[Federal Register Volume 60, Number 128 (Wednesday, July 5, 1995)]
[Rules and Regulations]
[Pages 34885-34888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16411]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 417

[OMC-022-F]


Full Reporting by Health Maintenance Organizations (HMOs) and 
Competitive Medical Plans (CMPs) Paid on a Cost Basis

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

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SUMMARY: This rule affects HMOs and CMPs that contract with HCFA to 
furnish services to Medicare beneficiaries and be paid on a cost basis. 
It requires a cost HMO or CMP to include in its cost report the costs 
of hospital and skilled nursing facility (SNF) services even if it has 
elected (under Sec. 417.532(c) of the HCFA regulations) to have HCFA's 
intermediary process those claims and pay the hospital or SNF directly.
    This change is necessary so that HCFA can determine and compare the 
cost of all services furnished by HMOs and CMPs with the cost of 
equivalent services paid for under the fee-for-service system.
    This rule also adds a definition and makes technical changes to 
clarify and update certain related provisions of subparts O and U of 
part 417 of the HCFA rules.

DATES: Effective Date: This rule is effective August 4, 1995.

FOR FURTHER INFORMATION CONTACT: Alfred D'Alberto, (410) 966-7610.

SUPPLEMENTARY INFORMATION:

I. Notice of Proposed Rulemaking

    On February 22, 1994, we published a proposed rule (at 59 FR 8435) 
that would establish--
     Presumptive limits on Medicare payments to cost HMOs and 
CMPs and to health care prepayment plans (HCPPs) that furnish inpatient 
hospital services;
     An exception process under which an affected HMO, CMP or 
HCPP could demonstrate that payment above the presumptive limit is 
justified as ``reasonable'' because of the special needs of its 
Medicare enrollees, or because of extraordinary circumstances beyond 
its control; and
     Criteria for the ``reasonableness'' of the costs of HCPPs 
that do not furnish inpatient hospital services.
    The rule also proposed to require cost HMOs and CMPs to include in 
their cost reports the costs of hospital and SNF services that the HMO 
or CMP elects to have paid by the Medicare intermediary, and to make a 
number of technical changes.
    Under this election, although HCFA intermediaries process and pay 
claims, the HMO or CMP authorizes the services and retains 
responsibility for coordinating those services with other services it 
furnishes to Medicare enrollees. 

[[Page 34886]]

    Although section 1876(b)(4)(A) of the Act requires that the HMO or 
CMP report its ``per capita incurred cost'', HMOs and CMPs currently 
report only the deductibles and coinsurance they incur for the hospital 
and SNF services and not the full costs paid directly by the Medicare 
intermediary.

II. Public Comments

    We received 60 letters of comment on the February 22 proposals. 
Seven of those letters commented on the full reporting and one on the 
technical changes. Careful consideration of the bulk of the comments 
and of the very complex exception process will delay publication of a 
final rule on payment limits. We have, therefore, separated those 
portions of the proposal that pertain to full reporting and technical 
changes, which need not be subjected to that delay. Those comments are 
discussed under part III of this preamble.

III. Discussion of Comments

A. Full Reporting

    This new requirement applies only to HMOs and CMPs, because HCFA 
contracts with HCPPs cover only Part B services, not provider services.
    Comment: All seven commenters recommended that full reporting not 
be required or that implementation be delayed. They expressed concern 
about--
     Obtaining from HCFA and its intermediaries complete and 
adequate information on a timely basis;
     The additional time, staff, and systems enhancement that 
would be required;
     The need to reimburse the HMO or CMP for these additional 
administrative costs.
    They noted specifically the need to--
     Relate HCFA data to plan data so as to match beneficiary 
number, date of service, place of service and deductible and 
coinsurance;
     Summarize deductible and coinsurance amounts;
     Identify beneficiary status in terms of institutionalized, 
Medicaid-eligible, or ESRD;
     Estimate the value of incurred but not reported claims.
    One commenter specifically objected to having intermediary-paid 
part A costs included because administrative and general (A & G) costs 
attributed to those services are not reimbursable to cost HMOs and 
CMPs.
    One commenter asked whether we would expect them to include items 
that are not considered in the DRG computations, and if so, where they 
would get the data.
    Response: We are providing lead time before the full reporting 
requirement goes into effect. During that time, we will be working to 
achieve the most efficient, least burdensome procedures for handling 
the data. Comments and recommendations from HMOs and CMPs can be useful 
for improving HCFA reports and minimizing systems problems. The 
additional administrative costs incurred because of full reporting are 
allowable.
    We recognize that, under full reporting, there may be some 
reduction in payments to HMOs and CMPs. This reduction would involve 
service-related A & G costs only, and only a small percentage of these 
costs. Service-related A & G costs are generally allocated on the basis 
of direct identification, functional allocation, or pooling. To the 
extent service-related A & G costs cannot be allocated to a specific 
service, they are allocated to services based upon a given service's 
percentage of the total service costs included on the HMO's or CMP's 
cost report. It is this small portion of A & G costs that could be 
affected by full cost reporting. The inclusion of hospital and SNF 
services in the cost report would result in a larger portion of this 
category of pool A & G costs being allocated to those services. This, 
in turn, would result in lower payment, because the amount already paid 
directly to a hospital or SNF for the services they provide would 
constitute payment in full for those services, and any pool A & G costs 
allocated to those services would be disallowed. Because the portion of 
service-related A & G costs that could be affected in this manner is 
small, however, we do not anticipate that there would be a significant 
reduction in payments to the HMO or CMP.
    With respect to the last question noted above, we would expect the 
report to reflect the full cost incurred by the hospital or SNF, 
including such things as day and cost outliers, pass throughs, graduate 
medical education, etc. Part of our effort during the lead time will be 
to ensure that we can provide accurate information on these as well as 
other pertinent costs.
    The fact is that, without full reporting, there is no way to 
determine the full actual cost of services furnished by cost HMOs and 
CMPs and how that cost compares with the cost of the same services 
furnished under the fee-for-service system.
    Comment: Two commenters contended that full reporting is in 
conflict with generally accepted accounting principles (GAAP) and with 
certain statements of the Financial Accounting Standards Board (the 
Board).

    Noted as an Example: When the intermediary pays a provider, for 
the HMO or CMP there is no inflow or outflow of assets.

    Accordingly, the transaction does not meet the Board's definition 
of revenue and expense.
    Response: The basic rule is that HCFA pays the HMO or CMP all the 
allowable costs it incurs to furnish covered services to its Medicare 
enrollees. By law and under the contract, the HMO or CMP is required to 
provide or arrange for all Medicare-covered services that are generally 
available in the area it serves. The fact that the HMO or the CMP 
elects to have HCFA process and pay provider claims does not--
     Relieve it of the responsibility for furnishing provider 
services when necessary and appropriate; or
     Change the fact that the sums paid by the intermediary are 
part of the cost of providing Medicare services through an HMO or CMP.
    Comment: One commenter argued that full reporting was not supported 
by current laws and regulations, and others contended that the amounts 
referred to in section 1876(b)(2) (A) and (B) of the Act and the 
implementing regulations (Sec. 417.532(g) of the HCFA rules) are in 
fact an actuarial projection of the average cost of Medicare covered 
services, and an actuarial value of the intermediary's payments.
    Response: We find support for the requirement in the following 
provisions of the statute and regulations:
    a. Section 1876(h)(4) of the Act provides that under a cost 
contract, the Secretary must require the HMO or CMP to report ``* * * 
its per capita incurred cost * * * for providing services described in 
subsection (a)(1) * * *'' (The services referred to in (a)(1) are all 
the covered services available to Medicare beneficiaries in the area 
served by the HMO or CMP.)
    b. Section 1876(h)(2)(A) allows the HMO or CMP to elect to have 
HCFA pay for provider services. Section 1876(h)(2)(B) provides that the 
amounts paid under the election shall be deducted from the payment that 
would otherwise be made to the HMO or CMP * * * for the allowable costs 
of all Medicare-covered services.
    These statutory provisions are reflected in Sec. 417.532 of the 
regulations. The distinction between actuarial values and actual 
payment amounts is clear from a comparison between Sec. 417.532(c)(3) 
and Sec. 417.532(g). The first provides for deducting, from the 
reasonable cost actually incurred by the HMO or CMP, ``an amount equal 
to the 

[[Page 34887]]
actuarial value * * * of deductible and coinsurance amounts that would 
have applied * * * if these enrollees had not enrolled in this or 
another HMO or CMP.''
    Section 417.532(g) states, in part, that ``HCFA will deduct these 
payments * * * in computing the payments to the HMO or CMP''.
    Over the years there have been discussions about how to handle 
these payments within the Medicare program budgeting. There has never 
been any doubt that these are actual payment amounts and not actuarial 
representations.
    Comment: Two commenters considered that the current cost report 
form is not adequate for full reporting.
    Response: As noted above, we want to ensure the most efficient and 
least burdensome procedures for full reporting. This will probably 
require changes in the form, to be worked out during the lead time.
    Comment: One commenter thought that including intermediary payments 
in the cost report might require the auditor that certifies the report 
to extend its testing procedures to include the intermediaries.
    Response: This will not be necessary. The auditor will certify that 
the amounts reported as paid by the intermediary are part of the HMO's 
or CMP's incurred costs.

B. Technical Amendments

    1. Comment: Three commenters inferred, from our proposed revision 
of Sec. 417.800(c), that we intended to change our current policy of 
paying 100 percent of reasonable costs for services for which 
beneficiaries are not liable for coinsurance.
    Response: That was not our intent. We have revised paragraph 
(c)(2)(ii) to clearly state that coinsurance is deducted only for 
services that are subject to coinsurance.
    2. Other changes. We have incorporated the proposed definition of 
``furnished'', and removed obsolete provisions that applied only to 
contract periods that began before January 1986.

C. Changes in the Regulations

    1. Definitions. In Sec. 417.1, we added a definition of 
``furnished'' to make clear that, in part 417, the term means made a 
available by the HMO, CMP, or HCPP either directly or under 
arrangements it makes with other entities.
    2. Full reporting. We have amended Sec. 417.576 to make clear that 
the incurred per capita costs in the cost report must include the costs 
paid by the Medicare intermediary.
    3. Deductions from HCPP reasonable costs. In Sec. 417.800, we have 
revised paragraph (c)(2) to make clear that the 20 percent deduction 
from the reasonable costs incurred by the HCPP applies only to services 
that are subject to coinsurance.
    4. Obsolete provisions. We have removed the following paragraphs 
and sections that applied to contract periods that began before January 
1986:
     Paragraph (b) of Sec. 417.546 (Physician services and 
other Part B services furnished under arrangements), and the Editorial 
note at the end of the section.
     Paragraph (d)(2) of Sec. 417.560 (Apportionment: Part B 
physician and supplier services).
     All of Sec. 417.562 (Weighting of direct services 
furnished by physicians and other practitioners).

D. Other Required Information

1. Information Collection Requirements
    Section 417.576 requires ``full reporting'' as discussed under part 
D of this preamble. This requirement is subject to review by the Office 
of Management and Budget under the Paperwork Reduction Act of 1980, and 
has been submitted for their review. The time required for compiling 
and processing the information and completing the report with the 
additional costs is estimated to be 180 hours per year.
2. Regulatory Impact Statement
    Consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612), we prepare a regulatory flexibility analysis unless the 
Secretary certifies that a rule will not have a significant economic 
impact on a substantial number of small entities. We consider all HMOs 
and CMPs that contract with us to furnish services to Medicare 
beneficiaries on a cost basis to be small entities.
    In addition, under section 1102(b) of the Act, the Secretary is 
required to prepare a regulatory impact analysis if a rule may have a 
significant impact on the operation 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 small rural hospital as a hospital that has fewer than 50 beds 
and is not located in a Metropolitan Statistical Area.
    This final rule requires HMOs and CMPs paid on a cost basis to 
include in their cost reports the costs of hospital and SNF services 
even if a Medicare intermediary processes those claims and makes 
payments directly to the hospital or SNF. There are approximately 25 
HMOs and CMPs that have elected to have the Medicare intermediaries pay 
for these services. As noted earlier in this preamble, we believe that 
payments to these HMOs and CMPs will not be reduced significantly 
because of the statutory limits on the A & G costs related to inpatient 
hospital and SNF care paid by Medicare intermediaries.
    The lead time before implementation of the full reporting 
requirement will enable HCFA and the affected HMOs and CMPs to work out 
the most efficient, least burdensome, procedures for handling these 
additional data. The additional costs incurred by the HMOs and CMPs for 
full reporting are allowable costs.
    We have not prepared a regulatory flexibility analysis because we 
have determined, and the Secretary certifies that this final rule will 
not have a significant economic impact on a substantial number of small 
entities or a significant impact on the operations of a substantial 
number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was not reviewed by the Office of Management and Budget.
List of Subjects in 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 417 is amended as set forth below.
    1. The authority citation for part 417 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh), secs. 1301, 1306, and 1310 of the Public 
Health Service Act (42 U.S.C. 300e, 300e-5, and 300e-9) and 31 
U.S.C. 9701.

    2. In Sec. 417.1, the following definition is added, in 
alphabetical order:
* * * * *
    Furnished, when used in connection with prepaid health care 
services, means services that are made available to an enrollee either 
directly by, or under arrangements made by, the HMO, CMP, or HCPP.
* * * * *


Sec. 417.546  [Amended]

    3. In Sec. 417.546, the following changes are made:
    a. Paragraph (b) and the Editorial note are removed.
    b. In paragraph (a), the ``(a)'' designation is removed, and the 
``(1)'' 

[[Page 34888]]
and (``2'') designations are changed to ``(a)'' and ``(b)'', 
respectively.


Sec. 417.560  [Amended]

    4. In Sec. 417.560, the following changes are made:
    a. Paragraph (d)(2) is removed.
    b. In paragraph (d)(1), the designation ``(1)'', and the clause 
``Except as provided in paragraph (d)(2) of this section,'' are 
removed, and the word ``the'', preceding ``Medicare share'' is revised 
to read ``The''.


Sec. 417.562  [Removed]

    5. Sec. 417.562 is removed.
    6. In Sec. 417.576, paragraph (b)(2)(i) is revised to read as 
follows:


Sec. 417.576  Final settlement.

* * * * *
    (b) * * *
    (2) Content of cost report. The cost report and supporting 
documents must include the following:
    (i) The per capita costs incurred in furnishing covered services to 
its Medicare enrollees, determined in accordance with subpart O of this 
part and including--
    (A) The costs incurred by entities related to the HMO or CMP by 
common ownership or control; and
    (B) For reports for cost-reporting periods that begin on or after 
January 1, 1996, the costs of hospital and SNF services paid by 
Medicare's intermediaries under the option provided by Sec. 417.532(d).
* * * * *
    7. Sec. 417.800 is amended to revise the heading and paragraph 
(c)(2) to read as follows:


Sec. 417.800  Payment to HCPPs: Definitions and basic rules.

* * * * *
    (c) Payment of reasonable cost. * * *
    (2) Payment for Part B services: Basic rules--(i) Cost basis 
payment. Except as provided in paragraph (d) of this section, HCFA pays 
an HCPP on the basis of the reasonable costs it incurs, as specified in 
subpart O of this part, for the covered Part B services furnished to 
its Medicare enrollees.
    (ii) Deductions. In determining the amount due an HCPP for covered 
Part B services furnished to its Medicare enrollees, HCFA deducts, from 
the reasonable cost actually incurred by the HCPP, the following:
    (A) The actuarial value of the Part B deductible.
    (B) An amount equal to 20 percent of the cost incurred for any 
service that is subject to the Medicare coinsurance.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: April 20, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.

    Dated: June 19, 1995.
Donna E. Shalala,
Secretary.
[FR Doc. 95-16411 Filed 7-3-95; 8:45 am]
BILLING CODE 4120-01-P