.0 percent.
    (4) Transitional authority. In applying paragraph (d)(1) of this 
section for hospital outpatient services furnished before January 1, 
2002, CMS may--
    (i) Apply paragraph (d)(1) of this section to a bill for these 
services related to an outpatient encounter (rather than for a specific 
service or group of services) using hospital outpatient payment amounts 
and transitional pass-through payments covered under the bill; and
    (ii) Use an appropriate cost-to-charge ratio for the hospital or 
CMHC (as determined by CMS), rather than for specific departments within 
the hospital.
    (e) Budget neutrality. CMS establishes payment under paragraph (d) 
of this section in a budget-neutral manner.

[65 FR 18542, Apr. 7, 2000, as amended at 65 FR 47677, Aug. 3, 2000; 66 
FR 55856, Nov. 2, 2001]



Sec. 419.44  Payment reductions for surgical procedures.

    (a) Multiple surgical procedures. When more than one surgical 
procedure for which payment is made under the hospital outpatient 
prospective payment system is performed during a single surgical 
encounter, the Medicare program payment amount and the beneficiary 
copayment amount are based on--
    (1) The full amounts for the procedure with the highest APC payment 
rate; and
    (2) One-half of the full program and the beneficiary payment amounts 
for all other covered procedures.
    (b) Terminated procedures. When a surgical procedure is terminated 
prior to completion due to extenuating circumstances or circumstances 
that threaten the well-being of the patient, the Medicare program 
payment amount and the beneficiary copayment amount are based on--
    (1) The full amounts if the procedure is discontinued after the 
induction of

[[Page 800]]

anesthesia or after the procedure is started; or
    (2) One-half of the full program and the beneficiary coinsurance 
amounts if the procedure is discontinued after the patient is prepared 
for surgery and taken to the room where the procedure is to be performed 
but before anesthesia is induced.



                           Subpart E--Updates



Sec. 419.50  Annual review.

    (a) General rule. Not less often than annually, CMS reviews and 
updates groups, relative payment weights, and the wage and other 
adjustments to take into account changes in medical practice, changes in 
technology, the addition of new services, new cost data, and other 
relevant information and factors.
    (b) Consultation requirement. CMS will consult with an expert 
outside advisory panel composed of an appropriate selection of 
representatives of providers to review (and advise CMS concerning) the 
clinical integrity of the groups and weights. The panel may use data 
collected or developed by entities and organizations (other than the 
Department of Health and Human Services) in conducting the review.
    (c) Effective dates. CMS conducts the first annual review under 
paragraph (a) of this section in 2001 for payments made in 2002.



                    Subpart F--Limitations on Review



Sec. 419.60  Limitations on administrative and judicial review.

    There can be no administrative or judicial review under sections 
1869 and 1878 of the Act or otherwise of the following:
    (a) The development of the APC system, including--
    (1) Establishment of the groups and relative payment weights;
    (2) Wage adjustment factors;
    (3) Other adjustments; and
    (4) Methods for controlling unnecessary increases in volume.
    (b) The calculation of base amounts described in section 1833(t)(3) 
of the Act.
    (c) Periodic adjustments described in section 1833(t)(9) of the Act.
    (d) The establishment of a separate conversion factor for hospitals 
described in section 1886(d)(1)(B)(v) of the Act.
    (e) The determination of the fixed multiple, or a fixed dollar 
cutoff amount, the marginal cost of care, or applicable percentage under 
Sec. 419.43(d) or the determination of insignificance of cost, the 
duration of the additional payments (consistent with subpart G of this 
part), the determination of initial and new categories under 
Sec. 419.66, the portion of the Medicare hospital outpatient fee 
schedule amount associated with particular devices, drugs, or 
biologicals, and the application of any pro rata reduction under 
Sec. 419.62(c).

[65 FR 18542, Apr. 7, 2000, as amended at 66 FR 55856, Nov. 2, 2001]



              Subpart G--Transitional Pass-through Payments

    Source: 66 FR 55856, Nov. 2, 2001, unless otherwise noted.



Sec. 419.62  Transitional pass-through payments: General rules.

    (a) General. CMS provides for additional payments under Secs. 419.64 
and 419.66 for certain innovative medical devices, drugs, and 
biologicals.
    (b) Budget neutrality. CMS establishes the additional payments under 
Secs. 419.64 and 419.66 in a budget neutral manner.
    (c) Uniform prospective reduction of pass-through payments. (1) If 
CMS estimates before the beginning of a calendar year that the total 
amount of pass-through payments under Secs. 419.64 and 419.66 for the 
year would exceed the applicable percentage (as described in paragraph 
(c)(2) of this section) of the total amount of Medicare payments under 
the outpatient prospective payment system. CMS will reduce, pro rata, 
the amount of each of the additional payments under Secs. 419.64 and 
419.66 for that year to ensure that the applicable percentage is not 
exceeded.
    (2) The applicable percentages are as follows:
    (i) For a year before CY 2004, the applicable percentage is 2.5 
percent.

[[Page 801]]

    (ii) For 2004 and subsequent years, the applicable percentage is a 
percentage specified by CMS up to (but not to exceed) 2.0 percent.
    (d) CY 2002 incorporated amount. For the portion of CY 2002 affected 
by these rules, CMS incorporated 75 percent of the estimated pass-
through costs (before the incorporation and any pro rata reduction) for 
devices into the procedure APCs associated with these devices.

[66 FR 55856, 55865, Nov. 2, 2001; 67 FR 9568, Mar. 1, 2002]

    Effective Date Note: At 66 FR 55865, Nov. 2, 2001, Sec. 419.62 was 
amended by adding paragraph (d), effective Jan. 1, 2002. At 66 FR 67494, 
Dec. 31, 2001, the amendment was delayed indefinitely.



Sec. 419.64  Transitional pass-through payments: Drugs and biologicals.

    (a) Eligibility for pass-through payment. CMS makes a transitional 
pass-through payment for the following drugs and biologicals that are 
furnished as part of an outpatient hospital service:
    (1) Orphan drugs. A drug or biological that is used for a rare 
disease or condition and has been designated as an orphan drug under 
section 526 of the Federal Food, Drug and Cosmetic Act if payment for 
the drug or biological as an outpatient hospital service was being made 
on August 1, 2000.
    (2) Cancer therapy drugs and biologicals. A drug or biological that 
is used in cancer therapy, including, but not limited to, a 
chemotherapeutic agent, an antiemetic, a hematopoietic growth factor, a 
colony stimulating factor, a biological response modifier, and a 
bisphosphonate if payment for the drug or biological as an outpatient 
hospital service was being made on August 1, 2000.
    (3) Radiopharmaceutical drugs and biological products. A 
radiopharmaceutical drug or biological product used in diagnostic, 
monitoring, and therapeutic nuclear medicine services if payment for the 
drug or biological as an outpatient hospital service was being made on 
August 1, 2000.
    (4) Other drugs and biologicals. A drug or biological that meets the 
following conditions:
    (i) It was first payable as an outpatient hospital service after 
December 31, 1996.
    (ii) CMS has determined the cost of the drug or biological is not 
insignificant in relation to the amount payable for the applicable APC 
(as calculated under Sec. 419.32(c)) as defined in paragraph (b) of this 
section.
    (b) Cost. CMS determines the cost of a drug or biological to be not 
insignificant if it meets the following requirements:
    (1) Services furnished before January 1, 2003. The expected 
reasonable cost of a drug or biological must exceed 10 percent of the 
applicable APC payment amount for the service related to the drug or 
biological.
    (2) Services furnished after December 31, 2002. CMS considers the 
average cost of a new drug or biological to be not insignificant if it 
meets the following conditions:
    (i) The estimated average reasonable cost of the drug or biological 
in the category exceeds 10 percent of the applicable APC payment amount 
for the service related to the drug or biological.
    (ii) The estimated average reasonable cost of the drug or biological 
exceeds the cost of the drug or biological portion of the APC payment 
amount for the related service by at least 25 percent.
    (iii) The difference between the estimated reasonable cost of the 
drug or biological and the estimated portion of the APC payment amount 
for the drug or biological exceeds 10 percent of the APC payment amount 
for the related service.
    (c) Limited period of payment. CMS limits the eligibility for a 
pass-through payment under this section to a period of at least 2 years, 
but not more than 3 years, that begins as follows:
    (1) For a drug or biological described in paragraphs (a)(1) through 
(a)(3) of this section--August 1, 2000.
    (2) For a drug or biological described in paragraph (a)(4) of this 
section--the date that CMS makes its first pass-through payment for the 
drug or biological.
    (d) Amount of pass-through payment. Subject to any reduction 
determined

[[Page 802]]

under Sec. 419.62(b), the pass-through payment for a drug or biological 
is 95 percent of the average wholesale price of the drug or biological 
minus the portion of the APC payment amount CMS determines is associated 
with the drug or biological.



Sec. 419.66  Transitional pass-through payments: Medical devices.

    (a) General rule. CMS makes a pass-through payment for a medical 
device that meets the requirements in paragraph (b) of this section and 
that is described by a category of devices established by CMS under the 
criteria in paragraph (c) of this section.
    (b) Eligibility. A medical device must meet the following 
requirements:
    (1) If required by the FDA, the device must have received FDA 
approval or clearance (except for a device that has received an FDA 
investigational device exemption (IDE) and has been classified as a 
Category B device by the FDA in accordance with Secs. 405.203 through 
405.207 and 405.211 through 405.215 of this chapter) or another 
appropriate FDA exemption.
    (2) The device is determined to be reasonable and necessary for the 
diagnosis or treatment of an illness or injury or to improve the 
functioning of a malformed body part (as required by section 
1862(a)(1)(A) of the Act).
    (3) The device is an integral and subordinate part of the service 
furnished, is used for one patient only, comes in contact with human 
tissue, and is surgically implanted or inserted whether or not it 
remains with the patient when the patient is released from the hospital.
    (4) The device is not any of the following:
    (i) Equipment, an instrument, apparatus, implement, or item of this 
type for which depreciation and financing expenses are recovered as 
depreciable assets as defined in Chapter 1 of the Medicare Provider 
Reimbursement Manual (CMS Pub. 15-1).
    (ii) A material or supply furnished incident to a service (for 
example, a suture, customized surgical kit, or clip, other than 
radiological site marker).
    (iii) A material that may be used to replace human skin (for 
example, a biological or synthetic material).
    (c) Criteria for establishing device categories. CMS uses the 
following criteria to establish a category of devices under this 
section:
    (1) CMS determines that a device to be included in the category is 
not described by any of the existing categories, and was not being paid 
for as an outpatient service as of December 31, 1996.
    (2) CMS determines that a device to be included in the category has 
demonstrated that it will substantially improve the diagnosis or 
treatment of an illness or injury or improve the functioning of a 
malformed body part compared to the benefits of a device or devices in a 
previously established category or other available treatment.
    (3) Except for medical devices identified in paragraph (e) of this 
section, CMS determines the cost of the device is not insignificant as 
described in paragraph (d) of this section.
    (d) Cost criteria. CMS considers the average cost of a category of 
devices to be not insignificant if it meets the following conditions:
    (1) The estimated average reasonable cost of devices in the category 
exceeds 25 percent of the applicable APC payment amount for the service 
related to the category of devices.
    (2) The estimated average reasonable cost of the devices in the 
category exceeds the cost of the device-related portion of the APC 
payment amount for the related service by at least 25 percent.
    (3) The difference between the estimated average reasonable cost of 
the devices in the category and the portion of the APC payment amount 
for the device exceeds 10 percent of the APC payment amount for the 
related service.
    (e) Devices exempt from cost criteria. The following medical devices 
are not subject to the cost requirements described in paragraph (d) of 
this section, if payment for the device was being made as an outpatient 
service on August 1, 2000:
    (1) A device of brachytherapy.
    (2) A device of temperature-monitored cryoablation.
    (f) Identifying a category for a device. A device is described by a 
category, if it meets the following conditions:

[[Page 803]]

    (1) Matches the long descriptor of the category code established by 
CMS.
    (2) Conforms to guidance issued by CMS relating to the definition of 
terms and other information in conjunction with the category descriptors 
and codes.
    (g) Limited period of payment for devices. CMS limits the 
eligibility for a pass-through payment established under this section to 
a period of at least 2 years, but not more than 3 years beginning on the 
date that CMS establishes a category of devices.
    (h) Amount of pass-through payment. Subject to any reduction 
determined under Sec. 419.62(b), the pass-through payment for a device 
is the hospital's charge for the device, adjusted to the actual cost for 
the device, minus the amount included in the APC payment amount for the 
device.



                    Subpart H--Transitional Corridors

    Source: 65 FR 18542, Apr. 7, 2000, unless otherwise noted. 
Redesignated at 66 FR 55856, Nov. 2, 2001.



Sec. 419.70  Transitional adjustment to limit decline in payment.

    (a) Before 2002. Except as provided in paragraph (d) of this 
section, for covered hospital outpatient services furnished before 
January 1, 2002, for which the prospective payment system amount (as 
defined in paragraph (e) of this section) is--
    (1) At least 90 percent, but less than 100 percent, of the pre-BBA 
amount (as defined in paragraph (f) of this section), the amount of 
payment under this part is increased by 80 percent of the amount of this 
difference;
    (2) At least 80 percent, but less than 90 percent, of the pre-BBA 
amount, the amount of payment under this part is increased by the amount 
by which the product of 0.71 and the pre-BBA amount exceeds the product 
of 0.70 and the prospective payment system amount;
    (3) At least 70 percent, but less than 80 percent, of the pre-BBA 
amount, the amount of payment under this part is increased by the amount 
by which the product of 0.63 and the pre-BBA amount, exceeds the product 
of 0.60 and the PPS amount; or
    (4) Less than 70 percent of the pre-BBA amount, the amount of 
payment under this part shall be increased by 21 percent of the pre-BBA 
amount.
    (b) For 2002. Except as provided in paragraph (d) of this section, 
for covered hospital outpatient services furnished during 2002, for 
which the prospective payment system amount is--
    (1) At least 90 percent, but less than 100 percent, of the pre-BBA 
amount, the amount of payment under this part is increased by 70 percent 
of the amount of this difference;
    (2) At least 80 percent, but less than 90 percent, of the pre-BBA 
amount, the amount of payment under this part is increased by the amount 
by which the product of 0.61 and the pre-BBA amount exceeds the product 
of 0.60 and the prospective payment system amount; or
    (3) Less than 80 percent of the pre-BBA amount, the amount of 
payment under this part is increased by 13 percent of the pre-BBA 
amount.
    (c) For 2003. Except as provided in paragraph (d) of this section, 
for covered hospital outpatient services furnished during 2003, for 
which the prospective payment system amount is--
    (1) At least 90 percent, but less than 100 percent, of the pre-BBA 
amount, the amount of payment under this part is increased by 60 percent 
of the amount of this difference; or
    (2) Less than 90 percent of the pre-BBA amount, the amount of 
payment under this part is increased by 6 percent of the pre-BBA amount.
    (d) Hold harmless provisions--(1) Temporary treatment for small 
rural hospitals. For covered hospital outpatient services furnished in a 
calendar year before January 1, 2004 for which the prospective payment 
system amount is less than the pre-BBA amount, the amount of payment 
under this part is increased by the amount of that difference if the 
hospital--
    (i) Is located in a rural area as defined in Sec. 412.63(b) of this 
chapter or is treated as being located in a rural area under section 
1886(d)(8)(E) of the Act; and
    (ii) Has 100 or fewer beds as defined in Sec. 412.105(b) of this 
chapter.
    (2) Permanent treatment for cancer hospitals and children's 
hospitals. In the

[[Page 804]]

case of a hospital described in Sec. 412.23(d) or Sec. 412.23(f) of this 
chapter for which the prospective payment system amount is less than the 
pre-BBA amount for covered hospital outpatient services, the amount of 
payment under this part is increased by the amount of this difference.
    (e) Prospective payment system amount defined. In this paragraph, 
the term ``prospective payment system amount'' means, with respect to 
covered hospital outpatient services, the amount payable under this part 
for these services (determined without regard to this paragraph or any 
reduction in coinsurance elected under Sec. 419.42), including amounts 
payable as copayment under Sec. 419.41, coinsurance under section 
1866(a)(2)(A)(ii) of the Act, and the deductible under section 1833(b) 
of the Act.
    (f) Pre-BBA amount defined--(1) General rule. In this paragraph, the 
``pre-BBA amount'' means, with respect to covered hospital outpatient 
services furnished by a hospital or a community mental health center 
(CMHC) in a year, an amount equal to the product of the reasonable cost 
of the provider for these services for the portions of the provider's 
cost reporting period (or periods) occurring in the year and the base 
provider outpatient payment-to-cost ratio for the provider (as defined 
in paragraph (f)(2) of this section).
    (2) Base payment-to-cost-ratio defined. For purposes of this 
paragraph, CMS shall determine these ratios as if the amendments to 
sections 1833(i)(3)(B)(i)(II) and 1833(n)(1)(B)(i) of the Act made by 
section 4521 of the BBA, to require that the full amount beneficiaries 
paid as coinsurance under section 1862(a)(2)(A) of the Act are taken 
into account in determining Medicare Part B Trust Fund payment to the 
hospital, were in effect in 1996. The ``base payment-to-cost ratio'' for 
a hospital or CMHC means the ratio of--
    (i) The provider's payment under this part for covered outpatient 
services furnished during the cost reporting period ending in 1996, 
including any payment for these services through cost-sharing described 
in paragraph (e) of this section; and
    (ii) The reasonable cost of these services for this period.
    (g) Interim payments. CMS makes payments under this paragraph to 
hospitals and CMHCs on an interim basis, subject to retrospective 
adjustments based on settled cost reports.
    (h) No effect on coinsurance. No payment made under this section 
affects the unadjusted coinsurance amount or the coinsurance amount 
described in Sec. 419.41.
    (i) Application without regard to budget neutrality. The additional 
payments made under this paragraph--
    (1) Are not considered an adjustment under Sec. 419.43(f); and
    (2) Are not implemented in a budget neutral manner.

[65 FR 18542, Apr. 7, 2000, as amended at 65 FR 67829, Nov. 13, 2000; 66 
FR 59923, Nov. 30, 2001]



PART 420--PROGRAM INTEGRITY: MEDICARE--Table of Contents




                      Subpart A--General Provisions

Sec.
420.1  Scope and purpose.
420.3  Other related regulations.

Subpart B [Reserved]

       Subpart C--Disclosure of Ownership and Control Information

420.200  Purpose.
420.201  Definitions.
420.202  Determination of ownership or control percentages.
420.203  Disclosure of hiring of intermediary's former employees.
420.204  Principals convicted of a program-related crime.
420.205  Disclosure by providers and part B suppliers of business 
          transaction information.
420.206  Disclosure of persons having ownership, financial, or control 
          interest.

  Subpart D--Access to Books, Documents, and Records of Subcontractors

420.300  Basis, purpose, and scope.
420.301  Definitions.
420.302  Requirement for access clause in contracts.
420.303  HHS criteria for requesting books, documents, and records.

[[Page 805]]

420.304  Procedures for obtaining access to books, documents, and 
          records.

Subpart E--Rewards for Information Relating to Medicare Fraud and Abuse, 
  and Establishment of a Program to Collect Suggestions for Improving 
   Medicare Program Efficiency and to Reward Suggesters for Monetary 
                                 Savings

420.400  Basis and scope.
420.405  Rewards for information relating to Medicare fraud and abuse.
420.410  Establishment of a program to collect suggestions for improving 
          Medicare program efficiency and to reward suggesters for 
          monetary savings.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 44 FR 31142, May 30, 1979, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 420.1  Scope and purpose.

    This part sets forth requirements for Medicare providers, 
intermediaries, and carriers to disclose ownership and control 
information. It also deals with access to records pertaining to certain 
contracts entered into by Medicare providers. These rules are aimed at 
protecting the integrity of the Medicare program. The statutory basis 
for these requirements is explained in each of the other subparts.

[51 FR 34787, Sept. 30, 1986]



Sec. 420.3  Other related regulations.

    (a) Appeals procedures. Part 498 of this chapter sets forth the 
appeals procedures available to providers whose provider agreements CMS 
terminates for failure to comply with the disclosure of information 
requirements set forth in subpart C of this part.
    (b) Exclusion, termination, or suspension. Part 1001 of this title 
sets forth the rules applicable to exclusion, termination, or suspension 
from the Medicare program because of fraud or abuse or conviction of 
program-related crimes.

[51 FR 34787, Sept. 30, 1986, as amended at 52 FR 22454, June 12, 1987]

Subpart B [Reserved]



       Subpart C--Disclosure of Ownership and Control Information



Sec. 420.200  Purpose.

    This subpart implements sections 1124, 1124A, 1126, and 
1861(v)(1)(i) of the Social Security Act. It sets forth requirements for 
providers, Part B suppliers, intermediaries, and carriers to disclose 
ownership and control information and the identities of managing 
employees. It also sets forth requirements for disclosure of information 
about a provider's or Part B supplier's owners, those with a controlling 
interest, or managing employees convicted of criminal offenses against 
Medicare, Medicaid, or the title V (Maternal and Child Health Services) 
and title XX (Social Services) programs.

[57 FR 27306, June 18, 1992, as amended at 60 FR 50442, Sept. 29, 1995]



Sec. 420.201  Definitions.

    As used in this subpart unless the context indicates otherwise:
    Agent means any person who has been delegated the authority to 
obligate or act on behalf of a provider.
    Disclosing entity means:
    (1) A provider of services, an independent clinical laboratory, a 
renal disease facility, a rural health clinic, a Federally qualified 
health center, or a health maintenance organization (as defined in 
section 1301(a) of the Public Health Service Act);
    (2) A carrier or other agency or organization that is acting for one 
or more providers of services for purposes of part A and part B of 
Medicare; and
    (3) A part B supplier, as defined in Sec. 400.202 of this chapter.
    Other disclosing entity means any other Medicare disclosing entity 
and any entity that does not participate in Medicare, but is required to 
disclose certain ownership and control information because of 
participation in any of the programs established under title V, XIX, or 
XX of the Act. This includes:
    (1) An entity (other than an individual practitioner or group of 
practitioners) that furnishes, or arranges for the furnishing of, items 
or services for which payment may be claimed by the entity under any 
plan or program established under title V of the Social

[[Page 806]]

Security Act or under an approved State Medicaid plan;
    (2) An entity (other than an individual practitioner or group of 
practitioners) that furnishes, or arranges for the furnishing of, 
health-related services for which payment may be claimed by the entity 
under an approved State plan and services program under title XX of the 
Act; or
    (3) A Medicaid fiscal agent.
    Group of practitioners means two or more health care practitioners 
who practice their profession at a common location (whether or not they 
share common facilities, common supporting staff, or common equipment).
    Indirect ownership interest means any ownership interest in an 
entity that has an ownership interest in the disclosing entity. The term 
includes an ownership interest in any entity that has an indirect 
ownership interest in the disclosing entity.
    Managing employee means a general manager, business manager, 
administrator, director, or other individual who exercises operational 
or managerial control over, or who directly or indirectly conducts, the 
day-to-day operation of the institution, organization, or agency.
    Ownership interest means the possession of equity in the capital, 
the stock, or the profits of the disclosing entity.
    Person with an ownership or control interest means a person or 
corporation that--
    (1) Has an ownership interest totaling 5 percent or more in a 
disclosing entity;
    (2) Has an indirect ownership interest equal to 5 percent or more in 
a disclosing entity;
    (3) Has a combination of direct and indirect ownership interests 
equal to 5 percent or more in a disclosing entity;
    (4) Owns an interest of 5 percent or more in any mortgage, deed of 
trust, note, or other obligation secured by the disclosing entity if 
that interest equals at least 5 percent of the value of the property or 
assets of the disclosing entity;
    (5) Is an officer or director of a disclosing entity that is 
organized as a corporation; or
    (6) Is a partner in a disclosing entity that is organized as a 
partnership.
    Significant business transaction means any business transaction or 
series of transactions during any one fiscal year, the total of which 
exceeds the lesser of $25,000 and 5 percent of the total operating 
expenses of the provider.
    Subcontractor means--
    (1) An individual, agency, or organization to which a disclosing 
entity has contracted or delegated some of its management functions or 
responsibilities of providing medical care to its patients; or
    (2) An individual, agency, or organization with which an 
intermediary or carrier has entered into a contract, agreement, purchase 
order or lease (or leases of real property) to obtain space, supplies, 
equipment, or services provided under the Medicare agreement.
    Wholly owned supplier means a supplier whose total ownership 
interest is held by a provider or by a person, persons, or other entity 
with an ownership or control interest in a provider.

[44 FR 41642, July 17, 1979, as amended at 57 FR 24982, June 12, 1992; 
57 FR 27306, June 18, 1992; 57 FR 35760, Aug. 11, 1992]



Sec. 420.202  Determination of ownership or control percentages.

    (a) Indirect ownership interest. The amount of indirect ownership 
interest is determined by multiplying the percentages of ownership in 
each entity. For example, if A owns 10 percent of the stock in a 
corporation that owns 80 percent of the disclosing entity, A's interest 
equates to an 8 percent indirect ownership interest in the disclosing 
entity and must be reported. Conversely, if B owns 80 percent of the 
stock of a corporation that owns 5 percent of the stock of the 
disclosing entity, B's interest equates to a 4 percent indirect 
ownership interest in the disclosing entity and need not be reported.
    (b) Person with an ownership or control interest. In order to 
determine the percentage of ownership interest in any mortgage, deed of 
trust, note, or other obligation, the percentage of interest owned in 
obligation is multiplied by the percentage of the disclosing entity's 
assets used to secure the obligation. For example, if A owns 10 percent 
of a note secured by 60 percent of the provider's assets, A's interest 
in the

[[Page 807]]

provider's assets equates to 6 percent and must be reported. Conversely, 
if B owns 40 percent of a note secured by 10 percent of the provider's 
assets, B's interest in the provider's assets equates to 4 percent and 
need not be reported.



Sec. 420.203  Disclosure of hiring of intermediary's former employees.

    A provider must notify the Secretary promptly if it, or its home 
office (in the case of a chain organization), employs or obtains the 
services of an individual who, at any time during the year preceding 
such employment, was employed in a managerial, accounting, auditing, or 
similar capacity by an agency or organization which currently serves, or 
at any time during the preceding year, served as a Medicare fiscal 
intermediary or carrier for the provider. Similar capacity means the 
performance of essentially the same work functions as those of a 
manager, accountant, or auditor even though the individual is not so 
designated by title.



Sec. 420.204  Principals convicted of a program-related crime.

    (a) Information required. Prior to CMS's acceptance of a provider 
agreement or issuance or reissuance of a supplier billing number, or at 
any time upon written request by CMS, the provider or part B supplier 
must furnish CMS with the identity of any person who:
    (1) Has an ownership or control interest in the provider or part B 
supplier;
    (2) Is an agent or managing employee of the provider or part B 
supplier; or
    (3) Is a person identified in paragraph (a)(1) or (a)(2) of this 
section and has been convicted of, or was an owner of, had a controlling 
interest in, or was a managing employee of a corporation that has been 
convicted of a criminal offense, subjected to any civil monetary 
penalty, or excluded from the programs for any activities related to 
involvement in the Medicare, Medicaid, title V or title XX social 
services program, since the inception of those programs.
    (b) Refusal to enter into or renew agreement or to issue or reissue 
billing numbers. CMS may refuse to enter into or renew an agreement with 
a provider of services, or to issue or reissue a billing number to a 
part B supplier, if any person who has an ownership or control interest 
in the provider or supplier, or who is an agent or managing employee, 
has been convicted of a criminal offense or subjected to any civil 
penalty or sanction related to the involvement of that person in 
Medicare, Medicaid, title V or title XX social services programs. In 
making this decision, CMS considers the facts and circumstances of the 
specific case, including the nature and severity of the crime, penalty 
or sanction and the extent to which it adversely affected beneficiaries 
and the programs involved. CMS also considers whether it has been given 
reasonable assurance that the person will not commit any further 
criminal or civil offense against the programs.
    (c) Notification of Inspector General. CMS promptly notifies the 
Inspector General of the Department of the receipt of any application or 
request for participation, certification, re-certification, or for a 
billing number that identifies any person described in paragraph (a)(3) 
of this section and the action taken on that application or request.

[57 FR 27306, June 18, 1992]



Sec. 420.205  Disclosure by providers and part B suppliers of business transaction information.

    A provider or part B supplier must submit to CMS, within 35 days 
after the date of a written request, full and complete information on--
    (a) The ownership of a subcontractor with which the provider or part 
B supplier has had, during the previous 12 months, business transactions 
in an aggregate amount in excess of $25,000;
    (b) Any significant business transactions between the provider or 
part B supplier and any wholly owned supplier or between the provider or 
part B supplier and any subcontractor, during the 5 year period ending 
on the date of the request;
    (c) The names of managing employees of the subcontractors;
    (d) The identity of any other entities to which payment may be made 
by Medicare, which a person with an ownership or control interest or a 
managing employee in the subcontractor has or has had an ownership or 
control

[[Page 808]]

interest in the 3-year period preceding disclosure; and
    (e) Any penalties, assessments, or exclusions under sections 1128, 
1128A and 1128B of the Act incurred by the subcontractor, its owners, 
managing employees or those with a controlling interest in the 
subcontract.

[57 FR 27306, June 18, 1992]



Sec. 420.206  Disclosure of persons having ownership, financial, or control interest.

    (a) Information that must be disclosed. A disclosing entity must 
submit the following information in the manner specified in paragraph 
(b) of this section:
    (1) The name and address of each person with an ownership or control 
interest in the entity or in any subcontractor in which the entity has 
direct or indirect ownership interest totaling 5 percent or more. In the 
case of a part B supplier that is a joint venture, ownership of 5 
percent or more of any company participating in the joint venture should 
be reported. Any physician who has been issued a Unique Physician 
Identification Number by the Medicare program must provide this number.
    (2) Whether any of the persons named, in compliance with paragraph 
(a)(1) of this section, is related to another as spouse, parent, child, 
or sibling.
    (3) The name of any other disclosing entity in which any person with 
an ownership or control interest, or who is a managing employee in the 
reporting disclosing entity, has, or has had in the previous three-year 
period, an ownership or control interest or position as managing 
employee, and the nature of the relationship with the other disclosing 
entity. If any of these other disclosing entities has been convicted of 
a criminal offense or received a civil monetary or other administrative 
sanction related to participation in Medicare, Medicaid, title V 
(Maternal and Child Health) or title XX (Social Services) programs, such 
as penalties assessments and exclusions under sections 1128, 1128A or 
1128B of the Act, the disclosing entity must also provide that 
information.
    (b) Time and manner of disclosure. (1) Any disclosing entity that is 
subject to periodic survey and certification of its compliance with 
Medicare standards must supply the information specified in paragraph 
(a) of this section to the State survey agency at the time it is 
surveyed. The survey agency will promptly furnish the information to the 
Secretary.
    (2) Any disclosing entity that is not subject to periodic survey and 
certification must supply the information specified in paragraph (a) of 
this section to CMS before entering into a contract or agreement with 
Medicare or before being issued or reissued a billing number as a part B 
supplier.
    (3) A disclosing entity must furnish updated information to CMS at 
intervals between recertification, or re-enrollment, or contract 
renewals, within 35 days of a written request. In the case of a part B 
supplier, the supplier must report also within 35 days, on its own 
initiative, any changes in the information it previously supplied.
    (c) Consequences of failure to disclose. (1) CMS does not approve an 
agreement or contract with, or make a determination of eligibility for, 
or (in the case of a part B supplier) issue or reissue a billing number 
to, any disclosing entity that fails to comply with paragraph (b) of 
this section.
    (2) CMS terminates any existing agreement or contract with, or 
withdraws a determination of eligibility for or (in the case of a part B 
supplier) revokes the billing number of, any disclosing entity that 
fails to comply with paragraph (b) of this section.
    (d) Public disclosure. Information furnished to the Secretary under 
the provisions of this section shall be subject to public disclosure as 
specified in 20 CFR part 422.

[44 FR 41642, July 17, 1979, as amended at 57 FR 27306, June 18, 1992]



  Subpart D--Access to Books, Documents, and Records of Subcontractors

    Source: 47 FR 58267, Dec. 30, 1982, unless otherwise noted.



Sec. 420.300  Basis, purpose, and scope.

    This subpart implements section 1861(v)(1)(I) of the Act, which 
requires,

[[Page 809]]

for Medicare payment under certain provider contracts, access by the 
Secretary, upon written request, and the Comptroller General, and their 
duly authorized representatives, to certain contracts for services and 
to books, documents, and records necessary to verify the costs of the 
services. The contracts affected are those between providers and their 
subcontractors, and between the subcontractors and organizations related 
to the subcontractor by control or common ownership. It also specifies 
the criteria by which HHS will determine whether to request access to 
books, documents, and records.



Sec. 420.301  Definitions.

    For purposes of this subpart--
    Books, documents, and records means all writings, recordings, 
transcriptions and tapes of any description necessary to verify the 
nature and extent of the costs of the services provided by the 
subcontractor.
    Common ownership means that an individual or individuals possess 
significant ownership or equity in the subcontractor and the entity 
providing the services under the contract.
    Contract for services means a contract through which a provider 
obtains the performance of an act or acts, as distinguished from 
supplies or equipment. It includes any contract for both goods and 
services to the extent the value or cost of the service component is 
$10,000 or more within a 12-month period.
    Control means that an individual or an organization has the power, 
directly or indirectly, significantly to influence or direct the actions 
of policies of an organization.
    Provider means a hospital, skilled nursing facility, home health 
agency, hospice or comprehensive outpatient rehabilitation facility, or 
a related organization (as defined in Sec. 413.17 of this chapter) of 
any of these providers.
    Related to the subcontractor means that the subcontractor is, to a 
significant extent, associated or affiliated with, owns, or is owned by, 
or has control of or is controlled by, the organization furnishing the 
services, facilities, or supplies.
    Subcontractor means any entity, including an individual or 
individuals, that contracts with a provider to supply a service, either 
to the provider or directly to a beneficiary, for which Medicare 
reimburses the provider the cost of the service. This includes 
organizations related to the subcontractor that have a contract with the 
subcontractor for which the cost or value is $10,000 or more in a 12-
month period.

[47 FR 58267, Dec. 30, 1982, as amended at 49 FR 13703, Apr. 6, 1984; 51 
FR 34833, Sept. 30, 1986]



Sec. 420.302  Requirement for access clause in contracts.

    (a) Applicability. This subpart applies to contracts--
    (1) Between a provider and a subcontractor and, where subject to 
section 1861(v)(l)(I)(ii) of the Act, between a subcontractor and an 
organization related to the subcontractor;
    (2) Entered into or renewed after December 5, 1980; and
    (3) For services the cost or value of which is $10,000 or more over 
a 12-month period, including contracts for both goods and services in 
which the service component is worth $10,000 or more over a 12-month 
period.
    (b) Requirement. Any contract meeting the conditions of paragraph 
(a) of this section must include a clause that allows the Comptroller 
General of the United States, HHS, and their duly authorized 
representatives access to the subcontractor's contract, books, 
documents, and records until the expiration of four years after the 
services are furnished under the contract or subcontract. The access 
must be provided for in accordance with the provisions of this subpart. 
The clause must also allow similar access by HHS, the Comptroller 
General, and their duly authorized representatives to contracts subject 
to section 1861(v)(l)(I)(ii) of the Act between a subcontractor and 
organizations related to the subcontractor and to books, documents, and 
records.
    (c) Prohibition against Medicare reimbursement. If a contract 
subject to the requirements of this subpart does not contain the clause 
required by paragraph (b) of this section, CMS will not reimburse the 
provider for the cost of the services furnished under the contract and 
will recoup any payments previously made for services under the 
contract. However, in order to avoid

[[Page 810]]

nonreimbursement or recoupment, providers will have until July 30, 1983, 
to amend those contracts entered into or renewed after December 5, 1980, 
and before January 31, 1983, that do not conform to the requirements of 
paragraph (b) of this section.

[47 FR 58267, Dec. 30, 1982, as amended at 49 FR 13703, Apr. 6, 1984]



Sec. 420.303  HHS criteria for requesting books, documents, and records.

    HHS will generally request books, documents, and records from a 
subcontractor only if one of the following situations exists and the 
question cannot satisfactorily and efficiently be resolved without 
access to the books, documents, and records:
    (a) HHS has reason to believe that the costs claimed for services of 
the subcontractor are excessive or inappropriate.
    (b) There is insufficient information to judge the appropriateness 
of the costs.
    (c) There is a written accusation with suitable evidence against the 
provider or subcontractor of kickbacks, bribes, rebates, or other 
illegal activities.
    (d) There is evidence of a possible nondisclosure of the existence 
of a related organization.



Sec. 420.304  Procedures for obtaining access to books, documents, and records.

    (a) Contents of the request. Requests for access will be in writing 
and contain the following elements:
    (1) Reasonable identification of the books, documents, and records 
to which access is being requested.
    (2) Identification of the contract or subcontract in which costs are 
being questioned as excessive or inappropriate.
    (3) The reason that the appropriateness of the costs or value of the 
services of the subcontractor in question cannot be adequately or 
efficiently determined without access to the subcontractor's books and 
records.
    (4) The authority in the statute and regulations for the access 
requested.
    (5) To the extent possible, the identification of those individuals 
who will be visiting the subcontractor to obtain access to the books, 
documents, and records.
    (6) The time and date of the scheduled visit.
    (7) The name of the duly authorized representative of HHS to contact 
if there are any questions.
    (b) Subcontractor response to a request for access to books, 
documents, and records. (1) The subcontractor will have 30 days from the 
date of a written request for access to books, documents, and records to 
make them available in accordance with the request.
    (2) If the subcontractor believes the request is inadequate because 
it does not fully meet one or more of the required elements in paragraph 
(a) of this section, the subcontractor must advise the requesting 
organization of the additional information needed.
    (i) The subcontractor must notify the requesting organization within 
20 days of the date of the request that it was improperly completed.
    (ii) The subcontractor must make the books, documents, and records 
available within 20 days after the date of the requesting organization's 
response.
    (3) If the subcontractor believes, for good cause, that the 
requested books, documents, and records cannot be made available as 
requested with the 30-day period under paragraph (b)(1) of this section, 
the subcontractor may request an extension of time within which to 
comply with the request from the requesting organization. The requesting 
organization may, at its discretion, grant the request for an extension, 
in whole or in part, for good cause shown.
    (4) The subcontractor must make the books, documents, and records 
available during its regular business hours for inspection, audit, and 
reproduction.
    (5) If HHS asks the subcontractor to reproduce books, documents, and 
records, HHS will pay the reasonable cost of reproduction. However, if 
the subcontractor reproduces books, documents, and records as a means of 
making them available, the subcontractor must bear the cost of the 
reproduction and no Medicare reimbursement will be made for that 
purpose.

[[Page 811]]

    (6) HHS reserves the right to examine the originals of any requested 
contracts, books, documents, and records, if they exist.
    (c) Refusal by subcontractor to furnish access to records. If CMS 
determines that the books, documents, and records are necessary for the 
reimbursement determination and the subcontractor refuses to make them 
available, HHS may initiate legal action against the subcontractor.



Subpart E--Rewards for Information Relating to Medicare Fraud and Abuse, 
  and Establishment of a Program to Collect Suggestions for Improving 
   Medicare Program Efficiency and to Reward Suggesters for Monetary 
                                 Savings

    Source: 63 FR 31128, June 8, 1998, unless otherwise noted.



Sec. 420.400  Basis and scope.

    This subpart implements sections 203(b) and (c) of Public Law 104-
191, which require the establishment of programs to encourage 
individuals to report suspected cases of fraud and abuse and submit 
suggestions on methods to improve the efficiency of the Medicare 
program. Sections 203(b) and (c) of Public Law 104-191 also provide the 
authority for CMS to reward individuals for reporting fraud and abuse 
and for submitting suggestions that could improve the efficiency of the 
Medicare program. This subpart sets forth procedures for rewarding 
individuals.

[64 FR 66401, Nov. 26, 1999]



Sec. 420.405  Rewards for information relating to Medicare fraud and abuse.

    (a) General rule. CMS pays a monetary reward for information that 
leads to the recovery of at least $100 of Medicare funds from 
individuals and entities that are engaging in, or have engaged in, acts 
or omissions that constitute grounds for the imposition of a sanction 
under section 1128, section 1128A, or section 1128B of the Act or that 
have otherwise engaged in sanctionable fraud and abuse against the 
Medicare program. The determination of whether an individual meets the 
criteria for an award, and the amount of the award, is at the discretion 
of CMS. CMS pays rewards only if a reward is not otherwise provided for 
by law. When CMS applies the criteria specified in paragraphs (b), (c), 
and (e) of this section to determine the eligibility and the amount of 
the reward, it notifies the recipient as specified in paragraph (d) of 
this section.
    (b) Information eligible for reward. (1) In order for an individual 
to be eligible to receive a reward, the information he or she supplied 
must relate to the activities of a specific individual or entity and 
must specify the time period of the alleged activities.
    (2) CMS does not give a reward for information relating to an 
individual or entity that, at the time the information is provided, is 
already the subject of a review or investigation by CMS or its 
contractors, or the OIG, the Department of Justice, the Federal Bureau 
of Investigation, or any other Federal, State, or local law enforcement 
agency.
    (c) Persons eligible to receive a reward--(1) General rule. Any 
person (other than one excluded under paragraph (c)(2) of this section) 
is eligible to receive a reward under this section if the person submits 
the information in the manner set forth in paragraph (f) of this 
section.
    (2) Excluded individuals. (i) An individual who was, or is an 
immediate family member of, an officer or employee of HHS or its 
contractors, the SSA, the OIG, a State Medicaid Agency, or the 
Department of Justice, the Federal Bureau of Investigation, or any other 
Federal, State, or local law enforcement agency at the time he or she 
came into possession of, or divulged, information leading to a recovery 
of Medicare funds is not eligible to receive a reward under this 
section.
    (ii) Any other Federal or State employee or contractor or an HHS 
grantee is not eligible for a reward under this section if the 
information submitted came to his or her knowledge in the course of his 
or her official duties.
    (iii) An individual who illegally obtained the information he or she 
submitted is excluded from receiving a reward under this section.

[[Page 812]]

    (iv) An individual who participated in the sanctionable offense with 
respect to which payment would be made is excluded from receiving a 
reward under this section.
    (d) Notification of eligibility--(1) General rule. After all 
Medicare funds have been recovered and CMS has determined a participant 
eligible to receive a reward under the provisions of this section, it 
notifies the informant of his or her eligibility, by mail, at the most 
recent address supplied by the individual. It is the individual's 
responsibility to ensure that the reward program has been notified of 
any change in his or her address or other relevant personal information 
(for example, change of name, phone number).
    (2) Special circumstances. (i) If the individual has relocated to an 
unknown address, the individual or his or her legal representative may 
claim the reward by contacting CMS within 1 year from the date on which 
CMS first attempted to notify the individual about a reward. CMS does 
not consider the individual or his or her legal representative eligible 
for a reward more than 1 year after the date on which it first attempted 
to give notice. CMS does not pay interest on rewards that are not 
immediately claimed.
    (ii) If the individual has become incapacitated or has died, an 
executor, administrator, or other legal representative may claim the 
reward on behalf of the individual or the individual's estate. The 
claimant must submit certified copies of the letters testamentary, 
letters of administration, or other similar evidence to show his or her 
authority to claim the reward. The claim must be filed within 1 year 
from the date on which CMS first gave or attempted to give notice of the 
reward.
    (e) Amount and payment of reward. (1) In determining whether it will 
pay a reward and, if so, the amount of the reward, CMS takes into 
account all relevant factors, including the significance of the 
information furnished in relation to the ultimate resolution of the case 
and the recovery of Medicare funds.
    (2) The amount of a reward represents what CMS considers to be 
adequate compensation in the particular case, not to exceed 10 percent 
of the overpayments recovered in the case or $1,000, whichever is less.
    (3) If more than one person is eligible to receive a reward in a 
particular case, CMS allocates the total reward amount (not to exceed 10 
percent of the overpayments recovered in that case or $1,000, whichever 
is less) among the participants.
    (4) CMS bases rewards only on recovered Medicare payments and not on 
amounts collected as penalties or fines.
    (5) CMS makes payments as promptly as the circumstances of the case 
permit, but not until it has collected all Medicare overpayments, fines, 
and penalties.
    (6) No person may make any offer or promise or otherwise bind CMS or 
HHS with respect to the payment of any reward under this section or the 
amount of the reward.
    (f) Submission of information. (1) An individual may submit 
information on persons or entities engaging in, or that have engaged in, 
fraud and abuse against the Medicare program to the Office of the 
Inspector General, or to the Medicare intermediary or carrier that has 
jurisdiction over the suspected fraudulent provider or supplier.
    (2) A participant interested in receiving a reward must provide his 
or her name, address, telephone number, and any other requested 
identifying information so that he or she may be contacted, if 
necessary, for additional information and, when applicable, for the 
payment of a reward upon resolution of the case.
    (g) Confidentiality. CMS does not reveal a participant's identity to 
any person, except as required by law.
    (h) Finding of ineligibility after reward is accepted. If, after a 
reward is accepted, CMS finds that the awardee was ineligible to receive 
the reward, the Government is not liable for the reward and the awardee 
must refund all monies received.



Sec. 420.410  Establishment of a program to collect suggestions for improving Medicare program efficiency and to reward suggesters for monetary savings.

    (a) Definitions. As used in this section, the following definitions 
apply:
    Payment means a monetary award given to a suggester in recognition 
of,

[[Page 813]]

and as a reward for, a suggestion adopted by CMS that improves the 
efficiency of, and results in monetary savings to, the Medicare program.
    Savings means the monetary value of the net benefits the Medicare 
program derives from implementing the suggestion.
    Suggester means an individual, a group of individuals, or a legal 
entity such as a corporation, partnership, or professional association, 
not otherwise excluded under Sec. 420.410(d), who submits a suggestion 
under this section.
    Suggestion means an original idea submitted in writing.
    Suggestion program means the specific procedures and requirements 
established by CMS for receiving suggestions from the suggester on 
methods to improve the efficiency of the Medicare program, evaluating 
the suggestions and, if appropriate, paying a reward to the suggester 
for adopted suggestions that result in improved efficiency and produce 
monetary savings to the Medicare program.
    (b) General rule. CMS may make payment for adopted suggestions that 
increase the efficiency of the Medicare program and result in monetary 
savings. CMS only makes payment for suggestions in instances in which a 
reward is not otherwise provided by law. The determination to adopt a 
suggestion, to reward the suggester, and the method of calculating a 
reward are at the sole discretion of CMS.
    (c) Eligibility. Except as specified in paragraph (d) of this 
section, any individual, group of individuals or legal entity, such as a 
corporation, partnership or professional association, is eligible to 
submit a suggestion and be considered for a reward under this suggestion 
program if the suggestion is submitted to CMS in the manner set forth in 
paragraph (e) of this section.
    (d) Exclusions. Medicare contractors, their officers and employees, 
individuals who work for Federal agencies under a contract, employees of 
Federally-sponsored research and demonstration projects, Federal 
officers and employees, and immediate family members of these 
individuals, are excluded from receiving payment under the suggestion 
program. If, after the suggester receives a reward payment, CMS 
determines that the suggester was ineligible to receive the reward, CMS 
is not liable for the reward payment and the suggester must refund all 
monies received.
    (e) Requirements for submitting suggestions--(1) To be considered, 
the suggestion must be in writing, mailed to CMS, and must include the 
following information:
    (i) A description of an existing problem or need;
    (ii) A suggested method for solving the problem or filling the need; 
and
    (iii) If known, an estimate of the savings potential that could 
result from implementing the suggestion.
    (2) Suggestions must be mailed to: Centers for Medicare & Medicaid 
Services Suggestion Program, 7500 Security Blvd., Baltimore, Maryland 
21244-1850.
    (3) Any suggesters interested in receiving a reward must provide CMS 
with the following information: An individual suggester must provide his 
or her name, a group of suggesters must provide the names of all the 
group members, and a legal entity must provide its name and the name of 
its representative. All suggesters must provide an address, telephone 
number, and any other identifying information that CMS needs to contact 
the suggester for additional information and, where applicable, to mail 
the reward.
    (f) Evaluation process--(1) Relevant factors. CMS evaluates all 
suggestions on the basis of the following factors:
    (i) Originality of suggestion.
    (ii) An estimate of potential monetary savings to the Medicare 
program.
    (iii) The extent to which Medicare program efficiency would be 
improved if CMS adopts the suggestion.
    (iv) Accuracy of the information reflected in the suggestion.
    (v) Feasibility of implementation.
    (vi) Nature and complexity of the suggestion.
    (vii) Any other factors that appear to be relevant.
    (2) Evaluation time limit. CMS concludes the evaluation process in a 
reasonable amount of time, not to exceed 2 years from the receipt date, 
taking into consideration the complexity of the suggestion, the number 
of possible implementation strategies, and CMS's current workload.

[[Page 814]]

    (g) Basis for reward payment--(1) General rule. If CMS determines 
that it is appropriate to make a reward payment for a suggestion adopted 
in whole or in part, that results in improved efficiency and monetary 
savings to the Medicare program, the payment is based on--
    (i) The actual first-year net savings to the Medicare program, or
    (ii) The average annual net savings to the Medicare program expected 
to be realized over a period of not more than 3 years if--
    (A) An improvement is expected to yield monetary savings for more 
than 1 year and implementation involves substantial costs; or
    (B) Monetary savings are negligible in the first year but are 
expected to substantially increase in subsequent years.
    (2) Reward payment amount. CMS determines the amount of a reward 
payment using the following formula:
    (i) Net savings from $1,000 to $10,000--10 percent of the savings, 
with a minimum award amount of $100;
    (ii) Net savings of $10,001 to $100,000--$1,000 for the first 
$10,000 of savings, plus 3 percent of the net savings over $10,000;
    (iii) Net savings of more than $100,000--$3,700 for the first 
$100,000 of savings, plus 0.5 percent of savings over $100,000, with a 
maximum award amount of $25,000.
    (h) Adoption of suggestion and issuance of reward payment--(1) 
Adoption. Upon completing its evaluation, CMS decides whether to adopt a 
suggestion. If CMS receives the same or an overlapping suggestion from 
two or more unrelated parties, CMS will consider a reward only for the 
suggestion CMS received first, if the suggestion or overlapping part of 
the suggestion are identical, and CMS has adopted that part. If the 
suggestions are not identical, CMS will consider rewarding the 
suggestion received first, if it is feasible and CMS is able to adopt 
and implement the suggestion. If the first suggestion cannot be 
implemented, CMS may consider rewarding the suggestion received next, 
even if it is similar, provided CMS can adopt and implement the 
suggestion.
    (2) Issuance of reward payment. After the reward payment amount is 
determined, as described in paragraph (g) of this section, CMS mails 
payment to the suggester (or to the legal representatives referenced in 
paragraph (k) of this section) only after the suggestion has been in 
operation for 1 year.
    (i) Group suggestions. When CMS deems that a reward payment is 
appropriate for a suggestion submitted by a group of individuals, CMS 
pays an equal share of the reward to each of the individuals identified 
in the group. If an organization such as a corporation, partnership, or 
professional association submits a suggestion, CMS makes a single reward 
payment to that organization.
    (j) Change in name or address. It is the suggester's responsibility 
to notify CMS of any change of address or other relevant information. If 
the suggester fails to update CMS on any change in this information, and 
the reward payment mailed to the suggester is returned to CMS, the 
suggester must claim the reward payment by contacting CMS within 1 year 
from the date CMS first mailed the reward payment to the suggester. CMS 
does not pay interest on rewards that, for any reason, are delayed or 
are not immediately claimed.
    (k) Incapacitated or deceased suggester. If the suggester is 
incapacitated or has died, an executor, administrator, or other legal 
representative may claim the reward on behalf of the suggester or the 
suggester's estate. The claimant must submit certified copies of the 
letters testamentary, letters of administration, or other similar 
evidence to CMS showing his or her authority to claim the reward. The 
claim must be filed within 1 year from the date on which CMS first 
attempted to pay the reward to the individual who submitted the 
suggestion.
    (l) Maintenance of records--(1) CMS retains records related to the 
administration of the suggestion program in accordance with 36 CFR part 
1228 (the regulations for the National Archives and Records 
Administration).
    (2) CMS does not disclose information submitted under the suggestion 
program, except as required by law.

[64 FR 66401, Nov. 26, 1999]

[[Page 815]]



PART 421--INTERMEDIARIES AND CARRIERS--Table of Contents




          Subpart A--Scope, Definitions, and General Provisions

Sec.
421.1  Basis and scope.
421.3  Definitions.
421.5  General provisions.

                        Subpart B--Intermediaries

421.100  Intermediary functions.
421.103  Options available to providers and CMS.
421.104  Nominations for intermediary.
421.105  Notification of action on nomination.
421.106  Change to another intermediary or to direct payment.
421.110  Requirements for approval of an agreement.
421.112  Considerations relating to the effective and efficient 
          administration of the program.
421.114  Assignment and reassignment of providers by CMS.
421.116  Designation of national or regional intermediaries.
421.117  Designation of regional and alternative designated regional 
          intermediaries for home health agencies and hospices.
421.118  Awarding of experimental contracts.
421.120  Performance criteria.
421.122  Performance standards.
421.124  Intermediary's failure to perform efficiently and effectively.
421.126  Termination of agreements.
421.128  Intermediary's opportunity for hearing and right to judicial 
          review.

                           Subpart C--Carriers

421.200  Carrier functions.
421.201  Performance criteria and standards.
421.202  Requirements and conditions.
421.203  Carrier's failure to perform efficiently and effectively.
421.205  Termination by the Secretary.
421.210  Designations of regional carriers to process claims for durable 
          medical equipment, prosthetics, orthotics and supplies.
421.212  Railroad Retirement Board contracts.
421.214  Advance payments to suppliers furnishing items or services 
          under Part B.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 45 FR 42179, June 23, 1980, unless otherwise noted.



          Subpart A--Scope, Definitions, and General Provisions



Sec. 421.1  Basis and scope.

    (a) This part is based on the indicated provisions of the following 
sections of the Act:

    1124--Requirements for disclosure of certain information.
    1816 and 1842--Use of organizations and agencies in making Medicare 
payments to providers and suppliers of services.

    (b) Section 421.118 is also based on 42 U.S.C.1395b-1(a)(1)(F), 
which authorizes demonstration projects involving intermediary 
agreements and carrier contracts.
    (c) The provisions of this part apply to agreements with Part A 
(Hospital Insurance) intermediaries and contracts with Part B 
(Supplementary Medical Insurance) carriers. They also state that CMS may 
perform certain functions directly or by contract. They specify criteria 
and standards to be used in selecting intermediaries and evaluating 
their performance, in assigning or reassigning a provider or providers 
to particular intermediaries, and in designating regional or national 
intermediaries for certain classes of providers. The provisions set 
forth the instances where there is the opportunity for a hearing for 
intermediaries and carriers affected by certain adverse actions. In some 
circumstances, the adversely affected intermediaries may request a 
judicial review of hearings decisions on--
    (1) Assignment or reassignment of a provider or providers; or
    (2) Designation of an intermediary or intermediaries to serve a 
class of providers.

[49 FR 3659, Jan. 30, 1984, as amended at 60 FR 50442, Sept. 29, 1995]



Sec. 421.3  Definitions.

    Intermediary means an entity that has a contract with CMS to 
determine and make Medicare payments for Part A or Part B benefits 
payable on a cost basis (or under the Prospective Payment System for 
hospitals) and to perform other related functions. For purposes of 
designating regional or alternative regional intermediaries for

[[Page 816]]

home health agencies and of designating intermediaries for hospices 
under Sec. 421.117 as well as for applying the performance criteria in 
Sec. 421.120 and the performance standards in Sec. 421.122 and any 
adverse action resulting from such application, the term intermediary 
also means a Blue Cross Plan which has entered into a subcontract 
approved by CMS with the Blue Cross and Blue Shield Association to 
perform intermediary functions.

[59 FR 681, Jan. 6, 1994]



Sec. 421.5  General provisions.

    (a) Competitive bidding not required for carriers. CMS may enter 
into contracts with carriers, or with intermediaries to act as carriers 
in certain circumstances, without regard to section 3709 of the U.S. 
Revised Statutes or any other provision of law that requires competitive 
bidding.
    (b) Indemnification of intermediaries and carriers. Intermediaries 
and carriers act on behalf of CMS in carrying out certain administrative 
responsibilities that the law imposes. Accordingly, their agreements and 
contracts contain clauses providing for indemnification with respect to 
actions taken on behalf of CMS and CMS is the real party of interest in 
any litigation involving the administration of the program.
    (c) Use of intermediaries to perform carrier functions. CMS may 
contract with an intermediary to perform carrier functions with respect 
to services for which Part B payment is made to a provider.
    (d) Nonrenewal of agreement or contract. Notwithstanding any of the 
provisions of this part, CMS has the authority not to renew an agreement 
or contract when its term expires.
    (e) Intermediary availability in an area. For more effective and 
efficient administration of the program, CMS retains the right to expand 
or diminish the geographical area in which an intermediary is available 
to serve providers.
    (f) Provision for automatic renewal. Agreements and contracts under 
this part may contain automatic renewal clauses for continuation from 
term to term unless either party gives notice, within timeframes 
specified in the agreement or contract, of its intention not to renew.

[45 FR 42179, June 23, 1980, as amended at 54 FR 4026, Jan. 27, 1989]



                        Subpart B--Intermediaries



Sec. 421.100  Intermediary functions.

    An agreement between CMS and an intermediary specifies the functions 
to be performed by the intermediary, which must include, but are not 
necessarily limited to, the following:
    (a) Coverage. (1) The intermediary ensures that it makes payments 
only for services that are:
    (i) Furnished to Medicare beneficiaries;
    (ii) Covered under Medicare; and
    (iii) In accordance with QIO determinations when they are services 
for which the QIO has assumed review responsibility under its contract 
with CMS.
    (2) The intermediary takes appropriate action to reject or adjust 
the claim if--
    (i) The intermediary or the QIO determines that the services 
furnished or proposed to be furnished were not reasonable, not medically 
necessary, or not furnished in the most appropriate setting; or
    (ii) The intermediary determines that the claim does not properly 
reflect the kind and amount of services furnished.
    (b) Fiscal management. The intermediary must receive, disburse, and 
account for funds in making Medicare payments.
    (c) Provider audits. The intermediary must audit the records of 
providers of services as necessary to assure proper payments.
    (d) Utilization patterns. The intermediary must assist providers to-
-
    (1) Develop procedures relating to utilization practices;
    (2) Make studies of the effectiveness of those procedures and 
recommend methods to improve them;
    (3) Evaluate the results of utilization review activity; and
    (4) Assist in the application of safeguards against unnecessary 
utilization of services.
    (e) Resolution of cost report disputes. The intermediary must 
establish and

[[Page 817]]

maintain procedures approved by CMS to consider and resolve any disputes 
that may result from provider dissatisfaction with an intermediary's 
determinations concerning provider cost reports.
    (f) Reconsideration of determinations. The intermediary must 
establish and maintain procedures approved by CMS for the 
reconsideration of its determinations to deny payments to an individual 
or to the provider that furnished services to the individual. The QIO 
performs reconsideration of cases in which it made a determination 
subject to reconsideration.
    (g) Information and reports. The intermediary must furnish to CMS 
any information and reports that CMS requests in order to carry out its 
responsibilities in the administration of the Medicare program.
    (h) Other terms and conditions. The intermediary must comply with 
all applicable laws and regulations and with any other terms and 
conditions included in its agreement.
    (i) Dual intermediary responsibilities. With respect to the 
responsibility for service to provider-based HHAs and provider-based 
hospices, where the HHA or hospice and its parent provider will be 
served by different intermediaries under Sec. 421.117 of this part, the 
designated regional intermediary will process bills, make coverage 
determinations and make payments to the HHAs and hospices. The 
intermediary serving the parent provider will perform all fiscal 
functions, including audits and settlement of the Medicare cost reports 
and the HHA and hospice supplement worksheets.

[45 FR 42179, June 23, 1980, as amended at 48 FR 7178, Feb. 18, 1983; 49 
FR 3659, Jan. 30, 1984; 51 FR 43198, Dec. 1, 1986; 53 FR 17944, May 19, 
1988; 54 FR 4026, Jan. 27, 1989]



Sec. 421.103  Options available to providers and CMS.

    (a) Except for hospices (which are covered under Sec. 421.117), a 
provider may elect to receive payment for covered services furnished to 
Medicare beneficiaries--
    (1) Directly from CMS (subject to the provisions of paragraph (b) of 
this section); or
    (2) Through an intermediary, when both CMS and the intermediary 
consent.
    (b) Whenever CMS determines it appropriate, it may contract with any 
organization (including an intermediary with which CMS has previously 
entered into an agreement under Sec. 421.105 and Sec. 421.110 or 
designated as a regional or alternative regional intermediary under 
Sec. 421.117) for the purposes of making payments to any provider that 
does not elect to receive payment from an intermediary.

[49 FR 3659, Jan. 30, 1984; 49 FR 9174, Mar. 12, 1984]



Sec. 421.104  Nominations for intermediary.

    (a) Nomination by groups or associations of providers. (1) An 
association of providers, except for hospices, may nominate an 
organization or agency to serve as intermediary for its members.
    (2) The nomination is not binding on any member of the association 
if it notifies CMS of its nonconcurrence with the nomination.
    (3) The nomination must be made in writing, to CMS, and must--
    (i) Identify the proposed intermediary by giving the complete name 
and address;
    (ii) Include, or furnish as an attachment, the name, address, and 
bed capacity (or patient care capacity in the case of home health 
agencies) of each member of the association;
    (iii) List the members that have concurred in the nomination of the 
proposed intermediary; and
    (iv) Be signed by an authorized representative of the association.
    (b) Action by nonmembers or nonconcurring members. Providers that 
nonconcur in their association's nomination, or are not members of an 
association, may--
    (1) Form a group of 2 or more providers for the specific purpose of 
nominating an intermediary, in accordance with provisions of paragraph 
(a) of this section;
    (2) Elect to receive payments from a fiscal intermediary with which 
CMS already has an agreement, if CMS and the intermediary agree to it 
(see Sec. 421.106); or

[[Page 818]]

    (3) Elect to receive payment from CMS as provided in Sec. 421.103.
    (c) CMS is not required to enter into an agreement with a proposed 
intermediary solely because it has been nominated.

[45 FR 42179, June 23, 1980, as amended at 48 FR 56035, Dec. 16, 1983; 
49 FR 3659, Jan. 30, 1984]



Sec. 421.105  Notification of action on nomination.

    (a) CMS will send, to each member of a nominating association or 
group, written notice of a decision to enter into or not enter into an 
agreement with the nominated organization or agency.
    (b) Any member of a group or association having more than one 
nominated intermediary approved by CMS to act on its behalf must 
withdraw its nomination from all but one or exercise the option provided 
in Sec. 421.103(a), subject to Sec. 421.103(b), to receive payment 
directly from CMS.

[45 FR 42179, June 23, 1980, as amended at 49 FR 3660, Jan. 30, 1984]



Sec. 421.106  Change to another intermediary or to direct payment.

    (a) Any provider may request a change of intermediary, or except for 
a hospice, that it be paid directly by CMS, by--
    (1) Giving CMS written notice of its desire at least 120 days before 
the end of its current fiscal year; and
    (2) Concurrently giving written notice to its intermediary.
    (b) If CMS finds the change is consistent with effective and 
efficient administration of the program and approves the request under 
paragraph (a) of this section, it will notify the provider, the outgoing 
intermediary, and the newly-elected intermediary (if any) that the 
change will be effective on the first day following the close of the 
fiscal year in which the request was filed.

[45 FR 42179, June 23, 1980, as amended at 49 FR 56036, Dec. 16, 1983; 
49 FR 3660, Jan. 30, 1984]



Sec. 421.110  Requirements for approval of an agreement.

    Before entering into or renewing an intermediary agreement, CMS 
will--
    (a) Determine that to do so is consistent with the effective and 
efficient administration of the Medicare program;
    (b) Review the performance of the intermediary as measured by the 
criteria (Sec. 421.120) and standards (Sec. 421.122); and
    (c) Determine that the intermediary or prospective intermediary--
    (1) Is willing and able to assist providers in the application of 
safeguards against unnecessary utilization of services;
    (2) Meets all solvency and financial responsibility requirements 
imposed by the statutes and regulatory authorities of the State or 
States in which it, or any subcontractor performing some or all of its 
functions, would serve;
    (3) Has the overall resources and experience to administer its 
responsibilities under the Medicare program and has an existing 
operational, statistical, and recordkeeping capacity to carry out the 
additional program responsibilities it proposes to assume. CMS will 
presume that an intermediary or prospective intermediary meets this 
requirement if it has at least 5 years experience in paying for or 
reimbursing the cost of health services;
    (4) Will serve a sufficient number of providers to permit a finding 
of effective and efficient administration. Under this criterion no 
intermediary or prospective intermediary shall be found to be not 
efficient or effective solely on the grounds that it serves only 
providers located in a single State;
    (5) Has acted in good faith to achieve effective cooperation with 
the providers it will service and with the physicians and medical 
societies in the area;
    (6) Has established a record of integrity and satisfactory service 
to the public; and

[[Page 819]]

    (7) Has an affirmative equal employment opportunity program that 
complies with the fair employment provisions of the Civil Rights Act of 
1964 and Executive Order 11246, as amended.



Sec. 421.112  Considerations relating to the effective and efficient administration of the program.

    (a) In order to accomplish the most effective and efficient 
administration of the Medicare program, determinations may be made by 
the Secretary with respect to the termination of an intermediary 
agreement, or by CMS with respect to the--
    (1) Renewal of an intermediary agreement (Sec. 421.110);
    (2) Assignment or reassignment of providers to an intermediary 
(Sec. 421.114); or
    (3) Designation of a regional or national intermediary to serve a 
class of providers (Sec. 421.116).
    (b) When taking the actions listed in paragraph (a), the Secretary 
or CMS will consider the performance of the individual intermediary in 
its Medicare operations using the factors contained in the performance 
criteria (Sec. 421.120) and performance standards (Sec. 421.122).
    (c) In addition, when taking the actions listed in paragraph (a) of 
this section, the Secretary or CMS may consider factors relating to--
    (1) Consistency in the administration of program policy;
    (2) Development of intermediary expertise in difficult areas of 
program administration;
    (3) Individual capacity of available intermediaries to serve 
providers as it is affected by such considerations as--
    (i) Program emphasis on the number or type of providers to be 
served; or
    (ii) Changes in data processing technology;
    (4) Overdependence of the program on the capacity of an intermediary 
to an extent that services could be interrupted;
    (5) Economy in the delivery of intermediary services;
    (6) Timeliness in the delivery of intermediary services;
    (7) Duplication in the availability of intermediaries;
    (8) Conflict of interest between an intermediary and provider; and
    (9) Any additional pertinent factors.

[45 FR 42179, June 23, 1980, as amended at 59 FR 682, Jan. 6, 1994]



Sec. 421.114  Assignment and reassignment of providers by CMS.

    CMS may assign or reassign any provider to any intermediary if it 
determines that the assignment or reassignment will result in a more 
effective and efficient administration of the Medicare program. Before 
making this determination CMS will consider--
    (a) The preferences of the provider;
    (b) The availability of an intermediary as specified in 
Sec. 421.5(e); and
    (c) Intermediary performance measured against the criteria and 
standards specified in Secs. 421.120 and 421.122.

[45 FR 42179, June 23, 1980, as amended at 49 FR 3660, Jan. 30, 1984]



Sec. 421.116  Designation of national or regional intermediaries.

    (a) After considering intermediary performance measured against the 
criteria and standards specified in Secs. 421.120 and 421.122, CMS may 
designate a particular intermediary to serve a class of providers 
nationwide or in any geographic area it defines. CMS may make this 
designation if it determines that the designation will result in a 
greater degree of effectiveness and efficiency in the administration of 
the Medicare program than could be achieved by an assignment of 
providers to an intermediary preferred by the providers.
    (b) No designation may be made until the affected providers and 
intermediaries are given an explanation and the intermediaries are 
advised of their right to a hearing and judicial review as specified in 
Sec. 421.128. This provision does not apply to experimental contracts 
awarded under Sec. 421.118.
    (c) To designate an intermediary, CMS may establish classes of 
providers on the basis of--
    (1) The type of provider, for example, hospital, skilled nursing 
facility, home health agency; or
    (2) Common characteristics.

[45 FR 42179, June 23, 1980, as amended at 49 FR 3660, Jan. 30, 1984]

[[Page 820]]



Sec. 421.117  Designation of regional and alternative designated regional intermediaries for home health agencies and hospices.

    (a) This section is based on section 1816(e)(4) of the Social 
Security Act, which requires the Secretary to designate regional 
intermediaries for home health agencies (HHAs) other than hospital-based 
HHAs but permits him or her to designate regional intermediaries for 
hospital-based HHAs only if the designation meets promulgated criteria 
concerning administrative efficiency and effectiveness; on section 
1816(e)(5) of the Social Security Act, which requires the Secretary to 
designate intermediaries for hospices; and on section 1874 of the Act, 
which permits CMS to contract with any organization for the purpose of 
making payments to any provider that elects to receive payment directly 
from CMS.
    (b) CMS applies the following criteria to determine whether the 
assignment of hospital-based HHAs to designated regional intermediaries 
will result in the more effective and efficient administration of the 
Medicare program:
    (1) Uniform interpretation of Medicare rules;
    (2) Expertise in bill processing;
    (3) Control of administrative costs;
    (4) Ease of communication of program policy and issues to affected 
providers;
    (5) Ease of data collection;
    (6) Ease of CMS's monitoring of intermediary performance; and
    (7) Other criteria as the Secretary believes to be pertinent.
    (c) Except as provided in paragraphs (e), (f), and (g) of this 
section, an HHA must receive payment through a regional intermediary 
designated by CMS.
    (d) Except as provided in paragraphs (f) through (h) of this 
section, a hospice must receive payment for covered services furnished 
to Medicare beneficiaries through an intermediary designated by CMS.
    (e) An HHA chain not desiring to receive payment from designated 
regional intermediaries may request service by one lead intermediary 
with the assistance of a local designated regional intermediary. 
Alternatively, the chain may request to be serviced by a single 
intermediary. A lead, local, or a single intermediary must be an 
organization that is a designated regional intermediary. Any request 
made under this paragraph is evaluated by CMS in accordance with the 
criteria contained at Sec. 421.106 of this subpart.
    (f) An HHA or hospice not wishing to receive payment from a regional 
intermediary designated under paragraph (c) or (d) of this section may 
submit a request to the CMS Regional Office to receive payment through 
an alternative regional intermediary designated by CMS.
    (g) Except as provided in paragraph (h) of this section, any request 
that an HHA or hospice may make to change from a designated regional 
intermediary to an alternative designated regional intermediary, in 
accordance with paragraph (f) of this section, is evaluated by CMS in 
accordance with the criteria set forth at Sec. 421.106(b) of this 
subpart and must be filed within the timeframe established at 
Sec. 421.106(a) of this subpart.
    (h) Exception: An HHA or a hospice that, as of June 20, 1988 is 
receiving payment from a designated regional intermediary may, without 
regard to the limitations contained in Sec. 421.106 of this subpart, 
continue to receive payment from that intermediary. It may do so even if 
that intermediary is not the designated regional intermediary or the 
alternative designated regional intermediary for the particular State in 
which the HHA or hospice is located.

[53 FR 17944, May 19, 1988]



Sec. 421.118  Awarding of experimental contracts.

    Notwithstanding the provisions of Secs. 421.103 and 421.104, CMS may 
award a fixed price or performance incentive contract under the 
experimental authority contained in 42 U.S.C. 1395b-1 for performance of 
any of the functions specified in Sec. 421.100. Action taken by CMS 
under this paragraph is not subject to--
    (a) The administrative and judicial review which would otherwise be 
available under Sec. 421.128; or

[[Page 821]]

    (b) Performance criteria and performance standards review as 
provided for in Secs. 421.120 and 421.122.

[45 FR 42179, June 23, 1980, as amended at 59 FR 682, Jan. 6, 1994]



Sec. 421.120  Performance criteria.

    (a) Application of performance criteria. As part of the intermediary 
evaluations authorized by section 1816(f) of the Act, CMS periodically 
assesses the performance of intermediaries in their Medicare operations 
using performance criteria. The criteria measure and evaluate 
intermediary performance of functional responsibilities such as--
    (1) Correct coverage and payment determinations;
    (2) Responsiveness to beneficiary concerns; and
    (3) Proper management of administrative funds.
    (b) Basis for criteria. CMS will base the performance criteria on--
    (1) Nationwide intermediary experience;
    (2) Changes in intermediary operations due to fiscal constraints; 
and
    (3) HFCA's objectives in achieving better performance.
    (c) Publication of criteria. The development and revision of 
criteria for evaluating intermediary performance is a continuing 
process. Therefore, before the beginning of each evaluation period, CMS 
will publish the performance criteria as a notice in the Federal 
Register.

[48 FR 7178, Feb. 18, 1983]



Sec. 421.122  Performance standards.

    (a) Development of standards. In addition to the performance 
criteria (Sec. 421.120), CMS develops detailed performance standards for 
use in evaluating intermediary performance which may be based on 
historical performance, application of acceptable statistical measures 
of variation to nationwide intermediary experience during a base period, 
or changing program emphases or requirements. These standards are also 
developed considering intermediary experience and evaluate the specific 
requirements of each functional responsibility or criterion.
    (b) Factors beyond intermediary's control. To identify measurable 
factors that significantly affect an intermediary's performance, but 
that are not within the intermediary's control, CMS will--
    (1) Study the performance of intermediaries during the base period, 
and
    (2) Consider the noncontrollable factors in developing performance 
standards.
    (c) Publication of standards. The development and revision of 
standards for evaluating intermediary performance is a continuing 
process. Therefore, before the beginning of each evaluation period, 
which usually coincides with the Federal fiscal year period of October 
1-September 30, CMS publishes the performance standards as part of the 
Federal Register notice describing the performance criteria issued under 
Sec. 421.120(c). CMS may not necessarily publish the criteria and 
standards every year. CMS interprets the statutory phrase ``before the 
beginning of each evaluation period'' as allowing publication of the 
criteria and standards after the Federal fiscal year begins, as long as 
the evaluation period of the intermediaries for the new criteria and 
standards begins after the publication of the notice.

[59 FR 682, Jan. 6, 1994]



Sec. 421.124  Intermediary's failure to perform efficiently and effectively.

    (a) Failure by an intermediary to meet, or to demonstrate the 
capacity to meet, the criteria or standards specified in Secs. 421.120 
and 421.122 may be grounds for adverse action by the Secretary or by 
CMS, such as reassignment of providers, offer of a short-term agreement, 
termination of a contract, or non-renewal of a contract. If an 
intermediary meets all criteria and standards in its overall 
performance, but does not meet them with respect to a specific provider 
or class of providers, CMS may reassign that provider or class of 
providers to another intermediary in accordance with Sec. 421.114.
    (b) In addition, notwithstanding whether an intermediary meets the 
criteria and standards, if the cost incurred by the intermediary to meet 
its contractual requirements exceeds the amount which CMS finds to be 
reasonable and adequate to meet the cost

[[Page 822]]

which must be incurred by an efficiently and economically operated 
intermediary, those high costs may also be grounds for adverse action.

[59 FR 682, Jan. 6, 1994]



Sec. 421.126  Termination of agreements.

    (a) Termination by intermediary. An intermediary may terminate its 
agreement at any time by--
    (1) Giving written notice of its intention to CMS and to the 
providers it services at least 180 days before its intended termination 
date; and
    (2) Giving public notice of its intention by publishing a statement 
of the effective date of termination at least 60 days before that date. 
Publication must be in a newspaper of general circulation in each 
community served by the intermediary.
    (b) Termination by the Secretary, and right of appeal. (1) The 
Secretary may terminate an agreement if--
    (i) The intermediary fails to comply with the requirements of this 
subpart;
    (ii) The intermediary fails to meet the criteria or standards 
specified in Secs. 421.120 and 421.122; or
    (iii) CMS has reassigned, under Sec. 421.114 or Sec. 421.116, all of 
the providers assigned to the intermediary.
    (2) If the Secretary decides to terminate an agreement, he or she 
will offer the intermediary an opportunity for a hearing, in accordance 
with Sec. 421.128.
    (3) If the intermediary does not request a hearing, or if the 
hearing decision affirms the Secretary's decision, the Secretary will 
provide reasonable notice of the effective date of termination to--
    (i) The intermediary;
    (ii) The providers served by the intermediary; and
    (iii) The general public.
    (4) The providers served by the intermediary will be given the 
opportunity to nominate another intermediary, in accordance with 
Sec. 421.104.



Sec. 421.128  Intermediary's opportunity for hearing and right to judicial review.

    (a) Basis for appeal. An intermediary adversely affected by any of 
the following actions shall be granted an opportunity for a hearing:
    (1) Assignment or reassignment of providers to another intermediary.
    (2) Designation of a national or regional intermediary to serve a 
class of providers.
    (3) Termination of the agreement.
    (b) Request for hearing. The intermediary shall file the request 
with CMS within 20 days from the date on the notice of intended action.
    (c) Hearing procedures. The hearing officer shall be a 
representative of the Secretary and not otherwise a party to the initial 
administrative decision. The intermediary may be represented by counsel 
and may present evidence and examine witnesses. A complete recording of 
the proceedings at the hearing will be made and transcribed.
    (d) Judicial review. An adverse hearing decision concerning action 
under paragraph (a)(1) or (a)(2) of this section is subject to judicial 
review in accordance with 5 U.S.C. chapter 7.
    (e) As specified in Sec. 421.118, contracts awarded under the 
experimental authority of CMS are not subject to the provisions of this 
section.
    (f) Exception. An intermediary adversely affected by the designation 
of a regional intermediary or an alternative regional intermediary for 
HHAs, or an intermediary for hospices, under Sec. 421.117 of this 
subpart is not entitled to a hearing or judicial review concerning 
adverse effects caused by the designation of an intermediary.

[45 FR 42179, June 23, 1980, as amended at 47 FR 38540, Sept. 1, 1982; 
49 FR 3660, Jan. 30, 1984; 53 FR 17945, May 19, 1988]



                           Subpart C--Carriers



Sec. 421.200  Carrier functions.

    A contract between CMS and a carrier, other than a regional DMEPOS 
carrier, specifies the functions to be performed by the carrier which 
must include, but are not necessarily limited to, the following:
    (a) Coverage. (1) The carrier ensures that payment is made only for 
services that are:
    (i) Furnished to Medicare beneficiaries;
    (ii) Covered under Medicare; and
    (iii) In accordance with QIO determinations when they are services 
for

[[Page 823]]

which the QIO has assumed review responsibility under its contract with 
CMS.
    (2) The carrier takes appropriate action to reject or adjust the 
claim if--
    (i) The carrier or the QIO determines that the services furnished or 
proposed to be furnished were not reasonable, not medically necessary, 
or not furnished in the most appropriate setting;
    (ii) The carrier determines that the claim does not properly reflect 
the kind and amount of services furnished.
    (b) Payment on a cost basis. If payment is on a cost basis, the 
carrier must assure that payments are based on reasonable costs, as 
determined under part 413 of this chapter.
    (c) Payment on a charge basis. If payment is on a charge basis, 
under part 405, subpart E of this chapter, the carrier must ensure that-
-
    (1) Charges are reasonable and not higher than the charge for a 
comparable service furnished under comparable circumstances to the 
carrier's policy holders and subscribers; and
    (2) The payment is based on one of the following--
    (i) An itemized bill.
    (ii) An assignment under the terms of which the reasonable charge is 
the full charge for the service, as specified in Sec. 424.55 of this 
chapter.
    (iii) If the beneficiary has died, the procedures set forth in 
Secs. 424.62 and 424.64 of this chapter.
    (d) Fiscal management. The carrier must receive, disburse, and 
account for funds in making payments under Medicare.
    (e) Provider audits. The carrier must audit the records of providers 
to whom it makes Medicare Part B payments to assure that payments are 
made properly.
    (f) Utilization patterns. (1) The carrier must have methods and 
procedures for identifying utilization patterns that deviate from 
professionally established norms and bring the deviant patterns to the 
attention of appropriate professional groups.
    (2) The carrier must assist providers and other persons who furnish 
Medicare Part B services to--
    (i) Develop procedures relating to utilization practices;
    (ii) Make studies of the effectiveness of those procedures and 
devise methods to improve them;
    (iii) Apply safeguards against unnecessary utilization of services; 
and
    (iv) Develop procedures for utilization review, and establish groups 
to perform such reviews of providers to whom it makes Medicare Part B 
payments.
    (g) Information and reports. The carrier must furnish to CMS any 
information and reports that CMS requests in order to carry out CMS's 
responsibilities in the administration of the Medicare program. The 
carrier must be responsive to requests for information from the public.
    (h) Maintenance and availability of records. The carrier must 
maintain and make available to CMS the records necessary for 
verification of payments and for other related purposes.
    (i) Hearings to Part B beneficiaries. (1) The carrier must provide 
an opportunity for a fair hearing if it denies the beneficiary's request 
for payment, does not act upon the request with reasonable promptness, 
or pays less than the amount claimed.
    (2) The hearing procedures must be in accordance with part 405, 
subpart H, of this chapter (Review and Hearing Under the Supplementary 
Medical Insurance Program).
    (j) Other terms and conditions. The carrier must comply with any 
other terms and conditions included in its contract.

[45 FR 42183, Jun. 23, 1980; 45 FR 64913, Oct. 1, 1980, as amended at 49 
FR 3660, Jan. 30, 1984; 49 FR 9174, Mar. 12, 1984; 51 FR 34833, Sept. 
30, 1986; 51 FR 41350, Nov. 14, 1986; 51 FR 43198, Dec. 1, 1986; 52 FR 
4499, Feb. 12, 1987; 53 FR 6648, Mar. 2, 1988; 54 FR 4027, Jan. 27, 
1989; 57 FR 27307, June 18, 1992]



Sec. 421.201  Performance criteria and standards.

    (a) Application of performance criteria and standards. As part of 
the carrier evaluations mandated by section 1842(b)(2) of the Act, CMS 
periodically assesses the performance of carriers in their Medicare 
operations using performance criteria and standards.
    (1) The criteria measure and evaluate carrier performance of 
functional responsibilities such as--

[[Page 824]]

    (i) Accurate and timely payment determinations;
    (ii) Responsiveness to beneficiary, physician, and supplier 
concerns; and
    (iii) Proper management of administrative funds.
    (2) The standards evaluate the specific requirements of each 
functional responsibility or criterion.
    (b) Basis for criteria and standards. CMS bases the performance 
criteria and standards on--
    (1) Nationwide carrier experience;
    (2) Changes in carrier operations due to fiscal constraints; and
    (3) CMS's objectives in achieving better performance.
    (c) Publication of criteria and standards. Before the beginning of 
each evaluation period, which usually coincides with the Federal fiscal 
year period of October 1-September 30, CMS publishes the performance 
criteria and standards as a notice in the Federal Register. CMS may not 
necessarily publish the criteria and standards every year. CMS 
interprets the statutory phrase ``before the beginning of each 
evaluation period'' as allowing publication of the criteria and 
standards after the Federal fiscal year begins, as long as the 
evaluation period of the carriers for the new criteria and standards 
begins after the publication of the notice.

[59 FR 682, Jan. 6, 1994]



Sec. 421.202  Requirements and conditions.

    Before entering into or renewing a carrier contract, CMS determines 
that the carrier--
    (a) Has the capacity to perform its contractual responsibilities 
effectively and efficiently;
    (b) Has the financial responsibility and legal authority necessary 
to carry out its responsibilities; and
    (c) Will be able to meet any other requirements CMS considers 
pertinent, and, if designated a regional DMEPOS carrier, any special 
requirements for regional carriers under Sec. 421.210 of this subpart.

[45 FR 42179, June 23, 1980, as amended at 57 FR 27307, June 18, 1992]



Sec. 421.203  Carrier's failure to perform efficiently and effectively.

    (a) Failure by a carrier to meet, or demonstrate the capacity to 
meet, the criteria and standards specified in Sec. 421.201 may be 
grounds for adverse action by the Secretary, such as contract 
termination or non-renewal.
    (b) Notwithstanding whether or not a carrier meets the criteria and 
standards specified in Sec. 421.201, if the cost incurred by the carrier 
to meet its contractual requirements exceeds the amount that CMS finds 
to be reasonable and adequate to meet the cost which must be incurred by 
an efficiently and economically operated carrier, those high costs may 
also be grounds for adverse action.

[59 FR 682, Jan. 6, 1994]



Sec. 421.205  Termination by the Secretary.

    (a) Cause for termination. The Secretary may terminate a contract 
with a carrier at any time if he or she determines that the carrier has 
failed substantially to carry out any material terms of the contract or 
has performed its function in a manner inconsistent with the effective 
and efficient administration of the Medicare Part B program.
    (b) Notice and opportunity for hearing. Upon notification of the 
Secretary's intent to terminate the contract, the carrier may request a 
hearing within 20 days after the date on the notice of intent to 
terminate.
    (c) Hearing procedures. The hearing procedures will be those 
specified in Sec. 421.128(c).



Sec. 421.210  Designations of regional carriers to process claims for durable medical equipment, prosthetics, orthotics and supplies.

    (a) Basis. This section is based on sections 1834(a) and 1834(h) of 
the Act which authorize the Secretary to designate one or more carriers 
by specific regions to process claims for durable medical equipment, 
prosthetic devices, prosthetics, orthotics and other supplies (DMEPOS). 
This authority has been delegated to CMS.
    (b) Types of claims. Claims for the following, except for items 
incident to a

[[Page 825]]

physician's professional service as defined in Sec. 410.26, incident to 
a physician's service in a rural health clinic as defined in 
Sec. 405.2413, or bundled into payment to a provider, ambulatory 
surgical center, or other facility, are processed by the designated 
carrier for its designated region and not by other carriers--
    (1) Durable medical equipment (and related supplies) as defined in 
section 1861(n) of the Act;
    (2) Prosthetic devices (and related supplies) as described in 
section 1861(s)(8) of the Act, (including intraocular lenses and 
parenteral and enteral nutrients, supplies, and equipment, when 
furnished under the prosthetic device benefit);
    (3) Orthotics and prosthetics (and related supplies) as described in 
section 1861(s)(9);
    (4) Home dialysis supplies and equipment as described in section 
1861(s)(2)(F);
    (5) Surgical dressings and other devices as described in section 
1861(s)(5);
    (6) Immunosuppressive drugs as described in section 1861(s)(2)(J); 
and
    (7) Other items or services which are designated by CMS.
    (c) Region designation. The boundaries of the four regions for 
processing claims described in paragraph (b) of this section coincide 
with the boundaries of 1 or more sectors or areas designated for the 
Common Working File. These four regions contain the following States and 
territories: Region A: Maine, New Hampshire, Vermont, Massachusetts, 
Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, and 
Delaware. Region B: Maryland, the District of Columbia, Virginia, West 
Virginia, Ohio, Michigan, Indiana, Illinois, Wiconsin and Minnesota. 
Region C: North Carolina, South Carolina, Kentucky, Tennessee, Georgia, 
Florida, Alabama, Mississippi, Louisiana, Texas, Arkansas, Oklahoma, New 
Mexico, Colorado, Puerto Rico and the Virgin Islands. Region D: Alaska, 
Hawaii, American Samoa, Guam, the Northern Mariana Islands, California, 
Nevada, Arizona, Washington, Oregon, Montana, Idaho, Utah, Wyoming, 
North Dakota, South Dakota, Nebraska, Kansas, Iowa and Missouri.
    (d) Criteria for designating regional carriers. CMS designates 
regional carriers to achieve a greater degree of effectiveness and 
efficiency in the administration of the Medicare program as measured by-
-
    (1) Timeliness of claim processing;
    (2) Cost per claim;
    (3) Claim processing quality;
    (4) Experience in claim processing, and in establishing local 
medical review policy; and
    (5) Other criteria that CMS believes to be pertinent.
    (e) Carrier designation. (1) Each carrier designated a regional 
carrier is responsible, using the payment rates applicable for the State 
of residence of a beneficiary, including a qualified Railroad Retirement 
beneficiary, for processing claims for items listed in paragraph (b) of 
this section for beneficiaries whose permanent residence is within the 
area designated in paragraph (c) of this section. A beneficiary's 
permanent residence is the address at which he or she intends to spend 6 
months or more of the calendar year.
    (2) The regional carriers designated to process DMEPOS claims (as 
defined in paragraph (b) of this section) for all Medicare beneficiaries 
residing in their respective regions (as designated in paragraph (c) of 
this section), including those entitled under the Railroad Retirement 
Act, are the following:
    (i) The Travelers Insurance Company (Region A), which will be 
processing claims in Pennsylvania.
    (ii) Associated Insurance Companies, Inc.--AdminaStar (Region B), 
which will be processing claims in Indiana.
    (iii) Blue Cross and Blue Shield of South Carolina (doing business 
as Palmetto Governments Benefits Administrators) (Region C), which will 
be processing claims in South Carolina.
    (iv) Connecticut General Life Insurance Co. (a CIGNA Company) 
(Region D), which will be processing claims in Tennessee.
    (3) Blue Cross and Blue Shield of South Carolina (Palmetto 
Government Benefits Administrators) has been selected to serve as the 
National Supplier Clearinghouse and the Statistical Analysis DME 
regional carrier.

[[Page 826]]

    (4) The contracts for the four DME regional carriers will be 
periodically recompeted. The National Supplier Clearinghouse and 
Statistical Analysis DME regional carrier do not constitute separate 
contracts, but are contract amendments to one of the DME regional 
carrier contracts. The National Supplier Clearinghouse and Statistical 
Analysis DME regional carrier contract amendments will also be 
periodically recompeted.
    (f) Collecting information of ownership. Carriers designated as 
regional claims processors must obtain from each supplier of items 
listed in paragraph (b) of this section information concerning ownership 
and control as required by section 1124A of the Act and part 420 of this 
chapter, and certifications that supplier standards are met as required 
by part 424 of this chapter.

[57 FR 27307, June 18, 1992, as amended at 58 FR 60796, Nov. 18, 1993]



Sec. 421.212  Railroad Retirement Board contracts.

    In accordance with this subpart C, the Railroad Retirement Board 
contracts with DMEPOS regional carriers designated by CMS, as set forth 
in Sec. 421.210(e)(2), for processing claims for Medicare-eligible 
Railroad Retirement beneficiaries, for the same contract period as the 
contracts entered into between CMS and the DMEPOS regional carriers.

[58 FR 60797, Nov. 18, 1993]



Sec. 421.214  Advance payments to suppliers furnishing items or services under Part B.

    (a) Scope and applicability. This section provides for the 
following:
    (1) Sets forth requirements and procedures for the issuance and 
recovery of advance payments to suppliers of Part B services and the 
rights and responsibilities of suppliers under the payment and recovery 
process.
    (2) Does not limit CMS's right to recover unadjusted advance payment 
balances.
    (3) Does not affect suppliers' appeal rights under part 405, subpart 
H of this chapter relating to substantive determinations on suppliers' 
claims.
    (4) Does not apply to claims for Part B services furnished by 
suppliers that have in effect provider agreements under section 1866 of 
the Act and part 489 of this chapter, and are paid by intermediaries.
    (b) Definition. As used in this section, advance payment means a 
conditional partial payment made by the carrier in response to a claim 
that it is unable to process within established time limits.
    (c) When advance payments may be made. An advance payment may be 
made if all of the following conditions are met:
    (1) The carrier is unable to process the claim timely.
    (2) CMS determines that the prompt payment interest provision 
specified in section 1842(c) of the Act is insufficient to make a 
claimant whole.
    (3) CMS approves, in writing to the carrier, the making of an 
advance payment by the carrier.
    (d) When advance payments are not made. Advance payments are not 
made to any supplier that meets any of the following conditions:
    (1) Is delinquent in repaying a Medicare overpayment.
    (2) Has been advised of being under active medical review or program 
integrity investigation.
    (3) Has not submitted any claims.
    (4) Has not accepted claims' assignments within the most recent 180-
day period preceding the system malfunction.
    (e) Requirements for suppliers. (1) Except as provided for in 
paragraph (g)(1) of this section, a supplier must request, in writing to 
the carrier, an advance payment for Part B services it furnished.
    (2) A supplier must accept an advance payment as a conditional 
payment subject to adjustment, recoupment, or both, based on an eventual 
determination of the actual amount due on the claim and subject to the 
provisions of this section.
    (f) Requirements for carriers. (1) A carrier must notify a supplier 
as soon as it is determined that payment will not be made in a timely 
manner, and an advance payment option is to be offered to the supplier.
    (i) A carrier must calculate an advance payment for a particular 
claim at no more than 80 percent of the anticipated payment for that 
claim based

[[Page 827]]

upon the historical assigned claims payment data for claims paid the 
supplier.
    (ii) ``Historical data'' are defined as a representative 90-day 
assigned claims payment trend within the most recent 180-day experience 
before the system malfunction.
    (iii) Based on this amount and the number of claims pending for the 
supplier, the carrier must determine and issue advance payments.
    (iv) If historical data are not available or if backlogged claims 
cannot be identified, the carrier must determine and issue advance 
payments based on some other methodology approved by CMS.
    (v) Advance payments can be made no more frequently than once every 
2 weeks to a supplier.
    (2) Generally, a supplier will not receive advance payments for more 
assigned claims than were paid, on a daily average, for the 90-day 
period before the system malfunction.
    (3) A carrier must recover an advance payment by applying it against 
the amount due on the claim on which the advance was made. If the 
advance payment exceeds the Medicare payment amount, the carrier must 
apply the unadjusted balance of the advance payment against future 
Medicare payments due the supplier.
    (4) In accordance with CMS instructions, a carrier must maintain a 
financial system of data in accordance with the Statement of Federal 
Financial Accounting Standards for tracking each advance payment and its 
recoupment.
    (g) Requirements for CMS. (1) In accordance with the provisions of 
this section, CMS may determine that circumstances warrant the issuance 
of advance payments to all affected suppliers furnishing Part B 
services. CMS may waive the requirement in paragraph (e)(1) of this 
section as part of that determination.
    (2) If adjusting Medicare payments fails to recover an advance 
payment, CMS may authorize the use of any other recoupment method 
available (for example, lump sum repayment or an extended repayment 
schedule) including, upon written notice from the carrier to the 
supplier, converting any unpaid balances of advance payments to 
overpayments. Overpayments are recovered in accordance with part 401, 
subpart F of this chapter concerning claims collection and compromise 
and part 405, subpart C of this chapter concerning recovery of 
overpayments.
    (h) Prompt payment interest. An advance payment is a ``payment'' 
under section 1842(c)(2)(C) of the Act for purposes of meeting the time 
limit for the payment of clean claims, to the extent of the advance 
payment.
    (i) Notice, review, and appeal rights. (1) The decision to advance 
payments and the determination of the amount of any advance payment are 
committed to CMS's discretion and are not subject to review or appeal.
    (2) The carrier must notify the supplier receiving an advance 
payment about the amounts advanced and recouped and how any Medicare 
payment amounts have been adjusted.
    (3) The supplier may request an administrative review from the 
carrier if it believes the carrier's reconciliation of the amounts 
advanced and recouped is incorrectly computed. If a review is requested, 
the carrier must provide a written explanation of the adjustments.
    (4) The review and explanation described in paragraph (i)(3) of this 
section is separate from a supplier's right to appeal the amount and 
computation of benefits paid on the claim, as provided at part 405, 
subpart H of this chapter. The carrier's reconciliation of amounts 
advanced and recouped is not an initial determination as defined at 
Sec. 405.803 of this chapter, and any written explanation of a 
reconciliation is not subject to further administrative review.

[61 FR 49275, Sept. 19, 1996]



PART 422--MEDICARE+CHOICE PROGRAM--Table of Contents




                      Subpart A--General Provisions

Sec.
422.1  Basis and scope.
422.2  Definitions.
422.4  Types of M+C plans.
422.6  Application requirements.
422.8  Evaluation and determination procedures.
422.10  Cost-sharing in enrollment-related costs (M+C user fee).

[[Page 828]]

            Subpart B--Eligibility, Election, and Enrollment

422.50  Eligibility to elect an M+C plan.
422.54  Continuation of enrollment.
422.56  Limitations on enrollment in an M+C MSA plan.
422.57  Limited enrollment under M+C RFB plans.
422.60  Election process
422.62  Election of coverage under an M+C plan.
422.64  Information about the M+C program.
422.66  Coordination of enrollment and disenrollment through M+C 
          organizations.
422.68  Effective dates of coverage and change of coverage.
422.74  Disenrollment by the M+C organization.
422.80  Approval of marketing materials and election forms.

             Subpart C--Benefits and Beneficiary Protections

422.100  General requirements.
422.101  Requirements relating to basic benefits.
422.102  Supplemental benefits.
422.103  Benefits under an M+C MSA plan.
422.104  Special rules on supplemental benefits for M+C MSA plans.
422.105  Special rules for point of service option.
422.106  Coordination of benefits with employer group health plans and 
          Medicaid.
422.108  Medicare secondary payer (MSP) procedures.
422.109  Effect of national coverage determinations (NCDs).
422.110  Discrimination against beneficiaries prohibited.
422.111  Disclosure requirements.
422.112  Access to services.
422.113  Special rules for ambulance services, emergency and urgently 
          needed services, and maintenance and post-stabilization care 
          services.
422.114  Access to services under an M+C private fee-for-service plan.
422.118  Confidentiality and accuracy of enrollee records.
422.128  Information on advance directives.
422.132  Protection against liability and loss of benefits.

                      Subpart D--Quality Assurance

422.152  Quality assessment and performance improvement program.
422.154  External review.
422.156  Compliance deemed on the basis of accreditation.
422.157  Accreditation organizations.
422.158  Procedures for approval of accreditation as a basis for deeming 
          compliance.

                 Subpart E--Relationships With Providers

422.200  Basis and scope.
422.202  Participation procedures.
422.204  Provider selection and credentialing.
422.205  Provider antidiscrimination rules.
422.206  Interference with health care professionals' advice to 
          enrollees prohibited.
422.208  Physician incentive plans: requirements and limitations.
422.210  Disclosure of physician incentive plans
422.212  Limitations on provider indemnification.
422.214  Special rules for services furnished by noncontract providers.
422.216  Special rules for M+C private fee-for-service plans.
422.220  Exclusion of services furnished under a private contract.

          Subpart F--Payments to Medicare+Choice Organizations

422.249  Terminology
422.250  General provisions.
422.252  Annual capitation rates.
422.254  Calculation and adjustment factors.
422.256  Adjustments to capitation rates and aggregate payments.
422.257  Encounter data.
422.258  Announcement of annual capitation rates and methodology 
          changes.
422.262  Special rules for beneficiaries enrolled in M+C MSA plans.
422.264  Special rules for coverage that begins or ends during an 
          inpatient hospital stay.
422.266  Special rules for hospice care.
422.268  Source of payment and effect of election of the M+C plan 
          election on payment.
422.270  Payments to M+C organizations for graduate medical education 
          costs.

                  Subpart G--Premiums and Cost-Sharing

422.300  Basis and scope.
422.302  Terminology.
422.304  Rules governing premiums and cost-sharing.
422.306  Submission of proposed premiums and related information.
422.308  Limits on premiums and cost-sharing amounts.
422.309  Incorrect collections of premiums and cost-sharing.
422.310  Adjusted community rate (ACR) approval process.
422.312  Requirement for additional benefits.

               Subpart H--Provider-Sponsored Organizations

422.350  Basis, scope, and definitions.
422.352  Basic requirements.
422.354  Requirements for affiliated providers.

[[Page 829]]

422.356  Determining substantial financial risk and majority financial 
          interest.
422.370  Waiver of State licensure.
422.372  Basis for waiver of State licensure.
422.374  Waiver request and approval process.
422.376  Conditions of the waiver.
422.378  Relationship to State law.
422.380  Solvency standards.
422.382  Minimum net worth amount.
422.384  Financial plan requirement.
422.386  Liquidity.
422.388  Deposits.
422.390  Guarantees.

  Subpart I--Organization Compliance With State Law and Preemption by 
                               Federal Law

422.400  State licensure requirement.
422.402  Federal preemption of State law.
422.404  State premium taxes prohibited.

Subpart J [Reserved]

         Subpart K--Contracts With Medicare+Choice Organizations

422.500  Definitions.
422.501  General provisions.
422.502  Contract provisions.
422.504  Effective date and term of contract.
422.506  Nonrenewal of contract.
422.508  Modification or termination of contract by mutual consent.
422.510  Termination of contract by CMS.
422.512  Termination of contract by the M+C organization.
422.514  Minimum enrollment requirements.
422.516  Reporting requirements.
422.520  Prompt payment by M+C organization.
422.524  Special rules for RFB societies.

Subpart L--Effect of Change of Ownership or Leasing of Facilities During 
                            Term of Contract

422.550  General provisions.
422.552  Novation agreement requirements.
422.553  Effect of leasing of an M+C organization's facilities.

     Subpart M--Grievances, Organization Determinations and Appeals

422.560  Basis and scope.
422.561  Definitions.
422.562  General provisions.
422.564  Grievance procedures.
422.566  Organization determinations.
422.568  Standard timeframes and notice requirements for organization 
          determinations.
422.570  Expediting certain organization determinations.
422.572  Timeframes and notice requirements for expedited organization 
          determinations.
422.574  Parties to the organization determination.
422.576  Effect of an organization determination.
422.578  Right to a reconsideration.
422.580  Reconsideration defined.
422.582  Request for a standard reconsideration.
422.584  Expediting certain reconsiderations.
422.586  Opportunity to submit evidence.
422.590  Timeframes and responsibility for reconsiderations.
422.592  Reconsideration by an independent entity.
422.594  Notice of reconsidered determination by the independent entity.
422.596  Effect of a reconsidered determination.
422.600  Right to a hearing.
422.602  Request for an ALJ hearing.
422.608  Departmental Appeals Board (the Board) review.
422.612  Judicial review.
422.616  Reopening and revising determinations and decisions.
422.618  How an M+C organization must effectuate standard reconsidered 
          determinations or decisions.
422.619  How an M+C organization must effectuate expedited reconsidered 
          determinations.
422.620  How enrollees of M+C organizations must be notified of 
          noncoverage of inpatient hospital care.
422.622  Requesting immediate QIO review of noncoverage of inpatient 
          hospital care.

         Subpart N--Medicare Contract Determinations and Appeals

422.641  Contract determinations.
422.644  Notice of contract determination.
422.646  Effect of contract determination.
422.648  Reconsideration: Applicability.
422.650  Request for reconsideration.
422.652  Opportunity to submit evidence.
422.654  Reconsidered determination.
422.656  Notice of reconsidered determination.
422.658  Effect of reconsidered determination.
422.660  Right to a hearing.
422.662  Request for hearing.
422.664  Postponement of effective date of a contract determination when 
          a request for a hearing with respect to a contract 
          determination is filed timely.
422.666  Designation of hearing officer.
422.668  Disqualification of hearing officer.
422.670  Time and place of hearing.
422.672  Appointment of representatives.
422.674  Authority of representatives.
422.676  Conduct of hearing.
422.678  Evidence.
422.680  Witnesses.
422.682  Discovery.
422.684  Prehearing.

[[Page 830]]

422.686  Record of hearing.
422.688  Authority of hearing officer.
422.690  Notice and effect of hearing decision.
422.692  Review by the Administrator.
422.694  Effect of Administrator's decision.
422.696  Reopening of contract or reconsidered determination or decision 
          of a hearing officer or the Administrator.
422.698  Effect of revised determination.

                    Subpart O--Intermediate Sanctions

422.750  Kinds of sanctions.
422.752  Basis for imposing sanctions.
422.756  Procedures for imposing sanctions.
422.758  Maximum amount of civil money penalties imposed by CMS.
422.760  Other applicable provisions.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 63 FR 18134, Apr. 14, 1998, unless otherwise noted.



                      Subpart A--General Provisions

    Source: 63 FR 35068, June 26, 1998, unless otherwise noted.



Sec. 422.1  Basis and scope.

    (a) Basis. This part is based on the indicated provisions of the 
following sections of the Act:

1851--Eligibility, election, and enrollment.
1852--Benefits and beneficiary protections.
1853--Payments to Medicare+Choice (M+C) organizations.
1854--Premiums.
1855--Organization, licensure, and solvency of M+C organizations.
1856--Standards.
1857--Contract requirements.
1859--Definitions; enrollment restriction for certain M+C plans.

    (b) Scope. This part establishes standards and sets forth the 
requirements, limitations, and procedures for Medicare services 
furnished, or paid for, by Medicare+Choice organizations through 
Medicare+Choice plans.



Sec. 422.2  Definitions.

    As used in this part--
    ACR stands for adjusted community rate.
    Additional benefits are health care services not covered by 
Medicare, and reductions in premiums or cost-sharing for Medicare 
covered services, funded from adjusted excess amounts as calculated in 
the ACR.
    Adjusted community rate (ACR) is the equivalent of the maximum 
amount allowed under Sec. 422.310.
    Arrangement means a written agreement between an M+C organization 
and a provider or provider network, under which--
    (1) The provider or provider network agrees to furnish for a 
specific M+C plan(s) specified services to the organization's M+C 
enrollees;
    (2) The organization retains responsibilities for the services; and
    (3) Medicare payment to the organization discharges the enrollee's 
obligation to pay for the services.
    Balance billing generally refers to an amount billed by a provider 
that represents the difference between the amount the provider charges 
an individual for a service and the sum of the amount the individual's 
health insurer (for example, the original Medicare program) will pay for 
the service plus any cost-sharing by the individual.
    Basic benefits means all Medicare-covered benefits (except hospice 
services) and additional benefits.
    Benefits are health care services that are intended to maintain or 
improve the health status of enrollees, for which the M+C organization 
incurs a cost or liability under an M+C plan (not solely an 
administrative processing cost). Benefits are submitted and approved 
through the ACR process.
    Coinsurance is a fixed percentage of the total amount paid for a 
health care service that can be charged to an M+C enrollee on a per-
service basis.
    Copayment is a fixed amount that can be charged to an M+C plan 
enrollee on a per-service basis.
    Cost-sharing includes deductibles, coinsurance, and copayments.
    Licensed by the State as a risk-bearing entity means the entity is 
licensed or otherwise authorized by the State to assume risk for 
offering health insurance or health benefits coverage, such that the 
entity is authorized to accept prepaid capitation for providing, 
arranging, or paying for comprehensive health services under an M+C 
contract.
    M+C stands for Medicare+Choice.
    M+C eligible individual means an individual who meets the 
requirements of Sec. 422.50.

[[Page 831]]

    M+C organization means a public or private entity organized and 
licensed by a State as a risk-bearing entity (with the exception of 
provider-sponsored organizations receiving waivers) that is certified by 
CMS as meeting the M+C contract requirements.
    M+C plan means health benefits coverage offered under a policy or 
contract by an M+C organization that includes a specific set of health 
benefits offered at a uniform premium and uniform level of cost-sharing 
to all Medicare beneficiaries residing in the service area of the M+C 
plan (or in individual segments of a service area, under 
Sec. 422.304(b)(2)).
    M+C plan enrollee is an M+C eligible individual who has elected an 
M+C plan offered by an M+C organization.
    Mandatory supplemental benefits are health services not covered by 
Medicare that an M+C enrollee must purchase as part of an M+C plan that 
are paid for in full, directly by (or on behalf of) Medicare enrollees, 
in the form of premiums or cost-sharing.
    MSA stands for medical savings account.
    MSA trustee means a person or business with which an enrollee 
establishes an M+C MSA. A trustee may be a bank, an insurance company, 
or any other entity that--
    (1) Is approved by the Internal Revenue Service to be a trustee or 
custodian of an individual retirement account (IRA); and
    (2) Meets the requirements of Sec. 422.262(b).
    National coverage determination (NCD) means a national policy 
determination regarding the coverage status of a particular service that 
CMS makes under section 1862(a)(1) of the Act, and publishes as a 
Federal Register notice or CMS ruling. (The term does not include 
coverage changes mandated by statute.)
    Optional supplemental benefits are health services not covered by 
Medicare that are purchased at the option of the M+C enrollee and paid 
for in full, directly by (or on behalf of) the Medicare enrollee, in the 
form of premiums or cost-sharing. These services may be grouped or 
offered individually.
    Original Medicare means health insurance available under Medicare 
Part A and Part B through the traditional fee-for service payment 
system.
    Point of service (POS) is a benefit option that an M+C coordinated 
care plan can offer to its Medicare enrollees as an additional, 
mandatory supplemental, or optional supplemental benefit. Under the POS 
benefit option, the M+C plan allows members the option of receiving 
specified services outside of the M+C plan's provider network. In return 
for this flexibility, members typically have higher cost-sharing 
requirements for services received and, where offered as a mandatory or 
optional supplemental benefit, may also be charged a premium for the POS 
benefit option.
    Provider means--
    (1) Any individual who is engaged in the delivery of health care 
services in a State and is licensed or certified by the State to engage 
in that activity in the State; and
    (2) Any entity that is engaged in the delivery of health care 
services in a State and is licensed or certified to deliver those 
services if such licensing or certification is required by State law or 
regulation.
    Provider network means the providers with which an M+C organization 
contracts or makes arrangements to furnish covered health care services 
to Medicare enrollees under an M+C coordinated care or network MSA plan.
    Religious and fraternal benefit (RFB) society means an organization 
that--
    (1) Is described in section 501(c)(8) of the Internal Revenue Code 
of 1986 and is exempt from taxation under section 501(a) of that Act; 
and
    (2) Is affiliated with, carries out the tenets of, and shares a 
religious bond with, a church or convention or association of churches 
or an affiliated group of churches.
    RFB plan means an M+C plan that is offered by an RFB society.
    Service area means a geographic area approved by CMS within which an 
M+C-eligible individual may enroll in a particular M+C plan offered by 
an M+C organization. Each M+C plan must be available to all M+C-eligible 
individuals within the plan's service area. In deciding whether to 
approve an M+C plan's proposed service area, CMS considers the following 
criteria:

[[Page 832]]

    (1) Whether the area meets the ``county integrity rule'' that a 
service area generally consists of a full county or counties. However, 
CMS may approve a service area that includes a portion of a county if it 
determines that the ``partial county'' area is necessary, 
nondiscriminatory, and in the best interests of the beneficiaries.
    (2) The extent to which the proposed services area mirrors service 
areas of existing commercial health care plans or M+C plans offered by 
the organization.
    (3) For M+C coordinated care plans and network M+C MSA plans, 
whether the contracting provider network meets the access and 
availability standards set forth in Sec. 422.112. Although not all 
contracting providers must be located within the plan's service area, 
CMS must determine that all services covered under the plan are 
accessible from the service area.
    (4) For non-network M+C MSA plans, CMS may approve single county 
non-network M+C MSA plans even if the M+C organization's commercial 
plans have multiple county service areas.

[63 FR 35068, June 26, 1998, as amended at 65 FR 40314, June 29, 2000]



Sec. 422.4  Types of M+C plans.

    (a) General rule. An M+C plan may be a coordinated care plan, a 
combination of an M+C MSA plan and a contribution into an M+C MSA 
established in accordance with Sec. 422.262, or an M+C private fee-for-
service plan.
    (1) A coordinated care plan. A coordinated care plan is a plan that 
includes a network of providers that are under contract or arrangement 
with the organization to deliver the benefit package approved by CMS.
    (i) The network is approved by CMS to ensure that all applicable 
requirements are met, including access and availability, service area, 
and quality.
    (ii) Coordinated care plans may include mechanisms to control 
utilization, such as referrals from a gatekeeper for an enrollee to 
receive services within the plan, and financial arrangements that offer 
incentives to providers to furnish high quality and cost-effective care.
    (iii) Coordinated care plans include plans offered by health 
maintenance organizations (HMOs), provider-sponsored organizations 
(PSOs), preferred provider organizations (PPOs) as specified in 
paragraph (a)(1)(iv) of this section, RFBs, and other network plans 
(except network MSA plans).
    (iv) A PPO plan is a plan that has a network of providers that have 
agreed to a contractually specified reimbursement for covered benefits 
with the organization offering the plan; provides for reimbursement for 
all covered benefits regardless of whether the benefits are provided 
within the network of providers; and is offered by an organization that 
is not licensed or organized under State law as an HMO.
    (2) A combination of an M+C MSA plan and a contribution into the M+C 
MSA established in accordance with Sec. 422.262. (i) M+C MSA plan means 
a plan that--
    (A) Pays at least for the services described in Sec. 422.101, after 
the enrollee has incurred countable expenses (as specified in the plan) 
equal in amount to the annual deductible specified in Sec. 422.103(d); 
and
    (B) Meets all other applicable requirements of this part.
    (ii) An M+C MSA plan may be either a network plan or a non-network 
plan.
    (A) M+C network MSA plan means an MSA plan under which enrollees 
must receive services through a defined provider network that is 
approved by CMS to ensure that all applicable requirements are met, 
including access and availability, service area, and quality.
    (B) M+C non-network MSA plan means an MSA plan under which enrollees 
are not required to receive services through a provider network.
    (iii) M+C MSA means a trust or custodial account--
    (A) That is established in conjunction with an MSA plan for the 
purpose of paying the qualified expenses of the account holder; and
    (B) Into which no deposits are made other than contributions by CMS 
under the M+C program, or a trustee-to-trustee transfer or rollover from 
another M+C MSA of the same account holder, in accordance with the 
requirements of sections 138 and 220 of the Internal Revenue Code.
    (3) M+C private fee-for-service plan. An M+C private fee-for-service 
plan is an M+C plan that--

[[Page 833]]

    (i) Pays providers of services at a rate determined by the plan on a 
fee-for-service basis without placing the provider at financial risk;
    (ii) Does not vary the rates for a provider based on the utilization 
of that provider's services; and
    (iii) Does not restrict enrollees' choices among providers that are 
lawfully authorized to provide services and agree to accept the plan's 
terms and conditions of payment.
    (b) Multiple plans. Under its contract, an M+C organization may 
offer multiple plans, regardless of type, provided that the M+C 
organization is licensed or approved under State law to provide those 
types of plans (or, in the case of a PSO plan, has received from CMS a 
waiver of the State licensing requirement). If an M+C organization has 
received a waiver for the licensing requirement to offer a PSO plan, 
that waiver does not apply to the licensing requirement for any other 
type of M+C plan.

[63 FR 35068, June 26, 1998, as amended at 65 FR 40315, June 29, 2000]



Sec. 422.6  Application requirements.

    (a) Scope. This section sets forth application requirements for 
entities that seek a contract as an M+C organization offering an M+C 
plan.
    (b) Completion of an application. (1) In order to obtain a 
determination on whether it meets the requirements to become an M+C 
organization and is qualified to provide a particular type of M+C plan, 
an entity, or an individual authorized to act for the entity (the 
applicant) must complete a certified application, in the form and manner 
required by CMS, including the following:
    (i) Documentation of appropriate State licensure or State 
certification that the entity is able to offer health insurance or 
health benefits coverage that meets State-specified standards applicable 
to M+C plans, and is authorized by the State to accept prepaid 
capitation for providing, arranging, or paying for the comprehensive 
health care services to be offered under the M+C contract; or
    (ii) Federal waiver as described in subpart H of this part.
    (2) The authorized individual must describe thoroughly how the 
entity and M+C plan meet, or will meet, the requirements described in 
this part.
    (c) Responsibility for making determinations. CMS is responsible for 
determining whether an entity qualifies as an M+C organization and 
whether proposed M+C plans meet the requirements of this part.
    (d) Resubmittal of application. An application that has been denied 
by CMS may not be resubmitted for 4 months after the date of the notice 
from CMS denying the application.
    (e) Disclosure of application information under the Freedom of 
Information Act. An applicant submitting material that he or she 
believes is protected from disclosure under 5 U.S.C. 552, the Freedom of 
Information Act, or because of exceptions provided in 45 CFR part 5 (the 
Department's regulations providing exceptions to disclosure), should 
label the material ``privileged'' and include an explanation of the 
applicability of an exception described in 45 CFR part 5.



Sec. 422.8  Evaluation and determination procedures.

    (a) Basis for evaluation and determination. (1) CMS evaluates an 
application for an M+C contract on the basis of information contained in 
the application itself and any additional information that CMS obtains 
through on-site visits, public hearings, and any other appropriate 
procedures.
    (2) If the application is incomplete, CMS notifies the contract 
applicant and allows 60 days from the date of the notice for the 
contract applicant to furnish the missing information.
    (3) After evaluating all relevant information, CMS determines 
whether the contract applicant's application meets the applicable 
requirements of Sec. 422.6.
    (b) Use of information from a prior contracting period. If an M+C 
organization, HMO, competitive medical plan, or health care prepayment 
plan has failed to comply with the terms of a previous year's contract 
with CMS under title XVIII of the Act, or has failed to complete a 
corrective action plan during the term of the contract, CMS may deny an 
application from a contract

[[Page 834]]

applicant based on the contract applicant's failure to comply with that 
prior contract with CMS even if the contract applicant meets all of the 
current requirements.
    (c) Notice of determination. CMS notifies each applicant that 
applies for an M+C contract under this part of its determination and the 
basis for the determination. The determination may be approval, intent 
to deny, or denial.
    (d) Approval of application. If CMS approves the application, it 
gives written notice to the contract applicant, indicating that it meets 
the requirements for an M+C contract.
    (e) Intent to deny. (1) If CMS finds that the contract applicant 
does not appear to meet the requirements for an M+C organization and 
appears to be able to meet those requirements within 60 days, CMS gives 
the contract applicant notice of intent to deny the application for an 
M+C contract and a summary of the basis for this preliminary finding.
    (2) Within 60 days from the date of the notice, the contract 
applicant may respond in writing to the issues or other matters that 
were the basis for CMS's preliminary finding and may revise its 
application to remedy any defects CMS identified.
    (f) Denial of application. If CMS denies the application, it gives 
written notice to the contract applicant indicating--
    (1) That the contract applicant does not meet the contract 
requirements under part C of title XVIII of the Act;
    (2) The reasons why the contract applicant does not meet the 
contract requirements; and
    (3) The contract applicant's right to request reconsideration in 
accordance with the procedures specified in subpart N of this part.
    (g) Oversight of continuing compliance. (1) CMS oversees an M+C 
organization's continued compliance with the requirements for an M+C 
organization.
    (2) If an M+C organization no longer meets those requirements, CMS 
terminates the contract in accordance with Sec. 422.510.

[65 FR 40315, June 29, 2000]



Sec. 422.10  Cost-sharing in enrollment-related costs (M+C user fee).

    (a) Basis and scope. This section implements that portion of section 
1857 of the Act that pertains to cost-sharing in enrollment-related 
costs. It sets forth the procedures that CMS follows to determine the 
aggregate annual ``user fee'' to be contributed by M+C organizations and 
to assess the required user fees for M+C plans offered by M+C 
organizations.
    (b) Purpose of assessment. Section 1857(e)(2) of the Act authorizes 
CMS to charge and collect from each M+C plan offered by an M+C 
organization its pro rate share of fees for administering section 1851 
of the Act, relating to dissemination of enrollment information; and 
section 4360 of the Omnibus Budget Reconciliation Act of 1990, relating 
to the health insurance counseling and assistance program.
    (c) Applicability. The fee assessment also applies to those 
demonstrations for which enrollment is effected or coordinated under 
section 1851 of the Act.
    (d) Collection of fees. (1) Timing of collection. CMS collects the 
fees over 9 consecutive months beginning with January of each fiscal 
year.
    (2) Amount to be collected. The aggregate amount of fees for a 
fiscal year is the lesser of--
    (i) The estimated costs to be incurred by CMS in that fiscal year to 
carry out the activities described in paragraph (b) of this section; or
    (ii) For fiscal year 2000, $100 million and for fiscal year 2001 and 
each succeeding year, the M+C portion (as defined in paragraph (e) of 
this section) of $100 million.
    (e) M+C portion. In this section, the term ``M+C portion'' means, 
for a fiscal year, the ratio, as estimated by the Secretary of the 
average number of individuals enrolled in M+C plans during the fiscal 
year to the average number of individuals entitled to benefits under 
part A, and enrolled under part B, during the fiscal year.
    (f) Assessment methodology. (1) The amount of the M+C portion of the 
user fee each M+C organization must pay is assessed as a percentage of 
the total Medicare payments to each organization. CMS determines this 
percentage rate using the following formula:


[[Page 835]]


    A times B divided by C where--
    A is the total estimated January payments to all organizations 
subject to the assessment;
    B is the 9-month (January through September) assessment period; and
    C is the total fiscal year M+C user fee assessment amount determined 
in accordance with paragraph (d)(2) of this section.

    (2) CMS determines each organization's pro rata share of the annual 
fee on the basis of the organization's calculated monthly payment amount 
during the 9 consecutive months beginning with January. CMS calculates 
each organization's monthly pro rata share by multiplying the 
established percentage rate by the total monthly calculated Medicare 
payment amount to the organization as recorded in CMS's payment system 
on the first day of the month.
    (3) CMS deducts the organization's fee from the amount of Federal 
funds otherwise payable to the organization for that month under the M+C 
program.
    (4) If assessments reach the amount authorized for the year before 
the end of September, CMS discontinues assessment.
    (5) If there are delays in determining the amount of the annual 
aggregate fees specified in paragraph (d)(2) of this section, or the fee 
percentage rate specified in paragraph (f)(2), CMS may adjust the 
assessment time period and the fee percentage amount.

[65 FR 40315, June 29, 2000]



            Subpart B--Eligibility, Election, and Enrollment

    Source: 63 FR 35071, June 26, 1998, unless otherwise noted.



Sec. 422.50  Eligibility to elect an M+C plan.

    (a) An individual is eligible to elect an M+C plan if he or she--
    (1) Is entitled to Medicare under Part A and enrolled in Part B 
(except that an individual entitled only to Part B and who was enrolled 
in an HMO or CMP with a risk contract under part 417 of this chapter on 
December 31, 1998 may continue to be enrolled in the M+C organization as 
an M+C plan enrollee);
    (2) Has not been medically determined to have end-stage renal 
disease, except that an individual who develops end-stage renal disease 
while enrolled in an M+C plan or in a health plan offered by the M+C 
organization is eligible to elect an M+C plan offered by that 
organization;
    (3) Meets either of the following residency requirements:
    (i) Resides in the service area of the M+C plan.
    (ii) Resides outside of the service area of the M+C plan and is 
enrolled in a health plan offered by the M+C organization during the 
month immediately preceding the month in which the individual is 
entitled to both Medicare Part A and Part B, provided that an M+C 
organization chooses to offer this option and that CMS determines that 
all applicable M+C access requirements of Sec. 422.112 are met for that 
individual through the M+C plan's established provider network. The M+C 
organization must furnish the same benefits to these enrollees as to 
enrollees who reside in the service area;
    (4) Has been a member of an Employer Group Health Plan (EGHP) that 
includes the elected M+C plan, even if the individual lives outside of 
the M+C plan service area, provided that an M+C organization chooses to 
offer this option and that CMS determines that all applicable M+C access 
requirements at Sec. 422.12 are met for that individual through the M+C 
plan's established provider network. The M+C organization must furnish 
the same benefits to all enrollees, regardless of whether they reside in 
the service area;
    (5) Completes and signs an election form and gives information 
required for enrollment; and
    (6) Agrees to abide by the rules of the M+C organization after they 
are disclosed to him or her in connection with the election process.
    (b) An M+C eligible individual may not be enrolled in more than one 
M+C plan at any given time.

[63 FR 35071, June 26, 1998; 63 FR 52611, Oct. 1, 1998, as amended at 65 
FR 40316, June 29, 2000]



Sec. 422.54  Continuation of enrollment.

    (a) Definition. Continuation area means an additional area (outside 
the

[[Page 836]]

service area) within which the M+C organization furnishes or arranges 
for furnishing services to its continuation-of-enrollment enrollees. 
Enrollees must reside in a continuation area on a permanent basis. A 
continuation area does not expand the service area of any plan.
    (b) Basic rule. An M+C organization may offer a continuation of 
enrollment option to enrollees when they no longer reside in the service 
area of a plan and permanently move into the geographic area designated 
by the M+C organization as a continuation of enrollment area. The intent 
to no longer reside in an area and permanently live in another area is 
verified through documentation that establishes residency, such as, 
driver's license, voter registration.
    (c) General requirements. (1) An M+C organization that wishes to 
offer a continuation of enrollment option must meet the following 
requirements:
    (i) Obtain CMS's approval of the continuation area, the marketing 
materials that describe the option, and the M+C organization's 
assurances of access to services.
    (ii) Describe the option(s) in the member materials it offers and 
make the option available to all enrollees residing in the continuation 
area.
    (2) An enrollee who moves out of the service area into the 
geographic area designated as the continuation area has the choice of 
continuing enrollment or disenrolling from the plan. The enrollee must 
make the choice of continuing enrollment in a manner specified by CMS. 
If no choice is made, the enrollee must be disenrolled from the plan.
    (d) Specific requirements--
    (1) Continuation of enrollment benefits. The M+C organization must, 
at a minimum, provide or arrange for the Medicare-covered benefits as 
described in Sec. 422.101(a).
    (2) Reasonable access. The M+C organization must ensure reasonable 
access in the continuation area--
    (i) Through contracts with providers, or through direct payment of 
claims that satisfy the requirements in Sec. 422.100(b)(2), to other 
providers who meet the requirement in subpart E of this part; and
    (ii) By ensuring that the access requirements of Sec. 422.112 are 
met.
    (3) Reasonable cost-sharing. For services furnished in the 
continuation area, an enrollee's cost-sharing liability is limited to 
the cost-sharing amounts required in the M+C plan's service area (in 
which the enrollee no longer resides).
    (4) Protection of enrollee rights. An M+C organization that offers a 
continuation of enrollment option must convey all enrollee rights 
conferred under this rule, with the understanding that--
    (i) The ultimate responsibility for all appeals and grievance 
requirements remain with the organization that is receiving payment from 
CMS; and
    (ii) Organizations that require enrollees to give advance notice of 
intent to use the continuation of enrollment option, must stipulate the 
notification process in the marketing materials.
    (e) Capitation payments. CMS's capitation payments to all M+C 
organizations, for all Medicare enrollees, are based on rates 
established on the basis of the enrollee's permanent residence, 
regardless of where he or she receives services.

[63 FR 35071, June 26, 1998; 63 FR 52611, Oct. 1, 1998, as amended at 65 
FR 40316, June 29, 2000]



Sec. 422.56  Limitations on enrollment in an M+C MSA plan.

    (a) General. An individual is not eligible to elect an M+C MSA plan-
-
    (1) If the number of individuals enrolled in M+C MSA plans has 
reached 390,000;
    (2) Unless the individual provides assurances that are satisfactory 
to CMS that he or she will reside in the United States for at least 183 
days during the year for which the election is effective; or
    (3) On or after January 1, 2003, unless the enrollment is the 
continuation of an enrollment in effect as of that date.
    (b) Individuals eligible for or covered under other health benefits 
program. An individual who is enrolled in a Federal Employee Health 
Benefit plan under 5 U.S.C. chapter 89, or is eligible for health care 
benefits through the Veteran's Administration under 10 U.S.C.

[[Page 837]]

chapter 55 or the Department of Defense under 38 U.S.C. chapter 17, may 
not enroll in an M+C MSA plan.
    (c) Individuals eligible for Medicare cost-sharing under Medicaid 
State plans. An individual who is entitled to coverage of Medicare cost-
sharing under a State plan under title XIX of the Act is not eligible to 
enroll in an M+C MSA plan.
    (d) Other limitations. An individual who receives health benefits 
that cover all or part of the annual deductible under the M+C MSA plan 
may not enroll in an M+C MSA plan. Examples of this type of coverage 
include, but are not limited to, primary health care coverage other than 
Medicare, current coverage under the Medicare hospice benefit, 
supplemental insurance policies not specifically permitted under 
Sec. 422.104, and retirement health benefits.

[63 FR 35071, June 26, 1998; 63 FR 52612, Oct. 1, 1998]



Sec. 422.57  Limited enrollment under M+C RFB plans.

    An RFB society that offers an M+C RFB plan may offer that plan only 
to members of the church, or convention or group of churches with which 
the society is affiliated.



Sec. 422.60  Election process.

    (a) Acceptance of enrollees: General rule. (1) Except for the 
limitations on enrollment in an M+C MSA plan provided by 
Sec. 422.62(d)(1) and except as specified in paragraph (a)(2) of this 
section, each M+C organization must accept without restriction (except 
for an M+C RFB plan as provided by Sec. 422.57) individuals who are 
eligible to elect an M+C plan that the M+C organization offers and who 
elect an M+C plan during initial coverage election periods under 
Sec. 422.62(a)(1), annual election periods under Sec. 422.62(a)(2), and 
under the circumstances described in Sec. 422.62(b)(1) through (b)(4).
    (2) M+C organizations must accept elections during the open 
enrollment periods specified in Sec. 422.62(a)(3), (a)(4), and (a)(5) if 
their M+C plans are open to new enrollees.
    (b) Capacity to accept new enrollees. (1) M+C organizations may 
submit information on enrollment capacity of plans they offer by July 1 
of each year as provided by Sec. 422.306(a)(1).
    (2) If CMS determines that an M+C plan offered by an M+C 
organization has a capacity limit, and the number of M+C eligible 
individuals who elect to enroll in that plan exceeds the limit, the M+C 
organization offering the plan may limit enrollment in the plan under 
this part, but only if it provides priority in acceptance as follows:
    (i) First, for individuals who elected the plan prior to the CMS 
determination that capacity has been exceeded, elections will be 
processed in chronological order by date of receipt of their election 
forms.
    (ii) Then for other individuals in a manner that does not 
discriminate on the basis of any factor related to health as described 
in Sec. 422.110.
    (3) CMS considers enrollment limit requests for an M+C plan service 
area, other than those submitted with the adjusted community rate 
proposal, or for a portion of the plan service area, only if the health 
and safety of beneficiaries is at risk, such as if the provider network 
is not available to serve the enrollees in all or a portion of the 
service area.
    (c) Election forms. (1) The election form must comply with CMS 
instructions regarding content and format and have been approved by CMS 
as described in Sec. 422.80. The form must be completed and signed by 
the M+C eligible individual (or the individual who will soon become 
entitled to Medicare benefits) and include authorization for disclosure 
and exchange of necessary information between the U.S. Department of 
Health and Human Services and its designees and the M+C organization. 
Persons who assist beneficiaries in completing forms must sign the form 
and indicate their relationship to the beneficiary.
    (2) The M+C organization must file and retain election forms for the 
period specified in CMS instructions.
    (d) When an election is considered to have been made. An election in 
an M+C plan is considered to have been made on the date the election 
form is received by the M+C organization.
    (e) Handling of election forms. The M+C organization must have an 
effective system for receiving, controlling,

[[Page 838]]

and processing election forms. The system must meet the following 
conditions and requirements:
    (1) Each election form is dated as of the day it is received.
    (2) Election forms are processed in chronological order, by date of 
receipt.
    (3) The M+C organization gives the beneficiary prompt written notice 
of acceptance or denial in a format specified by CMS.
    (4) In a format specified by CMS, a notice of acceptance--
    (i) Informs the beneficiary of the date on which enrollment will be 
effective under Sec. 422.68; and
    (ii) If the M+C plan is enrolled to capacity, explains the 
procedures that will be followed when vacancies occur.
    (5) A notice of denial explains the reasons for denial in a format 
specified by CMS.
    (6) Upon receipt of the election form or from the date a vacancy 
occurs for an individual who was accepted for future enrollment, the M+C 
organization transmits, within the timeframes specified by CMS, the 
information necessary for CMS to add the beneficiary to its records as 
an enrollee of the M+C organization.
    (f) Exception for employer group health plans.
    (1) In cases in which an M+C organization has both a Medicare 
contract and a contract with an employer group health plan, and in which 
the M+C organization arranges for the employer to process election forms 
for Medicare-entitled group members, who wish to enroll under the 
Medicare contract, the effective date of the election may be 
retroactive. Consistent with Sec. 422.250(b), payment adjustments based 
on a retroactive effective date may be made for up to a 90-day period.
    (2) In order to obtain the effective date described in paragraph 
(f)(1) of this section, the beneficiary must certify that, at the time 
of enrollment in the M+C organization, he or she received the disclosure 
statement specified in Sec. 422.111.
    (3) Upon receipt of the election form from the employer, the M+C 
organization must submit the enrollment within timeframes specified by 
CMS.

[63 FR 35071, June 26, 1998; 63 FR 52612, Oct. 1, 1998; 63 FR 54526, 
Oct. 9, 1998; 64 FR 7980, Feb. 17, 1999; 65 FR 40316, June 29, 2000]



Sec. 422.62  Election of coverage under an M+C plan.

    (a) General: Coverage election periods--(1) Initial coverage 
election period. The initial coverage election period is the period 
during which a new M+C eligible individual may make an initial election. 
This period begins 3 months prior to the month the individual is first 
entitled to both Part A and Part B and ends the last day of the month 
preceding the month of entitlement.
    (2) Annual election period. (i) Beginning in 1999, the month of 
November is the annual election period for the following calendar year. 
Organizations offering M+C plans in January 1999 must open enrollment to 
Medicare beneficiaries in November 1998.
    (ii) During the annual election period, an individual eligible to 
enroll in an M+C plan may change his or her election from an M+C plan to 
original Medicare or to a different M+C plan, or from original Medicare 
to an M+C plan.
    (3) Open enrollment and disenrollment opportunities through 2001. 
From 1998 through 2001, the number of elections or changes that an M+C 
eligible individual may make is not limited (except as provided for in 
paragraph (d) of this section for M+C MSA plans). Subject to the M+C 
plan being open to enrollees as provided under Sec. 422.60(a)(2), an 
individual eligible to elect an M+C plan may change his or her election 
from an M+C plan to original Medicare or to a different M+C plan, or 
from original Medicare to an M+C plan.
    (4) Open enrollment and disenrollment during 2002. (i) Except as 
provided in paragraphs (a)(4)(ii), (a)(4)(iii), and (a)(6) of this 
section, an individual who is eligible to elect an M+C plan in 2002 may 
elect an M+C plan or change his or her election from an M+C plan to 
original Medicare or to a different M+C plan, or from original Medicare 
to an M+C plan, but only once during the first 6 months of the year.
    (ii) Newly eligible M+C individual. An individual who becomes an M+C 
eligible individual during 2002 may elect an

[[Page 839]]

M+C plan or original Medicare and then change his or her election once 
during the period that begins the month the individual is entitled to 
both Part A and Part B and ends on the last day of the 6th month of such 
entitlement, or on December 31, whichever is earlier. The individual can 
change the election from an M+C plan to original Medicare or to a 
different M+C plan, or from original Medicare to an M+C plan during this 
period.
    (iii) The limitation to one election or change in paragraphs 
(a)(4)(i) and (a)(4)(ii) of this section does not apply to elections or 
changes made during the annual election period specified in (a)(2) of 
this section or during a special enrollment period specified in 
paragraph (b) of this section.
    (5) Open enrollment and disenrollment beginning in 2003. (i) For 
2003 and subsequent years, except as provided in paragraphs (a)(5)(ii), 
(a)(5)(iii), and (a)(6) of this section, an individual who is eligible 
to elect an M+C plan may elect an M+C plan, change his or her election 
from an M+C plan to original Medicare or to a different M+C plan, or 
from original Medicare to an M+C plan, but only once during the first 3 
months of the year.
    (ii) Newly eligible M+C individual. An individual who becomes an M+C 
eligible individual during 2003 or later may elect an M+C plan or 
original Medicare and then change his or her election once during the 
period that begins the month the individual is entitled to both Part A 
and Part B and ends on the last day of the 3rd month of such 
entitlement, or on December 31, whichever is earlier. The individual can 
change the election from an M+C plan to original Medicare or to a 
different M+C plan, or from original Medicare to an M+C plan during this 
period.
    (iii) The limitation to one election or change in paragraphs 
(a)(5)(i) and (a)(5)(ii) of this section does not apply to elections or 
changes made during the annual election period specified in paragraph 
(a)(2) of this section or during a special election period specified in 
paragraph (b) of this section.
    (6) Open enrollment period for institutionalized individuals. After 
2001, an individual who is eligible to elect an M+C plan and who is 
institutionalized, as defined by CMS, is not limited (except as provided 
for in paragraph (d) of this section for M+C MSA plans) in the number of 
elections or changes he or she may make. Subject to the M+C plan being 
open to enrollees as provided under Sec. 422.60(a)(2), an M+C eligible 
institutionalized individual may at any time elect an M+C plan or change 
his or her election from an M+C plan to original Medicare, to a 
different M+C plan, or from iginal Medicare to an M+C plan.
    (b) Special election periods. Effective as of January 1, 1999 for 
M+C MSA plans, and as of January 1, 2002, for all other types of M+C 
plans, an individual may at any time (that is, not limited to the annual 
election period) discontinue the election of an M+C plan offered by an 
M+C organization and change his or her election, in the form and manner 
specified by CMS, from an M+C plan to original Medicare or to a 
different M+C plan under any of the following circumstances:
    (1) CMS or the organization has terminated the organization's 
contract for the plan, discontinued the plan in the area in which the 
individual resides, or the organization has notified the individual of 
the impending termination of the plan, or the impending discontinuation 
of the plan in the area in which the individual resides.
    (2) The individual is not eligible to remain enrolled in the plan 
because of a change in his or her place of residence to a location out 
of the service area or continuation area or other change in 
circumstances as determined by CMS but not including terminations 
resulting from a failure to make timely payment of an M+C monthly or 
supplemental beneficiary premium, or from disruptive behavior.
    (3) The individual demonstrates to CMS, in accordance with 
guidelines issued by CMS, that--
    (i) The organization offering the plan substantially violated a 
material provision of its contract under this part in relation to the 
individual, including, but not limited to the following:
    (A) Failure to provide the beneficiary on a timely basis medically 
necessary services for which benefits are available under the plan.

[[Page 840]]

    (B) Failure to provide medical services in accordance with 
applicable quality standards; or
    (ii) The organization (or its agent, representative, or plan 
provider) materially misrepresented the plan's provisions in marketing 
the plan to the individual.
    (4) The individual meets such other exceptional conditions as CMS 
may provide.
    (c) Special election period for individual age 65. Effective January 
1, 2002, an M+C eligible individual who elects an M+C plan during the 
initial enrollment period, as defined under section 1837(d) of the Act, 
that surrounds his or her 65th birthday (this period begins 3 months 
before and ends 3 months after the month of the individual's 65th 
birthday) may discontinue the election of that plan and elect coverage 
under original Medicare at any time during the 12-month period that 
begins on the effective date of enrollment in the M+C plan.
    (d) Special rules for M+C MSA plans--(1) Enrollment. An individual 
may enroll in an M+C MSA plan only during an initial or annual election 
period described in paragraphs (a)(1) and (a)(2) of this section or 
during November 1998.
    (2) Disenrollment. (i) Except as provided in paragraph (d)(2)(ii) of 
this section, an individual may disenroll from an M+C MSA plan only 
during--
    (A) November 1998;
    (B) An annual election period; or
    (C) The special election period described in paragraph (b) of this 
section.
    (ii) Exception. An individual who elects an M+C MSA plan during an 
annual election period and has never before elected an M+C MSA plan may 
revoke that election, no later than December 15 of that same year, by 
submitting to the organization that offers the M+C MSA plan a signed and 
dated request in the form and manner prescribed by CMS or by filing the 
appropriate disenrollment form through other mechanisms as determined by 
CMS.

[63 FR 35071, June 26, 1998; 63 FR 52612, Oct. 1, 1998, as amended at 65 
FR 40317, June 29, 2000]



Sec. 422.64  Information about the M+C program.

    Each M+C organization must provide, on an annual basis, and in a 
format and using standard terminology that may be specified by CMS, the 
information necessary to enable CMS to provide to current and potential 
beneficiaries the information they need to make informed decisions with 
respect to the available choices for Medicare coverage.

[65 FR 40317, June 29, 2000]



Sec. 422.66  Coordination of enrollment and disenrollment through M+C organizations.

    (a) Enrollment. An individual who wishes to elect an M+C plan 
offered by an M+C organization may make or change his or her election 
during the election periods specified in Sec. 422.62 by filing the 
appropriate election form with the organization or through other 
mechanisms as determined by CMS.
    (b) Disenrollment--(1) Basic rule. An individual who wishes to 
disenroll from an M+C plan may change his or her election during the 
election periods specified in Sec. 422.62 in either of the following 
manners:
    (i) Elect a different M+C plan by filing the appropriate election 
form with the M+C organization or through other mechanisms as determined 
by CMS.
    (ii) Submit a signed and dated request for disenrollment to the M+C 
organization in the form and manner prescribed by CMS or file the 
appropriate disenrollment form through other mechanisms as determined by 
CMS.
    (2) When a disenrollment request is considered to have been made. A 
disenrollment request is considered to have been made on the date the 
disenrollment request is received by the M+C organization.
    (3) Responsibilities of the M+C organization. The M+C organization 
must--
    (i) Submit a disenrollment notice to CMS within timeframes specified 
by CMS;
    (ii) Provide the enrollee with a copy of the request for 
disenrollment; and
    (iii) In the case of a plan where lock-in applies, also provide the 
enrollee with a statement explaining that he or she--

[[Page 841]]

    (A) Remains enrolled until the effective date of disenrollment; and
    (B) Until that date, neither the M+C organization nor CMS pays for 
services not provided or arranged for by the M+C plan in which the 
enrollee is enrolled; and
    (iv) File and retain disenrollment requests for the period specified 
in CMS instructions.
    (4) Effect of failure to submit disenrollment notice to CMS 
promptly. If the M+C organization fails to submit the correct and 
complete notice required in paragraph (b)(3)(i) of this section, the M+C 
organization must reimburse CMS for any capitation payments received 
after the month in which payment would have ceased if the requirement 
had been met timely.
    (5) Retroactive disenrollment. CMS may grant retroactive 
disenrollment in the following cases:
    (i) There never was a legally valid enrollment.
    (ii) A valid request for disenrollment was properly made but not 
processed or acted upon.
    (c) Election by default: Initial coverage election period. An 
individual who fails to make an election during the initial coverage 
election period is deemed to have elected original Medicare.
    (d) Conversion of enrollment (seamless continuation of coverage)--
(1) Basic rule. An M+C plan offered by an M+C organization must accept 
any individual (regardless of whether the individual has end-stage renal 
disease) who is enrolled in a health plan offered by the M+C 
organization during the month immediately preceding the month in which 
he or she is entitled to both Part A and Part B, and who meets the 
eligibility requirements at Sec. 422.50.
    (2) Reserved vacancies. Subject to CMS's approval, an M+C 
organization may set aside a reasonable number of vacancies in order to 
accommodate enrollment of conversions. Any set aside vacancies that are 
not filled within a reasonable time must be made available to other M+C 
eligible individuals.
    (3) Effective date of conversion. If an individual chooses to remain 
enrolled with the M+C organization as an M+C enrollee, the individual's 
conversion to an M+C enrollee is effective the month in which he or she 
is entitled to both Part A and Part B in accordance with the 
requirements in paragraph (d)(5) of this section.
    (4) Prohibition against disenrollment. The M+C organization may 
disenroll an individual who is converting under the provisions of 
paragraph (a) of this section only under the conditions specified in 
Sec. 422.74.
    (5) Election form. The individual who is converting must complete 
and sign an election form as described in Sec. 422.60(c)(1).
    (6) Submittal of information to CMS. The M+C organization must 
transmit the information necessary for CMS to add the individual to its 
records as specified in Sec. 422.60(e)(6).
    (e) Maintenance of enrollment. An individual who has made an 
election under this section is considered to have continued to have made 
that election until either of the following, which ever occurs first:
    (1) The individual changes the election under this section.
    (2) The elected M+C plan is discontinued or no longer serves the 
area in which the individual resides, the organization does not offer, 
or the individual does not elect, the option of continuing enrollment, 
as provided under either Sec. 422.54 or Sec. 422.74(b)(3)(ii).
    (f) Exception for employer group health plans. (1) In cases when an 
M+C organization has both a Medicare contract and a contract with an 
employer group health plan, and in which the M+C organization arranges 
for the employer to process election forms for Medicare-entitled group 
members who wish to disenroll from the Medicare contract, the effective 
date of the election may be retroactive. Consistent with 
Sec. 422.250(b), payment adjustments based on a retroactive effective 
date may be made for up to a 90-day period.
    (2) Upon receipt of the election form from the employer, the M+C 
organization must submit a disenrollment notice to CMS within timeframes 
specified by CMS.

[63 FR 35071, June 26, 1998; 63 FR 52612, Oct. 1, 1998, as amended at 65 
FR 40317, June 29, 2000]

[[Page 842]]



422.68  Effective dates of coverage and change of coverage.

    (a) Initial coverage election period. An election made during an 
initial coverage election period as described in Sec. 422.62(a)(1) is 
effective as of the first day of the month of entitlement to both Part A 
and Part B.
    (b) Annual election periods. For an election or change of election 
made during an annual election period as described in Sec. 422.62(a)(2), 
coverage is effective as of the first day of the following calendar 
year.
    (c) Open enrollment periods. For an election, or change in election, 
made during an open enrollment period, as described in Sec. 422.62(a)(3) 
through (a)(6), coverage is effective as of the first day of the first 
calendar month following the month in which the election is made.
    (d) Special election periods. For an election or change of election 
made during a special election period as described in Sec. 422.62(b), 
the effective date of coverage shall be determined by CMS, to the extent 
practicable, in a manner consistent with protecting the continuity of 
health benefits coverage.
    (e) Special election period for individual age 65. For an election 
of coverage under original Medicare made during a special election 
period for an individual age 65 as described in Sec. 422.62(c), coverage 
is effective as of the first day of the first calendar month following 
the month in which the election is made.

[63 FR 35071, June 26, 1998, as amended at 65 FR 40317, June 29, 2000; 
67 FR 13288, Mar. 22, 2002]



Sec. 422.74  Disenrollment by the M+C organization.

    (a) General rule. Except as provided in paragraphs (b) through (d) 
of this section, an M+C organization may not--
    (1) Disenroll an individual from any M+C plan it offers; or
    (2) Orally or in writing, or by any action or inaction, request or 
encourage an individual to disenroll.
    (b) Basis for disenrollment--(1) Optional disenrollment. An M+C 
organization may disenroll an individual from an M+C plan it offers in 
any of the following circumstances:
    (i) Any monthly basic and supplementary beneficiary premiums are not 
paid on a timely basis, subject to the grace period for late payment 
established under paragraph (d)(1) of this section.
    (ii) The individual has engaged in disruptive behaviors specified at 
paragraph (d)(2) of this section.
    (iii) The individual provides fraudulent information on his or her 
election form or permits abuse of his or her enrollment card as 
specified in paragraph (d)(3) of this section.
    (2) Required disenrollment. An M+C organization must disenroll an 
individual from an M+C plan it offers in any of the following 
circumstances:
    (i) The individual no longer resides in the M+C plan's service area 
as specified under paragraph (d)(4) of this section, is no longer 
eligible under Sec. 422.50(a)(3)(ii), and optional continued enrollment 
has not been offered or elected under Sec. 422.54.
    (ii) The individual loses entitlement to Part A or Part B benefits 
as described in paragraph (d)(5) of this section.
    (iii) Death of the individual as described in paragraph (d)(6) of 
this section.
    (3) Plan termination or reduction of area where plan is available. 
(i) General rule. An M+C organization that has its contract for an M+C 
plan terminated, that terminates an M+C plan, or that discontinues 
offering the plan in any portion of the area where the plan had 
previously been available, must disenroll affected enrollees in 
accordance with the procedures for disenrollment set forth at paragraph 
(d)(7) of this section, unless the exception in paragraph (b)(3)(ii) of 
this section applies.
    (ii) Exception. When an M+C organization discontinues offering an 
M+C plan in a portion of its service area, the M+C organization may 
elect to offer enrollees residing in all or portions of the affected 
area the option to continue enrollment in an M+C plan offered by the 
organization, provided that there is no other M+C plan offered in the 
affected area at the time of the organization's election. The 
organization may require an enrollee who chooses to continue enrollment 
to

[[Page 843]]

agree to receive the full range of basic benefits (excluding emergency 
and urgently needed care) exclusively through facilities designated by 
the organization within the plan service area.
    (c) Notice requirement. If the disenrollment is for any of the 
reasons specified in paragraphs (b)(1), (b)(2)(i), or (b)(3) of this 
section (that is, other than death or loss of entitlement to Part A or 
Part B) the M+C organization must give the individual a written notice 
of the disenrollment with an explanation of why the M+C organization is 
planning to disenroll the individual. Notices for reasons specified in 
paragraphs (b)(1) through (b)(2)(i) must--
    (1) Be mailed to the individual before submission of the 
disenrollment notice to CMS; and
    (2) Include an explanation of the individual's right to a hearing 
under the M+C organization's grievance procedures.
    (d) Process for disenrollment--(1) Monthly basic and supplementary 
premiums are not paid timely. An M+C organization may disenroll an 
individual from the M+C plan for failure to pay any basic and 
supplementary premiums under the following circumstances:
    (i) The M+C organization makes a reasonable effort to collect unpaid 
premium amounts by sending a written notice of nonpayment to the 
enrollee within 20 days after the date the delinquent charges were due--
    (A) Alerting the individual that the premiums are delinquent;
    (B) Providing the individual with an explanation of the 
disenrollment procedures and any lock-in requirements of the M+C plan; 
and
    (C) Advising that failure to pay the premiums within the 90-day 
grace period will result in termination of M+C coverage;
    (ii) The M+C organization only disenrolls a Medicare enrollee when 
the organization has not received payment within 90 days after the date 
it has sent the notice of nonpayment to the enrollee.
    (iii) The M+C organization gives the individual a written notice of 
disenrollment that meets the requirement set forth in paragraph (c) of 
this section.
    (iv) If the enrollee fails to pay the premium for optional 
supplemental benefits (that is, a package of benefits that an enrollee 
is not required to accept), but pays the basic premium and any mandatory 
supplemental premium, the M+C organization has the option to discontinue 
the optional supplemental benefits and retain the individual as an M+C 
enrollee.
    (2) Disenrollment for disruptive behavior--(i) Basis for 
disenrollment.An M+C organization may disenroll an individual from the 
M+C plan if the individual's behavior is disruptive, unruly, abusive, or 
uncooperative to the extent that his or her continued enrollment in the 
plan seriously impairs the M+C plan's ability to furnish services to 
either the particular individual or other individuals enrolled in the 
plan.
    (ii) Effort to resolve the problem.The M+C organization must make a 
serious effort to resolve the problems presented by the individual, 
including the use (or attempted use) of the M+C organization's grievance 
procedures. The beneficiary has a right to submit any information or 
explanation that he or she may wish to submit to the M+C organization.
    (iii) Consideration of extenuating circumstances. The M+C 
organization must establish that the individual's behavior is not 
related to the use of medical services or to diminished mental capacity.
    (iv) Documentation. The M+C organization must document the 
enrollee's behavior, its own efforts to resolve any problems, and any 
extenuating circumstances, as described in paragraphs (d)(2)(i) through 
(d)(2)(iii) of this section.
    (v) CMS review of the M+C organization's proposed disenrollment. (A) 
CMS decides after reviewing the documentation submitted by the M+C 
organization and any information submitted by the beneficiary (which the 
M+C organization must forward to CMS) whether the M+C organization has 
met the disenrollment requirements.
    (B) CMS makes the decision within 20 working days after receipt of 
the documentation and notifies the M+C organization within 5 working 
days after making its decision.

[[Page 844]]

    (vi) Effective date of disenrollment. If CMS permits an M+C 
organization to disenroll an individual for disruptive behavior, the 
termination is effective the first day of the calendar month after the 
month in which the M+C organization gives the individual written notice 
of the disenrollment that meets the requirements set forth in paragraph 
(c) of this section.
    (3) Individual commits fraud or permits abuse of enrollment card.--
(i) Basis for disenrollment. An M+C organization may disenroll the 
individual from an M+C plan if the individual--
    (A) Knowingly provides, on the election form, fraudulent information 
that materially affects the individual's eligibility to enroll in the 
M+C plan; or
    (B) Intentionally permits others to use his or her enrollment card 
to obtain services under the M+C plan.
    (ii) Notice of disenrollment. The M+C organization must give the 
individual a written notice of the disenrollment that meets the 
requirements set forth in paragraph (c) of this section.
    (iii) Report to CMS. The M+C organization must report to CMS any 
disenrollment based on fraud or abuse by the individual.
    (4) Individual no longer resides in the M+C plan's service area. (i) 
Basis for disenrollment. Unless continuation of enrollment is elected 
under Sec. 422.54, the M+C organization must disenroll an individual if 
the M+C organization establishes, on the basis of a written statement 
from the individual or other evidence acceptable to CMS, that the 
individual has permanently moved out of a plan's service area. If the 
individual has not moved from the M+C plan's service area, but has left 
the plan's service area for more than 6 months, the M+C organization 
must disenroll the individual.
    (ii) Special rule. The M+C organization must disenroll an individual 
who is enrolled in the M+C plan, under the eligibility requirements at 
Sec. 422.50(a)(3)(ii) or (a)(4), if the organization establishes, on the 
basis of a written statement from the individual or other evidence 
acceptable to CMS, that the individual has permanently moved from the 
residence in which she or he resided at the time of enrollment in the 
M+C plan, to an area outside the M+C plan service area (unless 
continuation of enrollment is elected under Sec. 422.54). If the 
individual has not permanently moved from the residence in which she or 
he resided at the time of enrollment in the M+C plan, but has left the 
residence for over 6 months, the M+C organization must disenroll the 
individual.
    (iii) Notice of disenrollment. The M+C organization must give the 
individual a written notice of the disenrollment that meets the 
requirements set forth in paragraph (c) of this section.
    (5) Loss of entitlement to Part A or Part B benefits. If an 
individual is no longer entitled to Part A or Part B benefits, CMS 
notifies the M+C organization that the disenrollment is effective the 
first day of the calendar month following the last month of entitlement 
to Part A or Part B benefits.
    (6) Death of the individual. If the individual dies, disenrollment 
is effective the first day of the calendar month following the month of 
death.
    (7) Plan termination or area reduction. (i) When an M+C organization 
has its contract for an M+C plan terminated, terminates an M+C plan, or 
discontinues offering the plan in any portion of the area where the plan 
had previously been available, the M+C organization must give each 
affected M+C plan enrollee a written notice of the effective date of the 
plan termination or area reduction and a description of alternatives for 
obtaining benefits under the M+C program.
    (ii) The notice must be sent before the effective date of the plan 
termination or area reduction, and in the timeframes specified in 
Sec. 422.506(a)(2).
    (e) Consequences of disenrollment--(1) Disenrollment for non-payment 
of premiums, disruptive behavior, fraud or abuse, loss of Part A or Part 
B. An individual who is disenrolled under paragraph (b)(1)(i), 
(b)(1)(ii), (b)(1)(iii), or paragraph (b)(2)(ii) of this section is 
deemed to have elected original Medicare.
    (2) Disenrollment based on plan termination, area reduction, or 
individual moves out of area. (i) An individual who is disenrolled under 
paragraph (b)(2)(i) or (b)(3) of this section has a special election 
period in which to make a new

[[Page 845]]

election as provided in Sec. 422.62(b)(1) and (b)(2).
    (ii) An individual who fails to make an election during the special 
election period is deemed to have elected original Medicare.

[63 FR 35071, June 26, 1998; 63 FR 52612, Oct. 1, 1998, as amended at 65 
FR 40318, June 29, 2000]



Sec. 422.80  Approval of marketing materials and election forms.

    (a) CMS review of marketing materials. An M+C organization may not 
distribute any marketing materials (as defined in paragraph (b)), or 
election forms, or make such materials or forms available to individuals 
eligible to elect an M+C plan, unless--
    (1) At least 45 days (or 10 days if using marketing materials that 
use, without modification, proposed model language as specified by CMS) 
before the date of distribution the M+C organization has submitted the 
material or form to CMS for review under the guidelines in paragraph 
(c); and
    (2) CMS has not disapproved the distribution of the material or 
form.
    (b) Definition of marketing materials. Marketing materials include 
any informational materials targeted to Medicare beneficiaries which:
    (1) Promote the M+C organization, or any M+C plan offered by the M+C 
organization;
    (2) Inform Medicare beneficiaries that they may enroll, or remain 
enrolled in, an M+C plan offered by the M+C organization;
    (3) Explain the benefits of enrollment in an M+C plan, or rules that 
apply to enrollees;
    (4) Explain how Medicare services are covered under an M+C plan, 
including conditions that apply to such coverage;
    (5) Examples of marketing materials include, but are not limited to:
    (i) General audience materials such as general circulation 
brochures, newspapers, magazines, television, radio, billboards, yellow 
pages, or the internet.
    (ii) Marketing representative materials such as scripts or outlines 
for telemarketing or other presentations.
    (iii) Presentation materials such as slides and charts.
    (iv) Promotional materials such as brochures or leaflets, including 
materials for circulation by third parties (e.g., physicians or other 
providers).
    (v) Membership communication materials such as membership rules, 
subscriber agreements (evidence of coverage), member handbooks and 
wallet card instructions to enrollees.
    (vi) Letters to members about contractual changes; changes in 
providers, premiums, benefits, plan procedures etc.
    (vii) Membership or claims processing activities (e.g., materials on 
rules involving non-payment of premiums, confirmation of enrollment or 
disenrollment, or annual notification information).
    (c) Guidelines for CMS review. In reviewing marketing material or 
election forms under paragraph (a) of this section, CMS determines that 
the marketing materials:
    (1) Provide, in a format (and, where appropriate, print size), and 
using standard terminology that may be specified by CMS, the following 
information to Medicare beneficiaries interested in enrolling:
    (i) Adequate written description of rules (including any limitations 
on the providers from whom services can be obtained), procedures, basic 
benefits and services, and fees and other charges.
    (ii) Adequate written description of any supplemental benefits and 
services.
    (iii) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each.
    (iv) Any other information necessary to enable beneficiaries to make 
an informed decision about enrollment.
    (2) Notify the general public of its enrollment period (whether 
time-limited or continuous) in an appropriate manner, through 
appropriate media, throughout its service and continuation area.
    (3) Include in the written materials notice that the M+C 
organization is authorized by law to refuse to renew its contract with 
CMS, that CMS also may refuse to renew the contract, and that 
termination or non-renewal may result in termination of the 
beneficiary's enrollment in the plan.

[[Page 846]]

    (4) Are not materially inaccurate or misleading or otherwise make 
material misreprepresentations.
    (5) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.
    (d) Deemed approval (one-stop shopping). If CMS has not disapproved 
the distribution of marketing materials or forms submitted by an M+C 
organization with respect to an M+C plan in an area, CMS is deemed not 
to have disapproved the distribution in all other areas covered by the 
M+C plan and organization except with regard to any portion of the 
material or form that is specific to the particular area.
    (e) Standards for M+C organization marketing. (1) In conducting 
marketing activities, M+C organizations may not:
    (i) Provide for cash or other monetary rebates as an inducement for 
enrollment or otherwise. This does not prohibit explanation of any 
legitimate benefits the beneficiary might obtain as an enrollee of the 
M+C plan, such as eligibility to enroll in a supplemental benefit plan 
that covers deductibles and coinsurance, or preventive services.
    (ii) Engage in any discriminatory activity such as, for example, 
attempts to recruit Medicare beneficiaries from higher income areas 
without making comparable efforts to enroll Medicare beneficiaries from 
lower income areas.
    (iii) Solicit door-to-door for Medicare beneficiaries.
    (iv) Engage in activities that could mislead or confuse Medicare 
beneficiaries, or misrepresent the M+C organization. The M+C 
organization may not claim that it is recommended or endorsed by CMS or 
Medicare or that CMS or Medicare recommends that the beneficiary enroll 
in the M+C plan. It may, however, explain that the organization is 
approved for participation in Medicare.
    (v) Distribute marketing materials for which, before expiration of 
the 45-day period, the M+C organization receives from CMS written notice 
of disapproval because it is inaccurate or misleading, or misrepresents 
the M+C organization, its marketing representatives, or CMS.
    (vi) Use providers or provider groups to distribute printed 
information comparing the benefits of different health plans unless the 
materials have the concurrence of all M+C organizations involved and 
have received prior approval by CMS. Physicians or providers may 
distribute health plan brochures (exclusive of application forms) at a 
health fair or in their offices. Physicians may discuss, in response to 
an individual patient's inquiry, the various benefits in different 
health plans.
    (vii) Accept plan applications in provider offices or other places 
where health care is delivered.
    (viii) Employ M+C plan names that suggest that a plan is not 
available to all Medicare beneficiaries. This prohibition shall not 
apply to M+C plan names in effect on July 31, 2000.
    (2) In its marketing, the M+C organization must:
    (i) Demonstrate to CMS's satisfaction that marketing resources are 
allocated to marketing to the disabled Medicare population as well as 
beneficiaries age 65 and over.
    (ii) Establish and maintain a system for confirming that enrolled 
beneficiaries have in fact, enrolled in the M+C plan, and understand the 
rules applicable under the plan.
    (f) Employer group retiree marketing. M+C organizations may develop 
marketing materials designed for members of an employer group who are 
eligible for employer-sponsored benefits through the M+C organization, 
and furnish these materials only to the group members. While the 
materials must be submitted for approval under paragraph (a) of this 
section, CMS will not review portions of these materials that relate to 
employer group benefits.

[63 FR 35071, June 26, 1998; 63 FR 52612, Oct. 1, 1998, as amended at 65 
FR 40318, June 29, 2000; 67 FR 13288, Mar. 22, 2002]



             Subpart C--Benefits and Beneficiary Protections

    Source: 63 FR 35077, June 26, 1998, unless otherwise noted.



Sec. 422.100  General requirements.

    (a) Basic rule. Subject to the conditions and limitations set forth 
in this

[[Page 847]]

subpart, an M+C organization offering an M+C plan must provide enrollees 
in that plan with coverage of the basic benefits described in paragraph 
(c) of this section (and, to the extent applicable, the benefits 
described in Sec. 422.102) by furnishing the benefits directly or 
through arrangements, or by paying for the benefits. CMS reviews these 
benefits subject to the requirements of Sec. 422.100(g) and the 
requirements in subpart G of this part.
    (b) Services of noncontracting providers and suppliers. (1) An M+C 
organization must make timely and reasonable payment to or on behalf of 
the plan enrollee for the following services obtained from a provider or 
supplier that does not contract with the M+C organization to provide 
services covered by the M+C plan:
    (i) Ambulance services dispatched through 911 or its local 
equivalent as provided in Sec. 422.113.
    (ii) Emergency and urgently needed services as provided in 
Sec. 422.113.
    (iii) Maintenance and post-stabilization care services as provided 
in Sec. 422.113.
    (iv) Renal dialysis services provided while the enrollee was 
temporarily outside the plan's service area.
    (v) Services for which coverage has been denied by the M+C 
organization and found (upon appeal under subpart M of this part) to be 
services the enrollee was entitled to have furnished, or paid for, by 
the M+C organization.
    (2) An M+C plan (other than an M+C MSA plan) offered by an M+C 
organization satisfies paragraph (a) of this section with respect to 
benefits for services furnished by a noncontracting provider if that M+C 
plan provides payment in an amount the provider would have received 
under original Medicare (including balance billing permitted under 
Medicare Part A and Part B).
    (c) Types of benefits. An M+C plan includes at a minimum basic 
benefits, and also may include mandatory and optional supplemental 
benefits.
    (1) Basic benefits are all Medicare-covered services, except hospice 
services, and additional benefits as defined in Sec. 422.2 and meeting 
all requirements in Sec. 422.312.
    (2) Supplemental benefits, which consist of--
    (i) Mandatory supplemental benefits are services not covered by 
Medicare that an M+C enrollee must purchase as part of an M+C plan that 
are paid for in full, directly by (or on behalf of) Medicare enrollees, 
in the form of premiums or cost-sharing.
    (ii) Optional supplemental benefits are health services not covered 
by Medicare that are purchased at the option of the M+C enrollee and 
paid for in full, directly by (or on behalf of) the Medicare enrollee, 
in the form of premiums or cost-sharing. These services may be grouped 
or offered individually.
    (d) Availability and structure of plans. An M+C organization 
offering an M+C plan must offer it--
    (1) To all Medicare beneficiaries residing in the service area of 
the M+C plan;
    (2) At a uniform premium, with uniform benefits and level of cost-
sharing throughout the plan's service area, or segment of service area 
as provided in Sec. 422.304(b)(2).
    (e) Terms of M+C plans. Terms of M+C plans described in instructions 
to beneficiaries, as required by Sec. 422.111, will include basic and 
supplemental benefits and terms of coverage for those benefits.
    (f) Multiple plans in one service area. An M+C organization may 
offer more than one M+C plan in the same service area subject to the 
conditions and limitations set forth in this subpart for each M+C plan.
    (g) CMS review and approval of M+C benefits. CMS reviews and 
approves M+C benefits using written policy guidelines and requirements 
in this part, operational policy letters, and other CMS instructions to 
ensure that--
    (1) Medicare-covered services meet CMS fee-for-service guidelines;
    (2) M+C organizations are not designing benefits to discriminate 
against beneficiaries, promote discrimination, discourage enrollment, 
steer subsets of Medicare beneficiaries to particular M+C plans, or 
inhibit access to services; and
    (3) Benefit design meets other M+C program requirements.
    (h) Benefits affecting screening mammography, influenza vaccine, and 
pneumoccal vaccine. (1) Enrollees of

[[Page 848]]

M+C organizations may directly access (through self-referral) screening 
mammography and influenza vaccine.
    (2) M+C organizations may not impose cost-sharing for influenza 
vaccine and pneumococcal vaccine on their M+C plan enrollees.
    (i) Requirements relating to Medicare conditions of participation. 
Basic benefits must be furnished through providers meeting the 
requirements in Sec. 422.204(b)(3).
    (j) Provider networks. The M+C plans offered by an M+C organization 
may share a provider network as long as each M+C plan independently 
meets the access and availability standards described at Sec. 422.112, 
as determined by CMS.

[65 FR 40319, June 29, 2000, as amended at 67 FR 13288, Mar. 22, 2002]



Sec. 422.101  Requirements relating to basic benefits.

    Except as specified in Sec. 422.264 (for entitlement that begins or 
ends during a hospital stay) and Sec. 422.266 (with respect to hospice 
care), each M+C organization must meet the following requirements:
    (a) Provide coverage of, by furnishing, arranging for, or making 
payment for, all services that are covered by Part A and Part B of 
Medicare (if the enrollee is entitled to benefits under both parts) or 
by Medicare Part B (if entitled only under Part B) and that are 
available to beneficiaries residing in the plan's service area. Services 
may be provided outside of the service area of the plan if the services 
are accessible and available to enrollees.
    (b) Comply with--
    (1) CMS's national coverage determinations;
    (2) General coverage guidelines included in original Medicare 
manuals and instructions unless superseded by operational policy letters 
or regulations in this part; and
    (3) Written coverage decisions of local carriers and intermediaries 
with jurisdiction for claims in the geographic area in which services 
are covered under the M+C plan.

[65 FR 40319, June 29, 2000]



Sec. 422.102  Supplemental benefits.

    (a) Mandatory supplemental benefits. (1) Subject to CMS's approval, 
an M+C organization may require Medicare enrollees of an M+C plan other 
than an MSA plan to accept and pay for services in addition to Medicare-
covered services described in Sec. 422.101 and additional benefits 
described in Sec. 422.312.
    (2) If the M+C organization imposes mandatory supplemental benefits, 
it must impose them on all Medicare beneficiaries enrolled in the M+C 
plan.
    (3) CMS approves mandatory supplemental benefits if the benefits are 
designed in accordance with CMS's guidelines and requirements as stated 
in this part and instructions and operational policy letters.
    (b) Optional supplemental benefits. Except as provided in 
Sec. 422.104 in the case of MSA plans, each M+C organization may offer 
(for election by the enrollee and without regard to health status) 
services that are not included in the basic benefits as described in 
Sec. 422.100(c) and any mandatory supplemental benefits described in 
paragraph (a) of this section. Optional supplemental benefits are 
purchased at the discretion of the enrollee and must be offered to all 
Medicare beneficiaries enrolled in the M+C plan.
    (c) Payment for supplemental services. All supplemental benefits are 
paid for in full, directly by (or on behalf of) the enrollee of the M+C 
plan.
    (d) Marketing of supplemental benefits. M+C organizations may offer 
enrollees a group of services as one optional supplemental benefit, 
offer services individually, or offer a combination of groups and 
individual services.

[65 FR 40320, June 29, 2000]



Sec. 422.103  Benefits under an M+C MSA plan.

    (a) General rule. An M+C organization offering an M+C MSA plan must 
make available to an enrollee, or provide reimbursement for, at least 
the services described under in Sec. 422.101 after the enrollee incurs 
countable expenses equal to the amount of the plan's annual deductible.
    (b) Countable expenses. An M+C organization offering an M+C MSA plan

[[Page 849]]

must count toward the annual deductible at least all amounts that would 
be paid for the particular service under original Medicare, including 
amounts that would be paid by the enrollee as deductibles or 
coinsurance.
    (c) Services after the deductible. For services received by the 
enrollee after the annual deductible is satisfied, an M+C organization 
offering an M+C MSA plan must pay, at a minimum, the lesser of the 
following amounts:
    (1) 100 percent of the expense of the services.
    (2) 100 percent of the amounts that would have been paid for the 
services under original Medicare, including amounts that would be paid 
by the enrollee as deductibles and coinsurance.
    (d) Annual deductible. The annual deductible for an M+C MSA plan--
    (1) For contract year 1999, may not exceed $6,000; and
    (2) For subsequent contract years may not exceed the deductible for 
the preceding contract year, increased by the national per capita growth 
percentage determined under Sec. 422.252(b).



Sec. 422.104  Special rules on supplemental benefits for M+C MSA plans.

    (a) An M+C organization offering an M+C MSA plan may not provide 
supplemental benefits that cover expenses that count towards the 
deductible specified in Sec. 422.103(d).
    (b) In applying the limitation of paragraph (a) of this section, the 
following kinds of policies are not considered as covering the 
deductible:
    (1) A policy that provides coverage (whether through insurance or 
otherwise) for accidents, disability, dental care, vision care, or long-
term care.
    (2) A policy of insurance in which substantially all of the coverage 
relates to liabilities incurred under workers' compensation laws, tort 
liabilities, liabilities relating to use or ownership of property, and 
any other similar liabilities that CMS may specify by regulation.
    (3) A policy of insurance that provides coverage for a specified 
disease or illness or pays a fixed amount per day (or other period) of 
hospitalization.



Sec. 422.105  Special rules for point of service option.

    (a) General rule. A POS benefit is an option that an M+C 
organization may offer in an M+C coordinated care plan or network M+C 
MSA plan to provide enrollees with additional choice in obtaining 
specified health care services. The organization may offer a POS option-
-
    (1) Under a coordinated care plan only as an additional benefit as 
described in Sec. 422.312;
    (2) Under a coordinated care plan only as a mandatory supplemental 
benefit as described in Sec. 422.102(a); or
    (3) Under a coordinated care plan or network MSA plan as an optional 
supplemental benefit as described in Sec. 422.102(b).
    (b) Approval required. An M+C organization may not implement a POS 
benefit until it has been approved by CMS.
    (c) Ensuring availability and continuity of care. An M+C network 
plan that includes a POS benefit must continue to provide all benefits 
and ensure access as required under this subpart.
    (d) Enrollee information and disclosure. The disclosure requirements 
specified in Sec. 422.111 apply in addition to the following 
requirements:
    (1) Written rules. M+C organizations must maintain written rules on 
how to obtain health benefits through the POS benefit.
    (2) Evidence of coverage document. The M+C organization must provide 
to beneficiaries enrolling in a plan with a POS benefit an ``evidence of 
coverage'' document, or otherwise provide written documentation, that 
specifies all costs and possible financial risks to the enrollee, 
including--
    (i) Any premiums and cost-sharing for which the enrollee is 
responsible;
    (ii) Annual limits on benefits and on out-of-pocket expenditures;
    (iii) Potential financial responsibility for services for which the 
plan denies payment because they were not covered under the POS benefit, 
or exceeded the dollar limit for the benefit; and
    (iv) The annual maximum out-of-pocket expense an enrollee could 
incur.

[[Page 850]]

    (e) Prompt payment. Health benefits payable under the POS benefit 
are subject to the prompt payment requirements in Sec. 422.520.
    (f) POS-related data. An M+C organization that offers a POS benefit 
through an M+C plan must report enrollee utilization data at the plan 
level by both plan contracting providers (in-network) and by non-
contracting providers (out-of-network) including enrollee use of the POS 
benefit, in the form and manner prescribed by CMS.

[63 FR 35077, June 26, 1998, as amended at 65 FR 40320, June 29, 2000]



Sec. 422.106  Coordination of benefits with employer group health plans and Medicaid.

    (a) General rule. If an M+C organization contracts with an employer 
group health plan (EGHP) that covers enrollees in an M+C plan, or 
contracts with a State Medicaid agency to provide Medicaid benefits to 
individuals who are eligible for both Medicare and Medicaid, and who are 
enrolled in an M+C plan, the enrollees must be provided the same 
benefits as all other enrollees in the M+C plan, with the EGHP or 
Medicaid benefits supplementing the M+C plan benefits. Jurisdiction 
regulating benefits under these circumstances is as follows:
    (1) All requirements of this part that apply to the M+C program 
apply to the M+C plan coverage provided to enrollees eligible for 
benefits under an EGHP or Medicaid contract.
    (2) Employer benefits that complement an M+C plan, and the marketing 
materials associated with the benefits, are not subject to review or 
approval by CMS. M+C plan benefits provided to members of the EGHP, and 
the associated marketing materials, are subject to CMS review and 
approval.
    (3) Medicaid benefits are not reviewed under this part, but are 
subject to appropriate CMS review under the Medicaid program. M+C plan 
benefits provided to individuals entitled to Medicaid benefits provided 
by the M+C organization under a contract with the State Medicaid agency 
are subject to M+C rules and requirements.
    (b) Examples. Employer/Medicaid benefits, permissible EGHP or 
Medicaid plan benefits include the following:
    (1) Payment of a portion or all of the M+C basic and supplemental 
premiums.
    (2) Payment of a portion or all of other cost-sharing amounts 
approved for the M+C plan.
    (3) Other employer-sponsored benefits that may require additional 
premium and cost-sharing, or other benefits provided by the organization 
under a contract with the State Medicaid agency.

[65 FR 40320, June 29, 2000]



Sec. 422.108  Medicare secondary payer (MSP) procedures.

    (a) Basic rule. CMS does not pay for services to the extent that 
Medicare is not the primary payer under section 1862(b) of the Act and 
part 411 of this chapter.
    (b) Responsibilities of the M+C organization. The M+C organization 
must, for each M+C plan--
    (1) Identify payers that are primary to Medicare under section 
1862(b) of the Act and part 411 of this chapter;
    (2) Identify the amounts payable by those payers; and
    (3) Coordinate its benefits to Medicare enrollees with the benefits 
of the primary payers.
    (c) Collecting from other entities. The M+C organization may bill, 
or authorize a provider to bill, other individuals or entities for 
covered Medicare services for which Medicare is not the primary payer, 
as specified in paragraphs (d) and (e) of this section.
    (d) Collecting from other insurers or the enrollee. If a Medicare 
enrollee receives from an M+C organization covered services that are 
also covered under State or Federal workers' compensation, any no-fault 
insurance, or any liability insurance policy or plan, including a self-
insured plan, the M+C organization may bill, or authorize a provider to 
bill any of the following--
    (1) The insurance carrier, the employer, or any other entity that is 
liable for payment for the services under section 1862(b) of the Act and 
part 411 of this chapter.
    (2) The Medicare enrollee, to the extent that he or she has been 
paid by the

[[Page 851]]

carrier, employer, or entity for covered medical expenses.
    (e) Collecting from group health plans (GHPs) and large group health 
plans (LGHPs). An M+C organization may bill a GHP or LGHP for services 
it furnishes to a Medicare enrollee who is also covered under the GHP or 
LGHP and may bill the Medicare enrollee to the extent that he or she has 
been paid by the GHP or LGHP.
    (f) MSP rules and State laws. Consistent with Sec. 422.402 
concerning the Federal preemption of State law, the rules established 
under this section supersede any State laws, regulations, contract 
requirements, or other standards that would otherwise apply to M+C plans 
only to the extent that those State laws are inconsistent with the 
standards established under this part. A State cannot take away an M+C 
organization's right under Federal law and the MSP regulations to bill, 
or to authorize providers and suppliers to bill, for services for which 
Medicare is not the primary payer. Section 1852(a)(4) of the Social 
Security Act does not prohibit a State from limiting the amount of the 
recovery; thus, State law could modify, but not negate, an M+C 
organization's rights in this regard.

[63 FR 35077, June 26, 1998, as amended at 65 FR 40320, June 29, 2000]



Sec. 422.109  Effect of national coverage determinations (NCDs).

    (a) If CMS determines and announces that an NCD meets the criteria 
for ``significant cost'' described in paragraph (c) of this section, an 
M+C organization is not required to assume risk for the costs of that 
service until the contract year for which the annual M+C capitation rate 
is determined on a basis that includes the cost of the NCD service.
    (b) The M+C organization must furnish, arrange or pay for an NCD 
``significant cost'' service before the adjustment of the annual M+C 
capitation rate. The following rules apply to these services:
    (1) Medicare payment for the service is:
    (i) In addition to the capitation payment to the M+C organization; 
and
    (ii) Made directly by the fiscal intermediary and carrier to the M+C 
organization in accordance with original Medicare payment rules, 
methods, and requirements.
    (2) NCD costs for which CMS intermediaries and carriers will not 
make payment and are the responsibility of the M+C organization are--
    (i) Services necessary to diagnose a condition covered by the NCD;
    (ii) Most services furnished as follow-up care to the NCD service;
    (iii) Any service that is already a Medicare-covered service and 
included in the annual M+C capitation rate; and
    (iv) Any service, including the costs of the NCD service itself, to 
the extent the M+C organization is already obligated to cover it as an 
additional benefit under Sec. 422.312 or supplemental benefit under 
Sec. 422.102.
    (3) NCD costs for which CMS intermediaries and carriers make payment 
are--
    (i) Costs relating directly to the provision of services related to 
the NCD that were noncovered services prior to the issuance of the NCD; 
and
    (ii) A service that is not included in the M+C per capita payment 
rate.
    (4) If the M+C organization does not provide or arrange for the 
service consistent with CMS's NCD, enrollees may obtain the services 
through qualified providers not under contract to the M+C organization, 
and the organization will pay for the services consistent with 
Sec. 422.109(c).
    (5) Beneficiaries are liable for any applicable coinsurance amounts, 
but are not responsible for the Part A deductible.
    (c) The term ``significant cost'' as it relates to a particular NCD 
means either of the following:
    (1) The average cost of furnishing a single service exceeds a cost 
threshold that--
    (i) For calendar years 1998 and 1999, is $100,000;
    (ii) For calendar year 2000 and subsequent calendar years, is the 
preceding year's dollar threshold adjusted to reflect the national per 
capita growth percentage described in Sec. 422.254(b).
    (2) The estimated cost of all of Medicare services furnished 
nationwide as a result of a particular NCD represents

[[Page 852]]

at least 0.1 percent of the national standardized annual capitation rate 
(see Sec. 422.254(f)), multiplied by the total number of Medicare 
beneficiaries nationwide for the applicable calendar year.

[63 FR 35077, June 26, 1998, as amended at 65 FR 40321, June 29, 2000]



Sec. 422.110  Discrimination against beneficiaries prohibited.

    (a) General prohibition. Except as provided in paragraph (b) of this 
section, an M+C organization may not deny, limit, or condition the 
coverage or furnishing of benefits to individuals eligible to enroll in 
an M+C plan offered by the organization on the basis of any factor that 
is related to health status, including, but not limited to the 
following:
    (1) Medical condition, including mental as well as physical illness.
    (2) Claims experience.
    (3) Receipt of health care.
    (4) Medical history.
    (5) Genetic information.
    (6) Evidence of insurability, including conditions arising out of 
acts of domestic violence.
    (7) Disability.
    (b) Exception. An M+C organization may not enroll an individual who 
has been medically determined to have end-stage renal disease. However, 
an enrollee who develops end-stage renal disease while enrolled in a 
particular M+C organization may not be disenrolled for that reason. An 
individual who is an enrollee of a particular M+C organization, and 
resides in the M+C plan service area at the time he or she first becomes 
M+C eligible, is considered to be ``enrolled'' in the M+C organization 
for purposes of the preceding sentence.
    (c) Additional requirements. An M+C organization is required to 
observe the provisions of the Civil Rights Act, Age Discrimination Act, 
Rehabilitation Act of 1973, and Americans with Disabilities Act (see 
Sec. 422.502(h)).

[63 FR 35077, June 26, 1998; 63 FR 52612, Oct. 1, 1998; 64 FR 7980, Feb. 
17, 1999, as amended at 65 FR 40321, June 29, 2000]



Sec. 422.111  Disclosure requirements.

    (a) Detailed description. An M+C organization must disclose the 
information specified in paragraph (b) of this section--
    (1) To each enrollee electing an M+C plan it offers;
    (2) In clear, accurate, and standardized form; and
    (3) At the time of enrollment and at least annually thereafter.
    (b) Content of plan description. The description must include the 
following information:
    (1) Service area. The M+C plan's service area and any enrollment 
continuation area.
    (2) Benefits. The benefits offered under the plan, including 
applicable conditions and limitations, premiums and cost-sharing (such 
as copayments, deductibles, and coinsurance) and any other conditions 
associated with receipt or use of benefits; and for purposes of 
comparison--
    (i) The benefits offered under original Medicare, including the 
content specified in paragraph (f)(1) of this section;
    (ii) For an M+C MSA plan, the benefits under other types of M+C 
plans; and
    (iii) The availability of the Medicare hospice option and any 
approved hospices in the service area, including those the M+C 
organization owns, controls, or has a financial interest in.
    (3) Access. The number, mix, and distribution (addresses) of 
providers from whom enrollees may obtain services; any out-of network 
coverage; any point-of-service option, including the supplemental 
premium for that option; and how the M+C organization meets the 
requirements of Secs. 422.112 and 422.114 for access to services offered 
under the plan.
    (4) Out-of-area coverage provided under the plan, including coverage 
provided to individuals eligible to enroll in the plan under 
Sec. 422.50(a)(3)(ii).
    (5) Emergency coverage. Coverage of emergency services, including--
    (i) Explanation of what constitutes an emergency, referencing the 
definitions of emergency services and emergency medical condition at 
Sec. 422.113;
    (ii) The appropriate use of emergency services, stating that prior 
authorization cannot be required;

[[Page 853]]

    (iii) The process and procedures for obtaining emergency services, 
including use of the 911 telephone system or its local equivalent; and
    (iv) The locations where emergency care can be obtained and other 
locations at which contracting physicians and hospitals provide 
emergency services and post-stabilization care included in the M+C plan.
    (6) Supplemental benefits. Any mandatory or optional supplemental 
benefits and the premium for those benefits.
    (7) Prior authorization and review rules. Prior authorization rules 
and other review requirements that must be met in order to ensure 
payment for the services. The M+C organization must instruct enrollees 
that, in cases where noncontracting providers submit a bill directly to 
the enrollee, the enrollee should not pay the bill, but submit it to the 
M+C organization for processing and determination of enrollee liability, 
if any.
    (8) Grievance and appeals procedures. All grievance and appeals 
rights and procedures.
    (9) Quality assurance program. A description of the quality 
assurance program required under Sec. 422.152.
    (10) Disenrollment rights and responsibilities.
    (c) Disclosure upon request. Upon request of an individual eligible 
to elect an M+C plan, an M+C organization must provide to the individual 
the following information:
    (1) The information required paragraph (f) of this section.
    (2) The procedures the organization uses to control utilization of 
services and expenditures.
    (3) The number of disputes, and the disposition in the aggregate, in 
a manner and form described by the Secretary. Such disputes shall be 
categorized as
    (i) Grievances according to Sec. 422.564; and
    (ii) Appeals according to Sec. 422.578 et. seq.
    (4) A summary description of the method of compensation for 
physicians.
    (5) Financial condition of the M+C organization, including the most 
recently audited information regarding, at least, a description of the 
financial condition of the M+C organization offering the plan.
    (d) Changes in rules. If an M+C organization intends to change its 
rules for an M+C plan, it must:
    (1) Submit the changes for CMS review under the procedures of 
Sec. 422.80.
    (2) For changes that take effect on January 1, notify all enrollees 
by the previous October 15.
    (3) For all other changes, notify all enrollees at least 30 days 
before the intended effective date of the changes.
    (e) Changes to provider network. The M+C organization must make a 
good faith effort to provide written notice of a termination of a 
contracted provider at least 30 calendar days before the termination 
effective date to all enrollees who are patients seen on a regular basis 
by the provider whose contracted is terminating, irrespective of whether 
the termination was for cause or without cause. When a contract 
termination involves a primary care professional, all enrollees who are 
patients of that primary care professional must be notified.
    (f) Disclosable information--(1) Benefits under original Medicare. 
(i) Covered services.
    (ii) Beneficiary cost-sharing, such as deductibles, coinsurance, and 
copayment amounts.
    (iii) Any beneficiary liability for balance billing.
    (2) Enrollment procedures. Information and instructions on how to 
exercise election options under this subpart.
    (3) Rights. A general description of procedural rights (including 
grievance and appeals procedures) under original Medicare and the M+C 
program and the right to be protected against discrimination based on 
factors related to health status in accordance with Sec. 422.110.
    (4) Medigap and Medicare Select. A general description of the 
benefits, enrollment rights, and requirements applicable to Medicare 
supplemental policies under section 1882 of the Act, and provisions 
relating to Medicare Select policies under section 1882(t) of the Act.
    (5) Potential for contract termination. The fact that an M+C 
organization may terminate or refuse to renew its

[[Page 854]]

contract, or reduce the service area included in its contract, and the 
effect that any of those actions may have on individuals enrolled in 
that organization's M+C plan.
    (6) Comparative information. A list of M+C plans that are or will be 
available to residents of the service area in the following calendar 
year, and, for each available plan, information on the aspects described 
in paragraphs (c)(7) through (c)(11) of this section, presented in a 
manner that facilitates comparison among the plans.
    (7) Benefits. (i) Covered services beyond those provided under 
original Medicare.
    (ii) Any beneficiary cost-sharing.
    (iii) Any maximum limitations on out-of-pocket expenses.
    (iv) In the case of an M+C MSA plan, the amount of the annual MSA 
deposit and the differences in cost-sharing, enrollee premiums, and 
balance billing, as compared to M+C plans.
    (v) In the case of an M+C private fee-for-service plan, differences 
in cost-sharing, enrollee premiums, and balance billing, as compared to 
M+C plans.
    (vi) The extent to which an enrollee may obtain benefits through 
out-of-network health care providers.
    (vii) The types of providers that participate in the plan's network 
and the extent to which an enrollee may select among those providers.
    (viii) The coverage of emergency and urgently needed services.
    (8) Premiums. (i) The M+C monthly basic beneficiary premiums.
    (ii) The M+C monthly supplemental beneficiary premium.
    (9) The plan's service area.
    (10) Quality and performance indicators for benefits under a plan to 
the extent they are available as follows (and how they compare with 
indicators under original Medicare):
    (i) Disenrollment rates for Medicare enrollees for the 2 previous 
years, excluding disenrollment due to death or moving outside the plan's 
service area, calculated according to CMS guidelines.
    (ii) Medicare enrollee satisfaction.
    (iii) Health outcomes.
    (iv) Plan-level appeal data.
    (v) The recent record of plan compliance with the requirements of 
this part, as determined by the Secretary.
    (vi) Other performance indicators.
    (11) Supplemental benefits. Whether the plan offers mandatory 
supplemental benefits or offers optional supplemental benefits and the 
premiums and other terms and conditions for those benefits.

[63 FR 35077, June 26, 1998, as amended at 64 FR 7980, Feb. 17, 1999; 65 
FR 40321, June 29, 2000]



Sec. 422.112  Access to services.

    (a) Rules for coordinated care plans and network M+C MSA plans. An 
M+C organization that offers an M+C coordinated care plan or network M+C 
MSA plan may specify the networks of providers from whom enrollees may 
obtain services if the M+C organization ensures that all covered 
services, including additional or supplemental services contracted for 
by (or on behalf of) the Medicare enrollee, are available and accessible 
under the plan. To accomplish this, the M+C organization must meet the 
following requirements:
    (1) Provider network. Maintain and monitor a network of appropriate 
providers that is supported by written agreements and is sufficient to 
provide adequate access to covered services to meet the needs of the 
population served. These providers are typically utilized in the network 
as primary care providers (PCPs), specialists, hospitals, skilled 
nursing facilities, home health agencies, ambulatory clinics, and other 
providers.
    (2) PCP panel. Establish a panel of PCPs from which the enrollee may 
select a PCP. If an M+C organization requires its enrollees to obtain a 
referral in most situations before receiving services from a specialist, 
the M+C organization must either assign a PCP for purposes of making the 
needed referral or make other arrangements to ensure access to medically 
necessary specialty care.
    (3) Specialty care. Provide or arrange for necessary specialty care, 
and in particular give women enrollees the option of direct access to a 
women's health specialist within the network for women's routine and 
preventive health care services provided as basic

[[Page 855]]

benefits (as defined in Sec. 422.2). The M+C organization arranges for 
specialty care outside of the plan provider network when network 
providers are unavailable or inadequate to meet an enrollee's medical 
needs.
    (4) Serious medical conditions. Ensure that for each plan, the M+C 
organization has in effect CMS-approved procedures that enable the M+C 
organization, through appropriate health care professionals, to--
    (i) Identify individuals with complex or serious medical conditions;
    (ii) Assess those conditions, and use medical procedures to diagnose 
and monitor them on an ongoing basis; and
    (iii) Establish and implement a treatment plan that--
    (A) Is appropriate to those conditions;
    (B) Includes an adequate number of direct access visits to 
specialists consistent with the treatment plan;
    (C) Is time-specific and updated periodically; and
    (D) Ensures adequate coordination of care among providers.
    (5) Service area expansion. If seeking a service area expansion for 
an M+C plan, demonstrate that the number and type of providers available 
to plan enrollees are sufficient to meet projected needs of the 
population to be served.
    (6) Credentialed providers. Demonstrate to CMS that its providers in 
an M+C plan are credentialed through the process set forth at 
Sec. 422.204(a).
    (7) Written standards. Establish written standards for the 
following:
    (i) Timeliness of access to care and member services that meet or 
exceed standards established by CMS. Timely access to care and member 
services within a plan's provider network must be continuously monitored 
to ensure compliance with these standards, and the M+C organization must 
take corrective action as necessary.
    (ii) Policies and procedures (coverage rules, practice guidelines, 
payment policies, and utilization management) that allow for individual 
medical necessity determinations.
    (iii) Provider consideration of beneficiary input into the 
provider's proposed treatment plan.
    (8) Hours of operation. Ensure that--
    (i) The hours of operation of its M+C plan providers are convenient 
to the population served under the plan and do not discriminate against 
Medicare enrollees; and
    (ii) Plan services are available 24 hours a day, 7 days a week, when 
medically necessary.
    (9) Cultural considerations. Ensure that services are provided in a 
culturally competent manner to all enrollees, including those with 
limited English proficiency or reading skills, and diverse cultural and 
ethnic backgrounds.
    (10) Ambulance services, emergency and urgently needed services, and 
post-stabilization care services coverage. Provide coverage for 
ambulance services, emergency and urgently needed services, and post-
stabilization care services in accordance with Sec. 422.113.
    (b) Rules for all M+C organizations to ensure continuity of care. 
The M+C organization must ensure continuity of care and integration of 
services through arrangements that include, but are not limited to the 
following--
    (1) Policies that specify under what circumstances services are 
coordinated and the methods for coordination;
    (2) Offering to provide each enrollee with an ongoing source of 
primary care and providing a primary care source to each enrollee who 
accepts the offer;
    (3) Programs for coordination of plan services with community and 
social services generally available through contracting or 
noncontracting providers in the area served by the M+C plan, including 
nursing home and community-based services; and
    (4) Procedures to ensure that the M+C organization and its provider 
network have the information required for effective and continuous 
patient care and quality review, including procedures to ensure that--
    (i) The M+C organization makes a ``best-effort'' attempt to conduct 
an initial assessment of each enrollee's health care needs, including 
following up on unsuccessful attempts to contact an enrollee, within 90 
days of the effective date of enrollment;
    (ii) Each provider, supplier, and practitioner furnishing services 
to enrollees maintains an enrollee health record

[[Page 856]]

in accordance with standards established by the M+C organization, taking 
into account professional standards; and
    (iii) There is appropriate and confidential exchange of information 
among provider network components.
    (5) Procedures to ensure that enrollees are informed of specific 
health care needs that require follow-up and receive, as appropriate, 
training in self-care and other measures they may take to promote their 
own health; and
    (6) Systems to address barriers to enrollee compliance with 
prescribed treatments or regimens.

[64 FR 7980, Feb. 17, 1999, as amended at 65 FR 40321, June 29, 2000 ]



Sec. 422.113  Special rules for ambulance services, emergency and urgently needed services, and maintenance and post-stabilization care services.

    (a) Ambulance services. The M+C organization is financially 
responsible for ambulance services, including ambulance services 
dispatched through 911 or its local equivalent, where other means of 
transportation would endanger the beneficiary's health.
    (b) Emergency and urgently needed services.-- (1) Definitions.
    (i) Emergency medical condition means a medical condition 
manifesting itself by acute symptoms of sufficient severity (including 
severe pain) such that a prudent layperson, with an average knowledge of 
health and medicine, could reasonably expect the absence of immediate 
medical attention to result in--
    (A) Serious jeopardy to the health of the individual or, in the case 
of a pregnant woman, the health of the woman or her unborn child;
    (B) Serious impairment to bodily functions; or
    (C) Serious dysfunction of any bodily organ or part.
    (ii) Emergency services means covered inpatient and outpatient 
services that are--
    (A) Furnished by a provider qualified to furnish emergency services; 
and
    (B) Needed to evaluate or stabilize an emergency medical condition.
    (iii) Urgently needed services means covered services that are not 
emergency services as defined this section, provided when an enrollee is 
temporarily absent from the M+C plan's service (or, if applicable, 
continuation) area (or, under unusual and extraordinary circumstances, 
provided when the enrollee is in the service or continuation area but 
the organization's provider network is temporarily unavailable or 
inaccessible) when the services are medically necessary and immediately 
required--
    (A) As a result of an unforeseen illness, injury, or condition; and
    (B) It was not reasonable given the circumstances to obtain the 
services through the organization offering the M+C plan.
    (2) M+C organization financial responsibility. The M+C organization 
is financially responsible for emergency and urgently needed services--
    (i) Regardless of whether the services are obtained within or 
outside the M+C organization;
    (ii) Regardless of whether there is prior authorization for the 
services.
    (A) Instructions to seek prior authorization for emergency or 
urgently needed services may not be included in any materials furnished 
to enrollees (including wallet card instructions), and enrollees must be 
informed of their right to call 911.
    (B) Instruction to seek prior authorization before the enrollee has 
been stabilized may not be included in any materials furnished to 
providers (including contracts with providers);
    (iii) In accordance with the prudent layperson definition of 
emergency medical condition regardless of final diagnosis;
    (iv) For which a plan provider or other M+C organization 
representative instructs an enrollee to seek emergency services within 
or outside the plan; and
    (v) With a limit on charges to enrollees for emergency services of 
$50 or what it would charge the enrollee if he or she obtained the 
services through the M+C organization, whichever is less.
    (3) Stabilized condition. The physician treating the enrollee must 
decide when the enrollee may be considered stabilized for transfer or 
discharge, and that decision is binding on the M+C organization.

[[Page 857]]

    (c) Maintenance care and post-stabilization care services (hereafter 
together referred to as ``post-stabilization care services'').
    (1) Definition. Post-stabilization care services means covered 
services, related to an emergency medical condition, that are provided 
after an enrollee is stabilized in order to maintain the stabilized 
condition, or, under the circumstances described in paragraph 
(c)(2)(iii) of this section, to improve or resolve the enrollee's 
condition.
    (2) M+C organization financial responsibility. The M+C organization-
-
    (i) Is financially responsible (consistent with Sec. 422.214) for 
post-stabilization care services obtained within or outside the M+C 
organization that are pre-approved by a plan provider or other M+C 
organization representative;
    (ii) Is financially responsible for post-stabilization care services 
obtained within or outside the M+C organization that are not pre-
approved by a plan provider or other M+C organization representative, 
but administered to maintain the enrollee's stabilized condition within 
1 hour of a request to the M+C organization for pre-approval of further 
post-stabilization care services;
    (iii) Is financially responsible for post-stabilization care 
services obtained within or outside the M+C organization that are not 
pre-approved by a plan provider or other M+C organization 
representative, but administered to maintain, improve, or resolve the 
enrollee's stabilized condition if--
    (A) The M+C organization does not respond to a request for pre-
approval within 1 hour;
    (B) The M+C organization cannot be contacted; or
    (C) The M+C organization representative and the treating physician 
cannot reach an agreement concerning the enrollee's care and a plan 
physician is not available for consultation. In this situation, the M+C 
organization must give the treating physician the opportunity to consult 
with a plan physician and the treating physician may continue with care 
of the patient until a plan physician is reached or one of the criteria 
in Sec. 422.113(c)(3) is met; and
    (iv) Must limit charges to enrollees for post-stabilization care 
services to an amount no greater than what the organization would charge 
the enrollee if he or she had obtained the services through the M+C 
organization.
    (3) End of M+C organization's financial responsibility. The M+C 
organization's financial responsibility for post-stabilization care 
services it has not pre-approved ends when--
    (i) A plan physician with privileges at the treating hospital 
assumes responsibility for the enrollee's care;
    (ii) A plan physician assumes responsibility for the enrollee's care 
through transfer;
    (iii) An M+C organization representative and the treating physician 
reach an agreement concerning the enrollee's care; or
    (iv) The enrollee is discharged.

[65 FR 40322, June 29, 2000]



Sec. 422.114  Access to services under an M+C private fee-for-service plan.

    (a) Sufficient access. (1) An M+C organization that offers an M+C 
private fee-for-service plan must demonstrate to CMS that it has 
sufficient number and range of providers willing to furnish services 
under the plan.
    (2) CMS finds that an M+C organization meets the requirement in 
paragraph (a)(1) of this section if, with respect to a particular 
category of health care providers, the M+C organization has--
    (i) Payment rates that are not less than the rates that apply under 
original Medicare for the provider in question;
    (ii) Contracts or agreements with a sufficient number and range of 
providers to furnish the services covered under the M+C private fee-for-
service plan; or
    (iii) A combination of paragraphs (a)(2)(i) and (a)(2)(ii) of this 
section.
    (b) Freedom of choice. M+C fee-for-service plans must permit 
enrollees to obtain services from any entity that is authorized to 
provide services under Medicare Part A and Part B and agrees to provide 
services under the terms of the plan.



Sec. 422.118  Confidentiality and accuracy of enrollee records.

    For any medical records or other health and enrollment information 
it

[[Page 858]]

maintains with respect to enrollees, an M+C organization must establish 
procedures to do the following:
    (a) Abide by all Federal and State laws regarding confidentiality 
and disclosure of medical records, or other health and enrollment 
information. The M+C organization must safeguard the privacy of any 
information that identifies a particular enrollee and have procedures 
that specify--
    (1) For what purposes the information will be used within the 
organization; and
    (2) To whom and for what purposes it will disclose the information 
outside the organization.
    (b) Ensure that medical information is released only in accordance 
with applicable Federal or State law, or pursuant to court orders or 
subpoenas.
    (c) Maintain the records and information in an accurate and timely 
manner.
    (d) Ensure timely access by enrollees to the records and information 
that pertain to them.

[65 FR 40323, June 29, 2000]



Sec. 422.128  Information on advance directives.

    (a) Each M+C organization must maintain written policies and 
procedures that meet the requirements for advance directives, as set 
forth in subpart I of part 489 of this chapter. For purposes of this 
part, advance directive has the meaning given the term in Sec. 489.100 
of this chapter.
    (b) An M+C organization must maintain written policies and 
procedures concerning advance directives with respect to all adult 
individuals receiving medical care by or through the M+C organization.
    (1) An M+C organization must provide written information to those 
individuals with respect to the following:
    (i) Their rights under the law of the State in which the 
organization furnishes services (whether statutory or recognized by the 
courts of the State) to make decisions concerning their medical care, 
including the right to accept or refuse medical or surgical treatment 
and the right to formulate advance directives. Providers may contract 
with other entities to furnish this information but remain legally 
responsible for ensuring that the requirements of this section are met. 
The information must reflect changes in State law as soon as possible, 
but no later than 90 days after the effective date of the State law.
    (ii) The M+C organization's written policies respecting the 
implementation of those rights, including a clear and precise statement 
of limitation if the M+C organization cannot implement an advance 
directive as a matter of conscience. At a minimum, this statement must 
do the following:
    (A) Clarify any differences between institution-wide conscientious 
objections and those that may be raised by individual physicians.
    (B) Identify the state legal authority permitting such objection.
    (C) Describe the range of medical conditions or procedures affected 
by the conscience objection.
    (D) Provide the information specified in paragraph (a)(1) of this 
section to each enrollee at the time of initial enrollment. If an 
enrollee is incapacitated at the time of initial enrollment and is 
unable to receive information (due to the incapacitating condition or a 
mental disorder) or articulate whether or not he or she has executed an 
advance directive, the M+C organization may give advance directive 
information to the enrollee's family or surrogate in the same manner 
that it issues other materials about policies and procedures to the 
family of the incapacitated enrollee or to a surrogate or other 
concerned persons in accordance with State law. The M+C organization is 
not relieved of its obligation to provide this information to the 
enrollee once he or she is no longer incapacitated or unable to receive 
such information. Follow-up procedures must be in place to ensure that 
the information is given to the individual directly at the appropriate 
time.
    (E) Document in a prominent part of the individual's current medical 
record whether or not the individual has executed an advance directive.
    (F) Not condition the provision of care or otherwise discriminate 
against an individual based on whether or not the individual has 
executed an advance directive.
    (G) Ensure compliance with requirements of State law (whether 
statutory

[[Page 859]]

or recognized by the courts of the State) regarding advance directives.
    (H) Provide for education of staff concerning its policies and 
procedures on advance directives.
    (I) Provide for community education regarding advance directives 
that may include material required in paragraph (a)(1)(i) of this 
section, either directly or in concert with other providers or entities. 
Separate community education materials may be developed and used, at the 
discretion of the M+C organization. The same written materials are not 
required for all settings, but the material should define what 
constitutes an advance directive, emphasizing that an advance directive 
is designed to enhance an incapacitated individual's control over 
medical treatment, and describe applicable State law concerning advance 
directives. An M+C organization must be able to document its community 
education efforts.
    (2) The M+C organization--
    (i) Is not required to provide care that conflicts with an advance 
directive; and
    (ii) Is not required to implement an advance directive if, as a 
matter of conscience, the M+C organization cannot implement an advance 
directive and State law allows any health care provider or any agent of 
the provider to conscientiously object.
    (3) The M+C organization must inform individuals that complaints 
concerning noncompliance with the advance directive requirements may be 
filed with the State survey and certification agency.



Sec. 422.132  Protection against liability and loss of benefits.

    Enrollees of M+C organizations are entitled to the protections 
specified in Sec. 422.502(g).



                      Subpart D--Quality Assurance

    Source: 63 FR 35082, June 26, 1998, unless otherwise noted.



Sec. 422.152  Quality assessment and performance improvement program.

    (a) General rule. Each M+C organization that offers one or more M+C 
plans must have, for each of those plans, an ongoing quality assessment 
and performance improvement program that meets the applicable 
requirements of this section for the services it furnishes to its M+C 
enrollees.
    (b) Requirements for network M+C MSA plans and M+C coordinated care 
plans other than PPO plans. An organization offering a network M+C MSA 
plan or M+C coordinated care plan other than a PPO plan must do the 
following:
    (1) Meet the requirements in paragraph (c)(1) of this section 
concerning performance measurement and reporting. With respect to an M+C 
coordinated care plan, an organization must also meet the requirements 
of paragraph (c)(2) of this section concerning the achievement of 
minimum performance levels. The requirements of paragraph (c)(2) of this 
section do not apply with respect to an M+C MSA plan.
    (2) Conduct performance improvement projects as described in 
paragraph (d) of this section. These projects must achieve, through 
ongoing measurement and intervention, demonstrable and sustained 
improvement in significant aspects of clinical care and nonclinical care 
areas that can be expected to have a favorable effect on health outcomes 
and enrollee satisfaction.
    (3) In processing requests for initial or continued authorization of 
services, follow written policies and procedures that reflect current 
standards of medical practice.
    (4) Have in effect mechanisms to detect both underutilization and 
overutilization of services.
    (5) Make available to CMS information on quality and outcomes 
measures that will enable beneficiaries to compare health coverage 
options and select among them, as provided in Sec. 422.64(c)(10).
    (c) Performance measurement and reporting. The organization offering 
the plan must do the following:
    (1) Measure performance under the plan, using standard measures 
required by CMS, and report its performance to CMS. The standard 
measures may be specified in uniform data collection and reporting 
instruments required by CMS, and will relate to--

[[Page 860]]

    (i) Clinical areas including effectiveness of care, enrollee 
perception of care, and use of services; and
    (ii) Nonclinical areas including access to and availability of 
services, appeals and grievances, and organizational characteristics.
    (2) Achieve any minimum performance levels that CMS establishes 
locally, regionally, or nationally with respect to the standard 
measures.
    (i) In establishing minimum performance levels, CMS considers 
historical plan and original Medicare performance data and trends.
    (ii) CMS establishes the minimum performance levels prospectively 
upon contract initiation and renewal.
    (iii) The organization must meet the minimum performance levels by 
the end of the contract year.
    (iv) In accordance with Sec. 422.506, CMS may decline to renew the 
organization's contract in the year that CMS determines that it did not 
meet the minimum performance levels.
    (d) Performance improvement projects. (1) Performance improvement 
projects are organization initiatives that focus on specified clinical 
and nonclinical areas and that involve the following:
    (i) Measurement of performance.
    (ii) System interventions, including the establishment or alteration 
of practice guidelines.
    (iii) Improving performance.
    (iv) Systematic follow-up on the effect of the interventions.
    (2) Each project must address the entire population to which the 
measurement specified in paragraph (d)(1)(i) of this section is 
relevant.
    (3) CMS establishes M+C organization and M+C plan-specific 
obligations for the number and distribution of projects among the 
required clinical and nonclinical areas, in accordance with paragraphs 
(d)(4) and (d)(5) of this section, to ensure that the projects are 
representative of the entire spectrum of clinical and nonclinical care 
areas associated with a plan.
    (4) The required clinical areas include:
    (i) Prevention and care of acute and chronic conditions.
    (ii) High-volume services.
    (iii) High-risk services.
    (iv) Continuity and coordination of care.
    (5) The required nonclinical areas include:
    (i) Appeals, grievances, and other complaints.
    (ii) Access to, and availability of, services.
    (6) In addition to requiring that the organization initiate its own 
performance improvement projects, CMS may require that the organization-
-
    (i) Conduct particular performance improvement projects that are 
specific to the organization; and
    (ii) Participate in national or statewide performance improvement 
projects.
    (7) For each project, the organization must assess performance under 
the plan using quality indicators that are--
    (i) Objective, clearly and unambiguously defined, and based on 
current clinical knowledge or health services research; and
    (ii) Capable of measuring outcomes such as changes in health status, 
functional status and enrollee satisfaction, or valid proxies of those 
outcomes.
    (8) Performance assessment on the selected indicators must be based 
on systematic ongoing collection and analysis of valid and reliable 
data.
    (9) Interventions must achieve improvement that is significant and 
sustained over time.
    (10) The organization must report the status and results of each 
project to CMS as requested.
    (e) Requirements for M+C PPO plans, non-network MSA plans, and M+C 
private fee-for-service plans. An organization offering an M+C plan, 
non-network MSA plan, or private fee-for-service plan must do the 
following:
    (1) Measure performance under the plan using standard measures 
required by CMS and report its performance to CMS. The standard measures 
may be specified in uniform data collection and reporting instruments 
required by CMS and will relate to--
    (i) Clinical areas including effectiveness of care, enrollee 
perception of care, and use of services; and
    (ii) Nonclinical areas including access to and availability of 
services, appeals and grievances, and organizational characteristics.

[[Page 861]]

    (2) Evaluate the continuity and coordination of care furnished to 
enrollees.
    (3) If the organization uses written protocols for utilization 
review, the organization must--
    (i) Base those protocols on current standards of medical practice; 
and
    (ii) Have mechanisms to evaluate utilization of services and to 
inform enrollees and providers of services of the results of the 
evaluation.
    (f) Requirements for all types of plans--(1) Health information. For 
all types of plans that it offers, an organization must--
    (i) Maintain a health information system that collects, analyzes, 
and integrates the data necessary to implement its quality assessment 
and performance improvement program;
    (ii) Ensure that the information it receives from providers of 
services is reliable and complete; and
    (iii) Make all collected information available to CMS.
    (2) Program review. For each plan, there must be in effect a process 
for formal evaluation, at least annually, of the impact and 
effectiveness of its quality assessment and performance improvement 
program.
    (3) Remedial action. For each plan, the organization must correct 
all problems that come to its attention through internal surveillance, 
complaints, or other mechanisms.

[63 FR 35082, June 26, 1998, as amended at 65 FR 40323, June 29, 2000]



Sec. 422.154  External review.

    (a) Basic rule. Except as provided in paragraph (c) of this section, 
each M+C organization must, for each M+C plan it operates, have an 
agreement with an independent quality review and improvement 
organization (review organization) approved by CMS to perform functions 
of the type described in part 466 of this chapter.
    (b) Terms of the agreement. The agreement must be consistent with 
CMS guidelines and include the following provisions:
    (1) Require that the organization--
    (i) Allocate adequate space for use of the review organization 
whenever it is conducting review activities; and
    (ii) Provide all pertinent data, including patient care data, at the 
time the review organization needs the data to carry out the reviews and 
make its determinations.
    (2) Except in the case of complaints about quality, exclude review 
activities that CMS determines would duplicate review activities 
conducted as part of an approved accreditation process or as part of CMS 
monitoring.
    (c) Exceptions. The requirement of paragraph (a) of this section 
does not apply for an M+C private fee-for-service plan or a non-network 
M+C MSA plan if the organization does not carry out utilization review 
with respect to the plan.

[63 FR 35082, June 26, 1998, as amended at 65 FR 40323, June 29, 2000]



Sec. 422.156  Compliance deemed on the basis of accreditation.

    (a) General rule. An M+C organization is deemed to meet all of the 
requirements of any of the areas described in paragraph (b) of this 
section if--
    (1) The M+C organization is fully accredited (and periodically 
reaccredited) for the standards related to the applicable area under 
paragraph (b) of this section by a private, national accreditation 
organization approved by CMS; and
    (2) The accreditation organization used the standards approved by 
CMS for the purposes of assessing the M+C organization's compliance with 
Medicare requirements.
    (b) Deemable requirements. The requirements relating to the 
following areas are deemable:
    (1) Quality assurance.
    (2) Antidiscrimination.
    (3) Access to services.
    (4) Confidentiality and accuracy of enrollee records.
    (5) Information on advance directives.
    (6) Provider participation rules.
    (c) Effective date of deemed status. The date on which the 
organization is deemed to meet the applicable requirements is the later 
of the following:
    (1) The date on which the accreditation organization is approved by 
CMS.
    (2) The date the M+C organization is accredited by the accreditation 
organization.

[[Page 862]]

    (d) Obligations of deemed M+C organizations. An M+C organization 
deemed to meet Medicare requirements must--
    (1) Submit to surveys by CMS to validate its accreditation 
organization's accreditation process; and
    (2) Authorize its accreditation organization to release to CMS a 
copy of its most recent accreditation survey, together with any survey-
related information that CMS may require (including corrective action 
plans and summaries of unmet CMS requirements).
    (e) Removal of deemed status. CMS removes part or all of an M+C 
organization's deemed status for any of the following reasons:
    (1) CMS determines, on the basis of its own investigation, that the 
M+C organization does not meet the Medicare requirements for which 
deemed status was granted.
    (2) CMS withdraws its approval of the accreditation organization 
that accredited the M+C organization.
    (3) The M+C organization fails to meet the requirements of paragraph 
(d) of this section.
    (f) Enforcement authority. CMS retains the authority to initiate 
enforcement action against any M+C organization that it determines, on 
the basis of its own survey or the results of an accreditation survey, 
no longer meets the Medicare requirements for which deemed status was 
granted.

[63 FR 35082, June 26, 1998, as amended at 65 FR 40323, June 29, 2000; 
65 FR 59749, Oct. 6, 2000]



Sec. 422.157  Accreditation organizations.

    (a) Conditions for approval. CMS may approve an accreditation 
organization with respect to a given standard under this part if it 
meets the following conditions:
    (1) In accrediting M+C organizations, it applies and enforces 
standards that are at least as stringent as Medicare requirements with 
respect to the standard or standards in question.
    (2) It complies with the application and reapplication procedures 
set forth in Sec. 422.158.
    (3) It ensures that:
    (i) Any individual associated with it, who is also associated with 
an entity it accredits, does not influence the accreditation decision 
concerning that entity.
    (ii) The majority of the membership of its governing body is not 
comprised of managed care organizations or their representatives.
    (iii) Its governing body has a broad and balanced representation of 
interests and acts without bias.
    (b) Notice and comment--(1) Proposed notice. CMS publishes a notice 
in the Federal Register whenever it is considering granting an 
accreditation organization's application for approval. The notice--
    (i) Announces CMS's receipt of the accreditation organization's 
application for approval;
    (ii) Describes the criteria CMS will use in evaluating the 
application; and
    (iii) Provides at least a 30-day comment period.
    (2) Final notice. (i) After reviewing public comments, CMS publishes 
a final Federal Register notice indicating whether it has granted the 
accreditation organization's request for approval.
    (ii) If CMS grants the request, the final notice specifies the 
effective date and the term of the approval, which may not exceed 6 
years.
    (c) Ongoing responsibilities of an approved accreditation 
organization. An accreditation organization approved by CMS must 
undertake the following activities on an ongoing basis:
    (1) Provide to CMS in written form and on a monthly basis all of the 
following:
    (i) Copies of all accreditation surveys, together with any survey-
related information that CMS may require (including corrective action 
plans and summaries of unmet CMS requirements).
    (ii) Notice of all accreditation decisions.
    (iii) Notice of all complaints related to deemed M+C organizations.
    (iv) Information about any M+C organization against which the 
accrediting organization has taken remedial or adverse action, including 
revocation, withdrawal or revision of the M+C organization's 
accreditation. (The accreditation organization must provide this 
information within 30 days of taking the remedial or adverse action.)

[[Page 863]]

    (v) Notice of any proposed changes in its accreditation standards or 
requirements or survey process. If the organization implements the 
changes before or without CMS approval, CMS may withdraw its approval of 
the accreditation organization.
    (2) Within 30 days of a change in CMS requirements, submit to CMS--
    (i) An acknowledgment of CMS's notification of the change;
    (ii) A revised cross-walk reflecting the new requirements; and
    (iii) An explanation of how the accreditation organization plans to 
alter its standards to conform to CMS's new requirements, within the 
time-frames specified in the notification of change it receives from 
CMS.
    (3) Permit its surveyors to serve as witnesses if CMS takes an 
adverse action based on accreditation findings.
    (4) Within 3 days of identifying, in an accredited M+C organization, 
a deficiency that poses immediate jeopardy to the organization's 
enrollees or to the general public, give CMS written notice of the 
deficiency.
    (5) Within 10 days of CMS's notice of withdrawal of approval, give 
written notice of the withdrawal to all accredited M+C organizations.
    (6) Provide, on an annual basis, summary data specified by CMS that 
relate to the past year's accreditation activities and trends.
    (d) Continuing Federal oversight of approved accreditation 
organizations. This paragraph establishes specific criteria and 
procedures for continuing oversight and for withdrawing approval of an 
accreditation organization.
    (1) Equivalency review. CMS compares the accreditation 
organization's standards and its application and enforcement of those 
standards to the comparable CMS requirements and processes when--
    (i) CMS imposes new requirements or changes its survey process;
    (ii) An accreditation organization proposes to adopt new standards 
or changes in its survey process; or
    (iii) The term of an accreditation organization's approval expires.
    (2) Validation review. CMS or its agent may conduct a survey of an 
accredited organization, examine the results of the accreditation 
organization's own survey, or attend the accreditation organization's 
survey, in order to validate the organization's accreditation process. 
At the conclusion of the review, CMS identifies any accreditation 
programs for which validation survey results--
    (i) Indicate a 20 percent rate of disparity between certification by 
the accreditation organization and certification by CMS or its agent on 
standards that do not constitute immediate jeopardy to patient health 
and safety if unmet;
    (ii) Indicate any disparity between certification by the 
accreditation organization and certification by CMS or its agent on 
standards that constitute immediate jeopardy to patient health and 
safety if unmet; or
    (iii) Indicate that, irrespective of the rate of disparity, there 
are widespread or systematic problems in an organization's accreditation 
process such that accreditation no longer provides assurance that the 
Medicare requirements are met or exceeded.
    (3) Onsite observation. CMS may conduct an onsite inspection of the 
accreditation organization's operations and offices to verify the 
organization's representations and assess the organization's compliance 
with its own policies and procedures. The onsite inspection may include, 
but is not limited to, reviewing documents, auditing meetings concerning 
the accreditation process, evaluating survey results or the 
accreditation status decision making process, and interviewing the 
organization's staff.
    (4) Notice of intent to withdraw approval. If an equivalency review, 
validation review, onsite observation, or CMS's daily experience with 
the accreditation organization suggests that the accreditation 
organization is not meeting the requirements of this subpart, CMS gives 
the organization written notice of its intent to withdraw approval.
    (5) Withdrawal of approval. CMS may withdraw its approval of an 
accreditation organization at any time if CMS determines that--

[[Page 864]]

    (i) Deeming based on accreditation no longer guarantees that the M+C 
organization meets the M+C requirements, and failure to meet those 
requirements could jeopardize the health or safety of Medicare enrollees 
and constitute a significant hazard to the public health; or
    (ii) The accreditation organization has failed to meet its 
obligations under this section or under Sec. 422.156 or Sec. 422.158.
    (6) Reconsideration of withdrawal of approval. An accreditation 
organization dissatisfied with a determination to withdraw CMS approval 
may request a reconsideration of that determination in accordance with 
subpart D of part 488 of this chapter.

[63 FR 35082, June 26, 1998, as amended at 65 FR 40323, June 29, 2000; 
65 FR 59749, Oct. 6, 2000]



Sec. 422.158  Procedures for approval of accreditation as a basis for deeming compliance.

    (a) Required information and materials. A private, national 
accreditation organization applying for approval must furnish to CMS all 
of the following information and materials. (When reapplying for 
approval, the organization need furnish only the particular information 
and materials requested by CMS.)
    (1) The types of M+C plans that it would review as part of its 
accreditation process.
    (2) A detailed comparison of the organization's accreditation 
requirements and standards with the Medicare requirements (for example, 
a crosswalk).
    (3) Detailed information about the organization's survey process, 
including--
    (i) Frequency of surveys and whether surveys are announced or 
unannounced.
    (ii) Copies of survey forms, and guidelines and instructions to 
surveyors.
    (iii) Descriptions of--
    (A) The survey review process and the accreditation status decision 
making process;
    (B) The procedures used to notify accredited M+C organizations of 
deficiencies and to monitor the correction of those deficiencies; and
    (C) The procedures used to enforce compliance with accreditation 
requirements.
    (4) Detailed information about the individuals who perform surveys 
for the accreditation organization, including--
    (i) The size and composition of accreditation survey teams for each 
type of plan reviewed as part of the accreditation process;
    (ii) The education and experience requirements surveyors must meet;
    (iii) The content and frequency of the in-service training provided 
to survey personnel;
    (iv) The evaluation systems used to monitor the performance of 
individual surveyors and survey teams; and
    (v) The organization's policies and practice with respect to the 
participation, in surveys or in the accreditation decision process by an 
individual who is professionally or financially affiliated with the 
entity being surveyed.
    (5) A description of the organization's data management and analysis 
system with respect to its surveys and accreditation decisions, 
including the kinds of reports, tables, and other displays generated by 
that system.
    (6) A description of the organization's procedures for responding to 
and investigating complaints against accredited organizations, including 
policies and procedures regarding coordination of these activities with 
appropriate licensing bodies and ombudsmen programs.
    (7) A description of the organization's policies and procedures with 
respect to the withholding or removal of accreditation for failure to 
meet the accreditation organization's standards or requirements, and 
other actions the organization takes in response to noncompliance with 
its standards and requirements.
    (8) A description of all types (for example, full, partial) and 
categories (for example, provisional, conditional, temporary) of 
accreditation offered by the organization, the duration of each type and 
category of accreditation and a statement identifying the types and 
categories that would serve as a basis for accreditation if CMS approves 
the accreditation organization.

[[Page 865]]

    (9) A list of all currently accredited M+C organizations and the 
type, category, and expiration date of the accreditation held by each of 
them.
    (10) A list of all full and partial accreditation surveys scheduled 
to be performed by the accreditation organization as requested by CMS.
    (11) The name and address of each person with an ownership or 
control interest in the accreditation organization.
    (b) Required supporting documentation. A private, national 
accreditation organization applying or reapplying for approval must also 
submit the following supporting documentation:
    (1) A written presentation that demonstrates its ability to furnish 
CMS with electronic data in CMS compatible format.
    (2) A resource analysis that demonstrates that its staffing, 
funding, and other resources are adequate to perform the required 
surveys and related activities.
    (3) A statement acknowledging that, as a condition for approval, it 
agrees to comply with the ongoing responsibility requirements of 
Sec. 422.157(c).
    (c) Additional information. If CMS determines that it needs 
additional information for a determination to grant or deny the 
accreditation organization's request for approval, it notifies the 
organization and allows time for the organization to provide the 
additional information.
    (d) Onsite visit. CMS may visit the accreditation organization's 
offices to verify representations made by the organization in its 
application, including, but not limited to, review of documents, and 
interviews with the organization's staff.
    (e) Notice of determination. CMS gives the accreditation 
organization, within 210 days of receipt of its completed application, a 
formal notice that--
    (1) States whether the request for approval has been granted or 
denied;
    (2) Gives the rationale for any denial; and
    (3) Describes the reconsideration and reapplication procedures.
    (f) Withdrawal. An accreditation organization may withdraw its 
application for approval at any time before it receives the formal 
notice specified in paragraph (e) of this section.
    (g) Reconsideration of adverse determination. An accreditation 
organization that has received notice of denial of its request for 
approval may request reconsideration in accordance with subpart D of 
part 488 of this chapter.
    (h) Request for approval following denial. (1) Except as provided in 
paragraph (h)(2) of this section, an accreditation organization that has 
received notice of denial of its request for approval may submit a new 
request if it--
    (i) Has revised its accreditation program to correct the 
deficiencies on which the denial was based;
    (ii) Can demonstrate that the M+C organizations that it has 
accredited meet or exceed applicable Medicare requirements; and
    (iii) Resubmits the application in its entirety.
    (2) An accreditation organization that has requested reconsideration 
of CMS's denial of its request for approval may not submit a new request 
until the reconsideration is administratively final.

[63 FR 35082, June 26, 1998, as amended at 65 FR 40324, June 29, 2000]



                 Subpart E--Relationships With Providers

    Source: 63 FR 35085, June 26, 1998, unless otherwise noted.



422.200  Basis and scope.

    This subpart is based on sections 1852(a)(1), (a)(2), (b)(2), 
(c)(2)(D), (j), and (k) of the Act; section 1859(b)(2)(A) of the Act; 
and the general authority under 1856(b) of the Act requiring the 
establishment of standards. It sets forth the requirements and standards 
for the M+C organization's relationships with providers including 
physicians, other health care professionals, institutional providers and 
suppliers, under contracts or arrangements or deemed contracts under M+C 
private fee-for-service plans. This subpart also contains some 
requirements that apply to noncontracting providers.

[[Page 866]]



Sec. 422.202  Participation procedures.

    (a) Notice and appeal rights. An M+C organization that operates a 
coordinated care plan or network MSA plan must provide for the 
participation of individual physicians, and the management and members 
of groups of physicians, through reasonable procedures that include the 
following:
    (1) Written notice of rules of participation including terms of 
payment, credentialing, and other rules directly related to 
participation decisions.
    (2) Written notice of material changes in participation rules before 
the changes are put into effect.
    (3) Written notice of participation decisions that are adverse to 
physicians.
    (4) A process for appealing adverse participation decisions, 
including the right of physicians to present information and their views 
on the decision. In the case of a termination or suspension of a 
provider contract by the M+C organization, this process must conform to 
the rules in Sec. 422.204(c).
    (b) Consultation. The M+C organization must establish a formal 
mechanism to consult with the physicians who have agreed to provide 
services under the M+C plan offered by the organization, regarding the 
organization's medical policy, quality assurance programs and medical 
management procedures and ensure that the following standards are met:
    (1) Practice guidelines and utilization management guidelines--
    (i) Are based on reasonable medical evidence or a consensus of 
health care professionals in the particular field;
    (ii) Consider the needs of the enrolled population;
    (iii) Are developed in consultation with contracting physicians; and
    (iv) Are reviewed and updated periodically.
    (2) The guidelines are communicated to providers and, as 
appropriate, to enrollees.
    (3) Decisions with respect to utilization management, enrollee 
education, coverage of services, and other areas in which the guidelines 
apply are consistent with the guidelines.
    (c) Subcontracted groups. An M+C organization that operates an M+C 
plan through subcontracted physician groups must provide that the 
participation procedures in this section apply equally to physicians 
within those subcontracted groups.
    (d) Suspension or termination of contract. An M+C organization that 
operates a coordinated care plan or network MSA plan providing benefits 
through contracting providers must meet the following requirements:
    (1) Notice to physician. An M+C organization that suspends or 
terminates an agreement under which the physician provides services to 
M+C plan enrollees must give the affected individual written notice of 
the following:
    (i) The reasons for the action, including, if relevant, the 
standards and profiling data used to evaluate the physician and the 
numbers and mix of physicians needed by the M+C organization.
    (ii) The affected physician's right to appeal the action and the 
process and timing for requesting a hearing.
    (2) Composition of hearing panel. The M+C organization must ensure 
that the majority of the hearing panel members are peers of the affected 
physician.
    (3) Notice to licensing or disciplinary bodies. An M+C organization 
that suspends or terminates a contract with a physician because of 
deficiencies in the quality of care must give written notice of that 
action to licensing or disciplinary bodies or to other appropriate 
authorities.
    (4) Timeframes. An M+C organization and a contracting provider must 
provide at least 60 days written notice to each other before terminating 
the contract without cause.

[64 FR 7981, Feb. 17, 1999, as amended at 65 FR 40324, June 29, 2000]



Sec. 422.204  Provider selection and credentialing.

    (a) General rule. An M+C organization must have written policies and 
procedures for the selection and evaluation of providers. These policies 
must conform with the credential and recredentialing requirements set 
forth in paragraph (b) of this section and with the antidiscrimination 
provisions set forth in Sec. 422.205.
    (b) Basic requirements. An M+C organization must follow a documented 
process with respect to providers and

[[Page 867]]

suppliers who have signed contracts or participation agreements that--
    (1) For providers (other than physicians and other health care 
professionals) requires determination, and redetermination at specified 
intervals, that each provider is--
    (i) Licensed to operate in the State, and in compliance with any 
other applicable State or Federal requirements; and
    (ii) Reviewed and approved by an accrediting body, or meets the 
standards established by the organization itself;
    (2) For physicians and other health care professionals, including 
members of physician groups, covers--
    (i) Initial credentialing that includes written application, 
verification of licensure or certification from primary sources, 
disciplinary status, eligibility for payment under Medicare, and site 
visits as appropriate. The application must be signed and dated and 
include an attestation by the applicant of the correctness and 
completeness of the application and other information submitted in 
support of the application;
    (ii) Recredentialing at least every 3 years that updates information 
obtained during initial credentialing, considers performance indicators 
such as those collected through quality assurance programs, utilization 
management systems, handling of grievances and appeals, enrollee 
satisfaction surveys, and other plan activities, and that includes an 
attestation of the correctness and completeness of the new information; 
and
    (iii) A process for consulting with contracting health care 
professionals with respect to criteria for credentialing and 
recredentialing.
    (3) Specifies that basic benefits must be provided through, or 
payments must be made to, providers and suppliers that meet applicable 
requirements of title XVIII and part A of title XI of the Act. In the 
case of providers meeting the definition of ``provider of services'' in 
section 1861(u) of the Act, basic benefits may only be provided through 
these providers if they have a provider agreement with CMS permitting 
them to provide services under original Medicare.
    (4) Ensures compliance with the requirements at Sec. 422.752(a)(8) 
that prohibit employment or contracts with individuals (or with an 
entity that employs or contracts with such an individual) excluded from 
participation under Medicare and with the requirements at Sec. 422.220 
regarding physicians and practitioners who opt out of Medicare.

[65 FR 40324, June 29, 2000, as amended at 66 FR 47413, Sept. 12, 2001]



Sec. 422.205  Provider antidiscrimination rules.

    (a) General rule. Consistent with the requirements of this section, 
the policies and procedures concerning provider selection and 
credentialing established under Sec. 422.204, and with the requirement 
under Sec. 422.100(c) that all Medicare-covered services be available to 
M+C plan enrollees, an M+C organization may select the practitioners 
that participate in its plan provider networks. In selecting these 
practitioners, an M+C organization may not discriminate, in terms of 
participation, reimbursement, or indemnification, against any health 
care professional who is acting within the scope of his or her license 
or certification under State law, solely on the basis of the license or 
certification. If an M+C organization declines to include a given 
provider or group of providers in its network, it must furnish written 
notice to the effected provider(s) of the reason for the decision.
    (b) Construction. The prohibition in paragraph (a)(1) of this 
section does not preclude any of the following by the M+C organization:
    (1) Refusal to grant participation to health care professionals in 
excess of the number necessary to meet the needs of the plan's enrollees 
(except for M+C private-fee-for-service plans, which may not refuse to 
contract on this basis).
    (2) Use of different reimbursement amounts for different specialties 
or for different practitioners in the same specialty.
    (3) Implementation of measures designed to maintain quality and 
control costs consistent with its responsibilities.

[65 FR 40324, June 29, 2000]

[[Page 868]]



Sec. 422.206  Interference with health care professionals' advice to enrollees prohibited.

    (a) General rule. (1) An M+C organization may not prohibit or 
otherwise restrict a health care professional, acting within the lawful 
scope of practice, from advising, or advocating on behalf of, an 
individual who is a patient and enrolled under an M+C plan about--
    (i) The patient's health status, medical care, or treatment options 
(including any alternative treatments that may be self-administered), 
including the provision of sufficient information to the individual to 
provide an opportunity to decide among all relevant treatment options;
    (ii) The risks, benefits, and consequences of treatment or non-
treatment; or
    (iii) The opportunity for the individual to refuse treatment and to 
express preferences about future treatment decisions.
    (2) Health care professionals must provide information regarding 
treatment options in a culturally-competent manner, including the option 
of no treatment. Health care professionals must ensure that individuals 
with disabilities have effective communications with participants 
throughout the health system in making decisions regarding treatment 
options.
    (b) Conscience protection. The general rule in paragraph (a) of this 
section does not require the M+C plan to cover, furnish, or pay for a 
particular counseling or referral service if the M+C organization that 
offers the plan--
    (1) Objects to the provision of that service on moral or religious 
grounds; and
    (2) Through appropriate written means, makes available information 
on these policies as follows:
    (i) To CMS, with its application for a Medicare contract, within 10 
days of submitting its ACR proposal or, for policy changes, in 
accordance with Sec. 422.80 (concerning approval of marketing materials 
and election forms) and with Sec. 422.111.
    (ii) To prospective enrollees, before or during enrollment.
    (iii) With respect to current enrollees, the organization is 
eligible for the exception provided in paragraph (b)(1) of this section 
if it provides notice of such change within 90 days after adopting the 
policy at issue; however, under Sec. 422.111(d), notice of such a change 
must be given in advance.
    (c) Construction. Nothing in paragraph (b) of this section may be 
construed to affect disclosure requirements under State law or under the 
Employee Retirement Income Security Act of 1974.
    (d) Sanctions. An M+C organization that violates the prohibition of 
paragraph (a) of this section or the conditions in paragraph (b) of this 
section is subject to intermediate sanctions under subpart O of this 
part.

[63 FR 35085, June 26, 1998, as amended at 65 FR 40325, June 29, 2000]



Sec. 422.208  Physician incentive plans: requirements and limitations.

    (a) Definitions. In this subpart, the following definitions apply:
    Bonus means a payment made to a physician or physician group beyond 
any salary, fee-for-service payments, capitation, or returned withhold.
    Capitation means a set dollar payment per patient per unit of time 
(usually per month) paid to a physician or physician group to cover a 
specified set of services and administrative costs without regard to the 
actual number of services provided. The services covered may include the 
physician's own services, referral services, or all medical services.
    Physician group means a partnership, association, corporation, 
individual practice association, or other group of physicians that 
distributes income from the practice among members. An individual 
practice association is defined as a physician group for this section 
only if it is composed of individual physicians and has no subcontracts 
with physician groups.
    Physician incentive plan means any compensation arrangement to pay a 
physician or physician group that may directly or indirectly have the 
effect of reducing or limiting the services provided to any plan 
enrollee.
    Potential payments means the maximum payments possible to physicians 
or physician groups including payments for services they furnish 
directly, and additional payments based

[[Page 869]]

on use and costs of referral services, such as withholds, bonuses, 
capitation, or any other compensation to the physician or physician 
group. Bonuses and other compensation that are not based on use of 
referrals, such as quality of care furnished, patient satisfaction or 
committee participation, are not considered payments in the 
determination of substantial financial risk.
    Referral services means any specialty, inpatient, outpatient, or 
laboratory services that a physician or physician group orders or 
arranges, but does not furnish directly.
    Risk threshold means the maximum risk, if the risk is based on 
referral services, to which a physician or physician group may be 
exposed under a physician incentive plan without being at substantial 
financial risk. This is set at 25 percent risk.
    Substantial financial risk, for purposes of this section, means risk 
for referral services that exceeds the risk threshold.
    Withhold means a percentage of payments or set dollar amounts 
deducted from a physician's service fee, capitation, or salary payment, 
and that may or may not be returned to the physician, depending on 
specific predetermined factors.
    (b) Applicability. The requirements in this section apply to an M+C 
organization and any of its subcontracting arrangements that utilize a 
physician incentive plan in their payment arrangements with individual 
physicians or physician groups. Subcontracting arrangements may include 
an intermediate entity, which includes but is not limited to, an 
individual practice association that contracts with one or more 
physician groups or any other organized group such as those specified in 
Sec. 422.4.
    (c) Basic requirements. Any physician incentive plan operated by an 
M+C organization must meet the following requirements:
    (1) The M+C organization makes no specific payment, directly or 
indirectly, to a physician or physician group as an inducement to reduce 
or limit medically necessary services furnished to any particular 
enrollee. Indirect payments may include offerings of monetary value 
(such as stock options or waivers of debt) measured in the present or 
future.
    (2) If the physician incentive plan places a physician or physician 
group at substantial financial risk (as determined under paragraph (d) 
of this section) for services that the physician or physician group does 
not furnish itself, the M+C organization must assure that all physicians 
and physician groups at substantial financial risk have either aggregate 
or per-patient stop-loss protection in accordance with paragraph (f) of 
this section, and conduct periodic surveys in accordance with paragraph 
(h) of this section.
    (3) For all physician incentive plans, the M+C organization provides 
to CMS the information specified in Sec. 422.210.
    (d) Determination of substantial financial risk--(1) Basis. 
Substantial financial risk occurs when risk is based on the use or costs 
of referral services, and that risk exceeds the risk threshold. Payments 
based on other factors, such as quality of care furnished, are not 
considered in this determination.
    (2) Risk threshold. The risk threshold is 25 percent of potential 
payments.
    (3) Arrangements that cause substantial financial risk. The 
following incentive arrangements cause substantial financial risk within 
the meaning of this section, if the physician's or physician group's 
patient panel size is not greater than 25,000 patients, as shown in the 
table at paragraph (f)(2)(iii) of this section:
    (i) Withholds greater than 25 percent of potential payments.
    (ii) Withholds less than 25 percent of potential payments if the 
physician or physician group is potentially liable for amounts exceeding 
25 percent of potential payments.
    (iii) Bonuses that are greater than 33 percent of potential payments 
minus the bonus.
    (iv) Withholds plus bonuses if the withholds plus bonuses equal more 
than 25 percent of potential payments. The threshold bonus percentage 
for a particular withhold percentage may be calculated using the 
formula--Withhold % = -0.75 (Bonus %) +25%.
    (v) Capitation arrangements, if--
    (A) The difference between the maximum potential payments and the 
minimum potential payments is more than

[[Page 870]]

25 percent of the maximum potential payments;
    (B) The maximum and minimum potential payments are not clearly 
explained in the contract with the physician or physician group.
    (vi) Any other incentive arrangements that have the potential to 
hold a physician or physician group liable for more than 25 percent of 
potential payments.
    (e) Prohibition for private M+C fee-for-service plans. An M+C fee-
for-service plan may not operate a physician incentive plan.
    (f) Stop-loss protection requirements--(1) Basic rule. The M+C 
organization must assure that all physicians and physician groups at 
substantial financial risk have either aggregate or per-patient stop-
loss protection in accordance with the following requirements:
    (2) Specific requirements. (i) Aggregate stop-loss protection must 
cover 90 percent of the costs of referral services that exceed 25 
percent of potential payments.
    (ii) For per-patient stop-loss protection if the stop-loss 
protection provided is on a per-patient basis, the stop-loss limit 
(deductible) per patient must be determined based on the size of the 
patient panel and may be a combined policy or consist of separate 
policies for professional services and institutional services. In 
determining patient panel size, the patients may be pooled in accordance 
with paragraph (g) of this section.
    (iii) Stop-loss protection must cover 90 percent of the costs of 
referral services that exceed the per patient deductible limit. The per-
patient stop-loss deductible limits are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                 Separate           Separate
                       Panel size                         Single combined     institutional       professional
                                                             deductible         deductible         deductible
----------------------------------------------------------------------------------------------------------------
1-1,000................................................             $6,000            $10,000             $3,000
1,001-5,000............................................             30,000             40,000             10,000
5,001-8,000............................................             40,000             60,000             15,000
8,001-10,000...........................................             75,000            100,000             20,000
10,001-25,000..........................................            150,000            200,000             25,000
25,000......................................              (\1\)              (\1\)              (\1\)
----------------------------------------------------------------------------------------------------------------
\1\ None.

    (g) Pooling of patients. Any entity that meets the pooling 
conditions of this section may pool commercial, Medicare, and Medicaid 
enrollees or the enrollees of several M+C organizations with which a 
physician or physician group has contracts. The conditions for pooling 
are as follows:
    (1) It is otherwise consistent with the relevant contracts governing 
the compensation arrangements for the physician or physician group.
    (2) The physician or physician group is at risk for referral 
services with respect to each of the categories of patients being 
pooled.
    (3) The terms of the compensation arrangements permit the physician 
or physician group to spread the risk across the categories of patients 
being pooled.
    (4) The distribution of payments to physicians from the risk pool is 
not calculated separately by patient category.
    (5) The terms of the risk borne by the physician or physician group 
are comparable for all categories of patients being pooled.
    (h) Periodic surveys of current and former enrollees. An M+C 
organization must conduct periodic surveys of current and former 
enrollees where substantial financial risk exists. These periodic 
surveys must--
    (1) Include either a sample of, or all, current Medicare/Medicaid 
enrollees in the M+C organization and individuals disenrolled in the 
past 12 months for reasons other than--
    (i) The loss of Medicare or Medicaid eligibility;
    (ii) Relocation outside the M+C organization's service area;
    (iii) For failure to pay premiums or other charges;
    (iv) For abusive behavior; and
    (v) Retroactive disenrollment.
    (2) Be designed, implemented, and analyzed in accordance with 
commonly

[[Page 871]]

accepted principles of survey design and statistical analysis;
    (3) Measure the degree of enrollees/disenrollees' satisfaction with 
the quality of the services provided and the degree to which the 
enrollees/disenrollees have or had access to the services provided under 
the M+C organization; and
    (4) Be conducted no later than 1 year after the effective date of 
the M+C organization's contract and at least annually thereafter.
    (i) Sanctions. An M+C organization that fails to comply with the 
requirements of this section is subject to intermediate sanctions under 
subpart O of this part.

[63 FR 35085, June 26, 1998, as amended at 65 FR 40325, June 29, 2000]



Sec. 422.210  Disclosure of physician incentive plans

    (a) Disclosure to CMS--(1) Basic requirement. Each M+C organization 
must provide to CMS descriptive information about its physician 
incentive plan in sufficient detail to enable CMS to determine whether 
that plan complies with the requirements of Sec. 422.208. Reporting 
should be on the CMS PIP Disclosure Form (OMB No. 0938-0700).
    (2) Content. The information must include at least the following:
    (i) Whether services not furnished by the physician or physician 
group are covered by the incentive plan.
    (ii) The type or types of incentive arrangements, such as, 
withholds, bonus, capitation.
    (iii) The percent of any withhold or bonus the plan uses.
    (iv) Assurance that the physicians or physician group has adequate 
stop-loss protection, and the amount and type of stop-loss protection.
    (v) The patient panel size and, if the plan uses pooling, the 
pooling method.
    (vi) If the M+C organization is required to conduct enrollee 
surveys, a summary of the survey results.
    (3) When disclosure must be made to CMS. An M+C organization must 
disclose annually to CMS the physician incentive arrangements that are 
effective at the start of each year. In addition, CMS does not approve 
an M+C organization's application for a contract unless the M+C 
organization discloses the physician incentive arrangements effective 
for that contract.
    (b) Disclosure to Medicare beneficiaries--Basic requirement. An M+C 
organization must provide the following information to any Medicare 
beneficiary who requests it:
    (1) Whether the M+C organization uses a physician incentive plan 
that affects the use of referral services.
    (2) The type of incentive arrangement.
    (3) Whether stop-loss protection is provided.
    (4) If the M+C organization was required to conduct a survey, a 
summary of the survey results.



Sec. 422.212  Limitations on provider indemnification.

    An M+C organization may not contract or otherwise provide, directly 
or indirectly, for any of the following individuals, organizations, or 
entities to indemnify the organization against any civil liability for 
damage caused to an enrollee as a result of the M+C organization's 
denial of medically necessary care:
    (a) A physician or health care professional.
    (b) Provider of services.
    (c) Other entity providing health care services.
    (d) Group of such professionals, providers, or entities.



Sec. 422.214  Special rules for services furnished by noncontract providers.

    (a) Services furnished by non-section 1861(u) providers. (1) Any 
provider (other than a provider of services as defined in section 
1861(u) of the Act) that does not have in effect a contract establishing 
payment amounts for services furnished to a beneficiary enrolled in an 
M+C coordinated care plan or M+C private fee-for-service plan must 
accept, as payment in full, the amounts that the provider could collect 
if the beneficiary were enrolled in original Medicare.
    (2) Any statutory provisions (including penalty provisions) that 
apply to payment for services furnished to a beneficiary not enrolled in 
an M+C plan also apply to the payment described in paragraph (a)(1) of 
this section.

[[Page 872]]

    (b) Services furnished by section 1861(u) providers of service. Any 
provider of services as defined in section 1861(u) of the Act that does 
not have in effect a contract establishing payment amounts for services 
furnished to a beneficiary enrolled in an M+C coordinated care plan or 
M+C private fee-for-service plan must accept as payment in full the 
amounts (less any payments under Secs. 412.105(g) and 413.86(d)) of this 
chapter that it could collect if the beneficiary were enrolled in 
original Medicare. (Section 412.105(g) concerns indirect medical 
education payment to hospitals for managed care enrollees. Section 
413.86(d) concerns calculating payment for direct graduate medical 
education costs.)

[63 FR 35085, June 26, 1998, as amended at 65 FR 40325, June 29, 2000]



Sec. 422.216  Special rules for M+C private fee-for-service plans.

    (a) Payment to providers--(1) Payment rate. (i) The M+C organization 
must establish uniform payment rates for items and services that apply 
to all contracting providers, regardless of whether the contract is 
signed or deemed under paragraph (f) of this section.
    (ii) Contracting providers must be reimbursed on a fee-for-service 
basis.
    (iii) The M+C organization must make information on its payment 
rates available to providers that furnish services that may be covered 
under the M+C private fee-for-service plan.
    (2) Payment to contract providers. For each service, the M+C 
organization pays a contract provider (including one deemed to have a 
contract) an amount that is equal to the payment rate under paragraph 
(a)(1) of this section minus any applicable cost-sharing.
    (3) Noncontract providers. The organization pays for services of 
noncontract providers in accordance with Sec. 422.100(b)(2).
    (4) Service furnished by providers of service. Any provider of 
services as defined in section 1861(u) of the Act that does not have in 
effect a contract establishing payment mounts for services furnished to 
a beneficiary enrolled in an M+C private fee-for-service plan must 
accept as payment in full the amounts (less any payments under 
Secs. 412.105(g) and 413.86(d) of this chapter) that it could collect if 
the beneficiary were enrolled in original Medicare.
    (b) Charges to enrollees--(1) Contract providers. (i) Contract 
providers and ``deemed'' contract providers may charge enrollees no more 
than the cost-sharing and, subject to the limit in paragraph (b)(1)(ii) 
of this section, balance billing amounts that are permitted under the 
plan, and these amounts must be the same for ``deemed'' contract 
providers as for those that have signed contracts in effect.
    (ii) The organization may permit balance billing no greater than 15 
percent of the payment rate established under paragraph (a)(1) of this 
section.
    (iii) The M+C organization must specify the amount of cost-sharing 
and balance billing in its contracts with providers and these amounts 
must be the same for ``deemed'' contract providers as for those that 
have signed contracts in effect.
    (iv) The M+C organization is subject to intermediate sanctions under 
Sec. 422.752(a)(7), under the rules in subpart O of this part, if it 
fails to enforce the limit specified in paragraph (b)(1)(i) of this 
section.
    (2) Noncontract providers. A noncontract provider may not collect 
from an enrollee more than the cost-sharing established by the M+C 
private fee-for-service plan as specified in Sec. 422.308(b), unless the 
provider has opted out of Medicare as described in part 405, subpart D 
of this chapter.
    (c) Enforcement of limit--(1) Contract providers. An M+C 
organization that offers an M+C fee-for-service plan must enforce the 
limit specified in paragraph (b)(1) of this section.
    (2) Noncontract providers. An M+C organization that offers an M+C 
private fee-for-service plan must monitor the amount collected by 
noncontract providers to ensure that those amounts do not exceed the 
amounts permitted to be collected under paragraph (b)(2) of this 
section, unless the provider has opted out of Medicare as described in 
part 405, subpart D of this chapter. The M+C organization must develop 
and

[[Page 873]]

document violations specified in instructions and must forward 
documented cases to CMS.
    (d) Information on enrollee liability--(1) General information. An 
M+C organization that offers an M+C fee-for-service plan must provide to 
plan enrollees, for each claim filed by the enrollee or the provider 
that furnished the service, an appropriate explanation of benefits. The 
explanation must include a clear statement of the enrollee's liability 
for deductibles, coinsurance, copayment, and balance billing.
    (2) Advance notice for hospital services. In its terms and 
conditions of payment to hospitals, the M+C organization must require 
the hospital, if it imposes balance billing, to provide to the enrollee, 
before furnishing any services for which balance billing could amount to 
not less than $500--
    (i) Notice that balance billing is permitted for those services;
    (ii) A good faith estimate of the likely amount of balance billing, 
based on the enrollees presenting condition; and
    (iii) The amount of any deductible, coinsurance, and copayment that 
may be due in addition to the balance billing amount.
    (e) Coverage determinations. The M+C organization must make coverage 
determinations in accordance with subpart M of this part.
    (f) Rules describing deemed contract providers. Any provider 
furnishing health services, except for emergency services furnished in a 
hospital pursuant to Sec. 489.24 of this chapter, to an enrollee in an 
M+C private fee-for-service plan, and who has not previously entered 
into a contract or agreement to furnish services under the plan, is 
treated as having a contract in effect and is subject to the limitations 
of this section that apply to contract providers if the following 
conditions are met:
    (1) The services are covered under the plan and are furnished--
    (i) To an enrollee of an M+C fee-for-service plan; and
    (ii) Provided by a provider including a provider of services (as 
defined in section 1861(u) of the Act) that does not have in effect a 
signed contract with the M+C organization.
    (2) Before furnishing the services, the provider--
    (i) Was informed of the individual's enrollment in the plan; and
    (ii) Was informed (or given a reasonable opportunity to obtain 
information) about the terms and conditions of payment under the plan, 
including the information described in Sec. 422.202(a)(1).
    (3) The information was provided in a manner that was reasonably 
designed to effect informed agreement and met the requirements of 
paragraphs (g) and (h) of this section.
    (g) Enrollment information. Enrollment information was provided by 
one of the following methods or a similar method:
    (1) Presentation of an enrollment card or other document attesting 
to enrollment.
    (2) Notice of enrollment from CMS, a Medicare intermediary or 
carrier, or the M+C organization itself.
    (h) Information on payment terms and conditions. Information on 
payment terms and conditions was made available through either of the 
following methods:
    (1) The M+C organization used postal service, electronic mail, FAX, 
or telephone to communicate the information to one of the following:
    (i) The provider.
    (ii) The employer or billing agent of the provider.
    (iii) A partnership of which the provider is a member.
    (iv) Any party to which the provider makes assignment or reassigns 
benefits.
    (2) The M+C organization has in effect a procedure under which--
    (i) Any provider furnishing services to an enrollee in an M+C 
private fee-for-service plan, and who has not previously entered into a 
contract or agreement to furnish services under the plan, can receive 
instructions on how to request the payment information;
    (ii) The organization responds to the request before the entity 
furnishes the service; and
    (iii) The information the organization provides includes the 
following:
    (A) Billing procedures.
    (B) The amount the organization will pay towards the service.

[[Page 874]]

    (C) The amount the provider is permitted to collect from the 
enrollee.
    (D) The information described in Sec. 422.202(a)(1).
    (3) Announcements in newspapers, journals, or magazines or on radio 
or television are not considered communication of the terms and 
conditions of payment.
    (i) Provider credentialing requirements. Contracts with providers 
must provide that, in order to be paid to provide services to plan 
enrollees, providers must meet the requirements specified in 
Sec. 422.204(a)(1) and (a)(1)(iii).

[63 FR 35085, June 26, 1998, as amended at 65 FR 40325, June 29, 2000]



Sec. 422.220  Exclusion of services furnished under a private contract.

    An M+C organization may not pay, directly or indirectly, on any 
basis, for services (other than emergency or urgently needed services as 
defined in Sec. 422.2) furnished to a Medicare enrollee by a physician 
(as defined in section 1861(r)(1) of the Act) or other practitioner (as 
defined in section 1842(b)(18)(C) of the Act) who has filed with the 
Medicare carrier an affidavit promising to furnish Medicare-covered 
services to Medicare beneficiaries only through private contracts under 
section 1802(b) of the Act with the beneficiaries. An M+C organization 
must pay for emergency or urgently needed services furnished by a 
physician or practitioner who has not signed a private contract with the 
beneficiary.



          Subpart F--Payments to Medicare+Choice Organizations

    Source: 63 FR 35090, June 26, 1998, unless otherwise noted.



Sec. 422.249  Terminology.

    In this subpart--
    (a) The terms ``per capita rate'' and ``capitation rate'' (see 
Sec. 422.252) are used interchangeably; and
    (b) In the term ``area-specific,'' ``area'' refers to any of the 
payment areas described in Sec. 422.250(c).



Sec. 422.250  General provisions.

    (a) Monthly payments--(1) General rule. Except as provided in 
paragraphs (a)(2) or (f) of this section, CMS makes advance monthly 
payments equal to \1/12\th of the annual M+C capitation rate for the 
payment area described in paragraph (c) of this section adjusted for 
such demographic risk factors as an individual's age, disability status, 
sex, institutional status, and other such factors as it determines to be 
appropriate to ensure actuarial equivalence. Effective January 1, 2000, 
CMS adjusts for health status as provided in Sec. 422.256(c). When the 
new risk adjustment is implemented, \1/12\th of the annual capitation 
rate for the payment area described in paragraph (c) of this section 
will be adjusted by the risk adjustment methodology under 
Sec. 422.256(d).
    (2) Special rules--(i) Enrollees with end-stage renal disease. (A) 
For enrollees determined to have end-stage renal disease (ESRD), CMS 
establishes special rates that are determined under an actuarially 
equivalent approach to that used in establishing the rates under 
original Medicare.
    (B) CMS reduces the payment rate for each renal dialysis treatment 
by the same amount that the Secretary is authorized to reduce the amount 
of each composite rate payment for each treatment as set forth in 
section 1881(b)(7) of the Act. These funds are to be used to help pay 
for the ESRD network program in the same manner as similar reductions 
are used in original Medicare.
    (ii) MSA enrollees. For MSA enrollees, CMS makes advanced monthly 
payments as described in paragraph (a)(1) less the amount (if any) 
identified in Sec. 422.262(c)(1)(ii) to be deposited in the M+C MSA. In 
addition, CMS deposits in the M+C MSA the lump sum amounts (if any) 
determined in accordance with Sec. 422.262(c).
    (iii) RFB plan enrollees. For RFB plan enrollees, CMS adjusts the 
capitation payments otherwise determined under this subpart to ensure 
that the payment level is appropriate for the actuarial characteristics 
and experience of these enrollees. Such adjustment can be made on an 
individual or organization basis.
    (b) Adjustment of payments to reflect number of Medicare enrollees--
(1) General

[[Page 875]]

rule. CMS adjusts payments retroactively to take into account any 
difference between the actual number of Medicare enrollees and the 
number on which it based an advance monthly payment.
    (2) Special rules for certain enrollees. (i) Subject to paragraph 
(b)(2)(ii) of this section, CMS may make adjustments, for a period (not 
to exceed 90 days) that begins when a beneficiary elects a group health 
plan (as defined in Sec. 411.101 of this chapter) offered by an M+C 
organization, and ends when the beneficiary is enrolled in an M+C plan 
offered by the M+C organization.
    (ii) CMS does not make an adjustment unless the beneficiary 
certifies that, at the time of enrollment under the M+C plan, he or she 
received from the organization the disclosure statement specified in 
Sec. 422.111.
    (c) Payment areas--(1) General rule. Except as provided in paragraph 
(e) of this section, the M+C payment area is a county or an equivalent 
geographic area specified by CMS.
    (2) Special rule for ESRD enrollees. For ESRD enrollees, the M+C 
payment area is a State or other geographic area specified by CMS.
    (d) Terminology. As used in paragraph (e) of this section, 
``metropolitan statistical area,'' ``consolidated metropolitan 
statistical area,'' and ``primary metropolitan statistical area'' mean 
any areas so designated by the Secretary of Commerce.
    (e) Geographic adjustment of payment areas. For contract years 
beginning after 1999--
    (1) State request. A State's chief executive may request, no later 
than February 1 of any year, a geographic adjustment of the State's 
payment areas for the following calendar year. The chief executive may 
request any of the following adjustments to the payment area specified 
in paragraph (c)(1) of this section:
    (i) A single Statewide M+C payment area.
    (ii) A metropolitan-based system in which all nonmetropolitan areas 
within the State constitute a single payment area and any of the 
following constitutes a separate M+C payment area:
    (A) All portions of each single metropolitan statistical area within 
the State.
    (B) All portions of each primary metropolitan statistical area 
within each consolidated metropolitan statistical area within the State.
    (iii) A consolidation of noncontiguous counties.
    (2) CMS response. In response to the request, CMS makes the payment 
adjustment requested by the chief executive.
    (3) Budget neutrality adjustment for geographically adjusted payment 
areas. If CMS adjusts a State's payment areas in accordance with 
paragraph (e)(2) of this section, CMS at that time, and each year 
thereafter, adjusts the capitation rates so that the aggregate Medicare 
payments do not exceed the aggregate Medicare payments that would have 
been made to all the State's payments areas, absent the geographic 
adjustment.
    (f) Determination and applicability of payment rates. (1) All 
payment rates are annual rates, determined and promulgated no later than 
March 1st, for the following calendar year.
    (2) For purposes of paragraphs (b) and (c) of Sec. 422.252, except 
as provided in Sec. 422.254(e)(4), the ``capitation payment rate for 
1997'' is the rate determined under section 1876(a)(1)(c) of the Act.
    (g) Bonus payments. (1) CMS provides bonus payments to the M+C 
organization(s) that first offers a plan in a previously unserved county 
on or after January 1, 2000 and no later than December 31, 2001. The 
bonus payment amounts equal--
    (i) For the first 12 months after a plan is offered in a previously 
unserved county, 5 percent of the monthly capitation rate otherwise 
payable under this section; and
    (ii) For the subsequent 12 months, 3 percent of the monthly 
capitation rate otherwise payable under this section.
    (2) A previously unserved county is defined as--
    (i) A county in which no M+C plan has been offered;
    (ii) A county in which an M+C plan or plans have been offered, but 
where all M+C organizations offering an M+C plan notified CMS by October 
13, 1999,

[[Page 876]]

that they will no longer offer plans in the county as of January 1, 
2000; or
    (iii) A county in which an M+C plan or plans have been offered, but 
where all M+C organizations offering an M+C plan notified CMS by October 
3, 2000, that they will no longer offer plans in the county as of 
January 1, 2001.
    (3) A plan is considered to be offered when--
    (i) The M+C organization sponsoring the plan has a contract in 
effect to serve beneficiaries in the previously unserved area; and
    (ii) The M+C plan is open for enrollment.

[63 FR 35090, June 26, 1998; 63 FR 52613, Oct. 1, 1998, as amended at 65 
FR 40325, June 29, 2000; 67 FR 13288, Mar. 22, 2002]



Sec. 422.252  Annual capitation rates.

    Subject to the adjustments specified in this subpart, the annual 
capitation rate for a particular payment area is equal to the largest of 
the following:
    (a) Blended capitation rate. The blended capitation rate is the sum 
of--
    (1) The area-specific percentage (specified in Sec. 422.254(a)) for 
the year multiplied by the annual area-specific capitation rate for the 
payment area as determined under Sec. 422.254(e) for the year, and
    (2) The national percentage (specified in Sec. 422.254(a)) for the 
year multiplied by the national input-price-adjusted capitation rate for 
the payment area as determined under Sec. 422.254(g) for the year.
    (3) Multiplied by the budget neutrality adjustment factor determined 
under Sec. 422.254(d).
    (b) Minimum amount rate. (1) For 1998--
    (i) For the 50 States and the District of Columbia, the minimum 
amount rate is 12 times $367.
    (ii) For all other jurisdictions the minimum amount rate is the 
lesser of the rate described in (b)(1)(i) or 150 percent of the 
capitation payment rate for 1997.
    (2) For 1999, 2000, and January and February of 2001, the minimum 
amount rate is the minimum amount rate for the preceding year, increased 
by the national per capita growth percentage (specified in 
Sec. 422.254(b)) for the year.
    (3) For March through December, 2001--
    (i) The minimum amount rate for any area in a metropolitan 
statistical area within the 50 States and the District of Columbia with 
a population of more than 250,000 is $525;
    (ii) For any other area within the 50 States, it is $475; or
    (iii) For any area outside the 50 States and the District of 
Columbia, it is not more than 120 percent of the minimum amount rates 
for CY 2000.
    (4) For 2002 and each succeeding year, the minimum amount rate is 
the minimum amount for the preceding year, increased by the national per 
capita percentage (specified in Sec. 422.252(b)) for the year.
    (c) Minimum percentage increase rate. (1) For 1998, the minimum 
percentage increase rate is 102 percent of the annual capitation rate 
for 1997.
    (2) For 1999, 2000, and January and February of 2001, the minimum 
percentage increase is 102 percent of the annual Medicare+Choice 
capitation rate for the preceding year.
    (3) For March through December of 2001, the minimum percentage 
increase is 103 percent of the annual Medicare+Choice capitation rate 
for 2000.
    (4) For 2002, and for each succeeding year, the minimum percentage 
increase is 102 percent of the annual Medicare+Choice capitation rate 
for the preceding year.

[63 FR 35090, June 26, 1998, as amended at 67 FR 13288, Mar. 22, 2002]



Sec. 422.254  Calculation and adjustment factors.

    The following are the factors used in calculating the per capita 
payment rates:
    (a) Area-specific and national percentages. For purposes of 
Sec. 422.252(a)(1), the area-specific percentage and the national 
percentage, for each year, are as follows:

------------------------------------------------------------------------
                                                     Area-
                                                   specific    National
------------------------------------------------------------------------
For 1998........................................          90          10
For 1999........................................          82          18
For 2000........................................          74          26
For 2001........................................          66          34
For 2002........................................          58          42
For years after 2002............................          50          50
------------------------------------------------------------------------


[[Page 877]]

    (b) National per capita growth percentage. For purposes of 
Sec. 422.252(a)(2),
    (1) The national per capita growth percentage for a year is CMS's 
estimate of the rate of growth in per capita expenditures, reduced by 
the percentage points specified in paragraph (b)(2) of this section for 
the year. CMS may make separate estimates for aged enrollees, disabled 
enrollees, and enrollees who have ESRD.
    (2) The percentage points that CMS uses to reduce its estimates are 
as follows:
    (i) For 1998, 0.8 percentage points.
    (ii) For years 1999 through 2001, 0.5 percentage points.
    (iii) For 2002, 0.3 percentage points.
    (iv) For years after 2002, 0 percentage points.
    (c) Medical education payment adjustments. For purposes of paragraph 
(e)(2) the medical education payment adjustments are amounts that CMS 
estimates were payable to teaching hospitals during 1997 for--
    (1) the indirect costs of medical education under section 
1886(d)(5)(B) of the Act; and
    (2) The direct costs of graduate medical education under section 
1886(h) of the Act.
    (d) General budget neutrality factor. For each year, CMS applies a 
budget neutrality factor to the blended capitation rates under 
Sec. 422.252(a) so that the estimated aggregate payments made under this 
part equal the estimated aggregate payments that would have been made if 
based entirely on area-specific capitation rates.
    (e) Annual Area-specific capitation rate (1) Basic rule. Subject to 
the provisions of paragraphs (e)(2) and (e)(3) of this section, the 
annual area-specific capitation rate for a particular payment area is--
    (i) For 1998, subject to paragraph (e)(4) of this section, the per 
capita rate determined for that area for 1997 under section 
1876(a)(1)(c) of the Act, increased by the national per capita growth 
percentage for 1998; and
    (ii) For a subsequent year, the area-specific capitation rate 
determined for the previous year, increased by the national per capita 
growth percentage for the year.
    (2) Exclusion of medical education costs. In calculating the area-
specific capitation rates, the following percentages of the amounts 
estimated by CMS under Sec. 422.254(c) as medical education payment 
adjustments to hospitals, are excluded:

For 1998.................................  20 percent.
For 1999.................................  40 percent.
For 2000.................................  60 percent.
For 2001.................................  80 percent.
For years after 2001.....................  100 percent.
 

    (3) Payments under the State hospital reimbursement system. To the 
extent that CMS estimates that a 1997 per capita rate reflects payments 
to hospitals under section 1814(b)(3) of the Act, CMS makes a payment 
adjustment that is comparable to the adjustment that would have been 
made under paragraph (e)(2) of this section if the hospitals had not 
been reimbursed under section 1814(b)(3) of the Act.
    (4) Areas with highly variable per capita rates. With respect to a 
payment area for which the per capita rate for 1997 varies by more than 
20 percent from the per capita rate for 1996, CMS may substitute for the 
1997 rate a rate that is more representative of the costs of the 
enrollees in the area.
    (f) National standardized annual capitation rate. The national 
standardized annual capitation rate is equal to--
    (1) The sum, for all payment areas, of the products of--
    (i) The annual area-specific capitation rate and
    (ii) The average number of Medicare beneficiaries residing in the 
area multiplied by the average of the risk-factor weights used to adjust 
payments under Sec. 422.256(c);
    (2) Divided by the sum, for all payment areas, of the products 
specified in paragraph (f)(1)(ii) of this section for all payment areas.
    (g) The input-price-adjusted annual national capitation rate--(1) 
General rule. The input-price-adjusted annual national capitation rate 
for a M+C payment area for a year is equal to the sum, for all the types 
of Medicare services (as classified by CMS), of the product (for each 
service) of--
    (i) The national standardized annual M+C capitation rate (determined 
under paragraph (f) of this section) for the year;

[[Page 878]]

    (ii) The proportion of such rates for the year which is attributable 
to such type of services; and
    (iii) An index that reflects (for that year and that type of 
services) the relative input price of such services in the area compared 
to the national average input price for such services.
    (2) CMS may, subject to the special rules for 1988, use indices that 
are used in applying or updating national payment rates for particular 
areas and localities.
    (3) Special rules for 1988. In applying this paragraph for 1998--
    (i) Medicare services are classified as Part A and Part B services;
    (ii) The proportion attributable to Part A services is the ratio 
(expressed as a percentage) of the national average per capita rate of 
payment for Part A services for 1997 to the national average per capita 
rate of payment for Part A and Part B services for that year;
    (iii) The proportion attributed to part B services is 100 percent 
minus the ratio described in paragraph (g)(3)(ii) of this section;
    (iv) For Part A services, 70 percent of the payments attributable to 
those services are adjusted by the index used under section 
1886(d)(3)(E) of the Act to adjust payment rates for relative hospital 
wage levels for hospitals located in the particular payment area; and
    (v) For part B services--
    (A) 66 percent of payments attributable to those services are 
adjusted by the index of the geographic area factors under section 
1848(e) of the Act used to adjust payment rates for physician services 
in the particular payment area; and
    (B) Of the remaining 34 percent, 40 percent is adjusted by the index 
specified in paragraph (g)(3)(iv) of this section.

[63 FR 35090, June 26, 1998, as amended at 65 FR 40326, June 29, 2000]



Sec. 422.256  Adjustments to capitation rates and aggregate payments.

    (a) Adjustment for over or under projection of national per capita 
growth percentages. (1) Beginning with rates for 1999, CMS adjusts all 
area-specific and national capitation rates for the previous year to 
reflect any differences between the projected national per capita growth 
percentages for that year and previous years, and the current estimates 
of those percentages for such years.
    (2) Beginning with rates for 2000, CMS also adjusts the minimum 
amount rate (calculated under Sec. 422.252(b)) in the same manner.
    (b) Adjustment for national coverage determination (NCD) services. 
If CMS determines that the cost of furnishing an NCD service is 
``significant,'' CMS adjusts capitation rates for the next calendar year 
to take account of the cost of that service. Until the new capitation 
rates are in effect, the M+C organization is paid for the ``significant 
cost'' service on a fee-for-service basis as provided under section 
422.105(b).
    (c) Risk adjustment: General rule. Capitation payments are adjusted 
for age, gender, institutional status, and other appropriate factors, 
including health status.
    (d) Risk adjustment: Health status--(1) Data collection. To adjust 
for health status, CMS applies a risk factor based on data obtained in 
accordance with Sec. 422.257.
    (2) Implementation. CMS applies the risk adjustment factor as 
follows:
    (i) For payments beginning January 1, 2001 and ending December 31, 
2003, CMS applies a risk factor that incorporates inpatient hospital 
encounter data. The risk factor will comprise 10 percent of the monthly 
payment.
    (ii) For payments beginning January 1, 2000 and ending December 31, 
2001 only, the risk factor comprises 100 percent of the monthly payment 
for individuals with a qualifying inpatient diagnosis of congestive 
heart failure who are enrolled in a coordinated care plan that is the 
only coordinated care plan offered on January 1, 2001 in the area where 
the individual lives.
    (iii) For payments beginning January 1, 2004, and for all succeeding 
years, CMS applies a risk factor that incorporates inpatient hospital 
and ambulatory encounter data. This factor is phased in as follows:
    (A) 30 percent in 2004;
    (B) 50 percent in 2005;
    (C) 75 percent 2006; and
    (D) 100 percent in 2007 and succeeding years.

[[Page 879]]

    (3) Uniform application. Except as provided for M+C RFB plans under 
Sec. 422.250(a)(2)(iii), CMS applies this adjustment factor to all types 
of plans.

[63 FR 35090, June 26, 1998, as amended at 67 FR 13288, Mar. 22, 2002]



Sec. 422.257  Encounter data.

    (a) Data collection: Basic rule. Each M+C organization must submit 
to CMS (in accordance with CMS instructions) all data necessary to 
characterize the context and purposes of each encounter between a 
Medicare enrollee and a provider, supplier, physician, or other 
practitioner.
    (b) Types of service and timing of submittal. M+C organizations must 
submit data as follows:
    (1) Beginning on a date determined by CMS, inpatient hospital care 
data for all discharges that occur on or after July 1, 1997.
    (2) CMS will provide advance notice to M+C organizations to collect 
and submit data for services that occur on or after July 1, 1998, as 
follow:
    (i) Physician, outpatient hospital, SNF, and HHA data beginning no 
earlier than October 1, 1999; and
    (ii) All other data CMS deems necessary beginning no earlier than 
October 1, 2000.
    (c) Sources and extent of data. (1) To the extent required by CMS, 
the data must account for services covered under the original Medicare 
program, for Medicare covered services for which Medicare is not the 
primary payor, or for other additional or supplemental benefits that the 
M+C organization may provide.
    (2) The data must account separately for each provider, supplier, 
physician, or other practitioner that would be permitted to bill 
separately under the Medicare fee-for-service program, even if they 
participate jointly in the same encounter.
    (d) Other data requirements. (1) M+C organizations must submit data 
that conform to the requirements for equivalent data for Medicare fee-
for-service when appropriate, and to all relevant national standards.
    (2) The data must be submitted electronically to the appropriate CMS 
contractor.
    (3) M+C organizations must obtain the encounter data required by CMS 
from the provider, supplier, physician, or other practitioner that 
rendered the services.
    (4) M+C organizations may include in their contracts with providers, 
suppliers, physicians, and other practitioners, provisions that require 
submission of complete and accurate encounter data as required by CMS. 
These provisions may include financial penalties for failure to submit 
complete data, or for failure to submit data that conform to the 
requirements for equivalent data for Medicare fee-for-service.
    (e) Validation of data. M+C organizations and their providers and 
practitioners will be required to submit medical records for the 
validation of encounter data, as prescribed by CMS.
    (f) Use of data. CMS uses the data obtained under this section to 
determine the risk adjustment factor that it applies to annual 
capitation rates under Sec. 422.256(c). CMS may also use the data for 
other purposes.
    (g) Deadlines for submission of encounter data. Risk adjustment 
factors for each payment year are based on encounter data submitted for 
services furnished during the 12 month period ending 6 months before to 
the payment year (for example, risk adjustment factors for CY 2000 are 
based on data for services furnished during the period July 1, 1998 
through June 30, 1999).
    (1) The annual deadline for encounter data submission is September 
10 for encounter data reflecting services furnished during the 12 month 
period ending the prior June 30 (for example, the deadline for 
submission of data for the period July 1, 1998 through June 30, 1999 is 
September 10, 1999).
    (2) CMS allows a reconciliation process to account for late data 
submissions. CMS continues to accept encounter data submitted after the 
September 10 deadline until June 30 of the payment year (for example, 
until June 30, 2000 for data from the period July 1, 1998 through June 
30, 1999). After the payment year is completed, CMS recalculates the 
risk factors for affected individuals to determine if adjustments to 
payments are necessary.

[63 FR 35090, June 26, 1998, as amended at 65 FR 40326, June 29, 2000]

[[Page 880]]



Sec. 422.258  Announcement of annual capitation rates and methodology changes.

    (a) Capitation rates. (1) No later than March 1 of each year, CMS 
announces to M+C organizations and other interested parties the 
capitation rates for the following calendar year.
    (2) CMS includes in the announcement a description of the risk and 
other factors and explains the methodology in sufficient detail to 
enable M+C organizations to compute monthly adjusted capitation rates 
for individuals in each of its payment areas.
    (b) Advance notice of changes in methodology. (1) No later than 
January 15 of each year, CMS notifies M+C organizations of changes it 
proposes to make in the factors and the methodology it used in the 
previous determination of capitation rates.
    (2) The M+C organizations have 15 days to comment on the proposed 
changes.



Sec. 422.262  Special rules for beneficiaries enrolled in M+C MSA plans.

    (a) Establishment and designation of medical savings account (MSA). 
A beneficiary who elects coverage under an M+C MSA plan--
    (1) Must establish an M+C MSA with a trustee that meets the 
requirements of paragraph (b) of this section; and
    (2) If he or she has more than one M+C MSA, designate the particular 
account to which payments under the M+C MSA plan are to be made.
    (b) Requirements for MSA trustees. An entity that acts as a trustee 
for an M+C MSA must--
    (1) Register with CMS;
    (2) Certify that it is a licensed bank, insurance company, or other 
entity qualified, under sections 408(a)(2) or 408(h) of the IRS Code, to 
act as a trustee of individual retirement accounts;
    (3) Agree to comply with the M+C MSA provisions of section 138 of 
the IRS Code of 1986; and
    (4) Provide any other information that CMS may require.
    (c) Deposit in the M+C MSA. (1) The payment is calculated as 
follows:
    (i) The monthly M+C MSA premium is compared with \1/12\ of the 
annual capitation rate for the area determined under Sec. 422.252.
    (ii) If the monthly M+C MSA premium is less than \1/12\ of the 
annual capitation rate, the difference is the amount to be deposited in 
the M+C MSA for each month for which the beneficiary is enrolled in the 
MSA plan.
    (2) CMS deposits the full amount to which a beneficiary is entitled 
under paragraph (c)(1)(ii) of this section for the calendar year, 
beginning with the month in which M+C MSA coverage begins.
    (3) If the beneficiary's coverage under the M+C MSA plan ends before 
the end of the calendar year, CMS recovers the amount that corresponds 
to the remaining months of that year.



Sec. 422.264  Special rules for coverage that begins or ends during an inpatient hospital stay.

    (a) Applicability. This section applies to inpatient services in a 
``subsection (d) hospital'' as defined in section 1886(d)(1)(B) of the 
Act.
    (b) Coverage that begins during an inpatient hospital stay. If 
coverage under an M+C plan offered by an M+C organization begins while 
the beneficiary is an inpatient in a subsection (d) hospital--
    (1) Payment for inpatient services until the date of the 
beneficiary's discharge is made by the previous M+C organization or 
original Medicare, as appropriate.
    (2) The M+C organization offering the newly-elected M+C plan is not 
responsible for the inpatient services until the date after the 
beneficiary's discharge; and
    (3) The M+C organization offering the newly-elected M+C plan is paid 
the full amount otherwise payable under this subpart.
    (c) Coverage that ends during an inpatient hospital stay. If 
coverage under an M+C plan offered by an M+C organization ends while the 
beneficiary is an inpatient in a subsection (d) hospital--
    (1) The M+C organization is responsible for the inpatient services 
until the date of the beneficiary's discharge;
    (2) Payment for those services during the remainder of the stay is 
not made

[[Page 881]]

by original Medicare or by any succeeding M+C organization offering a 
newly-elected M+C plan; and
    (3) The M+C organization that no longer provides coverage receives 
no payment for the beneficiary for the period after coverage ends.



Sec. 422.266  Special rules for hospice care.

    (a) Information. An M+C organization that has a contract under 
subpart K of this part must inform each Medicare enrollee eligible to 
elect hospice care under section 1812(d)(1) of the Act about the 
availability of hospice care (in a manner that objectively presents all 
available hospice providers, including a statement of any ownership 
interest in a hospice held by the M+C organization or a related entity) 
if--
    (1) A Medicare hospice program is located within the plan's service 
area; or
    (2) It is common practice to refer patients to hospice programs 
outside that area.
    (b) Enrollment status. Unless the enrollee disenrolls from the M+C 
plan, a beneficiary electing hospice continues his or her enrollment in 
the M+C plan and is entitled to receive, through the M+C plan, any 
benefits other than those that are the responsibility of the Medicare 
hospice.
    (c) Payment. During the time the hospice election is in effect, 
CMS's monthly capitation payment to the M+C organization is reduced to 
an amount equal to the adjusted excess amount determined under 
Sec. 422.312. In addition, CMS pays through the original Medicare 
program (subject to the usual rules of payment)--
    (1) The hospice program for hospice care furnished to the Medicare 
enrollee; and
    (2) The M+C organization, provider or supplier for other Medicare-
covered services furnished to the enrollee.



Sec. 422.268  Source of payment and effect of election of the M+C plan election on payment.

    (a) Source of payments. Payments under this subpart, to M+C 
organizations or M+C MSAs, are made from the Federal Hospital Insurance 
Trust Fund or the Supplementary Medical Insurance Trust Fund. CMS 
determines the proportions to reflect the relative weight that benefits 
under Part A, and benefits under Part B represents of the actuarial 
value of the total benefits under title XVIII of the Act.
    (b) Payments to the M+C organization. Subject to Secs. 412.105(g) 
and 413.86(d) of this chapter and Secs. 422.109, 422.264, and 422.266, 
CMS's payments under a contract with an M+C organization (described in 
Sec. 422.250) with respect to an individual electing an M+C plan offered 
by the organization are instead of the amounts which (in the absence of 
the contract) would otherwise be payable under original Medicare for 
items and services furnished to the individual.
    (c) Only the M+C organization entitled to payment. Subject to 
Sec. 422.262, 422.264, 422.266, and 422.520 of this part and sections 
1886(d)(11) and 1886(h)(3)(D) of the Act, only the M+C organization is 
entitled to receive payment from CMS under title XVIII of the Act for 
items and services furnished to the individual.

[63 FR 35090, June 26, 1998; 63 FR 52613, Oct. 1, 1998]



Sec. 422.270  Payments to M+C organizations for graduate medical education costs.

    (a) Effective January 1, 1999, Medicare+Choice organizations may 
receive direct graduate medical education payments for the time that 
residents spend in nonhospital provider settings such as freestanding 
clinics, nursing homes, and physicians' offices in connection with 
approved programs.
    (b) Medicare+Choice organizations may receive direct graduate 
medical education payments if all of the following conditions are met:
    (1) The resident spends his or her time assigned to patient care 
activities.
    (2) The Medicare+Choice organization incurs ``all or substantially 
all'' of the costs for the training program in the nonhospital setting 
as defined in Sec. 413.86(b) of this subchapter.
    (3) There is a written agreement between the Medicare+Choice 
organization and the nonhospital site that indicates the Medicare+Choice 
organization will incur the costs of the resident's salary and fringe 
benefits and provide reasonable compensation to

[[Page 882]]

the nonhospital site for teaching activities.
    (c) A Medicare+Choice organization's allowable direct graduate 
medical education costs, subject to the redistribution and community 
support principles specified in Sec. 413.85(c) of this subchapter, 
consist of--
    (1) Residents' salaries and fringe benefits (including travel and 
lodging where applicable); and
    (2) Reasonable compensation to the nonhospital site for teaching 
activities related to the training of medical residents.
    (d) The direct graduate medical education payment is equal to the 
product of--
    (1) The lower of--
    (i) The Medicare+Choice organization's allowable costs per resident 
as defined in paragraph (c) of this section; or
    (ii) The national average per resident amount; and
    (2) Medicare's share, which is equal to the ratio of the number of 
Medicare beneficiaries enrolled to the total number of individuals 
enrolled in the Medicare+Choice organization.
    (e) Direct graduate medical education payments made to 
Medicare+Choice organizations under this section are made from the 
Federal Supplementary Medical Insurance Trust Fund.

[66 FR 3376, Jan. 12, 2001]



                  Subpart G--Premiums and Cost-Sharing

    Source: 63 FR 35093, June 26, 1998, unless otherwise noted.



Sec. 422.300  Basis and scope.

    (a) General. This subpart is based on section 1854 of the Act. It 
sets forth the requirements and limitations for payments by and on 
behalf of Medicare beneficiaries who elect an M+C plan.
    (b) Transition period. For contract periods beginning before January 
1, 2002, CMS applies the following special rules.
    (1) M+C organizations may, with CMS's agreement, modify an M+C plan 
offered prior to January 1, 2002 by--
    (i) Adding benefits at no additional cost to the M+C plan enrollee; 
and
    (ii) Lowering the premiums approved through the ACR process;
    (iii) Lowering other cost-sharing amounts approved through the ACR 
process.
    (2) For contracts beginning on a date other than January 1 
(according to Sec. 422.504(d)), M+C organizations may submit ACRs on a 
date other than July 1 approved by CMS.

[63 FR 35093, June 26, 1998, asa amended at 65 FR 40326, June 29, 2000]



Sec. 422.302  Terminology.

    As used in this subpart, unless specified otherwise--
    Additional revenues are revenues collected or expected to be 
collected from charges for M+C plans offered by an M+C organization in 
excess of costs actually incurred or expected to be incurred. Additional 
revenues would include such things as revenues in excess of expenses of 
an M+C plan, profits, contribution to surplus, risk margins, 
contributions to risk reserves, assessments by a related entity that do 
not represent a direct medical or related administrative cost, and any 
other premium component not reflected in direct medical care costs and 
administrative costs.
    APR stands for the M+C plan's average per capita rates of payment. 
The APR is the average amount the M+C organization estimates CMS will 
pay (without any needed offsets or reductions, such as, those required 
by Sec. 422.250(a)(2)(ii) for M+C MSA plan enrollees) for the period 
covered by the ACR for all of the Medicare beneficiaries electing the 
M+C plan.
    M+C monthly basic beneficiary premium means, with respect to an M+C 
coordinated care plan, the amount authorized to be charged under 
Sec. 422.308(a)(1) for the plan, or, with respect to a M+C private fee-
for-service plan, the amount filed under Sec. 422.306(d)(1).
    M+C monthly supplemental beneficiary premium means, with respect to 
an M+C coordinated care plan, the amount authorized to be charged under 
Sec. 422.308(a)(2) for the M+C plan, or, with respect to an MSA or an 
M+C private fee-for-service plan, the amount filed under 
Sec. 422.306(c)(2) or Sec. 422.306(d)(2).

[[Page 883]]

    M+C monthly MSA premium means, with respect to an M+C plan, the 
amount of such premium filed under Sec. 422.306(c)(1).



Sec. 422.304  Rules governing premiums and cost-sharing.

    (a) Monthly premiums. The monthly premium charged to the beneficiary 
is--
    (1) For an individual enrolled in an M+C plan (other than an M+C MSA 
plan) offered by an M+C organization, the sum of the M+C monthly basic 
beneficiary premium plus the M+C monthly supplemental beneficiary 
premium (if any); or
    (2) For an individual enrolled in an M+C MSA plan offered by an M+C 
organization, the M+C monthly supplemental beneficiary premium (if any).
    (b) Uniformity.--(1) General rule. The M+C monthly basic beneficiary 
premium, the M+C monthly supplemental beneficiary premiums, and the M+C 
monthly MSA premium of an M+C organization may not vary among 
individuals enrolled in an M+C plan (or segment of the plan as provided 
under paragraph (b)(2) of this section). In addition, the M+C 
organization may not vary the level of cost-sharing charged for basic 
benefits or supplemental benefits (if any), among individuals enrolled 
in an M+C plan (or segment of the plan as provided under paragraph 
(b)(2) of this section).
    (2) Segmented service area option. An M+C organization may apply the 
uniformity requirements in paragraph (b)(1) of this section to segments 
of an M+C plan service area (rather than to the entire service area) as 
long as any such segment is composed of one or more M+C payment areas, 
and the information specified under Sec. 422.306 is submitted 
separately, as provided in that section, for each such segment.
    (c) Timing of payments. The M+C organization must permit payments of 
M+C monthly basic and supplemental beneficiary premium on a monthly 
basis and may not terminate coverage for failure to make timely payments 
except as provided in Sec. 422.74(b)(1).
    (d) Monetary inducements prohibited. An M+C organization may not 
provide for cash or other monetary rebates as an inducement for 
enrollment or for any other reason or purpose.

[63 FR 35093, June 26, 1998, asa amended at 65 FR 40326, June 29, 2000]



Sec. 422.306  Submission of proposed premiums and related information.

    (a) General rule. (1) Not later than July 1 of each year, each M+C 
organization and any organization intending to contract as an M+C 
organization in the subsequent year must submit to CMS, in the manner 
and form prescribed by CMS, for each M+C plan (or service area segment, 
under Sec. 422.304(b)(2)) it intends to offer in the following year--
    (i) The information specified in paragraph (b), (c), or paragraph 
(d) of this section for the type of M+C plan involved; and
    (ii) The service area and enrollment capacity (if any).
    (2) If the submission is not complete, timely, or accurate, CMS has 
the authority to impose sanctions under subpart O of this part or may 
choose not to renew the contract.
    (b) Information required for coordinated care plans--(1) Basic 
benefits. For basic benefits, the following information is required:
    (i) The ACR as specified in Sec. 422.310.
    (ii) The M+C monthly basic beneficiary premium.
    (iii) A description of cost-sharing to be imposed under the plan, 
and its actuarial value.
    (iv) A description of any additional benefits to be provided 
pursuant to Sec. 422.312 and the actuarial value determined for those 
benefits.
    (v) Amounts collected in the previous contract period for basic 
benefits.
    (2) Supplemental benefits. For supplemental benefits, the following 
information is required:
    (i) The ACR.
    (ii) The M+C monthly supplemental beneficiary premium.
    (iii) A description of supplemental benefits being offered, the cost 
sharing to be imposed, and their actuarial value.
    (iv) Amounts collected in the previous contract period for 
supplemental benefits.

[[Page 884]]

    (c) Information required for MSA plans. (1) The monthly MSA premium 
for basic benefits.
    (2) The M+C monthly supplementary beneficiary premium for 
supplemental benefits.
    (3) A description of all benefits offered under the M+C MSA plan.
    (4) The amount of the deductible imposed under the plan.
    (5) Amounts collected in the previous contract period for 
supplemental benefits.
    (d) Information required for M+C private fee-for-service plans. (1) 
The information specified under paragraph (b)(1) of this section.
    (2) The amount of the M+C monthly supplemental beneficiary premium.
    (3) A description of all benefits offered under the plan.
    (4) Amounts collected in the previous contract period for basic and 
supplemental benefits.
    (e) CMS review--(1) Basic rule. Except as specified in paragraph 
(e)(2) of this section, CMS reviews and approves or disapproves the 
information submitted under this section.
    (2) Exception. CMS does not review or approve or disapprove the 
following information:
    (i) Any amounts submitted with respect to M+C MSA plans.
    (ii) The M+C monthly basic and supplementary beneficiary premiums 
for M+C private fee-for-service plans.

[63 FR 35093, June 26, 1998, as amended at 65 FR 40326, June 29, 2000]



Sec. 422.308  Limits on premiums and cost sharing amounts.

    (a) Rules for coordinated care plans. (1) For basic benefits, the 
M+C monthly basic beneficiary premium (multiplied by 12) charged, plus 
the actuarial value of the cost-sharing applicable, on average, to 
beneficiaries enrolled under this part may not exceed the annual 
actuarial value of the deductibles and coinsurance that would be 
applicable, on average, to beneficiaries entitled to Medicare Part A and 
enrolled in Medicare Part B if they were not enrollees of an M+C 
organization as determined in the ACR under Sec. 422.310. For those M+C 
plan enrollees that are enrolled in Medicare Part B only, the M+C 
monthly basic beneficiary premium (multiplied by 12) charged, plus the 
actuarial value of the deductibles, coinsurance and copayments 
applicable, on average, to those beneficiaries enrolled under this part 
may not exceed the annual actuarial value of the deductibles and 
coinsurance that would be applicable, on average, to beneficiaries 
enrolled in Medicare Part B if they were not enrollees of an M+C 
organization as determined in the ACR under Sec. 422.310.
    (2) For supplemental benefits, the M+C monthly supplemental 
beneficiary premium (multiplied by 12) charged, plus the actuarial value 
of its cost-sharing, may not exceed the amounts approved in the ACR for 
those benefits, as determined under Sec. 422.310 on an annual basis.
    (3) Coverage of Part A services for Part B-only Medicare enrollees. 
If an M+C organization furnishes coverage of Medicare Part A-type 
services to a Medicare enrollee entitled to Part B only, the M+C plan's 
premium plus the actuarial value of its cost-sharing for these services 
may not exceed the lesser of--
    (i) The APR that is payable for these services for those 
beneficiaries entitled to Part A plus the actuarial value of Medicare 
deductibles and Coinsurance for the services;
    (ii) or the ACR for such services.
    (b) Rule for M+C private fee-for-service plans. (1) The average 
actuarial value of the cost-sharing for basic benefits may not exceed 
the actuarial value of the cost-sharing that would apply, on average, to 
beneficiaries entitled to Medicare Part A and enrolled in Medicare Part 
B if they were not enrolled in an M+C plan as determined in the ACR 
under Sec. 422.310.
    (2) For supplemental benefits, the actuarial value of its cost-
sharing may not exceed the amounts approved in the ACR for those 
benefits, as determined under Sec. 422.310 on an annual basis.
    (c) Special rules for determination of actuarial value. If CMS 
determines that adequate data are not available to determine actuarial 
value under paragraph (a) or (b) of this section, CMS may make the 
determination with respect to all M+C eligible individuals in the same 
geographic area or State or in

[[Page 885]]

the United States, or on the basis of other appropriate data.

[63 FR 35093, June 26, 1998; 63 FR 52614, Oct. 1, 1998]



Sec. 422.309  Incorrect collections of premiums and cost-sharing.

    (a) Definitions. As used in this section--
    (1) Amounts incorrectly collected
    (i) Means amounts that:
    (A) Exceed the limits imposed by Sec. 422.308;
    (B) In the case of a M+C private fee-for-service plan, exceed the 
M+C monthly basic beneficiary premium or the M+C monthly supplemental 
premium submitted under Sec. 422.306; and
    (C) In the case of a M+C MSA plan, exceed the M+C monthly 
supplemental premium submitted under Sec. 422.306 and the deductible for 
basic benefits; and
    (ii) Includes amounts collected from an enrollee who was believed 
not entitled to Medicare benefits but was later found to be entitled.
    (2) Other amounts due are amounts due for services that were--
    (i) Emergency, urgently needed services, or other services obtained 
outside the M+C plan; or
    (ii) Initially denied but, upon appeal, found to be services the 
enrollee was entitled to have furnished by the M+C organization.
    (b) Basic commitments. An M+C organization must agree to refund all 
amounts incorrectly collected from its Medicare enrollees, or from 
others on behalf of the enrollees, and to pay any other amounts due the 
enrollees or others on their behalf.
    (c) Refund methods--(1) Lump-sum payment. The M+C organization must 
use lump-sum payments for the following:
    (i) Amounts incorrectly collected that were not collected as 
premiums.
    (ii) Other amounts due.
    (iii) All amounts due if the M+C organization is going out of 
business or terminating its M+C contract for an M+C plan(s).
    (2) Premium adjustment or lump-sum payment, or both. If the amounts 
incorrectly collected were in the form of premiums, or included premiums 
as well as other charges, the M+C organization may refund by adjustment 
of future premiums or by a combination of premium adjustment and lump-
sum payments.
    (3) Refund when enrollee has died or cannot be located. If an 
enrollee has died or cannot be located after reasonable effort, the M+C 
organization must make the refund in accordance with State law.
    (d) Reduction by CMS. If the M+C organization does not make the 
refund required under this section by the end of the contract period 
following the contract period during which an amount was determined to 
be due an enrollee, CMS reduces the premium the M+C organization is 
allowed to charge an M+C plan enrollee by the amounts incorrectly 
collected or otherwise due. In addition, the M+C organization would be 
subject to sanction under subpart O for failure to refund amounts 
incorrectly collected from M+C plan enrollees.



Sec. 422.310  Adjusted community rate (ACR) approval process.

    (a) General rule. (1) Except with respect to M+C MSA plans, each M+C 
organization must compute a separate ACR for each M+C coordinated care 
or private fee-for-service plan offered to Medicare beneficiaries. In 
computing the ACR, the M+C organization calculates an initial rate (for 
years after 1999, using the methods described in paragraph (b), for 
1999, under Sec. 417.594(b)) that represents the ``commercial premium'' 
the M+C organization would charge its general non-Medicare eligible 
enrollment population for the basic benefits, and any mandatory 
supplemental benefits covered under the M+C plan. The M+C organization 
should also calculate a separate initial rate (using the same approach) 
for each optional supplemental benefit package it offers under an M+C 
plan. For years after 1999 the M+C organization then either adjusts that 
rate by the factors specified in paragraph (c) of this section or 
requests that CMS adjust the rate in accordance with the procedures 
specified in paragraph (c)(6) of this section. For 1999, adjustments are 
made under section 417.594(c). All data submitted as part of the ACR 
process is subject to audit by

[[Page 886]]

CMS or any person or organization designated by CMS.
    (2) To calculate the adjusted excess described in section 422.312, 
the M+C organization or CMS further reduces the rate for Medicare-
covered services by the actuarial value of applicable Medicare 
coinsurance and deductibles.
    (3) Separate ACRs must be calculated for Part A and Part B enrollees 
and Part B-only enrollees for each M+C plan offered, and for each 
optional supplemental benefit option.
    (4) In calculating its initial rate, the M+C organization must 
identify and take into account anticipated revenue collectible from 
other payers for those services for which Medicare is not the primary 
payer as described in Sec. 422.108.
    (5) Except as provided in paragraph (a)(6) of this section, the M+C 
organization must have an adequate accounting system that is accrual 
based and uses generally-accepted accounting principles to develop its 
ACR.
    (6) For M+C organizations that are part of a government entity that 
uses a cash basis of accounting, ACR cost data developed on this basis 
is acceptable. However, only depreciation on capital assets, rather than 
the expenditure for the asset, is acceptable.
    (b) Initial rate calculation for years after 1999. (1) The M+C 
organization's initial rate for each M+C plan is calculated on a 12-
month basis for non-Medicare enrollees, using either, at the M+C 
organization's election--
    (i) A community rating system (as defined in section 1308(8) of the 
PHS Act, other than subparagraph (C)); or
    (ii) A system, approved by CMS, under which the M+C organization 
develops an aggregate premium for each M+C plan for all enrollees of 
that M+C plan that is weighted by the size of the various enrolled 
groups and individuals that compose the M+C organization's enrollment in 
that M+C plan. For purposes of this section, enrolled groups are defined 
as employee groups or other bodies of subscribers (including individual 
subscribers) that enroll in the M+C plan on a premium basis.
    (2) Regardless of which method the M+C organization uses to 
calculate its initial rate, the initial rate must be equal to the 
premium the M+C organization would charge its non-Medicare enrollees on 
a yearly basis for services included in the M+C plan.
    (3) Except as provided in paragraph (b)(4) of this section, the M+C 
organization must identify in its initial rate calculation for an M+C 
plan, the following components whose rates must be consistent with rates 
used by the M+C organization in calculating premiums for non-Medicare 
enrollees:
    (i) Direct medical care.
    (ii) Administration.
    (iii) Additional Revenues.
    (iv) Enrollee cost sharing (for example, deductibles, coinsurance, 
or copayments) for Medicare-covered services and for additional and 
supplemental benefits.
    (4) An M+C organization that does not usually separate its premium 
components as described in paragraph (b)(3) of this section may 
calculate its initial rate with the methods it uses for its other 
enrolled groups if the M+C organization provides CMS with the 
documentation necessary to support any adjustments the M+C organization 
makes to the initial rate in accordance with paragraph (c)(5) of this 
section.
    (5) The initial rate calculation must not carry forward any losses 
experienced by the M+C organization during prior contract periods. The 
M+C organization must submit supporting documentation to assure CMS that 
ACR values do not include past losses but only premiums for covered 
services, additional services, and supplemental benefits for the 
upcoming 12-month period.
    (c) Adjustment factors for years after 1999. Adjustment factors are 
designed to adjust on a component basis the initial rate calculated 
under paragraph (b) of this section to reflect differences in 
utilization characteristics of the M+C organization's Medicare enrollees 
electing an M+C plan using a relative cost ratio. Adjustment factors are 
as follows:
    (1) Direct medical care. The relative cost ratio for direct medical 
care for an M+an is determined by comparing the direct medical care 
costs actually incurred on an accrual basis during the most recently 
ended calendar year prior to submission of the ACR for Medicare 
enrollees that elected the M+C plan to the direct medical care

[[Page 887]]

costs of non-Medicare enrollees incurred over the same period. The non-
Medicare enrollees included in this computation must be consistent with 
the non-Medicare enrollees included in the initial rate computation.
    (2) Administration. The relative cost ratio for Administration for 
an M+C plan is determined by comparing the administrative costs actually 
incurred on an accrual basis during the most recently ended calendar 
year prior to submission of the ACR for Medicare enrollees that elected 
the M+C plan to the administrative costs of non-Medicare enrollees 
incurred over the same period. The non-Medicare enrollees included in 
this computation must be consistent with the non-Medicare enrollees 
included in the initial rate computation.
    (3) Additional revenues. The relative cost ratio for total revenues 
for an M+C plan is determined by comparing the total revenues charged on 
an accrual basis during the most recently ended calendar year prior to 
submission of the ACR for Medicare enrollees (including payments from 
CMS without any needed offsets or reductions, such as, those required by 
Sec. 422.250(a)(2)(i)(B) for ESRD enrollees) that elected the M+C plan 
to the total revenues charged for non-Medicare enrollees over the same 
period. The non-Medicare enrollees included in this computation must be 
consistent with the non-Medicare enrollees included in the initial rate 
computation. When the relative cost ratio for total revenues is applied 
to the total initial rate, the value of additional revenues is the 
remaining value after removing the value of direct medical costs (as 
adjusted by paragraph (c)(1) of this section) and the value of 
Administration (as adjusted by paragraph (c)(2) of this section).
    (4) Additional adjustments. Additional adjustments may be necessary 
if the M+C organization, with agreement of CMS, determines that the 
adjustment of the initial rate by the relative cost ratios does not 
represent an accurate ACR value of the initial rate component. In 
addition, adjustments will be allowed that are designed to reduce ACR 
values to equal the actuarial value of the M+C plan charge structure.
    (5) Supporting documentation. All adjustments made by the M+C 
organization must be accompanied by adequate supporting data. If an M+C 
organization does not have sufficient enrollment experience to develop 
this data, it may, during its initial contract period use reasonable 
estimates acceptable to CMS to establish its ACR values.
    (6) Adjustment by CMS. If it is determined that the M+C organization 
does not have adequate data to adjust the initial rate calculated under 
paragraph (b) of this section to reflect the utilization characteristics 
of Medicare enrollees, CMS adjusts the initial rate. CMS adjusts the 
rate on the basis of differences in the utilization characteristics of--
    (i) Medicare and non-Medicare enrollees in other M+C plans; or
    (ii) Medicare beneficiaries in the M+C organization's area, State, 
or the United States who are eligible to elect an M+C plan and other 
individuals in that same area, State, or the United States.
    (d) Special rules for certain organizations. An M+C organization 
that does not have non-Medicare enrollees or sufficient Medicare 
enrollment experience to adequately calculate ACR values may calculate 
its ACR using estimates described in paragraphs (d)(1) and (d)(2) of 
this section as an additional adjustment described in paragraph (c)(4) 
of this section.
    (1) The M+C organization may use an estimate of the ACR value for 
the direct medical and administrative components of a service or 
services offered using generally-accepted accounting principles.
    (2) The M+C organization may use an estimate of the ACR value for 
the additional revenue component of a service or services offered based 
on the lesser of (if the information is available)--
    (i) The average of additional revenues received through risk 
payments for health services contracted to be furnished to an enrolled 
population of other organizations;
    (ii) The average of additional revenues received for health services 
furnished; or

[[Page 888]]

    (iii) A reasonable estimate of additional revenues of other M+C 
organizations in the general marketplace.
    (e) Adjustment by CMS. If CMS finds that there is insufficient 
enrollment experience to determine the APR or ACR for a M+C plan at the 
beginning of a contract period, CMS may--
    (1) Determine the APR based on the enrollment experience of other 
M+C organizations;
    (2) Determine ACR using data in the general commercial marketplace; 
or
    (3) Determine either or both rates using the best available 
information, which may include enrollment experience of other M+C 
organizations and section 1876 risk contractors.
    (f) CMS review. (1) The M+C organization's methodology and 
computation of its ACR are subject to review and approval by CMS. When 
the M+C organization submits the ACR computation, it must include 
adequate supporting data. Except as provided in Sec. 422.306(e)(2), CMS 
authorizes the M+C organization to collect premiums and other cost 
sharing amounts described in Sec. 422.306 that are equal to the amounts 
calculated in the ACR.
    (2) If the M+C organization is dissatisfied with an CMS 
determination that the M+C organization's computation is not acceptable, 
the M+C organization may within 2 weeks after the date of receipt of 
notification of this determination, file a request for a hearing with 
CMS. The request must state why the M+C organization believes the 
determination is incorrect and must be accompanied by any supporting 
evidence the M+C organization wishes to submit. The hearing is conducted 
by a hearing officer designated by CMS under the hearing procedures 
described in subpart N.

[63 FR 35093, June 26, 1998; 63 FR 52614, Oct. 1, 1998, as amended at 65 
FR 40326, June 29, 2000]



Sec. 422.312  Requirement for additional benefits.

    (a) Definitions. As used in this section--
    (1) Excess amount is the amount by which the APR exceeds the 
actuarial value of the Medicare covered services required under 
Sec. 422.101(a), as determined on the basis of the ACR determined under 
Sec. 422.310, as reduced for the actuarial value of the cost-sharing 
under Medicare Parts A and B. A separate excess amount must be 
determined for Part B-only enrollees.
    (2) Adjusted excess amount is the excess amount minus any amount 
withheld and reserved for the organization in a stabilization fund, as 
provided in paragraph (c) of this section.
    (b) Requirement for additional benefits. If there is an adjusted 
excess amount for the plan it offers, the M+C organization must--
    (1) Provide additional benefits with an actuarial value (less the 
actuarial value of any cost-sharing associated with the benefit) which 
CMS determines is at least equal to the adjusted excess amount; and
    (2) Provide those benefits uniformly for all Medicare enrollees 
electing the plan.
    (c) Stabilization fund. (1) An M+C organization may request for part 
of an excess amount to be withheld and reserved, for a specified number 
of contract periods, in the Federal Hospital Insurance Trust Fund, or 
the Federal Supplementary Insurance Trust Fund in the proportions that 
CMS determines to be appropriate.
    (2) The reserved funds are to be used to stabilize and prevent undue 
fluctuations in the additional benefits that are required under this 
section and are provided during subsequent contract periods.
    (3) Any amounts not provided as additional benefits during the 
period specified by the M+C organization for which the stabilization 
fund is established, reverts for the use of the trust funds.
    (4) Establishment of a stabilization fund. An M+C organization's 
request to have monies withheld in a stabilization fund for a specific 
M+C plan must be made when the M+C organization notifies CMS under 
Sec. 422.306 of its proposed premiums, other cost-sharing amounts, and 
related information in preparation for its next contract period.
    (i) Limit per contract period. Except as provided in paragraph 
(c)(4)(iii) of this section, CMS does not withhold in a stabilization 
fund more than 15 percent of the excess amount for a given contract 
period.

[[Page 889]]

    (ii) Cumulative limit. If CMS has established a stabilization fund 
for an M+C plan, it does not approve a request for withholding made by 
that M+C organization for a subsequent contract period that would cause 
the total value of the stabilization fund to exceed 25 percent of the 
excess amount applicable to the M+C plan for that subsequent contract 
period.
    (iii) Exception. CMS may grant an exception to the limit described 
in paragraph (c)(3)(i) of this section if the M+C organization can 
demonstrate to CMS's satisfaction that the value of the additional 
benefits it provides to its Medicare enrollees electing this M+C plan 
fluctuates substantially in excess of 15 percent from one contract 
period to another.
    (iv) Interest. The amounts withheld in a stabilization fund are 
accounted for by CMS in accounts for which interest does not accrue to 
the M+C organization.
    (5) Withdrawal from a stabilization fund. An M+C organization's 
request to make a withdrawal from the stabilization fund established for 
an M+C plan to be used during a contract period must be made when the 
M+C organization notifies CMS under Sec. 422.306 of its proposed 
premiums, cost-sharing amounts, and related information in preparation 
for its next contract period.
    (i) Notification requirements. An M+C organization must--
    (A) Indicate how it intends to use the withdrawn amounts;
    (B) Justify the need for the withdrawal in terms of stabilizing the 
additional benefits it provides to Medicare enrollees;
    (C) Document the M+C plan's experience with fluctuations of revenue 
requirements relative to the additional benefits it provides to Medicare 
enrollees; and
    (D) Document its experience during the contract period previous to 
the one for which it requests withdrawal to ensure that the M+C 
organization will not be using the withdrawn amounts to refinance losses 
suffered during that previous contract period.
    (ii) Criteria for CMS approval. CMS approves a request for a 
withdrawal from a benefit stabilization fund for use during the next 
contract period only if--
    (A) The average of the APR for the M+C plan's next contract period 
of the M+C plan is less than that of the previous contract period;
    (B) The M+C plan's ACR for the next contract period is significantly 
higher than that of the previous contract period;
    (C) The M+C plan's revenue requirements for the next contract period 
for providing the additional benefits it provided during the previous 
contract period is significantly higher than the requirements for that 
previous period; or
    (D) The ACR for the next contract period results in additional 
benefits that are significantly less in total value than that of the 
previous contract period.
    (iii) Basis for denial. CMS does not approve a request for a 
withdrawal from a stabilization fund if the withdrawal would allow the 
M+C organization to refinance prior contract period losses or to avoid 
losses in the upcoming contract period.
    (iv) Form of payment. Payment of monies withdrawn from a 
stabilization fund is made, in equal parts, as an additional amount to 
the monthly advance payment made to the M+C organization for Medicare 
beneficiaries electing the M+C plan during the period of the contract.
    (d) Construction. Nothing in this section may be construed as 
preventing an M+C organization from providing supplemental benefits in 
addition to those required under this section and from imposing a 
premium for those supplemental benefits.

[63 FR 35093, June 26, 1998, as amended at 65 FR 40326, June 29, 2000]



               Subpart H--Provider-Sponsored Organizations

    Editorial Note: Nomenclature changes to subpart H appear at 63 FR 
35098, 35099, June 26, 1998.



Sec. 422.350  Basis, scope, and definitions.

    (a) Basis and scope. This subpart is based on sections 1851 and 1855 
of the Act which, in part,--

[[Page 890]]

    (1) Authorize provider sponsored organizations, (PSOs), to contract 
as a M+C plan;
    (2) Require that a PSO meet certain qualifying requirements; and
    (3) Provide for waiver of State licensure for PSOs under specified 
conditions.
    (b) Definitions. As used in this subpart (unless otherwise 
specified)--
    Capitation payment means a fixed per enrollee per month amount paid 
for contracted services without regard to the type, cost, or frequency 
of services furnished.
    Cash equivalent means those assets excluding accounts receivable 
that can be exchanged on an equivalent basis as cash, or converted into 
cash within 90 days from their presentation for exchange.
    Control means that an individual, group of individuals, or entity 
has the power, directly or indirectly, to direct or influence 
significantly the actions or policies of an organization or institution.
    Current ratio means total current assets divided by total current 
liabilities.
    Deferred acquisition costs are those costs incurred in starting or 
purchasing a business. These costs are capitalized as intangible assets 
and carried on the balance sheet as deferred charges since they benefit 
the business for periods after the period in which the costs were 
incurred.
    Engaged in the delivery of health care services means--
    (1) For an individual, that the individual directly furnishes health 
care services, or
    (2) For an entity, that the entity is organized and operated 
primarily for the purpose of furnishing health care services directly or 
through its provider members or entities.
    Generally accepted accounting principles (GAAP) means broad rules 
adopted by the accounting profession as guides in measuring, recording, 
and reporting the financial affairs and activities of a business to its 
owners, creditors and other interested parties.
    Guarantor means an entity that--
    (1) Has been approved by CMS as meeting the requirements to be a 
guarantor; and
    (2) Obligates its resources to a PSO to enable the PSO to meet the 
solvency requirements required to contract with CMS as an M+C 
organization.
    Health care delivery assets (HCDAs) means any tangible assets that 
are part of a PSO's operation, including hospitals and other medical 
facilities and their ancillary equipment, and such property as may be 
reasonably required for the PSO's principal office or for such other 
purposes as the PSO may need for transacting its business.
    Insolvency means a condition in which the liabilities of the debtor 
exceed the fair valuation of its assets.
    Net worth means the excess of total assets over total liabilities, 
excluding fully subordinated debt or subordinated liabilities.
    Provider-sponsored organization (PSO) means a public or private 
entity that--
    (1) Is established or organized, and operated, by a provider or 
group of affiliated providers;
    (2) Provides a substantial proportion (as defined in Sec. 422.352) 
of the health care services under the M+C contract directly through the 
provider or affiliated group of providers; and
    (3) When it is a group, is composed of affiliated providers who--
    (i) Share, directly or indirectly, substantial financial risk, as 
determined under Sec. 422.356, for the provision of services that are 
the obligation of the PSO under the M+C contract; and
    (ii) Have at least a majority financial interest in the PSO.
    Qualified actuary means a member in good standing of the American 
Academy of Actuaries or a person recognized by the Academy as qualified 
for membership, or a person who has otherwise demonstrated competency in 
the field of actuarial determination and is satisfactory to CMS.
    Statutory accounting practices means those accounting principles or 
practices prescribed or permitted by the domiciliary State insurance 
department in the State that PSO operates.
    Subordinated debt means an obligation that is owed by an 
organization, that the creditor of the obligation, by law, agreement, or 
otherwise, has a lower repayment rank in the hierarchy of creditors than 
another creditor. The

[[Page 891]]

creditor would be entitled to repayment only after all higher ranking 
creditors' claims have been satisfied. A debt is fully subordinated if 
it has a lower repayment rank than all other classes of creditors.
    Subordinated liability means claims liabilities otherwise due to 
providers that are retained by the PSO to meet net worth requirements 
and are fully subordinated to all other creditors.
    Uncovered expenditures means those expenditures for health care 
services that are the obligation of an organization, for which an 
enrollee may also be liable in the event of the organization's 
insolvency and for which no alternative arrangements have been made that 
are acceptable to CMS. They include expenditures for health care 
services for which the organization is at risk, such as out-of-area 
services, referral services and hospital services. However, they do not 
include expenditures for services when a provider has agreed not to bill 
the enrollee.

[63 FR 18134, Apr. 14, 1998, as amended at 63 FR 25376, May 7, 1998; 63 
FR 35098, June 26, 1998]



Sec. 422.352  Basic requirements.

    (a) General rule. An organization is considered a PSO for purposes 
of a M+C contract if the organization--
    (1) Has obtained a waiver of State licensure as provided for under 
Sec. 422.370;
    (2) Meets the definition of a PSO set forth in Sec. 422.350 and 
other applicable requirements of this subpart; and
    (3) Is effectively controlled by the provider or, in the case of a 
group, by one or more of the affiliated providers that established and 
operate the PSO.
    (b) Provision of services. A PSO must demonstrate to CMS's 
satisfaction that it is capable of delivering to Medicare enrollees the 
range of services required under a contract with CMS. Each PSO must 
deliver a substantial proportion of those services directly through the 
provider or the affiliated providers responsible for operating the PSO. 
Substantial proportion means--
    (1) For a non-rural PSO, not less than 70% of Medicare services 
covered under the contract.
    (2) For a rural PSO, not less than 60% of Medicare services covered 
under the contract.
    (c) Rural PSO. To qualify as a rural PSO, a PSO must--
    (1) Demonstrate to CMS that--
    (i) It has available in the rural area, as defined in Sec. 412.62(f) 
of this chapter, routine services including but not limited to primary 
care, routine specialty care, and emergency services; and
    (ii) The level of use of providers outside the rural area is 
consistent with general referral patterns for the area; and
    (2) Enroll Medicare beneficiaries, the majority of which reside in 
the rural area the PSO serves.

[63 FR 18134, Apr. 14, 1998, as amended at 63 FR 35098, June 26, 1998; 
65 FR 40327, June 29, 2000]



Sec. 422.354  Requirements for affiliated providers.

    A PSO that consists of two or more providers must demonstrate to 
CMS'S satisfaction that it meets the following requirements:
    (a) The providers are affiliated. For purposes of this subpart, 
providers are affiliated if, through contract, ownership, or otherwise--
    (1) One provider, directly or indirectly, controls, is controlled 
by, or is under common control with another;
    (2) Each provider is part of a lawful combination under which each 
shares substantial financial risk in connection with the PSO's 
operations;
    (3) Both, or all, providers are part of a controlled group of 
corporations under section 1563 of the Internal Revenue Code of 1986; or
    (4) Both, or all, providers are part of an affiliated service group 
under section 414 of that Code.
    (b) Each affiliated provider of the PSO shares, directly or 
indirectly, substantial financial risk for the furnishing of services 
the PSO is obligated to provide under the contract.
    (c) Affiliated providers, as a whole or in part, have at least a 
majority financial interest in the PSO.
    (d) For purposes of paragraph(a)(1) of this section, control is 
presumed to exist if one party, directly or indirectly, owns, controls, 
or holds the power to vote, or proxies for, not less

[[Page 892]]

than 51 percent of the voting rights or governance right of another.

[63 FR 18134, Apr. 14, 1998, as amended at 63 FR 35098, June 26, 1998]



Sec. 422.356  Determining substantial financial risk and majority financial interest.

    (a) Determining substantial financial risk. The PSO must demonstrate 
to CMS's satisfaction that it apportions a significant part of the 
financial risk of the PSO enterprise under the M+C contract to each 
affiliated provider. The PSO must demonstrate that the financial 
arrangements among its affiliated providers constitute ``substantial'' 
risk in the PSO for each affiliated provider. The following mechanisms 
may constitute risk-sharing arrangements, and may have to be used in 
combination to demonstrate substantial financial risk in the PSO 
enterprise.
    (1) Agreement by a provider to accept capitation payment for each 
Medicare enrollee.
    (2) Agreement by a provider to accept as payment a predetermined 
percentage of the PSO premium or the PSO's revenue.
    (3) The PSO's use of significant financial incentives for its 
affiliated providers, with the aim of achieving utilization management 
and cost containment goals. Permissible methods include the following:
    (i) Affiliated providers agree to a withholding of a significant 
amount of the compensation due them, to be used for any of the 
following:
    (A) To cover losses of the PSO.
    (B) To cover losses of other affiliated providers.
    (C) To be returned to the affiliated provider if the PSO meets its 
utilization management or cost containment goals for the specified time 
period.
    (D) To be distributed among affiliated providers if the PSO meets 
its utilization management or cost-containment goals for the specified 
time period.
    (ii) Affiliated providers agree to preestablished cost or 
utilization targets for the PSO and to subsequent significant financial 
rewards and penalties (which may include a reduction in payments to the 
provider) based on the PSO's performance in meeting the targets.
    (4) Other mechanisms that demonstrate significant shared financial 
risk.
    (b) Determining majority financial interest. Majority financial 
interest means maintaining effective control of the PSO.

[63 FR 18134, Apr. 14, 1998, as amended at 63 FR 35098, June 26, 1998]



Sec. 422.370  Waiver of State licensure.

    For an organization that seeks to contract to offer an M+C plan 
under this subpart, CMS may waive the State licensure requirement of 
section 1855(a)(1) of the Act if--
    (a) The organization requests a waiver no later than November 1, 
2002; and
    (b) CMS determines there is a basis for a waiver under Sec. 422.372.

[63 FR 25376, May 7, 1998, as amended at 63 FR 35098, June 26, 1998]



Sec. 422.372  Basis for waiver of State licensure.

    (a) General rule. Subject to this section and to paragraphs (a) and 
(e) of Sec. 422.374, CMS may waive the State licensure requirement if 
the organization has applied (except as provided in paragraph (b)(4) of 
this section) for the most closely appropriate State license or 
authority to conduct business as an M+C plan.
    (b) Basis for waiver of State licensure. Any of the following may 
constitute a basis for CMS's waiver of State licensure.
    (1) Failure to act timely on application. The State failed to 
complete action on the licensing application within 90 days of the date 
the State received a substantially complete application.
    (2) Denial of application based on discriminatory treatment. The 
State has--
    (i) Denied the license application on the basis of material 
requirements, procedures, or standards (other than solvency 
requirements) not generally applied by the State to other entities 
engaged in a substantially similar business; or
    (ii) Required, as a condition of licensure that the organization 
offer any product or plan other than an M+C plan.

[[Page 893]]

    (3) Denial of application based on different solvency requirements. 
(i) The State has denied the application, in whole or in part, on the 
basis of the organization's failure to meet solvency requirements that 
are different from those set forth in Secs. 422.380 through 422.390; or
    (ii) CMS determines that the State has imposed, as a condition of 
licensure, any documentation or information requirements relating to 
solvency or other material requirements, procedures, or standards 
relating to solvency that are different from the requirements, 
procedures, or standards set forth by CMS to implement, monitor, and 
enforce Secs. 422.380 through 422.390.
    (4) State declines to accept licensure application. The appropriate 
State licensing authority has given the organization written notice that 
it will not accept its licensure application.

[63 FR 35098, June 26, 1998]



Sec. 422.374  Waiver request and approval process.

    (a) Substantially complete waiver request. The organization must 
submit a substantially complete waiver request that clearly demonstrates 
and documents its eligibility for a waiver under Sec. 422.372.
    (b) CMS gives the organization written notice of granting or denial 
of waiver within 60 days of receipt of a substantially complete waiver 
request.
    (c) Subsequent waiver requests. An organization that has had a 
waiver request denied, may submit subsequent waiver requests until 
November 1, 2002.
    (d) Effective date. A waiver granted under Sec. 422.370 will be 
effective on the effective date of the organization's M+C contract.
    (e) Consistency in application. CMS reserves the right to revoke 
waiver eligibility if it subsequently determines that the organization's 
M+C application is significantly different from the application 
submitted by the organization to the State licensing authority.

[63 FR 25377, May 7, 1998, as amended at 63 FR 35098, June 26, 1998]



Sec. 422.376  Conditions of the waiver.

    A waiver granted under this section is subject to the following 
conditions:
    (a) Limitation to State. The waiver is effective only for the 
particular State for which it is granted and does not apply to any other 
State. For each State in which the organization wishes to operate 
without a State license, it must submit a waiver request and receive a 
waiver.
    (b) Limitation to 36-month period. The waiver is effective for 36 
months or through the end of the calendar year in which the 36 month 
period ends unless it is revoked based on paragraph (c) of this section.
    (c) Mid-period revocation. During the waiver period (set forth in 
paragraph (b) of this section), the waiver is automatically revoked 
upon--
    (1) Termination of the M+C contract;
    (2) The organization's compliance with the State licensure 
requirement of section 1855(a)(1) of the Act; or
    (3) The organization's failure to comply with Sec. 422.378.

[63 FR 25377, May 7, 1998]



Sec. 422.378  Relationship to State law.

    (a) Preemption of State law. Any provisions of State law that relate 
to the licensing of the organization and that prohibit the organization 
from providing coverage under a contract as specified in this subpart, 
are superseded.
    (b) Consumer protection and quality standards. (1) A waiver of State 
licensure granted under this subpart is conditioned upon the 
organization's compliance with all State consumer protection and quality 
standards that--
    (i) Would apply to the organization if it were licensed under State 
law;
    (ii) Generally apply to other M+C organizations and plans in the 
State; and
    (iii) Are consistent with the standards established under this part.
    (2) The standards specified in paragraph (b)(1) of this section do 
not include any standard preempted under section 1856(b)(3)(B) of the 
Act.
    (c) Incorporation into contract. In contracting with an organization 
that has

[[Page 894]]

a waiver of State licensure, CMS incorporates into the contract the 
requirements specified in paragraph (b) of this section.
    (d) Enforcement. CMS may enter into an agreement with a State for 
the State to monitor and enforce compliance with the requirements 
specified in paragraph (b) of this section by an organization that has 
obtained a waiver under this subpart.

[63 FR 25377, May 7, 1998]



Sec. 422.380  Solvency standards.

    General rule. A PSO or the legal entity of which the PSO is a 
component that has been granted a waiver under Sec. 422.370 must have a 
fiscally sound operation that meets the requirements of Secs. 422.382 
through 422.390.

[63 FR 25377, May 7, 1998]



Sec. 422.382  Minimum net worth amount.

    (a) At the time an organization applies to contract with CMS as a 
PSO under this part, the organization must have a minimum net worth 
amount, as determined under paragraph (c) of this section, of:
    (1) At least $1,500,000, except as provided in paragraph (a)(2) of 
this section.
    (2) No less than $1,000,000 based on evidence from the 
organization's financial plan (under Sec. 422.384) demonstrating to 
CMS's satisfaction that the organization has available to it an 
administrative infrastructure that CMS considers appropriate to reduce, 
control or eliminate start-up administrative costs.
    (b) After the effective date of a PSO's M+C contract, a PSO must 
maintain a minimum net worth amount equal to the greater of--
    (1) One million dollars;
    (2) Two percent of annual premium revenues as reported on the most 
recent annual financial statement filed with CMS for up to and including 
the first $150,000,000 of annual premiums and 1 percent of annual 
premium revenues on premiums in excess of $150,000,000;
    (3) An amount equal to the sum of three months of uncovered health 
care expenditures as reported on the most recent financial statement 
filed with CMS; or
    (4) Using the most recent financial statement filed with CMS, an 
amount equal to the sum of--
    (i) Eight percent of annual health care expenditures paid on a non-
capitated basis to non-affiliated providers; and
    (ii) Four percent of annual health care expenditures paid on a 
capitated basis to non-affiliated providers plus annual health care 
expenditures paid on a non-capitated basis to affiliated providers.
    (iii) Annual health care expenditures that are paid on a capitated 
basis to affiliated providers are not included in the calculation of the 
net worth requirement (regardless of downstream arrangements from the 
affiliated provider) under paragraphs (a) and (b)(4) of this section.
    (c) Calculation of the minimum net worth amount--(1) Cash 
requirement. (i) At the time of application, the organization must 
maintain at least $750,000 of the minimum net worth amount in cash or 
cash equivalents.
    (ii) After the effective date of a PSO's M+C contract, a PSO must 
maintain the greater of $750,000 or 40 percent of the minimum net worth 
amount in cash or cash equivalents.
    (2) Intangible assets. An organization may include intangible 
assets, the value of which is based on Generally Accepted Accounting 
Principles (GAAP), in the minimum net worth amount calculation subject 
to the following limitations--
    (i) At the time of application. (A) Up to 20 percent of the minimum 
net worth amount, provided at least $1,000,000 of the minimum net worth 
amount is met through cash or cash equivalents; or
    (B) Up to 10 percent of the minimum net worth amount, if less than 
$1,000,000 of the minimum net worth amount is met through cash or cash 
equivalents, or if CMS has used its discretion under paragraph (a)(2) of 
this section.
    (ii) From the effective date of the contract. (A) Up to 20 percent 
of the minimum net worth amount if the greater of $1,000,000 or 67 
percent of the minimum net worth amount is met by cash or cash 
equivalents; or

[[Page 895]]

    (B) Up to ten percent of the minimum net worth amount if the greater 
of $1,000,000 or 67 percent of the minimum net worth amount is not met 
by cash or cash equivalents.
    (3) Health care delivery assets. Subject to the other provisions of 
this section, a PSO may apply 100 percent of the GAAP depreciated value 
of health care delivery assets (HCDAs) to satisfy the minimum net worth 
amount.
    (4) Other assets. A PSO may apply other assets not used in the 
delivery of health care provided that those assets are valued according 
to statutory accounting practices (SAP) as defined by the State.
    (5) Subordinated debts and subordinated liabilities. Fully 
subordinated debt and subordinated liabilities are excluded from the 
minimum net worth amount calculation.
    (6) Deferred acquisition costs. Deferred acquisition costs are 
excluded from the calculation of the minimum net worth amount.

[63 FR 25377, May 7, 1998, as amended at 64 FR 71678, Dec. 22, 1999]



Sec. 422.384  Financial plan requirement.

    (a) General rule. At the time of application, an organization must 
submit a financial plan acceptable to CMS.
    (b) Content of plan. A financial plan must include--
    (1) A detailed marketing plan;
    (2) Statements of revenue and expense on an accrual basis;
    (3) Cash-flow statements;
    (4) Balance sheets;
    (5) Detailed justifications and assumptions in support of the 
financial plan including, where appropriate, certification of reserves 
and actuarial liabilities by a qualified actuary; and
    (6) If applicable, statements of the availability of financial 
resources to meet projected losses.
    (c) Period covered by the plan. A financial plan must--
    (1) Cover the first 12 months after the estimated effective date of 
a PSO's M+C contract; or
    (2) If the PSO is projecting losses, cover 12 months beyond the end 
of the period for which losses are projected.
    (d) Funding for projected losses. Except for the use of guarantees, 
LOC, and other means as provided in Sec. 422.384(e), (f) and (g), an 
organization must have the resources for meeting projected losses on its 
balance sheet in cash or a form that is convertible to cash in a timely 
manner, in accordance with the PSO's financial plan.
    (e) Guarantees and projected losses. Guarantees will be an 
acceptable resource to fund projected losses, provided that a PSO--
    (1) Meets CMS's requirements for guarantors and guarantee documents 
as specified in Sec. 422.390; and
    (2) Obtains from the guarantor cash or cash equivalents to fund the 
projected losses timely, as follows--
    (i) Prior to the effective date of a PSO's M+C contract, the amount 
of the projected losses for the first two quarters;
    (ii) During the first quarter and prior to the beginning of the 
second quarter of a PSO's M+C contract, the amount of projected losses 
through the end of the third quarter; and
    (iii) During the second quarter and prior to the beginning of the 
third quarter of a PSO's M+C contract, the amount of projected losses 
through the end of the fourth quarter.
    (3) If the guarantor complies with the requirements in paragraph 
(e)(2) of this section, the PSO, in the third quarter, may notify CMS of 
its intent to reduce the period of advance funding of projected losses. 
CMS will notify the PSO within 60 days of receiving the PSO's request if 
the requested reduction in the period of advance funding will not be 
accepted.
    (4) If the guarantee requirements in paragraph (e)(2) of this 
section are not met, CMS may take appropriate action, such as requiring 
funding of projected losses through means other than a guarantee. CMS 
retains discretion to require other methods or timing of funding, 
considering factors such as the financial condition of the guarantor and 
the accuracy of the financial plan.
    (f) Letters of credit. Letters of credit are an acceptable resource 
to fund projected losses, provided they are irrevocable, unconditional, 
and satisfactory to CMS. They must be capable of being promptly paid 
upon presentation of a sight draft under the letters of credt

[[Page 896]]

without further reference to any other agreement, document, or entity.
    (g) Other means. If satisfactory to CMS, and for periods beginning 
one year after the effective date of a PSO's M+C contract, a PSO may use 
the following to fund projected losses--
    (1) Lines of credit from regulated financial institutions;
    (2) Legally binding agreements for capital contributions; or
    (3) Legally binding agreements of a similar quality and reliability 
as permitted in paragraphs (g)(1) and (2) of this section.
    (h) Application of guarantees, Letters of credit or other means of 
funding projected losses. Notwithstanding any other provision of this 
section, a PSO may use guarantees, letters of credit and, beginning one 
year after the effective date of a PSO's M+C contract, other means of 
funding projected losses, but only in a combination or sequence that CMS 
considers appropriate.

[63 FR 25378, May 7, 1998, as amended at 63 FR 35098, June 26, 1998; 64 
FR 71678, Dec. 22, 1999]



Sec. 422.386  Liquidity.

    (a) A PSO must have sufficient cash flow to meet its financial 
obligations as they become due and payable.
    (b) To determine whether the PSO meets the requirement in paragraph 
(a) of this section, CMS will examine the following--
    (1) The PSO's timeliness in meeting current obligations;
    (2) The extent to which the PSO's current ratio of assets to 
liabilities is maintained at 1:1 including whether there is a declining 
trend in the current ratio over time; and
    (3) The availability of outside financial resources to the PSO.
    (c) If CMS determines that a PSO fails to meet the requirement in 
paragraph (b)(1) of this section, CMS will require the PSO to initiate 
corrective action and pay all overdue obligations.
    (d) If CMS determines that a PSO fails to meet the requirement of 
paragraph (b)(2) of this section, CMS may require the PSO to initiate 
corrective action to--
    (1) Change the distribution of its assets;
    (2) Reduce its liabilities; or
    (3) Make alternative arrangements to secure additional funding to 
restore the PSO's current ratio to 1:1.
    (e) If CMS determines that there has been a change in the 
availability of outside financial resources as required by paragraph 
(b)(3) of this section, CMS requires the PSO to obtain funding from 
alternative financial resources.

[63 FR 25378, May 7, 1998, as amended at 64 FR 71678, Dec. 22, 1999]



Sec. 422.388  Deposits.

    (a) Insolvency deposit. (1) At the time of application, an 
organization must deposit $100,000 in cash or securities (or any 
combination thereof) into an account in a manner that is acceptable to 
CMS.
    (2) The deposit must be restricted to use in the event of insolvency 
to help assure continuation of services or pay costs associated with 
receivership or liquidation.
    (3) At the time of the PSO's application for an M+C contract and, 
thereafter, upon CMS's request, a PSO must provide CMS with proof of the 
insolvency deposit, such proof to be in a form that CMS considers 
appropriate.
    (b) Uncovered expenditures deposit. (1) If at any time uncovered 
expenditures exceed 10 percent of a PSO's total health care 
expenditures, then the PSO must place an uncovered expenditures deposit 
into an account with any organization or trustee that is acceptable to 
CMS.
    (2) The deposit must at all times have a fair market value of an 
amount that is 120 percent of the PSO's outstanding liability for 
uncovered expenditures for enrollees, including incurred, but not 
reported claims.
    (3) The deposit must be calculated as of the first day of each month 
required and maintained for the remainder of each month required.
    (4) If a PSO is not otherwise required to file a quarterly report, 
it must file a report within 45 days of the end of the calendar quarter 
with information sufficient to demonstrate compliance with this section.
    (5) The deposit required under this section is restricted and in 
trust for CMS's use to protect the interests of the PSO's Medicare 
enrollees and to

[[Page 897]]

pay the costs associated with administering the insolvency. It may be 
used only as provided under this section.
    (c) A PSO may use the deposits required under paragraphs (a) and (b) 
of this section to satisfy the PSO's minimum net worth amount required 
under Sec. 422.382(a) and (b).
    (d) All income from the deposits or trust accounts required under 
paragraphs (a) and (b) of this section, are considered assets of the 
PSO. Upon CMS's approval, the income from the deposits may be withdrawn.
    (e) On prior written approval from CMS, a PSO that has made a 
deposit under paragraphs (a) or (b) of this section, may withdraw that 
deposit or any part thereof if--
    (1) A substitute deposit of cash or securities of equal amount and 
value is made;
    (2) The fair market value exceeds the amount of the required 
deposit; or
    (3) The required deposit under paragraphs (a) or (b) of this section 
is reduced or eliminated.

[63 FR 25379, May 7, 1998]



Sec. 422.390  Guarantees.

    (a) General policy. A PSO, or the legal entity of which the PSO is a 
component, may apply to CMS to use the financial resources of a 
guarantor for the purpose of meeting the requirements in Sec. 422.384. 
CMS has the discretion to approve or deny approval of the use of a 
guarantor.
    (b) Request to use a guarantor. To apply to use the financial 
resources of a guarantor, a PSO must submit to CMS--
    (1) Documentation that the guarantor meets the requirements for a 
guarantor under paragraph (c) of this section; and
    (2) The guarantor's independently audited financial statements for 
the current year-to-date and for the two most recent fiscal years. The 
financial statements must include the guarantor's balance sheets, profit 
and loss statements, and cash flow statements.
    (c) Requirements for guarantor. To serve as a guarantor, an 
organization must meet the following requirements:
    (1) Be a legal entity authorized to conduct business within a State 
of the United States.
    (2) Not be under Federal or State bankruptcy or rehabilitation 
proceedings.
    (3) Have a net worth (not including other guarantees, intangibles 
and restricted reserves) equal to three times the amount of the PSO 
guarantee.
    (4) If the guarantor is regulated by a State insurance commissioner, 
or other State official with authority for risk-bearing entities, it 
must meet the net worth requirement in Sec. 422.390(c)(3) with all 
guarantees and all investments in and loans to organizations covered by 
guarantees excluded from its assets.
    (5) If the guarantor is not regulated by a State insurance 
commissioner, or other similar State official it must meet the net worth 
requirement in Sec. 422.390(c)(3) with all guarantees and all 
investments in and loans to organizations covered by a guarantee and to 
related parties (subsidiaries and affiliates) excluded from its assets.
    (d) Guarantee document. If the guarantee request is approved, a PSO 
must submit to CMS a written guarantee document signed by an appropriate 
authority of the guarantor. The guarantee document must--
    (1) State the financial obligation covered by the guarantee;
    (2) Agree to--
    (i) Unconditionally fulfill the financial obligation covered by the 
guarantee; and
    (ii) Not subordinate the guarantee to any other claim on the 
resources of the guarantor;
    (3) Declare that the guarantor must act on a timely basis, in any 
case not more than 5 business days, to satisfy the financial obligation 
covered by the guarantee; and
    (4) Meet other conditions as CMS may establish from time to time.
    (e) Reporting requirement. A PSO must submit to CMS the current 
internal financial statements and annual audited financial statements of 
the guarantor according to the schedule, manner, and form that CMS 
requests.
    (f) Modification, substitution, and termination of a guarantee. A 
PSO cannot modify, substitute or terminate a guarantee unless the PSO--
    (1) Requests CMS's approval at least 90 days before the proposed 
effective

[[Page 898]]

date of the modification, substitution, or termination;
    (2) Demonstrates to CMS's satisfaction that the modification, 
substitution, or termination will not result in insolvency of the PSO; 
and
    (3) Demonstrates how the PSO will meet the requirements of this 
section.
    (g) Nullification. If at any time the guarantor or the guarantee 
ceases to meet the requirements of this section, CMS will notify the PSO 
that it ceases to recognize the guarantee document. In the event of this 
nullification, a PSO must--
    (1) Meet the applicable requirements of this section within 15 
business days; and
    (2) If required by CMS, meet a portion of the applicable 
requirements in less than the time period granted in paragraph (g)(1) of 
this section.

[63 FR 25379, May 7, 1998]



  Subpart I--Organization Compliance With State Law and Preemption by 
                               Federal Law

    Source: 63 FR 35099, June 26, 1998, unless otherwise noted.



Sec. 422.400  State licensure requirement.

    Except in the case of a PSO granted a waiver under subpart H of this 
part, each M+C organization must--
    (a) Be licensed under State law, or otherwise authorized to operate 
under State law, as a risk-bearing entity (as defined in Sec. 422.2) 
eligible to offer health insurance or health benefits coverage in each 
State in which it offers one or more M+C plans;
    (b) If not commercially licensed, obtain certification from the 
State that the organization meets a level of financial solvency and such 
other standards as the State may require for it to operate as an M+C 
organization; and
    (c) Demonstrate to CMS that--
    (1) The scope of its license or authority allows the organization to 
offer the type of M+C plan or plans that it intends to offer in the 
State; and
    (2) If applicable, it has obtained the State certification required 
under paragraph (b) of this section.



Sec. 422.402  Federal preemption of State law.

    (a) General preemption. Except as provided in paragraph (b) of this 
section, the rules, contract requirements, and standards established 
under this part supersede any State laws, regulations, contract 
requirements, or other standards that would otherwise apply to M+C 
organizations and their M+C plans only to the extent that such State 
laws are inconsistent with the standards established under this part. 
This preemption of State laws and other standards applies only to 
coverage pursuant to an M+C contract, and does not extend to benefits 
outside of such contract or to individuals who are not M+C enrollees of 
an organization with an M+C contract.
    (b) Specific preemption. As they might otherwise apply to the M+C 
plans of an M+C organization in a State, State laws and regulations 
pertaining to the following areas are specifically preempted by this 
part:
    (1) Benefit requirements, such as mandating the inclusion in an M+C 
plan of a particular service, or specifying the scope or duration of a 
service (for example, length of hospital stay, number of home health 
visits). State cost-sharing standards with respect to any benefits are 
preempted only if they are inconsistent with this part, as provided for 
in paragraph (a) of this section.
    (2) Requirements relating to inclusion or treatment of providers and 
suppliers.
    (3) Coverage determinations (including related appeal and grievance 
processes for all benefits included under an M+C contract). 
Determinations on issues other than whether a service is covered under 
an M+C contract, and the extent of enrollee liability under the M+C plan 
for such a service, are not considered coverage determinations for 
purposes of this paragraph.
    (c) Except as provided in paragraphs (a) and (b) of this section, 
nothing in this section may be construed to affect or modify the 
provisions of any other law or regulation that imposes or preempts a 
specific State authority.

[[Page 899]]



Sec. 422.404  State premium taxes prohibited.

    (a) Basic rule. No premium tax, fee, or other similar assessment may 
be imposed by any State, the District of Columbia, the Commonwealth of 
Puerto Rico, the Virgin Islands, Guam, and American Samoa, or any of 
their political subdivision or other governmental authorities with 
respect to any payment CMS makes on behalf of M+C enrollees under 
subpart F of this part.
    (b) Construction. Nothing in this section shall be construed to 
exempt any M+C organization from taxes, fees, or other monetary 
assessments related to the net income or profit that accrues to, or is 
realized by, the organization from business conducted under this part, 
if that tax, fee, or payment is applicable to a broad range of business 
activity.

Subpart J [Reserved]



         Subpart K--Contracts With Medicare+Choice Organizations

    Source: 63 FR 35099, June 26, 1998, unless otherwise noted.



Sec. 422.500  Definitions.

    For purposes of this subpart, the following definitions apply:
    Business transaction means any of the following kinds of 
transactions:
    (1) Sale, exchange, or lease of property.
    (2) Loan of money or extension of credit.
    (3) Goods, services, or facilities furnished for a monetary 
consideration, including management services, but not including--
    (i) Salaries paid to employees for services performed in the normal 
course of their employment; or
    (ii) Health services furnished to the M+C organization's enrollees 
by hospitals and other providers, and by M+C organization staff, medical 
groups, or independent practice associations, or by any combination of 
those entities.
    Clean claim means--
    (1) A claim that has no defect, impropriety, lack of any required 
substantiating documentation (consistent with Sec. 422.257(d)) or 
particular circumstance requiring special treatment that prevents timely 
payment; and
    (2) A claim that otherwise conforms to the clean claim requirements 
for equivalent claims under original Medicare.
    Downstream entity means any party that enters into an acceptable 
written arrangement below the level of the arrangement between an M+C 
organization (or contract applicant) and a first tier entity. These 
written arrangements continue down to the level of the ultimate provider 
of both health and administrative services.
    First tier entity means any party that enters into an acceptable 
written arrangement with an M+C organization or contract applicant to 
provide administrative services or health care services for a Medicare 
eligible individual.
    Party in interest includes the following:
    (1) Any director, officer, partner, or employee responsible for 
management or administration of an M+C organization.
    (2) Any person who is directly or indirectly the beneficial owner of 
more than 5 percent of the organization's equity; or the beneficial 
owner of a mortgage, deed of trust, note, or other interest secured by 
and valuing more than 5 percent of the organization.
    (3) In the case of an M+C organization organized as a nonprofit 
corporation, an incorporator or member of such corporation under 
applicable State corporation law.
    (4) Any entity in which a person described in paragraph (1), (2), or 
(3) of this definition:
    (i) Is an officer, director, or partner; or
    (ii) Has the kind of interest described in paragraphs (1), (2), or 
(3) of this definition.
    (5) Any person that directly or indirectly controls, is controlled 
by, or is under common control with, the M+C organization.
    (6) Any spouse, child, or parent of an individual described in 
paragraph (1), (2), or (3) of this definition.
    Related entity means any entity that is related to the M+C 
organization by common ownership or control and--

[[Page 900]]

    (1) Performs some of the M+C organization's management functions 
under contract or delegation;
    (2) Furnishes services to Medicare enrollees under an oral or 
written agreement; or
    (3) Leases real property or sells materials to the M+C organization 
at a cost of more than $2,500 during a contract period.
    Significant business transaction means any business transaction or 
series of transactions of the kind specified in the above definition of 
``business transaction'' that, during any fiscal year of the M+C 
organization, have a total value that exceeds $25,000 or 5 percent of 
the M+C organization's total operating expenses, whichever is less.

[65 FR 35099, June 26, 1998, as amended at 65 FR 40327, June 29, 2000]



Sec. 422.501  General provisions.

    (a) Basic rule. In order to qualify as an M+C organization, enroll 
beneficiaries in any M+C plans it offers, and be paid on behalf of 
Medicare beneficiaries enrolled in those plans, an M+C organization must 
enter into a contract with CMS.
    (b) Conditions necessary to contract as an M+C organization. Any 
entity seeking to contract as an M+C organization must:
    (1) Be licensed by the State as a risk bearing entity in each State 
in which it seeks to offer an M+C plan as defined in Sec. 422.2.
    (2) Meet the minimum enrollment requirements of Sec. 422.514, unless 
waived under Sec. 422.514(b).
    (3) Have administrative and management arrangements satisfactory to 
CMS, as demonstrated by at least the following:
    (i) A policy making body that exercises oversight and control over 
the M+C organization's policies and personnel to ensure that management 
actions are in the best interest of the organization and its enrollees.
    (ii) Personnel and systems sufficient for the M+C organization to 
organize, plan, control, and evaluate financial and marketing 
activities, the furnishing of services, the quality assurance program, 
and the administrative and management aspects of the organization.
    (iii) At a minimum, an executive manager whose appointment and 
removal are under the control of the policy making body.
    (iv) A fidelity bond or bonds, procured and maintained by the M+C 
organization, in an amount fixed by its policymaking body but not less 
than $100,000 per individual, covering each officer and employee 
entrusted with the handling of its funds. The bond may have reasonable 
deductibles, based upon the financial strength of the M+C organization.
    (v) Insurance policies or other arrangements, secured and maintained 
by the M+C organization and approved by CMS to insure the M+C 
organization against losses arising from professional liability claims, 
fire, theft, fraud, embezzlement, and other casualty risks.
    (vi) A compliance plan that consists of the following:
    (A) Written policies, procedures, and standards of conduct that 
articulate the organization's commitment to comply with all applicable 
Federal and State standards.
    (B) The designation of a compliance officer and compliance committee 
that are accountable to senior management.
    (C) Effective training and education between the compliance officer 
and organization employees.
    (D) Effective lines of communication between the compliance officer 
and the organization's employees.
    (E) Enforcement of standards through well-publicized disciplinary 
guidelines.
    (F) Provision for internal monitoring and auditing.
    (G) Procedures for ensuring prompt response to detected offenses and 
development of corrective action initiatives relating to the 
organization's M+C contract.
    (4) Not accept new enrollees under a section 1876 reasonable cost 
contract in any area in which it seeks to offer an M+C plan.
    (5) The M+C organization's contract must not have been terminated by 
CMS under Sec. 422.510 within the past 2 years unless--
    (i) During the 6-month period beginning on the date the organization 
notified CMS of the intention to terminate the most recent previous 
contract,

[[Page 901]]

there was a change in the statute or regulations that had the effect of 
increasing M+C payments in the payment area or areas at issue; or
    (ii) CMS has otherwise determined that circumstances warrant special 
consideration.
    (c) Contracting authority. Under the authority of section 1857(c)(5) 
of the Act, CMS may enter into contracts under this part without regard 
to Federal and Departmental acquisition regulations set forth in title 
48 of the CFR and provisions of law or other regulations relating to the 
making, performance, amendment, or modification of contracts of the 
United States if CMS determines that those provisions are inconsistent 
with the efficient and effective administration of the Medicare program.
    (d) Protection against fraud and beneficiary protections. (1) CMS 
annually audits the financial records (including data relating to 
Medicare utilization, costs, and computation of the ACR) of at least 
one-third of the M+C organizations offering M+C plans. These auditing 
activities are subject to monitoring by the Comptroller General.
    (2) Each contract under this section must provide that CMS, or any 
person or organization designated by CMS has the right to:
    (i) Inspect or otherwise evaluate the quality, appropriateness, and 
timeliness of services performed under the M+C contract;
    (ii) Inspect or otherwise evaluate the facilities of the 
organization when there is reasonable evidence of some need for such 
inspection; and
    (iii) Audit and inspect any books, contracts, and records of the M+C 
organization that pertain to--
    (A) The ability of the organization or its first tier or downstream 
providers to bear the risk of potential financial losses; or
    (B) Services performed or determinations of amounts payable under 
the contract.
    (e) Severability of contracts. The contract must provide that, upon 
CMS's request--
    (1) The contract will be amended to exclude any M+C plan or State-
licensed entity specified by CMS; and
    (2) A separate contract for any such excluded plan or entity will be 
deemed to be in place when such a request is made.

[63 FR 35099, June 26, 1998, as amended at 65 FR 40327, June 29, 2000]



Sec. 422.502  Contract provisions.

    The contract between the M+C organization and CMS must contain the 
following provisions:
    (a) Agreement to comply with regulations and instructions. The M+C 
organization agrees to comply with all the applicable requirements and 
conditions set forth in this part and in general instructions. An M+C 
organization's compliance with paragraphs (a)(1) through (a)(13) of this 
section is material to performance of the contract. The M+C organization 
agrees--
    (1) To accept new enrollments, make enrollments effective, process 
voluntary disenrollments, and limit involuntary disenrollments, as 
provided in subpart B of this part.
    (2) That it will comply with the prohibition in Sec. 422.110 on 
discrimination in beneficiary enrollment.
    (3) To provide--
    (i) The basic benefits as required under Sec. 422.101 and, to the 
extent applicable, supplemental benefits under Sec. 422.102; and
    (ii) Access to benefits as required under subpart C of this part;
    (iii) In a manner consistent with professionally recognized 
standards of health care, all benefits covered by Medicare.
    (4) To disclose information to beneficiaries in the manner and the 
form prescribed by CMS as required under Sec. 422.111;
    (5) To operate a quality assurance and performance improvement 
program and have an agreement for external quality review as required 
under subpart D of this part;
    (6) To comply with all applicable provider requirements in subpart E 
of this part, including provider certification requirements, anti-
discrimination requirements, provider participation and

[[Page 902]]

consultation requirements, the prohibition on interference with provider 
advice, limits on provider indemnification, rules governing payments to 
providers, and limits on physician incentive plans;
    (7) To comply with all requirements in subpart M of this part 
governing coverage determinations, grievances, and appeals;
    (8) To comply with the reporting requirements in Sec. 422.516 and 
the requirements in Sec. 422.257 for submitting encounter data to CMS;
    (9) That it will be paid under the contract in accordance with the 
payment rules in subpart F of this part;
    (10) To develop its annual ACR, and submit all required information 
on premiums, benefits, and cost-sharing by May 1, as provided in subpart 
G of this part;
    (11) That its contract may not be renewed or may be terminated in 
accordance with this subpart and subpart N of this part.
    (12) To comply with all requirements that are specific to a 
particular type of M+C plan, such as the special rules for private fee-
for-service plans in Secs. 422.114 and 422.216 and the MSA requirements 
in Secs. 422.56, 422.103, and 422.262; and
    (13) To comply with the confidentiality and enrollee record accuracy 
requirements in Sec. 422.118.
    (14) An M+C organization's compliance with paragraphs (a)(1) through 
(a)(13) and (c) of this section is material to performance of the 
contract.
    (b) Communication with CMS. The M+C organization must have the 
capacity to communicate with CMS electronically.
    (c) Prompt payment. The M+C organization must comply with the prompt 
payment provisions of Sec. 422.520 and with instructions issued by CMS, 
as they apply to each type of plan included in the contract.
    (d) Maintenance of records. The M+C organization agrees to maintain 
for 6 years books, records, documents, and other evidence of accounting 
procedures and practices that--
    (1) Are sufficient to do the following:
    (i) Accommodate periodic auditing of the financial records 
(including data related to Medicare utilization, costs, and computation 
of the ACR) of M+C organizations.
    (ii) Enable CMS to inspect or otherwise evaluate the quality, 
appropriateness and timeliness of services performed under the contract, 
and the facilities of the organization.
    (iii) Enable CMS to audit and inspect any books and records of the 
M+C organization that pertain to the ability of the organization to bear 
the risk of potential financial losses, or to services performed or 
determinations of amounts payable under the contract.
    (iv) Properly reflect all direct and indirect costs claimed to have 
been incurred and used in the preparation of the ACR proposal.
    (v) Establish component rates of the ACR for determining additional 
and supplementary benefits.
    (vi) Determine the rates utilized in setting premiums for State 
insurance agency purposes and for other government and private 
purchasers; and
    (2) Include at least records of the following:
    (i) Ownership and operation of the M+C organization's financial, 
medical, and other record keeping systems.
    (ii) Financial statements for the current contract period and six 
prior periods.
    (iii) Federal income tax or informational returns for the current 
contract period and six prior periods.
    (iv) Asset acquisition, lease, sale, or other action.
    (v) Agreements, contracts, and subcontracts.
    (vi) Franchise, marketing, and management agreements.
    (vii) Schedules of charges for the M+C organization's fee-for-
service patients.
    (viii) Matters pertaining to costs of operations.
    (ix) Amounts of income received by source and payment.
    (x) Cash flow statements.
    (xi) Any financial reports filed with other Federal programs or 
State authorities.
    (e) Access to facilities and records. The M+C organization agrees to 
the following:
    (1) HHS, the Comptroller General, or their designee may evaluate, 
through inspection or other means--

[[Page 903]]

    (i) The quality, appropriateness, and timeliness of services 
furnished to Medicare enrollees under the contract;
    (ii) The facilities of the M+C organization; and
    (iii) The enrollment and disenrollment records for the current 
contract period and six prior periods.
    (2) HHS, the Comptroller General, or their designees may audit, 
evaluate, or inspect any books, contracts, medical records, patient care 
documentation, and other records of the M+C organization, related 
entity, contractor, subcontractor, or its transferee that pertain to any 
aspect of services performed, reconciliation of benefit liabilities, and 
determination of amounts payable under the contract, or as the Secretary 
may deem necessary to enforce the contract.
    (3) The M+C organization agrees to make available, for the purposes 
specified in paragraph (d) of this section, its premises, physical 
facilities and equipment, records relating to its Medicare enrollees, 
and any additional relevant information that CMS may require.
    (4) HHS, the Comptroller General, or their designee's right to 
inspect, evaluate, and audit extends through 6 years from the final date 
of the contract period or completion of audit, whichever is later 
unless--
    (i) CMS determines there is a special need to retain a particular 
record or group of records for a longer period and notifies the M+C 
organization at least 30 days before the normal disposition date;
    (ii) There has been a termination, dispute, or fraud or similar 
fault by the M+C organization, in which case the retention may be 
extended to 6 years from the date of any resulting final resolution of 
the termination, dispute, or fraud or similar fault; or
    (iii) CMS determines that there is a reasonable possibility of 
fraud, in which case it may inspect, evaluate, and audit the M+C 
organization at any time.
    (f) Disclosure of information. The M+C organization agrees to 
submit--
    (1) To CMS, certified financial information that must include the 
following:
    (i) Such information as CMS may require demonstrating that the 
organization has a fiscally sound operation.
    (ii) Such information as CMS may require pertaining to the 
disclosure of ownership and control of the M+C organization.
    (2) To CMS, all information that is necessary for CMS to administer 
and evaluate the program and to simultaneously establish and facilitate 
a process for current and prospective beneficiaries to exercise choice 
in obtaining Medicare services. This information includes, but is not 
limited to:
    (i) The benefits covered under an M+C plan;
    (ii) The M+C monthly basic beneficiary premium and M+C monthly 
supplemental beneficiary premium, if any, for the plan or in the case of 
an MSA plan, the M+C monthly MSA premium.
    (iii) The service area and continuation area, if any, of each plan 
and the enrollment capacity of each plan;
    (iv) Plan quality and performance indicators for the benefits under 
the plan including --
    (A) Disenrollment rates for Medicare enrollees electing to receive 
benefits through the plan for the previous 2 years;
    (B) Information on Medicare enrollee satisfaction;
    (C) Information on health outcomes;
    (D) The recent record regarding compliance of the plan with 
requirements of this part, as determined by CMS; and
    (E) Other information determined by CMS to be necessary to assist 
beneficiaries in making an informed choice among M+C plans and 
traditional Medicare;
    (v) Information about beneficiary appeals and their disposition;
    (vi) Information regarding all formal actions, reviews, findings, or 
other similar actions by States, other regulatory bodies, or any other 
certifying or accrediting organization;
    (vii) For M+C organizations offering an MSA plan, information 
specified by CMS for CMS's use in preparing its report to the Congress 
on the MSA demonstration, including data specified by CMS in the areas 
of selection, use of preventative care, and access to services.

[[Page 904]]

    (viii) To CMS, any other information deemed necessary by CMS for the 
administration or evaluation of the Medicare program.
    (3) To its enrollees all informational requirements under 
Sec. 422.64 and, upon an enrollee's, request the financial disclosure 
information required under Sec. 422.516.
    (g) Beneficiary financial protections. The M+C organization agrees 
to comply with the following requirements:
    (1) Each M+C organization must adopt and maintain arrangements 
satisfactory to CMS to protect its enrollees from incurring liability 
(for example, as a result of an organization's insolvency or other 
financial difficulties) for payment of any fees that are the legal 
obligation of the M+C organization. To meet this requirement, the M+C 
organization must--
    (i) Ensure that all contractual or other written arrangements with 
providers prohibit the organization's providers from holding any 
beneficiary enrollee liable for payment of any such fees; and
    (ii) Indemnify the beneficiary enrollee for payment of any fees that 
are the legal obligation of the M+C organization for services furnished 
by providers that do not contract, or that have not otherwise entered 
into an agreement with the M+C organization, to provide services to the 
organization's beneficiary enrollees.
    (2) The M+C organization must provide for continuation of enrollee 
health care benefits--
    (i) For all enrollees, for the duration of the contract period for 
which CMS payments have been made; and
    (ii) For enrollees who are hospitalized on the date its contract 
with CMS terminates, or, in the event of an insolvency, through 
discharge.
    (3) In meeting the requirements of this paragraph, other than the 
provider contract requirements specified in paragraph (g)(1)(i) of this 
section, the M+C organization may use--
    (i) Contractual arrangements;
    (ii) Insurance acceptable to CMS;
    (iii) Financial reserves acceptable to CMS; or
    (iv) Any other arrangement acceptable to CMS.
    (h) Requirements of other laws and regulations. (1) The M+C 
organization agrees to comply with--
    (i) Title VI of the Civil Rights Act of 1964 as implemented by 
regulations at 45 CFR part 84;
    (ii) The Age Discrimination Act of 1975 as implemented by 
regulations at 45 CFR part 91;
    (iii) The Rehabilitation Act of 1973;
    (iv) The Americans With Disabilities Act;
    (v) Other laws applicable to recipients of Federal funds; and
    (vi) All other applicable laws and rules.
    (2) M+C organizations receiving Federal payments under M+C 
contracts, and related entities, contractors, and subcontractors paid by 
an M+C organization to fulfill its obligations under its M+C contract 
are subject to certain laws that are applicable to individuals and 
entities receiving Federal funds. M+C organizations must inform all 
related entities, contractors and subcontractors that payments that they 
receive are, in whole or in part, from Federal funds.
    (i) M+C organization relationship with related entities, 
contractors, and subcontractors. (1) Notwithstanding any relationship(s) 
that the M+C organization may have with related entities, contractors, 
or subcontractors, the M+C organization maintains ultimate 
responsibility for adhering to and otherwise fully complying with all 
terms and conditions of its contract with CMS.
    (2) The M+C organization agrees to require all related entities, 
contractors, or subcontractors to agree that--
    (i) HHS, the Comptroller General, or their designees have the right 
to inspect, evaluate, and audit any pertinent contracts, books, 
documents, papers, and records of the related entity(s), contractor(s), 
or subcontractor(s) involving transactions related to the M+C contract; 
and
    (ii) HHS', the Comptroller General's, or their designee's right to 
inspect, evaluate, and audit any pertinent information for any 
particular contract period will exist through 6 years from the final 
date of the contract period or from the date of completion of any audit, 
whichever is later.

[[Page 905]]

    (3) All contracts or written arrangements between M+C organizations 
and providers, related entities, contractors, subcontractors, first tier 
and downstream entities must contain the following:
    (i) Enrollee protection provisions that provide, consistent with 
paragraph (g)(1) of this section, arrangements that prohibit providers 
from holding an enrollee liable for payment of any fees that are the 
obligation of the M+C organization.
    (ii) Accountability provisions that indicate that--
    (A) The M+C organization oversees and is accountable to CMS for any 
functions or responsibilities that are described in these standards; and
    (B) The M+C organization may only delegate activities or functions 
to a provider, related entity, contractor, or subcontractor in a manner 
consistent with requirements set forth at paragraph (i)(4) of this 
section.
    (iii) A provision requiring that any services or other activity 
performed by a related entity, contractor, subcontractor, or first-tier 
or downstream entity in accordance with a contract or written agreement 
are consistent and comply with the M+C organization's contractual 
obligations.
    (4) If any of the M+C organizations' activities or responsibilities 
under its contract with CMS are delegated to other parties, the 
following requirements apply to any related entity, contractor, 
subcontractor, or provider:
    (i) Written arrangements must specify delegated activities and 
reporting responsibilities.
    (ii) Written arrangements must either provide for revocation of the 
delegation activities and reporting requirements or specify other 
remedies in instances where CMS or the M+C organization determine that 
such parties have not performed satisfactorily.
    (iii) Written arrangements must specify that the performance of the 
parties is monitored by the M+C organization on an ongoing basis.
    (iv) Written arrangements must specify that either--
    (A) The credentials of medical professionals affiliated with the 
party or parties will be either reviewed by the M+C organization; or
    (B) The credentialing process will be reviewed and approved by the 
M+C organization and the M+C organization must audit the credentialing 
process on an ongoing basis.
    (v) All contracts or written arrangements must specify that the 
related entity, contractor, or subcontractor must comply with all 
applicable Medicare laws, regulations, and CMS instructions.
    (5) If the M+C organization delegates selection of the providers, 
contractors, or subcontractor to another organization, the M+C 
organization's written arrangements with that organization must state 
that the CMS-contracting M+C organization retains the right to approve, 
suspend, or terminate any such arrangement.
    (j) Additional contract terms. The M+C organization agrees to 
include in the contract such other terms and conditions as CMS may find 
necessary and appropriate in order to implement requirements in this 
part.
    (k) Severability of contracts. The contract must provide that, upon 
CMS's request--
    (1) The contract will be amended to exclude any M+C plan or State-
licensed entity specified by CMS; and
    (2) A separate contract for any such excluded plan or entity will be 
deemed to be in place when such a request is made.
    (l) Certification of data that determine payment. As a condition for 
receiving a monthly payment under subpart F of this part, the M+C 
organization agrees that its chief executive officer (CEO), chief 
financial officer (CFO), or an individual delegated the authority to 
sign on behalf of one of these officers, and who reports directly to 
such officer, must request payment under the contract on a document that 
certifies (based on best knowledge, information, and belief) the 
accuracy, completeness, and truthfulness of relevant data that CMS 
requests. Such data include specified enrollment information, encounter 
data, and other information that CMS may specify.
    (1) The CEO, CFO, or an individual delegated the authority to sign 
on behalf of one of these officers, and who reports directly to such 
officer, must certify that each enrollee for whom the

[[Page 906]]

organization is requesting payment is validly enrolled in an M+C plan 
offered by the organization and the information relied upon by CMS in 
determining payment (based on best knowledge, information, and belief) 
is accurate, complete, and truthful.
    (2) The CEO, CFO, or an individual delegated with the authority to 
sign on behalf of one of these officers, and who reports directly to 
such officer, must certify (based on best knowledge, information, and 
belief) that the encounter data it submits under Sec. 422.257 are 
accurate, complete, and truthful.
    (3) If such encounter data are generated by a related entity, 
contractor, or subcontractor of an M+C organization, such entity, 
contractor, or subcontractor must similarly certify (based on best 
knowledge, information, and belief) the accuracy, completeness, and 
truthfulness of the data.
    (4) The CEO, CFO, or an individual delegated the authority to sign 
on behalf of one of these officers, and who reports directly to such 
officer, must certify (based on best knowledge, information, and belief) 
that the information in its ACR submission is accurate, complete, and 
truthful and fully conforms to the requirements in Sec. 422.310.

[63 FR 35099, June 26, 1998; 63 FR 52614, Oct. 1, 1998, as amended at 64 
FR 7980, Feb. 17, 1999; 65 FR 40327, June 29, 2000]



Sec. 422.504  Effective date and term of contract.

    (a) Effective date. The contract is effective on the date specified 
in the contract between the M+C organization and CMS and, for a contract 
that provides for coverage under an MSA plan, not earlier than January 
1999.
    (b) Term of contract. Each contract is for a period of at least 12 
months.
    (c) Renewal of contract. In accordance with Sec. 422.506, contracts 
are renewed annually only if--
    (1) CMS informs the M+C organization that it authorizes a renewal; 
and
    (2) The M+C organization has not provided CMS with a notice of 
intention not to renew.

[63 FR 35099, June 26, 1998, as amended at 65 FR 40328, June 29, 2000]



Sec. 422.506  Nonrenewal of contract.

    (a) Nonrenewal by an M+C organization. (1) An M+C organization may 
elect not to renew its contract with CMS as of the end of the term of 
the contract for any reason provided it meets the timeframes for doing 
so set forth in paragraphs (a)(2) and (a)(3) of this section.
    (2) If an M+C organization does not intend to renew its contract, it 
must notify--
    (i) CMS in writing, by July 1 of the year in which the contract 
would end;
    (ii) Each Medicare enrollee, at least 90 days before the date on 
which the nonrenewal is effective. This notice must include a written 
description of alternatives available for obtaining Medicare services 
within the service area, including alternative M+C plans, Medigap 
options, and original Medicare and must receive CMS approval.
    (iii) The general public, at least 90 days before the end of the 
current calendar year, by publishing a notice in one or more newspapers 
of general circulation in each community located in the M+C 
organization's service area.
    (3) CMS may accept a nonrenewal notice submitted after July 1 if--
    (i) The M+C organization notifies its Medicare enrollees and the 
public in accordance with paragraph (a)(2)(ii) and (a)(2)(iii) of this 
section; and
    (ii) Acceptance is not inconsistent with the effective and efficient 
administration of the Medicare program.
    (4) If an M+C organization does not renew a contract under this 
paragraph (a), CMS will not enter into a contract with the organization 
for 2 years unless there are special circumstances that warrant special 
consideration, as determined by CMS.
    (b) CMS decision not to renew. (1) CMS may elect not to authorize 
renewal of a contract for any of the following reasons:
    (i) The M+C organization has not fully implemented or shown 
discernable progress in implementing quality improvement projects as 
defined in Sec. 422.152(d).
    (ii) For any of the reasons listed in Sec. 422.510(a), which would 
also permit CMS to terminate the contract.
    (iii) The M+C organization has committed any of the acts in 
Sec. 422.752(a)

[[Page 907]]

that would support the imposition of intermediate sanctions or civil 
money penalties under subpart O of this part.
    (2) Notice. CMS provides notice of its decision whether to authorize 
renewal of the contract as follows:
    (i) To the M+C organization by May 1 of the contract year.
    (ii) If CMS decides not to authorize a renewal of the contract, to 
the M+C organization's Medicare enrollees by mail at least 90 days 
before the end of the current calendar year.
    (iii) If CMS decides not to authorize a renewal of the contract, to 
the general public at least 90 days before the end of the current 
calendar year, by publishing a notice in one or more newspapers of 
general circulation in each community or county located in the M+C 
organization's service area.
    (3) Notice of appeal rights. CMS gives the M+C organization written 
notice of its right to appeal the decision not to renew in accordance 
with Sec. 422.644.

[63 FR 35099, June 26, 1998, as amended at 65 FR 40328, June 29, 2000; 
67 FR 13289, Mar. 22, 2002]



Sec. 422.508  Modification or termination of contract by mutual consent.

    (a) A contract may be modified or terminated at any time by written 
mutual consent.
    (1) If the contract is terminated by mutual consent, except as 
provided in paragraph (b) of this section, the M+C organization must 
provide notice to its Medicare enrollees and the general public as 
provided in Sec. 422.512(b)(2) and (b)(3).
    (2) If the contract is modified by mutual consent, the M+C 
organization must notify its Medicare enrollees of any changes that CMS 
determines are appropriate for notification within timeframes specified 
by CMS.
    (b) If the contract terminated by mutual consent is replaced the day 
following such termination by a new M+C contract, the M+C organization 
is not required to provide the notice specified in paragraph (a)(1) of 
this section.



Sec. 422.510  Termination of contract by CMS.

    (a) Termination by CMS. CMS may terminate a contract for any of the 
following reasons:
    (1) The M+C organization has failed substantially to carry out the 
terms of its contract with CMS.
    (2) The M+C organization is carrying out its contract with CMS in a 
manner that is inconsistent with the effective and efficient 
implementation of this part.
    (3) CMS determines that the M+C organization no longer meets the 
requirements of this part for being a contracting organization.
    (4) The M+C organization commits or participates in fraudulent or 
abusive activities affecting the Medicare program, including submission 
of fraudulent data.
    (5) The M+C organization experiences financial difficulties so 
severe that its ability to make necessary health services available is 
impaired to the point of posing an imminent and serious risk to the 
health of its enrollees, or otherwise fails to make services available 
to the extent that such a risk to health exists.
    (6) The M+C organization substantially fails to comply with the 
requirements in subpart M of this part relating to grievances and 
appeals.
    (7) The M+C organization fails to provide CMS with valid encounter 
data as required under Sec. 422.257.
    (8) The M+C organization fails to implement an acceptable quality 
assessment and performance improvement program as required under subpart 
D of this part.
    (9) The M+C organization substantially fails to comply with the 
prompt payment requirements in Sec. 422.520.
    (10) The M+C organization substantially fails to comply with the 
service access requirements in Sec. 422.112 or Sec. 422.114.
    (11) The M+C organization fails to comply with the requirements of 
Sec. 422.208 regarding physician incentive plans.
    (12) The M+C organization substantially fails to comply with the 
marketing requirements in Sec. 422.80.
    (b) Notice. If CMS decides to terminate a contract for reasons other 
than the grounds specified in Sec. 422.510(a)(5), it gives notice of the 
termination as follows:
    (1) Termination of contract by CMS. (i) CMS notifies the M+C 
organization in

[[Page 908]]

writing 90 days before the intended date of the termination.
    (ii) The M+C organization notifies its Medicare enrollees of the 
termination by mail at least 30 days before the effective date of the 
termination.
    (iii) The M+C organization notifies the general public of the 
termination at least 30 days before the effective date of the 
termination by publishing a notice in one or more newspapers of general 
circulation in each community or county located in the M+C 
organization's service area.
    (2) Immediate termination of contract by CMS. (i) For terminations 
based on violations prescribed in Sec. 422.510(a)(5), CMS notifies the 
M+C organization in writing that its contract has been terminated 
effective the date of the termination decision by CMS. If termination is 
effective in the middle of a month, CMS has the right to recover the 
prorated share of the capitation payments made to the M+C organization 
covering the period of the month following the contract termination.
    (ii) CMS notifies the M+C organization's Medicare enrollees in 
writing of CMS's decision to terminate the M+C organization's contract. 
This notice occurs no later than 30 days after CMS notifies the plan of 
its decision to terminate the M+C contract. CMS simultaneously informs 
the Medicare enrollees of alternative options for obtaining Medicare 
services, including alternative M+C organizations in a similar 
geographic area and original Medicare.
    (iii) CMS notifies the general public of the termination no later 
than 30 days after notifying the plan of CMS's decision to terminate the 
M+C contract. This notice is published in one or more newspapers of 
general circulation in each community or county located in the M+C 
organization's service area.
    (c) Corrective action plan--(1) General. Before terminating a 
contract for reasons other than the grounds specified in paragraph 
(a)(5) of this section, CMS provides the M+C organization with 
reasonable opportunity to develop and receive CMS approval of a 
corrective action plan to correct the deficiencies that are the basis of 
the proposed termination.
    (2) Exception. If a contract is terminated under Sec. 422.510(a)(5), 
the M+C organization will not have the opportunity to submit a 
corrective action plan.
    (d) Appeal rights. If CMS decides to terminate a contract, it sends 
written notice to the M+C organization informing it of its termination 
appeal rights in accordance with subpart N of this part.

[63 FR 35099, June 26, 1998, as amended at 65 FR 40328, June 29, 2000]



Sec. 422.512  Termination of contract by the M+C organization.

    (a) Cause for termination. The M+C organization may terminate the 
M+C contract if CMS fails to substantially carry out the terms of the 
contract.
    (b) Notice. The M+C organization must give advance notice as 
follows:
    (1) To CMS, at least 90 days before the intended date of 
termination. This notice must specify the reasons why the M+C 
organization is requesting contract termination.
    (2) To its Medicare enrollees, at least 60 days before the 
termination effective date. This notice must include a written 
description of alternatives available for obtaining Medicare services 
within the services area, including alternative M+C plans, Medigap 
options, original Medicare and must receive CMS approval.
    (3) To the general public at least 60 days before the termination 
effective date by publishing an CMS-approved notice in one or more 
newspapers of general circulation in each community or county located in 
the M+C organization's geographic area.
    (c) Effective date of termination. The effective date of the 
termination is determined by CMS and is at least 90 days after the date 
CMS receives the M+C organization's notice of intent to terminate.
    (d) CMS's liability. CMS's liability for payment to the M+C 
organization ends as of the first day of the month after the last month 
for which the contract is in effect.
    (e) Effect of termination by the organization. CMS does not enter 
into an agreement with an organization that has terminated its contract 
within the

[[Page 909]]

preceding 2 years unless there are circumstances that warrant special 
consideration, as determined by CMS.

[63 FR 35099, June 26, 1998, as amended at 67 FR 13288, Mar. 22, 2002]



Sec. 422.514  Minimum enrollment requirements.

    (a) Basic rule. Except as provided in paragraph (b) of this section, 
CMS does not enter into a contract under this subpart unless the 
organization meets the following minimum enrollment requirement--
    (1) At least 5,000 individuals (or 1,500 individuals if the 
organization is a PSO) are enrolled for the purpose of receiving health 
benefits from the organization; or
    (2) At least 1,500 individuals (or 500 individuals if the 
organization is a PSO) are enrolled for purposes of receiving health 
benefits from the organization and the organization primarily serves 
individuals residing outside of urbanized areas as defined in 
Sec. 412.62(f) (or, in the case of a PSO, the PSO meets the requirements 
in Sec. 422.352(c)).
    (3) Except as provided for in paragraph (b) of this section, an M+C 
organization must maintain a minimum enrollment as defined in paragraphs 
(a)(1) and (a)(2) of this section for the duration of its contract.
    (b) Minimum enrollment waiver. (1) For a contract applicant or M+C 
organization that does not meet the applicable requirement of paragraph 
(a) of this section at application for an M+C contract or during the 
first 3 years of the contract, CMS may waive the minimum enrollment 
requirement as provided for below. To receive a waiver, a contract 
applicant or M+C organization must demonstrate to CMS's satisfaction 
that it is capable of administering and managing an M+C contract and is 
able to manage the level of risk required under the contract. Factors 
that CMS takes into consideration in making this evaluation include the 
extent to which--
    (i) The contract applicant or M+C organization's management and 
providers have previous experience in managing and providing health care 
services under a risk-based payment arrangement to at least as many 
individuals as the applicable minimum enrollment for the entity as 
described in paragraph (a) of this section, or
    (ii) The contract applicant or M+C organization has the financial 
ability to bear financial risk under an M+C contract. In determining 
whether an organization is capable of bearing risk, CMS considers 
factors such as the organization's management experience as described in 
paragraph (b)(1)(i) of this section and stop-loss insurance that is 
adequate and acceptable to CMS; and
    (iii) The contract applicant or M+C organization is able to 
establish a marketing and enrollment process that allows it to meet the 
applicable enrollment requirement specified in paragraph (a) of this 
section before completion of the third contract year.
    (2) If an M+C organization fails to meet the enrollment requirement 
in the first year, CMS may waive the minimum requirements for another 
year provided that the organization--
    (i) Requests an additional minimum enrollment waiver no later than 
120 days before the end of the first year;
    (ii) Continues to demonstrate it is capable of administering and 
managing an M+C contract and is able to manage the level of risk; and,
    (iii) Demonstrates an acceptable marketing and enrollment process. 
Enrollment projections for the second year of the waiver will become the 
organization's transitional enrollment standard.
    (3) If an M+C organization fails to meet the enrollment requirement 
in the second year, CMS may waive the minimum requirements for the third 
year only if the organization has attained the transitional enrollment 
standard as described in paragraph (b)(2)(iii) of this section.
    (c) Failure to meet enrollment requirements. CMS may elect not to 
renew its contract with an M+C organization that fails to meet the 
applicable enrollment requirement in paragraph (a) of this section

[63 FR 35099, June 26, 1998, as amended at 65 FR 40328, June 29, 2000]



Sec. 422.516  Reporting requirements.

    (a) Required information. Each M+C organization must have an 
effective

[[Page 910]]

procedure to develop, compile, evaluate, and report to CMS, to its 
enrollees, and to the general public, at the times and in the manner 
that CMS requires, and while safeguarding the confidentiality of the 
doctor-patient relationship, statistics and other information with 
respect to the following:
    (1) The cost of its operations.
    (2) The patterns of utilization of its services.
    (3) The availability, accessibility, and acceptability of its 
services.
    (4) To the extent practical, developments in the health status of 
its enrollees.
    (5) Information demonstrating that the M+C organization has a 
fiscally sound operation.
    (6) Other matters that CMS may require.
    (b) Significant business transactions. Each M+C organization must 
report to CMS annually, within 120 days of the end of its fiscal year 
(unless for good cause shown, CMS authorizes an extension of time), the 
following:
    (1) A description of significant business transactions (as defined 
in Sec. 422.500) between the M+C organization and a party in interest.
    (2) With respect to those transactions--
    (i) A showing that the costs of the transactions listed in paragraph 
(c) of this section do not exceed the costs that would be incurred if 
these transactions were with someone who is not a party in interest; or
    (ii) If they do exceed, a justification that the higher costs are 
consistent with prudent management and fiscal soundness requirements.
    (3) A combined financial statement for the M+C organization and a 
party in interest if either of the following conditions is met:
    (i) Thirty-five percent or more of the costs of operation of the M+C 
organization go to a party in interest.
    (ii) Thirty-five percent or more of the revenue of a party in 
interest is from the M+C organization.
    (c) Requirements for combined financial statements. (1) The combined 
financial statements required by paragraph (b)(3) of this section must 
display in separate columns the financial information for the M+C 
organization and each of the parties in interest.
    (2) Inter-entity transactions must be eliminated in the consolidated 
column.
    (3) The statements must have been examined by an independent auditor 
in accordance with generally accepted accounting principles and must 
include appropriate opinions and notes.
    (4) Upon written request from an M+C organization showing good 
cause, CMS may waive the requirement that the organization's combined 
financial statement include the financial information required in this 
paragraph (c) with respect to a particular entity.
    (d) Reporting and disclosure under ERISA. (1) For any employees' 
health benefits plan that includes an M+C organization in its offerings, 
the M+C organization must furnish, upon request, the information the 
plan needs to fulfill its reporting and disclosure obligations (with 
respect to the particular M+C organization) under the Employee 
Retirement Income Security Act of 1974 (ERISA).
    (2) The M+C organization must furnish the information to the 
employer or the employer's designee, or to the plan administrator, as 
the term ``administrator'' is defined in ERISA.
    (e) Loan information. Each organization must notify CMS of any loans 
or other special financial arrangements it makes with contractors, 
subcontractors and related entities.
    (f) Enrollee access to Information. Each M+C organization must make 
the information reported to CMS under Sec. 422.502(f)(1) available to 
its enrollees upon reasonable request.



Sec. 422.520  Prompt payment by M+C organization.

    (a) Contract between CMS and the M+C organization.
    (1) The contract between CMS and the M+C organization must provide 
that the M+C organization will pay 95 percent of the ``clean claims'' 
within 30 days of receipt if they are submitted by, or on behalf of, an 
enrollee of an M+C private fee-for-service plan or are claims for 
services that are not furnished under a written agreement between the 
organization and the provider.

[[Page 911]]

    (2) The M+C organization must pay interest on clean claims that are 
not paid within 30 days in accordance with sections 1816(c)(2)(B) and 
1842(c)(2)(B).
    (3) All other claims must be paid or denied within 60 calendar days 
from the date of the request.
    (b) Contracts between M+C organizations and providers and suppliers. 
Contracts or other written agreements between M+C organizations and 
providers must contain a prompt payment provision, the terms of which 
are developed and agreed to by both the M+C organization and the 
relevant provider.
    (c) Failure to comply. If CMS determines, after giving notice and 
opportunity for hearing, that an M+C organization has failed to make 
payments in accordance with paragraph (a) of this section, CMS may 
provide--
    (1) For direct payment of the sums owed to providers, or M+C private 
fee-for-service plan enrollees; and
    (2) For appropriate reduction in the amounts that would otherwise be 
paid to the organization, to reflect the amounts of the direct payments 
and the cost of making those payments.

[63 FR 35099, June 26, 1998, as amended at 65 FR 40328, June 29, 2000]



Sec. 422.524  Special rules for RFB societies.

    In order to participate as an M+C organization, an RFB society--
    (a) May not impose any limitation on membership based on any factor 
related to health status; and
    (b) Must offer, in addition to the M+C RFB plan, health coverage to 
individuals who are members of the church or convention or group of 
churches with which the society is affiliated, but who are not entitled 
to receive benefits from the Medicare program.



Subpart L--Effect of Change of Ownership or Leasing of Facilities During 
                            Term of Contract

    Source: 63 FR 35067, June 26, 1998, unless otherwise noted.

    Editorial Note: Nomenclature changes to subpart L appear at 63 FR 
35106, June 26, 1998.



Sec. 422.550  General provisions.

    (a) What constitutes change of ownership--(1) Partnership. The 
removal, addition, or substitution of a partner, unless the partners 
expressly agree otherwise as permitted by applicable State law, 
constitutes a change of ownership.
    (2) Asset Sale. Transfer of title and property to another party 
constitutes change of ownership.
    (3) Corporation. (i) The merger of the M+C organization's 
corporation into another corporation or the consolidation of the M+C 
organization with one or more other corporations, resulting in a new 
corporate body, constitutes a change of ownership.
    (ii) Transfer of corporate stock or the merger of another 
corporation into the M+C organization's corporation, with the M+C 
organization surviving, does not ordinarily constitute change of 
ownership.
    (b) Advance notice requirement. (1) An M+C organization that has a 
Medicare contract in effect and is considering or negotiating a change 
in ownership must notify CMS at least 60 days before the anticipated 
effective date of the change. The M+C organization must also provide 
updated financial information and a discussion of the financial and 
solvency impact of the change of ownership on the surviving 
organization.
    (2) If the M+C organization fails to give CMS the required notice 
timely, it continues to be liable for capitation payments that CMS makes 
to it on behalf of Medicare enrollees after the date of change of 
ownership.
    (c) Novation agreement defined. A novation agreement is an agreement 
among the current owner of the M+C organization, the prospective new 
owner, and CMS--
    (1) That is embodied in a document executed and signed by all three 
parties;
    (2) That meets the requirements of Sec. 422.552; and
    (3) Under which CMS recognizes the new owner as the successor in 
interest to the current owner's Medicare contract.
    (d) Effect of change of ownership without novation agreement. Except 
to the extent provided in paragraph (b)(2) of this section, the effect 
of a change of

[[Page 912]]

ownership without a novation agreement is that--
    (1) The existing contract becomes invalid; and
    (2) If the new owner wishes to participate in the Medicare program, 
it must apply for, and enter into, a contract in accordance with subpart 
K of this part.
    (e) Effect of change of ownership with novation agreement. If the 
M+C organization submits a novation agreement that meets the 
requirements of Sec. 422.552, and CMS signs it, the new owner becomes 
the successor in interest to the current owner's Medicare contract.

[60 FR 45681, Sept. 1, 1995. Redesignated and amended at 63 FR 35067, 
35106, June 26, 1998; 63 FR 52614, Oct. 1, 1998; 65 FR 40328, June 29, 
2000]



Sec. 422.552  Novation agreement requirements.

    (a) Conditions for CMS approval of a novation agreement. HFCA 
approves a novation agreement if the following conditions are met:
    (1) Advance notification. The M+C organization notifies CMS at least 
60 days before the date of the proposed change of ownership. The M+C 
organization also provides CMS with updated financial information and a 
discussion of the financial and solvency impact of the change of 
ownership on the surviving organization.
    (2) Advance submittal of agreement. The M+C organization submits to 
CMS, at least 30 days before the proposed change of ownership date, 
three signed copies of the novation agreement containing the provisions 
specified in paragraph (b) of this section, and one copy of other 
relevant documents required by CMS.
    (3) CMS's determination. CMS determines that--
    (i) The proposed new owner is in fact a successor in interest to the 
contract;
    (ii) Recognition of the new owner as a successor in interest to the 
contract is in the best interest of the Medicare program; and
    (iii) The successor organization meets the requirements to qualify 
as an M+C organization under subpart J of this part.
    (b) Provisions of a novation agreement. (1) Assumption of contract 
obligations. The new owner must assume all obligations under the 
contract.
    (2) Waiver of right to reimbursement. The previous owner must waive 
its rights to reimbursement for covered services furnished during the 
rest of the current contract period.
    (3) Guarantee of performance. (i) The previous owner must guarantee 
performance of the contract by the new owner during the contract period; 
or
    (ii) The new owner must post a performance bond that is satisfactory 
to CMS.
    (4) Records access. The previous owner must agree to make its books 
and records and other necessary information available to the new owner 
and to CMS to permit an accurate determination of costs for the final 
settlement of the contract period.

[50 FR 1346, Jan. 10, 1985, as amended at 56 FR 8853, Mar. 1, 1991; 58 
FR 38079, July 15, 1993; 60 FR 45681, Sept. 1, 1995. Redesignated and 
amended at 63 FR 35067, 35106, June 26, 1998]



Sec. 422.553  Effect of leasing of an M+C organization's facilities.

    (a) General effect of leasing. If an M+C organization leases all or 
part of its facilities to another entity, the other entity does not 
acquire M+C organization status under section 1876 of the Act.
    (b) Effect of lease of all facilities. (1) If an M+C organization 
leases all of its facilities to another entity, the contract terminates.
    (2) If the other entity wishes to participate in Medicare as an M+C 
organization, it must apply for and enter into a contract in accordance 
with subpart L of this part.
    (c) Effect of partial lease of facilities. If the M+C organization 
leases part of its facilities to another entity, its contract with CMS 
remains in effect while CMS surveys the M+C organization to determine 
whether it continues to be in compliance with the applicable 
requirements and qualifying conditions specified in subpart K of this 
part.

[50 FR 1346, Jan. 10, 1985; 50 FR 20570, May 17, 1985, as amended at 58 
FR 38079, July 15, 1993; 60 FR 45681, Sept. 1, 1995. Redesignated and 
amended at 63 FR 35067, 35106, June 26, 1998]

[[Page 913]]



     Subpart M--Grievances, Organization Determinations and Appeals

    Source: 63 FR 35107, June 26, 1998, unless otherwise noted.



Sec. 422.560  Basis and scope.

    (a) Statutory basis. (1) Section 1852(f) of the Act provides that an 
M+C organization must establish meaningful grievance procedures.
    (2) Section 1852(g) of the Act establishes requirements that an M+C 
organization must meet concerning organization determinations and 
appeals.
    (b) Scope. This subpart sets forth--
    (1) Requirements for M+C organizations with respect to grievance 
procedures, organization determinations, and appeal procedures.
    (2) The rights of M+C enrollees with respect to organization 
determinations, and grievance and appeal procedures.
    (3) The rules concerning notice of noncoverage of inpatient hospital 
care.
    (4) The rules that apply when an M+C enrollee requests immediate QIO 
review of a determination that he or she no longer needs inpatient 
hospital care.



Sec. 422.561  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Appeal means any of the procedures that deal with the review of 
adverse organization determinations on the health care services the 
enrollee believes he or she is entitled to receive, including delay in 
providing, arranging for, or approving the health care services (such 
that a delay would adversely affect the health of the enrollee), or on 
any amounts the enrollee must pay for a service, as defined under 
Sec. 422.566(b). These procedures include reconsiderations by the M+C 
organization, and if necessary, an independent review entity, hearings 
before ALJs, review by the Departmental Appeals Board (DAB), and 
judicial review.
    Authorized representative means an individual authorized by an 
enrollee, or under State law, to act on his or her behalf in obtaining 
an organization determination or in dealing with any of the levels of 
the appeal process, subject to the rules described in 20 CFR part 404, 
subpart R, unless otherwise stated in this subpart.
    Enrollee means an M+C eligible individual who has elected an M+C 
plan offered by an M+C organization, or his or her authorized 
representative.
    Grievance means any complaint or dispute other than one involving an 
organization determination, as defined in Sec. 422.566(b).
    Physician has the meaning given the term in section 1861(r) of the 
Act.

[63 FR 35067, June 26, 1998, as amended at 65 FR 40328, June 29, 2000]



Sec. 422.562  General provisions.

    (a) Responsibilities of the M+C organization. (1) An M+C 
organization, with respect to each M+C plan that it offers, must 
establish and maintain--
    (i) A grievance procedure as described in Sec. 422.564 for 
addressing issues that do not involve organization determinations;
    (ii) A procedure for making timely organization determinations;
    (iii) Appeal procedures that meet the requirements of this subpart 
for issues that involve organization determinations; and
    (2) An M+C organization must ensure that all enrollees receive 
written information about the--
    (i) Grievance and appeal procedures that are available to them 
through the M+C organization; and
    (ii) Complaint process available to the enrollee under the QIO 
process as set forth under section 1154(a)(14) of the Act.
    (3) In accordance with subpart K of this part, if the M+C 
organization delegates any of its responsibilities under this subpart to 
another entity or individual through which the organization provides 
health care services, the M+C organization is ultimately responsible for 
ensuring that the entity or individual satisfies the relevant 
requirements of this subpart.
    (b) Rights of M+C enrollees. In accordance with the provisions of 
this subpart, enrollees have the following rights:
    (1) The right to have grievances between the enrollee and the M+C 
organization heard and resolved, as described in Sec. 422.564.

[[Page 914]]

    (2) The right to a timely organization determination, as provided 
under Sec. 422.566.
    (3) The right to request an expedited organization determination, as 
provided under Sec. 422.570.
    (4) If dissatisfied with any part of an organization determination, 
the following appeal rights:
    (i) The right to a reconsideration of the adverse organization 
determination by the M+C organization, as provided under Sec. 422.578.
    (ii) The right to request an expedited reconsideration, as provided 
under Sec. 422.584.
    (iii) If, as a result of a reconsideration, an M+C organization 
affirms, in whole or in part, its adverse organization determination, 
the right to an automatic reconsidered determination made by an 
independent, outside entity contracted by CMS, as provided in 
Sec. 422.592.
    (iv) The right to an ALJ hearing if the amount in controversy is 
$100 or more, as provided in Sec. 422.600.
    (v) The right to request DAB review of the ALJ hearing decision, as 
provided in Sec. 422.608.
    (vi) The right to judicial review of the hearing decision if the 
amount in controversy is $1000 or more, as provided in Sec. 422.612.
    (c) Limits on when this subpart applies. (1) If an enrollee receives 
immediate QIO review (as provided in Sec. 422.622) of a determination of 
noncoverage of inpatient hospital care--
    (i) The enrollee is not entitled to review of that issue by the M+C 
organization; and
    (ii) The QIO review decision is subject only to the appeal 
procedures set forth in part 473 of this chapter.
    (2) If an enrollee has no further liability to pay for services that 
were furnished by an M+C organization, a determination regarding these 
services is not subject to appeal.
    (d) When other regulations apply. Unless this subpart provides 
otherwise, the regulations in 20 CFR, part 404, subparts J and R 
(covering, respectively, the administrative review and hearing process 
and representation of parties under title II of the Act), apply under 
this subpart to the extent they are appropriate.

[63 FR 35067, June 26, 1998, as amended at 65 FR 40329, June 29, 2000]



Sec. 422.564  Grievance procedures.

    (a) General rules. (1) Each M+C organization must provide meaningful 
procedures for timely hearing and resolution of grievances between 
enrollees and the organization or any other entity or individual through 
which the organization provides health care services under any M+C plan 
it offers.
    (2) Grievance procedures must meet any guidelines established by 
CMS.
    (b) Distinguished from organization determinations and appeals. 
Grievance procedures are separate and distinct from organization 
determinations and appeal procedures, which address organization 
determinations.
    (c) Distinguished from the QIO complaint process. Under section 
1154(a)(14) of the Act, the QIO must review beneficiaries' written 
complaints about the quality of services they have received under the 
Medicare program; this process is separate and distinct from the 
grievance procedures of the M+C organization.



Sec. 422.566  Organization determinations.

    (a) Responsibilities of the M+C organization. Each M+C organization 
must have a procedure for making timely organization determinations (in 
accordance with the requirements of this subpart) regarding the benefits 
an enrollee is entitled to receive under an M+C plan, including basic 
benefits as described under Sec. 422.100(c)(1) and mandatory and 
optional supplemental benefits as described under Sec. 422.102, and the 
amount, if any, that the enrollee is required to pay for a health 
service. The M+C organization must have a standard procedure for making 
determinations, in accordance with Sec. 422.568, and an expedited 
procedure for situations in which applying the standard procedure could 
seriously jeopardize the enrollee's life, health, or ability to regain 
maximum function, in accordance with Secs. 422.570 and 422.572.
    (b) Actions that are organization determinations. An organization 
determination is any determination made by an

[[Page 915]]

M+C organization with respect to any of the following:
    (1) Payment for temporarily out of the area renal dialysis services, 
emergency services, post-stabilization care, or urgently needed 
services.
    (2) Payment for any other health services furnished by a provider 
other than the M+C organization that the enrollee believes--
    (i) Are covered under Medicare; or
    (ii) If not covered under Medicare, should have been furnished, 
arranged for, or reimbursed by the M+C organization.
    (3) The M+C organization's refusal to provide or pay for services, 
in whole or in part, including the type or level of services, that the 
enrollee believes should be furnished or arranged for by the M+C 
organization.
    (4) Discontinuation of a service if the enrollee believes that 
continuation of the services is medically necessary.
    (5) Failure of the M+C organization to approve, furnish, arrange 
for, or provide payment for health care services in a timely manner, or 
to provide the enrollee with timely notice of an adverse determination, 
such that a delay would adversely affect the health of the enrollee.
    (c) Who can request an organization determination. Any of the 
parties listed in Sec. 422.574 can request an organization 
determination, with the exception that only the parties listed in 
Sec. 422.570(a) can request an expedited determination.

[63 FR 35067, June 26, 1998, as amended at 65 FR 40329, June 29, 2000]



Sec. 422.568  Standard timeframes and notice requirements for organization determinations.

    (a) Timeframe for requests for service. When a party has made a 
request for a service, the M+C organization must notify the enrollee of 
its determination as expeditiously as the enrollee's health condition 
requires, but no later than 14 calendar days after the date the 
organization receives the request for a standard organization 
determination. The M+C organization may extend the timeframe by up to 14 
calendar days if the enrollee requests the extension or if the 
organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an M+C 
organization's decision to deny). When the M+C organization extends the 
timeframe, it must notify the enrollee in writing of the reasons for the 
delay, and inform the enrollee of the right to file a grievance if he or 
she disagrees with the M+C organization's decision to grant an 
extension. The M+C organization must notify the enrollee of its 
determination as expeditiously as the enrollee's health condition 
requires, but no later than upon expiration of the extension.
    (b) Timeframe for requests for payment. The M+C organization must 
process requests for payment according to the ``prompt payment'' 
provisions set forth in Sec. 422.520.
    (c) Written notification by practitioners. At each patient encounter 
with an M+C enrollee, a practitioner must notify the enrollee of his or 
her right to receive, upon request, a detailed written notice from the 
M+C organization regarding the enrollee's services, consistent with 
paragraph (d) of this section. The practitioner's notification must--
    (1) Provide the enrollee with the information necessary to contact 
the M+C organization; and
    (2) Comply with any other requirements specified by CMS.
    (d) Written notice for M+C organization denials. If an enrollee 
requests an M+C organization to provide a detailed notice of a 
practitioner's decision to deny a service in whole or in part, or if an 
M+C organization decides to deny service or payment in whole or in part, 
it must give the enrollee written notice of the determination.
    (e) Form and content of the M+C organization notice. The notice of 
any denial under paragraph (d) of this section must--
    (1) Use approved notice language in a readable and understandable 
form;
    (2) State the specific reasons for the denial;
    (3) Inform the enrollee of his or her right to a reconsideration;

[[Page 916]]

    (4)(i) For service denials, describe both the standard and expedited 
reconsideration processes, including the enrollee's right to, and 
conditions for, obtaining an expedited reconsideration and the rest of 
the appeal process; and
    (ii) For payment denials, describe the standard reconsideration 
process and the rest of the appeal process; and
    (5) Comply with any other notice requirements specified by CMS.
    (f) Effect of failure to provide timely notice. If the M+C 
organization fails to provide the enrollee with timely notice of an 
organization determination as specified in this section, this failure 
itself constitutes an adverse organization determination and may be 
appealed.

[65 FR 40329, June 29, 2000]



Sec. 422.570  Expediting certain organization determinations.

    (a) Request for expedited determination. An enrollee or a physician 
(regardless of whether the physician is affiliated with the M+C 
organization) may request that an M+C organization expedite an 
organization determination involving the issues described in 
Sec. 422.566(b)(3) and (b)(4). (This does not include requests for 
payment of services already furnished.)
    (b) How to make a request. (1) To ask for an expedited 
determination, an enrollee or a physician must submit an oral or written 
request directly to the M+C organization or, if applicable, to the 
entity responsible for making the determination, as directed by the M+C 
organization.
    (2) A physician may provide oral or written support for a request 
for an expedited determination.
    (c) How the M+C organization must process requests. The M+C 
organization must establish and maintain the following procedures for 
processing requests for expedited determinations:
    (1) Establish an efficient and convenient means for individuals to 
submit oral or written requests. The M+C organization must document all 
oral requests in writing and maintain the documentation in the case 
file.
    (2) Promptly decide whether to expedite a determination, based on 
the following requirements:
    (i) For a request made by an enrollee the M+C organization must 
provide an expedited determination if it determines that applying the 
standard timeframe for making a determination could seriously jeopardize 
the life or health of the enrollee or the enrollee's ability to regain 
maximum function.
    (ii) For a request made or supported by a physician, the M+C 
organization must provide an expedited determination if the physician 
indicates that applying the standard timeframe for making a 
determination could seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial. If an M+C organization denies a 
request for expedited determination, it must take the following actions:
    (1) Automatically transfer a request to the standard timeframe and 
make the determination within the 14-day timeframe established in 
Sec. 422.568 for a standard determination. The 14-day period begins with 
the day the M+C organization receives the request for expedited 
determination.
    (2) Give the enrollee prompt oral notice of the denial and 
subsequently deliver, within 3 calendar days, a written letter that--
    (i) Explains that the M+C organization will process the request 
using the 14-day timeframe for standard determinations;
    (ii) Informs the enrollee of the right to file a grievance if he or 
she disagrees with the M+C organization's decision not to expedite; and
    (iii) Informs the enrollee of the right to resubmit a request for an 
expedited determination with any physician's support; and
    (iv) Provides instructions about the grievance process and its 
timeframes.
    (e) Action on accepted request for expedited determination. If an 
M+C organization grants a request for expedited determination, it must 
make the determination and give notice in accordance with Sec. 422.572.
    (f) Prohibition of punitive action. An M+C organization may not take 
or threaten to take any punitive action against a physician acting on 
behalf or

[[Page 917]]

in support of an enrollee in requesting an expedited determination.

[63 FR 35107, June 26, 1998, as amended at 65 FR 40329, June 29, 2000]



Sec. 422.572  Timeframes and notice requirements for expedited organization determinations.

    (a) Timeframe. Except as provided in paragraph (b) of this section, 
an M+C organization that approves a request for expedited determination 
must make its determination and notify the enrollee (and the physician 
involved, as appropriate) of its decision, whether adverse or favorable, 
as expeditiously as the enrollee's health condition requires, but no 
later than 72 hours after receiving the request.
    (b) Extensions. The M+C organization may extend the 72-hour deadline 
by up to 14 calendar days if the enrollee requests the extension or if 
the organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an M+C 
organization's decision to deny). When the M+C organization extends the 
deadline, it must notify the enrollee in writing of the reasons for the 
delay and inform the enrollee of the right to file a grievance if he or 
she disagrees with the M+C organization's decision to grant an 
extension. The M+C organization must notify the enrollee of its 
determination as expeditiously as the enrollee's health condition 
requires, but no later than upon expiration of the extension.
    (c) Confirmation of oral notice. If the M+C organization first 
notifies an enrollee of its expedited determination orally, it must mail 
written confirmation to the enrollee within 3 calendar days of the oral 
notification.
    (d) How the M+C organization must request information from 
noncontract providers. If the M+C organization must receive medical 
information from noncontract providers, the M+C organization must 
request the necessary information from the noncontract provider within 
24 hours of the initial request for an expedited organization 
determination. Noncontract providers must make reasonable and diligent 
efforts to expeditiously gather and forward all necessary information to 
assist the M+C organization in meeting the required timeframe. 
Regardless of whether the M+C organization must request information from 
noncontract providers, the M+C organization is responsible for meeting 
the timeframe and notice requirements of this section.
    (e) Content of the notice of expedited determination. (1) The notice 
of any expedited determination must state the specific reasons for the 
determination in understandable language.
    (2) If the determination is not completely favorable to the 
enrollee, the notice must--
    (i) Inform the enrollee of his or her right to a reconsideration;
    (ii) Describe both the standard and expedited reconsideration 
processes, including the enrollee's right to request, and conditions for 
obtaining, an expedited reconsideration, and the rest of the appeal 
process; and
    (iii) Comply with any other requirements specified by CMS.
    (f) Effect of failure to provide a timely notice. If the M+C 
organization fails to provide the enrollee with timely notice of an 
expedited organization determination as specified in this section, this 
failure itself constitutes an adverse organization determination and may 
be appealed.

[63 FR 35107, June 26, 1998, as amended at 65 FR 40329, June 29, 2000]



Sec. 422.574  Parties to the organization determination.

    The parties to the organization determination are--
    (a) The enrollee (including his or her authorized representative);
    (b) An assignee of the enrollee (that is, a physician or other 
provider who has furnished a service to the enrollee and formally agrees 
to waive any right to payment from the enrollee for that service);
    (c) The legal representative of a deceased enrollee's estate; or
    (d) Any other provider or entity (other than the M+C organization) 
determined to have an appealable interest in the proceeding.

[[Page 918]]



Sec. 422.576  Effect of an organization determination.

    The organization determination is binding on all parties unless it 
is reconsidered under Secs. 422.578 through 422.596 or is reopened and 
revised under Sec. 422.616.



Sec. 422.578  Right to a reconsideration.

    Any party to an organization determination (including one that has 
been reopened and revised as described in Sec. 422.616) may request that 
the determination be reconsidered under the procedures described in 
Sec. 422.582, which address requests for a standard reconsideration. An 
enrollee or physician (acting on behalf of an enrollee) may request an 
expedited reconsideration as described in Sec. 422.584.



Sec. 422.580  Reconsideration defined.

    A reconsideration consists of a review of an adverse organization 
determination, the evidence and findings upon which it was based, and 
any other evidence the parties submit or the M+C organization or CMS 
obtains.



Sec. 422.582  Request for a standard reconsideration.

    (a) Method and place for filing a request. A party to an 
organization determination must ask for a reconsideration of the 
determination by filing a written request with--
    (1) The M+C organization that made the organization determination;
    (2) An SSA office; or
    (3) In the case of a qualified railroad retirement beneficiary, an 
RRB office.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, a party must file a request for a reconsideration 
within 60 calendar days from the date of the notice of the organization 
determination. If the SSA or RRB receives a request, it forwards the 
request to the M+C organization for its reconsideration. The timeframe 
within which the organization must conduct its review begins when it 
receives the request.
    (c) Extending the time for filing a request--(1) General rule. If a 
party shows good cause, the M+C organization may extend the timeframe 
for filing a request for reconsideration.
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for a reconsideration has expired, a party to 
the organization determination may file a request for reconsideration 
with the M+C organization, SSA, or an RRB office. If SSA or RRB receives 
a request, it forwards the request to the M+C organization for its 
reconsideration. The request for reconsideration and to extend the 
timeframe must--
    (i) Be in writing; and
    (ii) State why the request for reconsideration was not filed on 
time.
    (d) Parties to the reconsideration. The parties to the 
reconsideration are the parties to the organization determination, as 
described in Sec. 422.574, and any other provider or entity (other than 
the M+C organization) whose rights with respect to the organization 
determination may be affected by the reconsideration, as determined by 
the entity that conducts the reconsideration.
    (e) Withdrawing a request. The party who files a request for 
reconsideration may withdraw it by filing a written request for 
withdrawal at one of the places listed in paragraph (a) of this section.



Sec. 422.584  Expediting certain reconsiderations.

    (a) Who may request an expedited reconsideration. An enrollee or a 
physician (regardless of whether he or she is affiliated with the M+C 
organization) may request that an M+C organization expedite a 
reconsideration of a determination that involves the issues described in 
Sec. 422.566(b)(3) and (b)(4). (This does not include requests for 
payment of services already furnished.)
    (b) How to make a request. (1) To ask for an expedited 
reconsideration, an enrollee or a physician acting on behalf of an 
enrollee must submit an oral or written request directly to the M+C 
organization or, if applicable, to the entity responsible for making the 
reconsideration, as directed by the M+C organization.
    (2) A physician may provide oral or written support for a request 
for an expedited reconsideration.
    (c) How the M+C organization must process requests. The M+C 
organization

[[Page 919]]

must establish and maintain the following procedures for processing 
requests for expedited reconsiderations:
    (1) Handling of requests. The M+C organization must establish an 
efficient and convenient means for individuals to submit oral or written 
requests, document all oral requests in writing, and maintain the 
documentation in the case file.
    (2) Prompt decision. Promptly decide on whether to expedite the 
reconsideration or follow the timeframe for standard reconsideration 
based on the following requirements:
    (i) For a request made by an enrollee, the M+C organization must 
provide an expedited reconsideration if it determines that applying the 
standard timeframe for reconsidering a determination could seriously 
jeopardize the life or health of the enrollee or the enrollee's ability 
to regain maximum function.
    (ii) For a request made or supported by a physician, the M+C 
organization must provide an expedited reconsideration if the physician 
indicates that applying the standard timeframe for conducting a 
reconsideration could seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial. If an M+C organization denies a 
request for expedited reconsideration, it must take the following 
actions:
    (1) Automatically transfer a request to the standard timeframe and 
make the determination within the 30-day timeframe established in 
Sec. 422.590(a). The 30-day period begins the day the M+C organization 
receives the request for expedited reconsideration.
    (2) Give the enrollee prompt oral notice, and subsequently deliver, 
within 3 calendar days, a written letter that--
    (i) Explains that the M+C organization will process the enrollee's 
request using the 30-day timeframe for standard reconsiderations;
    (ii) Informs the enrollee of the right to file a grievance if he or 
she disagrees with the organization's decision not to expedite;
    (iii) Informs the enrollee of the right to resubmit a request for an 
expedited reconsideration with any physician's support; and
    (iv) Provides instructions about the grievance process and its 
timeframes.
    (e) Action following acceptance of a request. If an M+C organization 
grants a request for expedited reconsideration, it must conduct the 
reconsideration and give notice in accordance with Sec. 422.590(d).
    (f) Prohibition of punitive action. An M+C organization may not take 
or threaten to take any punitive action against a physician acting on 
behalf or in support of an enrollee in requesting an expedited 
reconsideration.

[63 FR 35107, June 26, 1998, as amended at 65 FR 40330, June 29, 2000]



Sec. 422.586  Opportunity to submit evidence.

    The M+C organization must provide the parties to the reconsideration 
with a reasonable opportunity to present evidence and allegations of 
fact or law, related to the issue in dispute, in person as well as in 
writing. In the case of an expedited reconsideration, the opportunity to 
present evidence is limited by the short timeframe for making a 
decision. Therefore, the M+C organization must inform the parties of the 
conditions for submitting the evidence.



Sec. 422.590  Timeframes and responsibility for reconsiderations.

    (a) Standard reconsideration: Request for services. (1) If the M+C 
organization makes a reconsidered determination that is completely 
favorable to the enrollee, the M+C organization must issue the 
determination (and effectuate it in accordance with Sec. 422.618(a)) as 
expeditiously as the enrollee's health condition requires, but no later 
than 30 calendar days from the date it receives the request for a 
standard reconsideration. The M+C organization may extend the timeframe 
by up to 14 calendar days if the enrollee requests the extension or if 
the organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an M+C 
organization's decision to deny). When the M+C organization extends the 
timeframe, it must notify the enrollee in writing of the reasons for the 
delay, and inform the enrollee of the

[[Page 920]]

right to file a grievance if he or she disagrees with the M+C 
organization's decision to grant an extension. For extensions, the M+C 
organization must issue and effectuate its determination as 
expeditiously as the enrollee's health condition requires, but no later 
than upon expiration of the extension.
    (2) If the M+C organization makes a reconsidered determination that 
affirms, in whole or in part, its adverse organization determination, it 
must prepare a written explanation and send the case file to the 
independent entity contracted by CMS as expeditiously as the enrollee's 
health condition requires, but no later than 30 calendar days from the 
date it receives the request for a standard reconsideration (or no later 
than the expiration of an extension described in paragraph (a)(1) of 
this section). The organization must make reasonable and diligent 
efforts to assist in gathering and forwarding information to the 
independent entity.
    (b) Standard reconsideration: Request for payment. (1) If the M+C 
organization makes a reconsidered determination that is completely 
favorable to the enrollee, the M+C organization must issue its 
reconsidered determination to the enrollee (and effectuate it in 
accordance with Sec. 422.618(a)) no later than 60 calendar days from the 
date it receives the request for a standard reconsideration.
    (2) If the M+C organization affirms, in whole or in part, its 
adverse organization determination, it must prepare a written 
explanation and send the case file to the independent entity contracted 
by CMS no later than 60 calendar days from the date it receives the 
request for a standard reconsideration. The organization must make 
reasonable and diligent efforts to assist in gathering and forwarding 
information to the independent entity.
    (c) Effect of failure to meet timeframe for standard 
reconsideration. If the M+C organization fails to provide the enrollee 
with a reconsidered determination within the timeframes specified in 
paragraph (a) or paragraph (b) of this section, this failure constitutes 
an affirmation of its adverse organization determination, and the M+C 
organization must submit the file to the independent entity in the same 
manner as described under paragraphs (a)(2) and (b)(2) of this section.
    (d) Expedited reconsideration--(1) Timeframe. Except as provided in 
paragraph (d)(2) of this section, an M+C organization that approves a 
request for expedited reconsideration must complete its reconsideration 
and give the enrollee (and the physician involved, as appropriate) 
notice of its decision as expeditiously as the enrollee's health 
condition requires but no later than 72 hours after receiving the 
request.
    (2) Extensions. The M+C organization may extend the 72-hour deadline 
by up to 14 calendar days if the enrollee requests the extension or if 
the organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an M+C 
organization's decision to deny). When the M+C organization extends the 
timeframe, it must notify the enrollee in writing of the reasons for the 
delay, and inform the enrollee of the right to file a grievance if he or 
she disagrees with the M+C organization's decision to grant an 
extension. The M+C organization must notify the enrollee of its 
determination as expeditiously as the enrollee's health condition 
requires but no later than upon expiration of the extension.
    (3) Confirmation of oral notice. If the M+C organization first 
notifies an enrollee of a completely favorable expedited 
reconsideration, it must mail written confirmation to the enrollee 
within 3 calendar days.
    (4) How the M+C organization must request information from 
noncontract providers. If the M+C organization must receive medical 
information from noncontract providers, the M+C organization must 
request the necessary information from the noncontract provider within 
24 hours of the initial request for an expedited reconsideration. 
Noncontract providers must make reasonable and diligent efforts to 
expeditiously gather and forward all necessary information to assist the 
M+C organization in meeting the required timeframe. Regardless of 
whether the M+C organization must request information from noncontract 
providers, the M+C organization is responsible for

[[Page 921]]

meeting the timeframe and notice requirements.
    (5) Affirmation of an adverse expedited organization determination. 
If, as a result of its reconsideration, the M+C organization affirms, in 
whole or in part, its adverse expedited organization determination, the 
M+C organization must submit a written explanation and the case file to 
the independent entity contracted by CMS as expeditiously as the 
enrollee's health condition requires, but not later than within 24 hours 
of its affirmation. The organization must make reasonable and diligent 
efforts to assist in gathering and forwarding information to the 
independent entity.
    (e) Notification of enrollee. If the M+C organization refers the 
matter to the independent entity as described under this section, it 
must concurrently notify the enrollee of that action.
    (f) Failure to meet timeframe for expedited reconsideration. If the 
M+C organization fails to provide the enrollee with the results of its 
reconsideration within the timeframe described in paragraph (d) of this 
section, this failure constitutes an adverse reconsidered determination, 
and the M+C organization must submit the file to the independent entity 
within 24 hours of expiration of the timeframe set forth in paragraph 
(d) of this section.
    (g) Who must reconsider an adverse organization determination. (1) A 
person or persons who were not involved in making the organization 
determination must conduct the reconsideration.
    (2) When the issue is the M+C organization's denial of coverage 
based on a lack of medical necessity (or any substantively equivalent 
term used to describe the concept of medical necessity), the 
reconsidered determination must be made by a physician with expertise in 
the field of medicine that is appropriate for the services at issue. The 
physician making the reconsidered determination need not, in all cases, 
be of the same specialty or subspecialty as the treating physician.

[63 FR 35107, June 26, 1998, as amended at 65 FR 40330, June 29, 2000]



Sec. 422.592  Reconsideration by an independent entity.

    (a) When the M+C organization affirms, in whole or in part, its 
adverse organization determination, the issues that remain in dispute 
must be reviewed and resolved by an independent, outside entity that 
contracts with CMS.
    (b) The independent outside entity must conduct the review as 
expeditiously as the enrollee's health condition requires but must not 
exceed the deadlines specified in the contract.
    (c) When the independent entity conducts a reconsideration, the 
parties to the reconsideration are the same parties listed in 
Sec. 422.582(d) who qualified during the M+C organization's 
reconsideration, with the addition of the M+C organization.



Sec. 422.594  Notice of reconsidered determination by the independent entity.

    (a) Responsibility for the notice. When the independent entity makes 
the reconsidered determination, it is responsible for mailing a notice 
of its reconsidered determination to the parties and for sending a copy 
to CMS.
    (b) Content of the notice. The notice must--
    (1) State the specific reasons for the entity's decisions in 
understandable language;
    (2) If the reconsidered determination is adverse (that is, does not 
completely reverse the M+C organization's adverse organization 
determination), inform the parties of their right to an ALJ hearing if 
the amount in controversy is $100 or more;
    (3) Describe the procedures that a party must follow to obtain an 
ALJ hearing; and
    (4) Comply with any other requirements specified by CMS.

[63 FR 35107, June 26, 1998, as amended at 65 FR 40330, June 29, 2000]



Sec. 422.596  Effect of a reconsidered determination.

    A reconsidered determination is final and binding on all parties 
unless a party other than the M+C organization files a request for a 
hearing under the

[[Page 922]]

provisions of Sec. 422.602, or unless the reconsidered determination is 
revised under Sec. 422.616.

[65 FR 40331, June 29, 2000]



Sec. 422.600  Right to a hearing.

    (a) If the amount remaining in controversy is $100 or more, any 
party to the reconsideration (except the M+C organization) who is 
dissatisfied with the reconsidered determination has a right to a 
hearing before an ALJ. The M+C organization does not have the right to 
request a hearing before an ALJ.
    (b) The amount remaining in controversy, which can include any 
combination of Part A and Part B services, is computed in accordance 
with Sec. 405.740 of this chapter for Part A services and Sec. 405.817 
of this chapter for Part B services.
    (c) If the basis for the appeal is the M+C organization's refusal to 
provide services, CMS uses the projected value of those services to 
compute the amount remaining in controversy.



Sec. 422.602  Request for an ALJ hearing.

    (a) How and where to file a request. A party must file a written 
request for a hearing at one of the places listed in Sec. 422.582(a) or 
with the independent, outside entity. The organizations listed in 
Sec. 422.582(a) forward the request to the independent, outside entity, 
which is responsible for transferring the case to the appropriate ALJ 
hearing office.
    (b) When to file a request. Except when an ALJ extends the timeframe 
as provided in 20 CFR 404.933(c), a party must file a request for a 
hearing within 60 days of the date of the notice of a reconsidered 
determination.
    (c) Parties to a hearing. The parties to a hearing are the parties 
to the reconsideration, the M+C organization, and any other person or 
entity whose rights with respect to the reconsideration may be affected 
by the hearing, as determined by the ALJ.
    (d) When the amount in controversy is less than $100. (1) If a 
request for a hearing clearly shows that the amount in controversy is 
less than $100, the ALJ dismisses the request.
    (2) If, after a hearing is initiated, the ALJ finds that the amount 
in controversy is less than $100, he or she discontinues the hearing and 
does not rule on the substantive issues raised in the appeal.



Sec. 422.608  Departmental Appeals Board (the Board) review.

    Any party to the hearing, including the M+C organization, who is 
dissatisfied with the ALJ hearing decision, may request that the Board 
review the ALJ's decision or dismissal. Regulations located at 20 CFR 
404.967 through 404.984 regarding SSA Appeals Council Review apply to 
Board review for matters addressed by this subpart.

[63 FR 35107, June 26, 1998; 63 FR 52614, Oct. 1, 1998]



Sec. 422.612  Judicial review.

    (a) Review of ALJ's decision. Any party, including the M+C 
organization, may request judicial review (upon notifying the other 
parties) of an ALJ's decision if--
    (1) The Board denied the party's request for review; and
    (2) The amount in controversy is $1,000 or more.
    (b) Review of Board decision. Any party, including the M+C 
organization, may request judicial review (upon notifying the other 
parties) of the Board decision if it is the final decision of CMS and 
the amount in controversy is $ 1,000 or more.
    (c) How to request judicial review. A party must file a civil action 
in a district court of the United States in accordance with section 
205(g) of the Act (see 20 CFR 422.210 for a description of the 
procedures to follow in requesting judicial review).

[63 FR 35107, June 26, 1998; 63 FR 52614, Oct. 1, 1998, as amended at 65 
FR 40331, June 29, 2000]



Sec. 422.616  Reopening and revising determinations and decisions.

    (a) An organization or reconsidered determination made by an M+C 
organization, a reconsidered determination made by the independent 
entity described in Sec. 422.592, or the decision of an ALJ or the Board 
that is otherwise final and binding may be reopened and revised by the 
entity that made the determination or decision, under the rules in 
Sec. 405.750 of this chapter.

[[Page 923]]

    (b) Reopening may be at the instigation of any party.
    (c) The filing of a request for reopening does not relieve the M+C 
organization of its obligation to make payment or provide services as 
specified in Sec. 422.618.
    (d) Once an entity issues a revised determination or decision, any 
party may file an appeal.

[63 FR 35107, June 26, 1998; 63 FR 52614, Oct. 1, 1998]



Sec. 422.618  How an M+C organization must effectuate standard reconsidered determinations or decisions.

    (a) Reversals by the M+C organization--(1) Requests for service. If, 
on reconsideration of a request for service, the M+C organization 
completely reverses its organization determination, the organization 
must authorize or provide the service under dispute as expeditiously as 
the enrollee's health condition requires, but no later than 30 calendar 
days after the date the M+C organization receives the request for 
reconsideration (or no later than upon expiration of an extension 
described in Sec. 422.590(a)(1)).
    (2) Requests for payment. If, on reconsideration of a request for 
payment, the M+C organization completely reverses its organization 
determination, the organization must pay for the service no later than 
60 calendar days after the date the M+C organization receives the 
request for reconsideration.
    (b) Reversals by the independent outside entity. (1) Requests for 
service. If, on reconsideration of a request for service, the M+C 
organization's determination is reversed in whole or in part by the 
independent outside entity, the M+C organization must authorize the 
service under dispute within 72 hours from the date it receives notice 
reversing the determination, or provide the service under dispute as 
expeditiously as the enrollee's health condition requires, but no later 
than 14 calendar days from that date. The M+C organization must inform 
the independent outside entity that the organization has effectuated the 
decision.
    (2) Requests for payment. If, on reconsideration of a request for 
payment, the M+C organization's determination is reversed in whole or in 
part by the independent outside entity, the M+C organization must pay 
for the service no later than 30 calendar days from the date it receives 
notice reversing the organization determination. The M+C organization 
must inform the independent outside entity that the organization has 
effectuated the decision.
    (c) Reversals other than by the M+C organization or the independent 
outside entity. If the independent outside entity's determination is 
reversed in whole or in part by the ALJ, or at a higher level of appeal, 
the M+C organization must pay for, authorize, or provide the service 
under dispute as expeditiously as the enrollee's health condition 
requires, but no later than 60 calendar days from the date it receives 
notice reversing the determination. The M+C organization must inform the 
independent outside entity that the organization has effectuated the 
decision.

[63 FR 35107, June 26, 1998, as amended at 65 FR 40331, June 29, 2000]



Sec. 422.619  How an M+C organization must effectuate expedited reconsidered determinations.

    (a) Reversals by the M+C organization. If on reconsideration of an 
expedited request for service, the M+C organization completely reverses 
its organization determination, the M+C organization must authorize or 
provide the service under dispute as expeditiously as the enrollee's 
health condition requires, but no later than 72 hours after the date the 
M+C organization receives the request for reconsideration (or no later 
than upon expiration of an extension described in Sec. 422.590(d)(2)).
    (b) Reversals by the independent outside entity. If the M+C 
organization's determination is reversed in whole or in part by the 
independent outside entity, the M+C organization must authorize or 
provide the service under dispute as expeditiously as the enrollee's 
health condition requires but no later than 72 hours from the date it 
receives notice reversing the determination. The M+C organization must 
inform the independent outside entity that the organization has 
effectuated the decision.
    (c) Reversals other than by the M+C organization or the independent 
outside entity. If the independent review entity's

[[Page 924]]

expedited determination is reversed in whole or in part by the ALJ, or 
at a higher level of appeal, the M+C organization must authorize or 
provide the service under dispute as expeditiously as the enrollee's 
health condition requires, but no later than 60 days from the date it 
receives notice reversing the determination. The M+C organization must 
inform the independent outside entity that the organization has 
effectuated the decision.

[65 FR 40331, June 29, 2000]



Sec. 422.620  How enrollees of M+C organizations must be notified of noncoverage of inpatient hospital care.

    (a) Enrollee's entitlement. Where an M+C organization has authorized 
coverage of the inpatient admission of an enrollee, either directly or 
by delegation (or the admission constitutes emergency or urgently needed 
care, as described in Secs. 422.2 and 422.113), written notice of 
noncoverage under paragraph (c) of this section must be provided to each 
enrollee. An enrollee is entitled to coverage until at least noon the 
day after such notice is provided. If QIO review is requested under 
Sec. 422.622, coverage is extended as provided in that section.
    (b) Physician concurrence required. Before notice of noncoverage is 
provided as described in paragraph (c) of this section, the entity that 
makes the noncoverage/discharge determination (that is, the hospital by 
delegation or the M+C organization) must obtain the concurrence of the 
physician who is responsible for the enrollee's hospital care.
    (c) Notice to the enrollee. In all cases in which a determination is 
made that inpatient hospital care is no longer necessary, no later than 
the day before hospital coverage ends, written notice must be provided 
to the enrollee that includes the following elements:
    (1) The reason why inpatient hospital care is no longer needed.
    (2) The effective date and time of the enrollee's liability for 
continued inpatient care.
    (3) The enrollee's appeal rights.
    (4) Additional information specified by CMS.

[65 FR 40331, June 29, 2000]



Sec. 422.622  Requesting immediate QIO review of noncoverage of inpatient hospital care.

    (a) Enrollee's right to review or reconsideration. (1) An enrollee 
who wishes to appeal a determination by an M+C organization or hospital 
that inpatient care is no longer necessary must request immediate QIO 
review of the determination in accordance with paragraph (b) of this 
section. An enrollee who requests immediate QIO review may remain in the 
hospital with no additional financial liability as specified in 
paragraph (c) of this section.
    (2) An enrollee who fails to request immediate QIO review in 
accordance with the procedures in paragraph (b) of this section may 
request expedited reconsideration by the M+C organization as described 
in Sec. 422.584, but the financial liability rules of paragraph (c) of 
this section do not apply.
    (b) Procedures enrollee must follow. For the immediate QIO review 
process, the following rules apply:
    (1) The enrollee must submit the request for immediate review--
    (i) To the QIO that has an agreement with the hospital under 
Sec. 466.78 of this chapter;
    (ii) In writing or by telephone; and
    (iii) By noon of the first working day after he or she receives 
written notice that the M+C organization or hospital has determined that 
the hospital stay is no longer necessary.
    (2) On the date it receives the enrollee's request, the QIO must 
notify the M+C organization that the enrollee has filed a request for 
immediate review.
    (3) The M+C organization must supply any information that the QIO 
requires to conduct its review and must make it available, by phone or 
in writing, by the close of business of the first full working day 
immediately following the day the enrollee submits the request for 
review.
    (4) In response to a request from the M+C organization, the hospital 
must submit medical records and other pertinent information to the QIO 
by close of business of the first full working day immediately following 
the day the organization makes its request.
    (5) The QIO must solicit the views of the enrollee who requested the 
immediate QIO review.

[[Page 925]]

    (6) The QIO must make a determination and notify the enrollee, the 
hospital, and the M+C organization by close of business of the first 
working day after it receives all necessary information from the 
hospital, or the organization, or both.
    (c) Liability for hospital costs--(1) When the M+C organization 
determines that hospital services are not, or are no longer, covered. 
(i) Except as provided in paragraph (c)(1)(ii) of this section, if the 
M+C organization authorized coverage of the inpatient admission directly 
or by delegation (or the admission constitutes emergency or urgently 
needed care, as described in Secs. 422.2 and 422.112(c)), the 
organization continues to be financially responsible for the costs of 
the hospital stay when a timely appeal is filed under paragraph (a)(1) 
of this section until noon of the calendar day following the day the QIO 
notifies the enrollee of its review determination. If coverage of the 
hospital admission was never approved by the M+C organization (or the 
admission does not constitute emergency or urgently needed care, as 
described in Secs. 422.2 and 422.112(c)), the M+C organization is liable 
for the hospital costs only if it is determined on appeal that the 
hospital stay should have been covered under the M+C plan.
    (ii) The hospital may not charge the M+C organization (or the 
enrollee) if--
    (A) It was the hospital (acting on behalf of the enrollee) that 
filed the request for immediate QIO review; and
    (B) The QIO upholds the noncoverage determination made by the M+C 
organization.
    (2) When the hospital determines that hospital services are no 
longer required. If the hospital determines that inpatient hospital 
services are no longer necessary, and the enrollee could not reasonably 
be expected to know that the services would not be covered, the hospital 
may not charge the enrollee for inpatient services received before noon 
of the calendar day following the day the QIO notifies the enrollee of 
its review determination.

[63 FR 35107, June 26, 1998; 63 FR 52614, Oct. 1, 1998]



         Subpart N--Medicare Contract Determinations and Appeals

    Source: 63 FR 35113, June 26, 1998, unless otherwise noted.



Sec. 422.641  Contract determinations.

    This subpart establishes the procedures for making and reviewing the 
following contract determinations:
    (a) A determination that an entity is not qualified to enter into a 
contract with CMS under Part C of title XVIII of the Act.
    (b) A determination to terminate a contract with an M+C organization 
in accordance with Sec. 422.510(a).
    (c) A determination not to authorize a renewal of a contract with an 
M+C organization in accordance with Sec. 422.506(b).



Sec. 422.644  Notice of contract determination.

    (a) When CMS makes a contract determination, it gives the M+C 
organization written notice.
    (b) The notice specifies--
    (1) The reasons for the determination; and
    (2) The M+C organization's right to request reconsideration.
    (c) For CMS-initiated terminations, CMS mails notice 90 days before 
the anticipated effective date of the termination. For terminations 
based on initial determinations described at Sec. 422.510(a)(5), CMS 
immediately notifies the M+C organization of its decision to terminate 
the organization's M+C contract.
    (d) When CMS determines that it will not authorize a contract 
renewal, CMS mails the notice to the M+C organization by May 1 of the 
current contract year.



Sec. 422.646  Effect of contract determination.

    The contract determination is final and binding unless--
    (a) The determination is reconsidered in accordance with 
Secs. 422.648 through 422.658;
    (b) A timely request for a hearing is filed under Sec. 422.662; or
    (c) The reconsideration decision is revised as a result of a 
reopening under Sec. 422.696.

[[Page 926]]



Sec. 422.648  Reconsideration: Applicability.

    (a) Reconsideration is the first step for appealing a contract 
determination specified in Sec. 422.641.
    (b) CMS reconsiders the specified determinations if the contract 
applicant or the M+C organization files a written request in accordance 
with Sec. 422.650.

[63 FR 35113, June 26, 1998, as amended at 65 FR 40331, June 29, 2000]



Sec. 422.650  Request for reconsideration.

    (a) Method and place for filing a request. A request for 
reconsideration must be made in writing and filed with any CMS office.
    (b) Time for filing a request. The request for reconsideration must 
be filed within 15 days from the date of the notice of the initial 
determination.
    (c) Proper party to file a request. Only an authorized official of 
the contract applicant or M+C organization that was the subject of a 
contract determination may file the request for reconsideration.
    (d) Withdrawal of a request. The M+C organization or contract 
applicant who filed the request for a reconsideration may withdraw it at 
any time before the notice of the reconsidered determination is mailed. 
The request for withdrawal must be in writing and filed with CMS.

[63 FR 35113, June 26, 1998, as amended at 65 FR 40331, June 29, 2000]



Sec. 422.652  Opportunity to submit evidence.

    CMS provides the M+C organization or contract applicant and the CMS 
official or officials who made the contract determination reasonable 
opportunity, not to exceed the timeframe in which an M+C organization 
could choose to request a hearing as described at Sec. 422.662, to 
present as evidence any documents or written statements that are 
relevant and material to the matters at issue.

[65 FR 40332, June 29, 2000]



Sec. 422.654  Reconsidered determination.

    A reconsidered determination is a new determination that--
    (a) Is based on a review of the contract determination, the evidence 
and findings upon which that was based, and any other written evidence 
submitted before notice of the reconsidered determination is mailed, 
including facts relating to the status of the M+C organization 
subsequent to the contract determination; and
    (b) Affirms, reverses, or modifies the initial determination.



Sec. 422.656  Notice of reconsidered determination.

    (a) CMS gives the M+C organization or contract applicant written 
notice of the reconsidered determination.
    (b) The notice--
    (1) Contains findings with respect to the contract applicant's 
qualifications to enter into, or the M+C organization's qualifications 
to remain under, a contract with CMS under Part C of title XVIII of the 
Act;
    (2) States the specific reasons for the reconsidered determination; 
and
    (3) Informs the M+C organization or contract applicant of its right 
to a hearing if it is dissatisfied with the determination.

[63 FR 35113, June 26, 1998, as amended at 65 FR 40332, June 29, 2000]



Sec. 422.658  Effect of reconsidered determination.

    A reconsidered determination is final and binding unless a request 
for a hearing is filed in accordance with Sec. 422.662 or it is revised 
in accordance with Sec. 422.696.



Sec. 422.660  Right to a hearing.

    The following parties are entitled to a hearing:
    (a) A contract applicant that has been determined in a reconsidered 
determination to be unqualified to enter into a contract with CMS under 
Part C of title XVIII of the Act.
    (b) An M+C organization whose contract with CMS has been terminated 
or has not been renewed as a result of a contract determination as 
provided in Sec. 422.641.

[63 FR 35113, June 26, 1998, as amended at 65 FR 40332, June 29, 2000]



Sec. 422.662  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be

[[Page 927]]

made in writing and filed by an authorized official of the contract 
applicant or M+C organization that was the party to the determination 
under appeal. The request for a hearing must be filed with any CMS 
office.
    (b) Time for filing a request. A request for a hearing must be filed 
within 15 days after the date of the reconsidered determination.
    (c) Parties to a hearing. The parties to a hearing must be--
    (1) The parties described in Sec. 422.660;
    (2) At the discretion of the hearing officer, any interested parties 
who make a showing that their rights may be prejudiced by the decision 
to be rendered at the hearing; and
    (3) CMS.

[63 FR 35113, June 26, 1998, as amended at 65 FR 40332, June 29, 2000]



Sec. 422.664  Postponement of effective date of a contract determination when a request for a hearing with respect to a contract determination is filed timely.

    (a) CMS postpones the proposed effective date of the contract 
determination to terminate a contract with an M+C organization until a 
hearing decision is reached and affirmed by the Administrator following 
review under Sec. 422.692 in instances where an M+C organization 
requests review by the Administrator; and
    (b) CMS extends the current contract at the end of the contract 
period (in the case of a determination not to renew) only--
    (1) If CMS finds that an extension of the contract will be 
consistent with the purpose of this part; and
    (2) For such period as CMS and the M+C organization agree.
    (c) Exception: A contract terminated in accordance with 
Sec. 422.510(a)(5) will be immediately terminated and will not be 
postponed if a hearing is requested.



Sec. 422.666  Designation of hearing officer.

    CMS designates a hearing officer to conduct the hearing. The hearing 
officer need not be an ALJ.



Sec. 422.668  Disqualification of hearing officer.

    (a) A hearing officer may not conduct a hearing in a case in which 
he or she is prejudiced or partial to any party or has any interest in 
the matter pending for decision.
    (b) A party to the hearing who objects to the designated hearing 
officer must notify that officer in writing at the earliest opportunity.
    (c) The hearing officer must consider the objections, and may, at 
his or her discretion, either proceed with the hearing or withdraw.
    (1) If the hearing officer withdraws, CMS designates another hearing 
officer to conduct the hearing.
    (2) If the hearing officer does not withdraw, the objecting party 
may, after the hearing, present objections and request that the 
officer's decision be revised or a new hearing be held before another 
hearing officer. The objections must be submitted in writing to CMS.



Sec. 422.670  Time and place of hearing.

    (a) The hearing officer fixes a time and place for the hearing, 
which is not to exceed 30 days from the receipt of the request for the 
hearing, and sends written notice to the parties. The notice also 
informs the parties of the general and specific issues to be resolved 
and information about the hearing procedure.
    (b) The hearing officer may, on his or her own motion, or at the 
request of a party, change the time and place for the hearing. The 
hearing officer may adjourn or postpone the hearing.
    (c) The hearing officer will give the parties reasonable notice of 
any change in time or place of hearing, or of adjournment or 
postponement.



Sec. 422.672  Appointment of representatives.

    A party may appoint as its representative at the hearing anyone not 
disqualified or suspended from acting as a representative before the 
Secretary or otherwise prohibited by law.



Sec. 422.674  Authority of representatives.

    (a) A representative appointed and qualified in accordance with 
Sec. 422.672

[[Page 928]]

may, on behalf of the represented party--
    (1) Gives or accepts any notice or request pertinent to the 
proceedings set forth in this subpart;
    (2) Presents evidence and allegations as to facts and law in any 
proceedings affecting that party; and
    (3) Obtains information to the same extent as the party.
    (b) A notice or request sent to the representative has the same 
force and effect as if it had been sent to the party.



Sec. 422.676  Conduct of hearing.

    (a) The hearing is open to the parties and to the public.
    (b) The hearing officer inquires fully into all the matters at issue 
and receives in evidence the testimony of witnesses and any documents 
that are relevant and material.
    (c) The hearing officer provides the parties an opportunity to enter 
any objection to the inclusion of any document.
    (d) The hearing officer decides the order in which the evidence and 
the arguments of the parties are presented and the conduct of the 
hearing.



Sec. 422.678  Evidence.

    The hearing officer rules on the admissibility of evidence and may 
admit evidence that would be inadmissible under rules applicable to 
court procedures.



Sec. 422.680  Witnesses.

    (a) The hearing officer may examine the witnesses.
    (b) The parties or their representatives are permitted to examine 
their witnesses and cross-examine witnesses of other parties.



Sec. 422.682  Discovery.

    (a) Prehearing discovery is permitted upon timely request of a 
party.
    (b) A request is timely if it is made before the beginning of the 
hearing.
    (c) A reasonable time for inspection and reproduction of documents 
is provided by order of the hearing officer.
    (d) The hearing officer's order on all discovery matters is final.



Sec. 422.684  Prehearing.

    The hearing officer may schedule a prehearing conference if he or 
she believes that a conference would more clearly define the issues.



Sec. 422.686  Record of hearing.

    (a) A complete record of the proceedings at the hearing is made and 
transcribed and made available to all parties upon request.
    (b) The record may not be closed until a hearing decision has been 
issued.



Sec. 422.688  Authority of hearing officer.

    In exercising his or her authority, the hearing officer must comply 
with the provisions of title XVIII and related provisions of the Act, 
the regulations issued by the Secretary, and general instructions issued 
by CMS in implementing the Act.



Sec. 422.690  Notice and effect of hearing decision.

    (a) As soon as practical after the close of the hearing, the hearing 
officer issues a written decision that--
    (1) Is based upon the evidence of record; and
    (2) Contains separately numbered findings of fact and conclusions of 
law.
    (b) The hearing officer provides a copy of the hearing decision to 
each party.
    (c) The hearing decision is final and binding unless it is reversed 
or modified by the Administrator following review under Sec. 422.692, or 
reopened and revised in accordance with Sec. 422.696.



Sec. 422.692  Review by the Administrator.

    (a) Request for review by Administrator. An M+C organization that 
has received a hearing decision upholding a contract termination 
determination may request review by the Administrator within 15 days of 
receiving the hearing decision as provided under Sec. 422.690(b).
    (b) Review by the Administrator. The Administrator shall review the 
hearing officer's decision, and determine, based upon this decision, the 
hearing record, and any written arguments submitted by the M+C 
organization, whether the termination decision should be upheld, 
reversed, or modified.

[[Page 929]]

    (c) Decision by the Administrator. The Administrator issues a 
written decision, and furnishes the decision to the M+C organization 
requesting review.



Sec. 422.694  Effect of Administrator's decision.

    A decision by the Administrator under section 422.692 is final and 
binding unless it is reopened and revised in accordance with 
Sec. 422.696.



Sec. 422.696  Reopening of contract or reconsidered determination or decision of a hearing officer or the Administrator.

    (a) Initial or reconsidered determination. CMS may reopen and revise 
an initial or reconsidered determination upon its own motion within one 
year of the date of the notice of determination.
    (b) Decision of hearing officer. A decision of a hearing officer 
that is unfavorable to any party and is otherwise final may be reopened 
and revised by the hearing officer upon the officer's own motion within 
one year of the notice of the hearing decision. Another hearing officer 
designated by CMS may reopen and revise the decision if the hearing 
officer who issued the decision is unavailable.
    (c) Decision of Administrator. A decision by the Administrator that 
is otherwise final may be reopened and revised by the Administrator upon 
the Administrator's own motion within one year of the notice of the 
Administrator's decision.
    (d) Notices. (1) The notice of reopening and of any revisions 
following the reopening is mailed to the parties.
    (2) The notice of revision specifies the reasons for revisions.



Sec. 422.698  Effect of revised determination.

    The revision of a contract or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec. 422.662.



                    Subpart O--Intermediate Sanctions

    Source: 63 FR 35115, June 26, 1998, unless otherwise noted.



Sec. 422.750  Kinds of sanctions.

    (a) The following intermediate sanctions and civil money penalties 
may be imposed:
    (1) Civil money penalties ranging from $10,000 to $100,000 depending 
upon the violation.
    (2) Suspension of enrollment of Medicare beneficiaries.
    (3) Suspension of payment to the M+C organization for Medicare 
beneficiaries who enroll.
    (4) Require the M+C organization to suspend all marketing activities 
to Medicare beneficiaries for the M+C plan subject to the intermediate 
sanctions.
    (b) The enrollment, payment, and marketing sanctions continue in 
effect until CMS is satisfied that the deficiency on which the 
determination was based has been corrected and is not likely to recur.



Sec. 422.752  Basis for imposing sanctions.

    (a) All intermediate sanctions. For the violations listed below, CMS 
may impose any of the sanctions specified in Sec. 422.750 on any M+C 
organization that has a contract in effect. The M+C organization may 
also be subject to other applicable remedies available under law.
    (1) Fails substantially to provide, to an M+C enrollee, medically 
necessary services that the organization is required to provide (under 
law or under the contract) to an M+C enrollee, and that failure 
adversely affects (or is substantially likely to adversely affect) the 
enrollee.
    (2) Imposes on M+C enrollees premiums in excess of the monthly basic 
and supplemental beneficiary premiums permitted under section 1854 of 
the Act and subpart G of this part.
    (3) Expels or refuses to reenroll a beneficiary in violation of the 
provisions of this part.
    (4) Engages in any practice that could reasonably be expected to 
have the effect of denying or discouraging enrollment of individuals 
whose medical condition or history indicates a need for substantial 
future medical services.
    (5) Misrepresents or falsifies information that it furnishes--
    (i) To CMS; or

[[Page 930]]

    (ii) To an individual or to any other entity.
    (6) Fails to comply with the requirements of Sec. 422.206, which 
prohibits interference with practitioners' advice to enrollees.
    (7) Fails to comply with Sec. 422.216, which requires the 
organization to enforce the limit on balance billing under a private 
fee-for service plan.
    (8) Employs or contracts with an individual who is excluded from 
participation in Medicare under section 1128 or 1128A of the Act (or 
with an entity that employs or contracts with such an individual) for 
the provision of any of the following:
    (i) Health care.
    (ii) Utilization review.
    (iii) Medical social work.
    (iv) Administrative services.
    (b) Suspension of enrollment and marketing. If CMS makes a 
determination under Sec. 422.510(a), CMS may impose the intermediate 
sanctions in Sec. 422.756(c)(1) and (c)(3).

[63 FR 35115, June 26, 1998; 63 FR 52614, Oct. 1, 1998]



Sec. 422.756  Procedures for imposing sanctions.

    (a) Notice of Sanction and opportunity to respond--(1) Notice of 
sanction. Before imposing the intermediate sanctions specified in 
paragraph (c) of this section CMS--
    (i) Sends a written notice to the M+C organization stating the 
nature and basis of the proposed sanction; and
    (ii) Sends the OIG a copy of the notice.
    (2) Opportunity to respond. CMS allows the M+C organization 15 days 
from receipt of the notice to provide evidence that it has not committed 
an act or failed to comply with the requirements described in 
Sec. 422.752, as applicable. CMS may allow a 15-day addition to the 
original 15 days upon receipt of a written request from the M+C 
organization. To be approved, the request must provide a credible 
explanation of why additional time is necessary and be received by CMS 
before the end of the 15-day period following the date of receipt of the 
sanction notice. CMS does not grant an extension if it determines that 
the M+C organization's conduct poses a threat to an enrollee's health 
and safety.
    (b) Informal reconsideration. If, consistent with paragraph (a)(2) 
of this section the M+C organization submits a timely response to CMS's 
notice of sanction, CMS conducts an informal reconsideration that:
    (1) Consists of a review of the evidence by an CMS official who did 
not participate in the initial decision to impose a sanction; and
    (2) Gives the M+C organization a concise written decision setting 
forth the factual and legal basis for the decision that affirms or 
rescinds the original determination.
    (c) Specific sanctions. If CMS determines that an M+C organization 
has acted or failed to act as specified in Sec. 422.752 and affirms this 
determination in accordance with paragraph (b) of this section, CMS may-
-
    (1) Require the M+C organization to suspend acceptance of 
applications made by Medicare beneficiaries for enrollment in the 
sanctioned M+C plan during the sanction period;
    (2) In the case of a violation under Sec. 422.752(a), suspend 
payments to the M+C organization for Medicare beneficiaries enrolled in 
the sanctioned M+C plan during the sanction period; and
    (3) Require the M+C organization to suspend all marketing activities 
for the sanctioned M+C plan to Medicare enrollees.
    (d) Effective date and duration of sanctions--(1) Effective date. 
Except as provided in paragraph (d)(2) of this section, a sanction is 
effective 15 days after the date that the organization is notified of 
the decision to impose the sanction or, if the M+C organization timely 
seeks reconsideration under paragraph (b) of this section, on the date 
specified in the notice of CMS's reconsidered determination.
    (2) Exception. If CMS determines that the M+C organization's conduct 
poses a serious threat to an enrollee's health and safety, CMS may make 
the sanction effective on a date before issuance of CMS's reconsidered 
determination.
    (3) Duration of sanction. The sanction remains in effect until CMS 
notifies the M+C organization that CMS is satisfied that the basis for 
imposing the

[[Page 931]]

sanction has been corrected and is not likely to recur.
    (e) Termination by CMS. In addition to or as an alternative to the 
sanctions described in paragraph (c) of this section, CMS may decline to 
authorize the renewal of an organization's contract in accordance with 
Sec. 422.506(b)(2) and (b)(3), or terminate the contract in accordance 
with Sec. 422.510.
    (f) Civil money penalties. (1) If CMS determines that an M+C 
organization has committed an act or failed to comply with a requirement 
described in Sec. 422.752, CMS notifies the OIG of this determination, 
and also notifies OIG when CMS reverses or terminates a sanction imposed 
under this part.
    (2) In the case of a violation described in paragraph (a) of 
Sec. 422.752, or a determination under paragraph (b) of Sec. 422.752 
based upon a violation under Sec. 422.510(a)(4) (involving fraudulent or 
abusive activities), in accordance with the provisions of 42 CFR parts 
1003 and 1005, the OIG may impose civil money penalties on the M+C 
organization in accordance with parts 1003 and 1005 of this title in 
addition to, or in place of, the sanctions that CMS may impose under 
paragraph (c) of this section.
    (3) In the case of a determination under paragraph (b) of 
Sec. 422.752 other than a determination based upon a violation under 
Sec. 422.510(a)(4), in accordance with the provisions of 42 CFR parts 
1003 and 1005, CMS may impose civil money penalties on the M+C 
organization in the amounts specified in Sec. 422.758 in addition to, or 
in place of, the sanctions that CMS may impose under paragraph (c) of 
this section.



Sec. 422.758  Maximum amount of civil money penalties imposed by CMS.

    If CMS makes a determination under Sec. 422.752(b), based on any 
determination under Sec. 422.510(a) except a determination under 
Sec. 422.510(a)(4), CMS may impose civil money penalties in the 
following amounts:
    (a) If the deficiency on which the determination is based has 
directly adversely affected (or has the substantial likelihood of 
adversely affecting) one or more M+C enrollees--$25,000 for each 
determination.
    (b) For each week that a deficiency remains uncorrected after the 
week in which the M+C organization receives CMS's notice of the 
determination--$10,000.



Sec. 422.760  Other applicable provisions.

    The provisions of section 1128A of the Act (except subsections (a) 
and (b)) apply to civil money penalties under this subpart to the same 
extent that they apply to a civil money penalty or procedure under 
section 1128A of the Act.



PART 424--CONDITIONS FOR MEDICARE PAYMENT--Table of Contents




                      Subpart A--General Provisions

Sec.
424.1  Basis and scope.
424.3  Definitions.
424.5  Basic conditions.
424.7  General limitations.

       Subpart B--Certification and Plan of Treatment Requirements

424.10  Purpose and scope.
424.11  General procedures.
424.13  Requirements for inpatient services of hospitals other than 
          psychiatric hospitals.
424.14  Requirements for inpatient services of psychiatric hospitals.
424.15  Requirements for inpatient CAH services.
424.16  Timing of certification for individual admitted to a hospital 
          before entitlement to Medicare benefits.
424.20  Requirements for posthospital SNF care.
424.22  Requirements for home health services.
424.24  Requirements for medical and other health services furnished by 
          providers under Medicare Part B.
424.27  Requirements for comprehensive outpatient rehabilitation 
          facility (CORF) services.

                      Subpart C--Claims for Payment

424.30  Scope.
424.32  Basic requirements for all claims.
424.33  Additional requirements: Claims for services of providers and 
          claims by suppliers and nonparticipating hospitals.
424.34  Additional requirements: Beneficiary's claim for direct payment.
424.36  Signature requirements.
424.37  Evidence of authority to sign on behalf of the beneficiary.
424.40  Request for payment effective for more than one claim.
424.44  Time limits for filing claims.

[[Page 932]]

424.45  What constitutes a claim for purposes of meeting the time 
          limits.

              Subpart D--To Whom Payment is Ordinarily Made

424.50  Scope.
424.51  Payment to the provider.
424.52  Payment to a nonparticipating hospital.
424.53  Payment to the beneficiary.
424.54  Payment to the beneficiary's legal representative or 
          representative payee.
424.55  Payment to the supplier.
424.56  Payment to a beneficiary and to a supplier.
424.57  Special payment rules for items furnished by DMEPOS suppliers 
          and issuance of DMEPOS supplier billing privileges.

        Subpart E--To Whom Payment is Made in Special Situations

424.60  Scope.
424.62  Payment after beneficiary's death: Bill has been paid.
424.64  Payment after beneficiary's death: Bill has not been paid.
424.66  Payment to entities that provide coverage complementary to 
          Medicare Part B.

     Subpart F--Limitations on Assignment and Reassignment of Claims

424.70  Basis and scope.
424.71  Definitions.
424.73  Prohibition of assignment of claims by providers.
424.74  Termination of provider agreement.
424.80  Prohibition of reassignment of claims by suppliers.
424.82  Revocation of right to receive assigned benefits.
424.83  Hearings on revocation of right to receive assigned benefits.
424.84  Final determination on revocation of right to receive assigned 
          benefits.
424.86  Prohibition of assignment of claims by beneficiaries.
424.90  Court ordered assignments: Conditions and limitations.

    Subpart G--Special Conditions: Emergency Services Furnished by a 
                        Nonparticipating Hospital

424.100  Scope.
424.101  Definitions.
424.102  Situations that do not constitute an emergency.
424.103  Conditions for payment for emergency services.
424.104  Election to claim payment for emergency services furnished 
          during a calendar year.
424.106  Criteria for determining whether the hospital was the most 
          accessible.
424.108  Payment to a hospital.
424.109  Payment to the beneficiary.

 Subpart H--Special Conditions: Services Furnished in a Foreign Country

424.120  Scope.
424.121  Scope of payments.
424.122  Conditions for payment for emergency inpatient hospital 
          services.
424.123  Conditions for payment for nonemergency inpatient services 
          furnished by a hospital closer to the individual's residence.
424.124  Conditions for payment for physician services and ambulance 
          services.
424.126  Payment to the hospital.
424.127  Payment to the beneficiary.

Subparts I-L [Reserved]

       Subpart M--Replacement and Reclamation of Medicare Payments

424.350  Replacement of checks that are lost, stolen, defaced, 
          mutilated, destroyed, or paid on forged endorsements.
424.352  Intermediary and carrier checks that are lost, stolen, defaced, 
          mutilated, destroyed, or paid on forged endorsements.

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 
1302 and 1395hh).

    Source: 53 FR 6634, Mar. 2, 1988, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 424.1  Basis and scope.

    (a) Statutory basis. (1) This part is based on the indicated 
provisions of the following sections of the Act:

    1814--Basic conditions for, and limitations on, Medicare payments 
for Part A services.
    1815--Payment to providers for Part A services.
    1820--Conditions for designating certain hospitals as critical 
assess hospitals.
    1835--Procedures for payment to providers for Part B services.
    1842(b)(3)(B)(ii)--Assignment of Part B Medicare claims.
    1842(b)(6)--Payment to entities other than the supplier.
    1848--Payment for physician services.
    1870(e) and (f)--Settlement of claims after death of the 
beneficiary.

    (2) Section 424.444(c) is also based on section 216(j) of the Act.

[[Page 933]]

    (b) Scope. This part sets forth certain specific conditions and 
limitations applicable to Medicare payments and cites other conditions 
and limitations set forth elsewhere in this chapter. This subpart A 
provides a general overview. Other subparts deal specifically with--
    (1) The requirement that the need for services be certified and that 
a physician establish a plan of treatment (subpart B);
    (2) The procedures and time limits for filing claims (subpart C);
    (3) The individuals or entities to whom payment may be made 
(subparts D and E);
    (4) The limitations on assignment and reassignment of claims 
(subpart F);
    (5) Special requirements that apply to services furnished by 
nonparticipating U.S. hospitals and foreign hospitals (subparts G and 
H); and
    (6) The replacement and reclamation of Medicare payment checks 
(subpart M).
    (c) Other applicable rules. Except for Sec. 424.40(c)(3), this part 
does not deal with the conditions for payment of rural health clinic 
(RHC) services, Federally qualified health center (FQHC) services, or 
ambulatory surgical center (ASC) services. Those conditions are set 
forth in part 405, subpart X, and part 481 subpart A of this chapter for 
RHC and FQHC services; and in part 416 of this chapter, for ASC 
services. The rules for physician certification of terminal illness, 
required in connection with hospice care, are set forth in Sec. 418.22 
of this chapter.

[53 FR 6634, Mar. 2, 1988, as amended at 60 FR 38271, July 26, 1995; 60 
FR 50442, Sept. 29, 1995; 62 FR 46035, Aug. 29, 1997]



Sec. 424.3  Definitions.

    As used in this part, unless the context indicates otherwise--
    HCPCS means CMS Common Procedure Coding System.
    ICD-9-CM means International Classification of Diseases, Ninth 
Revision, Clinical Modification.
    Nonparticipating hospital means a hospital that does not have in 
effect a provider agreement to participate in Medicare.
    Participating hospital means a hospital that has in effect a 
provider agreement to participate in Medicare.

[53 FR 6634, Mar. 2, 1988, as amended at 59 FR 10299, Mar. 4, 1994; 63 
FR 26311, May 12, 1998]



Sec. 424.5  Basic conditions.

    (a) As a basis for Medicare payment, the following conditions must 
be met:
    (1) Types of services. The services must be--
    (i) Covered services, as specified in part 409 or part 410 of this 
chapter; or
    (ii) Services excluded from coverage as custodial care or services 
not reasonable and necessary, but reimbursable in accordance with 
Secs. 405.332 through 405.334 of this chapter, pertaining to limitation 
of liability.
    (2) Sources of services. The services must have been furnished by a 
provider, nonparticipating hospital, or supplier that was, at the time 
it furnished the services, qualified to have payment made for them.
    (3) Recipient of services. Except as provided in Sec. 409.68 of this 
chapter, the services must have been furnished while the individual was 
eligible to have payment made for them. (Section 409.68 provides for 
payment of inpatient hospital services furnished before the hospital is 
notified that the beneficiary has exhausted the Medicare benefits 
available for the current benefit period.)
    (4) Certification of need for services. When required, the provider 
must obtain certification and recertification of the need for the 
services in accordance with subpart B of this part.
    (5) Claim for payment. The provider, supplier, or beneficiary, as 
appropriate, must file a claim that includes or makes reference to a 
request for payment, in accordance with subpart C of this part.
    (6) Sufficient information. The provider, supplier, or beneficiary, 
as appropriate, must furnish to the intermediary or carrier sufficient 
information to determine whether payment is due and the amount of 
payment.
    (b) Additional conditions applicable in certain circumstances or to 
certain services are set forth in other sections of this part.

[53 FR 6635, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988; 60 FR 38271, July 
26, 1995]

[[Page 934]]



Sec. 424.7  General limitations.

    (a) Utilization review finding on medical necessity. When a QIO or a 
UR committee notifies a hospital or SNF of its finding that further 
services are not medically necessary, the following rules apply:
    (1) Hospitals subject to PPS. Payment may not be made for inpatient 
hospital services furnished by a PPS hospital after the second day after 
the day on which the hospital received the notice.
    (2) Hospitals not subject to PPS and SNFs--(i) Basic rule. Except as 
provided in paragraph (a)(2)(ii) of this section, payment may not be 
made for inpatient hospital services or posthospital SNF care furnished 
after the day on which the hospital or SNF received the notice.
    (ii) Exception. Payment may be made for 1 or 2 additional days if 
the QIO or UR committee approves them as necessary for planning for 
post-discharge care.
    (b) Failure to make timely utilization review. Payment may not be 
made for inpatient hospital services or posthospital SNF care furnished, 
after the 20th consecutive day of a stay, to an individual who is 
admitted to the hospital or SNF after CMS has determined that the 
hospital or SNF has failed to make timely utilization review in long 
stay cases. (This provision does not apply to a hospital or SNF for 
which a QIO has assumed binding review.)

[53 FR 6635, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



       Subpart B--Certification and Plan of Treatment Requirements



Sec. 424.10  Purpose and scope.

    (a) Purpose. The physician has a major role in determining 
utilization of health services furnished by providers. The physician 
decides upon admissions, orders tests, drugs, and treatments, and 
determines the length of stay. Accordingly, sections 1814(a)(2) and 
1835(a)(2) of the Act establish as a condition for Medicare payment that 
a physician certify the necessity of the services and, in some 
instances, recertify the continued need for those services.

Section 1814(a)(2) of the Act also permits nurse practitioners or 
clinical nurse specialists to certify and recertify the need for post-
hospital extended care services.
    (b) Scope. This subpart sets forth the timing, content, and 
signature requirements for certification and recertification with 
respect to certain Medicare services furnished by providers.

[60 FR 38271, July 26, 1995]



Sec. 424.11  General procedures.

    (a) Responsibility of the provider. The provider must--
    (1) Obtain the required certification and recertification 
statements;
    (2) Keep them on file for verification by the intermediary, if 
necessary; and
    (3) Certify, on the appropriate billing form, that the statements 
have been obtained and are on file.
    (b) Obtaining the certification and recertification statements. No 
specific procedures or forms are required for certification and 
recertification statements. The provider may adopt any method that 
permits verification. The certification and recertification statements 
may be entered on forms, notes, or records that the appropriate 
individual signs, or on a special separate form. Except as provided in 
paragraph (d) of this section for delayed certifications, there must be 
a separate signed statement for each certification or recertification.
    (c) Required information. The succeeding sections of this subpart 
set forth specific information required for different types of services. 
If that information is contained in other provider records, such as 
physicians' progress notes, it need not be repeated. It will suffice for 
the statement to indicate where the information is to be found.
    (d) Timeliness. (1) The succeeding sections of this subpart also 
specify the time frames for certifications and for initial and 
subsequent recertifications.
    (2) A hospital or SNF may provide for obtaining a certification or 
recertification earlier than required by these regulations, or vary the 
time frame (within the prescribed outer limits) for different diagnostic 
or clinical categories.

[[Page 935]]

    (3) Delayed certification and recertification statements are 
acceptable when there is a legitimate reason for delay. (For instance, 
the patient was unaware of his or her entitlement when he or she was 
treated.) Delayed certification and recertification statements must 
include an explanation of the reason for the delay.
    (4) A delayed certification may be included with one or more 
recertifications on a single signed statement.
    (e) Limitation on authorization to sign statements. A certification 
or recertification statement may be signed only by one of the following:
    (1) A physician who is a doctor of medicine or osteopathy.
    (2) A dentist in the circumstances specified in Sec. 424.13(c).
    (3) A doctor of podiatric medicine if his or her certification is 
consistent with the functions he or she is authorized to perform under 
State law.
    (4) A nurse practitioner or clinical nurse specialist, as defined in 
paragraph (e)(5) or (e)(6) of this section, in the circumstances 
specified in Sec. 424.20(e).
    (5) For purposes of this section, to qualify as a nurse 
practitioner, an individual must--
    (i) Be a registered professional nurse who is currently licensed to 
practice nursing in the State where he or she practices; be authorized 
to perform the services of a nurse practitioner in accordance with State 
law; and have a master's degree in nursing;
    (ii) Be certified as a nurse practitioner by a professional 
association recognized by CMS that has, at a minimum, eligibility 
requirements that meet the standards in paragraph (e)(5)(i) of this 
section; or
    (iii) Meet the requirements for a nurse practitioner set forth in 
paragraph (e)(5)(i) of this section, except for the master's degree 
requirement, and have received before August 25, 1998 a certificate of 
completion from a formal advanced practice program that prepares 
registered nurses to perform an expanded role in the delivery of primary 
care.
    (6) For purposes of this section, to qualify as a clinical nurse 
specialist, an individual must--
    (i) Be a registered professional nurse who is currently licensed to 
practice nursing in the State where he or she practices; be authorized 
to perform the services of a clinical nurse specialist in accordance 
with State law; and have a master's degree in a defined clinical area of 
nursing;
    (ii) Be certified as a clinical nurse specialist by a professional 
association recognized by CMS that has at a minimum, eligibility 
requirements that meet the standards in paragraph (e)(6)(i) of this 
section; or
    (iii) Meet the requirements for a clinical nurse specialist set 
forth in paragraph (e)(6)(i) of this section, except for the master's 
degree requirement, and have received before August 25, 1998 a 
certificate of completion from a formal advanced practice program that 
prepares registered nurses to perform an expanded role in the delivery 
of primary care.

[53 FR 6634, Mar. 2, 1988, as amended at 56 FR 8845, Mar. 1, 1991; 60 FR 
38272, July 26, 1995]



Sec. 424.13  Requirements for inpatient services of hospitals other than psychiatric hospitals.

    (a) Content of certification and recertification. Medicare Part A 
pays for inpatient hospital services of hospitals other than psychiatric 
hospitals only if a physician certifies and recertifies the following:
    (1) The reasons for either--
    (i) Continued hospitalization of the patient for medical treatment 
or medically required inpatient diagnostic study; or
    (ii) Special or unusual services for cost outlier cases (under the 
prospective payment system set forth in subpart F of part 412 of this 
chapter).
    (2) The estimated time the patient will need to remain in the 
hospital.
    (3) The plans for posthospital care, if appropriate.
    (b) Certification of need for hospitalization when a SNF bed is not 
available. (1) A physician may certify or recertify need for continued 
hospitalization if the physician finds that the patient could receive 
proper treatment in a SNF but no bed is available in a participating 
SNF.
    (2) If this is the basis for the physician's certification or 
recertification,

[[Page 936]]

the required statement must so indicate; and the physician is expected 
to continue efforts to place the patient in a participating SNF as soon 
as a bed becomes available.
    (c) Signatures. (1) Basic rule. Except as specified in paragraph 
(c)(2) of this section, certifications and recertifications must be 
signed by the physician responsible for the case, or by another 
physician who has knowledge of the case and who is authorized to do so 
by the responsible physician or by the hospital's medical staff.
    (2) Exception. If the intermediary requests certification of the 
need to admit a patient in connection with dental procedures, because 
his or her underlying medical condition and clinical status or the 
severity of the dental procedures require hospitalization, that 
certification may be signed by the dentist caring for the patient.
    (d) Timing of certifications and recertifications: Cases not subject 
to the prospective payment system (PPS). (1) For cases that are not 
subject to PPS, certification is required no later than as of the 12th 
day of hospitalization. A hospital may, at its option, provide for the 
certification to be made earlier, or it may vary the timing of the 
certification within the 12-day period by diagnostic or clinical 
categories.
    (2) The first recertification is required no later than as of the 
18th day of hospitalization.
    (3) Subsequent recertifications are required at intervals 
established by the UR committee (on a case-by-case basis if it so 
chooses), but no less frequently than every 30 days.
    (e) Timing of certification and recertification: Cases subject to 
PPS. For cases subject to PPS, certification is required as follows:
    (1) For day-outlier cases, certification is required no later than 
one day after the hospital reasonably assumes that the case meets the 
outlier criteria, established in accordance with Sec. 412.80(a)(1)(i) of 
this chapter, or no later than 20 days into the hospital stay, whichever 
is earlier. The first and subsequent recertifications are required at 
intervals established by the UR committee (on a case-by-case basis if it 
so chooses) but not less frequently than every 30 days.
    (2) For cost-outlier cases, certification is required no later than 
the date on which the hospital requests cost outlier payment or 20 days 
into the hospital stay, whichever is earlier. If possible, certification 
must be made before the hospital incurs costs for which it will seek 
cost outlier payment. In cost outlier cases, the first and subsequent 
recertifications are required at intervals established by the UR 
committee (on a case-by-case basis if it so chooses).
    (f) Recertification requirement fulfilled by utilization review. (1) 
At the hospital's option, extended stay review by its UR committee may 
take the place of the second and subsequent physician recertifications 
required for cases not subject to PPS and for PPS day-outlier cases.
    (2) A utilization review that is used to fulfill the recertification 
requirement is considered timely if performed no later than the seventh 
day after the day the physician recertification would have been 
required. The next physician recertification would need to be made no 
later than the 30th day following such review; if review by the UR 
committee took the place of this physician recertification, the review 
could be performed as late as the seventh day following the 30th day.
    (g) Description of procedures. The hospital must have available on 
file a written description that specifies the time schedule for 
certifications and recertifications, and indicates whether utilization 
review of long-stay cases fulfills the requirement for second and 
subsequent recertifications of all cases not subject to PPS and of PPS 
day outlier cases.



Sec. 424.14  Requirements for inpatient services of psychiatric hospitals.

    (a) Content of certification and recertification: General 
considerations. The content requirements differ from those for other 
hospitals because the care furnished in psychiatric hospitals is often 
purely custodial and thus not covered under Medicare. The purpose of the 
statements, therefore, is to help ensure that Medicare pays only for 
services of the type appropriate for Medicare coverage. Accordingly, 
Medicare Part A pays for inpatient care in

[[Page 937]]

a psychiatric hospital only if a physician certifies and recertifies the 
need for services consistent with the content of paragraphs (b) or (c) 
of this section, as appropriate.
    (b) Content of certification. Inpatient psychiatric services were 
required--
    (1) For treatment that could reasonably be expected to improve the 
patient's condition; or
    (2) For diagnostic study.
    (c) Content of recertification. (1) Inpatient services furnished 
since the previous certification or recertification were, and continue 
to be, required--
    (i) For treatment that could reasonably be expected to improve the 
patient's condition; or
    (ii) For diagnostic study; and
    (2) The hospital records show that the services furnished were--
    (i) Intensive treatment services;
    (ii) Admission and related services necessary for diagnostic study; 
or
    (iii) Equivalent services.
    (d) Timing of certification and recertification. (1) Certification 
is required at the time of admission or as soon thereafter as is 
reasonable and practicable.
    (2) The first recertification is required as of the 18th day of 
hospitalization. Subsequent recertifications are required at intervals 
established by the UR committee (on a case-by-case basis if it so 
chooses), but no less frequently than every 30 days.
    (e) Other requirements. Psychiatric hospitals must also meet the 
requirements set forth in Sec. 424.13 (b), (c), (f), and (g).



Sec. 424.15  Requirements for inpatient CAH services.

    (a) Content of certification. Medicare Part A pays for inpatient CAH 
services only if a physician certifies that the individual may 
reasonably be expected to be discharged or transferred to a hospital 
within 96 hours after admission to the CAH.
    (b) Timing of certification. Certification is required no later than 
1 day before the date on which the claim for payment for the inpatient 
CAH services is submitted.

[58 FR 30671, May 26, 1993, as amended at 60 FR 45850, Sept. 1, 1995; 62 
FR 46035, 46037, Aug. 29, 1997]



Sec. 424.16  Timing of certification for individual admitted to a hospital before entitlement to Medicare benefits.

    (a) Basic rule. If an indivdual is admitted to a hospital before 
becoming entitled to Medicare benefits (for instance, before attaining 
age 65), the day of entitlement (instead of the day of admission) is the 
starting point for the time limits specified in Sec. 424.13(e) for 
certification and recertification.
    (b) Example. (Hospital that is not a psychiatric hospital and is not 
subject to PPS). For a patient who is admitted on August 15 and becomes 
entitled on September 1--
    (1) The certification is required no later than September 12;
    (2) The first recertification is required no later than September 
18; and
    (3) Subsequent recertifications are required at least every 30 days 
after September 18.

[53 FR 6635, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



Sec. 424.20  Requirements for posthospital SNF care.

    Medicare Part A pays for posthospital SNF care furnished by an SNF, 
or a hospital or CAH with a swing-bed approval, only if the 
certification and recertification for services are consistent with the 
content of paragraph (a) or (c) of this section, as appropriate.
    (a) Content of certification--(1) General requirements. Posthospital 
SNF care is or was required because--
    (i) The individual needs or needed on a daily basis skilled nursing 
care (furnished directly by or requiring the supervision of skilled 
nursing personnel) or other skilled rehabilitation services that, as a 
practical matter, can only be provided in an SNF or a swing-bed hospital 
on an inpatient basis, and the SNF care is or was needed for a condition 
for which the individual received inpatient care in a participating 
hospital or a qualified hospital, as defined in Sec. 409.3 of this 
chapter; or
    (ii) The individual has been correctly assigned to one of the 
Resource Utilization Groups designated as representing the required 
level of care, as provided in Sec. 409.30 of this chapter.

[[Page 938]]

    (2) Special requirement for certifications performed prior to July 
1, 2002: A swing-bed hospital with more than 49 beds (but fewer than 
100) that does not transfer a swing-bed patient to a SNF within 5 days 
of the availability date. Transfer of the extended care patient to the 
SNF is not medically appropriate.
    (b) Timing of certification. (1) General rule. The certification 
must be obtained at the time of admission or as soon thereafter as is 
reasonable and practicable.
    (2) Special rules for certain swing-bed hospitals. For swing-bed 
hospitals with more than 49 beds that are approved after March 31, 1988, 
the extended care patient's physician has 5 days (excluding weekends and 
holidays) beginning on the availability date as defined in 
Sec. 413.114(b), to certify that the transfer of the extended care 
patient is not medically appropriate.
    (c) Content of recertifications. (1) The reasons for the continued 
need for posthopsital SNF care:
    (2) The estimated time the individual will need to remain in the 
SNF;
    (3) Plans for home care, if any; and
    (4) If appropriate, the fact that continued services are needed for 
a condition that arose after admission to the SNF and while the 
individual was still under treatment for the condition for which he or 
she had received inpatient hospital services.
    (d) Timing of recertifications. (1) The first recertification is 
required no later than the 14th day of posthospital SNF care.
    (2) Subsequent recertifications are required at least every 30 days 
after the first recertification.
    (e) Signature. Certification and recertification statements may be 
signed by--
    (1) The physician responsible for the case or, with his or her 
authorization, by a physician on the SNF staff or a physician who is 
available in case of an emergency and has knowledge of the case; or
    (2) A nurse practitioner or clinical nurse specialist, neither of 
whom has a direct or indirect employment relationship with the facility 
but who is working in collaboration with a physician. For purposes of 
this section, collaboration means a process whereby a nurse practitioner 
or clinical nurse specialist works with a doctor of medicine or 
osteopathy to deliver health care services. The services are delivered 
within the scope of the nurse's professional expertise, with medical 
direction and appropriate supervision as provided for in guidelines 
jointly developed by the nurse and the physician or other mechanisms 
defined by Federal regulations and the law of the State in which the 
services are performed.
    (f) Recertification requirement fulfilled by utilization review. A 
SNF may substitute utilization review of extended stay cases for the 
second and subsequent recertifications, if it includes this procedure in 
its utilization review plan.
    (g) Description of procedures. The SNF must have available on file a 
written description that specifies the certification and recertification 
time schedule and indicates whether utilization review is used as an 
alternative to the second and subsequent recertifications.

[53 FR 6634, Mar. 2, 1988, as amended at 54 FR 37275, Sept. 7, 1989; 58 
FR 30671, May 26, 1993; 60 FR 38272, July 26, 1995; 62 FR 46037, Aug. 
29, 1997; 63 FR 26311, May 12, 1998; 63 FR 53307, Oct. 5, 1998; 66 FR 
39600, July 31, 2001]



Sec. 424.22  Requirements for home health services.

    Medicare Part A or Part B pays for home health services only if a 
physician certifies and recertifies the content specified in paragraphs 
(a)(1) and (b)(2) of this section, as appropriate.
    (a) Certification--(1) Content of certification. As a condition for 
payment of home health services under Medicare Part A or Medicare Part 
B, a physician must certify as follows:
    (i) The individual needs or needed intermittent skilled nursing 
care, or physical or speech therapy, or (for the period from July 
through November 30, 1981) occupational therapy.
    (ii) Home health services were required because the individual was 
confined to the home except when receiving outpatient services.
    (iii) A plan for furnishing the services has been established and is 
periodically reviewed by a physician who is a doctor of medicine, 
osteopathy, or podiatric medicine, and who is not precluded from 
performing this function under

[[Page 939]]

paragraph (d) of this section. (A doctor of podiatric medicine may 
perform only plan of treatment functions that are consistent with the 
functions he or she is authorized to perform under State law.)
    (iv) The services were furnished while the individual was under the 
care of a physician who is a doctor of medicine, osteopathy, or 
podiatric medicine.1
---------------------------------------------------------------------------

    \1\ As a condition of Medicare Part A payment for home health 
services furnished before July 1981, the physician was also required to 
certify that the services were needed for a condition for which the 
individual had received inpatient hosptial or SNF services.
---------------------------------------------------------------------------

    (2) Timing and signature. The certification of need for home health 
services must be obtained at the time the plan of treatment is 
established or as soon thereafter as possible and must be signed by the 
physician who establishes the plan.
    (b) Recertification. (1) Timing and signature of recertification. 
Recertification is required at least every 60 days, preferably at the 
time the plan is reviewed, and must be signed by the physician who 
reviews the plan of care. The recertification is required at least every 
60 days when there is a--
    (i) Beneficiary elected transfer; or
    (ii) Discharge and return to the same HHA during the 60-day episode.
    (2) Content and basis of recertification. The recertification 
statement must indicate the continuing need for services and estimate 
how much longer the services will be required. Need for occupational 
therapy may be the basis for continuing services that were initiated 
because the individual needed skilled nursing care or physical or speech 
therapy.
    (c) [Reserved]
    (d) Limitation on the performance of certification and plan of 
treatment functions. The need for home health services to be provided by 
an HHA may not be certified or recertified, and a plan of treatment may 
not be established and reviewed, by any physician who has a financial 
relationship, as defined in Sec. 411.351 of this chapter, with that HHA, 
unless the physician's relationship meets one of the exceptions in 
section 1877 of the Act, which sets forth general exceptions to the 
referral prohibition related to both ownership/investment and 
compensation; exceptions to the referral prohibition related to 
ownership or investment interests; and exceptions to the referral 
prohibition related to compensation arrangements.

[53 FR 6638, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988; 56 FR 8845, Mar. 
1, 1991, as amended at 65 FR 41211, July 3, 2000; 66 FR 962, Jan. 4, 
2001]



Sec. 424.24  Requirements for medical and other health services furnished by providers under Medicare Part B.

    (a) Exempted services. Certification is not required for the 
following: (1) Hospital services and supplies incident to physicians' 
services furnished to outpatients. The exemption applies to drugs and 
biologicals that cannot be self-administered, but not to partial 
hospitalization services, as set forth in paragraph (e) of this section.
    (2) Outpatient hospital diagnostic services, including necessary 
drugs and biologicals, ordinarily furnished or arranged for by a 
hospital for the purpose of diagnostic study.
    (b) General rule. Medicare Part B pays for medical and other health 
services furnished by providers (and not exempted under paragraph (a) of 
this section) only if a physician certifies the content specified in 
paragraph (c)(1), (c)(4) or (e)(1) of this section, as appropriate.
    (c) Outpatient physical therapy and speech-language pathology 
services--(1) Content of certification. (i) The individual needs, or 
needed, physical therapy or speech pathology services.
    (ii) The services were furnished while the individual was under the 
care of a physician, nurse practitioner, clinical nurse specialist, or 
physician assistant.
    (iii) The services were furnished under a plan of treatment that 
meets the requirements of Sec. 410.61 of this chapter.
    (2) Timing. The certification statement must be obtained at the time 
the plan of treatment is established, or as soon thereafter as possible.
    (3) Signature. (i) If the plan of treatment is established by a 
physician, nurse practitioner, clinical nurse specialist, or physician 
assistant, the certification must be signed by that physician or 
nonphysician practitioner.

[[Page 940]]

    (ii) If the plan of treatment is established by a physical therapist 
or speech-language pathologist, the certification must be signed by a 
physician or by a nurse practitioner, clinical nurse specialist, or 
physician assistant who has knowledge of the case.
    (4) Recertification--(i) Timing. Recertification statements are 
required at least every 30 days and must be signed by the physician, 
nurse practitioner, clinical nurse specialist, or physician assistant 
who reviews the plan of treatment.
    (ii) Content. The recertification statement must indicate the 
continuing need for physical therapy or speech-language pathology 
services and an estimate of how much longer the services will be needed.
    (iii) Signature. Recertifications must be signed by the physician, 
nurse practitioner, clinical nurse specialist, or physician assistant 
who reviews the plan of treatment.
    (d) [Reserved]
    (e) Partial hospitalization services: Content of certification and 
plan of treatment requirements--(1) Content of certification. (i) The 
individual would require inpatient psychiatric care if the partial 
hospitalization services were not provided.
    (ii) The services are or were furnished while the individual was 
under the care of a physician.
    (iii) The services were furnished under a written plan of treatment 
that meets the requirements of paragraph (e)(2) of this section.
    (2) Plan of treatment requirements. (i) The plan is an 
individualized plan that is established and is periodically reviewed by 
a physician in consultation with appropriate staff participating in the 
program, and that sets forth--
    (A) The physician's diagnosis;
    (B) The type, amount, duration, and frequency of the services; and
    (C) The treatment goals under the plan.
    (ii) The physician determines the frequency and duration of the 
services taking into account accepted norms of medical practice and a 
reasonable expectation of improvement in the patient's condition.
    (3) Recertification requirements.
    (i) Signature. The physician recertification must be signed by a 
physician who is treating the patient and has knowledge of the patient's 
response to treatment.
    (ii) Timing. The first recertification is required as of the 18th 
day of partial hospitalization services. Subsequent recertifications are 
required at intervals established by the provider, but no less 
frequently than every 30 days.
    (iii) Content. The recertification must specify that the patient 
would otherwise require inpatient psychiatric care in the absence of 
continued stay in the partial hospitalization program and describe the 
following:
    (A) The patient's response to the therapeutic interventions provided 
by the partial hospitalization program.
    (B) The patient's psychiatric symptoms that continue to place the 
patient at risk of hospitalization.
    (C) Treatment goals for coordination of services to facilitate 
discharge from the partial hospitalization program.
    (f) All other covered medical and other health services furnished by 
providers--(1) Content of certification. The services were medically 
necessary,
    (2) Signature. The certificate must be signed by a physician, nurse 
practioner, clinical nurse specialist, or physician assistant who has 
knowledge of the case.
    (3) Timing. The physician, nurse practioner, clinical nurse 
specialist, or physician assistant may provide certification at the time 
the services are furnished or, if services are provided on a continuing 
basis, either at the beginning or at the end of a series of visits.
    (4) Recertification. Recertification of continued need for services 
is not required.

[53 FR 6638, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988; 56 FR 8845, 8853, 
Mar. 1, 1991; 63 FR 58912, Nov. 2, 1998; 65 FR 18548, Apr. 7, 2000]



Sec. 424.27  Requirements for comprehensive outpatient rehabilitation facility (CORF) services.

    Medicare Part B pays for CORF services only if a physician 
certifies, and the facility physician recertifies, the content specified 
in paragraphs (a) and (b)(2) of this section, as appropriate.

[[Page 941]]

    (a) Certification: Content. (1) The services were required because 
the individual needed skilled rehabilitation services;
    (2) The services were furnished while the individual was under the 
care of a physician; and
    (3) A written plan of treatment has been established and is reviewed 
periodically by a physician.
    (b) Recertification--(1) Timing. Recertification is required at 
least every 60 days, based on review by a facility physician who, when 
appropriate, consults with the professional personnel who furnish the 
services.
    (2) Content. (i) The plan is being followed;
    (ii) The patient is making progress in attaining the rehabilitation 
goals; and,
    (iii) The treatment is not having any harmful effect on the patient.



                      Subpart C--Claims for Payment



Sec. 424.30  Scope.

    This subpart sets forth the requirements, procedures, and time 
limits for claiming Medicare payments. Claims must be filed in all cases 
except when services are furnished on a prepaid capitation basis by a 
health maintenance organization (HMO), a competitive medical plan (CMP), 
or a health care prepayment plan (HCPP). Special procedures for claiming 
payment after the beneficiary has died and for certain bills paid by 
organizations are set forth in subpart E of this part.

[53 FR 6639, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



Sec. 424.32  Basic requirements for all claims.

    (a) A claim must meet the following requirements:
    (1) A claim must be filed with the appropriate intermediary or 
carrier on a form prescribed by CMS in accordance with CMS instructions.
    (2) A claim for physician services, clinical psychologist services, 
or clinical social worker services must include appropriate diagnostic 
coding for those services using ICD-9-CM.
    (3) A claim must be signed by the beneficiary or the beneficiary's 
representative (in accordance with Sec. 424.36(b)).
    (4) A claim must be filed within the time limits specified in 
Sec. 424.44.
    (5) All Part B claims for services furnished to SNF residents 
(whether filed by the SNF or by another entity) must include the SNF's 
Medicare provider number and appropriate HCPCS coding.
    (b) The prescribed forms for claims are the following:

    CMS-1450--Uniform Institutional Provider Bill. (This form is for 
institutional provider billing for Medicare inpatient, outpatient and 
home health services.)
    CMS-1490S--Request for Medicare payment. (For use by a patient to 
request payment for medical expenses.)
    CMS-1490U--Request for Medicare Payment by Organization. (For use by 
an organization requesting payment for medical services.)
    CMS-1491--Request for Medicare Payment-Ambulance. (For use by an 
organization requesting payment for ambulance services.)
    CMS-1500--Health Insurance Claim Form. (For use by physicians and 
other suppliers to request payment for medical services.)
    CMS-1660--Request for Information-Medicare Payment for Services to a 
Patient now Deceased. (For use in requesting amounts payable under title 
XVIII to a deceased beneficiary.)

    (c) Where claims forms are available. Excluding forms CMS-1450 and 
CMS-1500, all claims forms prescribed for use in the Medicare program 
are distributed free-of-charge to the public, institutions, or 
organizations. The CMS-1450 and CMS-1500 may be obtained only by 
commercial purchase. All other claims forms can be obtained upon request 
from CMS or any Social Security branch or district office, or from 
Medicare intermediaries or carriers. The CMS-1490S is also available at 
local Social Security Offices.

[53 FR 6639, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988, as amended at 59 
FR 10299, Mar. 4, 1994; 63 FR 26311, May 12, 1998; 63 FR 53307, Oct. 5, 
1998; 66 FR 39601, July 31, 2001]



Sec. 424.33  Additional requirements: Claims for services of providers and claims by suppliers and nonparticipating hospitals.

    All claims for services of providers and all claims by suppliers and 
nonparticipating hospitals must be--
    (a) Filed by the provider, supplier, or hospital; and

[[Page 942]]

    (b) Signed by the provider, supplier, or hospital unless CMS 
instructions waive this requirement.



Sec. 424.34  Additional requirements: Beneficiary's claim for direct payment.

    (a) Basic rule. A beneficiary's claim for direct payment for 
services furnished by a supplier, or by a nonparticipating hospital that 
has not elected to claim payment for emergency services, must include an 
itemized bill or a ``report of services'', as specified in paragraphs 
(b) and (c) of this section.
    (b) Itemized bill from the hospital or supplier. The itemized bill 
for the services, which may be receipted or unpaid, must include all of 
the following information:
    (1) The name and address of--
    (i) The beneficiary;
    (ii) The supplier or nonparticipating hospital that furnished the 
services; and
    (iii) The physician who prescribed the services if they were 
furnished by a supplier other than the physician.
    (2) The place where each service was furnished, e.g., home, office, 
independent laboratory, hospital.
    (3) The date each service was furnished.
    (4) A listing of the services in sufficient detail to permit 
determination of payment under the fee schedule for physicians' 
services; for itemized bills from physicians, appropriate diagnostic 
coding using ICD-9-CM must be used.
    (5) The charges for each service.
    (c) Report of services furnished by a supplier. For Medicare Part B 
services furnished by a supplier, the beneficiary claims may include the 
``Report of Services'' portion of the appropriate claims form, completed 
by the supplier in accordance with CMS instructions, in lieu of an 
itemized bill.

[53 FR 6634, Mar. 2, 1988, as amended at 59 FR 10299, Mar. 4, 1994; 59 
FR 26740, May 24, 1994]



Sec. 424.36  Signature requirements.

    (a) General rule. The beneficiary's own signature is required on the 
claim unless the beneficiary has died or the provisions of paragraph 
(b), (c), or (d) of this section apply.
    (b) Who may sign when the beneficiary is incapable. If the 
beneficiary is physically or mentally incapable of signing the claim, 
the claim may be signed on his or her behalf by one of the following:
    (1) The beneficiary's legal guardian.
    (2) A relative or other person who receives social security or other 
governmental benefits on the beneficiary's behalf.
    (3) A relative or other person who arranges for the beneficiary's 
treatment or exercises other responsibility for his or her affairs.
    (4) A representative of an agency or institution that did not 
furnish the services for which payment is claimed but furnished other 
care, services, or assistance to the beneficiary.
    (5) A representative of the provider or of the nonparticipating 
hospital claiming payment for services it has furnished if the provider 
or nonparticipating hospital is unable to have the claim signed in 
accordance with paragraph (b) (1), (2), (3), or (4) of this section.
    (c) Who may sign if the beneficiary was not present for the service. 
If a provider, nonparticipating hospital, or supplier files a claim for 
services that involved no personal contact between the provider, 
hospital, or supplier and the beneficiary (for example, a physician sent 
a blood sample to the provider for diagnostic tests), a representative 
of the provider, hospital, or supplier may sign the claim on the 
beneficiary's behalf.
    (d) Claims by entities that provide coverage complementary to 
Medicare. A claim by an entity that provides coverage complementary to 
Medicare Part B may be signed by the entity on the beneficiary's behalf.
    (e) Acceptance of other signatures for good cause. If good cause is 
shown, CMS may honor a claim signed by a party other than those 
specified in paragraphs (a) through (c) of this section.

[53 FR 6640, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988, as amended at 53 
FR 28388, July 28, 1988]



Sec. 424.37  Evidence of authority to sign on behalf of the beneficiary.

    (a) Beneficiary incapable. When a party specified in Sec. 424.36(b) 
signs a

[[Page 943]]

claim or request for payment statement, he or she must also submit a 
brief statement that--
    (1) Describes his or her relationship to the beneficiary; and
    (2) Explains the circumstances that make it impractical for the 
beneficiary to sign the claim or statement.
    (b) Beneficiary not present for services. When a representative of 
the provider, nonparticipating hospital, or supplier signs a claim or 
request for payment statement under Sec. 424.36(c), he or she must 
explain why it was not possible to obtain the beneficiary's signature. 
(For example: ``Patient not physically present for test.'')

[53 FR 6640, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



Sec. 424.40  Request for payment effective for more than one claim.

    (a) Basic procedure. A separate request for payment statement 
prescribed by CMS and signed by the beneficiary (or by his or her 
representative) may be included in claims by reference, in the 
circumstances specified in paragraphs (b) through (d) of this section.
    (b) Claims filed by a provider or nonparticipating hospital--(1) 
Inpatient services. A signed request for payment statement, included in 
the first claim for Part A services furnished by a facility (a 
participating hospital or SNF, or a nonparticipating hospital that has 
elected to claim payment) during a beneficiary's period of confinement, 
may be effective for all claims for Part A services the facility 
furnishes that beneficiary during that confinement.
    (2) Home health services and outpatient physical therapy or speech 
pathology services. A signed request for payment statement, included in 
the first claim for home health services or outpatient physical therapy 
or speech pathology services furnished by a provider under a plan of 
treatment, may be effective for all claims for home health services or 
outpatient physical therapy or speech pathology services furnished by 
the provider under that plan of treatment.
    (c) Signed statement in the provider record--(1) Services to 
inpatients. A signed request for payment statement in the files of a 
participating hospital or SNF may be effective for all claims for 
services furnished to the beneficiary during a single inpatient stay in 
that facility--
    (i) By the hospital or SNF;
    (ii) By physicians, if their services are billed by the hospital or 
SNF in its name; or
    (iii) By physicians who bill separately, if the services were 
furnished in the hospital or SNF.
    (2) Services to outpatients: Providers and renal dialysis 
facilities. A signed request for payment statement retained in the 
provider's or facility's files may be effective indefinitely, for all 
claims for services furnished to that beneficiary on an outpatient 
basis--
    (i) By the provider or facility;
    (ii) By physicians whose services are billed by the provider or 
facility in its name; or
    (iii) By physicians who bill separately, if the services were 
furnished in the provider or facility.
    (3) Services to outpatients: Independent rural health clinics and 
Federally qualified health centers. A signed request for payment 
statement retained in the clinic's or center's files may be effective 
indefinitely for all claims for services furnished to that beneficiary 
by the clinic.
    (d) Signed statement in the supplier's record. A signed request for 
payment statement retained in the supplier's file may be effective 
indefinitely subject to the following restrictions:
    (1) This policy does not apply to unassigned claims for rental of 
durable medical equipment (DME).
    (2) With respect to assigned claims for rental or purchase of DME, a 
new statement is required if another item of equipment is rented or 
purchased.

[53 FR 6634, Mar. 2, 1988, as amended at 57 FR 24982, June 12, 1992]



Sec. 424.44  Time limits for filing claims.

    (a) Basic limits. Except as provided in paragraph (b) of this 
section, the claim must be mailed or delivered to the intermediary or 
carrier, as appropriate--
    (1) On or before December 31 of the following year for services that 
were furnished during the first 9 months of a calendar year; and
    (2) On or before December 31 of the second following year for 
services that

[[Page 944]]

were furnished during the last 3 months of the calendar year.
    (b) Extension of filing time because of error or misrepresentation. 
(1) The time for filing a claim will be extended if failure to meet the 
deadline in paragraph (a) of this section was caused by error or 
misrepresentation of an employee, intermediary, carrier, or agent of the 
Department that was performing Medicare functions and acting within the 
scope of its authority.
    (2) The time will be extended through the last day of the 6th 
calendar month following the month in which the error or 
misrepresentation is corrected.
    (c) Extension of period ending on a nonworkday. If the last day of 
the period allowed under paragraph (a) or (b) of this section falls on a 
Federal nonworkday (a Saturday, Sunday, legal holiday, or a day which by 
statute or Executive Order is declared to be a nonworkday for Federal 
employees), the time is extended to the next succeeding workday.
    (d) Outpatient diabetes self-management training. CMS makes payment 
in half-hour increments to an entity for the furnishing of outpatient 
diabetes self-management training on or after the approval date CMS 
approves the entity to furnish the services under part 410, subpart H of 
this chapter.

[53 FR 6634, Mar. 2, 1988, as amended at 65 FR 83153, Dec. 29, 2000]



Sec. 424.45  What constitutes a claim for purposes of meeting the time limits.

    A written statement of intent to claim Medicare benefits constitutes 
a claim if--
    (a) The statement is filed with CMS or any carrier or intermediary 
within the time limits specified in Sec. 424.44;
    (b) The statement indicates the intent to claim Medicare payment for 
specified services furnished to an identified beneficiary; and
    (c) A claim that meets the requirements of Sec. 424.32(a) is filed 
within 6 months after the month in which the intermediary or carrier, as 
appropriate, advises the claimant to file that claim.



              Subpart D--To Whom Payment Is Ordinarily Made



Sec. 424.50  Scope.

    (a) This subpart specifies to whom Medicare payment is ordinarily 
made for different kinds of services.
    (b) Subpart E of this part sets forth provisions applicable in 
special situations.
    (c) Subpart F of this part specifies the exceptional circumstances 
under which payment may be made to an assignee or reassignee.



Sec. 424.51  Payment to the provider.

    (a) Basic rule. Except as specified in paragraph (b) of this 
section, Medicare pays the provider for services furnished by a 
provider.
    (b) Exception. Medicare pays the beneficiary for outpatient hospital 
services if the hospital has collected an amount in excess of the unmet 
deductible and coinsurance, as specified in Sec. 489.30(b)(4) of this 
chapter.



Sec. 424.52  Payment to a nonparticipating hospital.

    Medicare pays a nonparticipating hospital for the following 
services, if covered, in the specified circumstances:
    (a) Emergency inpatient and outpatient services furnished by a U.S. 
hospital, if the hospital has in effect an election to claim payment in 
accordance with subpart G of this part.
    (b) Certain medical and other health services covered under Medicare 
Part B and furnished by a U.S. hospital, if the hospital meets the 
requirements of Sec. 424.55 for payment as a supplier.
    (c) Emergency or nonemergency inpatient services furnished by a 
foreign hospital if the hospital has in effect an election to claim 
payment in accordance with subpart G of this part.



Sec. 424.53  Payment to the beneficiary.

    Medicare pays the beneficiary for the following services, if 
covered, in the specified circumstances:
    (a) Emergency inpatient and outpatient services furnished by a 
nonparticipating U.S. hospital that has

[[Page 945]]

not elected to claim payment in accordance with subpart G of this part.
    (b) Certain medical and other health services covered under Medicare 
Part B and furnished by a nonparticipating U.S. hospital, if the 
hospital does not receive assigned payment as a supplier under 
Sec. 424.55.
    (c) Emergency or nonemergency services furnished by a foreign 
hospital if the hospital does not have in effect an election to claim 
payment in accordance with subpart H of this part.
    (d) Physician and ambulance services furnished outside the United 
States.
    (e) Services furnished by a supplier if the claim has not been 
assigned to the supplier.



Sec. 424.54  Payment to the beneficiary's legal guardian or representative payee.

    Medicare may pay amounts due a beneficiary to the beneficiary's 
legal guardian or representative payee.



Sec. 424.55  Payment to the supplier.

    (a) Medicare pays the supplier for covered services if the 
beneficiary (or the person authorized to request payment on the 
beneficiary's behalf) assigns the claim to the supplier and the supplier 
accepts assignment.
    (b) In accepting assignment, the supplier agrees to the following:
    (1) To accept, as full charge for the service, the amount approved 
by the carrier as the basis for determining the Medicare Part B payment 
(the reasonable charge or the lesser of the fee schedule amount and the 
actual charge).
    (2) To limit charges to the beneficiary or any other source as 
follows:
    (i) To collect nothing for those services for which Medicare pays 
100 percent of the Medicare approved amount.
    (ii) To collect only the difference between the Medicare approved 
amount and the Medicare Part B payment (for example, the amount of any 
reduction in incurred expenses under Sec. 410.155(c), any applicable 
deductible amount, and any applicable coinsurance amount) for services 
for which Medicare pays less than 100 percent of the approved amount.
    (3) Not to charge the beneficiary when Medicare paid for services 
determined to be ``not reasonable or necessary'' if--
    (i) The beneficiary was without fault in the overpayment; and
    (ii) The determination that the payment was incorrect was made by 
the carrier after the third year following the year in which the carrier 
sent notice to the beneficiary that it approved the payment.

[53 FR 6634, Mar. 2, 1988, as amended at 63 FR 20130, Apr. 23, 1998]



Sec. 424.56  Payment to a beneficiary and to a supplier.

    (a) Conditions for split payment. If the beneficiary assigns the 
claim after paying part of the bill, payment may be made partly to the 
beneficiary and partly to the supplier.
    (b) Payment to the supplier. Payment to the supplier who submits the 
assigned claim is for whichever of the following amounts is less:
    (1) The reasonable charge minus the amount the beneficiary had 
already paid to the supplier; or
    (2) The full Part B benefit due for the services furnished.
    (c) Payment to the beneficiary. Any part of the Part B benefit 
which, on the basis of paragraph (b) of this section, is not payable to 
the supplier, is paid to the beneficiary.
    (d) Examples.

    Example 1. An assigned bill of $300 on which partial payment of $100 
has been made is submitted to the carrier. The carrier determines that 
$300 is the reasonable charge for the service furnished. Total payment 
due is 80 percent of $300 or $240. Of this amount, $200 (the difference 
between the $100 partial payment and the $300 reasonable charge) is paid 
to the supplier. The remaining $40 is paid to the beneficiary.
    Example 2. An assigned bill of $325 on which partial payment of $275 
has been made is submitted to the carrier. The carrier determines that 
$275 is the reasonable charge for the services. Total payment due is 80 
percent of $275 or $220. The $220 is paid to the beneficiary, since any 
payment to the supplier, when added to the $275 partial payment would 
exceed the reasonable charge for the services furnished.

[53 FR 6641, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]

[[Page 946]]



Sec. 424.57  Special payment rules for items furnished by DMEPOS suppliers and issuance of DMEPOS supplier billing privileges.

    (a) Definitions. As used in this section, the following definitions 
apply:
    DMEPOS stands for durable medical equipment, prosthetics, orthotics 
and supplies.
    DMEPOS supplier means an entity or individual, including a physician 
or a Part A provider, which sells or rents Part B covered items to 
Medicare beneficiaries and which meets the standards in paragraph (c) of 
this section.
    Medicare covered items means medical equipment and supplies as 
defined in section 1834(j)(5) of the Act.
    (b) General rule. A DMEPOS supplier must meet the following 
conditions in order to be eligible to receive payment for a Medicare-
covered item:
    (1) The supplier has submitted a completed application to CMS to 
furnish Medicare-covered items including required enrollment forms. (The 
supplier must enroll separate physical locations it uses to furnish 
Medicare-covered DMEPOS, with the exception of locations that it uses 
solely as warehouses or repair facilities.)
    (2) The item was furnished on or after the date CMS issued to the 
supplier a DMEPOS supplier number conveying billing privileges. (CMS 
issues only one supplier number for each location.) This requirement 
does not apply to items furnished incident to a physician's service.
    (3) CMS has not revoked or excluded the DMEPOS supplier's privileges 
during the period which the item was furnished has not been revoked or 
excluded.
    (4) A supplier that furnishes a drug used as a Medicare-covered 
supply with durable medical equipment or prosthetic devices must be 
licensed by the State to dispense drugs (A supplier of drugs must bill 
and receive payment for the drug in its own name. A physician, who is 
enrolled as a DMEPOS supplier, may dispense, and bill for, drugs under 
this standard if authorized by the State as part of the physician's 
license.)
    (5) The supplier has furnished to CMS all information or 
documentation required to process the claim.
    (c) Application certification standards. The supplier must meet and 
must certify in its application for billing privileges that it meets and 
will continue to meet the following standards. The supplier:
    (1) Operates its business and furnishes Medicare-covered items in 
compliance with all applicable Federal and State licensure and 
regulatory requirements;
    (2) Has not made, or caused to be made, any false statement or 
misrepresentation of a material fact on its application for billing 
privileges. (The supplier must provide complete and accurate information 
in response to questions on its application for billing privileges. The 
supplier must report to CMS any changes in information supplied on the 
application within 30 days of the change.);
    (3) Must have the application for billing privileges signed by an 
individual whose signature binds a supplier;
    (4) Fills orders, frabicates, or fits items from its own inventory 
or by contracting with other companies for the purchase of items 
necessary to fill the order. If it does, it must provide, upon request, 
copies of contracts or other documentation showing compliance with this 
standard. A supplier may not contract with any entity that is currently 
excluded from the Medicare program, any State health care programs, or 
from any other Federal Government Executive Branch procurement or 
nonprocurement program or activity;
    (5) Advises beneficiaries that they may either rent or purchase 
inexpensive or routinely purchased durable medical equipment, and of the 
purchase option for capped rental durable medical equipment, as defined 
in Sec. 414.220(a) of this subchapter. (The supplier must provide, upon 
request, documentation that it has provided beneficiaries with this 
information, in the form of copies of letters, logs, or signed 
notices.);
    (6) Honors all warranties expressed and implied under applicable 
State law. A supplier must not charge the beneficiary or the Medicare 
program

[[Page 947]]

for the repair or replacement of Medicare covered items or for services 
covered under warranty. This standard applies to all purchased and 
rented items, including capped rental items, as described in 
Sec. 414.229 of this subchapter. The supplier must provide, upon 
request, documentation that it has provided beneficiaries with 
information about Medicare covered items covered under warranty, in the 
form of copies of letters, logs, or signed notices;
    (7) Maintains a physical facility on an appropriate site. The 
physical facility must contain space for storing business records 
including the supplier's delivery, maintenance, and beneficiary 
communication records. For purposes of this standard, a post office box 
or commercial mailbox is not considered a physical facility. In the case 
of a multi-site supplier, records may be maintained at a centralized 
location;
    (8) Permits CMS, or its agents to conduct on-site inspections to 
ascertain supplier compliance with the requirements of this section. The 
supplier location must be accessible during reasonable business hours to 
beneficiaries and to CMS, and must maintain a visible sign and posted 
hours of operation;
    (9) Maintains a primary business telephone listed under the name of 
the business locally or toll-free for beneficiaries. The supplier must 
furnish information to beneficiaries at the time of delivery of items on 
how the beneficiary can contact the supplier by telephone. The exclusive 
use of a beeper number, answering service, pager, facsimile machine, car 
phone, or an answering machine may not be used as the primary business 
telephone for purposes of this regulation;
    (10) Has a comprehensive liability insurance policy in the amount of 
at least $300,000 that covers both the supplier's place of business and 
all customers and employees of the supplier. In the case of a supplier 
that manufactures its own items, this insurance must also cover product 
liability and completed operations. Failure to maintain required 
insurance at all times will result in revocation of the supplier's 
billing privileges retroactive to the date the insurance lapsed;
    (11) Must agree not to contact a beneficiary by telephone when 
supplying a Medicare-covered item unless one of the following applies:
    (i) The individual has given written permission to the supplier to 
contact them by telephone concerning the furnishing of a Medicare-
covered item that is to be rented or purchased.
    (ii) The supplier has furnished a Medicare-covered item to the 
individual and the supplier is contacting the individual to coordinate 
the delivery of the item.
    (iii) If the contact concerns the furnishing of a Medicare-covered 
item other than a covered item already furnished to the individual, the 
supplier has furnished at least one covered item to the individual 
during the 15-month period preceding the date on which the supplier 
makes such contact.
    (12) Must be responsible for the delivery of Medicare covered items 
to beneficiaries and maintain proof of delivery. (The supplier must 
document that it or another qualified party has at an appropriate time, 
provided beneficiaries with necessary information and instructions on 
how to use Medicare-covered items safely and effectively);
    (13) Must answer questions and respond to complaints a beneficiary 
has about the Medicare-covered item that was sold or rented. A supplier 
must refer beneficiaries with Medicare questions to the appropriate 
carrier. A supplier must maintain documentation of contacts with 
beneficiaries regarding complaints or questions;
    (14) Must maintain and replace at no charge or repair directly, or 
through a service contract with another company, Medicare-covered items 
it has rented to beneficiaries. The item must function as required and 
intended after being repaired or replaced;
    (15) Must accept returns from beneficiaries of substandard (less 
than full quality for the particular item or unsuitable items, 
inappropriate for the beneficiary at the time it was fitted and rented 
or sold);
    (16) Must disclose these supplier standards to each beneficiary to 
whom it supplies a Medicare-covered item;
    (17) Must comply with the disclosure provisions in Sec. 420.206 of 
this subchapter;

[[Page 948]]

    (18) Must not convey or reassign a supplier number;
    (19) Must have a complaint resolution protocol to address 
beneficiary complaints that relate to supplier standards in paragraph 
(c) of this section and keep written complaints, related correspondence 
and any notes of actions taken in response to written and oral 
complaints. Failure to maintain such information may be considered 
evidence that supplier standards have not been met. (This information 
must be kept at its physical facility and made available to CMS, upon 
request.);
    (20) Must maintain the following information on all written and oral 
beneficiary complaints, including telephone complaints, it receives:
    (i) The name, address, telephone number, and health insurance claim 
number of the beneficiary.
    (ii) A summary of the complaint; the date it was received; the name 
of the person receiving the complaint, and a summary of actions taken to 
resolve the complaint.
    (iii) If an investigation was not conducted, the name of the person 
making the decision and the reason for the decision.
    (21) Provides to CMS, upon request, any information required by the 
Medicare statute and implementing regulations.
    (d) Failure to meet standards. CMS will revoke a supplier's billing 
privileges if it is found not to meet the standards in paragraphs (b) 
and (c) of this section. (The revocation is effective 15 days after the 
entity is sent notice of the revocation, as specified in Sec. 405.874 of 
this subchapter.)
    (e) Renewal of billing privileges. A supplier must renew its 
application for billing privileges every 3 years after the billing 
privileges are first granted. (Each supplier must complete a new 
application for billing privileges 3 years after its last renewal of 
privileges.)

[65 FR 60377, Oct. 11, 2000]



        Subpart E--To Whom Payment is Made in Special Situations



Sec. 424.60  Scope.

    (a) This subpart sets forth provisions applicable to payment after 
the beneficiary's death and payment to entities that provide coverage 
complementary to Medicare Part B.
    (b) The provisions applicable to payment for services excluded as 
custodial care or services not reasonable and necessary are set forth in 
Secs. 405.332 through 405.336 of this chapter.

[53 FR 6634, Mar. 2, 1988, as amended at 53 FR 28388, July 28, 1988]



Sec. 424.62  Payment after beneficiary's death: Bill has been paid.

    (a) Scope. This section specifies the persons whom Medicare pays, 
and the conditions for payments, when the beneficiary has died and the 
bill has been paid.
    (b) Situation. (1) The beneficiary has received covered services for 
which he could receive direct payment under Sec. 424.53.
    (2) The beneficiary died without receiving Medicare payment.
    (3) The bill has been paid.
    (c) Persons whom Medicare pays. In the situation described in 
paragraph (b) of this section, Medicare pays the following persons in 
the specified circumstances:
    (1) The person or persons who, without a legal obligation to do so, 
paid for the services with their own funds, before or after the 
beneficiary's death.
    (2) The legal representative of the beneficiary's estate if the 
services were paid for by the beneficiary before he or she died, or with 
funds from the estate.
    (3) If the deceased beneficiary or his or her estate paid for the 
services and no legal representative of the estate has been appointed, 
the survivors, in the following order of priority:
    (i) The person found by SSA to be the surviving spouse, if he or she 
was either living in the same household with the deceased at the time of 
death, or was, for the month of death, entitled to

[[Page 949]]

monthly social security or railroad retirement benefits on the basis of 
the same earnings record as the deceased beneficiary;
    (ii) The child or children, who were, for the month of death, 
entitled to monthly social security or railroad retirement benefits on 
the basis of the same earnings record as the deceased (and, if there is 
more than one child, in equal parts to each child);
    (iii) The parent or parents, who were, for the month of death, 
entitled to monthly social security or railroad retirement benefits on 
the basis of the same earnings record as the deceased (and, if there is 
more than one parent, in equal parts to each parent);
    (iv) The person found by SSA to be the surviving spouse who was not 
living in the same household with the deceased at the time of death and 
was not, for the month of death, entitled to monthly social security or 
railroad retirement benefits on the basis of the same earnings record as 
the deceased beneficiary;
    (v) The child or children who were not entitled to monthly social 
security or railroad retirement benefits on the basis of the same 
earnings record as the deceased (and, if there is more than one child, 
in equal parts to each child);
    (vi) The parent or parents who were not entitled to monthly social 
security or railroad retirement benefits on the basis of the same 
earnings record as the deceased (and, if there is more than one parent, 
in equal parts to each parent).
    (4) If none of the listed relatives survive, no payment is made.
    (5) If the services were paid for by a person other than the 
deceased beneficiary, and that person died before payment was completed, 
Medicare does not pay that person's estate. Medicare pays a surviving 
relative of the deceased beneficiary in accordance with the priorities 
in paragraph (c)(3) of this section. If none of those relatives survive. 
Medicare pays the legal representative of the deceased beneficiary's 
estate. If there is no legal representative of the estate, no payment is 
made.
    (d) Amount of payment. The amount of payment is the amount due, 
including unnegotiated checks issued for the purpose of making direct 
payment to the beneficiary.
    (e) Conditions for payment. For payment to be made under this 
section--
    (1) The person who claims payment must meet the following 
requirements:
    (i) Submit a claim on a CMS-prescribed form and an itemized bill in 
accordance with the requirements of this subpart. (See paragraph (g) of 
this section for an exception.)
    (ii) Provide evidence that the services were furnished if the 
intermediary or carrier requests it.
    (iii) Provide evidence of payment of the bill and of the identity of 
the person who paid it.
    (2) If a person claims payment as the legal representative of the 
deceased beneficiary's estate, he or she must also submit a copy of the 
papers showing appointment as legal representative.
    (3) If a person claims payment as a survivor of the beneficiary, he 
or she must also submit evidence, if the intermediary or carrier 
requests it, that he or she is highest on the priority list of paragraph 
(c)(3) of this section.
    (f) Evidence of payment. Evidence of payment may be--
    (1) A receipted bill, or a properly completed ``Report of Services'' 
section of a claim form, showing who paid the bill;
    (2) A cancelled check;
    (3) A written statement from the provider or supplier or an 
authorized staff member; or
    (4) Other probative evidence.
    (g) Exception: Claim submitted before beneficiary died. If a claim 
and itemized bill has been submitted by or on behalf of the beneficiary 
before he or she died, submission of another claim form and itemized 
bill is not required; any written request by the person seeking payment 
is sufficient.



Sec. 424.64  Payment after beneficiary's death: Bill has not been paid.

    (a) Scope. This section specifies whom Medicare pays, and the 
conditions for payment when the beneficiary has died and the bill has 
not been paid.
    (b) Situation. (1) The beneficiary has received covered Part B 
services furnished by a physician or other supplier.

[[Page 950]]

    (2) The beneficiary died without making an assignment to the 
physician or other supplier or receiving Medicare payment.
    (3) The bill has not been paid.
    (c) To whom payment is made. In the situation described in paragraph 
(b) of this section, Medicare pays as follows:
    (1) Payment to the supplier. Medicare pays the physician or other 
supplier if he or she--
    (i) Files a claim on a CMS-prescribed form in accordance with the 
applicable requirements of this subpart;
    (ii) Upon request from the carrier, provides evidence that the 
services for which it claims payment were, in fact, furnished; and
    (iii) Agrees in writing to accept the reasonable charge as the full 
charge for the services.
    (2) Payment to a person who assumes legal obligation to pay for the 
services. If the physician or other supplier does not agree to accept 
the reasonable charge as full charge for the service, Medicare pays any 
person who submits to the carrier all of the following:
    (i) A statement indicating that he or she has assumed legal 
obligation to pay for the services.
    (ii) A claim on a CMS-prescribed form in accordance with the 
requirements of this subpart. (If a claim had been submitted by or on 
behalf of the beneficiary before he or she died, submission of another 
claim form is not required; a written request by the person seeking 
payment meets the requirement for a claim.)
    (iii) An itemized bill that identifies the claimant as the person to 
whom the physician or other supplier holds responsible for payment. (If 
such an itemized bill had been submitted by or on behalf of the 
beneficiary before he or she died, submission of another itemized bill 
is not required.)
    (iv) If the intermediary or carrier requests it, evidence that the 
services were actually furnished.

[53 FR 6634, Mar. 2, 1988, as amended at 53 FR 28388, July 28, 1988]



Sec. 424.66  Payment to entities that provide coverage complementary to Medicare Part B.

    (a) Conditions for payment. Medicare may pay an entity for Part B 
services furnished by a physician or other supplier if the entity meets 
all of the following requirements:
    (1) Provides coverage of the service under a complementary health 
benefit plan (this is, the coverage that the plan provides is 
complementary to Medicare benefits and covers only the amount by which 
the Part B payment falls short of the approved charge for the service 
under the plan).
    (2) Has paid the person who provided the service an amount 
(including the amount payable under the Medicare program) that the 
person accepts as full payment.
    (3) Has the written authorization of the beneficiary (or of a person 
authorized to sign claims on his behalf under Sec. 424.36) to receive 
the Part B payment for the services for which the entity pays.
    (4) Relieves the beneficiary of liability for payment for the 
service and will not seek any reimbursement from the beneficiary, his or 
her survivors or estate.
    (5) Submits any information CMS or the carrier may request, 
including an itemized physician or supplier bill, in order to apply the 
requirements under the Medicare program.
    (6) Identifies and excludes from its requests for payment all 
services for which Medicare is the secondary payer.
    (b) Services paid for by the entity. An entity is not required to 
pay and claim reimbursement for all Part B services furnished to members 
of its plans. However, if it does not pay and claim reimbursement for 
all those services, it must establish in advance precise criteria for 
identifying the services for which it will pay and claim reimbursement.

[53 FR 28388, July 28, 1988; 53 FR 40231, Oct. 14, 1988]



     Subpart F--Limitations on Assignment and Reassignment of Claims



Sec. 424.70  Basis and scope.

    (a) Statutory basis. This subpart implements sections 1815(c) and 
1842(b)(6) of the Act, which establish limitations on who may receive 
payments due a

[[Page 951]]

provider or supplier of services or a beneficiary.
    (b) Scope. This subpart--
    (1) Prohibits the assignment, reassignment, or other transfer of the 
right to Medicare payments except under specified conditions;
    (2) Sets forth the sanctions that CMS may impose on a provider or 
supplier that violates this prohibition, or on a supplier that violates 
the conditions to which it agreed in accepting assignment from the 
individual; and
    (3) Specifies the conditions for payment under court-ordered 
assignments or reassignments.



Sec. 424.71  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Court of competent jurisdiction means a court that has jurisdiction 
over the subject matter and the parties before it.
    Facility means a hospital or other institution that furnishes health 
care services to inpatients.
    Health care delivery system or system means a public or private 
organization for delivering health services. The term includes, but is 
not limited to, clinics and health care prepayment plans.
    Power of attorney means any written documents by which a principal 
authorizes an agent to--
    (1) Receive, in the agent's name, any payments due the principal;
    (2) Negotiate checks payable to the principal; or
    (3) Receive, in any other manner, direct payment of amounts due the 
principal.



Sec. 424.73  Prohibition of assignment of claims by providers.

    (a) Basic prohibition. Except as specified in paragraph (b) of this 
section, Medicare does not pay amounts that are due a provider to any 
other person under assignment, or power of attorney, or any other direct 
payment arrangement.
    (b) Exceptions to the prohibition--(1) Payment to a government 
agency or entity. Subject to the requirements of the Assignment of 
Claims Act (31 U.S.C. 3727), Medicare may pay a government agency or 
entity under an assignment by the provider.
    (2) Payment under assignment established by court order. Medicare 
may pay under an assignment established by, or in accordance with, the 
order of a court of competent jurisdiction if the assignment meets the 
conditions set forth in Sec. 424.90.
    (3) Payment to an agent. Medicare may pay an agent who furnishes 
billing and collection services to the provider if the following 
conditions are met:
    (i) The agent receives the payment under an agency agreement with 
the provider;
    (ii) The agent's compensation is not related in any way to the 
dollar amounts billed or collected;
    (iii) The agent's compensation is not dependent upon the actual 
collection of payment;
    (iv) The agent acts under payment disposition instructions that the 
provider may modify or revoke at any time; and
    (v) The agent, in receiving the payment, acts only on behalf of the 
provider.

Payment to an agent will always be made in the name of the provider.



Sec. 424.74  Termination of provider agreement.

    CMS may terminate a provider agreement, in accordance with 
Sec. 489.53(a)(1) of this chapter, if the provider--
    (a) Executes or continues a power of attorney, or enters into or 
continues any other arrangement, that authorizes or permits payment 
contrary to the provisions of this subpart; or
    (b) Fails to furnish, upon request by CMS or the intermediary, 
evidence necessary to establish compliance with the requirements of this 
subpart.



Sec. 424.80  Prohibition of reassignment of claims by suppliers.

    (a) Basic prohibition. Except as specified in paragraph (b) of this 
section, Medicare does not pay amounts that are due a supplier under an 
assignment to any other person under reassignment, power of attorney, or 
any other direct arrangement.
    (b) Exceptions to the basic rule--(1) Payment to employer. Medicare 
may pay

[[Page 952]]

the supplier's employer if the supplier is required, as a condition of 
employment, to turn over to the employer the fees for his or her 
services.
    (2) Payment to a facility. Medicare may pay the facility in which 
the services were furnished if there is a contractual arrangement 
between the facility and the supplier under which the facility bills for 
the supplier's services.
    (3) Payment to health care delivery system. Medicare may pay a 
health care delivery system if there is a contractual arrangement 
between the system and the supplier under which the system bills for the 
supplier's services.
    (4) Payment to a government agency or entity. Subject to the 
requirements of the Assignment of Claims Act (31 U.S.C. 3727), Medicare 
may pay a government agency or entity under a reassignment by the 
supplier.
    (5) Payment under a reassignment established by court order. 
Medicare may pay under a reassignment established by, or in accordance 
with, the order of a court competent jurisdiction, if the reassignment 
meets the conditions set forth in Sec. 424.90.
    (6) Payment to an agent. Medicare may pay an agent who furnishes 
billing and collection services to the supplier, or to the employer, 
facility, or system specified in paragraphs (b) (1), (2) and (3) of this 
section, if the conditions of Sec. 424.73(b)(3) for payment to a 
provider's agent are met by the agent of the supplier or of the 
employer, facility, or system. Payment to an agent will always be made 
in the name of the supplier or the employer, facility, or system.
    (c) Rules applicable to an employer, facility, or system. An 
employer, facility, or system that may receive payment under paragraph 
(b)(1), (b)(2), or (b)(3) of this section will itself be considered the 
supplier of those services for purposes of the rules of subparts C, D, 
and E of this part.

[53 FR 6634, Mar. 2, 1988, as amended at 54 FR 4027, Jan. 27, 1989]



Sec. 424.82  Revocation of right to receive assigned benefits.

    (a) Scope. This section sets forth the conditions and procedures for 
revocation of the right of a supplier or other party to receive Medicare 
payments.
    (b) Definition. As used in this section, other party means an 
employer, facility, or health care delivery system to which Medicare may 
make payment under Sec. 424.80(b) (1), (2), or (3).
    (c) Basis for revocation. CMS may revoke the right of a supplier or 
other party to receive Medicare payments if the supplier or other party, 
after warning by CMS or the carrier--
    (1) Violates the terms of assignment in Sec. 424.55(b).
    (2) Continues collection efforts or fails to refund moneys 
incorrectly collected, in violation of the terms of assignment in 
Sec. 424.55(b).
    (3) Executes or continues in effect a reassignment or power of 
attorney or any other arrangement that seeks to obtain payment contrary 
to the provisions of Sec. 424.80; or
    (4) Fails to furnish evidence necessary to establish its compliance 
with the requirements of Sec. 424.80.
    (d) Proposed revocation: Notice and opportunity for review. If CMS 
proposes to revoke the right to payment in accordance with paragraph (c) 
of this section, it will send the supplier or other party a written 
notice that--
    (1) States the reasons for the proposed revocation; and
    (2) Provides an opportunity for the supplier or other party to 
submit written argument and evidence against the proposed revocation. 
CMS usually allows 15 days from the date on the notice, but may extend 
or reduce the time as circumstances require.
    (e) Actual revocation: Timing, notice, and opportunity for hearing--
(1) Timing. CMS determines whether to revoke after considering any 
written argument or evidence submitted by the supplier or other party 
or, if none is submitted, at the expiration of the period specified in 
the notice of proposed revocation.
    (2) Notice and opportunity for hearing. The notice of revocation 
specifies--
    (i) The reasons for the revocation;
    (ii) That the revocation is effective as of the date on the notice;
    (iii) That the supplier or other party may, within 60 days from the 
date on the notice (or a longer period if the notice so specifies), 
request an administrative hearing and may be represented

[[Page 953]]

by counsel or other qualified representative.
    (iv) That the carrier will withhold payment on any claims submitted 
by the supplier or other party until the period for requesting a hearing 
expires or, if a hearing is requested, until the hearing officer issues 
a decision;
    (v) That if the hearing decision reverses the revocation, the 
carrier will pay the supplier's or other party's claims; and
    (vi) That if a hearing is not requested or the hearing decision 
upholds the revocation, payment will be made to the beneficiary or to 
another person or agency authorized to receive payment on his or her 
behalf.

[53 FR 6644, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



Sec. 424.83  Hearings on revocation of right to receive assigned benefits.

    If the supplier or other party requests a hearing under 
Sec. 424.82(e)(2)--
    (a) The hearing is conducted--
    (1) By a CMS hearing official who was not involved in the decision 
to revoke; and
    (2) In accordance with the procedures set forth in Secs. 405.824 
through 405.833 (but excepting Sec. 405.832(d)) and 405.860 through 
405.872 of this chapter. In applying those procedures, ``CMS'' is 
substituted for ``carrier''; and ``hearing official'', for ``hearing 
officer''.
    (b) As soon as practicable after the close of the hearing, the 
official who conducted it issues a hearing decision that--
    (1) Is based on all the evidence presented at the hearing and 
included in the hearing record; and
    (2) Contains findings of fact and a statement of reasons.



Sec. 424.84  Final determination on revocation of right to receive assigned benefits.

    (a) Basis of final determination--(1) Final determination without a 
hearing. If the supplier or other party does not request a hearing, 
CMS's revocation determination becomes final at the end of the period 
specified in the notice of revocation.
    (2) Final determination following a hearing. If there is a hearing, 
the hearing decision constitutes CMS's final determination.
    (b) Notice of final determination. CMS sends the supplier or other 
party a written notice of the final determination and, if there was a 
hearing, includes a copy of the hearing decision.
    (c) Application of the final determination--(1) A final 
determination not to revoke is the final administrative decision by CMS 
on the matter.
    (2) A final determination to revoke remains in effect until CMS 
finds that the reason for the revocation has been removed and that there 
is reasonable assurance that it will not recur.
    (d) Effect of revocation when supplier or other party has a 
financial interest in another entity. Revocation of the party's right to 
accept assignment also applies to any corporation, partnership, or other 
entity in which the party, directly or indirectly, has or acquires all 
or all but a nominal part of the financial interest.

[53 FR 6644, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988]



Sec. 424.86  Prohibition of assignment of claims by beneficiaries.

    (a) Basic prohibition. Except as specified in paragraph (b) of this 
section, Medicare does not pay amounts that are due a beneficiary under 
Sec. 424.53 to any other person under assignment, power of attorney, or 
any other direct payment arrangement.
    (b) Exceptions--(1) Payment to a government agency or entity. 
Subject to the requirements of the Assignment of Claims Act (31 U.S.C. 
3727), Medicare may pay a government agency or entity under an 
assignment by a beneficiary (or by the beneficiary's legal guardian or 
representative payee).
    (2) Payment under an assignment established by court order. Medicare 
may pay under an assignment established by, or in accordance with, a 
court order if the assignment meets the conditions set forth in 
Sec. 424.90.



Sec. 424.90  Court ordered assignments: Conditions and limitations.

    (a) Conditions for acceptance. An assignment or reassignment 
established by or in accordance with a court order is effective for 
Medicare payments only if--

[[Page 954]]

    (1) Someone files a certified copy of the court order and of the 
executed assignment or reassignment (if it was necessary to execute one) 
with the intermediary or carrier responsible for processing the claim; 
and
    (2) The assignment or reassignment--
    (i) Applies to all Medicare benefits payable to a particular person 
or entity during a specified or indefinite time period; or
    (ii) Specifies a particular amount of money, payable to a particular 
person or entity by a particular intermediary or carrier.
    (b) Retention of authority to reduce interim payments to providers. 
A court-ordered assignment does not preclude the intermediary or carrier 
from reducing interim payments, as set forth in Sec. 413.64(i) of this 
chapter, if the provider or assignee is in imminent danger of insolvency 
or bankruptcy.
    (c) Liability of the parties. The party that receives payments under 
a court-ordered assignment or reassignment that meets the conditions of 
paragraph (a) of this section and the party that would have received 
payment if the court order had not been issued are jointly and severally 
responsible for any Medicare overpayment to the former.



    Subpart G--Special Conditions: Emergency Services Furnished by a 
                        Nonparticipating Hospital



Sec. 424.100  Scope.

    This subpart sets forth procedures and criteria that are followed in 
determining whether Medicare will pay for emergency services furnished 
by a hospital that is located in the United States and does not have in 
effect a provider agreement, that is, an agreement to participate in 
Medicare.



Sec. 424.101  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Emergency services means inpatient or outpatient hospital services 
that are necessary to prevent death or serious impairment of health and, 
because of the danger to life or health, require use of the most 
accessible hospital available and equipped to furnish those services.
    Hospital means a facility that--
    (1) Is primarily engaged in providing, by or under the supervision 
of doctors of medicine or osteopathy, inpatient services for the 
diagnosis, treatment, and care or rehabilitation of persons who are 
sick, injured, or disabled;
    (2) Is not primarily engaged in providing skilled nursing care and 
related services for patients who require medical or nursing care, as 
described in section 1861(j)(1)(A) of the Act;
    (3) Provides 24-hour nursing service in accordance with section 
1861(e)(5) of the Act; and
    (4) Is licensed, or is approved as meeting the standards for 
licensing, by the State or local licensing agency.
    Reasonable charges means customary charges insofar as they are 
reasonable.



Sec. 424.102  Situations that do not constitute an emergency.

    Without additional evidence of a threat to life or health, the 
following situations do not in themselves indicate a need for emergency 
services:
    (a) Lack of care at home.
    (b) Lack of transportation to a participating hospital.
    (c) Death of the patient in the hospital.



Sec. 424.103  Conditions for payment for emergency services.

    Medicare pays for emergency services furnished to a beneficiary by a 
nonparticipating hospital or under arrangements made by such a hospital 
if the conditions of this section are met.
    (a) General requirements. (1) The services are of the type that 
Medicare would pay for if they were furnished by a participating 
hospital.
    (2) The hospital has in effect an election to claim payment for all 
emergency services furnished in a calendar year in accordance with 
Sec. 424.104.
    (3) The need for emergency services arose while the beneficiary was 
not an inpatient in a hospital.
    (4) In the case of inpatient hospital services, the services are 
furnished during a period in which the beneficiary could not be safely 
discharged or transferred to a participating hospital or other 
institution.

[[Page 955]]

    (5) The determination that the hospital was the most accessible 
hospital available and equipped to furnish the services is made in 
accordance with Sec. 424.106.
    (b) Medical information requirements. A physician (or, if 
appropriate, the hospital) submits medical information that--
    (1) Describes the nature of the emergency and specifies why it 
required that the beneficiary be treated in the most accessible 
hospital;
    (2) Establishes that all the conditions in paragraph (a) of this 
section are met; and
    (3) Indicates when the emergency ended, which, for inpatient 
hospital services, is the earliest date on which the beneficiary could 
be safely discharged or transferred to a participating hospital or other 
institution.



Sec. 424.104  Election to claim payment for emergency services furnished during a calendar year.

    (a) Terms of the election. The hospital agrees to the following:
    (1) To comply with the provisions of subpart C of part 489 of this 
chapter relating to charges for items and services the hospital may make 
to the beneficiary, or any other person on his or her behalf.
    (2) To comply with the provisions of subpart D of part 489 of this 
chapter relating to proper disposition of monies incorrectly collected 
from, or on behalf of a beneficiary.
    (3) To request payment under the Medicare program based on amounts 
specified in Sec. 413.74 of this chapter.
    (b) Filing of election statement. An election statement must be 
filed on a form designated by CMS, signed by an authorized official of 
the hospital, and either received by CMS, or postmarked, before the 
close of the calendar year of election.
    (c) Acceptance and effective date of election. If CMS accepts the 
election statement, the election is effective as of the earliest day of 
the calendar year of election from which CMS determines the hospital has 
been in continuous compliance with the requirements of section 1814(d) 
of the Act.
    (d) Appeal by hospital. Any hospital dissatisfied with a 
determination that it does not qualify to claim reimbursement shall be 
entitled to appeal the determination as provided in part 498 of this 
chapter.
    (e) Conditions for reinstatement after notice of failure to continue 
to qualify. If CMS has notified a hospital that it no longer qualifies 
to receive reimbursement for a calendar year, CMS will not accept 
another election statement from that hospital until CMS finds that--
    (1) The reason for its failure to qualify has been removed; and
    (2) There is reasonable assurance that it will not recur.



Sec. 424.106  Criteria for determining whether the hospital was the most accessible.

    (a) Basic requirement. (1) The hospital must be the most accessible 
one available and equipped to furnish the services.
    (2) CMS determines accessibility based on the factors specified in 
paragraphs (b) and (c) of this section and the conditions set forth in 
paragraph (d) of this section.
    (b) Factors that are considered. CMS considers the following factors 
in determining whether a nonparticipating hospital in a rural area meets 
the accessibility requirements:
    (1) The relative distances of participating and nonparticipating 
hospitals in the area.
    (2) The transportation facilities available to these hospitals.
    (3) The quality of the roads to each hospital.
    (4) The availability of beds at each hospital.
    (5) Any other factors that bear on whether or not the services could 
be provided sooner in the nonparticipating hospitals than in a 
participating hospital in the general area.

In urban and suburban areas where both participating and 
nonparticipating hospitals are similarly available, CMS presumes that 
the services could have been provided in a participating hospital unless 
clear and convincing evidence shows that there was a medical or 
practical need to use the nonparticipating hospital.

[[Page 956]]

    (c) Factors that are not considered. CMS gives no consideration to 
the following factors in determining whether the nonparticipating 
hospital was the most accessible hospital:
    (1) The personal preference of the beneficiary, the physician, or 
members of the family.
    (2) The fact that the attending physician did not have staff 
privileges in a participating hospital which was available and the most 
accessible to the beneficiary.
    (3) The location of previous medical records.
    (d) Conditions under which the accessibility requirement is met. If 
a beneficiary must be taken to a hospital immediately for required 
diagnosis and treatment, the nonparticipating hospital meets the 
accessibility requirement if--
    (1) It was the nearest hospital to the point where the emergency 
occurred, it was medically equipped to handle the type of emergency, and 
it was the most accessible, on the basis of the factors specified in 
paragraph (b) of this section; or
    (2) There was a closer participating hospital equipped to handle the 
emergency, but the participating hospital did not have a bed available 
or would not accept the individual.



Sec. 424.108  Payment to a hospital.

    (a) Conditions for payment. Medicare pays the hospital for emergency 
services if the hospital--
    (1) Has in effect a statement of election to claim payment for all 
covered emergency services furnished during a calendar year, in 
accordance with Sec. 424.104;
    (2) Claims payment in accordance with Sec. 424.32; and
    (3) Submits evidence requested by CMS to establish that the services 
meet the requirements of this subpart.
    (b) Subsequent claims. If the hospital files subsequent claims 
because the initial claim did not include all the services furnished, 
those claims must include physicians' statements that--
    (1) Contain sufficient information to clearly establish that, when 
the additional services were furnished, the emergency still existed; and
    (2) Indicate when the emergency ended, which, for inpatient hospital 
services, is the earliest date on which the beneficiary could be safely 
discharged or transferred to a participating hospital or other 
institution.



Sec. 424.109  Payment to the beneficiary.

    Medicare pays the beneficiary for emergency services if the 
following conditions are met:
    (a) The hospital does not have in effect an election to claim 
payment.
    (b) The beneficiary, or someone on his or her behalf, submits--
    (1) A claim that meets the requirements of Sec. 424.32;
    (2) An itemized hospital bill; and
    (3) Evidence requested by CMS to establish that the services meet 
the requirements of this subpart.



 Subpart H--Special Conditions: Services Furnished in a Foreign Country



Sec. 424.120  Scope.

    This subpart sets forth the conditions for payment for services 
furnished in a foreign country.



Sec. 424.121  Scope of payments.

    Subject to the conditions set forth in this subpart--
    (a) Medicare Part A pays, in the amounts specified in Sec. 413.74 of 
this chapter, for emergency and nonemergency inpatient hospital services 
furnished by a foreign hospital.
    (b) Medicare Part B pays for certain physicians' services and 
ambulance services furnished in connection with covered inpatient care 
in a foreign hospital, as specified in Sec. 424.124.
    (c) All other services furnished outside the United States are 
excluded from Medicare coverage, as specified in Sec. 405.313 of this 
chapter.



Sec. 424.122  Conditions for payment for emergency inpatient hospital services.

    Medicare Part A pays for emergency inpatient hospital services 
furnished by a foreign hospital if the following conditions are met:
    (a) At the time of the emergency that required the inpatient 
hospital services, the beneficiary was--

[[Page 957]]

    (1) In the United States; or
    (2) In Canada traveling between Alaska and another State without 
unreasonable delay and by the most direct route.
    (b) The foreign hospital was closer to, or more accessible from, the 
site of the emergency than the nearest United States hospital equipped 
to deal with, and available to treat, the individual's illness or 
injury.
    (c) The conditions for payment for emergency services set forth in 
Sec. 424.103 are met.
    (d) The hospital is a hospital as defined in Sec. 424.101, and is 
licensed, or approved as meeting the conditions for licensing, by the 
appropriate agency of the country in which it is located.
    (e) The determination of whether the hospital was more accessible is 
made in accordance with Sec. 424.106.



Sec. 424.123  Conditions for payment for nonemergency inpatient services furnished by a hospital closer to the individual's residence.

    Medicare Part A pays for inpatient hospital services furnished by a 
foreign hospital if the following conditions are met:
    (a) The beneficiary is a resident of the United States.
    (b) The foreign hospital is closer or more accessible to the 
beneficiary's residence than the nearest United States hospital equipped 
to deal with, and available to treat, the individual's illness or 
injury.
    (c) The foreign hospital is--
    (1) A hospital as defined in Sec. 424.101 and, it is licensed, or 
approved as meeting the conditions for licensing, by the appropriate 
agency of the country in which it is located; and
    (2) Accredited by the Joint Commission on Accreditation of Hospitals 
(JCAH) or accredited or approved by a program of the country where it is 
located under standards that CMS finds to be essentially equivalent to 
those of the JCAH.
    (d) The services are covered services that Medicare would pay for if 
they were furnished by a participating hospital.



Sec. 424.124  Conditions for payment for physician services and ambulance services.

    (a) Basic rules. Medicare Part B pays for physician and ambulance 
services if--
    (1) They are furnished--
    (i) To an individual who is entitled to Part B benefits; and
    (ii) In connection with covered inpatient hospital services; and
    (2) They meet the conditions set forth in paragraphs (b) and (c) of 
this section.
    (b) Physician services. (1) The physician services are services 
covered under Medicare Part B and are furnished--
    (i) In the hospital, during a period of covered inpatient services; 
or
    (ii) Outside the hospital, on the day of admission and for the same 
condition that required inpatient admission; and
    (2) The physician is legally authorized to practice in the country 
where he or she furnishes the services.
    (c) Ambulance services. The ambulance services are--
    (1) Necessary because the use of other means of transportation is 
contraindicated by the beneficiary's condition; and
    (2) Furnished by an ambulance that meets the definition in 
Sec. 410.41 of this chapter.

[53 FR 6646, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988; 64 FR 3649, Jan. 
25, 1999]



Sec. 424.126  Payment to the hospital.

    (a) Conditions for payment. Medicare pays the hospital if it--
    (1) Has in effect an election that--
    (i) Meets the requirements set forth in Sec. 424.104; and
    (ii) Reflects the hospital's intent to claim for all covered 
services furnished during a calendar year.
    (2) Claims payment in accordance with Secs. 424.32 and 413.74 of 
this chapter; and
    (3) Submits evidence requested by CMS to establish that the services 
meet the requirements of this subpart.
    (b) Amount of payment. Payment is made (in accordance with 
Sec. 413.74 of this chapter) on the basis of 100 percent of the 
hospital's customary charges, subject to the applicable deductible

[[Page 958]]

and coinsurance provisions set forth elsewhere in this chapter.



Sec. 424.127  Payment to the beneficiary.

    (a) Conditions for payment of inpatient hospital services. Medicare 
pays the beneficiary if--
    (1) The hospital does not have in effect an election to claim 
payment; and
    (2) The beneficiary, or someone on his or her behalf, submits--
    (i) A claim in accordance with Sec. 424.32;
    (ii) An itemized hospital bill; and
    (iii) Evidence requested by CMS to establish that the services meet 
the requirements of this subpart.
    (b) Amount payable for inpatient hospital services. The amount 
payable to the beneficiary is determined in accordance with 
Sec. 424.109(b).
    (c) Conditions for payment for Part B services. Medicare pays the 
beneficiary for physicians' services and ambulance services as specified 
in Sec. 424.121, if an itemized bill for the services is submitted by 
the beneficiary or someone on his or her behalf and the conditions of 
Sec. 424.126(a) (2) and (3) are met.
    (d) The amount payable to the beneficiary is determined in 
accordance with Sec. 410.152 of this chapter.

Subparts I-L [Reserved]



       Subpart M--Replacement and Reclamation of Medicare Payments



Sec. 424.350  Replacement of checks that are lost, stolen, defaced, mutilated, destroyed, or paid on forged endorsements.

    (a) U.S. Government checks--(1) Responsibility. The Treasury 
Department is responsible for the investigation and settlement of claims 
in connection with Treasury checks issued on behalf of CMS.
    (2) Action by CMS. CMS forwards reports of lost, stolen, defaced, 
mutilated, destroyed, or forged Treasury checks to the Treasury 
Department disbursing center responsible for issuing checks.
    (3) Action by the Treasury Department. The Treasury Department will 
replace and begin reclamation of Treasury checks in accordance with 
Treasury Department regulations (31 CFR parts 235, 240, and 245).
    (b) Intermediary and carrier benefit checks. Checks issued by 
intermediaries and carriers are drawn on commercial banks and are not 
subject to the Federal laws and Treasury Department regulations that 
govern Treasury checks. Replacement procedures are carried out in 
accordance with Sec. 424.352 under applicable State law (including any 
Federal banking laws or regulations that may affect the relevant State 
proceedings).

[58 FR 65129, Dec. 13, 1993]



Sec. 424.352  Intermediary and carrier checks that are lost, stolen, defaced, mutilated, destroyed or paid on forged endorsements.

    (a) When an intermediary or carrier is notified by a payee that a 
check has been lost, stolen, defaced, mutilated, destroyed, or paid on 
forged endorsement, the intermediary or carrier contacts the commercial 
bank on whose paper the check was drawn and determines whether the check 
has been negotiated.
    (b) If the check has been negotiated--
    (1) The intermediary or carrier provides the payee with a copy of 
the check and other pertinent information (such as a claim form, 
affidavit or questionnaire to be completed by the payee) required to 
pursue his or her claim in accordance with State law and commercial 
banking regulations.
    (2) To pursue the claim, the payee must examine the check and 
certify (by completing the claim form, questionnaire or affidavit) that 
the endorsement is not the payee's.
    (3) The claim form and other pertinent information is sent to the 
intermediary or carrier for review and processing of the claim.
    (4) The intermediary or carrier reviews the payee's claim. If the 
intermediary or carrier determines that the claim appears to be valid, 
it forwards the claim and a copy of the check to the issuing bank. The 
intermediary or carrier takes further action to recover the proceeds of 
the check in accordance with the State law and regulations.
    (5) Once the intermediary or carrier recovers the proceeds of the 
initial

[[Page 959]]

check, the intermediary or carrier issues a replacement check to the 
payee.
    (6) If the bank of first deposit refuses to settle on the check for 
good cause, the payee must pursue the claim on his or her own and the 
intermediary or carrier will not reissue the check to the payee.
    (c) If the check has not been negotiated--
    (1) The intermediary or carrier arranges with the bank to stop 
payment on the check; and
    (2) Except as provided in paragraph (d), the intermediary or carrier 
reissues the check to the payee.
    (d) No check may be reissued under (c)(2) unless the claim for a 
replacement check is received by the intermediary or carrier no later 
than 1 year from the date of issuance of the original check, unless 
State law (including any applicable Federal banking laws or regulations 
that may affect the relevant State proceeding) provides a longer period 
which will control.

[58 FR 65130, Dec. 13, 1993]


[[Page 961]]



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an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Material Approved for Incorporation by Reference
  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  List of CFR Sections Affected

[[Page 963]]

            Material Approved for Incorporation by Reference

                     (Revised as of October 1, 2002)

  The Director of the Federal Register has approved under 5 U.S.C. 
552(a) and 1 CFR part 51 the incorporation by reference of the following 
publications. This list contains only those incorporations by reference 
effective as of the revision date of this volume. Incorporations by 
reference found within a regulation are effective upon the effective 
date of that regulation. For more information on incorporation by 
reference, see the preliminary pages of this volume.


42 CFR (PARTS 400-429)

CENTERS FOR MEDICARE AND MEDICAID SERVICES, DEPARTMENT OF HEALTH AND 
HUMAN SERVICES
                                                                  42 CFR


American Hospital Association

  Available from: Centers for Medicare and 
  Medicaid Services, Office of Management and 
  Budget, Division of Communication Services, 
  Printing and Publishing Branch, Gwynn Oak Bldg., 
  Baltimore, MD 21235
Chart of Accounts for Hospitals (1973 Ed.)........      405.415(b)(7)(i)


American Lung Association

  (Formerly National Tuberculosis Association)
  1740 Broadway, New York, NY 10019
Diagnostic Standards and Classification of                405.1039(b)(2)
  Tuberculosis (1974 Ed.).


American National Standards Institute

  25 West 43rd Street, Fourth floor, New York, NY 
  10036 Telephone: (212) 642-4900
ANSI A117.1-1971 Specifications for Making                   405.1134(c)
  Buildings and Facilities Accessible to and 
  Usable by Physically Handicapped People.


American Psychiatric Association

  Division of Publications and Marketing, 1400 K 
  Street NW., Washington, DC 20005
Diagnostic and Statistical Manual of Mental                 405.243(b); 
  Disorders, 1980 (3rd Ed.).                             405.1037(a)(12)


Association for the Advancement of Medical Instrumentation

  3330 Washington Blvd., Arlington, VA 22201-4598
ASNI/AAMI RD5-1992, Hemodialysis Systems, second           405.2150(a); 
  edition.                                                   405.2140(a)
Recommended Practice for Reuse of Hemodialyzers...              405.2150


National Academy of Sciences

  Academy Press, 2101 Constitution Ave. NW., 
  Washington, DC 20418
Recommended Dietary Allowances Current Edition,           405.1025(c)(2)
  1980 (9th Ed.).


National Fire Protection Association (NFPA)

  1 Batterymarch Park, P.O. Box 9101, Quincy, MA 
  02269-9101
NFPA 101, Life Safety Code (1997 Edition).........               403.744



[[Page 965]]



                    Table of CFR Titles and Chapters




                     (Revised as of October 1, 2002)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
        IV  Miscellaneous Agencies (Parts 400--500)

                          Title 2  [Reserved]

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  General Accounting Office (Parts 1--99)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Part 2100)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
        XV  Office of Administration, Executive Office of the 
                President (Parts 2500--2599)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Part 3201)
     XXIII  Department of Energy (Part 3301)
      XXIV  Federal Energy Regulatory Commission (Part 3401)
       XXV  Department of the Interior (Part 3501)
      XXVI  Department of Defense (Part 3601)

[[Page 966]]

    XXVIII  Department of Justice (Part 3801)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Part 4301)
      XXXV  Office of Personnel Management (Part 4501)
        XL  Interstate Commerce Commission (Part 5001)
       XLI  Commodity Futures Trading Commission (Part 5101)
      XLII  Department of Labor (Part 5201)
     XLIII  National Science Foundation (Part 5301)
       XLV  Department of Health and Human Services (Part 5501)
      XLVI  Postal Rate Commission (Part 5601)
     XLVII  Federal Trade Commission (Part 5701)
    XLVIII  Nuclear Regulatory Commission (Part 5801)
         L  Department of Transportation (Part 6001)
       LII  Export-Import Bank of the United States (Part 6201)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Part 6401)
      LVII  General Services Administration (Part 6701)
     LVIII  Board of Governors of the Federal Reserve System (Part 
                6801)
       LIX  National Aeronautics and Space Administration (Part 
                6901)
        LX  United States Postal Service (Part 7001)
       LXI  National Labor Relations Board (Part 7101)
      LXII  Equal Employment Opportunity Commission (Part 7201)
     LXIII  Inter-American Foundation (Part 7301)
       LXV  Department of Housing and Urban Development (Part 
                7501)
      LXVI  National Archives and Records Administration (Part 
                7601)
      LXIX  Tennessee Valley Authority (Part 7901)
      LXXI  Consumer Product Safety Commission (Part 8101)
    LXXIII  Department of Agriculture (Part 8301)
     LXXIV  Federal Mine Safety and Health Review Commission (Part 
                8401)
     LXXVI  Federal Retirement Thrift Investment Board (Part 8601)
    LXXVII  Office of Management and Budget (Part 8701)

                          Title 6  [Reserved]

              

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)

[[Page 967]]

        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy, Department of Agriculture (Parts 
                2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  Cooperative State Research, Education, and Extension 
                Service, Department of Agriculture (Parts 3400--
                3499)

[[Page 968]]

      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

         I  Immigration and Naturalization Service, Department of 
                Justice (Parts 1--599)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 1000-
                -1099)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Part 1800)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)

[[Page 969]]

         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--499)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)

[[Page 970]]

       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  United States Customs Service, Department of the 
                Treasury (Parts 1--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)

[[Page 971]]

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)
        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Employment Standards Administration, Department of 
                Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 800-
                -899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training, Department of Labor 
                (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board (Parts 900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 1600-
                -1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

[[Page 972]]

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

[[Page 973]]

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Part 1200)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--899)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Bureau of Alcohol, Tobacco and Firearms, Department of 
                the Treasury (Parts 1--299)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--199)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 0-
                -99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)
        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)

[[Page 974]]

        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Pension and Welfare Benefits Administration, 
                Department of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Minerals Management Service, Department of the 
                Interior (Parts 200--299)
       III  Board of Surface Mining and Reclamation Appeals, 
                Department of the Interior (Parts 300--399)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 200-
                -399)
        IV  Secret Service, Department of the Treasury (Parts 400-
                -499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)
      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)

[[Page 975]]

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Transportation (Parts 1--
                199)
        II  Corps of Engineers, Department of the Army (Parts 200-
                -399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
        IV  Office of Vocational and Adult Education, Department 
                of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599)
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799)
        XI  National Institute for Literacy (Parts 1100--1199)
            Subtitle C--Regulations Relating to Education
       XII  National Council on Disability (Parts 1200--1299)

[[Page 976]]

                        Title 35--Panama Canal

         I  Panama Canal Regulations (Parts 1--299)

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 300-
                -399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Part 1501)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  Copyright Office, Library of Congress (Parts 200--299)
        IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--499)
         V  Under Secretary for Technology, Department of Commerce 
                (Parts 500--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--99)

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Rate Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--799)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)

[[Page 977]]

       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)

          Title 41--Public Contracts and Property Management

            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System
       201  Federal Information Resources Management Regulation 
                (Parts 201-1--201-99) [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-70)
       304  Payment from a Non-Federal Source for Travel Expenses 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--499)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

[[Page 978]]

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 200--499)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10005)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Office of Human Development Services, Department of 
                Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission on Fine Arts (Parts 2100--2199)

[[Page 979]]

     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Transportation (Parts 1--
                199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Transportation (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 300-
                -399)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Department of Defense (Parts 200--299)
         3  Department of Health and Human Services (Parts 300--
                399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  United States Agency for International Development 
                (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)

[[Page 980]]

        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        35  Panama Canal Commission (Parts 3500--3599)
        44  Federal Emergency Management Agency (Parts 4400--4499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399)
        54  Defense Logistics Agency, Department of Defense (Part 
                5452)
        57  African Development Foundation (Parts 5700--5799)
        61  General Services Administration Board of Contract 
                Appeals (Parts 6100--6199)
        63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Research and Special Programs Administration, 
                Department of Transportation (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Transportation (Parts 400--
                499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board, Department of 
                Transportation (Parts 1000--1399)

[[Page 981]]

        XI  Bureau of Transportation Statistics, Department of 
                Transportation (Parts 1400--1499)
       XII  Transportation Security Administration, Department of 
                Transportation (Parts 1500--1599)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

                      CFR Index and Finding Aids

            Subject/Agency Index
            List of Agency Prepared Indexes
            Parallel Tables of Statutory Authorities and Rules
            List of CFR Titles, Chapters, Subchapters, and Parts
            Alphabetical List of Agencies Appearing in the CFR



[[Page 983]]





           Alphabetical List of Agencies Appearing in the CFR




                     (Revised as of October 1, 2002)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Advanced Research Projects Agency                 32, I
Advisory Council on Historic Preservation         36, VIII
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development, United      22, II
     States
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            5, LXXIII
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Cooperative State Research, Education, and      7, XXXIV
       Extension Service
  Economic Research Service                       7, XXXVII
  Energy, Office of                               7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Alcohol, Tobacco and Firearms, Bureau of          27, I
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII
Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII

[[Page 984]]

Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Benefits Review Board                             20, VII
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase From People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X
Civil Rights, Commission on                       45, VII
Civil Rights, Office for                          34, I
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               44, IV
  Census Bureau                                   15, I
  Economic Affairs, Under Secretary               37, V
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Fishery Conservation and Management             50, VI
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV, VI
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology, Under Secretary for                 37, V
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Product Safety Commission                5, LXXI; 16, II
Cooperative State Research, Education, and        7, XXXIV
     Extension Service
Copyright Office                                  37, II
Corporation for National and Community Service    45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    28, VIII
     for the District of Columbia
Customs Service, United States                    19, I
Defense Contract Audit Agency                     32, I
Defense Department                                5, XXVI; 32, Subtitle A; 
                                                  40, VII
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII

[[Page 985]]

  Army Department                                 32, V; 33, II; 36, III, 
                                                  48, 51
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 2
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
District of Columbia, Court Services and          28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Affairs, Under Secretary                 37, V
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Vocational and Adult Education, Office of       34, IV
Educational Research and Improvement, Office of   34, VII
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             5, XXIII; 10, II, III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   5, LIV; 40, I, IV, VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Administration, Office of                       5, XV
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                5, III, LXXVII; 14, VI; 
                                                  48, 99
  National Drug Control Policy, Office of         21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           5, LII; 12, IV
Family Assistance, Office of                      45, II

[[Page 986]]

Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       11, I
Federal Emergency Management Agency               44, I
  Federal Acquisition Regulation                  48, 44
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority, and General    5, XIV; 22, XIV
     Counsel of the Federal Labor Relations 
     Authority
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Fishery Conservation and Management               50, VI
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Accounting Office                         4, I
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Management Regulation                   41, 102
  Federal Property Management Regulation          41, 101
  Federal Travel Regulation System                41, Subtitle F

[[Page 987]]

  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          5, XLV; 45, Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Human Development Services, Office of           45, XIII
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Housing and Urban Development, Department of      5, LXV; 24, Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Human Development Services, Office of             45, XIII
Immigration and Naturalization Service            8, I
Independent Counsel, Office of                    28, VII
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V

[[Page 988]]

  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  Minerals Management Service                     30, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Reclamation, Bureau of                          43, I
  Secretary of the Interior, Office of            43, Subtitle A
  Surface Mining and Reclamation Appeals, Board   30, III
       of
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Fishing and Related Activities      50, III
International Investment, Office of               31, VIII
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                5, XXVIII; 28, I, XI; 40, 
                                                  IV
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration and Naturalization Service          8, I
  Offices of Independent Counsel                  28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  5, XLII
  Benefits Review Board                           20, VII
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Pension and Welfare Benefits Administration     29, XXV
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Office                                37, II
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II

[[Page 989]]

Micronesian Status Negotiations, Office for       32, XXVII
Mine Safety and Health Administration             30, I
Minerals Management Service                       30, II
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
National Aeronautics and Space Administration     5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   45, XII, XXV
National Archives and Records Administration      5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Bureau of Standards                      15, II
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           21, III
National Foundation on the Arts and the           45, XI
     Humanities
National Highway Traffic Safety Administration    23, II, III; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute for Literacy                   34, XI
National Institute of Standards and Technology    15, II
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV, VI
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III
     Administration
National Transportation Safety Board              49, VIII
National Weather Service                          15, IX
Natural Resources Conservation Service            7, VI
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Offices of Independent Counsel                    28, VI
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Panama Canal Commission                           48, 35
Panama Canal Regulations                          35, I
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
   Certain Employees
[[Page 990]]

Peace Corps                                       22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension and Welfare Benefits Administration       29, XXV
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 45, VIII
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Postal Rate Commission                            5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Procurement and Property Management, Office of    7, XXXII
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Regional Action Planning Commissions              13, V
Relocation Allowances                             41, 302
Research and Special Programs Administration      49, I
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                17, II
Selective Service System                          32, XVI
Small Business Administration                     13, I
Smithsonian Institution                           36, V
Social Security Administration                    20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining and Reclamation Appeals, Board of  30, III
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV
Technology, Under Secretary for                   37, V
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     5, L
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II

[[Page 991]]

  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 49, V
  Research and Special Programs Administration    49, I
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Surface Transportation Board                    49, X
  Transportation Security Administration          49, XII
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               5, XXI; 12, XV; 17, IV; 
                                                  31, IX
  Alcohol, Tobacco and Firearms, Bureau of        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs Service, United States                  19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Law Enforcement Training Center         31, VII
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  International Investment, Office of             31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Vocational and Adult Education, Office of         34, IV
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I
World Agricultural Outlook Board                  7, XXXVIII

[[Page 993]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations which were 
made by documents published in the Federal Register since January 1, 
2001, are enumerated in the following list. Entries indicate the nature 
of the changes effected. Page numbers refer to Federal Register pages. 
The user should consult the entries for chapters and parts as well as 
sections for revisions.
For the period before January 1, 2001, see the ``List of CFR Sections 
Affected, 1949-1963, 1964-1972, 1973-1985 and 1986-2000'' published in 
11 separate volumes.

                                  2001

42CFR
                                                                   66 FR
                                                                    Page
Chapter IV
Chapter  IV Nomenclature change; heading revised...................39452
400.200  Amended...................................................39452
400.203  Amended....................................................6402
    Regulation at 66 FR 6402 effective date delayed................32776
    Regulation at 66 FR 6402 eff. date delayed to 8-16-02..........43090
402.1  (c) introductory text, (16), (29), (d)(2), (e)(1)(ii) and 
        (vii) revised; (c)(31), (32) and (33) added; eff. 10-29-01
                                                                   49546
402.105  (a) revised; (d)(3), (4) and (g) added; eff. 10-29-01.....49546
402.107  (b)(8) revised; eff. 10-29-01.............................49546
405.520  (c) revised; eff. 10-29-01................................49547
405.534  Introductory text added...................................55328
405.535  Heading revised; introductory text amended................55328
405.2175  Added....................................................33030
405.2468  (f)(6)(ii)(D) revised....................................39932
410  Technical correction............................13020, 13021, 16607
410.1  Regulation at 65 FR 83130 confirmed.........................14861
410.3  (a)(1) revised..............................................55328
410.10  (x) added..................................................55328
410.21  Redesignated from 410.22...................................55328
410.22  Redesignated as 410.21; new 410.22 redesignated from 
        410.23.....................................................55328
410.23  Redesignated from 410.22; new 410.23 added.................55328
410.26  (a) and (b) redesignated as (b) and (c); new (a) and (c) 
        heading added..............................................55328
410.28  (f) added; eff. 11-25-02...................................58809
410.32  (d) introductory text and (1) through (7) redesignated as 
        (d)(1) introductory text and (i) through (vii); new (d)(1) 
        heading and (2) through (e) added..........................58809
410.37  (d), (e)(2) and (g) revised; (e)(3) added..................55329
410.46  Added......................................................55329
410.56  (b)(1), (2) introductory text and (3) revised..............55329
410.78  Revised....................................................55330
410.130--410.134 (Subpart G)  Added................................55331
410.140--410.146 (Subpart H)  Regulation at 65 FR 83148 confirmed 
                                                                   14861
410.150  (b)(14) revised...........................................39599
410.152  (k)(2) revised; interim...................................32192
411  Technical correction.....................................3497, 8771
    Comment period extension.......................................17813
411.1  (a) revised; eff. 1-4-02......................................952
411.15  (q) redesignated as (r); new (q) added.....................32778
    (p)(1), (2) introductory text, (i) and (3) introductory text 
revised............................................................39600
    (p)(2)(i) corrected............................................48078
    (a)(1) revised; (k)(10) added..................................55331
    Corrected......................................................58786
411.350  Revised; eff. 1-4-02........................................952

[[Page 994]]

411.351  Revised; eff. 1-4-02........................................952
411.352  Added; eff. 1-4-02..........................................956
411.353  Revised; eff. 1-4-02........................................958
411.354  Added; eff. 1-4-02..........................................958
    Regulation at 66 FR 958 eff. date delayed to 1-6-03............60155
411.355  Revised; eff. 1-4-02........................................959
411.357  (k) through (p) added; eff. 1-4-02..........................961
412  Technical correction...................................13020, 13021
412.1  Revised; eff. 1-1-02........................................41385
412.2  (e)(4) revised..............................................39933
    (f)(9) added; eff. 10-9-01.....................................46924
412.20  (b) redesignated as (c); (a) and new (c) introductory text 
        revised; new (b) added; eff. 1-1-02........................41386
412.22  (a), (b), (e) introductory text and (h)(2) introductory 
        text revised; eff. 1-1-02..................................41386
412.23  (i) added..................................................39933
    Introductory text, (b) introductory text, (b)(2) introductory 
text, (8) and (9) revised; eff. 1-1-02.............................41386
412.25  (f) added..................................................39933
    (a) introductory text and (e)(2) introductory text revised; 
eff. 1-1-02........................................................41387
412.29  Introductory text revised; eff. 1-1-02.....................41387
412.63  (s) revised; interim.......................................32192
    (t) and (u) revised............................................39933
412.77  Heading and (a)(1) revised; (a)(2) removed; (a)(3) and (4) 
        redesignated as new (a)(2) and (3); interim................32192
412.80--412.86 (Subpart F)  Heading revised; eff. 10-9-01..........46924
412.80  Undesignated center heading and (a)(3) added; heading 
        revised; eff. 10-9-01......................................46924
412.87  Undesignated center heading and section added; eff. 10-9-
        01.........................................................46924
412.88  Added; eff. 10-9-01........................................46924
412.92  (d)(1)(iv), (2)(i), (ii) and (iii) revised; interim........32193
    (b)(1)(iii)(A) amended; (c)(1) revised.........................39933
412.105  (d)(3)(v) revised; interim................................32193
    (a)(1), (d)(3)(vi), (f)(1)(ii)(C), (iii) and (ix) revised; 
(d)(3)(vii) added; (f)(1)(v) and (vii) amended.....................39933
412.106  (c)(1)(i) through (iv), (d)(2)(ii)(A) through (D), (iii), 
        (iv) and (e)(4) revised; interim...........................32193
    (e) heading and (5) revised....................................39934
412.108  (a)(1)(iii) introductory text and (b) revised; 
        (a)(1)(iii)(C) added; (d)(3)(iii) amended; interim.........32194
    (b) revised....................................................39932
412.113  (c) amended...............................................39934
412.116  (a) revised; eff. 1-1-02..................................41387
412.130  (a)(1), (2) and (b) revised; eff. 1-1-02..................41387
412.230  (a)(5)(v) added; (e)(2) revised...........................39934
412.232  (d)(2) revised............................................39934
412.235  Added.....................................................39935
412.273  (b) and (c) redesignated as (c) and (d); new (b) added; 
        Heading and new (c) revised................................39935
412.274  (b) revised...............................................39935
412.348  (g)(6) revised; (g)(9) added..............................39936
412.600--412.632 (Subpart P)  Added; eff. 1-1-02...................41388
413  Technical correction.............................3497, 13020, 13021
    Authority citation revised.......................39600, 39932, 41394
413.1  (d)(2)(ii) revised; (d)(2)(iv) and (v) added; eff. 1-1-02 
                                                                   41394
413.24  (d)(6) revised; (d)(7) added...............................59920
413.40  (c)(4)(iii) introductory text, (A), (B)(4)(i) and (d)(2) 
        revised; interim...........................................32194
    (a)(2)(i)(C) and (iii)(C) added; (a)(2)(ii) revised; eff. 1-1-
02.................................................................41394
413.64  (h)(2)(i) revised; eff. 1-1-02.............................41394
413.65  (d)(7)(iii), (f)(3), (j)(3), (4) and (5) corrected..........1599
    (a)(1), (b) (c), (d) introductory text, (7), (g)(7), (i)(1) 
introductory text, (1)(ii) and (2) revised; (a)(2) amended.........59920
413.70  (b)(2)(ii), (iii), (3)(ii)(B) and (3)(iii) revised; 
        interim....................................................32195
    (a)(1)(iv), (3), (b)(4), (5) and (6) added; (a)(2), (b)(1) and 
(2)(i)(C) revised..................................................39936
413.80  (h)(3) revised; (h)(4) added; interim......................32195
413.85  (h) redesignated as 422.270; revised........................3374

[[Page 995]]

    Regulation at 66 FR 3374 eff. date delayed.....................14342
413.86  (d)(4) revised; interim....................................32195
    (g)(11)(i) introductory text and (ii) introductory text 
amended; (g)(11)(v)(C) revised.....................................39932
    (e)(4)(ii)(C)(1), (g)(4), (5) and (8) revised; (e)(5)(iv) 
removed; (g)(6) amended............................................39937
413.87  (c) introductory text, (1), (2) and (e) redesignated as 
        (c)(1) introductory text, (i), (ii) and (f); new (c)(1), 
        (d) introductory text, (3), new (f)(1) introductory text, 
        (1) and (2) revised; (c)(2) and (e) added; interim.........32195
413.114  (a), (c) heading and (d)(1) introductory text revised.....39600
413.337  (e) added.................................................39600
414  Technical correction..........................................16607
414.2  Amended.....................................................55332
414.63  Regulation at 65 FR 83153 confirmed........................14861
414.64  Added......................................................55332
414.65  Revised....................................................55332
414.100--414.104 (Subpart C)  Added; eff. 1-1-02...................45176
415.130  (a), (b) and (c) redesignated as (b), (c) and (d); new 
        (a) added; new (b)(3) and (4) amended; new (d) revised.....55332
416.42  (b) revised.................................................4686
    Regulation at 66 FR 4686 eff. date delayed.....................15352
    Regulation at 66 FR 4686 delayed to 11-14-01...................27598
    416.42Regulation at 66 FR 4686 withdrawn; (b) revised; (d) 
added..............................................................56768
419.2  (c) revised.................................................59922
419.20  (a) revised; (b)(3) and (4) added..........................59922
419.22  (r) added..................................................59922
419.32  (b)(1) revised.............................................59922
    Regulation at 66 FR 59922 delayed in part......................67494
419.40  Revised....................................................59922
419.41  Amended; heading revised; (c)(4)(ii) redesignated as 
        (c)(4)(iv); new (c)(4)(ii) and (iii) added.................59923
419.42  (a), (c) and (e) revised...................................59923
419.43  (e) removed; (f) redesignated as new (e); new (e) revised; 
        interim....................................................55856
    Heading and (a) amended........................................59923
419.60  (e) revised; interim.......................................55856
419.62--419.66 (Subpart G)  Added; interim.........................55856
419.62  (d) added..................................................55865
    Regulation at 66 FR 55865 delayed..............................67494
419.70 (Subpart G)  Redesignated as Subpart H; interim.............55856
    (d)(2) revised.................................................59923
422  Authority citation revised..............................3376, 47413
422.156  (e)(1) correctly revised; CFR correction..................13854
422.204  (b)(2)(ii) revised; eff. 10-12-01.........................47413
422.270  Redesignated from 413.85 (h)...............................3374
    Revised.........................................................3376
    Regulations at 66 FR 3374 and 3376 eff. date delayed...........14342
424  Comment period extension......................................17813
424.20  (a)(2) heading revised.....................................39600
424.22  (e), (f) and (g) removed; eff. 1-4-02; (d) revised...........962
    Regulation at 66 FR 962 eff. date corrected to 4-6-01...........8771
424.32  (a)(2) and (5) revised.....................................39601
424.44  Regulation at 65 FR 83153 confirmed........................14861

                                  2002

  (Regulations published from January 1, 2002, through October 1, 2002)

42CFR
                                                                   67 FR
                                                                    Page
Chapter IV
Chapter  IV Nomenclature change....................................36540
400  Technical correction..........................................42609
400.200  Amended...................................................36540
400.203  Regulation at 66 FR 6402, 11546, 32276 and 43090 
        withdrawn..................................................40988
    Amended........................................................41094
403  Authority citation revised....................................56682
403.800--403.820 (Subpart H)  Added................................56682
405  Technical correction..........................................20681
405.1885  (b) revised; (e) redesignated as (f); new (e) added......50110
405.2175  Removed..................................................48801
408.200--408.210 (Subpart H)  Added; eff. 3-26-03..................60996
410  Technical correction.....................11549, 13278, 15011, 20681

[[Page 996]]

410.40  (b), (d)(1), (2), (3) heading and introductory text and 
        (i) revised; (d)(3)(iii), (iv) and (v) added................9132
411  Technical correction.....................11549, 13278, 15011, 20681
412.1  (b)(12) redeisignated as (b)(13); (a)(3) and new (b)(12) 
        added......................................................56048
412.4  (f)(1) amended..............................................50111
412.20  (a) revised; (c) redesignated as (d); new (c) added........56048
412.22  (h)(2) introductory text revised; (h)(2)(iii)(A) through 
        (F) redesignated as (h)(2)(iii)(B) through (G); new 
        (h)(2)(iii)(A) added.......................................50111
    (b) revised; (e)(6) and (h)(5) added...........................56048
412.23  (e) revised................................................56048
412.25  (e)(2) introductory text revised; (e)(2)(iii)(A) through 
        (F) redesignated as (e)(2)(iii)(B) through (G); new 
        (e)(2)(iii)(A) added.......................................50111
412.63  (x)(2)(i)(A) amended; (x)(3) and (4) removed; (x)(5) 
        redesignated as (x)(3).....................................50111
412.80  (a)(2) revised.............................................50111
412.88  (a)(1) revised.............................................50111
412.92  (c)(2) revised.............................................50111
412.105  (a)(1), (f)(1)(iii)(A) and (vi) revised; (f)(1) cross 
        references amended.........................................50111
412.106  (d)(2)(iv)(A) amended.....................................50112
412.108  (b) revised...............................................50112
412.113  (c)(2)(i)(D), (ii) and (iii) revised......................50112
412.116  (a) heading revised; (a)(4) added.........................56049
412.230  (e)(2)(iii) added.........................................50113
412.273  Heading, (b)(2)(i) and (ii) revised; (d) redesignated as 
        (e); (b)(2)(iii) and new (d) added.........................50113
2.304  (c) revised.................................................50113
412.308  (b)(6) added..............................................50113
412.312  (e) added.................................................50113
412.500--412.541 (Subpart O)  Added................................56049
412.602  Amended...................................................44077
412.604  (b), (e)(1)(i) and (iii) amended..........................44077
412.610  (c)(2)(ii)(A) amended.....................................44077
412.618  (c) revised...............................................44077
412.624  (a)(1), (c)(4) and (e)(4) amended; (g)(1) and (2) 
        introductory text revised..................................44077
412.626  (b)(1) and (2) amended....................................44077
413  Technical correction............................13278, 11549, 15011
    Authority citation revised.....................................50114
413.1  (d)(2)(iv) amended..........................................44077
    (d)(2)(ii) revised; (d)(2)(vi) and (vii) added.................56055
413.30  (d) corrected..............................................48802
413.40  (c)(4)(iii)(A)(2) revised..................................50114
413.40  (a)(2)(i)(D) added; (a)(2)(ii)(A) and (B) amended; 
        (a)(2)(ii)(C) and (iv) added...............................56055
413.64  (h)(2)(i) and (3) introductory text revised................56056
413.65  (a)(2) amended; (j) removed; (e), (f), (h), (i), (l), (m) 
        and (n) redesignated as (f), (h), (i), (j), (m), (n) and 
        (o); (a)(1)(ii), (G), (H), (b)(2), (3), (c), (d), new (f), 
        (g) introductory text, (1), (2), (7), new (h), (i), (j), 
        (k), new (n) heading and new (o) revised; (a)(1)(ii)(J), 
        (K), new (e) and (l) added.................................50114
413.70  (b)(3)(i) revised..........................................50118
413.86  (b), (e)(5)(i) introductory text and (g) cross references 
        amended; (e)(5)(i)(B), (f)(2) and (g)(4)(iv) revised; 
        (g)(7) through (12) redesignated as (g)(8) through (13); 
        new (g)(7) added...........................................50119
    (e)(4)(ii)(C)(2)(iii) correctly designated; (e)(4)(ii)(C)(2) 
introductory text, (i) and (iii) correctly added; CFR correction 
                                                                   61496
414  Technical correction..........................................20681
414.1  Revised......................................................9132
414.22  (b)(6) revised; interim....................................43558
414.601--414.625 (Subpart H)  Added.................................9132
415  Technical correction..........................................20681
417.402  (b) revised...............................................13288
419.32  (b)(1)(iii) corrected.......................................9568
419.62  (d) corrected...............................................9568
422.68  (c) revised................................................13288
422.80  (a)(1) revised.............................................13288
422.100  (d)(2) and (g)(2) revised.................................13288
422.250  (g)(2)(i) and (ii) revised; (g)(2)(iii) added.............13288

[[Page 997]]

422.252  (b)(2) and (c)(2) revised; (b)(3), (4), (c)(3) and (4) 
        added......................................................13289
422.256  (d)(2) revised............................................13289
422.506  (a)(4) amended............................................13289
422.512  (e) amended...............................................13289
424  Technical correction............................11549, 13278, 15011


                      []