[Federal Register Volume 61, Number 60 (Wednesday, March 27, 1996)]
[Rules and Regulations]
[Pages 13430-13450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7228]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 417 and 434

Office of Inspector General

42 CFR Part 1003

[OMC-010-FC]
RIN 0938-AF74


Medicare and Medicaid Programs; Requirements for Physician 
Incentive Plans in Prepaid Health Care Organizations

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

ACTION: Final rule with comment period.

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SUMMARY: This final rule amends the regulations governing Federally-
qualified health maintenance organizations and competitive medical 
plans contracting with the Medicare program, and certain health 
maintenance organizations and health insuring organizations contracting 
with the Medicaid program. It implements requirements in sections 
4204(a) and 4731 of the Omnibus Budget Reconciliation Act of 1990 that 
concern physician incentive plans.
    The provisions of this final rule will also have an effect on 
certain entities subject to the physician referral rules in section 
1877 of the Social Security Act (the Act) as amended by the Omnibus 
Budget Reconciliation Act of 1993 (OBRA '93). Section 1877 provides 
that, if a physician (or an immediate family member of the physician) 
has a financial relationship with certain entities (that is, has an 
ownership or investment interest in the entity or a compensation 
arrangement with the entity), the physician may not make a referral to 
the entity for the furnishing of certain health services for which 
payment otherwise may be made under the Medicare program. Additionally, 
effective December 31, 1994, section 1903(s) of the Act provides for 
denial of Federal financial participation payment under the Medicaid 
program to a State for expenditures for certain health services 
furnished to an individual on the basis of a physician referral that 
would result in denial of payment under the Medicare program if 
Medicare covered the services in the same manner as they are covered 
under the State plan.
    Among other amendments, section 13562 of OBRA '93 sets forth an 
exception to the physician referral prohibition that, in effect, 
incorporates the provisions of this final rule. That is, it provides 
that, under certain circumstances, compensation received under a 
personal services arrangement that meets the physician incentive plan 
requirements established by the Secretary does not trigger the ban on 
referrals. Thus, the provisions of this final rule have implications 
for entities that would not have been affected at the time we published 
the proposed rule (December 14, 1992). (The proposed rule applied to 
only prepaid health plans that contract with Medicare or Medicaid under 
section 1876 or 1903(m) of the Act, respectively.) OBRA '93 applies the 
requirements to any prepaid health care organization that bills 
Medicare or Medicaid. The additional organizations that may be affected 
include preferred provider organizations, health maintenance 
organizations that do not contract with Medicare or Medicaid and are 
not Federally qualified, prepaid health plans that contract with 
Medicaid, and some States that contract with managed care organizations 
under the Medicaid program (including those that operate under a 
section 1115 waiver).

DATES: Effective dates. These regulations are effective on April 26, 
1996.
    Comment dates. To be considered, comments must be mailed or 
delivered to the appropriate address, as provided below and must be 
received by 5 p.m. on May 28, 1996.
    Compliance dates. Affected organizations with contracts or 
agreements on March 27, 1996 must comply with (1) the applicable 
disclosure requirements at Sec. 417.479(h)(1)(i) through (h)(1)(v) or 
with Sec. 434.70(a)(3) of this rule by May 28, 1996 or by the renewal 
date of the contract or agreement, whichever is later, and (2) the 
survey requirement at Sec. 417.479(g)(1)(iv) and the disclosure 
requirement at Sec. 417.479(h)(1)(vi) by March 27, 1997. Affected 
organizations must comply with all other requirements by May 28, 1996.
ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: OMC-010-FC, P.O. Box 26688, 
Baltimore, MD 21207.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., 
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code OMC-010-FC. Comments received timely will be available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue SW., Washington, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: (202) 690-7890).

FOR FURTHER INFORMATION CONTACT: Medicare: Tony Hausner, (410) 786-
1093. Medicaid: Beth Sullivan, (410) 786-4596. Office of Inspector 
General: Joel Schaer, (202) 619-0089.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    Prepaid health care organizations, 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. The 
goal of prepaid health care delivery is to control health care costs 
through preventive care and case management and provide enrollees with 
affordable, coordinated, quality health care services. Titles XVIII and 
XIX of the Social Security Act (the Act) authorize contracts with 
prepaid health care organizations (hereinafter referred to as 
``organizations'' or ``prepaid plans'') for the provision of covered 
health services to Medicare beneficiaries and Medicaid recipients, 
respectively. Such organizations may contract under either a risk-based 
or cost-reimbursed contract.

[[Page 13431]]


B. Medicare

    Section 1876 of the Act authorizes the Secretary to enter into 
contracts with eligible organizations (HMOs that have been Federally 
qualified under section 1310(d) of the Public Health Service Act and 
CMPs that meet the requirements of section 1876(b)(2) of the Act) to 
provide Medicare-covered services to beneficiaries and specifies the 
requirements the organizations must meet. Section 1876 of the Act also 
provides for Medicare payment at predetermined rates to eligible 
organizations that have entered into risk-based contracts under 
Medicare or for Medicare payment of reasonable costs to eligible 
organizations that have entered into cost-reimbursed contracts under 
Medicare. Implementing Federal regulations for the organization and 
operation of Medicare prepaid health care organizations, contract 
requirements, and conditions for payment are located at 42 CFR 417.400 
through 417.694.
    Risk-based organizations are paid a prospectively-determined per 
capita monthly payment for each Medicare beneficiary enrolled in the 
organization. This capitated payment is the projected actuarial 
equivalence of 95 percent of what Medicare would have paid if the 
beneficiaries had received services from fee-for-service providers or 
suppliers. Organizations paid on a risk basis are liable for any 
difference between the Medicare prepaid amounts and the actual costs 
they incur in furnishing services, and they are therefore ``at risk.''
    Cost-reimbursed organizations are paid monthly interim per capita 
payments that are based on a budget. Later, a retrospective cost 
settlement occurs to reflect the reasonable costs actually incurred by 
the organization for the covered services it furnished to its Medicare 
enrollees.

C. Medicaid

    Section 1903(m) of the Act specifies requirements that must be met 
for States to receive Federal financial participation (FFP) for their 
contracts with organizations (HMOs or HIOs) to furnish, either directly 
or through arrangements, specific arrays of services on a risk basis. 
Federal implementing regulations for these contract requirements and 
conditions for payment are located at 42 CFR part 434.
    States determine the per capita monthly rates that are to be paid 
to risk-based organizations. FFP is available for these payments at the 
matching rate applicable in the State as long as HCFA determines that: 
(1) The HMO or HIO rates are actuarially sound; (2) the rates do not 
exceed the cost of providing the same scope of services, to an 
actuarially equivalent nonenrolled population group, on a fee-for-
service basis; and (3) the contract meets the additional requirements 
at 42 CFR part 434 (``Contracts'') and 45 CFR part 74 (``Administration 
of Grants'').

II. Legislative History

    Section 9313(c) of the Omnibus Budget Reconciliation Act of 1986 
(OBRA '86), Public Law 99-509, prohibited, effective April 1, 1989, 
hospitals and prepaid health care organizations with Medicare or 
Medicaid risk contracts from knowingly making incentive payments to a 
physician as an inducement to reduce or limit services to Medicare 
beneficiaries or Medicaid recipients. Under the OBRA '86 provisions, 
parties who knowingly made or accepted these payments would have been 
subject to specified civil money penalties. Additionally, the 
provisions required that the Secretary report on incentive arrangements 
in HMOs and CMPs. Section 4016 of the Omnibus Budget Reconciliation Act 
of 1987 (OBRA '87), Public Law 100-203, extended the original 
implementation date for the OBRA '86 physician incentive provisions to 
April 1, 1991. Subsequently, sections 4204(a) and 4731 of the Omnibus 
Budget Reconciliation Act of 1990 (OBRA '90), Public Law 101-508, 
repealed, effective November 5, 1990, the prohibition of physician 
incentive plans in prepaid health care organizations and enacted 
requirements, effective January 1, 1992, for regulating these plans.
    Specifically, section 4204(a)(1) of OBRA '90 added paragraph (8) to 
section 1876(i) of the Act to specify that each Medicare contract with 
a prepaid health care organization must stipulate that the organization 
must meet the following requirements if it operates a physician 
incentive plan:
     That it not operate a physician incentive plan that 
directly or indirectly makes specific payments to a physician or 
physician group as an inducement to limit or reduce medically necessary 
services to a specific individual enrolled with the organization.
     That it disclose to us its physician incentive plan 
arrangements in detail that is sufficient to allow us to determine 
whether the arrangements comply with Departmental regulations.
     That, if a physician incentive plan places a physician or 
physician group at ``substantial financial risk'' (as defined by the 
Secretary) for services not provided directly, the prepaid health care 
organization: (1) Provide the physician or physician group with 
adequate and appropriate stop-loss protections (under standards 
determined by the Secretary) and (2) conduct surveys of currently and 
previously enrolled members to assess the degree of access to services 
and the satisfaction with the quality of services.
    Section 4204(a)(2) of OBRA '90 amended section 1876(i)(6)(A)(vi) of 
the Act to add violations of the above requirements to the list of 
violations that could subject a prepaid health care organization to 
intermediate sanctions and civil money penalties.
    Section 4731 of OBRA '90 enacted similar provisions for the 
Medicaid program by amending sections 1903(m)(2)(A) and 1903(m)(5)(A) 
of the Act.
    As noted earlier (in the ``Summary'' section), subsequent to the 
December 1992 publication of the proposed rule, the Omnibus Budget 
Reconciliation Act of 1993 (OBRA '93), Public Law 103-66, was enacted. 
Section 13562 of OBRA '93 amended section 1877 of the Act, which 
prohibits physician referrals to entities with which the physician (or 
an immediate family member) has a financial relationship (which can 
consist of either (1) an ownership or investment interest or (2) a 
compensation arrangement). OBRA '93 provides an exception to the 
section 1877 physician referral prohibition that incorporates the 
physician incentive plan rules implemented in this final rule. Under 
this exception, compliance with these physician incentive rules is one 
of several conditions that must be satisfied if a personal services 
compensation arrangement involves compensation that varies based on the 
volume or value of referrals.
    This exception affects managed care organizations that were not 
specified in the December 1992 proposed rule on physician incentive 
plans. The proposed rule applied to only prepaid plans that contract 
with Medicare or Medicaid under section 1876 or 1903(m) of the Act, 
respectively. The OBRA '93 physician referral provisions, however, 
apply to any entity with an incentive plan that bills Medicare or 
Medicaid. The additional organizations that may be affected include 
preferred provider organizations, HMOs that do not contract with 
Medicare or Medicaid and are not Federally qualified, and prepaid 
health plans'' (PHPs) that contract with Medicaid. (PHPs are 
organizations that are exempt from section 1903(m) of the Act.) Some 
States that contract with managed care organizations under the Medicaid 
program (including those that operate under a section 1115 waiver)

[[Page 13432]]
may also be affected. We believe that most prepaid health care 
organizations will not be affected by these provisions since they apply 
only if (1) the physician incentive plan includes services not 
furnished by the physician group, and (2) there is a compensation 
arrangement between the physician group and the entity furnishing the 
services.

III. Opportunity for Public Comment

    Because there may be entities that were not affected by the 
proposed rule at the time it was published but are now affected, we are 
publishing this rule as a final rule with a 60-day comment period so 
that these newly-affected entities have an opportunity to comment. Note 
also, we will incorporate the OBRA '93 amendments to section 1877 of 
the Act into a final rule with comment covering the physician referral 
prohibition as it relates to referrals for clinical laboratory 
services. We will also publish a proposed rule to interpret or clarify 
these OBRA '93 amendments as they relate to referrals for all of the 
health services designated in section 1877 of the Act, including 
clinical laboratory services. Once these rules are published, entities 
will have had several opportunities to comment on the interaction 
between the physician referral prohibition in section 1877 and the 
physician incentive rules.
    We are also providing the 60-day comment period because we are 
interested in receiving comments on the changes from the proposed rule. 
For example, we are particularly interested in receiving comments on 
the thresholds we have set for determining substantial financial risk 
and for determining per-patient stop loss limits.
    Because of the large number of items of correspondence we normally 
receive on a rule, we are not able to acknowledge or respond to them 
individually. We will, however, consider all comments that we receive 
by the date specified in the DATES section of this preamble and, if we 
publish a subsequent document, we will respond to the comments in that 
document.

IV. Discussion of Physician Incentive Plans

    Effective utilization control that identifies both underutilization 
and overutilization is essential for the efficient operation of prepaid 
health care organizations. A prepaid health care organization needs to 
minimize overutilization of services not only to prevent unnecessary 
spending, but also to reduce the risk of unnecessary and intrusive 
procedures. Nonetheless, a prepaid health care organization also needs 
to ensure that all medically necessary services are furnished both to 
protect patient health and to avoid the need for more costly care 
later. Medicare and Medicaid require both cost-reimbursed and risk 
organizations to have internal quality assurance programs, external 
quality review or medical audits, and other mechanisms to ensure proper 
delivery of health care services. Medicare and Medicaid contracts also 
are subject to periodic monitoring for compliance. In addition, 
sections 1876(i)(6) and 1903(m)(5) of the Act provide for intermediate 
sanctions and civil money penalties that may be imposed if an HMO or 
CMP fails substantially to provide medically necessary services. 
(Regulations implementing this authority were published on July 15, 
1994 (59 FR 36072).
    One mechanism many prepaid health care organizations use to 
encourage proper utilization is a financial incentive as part of a 
physician incentive plan. OBRA '90 defines a physician incentive plan 
as any compensation arrangement between an eligible organization and a 
physician or physician group that may directly or indirectly have the 
effect of reducing or limiting services furnished with respect to 
individuals enrolled in the organization.
    A review and analysis of physician incentive plans in a sample of 
HMOs was conducted and presented in the Department's 1990 report to the 
Congress, ``Incentive Arrangements Offered by Health Maintenance 
Organizations and Competitive Medical Plans to Physicians.'' The 
results showed a wide variety of incentive plans. There were 
differences in the types of incentive payments, the distribution of 
incentives, the basis for determining the incentive payments, and the 
parties or entities the incentives affected.
    Physicians in prepaid health care organizations generally receive 
fee-for-service payments, salary, or capitation payments (a set dollar 
amount per patient) for the services they furnish. Financial incentives 
may be used with the various types of physician payments to encourage 
appropriate levels of referral services. Referral services are any 
specialty, inpatient, outpatient, or laboratory services that a 
physician arranges for but does not provide directly. Prepaid health 
care organizations may hold physicians or physician groups at risk for 
all or a portion of the cost of referral services so that they have a 
financial incentive to arrange for the furnishing of only medically 
necessary services. If the physician or physician group successfully 
controls the levels of referral services, the physician or group may 
receive additional compensation (an incentive payment) from the prepaid 
health care organization. The incentive payment may take the form of 
unused capitation, a returned withhold, or a bonus payment. Each of 
these methods is described below.
    A capitation payment is a set dollar amount per patient per month 
that a prepaid health care organization pays to a physician or a 
physician group to cover a specified set of services, without regard to 
the actual number of services furnished to each person. The capitation 
may cover the physician's own services, referral services, or all 
medical services and/or administrative costs. If patient costs exceed 
the capitation amount, the physician or physician group must absorb 
these additional costs. If costs are below the capitation, the 
physician or physician group may keep the additional money.
    Withholds are percentages of payments or set dollar amounts that a 
prepaid health care organization deducts from each physician's or 
physician group's payment (salary, fees, or capitation). The amount 
withheld is set aside in pools to pay for specialty referral services 
and inpatient hospital services. If referral costs exceed a prepaid 
health care organization's budget, part or all of the withhold may be 
forfeited depending on the terms of the physician's contract. If 
referral costs do not exceed the ceiling, part or all of the withhold 
may be returned to a physician or a physician group. Some plans limit 
the amount of the risk to the withhold; others hold the physician or 
physician group liable for amounts beyond the amount withheld.
    Bonuses are payments prepaid health care organizations make to a 
physician or a physician group beyond the physician's set salary, fee-
for-service payments, or capitation. Bonuses may be based on a 
physician's or physician group's level of referral services or may be 
based on the overall performance of the organization.
    If the physician or physician group has excessive referrals (as 
defined by the prepaid health care organization), it may not receive 
any incentive funds. In addition, the prepaid health care organization 
may hold the physician or physician group liable for referral costs 
that exceed a specified threshold. The prepaid health care organization 
may also increase the physician's or physician group's withhold or make 
other changes in its incentive arrangements.

[[Page 13433]]

    Many physician incentive plans incorporate stop-loss protection to 
limit the liability of the physician or physician group. Most often, 
the stop-loss protection limits a physician's maximum liability per 
patient to a specific dollar amount.
    Other variables may affect the amount of risk or the effect of 
financial incentives on physicians; for example, whether incentive 
payments are calculated according to each individual physician's 
performance or according to a physician group's performance; the size 
of the physician group; the length of time over which performance is 
evaluated; the number of enrollees; and the amount of total income at 
risk. In addition, the relative health status of the patients involved 
affects the level of risk. If because of their health status the 
patients served require more services than the average enrollee, the 
risk increases. Conversely, if they are healthier than the average 
enrollee, the risk may be lower.

V. Provisions of the Proposed Regulations

    On December 14, 1992, we published a proposed rule (57 FR 59024) 
that set forth our proposal for implementing the requirements of 
sections 1876(i) and 1903(m) of the Act as amended, respectively, by 
sections 4204(a) and 4731 of OBRA '90. Sections 1876(i)(8) and 
1903(m)(2)(A)(x) of the Act require that physician incentive plans be 
regulated, and sections 1876(i)(6)(A) and 1903(m)(5)(A) provide 
penalties for violation of the regulation. To implement these 
provisions for Medicare, we proposed to impose new contract 
requirements pertaining to physician incentive plans. For Medicaid, we 
proposed new requirements for the granting of FFP for State Medicaid 
agency contracts with HMOs and HIOs. The requirements address--
     The scope of the regulation;
     Disclosure requirements;
     Criteria for the determination of substantial financial 
risk;
     Requirements for physician incentive plans that place 
physicians at substantial financial risk;
     Prohibition on certain physician payments; and
     Enforcement.
Each proposed requirement is summarized individually below. Readers who 
desire more specifics are referred to the proposed rule.

A. Scope

    Because sections 4204(a)(2) and 4731 of OBRA '90 amended sections 
that govern Medicare and Medicaid contracts, but did not amend title 
XIII of the Public Health Service Act, which governs all Federally-
qualified HMOs, we proposed to apply these requirements to only 
physician incentive plans that base incentive payments (in whole or in 
part) on services provided to Medicare beneficiaries or Medicaid 
recipients. Nonetheless, because relevant statutory language uses the 
term ``individuals enrolled with the organization,'' which could be 
interpreted as all of an organization's enrollees, not just Medicare or 
Medicaid enrollees, we specifically sought comments regarding the 
proposed scope of the regulations.

B. Disclosure

    We proposed that an HMO, CMP, or HIO disclose to HCFA (for 
Medicare) or to the State Medicaid agency (for Medicaid) information on 
physician incentive plans that affect Medicare beneficiaries or 
Medicaid recipients that is sufficient for us or the States to 
determine whether the organization is in compliance with our 
requirements. We also proposed when submittal of the information would 
be required.

C. Substantial Financial Risk

    We proposed that a physician or physician group is considered to be 
at substantial financial risk if more than a specified percentage (the 
risk threshold) of the prepaid health care organization's total 
potential payments to the physician or physician group is at risk and 
the risk is based on the costs of services the physician or physician 
group does not provide (for example, referrals to specialists or the 
cost of inpatient care).
    For purposes of determining substantial financial risk, we proposed 
to define payments as any amounts the organization pays physicians or 
physician groups for services they provide, plus amounts paid for 
administration and controlling levels or costs of referral services. We 
proposed that payments do not include bonuses or other forms of 
compensation that are not based on referral levels (such as bonuses 
based solely on the quality of care provided, patient satisfaction, and 
participation on committees).
    Under our proposal, the risk threshold that determines substantial 
financial risk would depend on the frequency with which the health plan 
assesses or distributes incentive payments. We proposed that, for 
prepaid health care organizations that assess or distribute incentive 
payments no more often than annually, the risk threshold is 25 percent. 
The risk threshold we proposed for prepaid health care organizations 
that assess or distribute incentive payments more often than annually 
was 15 percent.
    Often, prepaid health care organizations use more than one type of 
compensation arrangement. If more than one type of arrangement is used, 
we proposed to consider all the different risk arrangements placed on 
physicians or physician groups to determine whether they collectively 
exceeded either of the thresholds.

D. Requirements for Physician Incentive Plans That Place Physicians at 
Substantial Financial Risk

1. Enrollee Surveys
    We proposed that HMOs, CMPs, and HIOs that place their physicians 
or physician groups at substantial financial risk must conduct enrollee 
surveys at least annually. We proposed that the surveys must--
     Either survey all current Medicare/Medicaid enrollees in 
the organization and those who have disenrolled (due to other than loss 
of eligibility in Medicaid) in the past 12 months, or survey a 
statistically valid sample of these same enrollees and disenrollees;
     Be designed, conducted, and results analyzed in accordance 
with commonly accepted principles of survey design and statistical 
analysis; and
     Address enrollees'/disenrollees' satisfaction with the 
quality of the services furnished and their degree of access to the 
services.
2. Stop-loss Protection
    We proposed two levels of stop-loss protection depending on the 
incentive plan's risk threshold. If the risk threshold is 25 percent, 
the stop-loss protection must protect physicians and physician groups 
from losses greater than 30 percent of the payments for services they 
furnish, plus payments for administrative costs and controlling levels 
of referral services. If the risk threshold is 15 percent, the stop-
loss protection must protect physicians and physician groups from 
losses greater than 20 percent of payments.
    We proposed that the organization may provide the stop-loss 
protection directly or purchase it, or the physician or physician group 
may purchase it.

E. Prohibited Physician Payments

    We proposed language reflecting section 1876(i)(8)(A)(i) of the 
Act, which provides that physician incentive plans may operate only if 
no specific payment is made directly or indirectly under the plan as an 
inducement to reduce or limit medically necessary services furnished to 
a specific enrollee. We

[[Page 13434]]
proposed that indirect payments include offerings of monetary value 
(such as stock options or waivers of debt) measured in the present or 
future.

F. Enforcement

    We proposed that noncompliance with the proposed requirements 
discussed above could result in civil money penalties, intermediate 
sanctions, and/or contract termination (for Medicare) or withholding of 
FFP (for Medicaid). The civil money penalties would be limited to 
$25,000 for each determination of noncompliance. Under the intermediate 
sanctions provision, HCFA could (for Medicare) suspend the enrollment 
of individuals into noncompliant plans and HCFA (for Medicare) or the 
State (for Medicaid) could suspend payment for new enrollees until it 
is satisfied that the basis for the determination is not likely to 
recur. The process for applying civil money penalties and intermediate 
sanctions would be the same process as that proposed in the July 22, 
1991, proposed rule on civil money penalties and intermediate sanctions 
(56 FR 33404).

VI. Analysis of and Responses to Public Comments

    We received 41 timely comments on the December 1992 proposed rule. 
(Comments related to the provisions that were proposed in the July 1991 
proposed rule on civil money penalties and intermediate sanctions and 
that were merely republished in the December 1992 proposed rule were 
not considered timely.) Commenters included prepaid plans, State 
agencies, national and local associations of managed care providers, 
physician associations, consumer advocacy groups, and an insurance 
industry trade association. This section of the preamble contains a 
summary of the comments and our responses.

    Note: This final rule changes the CFR designation of a number of 
the proposed provisions. To aid the reader, we have provided in 
section VI. of this preamble, a crosswalk between the proposed 
provisions and the provisions of this final rule.

Scope of Regulation

    Comment: Many commenters agreed with our position that the proposed 
rule should apply to only Medicare and Medicaid risk contracts. In 
contrast, one commenter believed protection should be extended to plans 
governed by title XIII of the Public Health Service Act but conceded 
that the scope of the authorizing legislation is not clear on this 
point. This commenter recommended that we seek congressional 
clarification of the intent of the statute.
    Response: As indicated in the preamble to the proposed regulation 
(hereinafter referred to as the ``proposed preamble''), the original 
legislation amended only titles XVIII and XIX of the Act. Subsequent 
legislation, however, applies to all physicians that furnish services 
under the Medicare or Medicaid program.
    Comment: One commenter suggested that we apply the proposed 
requirements only if there is a greater risk for Medicare and Medicaid 
contracts than for commercial contracts.
    Response: The legislation requires us to develop these regulations 
for Medicare and Medicaid prepaid plans but not for commercial plans. 
It does not provide us with flexibility to make this determination. 
Thus, we will examine only incentive plans between a prepaid plan and a 
physician or physician group that apply to Medicare and Medicaid 
enrollees. We will not examine the incentive plans as they relate to 
commercial enrollees, even if the commercial enrollees are in addition 
to Medicare and Medicaid enrollees. The only exception to this is if 
the plan uses the pooling methods described later in this preamble.
    Comment: One commenter suggested that the Department of Health and 
Human Services should evaluate the feasibility of applying these 
regulations to accountable health plans or other health care delivery 
systems that may be created under health care reform.
    Response: This suggestion does not fall within the scope of this 
rulemaking, which implements enacted legislation in regulations.
    Comment: Some commenters stated that there are no published studies 
that link quality problems to physician incentive plans. They suggest, 
therefore, that the regulation be dropped. In addition, some commenters 
suggested that we are only responding to pressures from press reports. 
Furthermore, some commenters believed this rule would not improve 
quality of care and that it would only add to the cost of care.
    One commenter believed that the proposed rule is too restrictive. 
The commenter stated that it would make far more sense to monitor the 
health outcomes of enrollees to ensure that they are receiving quality 
health care services than to micromanage the administrative 
arrangements within these health organizations.
    Response: We reject these recommendations for the following 
reasons:
     OBRA '90 requires us to issue these regulations.
     While we acknowledged in the proposed preamble that no 
link between quality problems and incentive plans has been established, 
the issue has not been sufficiently examined. In the report to the 
Congress entitled ``Incentive Arrangements Offered by Health 
Maintenance Organizations and Competitive Medical Plans to Physicians'' 
(hereinafter referred to as the ``Report''), no study is cited that 
directly tests the link. Instead the Report cites studies that show no 
differences in quality between prepaid plans and fee-for-service 
arrangements. From this evidence, the Report infers that incentive 
plans do not affect quality. It should be noted that studies to date 
have used limited outcome measures.
    Furthermore, the OBRA '90 provisions that require these regulations 
were enacted after the submission of the Report, confirming legislative 
intent subsequent to the Report.
     HCFA is sponsoring quality assurance reform initiatives in 
both Medicare and Medicaid that will begin to develop outcome measures 
for HMOs. HCFA's first efforts contain some outcome measures. Future 
projects will develop even more of these measures. The state of the art 
in outcome measures is still in the early stages and, thus, at this 
time, they cannot serve as a reliable measure of potential 
underutilization.
    While there is no guarantee that these requirements will result in 
improvements in the quality of care, the Congress was concerned with 
ensuring that underuse of necessary services does not occur. We are all 
concerned with ensuring adequate protection of beneficiaries and 
recipients so that they have access to all necessary and appropriate 
care. As indicated in both the proposed preamble and later in this 
document, we anticipate most prepaid plans will not incur significant 
additional costs because most of them already meet the requirements 
that are specified in this regulation.
    Comment: A major organization suggested that we examine incentive 
plans only if quality problems are detected.
    Response: We rejected this recommendation for the following 
reasons:
     The legislation does not provide for an exception if there 
is an absence of quality problems.
     As indicated in the Report, there are limitations in the 
quality studies and methodologies used to detect quality problems.

Prohibited Arrangements

    Comment: One commenter recommended that we revise proposed

[[Page 13435]]
Sec. 417.479(c) (``Prohibited physician payments'') to clarify that 
medically necessary services means medically necessary covered 
services.
    Response: In this final rule, we have revised proposed 
Sec. 417.479(c) (now designated as Sec. 417.479(d)) to include all 
medically necessary services covered by the prepaid plan contract. We 
have included all services covered in the contract since some plans 
contain services in their Medicare and Medicaid contracts that are in 
addition to those covered under the regular Medicare or Medicaid 
program. Furthermore, as established under title XIX of the Act, if a 
plan contracts to provide early and periodic screening and diagnosis 
and treatment services, the plan is responsible for any medically 
necessary Medicaid covered services, regardless of whether these 
services are covered under the State plan.

Disclosure

    Comment: Several commenters, including major organizations, 
requested that we require disclosure of the incentive plans to all 
enrollees at the time of enrollment. They believed that disclosure is 
necessary to protect patients and physicians.
    In contrast, several commenters, also including major 
organizations, stated that incentive plans are proprietary information 
and, as such, should be exempt from disclosure under the Freedom of 
Information Act (FOIA).
    Response: We agree that disclosure of the incentive plans to 
patients can aid them in ensuring that they receive needed services. 
This information in the hands of Medicare beneficiaries and Medicaid 
recipients will also help physicians to counter pressure from the 
prepaid plans to reduce services. At the same time, we want to protect 
the proprietary aspects of the information. To effectively balance 
these conflicting goals, this final rule adds new Secs. 417.479(h)(3) 
and 434.70(a)(4) to require that prepaid plans provide a summary of 
three items of information to Medicare beneficiaries and Medicaid 
recipients, respectively, when they request it. The three items are 
identified in the next response. As the prepaid plans' experience with 
physician incentive plans and disclosure increases, we encourage them 
to voluntarily share summaries of the incentive plans with all 
enrollees. We have not asked that more information be provided for the 
following reasons:
     We do not want to put an undue burden on the prepaid 
plans.
     We do not require fee-for-service physicians to provide a 
notice that they have incentives to provide excessive services.
     Certain information in the incentive plans is proprietary 
information and is exempt from disclosure under the FOIA.
    Comment: One commenter recommends we clarify what constitutes 
``sufficient information'' for disclosure purposes.
    Response: This final rule revises proposed Secs. 417.479(h) and 
434.70(a) to provide for two types of disclosure. Disclosure to HCFA 
and the States requires that prepaid plans submit information that 
describes (1) whether services not furnished by the physician or 
physician group are covered by the incentive arrangement (if only the 
services furnished by the physician or physician group are covered by 
the incentive plan, there is no need for disclosure of other aspects of 
the plan); (2) the type of incentive arrangement, for example, 
withhold, bonus, capitation; (3) the percent of the withhold or bonus, 
if any; (4) the amount and type of stop-loss protection; (5) the panel 
size and, if enrollees are pooled according to the principles discussed 
later, the method of pooling used; (6) in the case of capitated 
physicians or physician groups, capitation payments paid to primary 
care physicians for the most recent year broken down by percent for 
primary care services, referral services to specialists, hospital 
services, and other types of provider (for example, nursing homes and 
home health agencies) services; and (7) in the case of those prepaid 
plans that are required to conduct beneficiary surveys, the survey 
results. We are requesting the information described in item 6 so that 
we can determine whether additional standards are necessary in the 
future.
    Disclosure to Medicare beneficiaries and Medicaid recipients 
requires that only a summary of the above information be made available 
if requested by the beneficiary. This information will indicate, 1) 
whether the prepaid plan uses a physician incentive plan that affects 
the use of referral services, 2) the type of incentive arrangement, 3) 
and whether stop-loss protection is provided. In addition, those 
prepaid plans that must conduct enrollee surveys must provide a summary 
of the survey results to those beneficiaries and recipients who request 
it.
    Comment: One commenter stated that disclosure should not be needed 
each time there is any change in the incentive plan. A second commenter 
stated that we should require disclosure only initially and when 
changes occur relative to rules.
    Response: We agree with these recommendations. Therefore, we have 
revised proposed Sec. 417.479(h)(3) and proposed Sec. 434.70(a)(2)(ii) 
to specify that an organization must provide information concerning any 
of the following changes in its incentive plan: A change as to the type 
of incentive plan; a change in the amounts of risk or stop-loss 
protection; or expansion of the risk formula to cover services not 
provided by the physician group which the formula had not included 
previously. We also specify that this information must be provided to 
HCFA at least 45 days (rather than the proposed 30 days) before the 
change takes effect. This latter change is made to make this rule 
consistent with existing Sec. 417.428, which requires that HMOs and 
CMPs submit to HCFA all marketing information 45 days in advance of 
distribution. (Proposed Sec. 417.479(h)(3) is now 
Sec. 417.479(h)(2)(C)(ii).)
    Comment: One commenter recommended that the due date for submission 
of the required information by organizations that have a contract with 
us be extended from 30 days after publication of the final rule to 60 
days after publication. The commenter stated that 30 days is not 
sufficient for organizations to become aware of the rule, study its 
details, analyze their incentive plans, and formulate disclosures that 
meet the rule's requirements.
    One commenter believed there should be a phase-in period for 
organizations to comply with the regulations. The commenter suggested 
that the phase-in period be the remainder of the term of the 
organization's existing provider contract.
    Response: We agree that organizations should be given more than 30 
days to comply with the provisions of this rule. Since 60 days for 
compliance is a standard time period used in many of our regulations, 
particularly in the Medicaid program, we have extended the time period 
in which organizations must comply with this rule to at least 60 days 
from the date of publication. Further, we now require that 
organizations with existing contracts with us comply with most of the 
disclosure requirements by the date of the contract renewal or at least 
60 days from the date of publication of this final rule, whichever is 
later. We now require compliance with the disclosure requirement 
related to capitation data within 1 year from the date of publication 
of this rule. (See Dates section of this rule.)
    Comment: One commenter believed that subcontracting poses an

[[Page 13436]]
impediment to an HMO's ability to comply with the disclosure 
requirement. The commenter stated that subcontracting will result in 
numerous contracts being subject to disclosure, particularly in the 
case of larger HMOs. This commenter also pointed out that the proposed 
rule does not address the extent to which subcontractors will be 
compelled to disclose information concerning incentive arrangements. 
The commenter stated that HMOs need to know the extent of the 
disclosure obligation of the HMO where subcontracting has resulted in 
incentive arrangements currently unknown to the HMO.
    This same commenter believed that our estimate of 4 hours per 
organization to meet disclosure requirements is a serious 
underestimation given the complexity of current industry contracting 
practices. The commenter did not offer an alternate estimate.
    Response: Under this final rule, if the prepaid plan contracts with 
a physician group that puts its individual physician members at 
substantial financial risk for services not provided, the prepaid plan 
must disclose to us (or in the case of Medicaid, to the State agency) 
any physician incentive plans between the physician group and its 
individual physicians that base compensation on the use or cost of 
services furnished to beneficiaries or recipients.
    Additionally, if a prepaid plan contracts with an ``intermediate 
entity'' that, in turn, subcontracts with individual physicians or a 
physician group, the prepaid plan, under all circumstances, must 
disclose to us (or the State agency) any physician incentive plans 
between the intermediate entity and the individual physician or 
physician group that base compensation on the use or cost of services 
furnished to beneficiaries. This information is necessary to ensure 
that physicians are not placed at substantial financial risk for 
services not provided.
    For purposes of this requirement, we define intermediate entities 
as organizations or individuals who contract with the prepaid plan and, 
in turn, subcontract with one or more physician groups. Thus, for 
example, an individual practice association (IPA) is an intermediate 
entity if it subcontracts with one or more physician groups. (It is 
simply a physician group when it is composed of a set of individual 
physicians and has no subcontracts with physician groups.) A physician 
hospital organization is also an example of an intermediate entity.
    The information to be disclosed for each of the situations 
described above includes the following:
     Whether services not furnished by the physician or 
physician group are covered by the incentive plan. If only the services 
furnished by the physician or physician group are covered by the 
incentive plan, disclosure of other aspects of the plan need not be 
made.
     The type of incentive arrangement; for example, withhold, 
bonus, capitation.
     If the incentive plan involves a withhold or bonus, the 
percent of the withhold or bonus.
     The amount and type of stop-loss protection.
     The panel size and, if patients are pooled according to 
one of the permitted methods, which method is used.
     In the case of capitated physicians or physician group, 
capitation payments paid to primary care physicians for the most recent 
year broken down by percent for primary care services, referral 
services to specialists, and hospital and other types of provider 
services.
     In the case of those prepaid plans that are required to 
conduct beneficiary surveys, the survey results.
    In subcontracting relations, if, under any circumstances, a 
physician group and/or individual physicians are put at substantial 
financial risk, the prepaid plan must conduct the beneficiary survey 
required by this rule and provide adequate stop-loss protection to the 
physician group and/or individual physicians. We have taken this 
position because recent investigations by HCFA of HMOs in a number of 
States has led us to conclude that, in subcontracting situations, some 
physicians have been put at substantial financial risk without adequate 
examination of the effect this has on the quality of care furnished to 
the enrollees.
    We have set forth the above requirements in this final rule by 
adding a new paragraph (i) to Sec. 417.479 (for Medicare) and revising 
proposed Sec. 434.70(a) (for Medicaid). We have also revised the 
proposed definition of ``physician group'' at Sec. 417.479(b) to 
clarify that an IPA is a physician group only if it is composed of 
individual physicians and has no subcontracts with physician groups.
    We believe these additional requirements will increase the burden 
on prepaid health plans by an additional 4 hours, resulting in a total 
of 8 hours per organization to meet the disclosure requirements. The 
organization can either submit copies of its incentive plans or submit 
information that addresses the required items listed in 
Sec. 417.479(h)(1).
    We would welcome comments on our estimate of the burden imposed by 
the above requirements. We are particularly interested in receiving 
empirical data supporting any estimates the commenter may offer.
    Comment: One commenter believed the disclosure requirements are 
excessively burdensome. This commenter noted that, as stated in the 
preamble of the proposed rule, the justification for these disclosure 
requirements is that, if the information is only disclosed during site 
visits, an organization could change its physician incentive plan 
shortly after the site visit, and we would not know of the new 
arrangement for 2 years. The commenter pointed out that there are many 
items of information that we review at site visits that could be 
changed shortly thereafter without our knowledge; for example, HMO 
marketing material, provider contracts, and quality assurance plans. 
The commenter pointed out that these are reviewed during site visits 
and not re-reviewed during the 2-year cycle. The commenter stated that 
the proposed rule offered no explanation for different treatment for 
incentive plans, and, therefore, the requirements are not based on an 
acceptable justification.
    Response: Section 1876(i)(8)(A)(iii) of the Act requires that we 
obtain sufficient information to determine if substantial financial 
risk occurs, adequate stop-loss protection is provided, etc. As 
indicated in an earlier response, we have limited the amount of 
information prepaid plans are required to submit to HCFA and the States 
to information on just a few key items. As prescribed by legislation, 
marketing materials are submitted to us every year. Further, as a 
change from the proposed rule, we are requiring that we be notified of 
only significant changes in the incentive plan, rather than each 
change, thereby reducing the burden of this requirement.
    Comment: One commenter suggested that HCFA use a simple disclosure 
form that can quickly be completed by HMO personnel and reviewed 
promptly by HCFA.
    Response: HCFA will consider the feasibility of a form and, if it 
decides to adopt the recommendation, in accordance with the Paperwork 
Reduction Act of 1995, will publish a document in the Federal Register 
soliciting public comments on a proposed form.
    Comment: One commenter recommended that disclosure not be required 
if the HMO essentially admits substantial financial risk by agreeing to 
comply with enrollee survey and stop-loss requirements.

[[Page 13437]]

    Response: The statute requires that organizations disclose their 
incentive plan arrangements.
    Comment: One commenter asked what timeframes an organization may 
anticipate for HCFA's review of its incentive arrangements.
    Response: Timeframes for the review of incentive plans will be 
addressed in a forthcoming manual issuance. At this time, we anticipate 
that the average review time will be 60 days.

Implementation

    Comment: One commenter recommended that the final rules provide an 
explicit mechanism for dealing with disputes arising from and during 
the determination of whether physicians are at substantial financial 
risk.
    Response: We agree with the commenter that there should be 
procedures for these disputes. Details on the dispute procedures will 
be addressed in a forthcoming manual issuance.

Referral service

    Comment: We proposed to define ``referral services'' as any 
specialty, inpatient, outpatient, or laboratory services that a 
physician or physician group orders or arranges, but does not provide 
directly. One commenter believed that this definition is ambiguous. The 
commenter questioned whether we intended to distinguish between the 
services provided by the prepaid plan's physician employees and 
services provided by independent contract physicians. The commenter 
believed that absent knowing our position on this issue, the terms 
``provide directly'' in the definition is ambiguous. The commenter 
believed we should clarify that services provided by specialist 
physicians through a contract with the physician group would not 
constitute referral services. In addition, the commenter believed that 
``referral services'' should be limited to services that a physician is 
not licensed to provide, such as hospital services.
    Response: We disagree that the definition is ambiguous. We believe 
the problem the commenter had with this definition is related to the 
understanding of another term used in the definition, that is, the 
meaning of ``physician group.'' We assume that what the commenter is 
really asking is ``If a physician group contracts for services of a 
specialist, is the contract physician considered a member of the 
physician group?'' We see this as the real issue because, if the 
contract physician is a member of the physician group, then services 
furnished by that physician would be services furnished directly by the 
group. Thus, the services would not be referral services.
    We proposed to define ``physician group'' as a partnership, 
association, corporation, individual practice association, or other 
group that distributes income from the practice among members according 
to a prearranged plan unrelated to the members' referral levels. (For 
reasons that will be discussed later in this preamble, this final rule 
adopts a revised version of that definition. That is, we have deleted 
from the definition the phrase ``according to a prearranged plan 
unrelated to the members' referral levels''. We also no longer include 
an individual practice association in the definition.) According to 
this definition, a contract physician is not a member of the physician 
group.
    We disagree with the comment that referral services should be 
limited to services that a physician is not licensed to provide. The 
legislation requires the Secretary to determine if the plan places the 
physicians at substantial financial risk for services not provided by 
the physician group. Thus, referrals to specialists who are not part of 
the group practice are considered referral services in the 
determinations of risk. It is these services that the legislation 
intended to address. Prepaid plans generally use primary care 
physicians as gatekeepers. These models encourage the primary care 
physician gatekeeper to not use specialist services if he or she can 
perform the services. We support these models. The legislation, 
however, is designed to prevent restrictions on necessary specialist 
care.

Substantial Financial Risk

    Comment: Several commenters believed the definition of 
``substantial financial risk'' is overly restrictive. They believed it 
fails to fulfill the goal of only identifying outliers because it fails 
to address the variables that affect risk. One commenter suggested that 
it be redrafted or, if HCFA is unwilling to redraft the definition, 
that organizations be given the choice of either complying with the 
regulation as written or demonstrating to HCFA that their incentive 
plan does not put physicians at substantial financial risk.
    A number of commenters recommended, more specifically, that HCFA 
include the size of patient and physician pools (panels) in the risk 
formula threshold as, in their view, required by the legislation. On 
the other hand, one commenter stated that attempting to incorporate 
patient panel size as a risk factor would prove unduly complex and less 
workable than the approach contained in the proposed rule.
    Response: We have reconsidered this issue and, in this final rule, 
we take panel size into account in determining adequate stop-loss 
requirements (See Sec. 417.479(g)(2)(ii).) Analyses by Rossiter and 
Adamache (1990) (Health Care Financing Review, vol. 12, pp. 19-30) show 
that there is no significant variation in costs from year to year for 
counties with populations greater than 25,000. Based on these analyses, 
we have determined that physician groups with more than 25,000 patients 
are able to adequately spread risk and, therefore, are not at 
substantial financial risk, even if 100 percent of the physician 
group's income is at risk for referral services. This does not apply to 
panels of more than 25,000 patients as a result of pooling. (See 
Sec. 417.479(f).) Pooling of patients is discussed later in this 
preamble.
    As stated, our decision to set the threshold at 25,000 was based on 
the analyses done by Rossiter and Adamache. We would welcome 
information as to whether there are data that would support another 
threshold.
    With regard to the suggestion that we allow organizations the 
choice of either complying with the regulation as written or 
demonstrating that their incentive plan does not put physicians at 
substantial financial risk, we would be interested in receiving 
comments on how we might implement such an exception process.
    The remainder of this response applies to panels of less than 
25,000 patients. As stated in the proposed preamble, the size of the 
patient or physician pool can have several theoretical effects on 
substantial financial risk. Furthermore, there is no empirical evidence 
that could guide us on the effects of these and other factors. We 
requested information in this regard in the proposed preamble. 
Nonetheless, while commenters suggested that size is a factor, none of 
the commenters provided information on the exact relationship between 
size and risk. Therefore, we have no basis for specifying this 
relationship. Finally, the legislation discusses panel size only in 
regard to stop-loss protection and not in regard to substantial 
financial risk.
    Comment: One major organization stated that, under the proposed 
rule, prepaid plans that assess and/or distribute incentive payments 
more often than annually are subject to lower risk thresholds. It 
maintains that there are problems with this requirement as follows:
    First, it contends that the term ``assess'' as used in this regard 
is not

[[Page 13438]]
clear. It might, the organization suggests, be interpreted to bar plans 
from communication with physicians as to their progress in meeting 
annual goals. The organization stated that it disagrees with any 
interpretation of this requirement that might prevent plans that 
distribute incentive payments annually from working with their 
physicians on their mutual cost containment goals on a more frequent 
basis.
    Second, the proposed regulation does not achieve its goal of using 
an outlier approach in this area. Many organizations that use withhold 
and distribute, or assess, incentive payments more often than once a 
year exceed the 15 percent risk threshold. These organizations, 
however, fall within the 25 percent threshold set for plans 
distributing or assessing payments annually or less often.
    Another commenter stated that the frequency of the assessment or 
distribution should not affect the level or risk necessary to qualify 
as substantial financial risk.
    Response: The term ``assess'' is meant to refer to imposing a 
charge. It is not used in the meaning of an evaluation or appraisal of 
progress toward a goal.
    We agree that a 15 percent threshold is not an outlier, since the 
median withhold is between 10 and 20 percent. Also, there is no 
evidence that making assessments or distributions more often than 
annually affects the amount of risk placed on physicians. While our 
rationale in the proposed rule was based upon reasonable assumptions as 
to the impact of more frequent assessments or distributions, we now 
agree that the 15 percent threshold is inconsistent with our intent to 
use an outlier approach. Therefore, we have eliminated making a 
distinction on the basis of the frequency of the assessment or 
distribution. We establish the 25 percent threshold in all cases. The 
25 percent threshold is an outlier since it exceeds the median withhold 
of 10 to 20 percent. Proposed Sec. 417.479 has been revised to reflect 
the elimination of the distinction.
    Comment: One commenter stated that the proposed threshold for 
combination of withholds and bonuses does not identify only outliers. 
The commenter also stated that, in practice, physician performance will 
be either in the bonus area or in the withhold area; therefore, to 
limit the amount of financial risk that a physician will ultimately 
accept, it is not necessary to limit the combination. The commenter 
also pointed out that there is no evidence that upward variations on 
physician payments (bonuses) have the same potential to cause 
underutilization as downward variations (withholds).
    Response: If organizations do not use a combination of withholds 
and bonuses, there is no problem with setting the same limit for the 
combinations as for withholds and bonuses individually. Since it is 
possible for plans to use combinations of withholds and bonuses, it is 
necessary to set a limit on the combination. As indicated in the 
proposed preamble, to avoid putting physicians at substantial financial 
risk, we determined it necessary to use the same threshold for the 
combination.
    With regard to the last comment, we are not aware of any data on 
the effect of bonuses as opposed to withholds on physician behavior. We 
would, therefore, appreciate receiving any information in this regard.
    Comment: Several commenters recommended that we lower the 
threshold.
    Response: The proposed preamble had an extensive discussion of this 
issue. As we stated, because of the limited information available on 
this issue, the only logical approach is to use an outlier formula. 
Given this decision, the threshold of 25 percent that we proposed is 
consistent with the data that showed that the median withhold was 
between 10 to 20 percent. It is also consistent with the concept of 
substantial financial risk, which implies a greater than average risk. 
As indicated, the threshold is based on withhold data. Averaging in the 
organizations with capitation arrangements, which are the majority of 
organizations, and treating them as equal to 100 percent withhold would 
raise the threshold rather than lower it. We decided not to raise the 
threshold because that would not make a difference to the capitation 
arrangements. This would be so because, if capitation were considered 
equal to 100 percent withhold, all plans using capitation would be 
placing their physicians at substantial financial risk (unless the 
threshold were set at 100 percent). Furthermore, as indicated in the 
proposed preamble, the 25 percent withhold figure is within the range 
of discounts that physician groups frequently provide to various 
insurers. Physicians also lose similar amounts to bad debts.
    Comment: One commenter suggested that we include the risk 
arrangements between the physician groups and their individual 
physicians, because the prepaid plan may use this strategy to 
circumvent the process. The commenter maintained that the statute does 
not specifically exclude these arrangements from scrutiny. The 
commenter pointed out that the statute defines an incentive plan as 
``any compensation arrangement between an eligible organization and a 
physician that may directly or indirectly have the effect of reducing * 
* *'' [Emphasis added.] The commenter believed that the use of the 
words ``or indirectly'' indicates that the types of compensation 
arrangements should be looked at broadly.
    Response: As stated in an earlier response, we are requiring a 
prepaid health plan that contracts with an intermediate entity to 
disclose information about the physician incentive plans that the 
entity has with physician groups or physicians. This will prevent a 
prepaid plan from creating intermediate entities merely to evade the 
requirements of this rule.
    Furthermore, if the physician group subcontract with its physicians 
places the latter at substantial financial risk, the prepaid health 
plan must disclose the incentive arrangements. In order to minimize the 
burden on prepaid plans, we are not requiring disclosure of every 
incentive arrangement between physician groups and individual 
physicians, only of those under which the physicians are placed at 
significant financial risk.
    In regard to the phrase ``indirectly have the effect of reducing or 
limiting services,'' this phrase applies only to the arrangement 
between the plan and physician group. It does not apply to the 
relationship between the physician group and its individual physicians. 
``Indirect'' as used in the statute refers to methods of compensation 
to the physician groups that are not strictly monetary, but can be 
considered the equivalent. Examples would include providing stocks, 
waivers of debt, or equipment.
    The commenter has raised the issue of physician groups that have 
incentive arrangements with their individual physicians. As we examined 
this issue, we noted that the definition of ``physician group'' in 
proposed Sec. 417.479(b) technically would exclude such a physician 
group, since it would not be a group that ``distributes income from 
practice among members according to a * * * plan unrelated to the 
members' referral levels.'' (Emphasis added.) It was not intended that 
any physician group fall outside the scope of our definition, and thus 
technically outside the scope of these regulations. We, accordingly, 
are deleting ``according to a prearranged plan unrelated to the 
member's referral levels'' from the definition of ``physician group.'' 
It is also for this reason that we did not adopt any existing 
definitions of a physician group

[[Page 13439]]
or group practice that may similarly have contained provisions that 
would exclude a group Congress intended to reach in this rule (for 
example, the existing definition of ``medical group'' at 42 CFR 417.1 
or ``group practice'' in section 1877 of the Act.
    We are also taking this opportunity to point out that, although we 
define a ``physician incentive plan'' as ``any compensation arrangement 
between an organization and a physician or physician group that may 
directly or indirectly have the effect of reducing or limiting services 
furnished to Medicare beneficiaries or Medicaid recipients enrolled in 
the organization'' [emphasis added], this definition also encompasses a 
compensation arrangement between an entity with which the organization 
contracts and physicians/physician groups and a compensation 
arrangement between a physician group and its individual physicians. 
This is because, although not a direct relationship, a linkage between 
the organization and the physician group or individual physicians has 
been established through the entity or physician group with which the 
organization contracts.
    Comment: One commenter suggested that we not apply substantial 
financial risk to individual practice association (IPA) and direct 
contracting models. The commenter stated that there would be no loss if 
a few providers drop out.
    Response: While the organization may not feel a loss, the enrollees 
may be concerned about the loss. Furthermore, this may be an indication 
that the incentive plans are having an undesired effect. The 
legislation requires us to apply these regulations to all prepaid 
plans. There is no justification for treating IPA and direct 
contracting models differently. If anything, since these models 
frequently involve contracts with individual physicians, these 
physicians are less in a position to spread risk and may be at even 
greater risk than other models.
    Comment: Several commenters, including a major organization, raised 
the concern that they do not know the total payments and patient loads 
until the end of the year. They suggested that we substitute total 
potential payments, based on the most recent year's utilization and 
experience, in the substantial financial risk and stop-loss formulas.
    Response: We agree that this option is acceptable, unless the 
organization has information that suggests a significantly different 
situation; for example, the addition of a major new contract. 
Appropriate revisions have been made to proposed Sec. 417.479 to 
clarify this.
    Comment: A major organization suggested that we substitute an 
actuarially derived threshold instead of an outlier approach.
    Response: We reviewed this recommendation with several actuaries, 
including staff from HCFA's Office of the Actuary. We concluded that it 
is not feasible to make such an analysis. Actuaries can perform 
analyses for certain kinds of losses, such as loss of life or loss of 
income. However, the determination of what is a substantial loss of 
income to a physician or physician group is more of a subjective or 
policy decision than a measurable amount.
    The actuaries also indicated that they could not perform such an 
analysis because there are no empirical data to indicate how physicians 
respond to different levels of financial risk.
    Actuaries have supplied us with recommendations as to stop-loss 
protection, discussed later in this preamble. The recommendations 
result in different stop-loss requirements for different panel sizes. 
Also, as discussed earlier, we have determined that physicians or 
physician groups serving panels of over 25,000 patients are not at 
substantial financial risk. We are, however, interested in receiving 
current data on how physicians respond to different levels of financial 
risk.
    Comment: One commenter raised a concern that the Internal Revenue 
Service (IRS) is developing policy on withholds that defines them as 
discounts that would not be tax-exempt.
    Response: We have held discussions with the IRS to coordinate 
consistent policies and will continue to work with them.
    Comment: One organization commented that the threshold should only 
apply to the aggregate group of physicians and not to individual 
physicians. It stated that its incentive plan is within the specified 
limits for physician groups, but will exceed the limits for individual 
physicians whose behavior exceeds certain norms.
    Response: The legislation is concerned with whether a plan puts 
physicians or physician groups at substantial financial risk. Thus, the 
threshold policy applies to contracts between an organization and 
individual physicians, but only if the contract is specifically between 
the organization and an individual physician. As indicated earlier, we 
have not interpreted the legislation to apply to subcontracts between 
the physician group and its individual physicians.
    Comment: A major organization asked if a contract for primary care 
services outside the service area equals referral services.
    Response: Primary care services outside the service area are not 
``referral services.'' The prepaid plan, however, must ensure that all 
necessary services are available and accessible within the service 
area.
    Comment: A major organization commented that the proposed 
regulation poses a problem for staff model HMOs in medically 
underserved areas (MUAs). The commenter stated that, because the 
salaries of many physicians in community health centers (CHCs) are low 
(because they are often working under a Federal student loan repayment 
program), the formula we use to determine the risk threshold results in 
a threshold that is artificially low for these HMO programs. The 
commenter added that, to impose additional administrative obligations 
on these community programs, because of their bonus payment 
arrangements for salaried physicians, would divert time, energy, and 
resources away from their mission of providing health services in MUAs.
    Response: We share the concerns raised by this commenter. The low 
salaries do create an artificially lower threshold, and the centers 
have much more limited administrative resources. Nevertheless, these 
circumstances result in even greater pressures on these physicians to 
contain costs. With lower salaries, the physicians are more sensitive 
to factors that can affect their income. Therefore, it is even more 
appropriate to have the policies in this regulation apply to these 
centers. Unfortunately, we have not been able to develop a different 
policy for these centers. Note, however, that if an HMO contracts with 
a CHC, then, as indicated in an earlier response, these regulations 
would not apply to contracts between the centers and their physicians 
because they are subcontracts.

Capitation Arrangements With Physicians

    Comment: Several commenters, including a major organization, stated 
that the threshold should not apply to capitation. Their argument was 
that the thresholds were based on withhold data and, further, that it 
is difficult to separate services furnished by the physicians from 
referral services. The commenters also claimed that we did not specify 
that the capitation applies only to referral services.
    The commenters raised the concern that the capitation payments may 
include payments for services furnished directly by the physician 
group. Thus, they point out, we are limiting the

[[Page 13440]]
amount of risk a physician can accept for his or her own services. The 
commenters stated that to do so is beyond the mandate of the statute, 
which is intended to apply only to services not provided by the 
physician group.
    Response: We gave this issue a great deal of thought. We decided, 
however, to continue with our proposed policy of applying a 25 percent 
threshold. To exempt capitation from the threshold could place 
physicians who are compensated in this manner at substantial financial 
risk, without subjecting the prepaid plans to the requirement either to 
set limits to the risk in the form of maximums and minimums, or provide 
adequate stop-loss protection and conduct beneficiary surveys as 
required by the statute. Furthermore, the commenters are incorrect; the 
proposed and final rules are concerned with referral services. If the 
incentive plan applies only to the services furnished by the physician 
group, these rules do not apply. The legislation specifies that we 
address services not furnished by the physician group. If the incentive 
plan applies to all services or just referral services, these rules 
apply.
    The commenters are correct on these two points: our policy does 
affect services that the physician group directly provides if we are 
dealing with capitation for all services; and services furnished 
directly by the physician group or physician are not covered by the 
statute. However, when the capitation covers all services, we are not 
able to separate those service furnished directly from the referral 
services. And, since the referral services are our primary concern, we 
need to be inclusive rather than exclusive.
    Comment: One commenter recommended that we not require the maximum 
and minimum formula for capitation arrangements if the organization can 
show that a 25 percent differential had not occurred in the past.
    Response: While there is merit to this recommendation, we have 
decided to reject it. The legislation requires that organizations that 
place their physicians at substantial financial risk, as determined by 
the Secretary, provide stop-loss protection and conduct enrollee 
surveys. Thus, the formula is necessary for us to determine if 
substantial financial risk exists. Also, past behavior is no guarantee 
of future behavior. Thus, physicians could still feel the pressure if 
they are placed at substantial financial risk, regardless of past 
payments.
    Comment: One commenter believed the rule should distinguish between 
a monthly capitation payment to a physician group that includes an 
amount for referral services, and an incentive plan assessment or 
payment.
    Response: The applicability of the provisions of this rule depends 
upon the specific arrangements in the incentive plan. As stated 
earlier, if the incentive plan applies only to services directly 
furnished by the physician or physician group and does not cover 
referral services, the regulations do not apply. If the capitation 
includes payment for referral services, the provisions of 
Sec. 417.479(f)(5) apply. If the organization capitates its physicians 
only for services they directly furnish and uses withholds or bonuses 
(or a combination of withholds and bonuses) as incentives to control 
referrals, the requirements of Sec. 417.479(f)(5) concerning capitation 
do not apply. In this case, however, if the withholds or bonuses or 
combination of withholds and bonuses exceed the 25 percent risk 
threshold, the stop-loss and survey requirements of this rule apply.
    Comment: One commenter suggested that, if a physician group 
achieves a patient population of approximately 250 members from a 
single capitated HMO, there is no longer a need for the risk 
protection.
    Response: There is no evidence that supports this number. As 
indicated later in this preamble, we have set an exception for the 
stop-loss requirements that is based on panel size.
    Comment: A number of commenters stated that the proposed rules, as 
they relate to capitated payment arrangements, do not accommodate 
common, longstanding contractual arrangements and should be withdrawn 
to permit additional study.
    Response: The Group Health Association of America (GHAA) has 
supplied us with updated data as of the Winter 1993-94. Furthermore, 
Mathematica has published data from 1995. We took these data into 
account as we revisited our decisions regarding specific risk 
thresholds and issues concerning capitation and stop-loss protection. 
These data support the approach we have taken in this final rule. If 
more recent data exists, we would appreciate receiving it.
    Comment: Several commenters stated that they capitate their 
physicians but also provide adequate stop-loss protection. They 
believed that these physicians are not at risk, because of the stop-
loss protection.
    Response: We agree in principle with this view. If an HMO has stop-
loss protection in place that ensures that no more than 25 percent of a 
physician's or physician group's income is at risk, we would determine 
that the plan does not involve substantial financial risk.

Stop-Loss

    Comment: A commenter recommended that we put physicians at risk 
beyond the stop-loss limit. The commenter believed that setting an 
absolute limit on the amount of risk that physicians can accept (that 
is, requiring stop-loss protection to cover the cost of referrals in 
excess of 30 percent of payments) obstructs an organization's ability 
to control physician behavior beyond that point. The commenter 
suggested that the stop-loss requirement be constructed to allow for 
continued, but limited, risk sharing. The commenter recommended that 
the organization be allowed to hold physicians or physician groups 
responsible for 20 percent of the cost of referrals beyond the point at 
which the stop-loss protection begins. The commenter stated that it 
does not believe the statute requires an absolute limit on the amount 
of risk, but instead only ``adequate and appropriate'' stop-loss 
protection.
    Response: The approach suggested by this commenter is consistent 
with the policy used by a number of HMOs. The practice of requiring 
physicians to continue to share in the risk beyond a stop-loss limit 
makes the physicians sensitive to the need to avoid furnishing 
unnecessary services. Therefore, this final rule allows for continued, 
but limited, risk sharing beyond the point at which the stop-loss 
protection begins.
    For those prepaid plans that provide an aggregate stop-loss policy, 
we are setting the required stop-loss limit at 25 percent. The prepaid 
plan will bear 90 percent of the losses beyond this level and the 
physicians will bear 10 percent of the losses. (See 
Sec. 417.479(g)(2)(i).) Because we are adding a 90/10 ratio to the 
potential loss level, we believe it is necessary to reduce the proposed 
30 percent stop-loss limit to 25 percent to compensate for the added 
element of risk sharing. Furthermore, the 25 percent level is 
consistent with the threshold we established for substantial financial 
risk.
    The 90/10 split also applies to those plans that provide per 
patient stop-loss protection.
    Comment: Several commenters, including major organizations, stated 
that aggregate stop-loss policies are not currently used and would be 
difficult to obtain. They recommended that patient, dollar, and/or 
specific disease protections be substituted.
    Response: We have decided to allow plans to provide either 
aggregate or per-patient limit stop-loss policies. (See

[[Page 13441]]
Sec. 417.479(g)(2).) The amount of the per patient policy required to 
be considered adequate and appropriate will vary with the patient panel 
size and will be discussed later in this preamble. We reached this 
decision on the following basis.
    We agree that some organizations might have trouble purchasing 
aggregate stop-loss policies or that it may be expensive to switch from 
a per patient limit to an aggregate policy. Since most organizations do 
not have such policies, this aggregate policy requirement would, at the 
least, cause a significant change in policy, which could be very 
difficult or expensive to implement. Furthermore, actuarial analyses 
indicate that aggregate coverage is unlikely to be needed.
    On the other hand, there are some organizations that do provide 
aggregate stop-loss protection. Requiring them to switch to a per-
patient limit would also be expensive. There are advantages and 
disadvantages to both aggregate and per-patient stop-loss coverage. 
Aggregate policies provide greater overall protection, while per-
patient policies provide better protection at the individual patient 
level.
    Both of these options provide reasonable protection for physicians 
and their patients. By providing an option, we have eliminated the 
burden organizations might face to switch policies.
    We considered the recommendation to include specific disease 
protections. We reviewed the Department's preliminary plans for 
implementing the Medicare Catastrophic Coverage Act of 1988 (Public Law 
100-203), major provisions of which were repealed before being 
implemented. The Department had not planned to specify any specific 
diseases as catastrophic and instead planned to use specific dollar 
levels to define ``catastrophic'' expenses.
    Comment: Several commenters stated that the prepaid plans should 
not be required to pay for the cost of stop-loss protection. They 
believed they should be allowed to charge the physicians a reasonable 
premium for stop-loss protection.
    Response: Section 1876(i)(8)(ii) of the Act reads, in relevant 
part, as follows:
    (ii) If the plan places a physician or physician group at 
substantial financial risk * * * the organization--(I) provides stop-
loss protection for the physician or group * * *.

In the case where the physician or physician group decides to purchase 
its own stop-loss protection, we interpret ``provides'' to mean that 
the organization either pays for the premium or reduces the level at 
which the stop-loss protection applies by the cost of the stop-loss. We 
also rejected the proposal of allowing HMOs to make available stop-loss 
protection rather than paying for it. Making available is not 
consistent with providing.
    Thus, we provide, in Sec. 417.479(g)(2)(iii), that the prepaid plan 
may either (1) Provide the stop-loss protection directly, (2) purchase 
the stop-loss protection, or (3) if the physician or physician group 
purchases the protection, pay the portion of the premium that covers 
its enrollees or reduce the level at which the stop-loss protection 
applies by the cost of the stop-loss. We are interested in any comments 
on this provision and alternative proposals.
    Comment: Several commenters suggested that we establish a case-by-
case exceptions process for stop-loss requirements.
    Response: As stated previously for substantial financial risk, such 
a process would be administratively burdensome. Further, it would be 
difficult to make judgments.
    Comment: One commenter, a major organization, disputed our 
statement that there is little information available regarding the 
impact of various factors on physician behavior.
    Several commenters believed we should take patient panel size into 
account and exclude large panels from this requirement. Other 
commenters suggested that we have a higher stop-loss requirement, for 
example, $200,000 per patient, for larger panels. They noted that the 
legislation instructed us to take panel size into account for stop-loss 
protection. The commenters argued that, with a sufficiently large 
patient panel (generally a clinic), the physicians are able to spread 
the risk across all the patients.
    In addition, several commenters pointed out that a number of 
physician groups have contracts with many different HMOs, particularly 
IPA models, and have the equivalent of a large panel spread out among 
the HMOs. The commenters recommended that HMOs that contract with these 
groups be exempt from the stop-loss requirements.
    Response: Analyses by several actuarial firms and data from several 
HMOs support the position that having a large panel does reduce the 
level of risk. The data is also consistent with the findings of 
Rossiter and Adamache (1990) discussed previously. Based on these 
analyses, we have determined the limits specified in the following 
table (Table 1) for different panel sizes and have revised proposed 
Sec. 417.479(g)(2) accordingly. Providing a higher stop-loss 
requirement (a higher stop-loss level is a lower level of protection) 
is consistent with the legislation, which specified that we take panel 
size into account.

            Table 1.--Stop Loss Limits Per Patient Panel Size           
------------------------------------------------------------------------
            Number of patients              Stop-loss limits per patient
------------------------------------------------------------------------
Less than 1,000...........................  $10,000                     
1,000 to 10,000...........................  $30,000                     
10,000 to 25,001..........................  $200,000                    
Greater than 25,000 (unpooled)............  None                        
Greater than 25,000 (as a result of         $200,000                    
 pooling).                                                              
------------------------------------------------------------------------

    There are two ways physician groups can pool patients to meet the 
panel size requirements specified in the table: (1) Including 
commercial, Medicare, and/or Medicaid enrollees in the calculation of 
panel size, and (2) Pooling together, by the organization, of several 
physician groups into a single panel. Each method may lead to a panel 
size large enough to reduce the financial risk. These methods may be 
used to pool patients, provided they are consistent with the relevant 
contract between the physician or physician group and the prepaid plan. 
(For instance, if there are separate contracts for commercial, 
Medicare, and/or Medicaid enrollees, then, absent contractual 
provisions to the contrary, pooling would be precluded).
    We consider physician groups whose panels are greater than 25,000 
patients without pooling of patients as not at substantial financial 
risk. Thus, the organization would be exempt from stop-loss protection 
and beneficiary survey requirements.
    For those groups whose panel size is greater than 25,000 patients 
as a result of pooling, the organization is required to provide stop-
loss protection at the same level that is required if the panel size is 
between 10,000 to 25,000 patients ($200,000 per patient). This policy 
is adopted so that plans will not use pools to circumvent the stop-loss 
requirements. Furthermore, physicians may be at higher risk for panels 
that are pooled than panels that are not pooled since the former may 
experience greater variability in costs than the latter.
    We have not established an increasing scale for the aggregate stop-
loss option, except that those panels over 25,000 patients without 
pooling do not need aggregate stop-loss coverage. The scale does not 
need to increase because, since a percentage formula is used, the 
dollar

[[Page 13442]]
amount represented by the threshold rises as the panel size increases.
    We are willing to consider policy alternatives that are supported 
by empirical data. We are interested in receiving public comments in 
this regard.

Surveys

    Comment: Several commenters believed a survey of enrollee 
satisfaction should be required of all prepaid plans, not just those 
where there is substantial financial risk.
    Response: While most prepaid plans do conduct surveys, there is no 
legislative requirement to do so except as prescribed by this 
regulation.
    Comment: One commenter, a major organization, stated that the 
proposed rule is silent about what HCFA must do with the survey 
results. This organization proposed that the regulations explicitly 
require HCFA to (1) Annually review the results as they are filed, (2) 
share the complete results with the appropriate PRO, (3) take 
appropriate action if the results indicate a problem; and (4) ensure 
public access to the survey results by requiring that they be published 
and disseminated to interested parties by the PRO, the organization, or 
HCFA.
    Response: We partially addressed this comment earlier in this 
preamble. The survey results will be submitted to plan managers in 
HCFA's central and regional offices. They will review the results in 
conjunction with PRO results, disenrollment data, reconsiderations, and 
related information, as part of ongoing compliance monitoring 
activities. As HCFA develops performance measures and report cards over 
the next several years, it will consider the best way to make the 
survey results available to consumers and providers.
    Comment: One commenter suggested that disenrollees that move be 
excluded from the surveys.
    Response: We agree with this recommendation since it may be very 
hard to locate these beneficiaries. Therefore, we have revised proposed 
Sec. 417.479(g) accordingly.
    Comment: One commenter, a major organization, requested that we 
specify that surveys do not need to be done more often than annually.
    Response: This final rule, at Sec. 417.479(g)(1)(iv), revises the 
requirement to specify that the survey must be conducted no later than 
1 year from the effective date of the incentive plan, and at least 
every 2 years thereafter. As noted in the DATES section of this 
preamble, compliance with Sec. 417.479(g)(1)(iv) is not required until 
1 year after the effective date of this rule.

Medicaid

    Comment: One commenter asked whether States have the option to 
prohibit incentive plans that place providers at a substantial 
financial risk. The commenter believed this option would eliminate the 
need to obtain and monitor stop-loss requirements and a member survey.
    Response: Nothing in OBRA '90 prohibits States from placing more 
restrictive requirements under State law on the physician incentive 
plans of their HMO and HIO contractors. As a result, States do have the 
option of under State law prohibiting altogether incentive plans that 
place providers at substantial financial risk, regardless of any stop-
loss arrangements and member satisfaction surveys used by the 
contractor. We point out, however, that the sanctions and penalties 
provided for under this final rule would apply only with respect to 
violations of the Federal requirements in this rule.
    Comment: One commenter asked whether, if annual member surveys are 
already required under quality assurance standards, an additional 
member survey is necessary for those plans placing providers at 
substantial financial risk.
    Response: No additional survey is required, as long as the survey 
conducted under the quality assurance standards meets the requirements 
specified at Sec. 417.479(g) of this rule.
    Comment: One commenter stated that sufficient time must be allowed 
for States to incorporate the new provisions in program rules and 
existing provider agreements.
    Response: We agree with this comment. As a result, as stated in the 
DATES section of this preamble, the compliance date for most provisions 
is 60 days after publication of this final rule. This time period is 
the standard commonly used for implementation under Medicaid.
    Comment: One commenter stated that incentive plans for physicians 
serving Medicaid recipients need to address access to primary and 
preventive services and quality of care services. The commenter stated 
that these plans must include incentives based on specific health 
outcomes, timely access to primary care, and enrollee satisfaction 
based on specific health outcomes.
    Response: OBRA '90: (1) Prohibits certain physician incentive 
arrangements and (2) specifies two requirements to be met if other 
types of arrangements that place physicians at substantial financial 
risk are used. The statute does not go beyond these prohibitions and 
requirements to mandate the use of any particular type of incentive 
arrangements, including those described by the commenter. Accordingly, 
the rule does not include any requirements that certain types of 
incentives be used.
    Comment: One State agency stated that incentive plans for 
physicians serving Medicaid must limit the payment of any incentives to 
once annually. The commenter believed this would decrease the 
possibility that physicians will cut back on services or refuse to 
treat individual patients because of fear of financial losses.
    Response: OBRA '90 prohibited only one type of incentive 
arrangement: those that make specific payments, ``directly or 
indirectly under the plan to a physician or physician group as an 
inducement to reduce or limit medically necessary services provided 
with respect to a specific individual enrolled with the organization.'' 
All other types of incentive arrangements are allowed, including those 
that place physicians at ``substantial financial risk.'' (Those that 
place physicians at substantial financial risk must meet certain 
requirements for the provision of stop-loss protection for physicians 
and periodic enrollee satisfaction surveys.) The statute makes no 
provision, including the one recommended by the commenter, for banning 
other types of incentive plans. We cannot impose the restrictions on 
the incentive program that were recommended by the commenter. As noted 
above, however, OBRA '90 would not prohibit a State from imposing such 
a restriction under State law.
    Comment: One commenter recommended that the reporting and other 
requirements for physician incentive plans be limited to only those 
HMOs, CMPs, or HIOs that institute percentage risk levels that are 
greater for the Medicaid and Medicare populations than for their 
commercial contracts.
    Response: With respect to Medicaid, OBRA '90 amended section 
1903(m)(2)(A) of the Act to condition a State's receipt of FFP for 
expenditures in prepaid capitation or other risk-based reimbursement 
contracts upon a contractor's adherence to the requirements for 
physician incentive plans also described in OBRA '90. The statute does 
not authorize the Secretary to exempt certain plans or State Medicaid 
contracts from compliance with these reporting and other requirements. 
Therefore, we cannot change the regulation as the commenter has 
proposed.

[[Page 13443]]

    Comment: One commenter stated that the definitions of ``substantial 
risk,'' ``withhold,'' and ``bonus'' are too inflexible to meet the 
special needs related to the Medicaid program. Citing monthly 
eligibility variation and differences in payments based on varying 
Medicaid eligibility categories as examples of variables that can 
affect payment to a provider in any given period, the commenter 
questioned how, if incentive payments are based on end of year results 
and a percent sharing arrangement, a plan can know in advance if its 
providers will be at substantial risk.
    Response: The maximum potential (as opposed to the actual) amount 
of withhold or bonus lost or awarded, respectively, determines whether 
a prepaid plan has placed a physician or physician group at substantial 
financial risk. If the plan places the practitioner at risk of losing 
more than 25 percent of his/her potential earnings, then the plan has 
placed the physician or physician group at substantial financial risk. 
The actual amount of withhold returned or not returned or bonus awarded 
or not awarded at the end of the assessment and disbursement period is 
not the determinant of substantial financial risk because money 
returned or awarded after care has already been delivered does not 
serve as an inducement. It is the promise of potential earnings (or the 
prospect of loss thereof) that serves as the inducement. Therefore, a 
prepaid plan does not need to know its end of year results in order to 
determine if it is placing its physicians and physician groups at 
substantial financial risk.
    The minimum and maximum potential earnings, including the portions 
that are the result of incentive arrangements, should be known both to 
the plan and the physician or physician group under contract at the 
beginning of each risk assessment period. As a result, the regulation 
states that capitation arrangements in which the maximum and minimum 
possible payments are not clearly explained in the physician's or 
physician group's contract constitute substantial financial risk.
    Comment: One commenter stated that the rules are not very clear on 
defining a number of terms. As examples, the commenter asked the 
following questions:
     What does ``risk based on the levels or costs of referral 
services'' mean? Are the ``levels or costs'' applied to an individual 
capitated physician, physician group, or organization?
     What if the amount allocated to cover referral services is 
placed in a pool account for debiting patient costs and the amount from 
these services that might be paid as part of the incentive plan depends 
on the performance of the larger pool formed by a number of separate 
physicians and these physicians pool accounts?
     What if the ``capitation'' amount actually paid to a 
physician is meant to cover that physician's services and involves a 15 
percent withhold?
    Response: In response to the first question, the term ``referral 
services'' is defined in Sec. 417.479(c) of the regulation. In 
addition, the word ``level'' has been changed to ``use'' for greater 
clarity.
    In response to the first two questions, it is important to note 
that, in general, the regulation does not attempt to address how a 
prepaid plan chooses to design or implement its physician incentive 
plan. Rather, it attempts to regulate one of the final products, that 
is, the maximum financial risk to which a physician or physician group 
may be exposed for referral services. Plans may use a variety of 
incentive arrangements, including those identified by the commenter, in 
structuring their physician incentive plans. However, prepaid plans 
should be able to determine or establish, as part of their physician 
incentive plans, the maximum financial risk, when the risk is based on 
referral services, to which a physician or physician group may be 
exposed under the physician incentive plan. If a plan is unable, based 
on the structure and operation of its incentive plan, to determine the 
amount of the financial risk, then, according to 
Sec. 417.479(f)(5)(ii), we would determine that the plan places 
physicians or physician groups at ``substantial financial risk'' and 
the plan would be required to implement stop-loss protection and 
conduct enrollee surveys. As indicated previously, we have decided to 
allow a plan to pool patients for different physician groups.
    In response to the third question, the threshold for withhold 
arrangements is established in Sec. 417.479(f) of this final rule. This 
section would apply only if the withhold is based in part or in its 
entirety on utilization or costs of referral services. If the return of 
the withhold is based solely on the physicians' own services, then, 
under Sec. 417.479(f) of this final rule, these regulations would not 
apply.
    Comment: One commenter stated that the proposed rule does not allow 
for the differences found in HIOs, specifically that they have 
mandatory enrollment in a specific area, may be at-risk for 
retroactively eligible individuals, and may be responsible for an 
ongoing category of special members who are not capitated to a 
particular physician. The commenter noted that the cost of services to 
this population affects the incentive plan (withhold payment and 
surplus sharing). The commenter also specifically noted that the HIOs 
in California which are Medicaid only were not specifically addressed 
in the proposed rule.
    Response: The Consolidated Omnibus Budget Reconciliation Act of 
1985 (COBRA '85) generally subjected HIOs which were operational on or 
after January 1, 1986, to the same requirements as other organizations 
contracting with Medicaid agencies on a risk basis to provide or 
arrange for comprehensive services (HMOs). (Certain exceptions to this 
are allowed under the law.) Therefore, this proposed rule did not 
reiterate the fact that HIOs subject to the same requirements for HMOs 
are also subject to these requirements for physician financial 
incentive plans.
    Further, OBRA '90 did not contain any provisions calling for the 
differential treatment of HIOs. Because of this, and the historical 
interest of the Congress in subjecting HIOs to the same standards as 
HMOs, we did not identify the need for differential treatment of HIOs 
in this regulation.
    Comment: One commenter stated that the proposal on enrollee surveys 
excludes only those Medicaid enrollees who have disenrolled because of 
a loss of Medicaid eligibility. The commenter recommended we consider 
excluding those who disenroll from a prepaid plan because they moved 
from the plan's service area.
    Response: As stated earlier, we agree that individuals who have 
disenrolled from the plan because they have moved outside of a plan's 
service area may be omitted from the plan's enrollee survey. The 
regulations text at Sec. 417.479(g)(1) has been appropriately modified.
    Comment: One commenter stated that, in addition to an enrollee 
survey, monitoring of the complaint/appeals process for the plan and 
the State's Medicaid fair hearing process would be another check on the 
quality of care and the denial of needed service.
    Response: OBRA '90 does not address monitoring the complaint/
appeals process for the plan and the State Medicaid fair hearing 
process in the State. However, monitoring the plan's complaint hearing 
process is the responsibility of the State Medicaid agency as part of 
its routine monitoring of its managed care contractors. In addition, 
HCFA routinely monitors a State's fair hearing process as part of the 
monitoring of each State's Medicaid plan. As a result, these areas are 
not included in these regulations.

[[Page 13444]]


Miscellaneous

    Comment: One commenter recommended that we clarify the definition 
of ``medically necessary services'' as it applies in the prohibition on 
specific payment as an inducement to reduce or limit medically 
necessary services to a specific enrollee.
    Response: We are preparing a final rule entitled ``Medicare 
Program: Criteria and Procedures for Making Medical Services Coverage 
Decisions that Relate to Health Care Technology.'' This rule will 
specify the definition of medically necessary services that will apply 
for purposes of the prohibition in question. (The rule will be in 
response to a notice we published in the Federal Register on April 29, 
1987, at 52 FR 15559, that requested comments on procedures for medical 
services coverage decisions.)
    Comment: One commenter stated that managed care plans should be 
specifically directed to provide for effective physician participation 
in the development of incentive plans and other elements of the 
organization's management.
    Response: Physicians have the opportunity for input before they 
sign a contract with the organization. Physicians have the opportunity 
to negotiate all aspects of the contract. Since the contract specifies 
the nature of the incentive arrangements, the physicians have an 
opportunity for input through the negotiation process.
    Comment: Some commenters recommended that patients be allowed 
direct access to specialists and/or that the prepaid plan explain, as 
part of the enrollment contract, that patients have limited access to 
specialists.
    Response: HCFA supports the practice of HMOs using gatekeepers to 
limit patients from direct access to specialists. HMOs have found this 
to be an effective way to limit inappropriate utilization and 
expenditures. HMOs are required to explain this practice as part of the 
enrollment.
    Comment: Several commenters suggested that there be an appeals 
process for physicians and patients.
    Response: HCFA requires prepaid plans to provide an appeals process 
for enrollees. For physicians, there are several arrangements. All 
physicians have an opportunity to informally appeal decisions through 
the plan's medical review board and through the contract negotiation 
process. In addition, for Medicare risk contractors, unaffiliated 
physicians can represent a Medicare beneficiary in an appeal to the 
prepaid plan. In the case of a cost contract, the physician can 
represent a beneficiary in an appeal to whichever entity (prepaid plan, 
carrier, or intermediary) made the determination.

VII. Provisions of the Final Regulations

    The proposed rule is adopted, with the changes listed below. Many 
of these changes are discussed in section V. of this preamble. If the 
change is not discussed in section V, the reason for the change is 
given below.

Changes to Proposed Sec. 417.479

     We add a new paragraph (a); and designated proposed 
paragraph (a) as paragraph (b). New paragraph Sec. 417.479(a) is added 
to reflect the requirement at section 1876(i)(8) of the Act that each 
contract between HCFA and an eligible organization contain provisions 
related to physician incentive plans. This new paragraph also makes it 
clear why this provision is placed in part 417, subpart L (Medicare 
Contract Requirements).
     We designate paragraph (b) as paragraph (c) and revise the 
definition of ``physician group'' so that it no longer inadvertently 
excludes physician groups that pay their physicians using a methodology 
under which the amount of payment is affected by referrals. We also 
clarify, in that definition, that an IPA is a physician group only if 
it is composed of individual physicians and has no subcontracts with 
physician groups.
     We designate proposed (c) as paragraph (d). We also revise 
this paragraph to remove language that, because of the addition of new 
paragraph (a), became redundant. Also, in response to a comment, we 
change ``to reduce or limit medically necessary services'' to ``to 
reduce or limit medically necessary services covered under the 
organization's contract''.
     Proposed paragraph (d) is designated as paragraph (e). 
Additionally, the difference in risk threshold based on the frequency 
of distribution or assessment of incentive payments is removed.
     Proposed paragraph (e) is designated as paragraph (f) and 
is revised to--
    + Provide a definition of ``potential payments'' and clarify that 
it is these payments that are used in the calculation of the level of 
risk.
    + Provide that substantial financial risk does not exist if, 
without pooling, the patient panel size is 25,000 patients or more.
     Proposed paragraph (g) is revised to--
    + Specify that individuals who disenroll from a prepaid plan 
because they relocate outside the plan's service area need not be 
included in the enrollee survey.
    + Provide that, in the case of aggregate stop-loss protection, the 
protection must cover 90 percent of the costs of referral services 
(beyond allocated amounts) that exceed 25 percent of potential 
payments.
    + Establish, in the case of stop-loss protection based on a per-
patient limit, requirements as to the amount of stop-loss protection 
that are based on patient panel size.
     Proposed paragraph (h) is revised to-
    + Specify the items of information that must be disclosed to HCFA 
and to Medicare beneficiaries and, in accordance with Sec. 434.70(a)(3) 
and (a)(4), to the State Medicaid agency or recipient, respectively.
    + Include methods that may be used in the calculation of panel 
size.
    + Specify those types of changes in the incentive plan that must be 
reported to HCFA and require that this information be submitted to HCFA 
45 days before implementing the changes.
    + Remove proposed paragraph (h)(5). The proposed paragraph 
addressed when organizations with existing contracts must comply with 
the disclosure requirements. Because that provision would become 
quickly irrelevant, we have decided to address this issue in the DATES 
section of this final rule, rather than by incorporation into the CFR.
    + Require that organizations provide Medicare beneficiaries a 
summary of the disclosure information, if they request it.
     We designate proposed Sec. 417.479(i) as Sec. 417.479(j). 
We add a new Sec. 417.479(i) to specify requirements related to 
subcontracting arrangements.

Changes to Proposed Sec. 434.70

     Proposed paragraph (a)(2) is revised to--
    + Require compliance with Secs. 417.479(d) through (g) and the 
requirements related to subcontracts set forth at Sec. 417.479(i) if 
the subcontract is for the provision of services to Medicaid 
recipients.
    + Specify the items of information that must be disclosed to the 
State agency.
    + Require that the organization provide certain information 
concerning the physician incentive plan to any Medicaid recipient who 
requests it.
    + Remove proposed paragraph (a)(2)(iv). The proposed paragraph 
addressed when organizations with existing contracts (agreements) must 
comply with the disclosure requirements. Because that provision

[[Page 13445]]
would quickly become irrelevant, we have decided to address this issue 
in the DATES section of this final rule, rather than by incorporation 
into the CFR.

Crosswalk Between Proposed Rule and This Final Rule

    Note that those provisions related to civil money penalties and 
intermediate sanctions that were included in the July 22, 1991, 
proposed rule and that were merely republished in the December 1992 
proposed rule on physician incentive plans are not included in this 
final rule or in the following crosswalk.

------------------------------------------------------------------------
                 Proposed                             This rule         
------------------------------------------------------------------------
                                            Sec.  417.479(a)--new       
                                             contents.                  
Sec.  417.479(a)..........................  Sec.  417.479(b).           
Sec.  417.479(b)..........................  Sec.  417.479(c).           
Sec.  417.479(c)..........................  Sec.  417.479(d).           
Sec.  417.479(d)..........................  Sec.  417.479(e).           
Sec.  417.479(e)..........................  Sec.  417.479(f).           
Sec.  417.479(f)..........................  Content deleted.            
Sec.  417.479(g)..........................  Sec.  417.479(g).           
Sec.  417.479(h)..........................  Sec.  417.479(h).           
                                            Sec.  417.479(i)--new       
                                             contents.                  
Sec.  417.479(i)..........................  Sec.  417.479(j).           
Sec.  417.495(a)(7).......................  Sec.  417.500(a)(9).        
Sec.  434.44(a)...........................  Sec.  434.44(a).            
                                            Sec.  434.70(a)(3) and      
                                             (a)(4)--added.             
Sec.  1003.100(b)(vi).....................  Sec.  1003.100(b)(vi).      
Sec.  1003.101 (definitions)..............  Sec.  1003.101--only        
                                             definition of ``physician  
                                             incentive plan'' added by  
                                             this rule.                 
Sec.  1003.103(e)(iv) through (e)(vi).....  Sec.  1003.103(e)(iv)       
                                             through (e)(vi).           
Sec.  1003.106(a)(4)(vii).................  Sec.  1003.106(a)(4)(vii).  
------------------------------------------------------------------------

VIII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     Whether the information collection is necessary and useful 
to carry out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the following sections of this document that contain information 
collection requirements:
    The information collection requirements in Sec. 417.479(g)(1) (and 
Sec. 434.70(a)(3) for Medicaid) concern organizations that operate 
incentive plans that place physicians or physician groups at 
substantial financial risk and require them to conduct annual enrollee 
surveys that include either all current Medicare/Medicaid enrollees in 
the organization and those who have disenrolled (other than because of 
loss of eligibility in Medicaid or relocation outside the 
organization's service area) in the past 12 months, or a sample of 
these same enrollees and disenrollees. These surveys must be designed, 
implemented, and analyzed in accordance with commonly accepted 
principles of survey design and statistical analysis. They must address 
enrollees/disenrollees satisfaction with the quality of services 
furnished and their degree of access to the services. We estimate that 
200 organizations will conduct the surveys each year. We estimate that 
a total of approximately 90,000 enrollees will respond to the survey.
    The information collection requirements in Secs. 417.479(h)(1) and 
(h)(2), 417.479(i), and 434.70(a)(3) specify that disclosure concerning 
physician incentive plans must be made to HCFA or to the State, as 
appropriate. The requirements apply to physician incentive plans 
between eligible organizations and individual physicians or physician 
groups with whom they contract to furnish medical services to 
enrollees. The requirements apply only to physician incentive plans 
that base compensation on the use or cost of services furnished to 
Medicare beneficiaries or Medicaid recipients.
    The disclosure must contain the following information:
    (1) Whether services not furnished by the physician or physician 
group are covered by the incentive plan. (If not, disclosure of other 
aspects of the plan need not be made.)
    (2) The type of incentive arrangement.
    (3) If the incentive plan involves a withhold or bonus, the percent 
of the withhold or bonus.
    (4) The amount and type of stop-loss protection.
    (5) The patient panel size and, if patients are pooled, the pooling 
method used.
    (6) In the case of capitated physicians or physician groups, 
capitation payments paid to primary care physicians for the most recent 
year broken down by percent for primary care services, referral 
services to specialists, and hospital and other types of provider 
services.
    (7) In the case of prepaid plans that must conduct beneficiary/
recipient surveys, the survey results.
    An organization must provide the information upon application for a 
contract; upon application for a service area expansion; at least 45 
days before implementing certain changes in its incentive plan, and 
within 30 days of a request by HCFA or the State. The respondents that 
will provide the information are HMOs, CMPs, HIOs, and certain 
subcontractor entities that contract with the Medicare program or 
States and have physician incentive plans. We estimate that 
approximately 600 organizations will submit the information.
    Sections 417.479(h)(3) and 434.70(a)(4) require that the following 
information be provided to any Medicare beneficiary or Medicaid 
recipient, respectively, who requests it: Whether the plan uses a 
physician incentive plan that affects the use of referral services; if 
so, the type of incentive arrangement; whether stop-loss protection is 
provided; and, if a survey is required, a summary of the survey 
results. The respondents who will provide this information will be 
HMOs, CMPs, HIOs, that contract with the Medicare program or States and 
have physician incentive plans. We estimate that approximately 300 
organizations will provide this information to a total of approximately 
1,500 Medicare beneficiaries and 1,500 Medicaid recipients.
    The table below indicates the annual number of responses for each 
regulation section in this final rule containing information collection 
requirements, the average burden per response in minutes or hours, and 
the total annual burden hours.

----------------------------------------------------------------------------------------------------------------
                                              Annual No.                                                 Annual 
                CFR section                       of         Annual       Average burden per response    burden 
                                              responses     frequency                                     hours 
----------------------------------------------------------------------------------------------------------------
417.479(g)(1)..............................       90,000            1   10 minutes....................    15,000
417.479(h) (1) and (2) and 417.479(I)......          600            1   1 hour........................       600

[[Page 13446]]
                                                                                                                
417.479(h)(3)..............................        1,500            1   10 minutes....................       250
434.70(a)(4)...............................        1,500            1   10 minutes....................       250
----------------------------------------------------------------------------------------------------------------



    We have submitted a copy of this final rule with comment period to 
OMB for its review of the above information requirements. A document 
will be published in the Federal Register when OMB approval is 
obtained.
    If you comment on these information collection and recordkeeping 
requirements, please mail your comments to the following address: 
Health Care Financing Administration, Office of Financial and Human 
Resources, Management Planning and Analysis Staff, Room C2-26-17, 7500 
Security Boulevard, Baltimore, MD 21244-1850.

IX. 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. For purposes of the 
RFA, all HMOs, CMPs, and HIOs are considered to be small entities.
    In addition, section 1102(b) of the Act requires the Secretary to 
prepare a regulatory impact analysis if a 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.
    This final rule with comment period will amend the regulations 
governing prepaid health care organizations with Medicare or Medicaid 
risk contracts. Sections 4204(a) and 4731 of OBRA 1990 repealed the 
prohibition of physician incentive plans in prepaid health care 
organizations and enacted requirements, effective January 1, 1992, for 
regulating these plans.
    One of the requirements imposed was that each Medicare contract 
with a prepaid health care organization stipulate that, if a physician 
incentive plan places a physician or physician group at ``substantial 
financial risk'' for services not provided directly, the prepaid health 
plan organization must: (1) Provide the physician or physician group 
with adequate and appropriate stop-loss protection, and (2) conduct 
surveys of currently and previously enrolled members to assess the 
degree of access to services and the satisfaction with the quality of 
services.
    We received one comment that dealt with the impact statement in the 
proposed rule published in the Federal Register on December 14, 1992 
(57 FR 59034). The commenter believed that the proposed rule would have 
a substantial impact on prepaid health care organizations. The 
commenter stated that it would be required to make significant changes 
to limit physician group participation in incentive programs. The 
commenter also believed the proposed rule would limit its ability to 
control costs and also result in higher administrative expenses. We 
believe most plans already meet a majority of our requirements, as 
indicated by the survey data collected by GHAA and Mathematica 
discussed in the preamble. We strongly believe that if physicians are 
at substantial financial risk, organizations must provide stop-loss 
protection to ensure that essential health care services are received 
by Medicare beneficiaries and Medicaid enrollees.
    All of the approximately 600 HMOs, CMPs, and HIOs could be affected 
by the revised incentive plan disclosure requirements. We believe, 
however, that few incentive plans will require changes to comply with 
the regulations. In addition, since we expect that most current 
incentive plans already comply with the regulations, we believe that we 
will rarely need to impose intermediate sanctions or civil money 
penalties on prepaid health plan organizations that fail to provide 
covered medically necessary services. Further, we expect few additional 
surveys of currently and previously enrolled members will be necessary 
to assess the degree of access to services and the satisfaction with 
the quality of services. Thus, we believe that additional costs will be 
incurred by only a small number of organizations.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act because we have determined, and the Secretary certifies, 
that this 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. We will, 
however, publish a regulatory flexibility analysis and regulatory 
impact analysis if we receive comments and data that would enable us to 
do so.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 417

    Administrative practice and procedure, Health maintenance 
organization (HMO), Medicare, Reporting and recordkeeping requirements.

42 CFR Part 434

    Grant programs--Health, Health maintenance organization (HMO), 
Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 1003

    Administrative practice and procedure, Fraud, Grant programs--
Health, Health facilities, Health profession, Maternal and child 
health, Medicaid, Medicare, Penalties.
CHAPTER IV--HEALTH CARE FINANCING ADMINISTRATION, DEPARTMENT OF HEALTH 
AND HUMAN SERVICES
    I. Chapter IV of title 42 is amended as set forth below:

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

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

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

    2. A new Sec. 417.479 is added to read as follows:


Sec. 417.479  Requirements for physician incentive plans.

    (a) The contract must specify that an organization may operate a 
physician incentive plan only if--
    (1) No specific payment is made directly or indirectly under the 
plan to a physician or physician group as an inducement to reduce or 
limit medically necessary services furnished to an individual enrollee; 
and

[[Page 13447]]

    (2) The stop-loss protection, enrollee survey, and disclosure 
requirements of this section are met.
    (b) Applicability. The requirements in this section apply to 
physician incentive plans between eligible organizations and individual 
physicians or physician groups with whom they contract to provide 
medical services to enrollees. These requirements apply only to 
physician incentive plans that base compensation (in whole or in part) 
on the use or cost of services furnished to Medicare beneficiaries or 
Medicaid recipients.
    (c) Definitions. For purposes of this section:
    Bonus means a payment an organization makes to a physician or 
physician group beyond any salary, fee-for-service payments, 
capitation, or returned withhold.
    Capitation means a set dollar payment per patient per unit of time 
(usually per month) that an organization pays a physician or physician 
group to cover a specified set of services and administrative costs 
without regard to the actual number of services provided. The services 
covered may include the physician's own services, referral services, or 
all medical services.
    Payments means any amounts the organization pays physicians or 
physician groups for services they furnish directly, plus amounts paid 
for administration and amounts paid (in whole or in part) based on use 
and costs of referral services (such as withhold amounts, bonuses based 
on referral levels, and any other compensation to the physician or 
physician group to influence the use of referral services). Bonuses and 
other compensation that are not based on referral levels (such as 
bonuses based solely on quality of care furnished, patient 
satisfaction, and participation on committees) are not considered 
payments for purposes of this subpart.
    Physician group means a partnership, association, corporation, 
individual practice association, or other group that distributes income 
from the practice among members. An individual practice association is 
a physician group only if it is composed of individual physicians and 
has no subcontracts with physician groups.
    Physician incentive plan means any compensation arrangement between 
an organization and a physician or physician group that may directly or 
indirectly have the effect of reducing or limiting services furnished 
to Medicare beneficiaries or Medicaid recipients enrolled in the 
organization.
    Referral services means any specialty, inpatient, outpatient, or 
laboratory services that a physician or physician group orders or 
arranges, but does not furnish directly.
    Risk threshold means the maximum risk, if the risk is based on 
referral services, to which a physician or physician group may be 
exposed under a physician incentive plan without being at substantial 
financial risk.
    Withhold means a percentage of payments or set dollar amounts that 
an organization deducts from a physician's service fee, capitation, or 
salary payment, and that may or may not be returned to the physician, 
depending on specific predetermined factors.
    (d) Prohibited physician payments. No specific payment of any kind 
may be made directly or indirectly under the incentive plan to a 
physician or physician group as an inducement to reduce or limit 
covered medically necessary services covered under the organization's 
contract furnished to an individual enrollee. Indirect payments include 
offerings of monetary value (such as stock options or waivers of debt) 
measured in the present or future.
    (e) General rule: Determination of substantial financial risk. 
Substantial financial risk occurs when the incentive arrangements place 
the physician or physician group at risk for amounts beyond the risk 
threshold, if the risk is based on the use or costs of referral 
services. Amounts at risk based solely on factors other than a 
physician's or physician group's referral levels do not contribute to 
the determination of substantial financial risk. The risk threshold is 
25 percent.
    (f) Arrangements that cause substantial financial risk. For 
purposes of this paragraph, potential payments means the maximum 
anticipated total payments (based on the most recent year's utilization 
and experience and any current or anticipated factors that may affect 
payment amounts) that could be received if use or costs of referral 
services were low enough. The following physician incentive plans cause 
substantial financial risk if risk is based (in whole or in part) on 
use or costs of referral services and the patient panel size is not 
greater than 25,000 patients or is greater than 25,000 patients only as 
a result of pooling patients using a method set forth in paragraph 
(h)(1)(v) of this section:
    (1) Withholds greater than 25 percent of potential payments.
    (2) Withholds less than 25 percent of potential payments if the 
physician or physician group is potentially liable for amounts 
exceeding 25 percent of potential payments.
    (3) Bonuses that are greater than 33 percent of potential payments 
minus the bonus.
    (4) Withholds plus bonuses if the withholds plus bonuses equal more 
than 25 percent of potential payments. The threshold bonus percentage 
for a particular withhold percentage may be calculated using the 
formula--

Withhold %=-0.75 (Bonus %)+25%.

    (5) Capitation arrangements, if--
    (i) The difference between the maximum possible payments and 
minimum possible payments is more than 25 percent of the maximum 
possible payments; or
    (ii) The maximum and minimum possible payments are not clearly 
explained in the physician's or physician group's contract.
    (6) Any other incentive arrangements that have the potential to 
hold a physician or physician group liable for more than 25 percent of 
potential payments.
    (g) Requirements for physician incentive plans that place 
physicians at substantial financial risk. Organizations that operate 
incentive plans that place physicians or physician groups at 
substantial financial risk must do the following:
    (1) Conduct enrollee surveys. These surveys must--
    (i) Include either all current Medicare/Medicaid enrollees in the 
organization and those who have disenrolled (other than because of loss 
of eligibility in Medicaid or relocation outside the organization's 
service area) in the past 12 months, or a sample of these same 
enrollees and disenrollees;
    (ii) Be designed, implemented, and analyzed in accordance with 
commonly accepted principles of survey design and statistical analysis;
    (iii) Address enrollees/disenrollees satisfaction with the quality 
of the services provided and their degree of access to the services; 
and
    (iv) Be conducted no later than 1 year after the effective date of 
the incentive plan, and at least every 2 years thereafter.
    (2) Ensure that all physicians and physician groups at substantial 
financial risk have either aggregate or per-patient stop-loss 
protection in accordance with the following requirements:
    (i) If aggregate stop-loss protection is provided, it must cover 90 
percent of the costs of referral services (beyond allocated amounts) 
that exceed 25 percent of potential payments.
    (ii) If the stop-loss protection provided is based on a per-patient 
limit, the stop-loss limit per patient must be determined based on the 
size of the

[[Page 13448]]
patient panel. In determining patient panel size, the patients may be 
pooled using one of the methods set forth in paragraph (h)(1)(v) of 
this section if pooling is consistent with the relevant contract 
between the physician or physician group and the organization. Stop-
loss protection must cover 90 percent of the costs of referral services 
that exceed the per patient limit. The per-patient stop-loss limit is 
as follows:
    (A) Less than 1,000 patients--$10,000.
    (B) 1,000 to 10,000 patients--$30,000.
    (C) 10,000 to 25,001 patients--$200,000.
    (D) Greater than 25,000 patients--
    (1) Without pooling patients--none; and
    (2) As a result of pooling patients--$200,000.
    (iii) The organization may provide the stop-loss protection 
directly or purchase the stop-loss protection, or the physician or 
physician group may purchase the stop-loss protection. If the physician 
or physician group purchases the stop-loss protection, the organization 
must pay the portion of the premium that covers its enrollees or reduce 
the level at which the stop-loss protection applies by the cost of the 
stop-loss.
    (h) Disclosure requirements for organizations with physician 
incentive plans--(1) Disclosure to HCFA. Each organization must provide 
to HCFA information concerning its physician incentive plans as 
required or requested. The disclosure must contain the following 
information in detail sufficient to enable HCFA to determine whether 
the incentive plan complies with the requirements specified in this 
section:
    (i) Whether services not furnished by the physician or physician 
group are covered by the incentive plan. If only the services furnished 
by the physician or physician group are covered by the incentive plan, 
disclosure of other aspects of the plan need not be made.
    (ii) The type of incentive arrangement; for example, withhold, 
bonus, capitation.
    (iii) If the incentive plan involves a withhold or bonus, the 
percent of the withhold or bonus.
    (iv) The amount and type of stop-loss protection.
    (v) The panel size and, if patients are pooled according to one of 
the following permitted methods, the method used:
    (A) Including commercial, Medicare, and/or Medicaid patients in the 
calculation of the panel size.
    (B) Pooling together, by the organization, of several physician 
groups into a single panel.
    (vi) In the case of capitated physicians or physician groups, 
capitation payments paid to primary care physicians for the most recent 
year broken down by percent for primary care services, referral 
services to specialists, and hospital and other types of provider (for 
example, nursing home and home health agency) services.
    (vii) In the case of those prepaid plans that are required to 
conduct beneficiary surveys, the survey results.
    (2) When disclosure must be made to HCFA. (i) An organization must 
provide the information required by paragraph (h)(1) of this section to 
HCFA--
    (A) Upon application for a contract;
    (B) Upon application for a service area expansion; and
    (C) Within 30 days of a request by HCFA.
    (ii) An organization must notify HCFA at least 45 days before 
implementing any of the following changes in its incentive plan:
    (A) A change as to the type of incentive plan.
    (B) A change in the amounts of risk or stop-loss protection.
    (C) Expansion of the risk formula to cover services not furnished 
by the physician group that the formula had not included previously.
    (3) Disclosure to Medicare beneficiaries. An organization must 
provide the following information to any Medicare beneficiary who 
requests it:
    (i) Whether the prepaid plan uses a physician incentive plan that 
affects the use of referral services.
    (ii) The type of incentive arrangement.
    (iii) Whether stop-loss protection is provided.
    (iv) If the prepaid plan was required to conduct a survey, a 
summary of the survey results.
    (i) Requirements related to subcontracting arrangements--(1) 
Physician groups. An organization that contracts with a physician group 
that places the individual physician members at substantial financial 
risk for services they do not furnish must do the following:
    (i) Disclose to HCFA any incentive plan between the physician group 
and its individual physicians that bases compensation to the physician 
on the use or cost of services furnished to Medicare beneficiaries or 
Medicaid recipients. The disclosure must include the information 
specified in paragraphs (h)(1)(i) through (h)(1)(vii) of this section 
and be made at the times specified in paragraph (h)(2) of this section.
    (ii) Provide adequate stop-loss protection to the individual 
physicians.
    (iii) Conduct enrollee surveys as specified in paragraph (g)(1) of 
this section.
    (2) Intermediate entities. An organization that contracts with an 
entity (other than a physician group) for the provision of services to 
Medicare beneficiaries must do the following:
    (i) Disclose to HCFA any incentive plan between the entity and a 
physician or physician group that bases compensation to the physician 
or physician group on the use or cost of services furnished to Medicare 
beneficiaries or Medicaid recipients. The disclosure must include the 
information required to be disclosed under paragraphs (h)(1)(i) through 
(h)(1)(vii) of this section and be made at the times specified in 
paragraph (h)(2) of this section.
    (ii) If the physician incentive plan puts a physician or physician 
group at substantial financial risk for the cost of services the 
physician or physician group does not furnish--
    (A) Meet the stop-loss protection requirements of this subpart; and
    (B) Conduct enrollee surveys as specified in paragraph (g)(1) of 
this section.
    (3) For purposes of paragraph (i)(2) of this section, an entity 
includes, but is not limited to, an individual practice association 
that contracts with one or more physician groups and a physician 
hospital organization.
    (j) Sanctions against the organization. HCFA may apply intermediate 
sanctions, or the Office of Inspector General may apply civil money 
penalties described at Sec. 417.500, if HCFA determines that an 
eligible organization fails to comply with the requirements of this 
section.
    3. In Sec. 417.500, the introductory text of paragraph (a) is 
republished, and a new paragraph (a)(9) 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 
does one or more of the following:
* * * * *
    (9) Fails to comply with the requirements of Secs. 417.479(d) 
through (i) relating to physician incentive plans.
* * * * *

PART 434--CONTRACTS

    B. Part 434 is amended as follows:
    1. The authority citation for part 434 continues to read as 
follows:

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


[[Page 13449]]

    2. In Sec. 434.44, the introductory text of paragraph (a) is 
republished, and paragraph (a)(1) is revised to read as follows:


Sec. 434.44  Special rules for certain health insuring organizations.

    (a) A health insuring organization that first enrolls patients on 
or after January 1, 1986, and arranges with other providers (through 
subcontract, or through other arrangements) for the delivery of 
services (as described in Secs. 434.21(b)) to Medicaid enrollees on a 
prepaid capitation risk basis is--
    (1) Subject to the general requirements set forth in Sec. 434.20(d) 
concerning services that may be covered and Sec. 434.20(e) which sets 
forth the requirements for all contracts, the additional requirements 
set forth in Secs. 434.21 through 434.38 and the Medicaid agency 
responsibilities specified in subpart E of this part; and
* * * * *
    3. In Sec. 434.67, the introductory text of paragraph (a) is 
republished, and a new paragraph (a)(5) 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:
* * * * *
    (5) Fails to comply with the requirements of Secs. 417.479(d) 
through (g) of this chapter relating to physician incentive plans, or 
fails to submit to the State Medicaid agency its physician incentive 
plans as required or requested in Sec. 434.70.
* * * * *
    4. Section 434.70 is revised to read as follows:


Sec. 434.70 Condition for FFP.

    (a) FFP is available in expenditures for payments to contractors 
only for the periods that--
    (1) The contract--
    (i) Meets the requirements of this part;
    (ii) Meets the appropriate requirements of 45 CFR part 74; and
    (iii) Is in effect;
    (2) The HMO or HIO complies with the physician incentive plan 
requirements specified in Secs. 417.479(d) through (g) of this chapter 
and the requirements related to subcontracts set forth at 
Sec. 417.479(i) of this chapter if the subcontract is for the provision 
of services to Medicaid recipients;
    (3) The HMO or HIO (or, in accordance with Sec. 417.479(i) of this 
chapter, the subcontracting entity) has supplied the information on its 
physician incentive plan listed in Secs. 417.479(h)(1) of this chapter 
to the State Medicaid agency. The information must contain detail 
sufficient to enable the State to determine whether the plan complies 
with the requirements of Secs. 417.479(d) through (g) of this chapter. 
The HMO or HIO must supply this information to the State Medicaid 
agencies as follows:
    (i) Upon application for a contract.
    (ii) At least 45 days before implementing any of the following 
changes in its incentive plan:
    (A) A change as to the type of incentive plan.
    (B) A change in the amounts of risk or stop-loss protection.
    (C) Expansion of the risk formula to cover services not furnished 
by the physician group that the formula had not included previously.
    (iii) Within 30 days of a request by the State or HCFA; and
    (4) The HMO or HIO has provided the information on physician 
incentive plans listed in Sec. 417.479(h)(3) of this chapter to any 
Medicaid recipient who requests it.
    (b) HCFA may withhold FFP for any period during which--
    (1) The State fails to meet the State plan requirements of this 
part;
    (2) Either party to a contract substantially fails to carry out the 
terms of the contract; or
    (3) The State fails to obtain from each HMO or HIO contractor proof 
that it meets the requirements for physician incentive plans specified 
in Secs. 417.479(d) through (g) and (i) of this chapter.
CHAPTER V--OFFICE OF INSPECTOR GENERAL--HEALTH CARE, DEPARTMENT OF 
HEALTH AND HUMAN SERVICES
    II. 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 continues 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. In Sec. 1003.100, paragraph (b)(1) introductory text is revised 
and paragraph (b)(1)(vii) is revised to read as follows:


Sec. 1003.100   Basis and purpose.

* * * * *
    (b) Purpose. * * *
    (1) Provides for the imposition of civil money penalties and, as 
applicable, assessments against persons who--
* * * * *
    (vii) Substantially fail to provide an enrollee with required 
medically necessary items and services, or who engage in certain 
marketing, enrollment, reporting, claims payment, employment or 
contracting abuses, or that do not meet the requirements for physician 
incentive plans for Medicare specified in Secs. 417.479 (d) through (i) 
of this title;
* * * * *
    3. Section 1003.101 is amended by adding, in alphabetical order, a 
definition for the term ``Physician incentive plan'' to read as 
follows:


Sec. 1003.101   Definitions.

* * * * *
    Physician incentive plan means any compensation arrangement between 
a contracting organization and a physician group that may directly or 
indirectly have the effect of reducing or limiting services provided 
with respect to enrollees in the organization.
* * * * *
    4. In Sec. 1003.103, paragraph (f)(1) introductory text is 
republished, paragraphs (f)(1)(iv) and (f)(1)(v) are revised, and a new 
paragraph (f)(1)(vi) is added, to read as follows:


Sec. 1003.103   Amount of penalty.

* * * * *
    (f)(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--
* * * * *
    (iv) Misrepresented or falsified information furnished to an 
individual or any other entity under section 1876 or section 1903(m) of 
the Act;
    (v) Failed to comply with the requirements of section 1876(g)(6)(A) 
of the Act, regarding prompt payment of claims; or
    (vi) Failed to comply with the requirements of Secs. 417.479 (d) 
through (i) of this title for Medicare, and Secs. 417.479 (d) through 
(g) and (i) of this title for Medicaid, regarding certain prohibited 
incentive payments to physicians.
* * * * *
    5. In Sec. 1003.106, paragraph (a)(5) introductory text is 
republished; paragraphs (a)(5)(vii) and (a)(5)(viii) are redesignated 
as paragraphs (a)(5)(viii) and (a)(5)(ix), respectively; and a new 
paragraph (a)(5)(vii) is added to read as follows:

[[Page 13450]]



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

    (a) * * *
    (5) In determining the appropriate amount of any penalty in 
accordance with Sec. 1003.103(f), the OIG will consider, as 
appropriate--
* * * * *
    (vii) The extent to which the failure to provide medically 
necessary services could be attributed to a prohibited inducement to 
reduce or limit services under a physician incentive plan and the harm 
to the enrollee which resulted or could have resulted from such 
failure. It would be considered an aggravating factor if the 
contracting organization knowingly or routinely engaged in any 
prohibited practice which acted as an inducement to reduce or limit 
medically necessary services provided with respect to a specific 
enrollee in the organization;
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.733--
Medicare--Hospital Insurance Program; No. 93.774--Medicare 
Supplementary Medical Insurance Program; No. 93.778--Medical 
Assistance Program)

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

    Dated: May 19, 1995.
June G. Brown,
Inspector General, Department of Health and Human Services.

    Dated: November 2, 1995.
Donna E. Shalala,
Secretary.
[FR Doc. 96-7228 Filed 3-25-96; 8:45 am]
BILLING CODE 4120-01-P