[Federal Register Volume 63, Number 88 (Thursday, May 7, 1998)]
[Rules and Regulations]
[Pages 25360-25379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12058]
[[Page 25359]]
_______________________________________________________________________
Part III
Department of Health and Human Services
_______________________________________________________________________
Health Care Financing Administration
_______________________________________________________________________
42 CFR Part 422
Medicare Program: Waiver Requirements and Solvency Standards for
Provider-Sponsored Organizations; Final Rule
Federal Register / Vol. 63, No. 88 / Thursday, May 7, 1998 / Rules
and Regulations
[[Page 25360]]
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Part 422
[HCFA-1011-IFC]
RIN 0938-AI83
Medicare Program; Waiver Requirements and Solvency Standards for
Provider-Sponsored Organizations
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Interim final rule with comment period.
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SUMMARY: This interim final rule with a request for comments implements
authority to waive, in the case of provider-sponsored organizations
(PSOs) that meet certain criteria, the requirement that Medicare+Choice
organizations be licensed by a State as risk-bearing entities. The
waivers will be approved only under certain conditions where the State
has denied or failed to act on an application for licensure.
This rule also establishes solvency standards that certain entities
must meet to contract as PSOs under the new Medicare+Choice program.
These standards apply to PSOs that have received a waiver of the
requirement that Medicare+Choice organizations be licensed by a State
as risk-bearing entities.
DATES: Effective date: These regulations are effective on June 8, 1998.
Comment date: Comments will be considered if we receive them at the
appropriate address, as provided below, by 5 p.m. on July 6, 1998.
ADDRESSES: Mail an original and 3 copies of written comments to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: HCFA-1011-IFC, P.O. Box 26688,
Baltimore, MD 21207-5187.
If you prefer, you may deliver an original and 3 copies of your
written comments to one of the following addresses:
Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-1011-IFC. Comments received timely will be available
for public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in Room 309-G of
the Department's offices at 200 Independence Avenue, SW., Washington,
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.
(phone: (202) 690-7890).
If you wish to submit comments on the information collection
requirements contained in this interim final rule, you may submit
comments to:
Health Care Financing Administration, Office of Information Services,
Information Technology Investment Management Group, Division of HCFA
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard,
Baltimore, MD 21244-1850, Attn: John Burke, HCFA-1011-IFC
Office of Management and Budget, Room 10235, New Executive Office
Building, Washington, DC 20503, Attn: Allison Herron Eydt, HCFA Desk
Officer
FOR FURTHER INFORMATION CONTACT:
Aaron Brown, (410) 786-1033--general policy
Maureen Miller, (410) 786-1097--general policy
Philip Doer (410) 786-1059--program operations
Greg Snyder, (410) 786-0329--program operations
SUPPLEMENTARY INFORMATION:
I. Background
A. Current Medicare Contracting Program
Sections 1876 (g)(1) and (h)(1) of the Social Security Act (the
Act) authorize the Secretary to enter into risk-sharing and cost
contracts with eligible organizations to provide certain health
benefits to members. Section 1876(b) of the Act requires an eligible
organization, that may be a health maintenance organization (HMO) or a
competitive medical plan (CMP), to be organized under the laws of a
State. Additionally, section 1876(b) requires that such entities assume
full financial risk on a prospective basis for the provision of health
care services, and make adequate provisions against the risk of
insolvency.
B. Current Regulations
Regulations at title 42 of the Code of Federal Regulations (CFR),
Part 417, reflect the above requirement that Medicare contracting
organizations be organized under State law, and make adequate provision
against the risk of insolvency. Specifically, regulations at 42 CFR
417.120 require that Medicare contracting HMOs and CMPs have a fiscally
sound operation as demonstrated by the following:
Total assets greater than total unsubordinated
liabilities.
Sufficient cash flow and adequate liquidity to meet
obligations as they become due.
A net operating surplus or a financial plan.
An insolvency protection plan.
A fidelity bond or bonds, procured and maintained by the
HMO, in an amount fixed by its policy-making body but not less than
$100,000 per individual, covering each officer and employee entrusted
with handling of its funds. The bond may have reasonable deductibles
based upon the financial strength of the HMO.
Insurance policies or other arrangements, secured and
maintained by the HMO and approved by HCFA to insure the HMO against
losses arising from professional liability claims, fire, theft, fraud,
embezzlement and other casualty risks.
Since section 1876 of the Act requires that Medicare contracting
HMOs and CMPs be organized under the laws of any State, these entities
are subject to State laws regarding financial solvency. Many States
follow the financial solvency provisions of the HMO Model Act of the
National Association of Insurance Commissioners (NAIC). The financial
requirements of the Model HMO Act are distinct from those of the Health
Care Financing Administration (HCFA).
C. Balanced Budget Act of 1997
Section 4001 of the Balanced Budget Act of 1997 (BBA) (Public Law
105-33), enacted August 5, 1997, added new sections 1851 through 1859
to the Act. Those sections establish a new Medicare+Choice (M+C)
program under part C of title XVIII of the Act. Part C is designed to
give beneficiaries access to health plan choices that go beyond the
original Medicare fee-for-service program and existing Medicare HMOs.
Once the M+C program is implemented, an individual entitled to Medicare
Part A and Part B will be able to elect benefits either through
original Medicare or an M+C plan, depending on availability in their
area. Under Part C, the M+C plans that may be offered are coordinated
care plans (e.g., HMOs, provider-sponsored organizations (PSOs), and
preferred provider organizations (referred to as PPOs)), private-fee-
for service plans, and demonstration medical savings account (MSA)
plans (that is, a combination of a high deductible, catastrophic
insurance plan with a contribution to a Medicare+Choice account).
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Regulations for the overall implementation of the M+C program are
required by the BBA to be published by June 1, 1998. Those regulations
will be incorporated into Part 422 of title 42 of the CFR. Provisions
enacted by the BBA and the forthcoming M+C regulations establish broad
and comprehensive requirements for contracting as an M+C plan,
including basic benefits, payment, access to service, quality
assurance, beneficiary hold harmless, continuation of benefits, appeals
mechanisms, marketing and enrollment processes. Those overall M+C
regulations will apply to PSOs as well.
Section 1851(a)(2) of the Act explicitly provides for participation
of a PSO in the M+C program as a coordinated care plan. A PSO is
described in section 1855(d) of the Act as a public or private entity--
That is established or organized, and operated, by a
health care provider or group of affiliated health care providers;
That provides a substantial proportion of the health care
items and services directly through the provider or affiliated group of
providers; and
With respect to which the affiliated providers share,
directly or indirectly, substantial financial risk for the provision of
such items and services and have at least a majority financial interest
in the entity.
We recently published an interim final rule with an opportunity for
public comment setting out this definition, clarifying certain terms,
and establishing related requirements. (This PSO definitions rule
established 42 CFR Part 422 and, more specifically, Subpart H, which is
designated for the PSO provisions.) The terms and requirements related
to the definition of a PSO are now found at Secs. 422.350 through
422.356. Here, in this interim final rule with opportunity for public
comment, we focus on two more portions of the law established
specifically for PSOs and the M+C program: the Federal waiver of State
licensure and the solvency standards that will apply to PSOs that have
obtained such a waiver.
Section 1855(a)(2) of the Act establishes a special exception for
PSOs to the otherwise applicable requirement for State licensure if
certain conditions occur. This interim final rule implements the PSO
waiver provisions specified in the BBA, and makes clarifications. In
order to assist organizations that are considering applying to become
PSOs under the M+C program, we determined that the waiver provisions
should not be delayed until the June 1, 1998 regulation is published.
As with the PSO definitions rule mentioned above, early publication of
these PSO provisions is desirable because of requirements that must be
met before contract application.
Section 1856(a) of the Act provides that the Secretary establish
through a negotiated rulemaking process the solvency standards that
entities will be required to meet if they obtain a waiver of the
otherwise applicable requirement that they be licensed by a State. We
note here that based on Secs. 422.352(a) and 422.380, State-licensed
organizations that meet the PSO definition (see Secs. 422.350 through
356) may qualify for the minimum enrollment standards established under
Section 1857(b) of the Act but are not subject to these solvency
standards.
The solvency standards in this interim final rule with comment
period are a product of the negotiated rule making process. This rule
does not necessarily conclude the negotiated rulemaking process because
the Committee may be reconvened to consider public comments that are
received.
II. Waiver of State Licensure Requirement
A. Background
1. Statutory Basis
A fundamental requirement of the M+C program, as set forth under
new section 1855(a)(1) of the Act, is that an M+C organization must be
``organized and licensed under State law as a risk-bearing entity
eligible to offer health insurance or health benefits coverage in each
State in which it offers an M+C plan.'' However, section 1855(a)(2) of
the Act establishes an exception to this requirement by allowing
certain organizations established or operated and controlled by
providers, and known in the BBA as PSOs, to obtain from the Secretary a
Federal waiver of the State licensure requirement under certain
circumstances. This interim final rule with comment sets forth
regulations for implementing that waiver.
Unlike the regulations contained in this rule relating to PSO
solvency and capital adequacy, the waiver provisions were not developed
through the negotiated rulemaking process. The regulations described in
this section were developed by HCFA under its rulemaking authority.
2. State Licensure and the Medicare Program
Under section 1876(b) of the Act and implementing regulations at 42
CFR Part 417, Medicare contracting HMOs and CMPs must be organized
under the laws of a State. As used in section 1876 of the Act, the term
``HMO'' means a Federally qualified HMO and the term ``CMP'' means a
prepaid health plan that is likely regulated by the State as an HMO,
but is not Federally qualified. Thus a provider sponsored health plan
could apply to contract with HCFA as an HMO or a CMP if it became
Federally qualified or met the definition of CMP, and satisfied other
section 1876 requirements. In recent years, several States have adopted
licensure laws for PSOs (sometimes known as integrated or organized
delivery systems), thereby creating another licensure vehicle and
avenue for contracting with Medicare. (Some State PSO laws, however,
are limited in scope and licensed entities would not meet the CMP
requirements).
3. Federal Waivers and PSO Applications
As indicated above, section 1855(a)(1) requires that M+C
organizations be licensed as risk-bearing entities under the laws of
the State. Section 1855(a)(2) of the Act provides an exception to this
requirement for PSOs. PSOs are the only organization eligible to
participate in M+C without State licensure. It is clear from the
statute, however, that all organizations, including those established
by providers, must seek State licensure as the initial step toward an
M+C contract. Only under specific conditions, as described below, will
the organization be permitted to forego the preliminary and fundamental
requirement to be State-licensed as a risk-bearing entity.
If an organization believes that the circumstances of its State
application comply with one of the conditions for a waiver, it must
submit to HCFA a completed waiver request form. The request form, that
the Office of Management and Budget approved on April 2, 1998, (form
#0938-0722) is available through HCFA, and is posted on the HCFA web
site at http://www.hcfa.gov/Medicare/mplusc.htm. HCFA will make a
determination to approve or disapprove a waiver within 60 days of
receipt of a substantially complete request. If the waiver request is
approved, the organization will be considered eligible for a waiver,
and then may submit its contract application to HCFA. (The PSO
application form will be posted at the aforementioned Internet address
in the near future.) It is through the application process that the
organization must demonstrate to HCFA's satisfaction that it meets the
PSO definitions and requirements as set forth in 42 CFR 422.350 through
422.356, as well as the solvency standards established later in this
interim final rule. If it meets the
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definition, the organization will be considered a PSO and remains
eligible for a waiver.
Given the 60-day time period permitted HCFA to approve a waiver
request under section 1855(a)(2)(F) of the Act, we felt it would be
impossible in many cases to simultaneously process the waiver request
and determine whether an organization is a PSO as defined under
Sec. 422.350 through Sec. 422.356. This determination may require an
extensive review and verification of the organization's structure,
ownership or partnership arrangements, contracts and payment
arrangements. Therefore, as described above, the 60-day maximum time
period will apply to determining whether the organization is eligible
for a waiver, as required by law. The determination that the
organization is in fact a PSO will occur once it is eligible for a
waiver and has submitted an application for an M+C contract.
B. Waiver Provisions
In this interim final rule, we are establishing new provisions at
Sec. 422.370 through Sec. 422.378 for purposes of implementing section
1855(a)(2) of the Act. Because entities applying for a waiver as yet
will not have been determined to meet the PSO definition and
requirements of subpart H, the regulation text refers to these entities
as ``organizations.''
Section 422.370 implements the authority under section
1855(a)(2)(A) of the Act to waive the State licensure requirement for
M+C organizations contained in section 1855(a)(1) and restates the two
basic conditions for doing this. First, the rule requires organizations
interested in a waiver to file a request by no later than November 1,
2002, a time limit specified by the statute. Second, HCFA must
determine whether the organization meets one of the grounds for a
waiver listed in Sec. 422.372.
Section 422.372 of the rule establishes the basis for a waiver as
set forth in sections 1855(a)(2)(B), (C), and (D) of the Act. These
three conditions and a fourth condition identified by HCFA are
described below. In order for three of the conditions to be
effectuated, the organization must have applied for a State license
before requesting a waiver. By requiring that the organization apply
for ``the most closely appropriate'' license (or authority), we are
clarifying that the type of license must relate to the nature of M+C
coordinated care plans; that is, health plans providing coordinated,
comprehensive benefits through a health care delivery net work on a
fixed, prepayment basis. We are requiring this to ensure that
organizations requesting and obtaining waivers will likely meet the PSO
definition and M+C requirements during the application stage. We expect
that for most States the most appropriate license available will be an
HMO license, although this may change as States adopt PSO or modify
current licensure laws. It is very unlikely that we will approve a PSO
waiver based on an application for an indemnity insurance license, a
PPO license, any license or authority to provide limited health
services, or a limited license to bear risk for an HMO as a downstream
contractor.
Section 422.372(a) sets out the first basis on which an
organization may establish waiver eligibility, that is, the State
failed to complete action on the licensing application within 90 days
of the date the State received a substantially complete application.
(See section 1855(a)(2)(B).) The 90-day period may begin any time after
enactment of the BBA. It is counted from the date the State received a
``substantially complete application.'' In order to clarify the term
``substantially complete application,'' we consulted several parties
for technical assistance, and intend to make determinations as follows:
(1) If the State has notified the organization, in writing, that
the organization has submitted a substantially complete application,
the date of that notification will be considered the date the State
received a substantially complete application.
(2) If the State has not notified the organization, in writing, as
to the completeness of its application within 60 days of the date of
submission of an application, we will consider the date the
organization submitted its initial application to be the date the State
received a substantially complete application.
(3) If the organization can demonstrate to HCFA that it has
submitted all of the information requested in an incompleteness
notification from the State and the State still regards the application
as incomplete or fails to notify the organization as to the status of
its application within 30 days from the date it receives the
organization's submission of the additional information requested, then
HCFA will consider the date the State received the additional
information requested to be the date the State received a substantially
complete application.
(4) In a dispute between an organization and the State over whether
the organization has submitted a substantially complete application or
over the date the State received a substantially complete application,
HCFA will make the final determination based on consultation with the
organization and the State.
We believe that this process for determining the date the State
received a substantially complete application is consistent with
Congressional intent that an organization must make an earnest attempt
to become State licensed before requesting a waiver. This earnest
attempt includes working with the State in good faith to submit all of
the information necessary to have a license either approved or denied.
At the same time, however, we also believe that State licensing
agencies should be working in good faith with the organization to
either approve or deny an application in a timely manner.
We believe the process outlined above balances the concerns of the
States and of the organization. However, given the complexity of
implementing this provision, we invite comment on this approach.
Paragraph (b) of Sec. 422.372 establishes the second basis for a
waiver. Here, waiver eligibility results from the organization
experiencing discriminatory treatment in the State's denial of its
application. As provided in the statute, discriminatory treatment can
occur in two ways, as follows:
The State has denied the licensure application on the
basis of any material requirements, procedures or standards (other than
solvency requirements) that the State does not generally apply to other
entities engaged in a substantially similar business.
The State required, as a condition of licensure, that the
organization offer any product or plan other than an M+C plan.
Thus, an organization will be eligible for a waiver under this
provision if the State imposes different requirements, and these
different requirements are the basis of a license denial. In addition,
the organization must demonstrate what requirement, procedure, or
standard it failed to meet, and how this differs from what is generally
applied to other similar plans. In order to demonstrate that the State
does not ``generally apply'' the requirement on which the denial was
made, the organization must show that the requirement is more of an
exception and not usually applied to similar health plans. For example,
if a pattern exists where most HMOs within a State are not held to a
requirement, the PSO will be eligible for a waiver based on
discriminatory treatment.
By ``substantially similar business'' we mean entities that provide
and manage a comprehensive set of health
[[Page 25363]]
care services, and are prepaid a fixed amount in advance and without
regard to the frequency or cost of services when utilized. Such
entities are likely to include HMOs, and may include certain PPOs and
State-licensed PSOs. We do not anticipate considering indemnity
insurers, PPOs reimbursed on a discounted fee-for-service basis, or
``single-service'' managed care plans as being engaged in a
``substantially similar business'' to the waiver-requesting
organization.
We considered a broader use of the term ``engaged in a
substantially similar business'', but believe our interpretation is
consistent with the PSO provisions in section 1855 of the Act. We
believe an expanded interpretation, which includes all risk-bearing
entities (for example, indemnity insurers) does not comply with the
language of the statute. In processing waiver requests under this
provision at this time, we anticipate looking to the requirements,
procedures and standards that a State places on HMOs.
The second criterion for discriminatory treatment, set forth in
Sec. 422.372(b)(2), is that the State requires the organization to
offer its health plan to other than the Medicare population. Here, an
organization would have to demonstrate only that it was denied a
license because the health plan would serve only Medicare
beneficiaries. We believe this provision permits the establishment of
Medicare-only PSOs, and establishes a Federal preemption over any State
laws that would prevent it.
Paragraph (c) of Sec. 422.372, the third basis for approving a
waiver of the State licensure requirement, pertains to a State imposing
different requirements related to financial solvency. Two conditions,
or criteria are specifically addressed in this paragraph. (See
1855(a)(2)(D)(i) and (ii).) Under Sec. 422.372(c)(1), a waiver may be
granted if the State has denied the licensure application, in whole or
in part, based on the organization's failure to meet solvency
requirements that are different from those set forth in Secs. 422.380
through 422.390. This provision incorporates the new regulatory
citation for PSO solvency standards developed through negotiated
rulemaking as established in this rule.
An issue arose regarding waiver eligibility when a State has
adopted the Medicare PSO solvency standards and denies a license based
solely on a provision of the solvency standards that give the regulator
discretion. For example, it is likely that while using the same
solvency standards, HCFA and States could reach different decisions
regarding the acceptance of administrative infrastructure to reduce the
minimum net worth amount requirement. If a State does not permit such a
reduction, the issue arose whether HCFA would consider this a basis for
a waiver. We have decided to permit requests for waivers in these
situations. As documentation, we will require organizations to submit
all information relevant to the specific solvency requirement in
question, including any State correspondence. As part of our review, we
will likely seek input from the State. If we concur with the State's
determination regarding the specific discretionary issue, the waiver
request will be denied. However, if we make a decision, that differs
from the State's, then the waiver will be approved and the organization
may submit an M+C application. We considered acceding to States'
decisions where a regulator's discretion is warranted under the PSO
solvency rules, but concluded that this might overly restrict the
availability of waivers.
The second condition, for a waiver under Sec. 422.372(c) is that
the State has imposed documentation or information requirements, or
other requirements, procedures or standards related to solvency or
other material requirements that are different from those imposed by
HCFA in carrying out Secs. 422.380 through 422.390. As with the
previous condition, we believe that a PSO may seek a waiver if a State
denies a license based on its exercise of discretion in requiring
different information or documentation than HCFA. Therefore,
documentation, information, and other requirements which may stem from
such discretion can be the sole basis for granting a waiver under this
particular provision. Our position on this issue is based upon the
intent of the Congress, as reflected in the Conference Report
accompanying the BBA, that the State not impose documentation or
information requirements ``that are dilatory or unduly burdensome and
that are not generally applied to other entities engaged in a
substantially similar business.'' (H.R. Rep. No.105-217, 105th
Congress, Session 632 (1997))
The fourth basis for approving a waiver of the State licensure
requirement, paragraph (d) of Sec. 422.372, is that the appropriate
State licensing authority has notified the organization in writing that
it will not accept their licensure application. While this grounds for
approval is not in the Act, we are using our authority under section
1856(b)(1) to establish standards to add this provision based on
concerns that the Act allows for a waiver only if the PSO submits an
application to the State. We have identified a concern that some State
agencies may refuse to accept licensing applications from PSO-like
organizations, thus preventing these organizations from requesting a
waiver until 90 days have transpired.
We believe this provision facilitates the waiver process and
conforms with the intent of section 1855(a)(2) of the Act. If it is
clear that a State licensing agency will not act on an application as
described here, both the State and the organization can save time and
resources by permitting the organization to go directly to HCFA for a
waiver.
In Sec. 422.374 we clarify certain conditions and provisions
related to the waiver request and approval process. Paragraph (a)
clarifies section 1855(a)(2)(f) of the Act, which requires
organizations seeking a waiver to submit a substantially complete
waiver request. Section 422.374(a) specifies that to be substantially
complete, a request must clearly demonstrate and document the
organization's eligibility for a waiver. HCFA will notify the
organization if the request is not complete, and will work with the
organization to determine the information necessary to make a decision
on the request. HCFA will have final discretion in determining whether
a waiver request is substantially complete.
Paragraphs (b) and (c) of Sec. 422.374 provide that HCFA will act
promptly (within 60 days) to grant or deny a substantially complete
waiver request and allow organizations that have been denied a waiver
request to submit subsequent requests until November 1, 2002. (See
section 1855(a)(2)(F).)
Paragraph (d) of Sec. 422.374 establishes that the waiver will take
effect upon the effective date of the M+C contract. We have added this
provision to clarify that a waiver is linked to the contract and is not
active, or operable, without an effective M+C contract. This provision
helps organizations seeking a waiver, because the waiver is limited to
a one-time, three-year period. If the waiver is made effective
immediately upon approval of a waiver request and the approval of the
M+C contract takes longer than anticipated, the three-year waiver
period would be running and the organization could lose a significant
amount of time that it is eligible to operate without a State license.
If the contract application is denied, an even greater amount of time
may elapse by the time the organization can develop, submit and gain
approval of a revised contract application.
Paragraph (e) of Sec. 422.374 gives HCFA the right to revoke a
waiver if we
[[Page 25364]]
subsequently find that the organization's M+C application is
significantly different from the application submitted to the State.
Because Congress intended for organizations to make an earnest attempt
to obtain a State license before applying for a Federal waiver, we
believe that significant changes from the State application to the M+C
waiver application could undermine this policy. We believe that
requiring that the M+C contract application be very similar to the
application submitted for a State license addresses two possible
situations. First, it prevents organizations from circumventing the
intent for them to achieve State licensure if possible. It also assures
States the right to license an organization that has evolved or
reorganized from the time of its first application; that is, the
organization has undergone some significant changes and the application
for all intent and purposes is ``new.''
Organizations that reapply for an M+C contract because they were
not successful M+C applicants do not have to reapply to the State or
re-submit a waiver request as long as the revised application does not
invoke paragraph (e) of Sec. 422.374.
Section 422.376 is added to establish parameters of the waiver.
Paragraph (a) of this section restates section 1855(a)(2)(E)(i) of the
Act, the waiver is effective only for the particular State for which it
is granted and does not apply to any other State. It also clarifies
that an organization must be licensed or request and gain waiver
approval for each State where it wishes to operate an M+C plan.
Paragraph (b) of Sec. 422.376 incorporates section
1855(a)(2)(E)(ii) of the Act by limiting the waiver to a 36-month
period. We have modified this provision, however, to extend the period
through the end of the calendar year in which the 36-month period ends
unless the waiver is revoked based on paragraph (c) of this section. We
made this modification because we were concerned about terminating the
waiver and the M+C contract during the middle of a contract year. Such
mid-year terminations are unreasonable, disruptive, costly, and could
unnecessarily jeopardize the health care of beneficiaries enrolled in a
PSO. By waiting until the end of the contract year to end a waiver (and
thus the M+C contract), beneficiaries will be able to transition into
other M+C plans through the annual enrollment process.
Paragraph (c) of Sec. 422.376, mid-period revocation, was added to
clarify that the waiver will cease before the end of the 36 month
period if the organization's M+C contract is terminated or if the
organization becomes State licensed. This provision emphasizes again
the relationship between the waiver and the contract; namely that the
waiver is not effective without a contract in effect, and the contract
cannot be effective without the waiver. It also restates the Act by
conditioning the waiver upon the organization's compliance with State
consumer protection and quality standards as discussed further below.
The last section of the waiver provisions, Sec. 422.378, addresses
the relationship between State law and waivered organizations, or PSOs.
These provisions are a codification of sections 1855(a)(2)(E)(iii) and
(iv), and 1855(a)(2)(G) of the Act. Section 422.378(a) establishes a
general Federal preemption of any State law related to licensing the
organization that interferes with contracting under the M+C program.
Section 422.378(b), on the other hand, establishes the State's right to
require waivered organizations to comply with consumer protection and
quality standards applicable to all other M+C plans in the State, as
long as the standards are consistent with Medicare requirements.
Paragraphs (c) and (d) of Sec. 422.378 establish processes for ensuring
compliance with Sec. 422.378(b). We are developing a memorandum of
understanding with the NAIC to implement Secs. 422.378 (b), (c) and
(d).
III. PSO Solvency Standards
A. Background
1. Negotiated Rulemaking Act
The Negotiated Rulemaking Act (Pub. L. 101-648), establishes a
framework for the conduct of negotiated rulemaking. Negotiated
rulemaking is a process whereby a rule (generally a proposed rule) is
developed by a committee of representatives of interests that are
likely to be significantly affected under the rule and includes a
Federal government representative. The goal of the process is to reach
consensus on the text or content of the rule and then publish that text
for public comment. Consensus is defined in the Negotiated Rulemaking
Act as unanimous concurrence among the interests represented. However,
the committee could agree on another specified definition. The
committee is assisted by a neutral facilitator.
The agency responsible for the rule may use the services of an
impartial convener to identify potential participants in the
negotiation, determine whether they are willing to participate, inform
them about the process, discuss issues with potential participants, and
make recommendations regarding how to make the process work. The
committee must be chartered under the Federal Advisory Committee Act
(FACA) (5 U.S.C. App.2).
2. Establishing the Process
To expedite the development of PSO solvency standards, Congress
modified the negotiated rulemaking process by requiring that this rule
be published as an interim final rule with comment, shortening the
period for forming the committee, establishing a shortened period for
committee negotiations, and setting a target date for publication of
the interim final rule for April 1, 1998. (See section 1856(a) of the
Act.)
We selected the Department of Health and Human Services
Departmental Appeals Board (DAB) to serve as the convener and
facilitator for these negotiations because of their reputation for
impartiality, as well as their experience and availability. The DAB has
familiarity with HHS programs and experience convening and facilitating
negotiated rulemaking on Medicare issues such as the Medicare Hospice
Wage Index and the Shared-risk Exemption to Federal Health Care Anti-
Kickback Provisions. Further, a poll of parties interested in the
development of PSO solvency standards indicated unanimous support for
using the DAB to facilitate the negotiated rulemaking.
During the convening process, the DAB interviewed over 50
individuals from outside the Federal government, representing over 25
different associations, coalitions or companies. On September 8, 1997,
the DAB issued a convening report recommending participants for the
negotiated rulemaking committee (the Committee). This recommendation
was based on an evaluation of the potential effects of the rule on
groups that indicated a desire to serve on the Committee. When any
differences among groups were identified, the convener sought
information about how these differences were relevant with respect to
solvency standards, whether those differences could be adequately
represented by other groups, and whether there had been demonstrated
concern about solvency standards during the legislative debate. The
report also identified issues to be negotiated and potential barriers
to consensus.
On September 23, 1997, we published in the Federal Register (62 FR
49649) a notice of intent to form a negotiated rulemaking committee and
notice of meetings. Based on the recommendations contained in the
convener's report, the notice appointed
[[Page 25365]]
representatives of interests likely to be affected by PSO solvency
standards to the negotiated rulemaking Committee. Committee members
included the--
American Association of Health Plans,
American Association of Retired Persons,
American Hospital Association,
American Medical Association,
American Medical Group Association,
Blue Cross/Blue Shield Association,
Consortium on Citizens with Disabilities,
Federation of American Health Systems,
Health Insurance Association of America,
National Association of Insurance Commissioners,
National Rural Health Association
Coalition of the Catholic Hospital Association and Premier
Health Care
Coalition of the American Association of Homes and Services for
the Aging, the American Health Care Association, the Home Health
Services and Staffing Association, and the National Association for
Home Care; and
Coalition of the Independent Practice Association of America and
the National Independent Practice Association.
In addition the Committee included a representative from HCFA.
We requested public comment on whether we had identified the key
solvency issues to be negotiated by the Committee; if we had identified
the interests that will be affected by key issues listed; and whether
the party we were proposing to serve as the neutral facilitator was
acceptable. We also sought comments on several key definitions related
to the negotiated rulemaking and the forthcoming rulemaking for
Medicare+Choice organizations. In general, commenters supported the
notice and as a result no changes were made to the Committee membership
or issues to be discussed.
3. Summary of the Committee Process
The Committee met seven times from October 1997 to March 1998.
Notices of meetings were published in the Federal Register on September
23, 1997 (62 FR 49649) and February 13, 1998 (63 FR 7359). Minutes for
each of these meetings are posted on the M+C web page at http://
www.hcfa.gov/Medicare/mplusc.htm. At the first meeting, held October
20, 21, and 22, 1997, business and health industry analysts made
presentations that related to health plan solvency. Also the Committee
discussed how to address the principle solvency issues and how to
proceed in developing solvency standards. The Committee devoted the
remaining series of 3-day meetings, and a final 1-day meeting,
primarily to substantive discussion of solvency standards for Federally
waived PSOs.
The Committee's deliberations focused on the following issues: the
stages at which to evaluate a PSO's financial solvency, the amount,
composition, and location of assets and liabilities that PSOs must
maintain to be considered financially solvent; the planning and data
collection necessary to track PSO solvency; and the mechanisms needed
to protect beneficiaries if a PSO becomes insolvent.
On March 5, 1998, the Committee reached consensus on a PSO solvency
standards proposal. All Committee members signed an agreement
indicating unanimous concurrence with a written Committee statement of
the Committee's recommendations for PSO solvency standards.
In the agreement, HCFA agreed that, to the maximum extent possible
and consistent with legal obligations, it will draft an interim final
rule consistent with the Committee statement. We believe that the PSO
solvency provisions of the interim final rule published herein are
fully consistent with the Committee's recommendations, with some
additional clarifications. Committee members have agreed not to submit
negative comments on the interim final rule. If, however, a member
believes any provision of this rule incorrectly reflects the Committee
statement, the member may comment on the matter. If necessary, the
Committee will be reconvened at a later date.
4. Summary of the Committee's Deliberations
The Committee agreed that there are three stages at which to
consider solvency standards: initially at start-up, as an ongoing
business operation, and during insolvency. While these stages are only
concepts that do not have exact starting or finishing points, the
Committee felt that they are a useful framework for setting solvency
standards at different stages of operation. These stages are translated
in regulation to the application stage, the stage during which the M+C
contract is in effect, and insolvency.
The initial stage represents the period of activity prior to the
first day of actual operation as an M+C contracting PSO. It includes
the periods when an organization will request a Federal waiver of State
licensure and will apply for an M+C contract. In this preamble and the
regulation, the term PSO is reserved for organizations that are:
approved for a Federal waiver, determined to meet the definition and
related requirements of a PSO, and awarded a Medicare+Choice contract.
The ongoing stage represents the period that begins when a PSO's
M+C contract becomes effective. This is when a PSO will assume
responsibility for providing services to Medicare beneficiaries for a
fixed payment. During this stage, the appropriate solvency standards
are affected by the number of Medicare enrollees for which a PSO is
responsible. Lastly, the insolvent stage represents the period
beginning when a PSO's total liabilities exceed its total assets.
Using this three stage framework, the Committee developed alternate
proposals regarding the amount, composition, and status of assets and
liabilities that PSOs must maintain in order to be considered fiscally
sound and financially solvent. The alternate proposals reflected the
various interests of the Committee members and their constituencies.
These proposals formed the basis for negotiations and the subsequent
Committee statement and consensus agreement.
To develop the solvency standards, the Committee considered what
financial, capital and other factors must be present to assure that a
PSO is fiscally sound. Specifically, the Committee considered
requirements for net worth, financial plans, liquidity, financial
indicators, and beneficiary protection.
B. Net Worth Amount Requirements
The Committee considered the net worth requirements for the initial
and ongoing stages. In each stage, the Committee deliberated on the
appropriate amount and composition of assets to be counted toward the
net worth requirement. The Committee agreed that in the initial stage
an organization should have an initial minimum net worth amount of
$1,500,000. This is the same minimum net worth amount that is specified
in the HMO Model Act, with a significant difference. The Committee
agreed to allow HCFA to reduce the net worth requirement by up to
$500,000 if the PSO has available to it an administrative
infrastructure that HCFA considers appropriate to reduce, control or
eliminate start-up costs associated with the administration of the
organization. Such infrastructure would include office space and
equipment, computer systems, software, management services contracts
and personnel recruitment fees. In recognizing a reduction of up to
$500,000 for these costs, the Committee acknowledged that the minimum
net worth drops from $1,500,000 to $1,000,000 as soon as the PSO is
approved and that the $500,000 difference was to account for start-up
costs. HCFA has the discretion to approve the administrative costs that
an organization offers to obtain a reduction of up to $500,000.
[[Page 25366]]
For the ongoing stage, the Committee agreed that the minimum net
worth should be at least $1,000,000. This is the minimum specified in
the HMO Model Act for the ongoing stage. The difference between the
ongoing minimum net worth and the initial minimum net worth reflects
the Committee belief that PSOs will incur administrative costs in the
initial stage that will not be repeated in the ongoing stage. While the
floor on the minimum net worth amount in the ongoing stage is
$1,000,000, the Committee agreed to subject PSOs to a series of
``greater of'' tests to determine an appropriate minimum net worth. The
``greater of'' tests link the minimum net worth amount to the size of
annual premium revenues, the amount of uncovered health care
expenditures, and the amount of health care expenditures paid to non-
capitated and non-affiliated providers. These factors are indirectly
related to the size of the plan (that is, number of enrollees) and the
amount of risk being assumed.
The Committee discussed whether to include, among the factors
considered in setting the ongoing net worth amount for PSOs, the
authorized control level (i.e., the point in a financial crisis where a
State regulator is authorized to take control of an organization)
capital requirement derived from the NAIC Health Care Organization Risk
Based Capital (RBC) Formula. RBC is a new formula adopted by the NAIC
to determine the minimum capital level that an organization should have
before regulators become concerned about its solvency. The RBC level
depends on the riskiness of the company's assets, investments, and
products. RBC has several trigger points. As currently envisioned, if a
company's actual net worth falls below the trigger point called the
authorized control level, the State's insurance commissioner may take
control of the company. The RBC for health organizations has not yet
been adopted by States for setting minimum net worth requirements.
The RBC formula by design will be used by States to monitor the
financial viability of State-regulated managed care plans. It has not
yet been adopted by States in setting the minimum net worth amount
requirements. The Committee agreed that HCFA should consider adding
that RBC authorized control level factor to the ongoing net worth
amount requirements after evaluating whether the RBC is a valid
indicator of Medicare PSO solvency and after considering the manner in
which States have regulated managed care plans using the RBC authorized
control level. In 1999, after PSOs have begun to operate and report
financial data, HCFA will issue a notice requesting comment on adding
this factor to the net worth calculation for PSOs. As part of HCFA's
normal data collection process for all M+C plans, HCFA expects to be
collecting information necessary to perform the RBC calculations.
With regard to the composition of the minimum net worth amount, the
Committee agreed upon the following requirements--
At least $750,000 of the minimum net worth must be in cash
or cash equivalents. After the effective date of the contract, however,
the Committee agreed that $750,000 or 40 percent of the minimum net
worth amount must be in cash or cash equivalents.
Up to 10 percent of the minimum net worth amount can be
comprised of intangible assets in the initial stage. However, in the
initial stage, if a PSO keeps $1,000,000 in cash or cash equivalents
and does not use the administrative reduction, then up to 20 percent of
that PSO's minimum net worth can be comprised of intangible assets. In
the ongoing stage, a PSO must keep the greater of $1,000,000 or 67
percent of the ongoing minimum net worth in cash or cash equivalents to
qualify for the 20 percent level on intangibles.
Subject to the above provisions, health care delivery
assets (HCDAs) may be admitted at 100 percent of their value according
to generally accepted accounting principles (GAAP).
Subject to the above provisions, other assets may be
admitted according to their value under Statutory Accounting Practices
(SAP).
Subordinated debts and subordinated liabilities can be
excluded from the calculation of liabilities for the purposes of
determining net worth.
Deferred acquisition costs are excluded from the net worth
calculation.
The Committee also agreed that HCFA will look at SAP codification
upon its completion and will consider whether to adopt codification
standards on the asset concentration and quality of HCDAs for waivered
PSOs. SAP codification standards are currently being developed by the
NAIC to make SAP more consistent among the States. HCFA will request
public comment on whether to use any such standards in the notice on
the NAIC RBC (see above). Meanwhile, HCFA may apply judgement in
evaluating HCDAs for concentration and quality.
In the Committee's deliberations the concepts of net worth and
liquidity were closely related. Some Committee members suggested that
because PSOs have the potential to provide ``sweat equity,'' these
organizations could operate under different solvency standards for net
worth and liquidity than might be acceptable for other forms of
integrated delivery systems. The term ``sweat equity'' was used to
represent the value of health services that a PSO could provide
directly. One premise presented to the Committee was that PSOs could
continue to furnish services during financial crises because the
``owners'' actually provide health care services, whereas other managed
care systems that contract for the delivery of care may not be able to
continue to operate. In addition, PSOs could adopt contingent
reimbursement arrangements with their providers. Under such
arrangements, the affiliated providers' payments could be reduced until
the PSO had weathered the financial crisis.
The consensus was not to explicitly recognize sweat equity in the
solvency standards. This position evolved because of the difficulty in
developing an administrable solvency standard based upon sweat equity.
Further, the solvency standards implicitly recognize sweat equity in
other areas (e.g., the financial plan).
C. Liquidity Requirements
In conjunction with a minimum net worth amount requirement, the
Committee discussed a standard for meeting financial obligations on
time. The Committee adopted, for both the initial and the ongoing
stages, the liquidity standard that a PSO have sufficient cash flow to
meet its obligations as they become due. Also, the Committee
recommended that in the initial and ongoing stages HCFA should use the
same factors to determine the ability of a PSO to meet the liquidity
standard: (1) the timeliness of PSO payments of obligations, (2) the
extent to which the current ratio is maintained at 1:1 or whether there
is a change in the current ratio over a period of time, and (3) the
availability to a PSO of outside financial resources to meet its
obligations.
The current ratio focuses on a period that is up to one year long.
It compares all assets that are convertible to cash within that period
with all liabilities that will come due in that same period using the
following formula:
[GRAPHIC] [TIFF OMITTED] TR07MY98.000
The Committee agreed that PSOs should maintain a current ratio of
at least 1:1. That is, current assets should be equal to or greater
than current liabilities. The Committee also agreed that the current
ratio is a target rather than an absolute standard. This position
[[Page 25367]]
recognizes that valid reasons may exist for a PSO's current ratio to go
below 1:1 for short periods of time. However, there were also concerns
by some Committee members that the current ratio is an important
indicator of an organization's condition and a current ratio of under
1:1 should trigger some regulatory action. Therefore, the current ratio
will be used to identify trends or sudden major shifts in a PSO's
financial performance.
D. Financial Plan Requirements
Several presenters before the Committee identified poor planning
and management control as the primary reasons for the early HMO
failures. As a standard to encourage good planning and strong
management, the Committee agreed that a financial plan is essential for
PSOs. Further, such plans should be prospective, reasonable, and
consistent. The Committee used the financial plan standard for
contractors under section 1876 of the Act to develop the PSO standard,
but specified certain provisions differently. The specific requirements
of the financial plan are presented in the discussion of provisions,
below.
The Committee believed that the financial plan standard they agreed
to represents the minimum needed to monitor Federally waived PSOs. The
Committee agreed that HCFA should have the discretion to modify the
financial plan to require additional or different information as
necessary to evaluate the financial position of a Federally waived PSO.
The Committee agreed that in the initial stage, at the time of
application, organizations must submit financial plans covering the
period from the most recent financial audit until 12 months after the
effective date of an M+C contract. If, however, a financial plan
projects losses, then the time horizon must extend further, to 12
months after the point that the financial plan projects two consecutive
quarters of net operating surplus.
E. Pre-Funding of Projected Losses
One area of the financial plan that the Committee discussed
considerably was a requirement that PSOs must identify all sources of
funding for projected losses (and in certain circumstances actually
have the cash available). A key issue in this discussion was if and how
to recognize such financing methods as guarantees and letters of credit
(LOC). Some Committee members expressed concern about quickly securing
money that was pledged to a PSO in a guarantee or letter of credit
during a financial crisis. For a PSO that is under financial strain,
the timely availability of cash is crucial to both the PSO and HCFA in
attempting to protect Medicare enrollees. A delay in securing needed
cash--if, for example, the guarantor stalls or reneges on its
obligation--could exacerbate a financial crisis and further threaten
the quality and continuity of care for enrollees.
Other Committee members contended that guarantees and LOC are a
common and accepted means of obtaining capital for integrated health
delivery systems. Furthermore, many providers who are candidates to
become Federally waived PSOs could not participate unless guarantees or
LOC, or both, are allowed. Advocates of guarantees and LOC felt that
they should be admitted for two purposes: meeting the net worth
requirements and funding projected losses.
As a compromise, the Committee agreed to accept guarantees, but
only for funding projected losses that are reported by a PSO in its
financial plan. As previously mentioned, the solvency standards
contained herein require PSOs to fund all projected losses in the
financial plan from the effective date of their M+C contracts until
they achieve two consecutive quarters of net operating surplus. The
Committee agreed that guarantees are an acceptable means to fund
projected losses provided certain conditions are met. Further, the
Committee agreed that each PSO's guarantee would be subject to a trial
period of one-year from the effective date of the PSO's M+C contract.
During this period, guarantees would be accepted, but cash or cash
equivalents equaling the obligations covered by the guarantee would
have to be on a PSO's balance sheet six months prior to the date
actually needed. After a year, assuming that the guarantee obligations
are met timely, the Committee agreed that a PSO should be permitted to
notify HCFA of its intent to reduce or eliminate the pre-funding
period. The Committee further agreed that HCFA should have up to 60
days after the receipt of such notice to exercise its discretion and
modify or reject the notice. However, if the guarantee obligations are
not properly met on a timely basis, the Committee agreed that HCFA
should have the discretion to require a PSO to fund projected losses
through other methods or further in advance.
HCFA presented the Committee with draft standards on guarantees.
The Committee generally supported the draft with some revisions, but
did not officially adopt the standards as part of the Agreement before
needing to vote on consensus.
The Committee agreed that it should recognize LOC as a means to
fund projected losses. To be accepted, LOC must be irrevocable, clean,
and unconditional. Additionally, LOCs must be capable of being promptly
paid upon presentation of a sight draft under the LOC without further
reference to any other agreement, document or entity. The Committee
also agreed that beginning one year after the effective date of an M+C
contract, a PSO should be allowed to use the following other means to
fund projected losses: (1) lines of credit from regulated financial
institutions, (2) legally binding capital contribution agreements, and
(3) other legally binding contracts of similar reliability.
The Committee recognized that HCFA should have discretion regarding
the acceptance of guarantees, LOCs and other means to fund projected
losses. Accordingly, use of these vehicles is subject to an
appropriateness standard. That is, guarantees, LOCs and other means of
funding projected losses may only be used in a combination or sequence
that HCFA determines is appropriate.
F. Reporting
The Committee agreed that PSOs must meet HCFA requirements for
compiling, maintaining and reporting such financial information as the
agency determine is necessary. HCFA should have the discretion to
specify the contents, method of calculation, and the schedule for
reporting such financial indicators. We believe that this discretion is
necessary for proper oversight of Federally waived organizations as
they evolve and as market conditions evolve. The Committee recommended
that the general reporting format be the NAIC's Official Annual
Statement Blank--HMO Edition (the Orange Blank). HCFA will modify data
obtained from this form for application to PSOs. Use of this form will
not prohibit HCFA from requesting additional information if the agency
determines that such information is necessary to accurately assess a
PSO's financial condition.
The Committee agreed that the common practice should be to require
quarterly or annual reports. If a PSO has not achieved a net operating
surplus, the Committee felt that HCFA could require financial reporting
as frequently as monthly. Monthly reporting would be necessary to
enable HCFA to maintain better oversight of PSOs that are at heightened
financial risk.
[[Page 25368]]
G. Insolvency Protections
The Committee's deliberation in the area of insolvency focused upon
protecting beneficiaries. The Committee considered five issues
regarding insolvency: an insolvency deposit requirement, a hold
harmless requirement, a continuation of coverage provision, reserves
for uncovered expenditures, and termination of an M+C contract.
The Committee agreed that an insolvency deposit should be required.
The insolvency deposit would be used to pay for the costs associated
with receivership or liquidation. Committee discussions focused on the
amount of the insolvency deposit rather than the need for a deposit.
For the insolvency deposit requirement, the Committee considered a
range between $100,000 and $300,000. Committee members supporting a
$300,000 deposit contended that a lower deposit would be quickly
exhausted and inadequate in a financial crisis. Committee members who
supported the $100,000 deposit countered that a higher deposit would be
too onerous when combined with the cash reserves required to meet the
minimum net worth amount. The consensus position was to allow the lower
insolvency deposit of $100,000, provided that the requirement for the
cash portion of the minimum net worth amount be set at $750,000.
Additionally, the Committee agreed that the insolvency deposit would be
counted toward the minimum net worth requirement although not toward
the $750,000 cash requirement.
With regard to uncovered expenditures, the Committee adopted the
HMO Model Act standard. The Model Act requires that whenever uncovered
expenditures exceed 10 percent of total health care expenditures, an
entity must create a deposit equal to 120 percent of outstanding
liabilities for uncovered expenditures. Rather than being available for
a State insurance commissioner, the deposit would be restricted for
HCFA's use in the event of an insolvency to pay claims and
administration costs.
While the Committee discussed the issues of Federal bankruptcy/
State receivership, hold harmless, and continuation of coverage, they
concluded that these issues were beyond the scope of the negotiations.
Further, Federal bankruptcy and State receivership matters are not
within the purview of HCFA. The hold harmless and continuation of
benefits provisions will be considered as part of the overall M+C
regulation due to be published later this year.
H. Solvency Standards for Rural PSOs
In pre-consensus Committee discussion, there was vigorous
discussion of separate solvency standards for rural PSOs. (See
Sec. 422.352(c) for a definition of rural PSO.) Some Committee members
contended that rural providers would find it particularly difficult to
meet the solvency standards, especially the cash requirements. Rural
providers, as compared to their urban counterparts tend to have high
portions of their assets concentrated in health care delivery assets
and intangible assets. To rural PSOs, an excessive cash requirement may
amount to an undue barrier to entry.
The Committee's consensus on this issue was to develop one solvency
standard for all PSOs. The underlying premise was that the experience
of an unexpected, major claim would harm rural PSOs more because rural
PSOs tend to have smaller enrollments than urban PSOs, and therefore a
smaller revenue base for absorbing sudden financial fluctuations. The
Committee believed that financial instability in a rural PSO could be
more easily triggered by lower solvency standards.
However, recognizing the unique needs of rural communities, the
Committee directed HCFA to solicit public comment on the issue of
separate solvency standards for rural PSOs. Thus, we are hereby seeking
comments on this matter, particularly on the appropriateness of the net
worth and liquidity requirements of this interim final rule for rural
PSOs. HCFA is interested in the merit and appropriateness of separate
standards, alternative proposals, relevant analysis, and administrative
simplicity.
I. Credit for Reinsurance
As directed by the BBA, the Committee considered whether to allow a
credit for reinsurance. Several Committee members advocated that
reinsurance reduces the risk that PSOs will have to bear and would be
particularly valuable during the initial stage where PSOs are likely to
have fewer enrollees and claims are harder to predict. Committee
members who opposed reinsurance argued that many HMO reinsurance
contracts contain termination clauses that are triggered once an
organization starts losing money. Underlying this contract issue is a
broader problem; namely there would need to be provisions developed for
Federal regulation and oversight of PSO reinsurers given the Federal
waiver of State licensure. Without proper regulation and safeguards,
reinsurance policies could not be relied upon to protect beneficiaries
in the event of a financial crisis. Opponents also indicated that
reinsurance is an essential part of a sound business plan. Therefore,
it should not be treated as an optional credit against the minimum net
worth amount. Lastly, to the extent that reinsurance will reduce a
PSO's current and projected losses, reinsurance is implicitly
recognized in the financial plan. The consensus was not to admit
reinsurance as a credit against the minimum net worth amount. The
Committee felt that to the extent that reinsurance reduces projected
losses, it is implicitly recognized in the financial plan.
J. Financial Solvency Standards Provisions
The requirements of this interim final rule are found in 42 CFR
Part 422, Subpart H, Provider-Sponsored Organizations. Here we set
forth the solvency requirements for organizations that are applying for
and are operating under an M+C contract.
Section Sec. 422.350, Basis, Scope and Definitions, is amended to
include definitions and terminology for new terms related to the
solvency standards for PSOs.
Section Sec. 422.380 sets forth the general requirement that a PSO
must have a fiscally sound operation that meets the requirements of the
following provisions.
Section 422.382 sets forth the minimum net worth amount
requirements. There is a minimum net worth amount requirement for
organizations that are in the process of applying for a PSO M+C
contract, and another for organizations that are operating as a PSO
under an M+C contract.
Paragraph (a) of Sec. 422.382 sets forth the requirements that must
be met at the time of application. An organization must have a
$1,500,000 minimum net worth amount. This is the same amount that is
specified in the HMO Model Act, except that under this regulation, HCFA
has the discretion to reduce this amount by up to $500,000 for
organizations that at the time of application have available
administrative infrastructure that will reduce, control or eliminate
administrative costs.
Paragraph (b) of Sec. 422.382 sets forth the requirements that must
be met after the effective date of an M+C contract. A PSO must have a
minimum net worth amount of at least $1,000,000. The minimum net worth
amount is determined by a ``greater of'' test. The
[[Page 25369]]
``greater of test'' requires a PSO to have a minimum net worth amount
equal to the greater of--
$1,000,000;
Two percent of annual premium revenues up to and including
the first $150,000,000 of annual premiums and 1 percent of annual
premium revenues on premiums in excess of $150,000,000;
An amount health care expenditures; or
An amount equal to the sum of 8 percent of annual health
care expenditures paid on a non-capitated basis to non-affiliated
providers, and 4 percent of annual health care expenditures paid on a
capitated basis to non-affiliated providers plus annual health care
expenditures paid on a non-capitated basis to affiliated providers.
Annual health care expenditures that are paid on a capitated basis to
affiliated providers are not included in this calculation. In essence,
the ``greater of'' test establishes a minimum net worth requirement
above $1,000,000 that varies in proportion to the size of the PSO's
operation.
Section 422.382(c) establishes the composition of assets that are
needed to meet the minimum net worth requirement. The objective of the
minimum net worth requirement is to enable PSOs to avoid a financial
crisis or to mitigate the effects of a crisis. To achieve this,
organizations applying to become PSOs are required to have on their
balance sheets a minimum level of cash or cash equivalents. In
paragraph (c)(1) of Sec. 422.382, the minimum cash requirement is set
at $750,000 at application, and at $750,000 or 40 percent of the
minimum net worth amount after the effective date of the contract.
After the effective date of an M+C contract the cash requirement above
$750,000 is proportional to the minimum net worth amount. Lower cash
requirements were proposed, but the Committee was unable to reach
consensus on them. As discussed below, organizations that maintain a
higher cash level are permitted to use a greater proportion of
intangible assets to meet the minimum net worth requirement.
Other provisions of the paragraph address assets besides cash or
cash equivalents that may be included in determining the minimum net
worth, and limitations. Paragraph (c)(2) of Sec. 422.382 establishes
the proportion of the minimum net worth amount that may be comprised of
intangible assets, depending on an organization's cash level.
Intangible assets can comprise up to 10 percent of the minimum net
worth amount, at the time of application for an organization with
$750,000 (and less than $1,000,000) in cash or cash equivalents.
However, an organization that has $1,000,000 in cash or cash
equivalents at application can satisfy up to 20 percent of its minimum
net worth amount requirement with intangible assets. After the
effective date of the contract, an organization must maintain the
greater of $1,000,000 or 67 percent of the minimum net worth amount in
cash or cash equivalents to qualify for the admission of intangible
assets up to 20 percent of the minimum net worth amount.
Under paragraph (c)(3) of Sec. 422.382, HCDAs are admissible to
satisfy the minimum net worth amount requirement, subject to the cash
requirement. They are valued at 100 percent of their value according to
GAAP. Section 1856(a) of the Act directed the Secretary to take into
account ``the delivery system assets of [provider sponsored
organizations].'' The recognition of HCDAs under GAAP, that often times
is limited under SAP, was adopted to recognize that large portions of
PSOs' assets are HCDAs. The Committee agreed that if the cash
requirement were set at the appropriate level, then any perceived risk
from recognizing HCDAs was reduced.
Under paragraph (c)(4) of Sec. 422.382, other assets that are not
used in the delivery of health care are admissible to satisfy the
minimum net worth amount. However, they are admitted at their value
according to State SAP which generally are more conservative than GAAP.
Because SAP are determined at the State level, organizations will have
to follow the accounting methodology approved by the insurance
commissioner in the State in which they operate.
As set out in paragraph (c)(5) of Sec. 422.382, an organization
does not have to include subordinated debts or subordinated liabilities
for the purpose of calculating the minimum net worth. (Subordinated
liability is a new concept that the Committee defined to mean claims
liablities otherwise due to providers that are retained by the PSO to
meet the net worth requirements.) The Committee discussed this
provision in the context of provider reimbursement arrangements that
withhold a portion of payment contingent upon certain budget or
utilization targets being met. The Committee agreed that if these
payments are fully subordinated to all other creditors, then they
should not be included in the calculation of a PSOs net worth for the
purpose of meeting the minimum net worth amount requirement. We believe
that this provision is another example how the concept of sweat equity
is implicitly considered in these solvency standards.
In paragraph (c)(6) of Sec. 422.382, deferred acquisition costs are
not permitted to be included in the calculation of the minimum net
worth amount. The Committee believed that in an insolvency situation,
these would have little or no value.
Paragraphs (a) (b) and (c) of Sec. 422.384 sets forth the financial
plan requirement. The same documents required of Medicare contracting
HMOs and CMPs under section 417.120(a)(2) of the Medicare regulations
are required here; namely marketing plans, statements of revenue and
expense, statements of sources and uses of funds, balance sheets,
detailed justifications and assumptions supporting the financial plan,
and statements of the availability of financial resources to meet
projected losses.
PSOs should anticipate the need to utilize the services of
qualified actuaries (e.g., a member in good standing with the American
Academy of Actuaries) in (a) the preparation of financial plans
consistent with the PSO's business plan, (b) the development of claim
costs for the benefits to be offered by the PSO and (c) the analysis of
claim liabilities and the necessary liquid assets to meet obligations
on a timely basis. Accordingly, the Committee agreed that the financial
plan must be satisfactory to HCFA. HCFA expects and, at its discretion,
will ascertain that the information contained in the financial plan has
been certified by reputable and qualified actuaries.
Paragraph (d) of Sec. 422.384 sets forth the requirement that
organizations that are projecting a loss must have the resources to
fund those projected losses. This section also defines the conditions
under which HCFA will recognize various arrangements as acceptable
funding of projected losses. The general rule is that organizations
must have on their balance sheets assets that they identify to fund
projected losses. Exceptions are made for guarantees, LOCs, and other
means provided that certain conditions are met.
Paragraph (e) of Sec. 422.384 sets forth the exception to the ``on
the balance sheet'' requirement that applies when guarantees are used
to fund projected losses. Guarantees are permitted, but they are
subject to a trial period. For the first year after the effective date
of an M+C contract any organization using a guarantee must have from
the guarantor, in cash or cash equivalents, funds to cover projected
losses six months in advance of when needed. For example, prior to the
effective date of an M+C contract, a PSO must have funding from
[[Page 25370]]
the guarantor equal to the projected losses for the first two quarters
(6 months) of the contract. Before the start of the second quarter,
funding of projected losses through the third quarter must be added to
the balance sheet of the PSO. Because of the time it takes to bring a
new contractor onto the HCFA systems, the first two quarters funding
will need to be in the PSO, that is, on its balance sheet at least 45
days before the effective date of the contract. Quarters, or 90-day
periods, will be counted from the effective date of a PSO's M+C
contract.
If guarantee funding is timely during the first year, a PSO may
reduce or eliminate the period of pre-funding in future years by
providing notice to HCFA. Upon receipt of such notice, HCFA will have
up to 60 days in which to modify or reject any changes in the period of
prefunding. If the guarantee funding is not timely, then HCFA may take
appropriate action including requiring an organization to use other
methods or timing to fund projected losses. Lastly, guarantors and
guarantees must meet the requirements specified under Sec. 422.390,
discussed below.
Paragraph (f) of Sec. 422.384 sets forth the exception to the ``on
the balance sheet'' requirement that applies when LOCs are used to fund
projected losses. LOCs are admissible to fund projected losses on the
condition that they are provided by a high quality source and be
irrevocable, unconditional and satisfactory to HCFA. Additionally, LOCs
must be capable of being promptly paid upon presentation of a sight
draft under the LOCs without further reference to any other agreement,
document or entity. The Committee agreed that HCFA should have the
discretion to accept or reject a letter of credit.
Paragraph (g) of Sec. 422.384 sets forth the exception to the ``on
the balance sheet'' requirement that applies when other means are used
to fund projected losses. Other means of funding such as LOCs credit,
legally binding capital contribution agreements, and other legally
binding contracts of similar quality are admissible to fund projected
losses. However, these methods are available only after an organization
has had an M+C contract for at least one year.
Paragraph (h) of Sec. 422.384 sets forth the general rule that HCFA
will have the discretion to decide whether a PSO is using guarantees,
LOCs or other means in a combination or sequence that HCFA deems
appropriate. We note here that the BBA directed the Secretary to take
into account alternative means of protecting against insolvency
including guarantees, LOCs and other means. The Committee considered
whether to admit guarantees, LOCs, and other means to reduce the
minimum net worth amount, as well as to fund projected losses. However,
the consensus was to recognize them only toward meeting the requirement
to fund projected losses.
Section 422.386(a) sets forth the general liquidity requirement
that a PSO must have sufficient cash flow to meet its financial
obligations as they become due and payable. This requirement is
consistent with the standard that is applied to Medicare contracting
HMOs and CMPs under 42 CFR Sec. 417.120.
Paragraph (b) of Sec. 422.386 contains three tests to determine
whether an organization is able to meet its financial obligations as
they become due and payable: (a) history for timeliness in meeting
current obligations, (b) the extent to which a PSO maintains a current
ratio of 1:1, and (c) the availability of outside financial resources
to the PSO. The Committee adopted (a) because such a history is a
strong signal of management's commitment to maintaining a fiscally
sound organization.
The second test requires more discussion. We define ``current
ratio'' as total current assets divided by total current liabilities,
where the word ``current'' means less than one year. A current ratio of
1:1 means that an organization's current assets are sufficient to meet
its current liabilities. The possibility exists that in the course of
normal business operations PSOs may miss the current ratio slightly for
short, nonrecurring periods of time. In light of this, HCFA is using a
1:1 current ratio as a target rather than as an absolute standard.
Accordingly, HCFA will monitor PSOs that drop below the 1:1 ratio and
act where a PSO experiences a long-term, declining trend or a sudden,
large decline in its current ratio.
The use of trends in the current ratio allows HCFA to recognize
certain situations where current assets do not have to equal or exceed
current liabilities. For HMOs and PSOs in their early years, the
reported current ratio results will likely produce misleading trends.
The amount of pre-funding of projected losses ``within'' versus
``outside'' the organization may change over time, distorting trends.
Changing patterns of liabilities (for example, 30-day business expenses
unpaid or estimates of unreported claims) can also distort the current
ratio from one based on consistent underlying data. Consequently, the
PSO has an obligation to monitor underlying true trends and to provide
such information, together with a projection of continuing current
liabilities consistent with its business plans. The information should
be certified by a qualified actuary and presented to HCFA prior to the
filing of a timely financial report with a current ratio below
standard.
The third test for evaluating liquidity highlights in several ways
the importance of having outside financial resources available to a
PSO. First, such resources fill a practical role by providing a cushion
in the event of a financial crisis. Second, if such resources are
available from a parent or affiliate organization, it signals a
continuing commitment to the PSO. Third, the availability of such
resources from outside the corporation, either from a private or a
commercial source, indicates continuing market confidence that the
organization is a viable ongoing business concern.
Paragraph (c) of Sec. 422.386 requires that if HCFA determines that
an organization is not in compliance with the liquidity requirement, it
will require the organization to initiate corrective action to pay all
overdue obligations.
Paragraphs (d) and (e) of Sec. 422.386 specifies that corrective
action can include requiring the organization to change the
distribution of its assets, reduce its liabilities, secure additional
funding, or secure funding from new funding sources.
Section 422.388 sets forth the deposit requirements to provide
protection in the event of an insolvency. Paragraph (a) of Sec. 422.388
establishes an insolvency deposit that organizations are required to
make at the time of application and maintain for the duration of the
M+C contract. The insolvency deposit is $100,000. The deposit must be
restricted to use in the event of insolvency to help assure
continuation of services or pay costs associated with receivership or
liquidation. At the time of application and thereafter, upon HCFA's
request, the organization must provide HCFA with proof of the
insolvency deposit, in a form that HCFA considers appropriate.
Paragraph (b) of Sec. 422.388 establishes an uncovered expenditures
deposit requirement. The amount of uncovered expenditures that a PSO
experiences will vary, and this deposit is required any time that they
exceed 10 percent of the PSO's total health care expenditures. The
deposit must at all times have a fair market value of an amount that is
120 percent of the PSO's outstanding liability for uncovered
expenditures for enrollees, including incurred, but not reported
claims. The deposit must be calculated as of the first day of each
month required and maintained for the remainder of each month required.
If a
[[Page 25371]]
quarterly report is not otherwise required, a report must be filed
within 45 days of the end of the calendar quarter to demonstrate
compliance. The deposit must be restricted for HCFA's use to protect
the interests of the PSO's Medicare enrollees and to pay the costs
associated with administering the insolvency. The deposit is restricted
and in trust and may be used only as provided in Sec. 422.388.
Under paragraph (c) of Sec. 422.388 the deposits may be used to
satisfy the organization's minimum net worth requirement. Under
paragraph (d) of Sec. 422.388 all income from the deposits or trust
accounts are considered assets of the organization. Upon HCFA's
approval, the income from the deposits may be withdrawn.
Paragraph (e) of Sec. 422.388 sets forth requirements that upon
HCFA's written approval, the income from the deposits may be withdrawn
if a substitute deposit of cash or securities of equal amount and value
is made, the fair market value exceeds the amount of the required
deposit, or the required deposit is reduced or eliminated.
The deposit requirement for uncovered expenditures is triggered by
a historical trend analysis that indicates such expenditures are
comprising an increasing portion of total health care expenditures. The
Committee adopted the HMO Model Act language for the uncovered
expenditures deposit.
Section 422.390 sets forth the requirements for guarantors and
guarantees, which under Sec. 422.384(e), above, can be used to fund
projected losses. We are exercising caution in the use of guarantees
because we will have to monitor the financial viability of the PSO and
the guarantor as well. We believe we have selected a screening approach
that recognizes financially strong guarantors and protects Medicare
enrollees, yet permits affiliated providers or parent organizations to
support the PSO with financial backing.
Paragraph (a) of Sec. 422.390 vests HCFA with the discretion to
approve or deny the use of a guarantor. Paragraph (b) of Sec. 422.390
initiates the approval process with a request from the PSO, including
financial information on the guarantor.
Paragraph (c) of Sec. 422.390 sets forth the requirements that a
guarantor must meet to be licensed and authorized to conduct business
within a State or territory of the United States. The guarantor must be
solvent and not be under any Federal bankruptcy or State proceedings,
and have a net worth of at least three times the amount of the
guarantee.
A distinction is made between guarantors that are and are not
regulated by a State insurance commissioner. If regulated by a State
insurance commissioner, the guarantor's net worth calculation need only
exclude from its assets the value of all guarantees, investments in and
loans to organizations covered by guarantees. But, if a guarantor is
not regulated by a State insurance commissioner, then it must also
exclude the value of guarantees, investments and loans to related
parties (i.e., subsidiaries and affiliates) from its assets to
calculate its net worth. We believe these requirements ensure the
stability and financial strength of the guarantor without being overly
restrictive.
Paragraph (d) of Sec. 422.390 contains provisions for the guarantee
document to be submitted to HCFA by the PSO, and signed by the
guarantor. This document is the written commitment of the guarantor to
unconditionally fulfill its financial obligation to the PSO on a timely
basis.
In paragraph (e) of Sec. 422.390, the PSO is required to routinely
report financial information on the guarantor.
Paragraph (f) of Sec. 422.390 sets forth the requirements for
modification, substitution, and termination of the guarantee. A PSO
must have HCFA's approval at least 90 days before the proposed
effective date of the modification, substitution, or termination;
demonstrate to HCFA that insolvency will not result; and demonstrate
how the PSO will meet the requirements of this section within 15 days,
and if required by HCFA, meet a portion of the applicable requirements
in less than the time period granted.
Paragraph (g) of Sec. 422.390 establishes conditions that must be
met if the guarantee is nullified. If at any time the guarantor or the
guarantee ceases to meet the requirements of Sec. 422.390, HCFA will
notify the PSO that it ceases to recognize the guarantee document. In
the event of nullification, a PSO must meet the applicable requirements
of this section within 15 business days and if required by HCFA, meet a
portion of the applicable requirements in less than the above time
period. These requirements and conditions are not only good business
practices, but also protect Medicare enrollees by ensuring that a PSO's
financial backing is sound.
IV. Applicability of These Rules
The provisions of this rule apply only to certain PSOs and do not
apply to any other type of Medicare applicant or contracting entity.
Organizations that may be considered PSOs and that meet any of the
criteria as set forth in Sec. 422.372 may be eligible for a waiver of
State licensure. As discussed earlier, an organization interested in
entering into a contract with Medicare as a PSO must first contact the
appropriate State agency and, in most cases, submit an application for
a State license, or authority. A PSO that is denied licensure (and the
denial is related to any of the criteria cited) or is denied the
opportunity to apply for licensure, should submit a request for a
waiver to HCFA. Organizations that have their waiver request approved
by HCFA may then submit a PSO application. The PSO application contains
provisions for demonstrating compliance with the PSO definitions and
solvency requirements in addition to other contracting requirements (a
supplemental application may be necessary after the June regulation is
published). It is during the application process that an organization
will be determined to qualify as a PSO for purposes of Medicare
contracting under Part C of the Act. The waiver will take effect with
signing of the M+C contract.
The solvency standards established in this rule apply to
organizations which have had a waiver approved, as described above, and
are applying for a Medicare PSO contract, as well as waivered PSOs with
a Medicare contract in effect. These rules were developed through
negotiated rulemaking specifically for risk-bearing entities that will
enroll primarily beneficiaries of the Medicare program. Federal and
State government agencies that may contemplate use of these solvency
standards for other purposes or other populations should review them
carefully, and consider the nature of the health plans and the
populations they will serve.
Provider-sponsored managed care plans that obtain a State license
should apply directly for an M+C contract by completing the application
for HMO/PPOs/State-licensed PSOs (i.e., this is the same application as
used by HMOs). These entities, whether licensed as a PSO or HMO or
other managed care plan recognized by the State, will not have to
demonstrate compliance with the PSO definitions in Sec. 422.350 through
356, or with the PSO solvency standards. However, State-licensed PSOs
or State-licensed managed care plans that wish to meet the lower
minimum enrollment standard will have to meet the definitions criteria
of the PSO application. These ``State-licensed PSOs'' must meet the
solvency standards as required by their State, not the Medicare PSO
solvency standards as established in this interim final rule.
[[Page 25372]]
V. Regulatory Impact Analysis
A. Introduction
We have examined the impact of this interim final rule as required
by Executive Order 12866 and the Regulatory Flexibility Act (RFA)
(Public Law 96-354). Executive Order 12866 directs agencies to assess
all costs and benefits of available regulatory alternatives and, when
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental and public
health and safety effects; distributive impacts and equity). The
Regulatory Flexibility Act (RFA) requires agencies to analyze options
for regulatory relief for small businesses, unless we certify that the
regulation would not have a significant economic impact on a
substantial number of small entities. Most hospitals, and most other
providers, physicians and health care suppliers are small entities
either by non-profit status or by having revenues of less than $5
million annually. The impact of this regulation will be to create a new
business opportunity for such small entities to form provider sponsored
organizations to contract with the Medicare program.
Section 1102(b) of the Act requires us to prepare a regulatory
impact analysis if a final rule may have a significant impact on the
operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside a Metropolitan
Statistical Area and has fewer than 50 beds. We are not preparing an
analysis for section 1102(b) of the Act because we have determined, and
we certify, that this final rule will not have a significant impact on
the operations of a substantial number of small rural hospitals.
We prepared this impact analysis because of the probability that
these waiver requirements and solvency standards may have an impact on
certain hospitals, physicians, health plans and other providers. We are
preparing to publish a regulation outlining the overall provisions of
the M+C program. That regulation will consider the impacts of PSOs and
other new provider types in greater detail than is provided in this
regulation. The following analysis, in combination with the rest of
this interim final rule with comment period, constitutes a regulatory
impact analysis and a regulatory flexibility analysis.
B. Background
While the term ``provider sponsored organization'' has been used
generally in reference to health care delivery systems that providers
own or control and operate, the term has a more specific meeting for
purposes of the M+C program. Accordingly, we defined, by regulation,
the fundamental organizational requirements for entities seeking to be
PSOs. These definitions are set forth at 42 CFR 422.350. Organizations
that meet these definitional requirements can apply for a Federal
waiver and a M+C contract. Having defined the term PSO in earlier
regulation, this rule has two broad purposes: (1) To establish the
requirements and process necessary for organizations to obtain Federal
waiver of license requirements for risk-bearing entities; and (2) to
establish standards for financial solvency to which such Federally
waived organizations must adhere.
With regard to the impact of the waiver requirements and process,
we emphasize three important underlying factors. First, waivers cannot
exceed 36-months in duration and are not renewable. Second, the
Secretary's authority to grant waivers ends November 1, 2002. Finally,
the Secretary can grant waivers only to organizations that have first
applied for a State license as a risk bearing entity, but were denied
by virtue of three things: (1) States' failure to act timely on the
license application; (2) States' denial of the application for
``discriminatory'' reasons; or (3) States'' denial for failure to meet
different solvency standards than are promulgated here. The first two
factors (i.e., the duration of the waiver and the waiver authority) are
important to this impact analysis because they indicate that, under
current law, no organization will operate under a Federal waiver after
November 1, 2005. The third fact regarding eligibility for a Federal
waiver may have an effect on the waiver application rate.
The solvency standards have an even narrower focus than the waiver
requirements because the former only effect organizations that have
received a Federal waiver and are either applying for or actually have
received an M+C contract. Within this smaller population, organizations
will be affected differently or not at all depending upon the status of
the solvency standards in their respective States. It is likely that
waiver activity will be greater in States that have solvency standards
that differ significantly from the standards developed in this
regulation. Below we consider the anticipated impact of this rule.
C. Anticipated Effects
1. Effects on Providers
HCFA discussion with the industry as part of the negotiated rule
making process suggests widespread interest in the benefits of becoming
a PSO (i.e., waiver of State licensure and lower minimum enrollment
standards). This regulation benefits certain health services providers
that have been denied a State risk-bearing license by creating an
opportunity for them to obtain a Federal waiver of the State license
requirement and participate in the M+C program as contractors. As such,
this regulation provides means for such providers to gain access to a
market from which they otherwise would be excluded. While clearly not
possible to predict how many organizations will attempt to take
advantage of this new opportunity, we have seen estimates that the
first year application rate will be between 25 and 150 organizations.
For several reasons, we estimate between 25 and 50 organizations will
apply. In the first year many organizations will be interested, but we
expect that the ``learning curve'' necessary to gain familiarity with
this new program will restrain the first year application rate. Second,
the waiver process, which for this discussion includes the prerequisite
State application process, and M+C application process, are time
intensive steps. At a minimum, these steps could take up to 6 six
months to complete. After the first year, however, the number of
applicant organizations will increasingly be a function of PSOs'
performance and their reception in the market place.
We do not expect that the waiver process will create a substantial
additional burden for organizations. For one thing, the waiver process
is not a mandatory burden. The waiver process affects only
organizations that affirmatively choose to become Federally waived
PSOs. For those organizations that apply, we estimate that the waiver
application will require less than 20 hours to complete. However, we do
believe that waiver applicants will face the additional task of
documenting their denial of a State license.
Regarding the application for an M+C contract, there are existing
application requirements for organizations that seek to contract with
Medicare under section 1876 of the Act. We do not believe that the M+C
application process, which will be essentially the same, will be any
[[Page 25373]]
more burdensome than an application under section 1876 of the Act. To
the extent that organizations that previously have not contracted with
the Medicare program choose to seek an M+C contract, the application
will be a new task. Given the new provider focus of this initiative, it
is plausible to expect that many applicants have not previously
contracted directly with Medicare. However, we believe that the benefit
to Medicare beneficiaries gained by screening potential contractors
outweighs the burden associated with having a reasonable application
process in place.
2. Effects on the Market Place
We expect that the advent of PSOs will increase market competition
among health care service providers, albeit only slightly. The increase
in competition is expected to be limited for four reasons. First, since
Federally waived PSOs are limited to serving Medicare enrollees, any
changes in competition will be primarily concentrated in the Medicare
sector of the health services delivery market. We note that there may
be crossover effects to the extent that service providers' success with
Medicare may affect their success generally.
Second, we believe that this rule, primarily concerns the structure
of entities that can participate in the market for Medicare enrollees.
We expect transfer effects; that is, existing providers changing
corporate form in order to avail themselves of PSO status. However, we
do not anticipate a significant increase in the aggregate market place
capacity of providers or health service delivery assets. The providers
and hospitals that will form PSOs are coming from the same pool that
are currently providing services. In addition, the principle effect on
revenues will be a change in the source of payment from Medicare parts
A and B to the new part C.
Third, to the extent that these solvency standards are similar to
existing standards, the potential transfer effect will be limited.
Since standards vary greatly by State, and State standards are
evolving, it is difficult to assess the relative effect of the instant
standards. We note, however, that with several key exceptions (e.g.,
different initial minimum net worth requirement and a lower insolvency
deposit) the instant standards track the HMO Model Act. Therefore, we
do not believe there will be a significant transfer due to the
existence of an unlevel playing field between PSOs and other entities.
We believe that establishing standards of financial solvency is
necessary to insure that PSOs have the financial resources to provide
adequate quality care and to reduce the possibility of disrupting
beneficiary care.
Finally, in the preamble to this regulation, HCFA agreed that it
will consider the NAIC's Risk Based Capital formula as well as the
codification of Statutory Accounting Practices when these methodologies
become available. If one or both of these methodologies are adopted for
the PSO solvency standards, it would help to narrow any existing
differences between State-level and Federal solvency standards.
3. Effects on States
This regulation will affect States in several ways, some of which
are offsetting. First, we expect that a few States may have to reduce
their application turnaround times in order to avoid tolling the 90-day
limit for State review of a waiver application. However, based upon
conversations with State insurance commissioners, we believe in many
States the application turnaround time is at or near the 90-day limit.
The second effect will be a reduction in States' oversight burden.
For PSOs that obtain a Federal waiver, responsibility for monitoring
their financial solvency will be transferred from the States to HCFA.
This is a temporary reduction, since waivers last only 36 months and
the Secretary's authority to grant waivers ends on November 1, 2002. By
the end of a PSO's waiver, it will need a State license in order to
continue its M+C contract. Therefore, to ease the transition from a
Federal waiver to a State license, we encourage PSOs to establish a
relationship with regulators in their respective States soon after
receiving a waiver. To minimize the chances of a gap in financial
oversight, HCFA is negotiating with the State Insurance Commissioners
via the NAIC to develop a Memorandum of Understanding regarding sharing
information on the financial solvency of PSOs.
Lastly, it has been suggested that this interim final rule may
pressure States to adopt solvency standards that mirror the Federal
standards. Currently, we do not have a good measure of the extent to
which this will occur. However, we emphasize that the negotiated
rulemaking committee developed these solvency standards solely in the
context of Federally waived PSOs that will provide services under an
M+C contract. States are cautioned not to adopt these standards for
general application without first considering their affect on the
overall health services delivery market in their jurisdictions.
4. Effects on Beneficiaries
We expect that this regulation will have a positive effect on
Medicare beneficiaries since it creates a new managed care option. We
expect that the principle source for enrollees for newly formed PSOs
will be current Medicare fee-for-service enrollees. We expect that the
advent of PSOs and M+C in general will have the effect of further
mainstreaming managed care plans among Medicare enrollees. We do not
anticipate an increase in the potential for service interruptions
because these new PSOs will be subject to the same beneficiary hold-
harmless provisions and continuation of benefits requirements as all
M+C organizations. Lastly, section 1855(a)(2)(G) of the Act requires
PSOs to comply with all existing State consumer protection and quality
standards as if the PSO were licensed under State law.
D. Conclusion
By enacting the BBA provisions related to PSOs, Congress has
indicated its belief in the potential for provider controlled
organizations to improve the delivery of services to Medicare
beneficiaries. While expanding the options available to Medicare
beneficiaries, we believe that this regulation provides an opportunity
for providers to test their ability to manage the delivery of health
care services. The negotiated rulemaking Committee, which included
representatives from the entire range of interested parties, reached
consensus on provisions that were acceptable when considered as a
whole. It is safe to say that Committee members considered the impact
of these provisions on their respective constituencies during the
negotiating process.
We conclude that this regulation will have an undeterminable impact
on small health service providers. However the provisions of this
interim final rule are expected to be favorable for the managed care
community as a whole, as well as for the beneficiaries that they serve.
We have also determined, and the Secretary certifies that this proposed
rule will not result in a significant economic impact on a substantial
number of small entities and would not have a significant impact on the
operations of a substantial number of rural hospitals. In accordance
with the provisions of Executive order 12866, this regulation was
reviewed by the Office of Management and Budget.
[[Page 25374]]
VI. Collection of Information Requirements
Emergency Clearance: Public Information Collection Requirements
Submitted to the Office of Management and Budget (OMB)
In compliance with the requirement of section 3506(c)(2)(A) of the
Paperwork Reduction Act of 1995, the Health Care Financing
Administration (HCFA), Department of Health and Human Services (DHHS),
has submitted to the Office of Management and Budget (OMB) the
following request 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. The Agency cannot reasonably comply with the normal
clearance procedures because of the statutory requirement, as set forth
in section 1856 of Balanced Budget Act of 1997, to implement these
requirements on June 1, 1998.
HCFA is requesting OMB review and approval of this collection
within eleven working days, with a 180-day approval period. Written
comments and recommendations will be accepted from the public if
received by the individual designated below, within ten working days of
publication of this notice in the Federal Register.
During this 180-day period HCFA will pursue OMB clearance of this
collection as stipulated by 5 CFR. 1320.5.
In order to fairly evaluate whether an information collection
should be approved by OMB, section 3506(c)(2)(A) of the PRA requires
that we solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
Therefore, we are soliciting public comment on each of these issues
for the information collection requirements discussed below.
Section 422.374(a), requires an organization to submit a waiver
request if it has been denied licensure as a risk-bearing entity by the
State in which it operates or wishes to operate. To facilitate the
implementation of the requirements of this section we developed a model
waiver request form and submitted it to OMB for emergency clearance in
compliance with section 3506(c)(2)(a) of Paperwork Reduction Act of
1995. OMB has concurred with the model request form, and the form and
instructions are currently on view on the HCFA web site, the address of
which is provided in section II.A.3 of this document. The OMB approval
number is 0938-0722 and is referenced on the document.
A modification of this waiver request form is necessary to
incorporate the fourth criterion for a waiver of State licensure as
established in this interim final rule. The additional criterion allows
a PSO-type organization to forego a lengthy application process with
the State if the State informs the organization in writing that such an
application will not be reviewed. As part of the waiver request, the
organization will be required to submit a copy of the written
communication from the State. This criterion is mentioned in the
purpose section of the form, and, with publication of this rule, we can
add it to the check list in section III, Waiver Eligibility. We intend
to submit this modification to OMB in the near future.
Section 422.382(c) establishes the composition of assets the
organization must have at the time it applies to contract with HCFA as
a PSO. The organization must demonstrate that it has the required
minimum net worth amount as determined under paragraph (c), demonstrate
that it will maintain at least $750,000 of the minimum net worth amount
in cash or cash equivalents, and demonstrate that after the effective
date of a PSO's M+C contract, a PSO will maintain the necessary minimum
net worth.
Section 422.384 requires that at the time of application, an
organization must submit a financial plan acceptable to HCFA. The
financial plan must include a detailed marketing plan; statements of
revenue and expense on an accrual basis; a cash flow statement; balance
sheets; the assumptions in support of the financial plan; and if
applicable, statements of the availability of financial resources to
meet projected losses. The financial plan must cover the first 12
months after the estimated effective date of a PSO's M+C contract; or
if the PSO is projecting losses, cover 12 months beyond the period for
which losses are projected. Except for the use of guarantees, LOC, and
other means as provided in paragraphs (e), (f), (g) and (h) of
Sec. 422.384, an organization must demonstrate that it has the
resources for meeting projected losses on its balance sheet in cash or
a form that is convertible to cash in a timely manner, in accordance
with the PSO's financial plan.
Guarantees will be an acceptable resource to fund projected losses,
provided that the guarantor complies with the requirements in paragraph
(e)(2) of this section, and the PSO, in the third quarter, notifies
HCFA and requests a reduction in the period of advance funding of
projected losses.
Section 422.386 sets forth the general liquidity requirement that
at the time of application the PSO must demonstrate that it has
sufficient cash flow to meet its financial obligations as they become
due and payable. To meet this requirement HCFA will consider: the PSO's
timeliness in meeting current obligations, the extent to which the
PSO's current ratio of assets to liabilities is maintained at 1:1 and
whether there is a decline in the current ratio over time, and the
availability of outside financial resources to the PSO.
Section 422.388 sets forth the deposit requirements to provide
protection in the event of an insolvency. At the time of application,
an organization must demonstrate that they have deposited $100,000 in
cash or securities (or any combination thereof) into an account in a
manner that is acceptable to HCFA, and demonstrate that the deposit
will be restricted only to use in the event of insolvency to help
assure continuation of services or pay costs associated with
receivership or liquidation.
At the time of the PSO's application for an M+C contract and,
thereafter, upon HCFA's request, a PSO must provide HCFA with proof of
the insolvency deposit, such proof to be in a form that HCFA considers
appropriate.
If at any time uncovered expenditures exceed 10 percent of a PSO's
total health care expenditures, then the PSO must demonstrate in a
manner acceptable to HCFA that it has placed an uncovered expenditures
deposit into an account with an organization or trustee.
The PSO must also demonstrate that, at all times the deposit will
have a fair market value of an amount that is 120 percent of the PSO's
outstanding liability for uncovered expenditures for enrollees,
including incurred, but not reported claims; the deposit will be
calculated as of the first day of each month required and maintained
for the remainder of each month required; if a PSO is not otherwise
required to file a quarterly report, it must file a report within 45
days of the end of the calendar quarter with information sufficient to
demonstrate compliance with this section; the deposit required under
this section will be restricted and in trust and may be used only as
provided under this section.
As stated above, the burden associated with these provisions will
be
[[Page 25375]]
captured as part of the M+C PSO application and/or quarterly financial
reporting processes, similar to section 1876 HMO and CMP contractor
applications and quarterly financial reporting processes. Based on
section 1876 of the Act, we estimate the burden associated with the
submission of the application to be 100 hours per application and 62
annual hours per organization to submit their quarterly financial
report. Based upon the current volume of waiver reporting workload, we
estimate that on an annual basis, we will receive 25 to 50 applications
and 25 organizations will contract with us and will be required to
submit quarterly financial reports.
Under Sec. 422.388(d) PSOs may submit a written request to withdraw
income from the solvency deposits. We anticipate that, on an annual
basis, we will receive less than 10 requests. Therefore, these
requirements are not subject to the Paperwork Reduction Act as defined
in 5 CFR 1320.3(c).
Under Sec. 422.388(e) a PSO may submit a written request to
withdraw or substitute a deposit. We anticipate that, on an annual
basis, we will receive less than 10 requests. Therefore, these
requirements are not subject to the PRA as defined in 5 CFR 1320.3(c).
Under Sec. 422.390(b), in order to apply to use the financial
resources of a guarantor, a PSO must submit to HCFA, documentation that
the guarantor meets the requirements for a guarantor under paragraph
(c) of this section; and the guarantor's independently audited
financial statements for the current year-to-date and for the two most
recent fiscal years. The financial statements must include the
guarantor's balance sheets, profit and loss statements, and cash flow
statements. We believe that the initial burden associated with this
activity is most likely incurred during the application process, for
which we have previously estimated the aggregate burden. We expect that
less than 10 PSOs per year will incur this burden in subsequent years.
Therefore, these requirements are not subject to the Paperwork
Reduction Act as defined in 5 CFR 1320.3(c).
Under Sec. 422.390(d), if the guarantee request is approved, a PSO
must submit to HCFA a written guarantee document signed by an
appropriate authority of the guarantor. The guarantee document must
state the financial obligation covered by the guarantee; agree to
unconditionally fulfill the financial obligation covered by the
guarantee and not subordinate the guarantee to any other claim on the
resources of the guarantor; declare that the guarantor will act on a
timely basis (that is, in not more than 5 business days) to satisfy the
financial obligation covered by the guarantee; and meet other
conditions as HCFA may establish from time to time. We believe that the
initial burden associated with this activity is most likely incurred
during the application process, for which we have previously estimated
the aggregate burden. We expect that less than 10 PSOs per year will
incur this burden in subsequent years. Therefore, these requirements
are not subject to the PRA as defined in 5 CFR 1320.3(c)
A PSO must submit to HCFA the current internal financial statements
and annual audited financial statements of the guarantor according to
the schedule, manner, and form that HCFA requests.
A PSO cannot modify, substitute or terminate a guarantee unless the
PSO requests HCFA's approval at least 90 days before the proposed
effective date of the modification, substitution, or termination;
demonstrates to HCFA's satisfaction that the modification,
substitution, or termination will not result in insolvency of the PSO;
and demonstrates how the PSO will meet the requirements of this
section.
The public will be afforded several subsequent comment periods in
future publications of Federal Register notices announcing our
intention to seek OMB approval for the application and quarterly
reporting information collection requirements, including a modified
version of the National Data Reporting Requirements (the Orange Blank),
that will be submitted to OMB in the near future.
We have submitted a copy of this rule to OMB for its review of the
information collection requirements above. To obtain copies of the
supporting statement and any related forms for the proposed paperwork
collections referenced above, E-mail your request, including your
address, phone number and HCFA regulation identifier HCFA-1011, to
P[email protected], or call the Reports Clearance Office on (410) 786-
1326.
As noted above, comments on these information collection and record
keeping requirements must be mailed and/or faxed to the designee
referenced below, within ten working days of publication of this
collection in the Federal Register:
Health Care Financing Administration, Office of Information Services,
Information Technology Investment Management Group, Division of HCFA
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard,
Baltimore, MD 21244-1850. Attn: John Burke HCFA-1011. Fax Number: (410)
786-1415, and,
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. Fax Number: (202)
395-6974 or (202) 395-5167
VII. Waiver of Notice of Proposed Rulemaking
We ordinarily publish a notice of proposed rulemaking in the
Federal Register to provide a period for public comment before the
provisions of a rule are made final. Section 1871(b) of the Act,
however, provides that publication of a notice of proposed rulemaking
is not required before issuing a final rule where a statute
specifically permits a regulation to be issued in interim final form.
Section 1856(a)(1) of the Act, as added by section 4001 of the BBA,
directs the Secretary to establish the solvency standards for PSOs on
an expedited basis using a negotiated rulemaking process. Section
1856(a)(8) provides for the publication of solvency standards as an
interim final rule, with an opportunity for comment to follow. Under
section 1856(a)(3), the ``target date'' for publication of this rule
was April 1, 1998. We are promulgating the solvency provisions in this
rule according to the expressed interim final rule authority in section
1856(a)(8).
Section 1856(b)(1) also provides for the publication of other
standards implementing the new M+C program in Part C on an interim
final basis, with an opportunity for comment to follow. The PSO waiver
provisions in this rule are being promulgated according to this latter
expressed interim final rule authority. In addition, we may waive
publication of a notice of proposed rulemaking if we find good cause
that prior notice and comment are impractical, unnecessary, or contrary
to public interest. As discussed earlier in this preamble, HCFA and the
Committee believe that we need to establish the PSO waiver process
early in order to allow the sequence of waiver request, application,
and contract signing to occur, and to have PSOs initiate operations
upon implementation of the M+C program. Further, we determined that
entities considering applying to become PSOs under the M+C program need
to know whether and how they can qualify to participate in the program
in order to establish the complex organizational structures necessary
under the law prior to application. Many of these entities also need to
seek State licensure or a Federal waiver.
[[Page 25376]]
Given the time required for these events, and the clear impetus
from the Congress for implementation of the M+C program, we believe
that it is impractical and contrary to the public interest to publish a
notice of proposed rulemaking before establishing the Federal waiver
and solvency standards set forth in this interim final rule. We are
providing a 60-day period for public comment.
VIII. Response to Comments
Because of the large number of items of correspondence we normally
receive on Federal Register documents published for comment, we are not
able to acknowledge or respond to them individually. We will consider
all comments we receive by the date and time specified in the DATES
section of this preamble, and, when we proceed with a subsequent
document, we will respond to the comments in the preamble to that
document.
List of Subjects in 42 CFR Part 422
Health Maintenance organizations (HMO), Medicare+Choice, Provider
sponsored organizations (PSO).
42 CFR Part 422 is amended as set forth below:
PART 422--MEDICARE+CHOICE PROGRAM
Subpart H--Provider-Sponsored Organizations
1. The authority citation for Part 422 continues to read as
follows:
Authority: Secs. 1851, 1855 and 1856 of the Social Security Act
(42 U.S.C. 1302, 1395w-21 through 1395w-27, and 1395hh).
2. Section 422.350(b) is amended by adding the following
definitions in alphabetical order:
Sec. 422.350 Basis, scope, and definitions.
* * * * *
(b) * * *
Capitated basis is a payment method under which a fixed per member,
per month amount is paid for contracted services without regard to the
type, cost or frequency of services provided.
Cash equivalent means those assets excluding accounts receivables,
which can be exchanged on an equivalent basis as cash, or converted
into cash within 90 days from their presentation for exchange.
* * * * *
Current ratio means total current assets divided by total current
liabilities.
Deferred acquisition costs are those costs incurred in starting or
purchasing a business. These costs are capitalized as intangible assets
and carried on the balance sheet as deferred charges since they benefit
the business for periods after the period in which the costs were
incurred.
* * * * *
Generally accepted accounting principles (GAAP) means broad rules
adopted by the accounting profession as guides in measuring, recording,
and reporting the financial affairs and activities of a business to its
owners, creditors and other interested parties.
Guarantor means an entity that--
(1) Has been approved by HCFA as meeting the requirements to be a
guarantor; and
(2) Obligates its resources to a PSO to enable the PSO to meet the
solvency requirements required to contract with HCFA as an M+C
organization.
Health care delivery assets (HCDAs) means any tangible assets that
are part of a PSO's operation, including hospitals and other medical
facilities and their ancillary equipment, and such property as may be
reasonably required for the PSO's principal office or for such other
purposes as the PSO may need for transacting its business.
* * * * *
Insolvency means a condition where the liabilities of the debtor
exceed the fair valuation of its assets.
M+C stands for Medicare+Choice.
Net Worth means the excess of total assets over total liabilities,
excluding fully subordinated debt or subordinated liabilities.
* * * * *
Qualified Actuary means a member in good standing of the American
Academy of Actuaries or a person recognized by the Academy as qualified
for membership, or a person who has otherwise demonstrated competency
in the field of actuarial determination and is satisfactory to HCFA.
Statutory accounting practices means those accounting principles or
practices prescribed or permitted by the domiciliary State insurance
department in the State that PSO operates.
Subordinated debt means an obligation that is owed by an
organization, that the creditor of the obligation, by law, agreement,
or otherwise, has a lower repayment rank in the hierarchy of creditors
than another creditor. The creditor would be entitled to repayment only
after all higher ranking creditors' claims have been satisfied. A debt
is fully subordinated if it has a lower repayment rank than all other
classes of creditors.
Subordinated liability means claims liabilities otherwise due to
providers that are retained by the PSO to meet net worth requirements
and are fully subordinated to all other creditors.
Uncovered expenditures means those expenditures for health care
services that are the obligation of an organization, for which an
enrollee may also be liable in the event of the organization's
insolvency and for which no alternative arrangements have been made
that are acceptable to HCFA. They include expenditures for health care
services for which the organization is at risk, such as out-of-area
services, referral services and hospital services. However, they do not
include expenditures for services when a provider has agreed not to
bill the enrollee.
3. A new Sec. 422.370 is added to read as follows:
Sec. 422.370 Waiver of State licensure.
For an organization that seeks to contract as an M+C plan under
this subpart, HCFA may waive the State licensure requirement of section
1855(a)(1) of the Act if--
(1) The organization requests a waiver no later than November 1,
2002; and
(2) HCFA determines there is a basis for a waiver under
Sec. 422.372.
4. A new Sec. 422.372 is added to read as follows:
Sec. 422.372 Basis for waiver of State licensure.
In response to a request from an organization and subject to
paragraphs (a) and (e) of Sec. 422.374, HCFA may waive the State
licensure requirement if the organization has applied (except as
provided for in paragraph (d) of this section) for the most closely
appropriate State license or authority to conduct business as an M+C
plan as set forth in section 1851(a)(2)(A) of the Act and any of the
following conditions are met:
(a) Failure to act timely on application. The State failed to
complete action on the licensing application within 90 days of the date
the State received a substantially complete application.
(b) Denial of application based on discriminatory treatment. The
State has--
(1) Denied the licensure application on the basis of material
requirements, procedures, or standards (other than solvency
requirements) not generally applied by the State to other entities
engaged in a substantially similar business; or
(2) Required, as a condition of licensure, that the organization
offer any product or plan other than an M+C plan.
(c) Denial of application based on different solvency requirements.
(1) The State has denied the licensure
[[Page 25377]]
application, in whole or in part, on the basis of the organization's
failure to meet solvency requirements that are different from those set
forth in Secs. 422.380 through 422.390; or
(2) HCFA determines that the State has imposed, as a condition of
licensure, any documentation or information requirements relating to
solvency or other material requirements that are different from the
requirements, procedures, or standards set forth by HCFA to implement,
monitor and enforce Secs. 422.380 through 422.390.
(d) The appropriate State licensing authority has notified the
organization in writing that it will not accept their licensure
application.
5. A new Sec. 422.374 is added to read as follows:
Sec. 422.374 Waiver request and approval process.
(a) Substantially complete waiver request. The organization must
submit a substantially complete waiver request that clearly
demonstrates and documents its eligibility for a waiver under
Sec. 422.372.
(b) Prompt action on waiver request. The organization will be
notified in writing within 60 days of having submitted to HCFA a
substantially complete waiver request whether the waiver request has
been granted or denied.
(c) Subsequent waiver requests. An organization that has had a
waiver request denied, may submit subsequent waiver requests until
November 1, 2002.
(d) Effective date. A waiver granted under Sec. 422.370 will be
effective on the effective date of the organization's M+C contract.
(e) Consistency in application. HCFA reserves the right to revoke
waiver eligibility if it subsequently determines that the
organization's M+C application is significantly different from the
application submitted by the organization to the State licensing
authority.
6. A new Sec. 422.376 is added to read as follows:
Sec. 422.376 Conditions of the waiver.
A waiver granted under this section is subject to the following
conditions:
(a) Limitation to State. The waiver is effective only for the
particular State for which it is granted and does not apply to any
other State. For each State in which the organization wishes to operate
without a State license, it must submit a waiver request and receive a
waiver.
(b) Limitation to 36-month period. The waiver is effective for 36
months or through the end of the calendar year in which the 36 month
period ends unless it is revoked based on paragraph (c) of this
section.
(c) Mid-period revocation. During the waiver period (set forth in
paragraph (b) of this section), the waiver is automatically revoked
upon--
(1) Termination of the M+C contract;
(2) The organization's compliance with the State licensure
requirement of section 1855(a)(1) of the Act; or
(3) The organization's failure to comply with Sec. 422.378.
7. A new Sec. 422.378 is added to read as follows:
Sec. 422.378 Relationship to State law.
(a) Preemption of State law. Any provisions of State law that
relate to the licensing of the organization and that prohibit the
organization from providing coverage under a contract as specified in
this subpart, are superseded.
(b) Consumer protection and quality standards. (1) A waiver of
State licensure granted under this subpart is conditioned upon the
organization's compliance with all State consumer protection and
quality standards that--
(i) Would apply to the organization if it were licensed under State
law;
(ii) Generally apply to other M+C organizations and plans in the
State; and
(iii) Are consistent with the standards established under this
part.
(2) The standards specified in paragraph (b)(1) of this section do
not include any standard preempted under section 1856(b)(3)(B) of the
Act.
(c) Incorporation into contract. In contracting with an
organization that has a waiver of State licensure, HCFA incorporates
into the contract the requirements specified in paragraph (b) of this
section.
(d) Enforcement. HCFA may enter into an agreement with a State for
the State to monitor and enforce compliance with the requirements
specified in paragraph (b) of this section by an organization that has
obtained a waiver under this subpart.
8. A new Sec. 422.380 is added to read as follows:
Sec. 422.380 Solvency standards.
General rule. A PSO or the legal entity of which the PSO is a
component that has been granted a waiver under Sec. 422.370 must have a
fiscally sound operation that meets the requirements of Secs. 422.382
through 422.390.
9. A new Sec. 422.382 is added to read as follows:
Sec. 422.382 Minimum net worth amount.
(a) At the time an organization applies to contract with HCFA as a
PSO under this part, the organization must have a minimum net worth
amount, as determined under paragraph (c) of this section, of:
(1) At least $1,500,000, except as provided in paragraph (a)(2) of
this section.
(2) No less than $1,000,000 based on evidence from the
organization's financial plan (under Sec. 422.384) demonstrating to
HCFA's satisfaction that the organization has available to it an
administrative infrastructure that HCFA considers appropriate to
reduce, control or eliminate start-up administrative costs.
(b) After the effective date of a PSO's M+C contract, a PSO must
maintain a minimum net worth amount equal to the greater of--
(1) One million dollars;
(2) Two percent of annual premium revenues as reported on the most
recent annual financial statement filed with HCFA for up to and
including the first $150,000,000 of annual premiums and 1 percent of
annual premium revenues on premiums in excess of $150,000,000;
(3) An amount equal to the sum of three months of uncovered health
care expenditures as reported on the most recent financial statement
filed with HCFA; or
(4) Using the most recent annual financial statement filed with
HCFA, an amount equal to the sum of--
(i) Eight percent of annual health care expenditures paid on a non-
capitated basis to non-affiliated providers; and
(ii) Four percent of annual health care expenditures paid on a
capitated basis to non-affiliated providers plus annual health care
expenditures paid on a non-capitated basis to affiliated providers.
(iii) Annual health care expenditures that are paid on a capitated
basis to affiliated providers are not included in the calculation of
the net worth requirement under paragraphs (a) and (b)(4) of this
section.
(c) Calculation of the minimum net worth amount--(1) Cash
requirement. (i) At the time of application; the organization must
maintain at least $750,000 of the minimum net worth amount in cash or
cash equivalents.
(ii) After the effective date of a PSO's M+C contract, a PSO must
maintain the greater of $750,000 or 40 percent of the minimum net worth
amount in cash or cash equivalents.
(2) Intangible Assets. An organization may include intangible
assets, the value of which is based on Generally Accepted Accounting
Principles (GAAP), in the minimum net worth amount calculation subject
to the following limitations--
[[Page 25378]]
(i) At the time of application. (A) Up to 20 percent of the minimum
net worth amount, provided at least $1,000,000 of the minimum net worth
amount is met through cash or cash equivalents; or
(B) Up to 10 percent of the minimum net worth amount, if less than
$1,000,000 of the minimum net worth amount is met through cash or cash
equivalents, or if HCFA has used its discretion under paragraph (a)(2)
of this section.
(ii) From the effective date of the contract. (A) Up to 20 percent
of the minimum net worth amount if the greater of $1,000,000 or 67
percent of the minimum net worth amount is met by cash or cash
equivalents; or
(B) Up to ten percent of the minimum net worth amount if the
greater of $1,000,000 or 67 percent of the minimum net worth amount is
not met by cash or cash equivalents.
(3) Health Care Delivery Assets. Subject to the other provisions of
this section, a PSO may apply 100 percent of the GAAP depreciated value
of health care delivery assets (HCDAs) to satisfy the minimum net worth
amount.
(4) Other assets. A PSO may apply other assets not used in the
delivery of health care provided that those assets are valued according
to statutory accounting practices (SAP) as defined by the State.
(5) Subordinated debts and subordinated liabilities. Fully
subordinated debt and subordinated liabilities are excluded from the
minimum net worth amount calculation.
(6) Deferred acquisition costs. Deferred acquisition costs are
excluded from the calculation of the minimum net worth amount.
10. A new Sec. 422.384 is added to read as follows:
Sec. 422.384 Financial plan requirement.
(a) General rule. At the time of application, an organization must
submit a financial plan acceptable to HCFA.
(b) Content of plan. A financial plan must include--
(1) A detailed marketing plan;
(2) Statements of revenue and expense on an accrual basis;
(3) Statements of sources and uses of funds;
(4) Balance sheets;
(5) Detailed justifications and assumptions in support of the
financial plan including, where appropriate, certification of reserves
and actuarial liabilities by a qualified health maintenance
organization actuary; and
(6) If applicable, statements of the availability of financial
resources to meet projected losses.
(c) Period covered by the plan. A financial plan must--
(1) Cover the first 12 months after the estimated effective date of
a PSO's M+C contract; or
(2) If the PSO is projecting losses, cover 12 months beyond the end
of the period for which losses are projected.
(d) Funding for projected losses. Except for the use of guarantees,
LOC, and other means as provided in Sec. 422.384(e), (f) and (g), an
organization must have the resources for meeting projected losses on
its balance sheet in cash or a form that is convertible to cash in a
timely manner, in accordance with the PSO's financial plan.
(e) Guarantees and projected losses. Guarantees will be an
acceptable resource to fund projected losses, provided that a PSO--
(1) Meets HCFA's requirements for guarantors and guarantee
documents as specified in Sec. 422.390; and
(2) Obtains from the guarantor cash or cash equivalents to fund the
projected losses timely, as follows--
(i) Prior to the effective date of a PSO's M+C contract, the amount
of the projected losses for the first two quarters;
(ii) During the first quarter and prior to the beginning of the
second quarter of a PSO's M+C contract, the amount of projected losses
through the end of the third quarter; and
(iii) During the second quarter and prior to the beginning of the
third quarter of a PSO's M+C contract, the amount of projected losses
through the end of the fourth quarter.
(3) If the guarantor complies with the requirements in paragraph
(e)(2) of this section, the PSO, in the third quarter, may notify HCFA
of its intent to reduce the period of advance funding of projected
losses. HCFA will notify the PSO within 60 days of receiving the PSO's
request if the requested reduction in the period of advance funding
will not be accepted.
(4) If the guarantee requirements in paragraph (e)(2) of this
section are not met, HCFA may take appropriate action, such as
requiring funding of projected losses through means other than a
guarantee. HCFA retains discretion to require other methods or timing
of funding, considering factors such as the financial condition of the
guarantor and the accuracy of the financial plan.
(f) Letters of credit. Letters of credit are an acceptable resource
to fund projected losses, provided they are irrevocable, unconditional,
and satisfactory to HCFA. They must be capable of being promptly paid
upon presentation of a sight draft under the letters of credt without
further reference to any other agreement, document, or entity.
(g) Other means. If satisfactory to HCFA, and for periods beginning
one year after the effective date of a PSO's M+C contract, a PSO may
use the following to fund projected losses--
(1) Lines of credit from regulated financial institutions;
(2) Legally binding agreements for capital contributions; or
(3) Legally binding agreements of a similar quality and reliability
as permitted in paragraphs (g)(1) and (2) of this section.
(h) Application of guarantees, Letters of credit or other means of
funding projected losses. Notwithstanding any other provision of this
section, a PSO may use guarantees, letters of credit and, beginning one
year after the effective date of a PSO's M+C contract, other means of
funding projected losses, but only in a combination or sequence that
HCFA considers appropriate.
11. A new Sec. 422.386 is added to read as follows:
Sec. 422.386 Liquidity.
(a) A PSO must have sufficient cash flow to meet its financial
obligations as they become due and payable.
(b) To determine whether the PSO meets the requirement in paragraph
(a) of this section, HCFA will examine the following--
(1) The PSO's timeliness in meeting current obligations;
(2) The extent to which the PSO's current ratio of assets to
liabilities is maintained at 1:1 including whether there is a declining
trend in the current ratio over time; and
(3) The availability of outside financial resources to the PSO.
(c) If HCFA determines that a PSO fails to meet the requirement in
paragraph (b)(1) of this section, HCFA will require the PSO to initiate
corrective action and pay all overdue obligations.
(d) If HCFA determines that a PSO fails to meet the requirement of
paragraph (b)(2) of this section, HCFA will require the PSO to initiate
corrective action to--
(1) Change the distribution of its assets;
(2) Reduce its liabilities; or
(3) Make alternative arrangements to secure additional funding to
restore the PSO's current ratio to 1:1.
(e) If HCFA determines that a PSO fails to meet the requirement of
paragraph (b)(3) of this section, HCFA will require the PSO to obtain
funding from alternative financial resources.
12. A new Sec. 422.388 is added to read as follows:
[[Page 25379]]
Sec. 422.388 Deposits.
(a) Insolvency deposit. (1) At the time of application, an
organization must deposit $100,000 in cash or securities (or any
combination thereof) into an account in a manner that is acceptable to
HCFA.
(2) The deposit must be restricted to use in the event of
insolvency to help assure continuation of services or pay costs
associated with receivership or liquidation.
(3) At the time of the PSO's application for an M+C contract and,
thereafter, upon HCFA's request, a PSO must provide HCFA with proof of
the insolvency deposit, such proof to be in a form that HCFA considers
appropriate.
(b) Uncovered expenditures deposit. (1) If at any time uncovered
expenditures exceed 10 percent of a PSO's total health care
expenditures, then the PSO must place an uncovered expenditures deposit
into an account with any organization or trustee that is acceptable to
HCFA.
(2) The deposit must at all times have a fair market value of an
amount that is 120 percent of the PSO's outstanding liability for
uncovered expenditures for enrollees, including incurred, but not
reported claims.
(3) The deposit must be calculated as of the first day of each
month required and maintained for the remainder of each month required.
(4) If a PSO is not otherwise required to file a quarterly report,
it must file a report within 45 days of the end of the calendar quarter
with information sufficient to demonstrate compliance with this
section.
(5) The deposit required under this section is restricted and in
trust for HCFA's use to protect the interests of the PSO's Medicare
enrollees and to pay the costs associated with administering the
insolvency. It may be used only as provided under this section.
(c) A PSO may use the deposits required under paragraphs (a) and
(b) of this section to satisfy the PSO's minimum net worth amount
required under Sec. 422.382(a) and (b).
(d) All income from the deposits or trust accounts required under
paragraphs (a) and (b) of this section, are considered assets of the
PSO. Upon HCFA's approval, the income from the deposits may be
withdrawn.
(e) On prior written approval from HCFA, a PSO that has made a
deposit under paragraphs (a) or (b) of this section, may withdraw that
deposit or any part thereof if--
(1) A substitute deposit of cash or securities of equal amount and
value is made;
(2) The fair market value exceeds the amount of the required
deposit; or
(3) The required deposit under paragraphs (a) or (b) of this
section is reduced or eliminated.
13. A new Sec. 422.390 is added to read as follows:
Sec. 422.390 Guarantees.
(a) General policy. A PSO, or the legal entity of which the PSO is
a component, may apply to HCFA to use the financial resources of a
guarantor for the purpose of meeting the requirements in Sec. 422.384.
HCFA has the discretion to approve or deny approval of the use of a
guarantor.
(b) Request to use a guarantor. To apply to use the financial
resources of a guarantor, a PSO must submit to HCFA--
(1) Documentation that the guarantor meets the requirements for a
guarantor under paragraph (c) of this section; and
(2) The guarantor's independently audited financial statements for
the current year-to-date and for the two most recent fiscal years. The
financial statements must include the guarantor's balance sheets,
profit and loss statements, and cash flow statements.
(c) Requirements for guarantor. To serve as a guarantor, an
organization must meet the following requirements:
(1) Be a legal entity authorized to conduct business within a State
of the United States.
(2) Not be under Federal or State bankruptcy or rehabilitation
proceedings.
(3) Have a net worth (not including other guarantees, intangibles
and restricted reserves) equal to three times the amount of the PSO
guarantee.
(4) If the guarantor is regulated by a State insurance
commissioner, or other State official with authority for risk-bearing
entities, it must meet the net worth requirement in Sec. 422.390(c)(3)
with all guarantees and all investments in and loans to organizations
covered by guarantees excluded from its assets.
(5) If the guarantor is not regulated by a State insurance
commissioner, or other similar State official it must meet the net
worth requirement in Sec. 422.390(c)(3) with all guarantees and all
investments in and loans to organizations covered by a guarantee and to
related parties (subsidiaries and affiliates) excluded from its assets.
(d) Guarantee document. If the guarantee request is approved, a PSO
must submit to HCFA a written guarantee document signed by an
appropriate authority of the guarantor. The guarantee document must--
(1) State the financial obligation covered by the guarantee;
(2) Agree to--
(i) Unconditionally fulfill the financial obligation covered by the
guarantee; and
(ii) Not subordinate the guarantee to any other claim on the
resources of the guarantor;
(3) Declare that the guarantor must act on a timely basis, in any
case not more than 5 business days, to satisfy the financial obligation
covered by the guarantee; and
(4) Meet other conditions as HCFA may establish from time to time.
(e) Reporting requirement. A PSO must submit to HCFA the current
internal financial statements and annual audited financial statements
of the guarantor according to the schedule, manner, and form that HCFA
requests.
(f) Modification, substitution, and termination of a guarantee. A
PSO cannot modify, substitute or terminate a guarantee unless the PSO--
(1) Requests HCFA's approval at least 90 days before the proposed
effective date of the modification, substitution, or termination;
(2) Demonstrates to HCFA's satisfaction that the modification,
substitution, or termination will not result in insolvency of the PSO;
and
(3) Demonstrates how the PSO will meet the requirements of this
section.
(g) Nullification. If at any time the guarantor or the guarantee
ceases to meet the requirements of this section, HCFA will notify the
PSO that it ceases to recognize the guarantee document. In the event of
this nullification, a PSO must--
(1) Meet the applicable requirements of this section within 15
business days; and
(2) If required by HCFA, meet a portion of the applicable
requirements in less than the time period granted in paragraph (g)(1)
of this section.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)
Dated: April 20, 1998.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.
Dated: April 28, 1998.
Donna E. Shalala,
Secretary.
[FR Doc. 98-12058 Filed 5-4-98; 11:09 am]
BILLING CODE 4120-01-P