[Federal Register Volume 61, Number 252 (Tuesday, December 31, 1996)]
[Rules and Regulations]
[Pages 69034-69050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-33330]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
42 CFR Parts 417 and 434

[OMC-010-F]
RIN 0938-AF74


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

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

ACTION: Final rule.

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SUMMARY: This final rule amends the regulations established by a March 
27, 1996, final rule with comment period. The regulations govern 
physician incentive plans operated by 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.
    As explained in the March 27 rule, 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.

DATES: Effective date. These regulations are effective on January 1, 
1997.

FOR FURTHER INFORMATION CONTACT: Beth Sullivan, (410) 786-4596.

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.

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

[[Page 69035]]

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. Payment under these contracts may either be 
made on a risk capitation basis, under which a fixed amount is paid per 
Medicare enrollee per month, or on a reasonable cost basis, under which 
costs are reimbursed retrospectively. Implementing Federal regulations 
for the organization and operation of Medicare HMOs and CMPs, contract 
requirements, and conditions for payment are located at 42 CFR 417.400 
through 417.694.
    The amount paid to risk HMOs/CMPs 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 
contracts with organizations (HMOs, and certain 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 
the contracts comply with detailed requirements in section 
1903(m)(2)(A) and 42 CFR part 434.

II. Legislative and Regulatory 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.
    Section 13562 of OBRA '93 amended section 1877 of the Act, which 
prohibits physicians from referring Medicare patients to an entity for 
the furnishing of certain designated health services if the physician 
(or an immediate family member) has a financial relationship with that 
entity. A financial relationship can consist of either an ownership or 
investment interest in the entity or a compensation arrangement with 
the entity. 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 physician's or family 
member's personal services compensation arrangement with an entity 
involves compensation that varies based on the volume or value of 
referrals. OBRA '93 also extended the provisions in section 1877 to 
Medicaid.
    In the December 14, 1992 issue of Federal Register, we published, 
in conjunction with the Office of Inspector General, our proposal for 
implementing the requirements in sections 4204(a) and 4731 of OBRA '90 
(57 FR 59024). On March 27, 1996, again in conjunction with the Office 
of Inspector General, we published, at 61 FR 13430, a final rule with 
comment period that set forth in regulations incentive plan 
requirements that govern Federally-qualified HMOs and CMPs contracting 
with the Medicare program and certain HMOs and HIOs contracting with 
the Medicaid program. On September 3, 1996, we published, at 61 FR 
46384, a final rule correction that clarified and changed some of the 
dates by which prepaid health plans had to comply with the requirements 
of the March 27 rule. Readers who desire additional background 
information are referred to the above cited Federal Register documents.

III. Provisions of the March 27, 1996 Rule

    This section contains a brief summary of the provisions of the 
March 27, 1966 rule. If we received public comments on a particular 
provision, a fuller description of the provision is given in section IV 
of this preamble (Analysis of and Responses to Public Comments), and we 
indicate that in this section. Note that we do not describe below those 
provisions of the March 27, 1996 rule that amended 42 CFR Part 1003 
(Civil Money Penalties, Assessments

[[Page 69036]]

and Exclusions) since they are not the subject of this revised final 
rule.
    The requirements for physician incentive plans are set forth in 
Sec. 417.479. Paragraph (a) of that section specifies that the contract 
between HCFA and an HMO or CMP must specify that the HMO or CMP may 
operate a physician incentive plan only if: (1) No specific payment is 
made directly or indirectly under the plan to a physician or physician 
group as an inducement to reduce or limit medically necessary services 
furnished to an individual enrollee, and (2) the stop-loss protection, 
enrollee survey, and disclosure requirements of Sec. 417.479 are met.
    Section 417.479(b) provides that the physician incentive plan 
requirements apply to physician incentive plans between HMOs/CMPs and 
individual physicians or physician groups with whom the HMOs or CMPs 
contract to provide medical services to enrollees. It further provides 
that the 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.
    Section 417.479(c) defines the following terms for purposes of 
Sec. 417.479: Bonus, capitation, payment, physician group, physician 
incentive plan, referral services, risk threshold, and withhold.
    Section 417.479(d) prohibits payment of any kind made directly or 
indirectly under the incentive plan as an inducement to reduce or limit 
medically necessary services covered under the HMO's or CMP's contract 
that are furnished to an individual enrollee.
    Section 417.479(e) sets forth a general rule for determining when 
substantial financial risk occurs. (See section IV.)
    Section 417.479(g) mandates that, if an HMO or CMP operates an 
incentive plan that places physicians or physician groups at 
substantial financial risk, it must conduct enrollee surveys that meet 
specified requirements and ensure that all physicians and physician 
groups at substantial financial risk have either aggregate or per-
patient stop-loss protection that meets specified requirements. (See 
section IV.)
    Section 417.479(h) requires that organizations with physician 
incentive plans disclose information about those plans to us and to any 
Medicare beneficiary who requests it. (See section IV.)
    Section 417.479(i) sets forth requirements related to 
subcontracting arrangements. (See section IV.)
    Section 417.479(j) specifies that we may apply intermediate 
sanctions, or the Office of Inspector General may apply civil money 
penalties, if we determine that an HMO or CMP fails to comply with the 
physician incentive plan requirements. In addition, failure to comply 
with the physician incentive plan requirements was added to the list of 
bases for imposition of sanctions at Sec. 417.500.
    The March 27, 1996 final rule also amended the Medicaid rules at 
Sec. 434.70 (Conditions for Federal financial participation (FFP)) to 
specify that FFP is available in expenditures for payments to an HMO or 
HIO only if it complies with the physician incentive plan requirements. 
The final rule also incorporated these requirements into Secs. 434.44 
(Special rules for certain HIOs) and 434.67 (Sanctions against HMOs 
with risk comprehensive contracts).

IV. Analysis of and Responses to Public Comments

    We received 38 timely items of correspondence on the March 27, 1996 
final rule with comment period. Commenters included prepaid plans, 
national and local associations of managed care providers, physician 
associations, a State medical association, and consumer advocacy 
groups. This section of the preamble contains a summary of the comments 
and our responses. Note that a national association that indicated that 
it represents approximately 1,000 health plans and identified below as 
``a major association'' submitted comments. Although some of the 
comments below are attributed only to the major association, individual 
health plans also made some of these same comments.

Applicability

    Comment: A commenter asked whether the regulations apply to 
enrollees who are enrolled through the prepaid plan's commercial line 
of business if the enrollees are also Medicare beneficiaries. For 
example, if an individual who is over 65 but is actively working is 
covered by the prepaid plan's commercial product through his or her 
employer, would the physician incentive arrangement between the prepaid 
plan and the physician(s) treating that individual under the commercial 
product be subject to the regulations?
    Response: Yes, the regulations apply to these plans. The employer's 
plan is the first payer, and the Medicare capitation payment is 
adjusted downward, but the enrollee is still a Medicare beneficiary.
    Comment: One commenter stated that the regulation defines 
``physician group'' as a corporation or other group that ``distributes 
income from the practice among members.'' [Emphasis added by 
commenter.] The commenter stated that community health centers (CHCs) 
are clearly not included within this definition. As a result, the 
commenter is unable to ascertain whether plans contracting with CHCs 
will be required to provide to CHCs the stop-loss protection described 
in the regulation. The commenter recommends that the definition of 
``physician group'' be changed as regards distribution of income and 
membership so as to include CHCs. The commenter pointed out the 
following: CHCs are by definition public or private nonprofit entities. 
As tax-exempt entities, they cannot ``distribute'' income like a for-
profit entity does. CHC physicians are not ``members'' of the 
corporation. Usually they are employees or, in some instances, 
contractors.
    Response: We disagree that the definition needs to be revised. We 
believe the commenter has misinterpreted the definition as describing 
profit sharing among the members of a for-profit entity. The term 
``income'' does not equate to ``profits.'' The definition does include 
CHCs.

Disclosure

    We received several comments concerning the disclosure requirements 
in the March 27 rule. Specifically, Sec. 417.479(h)(1) requires each 
HMO or CMP with a physician incentive plan to provide us with 
information concerning its physician incentive plans as required or 
requested by us. The disclosure must contain the following information 
in detail sufficient to enable us to determine whether the incentive 
plan complies with the requirements of Sec. 417.479:
     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 plan, 
disclosure of other aspects of the plan need not be made.
     The type of incentive arrangement.
     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, the pooling 
method used.
     In the case of a capitated physician or physician group, 
capitation 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.

[[Page 69037]]

     In the case of an HMO or CMP that is required to conduct 
beneficiary surveys, the survey results.
    Section 417.479(h)(2) requires an HMO or CMP to provide the above 
information to us (1) upon application for a contract; (2) upon 
application for a service area expansion; and (3) within 30 days of a 
request by us. This section also requires an HMO or CMP to notify us at 
least 45 days before implementing a change in 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 furnished by the 
physician group that the formula had not included previously.
    Section 417.479(h)(3) of the March 27 rule requires an HMO or CMP 
to provide the following information to any Medicare beneficiary who 
requests it:
     Whether it uses a physician incentive plan that affects 
the use of referral services.
     The type of incentive arrangement.
     Whether stop-loss protection is provided.
     If it was required to conduct a beneficiary survey, a 
summary of the survey results.
    Section 417.479(i) requires a prepaid plan that contracts with a 
physician group that places the individual physician members at 
substantial financial risk for services they do not furnish to disclose 
to us 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 Sec. 417.479 
(h)(1)(i) through (h)(1)(vii) and be made at the times specified in 
Sec. 417.479(h)(2).
    Section 434.70(a) provides that Federal financial participation is 
available in expenditures for payment to HMOs or HIOs only for periods 
that the HMO or HIO has (1) supplied the information listed in 
Sec. 417.479(h)(1) to the State Medicaid agency; and (2) supplied the 
information on physician incentive plans listed in Sec. 417.479(h)(3) 
to any Medicaid recipient who requests it. The timeframes for 
disclosure to the State Medicaid agency are the same as those for 
Medicare.
    Comment: One commenter suggested that health plans be permitted to 
deem themselves to have transferred substantial financial risk without 
having to describe to us the specific incentive arrangements and 
analyses of each arrangement. The commenter also questioned our 
authority for requiring disclosure of incentive arrangements and 
believed that disclosure presents an enormous administrative burden. 
The commenter asked: If an HMO agrees to provide stop-loss and to 
conduct surveys, must it still disclose the information to HCFA as 
required by the regulation?
    Response: Yes, under the statute and the regulation, health plans 
must disclose this information. This information serves many purposes. 
For example, it will be used to monitor compliance, evaluate the impact 
of the regulation, and ensure the delivery of high quality health care. 
In addition, this information will be useful to beneficiaries in 
ensuring that they get needed care. Section 1876(i)(8) of the Act 
requires the HMO or CMP provide the Secretary with descriptive 
information regarding the plan that is sufficient to permit the 
Secretary to determine whether the plan is in compliance with the 
physician incentive plan requirements. Congress clearly intended health 
plans to disclose information about the nature of physician incentive 
compensation arrangements and the extent to which physicians are being 
placed at substantial risk by the arrangements.
    In preparing both the March 27 regulation and these amendments and 
clarifications, we have tried to limit the information being reported 
to only that which is essential for us to carry out this explicit 
statutory responsibility to ensure that plans are in compliance. We are 
not requiring extensive detail about the compensation arrangements 
being used, but rather are seeking information about the general nature 
and scope of these arrangements.
    Comment: One commenter believed that the information to be 
disclosed to us under the regulation is proprietary and should be 
protected under the Freedom of Information Act (FOIA). The commenter 
stated that we should adopt the same policy we use for disclosure of a 
risk contractor's adjusted community rating (ACR). The commenter 
believed that the physician incentive information merits comparable 
treatment.
    Response: To the degree that physician incentive information 
constitutes ``trade secrets or commercial or financial information 
obtained from a person [that is] privileged or confidential,'' the 
information will be protected from release under exemption (b)(4) of 
the FOIA (5 U.S.C. 552(b)(4).) In accordance with 45 CFR 5.65 (c) and 
(d), the submitter of such information may designate all or part of the 
information as confidential and exempt from disclosure at the time the 
information is submitted to the government. Also, the Freedom of 
Information and Privacy Office, HCFA, upon receipt of a FOIA request 
for the information, will ask that the involved submitter specify what 
it believes to be confidential commercial or financial information. In 
both situations, we will follow procedures set forth at 45 CFR 5.65(d), 
with the initial disclosure decisions independently made by our Freedom 
of Information Officer. The information specified as available to a 
beneficiary upon request will be available under FOIA. For instance, 
whether or not the incentive plan covers referral services, the type of 
incentive arrangement (for example, withhold or capitation), and 
whether adequate stop-loss protection is in place would be available 
under FOIA.
    Comment: One commenter did not believe that disclosure requirements 
would pose an undue burden on plans, because ``plans routinely provide 
information to patients at the time of enrollment.'' The commenter 
stresses the time that notice is provided as well as the substance of 
what is provided. The commenter believed that all financial information 
should be provided at enrollment (and annually thereafter), but also 
notes that plans should report information regarding the scope of 
benefits and procedures for review of grievances. The commenter stated 
that one of its internal publications includes a statement on incentive 
plans, asserting that these plans ``should be disclosed to the patient 
upon enrollment and at least annually thereafter.'' The commenter 
elaborated on that assertion by stating, ``[we] strongly support 
disclosure to patients of physician incentive plans affecting Medicare 
and Medicaid patients'' and ``strongly support disclosure by all 
managed care plans to patients of information regarding the scope of 
benefits and procedures for review of grievances.''
    The commenter also stated the disclosures are necessary to serve as 
notice to patients that incentives exist. The commenter went on to 
state that it believes the information is necessary in place of 
outcomes measures until such measures are widely accepted and 
available.
    In contrast, a major association of health plans asked that we give 
plans broad discretion to decide how this information will be 
presented.
    Another commenter contended that section 1876(i)(8) of the Act does 
not give us the authority to require that a prepaid plan release 
information about its incentive plans to Medicare beneficiaries and 
Medicaid recipients, and that there is no such grant of authority in 
parallel medical provisions. The commenter added that, even if it

[[Page 69038]]

were to assume that a general authority conferred upon us allows us to 
impose this obligation, the regulation goes far beyond what the 
commenter believes to be reasonable. The commenter noted that, under 
the regulation, every beneficiary or recipient in the country, 
regardless of location and regardless of the relationship to the 
prepaid plan, may obtain information about the incentive plan. The 
commenter recommended that only enrollees of the prepaid plan or 
beneficiaries or recipients who file an application to join the plan 
should be entitled to obtain the information. The commenter also 
recommended that the information be limited to the following: (1) 
Whether the physician has an arrangement with the prepaid plan that has 
the potential to compensate him or her for controlling the services he 
or she provides; (2) that the amount of risk is limited because of 
stop-loss protection; and (3) the results of any enrollee survey will 
be provided, upon request, including information about quality of care.
    Response: Some of the information may be confidential and will be 
protected by FOIA. Nonetheless, we intend to require plans to publish 
in the evidence of coverage (EOC) notices that beneficiaries can 
request summary information on the HMO's physician incentive plans. 
These EOC notices are available at enrollment. We will provide further 
guidance on this in the future.
    On the question of our legal authority to require disclosure to 
beneficiaries, we believe that in requiring disclosure of information 
on physician incentive plans, Congress intended that this information 
be used in the best interests of the beneficiary. While the statute 
refers only to disclosure of this information to the Secretary, this 
information is clearly of interest to beneficiaries as well. Requiring 
plan disclosure directly is simply more efficient than having the 
Secretary provide this information to beneficiaries, which the 
Secretary clearly has legal authority to do.
    We do not agree that this information should be made available only 
to an enrollee or applicant for enrollment in a managed care plan. This 
information is potentially very important and useful to a beneficiary 
in deciding whether to select managed care rather than fee-for-service 
care and which of the available managed care plans to select.
    Comment: A major association of health plans stated that we should 
make available to the public all the information on incentive plans 
that we and the States receive. The commenter did not explain why the 
information should be made public, but just noted that there is ``no 
valid reason to keep this information from the public'' and that 
publication would allow health policy researchers to better understand 
the relationship between specific risk arrangements and access and 
quality of care provided to enrollees.
    Response: We plan to publish aggregate information on physician 
incentive plans obtained under the regulation; therefore, the 
information will be public. Publication of additional information, 
beyond that specified in the regulation, however, would be a 
substantial administrative task and would not advance the purposes of 
the law.
    Comment: One commenter stated that requiring the HMO or CMP to 
collect information about incentive plans operated by physician groups 
or subcontractors is not the most efficient or effective means of 
collecting the necessary information. The commenter suggested that we 
collect the information directly from the physician groups and 
subcontractors. This commenter believed we should allow a physician 
group to attest that it has no physician incentive plan or no physician 
incentive plan related to use of referral services for Medicare or 
Medicaid enrollees and that HMOs should be allowed to rely upon that 
attestation.
    Response: The HMO/CMP is responsible for ensuring that the 
requirements of this regulation are met if a physician group or 
individual physicians are placed at substantial financial risk by a 
subcontractor or physician group. Requiring that the HMO or CMP collect 
the information ensures that it is aware of all arrangements subject to 
the regulations. In addition, since lines of communication between the 
physician group or subcontractor and the prepaid plan are already in 
place, the HMO or CMP is the most efficient conduit for the disclosure 
of information. We will allow physician groups to make attestations and 
will provide further guidance on this item. We will also develop a 
disclosure form that will describe the minimum amount of information 
that the prepaid plan must obtain from physician groups.

Substantial Financial Risk

    We received significant comments on our definition of ``substantial 
financial risk.'' Section 417.479(e) provides that substantial 
financial risk occurs when an incentive arrangement places a physician 
or physician group at risk for amounts beyond the risk threshold (25 
percent), 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.
    Section 417.479(f) provides that physician incentive plans with any 
of the following features place physicians at substantial financial 
risk if the 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:
     Withholds greater than 25 percent of potential payments.
     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.
     Bonuses greater than 33 percent of potential payments 
minus the bonus.
     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%.
     Capitation arrangements if--
    + The difference between the maximum possible payments and minimum 
possible payments is more than 25 percent of the maximum possible 
payments; or
    + The maximum and minimum possible payments are not clearly 
explained in the physician's or physician group's contract.
     Any other incentive arrangements that have the potential 
to hold a physician or physician group liable for more than 25 percent 
of potential payments.
    Section 417.479(f) defines ``potential payments'' as 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.
    Comment: A major association contended that the methodology for 
determining substantial financial risk is flawed because a substantial 
number of affected prepaid plans will be viewed as transferring 
substantial financial risk and be subject to the stop-loss and enrollee 
survey requirements. The association pointed out that we stated in the 
proposed rule that the original choice of a 25 percent threshold for 
substantial financial risk was based on the assumption that only 
``outlier'' risk levels would be considered ``substantial.'' The 
association contends

[[Page 69039]]

that our methodology in fact covers ``mainstream'' arrangements, and 
thus implicitly suggests that they are outliers. The association 
believes that the proportion of outliers in a given population should 
be quite small (typically in the range of 5 percent) and that a 
methodology that purports to only identify outliers is invalid to the 
extent it includes a proportion of the population beyond that 
represented by the extreme. The association has concluded, based on 
extensive communications with its membership and its work group, that 
application of the methodology in the March 27 rule will result in the 
inclusion of substantial numbers of what it contends to be 
``mainstream'' incentive arrangements as involving substantial 
financial risk. The association stated that, based upon information 
from its member organizations, a large number of plans combine 
capitation or withholds with bonuses, and the result is that the risk 
level exceeds 25 percent.
    The association reminded us that, in the preamble of the proposed 
rule, we stated that 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, but that if new 
information regarding the influence of various elements of physician 
incentive plans becomes available, we will evaluate it to determine if 
the approach in our proposed regulations should be reconsidered. The 
association contended that a reevaluation of this structure is clearly 
necessary at this time and that the regulations need to be modified to 
address five areas: (1) The association believes that the risk 
threshold should be refined to allow for the transfer of a larger 
portion of risk for referral services; (2) the association believes 
that the regulation needs a mechanism to estimate the amount of risk 
transferred if a precise calculation cannot be made; (3) the 
association recommends that maximum and minimum thresholds be 
calculated based on standards that are more ``realistic'' in its view; 
(4) the association would like more latitude in the pooling rules to 
allow large physician groups that spread risk across large total 
numbers of health plan patients to be exempt from the requirements; and 
(5) the association suggests that a good cause exemption be available 
to allow for the approval of physician incentive plans that, for policy 
reasons, should not be considered as transferring substantial financial 
risk, although the circumstances were not envisioned when the 
regulations were drafted.
    To achieve the above objectives, the association presented a number 
of recommendations. These recommendations and our response to each of 
them follow, but first we respond to the above comment that many plans 
would be identified as outliers.
    Response: At the time we were developing these regulations in 
proposed form, it was our understanding that most physician incentive 
plans created financial incentives to reduce unnecessary referrals 
through the use of bonuses or withholds or some combination of the two. 
On the assumption that a specific amount of payment was ``at risk'' 
(whether an amount withheld when referrals are high or a bonus paid if 
they are low), we had to come up with a threshold beyond which risk 
would be considered ``substantial.'' As the commenting association 
correctly notes, we used an outlier approach to determine what level of 
risk would be considered ``substantial'' under this methodology. This 
resulted in a figure of 25 percent of potential payments. It is our 
view that 25 percent represents a significant amount of income to lose. 
This may be in addition to discounts that physicians may give to 
various patients or prepaid plans. Many consumer and physician groups, 
in fact, believe that 25 percent is too high. We now recognize that an 
increasing number of plans use capitation arrangements under which 
referral service costs must be covered with capitation amounts, and 
that these plans will be determined to be at substantial financial risk 
if the maximum and minimum potential payments are not clearly explained 
in the physician's or physician group's contract. Raising the risk 
threshold to a higher level will not affect these plans since they 
would still be deemed to involve substantial financial risk and trigger 
stop-loss insurance requirements. However, in most of these cases, the 
physicians already have stop-loss protection comparable to the 
requirements of this regulation. With regard to suggestions to lower 
the threshold, here, again, changing the threshold would not affect 
these plans. We thus believe that the 25 percent threshold should 
remain in place.
    Recommendation: The association recommended that an exception to 
the 25 percent risk threshold be created for certain bonus 
arrangements. This exception would permit prepaid plans to supplement 
their incentive programs by offering an opportunity for a bonus, in 
addition to capitation payments or withholds, or an opportunity for an 
additional bonus where a bonus is already in place. The supplemental 
bonus could not exceed 15 percent of the ``payments.''
    Response: Under the March 27, 1996 rule, any combination of 
incentive arrangements that exceeds the 25 percent threshold, whether 
labeled a bonus or withhold, puts the physician or physician group at 
substantial financial risk. We adopted this policy towards bonuses 
because (1) if the same amount of money is at risk based on referral 
levels, it should not matter whether this money is labeled a withhold 
or a bonus, and (2) we did not want plans to avoid these rules merely 
by ``re-labeling'' withholds or other arrangements as bonuses. The 
incentive arrangement described in this comment would exceed the 25 
percent threshold for substantial financial risk as we interpret this 
term and, accordingly, should not be permitted in our view.
    Recommendation: The association recommended that a prepaid plan 
that capitates physicians or physician groups be permitted to estimate 
the portion of the capitation allocated to referral services for 
purposes of determining whether there is substantial financial risk. 
This is because it is the association's belief that many large prepaid 
plans do not have, and cannot obtain, this information. The association 
believes that the regulatory requirement that contracts specify the 
allocation between services provided by the physician or physician 
group and the amount allocated for referral services (provided outside 
the physician group or the physician's practice) has two objectives: 
(1) To provide a basis for the calculation of risk transference to 
determine whether substantial financial risk is transferred; and (2) to 
apprise the physician or physician group of the portion of its 
capitation ``at risk.'' The association contends that we could achieve 
the first of these two objectives by allowing the prepaid plan to 
estimate the expected portion of referrals through the use of 
historical data or actuarial tables. The prepaid plan could be required 
to certify that its decision was made in good faith based on the best 
available data. In accepting this proposal, the association contends 
that we would be meeting our responsibilities under E.O. 12866 to find 
an alternative regulatory approach that imposes the least burden on 
society while still achieving its objective.
    The association questioned whether the second objective it has 
presumed, to apprise the physician or physician group of the portion of 
its capitation ``at

[[Page 69040]]

risk,'' is meaningful today since physicians are far more aware of the 
implications of risk assumption than they once were.
    As an alternative approach, the association suggested that the 
physician/physician group put in the contract the estimated portion of 
services that would not be provided by the physician or physician 
group. The association stated that, although this amount may change 
over time, it would not support revisions to the contract to reflect 
changes made within the discretion of the individual physician or 
physician group. The association notes that this alternative approach 
would not be the most desirable because it would require the burdensome 
step of recontracting with large numbers of physicians.
    Response: As indicated in the March 27, 1996 rule, prepaid plans 
have the option of specifying in the contract maximum and minimum 
payment amounts. As long as the difference between these amounts does 
not exceed 25 percent of the maximum amount, the physician or physician 
group is not at substantial financial risk. Without specifying these 
limits, physicians who are capitated for all services are potentially 
at risk of losing 100 percent of their income. Given this potential 
loss, they may feel the pressure to reduce necessary services.
    Prepaid plans have the opportunity to include a provision in their 
contract with a physician group that would require the physician group 
to specify the level of potential risk for referral services. Relying 
on historical or actuarial data may not be reflective of risk in 
current contracts. While it may be true that physicians today are more 
aware of the implications of risk assumption, there is no evidence that 
the ability to manage this risk has substantially changed. Further, 
while physician groups may want the flexibility to change risk sharing 
arrangements on an ad hoc basis, we have to question the impact of 
these changes on patient care decisions.
    Recommendation: The association recommends that the regulation be 
amended to allow for the pooling of the total prepaid enrollment from 
the prepaid plan and across prepaid plans for purposes of determining 
substantial financial risk. The regulation exempts from the 
requirements of the regulations physicians or physician groups who 
provide services to 25,000 Medicare or Medicaid enrollees of the 
prepaid plan. The association maintains that this approach, which does 
not allow for the pooling of patients, is unnecessarily and 
inappropriately rigid and conservative. The association stated that it 
believed the 25,000 patient exemption is permitted because physician 
groups with a patient base this large can assume the risk for referral 
services greater than the risk threshold without the need for stop-loss 
coverage. As the number of enrollees under the responsibility of the 
physician group increases, so does the ability of the physician group 
to assume that risk. The association believed that this risk is reduced 
regardless of whether the patients are Medicare, Medicaid, or 
commercial. Similarly, this risk is reduced regardless of whether the 
patients are the enrollees of a single prepaid plan or the enrollees of 
several prepaid plans. Thus, for purposes of qualifying for the 
substantial financial risk exemption, a prepaid plan should be allowed 
to consider the total number of prepaid enrollees served by a physician 
group. These pooled enrollees should, in the association's view, 
include all enrollees of that prepaid plan and enrollees of other 
prepaid plans that have selected the physician or physician group, 
provided that the physician or physician group is at risk for the 
provision of services to those enrollees.
    Response: In the preamble, we provided evidence from analyses by 
Rossiter and Adamache (1990) (Health Care Financing Review, vol. 12, 
prepaid plan. 19-30) that supported the decision that physician groups 
with more than 25,000 patients are able to adequately spread risk and 
are so unlikely to lose money that we could determine them to not be at 
substantial financial risk.
    We have decided to allow pooling of Medicare, Medicaid, and 
commercial members for purposes of determining substantial financial 
risk because this kind of pooling is consistent with the rationale for 
permitting pooling (that is, the spreading of risk). The physician 
group may also pool patients across more than one managed care plan 
with which it has a contract. Note, however, that, as revised by this 
final rule, Sec. 417.479(h)(1)(v) allows for pooling of patients for 
purposes of determining substantial financial risk and meeting various 
stop-loss requirements. This section then specifies that pooling is 
permitted only if: (1) Pooling is otherwise consistent with the 
relevant contracts governing the compensation arrangements for the 
physician or physician group; (2) the physician or physician group is 
at risk for referral services with respect to each of the categories of 
patients being pooled; (3) the terms of the compensation arrangements 
permit the physician or physician group to spread the risk across the 
categories of patients being pooled; (4) the distribution of payments 
to physicians from the risk pool is not calculated separately by 
patient category; and (5) the terms of the risk borne by the physician 
or physician group are comparable for all categories of patients being 
pooled.
    In general, the purpose of these conditions is to ensure that all 
patients included in the risk pool are being treated under comparable 
payment arrangements; that is, the risk or reward to the physician or 
physician group would be the same for referring services for any 
individual patient in the pool. The patient categories refer to 
Medicare, Medicaid, and commercial members. The type of incentive 
arrangements, such as withholds and capitation would usually be the 
same throughout the pool to be considered comparable. Pools over the 25 
percent risk threshold can be combined with those arrangements below 
the 25 percent risk threshold. The pool represents the total dollars on 
which the payout is made to the doctor or the stop-loss threshold is 
assessed.
    This final rule, however, eliminates the arrangement that allows 
the HMO, CMP, or HIO to pool across physician groups to reduce the 
stop-loss requirements. We believe physician behavior is influenced by 
the number of patients using the physician group, rather than total 
enrollment in the HMO, CMP, or HIO. A physician group that has a small 
number of patients does not spread its risk throughout the prepaid 
plan, but only within its group. Allowing pooling across groups does 
not provide patients enough protection.
    Recommendation: The association recommended that the regulations 
apply a ``reasonableness test'' in calculating compensation under a 
physician incentive plan. The association noted that plans often use 
formulas to calculate the amount of the withhold to be returned or the 
bonus to be distributed. These formulas allow for distributions of a 
certain percentage of savings to the physician or physician group when 
utilization or costs are less than projected. These arrangements often 
do not cap the upside potential gain from a bonus although natural 
limits may exist because there is no expectation that the scenario in 
which no services are provided will occur. The physicians and physician 
groups understand these de facto limits, and it would be unnecessarily 
burdensome to require prepaid plans to amend thousands of contracts to 
insert bonus limits in their contracts. The regulations should be 
amended to confirm that prepaid plans may use an amount for purposes of 
determining the maximum

[[Page 69041]]

payment that is realistic rather than the theoretical highest payment 
level. The same standard should be applied in calculating minimum 
levels.
    Response: We believe that past behavior is no guarantee of future 
behavior. Physicians could still feel the pressure if they are placed 
at substantial financial risk, regardless of past payments. Therefore, 
the incentive plan contracts must contain these limits explicitly.
    Recommendation: The association recommends that the regulation 
should allow for a ``good cause'' exemption from the requirements of 
the regulation in the event that substantial financial risk is 
transferred. The association argued that in an ever-changing health 
care delivery system, the regulation should provide for flexibility to 
adapt to unanticipated circumstances. The association notes that our 
regulations frequently allow for good cause exemptions from 
requirements, and it contends that circumstances may arise in the 
future that merit an exemption from the regulatory requirements. 
According to the association, inclusion of a good cause exemption would 
give us the flexibility to approve appropriate physician incentive 
plans without the need to amend our regulations. An example of one 
instance in which a good cause exemption may be appropriate is if the 
prepaid plan can demonstrate that the physician group is assured of 
receiving compensation on an encounter basis comparable to or at a 
certain percentage of the resource-based relative value scale fee 
schedule amount.
    The association stated that it is currently exploring functional 
ways in which a good cause exemption could be designed and 
appropriately implemented.
    Response: We have no legal authority to permit plans to fail to 
comply with the rules in section 1876(i)(8) for ``good cause.'' 
Moreover, even if we did, we do not know of any systematic basis for 
providing a good cause exemption to this regulation. The example cited 
by the commenter can be written into the contract to ensure that the 
physician receives a certain percentage of the fee schedule amount. 
However, the issue is not guaranteeing a minimum level of income. 
Rather it is setting parameters so that decisions are not made because 
of a concern with unforseen circumstances, such as adverse selection, 
bad incentive plan design, etc. Our goal is to protect beneficiaries in 
these circumstances.
    Comment: A group that advocates on behalf of individuals with 
disabilities recommended that we consider alternative methods to 
determine the appropriate levels of stop-loss insurance for those 
involved in the care of persons or communities who are at high risk for 
unexpected, adverse medical events (For example, urban providers with a 
high patient load of pregnant women with histories of substance abuse). 
The group stated that these providers may have difficulties determining 
an accurate estimate of expected expenditures based on a previous 
year's per-patient costs. The group suggested that other methods to 
determine substantial financial risk may include:
    (1) The use of several years of longitudinal data to determine a 
realistic substantial risk level (in order to adjust for the 
periodicity of certain illnesses); or
    (2) The use of retrospective analyses to determine the incidence of 
unexpected events within the provider's pool, with adjustments made to 
correct for current levels of expected ``substantial risk'' related to 
the likelihood of these previous events.
    This group further recommended that we examine alternative methods 
of determining substantial risk for providers who are likely to care 
for ``medically needy'' eligibles. The association gave the following 
example, a preferred provider organization (PPO) medical specialist 
provider may care for a substantial number of persons with life-
threatening illness, such as cancer, Alzheimer's or AIDS. If patients 
switch from private to public health insurance while under the care of 
the medical provider (due to ``spending down'' into poverty), the 
provider's determination of ``substantial risk'' may be underestimated. 
In this case, the PPO medical specialist may be subject to various 
levels of financial incentives (through both private and public funded 
health plans) without having to demonstrate adequate quality of care or 
financial liability provisions.
    Response: The goal of the substantial financial risk analysis is to 
determine whether stop-loss protection is needed. The stop-loss 
protection is designed to provide protection if the physician group 
experiences patients with a greater than average risk. Thus, there is 
no need to set a different substantial financial risk threshold for 
high risk cases. The stop-loss protection addresses this concern.
    Comment: A commenter recommended that we consider lowering the 
threshold at which plans are required to provide stop-loss coverage for 
CHCs. The commenter suggested that we consider whether it is 
appropriate to compare risks to CHCs with risks to other kinds of 
primary care providers. The commenter pointed out that CHCs provide 
services almost exclusively to Medicaid/Medicare beneficiaries and 
impoverished uninsured patients. Thus, CHCs essentially have no 
capacity to generate revenues to offset losses sustained on referrals 
under a capitated rate. In addition, the commenter suggested that the 
schedule reducing the amount of protection required should be modified 
so that it decreases more slowly as a CHC's patient panel increases. 
The commenter said such a change is justified because CHCs may incur 
even greater risk as their capitated patient enrollment increases 
because the CHC's patients are likely to be in poorer health than the 
average patient.
    Response: We are giving additional consideration to the impact of 
the current risk threshold on physician incentive plans with CHCs. 
During the implementation of this regulation, we will collect data on 
the impact of the 25 percent threshold on CHCs, and consider whether 
some form of relief may be appropriate. We are concerned, however, that 
lowering the threshold as the commenter suggests would require a 
substantial number of these centers to provide stop-loss protection to 
their physicians that they may not be able to afford.
    Comment: A commenter asked whether ancillary services are 
considered referral services.
    Response: For purposes of Sec. 411.479, if the physician group 
performs the ancillary services then the services are not referral 
services. If the physician group refers patients to other providers of 
services for the ancillary services, then the services are referral 
services.
    Comment: A commenter pointed out that a response in the March 27 
final rule at 61 FR 13438, column 2, states that, if the HMO uses a 
combination of withhold and/or bonus arrangements, these arrangements 
will be aggregated for purposes of determining whether the physician is 
placed at substantial financial risk. The commenter adds that, in 
column 3 of that page, however, the response states that we are not 
requiring disclosure of every incentive arrangement between a physician 
group and its physicians, only those under which the physician is 
placed at substantial financial risk. A prepaid plan wanted to know how 
it could be expected to know that in the aggregate the arrangements 
created substantial financial risk if the physician group is not 
required to disclose the individual arrangements.
    Response: The above comment reflects a misconception. The quote 
from the third column addresses what

[[Page 69042]]

information must be disclosed by the prepaid plan to us, not what 
information the physician group must disclose to the prepaid plan. It 
is incumbent upon the prepaid plan to obtain from the physician group 
all the information that it needs to determine whether individual 
physicians are placed at substantial financial risk. This can be a 
subject addressed as part of the contract negotiations between the 
prepaid plan and the physician group.
    Comment: A commenter stated that the methodology used to determine 
substantial financial risk has consequences that they believe we never 
intended. For example, certain bonus arrangements could be construed as 
transferring substantial financial risk. The commenter described a 
program under which bonuses that are added to a base capitation are 
aimed at rewarding the primary care physician (PCP) for high quality 
care, full service capacity, long office hours, accepting all new 
patients, and cost-effectiveness. The commenter offered the following 
illustration: a PCP might get $10.50 per member/per month (PMPM) as 
capitation, $1.50 PMPM for scoring well on member surveys and office 
record reviews, $1.00 PMPM for being open to new patients, and $1.50 
PMPM for having average utilization. The total compensation would then 
be $14.50 PMPM. The commenter stated it does not believe that these 
quality performance and service bonuses are the ``substantial financial 
risk'' with which we are concerned. The commenter stated that there is 
no downside risk here, but there is the ability to add to income for 
good performance. If the intent is to include these bonus arrangements, 
the commenter wanted to know whether the relevant amount was the 
maximum attainable bonus or the average bonus paid to all PCPs in the 
network. The commenter also pointed out that, in applying our 
methodology to calculate substantial financial risk, a physician who is 
paid a higher quality office component than a second physician (both 
with the same utilization), would be found to have assumed a greater 
financial risk than the second, even though the first physician's 
revenues were greater.
    Response: While we are supportive of a quality bonus payment, there 
is very limited experience with its use, and whether a physician will 
actually receive it is speculative. We will revisit the issue when more 
information is available on the nature, extent, and experience with 
quality bonuses.

Subcontracting

    A number of commenters, including a major association, made the 
same comment on the provisions of section 417.479(i), which requires 
that the disclosure, stop-loss protection, and survey requirements of 
Sec. 417.479 be satisfied when an HMO or CMP contracts with a physician 
group that places the individual physician members at substantial 
financial risk for services they do not furnish. The major 
association's comment, which was the most comprehensive, is presented 
below.
    Comment: One major association challenged our legal authority to 
reach arrangements between a contracting physician group and its 
individual physicians (or between an ``intermediate entity'' and 
physicians or a physician group). The association pointed out that 
section 1876(i)(8)(B) of the Act defines a physician incentive plan 
as--

any compensation arrangement between an eligible organization and 
physician or physician group that may directly or indirectly have 
the effect of reducing or limiting services provided with respect to 
individuals enrolled with the organization. [Emphasis added by the 
association.]

    The association argued that, regardless of the policy 
considerations that favor extending the reach of these rules to 
subcontracts (for example, the possibility that failure to do so could 
create a ``loophole'' that could be abused), doing so was inconsistent 
with the ``plain meaning'' of this statute. The association accordingly 
contended that our interpretation was legally impermissible, regardless 
of the policy considerations in its favor.
    The association also argued that expanding the scope of the 
regulation to cover other incentive plans without a new opportunity for 
notice and comment violated the Administrative Procedure Act (APA). The 
association pointed out that the APA requires that there be a general 
notice of proposed rulemaking published in the Federal Register that 
includes, among other things, the terms or substance of a proposed rule 
or a description of the subjects and issues involved. The association 
included the following quotation from a decision by the Court of 
Appeals for the District of Columbia Circuit discussing a standard that 
the court applied for determining whether the APA requirement has been 
met:

Statutory duty to submit proposed rule for comment does not include 
obligation to provide new opportunities for comments whenever final 
rule differs from proposed rule; rather, an agency adopting final 
rules that differ from proposed rules is required to renotice when 
changes are so major that original notice did not adequately frame 
subjects for discussion. (Air Transport Association of America v. 
C.A.B., 732 F.2d 219 (D.C. Cir. 1984))

    The association argued that revising the proposed rule to extend 
its provisions to subcontractor arrangements was a sufficiently 
``major'' change that a new notice and opportunity for comment was 
required under the above standard.
    Finally, the association contended that support for its position 
could be found in language from earlier legislation directing HHS to 
study incentive arrangements. This language referred to ``incentive 
arrangements offered by health maintenance organizations and 
competitive medical plans to physicians.''
    Response: We believe that in referring both to individual 
``physician[s]'' and to ``physician group[s],'' Congress intended to 
cover all incentive arrangements that could provide incentives for a 
physician treating an HMO enrollee to reduce or limit services; both 
those affecting only an individual physician and those affecting a 
group of physicians as a whole. A letter from the original author of 
this legislation confirms that this was his intent in drafting this 
language.
    As noted above, the association attempts to place significance on 
the use of the word ``between'' in the definition of physician 
incentive plan in section 1876(i)(8)(B) (quoted above). The association 
reads this as limiting the scope of the definition of physician 
incentive plan to arrangements in a contract directly between a prepaid 
plan and a physician or physician group. In fact, however, an 
individual physician who serves a prepaid plan's enrollees as a member 
of a physician group does have a relationship with that prepaid plan, 
albeit an indirect one. There is an indirect but clear link ``between'' 
that physician and the prepaid plan whose enrollees the physician 
treats. The only difference is that instead of a single direct contract 
between the physician and the prepaid plan, the physician has a 
contract with the group, and the group in turn contracts with the 
prepaid plan.
    Even though this is a two or more step arrangement rather than a 
single direct contract, there nonetheless is a physician incentive plan 
involving the prepaid plan's enrollees that exists ``between'' the 
physician providing services to a prepaid plan's enrollees and the 
prepaid plan that is accountable for these services. There is simply an 
added layer of organization and legal arrangements ``between'' the 
physician and the prepaid plan. During our review

[[Page 69043]]

of applications for Medicare contracts, we currently review the plan's 
contracting arrangements to ensure that subcontracts actually signed by 
the physician at the ``retail'' end of the prepaid plan's health care 
delivery network inform physicians of their responsibility to carry out 
the prepaid plan's obligations under section 1876. This longstanding 
practice is fully consistent with our view that an individual physician 
contract with a physician group is part of the total arrangement 
``between'' that physician and the prepaid plan that is accountable for 
the services the physician is providing to the plan's members. For 
instance, we hold the plan accountable for the quality of care 
delivered by all components subcontracting with the plan including the 
care delivered by the physicians.
    For all of the above reasons, we believe that it is fully 
consistent with the words of the statute to reach all incentive 
arrangements that exist ``between'' doctors providing the care and a 
prepaid plan accountable for that care, whether they are contained in a 
physician's contract with a physician group or other intermediate 
entity, or in the contract the group or entity has with the prepaid 
plan. (With respect to the association's reliance on language in past 
legislation, we do not believe that it has any relevance in 
interpreting section 1876(i)(8). Indeed, it is inconsistent with the 
language in section 1876(i)(8), since it references only arrangements 
with a physician, and not those with a physician group.)
    In addition to being consistent with the words of the statute, we 
believe that our interpretation is consistent with the purpose of the 
statute, which is to protect Medicare beneficiaries enrolled in prepaid 
plans from the possible effects of financial incentives to deny or 
limit medically necessary care. It is irrelevant to this statutory 
objective whether incentives are contained in the prepaid plan's 
contract with a physician group, or in the group's contract with the 
physician. It is fully consistent with the intent and purpose of 
section 1876(i)(8) to reach any plan that could contain the incentives 
Congress wanted to address. As suggested above, it also would make no 
sense to establish a regulatory scheme that could be circumvented 
simply by erecting a ``protective shield'' between the prepaid plan and 
individual physicians in the form of an intermediate entity or 
physician group structure. The possibility of such a ``loophole'' 
permitting plans to circumvent these regulations was a major factor in 
our decision to extend the reach of these regulations to 
subcontractors.
    We also disagree with the association that the change we made in 
the final rule violated the APA under the standards of the Air 
Transport Association case cited by the association. Indeed, we believe 
that this type of revision is precisely the kind the court had in mind 
when it wrote that there is no ``obligation to provide new 
opportunities for comments whenever a final rule differs from a 
proposed rule.'' We believe that it is clear that this is not a change 
``so major that original notice did not adequately frame [the] subject 
[] for discussion.'' Clearly the ``original notice'' did ``frame'' this 
as a ``subject [] for discussion,'' since commenters in fact commented 
on this question. A second notice thus was not required under the Air 
Transport decision.
    In any event, even if a second opportunity to comment had been 
required under the Air Transport standard, any such requirement has now 
been satisfied through the notice and comment process culminating in 
this revised rule.

Stop-loss

    We received several comments on the stop-loss requirements in the 
March 27 rule. Section 417.479(g)(2) requires that HMOs or CMPs that 
operate incentive plans that place physicians or physician groups at 
substantial financial risk ensure that these physicians or physician 
groups have either aggregate or per-patient stop-loss protection in 
accordance with the following requirements:
     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.
     If the stop-loss protection provided is based on a per-
patient limit, the stop-loss limit per patient must be determined based 
on the size of the patient panel. In determining patient panel size, 
the patients may be pooled using one of the approved methods (discussed 
below) if pooling is consistent with the relevant contract between the 
physician or physician group and the prepaid plan. 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:
     Less than 1,000 patients--$10,000.
     1,000 to 10,000 patients--$30,000.
     10,000 to 25,001 patients--$200,000.
     Greater than 25,000 patients:
    + Without pooling patients--none; and
    + As a result of pooling patients--$200,000.
    Section 417.479(h)(1)(v) provides that, for purposes of determining 
panel size, patients may be pooled according to one of the following 
methods:
     Including commercial, Medicare, and/or Medicaid patients 
in the calculation of the panel size.
     Pooling together, by the HMO or CMP, of several physician 
groups into a single panel.
    Section 417.479(g)(2)(iii) provides that the HMO or CMP may provide 
the stop-loss protection directly or purchase it, or the physician or 
physician group may purchase the stop-loss protection. This section 
also provides that, if the physician or physician group purchases the 
stop-loss protection, the HMO or CMP 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 that protection.
    Comment: A major association stated that enormous confusion exists 
among its membership as to the meaning and application of the stop-loss 
provisions. The association urged us to reevaluate not only the 
substantive requirements, but the manner in which we expressed the 
information and to explain more clearly our intentions. The 
association's comments on this issue fall into two categories: (1) The 
obligation for payment of the stop-loss coverage and (2) the 
substantive requirements for stop-loss. In making its comments, the 
association also offered recommendations for amendments to the 
regulations. We summarize the association's comments and 
recommendations below:
    Comment 1. The association believed that the responsibility of 
paying for the stop-loss protection should be a negotiable issue 
between the HMO or CMP and its physician group or physician. The 
association argued that the language used in section 1876(i)(8) of the 
Act requiring HMOs or CMPs to provide stop-loss can be reasonably 
interpreted to impose an obligation that the stop-loss coverage be made 
available to the physician or physician group.
    The association also maintained that public policy supports 
allowing the financial responsibility for stop-loss coverage to be 
determined between the parties and not mandated by us. The association 
noted that a common element in a capitation arrangement between an 
organization and a physician group is a requirement that stop-loss be 
obtained to protect the physician group from undue risk. This stop-loss 
could be purchased by the prepaid plan or by the physician group.

[[Page 69044]]

The association stated that typically, these arrangements provide that 
the physician group, and not the prepaid plan, has the responsibility 
to pay for the stop-loss coverage. Another option the association noted 
would be to give the physician group the option either of purchasing 
the stop-loss coverage made available by the prepaid plan or purchasing 
the stop-loss coverage itself. The association pointed out that in all 
cases, the cost of the stop-loss coverage is an element of the 
compensation (the capitation would be reduced if the prepaid plan pays 
for the stop-loss coverage and would be higher if the physician group 
does).
    The association stated that stop-loss coverage at the levels 
required by the regulations is very expensive to obtain and that 
requiring prepaid plans to bear that cost would result in an enormous 
financial burden shifted from physician groups to prepaid plans. To 
avoid this, and consistent with the discussion above, the association 
recommended that we allow the prepaid plan and the physician group or 
physician to negotiate the financial responsibility for the stop-loss 
coverage.
    Response: After further analysis, and for the reasons set forth in 
the above comment, we are amending the regulation to require only that 
the HMO or CMP provide us proof that the physician groups have adequate 
stop-loss protection in place. We believe this is consistent with the 
primary goal of the regulation of ensuring that if the physicians are 
at substantial risk, they have adequate stop-loss protection. In 
addition, we have further information that physician groups may have 
access to more affordable stop-loss as a result of their participation 
in a number of HMOs or CMPs.
    Comment 2. The association recommended that we revise the 
regulations to reflect what it believes to be more appropriate stop-
loss levels, to account for existing stop-loss arrangements, and to 
provide an appropriate means of applying the stop-loss requirements to 
bonus and withhold arrangements. The association believed that the 
stop-loss limits are inappropriately low. It stated that a $10,000 
limit might be appropriate for a panel size less than 250 patients, but 
is not reasonable for a 1,000 patient panel. The association stated 
that one of its members projects that the cost of stop-loss over 
$10,000 for hospital services for a Medicare enrollment would be about 
20 percent of the total medical cost; this could be about $80 to $100 
per member per month depending on geographic area. Therefore, the 
association believed that it is incumbent upon us to reevaluate the 
stop-loss limits and to replace the existing limits with ones that are 
more appropriate and less costly to obtain.
    In addition, the association maintained that the stop-loss 
requirements fail to identify how prepaid plans can analyze stop-loss 
coverage that is already being provided to the physicians or physician 
groups to determine whether it meets the regulatory standard. The 
association stated that while it assumes we would allow prepaid plans 
to obtain ``credit'' for stop-loss coverage that already exists, it may 
be exceedingly difficult to compare the coverage. For example, existing 
stop-loss coverage may have a lower attachment point (that is, 
deductible), but higher coinsurance amounts or vice versa. Some stop-
loss coverage may vary by disease. Also, some coverage may vary 
depending on whether the cost is related to inpatient care or specialty 
care. Some prepaid plans apply individual and aggregate stop-loss 
simultaneously. Some stop-loss limits are linked to utilization levels 
and not cost levels. Some physician groups decline the coverage offered 
by the prepaid plan because it may be less costly to obtain the 
coverage for all their patients rather than only those who are 
enrollees of a single prepaid plan. In light of this, the association 
recommended that we do the following:
     Reevaluate the stop-loss limits in light of actuarial 
input on the appropriate need for stop-loss coverage and its cost.
     Allow a prepaid plan to retain the services of an actuary 
who would assign an actuarial value to the stop-loss coverage currently 
being provided to the physician or physician group. Allow the prepaid 
plan to meet the stop-loss requirements by providing (that is, making 
available) the difference between the actuarial value of the 
requirement and the value of the stop-loss currently being provided to 
the physician or physician group. The prepaid plan, in consultation 
with its actuary, could convert this difference into an actuarial 
equivalent in order that the new coverage be consistent with the nature 
of the stop-loss coverage already provided to the physician or 
physician group. The association stated that this recommendation is 
intended to accomplish two objectives: (1) The prepaid plan would 
obtain credit for stop-loss coverage already provided to the physician 
or physician group; (2) the prepaid plan would have more flexibility in 
determining how the requirement was met; for example, if it wished, the 
prepaid plan could meet the requirement by building on the structure of 
its existing stop-loss coverage.
    A second issue raised by the association concerns the applicability 
of the stop-loss requirements to withhold and bonus arrangements. When 
physicians or physician groups are at risk for referral services under 
a capitation arrangement, stop-loss coverage would protect the 
physician group or physician from excessive costs. In contrast, when an 
organization uses withholds or bonuses as its incentive arrangements, 
no large potential economic loss would occur at which the stop-loss 
would attach. The association recommended that we rethink the 
application of the stop-loss requirements to withhold and bonus 
situations. It also argued that we should amend our regulation to allow 
for adjustments in the stop-loss attachment points to account for 
inflation; that is, as health care costs increase, the limits need to 
be raised accordingly. Otherwise, the stop-loss coverage provided by 
the prepaid plan would become unduly and inappropriately comprehensive.
    Response: Based on actuarial analyses and consultation with experts 
knowledgeable about current stop-loss insurance practices, this final 
rule makes a number of changes to the stop-loss provision. Because many 
of the stop-loss arrangements currently in place differentiate between 
professional services and hospital or other institutional services, we 
are revising Sec. 417.478(g)(2)(ii) to permit prepaid plans and 
physician groups to choose either a single combined limit or separate 
limits for professional services and institutional services. We are 
also revising the categories of patient panel size to increase the 
number of categories and smooth out the gradation of attachment points. 
This final rule establishes the following limits:

[[Page 69045]]



                                                                        
------------------------------------------------------------------------
                                   Single       Separate      Separate  
          Panel Size              Combined   Institutional  Professional
                                   Limit         Limit          Limit   
------------------------------------------------------------------------
1-1000........................     * $6,000     * $10,000       * $3,000
1,001-5000....................       30,000        40,000         10,000
5,001-8,000...................       40,000        60,000         15,000
8,001-10,000..................       75,000       100,000         20,000
10,001-25,000.................      150,000       200,000         25,000
> 25,000......................         none          none           none
------------------------------------------------------------------------

    The asterisks indicate that, at this level, stop-loss insurance is 
impractical. The premiums would be prohibitively expensive. Plans and 
physician groups clearly should not be putting physicians at financial 
risk for panel sizes this small. It is our understanding that doing so 
is not common. For completeness, however, we do show what the limits 
would be in these circumstances.
    In regard to the comments on bonuses and withholds, we specifically 
indicated that when bonuses and withholds put physicians at substantial 
financial risk, the physicians need to have stop-loss protection. The 
legislation and regulation require that all forms of incentive 
arrangements that put physicians at substantial financial risk have 
stop-loss protection. Even though current stop-loss policies may not 
cover bonuses and withholds, this is the requirement of this 
regulation. Thus, if current policies do not cover these arrangements, 
the prepaid plans, physician groups, and/or the reinsurance companies 
must arrange for protection against losses that can occur due to 
withholds or the potential loss of bonus payments.
    With regard to the suggestion that we account for inflation, we 
will be periodically reviewing the requirements of this regulation in 
light of new or more complete information about compensation 
arrangements and their impact on patients. We will consider this and 
other recommendations again in the future.
    Comment: A commenter asked how frequently panel size can be updated 
and how soon this increased panel size can be reflected in higher stop-
loss limits for the group. The commenter also asked whether an HMO that 
increases enrollment in a physician panel and correspondingly raises 
its stop-loss limits must refile its physician incentive arrangement 
with us.
    Response: There is no limitation on the frequency with which panel 
size can be updated.
    Comment: One commenter noted that the stop-loss protection required 
by this regulation would cover only 90 percent of the costs of referral 
services that exceed 25 percent of potential payments. The commenter 
believed that the financial incentive to reduce or withhold referral 
services to Medicare patients could, in this situation, be 
overwhelming. The commenter said this would be particularly true in 
situations in which the physician treated an atypical mix of patients 
requiring referrals for specialty care.
    Response: We adopted our position based upon comments on the 
proposed rule. As indicated in the preamble to the March 27, 1996 final 
rule, this policy is currently used by many prepaid plans and has 
worked well to ensure that physicians are sensitive to avoid the 
furnishing of unnecessary services. Recent information from prepaid 
plans and actuaries confirms that this 90/10 standard is consistent 
with actual practices and policies. We set the ratio at the high end of 
the continuum of ratios used in the industry since they range from 90/
10 to 75/25. Thus, we have allowed for limited risk sharing beyond the 
stop-loss limits. Further, as indicated in the preamble to the March 
1996 rule, we made changes in the stop-loss limits to adjust for the 
incorporation of this additional risk sharing.
    Comment: A major organization representing physicians believed that 
we should require a reduced, but still substantial, amount of stop-loss 
for plans with enrollment in excess of 25,000 patients.
    Response: As stated earlier, evidence from analyses by Rossiter and 
Adamache supports the decision that physician groups with more than 
25,000 patients are able to adequately spread risk. Therefore we 
concluded that they are not at substantial financial risk. The 
commenter did not provide any data or rationale that would lead us to a 
different conclusion. Note also that the change made by this final rule 
discussed earlier that eliminates pooling by the prepaid plan across 
physician groups to achieve the 25,000 base should alleviate the 
commenter's concern.

Survey

    We received a single comment on the enrollee survey provisions in 
the rule. Section 417.479(g)(1) requires that HMOs or CMPs that operate 
incentive plans that place physicians or physician groups at 
substantial financial risk conduct enrollee surveys. These surveys 
must--
     Include either all current Medicare/Medicaid enrollees of 
the HMO or CMP and those who have disenrolled (other than because of 
loss of eligibility in Medicaid or relocation outside the HMO's or 
CMP's service area) in the past 12 months, or a sample of these same 
enrollees and disenrollees.
     Be designed, implemented, and analyzed in accordance with 
commonly accepted principles of survey design and statistical analysis.
     Address enrollees/disenrollees satisfaction with the 
quality of the services provided and their degree of access to the 
services.
     Be conducted no later than 1 year after the effective date 
of the incentive plan, and at least every 2 years thereafter.
    Comment: A major organization suggested that we require health 
plans to use a standardized survey questionnaire designed by HCFA; 
require health plans to oversample disenrollees and persons with 
chronic conditions or high cost illnesses; provide detailed 
instructions to plans on survey design; and publish a comparison report 
card of all survey results.
    Response: The final rule did not specify that the plans conduct a 
separate survey for this regulation because most plans already 
administer surveys that meet the requirements of this regulation. We 
do, however, recognize the value of having a standardized survey 
instrument and have developed one, as part of our effort to measure and 
improve quality of care, that can be used to satisfy the requirements 
of this regulation.
    We have, in concert with the Agency for Health Care Policy and 
Research through the latter's CAHPS process

[[Page 69046]]

(Consumer Assessments of Health Plans Study), sponsored the development 
of a Medicare-specific consumer satisfaction instrument, so that the 
unique health care concerns of the senior population are adequately 
addressed. CAHPS is a 5-year project whose purpose is to develop a set 
of standardized consumer satisfaction instruments usable across all 
populations; subpopulation specific modules are being developed not 
only for the Medicare population, but also for Medicaid, the 
chronically ill and disabled, and children.
    We have notified plans of our intention to require all Medicare 
contracting plans that have had a Medicare contract for at least 1 year 
as of January 1, 1997 to participate in this CAHPS survey. The CAHPS 
Medicare survey will be administered by an independent third-party 
contractor to the Government, secured through an open, competitive 
bidding process. The primary purpose of the survey is to provide 
information to consumers that will enable them to make plan-to-plan 
comparisons and thereby to make better-informed health plan choices. 
Key results of the survey will be published in a comparability chart 
that contains cost and benefit information on all Medicare contracting 
plans.
    We will consider participation by a plan in the CAHPS survey as 
satisfying the requirements of this regulation, subject to the 
following two additional considerations. First, the current version of 
CAHPS does not contain a module addressed to disenrollees. Efforts are 
underway to develop such a module, which may be available by 1998. For 
1997, we are preparing guidelines to managed care plans on how to 
satisfy the requirement to survey disenrollees. That guidance will be 
available in the spring of 1997.
    Second, as noted above, under the requirements of our quality 
initiative, plans that received their initial Medicare contract after 
January 1, 1996, are not required to participate in the CAHPS survey 
until calendar year 1998. There will likely be plans, however, that 
received their first contract after January 1, 1996, that will be 
required to meet the enrollee and disenrollee survey requirements of 
this regulation in calendar year 1997. Those plans may wish to use the 
CAHPS survey to meet this requirement.
    We have issued an operational policy letter explaining this 
requirement in more detail (See OPL number 96.045, December 3, 1996).
    Oversampling for the chronically ill and disabled, dually eligible, 
and various racial and ethnic groups is a complex issue. Strategies for 
doing so are being seriously considered. We will be forwarding 
additional guidance to managed care plans.
    It should also be noted that the CAHPS survey collects information 
at the level of the managed care plans, without distinguishing among 
patients of various physician groups within the plan. Ideally, the 
survey required under this regulation, however, should do so. We will 
accept the CAHPS survey as satisfying this regulation at this time, 
while we continue to evaluate additional measures that might be taken 
to collect information by physician group.
    Finally, we will not require that the Medicaid version of the CAHPS 
survey be administered by HMOs with Medicaid contracts. However, we are 
willing to assist States that wish to require administration of the 
CAHPS Medicaid survey.

Other Comments

    We received other comments that were not specifically directed to 
the provisions of the regulation. Since these comments do not directly 
address the regulations, we are not responding to them in this 
preamble.
    We also want to clarify an inconsistency that occurred in the 
preamble to the March 27, 1996 final rule. While the regulation text 
was accurate in specifying that subcontracts were covered by the 
regulations, we were inconsistent in different sections of the 
preamble. In the first column at 61 FR 13439, we indicated that 
subcontracts are covered, while in the second and third column of the 
same page we indicated that they were not covered. The statements in 
the second and third column were incorrect.

V. Provisions of this Final Rule

    This final rule reflects the March 27, 1996 final rule with comment 
period, with changes. Many of the substantive change listed below have 
been discussed in section IV of this preamble. Those that have not are 
explained below.
     Section 417.479(b) is revised to clarify that the 
physician incentive plan requirements also apply to subcontracting 
arrangements.
     Section 417.479(f), which describes arrangements that 
cause substantial financial risk, is revised to permit pooling by 
physician groups of patients across prepaid plans. A technical change 
is also made to change ``possible payments'' wherever it appears to 
``potential payments''. This latter change reflects the fact that 
``potential payments'' is the term defined in the paragraph's 
introductory text.
     In Sec. 417.479(g), which sets forth the requirements that 
HMOs and CMPs that place physicians or physician groups at substantial 
financial risk must meet, the following changes are made:
    + Paragraph (g)(1) is revised to require that the enrollee survey 
be conducted no later than 1 year after the effective date of the 
Medicare contract and at least annually thereafter.
    + Paragraph (g)(2)(ii) is revised to establish new stop-loss limits 
based either on a single combined limit or on separate limits for 
professional services and institutional services.
    + Paragraph (g)(2)(iii) is removed to eliminate the requirement 
that the HMO or CMP pay for the stop-loss protection.
     In Sec. 417.479(h), which concerns disclosure 
requirements, the following changes are made:
    + Paragraph (h)(1)(iv) is revised to specify that the HMO or CMP 
must provide us with proof that the physician or physician group has 
adequate stop-loss protection, including the amount and type of stop-
loss protection.
    + Existing paragraph (h)(1)(v) is removed to eliminate, as an 
approved method of pooling, pooling together, by the organization, of 
several physician groups into a single panel. A new paragraph (h)(1)(v) 
is added to permit pooling, by a physician group, of patients across 
prepaid plans. New paragraph (h)(1)(v) also specifies the conditions 
under which pooling is permitted.
    + Paragraph (h)(2) is revised to change when the HMO or CMP must 
provide the required information. The current regulation requires this 
to be done upon application for a contract, upon application for a 
service area expansion, within 30 days of a request by us, and at least 
45 days before implementing certain changes in the incentive plan. We 
have changed this to make it an annual requirement. This first 
submission must be done prior to approval of a new contract, with 
subsequent submissions prior to each renewal of the contract. This 
change is intended to simplify the requirement and reduce the reporting 
burden on the prepaid plans.
    In addition we now specify, in paragraph (h)(2)(ii), that an HMO or 
CMP must provide the capitation data for the previous calendar year to 
us by April 1 of each year. This change is being made to eliminate 
confusion about the reporting period and ensure consistency.
     In Sec. 434.70, which concerns conditions for FFP, 
paragraph (a)(3) is revised to--
    + Eliminate the requirement that the HMO or HIO must disclose 
certain

[[Page 69047]]

information within 30 days of a request by the State or HCFA.
    + To specify that an HMO or HIO must provide the capitation data 
for the previous calendar year to the State Medicaid agency by April 1 
of each year.
    + Eliminate the requirement that the HMO or HIO submit the required 
information at least 45 days before implementing certain changes in its 
incentive plan.

VI. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, agencies 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. This 
final rule contains information collections that are subject to review 
by OMB under the Paperwork Reduction Act of 1995. The title, 
description, and respondent description of the information collections 
are shown below with an estimate of the annual reporting and 
recordkeeping burden. Included in the estimate is the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and collecting and reviewing the 
collection of information.
    We are, however, requesting an emergency review of these 
regulations. In compliance with the requirement of section 
3506(c)(2)(A) of the Paperwork Reduction Act of 1995, we have submitted 
to OMB the following requirement for emergency review. We are 
requesting an emergency review because the collection of this 
information is needed prior to the expiration of the normal time limits 
under OMB's regulations at 5 CFR part 1320, to ensure compliance with 
the physician incentive regulation necessary to implement congressional 
intent with respect to incentive arrangements between managed care 
entities and their contracting providers. We cannot reasonably comply 
with the normal clearance procedures because public harm is likely to 
result due to the delay in reporting and monitoring of these 
incentives. If emergency clearance is not provided, we will be forced 
to postpone the collection of these data for 12 months due to the 
timing of contract cycles.
    We are requesting that OMB provide a 5-day public comment period 
with a 2-day OMB review period and a 180-day approval. During this 180-
day period, we will publish a separate Federal Register notice 
announcing the initiation of an extensive 60-day agency review and 
public comment period on these requirements. Then we will submit the 
requirements for OMB review and an extension of this emergency 
approval.
    Type of Information Request: New collection.
    Title of Information Collection: Incentive Arrangement Disclosure 
Form and Supporting Regulations 42 CFR 417.479 (g)(1), 417.479(h)(1) 
and (h)(2), 417.479(i), and 434.70(a)(3).
    Form Number: HCFA-R-201.
    Use: Incentive Arrangement Form and supporting regulations will be 
used to monitor physician incentive plans.
    Frequency: Annually.
    Affected Public: Nonprofit and for profit HMOs, CMPs, and HIOs.
    Number of Respondents: 450.
    Total Annual Responses: 450.
    Total Annual Hours Requested: 45,000.
    To request copies of the proposed paperwork collections referenced 
above, call the Reports Clearance Office at (410) 786-1326.
    The sections in these final regulations that contain information 
collection requirements are:. Secs. 417.479 (h)(1) and (h)(2), 
417.479(i), 434.70(a)(3), and 417.479(g)(1), (and Sec. 434.70(a)(3) for 
Medicaid) of this document. However, the information collection 
requirements referenced in Secs. 417.479(g)(1) and 434.70(a)(3) of this 
final rule, described below, are currently pending approval by OMB 
(under the title ``HEDIS 3.0 (Health Plan Data and Information Set) and 
supporting regulations 42 CFR 417.470 and 42 CFR 417.126'').
    The information collection requirements at existing 
Secs. 417.479(h) (1) and (h)(2), 417.479(i), and 434.70(a)(3) were 
established by the March 27, 1996 final rule with comment period. These 
sections of the regulations specify that disclosure concerning 
physician incentive plans must be made to us or the State, as 
appropriate. The requirements apply to physician incentive plans 
between prepaid plans 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. Under the existing regulations, a 
prepaid plan 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 us or the State. This rule would amend 
the regulations by removing the requirements that disclosure be made 
upon application for a service area expansion, within 30 days of a 
request by us or the State, and at least 45 days before implementing 
certain changes in the incentive plan. It would add that disclosure 
must be made prior to the approval of a new contract or agreement and 
annually thereafter. These changes should reduce the reporting burden 
on prepaid plans. At the time we published the March 1996 rule, we 
estimated that approximately 600 entities will submit the information. 
We estimated the burden as 8 hours per response. As discussed in 
section IV above, we received numerous comments stating that we greatly 
underestimated the burden associated with complying with the disclosure 
requirements and suggesting alternative approaches. We now estimate 
that approximately 450 prepaid plans will disclose information. We 
estimate that the burden per response will be 100 hours, for an annual 
total burden of 45,000 hours. This estimate includes time spent by 
subcontractors in furnishing information to the prepaid plan.
    Existing Sec. 417.479(g)(1) (and Sec. 434.70(a)(3) for Medicaid) 
concern prepaid plans that operate physician incentive plans that place 
physicians or physician groups at substantial financial risk and 
require them to conduct enrollee surveys that include either all 
current Medicare/Medicaid enrollees in the prepaid plan and those who 
have disenrolled (other than because of loss of eligibility in Medicaid 
or relocation outside the prepaid plan's) in the past 12 months, or a 
sample of these same enrollees and disenrollees. These surveys are 
required to be conducted annually.
    The information collection and recordkeeping requirements, 
referenced in Sec. 417.479 (h)(1) and (h)(2), 417.479(g)(1), 
417.479(i), and 434.70(a)(3) of these regulations are not effective 
until they have been approved by OMB. The agency has submitted a copy 
of this final rule with comment period to OMB for its review of these 
information collections. A notice will be published in the Federal 
Register when approval is obtained. Interested persons are invited to 
send comments regarding this burden or any other aspect of these 
collections of information, including any of the following subjects: 
(1) The necessity and utility of the information collection for the 
proper performance of the agency's functions; (2) the accuracy of the 
estimated burden; (3) ways to enhance the quality, utility, and clarity 
of the information to be collected; and (4) the use of automated 
collection

[[Page 69048]]

techniques or other forms of information technology to minimize the 
information collection burden.
    Comments on these information collections should be mailed directly 
to the following address:
    Office of Information and Regulatory Affairs, Office of Management 
and Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Allison Herron Eydt, HCFA Desk Officer.
    In addition, comments may be faxed to: Allison Herron Eydt at (202) 
395-6974.
    A copy of the comments may be mailed to the following address: 
Health Care Financing Administration, Office of Financial and Human 
Resources, Management Analysis and Planning Staff, Room C2-26-17, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    We will also be undertaking an overall evaluation of all of the 
reporting and disclosure requirements in this regulation within the 
next year, to assess the value of the information compared with the 
burden of reporting. All of the disclosure and reporting requirements, 
and any related forms, will continue to be subject to review under the 
Paperwork Reduction Act.

VII. 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, we consider all HMOs, CMPs, and HIOs to be small entities.
    In addition, section 1102(b) 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), we define a small rural hospital as a 
hospital that is located outside of a Metropolitan Statistical Area and 
has fewer than 50 beds.
    In the preamble to the March 27, 1996 rule, which provided an 
opportunity for comments, we stated that we had decided not to prepare 
a regulatory flexibility analysis because we believed that few 
incentive plans will require changes to comply with the regulations. A 
major association of health plans, which submitted comments on behalf 
of its membership, strongly disagreed with this position.
    The association maintained that the regulations, as adopted, will 
result in substantial administrative and financial burdens on a large 
number of organizations. The association requested that, in light of 
the information it was providing to us in its other comments, we 
reconsider our decision not to prepare a regulatory impact analysis.
    A number of commenters believed that, in estimating a burden of 8 
hours per response, we had grossly underestimated the time and 
financial resources that need to be expended to comply with the 
disclosure requirements. These commenters stated that this problem may 
be alleviated to some extent if the prepaid plans were allowed to agree 
that all or some of their physician incentive programs resulted in 
substantial financial risk without having to disclose to us the 
detailed information specified in the Regulations. One commenter added 
that the regulations, in essence, require prepaid plans to act as 
information gathering conduits for information related to physician 
group and/or subcontractor incentive plans. The commenter stated that 
this is not the most efficient or effective means and that a preferable 
approach is for us to solicit the information directly from the 
physician group or subcontractor. The commenter recommended that we 
adopt a uniform and standardized calculation and attestation form that 
prepaid plans could use to solicit the information.
    Another commenter stated that the stop-loss limits are 
inappropriately low and, because of this, the cost of stop-loss 
coverage is very high. The commenter maintains that this rule results 
in substantial financial burdens on a large number of prepaid plans.
    The suggestions offered by the commenters have been addressed in 
section IV above. With regard to our assessment of the impact of the 
March 27, 1966 rule, we have reviewed our assessment. In this review, 
we used information developed by a major accounting firm at the request 
of a major association, which was shared with us.
    Based on survey data from Mathematica (1995), approximately one-
third of prepaid plans capitate their physicians for all services. This 
means that, of approximately 300 Medicare prepaid plans, about 100 
plans will capitate for all services. Of approximately 300 Medicaid 
HMOs and HIOs, approximately one-half will have Medicare contracts and, 
thus, do not add to the total. Of the remaining 150 Medicaid plans, 
many will be relatively new Medicaid plans. Most new Medicaid plans do 
not capitate their physicians for all services. Therefore, we estimate 
that there will be a total of 25 Medicaid prepaid plans in addition to 
the 100 Medicare plans that capitate for all services. These 125 plans 
will have to provide stop-loss insurance. Very few plans that use 
bonuses or withholds will exceed the substantial risk threshold.
    Of the 125 plans that will need to provide stop-loss insurance, 
most of these plans already have such coverage. Taking into account the 
changes made by this final rule, we estimate that approximately 44 
prepaid plans (35 percent) will need to increase their stop-loss 
coverage. The cost of this additional coverage is estimated at 
approximately $65 million. Since the affected entities are large, $65 
million represents a very small percentage of their gross annual 
income. In addition, we expect that some of the $65 million will be 
offset by monies received from the insurers because of the increased 
coverage.
    With regard to the financial burden associated with complying with 
the disclosure requirements, we continue to estimate that approximately 
450 plans will need to comply with the disclosure requirements. We now 
estimate the burden to be 100 hours per response, at a cost of $20 per 
hour. This includes the burden on the physician groups and 
subcontractors in furnishing information to the prepaid plan. Thus, we 
estimate the total impact of the disclosure requirements at $900,000 
per year.
    This rule changes the frequency of the survey requirements (from 
biennially to annually), we believe that this imposes very little 
additional burden on prepaid plans since most plans already conduct 
annual surveys. In addition, as discussed in section V of the preamble, 
this rule changes when disclosure must be made to HCFA or the State 
Medicaid agency. While this rule adds that disclosure must be made upon 
the contract or agreement renewal or anniversary date, it removes other 
circumstances under which disclosure must be made. We believe the 
overall effect of these changes as to when disclosure must be made is 
to reduce the reporting burden on the affected prepaid plans.
    We are not preparing analyses of this final rule 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 economic impact on the operations of a substantial number 
of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

[[Page 69049]]

VIII. Waiver of Delayed Effective Date

    We ordinarily provide for final rules to be effective no sooner 
than 30 days after the date of publication unless we find good cause to 
waive the delay.
    This final rule amends existing regulations that set forth the 
requirements that certain managed care organizations must meet in order 
to contract with the Medicare and/or Medicaid program. A number of the 
changes made by this final rule either reduce the burden associated 
with the regulations or recognize existing industry practices. Since 
many managed care Medicare and Medicaid contracts renew on January 1, 
if this final rule does not become effective until after that date, the 
benefits that result from the changes made by this rule will not be 
realized until 1998. Therefore, we find that it would be against the 
public interest to delay the effective date of this final rule.
    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 continues to read as 
follows:

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

    2. In Sec. 417.479, paragraph (g) introductory text and paragraph 
(g)(1) introductory text are republished; paragraph (g)(2)(iii) is 
removed; paragraph (b), paragraph (f) introductory text, paragraphs 
(f)(5), (g)(1)(iv), (g)(2)(ii), (h)(1)(iv), (h)(1)(v), and (h)(2) are 
revised to read as follows:


Sec. 417.479  Requirements for physician incentive plans.

* * * * *
    (b) Applicability. The requirements in this section apply to 
physician incentive plans between HMOs and CMP and individual 
physicians or physician groups with which they contract to provide 
medical services to enrollees. The requirements in this section also 
apply to subcontracting arrangements as specified in Sec. 417.479(i). 
These requirements apply only to physician incentive plans that base 
compensation (in whole or in part) on the use or cost of services 
furnished to Medicare beneficiaries or Medicaid recipients.
* * * * *
    (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:
* * * * *
    (5) Capitation, arrangements, if--
    (i) The difference between the maximum potential payments and the 
minimum potential payments is more than 25 percent of the maximum 
potential payments; or
    (ii) The maximum and minimum potential payments are not clearly 
explained in the physician's or physician group's contract.
* * * * *
    (g) Requirements for physician incentive plans that place 
physicians at substantial financial risk. HMOs and CMPs that operate 
incentive plans that place physicians or physician groups at 
substantial financial risk must do the following:
    (1) Conduct enrollee surveys. These surveys must--
* * * * *
    (iv) Be conducted no later than 1 year after the effective date of 
the Medicare contract and at least annually thereafter.
    (2) * * *
    (ii) If the stop-loss protection provided is based on a per-patient 
limit, the stop-loss limit per patient must be determined based on the 
size of the patient panel and may be a single combined limit or consist 
of separate limits for professional services and institutional 
services. In determining patient panel size, the patients may be pooled 
in accordance with paragraph (h)(1)(v) of this section. Stop-loss 
protection must cover 90 percent of the costs of referral services that 
exceed the per patient limit. The per-patient stop-loss limit is as 
follows:

                                                                        
------------------------------------------------------------------------
                                   Single       Separate      Separate  
          Panel size              combined   institutional  professional
                                   limit         limit          limit   
------------------------------------------------------------------------
1-1000........................       $6,000       $10,000         $3,000
1,001-5000....................       30,000        40,000         10,000
5,001-8,000...................       40,000        60,000         15,000
8,001-10,000..................       75,000       100,000         20,000
10,001-25,000.................      150,000       200,000         25,000
> 25,000......................         none          none           none
------------------------------------------------------------------------

* * * * *
    (h) * * *
    (1) * * *
    (iv) Proof that the physician or physician group has adequate stop-
loss protection, including the amount and type of stop-loss protection.
    (v) The panel size and, if patients are pooled, the method used. 
Pooling is permitted only if: it is otherwise consistent with the 
relevant contracts governing the compensation arrangements for the 
physician or physician group; the physician or physician group is at 
risk for referral services with respect to each of the categories of 
patients being pooled; the terms of the compensation arrangements 
permit the physician or physician group to spread the risk across the 
categories of patients being pooled; the distribution of payments to 
physicians from the risk pool is not calculated separately by patient 
category; and the terms of the risk borne by the physician or physician 
group are comparable for all categories of patients being pooled. If 
these conditions are met, the physician or physician group may use 
either or both of the following methods to pool patients:
    (A) Pooling any combination of commercial, Medicare, or Medicaid 
patients enrolled in a specific HMO or CMP in the calculation of the 
panel size.
    (B) Pooling together, by a physician group that contracts with more 
than one HMO, CMP, health insuring organization (as defined in 
Sec. 434.2 of

[[Page 69050]]

this chapter), or prepaid health plan (as defined in Sec. 434.2 of this 
chapter) the patients of each of those entities.
* * * * *
    (2) When disclosure must be made to HCFA. (i) HCFA will not approve 
an HMO's or CMP's application for a contract unless the HMO or CMP has 
provided to it the information required by paragraphs (h)(1)(i) through 
(h)(1)(v) of this section. In addition, an HMO or CMP must provide this 
information to HCFA upon the effective date of its contract renewal.
    (ii) An HMO or CMP must provide the capitation data required under 
paragraph (h)(1)(vi) for the previous calendar year to HCFA by April 1 
of each year.
* * * * *

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).

    2. In Sec. 434.44, paragraph (a)(1) is revised to read as follows:


Sec. 434.44  Special rules for certain health insuring organizations.

    (a) * * *
    (1) Subject to the general requirements set forth in Sec. 434.20(d) 
concerning services that may be covered; 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. 434.70, paragraph (a) introductory text is republished, 
and paragraph (a)(3) 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--
* * * * *
    (3) The HMO, 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 Sec. 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 the information required under Secs. 417.479 
(h)(l)(i) through (h)(1)(v) of this chapter to the State Medicaid 
agency as follows:
    (i) Prior to approval of its contract or agreement.
    (ii) Upon the contract or agreements anniversary or renewal 
effective date.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; Program No. 93.774, Medicare--
Supplementary Medical Insurance Program; and Federal Domestic 
Assistance Program No. 93.778, Medical Assistance Program)

    Dated: December 17, 1996.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: December 20, 1996.
Donna E. Shalala,
Secretary.
[FR Doc. 96-33330 Filed 12-30-96; 8:45 am]
BILLING CODE 4120-01-P