[Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17221]


[[Page Unknown]]

[Federal Register: July 15, 1994]

BILLING CODE 4120-01-P
-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES
Office of the Secretary

42 CFR Parts 417, 431, 434, and 1003

RIN 0991-AA44

 

Medicare and State Health Care Programs: Fraud and Abuse, Civil 
Money Penalties and Intermediate Sanctions for Certain Violations by 
Health Maintenance Organizations and Competitive Medical Plans

AGENCY: Office of the Secretary, HHS, Office of Inspector General (OIG) 
and the Health Care Financing Administration (HCFA).

ACTION: Final rule.

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

SUMMARY: This final rule implements sections 9312(c)(2), 9312(f), and 
9434(b) of Public Law 99-509, section 7 of Public Law 100-93, section 
4014 of Public Law 100-203, sections 224 and 411(k)(12) of Public Law 
100-360, and section 6411(d)(3) of Public Law 101-239. These provisions 
broaden the Secretary's authority to impose intermediate sanctions and 
civil money penalties on health maintenance organizations (HMOs), 
competitive medical plans, and other prepaid health plans contracting 
under Medicare or Medicaid that (1) substantially fail to provide an 
enrolled individual with required medically necessary items and 
services; (2) engage in certain marketing, enrollment, reporting, or 
claims payment abuses; or (3) in the case of Medicare risk-contracting 
plans, employ or contract with, either directly or indirectly, an 
individual or entity excluded from participation in Medicare. The 
provisions also condition Federal financial participation in certain 
State payments on the State's exclusion of certain prohibited entities 
from participation in HMO contracts and waiver programs. This final 
rule is intended to significantly enhance the protections for Medicare 
beneficiaries and Medicaid recipients enrolled in a HMO, competitive 
medical plan, or other contracting organization under titles XVIII and 
XIX of the Social Security Act.

EFFECTIVE DATE: These rules are effective September 13, 1994.

FOR FURTHER INFORMATION, CONTACT:

Zeno W. St. Cyr, II, Legislation, Regulations, and Public Affairs 
Staff, OIG, (202) 619-3270 or
Marty Abeln, Office of Managed Care, HCFA, (202) 205-9582 or
Mike Fiore, Medicaid Bureau, HCFA, (410) 966-4460

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    Managed care plans, such as health maintenance organizations 
(HMOs), competitive medical plans (CMPs), and health insuring 
organizations (HIOs) are entities that provide enrollees with 
comprehensive, coordinated health care in a cost-efficient manner. 
Payment for these plans is generally made on a prepaid, capitation 
basis. The goal of prepaid health care delivery is to control health 
care costs while at the same time providing enrollees with affordable, 
coordinated, quality health care services. Titles XVIII and XIX of the 
Social Security Act (the Act) authorize contracts with managed health 
care plans for the provision of covered health services to Medicare 
beneficiaries and Medicaid recipients.

B. Medicare

    Section 1876 of the Act provides for Medicare payment at 
predetermined rates to eligible organizations that have entered into 
risk contracts with HFCA, or for payment of reasonable costs to 
eligible organizations that have entered into cost contracts. Eligible 
organizations include HMOs that have been federally qualified under 
section 1310(d) of title XIII of the Public Health Service Act, and 
CMPs that meet the requirements of section 1876(b)(2) of the Act.
    Medicare enrollees of risk-contracting CMPs or HMOs are required to 
receive covered services only through the organization, except for 
emergency services and urgently needed out-of-area services. In the 
case of a cost contract, the Medicare beneficiary may also receive 
services outside the organization, with Medicare paying for the 
services through the general Medicare fee-for-service system. If an HMO 
or CMP fails to comply with a contract provision, the Secretary may 
decide to not renew or to terminate the contract. Regulations governing 
nonrenewal of a contract are found at 42 CFR 417.492, and regulations 
governing termination of a contract are at 42 CFR 417.494.

C. Medicaid

    Section 1903(m) of the Act contains requirements that apply to 
State Medicaid contracts for the provision, on a risk basis, either 
directly or through arrangements, of at least certain specified 
services (``comprehensive services''). HCFA regulations at 42 CFR part 
434 implement the requirements in section 1903(m) and contain other 
requirements applicable to Medicaid contracts generally. Section 434.70 
provides that HCFA may withhold Federal matching payments, known as 
Federal financial participation (FFP), for State expenditures for 
services provided to Medicaid recipients when either party to a 
contract substantially fails to carry out the terms of the contract.

D. New Legislation

1. The Omnibus Budget Reconciliation Act of 1986
    Section 9312(c)(2) of Public Law 99-509, the Omnibus Budget 
Reconciliation Act of 1986 (OBRA 86), added section 1876(f)(3) to the 
Act. This provision authorizes the Secretary to suspend enrollment of 
Medicare beneficiaries by an HMO/CMP or to suspend payment to the HMO/
CMP for individuals newly enrolled, after the date the Secretary 
notifies the organization of noncompliance with the requirement in 
section 1876(f)(1) that limits enrollment to no more than 50 percent 
Medicare beneficiaries and Medicaid recipients. Prior to OBRA 86, 
HCFA's only recourse against an organization for noncompliance with any 
contract provisions was to non-renew or initiate termination of the 
contract. The new authority provides alternative remedies that may be 
used in place of or in addition to contract nonrenewal or termination 
for organizations that do not comply with the enrollment composition 
requirement.
    Additionally, sections 9312(f) and 9434(c) of OBRA 86 added 
sections 1876(i)(6) and 1903(m)(5), respectively, to the Act. These 
provisions authorize a civil money penalty not greater than $10,000 for 
each instance of failure by an organization with a Medicare risk 
contract, or certain organizations with a comprehensive risk contract 
under Medicaid, to provide required medically necessary items or 
services to Medicare or Medicaid enrollees if the failure adversely 
affects (or has the likelihood of adversely affecting) the enrollee.
2. The Medicare and Medicaid Patient and Program Protection Act of 1987
    Section 7 of Public Law 100-93, the Medicare and Medicaid Patient 
and Program Protection Act of 1987 (MMPPPA), added section 1902(p) of 
the Act, which grants States the authority to exclude individuals or 
entities from participation in their Medicaid programs for any of the 
reasons that constitute a basis for exclusion from Medicare under 
sections 1128, 1128A, or 1866(b)(2) of the Act. In addition, section 7 
of MMPPPA established a new condition that States must meet in order to 
receive FFP for payments to HMOs or entities furnishing services under 
a waiver approved under section 1915(b)(1) of the Act. The latter 
provision conditioned FFP upon a State's providing that it will exclude 
from participation, as an HMO or an entity furnishing services under a 
section 1915(b)(1) waiver, any entity that could be excluded under 
section 1128(b)(8) of the Act (that is, any individual or entity 
against whom criminal or civil penalties have been imposed). FFP is 
also conditioned upon a State excluding an entity that has, directly or 
indirectly, a substantial contractual relationship with a person 
described in section 1128(b)(8)(B) of the Act.
3. The Omnibus Budget Reconciliation Act of 1987
    Section 4014 of Public Law 100-203, the Omnibus Budget 
Reconciliation Act of 1987 (OBRA 87), provides the Department with 
increased penalty amounts and greater statutory authority and 
flexibility to take action against HMOs or CMPs that commit certain 
abuses. This authority also may be exercised in addition to or in place 
of initiating contract termination proceedings. Section 4014 of OBRA 87 
amends section 1876(i)(6) of the Act to authorize the Secretary to 
impose civil money penalties, suspend enrollment, and suspend payments 
for newly enrolled individuals in the case of an organization with a 
Medicare contract (both risk and cost contract) that the Secretary 
determines has (1) failed substantially to provide required medically 
necessary items and services to Medicare enrollees if the failure 
adversely affects (or has the likelihood of adversely affecting) the 
enrollee; (2) imposed premiums on Medicare enrollees in excess of 
permitted premium amounts; (3) acted to expel or refused to reenroll an 
individual in violation of section 1876 of the Act; (4) engaged in any 
practice that can reasonably be expected to deny or discourage 
enrollment (except as permitted under section 1876) by Medicare 
enrollees whose medical condition or history indicates a need for 
substantial future medical services; (5) misrepresented or falsified 
information provided under section 1876 to the Secretary, an 
individual, or any other entity; or (6) fails to comply with the 
requirements of section 1876(g)(6)(A) regarding prompt payment of 
claims. Under OBRA 87, the maximum allowable civil money penalty that 
can be imposed for each determination of a violation is increased to 
$25,000, or $100,000 in the case of a HMO or CMP determined to have 
committed acts in (4) above or for misrepresenting or falsifying 
information furnished to the Secretary under section 1876.
4. The Medicare Catastrophic Coverage Act of 1988
    The Medicare Catastrophic Coverage Act of 1988 (MCCA), Public Law 
100-360, amended sections 1876 and 1903(m) of the Act by adding new 
civil money penalty authority for violations occurring within the 
Medicare program and by applying the OBRA 87 HMO and CMP intermediate 
sanction and civil money penalty authority to the Medicaid program.
    Section 224 of MCCA amended section 1876(i)(6)(B)(i) of the Act. In 
addition to other civil money penalties, in cases where Medicare 
enrollees are charged more than the allowable premium, section 224 
imposes a penalty which doubles the amount of excess premium charged by 
the HMO or CMP. The excess premium amount is deducted from the penalty 
and returned to the Medicare enrollee. Section 224 also imposes a 
$15,000 penalty for each individual not enrolled if it is determined 
that the HMO or CMP engaged in any practice which denied or discouraged 
enrollment (except as permitted under section 1876 of the Act) by 
Medicare enrollees whose medical condition or history indicated a need 
for substantial future medical services.
    Section 411(k)(12) of MCCA amended section 1903(m)(5) of the Act to 
provide the Secretary with authority to impose civil money penalties on 
contracting organizations, and to deny payments for new enrollees of 
contracting organizations, in cases where the Secretary determines that 
an organization has (1) failed substantially to provide required 
medically necessary items and services to Medicaid enrollees if the 
failure adversely affects (or has the likelihood of adversely 
affecting) the enrollee; (2) imposed premiums on Medicaid enrollees in 
excess of premium amounts permitted under title XIX of the Act; (3) 
discriminated among individuals in violation of the provisions of 
section 1903(m)(2)(A)(v) of the Act, including expelling or refusing to 
reenroll an individual or engaging in any practice which could 
reasonably be expected to deny or discourage enrollment (except as 
permitted under section 1903(m)) by Medicaid recipients whose medical 
condition or history indicates a need for substantial future medical 
services; or (4) misrepresented or falsified information provided under 
section 1903 of the Act to the Secretary, State, an individual, or any 
other entity.
    Under the amendments to section 1903(m)(5) made by MCCA, the 
maximum allowable civil money penalty that can be imposed for each 
determination of a violation is increased to $25,000, or $100,000 in 
the case of a determination that a contracting organization has (1) 
violated the provisions of section 1903(m)(2)(A)(v) by expelling or 
refusing to reenroll an individual or by engaging in a practice which 
denied or discouraged enrollment (except as permitted under section 
1903(m)) by Medicaid recipients whose medical condition or history 
indicated a need for substantial future medical services; or (2) 
misrepresented or falsified information furnished to the Secretary or 
State under section 1903(m).
    Additionally, in cases where Medicaid enrollees are charged more 
than the allowable premium, section 411(k)(12) of MCCA amended section 
1903(m)(5) of the Act to authorize imposition of an additional penalty 
which doubles the amount of excess premium charged by the contracting 
organization, with the excess premium amount deducted from the penalty 
and returned to the Medicaid enrollee. Imposition of an additional 
$15,000 penalty is authorized for each individual not enrolled if it is 
determined that the contracting organization has violated the 
provisions of section 1903(m)(2)(A)(v) by expelling or refusing to 
reenroll an individual or by engaging in any practice which denied or 
discouraged enrollment (except as permitted under section 1903(m)) by 
Medicaid recipients whose medical condition or history indicated a need 
for substantial future medical services.
5. The Omnibus Budget Reconciliation Act of 1989
    Public Law 101-239, the Omnibus Budget Reconciliation Act of 1989 
(OBRA 89), amended sections 1876 and 1902(p) of the Act to provide the 
Secretary with an additional civil money penalty and intermediate 
sanction authority for violations occurring within the Medicare program 
and with additional conditions for FFP.
    Section 6411(d)(3)(A) of OBRA 89 amended section 1876(i)(6)(A) of 
the Act to authorize the Secretary to restrict enrollment in, suspend 
payment to, and impose a civil money penalty against an organization 
with a risk contract that (1) employs or contracts with any individual 
or entity excluded from Medicare participation under sections 1128 or 
1128A of the Act for the provision of health care, utilization review, 
medical social work, or administrative services; or (2) employs or 
contracts with any entity for the provision of such services (directly 
or indirectly) through an excluded individual or entity. The maximum 
allowable civil money penalty that may be imposed for each 
determination of a violation of this nature is $25,000.
    Section 6411(d)(3)(B) of OBRA 89 amended section 1902(p)(2) of the 
Act to condition FFP in payments to HMOs, or to entities furnishing 
services under a Sec. 1915(b)(1) waiver, upon the State's barring the 
following entities from participation as HMOs or section 1915(b)(1) 
waiver participants: (1) Any organization that employs or contracts 
with any individual or entity excluded from Medicaid participation 
under sections 1128 or 1128A of the Act for the provision of health 
care, utilization review, medical social work, or administrative 
services; or (2) any organization that employs or contracts with any 
entity for the provision of such services (directly or indirectly) 
through an excluded individual or entity.

II. Provisions of the Proposed Rule

    On July 22, 1991, we published a proposed rule with a 60-day 
comment period (56 FR 33403) that would amend 42 CFR Part 417, Subpart 
C; Part 431, Subpart B; Part 434, Subparts C, D, E, and F; and Part 
1003 specifically by establishing sanctions and civil money penalties 
which may be imposed on contracting organizations that substantially 
fail to provide an enrollee with required medically necessary items and 
services or that engage in certain marketing, enrollment, reporting, 
claims payment, employment, or contracting abuses.
    In the July 1991 proposed rule, we proposed to incorporate the 
Medicare sanction provisions of OBRA 86, OBRA 87, MCCA, and OBRA 89 
into agency regulations largely without substantial modifications. 
Under the proposed regulations, after HCFA (or a State) determines that 
a contracting organization has committed a violation under sections 
1876(i)(6)(A) or 1903(m)(5)(A), information pertaining to the violation 
would be provided to the OIG.
    Briefly, our proposed changes to the regulations were designed to 
implement the Department's new authorities by detailing HCFA's (and 
States') role in imposing intermediate sanctions, and the OIG's role in 
imposing civil money penalties, for certain abuses committed by 
contracting organizations providing health care items or services to 
Medicare beneficiaries or Medicaid recipients. We proposed that--
     Once it is determined that a Medicare contracting 
organization has committed a violation, and in place of initiating 
contract termination proceedings, HCFA may:

--Require the contracting organization to suspend enrollment of 
Medicare beneficiaries;
--Suspend payments to the contracting organization for individuals 
enrolled after a specified date.

     If a State Medicaid agency determines that a Medicaid 
contracting organization has committed a violation, it may, in place of 
terminating the contract, recommend to HCFA that HCFA's intermediate 
sanction authority be exercised to deny payment to the contracting 
organization for Medicaid recipients enrolled with the organization 
after a specified date. This recommendation takes effect absent HCFA 
action.
     In addition to or in place of other remedies available 
under law, the OIG may:

--Impose a penalty of up to $25,000 for each determination that a 
contracting organization has--
  (1) Failed substantially to provide an enrollee with required 
medically necessary items and services, if the failure adversely 
affects (or has the likelihood of adversely affecting) the enrollee; or
  (2) Committed enrollment, marketing, claims payment, or certain 
reporting violations;
--Impose a penalty of up to $25,000 for each determination that a 
contracting organization with a Medicare risk-sharing contract employs 
or contracts with--
  (1) Individuals or entities excluded from participation in Medicare, 
under sections 1128 or 1128A of the Act, for the provision of health 
care, utilization review, medical social work, or administrative 
services; or
  (2) Any entity for the provision of such services (directly or 
indirectly) through an excluded individual or entity; and
--Impose a penalty of up to $100,000 for each determination that a 
contracting organization has--
  (1) Misrepresented or falsified information furnished under the 
provisions of the statute to the Secretary or State; or
  (2) Expelled or refused to reenroll an individual or engaged in any 
practice that would reasonably be expected to have the effect of 
denying or discouraging enrollment (except as permitted by statute) by 
enrollees whose medical condition or history indicates a need for 
substantial future medical services.
     In cases where a civil money penalty is imposed against a 
plan for charging enrollees more than the allowable premium, the OIG 
will impose an additional penalty equal to double the amount of excess 
premium charged by the contracting organization. The excess premium 
amount will be deducted from the penalty and returned to the enrollee.
     The OIG will impose an additional $15,000 penalty for each 
individual not enrolled if it is determined that a contracting 
organization expelled or refused to reenroll an individual or engaged 
in any practice that would reasonably be expected to have the effect of 
denying or discouraging enrollment (except as permitted by statute) by 
enrollees whose medical condition or history indicates a need for 
substantial future medical services.
     The provisions also condition FFP in certain State 
payments on the State's exclusion of certain entities excluded (or 
excludable) from Medicare.

III. Analysis of and Responses to Public Comments

    In response to the July 22, 1991 proposed rule, we received 14 
timely items of correspondence. The comments were from group health 
associations, State agencies, health insurance plans, and law firms. A 
summary of these comments are discussed below:

A. Intermediate Sanctions

    Comment: Several commenters wanted clarification on how 
Sec. 417.495(a)(1), which describes the first basis for the imposition 
of intermediate sanctions, will be defined. There was particular 
interest expressed about the criteria by which the terms ``fails 
substantially'' and ``medically necessary'' will be evaluated.
    Response: In determining if an organization has violated 
Sec. 417.495(a)(1), HCFA and State Medicaid agencies will make a 
comprehensive three-part evaluation. Specifically, this will involve 
determining if the organization has: (1) Failed substantially to 
provide medically necessary items or services and this has (3) 
adversely affected (or has the substantial likelihood of adversely 
affecting) the enrollee. To determine if the three principal 
requirements of Sec. 417.495(a)(1) have been violated, HCFA and State 
Medicaid agencies will have recourse to a number of sources of 
information and guidance. For Medicare, the information sources include 
the attending physician, other health care personnel, the HMO or CMP, 
utilization reviewers, the Peer Review Organization (PRO), the Medicare 
enrollee or authorized representatives, and internal or possibly third-
party expertise. Additional sources of guidance will include clinical 
practice standards; guidelines or advisories promulgated by 
authoritative bodies; and Medicare law, regulations, and manuals.
    States, in making an initial finding on Medicaid contractor 
violations, also have a number of sources of information available to 
them. These include health care experts conducting the required 
periodic medical audits; the health professionals under contract to the 
State to perform the annual quality review of services delivered by 
HMOs and HIOs; other health consultants to the State agency; clinical 
practice standards, guidelines, or advisories promulgated by 
authoritative bodies; and Medicaid law, regulations, and manuals.
    In making determinations of ``substantial failure,'' consideration 
will be given to the impact on the health status of a Medicare or 
Medicaid enrollee of not having received covered items and services 
and, in cases where patterns of withholding items and services are 
identified, the frequency of the events and the resulting impact on the 
health status of enrollees.
    In making determinations of ``medical necessity,'' HCFA and the 
States will rely on their respective coverage or payment requirements 
but will also utilize various sources of expert opinion (as described 
above) in order to determine if required medically necessary care has 
either been denied or inappropriately provided.
    Comment: A commenter asked whether the same criteria used for 
``medical necessity'' for Medicare and Medicaid coverage of services 
will be used to determine medical necessity under the final rule.
    Response: In making medical necessity decisions, Medicare and 
Medicaid will continue to utilize the current oversight processes and 
coverage and payment criteria. Under the intermediate sanction, 
however, HCFA and States will also have recourse, on a case by case 
basis, to other sources of expert information and guidance (as 
described in the previous response) in making medical necessity 
decisions.
    Comment: A number of commenters wanted changes made to the 
definition of ``adverse affect.'' One commenter suggested that the 
definition is too narrow, and unreasonably requires the patient to 
suffer a high degree of risk to his or her health before a sanction can 
be applied. Another commenter said that the definition was too vague 
and suggested amending the definition to indicate that adverse effect 
is limited to the withholding of or failure to provide medically 
necessary care covered by the contract. Another commenter expressed 
concern that the definition of adverse affect appears to be lacking in 
that it addresses only those instances in which care has been withheld 
and fails to address those instances where substandard or inappropriate 
care has been delivered. Still another commenter believed the 
regulation should provide a definition for ``adverse affect'' that 
specifically includes sanctions against HMOs that fail to provide 
timely and adequate prenatal and children's preventive care.
    Response: The expertise needed to determine what constitutes 
``adverse effect'' are similar to those previously discussed which are 
needed to evaluate ``substantial failure'' and ``medically necessary.'' 
HCFA and States will rely on the same sources of information and 
guidance (as previously described) to determine when an enrollee has 
been adversely affected by the failure to provide the required 
medically necessary services.
    It should be noted that in addition to a substantial failure to 
provide medically necessary services, ``adverse effect'' may also be 
found to be the result of providing inappropriate or substandard care. 
Specifically, for medical services that are Medicare or Medicaid 
approved and are found to be medically necessary, if HCFA or the State 
determines that a failure to appropriately provide required services 
has adversely affected (or has a substantial likelihood of adversely 
affecting) an enrollee, then this will constitute a violation. This 
includes Medicaid required prenatal and children's preventive care.
    Comment: One commenter stated that ``adversely affects'' should be 
defined in terms of a detrimental effect on the condition(s) for which 
the person is seeking treatment.
    Response: HCFA and State Medicaid agencies will not limit a 
determination of adverse effect to only those conditions for which the 
person is seeking treatment. For example, instances may arise where 
beneficiaries are seeking treatment for one condition and the physician 
will determine that another condition is actually the cause of their 
symptoms.
    Comment: One commenter stated that the penalties should apply only 
to instances where the plan acts negligently or with intent to 
wrongfully deny medically necessary services. Similarly, a few 
commenters believed that any sanctions and/or civil money penalties 
should apply only when an organization has knowingly and willfully 
violated the law. Two of those commenters suggested that we add a 
requirement that any violations must be ``knowingly and willfully'' 
committed before we impose a sanction.
    Response: Sanctions will not be limited to instances where plans 
act negligently or with wrongful intent. Aggravating and mitigating 
factors, such as the degree of culpability of the organization, will be 
considered in determining any sanction or civil money penalty. As in 
all our determinations on intermediate sanctions, the scope, and 
duration of the violation, as well as the level of threat to enrollee 
health and safety, will be evaluated in determining the severity of a 
particular sanction. Further, we believe that an absolute requirement 
for ``knowingly and willfully'' violations is more stringent than the 
law anticipated. We will consider evidence that an organization has 
willfully violated the statute as an aggravating circumstance. 
Nevertheless, we will not add the requirement that violations must be 
``knowingly and willfully'' committed before the imposition of a 
sanction.
    Comment: One commenter asked whether it would be considered a 
failure to provide medically necessary services if an HMO determined, 
according to its standard procedures, that a particular service did not 
qualify as an emergency or out-of-area urgently needed care and denied 
the service. This commenter recommended that the regulation exclude 
from any definition of ``substantial failure to provide medically 
necessary services'' those circumstances in which care is not provided 
based upon a medical judgment made in accord with the HMO's standard 
operating policies determining coverage. In addition, the commenter 
asked under what circumstances the failure of a physician, with whom 
the HMO contracts on an independent contractor basis, to furnish a 
medically necessary item or service can be imputed to the HMO, absent a 
clear showing that the HMO knowingly contracted with a physician (or 
other provider) with a history of improper treatment of patients.
    Response: In general, an organization which reasonably follows 
approved guidelines and policies in making medical care decisions will 
not be found to have denied medically necessary services. It is 
important to emphasize that we expect medical care decisions to be made 
judiciously and appropriately. There may be instances when the 
organization's rules are inadequate; in such circumstances we expect 
the organization to protect the welfare of the beneficiary.
    With respect to an HMO contracting with an independent contractor 
physician, we consider the HMO responsible for the quality of care its 
members receive. The HMO has a duty to ensure that the care enrollees 
receive is appropriate, whether the physician or provider is an 
employee of the HMO or an independent contractor. If a HMO knowingly 
contracts with a provider that has a history of improper treatment 
toward patients, we would consider this a serious aggravating 
circumstance in determining a sanction or civil money penalty.
    Comment: One commenter pointed out that not all HMOs offer all 
routine covered services in their own health care centers, and 
therefore must contract out with other providers to offer those 
services. If it occurs that routine services cannot be scheduled 
without some minor delay, under what circumstances would such a delay 
result in a determination that the HMO failed substantially to provide 
medically necessary services?
    Response: Such a situation will be evaluated based on the judgement 
of experts with whom HCFA will consult and in accordance with Medicare 
law and regulations. As previously noted, these experts include 
physicians, other medical personnel, the PRO, and utilization 
reviewers. Factors such as the effect of delays on the beneficiary's 
health and whether such delays are reasonable given the type of service 
and the needs of the beneficiary will be considered. An HMO that 
contracts for various services remains responsible for the quality and 
timeliness of those services.
    Comment: Several commenters wanted more guidance as to what 
constitutes an excess premium for purposes of imposing intermediate 
sanctions in Sec. 434.67(a)(2). One commenter suggested that the 
regulation include language stating that HCFA approval of the premium 
amount is consistent with the statutory requirement. Another commenter 
believed that penalties in premium setting should be limited to 
instances in which plans knowingly and intentionally seek to overcharge 
beneficiaries.
    Response: In Medicare contracting organizations the premiums and 
other charges for Medicare enrollees are required to be the actuarial 
equivalent of what a Medicare beneficiary would pay in fee-for-service 
for Medicare covered services (section 1876(e)). Premium charges in 
excess of the HCFA approved amount would be considered excessive.
    Although premiums are not typically employed for Medicaid 
contracting HMOs for Medicaid enrollees, if the State and the HMO/HIO 
agreed to do so, the use of the premiums would have to be explicitly 
described in the HMO/HIOs contract with the State. The use of premiums 
in this way would also have to be described in the State plan, and 
could not exceed the actual value of deductibles and co-payment amounts 
provided for under the State plan. Both the State plan provision and 
the contract terms are required to have the approval of HCFA. Therefore 
any use of premiums which is not explicitly provided for in an HMO's or 
HIO's contract with the State, which has been approved by HCFA, would 
be in excess of a permitted premium.
    Comment: Proposed Sec. 417.495(a)(8), which we have designated as 
Sec. 417.500(a)(8) in this final rule, prohibits Medicare risk 
contractors from employing or contracting with or through individuals 
or entities (either directly or indirectly) which have been excluded 
from participating in Medicare. One commenter believed this provision 
placed an onerous burden on the risk contractor to conduct extensive 
inquiries into the background of each of its participating providers 
and subcontractors, as well as imposing an obligation to obtain from 
HCFA the most recent information regarding excluded entities. In 
addition, this commenter wanted clarification of the meaning of 
``employing or contracting * * * (directly or indirectly) through an 
excluded individual or entity,'' so the risk contractor will know the 
extent of background information it must require of participating 
providers and others. Further, the commenter suggested that HCFA 
implement this provision by, (1) providing the risk contractor with a 
periodic listing of all excluded entities; and (2) specifying that the 
statutory obligation is satisfied if the risk contractor requests the 
background information, checks the information furnished by the 
subcontractor against the most recent list of excluded entities 
provided by HCFA, and the contracting entity or entities are not on the 
list.
    Response: As part of its current operating procedures, HCFA makes 
available to Medicare contractors the Medicare/Medicaid Sanction-
Reimbursement Report, which lists entities, contractors, and providers 
excluded from Medicare. While we consider review of the sanction report 
a critical step in complying with the requirement prohibiting 
contracting with an excluded individual or entity, it is not conclusive 
proof of having satisfied the legal obligation. In general, beyond 
reviewing the sanction report, we expect a reasonable effort to comply 
with this requirement. This would include reasonable activities to 
verify provider credentials, and review of other relevant State and 
professional records. We do not require or expect contracting 
organizations to go beyond making a reasonable and conscientious effort 
to comply with this requirement.
    Comment: Many commenters wanted more than 15 days to respond to the 
notice of intermediate sanctions. The suggested time limits ranged from 
30 to 60 days with the option of additional extensions.
    Response: We agree that allowing more time for an organization to 
respond to a notification of sanction may be necessary in some 
instances. We have revised our regulations at Sec. 417.500(b)(2) and 
Sec. 434.67(c) to permit a 15 day extension to the original 15 days if 
HCFA approves a written request from the organization. The request for 
an extension must provide a credible explanation of why additional time 
is needed and must be received by HCFA or the State agency, as 
appropriate, before the end of the 15 day period following the 
organization's date of notification of sanction. An extension will not 
be available in instances where HCFA, or HCFA in consultation with the 
State agency, finds that the organization's conduct poses a serious 
threat to an enrollees' health and safety or if HCFA or the State 
agency, as appropriate, judges the additional 15 days to be unnecessary 
for the organization to respond.
    Comment: Two commenters wanted the regulation to specify the 
information that would be provided in the notice of intermediate 
sanctions. Another commenter suggested the following information be 
provided: (1) The sanction or sanctions to be imposed; (2) the 
effective date and duration of the sanction; (3) the authority for the 
sanction; (4) the reason for the sanction; (5) specific information 
regarding the organization's right to contest the determination, 
including timeframes for submission of the organization's request for 
reconsideration, the permissible content of the request and supporting 
materials, and to whom the request should be submitted; and (6) 
information regarding any rights to hearing or appeal, including 
judicial review, that the organization may have if the sanction is 
imposed. In addition, the organization should be provided with copies 
of any documents on which HCFA or the State Agency relied in 
determining that a violation occurred.
    Response: Confidentiality may not allow the release of certain 
documents which have influenced HCFA's decision to impose a sanction. 
However, most of the information listed above will be provided to an 
organization in the notification of sanction. Specifically, the notice 
of sanction will provide: (1) The sanction or sanctions to be imposed, 
(2) the reason for the sanction, (3) the authority for the sanction, 
(4) the effective date of the sanction, and (5) the time available for 
submission of the request for reconsideration and to whom the request 
should be submitted.
    HCFA will specify the above information in operating procedures 
rather than in the regulations. Under the intermediate sanctions, 
appeal rights will be limited to the reconsideration period.
    Comment: One commenter wanted the following information provided by 
HCFA following a reconsideration: (1) Whether the intermediate sanction 
will be imposed; (2) the reasons for imposing the sanction, addressing 
the evidence and arguments submitted by the organization; (3) the 
effective date and duration of the sanction; and (4) specific 
information regarding the organization's right to appeal the imposition 
of a sanction.
    Response: We will provide this information at the conclusion of a 
reconsideration, with two exceptions. First, the duration of the 
sanction will depend largely on the organization's corrective action 
plan and willingness and ability to resolve the problem(s). An 
organization that cannot immediately correct a deficiency for which it 
has been sanctioned will be expected to submit a corrective action plan 
to HCFA. This plan will be the organization's description of how and 
when it will resolve the problems that caused the sanctions to be 
imposed. Because each corrective action plan is unique, the duration of 
the sanction cannot be specified at the time it is imposed. Second, 
there will not be additional appeal steps beyond the initial 
reconsideration. HCFA will, however, act as quickly as possible when an 
organization believes it has resolved the violation(s) and wishes to be 
re-evaluated.
    Comment: One commenter recommended that the Medicaid regulations 
contain minimum standards for the State review procedure. In addition, 
this commenter believed that an organization sanctioned by a State 
should have an opportunity for a separate review determination on the 
Federal level which would supersede any State determination.
    Response: State Medicaid agencies are currently responsible for 
establishing and implementing procedures to monitor HMO and HIO 
contracts. The areas States monitor through these procedures are 
broader than the areas identified in this rule. Because States already 
have these monitoring and review procedures in place, we prefer to 
allow States to implement these additional responsibilities within 
their current activities. We will not, in these regulations, specify 
national standards for this one aspect of the overall monitoring and 
review of HMO and HIO contracts conducted by States.
    In response to the second comment, the Medicaid program is 
administered by States as opposed to the Federal government. We stated 
in the preamble of the proposed rule that we believe that States are in 
the best position to monitor the identified violations and to make a 
determinations as to whether a violation has occurred. The proposed 
rule and this final rule offer an additional opportunity for an HMO or 
HIO to receive a reconsideration of a State's determination. We do not 
see the need for a third level of review and determination.
    Comment: A commenter recommended that HCFA require States to 
collect information quarterly from Medicaid participating HMOs on the 
timeliness and frequency of prenatal visits for each Medicaid enrollee. 
The commenter also recommended requiring States to annually submit data 
to HCFA demonstrating that the State's rates for prenatal and Early 
Periodic Screening Diagnosis and Testing (EPSDT) services are adequate 
to ensure access under Medicaid's statutory requirements.
    Response: This comment goes beyond the scope of this rulemaking, 
which implements legislative authority for intermediate sanctions and 
civil money penalties for HMOs (and some HIOs). HMOs and HIOs are not 
yet obligated to pay EPSDT providers State rates. The adequacy of such 
State rates is not relevant in the case of HMO enrollees. Note, 
however, section 1926(a) of the Social Security Act requires that State 
Medicaid agency payments must be sufficient to enlist enough providers 
to ensure that obstetric and pediatric services are available to 
Medicaid recipients at least to the same extent available to the 
general population. HCFA is developing a proposed rule which would 
implement the provisions of section 1926(a) in regulations.
    Comment: One commenter believed that, without additional FFP, the 
Federal requirements mandating additional specific monitoring functions 
under this regulation would be burdensome for the States.
    Response: HCFA expects States to integrate these new areas of 
monitoring into their existing monitoring and review activities; for 
example, those required for monitoring an HMO's enrollment and 
termination practices and grievance procedures. There will continue to 
be FFP in the costs for conducting these activities at each State's 
current Federal matching rate.
    Comment: One commenter recommended that HCFA affirmatively adopt 
those State decisions with which it agrees. The commenter believes this 
will mean that HCFA will more closely examine State agency 
determinations or decisions if it is required to formally adopt them.
    Response: The regulation at Sec. 434.67(b) provides for a mechanism 
whereby HCFA must uphold or reject a State decision that a sanction be 
or not be imposed. We believe that HCFA's consequent imposition of a 
sanction or decision not to impose a sanction provides sufficient 
formal affirmative adoption or rejection of a State's recommendation.
    Comment: One commenter recommended that the final regulation should 
specify that the informal appeal must be conducted by an official 
``experienced and knowledgeable'' about contracting under sections 1876 
or 1903(m) of the Act.
    Response: HCFA will ensure that sanction reconsiderations are 
evaluated by qualified HCFA officials. However, we do not believe it is 
necessary to mandate specific qualifications in the regulation.
    Comment: A number of commenters were interested in HCFA's approach 
to beneficiary complaints. HCFA was encouraged to add provisions to the 
intermediate sanctions establishing timeframes and methodologies for 
the investigation of complaints. A specific recommendation was made to 
amend 42 CFR part 417 to require HCFA to have procedures to monitor and 
investigate violations of section 1876 of the Act. Other commenters 
believed that HCFA should require contracting organizations to 
publicize the availability of intermediate sanctions along with 
information on how to file complaints. Another commenter suggested the 
rules specify that the complainant receive: (1) Verification of receipt 
of the complaint; (2) a copy of the notice of intermediate sanction; 
(3) a copy of the HMOs response, if any, and; (4) a copy of the 
reconsideration determination. Finally, two commenters wanted a time 
limit placed on HCFA's investigation and review of beneficiary 
complaints, suggesting a 60-day deadline for processing the initial 
complaint and informing the complainant on the outcome of the 
investigation.
    Response: The purpose of the intermediate sanction is to provide 
more tools and authority to protect the Medicare beneficiary or 
Medicaid recipient. HCFA already has procedures in the regional offices 
and State Medicaid agencies for reporting and responding to beneficiary 
or recipient complaints. In addition, we already require that HMOs have 
a formal appeals process through which Medicare enrollees may submit 
complaints to HCFA. Information about this process must be included in 
written marketing materials, as set forth in Sec. 417.426. Thus, if an 
HMO or competitive medical plan denies a service or payment for a 
service to a Medicare enrollee, the HMO or competitive medical plan 
must advise the enrollee of his or her rights under Medicare that 
afford the beneficiary the right to appeal the denial to HCFA. 
Establishing a separate complaint mechanism for the intermediate 
sanctions regulation would only serve to divert scarce resources from 
oversight and enforcement activities. Nevertheless, enrollee complaints 
will continue to be used as a key indicator of potential problems in 
Medicare or Medicaid contracting plans as well as identifying potential 
problems where intermediate sanctions or civil money penalties would be 
effective.
    Comment: One commenter stated that an appropriate sanction for 
marketing abuse would be to require future marketing materials and/or 
membership materials to publicize the imposition of sanctions.
    Response: This goes beyond our legislative authority. We are 
constrained, by the provisions of the enabling legislation, in the 
sanctions we may apply.
    Comment: Two commenters were concerned that if the informal 
reconsideration results in a reversal of the initial determination, 
there is no provision to ensure that notice of the decision to reverse 
is provided to the OIG.
    Response: We agree that it is important that OIG be notified by 
HCFA if, in the course of reconsideration or at a later time, a 
sanction is rescinded. The single determination applies to the initial 
determination and HCFA will promptly forward to the OIG information on 
reversals or termination of sanctions. Generally, HCFA will only notify 
OIG of an intermediate sanction after HCFA has confirmed the imposition 
of a sanction. This confirmation of sanction will occur at the 
conclusion of the notification of sanction period or at the end of a 
reconsideration.
    Comment: One commenter believed that the sanctions available to 
HCFA were too limited and recommended that this final regulation 
include a third category of sanctions to include such additional 
sanctions as HCFA considers appropriate and as justice requires. 
Another commenter specifically suggested we broaden the intermediate 
sanctions to include sanctions for inappropriate marketing activities 
and noncompliance with appeal timeframes.
    Response: We cannot broaden the intermediate sanctions regulation 
by introducing a third new category of sanctions that would be 
determined by what HCFA would consider ``appropriate and as justice 
requires.'' To do so would exceed our statutory authority.
    With regard to applying the intermediate sanctions to marketing 
violations, section 1876(i)(6)(A)(V) of the Act authorizes HCFA to 
impose sanctions if an HMO/CMP misrepresents or falsifies information 
that it furnishes under section 1876 of the Act to HCFA, an individual, 
or to any other entity. We believe this provides us authority to 
address a wide range of potential marketing abuses. One of the 
sanctions provided by the statute is the suspension of enrollment 
Medicare beneficiaries by the HMO/CMP (section 1876(i)(B)(ii)). Because 
we consider marketing activities to be an integral part of the 
enrollment process, we believe the statute gives HCFA the authority to 
require the offending HMO/CMP to suspend marketing activities directed 
to Medicare beneficiaries. Therefore, in this final rule, we clarify 
this by adding a new Sec. 417.500(d)(3). Accordingly, Secs. 417.500 
(d)(1)-(d)(3) require the sanctioned HMO/CMP to stop accepting 
applications for enrollment made by Medicare beneficiaries, suspend 
payment to the HMO/CMP for Medicare beneficiaries enrolled during the 
sanction period, and, finally, requires the HMO/CMP to suspend all 
marketing activities to Medicare beneficiaries.
    Additionally, we believe that, even in cases where HCFA imposes the 
suspension of payment sanction, HCFA may require the HMO/CMP to suspend 
marketing activities to Medicare beneficiaries. We believe that, if 
HCFA could suspend all enrollment entirely at its discretion, 
conditions could be attached to a decision to permit an HMO/CMP to 
continue to enroll new members--namely that actual marketing to new 
members cease until the sanction is lifted.
    Noncompliance with appeal time frames may also be a violation of 
section 1876(i)(6)(A)(v) if, for example, HCFA finds that an HMO/CMP is 
misrepresenting information regarding its appeal process or is 
providing beneficiaries inaccurate information regarding appeal time 
frames. In addition, since the Medicare appeals process protects the 
Medicare enrollee's right to appeal an HMO's or competitive medical 
plan's decision not to furnish or pay for services, a violation of the 
appeals process is a failure to substantially provide required 
medically necessary items and services.
    Comment: One commenter requested that an organization which is 
under the sanction of suspension of new enrollment applications also be 
prohibited from any new subscriber marketing activities. Another 
commenter asked what the implications for the organization are if an 
intermediate sanction of suspension of enrollment is imposed. Does the 
organization still have an obligation to conduct the annual open 
enrollment period if it occurs during the sanction period? Also, if the 
sanction is the suspension of payments for new enrollees, will the 
organization still be required to accept new enrollees and provide 
health services for which they may not be paid?
    Finally, one commenter asked for a specific definition of 
``suspension.'' For example, if payments are suspended, the commenter 
wanted to know whether the organization can recover for services 
furnished during the sanction period after the sanction is lifted. The 
commenter also asked whether the organization may engage in marketing 
activities during the suspension period, holding applications in 
abeyance until the sanction is removed.
    Response: Based on the authority granted the Secretary under 
section 1876(f)(3) of the Act and established in this regulation at 
Secs. 417.500 (d)(1) through (d)(3), HCFA has the authority to impose 
the following penalties on offending HMOs or CMPs:
    1. Require the HMO or CMP to suspend the enrollment of Medicare 
beneficiaries during the sanction period; or
    2. Suspend payments to the organization for Medicare beneficiaries 
enrolled during the sanction period.
    Depending on the severity and nature of the violation, HCFA will 
determine which of the two penalties available under the intermediate 
sanctions is appropriate. A discussion of the two penalties under the 
intermediate sanctions available to HCFA follows.
    Suspension of new Medicare enrollments: Under this sanction, HCFA 
requires the HMO or CMP to cease all enrollments of Medicare 
beneficiaries. On the date the sanction is effective, the plan would be 
prohibited from accepting applications or otherwise enrolling any new 
Medicare beneficiaries in the plan. However, individuals already 
enrolled in the plan and who become Medicare eligible (age in) while 
the plan is under the suspension of new enrollments, may be enrolled, 
if they choose, in the plan during the sanction period. Under this 
sanction, the plan would also be prohibited from engaging in any 
marketing activities directed to Medicare beneficiaries.
    The organization would continue to be paid by HCFA for 
beneficiaries enrolled before the imposition of this sanction.
    Suspension of payments: Under the suspension of payments penalty, 
the HMO or CMP may continue to enroll beneficiaries but would not be 
paid for those beneficiaries during the sanction period. Once the 
sanction period ends, there will be a retroactive payment for 
beneficiaries enrolled during the sanction period. Thus, this penalty 
is purely a financial one, affecting only the withholding of the HMO's 
or competitive medical plan's capitation payment for new medicare 
enrollees during the sanction period.
    Enrollment of new members would be allowed to continue; thus the 
plan would not necessarily ``lose'' potential enrollees who would 
enroll with another HMO or CMP if enrollment was suspended under 
section 1876(i)(6)(B)(iii) of the Act. As was described in a previous 
response to a comment, at the time an HMO or CMP is notified that it is 
subject to the intermediate sanctions, the notice of sanction will 
inform the plan what specific intermediate sanction has been imposed, 
including what the plan must do to comply with the sanction, and the 
effective date of the sanction. In addition to whatever sanction HCFA 
imposes, the HMO or CMP may also be subject to civil money penalties 
levied by the Office of Inspector General.
    Comment: Several commenters suggested that the informal 
reconsideration be required to be conducted promptly, for example, 
within 30 or 60 days of receipt of the organization's evidence. In 
addition, one commenter requested that the review be expedited if the 
organization demonstrates that there is a pressing need for swift 
action.
    Response: It is our intent to conduct reconsiderations promptly. 
The purpose of an intermediate sanction is to allow us to resolve a 
problem quickly. Nevertheless, we do not choose to specify a time 
limit. We encourage organizations to inform us of any circumstances 
that require expedited reconsideration.
    Comment: One commenter stated that the language in proposed 
Sec. 417.495(e)(1), now designated as Sec. 417.500(e)(1), implies that 
HCFA's reconsideration will inevitably result in upholding the initial 
determination. They recommended the language of this paragraph be 
revised to clarify that the sanctions are effective only if HCFA 
decides to uphold the initial determination.
    Response: We disagree with the commenters interpretation of 
Sec. 417.500(e)(1) and we do not believe the recommended clarification 
is necessary. We believe it is clear that the provision on the 
effective date for a sanction only applies when a final decision to 
impose a sanction is made. The reconsideration process is meant to be a 
serious assessment of the response by the sanctioned organization. As 
such, HCFA will not inevitably uphold its initial decision. If HCFA 
reverses its initial decision, Sec. 417.500(e)(1) would have no 
applicability.
    Comment: One commenter noted that the regulation allows HCFA to 
make the intermediate sanction effective immediately if the 
organization's conduct poses a serious threat to an enrollee's health 
and safety. The commenter stated that if the health and safety of 
enrollees is at issue, HCFA should take steps to terminate the contract 
in its entirety, and that intermediate sanctions are not appropriate in 
such critical circumstances.
    Response: There may be instances in which HCFA will impose the 
intermediate sanction to stop the organization from enrollment and 
marketing activities at the same time a termination action is being 
initiated. We believe it is in the best interest of the enrollee that 
we maintain our authority to respond simultaneously with both actions.
    Comment: Three commenters wanted to know if the intermediate 
sanctions could be imposed retroactively.
    Response: Intermediate sanctions will always be imposed 
prospectively. Civil money penalties, on the other hand, may be imposed 
for conduct which has already occurred.
    Comment: One commenter asked that we clarify what ``generally'' 
means as it appears in proposed Secs. 417.495(e)--now Sec. 417.500(e)--
and 434.67(f)(1). These sections specify that if an HMO seeks 
reconsideration of a HCFA sanction, ``the intermediate sanction 
generally will be effective on the date the organization is notified of 
HCFA's decision.''
    Response: The notice of intermediate sanction, (or notice of 
reconsideration of an intermediate sanction) will specify the effective 
date. Usually this will be on the date of the reconsideration notice. 
We have revised these sections, however, to more clearly state that the 
sanction is effective on the date specified in the sanction notice or 
reconsideration notice, respectively.
    Comment: One commenter suggested a definition of ``substantial'' 
contractual relationship under a Medicaid contract. The commenter 
proposed that the regulation define ``substantial'' as greater than 5 
percent of the total annual volume of payments for categories of 
services under the program.
    Response: We considered use of a quantitative approach to defining 
a ``substantial'' contractual relationship--either a numerical dollar 
amount or, as suggested by the commenter, expressed as a percent. We 
dismissed such approaches because contracts of seemingly small 
financial value could still have a significant effect on Medicare or 
Medicaid enrollees. Furthermore, if an organization is large, with a 
substantial contracting budget, even a small percent, such as 5 
percent, could involve substantial sums of money. We are therefore 
adhering to the definition of a ``substantial'' contractual 
relationship contained in the proposed rule. Nevertheless, we will 
consider relative size as a factor in our determination of whether to 
impose intermediate sanctions or civil money penalties.
    Comment: A number of commenters believed that the imposition and 
duration of sanctions in both Medicare and Medicaid should be subject 
to a formal review instead of the proposed informal review process. One 
commenter stated that the formal review steps should consist of an 
independent review by an administrative law judge (ALJ), with review by 
the Departmental Appeals Board and, finally, judicial review; with 
sanctions not taking effect until all appeals are exhausted.
    Response: The legislative intent for the intermediate sanctions is 
to provide HCFA with the authority to respond in a flexible and timely 
manner to violations of contracting organizations. Allowing the 
sanction process to become linked to extended review procedures would 
not serve the interests of the beneficiary or meet the intent of 
legislation. We believe that the reconsideration process will provide 
organizations ample opportunity to explain their position.
    Comment: Two commenters stated that, if a pre-sanction hearing was 
not allowed, there should be a post-sanction hearing before an ALJ or 
other impartial body, held as soon as possible after the imposition of 
any sanctions.
    Response: As was stated previously, the intent of the statutory 
provisions implemented in this regulation is to allow HCFA to respond 
quickly to a problem. During the reconsideration process the decision 
to impose or not impose a sanction will be made judiciously. In the 
event a sanction is applied, HCFA will work with the organization to 
resolve the problem as rapidly as possible. We expect sanctions to be 
of short duration. If the violation persists, the likely outcome would 
be termination of the contract rather than an indefinite sanction. We 
believe that additional hearings would only serve to delay the 
resolution of problems.
    Comment: One commenter stated that an organization should have an 
``opportunity to cure'' by which the organization could avoid the 
imposition of sanctions by demonstrating not only that the alleged 
violation had not occurred, but that any prior violation already had 
been remedied.
    Response: We agree that an organization which has received a notice 
of sanction should have a reasonable opportunity to present its 
position. In the event the risk contractor demonstrates during the 
reconsideration period that the sanction is not appropriate, the 
sanction will not be imposed. The organization's prior contract 
performance will be considered as we determine whether to impose a 
sanction and the amount of any civil money penalty.
    Comment: One commenter requested than an organization be allowed to 
submit both documentary evidence, including statements and affidavits, 
and written arguments in response to a notice that HCFA intends to 
impose an intermediate sanction.
    Response: We agree. The rule provides for the submission of such 
information as part of the reconsideration process. (See Secs. 417.500 
(b) (proposed Sec. 417.495(b)) and 434.67(c))
    Comment: One commenter expressed concern about the potential 
duration of an intermediate sanction and recommended a procedure by 
which, once a sanction is imposed, it will remain in effect until the 
organization submits a credible allegation of compliance. The commenter 
defined this as a senior officer's written statement that the 
organization has taken steps to ensure alleged violations have been 
examined and, where necessary, corrected. The commenter stated that 
HCFA should then have 14 days to determine whether the sanction should 
be terminated. If HCFA is unable to make a determination within 14 
days, then the commenter believes that the intermediate sanction should 
be removed.
    Response: We disagree with the recommendation. Our review and 
decision if we should end a sanction will be done as quickly as 
possible, but the timing will depend largely on the complexity of the 
problem and responsiveness of the organization. If a sanction is 
imposed, the sanctioned organization will develop a corrective action 
plan, effectively setting their own timetable for the removal of 
sanctions. HCFA will respond as quickly as possible to review an 
organization that believes it has corrected its deficiencies.
    Comment: Several commenters wanted some means available to ensure 
prompt reevaluation of an existing sanction and a time limit placed on 
the duration of a sanction. A related comment was that any renewal of a 
contract should constitute ratification of the organization's 
performance under the contract and, thus, the end of the sanction 
period.
    Response: In the event a sanction is applied to an organization, 
HCFA will respond as quickly as possible to their request for a re-
evaluation. We, however, will not set specific limits on the timing or 
frequency of our reevaluations, or view contract renewal as HCFA's 
acknowledgement that sufficient corrective action has been taken.
    Comment: One commenter pointed out what was believed to be an error 
in proposed Sec. 434.67(f)(1). The last sentence of this citation in 
the proposed rule referred to ``the date the organization is notified 
of HCFA's decision under paragraph (d)(1)(ii) of this section.'' 
However, paragraph (d)(1)(ii) of that section does not relate to a 
notification of a decision following reconsideration by HCFA, but 
rather to a decision by a State agency.
    Response: We have modified Sec. 434.67(d)(2) to clarify that the 
State agency decision to impose a sanction becomes HCFA's decision 
except in instances where HCFA decides to modify or reverse that agency 
decision. We also have revised Sec. 434.67(f) so that it, (1) refers in 
paragraph (f)(1) to the date the HMO is ``notified * * * under 
paragraph (c),'' rather than ``under paragraph (d)(1)(ii);'' and, (2) 
refers in paragraph (f)(2) to ``the date specified in HCFA's 
reconsideration notice.''

B. Factors To be Considered in Levying Civil Money Penalties

    Comment: One commenter believed that the proposed ``Factors To Be 
Considered in Levying Civil Money Penalties'' greatly dilutes the 
effectiveness of the penalties by creating many opportunities for HMOs 
to argue for minimal fines. The commenter stated that the imposition of 
a full penalty is tied to proof that the HMO engaged in prohibited 
behavior on a repeated and knowing basis--which is excessively 
difficult to prove. The commenter suggested that the deterrent effect 
of the civil money penalties should be preserved by imposing maximum 
fines for all violations that come to light.
    Response: The intent of penalties is to quickly bring about 
corrective action on the part of a sanctioned organization and to deter 
further violations. The OIG will use the ``Factors to Be Considered in 
Levying Civil Money Penalties'' as a guide in determining the 
appropriate amount of any civil money penalty. Organizations that have 
made honest errors and are responsive to HCFA regulators will face less 
severe penalties than organizations that demonstrate a pattern of 
knowingly committing violations. We believe that, in performing our 
oversight responsibilities, it is important to retain flexibility in 
responding to violations. However, once all evidence has been evaluated 
and weighed, the OIG will act on the facts of the case in the manner it 
believes will best achieve the objectives of enrollee protection and 
regulatory compliance.
    Comment: One commenter had several suggestions regarding the 
enumeration of specific mitigating and aggravating circumstances for 
the imposition of civil money penalties.
    The commenter stated that the statute and regulation establish 
sanctions that can be imposed against organizations that charge 
enrollees premiums in excess of those permitted. The commenter believed 
it should be a mitigating circumstance if the premiums were only 
incidentally in excess of those permitted; it should be an aggravating 
circumstance if the premiums were greatly in excess of those permitted.
    The commenter stated that the statute and regulations also provide 
sanctions for contracting with excluded individuals or entities. The 
commenter believed it should be an aggravating circumstance if the 
entity was excluded because of its dealings with the HMO and the 
excluded entity is contracting with the HMO for health care services. 
The commenter believed it should be a mitigating circumstance if the--
    (1) Entity was excluded because of activities unrelated to its 
dealings with the HMO.
    (2) Contract with the excluded entity is unrelated to the delivery 
of health care services.
    (3) Violation is confined to a particular service area of the HMO.
    Response: We do not agree with these comments. We believe that the 
current factors listed under proposed Sec. 1003.106(a)(4) provide for 
sufficient consideration of the circumstances surrounding violations 
where premiums in excess of the allowable amount are charged by a 
contracting organization. Therefore, a separate factor addressing such 
a violation is unnecessary. With regard to the second comment, we 
believe that this goes beyond the scope of the statute. The enabling 
legislation provides for imposition of a civil money penalty without 
regard to the specific activities which resulted in an individual being 
excluded from the Medicare program. Additionally, since the statute 
provides that the penalty may be imposed in instances where excluded 
individuals are contracted to provide other than patient care, we see 
no need to mitigate this circumstance. Finally, we believe that the 
current factors listed under Sec. 1003.106(a)(4) provide for sufficient 
consideration of the scope of a violation. Therefore, an amendment 
addressing violations that may be confined to a particular service are 
not necessary.
    Comment: One commenter wanted the OIG to consider prior offenses 
for which the organization was not assessed any sanctions or money 
penalties. The commenter believed that even if prior violations had not 
been sanctioned, a pattern of violations should be considered more 
serious and dealt with more harshly. The commenter also suggested that 
proposed Sec. 1003.106(a)(4)(vii), which concerns the history of prior 
offenses, should be amended to include, in the list of factors to be 
considered, whether there were any prior offenses by the organization, 
regardless of administrative or civil sanctions assessed.
    Response: In making a determination on the imposition of sanctions 
we will consider an organization's pattern of conduct. A background of 
repeated violations would be considered an aggravating circumstance. We 
believe the current provisions in proposed Sec. 1003.106 allow the OIG 
to consider the prior conduct of an organization in levying civil money 
sanctions. Therefore, an amendment is unnecessary.
    Comment: One commenter stated that the standards in Sec. 1003.106 
relating to determinations regarding the amount of the penalty and 
assessment are subjective criteria which could result in arbitrary 
determinations by the OIG.
    Response: We disagree with this comment. Congress authorized a 
maximum penalty amount for certain violations contained in the 
underlying statutes. The proposed factors listed in Sec. 1003.106 
represent an attempt to provide a measure for impartially determining a 
penalty amount against a culpable organization. Moreover, the public is 
afforded an opportunity to comment on the proposed factors before their 
adoption in final regulations. This process is intended to inform the 
public about what factors will be used in determining penalty amounts, 
and, to the extent possible, remove subjectivity from penalty 
determination decisions.
    Comment: One commenter wanted to add the ``enrollee's compliance 
with rules and protocols of the contracting organization'' as a factor 
in our determination of imposing civil money penalties.
    Response: We believe that the current factors listed under proposed 
Sec. 1003.106(a)(4) provide for sufficient consideration of the 
commenter's concerns. Specifically, in paragraph (a)(4)(ii) the factor 
is the degree of culpability of the contracting organization. Under 
this factor, in determining whether or not to impose a penalty, as well 
as in determining the amount of any penalty which may be imposed, 
consideration will be given to the enrollee's culpability for the 
violation, including compliance with rules and protocols of the 
contracting organization. Therefore, a separate factor addressing this 
issue is unnecessary.
    Comment: One commenter asked if proposed Sec. 1003.103(c)(1)(iv), 
now designated as Sec. 1003.103(e)(1)(iv), establishes degrees or 
levels of misrepresentation and falsification of information that will 
be subject to varying amounts of civil money penalties. In addition, 
the commenter wanted a distinction to be made in the regulation between 
a misrepresentation and falsification and a mistake with no fraudulent 
intent.
    Response: Concerning a violation of this nature, we believe that 
once all pertinent information is examined, any reasonable person could 
discern the difference between a ``misrepresentation'' and ``a mistake 
with no fraudulent intent.'' Therefore, we believe that the language in 
Sec. 1003.103(c)(1)(iv) is sufficient as written.
    Comment: Section 1003.103(c)(1)(v) specifies that the failure to 
comply with prompt payment of claims as established in section 
1876(g)(6)(A) of the Act is the basis for a money penalty. A commenter 
asked what constitutes a violation of timely claims payment, whether it 
is one late claim or a percentage of claims beyond the standard. In 
addition, this commenter questioned whether late claims will be 
determined from a monthly report, Medicare carriers, on-site review, or 
beneficiary or provider complaints and asked whether this includes 
claims from nonparticipating providers.
    Response: Section 1876(g)(6)(A) of the Act contains a cross-
reference to sections 1816(c)(2) and 1842(c)(2) of the Act, which 
describe prompt payment. These sections require that 95 percent of 
claims be paid within a specified time period (currently 24 calendar 
days after receipt). As a result, a definition in this regulation is 
unnecessary.
    Comment: One commenter questioned whether Qualified Medicare 
Beneficiaries (QMBs) are subject to this rule.
    Response: This rule applies to plans that have a Medicare or 
Medicaid contract. QMBs could be enrolled (or want to enroll) in these 
plans, and thus, could be affected by these rules.
    Comment: One commenter wanted to know what constitutes 
``discouraging enrollment.'' Another commenter stated that a penalty 
should be imposed for discouraging enrollment only if a beneficiary is 
discouraged from enrolling because of a medical condition or a future 
need for substantial services.
    Response: It is not possible to set out all the possible ways that 
enrollments in a contracting organization might be discouraged. 
Essentially, such a determination would be made after judging all the 
facts and circumstances surrounding an alleged violation. We agree, 
however, that violations of this nature pertain to certain 
circumstances. The statute specifically authorizes imposition of a 
penalty in those instances in which, except as permitted by law, a 
contracting organization expels or refuses to reenroll an individual or 
engages in any practice that would reasonably be expected to have the 
effect of denying or discouraging enrollment by enrollees whose medical 
condition or history indicate a need for substantial future medical 
services.
    Comment: One commenter stated that Sec. 434.80 would require a 
State agency to exclude from participation, as a Medicaid contractor, 
any HMO that is controlled or owned by an individual who has been 
convicted of a criminal offense relating to financial misconduct. The 
commenter said that this provision amounts to a lifetime ban on 
participation in Medicaid for individuals who may have committed an 
offense only marginally related to the delivery of health care. The 
commenter recommended that this prohibition not be a lifetime ban, but 
that the prohibitions be restricted in their effect to criminal 
offenses which occurred within the past 10 years. The commenter also 
stated that the relationship of the criminal offense to the delivery of 
health care services should be a factor applied by the State agency in 
determining the fitness of the HMO contractor.
    Response: This requirement is based on the requirement in 
1902(p)(2) of the Act. The law does not provide authority for the 
Department to either grant exceptions to this requirement or make this 
requirement effective for only a specified time period.
    Comment: A commenter noted that proposed Sec. 1003.106(a)(1) refers 
to determining the amount of a penalty under Sec. 1003.103(a), (b) and 
(c)(1) through (c)(3), and proposed Sec. 1003.106(a)(4) refers to 
factors for the OIG to consider in determining the penalty under 
Sec. 1003.103(b)(4) [sic]. The commenter states that there is no 
Sec. 1003.103(b)(4), and believes that both of these references are 
incorrect.
    Response: We agree. Several sections were incorrectly referenced in 
Secs. 1003.106(a)(1) and 1003.106(a)(4) and we are revising the 
regulations accordingly. Numerous revisions to referenced sections are 
made in this final rule because of the publication of final OIG 
regulations since this HMO regulation was published as a proposed rule.

IV. Provisions of the Final Regulations

    After consideration of the comments received and our further 
analysis of specific issues, we are publishing as final the July 22, 
1991, proposed regulations with the revisions identified below. We have 
also made numerous editorial changes to improve the readability of the 
proposed text, without changing its substance.
    On October 17, 1991 HCFA published a final rule (56 FR 51984) that 
amended part 417 to simplify, clarify, and update regulations on 
prepaid health care. Among other changes, that rule designated the 
contents of Subpart C-- Health Maintenance Organization and Competitive 
Medical Plans as Subpart L--Medicare Contract Requirements. In the July 
1991 proposed rule, we proposed to add a new Sec. 417.495, ``Sanctions 
against the organizations'' to subpart C. Therefore, as a change from 
the proposed rule, we are designating proposed Sec. 417.495 as 417.500 
and adding it to subpart L.
    As discussed in section III of this preamble, we have revised 
proposed Secs. 417.495(b) and 434.67(c), which concern the time limit 
for seeking a reconsideration, to allow an additional 15 days under 
certain circumstances. (Proposed Sec. 417.495(b) is now 
Sec. 417.500(b).)
    In addition to changes to improve its readability, proposed 
Sec. 417.495(e), which concerns the effective date of a sanction, is 
revised to replace the inexplicit phrase ``generally will be effective 
on the date the organization is notified of HCFA's decision.'' In this 
final rule, we specify that, if an organization seeks a 
reconsideration, the sanction is effective on the date specified in 
HCFA's notice of reconsidered determination. (Proposed Sec. 417.495(e) 
is now Sec. 417.500(e). Proposed Sec. 431.55 is revised to improve its 
readability.)
    On January 29, 1992, the OIG published a final rule (57 FR 3298) 
that amended, among other parts, part 1003. As a result of the 
publication of the January 29, 1992 rule, we have made changes from our 
July 22, 1991 proposed rule as follows:
     The substance of proposed Secs. 1003.100(b)(1)(i) and 
(b)(1)(ii), which concern the purpose of part 1003, were incorporated 
into regulations at Secs. 100.100(b)(1)(i) and (b)(1)(iv), 
respectively, by the January 29 rule. Therefore, proposed 
Sec. 1003.100(b)(1)(i) is not included in this final rule. Section 
1003.100(b)(1)(iv) is included in this final rule solely to make 
technical corrections.
     Proposed Sec. 1003.100(b)(1)(iii), which also concerns the 
purpose of part 1003, is designated as Sec. 1003.100(b)(1)(vi) by this 
final rule.
     The substance of proposed Sec. 1003.102(b)(1), which 
identifies those individuals against whom the OIG may impose a penalty, 
was incorporated at Secs. 1003.102(b)(1) through (b)(3) by the January 
29, 1992 rule. Therefore, it is not included in this rule.
     Proposed Sec. 1003.102(b)(2), which concerns the 
imposition of penalties against contracting organizations, is 
designated as Sec. 1003.102(b)(8) by this final rule.
      In Sec. 1003.103, which concerns the amount of a penalty, 
proposed paragraph (c) is designated as paragraph (e). Further, 
paragraph (a) as established by the January 29 rule is revised to 
include a reference to the newly-established paragraph (e).
      Also in Sec. 1003.103, subparagraph (e)(3)(ii) is revised 
to more clearly reflect the penalty amount stipulated under the 
statute.
     In Sec. 1003.106, which concerns determining the amount of 
a penalty and assessment, we have replaced the phrase ``person or 
contracting organization'' with the phrase ``person.'' ``Person,'' as 
it is broadly defined in Sec. 1003.101, includes contracting 
organizations. Therefore, the phrase was replaced in the final rule.
    As discussed in section III of this preamble, we have included, at 
Sec. 1003.106(d), provisions regarding mitigating and aggravating 
circumstances to be considered in determining the amount of any 
penalty.

V. Information Collection Requirements

    This final rule contains no information collection requirements. 
Consequently, this final rule need not be reviewed by the Executive 
Office of Management and Budget under the authority of the Paperwork 
Reduction Act of 1980 (44 U.S.C. 3501 et seq.).

VI. Regulatory Impact Statement

    This final rule implements sections of OBRA 1986, sections of the 
Medicare and Medicaid Patient and Program Protection Act of 1987, 
sections of the Medicare Catastrophic Coverage Act of 1988, and a 
section of OBRA 1989. This final rule will implement the Secretary's 
broadened authority to impose intermediate sanctions and civil money 
penalties on HMOs and other prepaid health plans contracting under 
Medicare or Medicaid that substantially fail to provide an enrolled 
individual with required medically necessary items and services, engage 
certain marketing, enrollment, reporting, or claims payment abuses, or, 
in the case of Medicare, employ or contract with, either directly or 
indirectly, an individual or entity excluded from participation in 
Medicare.
    This regulation is the result of statutory changes and serves to 
clarify departmental policy with respect to the imposition of 
intermediate sanctions and civil money penalties. We believe the 
majority of plans, practitioners and providers do not engage in the 
prohibited activities and practices discussed in this final rule. In 
addition, we believe this final rule will have a deterrent effect upon 
providers and practitioners. Therefore, we expect that the aggregate 
economic impact would be minimal, affecting only those engaged in the 
prohibited behavior in violation of this final rule.
    The Office of Management and Budget has reviewed this final rule in 
accordance with the provisions of Executive Order 12866.
    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612) unless the Secretary certifies that a rule will not have a 
significant economic impact on a substantial number of small entities. 
For purposes of the RFA, we consider all HMOs, competitive medical 
plans and other contracting organizations to be small entities.
    In addition, section 1102(b) of the Act requires the Secretary to 
prepare a regulatory impact analysis if a final rule may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. This analysis must conform to the provisions of 
section 604 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital that is located outside of 
a Metropolitan Statistical Area and has fewer than 50 beds.
    We do not have data to assist us in estimating the number of 
contracting organizations that will be affected by this final rule or 
the magnitude of any penalties that will be imposed. Nevertheless, any 
impact will be minimal because we believe the number of providers and 
practitioners engaged in prohibited activities are few. Therefore, we 
are not preparing analyses for either the RFA or section 1102(b) of the 
Act since we have determined, and the Secretary certifies, that this 
final rule will not result in a significant economic impact on a 
substantial number of small entities and will not have a significant 
impact on the operations of a substantial number of small rural 
hospitals.

List of Subjects

42 CFR Part 417

    Administrative practice and procedure; Grant programs--health; 
Health care; Health facilities; Health insurance; Health Maintenance 
Organizations (HMO); Loan programs--health; Medicare; Reporting and 
recordkeeping requirements.

42 CFR Part 431

    Grant Programs--Health; Health facilities; Medicaid; Privacy; 
Reporting and recordkeeping requirements.

42 CFR Part 434

    Grant Programs--Health; Health Maintenance Organizations (HMO); 
Medicaid; Reporting and recordkeeping requirements.

42 CFR Part 1003

    Administrative practice and procedure; Fraud; Grant Programs--
Health; Health facilities; Health professions; Maternal and child 
health; Medicaid; Medicare; Penalties.
    A. 42 CFR part 417 is amended as set forth below:

PART 417--HEALTH MAINTENANCE ORGANIZATIONS, COMPETITIVE MEDICAL 
PLANS, AND HEALTH CARE PREPAYMENT PLANS

    1. The authority citation for part 417 is revised to read as 
follows:

    Authority: Secs. 1102, 1833(a)(1)(A), 1861(s)(2)(H), 1871, 1874, 
and 1876 of the Social Security Act (42 U.S.C. 1302, 1395l(a)(1)(A), 
1395x(s)(2)(H), 1395hh, 1395kk, and 1395mm); sec. 114(c) of Pub. L. 
97-248 (42 U.S.C. 1395mm note); section 9312(c) of Pub. L. 99-509 
(42 U.S.C. 1395mm note); and secs. 215, 353, and 1301 through 1318 
of the Public Health Service Act (42 U.S.C. 216, 263a, and 300e 
through 300e-17) and 31 U.S.C. 9701, unless otherwise noted.

Subpart L--Medicare Contract Requirements

    2. In subpart L, a new section 417.500 is added to read as follows:


Sec. 417.500   Sanctions against HMOs and CMPs.

    (a) Basis for imposition of sanctions. HCFA may impose the 
intermediate sanctions specified in paragraph (d) of this section, as 
an alternative to termination, if HCFA determines that an HMO or CMP 
with a contract under this subpart 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 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 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 HCFA, 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.
    (b) Notice of sanction. (1) Before imposing the intermediate 
sanctions specified in paragraph (d) of this section, HCFA--
    (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) HCFA 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. HCFA 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 request must provide a credible explanation of why additional time 
is necessary and be received by HCFA before the end of the 15-day 
period following the date of receipt of the sanction notice. HCFA 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 HCFA's 
notice of sanction, HCFA conducts an informal reconsideration that:
    (1) Consists of a review of the evidence by a HCFA 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 HCFA 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, HCFA 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 HCFA's reconsidered determination.
    (2) Exception. If HCFA determines that the HMO's or CMP's conduct 
poses a serious threat to an enrollee's health and safety, HCFA may 
make the sanction effective on a date before issuance of HCFA's 
reconsidered determination.
    (3) Duration of sanction. The sanction remains in effect until HCFA 
notifies the HMO or CMP that HCFA is satisfied that the basis for 
imposing the sanction has been corrected and is not likely to recur.
    (f) Termination by HCFA. In addition to or as an alternative to the 
sanctions described in paragraph (d) of this section, HCFA 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 HCFA 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), HCFA notifies the OIG of that 
determination. HCFA 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 HCFA may impose under paragraph (d) of this section.
    B. 42 CFR part 431 is amended as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

    1. The authority citation for part 431 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

    2. Section 431.55 is amended by adding a sentence at the end of 
paragraph (a) and adding new paragraph (h) to read as follows:


Sec. 431.55  Waiver of other Medicaid requirements.

    (a) Statutory basis. * * *. Section 1902(p)(2) of the Act 
conditions FFP in payments to an entity under a section 1915(b)(1) 
waiver on the State's provision for exclusion of certain entities from 
participation.
* * * * *
    (h) Waivers approved under section 1915(b)(1) of the Act--(1) Basic 
Rules. (i) An agency must submit, as part of it's waiver request, 
assurance that the entities described in paragraph (h)(2) of this 
section will be excluded from participation under an approved waiver.
    (ii) FFP is available in payments to an entity that furnishes 
services under a section 1915(b)(1) waiver only if the agency excludes 
from participation any entity described in paragraph (h)(2) of this 
section.
    (2) Entities that must be excluded. The agency must exclude an 
entity that meets any of the following conditions:
    (i) Could be excluded under section 1128(b)(8) of the Act as being 
controlled by a sanctioned individual.
    (ii) Has a substantial contractual relationship (direct or 
indirect) with an individual convicted of certain crimes, as described 
in section 1128(b)(8)(B) of the Act.
    (iii) Employs or contracts directly or indirectly with one of the 
following:
    (A) Any individual or entity that, under section 1128 or section 
1128A of the Act, is precluded from furnishing health care, utilization 
review, medical social services, or administrative services.
    (B) Any entity described in paragraph (h)(2)(i) of this section.
    (3) Definitions. As used in this section, substantial contractual 
relationship means any contractual relationship that provides for one 
or more of the following services:
    (i) The administration, management, or provision of medical 
services.
    (ii) The establishment of policies, or the provision of operational 
support, for the administration, management, or provision of medical 
services.
    C. 42 CFR part 434 is amended as set forth below:

PART 434--CONTRACTS

    1. The authority citation for part 434 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

Subpart C--Contracts with HMOs and PHPs: Contract Requirements

    2. In subpart C, a new Sec. 434.22 is added to read as follows:


Sec. 434.22  Application of sanctions to risk comprehensive contracts.

    A risk comprehensive contract must provide that payments provided 
for under the contract will be denied for new enrollees when, and for 
so long as, payment for those enrollees is denied by HCFA under 
Sec. 434.67(e).

Subpart D--Contracts With Health Insuring Organizations

    3. In subpart D, a new Sec. 434.42 is added to read as follows:


Sec. 434.42  Application of sanctions to risk comprehensive contracts.

    A risk comprehensive contract must provide that payments provided 
for under the contract will be denied for new enrollees when, and for 
so long as, payment for those enrollees is denied by HCFA under 
Sec. 434.67(e).

Subpart E--Contracts With HMOs and PHPs: Medicaid Agency 
Responsibilities

    4. In subpart E, Sec. 434.63 is revised to read as follows:


Sec. 434.63  Monitoring procedures.

    The agency must have procedures to do the following:
    (a) Monitor enrollment and termination practices.
    (b) Ensure proper implementation of the contractor's grievance 
procedures.
    (c) Monitor for violations of the requirements specified in 
Sec. 434.67 and the conditions necessary for FFP in contracts with HMOs 
specified in Sec. 434.80.

Subpart E--Contracts With HMOs and PHPs: Medicaid Agency 
Responsibilities

    5. In subpart E, a new Sec. 434.67 is added to read as follows:


Sec. 434.67  Sanctions against HMOs with risk comprehensive contracts.

    (a) Basis for imposition of sanctions. The agency may recommend 
that the intermediate sanction specified in paragraph (e) of this 
section be imposed if the agency determines that an HMO with a risk 
comprehensive contract does one or more of the following:
    (1) Fails substantially to provide the medically necessary items 
and services required under law or under the contract to be provided to 
an enrolled recipient and the failure has adversely affected (or has 
substantial likelihood of adversely affecting) the individual.
    (2) Imposes on Medicaid enrollees premium amounts in excess of 
premiums permitted.
    (3) Engages in any practice that discriminates among individuals on 
the basis of their health status or requirements for health care 
services, including expulsion or refusal to reenroll an individual, or 
any practice that could reasonably be expected to have the effect of 
denying or discouraging enrollment (except as permitted by section 
1903(m) of the Act) by eligible individuals whose medical conditions or 
histories indicate a need for substantial future medical services.
    (4) Misrepresents or falsifies information that it furnishes, under 
section 1903(m) of the Act to HCFA, the State agency, an individual, or 
any other entity.
    (b) Effect of an agency determination. (1) When the agency 
determines that an HMO with a risk comprehensive contract has committed 
one of the violations identified in paragraph (a) of this section, the 
agency must forward this determination to HCFA. This determination 
becomes HCFA's determination for purposes of section 1903(m)(5)(A) of 
the Act, unless HCFA reverses or modifies the determination within 15 
days.
    (2) When the agency decides to recommend imposition of the sanction 
specified in paragraph (e) of this section, this recommendation becomes 
HCFA's decision, for purposes of section 1903(m)(5)(B)(ii) of the Act, 
unless HCFA rejects this recommendation within 15 days.
    (c) Notice of sanction. If a determination to impose a sanction 
becomes HCFA's determination under paragraph (b)(2) of this section, 
the agency must send a written notice to the HMO stating the nature and 
basis of the proposed sanction. A copy of the notice is forwarded to 
the OIG at the same time it is sent to the HMO. The agency allows the 
HMO 15 days from the date it receives 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. The agency 
may allow a 15-day addition to the original 15 days upon receipt of a 
written request from the organization. To be approved, the request must 
provide a credible explanation of why additional time is necessary and 
be received by HCFA before the end of the 15-day period following the 
date the organization received the sanction notice. An extension is not 
granted if HCFA determines that the organization's conduct poses a 
threat to an enrollee's health and safety.
    (d) Informal reconsideration. (1) If the HMO submits a timely 
response to the agency's notice of sanction, the agency conducts an 
informal reconsideration that includes--
    (i) Review of the evidence by an agency official who did not 
participate in the initial recommendation to impose the sanction; and
    (ii) A concise written decision setting forth the factual and legal 
basis for the decision.
    (2) The agency decision under paragraph (d)(1)(ii) of this section 
is forwarded to HCFA and becomes HCFA's decision unless HCFA reverses 
or modifies the decision within 15 days from the date of HCFA's receipt 
of the agency determination. In the event HCFA modifies or reverses the 
agency decision, the agency sends the HMO a copy of HCFA's decision 
under this paragraph.
    (e) Denial of payment. If a HCFA determination that a HMO has 
committed a violation described in paragraph (a) of this section is 
affirmed on review under paragraph (d) of this section, or is not 
timely contested by the HMO under paragraph (c) of this section, HCFA, 
based upon the recommendation of the agency, may deny payment for new 
enrollees of the HMO under section 1903(m)(5)(B)(ii) of the Act. Under 
Secs. 434.22 and 434.42, HCFA's denial of payment for new enrollees 
automatically results in a denial of agency payments to the HMO for the 
same enrollees. A new enrollee is an enrollee that applies for 
enrollment after the effective date in paragraph (f)(1) of this 
section.
    (f) Effective date and duration of sanction. (1) Except as 
specified in paragraphs (f)(2) and (f)(3) of this section, a sanction 
is effective 15 days after the date the HMO is notified of the decision 
to impose the sanction under paragraph (c) of this section.
    (2) If the HMO seeks reconsideration under paragraph (d) of this 
section, the sanction is effective on the date specified in HCFA's 
reconsideration notice.
    (3) If HCFA, in consultation with the agency, determines that the 
HMO's conduct poses a serious threat to an enrollee's health and 
safety, the sanction may be made effective on a date prior to issuance 
of the decision under paragraph (d)(1)(ii) of this section.
    (g) Civil money penalties. If a determination that an organization 
has committed a violation under paragraph (a) of this section becomes 
HCFA's determination under paragraph (b)(1) of this section, HCFA 
conveys the determination to the OIG. In accordance with the provisions 
of 42 CFR part 1003, the OIG may impose civil money penalties on the 
organization in addition to or in place of the sanctions that may be 
imposed under this section.
    (h) HCFA's role. HCFA retains the right to independently perform 
the functions assigned to the agency in paragraphs (a) through (f) of 
this section.
    (i) State Plan requirements. The State Plan must include a plan to 
monitor for violations specified in paragraph (a) of this section and 
for implementing the provisions of this section.
    6. In subpart F, a new Sec. 434.80 is added to read as follows:

Subpart F--Federal Financial Participation


Sec. 434.80  Condition for FFP in contracts with HMOs.

    (a) Basic rule. FFP in payments to an HMO is available only if the 
agency excludes from participation as such an entity any entity 
described in paragraph (b) of this section.
    (b) Entities that must be excluded. (1) An entity that could be 
excluded under section 1128(b)(8) of the Act as being controlled by a 
sanctioned individual.
    (2) An entity that has a substantial contractual relationship as 
defined in Sec. 431.55(h)(2), either directly or indirectly, with an 
individual convicted of certain crimes as described in section 
1128(b)(8)(B) of the Act.
    (3) An entity that employs or contracts, directly or indirectly, 
with one of the following:
    (i) Any individual or entity excluded from Medicaid participation 
under section 1128 or section 1128A of the Act for the furnishing of 
health care, utilization review, medical social work, or administrative 
services.
    (ii) Any entity for the provision through an excluded individual or 
entity of services described in paragraph (b)(3)(i) of this section.
    D. 42 CFR part 1003 is amended as set forth below:

PART 1003--CIVIL MONEY PENALTIES, ASSESSMENTS, AND EXCLUSIONS

    1. The authority citation for part 1003 is revised to read as 
follows:

    Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7a, 1320b-10, 1395mm, 
1395ss(d), 1395u(j), 1395u(k), 1396b(m), 11131(c) and 11137(b)(2).

    2. Section 1003.100 is amended by revising paragraph (a); 
republishing paragraph (b)(1) introductory text; revising paragraphs 
(b)(1)(iv) and (b)(1)(v); and adding a new paragraph (b)(1)(vi) to read 
as follows:


Sec. 1003.100  Basis and purpose.

    (a) Basis. This part implements sections 1128, 1128(c), 1128A, 
1140, 1842(j), 1842(k), 1876(i)(6), 1882(d), and 1903(m)(5) of the 
Social Security Act, and sections 421(c) and 427(b)(2) of Public Law 
99-660 (42 U.S.C. 1320a-7, 1320a-7a, 1320a-7(c), 1320b-10, 1395mm, 
1395ss(d), 1395u(j), 1395u(k), 1396b(m), 11131(c) and 11137(b)(2)).
    (b) Purpose. * * *
    (1) Provides for the imposition of civil money penalties and, as 
applicable, assessments against persons who--
* * * * *
    (iv) Fail to report information concerning medical malpractice 
payments or who improperly disclose, use or permit access to 
information reported under part B of title IV of Public Law 99-660, and 
regulations specified in 45 CFR part 60;
    (v) Misuse certain Medicare and social security program words, 
letters, symbols and emblems; or
    (vi) Substantially fail to provide an enrollee with required 
medically necessary items and services, or that engage in certain 
marketing, enrollment, reporting, claims payment, employment, or 
contracting abuses.
* * * * *
    3. Section 1003.101 is amended by adding, in alphabetical order, 
definitions for the terms ``adverse effect,'' ``contracting 
organization,'' and ``enrollee'' to read as follows:


Sec. 1003.101  Definitions.

* * * * *
    Adverse effect means medical care has not been provided and the 
failure to provide such necessary medical care has presented an 
imminent danger to the health, safety, or well-being of the patient or 
has placed the patient unnecessarily in a high-risk situation.
* * * * *
    Contracting organization means a public or private entity, 
including of a health maintenance organization (HMO), competitive 
medical plan, or health insuring organization (HIO) which meets the 
requirements of section 1876(b) of the Act or is subject to the 
requirements in section 1903(m)(2)(A) of the Act and which has 
contracted with the Department or a State to furnish services to 
Medicare beneficiaries or Medicaid recipients.
    Enrollee means an individual who is eligible for Medicare or 
Medicaid and who enters into an agreement to receive services from a 
contracting organization that contracts with the Department under title 
XVIII or title XIX of the Act.
* * * * *
    4. Section 1003.102, paragraph (b) introductory text is republished 
and a new paragraph (b)(8) is added to read as follows:


Sec. 1003.102  Basis for civil money penalties and assessments.

* * * * *
    (b) The OIG may impose a penalty, and where authorized, an 
assessment against any person (including an insurance company in the 
case of paragraphs (b)(5) and (b)(6) of this section) whom it 
determines in accordance with this part--
* * * * *
    (8) Is a contracting organization that HCFA determines has 
committed an act or failed to comply with the requirements set forth in 
Sec. 417.500(a) or Sec. 434.67(a) of this title or failed to comply 
with the requirement set forth in Sec. 434.80(c) of this title.
* * * * *
    5. Section 1003.103 is amended by revising paragraph (a) and adding 
new paragraph (e) to read as follows:


Sec. 1003.103  Amount of penalty.

    (a) Except as provided in paragraphs (b) through (e) of this 
section, the OIG may impose a penalty of not more than $2,000 for each 
item or service that is subject to a determination under Sec. 1003.102.
* * * * *
    (e)(1) The OIG may, in addition to or in lieu of other remedies 
available under law, impose a penalty of up to $25,000 for each 
determination by HCFA that a contracting organization has:
    (i) Failed substantially to provide an enrollee with required 
medically necessary items and services and the failure adversely 
affects (or has the likelihood of adversely affecting) the enrollee;
    (ii) Imposed premiums on enrollees in excess of amounts permitted 
under section 1876 or Title XIX of the Act;
    (iii) Acted to expel or to refuse to re-enroll a Medicare 
beneficiary in violation of the provisions of section 1876 of the Act 
and for reasons other than the beneficiary's health status or 
requirements for health care services;
    (iv) Misrepresented or falsified information furnished to an 
individual or any other entity under section 1876 or section 1903(m) of 
the Act; or
    (v) Failed to comply with the requirements of section 1876(g)(6)(A) 
of the Act regarding prompt payment of claims.
    (2) The OIG may, in addition to or in lieu of other remedies 
available under law, impose a penalty of up to $25,000 for each 
determination by HCFA that a contracting organization with a contract 
under section 1876 of the Act:
    (i) Employs or contracts with individuals or entities excluded, 
under section 1128 or section 1128A of the Act, from participation in 
Medicare 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 
services (directly or indirectly) through an excluded individual or 
entity.
    (3) The OIG may, in addition to or in lieu of other remedies 
available under law, impose a penalty of up to $100,000 for each 
determination that a contracting organization has:
    (i) Misrepresented or falsified information furnished to the 
Secretary under section 1876 of the Act or to the State under section 
1903(m) of the Act; or
    (ii) Acted to expel or to refuse to reenroll a Medicaid recipient 
because of the individual's health status or requirements for health 
care services, or engaged in any practice that would reasonably be 
expected to have the effect of denying or discouraging enrollment 
(except as permitted by section 1876 or section 1903(m) of the Act) 
with the contracting organization by Medicare beneficiaries and 
Medicaid recipients whose medical condition or history indicates a need 
for substantial future medical services.
    (4) If enrollees are charged more than the allowable premium, the 
OIG will impose an additional penalty equal to double the amount of 
excess premium charged by the contracting organization. The excess 
premium amount will be deducted from the penalty and returned to the 
enrollee.
    (5) The OIG will impose an additional $15,000 penalty for each 
individual not enrolled when HCFA determines that a contracting 
organization has committed a violation described in paragraph 
(e)(3)(ii) of this section.
    (6) For purposes of paragraph (e) of this section, a violation is 
each incident where a person has committed an act listed in 
Sec. 417.500(a) or Sec. 434.67(a) of this title or failed to comply 
with a requirement set forth in Sec. 434.80(c) of this title.
    6. Section 1003.106 is amended by adding new paragraph (a)(4); 
redesignating paragraph (d) as paragraph (e) and republishing it; and 
adding a new paragraph (d) to read as follows:


Sec. 1003.106  Determinations regarding the amount of the penalty and 
assessment.

    (a) * * *
    (4) In determining the appropriate amount of any penalty in 
accordance with Sec. 1003.103(e), the OIG will consider as 
appropriate--
    (i) The nature and scope of the required medically necessary item 
or service not provided and the circumstances under which it was not 
provided;
    (ii) The degree of culpability of the contracting organization;
    (iii) The seriousness of the adverse effect that resulted or could 
have resulted from the failure to provide required medically necessary 
care;
    (iv) The harm which resulted or could have resulted from the 
provision of care by a person that the contracting organization is 
expressly prohibited, under section 1876(i)(6) or section 1903(p)(2) of 
the Act, from contracting with or employing;
    (v) The harm which resulted or could have resulted from the 
contracting organization's expulsion or refusal to reenroll a Medicare 
beneficiary or Medicaid recipient;
    (vi) The nature of the misrepresentation or fallacious information 
furnished by the contracting organization to the Secretary, State, 
enrollee, or other entity under section 1876 or section 1903(m) of the 
Act;
    (vii) The history of prior offenses by the contracting organization 
or principals of the contracting organization, including whether, at 
any time prior to determination of the current violation or violations, 
the contracting organization or any of its principals was convicted of 
a criminal charge or was held liable for 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; and
    (viii) Such other matters as justice may require.
* * * * *
    (d) In considering the factors listed in paragraph (a)(4) of this 
section, for violations subject to a determination under 
Sec. 1003.103(e), the following circumstances are to be considered, as 
appropriate, in determining the amount of any penalty--
    (1) Nature and circumstances of the incident. It would be 
considered a mitigating circumstance if, where more than one violation 
exists, the appropriate items or services not provided were:
    (i) Few in number, or
    (ii) Of the same type and occurred within a short period of time.
    It would be considered an aggravating circumstance if such items or 
services were of several types and occurred over a lengthy period of 
time, or if there were many such items or services (or the nature and 
circumstances indicate a pattern of such items or services not being 
provided).
    (2) Degree of culpability. It would be considered a mitigating 
circumstance if the violation was the result of an unintentional, 
unrecognized error, and corrective action was taken promptly after 
discovery of the error.
    (3) Failure to provide required care. It would be considered an 
aggravating circumstance if the failure to provide required care was 
attributable to an individual or entity that the contracting 
organization is expressly prohibited by law from contracting with or 
employing.
    (4) Use of excluded individuals. It would be considered an 
aggravating factor if the contracting organization knowingly or 
routinely engages in the prohibited practice of contracting or 
employing, either directly or indirectly, individuals or entities 
excluded from the Medicare program under section 1128 or section 1128A 
of the Act.
    (5) Routine practices. It would be considered an aggravating factor 
if the contracting organization knowingly or routinely engages in any 
discriminatory or other prohibited practice which has the effect of 
denying or discouraging enrollment by individuals whose medical 
condition or history indicates a need for substantial future medical 
services.
    (6) Prior offenses. It would be considered an aggravating 
circumstance if at any time prior to determination of the current 
violation or violations, the contracting organization or any of its 
principals was convicted on criminal charges or held liable for 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. The lack of prior liability for criminal, civil, or 
administrative sanctions by the contracting organization, or the 
principals of the contracting organization, would not necessarily be 
considered a mitigating circumstance in determining civil money penalty 
amounts.
    (e) (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.
    (2) The amount imposed will not be 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 will limit the authority of the 
Department to settle any issue or case as provided by Sec. 1003.126, or 
to compromise any penalty and assessment as provided by Sec. 1003.128.

    Dated: March 30, 1994.
June Gibbs Brown,
Inspector General.
    Dated: April 12, 1994.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Approved: July 7, 1994.
Donna E. Shalala,
Secretary, Department of Health and Human Services.
[FR Doc. 94-17221 Filed 7-14-94; 8:45 am]
BILLING CODE 4110-60-P