[Federal Register Volume 63, Number 123 (Friday, June 26, 1998)]
[Rules and Regulations]
[Pages 34968-35116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16731]



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Part II





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



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42 CFR Part 400, et al.



Medicare Program; Establishment of the Medicare+Choice Program; Final 
Rule

  Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Rules 
and Regulations  

[[Page 34968]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 400, 403, 410, 411, 417, and 422

[HCFA-1030-IFC]
RIN 0938-AI29


Medicare Program; Establishment of the Medicare+Choice Program

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

ACTION: Interim final rule with comment period.

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SUMMARY: The Balanced Budget Act of 1997 (BBA) establishes a new 
Medicare+Choice (M+C) program that significantly expands the health 
care options available to Medicare beneficiaries. Under this program, 
eligible individuals may elect to receive Medicare benefits through 
enrollment in one of an array of private health plan choices beyond the 
original Medicare program or the plans now available through managed 
care organizations under section 1876 of the Social Security Act. Among 
the alternatives that will be available to Medicare beneficiaries are 
M+C coordinated care plans (including plans offered by health 
maintenance organizations, preferred provider organizations, and 
provider-sponsored organizations), M+C ``MSA'' plans, that is, a 
combination of a high deductible M+C health insurance plan and a 
contribution to an M+C medical savings account (MSA), and M+C private 
fee-for-service plans.
    The introduction of the M+C program will have a profound effect on 
Medicare beneficiaries and on the health plans and providers that 
furnish care. The new provisions of the Medicare statute, set forth as 
Part C of title XVIII of the Social Security Act, address a wide range 
of areas, including eligibility and enrollment, benefits and 
beneficiary protections, quality assurance, participating providers, 
payments to M+C organizations, premiums, appeals and grievances, and 
contracting rules. This interim final rule explains and implements 
these provisions.
    In addition, we are soliciting letters of intent from organizations 
that intend to offer M+C MSA plans to Medicare beneficiaries and/or to 
serve as M+C MSA trustees.

DATES: Effective date: This interim final rule is effective July 27, 
1998.
    Comment period: Comments will be considered if received at the 
appropriate address, as provided below, no later than September 24, 
1998.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1030-IFC, P.O. Box 26688, 
Baltimore, MD 21207.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:

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

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1027-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).

FOR FURTHER INFORMATION CONTACT:

    Provider Sponsored Organizations, Aaron Brown, 410-786-1033.
    M+C Private Fee-For Service Plans, Anita Heygster, 410-786-4486.
    M+C MSA Plans, Cindy Mason, 410-786-6680.
    Applications, Robert King, 410-786-7623.
    Quality Assurance, Brian Agnew, 410-786-5964.
    Payment/ACRs, Al D'Alberto, 410-786-1100.
    Encounter Data, Cynthia Tudor, 410-786-6499.
    Federal/State, Rebecca Cardozo, 410-786-0300.
    Beneficiary Appeals, Valerie Hart, 410-786-6690.
    Enrollment, Debe McKeldin, 410-786-9159.
    Information Campaign, Jan Drass, 410-786-1354.
    Contracts, Chris Eisenberg, 410-786-5509.
    General Issues, Tony Hausner, 410-786-8290.
    General Issues, Dorothea Musgrave, 410-786-8290.

SUPPLEMENTARY INFORMATION:

I. Background

A. Balanced Budget Act of 1997

    Health care benefits covered under the Medicare program are divided 
into two parts: hospital insurance, also known as ``Part A,'' and 
supplementary medical insurance, also known as ``Part B.'' Health care 
services covered under Part A include: inpatient hospital care, skilled 
nursing facility care, home health agency care, and hospice care. Part 
B coverage is optional and requires payment of a monthly premium. Part 
B covers physician services (in both hospital and nonhospital settings) 
and services furnished by certain nonphysician practitioners. It also 
covers certain other services, including: clinical laboratory tests, 
durable medical equipment, medical supplies, diagnostic tests, 
ambulance services, prescription drugs that cannot be self-
administered, certain self-administered anti-cancer drugs, some other 
therapy services, certain other health services, and blood not covered 
under Part A.
    Section 4001 of the Balanced Budget Act of 1997 (BBA) (Public Law 
105-33), enacted August 5, 1997, added sections 1851 through 1859 to 
the Social Security Act (the Act) to establish a new Part C of the 
Medicare program, known as the ``Medicare+Choice Program.'' Note that 
hereinafter, unless otherwise indicated references to the statute are 
references to the Act. (The existing Part C of the statute, which 
included provisions in section 1876 governing existing Medicare health 
maintenance organization (HMO) contracts, has been redesignated as Part 
D.) Under section 1851(a)(1), every individual entitled to Medicare 
Part A and enrolled under Part B, except for individuals with end-stage 
renal disease, may elect to receive benefits through either the 
existing Medicare fee-for-service program or a Part C M+C plan.
    The introduction of the M+C program represents what is arguably the 
most significant change in the Medicare program since its inception in 
1965. As its name implies, the primary goal of the M+C program is to 
provide Medicare beneficiaries with a wider range of health plan 
choices to complement the Original Medicare option. Alternatives 
available to beneficiaries under the M+C program include both the 
traditional managed care plans (such as HMOs) that have participated in 
Medicare on a capitated payment basis under section 1876 , as well as a 
broader range of plans comparable to those now available through 
private insurance. Specifically, effective January 1, 1999, section 
1851(a)(2) provides for three types of M+C plans:
     M+C coordinated care plans, including HMO plans (with or 
without point of service options), provider-sponsored organization 
(PSO) plans, and preferred provider organization (PPO) plans.

[[Page 34969]]

     M+C medical savings account (MSA) plans (that is, 
combinations of a high deductible M+C health insurance plan and a 
contribution to an M+C MSA).
     M+C private fee-for-service plans.
    In addition to expanding the types of available health plans, the 
M+C program introduces several other fundamental changes to the private 
health plan sector of the Medicare program. These changes include:
     Establishment of an expanded array of quality assurance 
standards and other consumer protection requirements.
     Introduction of an annual coordinated election period. 
This election period, to be conducted in November for a January 
effective date, will feature a phased in lock-in of enrollees to the 
plan they have elected during this coordinated election period. In 
addition, the annual coordinated election period will include the 
distribution by HCFA of uniform, comprehensive information about 
participating plans that is needed to promote informed choices by 
beneficiaries.
     Revisions in the way we calculate payment rates to the 
plans that will narrow the amount of payment variation across the 
country and increase incentives for plans to operate in diverse 
geographic areas.
     Establishment of requirements concerning participation 
procedures for physicians and other health care professionals in M+C 
plans, including prohibitions on interference with advice to enrollees.
    These requirements will bring about changes for beneficiaries, for 
physicians and other health care providers, for managed care 
organizations that now contract with Medicare as well as those that 
will be able to contract with Medicare for the first time, and for HCFA 
and the States. The specific areas addressed by the different sections 
of the statute are as follows:
     Section 1851--Eligibility, election and enrollment
     Section 1852--Benefits and beneficiary protections
     Section 1853--Payments to M+C organizations
     Section 1854--Premiums
     Section 1855--Organizational and financial requirements 
for M+C organizations
     Section 1856--Establishment of standards
     Section 1857--Contracts with M+C organizations
     Section 1859--Definitions and miscellaneous provisions
    As provided for in section 1856(b)(1), this interim final rule (1) 
incorporates the new M+C provisions into the Medicare regulations, (2) 
interprets the new statutory provisions in Part C, and (3) establishes 
by regulation new standards under the M+C program. Other provisions of 
the BBA addressed in this interim final rule include:
     Section 4002--Transitional rules for current HMO Medicare 
program.
     Section 4003--Conforming changes in the Medigap program.
     Section 4006--M+C MSAs.
    We note that in February, 1998, the President issued an Executive 
Order directing the Secretary to comply to the extent possible through 
administrative activities with the standards contained in the Consumer 
Bill of Rights and Responsibilities. Therefore, as discussed in several 
sections of this preamble, we have taken these standards into 
consideration in developing the regulations contained in this interim 
final rule. We have also incorporated conforming provisions consistent 
with other parts of the Medicare statute, such as exempting services 
under M+C coordinated care plans from the anti-referral provisions in 
section 1877.
    In several places in this preamble, we indicate that HCFA intends 
to develop additional policy guidance or instructions. In doing so, we 
will use a formal rulemaking process and allow for review by the Office 
of Management and Budget pursuant to the requirements of the Paperwork 
Reduction Act of 1995, wherever it is appropriate to do so.

B. Codification of Regulations

    The regulations text set forth in this interim final rule is 
codified in 42 CFR Part 422--Medicare+Choice Program. (Note that new 
part 422 was established in our April 14, 1998 interim final rule on 
PSOs (63 FR 18124).) The current Medicare regulations for managed care 
organizations that contract with HCFA under section 1876, or for health 
care prepayment plans (HCPPs) that are paid under section 
1833(a)(1)(A), will continue to be located in 42 CFR part 417, Health 
Maintenance Organizations, Competitive Medical Plans, and Health Care 
Prepayment Plans. Although the part 422 provisions will eventually 
supersede the regulations in part 417 for contracts with risk-bearing 
HMOs and competitive medical plans (CMPs), there are some purposes for 
which the part 417 provisions will continue in effect for a 
transitional period. Also, various provisions of section 4002 of the 
BBA provide for the continuation of cost-based contracts under section 
1876 and of agreements with HCPPs under section 1833(a). Thus, the part 
422 regulations cannot entirely replace the part 417 regulations at 
this time. (Both transitional provisions and those relating to cost-
based contracts and HMOs are discussed in detail below in the 
appropriate sections of this interim final rule.)
    For the convenience of organizations that contract with HCFA only 
under the M+C program, we are including in part 422 both new 
requirements that implement newly enacted provisions in Part C and 
existing requirements from part 417 that also will be imposed under 
Part C. For transitional requirements, which could logically appear in 
both parts, we are setting forth the full requirements in part 422 and 
referencing them in part 417. Requirements that apply to organizations 
that contract with HCFA, or are paid by HCFA, only under section 1876 
or 1833(a) will remain in part 417. Regulations implementing the 
provisions of section 1310 of the Public Health Service Act concerning 
Federally-qualified HMOs also remain in part 417.

C. Organizational Overview of Part 422

    The major subjects covered in each subpart of part 422 are as 
follows:
     Subpart A--Definitions, including definition of types of 
plans, application process, and user fees.
     Subpart B--Requirements concerning beneficiary 
eligibility, election, enrollment and disenrollment procedures, and 
plan information and marketing materials.
     Subpart C--Requirements concerning benefits, point of 
service options, disclosure of information, access to services, 
confidentiality of enrollee records, advance directives, and 
beneficiary protection against liability.
     Subpart D--Quality assurance standards, external review, 
and deeming of accredited organizations.
     Subpart E--Organizational relationships with participating 
entities including the prohibition against interference with health 
care professionals' advice to enrollees, physician incentive 
requirements, and special rules for M+C private fee-for-service plans 
and private contracts with health care professionals.
     Subpart F--Payment methodology for M+C organizations, 
coverage that begins or ends during inpatient hospital stays, hospice 
care, and encounter data requirements.
     Subpart G--Requirements concerning terms and conditions 
for receiving capitated payments, limits on premiums and cost sharing, 
determination of adjusted community rate, and prohibition of State-
imposed premium taxes.

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     Subpart H--Requirements concerning provider-sponsored 
organizations (PSOs).
     Subpart I--Organization compliance with State law and 
preemption by Federal law.
     Subpart K--General contract and enrollment requirements, 
administration and management, and procedures for nonrenewal or 
termination of contracts.
     Subpart L--Effect of change of ownership or leasing of 
facilities during term of contract.
     Subpart M--Requirements concerning beneficiary grievances 
and organization determinations and appeals.
     Subpart N--Requirements and procedures for contractor 
appeals of nonrenewals or terminations of contracts.
     Subpart O--Procedures for imposing intermediate sanctions.
    Each of these subparts is discussed below in section II of this 
preamble. Sections III and IV consist of separate discussions of 
provisions of the part 422 regulations that specifically concern M+C 
MSA plans and M+C private fee-for-service plans, respectively.

II. Provisions of the Interim Final Rule

A. General Provisions--Subpart A

1. Overview
    Subpart A begins with a brief section (Sec. 422.1) that specifies 
the general statutory authority for the ensuing regulations and 
indicates that the scope of part 422 is to establish standards 
applicable to the M+C program. Under Sec. 422.2, we then set forth 
definitions for terms used in part 422 that we believe need 
clarification. These definitions provide the generally applied meaning 
for terms that are used throughout part 422. Where necessary, we have 
included in specific subparts of part 422 definitions for terms used 
primarily in those subparts. In Sec. 422.4, we define the three 
different types of M+C plans, consistent with section 1851(a)(2)--M+C 
coordinated care plans, M+C MSA plans and M+C private fee-for-service 
plans.
    Sections 422.6 and 422.8 then detail the application process for an 
entity seeking an M+C contract and HCFA's application evaluation 
procedures.
    Section 422.10 adopts, for purposes of the M+C program, the user 
fee provisions now set forth at Sec. 417.472(h).
2. Definitions (Sec. 422.2)
    For the most part, the definitions presented here are taken 
directly from the statute or are essentially self-explanatory. Below, 
we discuss some notable exceptions to this, including cases where we 
have clarified the exact meaning and context of certain terms. Please 
keep in mind that the definitions set forth in subpart A reflect 
general meanings for the terms as they are used in part 422 unless 
otherwise indicated; the definitions apply strictly for purposes of 
part 422. For example, the term ``provider'' has a more inclusive 
meaning under part 422 than it does for other Medicare purposes, as 
discussed below. Similarly, when we define a term anywhere in part 422 
other than in subpart A, it can be assumed that the definition of the 
term is limited to a specified purpose in the relevant subpart or 
section. Thus, as specified in the relevant sections of the 
regulations, the term ``substantial financial risk'' has a different 
meaning for purposes of the physician incentive provisions under 
Sec. 422.208 than it does in the PSO provisions under Sec. 422.356.

Benefits and Benefit Categories

    In Sec. 422.2, we have defined both the term ``benefits'' as well 
the different categories under which benefits are provided: basic 
benefits, additional benefits, mandatory supplemental benefits, and 
optional supplemental benefits. ``Benefits'' consist of the health care 
services delivered or covered by an M+C organization. (Note that 
``services,'' under the long-standing Medicare definition at 
Sec. 400.202, encompass medical care, services, and items.) The 
definition of benefits is relevant both for purposes of the process of 
determining adjusted community rates (ACRs) for M+C plans and for 
purposes of a new provision in Part C that ``pre-empts'' State laws 
relating to ``benefits.''
    When we refer to one of the categories under which benefits are 
provided, however, we generally are referring not only to the actual 
health services that a beneficiary receives or is eligible to receive, 
but also to the pricing structure applied to these benefits. For 
example, the definition of ``additional benefits'' includes both the 
health care services covered under a plan that are in addition to 
regularly covered Medicare services, as well as any reductions in 
premiums or cost-sharing for Medicare covered services. Thus, the 
amount of deductibles or copayments that an M+C plan enrollee must 
expend to receive services would fall within the scope of the term 
``additional benefits.''
    We wish to note that we have defined ``basic benefits'' in this 
regulation to include both the Medicare-covered benefits required under 
section 1852(a)(1)(A) and required ``additional benefits'' under 
section 1852(a)(1)(B). Both Medicare benefits and required additional 
benefits are: (1) Coupled together in section 1852(a)(1), in the first 
paragraph under subsection (a), titled ``Basic Benefits''; (2) benefits 
that an M+C has an obligation to provide (in contrast to supplemental 
benefits, which may be provided totally at the M+C organization's 
discretion); (3) benefits paid for with Medicare trust fund money; and 
(4) benefits that are covered by the basic premium, if any, that counts 
towards the limit based on the actuarial value of original Medicare 
coinsurance and deductible amounts.
    For all of these reasons, we have decided to divide benefits into 
the two categories of the ``basic benefits'' including all required 
benefits, and ``supplemental benefits,'' including both mandatory and 
optional supplemental benefits provided at the discretion of the M+C 
organization. We note that while Congress did not include a 
``definition'' of ``basic benefits'' in Part C, it appears to use the 
term ``basic'' to refer only to the Medicare-covered service package. 
(See, for example, section 1851(b)(1)(B) or section 1854(e)(1).) 
Although Congress did not actually include additional benefits in the 
term ``basic benefits,'' in almost all cases, it coupled these benefits 
together, and treated them the same. (See sections 1852(a)(1), and 
1854(a)(2)(A), (3)(A), (4)(A), and (e)(1).) We accordingly believe that 
it is appropriate in this regulation to include these two categories 
together in the definition of ``basic benefits'' that applies for 
purposes of part 422. We note, however, that where a statutory 
provision refers only to the Medicare benefit component of our part 422 
definition of ``basic benefits,'' we will similarly limit the 
regulation implementing that provision.

M+C Organization and M+C Plan

    The definitions of ``M+C organization'' and ``M+C plan'' set forth 
in Sec. 422.2 are based on the BBA's use of these terms, which is not 
always compatible with the way the terms ``organization'' and ``plan'' 
have been used in the past. In previous HCFA documents, the term 
``managed care organization'' frequently has been used interchangeably 
with the term ``managed care plan'' or ``health plan.'' Section 422.2 
addresses this area of potential confusion by clarifying the 
distinction between an M+C organization and an M+C plan. Succinctly 
stated, an M+C ``organization'' is an entity that contracts with HCFA 
to offer an M+C plan; the ``plan'' consists of the specific health 
benefits, terms of coverage, and pricing structure.

[[Page 34971]]

    Section 1857(a) specifically states that HCFA contracts with an M+C 
organization. Thus, for requirements that we would normally think of as 
contractual requirements, we use the term ``M+C organization.'' In 
Sec. 422.2 then, an M+C organization is defined as a public or private 
entity organized and licensed under State law as a risk-bearing entity 
(with the exceptions of PSOs receiving waivers) that is certified by 
HCFA as meeting the M+C contract requirements. Under various BBA 
provisions, the requirements M+C organizations are responsible for 
meeting include: processing the enrollment and disenrollment of 
beneficiaries within a plan; transmitting information such as 
enrollment information and encounter data to HCFA; submitting marketing 
materials; providing all Medicare-covered benefits and other benefits 
covered under the contract in a manner consistent with specified access 
standards; performing quality assurance; creating and carrying out all 
plan procedures for grievances, organization determinations, and 
appeals; maintaining necessary records; providing advance directives; 
establishing procedures related to provider participation; setting 
medical policies; notifying beneficiaries of any ``Conscience 
Protection'' exceptions; disclosing physician incentive plans; 
receiving payment; reporting financial information; paying user fees; 
making prompt payments to providers; receiving any sanctions invoked by 
HCFA on any of the organization's plans; and fulfilling other contract 
requirements as specified in regulation.
    Again, in contrast, an M+C plan is merely the health benefits 
coverage and pricing structure that the organization offers to 
beneficiaries. An M+C plan may include the basic benefits only (basic 
benefits include Medicare-covered benefits and additional benefits) or 
basic benefits combined with mandatory and/or optional supplemental 
benefits.
    An M+C organization may select which providers furnish services 
under the plan, as long as the benefit package meets all the 
requirements for access within the area, and outside of the area for 
specific services. As discussed in detail below, service areas and 
benefit packages generally are associated with individual plans; 
uniform premium requirements and the need for an ACR proposal also 
apply at the plan level.

Service Area

    The service area designation of an M+C plan is an important element 
of the structure and design of a particular plan. A plan's service 
area--
     Determines the payment rate to the organization for 
enrollees of the plan, based on the counties included in the service 
area;
     Affects what benefits will be provided, since benefits and 
premiums must be uniform under an M+C plan, throughout that plan's 
defined service area;
     Determines which beneficiaries are able to elect the plan, 
because organizations are obligated to enroll any eligible resident of 
the service area who elects the plan; and
     For network plans, is the area in which the plan is 
required to make covered services available and accessible; and 
determines the boundaries beyond which the plan assumes liability for 
urgently needed care and may offer enrollment continuation options.
    As explained below, we will exercise discretion in reviewing and 
approving service areas requested by M+C plans. For network plans, we 
will use our knowledge of how service areas have been designated in the 
past in the Medicare managed care program and in the Federally-
qualified HMO program, which we have administered since 1986, to ensure 
availability and accessibility of services. We will attempt to ensure 
that service areas of M+C network plans are consistent with community 
patterns of care and/or rating practices--that is, service area 
designations are not artificially delineated in such a way that usual 
sources of care, in terms of geographic location, are not available to 
beneficiaries; or in such a way that the service area designation 
allows ``gaming'' of the community rate that forms the basis of M+C 
premiums and benefits, to the disadvantage of Medicare beneficiaries. A 
nondiscrimination standard will also apply to both network and non-
network plans. To the extent possible, we will attempt to ensure a 
``level playing field'' among plans operating in the same geographic 
area (for example, if one plan in an area is subject to the county 
integrity rule discussed below, a new plan may also be subject to the 
same standard in determining a new service area). These standards will 
also be applied in evaluating requests for M+C service area expansions 
and service area reductions. Consistent with the goals of the new M+C 
program, we will attempt to maximize the number of choices available to 
Medicare beneficiaries and maximize the availability of low-cost plans 
offering additional benefits.
    The regulations at Sec. 422.2 provide that an M+C organization may 
propose a specified service area for each M+C plan, and HCFA will 
determine whether the proposed area can be approved. The regulatory 
definition of service area is slightly different from the current 
service area definition at Sec. 417.401. The latter regulation defines 
the term geographic area (which we used interchangeably with service 
area with respect to section 1876 contracts) as ``the area found by the 
Secretary to be the area in which an HMO is able to deliver the full 
range of services,'' a definition that was essentially common to both 
the Medicare program and the Federally qualified HMO program 
(Sec. 417.1, ``service area''). The earlier definition emphasizes the 
role of the Secretary (HCFA) in the designation of service areas, and 
incorporates one of the standards applicable to network plans (which 
continue to apply to such plans in these regulations). Statutory 
references to a service area or geographic area under Medicare, 
including references in the BBA, do not offer a definition of the term 
or an indication of how the area is to be determined.
    We have modified the wording of the earlier regulatory definition 
of ``service area'' to recognize that organizations will propose 
specific areas for M+C plans. Pursuant to section 1856(b)(1), which 
provides for establishing M+C standards by regulation, and section 
1856(b)(2), which provides for basing the standards on standards under 
section 1876, we have retained our authority to approve or deny service 
area configurations that organizations propose. This reflects what has 
been the actual past practice of the agency in administering the 
Medicare HMO/CMP program and the Federally-qualified HMO program. The 
new definition also recognizes that service areas designated by 
organizations for non-network plans are designated for the purpose of 
determining who is eligible to enroll in the plan.
    Consistent with current and past regulatory and statutory 
standards, we will evaluate proposed service areas of network plans to 
determine whether covered services are available and accessible, under 
the standards of Sec. 422.112, to any resident of the area eligible to 
elect enrollment in the plan. We will also examine the proposed service 
area of any plan, including non-network plans, to ensure that the 
delineation of the area does not result in discrimination against 
beneficiaries through ``gerrymandering'' or ``red-lining'' to 
deliberately avoid particular areas (e.g., to prevent the enrollment of 
poorer Medicare beneficiaries, or those known to be in poorer health). 
An example of such a practice would be an

[[Page 34972]]

urban area network plan's exclusion of poorer inner-city areas, leaving 
obvious ``holes'' in the service area where residents would not have 
any problem gaining access to care through the plan's providers had the 
area been included in the proposed service area. Although we would not 
ordinarily dictate the inclusion of particular areas in the service 
area of a plan--for example, a multi-county commercial plan could 
include only some of its counties in a Medicare contract--we would seek 
to prevent clear cases of discrimination against, or disadvantaging of, 
particular groups or populations.
    Prior to the BBA, contracting HMOs and CMPs (virtually without 
exception) all had existing, defined service areas prior to entering 
into a Medicare contract. These were areas in which the entities 
offered comprehensive health care services to non-Medicare enrollees of 
the specified geographic area. As noted above, Medicare's statutory 
language did not clearly define the terms service area or geographic 
area, but it was assumed that each organization would have a specific 
service area in which it operated and provided coverage to any enrollee 
from the community (including any Medicare enrollee). The Medicare 
premiums and benefits are a function of the community rate of the plan, 
the rate applicable to any covered group within the community covered 
by the plan. Hence, until the mid-1980s, we required that the service 
area for Medicare be the same as the service area for the non-Medicare 
population. Subsequently, we changed our policy to permit HMOs and CMPs 
to limit the Medicare service area to a subset of the non-Medicare 
(commercial) area, breaking the link between commercial service areas 
and Medicare service areas (though the Medicare premiums and benefits 
continue to be based on the community rate for the entire non-Medicare 
community). We applied a ``county integrity'' standard in determining 
how HMOs could reduce their service areas for Medicare; whole counties 
could be excluded, but partial counties could only be excluded if the 
organization operated (for commercial purposes) only in a portion of 
the county.
    Because the BBA provisions on waiver of minimum enrollment and 
composition of enrollment requirements permit organizations to have M+C 
plans with no prior enrollment, there will be plans that do not have 
designated service areas and do not have a commercial service area that 
can be used as a reference point for the designation of a Medicare 
service area. In the case of network plans, we would work with such 
organizations to determine an appropriate service area for the plan's 
provider network, taking into consideration the patterns of medical 
care in the community (e.g., where people obtain care, the types of 
providers available in the community, reasonable travel times to obtain 
care). We would also use our knowledge of how plan service areas 
generally have been determined and approved in the past, as well as how 
other organizations in the same area, or a similar area, have 
established their service areas. There could be concerns both with a 
proposed area that is too wide, offering limited availability of 
services for outlying areas, and with a proposed area that is too 
small, which would limit choices available to beneficiaries or might 
raise the concerns discussed above regarding discrimination.
    We believe that basing our decisions on community patterns of care 
and the practices of other organizations in the same area, or in 
similar areas, is consistent with our past approach to the issue of 
service area designations, and consistent with the BBA. The BBA 
requires a similar approach in developing elements of the adjusted 
community rate for new plans (e.g., 1854(f)(4), referring to 
``enrollment experience of other contracts entered into under this part 
and * * * data in the general commercial marketplace'').
    With respect to another issue related to service areas, our policy 
that permitted HMOs and CMPs under 1876 to vary premium and benefit 
offerings by county within a service area (the ``flexible benefits'' 
policy) will no longer apply under M+C. The flexible benefits policy 
permitted organizations to use non-Medicare revenue to offer extra 
benefits or reduced premiums (``free benefits'') to residents of a 
particular county or counties rather than in the entire service area, 
as long as all Medicare beneficiaries in the entire service received at 
least the level of benefits required under the statute as determined 
through the adjusted community rate process. With the requirement that 
premiums and benefits be uniform throughout an M+C service area, it is 
not possible to continue the flexible benefits policy. However, an 
organization may be able to offer multiple plans and propose different 
service areas for the plans in order to achieve a similar result as the 
flexible benefits policy. This presents us with an issue of how to deal 
with the proposals for service areas, or the carving up of existing 
non-Medicare service areas, when it is done in order to have different 
premiums and benefits in different counties. In the case of network 
plans, a carving up of an existing service area, and the offering of 
multiple plans across what may be a single service area for the non-
Medicare population, is only possible if each of the plans with 
different service areas is able to ``stand alone'' in terms of meeting 
all the requirements applicable to plans. The designation of multiple 
service areas in such cases should also be consistent with community 
practices in patterns of care, and/or consistent with rating practices, 
and service are designations, for other purchasers.
    Except in the case of non-network MSA plans, as discussed below, 
the fact that Medicare pays different capitation rates by county is not 
a sufficient reason to establish service areas consisting of individual 
counties. For example, a staff-model HMO operating in a multi-county 
area, that has a service delivery network consisting of only one 
hospital and a group of physicians employed by the organization, cannot 
designate each county as a separate service area. Although services are 
accessible and available in each county, we do not believe there is a 
valid reason to charge different premiums by county, for example, when 
all Medicare beneficiaries enrolled in the organization will be using 
the same providers.
    On the other hand, some organizations that operate with very large 
service areas may be justified in breaking up larger service areas for 
Medicare contracting purposes. This would be similar to what Federally-
qualified HMOs do in designating distinct service areas as ``regional 
components,'' which are sub-areas with an autonomous provider network 
and with different community rating for the regional component. Some 
HMOs, although they do not identify distinct service areas, require 
enrollees to obtain services from a particular subset of providers 
within the broader network (as Federally-qualified HMOs are permitted 
to do (see 45 FR 28655 (April 29, 1980)). Some HMOs offer large 
employers a statewide service area consisting of different provider 
networks in geographically distinct areas in which there is no crossing 
of boundaries, or very little crossing of boundaries, to receive 
services. The large employer may be offered one rate for all areas, but 
the same HMO may have smaller designated service areas for smaller 
regional employers, in which different rates apply.
    In evaluating proposals requesting approval of multiple service 
areas in a contiguous geographic area, we would consider the patterns 
of care in the community; and the rating and service

[[Page 34973]]

area practices of the individual organization, of other organizations 
in the area, and of other organizations in similar areas. The 
commercial service area will continue to be a reference point in that 
we would be likely to approve a proposal if what is proposed for 
Medicare contracting is similar to what is done in the commercial 
marketplace. Similarly, we would take into consideration any 
determination, or approval, of service areas by State regulatory 
bodies.
    At a minimum, each proposed M+C service area must be an area in 
which the full range of covered services are available and accessible 
to all Medicare enrollees primarily through providers located in the 
service area. We would also evaluate proposals on the basis of the 
criteria we discuss above relating to discrimination against, or 
disadvantaging of, particular beneficiaries in the community. These 
criteria would also be used in evaluating the proposed service areas of 
non-network plans. Using the inner-city example, an entity could 
request an area consisting only of the poorer inner-city area, where 
residents would be required to pay a relatively high premium, while 
other areas were charged a much lower premium. We would view this 
practice as discouraging enrollment within a particular area. Although 
the statute does not expressly provide for evaluation of service area 
designations to determine whether they are discriminatory, we believe 
that it is consistent with statutory requirements relating to 
discrimination and discouraging enrollment (at 1852(a)(3), with respect 
to the pricing of mandatory supplemental premiums, and 1852(b), with 
respect to limiting enrollment based on a health status factor, 
including claims experience or insurability). We have included the 
above criteria for service area approval in the definition of ``service 
area'' in Sec. 422.2.
    As noted above, we are providing for a special exception for 
service areas for non-network MSA plans. In the case of M+C MSA plans, 
differences in payment rates for a given county affect not just the 
amount the M+C organization offering the MSA plan is paid, but the 
amount that is deposited in MSA accounts. (See section III of this 
preamble.) We have decided that in the case of M+C non-network MSA 
plans, under which enrollees are not limited to receiving services in a 
defined area, we will permit M+C organizations to offer a different M+C 
plan in each county in which they wish to enroll beneficiaries. This 
would mean that a uniform amount would be deposited in the M+C MSA 
account of every enrollee in the M+C MSA plan, and the M+C organization 
could file a separate premium amount for each county to ensure that the 
proper amount is deposited in accounts in that county.

Emergency and Urgently Needed Services

    The definitions of emergency services and urgently needed services 
in Sec. 422.2 are based on section 1852(d) and thus differ from those 
in existing Sec. 417.401. In accordance with section 1852(d)(3) of the 
statute, we are codifying the concept that an ``emergency medical 
condition'' exists if a ``prudent layperson'' could reasonably expect 
the absence of immediate medical attention to result in serious 
jeopardy or harm to the individual. In addition, the new definition of 
``emergency services'' includes emergency services provided both within 
and outside of the plan, while the definition of ``urgently needed 
services'' continues to encompass only services provided outside of the 
plan's service area (or continuation area, if applicable), except in 
extraordinary circumstances such as those discussed below.
    Under section 1852(d)(1)(C)(i), M+C organizations are required to 
pay for nonemergency services provided other than through the 
organization where the services are immediately required because of 
unforseen illness, injury or condition, and it is not reasonable given 
the circumstances to obtain the services through the organization. We 
believe that except in the rarest and most extraordinary of 
circumstances, the only situation in which it would not be reasonable 
to receive nonemergency services through the organization would be when 
the enrollee is absent from the service area of the M+C plan in which 
he or she is enrolled. It is possible, however, albeit extremely 
unlikely, that there might be other situations in which this standard 
would be met by an enrollee who is in the plan service area.
    For example, there could be some temporary disruption of access to 
the M+C plan's provider network, such as a strike, or possibly some 
temporary physical impediment to traveling to M+C plan providers that 
are otherwise readily accessible. Under such circumstances, an 
individual might not need emergency services, but still may warrant 
immediate attention. Because we do not believe that we can say that the 
statutory standard could never be met by an individual who is in the 
plan service area, we believe it is appropriate to provide for an 
exception in the definition of urgently needed services to the rule 
that the enrollee be out of area. We are thus providing for such an 
exception in extraordinary cases in which the network is unavailable or 
inaccessible due to an unusual event.

Other Definitions

    In our April 14, 1998 interim final rule setting forth the 
definition of a PSO and related requirements, we established under 
Sec. 422.350(b) a definition for ``health care provider'' that is based 
on the PSO requirements in section 1855(d)(5). In this interim final 
rule, we are adopting the identical definition for general purposes of 
the M+C program. Under this definition, as discussed in greater detail 
in our April 14 interim final rule (63 FR 18126), the term ``provider'' 
applies both to individuals licensed or certified by a State to engage 
in the delivery health care services (such as physicians, nurse 
practitioners, clinical social workers), as well as to entities engaged 
in the delivery of health care services (such as hospitals, nursing 
homes, home health agencies).
    Another clarification contained in this subpart involves the 
definition of ``copayment.'' We have defined copayment as a fixed 
amount that can be charged for a service. This is to distinguish 
copayment from ``coinsurance,'' which is a fixed percentage of the 
total cost of a service that can be charged. Copayments, coinsurance, 
and deductibles represent the three forms of cost-sharing under a plan.
    Finally, we have included a general definition of the term 
``balance billing,'' indicating that balance billing refers to an 
amount billed by a provider that represents the difference between the 
amount the provider charges an individual for a service and the sum of 
the amount the individual's health insurer (for example, the original 
Medicare program) will pay for the service plus any cost sharing by the 
individual. We note that there is significant variation within both 
original Medicare and the M+C program regarding the extent to which 
balance billing is permissible. For example, under original Medicare, 
no balance billing is permitted for providers of services (such as 
hospitals and home health agencies), while for nonparticipating 
physicians, balance billing is permissible only up to the difference 
between the Medicare allowed amount and the Medicare limiting charge. 
Different rules apply under original Medicare for other 
nonparticipating suppliers (such as ambulance or durable medical 
equipment suppliers, for which there are currently no limits on balance

[[Page 34974]]

billing). Similarly, under the M+C program, different balance billing 
restrictions apply depending on the type of M+C plan and the 
contracting status of the provider. These restrictions are discussed in 
detail in the appropriate sections of this preamble, particularly in 
section IV regarding M+C private fee-for-service plans.
3. Types of M+C Plans (Sec. 422.4)
    The creation of the M+C program allows beneficiaries access to a 
much wider array of private health plan choices than the existing 
alternatives to the original Medicare program. Moreover, this new 
program will enable Medicare to use innovations from the commercial 
sector that have helped the private market contain costs and expand 
health care delivery options.
    The BBA provides for several different types of M+C plans to be 
available for beneficiaries. As noted above, these various M+C plans 
can be classified into three general categories: M+C coordinated care 
plans, M+C MSA plans (that is, a combination of a high deductible M+C 
health insurance plan and a contribution to an M+C MSA), and M+C 
private fee-for-service plans. Within each of these three categories, 
M+C organizations may offer a variety of plans to Medicare 
beneficiaries.
    Since these are the only legally significant categories of plans 
under the M+C program, we do not believe it is necessary to define all 
of the different entities that accept prepaid, capitated payment for 
delivering health services. Thus, examples of these entities, such as 
PPOs, HMOs, or health insurance organizations, are not defined for 
purposes of this regulation. Essentially, all entities that apply to 
offer an M+C plan must conform to the requirements for either an M+C 
coordinated care plan, an M+C MSA plan, or an M+C private fee-for-
service plan.

M+C Coordinated Care Plans (Sec. 422.4(a)(1))

    Under the M+C program, beneficiaries may choose from among a 
variety of coordinated care plans. Coordinated care plans include, but 
are not limited to, HMO plans (with or without point of service 
options) (HMOs), plans offered by PSOs (as defined in section 1855(d) 
and in our April 14, 1998 interim final rule), and PPO plans. In 
addition, certain beneficiaries may be able to choose another type of 
coordinated care plan, the Religious Fraternal Benefit Society plan, 
which is defined in section 1859(e).
    Except in the case of a PSO granted a waiver under subpart H of 
part 422, all organizations offering M+C coordinated care plans must 
meet the State licensure requirements in section 1855 (and 
Sec. 422.400). Thus, an M+C coordinated care plan must be offered by an 
entity that is (1) appropriately licensed by the State to bear risk and 
(2) eligible to offer health insurance or health benefits coverage in 
each State in which it offers an M+C plan.
    In addition, an M+C coordinated care plan must meet the definition 
of a coordinated care plan set forth in Sec. 422.4. That is, an M+C 
coordinated care plan is a type of plan offered by an M+C organization 
that includes a network of providers that are under contract or 
arrangement with the organization to deliver the benefit package 
approved by HCFA. The network must be approved by HCFA to ensure that 
all applicable requirements are met including access and availability 
standards, service area requirements, and quality standards. A 
coordinated care plan may include mechanisms to control utilization, 
such as referrals from a gatekeeper to receive services within the 
plan, and financial arrangements that offer incentives to providers to 
furnish high quality and cost-effective care.
    Except for PSOs that have obtained a waiver of the State licensure 
requirement, and thus are subject to the additional requirements set 
forth in subpart H of part 422, distinctions among HMOs, PSOs, PPOs, 
and other coordinated care plans are not relevant for the purpose of 
applying to offer an M+C plan. The distinctions among the various types 
of coordinated care plans may be relevant for purposes of State 
licensure. However, for the purpose of an M+C application, we are not 
concerned with what type of coordinated care plan an applicant intends 
to offer. In fact, an entity may offer an M+C coordinated care plan 
even though it is not specifically licensed as an HMO, PSO, or PPO. As 
long as the entity is licensed as a risk-bearing entity in accordance 
with section 1855 of the statute and the plan being offered meets the 
definition of a coordinated care plan under Sec. 422.4, the entity does 
not need to be licensed specifically as an HMO, PSO, or PPO to offer an 
M+C coordinated care plan.
    For example, like an HMO or a PSO, a PPO may offer an M+C plan. Any 
organization that is licensed as a risk-bearing entity in a State may 
offer an M+C plan that is structured in the form of a PPO. We are not 
requiring that an organization applying to offer an M+C PPO plan be 
operating as a PPO in the non-Medicare marketplace. In that sense, the 
BBA imposes a distinct change from prior law, because it does not 
require that organizations with Medicare prepaid health plan contracts 
meet certain conditions imposed on their structure and their commercial 
business. Under section 1876, a PPO generally could not obtain a 
Medicare risk contract because most PPOs have members that are 
enrollees of an indemnity insurance product, and would not meet the 
requirements under section 1876 to be an ``eligible organization'' 
entitled to contract under that section. The BBA only requires that an 
organization be providing health benefits and insurance to enrollees 
(regardless of whether on an indemnity or prepaid, capitated status) 
and that it be licensed by the State as a risk-bearing entity.
    The majority of the PPOs that are currently operating are plans 
being offered by State-licensed indemnity carriers or State-licensed 
HMOs. However, where the State does license the PPO as a risk-bearing 
entity, the PPO may be eligible to become an M+C organization in and of 
itself. Conversely, where the State does not allow the PPO to bear 
risk, the PPOs in those States would not be eligible to become an M+C 
organization on their own. These PPOs that are not allowed to bear risk 
may partner with a licensed risk-bearing entity or contract with a 
licensed risk-bearing entity to ``rent out'' their PPO network of 
providers. Consistent with our policy of deferring to the State as to 
which entities constitute licensed risk-bearing entities eligible for 
the M+C program, HCFA will defer to the State in terms of whether the 
PPOs can accept partial capitation from the licensed indemnity carrier 
or licensed HMO.
    An entity offering a PPO plan must still comply with the 
requirements in 1854(e), which limit enrollee financial liability under 
a PPO plan in the same manner that liability is limited under an HMO 
plan or any other type of M+C coordinated care plan. That is, the sum 
of the premium for basic benefits and the actuarial value of all out-
of-pocket expenses for such benefits (including the actuarial value of 
all cost-sharing for non-participating providers in a PPO) cannot 
exceed the actuarial value of the deductibles and coinsurance in 
original fee-for-service Medicare. Therefore, if a PPO expects a high 
level of utilization of non-participating providers, it must have a 
very low premium or it must have a significantly reduced level of cost-
sharing for such services.

Religious Fraternal Benefit Society Plans

    One specific type of coordinated care plan authorized by the BBA is 
a religious fraternal benefit society plan

[[Page 34975]]

(RFB plan), which is defined in section 1859(e). An RFB plan is an 
entirely new type of plan that may be offered under the M+C program.
    As with the other types of coordinated care plans, an entity 
offering an RFB plan 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. 
Essentially, an RFB society must meet the state licensing requirements 
outlined in section 1855. As discussed above, the States define the 
criteria for licensure, including any fiscal solvency standards that 
apply.
    Also, an organization offering an RFB plan under the M+C program 
must do more than merely pay health care claims on behalf of their 
beneficiaries. Rather, RFB plans that constitute M+C coordinated care 
plans must meet the definition of a coordinated care plan included in 
this regulation. That is, they must have a network of health 
professionals and meet the applicable access, availability, service 
area, and quality assurance requirements.
    Section 1859(e) defines and describes the requirements for RFB 
plans. Section 1859(e)(2) describes an M+C RFB plan as a coordinated 
care plan that: (A) Is offered by a religious fraternal benefit society 
only to members of the church, convention, or affiliated group; and (B) 
permits all members to enroll without regard to health status-related 
factors. Section 1859(e)(3) states that the RFB plan must be offered by 
a religious fraternal benefit society that: (A) is described under 
section 501(c)(8) of the Internal Revenue Code and is exempt from 
taxation under section 501(a) of that Act; (B) is affiliated with, 
carries out the tenets of, and shares a religious bond with, a church 
or convention or association of churches or an affiliated group of 
churches; (C) offers, in addition to an M+C religious fraternal benefit 
society plan, at least the same level of health coverage to individuals 
not entitled to Medicare benefits who are members of such church, 
convention, or group; and (D) does not impose any limitation on 
membership in the society based on any health status-related factor.
    Section 501(c) of the Internal Revenue Code generally describes the 
rules applicable to those organizations which are not subject to 
Federal income tax under section 501(a) of the code. Section 501(c)(8) 
describes one type-- fraternal beneficiary societies, orders or 
associations that (a) operate under the lodge system for the exclusive 
benefit of a Fraternity itself operating under the lodge system; (b) 
provide for the payment of life, sick or accident or other benefits for 
the members of such society or association or their dependents.
    RFB Plans have two distinguishing factors from other types of M+C 
coordinated care plans. The first is that RFB plans are allowed to 
limit their enrollment to members of the church. Section 1859(e)(1) 
indicates that a religious fraternal benefit society offering an M+C 
plan may restrict the enrollment of individuals in the plan to 
individuals who are members of the church, convention, or group with 
which the society is affiliated.
    In addition to this ability to limit enrollment strictly to members 
of the church, RFB plans are distinct from other M+C coordinated care 
plans in that RFB plans may be subject to possible payment adjustments 
to ensure an ``appropriate payment level.'' Specifically, section 
1859(e)(4) indicates that the Secretary shall provide for such 
adjustment to the payment amounts otherwise established under section 
1854 as may be appropriate to assure an appropriate payment level, 
taking into account the actuarial characteristics and experience of 
such individuals.

M+C MSA Plans (Sec. 422.4(a)(2))

    The definition of an M+C MSA plan, as well as other requirements 
that apply solely or in a different manner to M+C MSA plans, are 
discussed in full in section III. of this preamble. Note that in 
section III.K. of this preamble, we solicit letters of intent from 
organizations that intend to offer M+C MSA plans to Medicare 
beneficiaries and/or to serve as M+C MSA trustees.

M+C Private Fee-For-Service Plans (Sec. 422.4(a)(3))

    The definition of an M+C private fee-for-service plan, as well as 
other requirements that apply solely or in a different manner to M+C 
private fee-for-service plans, are discussed in full in section IV of 
this preamble.

Multiple Plans (Sec. 422.4(b))

    Section 422.4(b) establishes that an M+C organization may offer 
multiple plans, including plans of different types, under a single 
contract with HCFA, provided that the organization is licensed or 
approved under State law to offer the applicable types of plans. We 
believe that this policy should prove to be less administratively 
burdensome for both prospective M+C organizations and for HCFA than 
other alternatives, such as requiring separate contracts between HCFA 
and an M+C organization for each plan, or type of plan, being offered 
by the organization. We also specify under this section that if an M+C 
organization has received a waiver of the licensing requirement to 
offer a PSO plan, the waiver does not apply to the licensing 
requirement for other types of plans. Other issues associated with the 
ability of an M+C organization to offer multiple plans under a single 
contract with HCFA are discussed below, in the section of the preamble 
that deals with the contract requirements contained in subpart K of 
part 422.

4. Applications (Secs. 422.6 and 422.8)

    Sections 422.6 and 422.8 set forth the application requirements for 
entities seeking to contract with HCFA to offer M+C plans, as well as 
HCFA's application evaluation procedures. For the most part we have 
retained the contracting requirements from Secs. 417.143 and 417.144 as 
authorized by section 1856(b)(2). This section of the law allows HCFA 
to use past contracting standards applied to contracts under section 
1876 or to create new standards as needed to implement the M+C program. 
The application requirements and evaluation procedures are almost 
identical to the current application procedures.
    The primary change to our previous process is the additional 
requirement that organizations wishing to contract with HCFA must 
submit documentation of their appropriate State licensure, or submit 
documentation of State certification that the entity is, in fact, able 
to offer health insurance or health benefits coverage meeting State 
fiscal solvency standards and authorized to accept prepaid capitation 
for providing, arranging, or paying for comprehensive health care 
services. (Entities meeting the definition of a PSO can be exempted 
from this requirement if they meet conditions for a waiver, which can 
be granted by HCFA--see subpart H of part 422.) This requirement is 
necessitated by the fact that HCFA will no longer have primary 
responsibility for determining the fiscal solvency of new contractors. 
We intend to rely for the most part on State certification to insure 
that the entities that we contract with are indeed fiscally solvent and 
have the ability to handle and afford risk payments for health care 
coverage, although we will if necessary ``look behind'' State 
certifications for validation purposes.
    In one addition to existing rules, Sec. 422.8(b) specifies that 
HCFA may deny an entity's application to offer an M+C plan if the 
entity has failed to complete a corrective action plan during the term 
of its previous contract with HCFA, regardless of whether the contract 
was under the section 1833, 1876, or the new Part C provisions of the 
law. We

[[Page 34976]]

believe that this provision explicitly ensures that the proven 
performance problems of entities that apply to contract with HCFA under 
the M+C program are taken into consideration in the application 
evaluation process.
5. User Fees (Sec. 422.10)
    The last section of subpart A contains regulations implementing the 
user fees provided for in section 1857(e)(2). Section 1857(e)(2) 
directs the Secretary to collect user fees from M+C organizations, with 
each paying its pro rata share, for the purpose of paying for costs 
associated with enrollment and information activities under section 
1851 and subpart B, and counseling and assistance programs under 
section 4360 of the Omnibus Budget Reconciliation Act of 1990 (Public 
Law 103-66).
    Under section 1876(k)(4)(D), the user fees provided for in section 
1857(e)(2) apply in 1998 to HMOs and CMPs with risk contracts under 
section 1876. On December 2, 1997, we published regulations in 
Sec. 417.472(h) implementing the user fee authority in section 
1857(e)(2), and setting forth a methodology for determining an 
organization's ``pro rata share'' of these fees. (62 FR 63669).
    In this interim final rule, we are simply adopting at Sec. 422.10, 
for purposes of the M+C program, the user fee provisions now set forth 
at Sec. 417.472(h). Our reasons for adopting the methodology reflected 
in these regulations are set forth in the preamble to the December 2, 
1997 rule. We intend to respond to comments received on the December 2 
interim final rule, as well as comments on this rule, in a future 
rulemaking document.

B. Eligibility, Election, and Enrollment

1. Eligibility to Elect an M+C Plan (Sec. 422.50)
    Section 1876 background: The provisions that have in the past 
applied to managed care entities (and continue to apply until these 
entities become M+C organizations) are in section 1876 and part 417 of 
this chapter. Section 1876(d) provides that Medicare beneficiaries who 
are entitled to benefits under Part A and enrolled in Part B, or 
enrolled under Part B only, except those with ESRD, residing in the 
service area of the plan are eligible to receive all their Medicare 
benefits through an HMO or CMP that has a contract with HCFA. 
Regulations at Sec. 417.423(b) excluded beneficiaries who elect hospice 
care from enrolling in an HMOs or CMPs as long as the hospice election 
remains in effect. Existing regulations at Sec. 417.460(f) require that 
HMO or CMP disenroll individuals who move out of their geographic 
areas, except that Sec. 417.460(f)(2) allows enrollees to remain 
enrolled in an HMO or CMP under the following circumstances: (1) During 
a temporary move from the service area for up to 90 days, or (2) during 
a move to a new area for as long as 1 year if the HMO or CMP has 
elected to offer this option under Sec. 417.460(f)(2).
    a. Eligibility. The BBA established a new section 1851(a) that 
includes the eligibility criteria an individual must meet in order to 
enroll in an M+C plan, as defined in Sec. 422.4. Accordingly, except as 
discussed below at section B.1.b. regarding the transition of Part B 
only individuals, Sec. 422.50 states that individuals who are entitled 
to Part A and enrolled in Part B are eligible to enroll in an M+C plan. 
These individuals are referred to as ``M+C eligible individuals.''
    Individuals with end stage renal disease (ESRD) are not permitted 
to be new enrollees of an M+C organization offering an M+C plan. 
Section 1851(a)(3)(B) excludes individuals with ESRD from enrolling in 
an M+C plan generally, but provides that an individual who develops 
ESRD while an enrollee in an M+C plan may ``continue to be enrolled'' 
in that plan. For purposes of this provision only we are considering 
individuals who are enrolled in a private health plan offered by the 
M+C organization to have been enrollees of the M+C plan when they 
developed ESRD. In section 422.50(a)(2), therefore, we provide that an 
individual who develops end-stage renal disease while enrolled in an 
M+C plan, or in a private health plan offered by the M+C organization 
offering an M+C plan, may continue to be enrolled in the M+C 
organization as an M+C plan enrollee.
    We take this position because we believe that Congress intended in 
section 1851(a)(3)(B) to permit individuals with ESRD who are enrolled 
with an M+C organization to remain enrolled with that organization. If 
an individual develops ESRD as an enrollee of the organization after 
becoming Medicare eligible, he or she clearly would be permitted under 
section 1851(a)(3)(B) to remain enrolled with the organization. We do 
not believe that enrollees of an M+C organization should be penalized 
because they develop ESRD prior to becoming Medicare eligible rather 
than after. This position is consistent with our existing policy 
implementing a similar ESRD exclusion under section 1876, and therefore 
is supported by section 1856(b)(2), which provides for the retention of 
``standards established under section 1876 to carry out analogous 
provisions of such section.''
    We are not continuing the Sec. 417.423(b) exclusion policy on 
hospice; individuals who elect hospice coverage may elect an M+C plan. 
Unlike ESRD patients, individuals who elect hospice care are not 
specifically excluded from participating in the M+C program. In fact, 
section 1853(h) contains special rules for M+C organizations that 
enroll hospice patients.
    Section 1851(b) states that, except as the Secretary may otherwise 
provide, individuals must live in the geographic area served by the M+C 
plan in order to enroll in that plan. We have exercised the discretion 
provided in this provision to provide that those individuals converting 
from health plans in which they were enrolled prior to Medicare 
entitlement who reside out of the plan's service area may also continue 
enrollment in the M+C organization if they reside in the continuation 
area of the plan.
    An M+C organization must disenroll beneficiaries who permanently 
move from the service area, unless the plan has chosen to provide a 
continuation of enrollment option in the area to which the enrollee 
moved, as allowed in section 1851(b)(1)(B) and the enrollee chooses to 
remain with the plan. We discuss continuation of enrollment in detail 
in section b.2., ``Continuation of Enrollment.'' Section 4002 
enrollment transition for 1876 risk contracts.
    Section 1876 risk contracts cannot be renewed for a contract year 
beginning on or after January 1, 1999. Current risk contractors that 
remain in compliance with current standards and that demonstrate 
compliance with new requirements established by this regulation will be 
able to transition into the M+C program by entering into an M+C 
contract, as an M+C organization, with a contract effective date of 
January 1, 1999.
    Section 4002(c) of the BBA provided for a seamless transition of 
enrolled membership. An individual who is enrolled on December 31, 1998 
with an eligible organization under section 1876 shall be considered to 
be enrolled with that organization on January 1, 1999 under the M+C 
program if that organization has a contract under Part C of title XVIII 
for providing services on January 1, 1999, unless the individual has 
disenrolled effective on that date.
    In addition, section 4002(b) provides that an individual who is 
enrolled in Part B only and is enrolled in an eligible organization 
with a risk-sharing contract under section 1876 on December 31, 1998, 
may continue to be enrolled in the

[[Page 34977]]

organization in accordance with our regulations. This means that on 
January 1 there will be a small population of ``grandfathered Part B 
only'' enrollees retained in organizations formerly with risk contracts 
that now hold contracts under the M+C program. However, this is a one 
time opportunity, and an individual who is enrolled in Part B and not 
entitled to Part A and who disenrolls from the M+C organization is not 
eligible to elect a plan offered by another M+C organization.
    In summary, we are interpreting the statute to allow an individual 
to transition enrollment from the 1876 program without regard to 
location of residence or whether the individual has end-stage renal 
disease and to choose to enroll in any plan offered by the M+C 
organization into which they are transitioning.
2. Continuation of Enrollment (Sec. 422.54)
    As stated previously, section 1851(b)(1)(B) allows M+C 
organizations to offer enrollees the option of continued enrollment in 
the M+C plan when enrollees leave the plan's service area to reside 
elsewhere, we have to interpieted this to mean on a permanent basis.
    M+C organizations that choose the continuation of enrollment option 
must explain it in marketing materials and make it available to all 
enrollees in the service area. Enrollees may choose to exercise this 
option when they move or they may choose to disenroll.
    Before an M+C organization may offer a continuation of enrollment 
option to Medicare beneficiaries, the organization must obtain HCFA 
approval of the continuation area, its marketing materials, and the 
organization's assurances that it will meet access requirements. Under 
section 1851(b)(1)(B), the organization must provide enrollees with 
reasonable access within the continuation area to the Medicare covered 
benefits described in section 1852(a)(1)(A).
    The payment rate at which the M+C organization will receive payment 
from HCFA will be based on the rate and adjustment factors that 
correspond to the beneficiary's permanent residence. The M+C 
organization must, at a minimum, provide or arrange for the provision 
of Medicare covered benefits in the continuation area as described in 
the first sentence of Sec. 422.100(b)(1), and the plan must meet access 
and cost-sharing requirements for all basic benefits.
    Because the rate that we pay to M+C organizations includes amounts 
that ordinarily must be used to provide additional benefits (see 
preamble for subpart G), we believe that M+C organizations should be 
required to provide additional benefits in the continuation area. As 
noted above, however, section 1851(b)(1)(B) requires only that Medicare 
benefits be provided to continuation enrollees. We accordingly are 
considering a legislative proosial to require M+C organizations to 
provide all services in section 1852(a)(1), including required 
additional benefits under section 1852(a)(1)(B).
    Section 1851(b)(1)(B) requires that ``reasonable access'' be 
provided in the continuation area, and that enrollees be subject to 
``reasonable cost-sharing.'' We are requiring that M+C organizations 
satisfy the access requirements in Sec. 422.112, and provide services 
either through written agreements with providers or by making payments 
that satisfy the requirements in Sec. 422.100(b)(2).
    We are defining ``reasonable cost-sharing'' in the continuation 
area to be limited to (1) the cost-sharing amounts required in the M+C 
plan's service area (in which the enrollee no longer resides) if 
provided by contract providers; (2) the cost-sharing amounts required 
by the continuation area plan if provided through agreements with 
another M+C plan; or (3) the amount for which a beneficiary would be 
liable under original Medicare if noncontracting providers furnish the 
services.
    We have included two items in these regulations that reflect our 
prior experience with similar situations. They are: (1) that plans may 
require prior notification from members of their intention to use the 
continuation of enrollment option, but this requirement must be in 
their marketing materials, and (2) appeals and grievances in the 
continuation area must be handled in the same timely fashion as in the 
service area, but the ultimate responsibility for the appropriate 
handling of appeals and grievances is with the organization that is 
receiving payment from HCFA.
3. Limitations on Enrollment in an M+C MSA Plan (Sec. 422.56)
    While most M+C eligible individuals can choose to receive benefits 
through one of the M+C plans defined in Sec. 422.4, the statute places 
limitations on eligibility to enroll in M+C MSA plans.
    Sections 1851(b)(2) and (b)(3) specifically exclude certain 
individuals from enrolling in M+C MSA plans. We have specified at 
Sec. 422.56(b) of this section, that individuals who are enrolled in a 
Federal Employees Health Benefit program (FEHB) plan, or who are 
eligible for health care benefits through the Veterans Administration 
(VA) or the Department of Defense (DoD) may not enroll in an M+C MSA 
plan. The statute provides that the restrictions on FEHB enrollment may 
be eliminated if the Director of the Office of Management and Budget 
certifies to the Secretary that the Office of Personnel Management has 
adopted polices that will ensure that the enrollment of FEHB 
participants in M+C MSA plans will not result in increased expenditures 
for the Federal government. The Office of Personnel Management has 
indicated to HCFA that they would not be able to certify that FEHB 
costs would not increase at this time. Under our authority in section 
1851(b)(2)(B), we intend to apply the same rules for enrollment 
restriction to individuals who are eligible for health benefits through 
the VA and DoD. Additionally, in Sec. 422.56(c) we have incorporated 
the statutory requirement under section 1851(b)(3) that individuals who 
are entitled to Medicare cost-sharing under a State plan under title 
XIX are not eligible to enroll in M+C MSA plans. In addition, an 
individual who receives health benefits that cover all or part of the 
annual deductible under an M+C MSA plan may not enroll in an M+C MSA 
plan.
    Note that M+C MSA plans are described in detail in Section III of 
this preamble.
4. Limited Enrollment Under M+C RFB Plans (Sec. 422.57)
    Section 1859(e)(1) states that Religious Fraternal Benefit Society 
(RFB) plans may limit the enrollment of individuals to those who are 
members of the church, convention or group with which the society is 
affiliated. We have included the restrictions on enrollment in RFB 
plans at Sec. 422.57.
5. Election Process (Sec. 422.60)
    Under section 1851(c)(1) the Secretary is required to establish a 
process through which elections in M+C plans are made and changed, 
including the form and manner in which they are done. In Sec. 422.60, 
we describe the election process for enrollment with the M+C 
organization. Where applicable we have included existing rules from 42 
CFR Sec. 417.430 with conforming changes.
    As stated at Sec. 422.66(a), M+C eligible individuals who wish to 
elect an M+C plan may do so by filing the appropriate election form 
with the M+C organization. At Sec. 422.60(a), we specify that M+C 
organizations must accept without restriction, except as specified in 
Sec. 422.57 for RFB plans, individuals who enroll in an M+C plan during 
the

[[Page 34978]]

election periods described in section 1851(e)(6) and set forth at 
Sec. 422.62 of the regulation.
    As provided by section 1851(e)(6), and stated at Sec. 422.60(a), 
and displayed in the following chart, M+C organizations are required to 
accept enrollments during the initial coverage election period, the 
annual election period, and special election periods, but M+C 
organizations are not required to be open for enrollment during open 
enrollment periods.

                                     When Elections May Be Made or Changed*                                     
----------------------------------------------------------------------------------------------------------------
                                                                 M+C Plans Required to                          
      Coverage Election Periods           When: Sec.  422.62      Accept Enrollments:       Effective Date of   
                                                                      Sec.  422.60        Coverage: Sec.  422.68
----------------------------------------------------------------------------------------------------------------
Initial Coverage Election Period.....  3 months before          Yes....................  1st day of month of    
                                        entitlement to Part A                             entitlement to Part A 
                                        and Part B.                                       and Part B.           
Annual Election Period...............  Annually in November...  Yes....................  January 1.             
Special Election Period..............  Starting 2002, if        Yes....................  To Be Determined--     
                                        beneficiary moves,                                depends on situation. 
                                        plan terminates, etc.                                                   
Special Election Period at Age 65....  Starting 2002, in first  No--Election is          1st day of the month   
                                        12 months after          original Medicare.       after month of        
                                        initial election of                               election.             
                                        M+C plan.                                                               
Open Enrollment Periods..............  Anytime 1998-2001 Jan-   No--Plans have option    1st day of the month   
                                        Jun 2002 Jan-Mar 2003+.  of accepting             after month of        
                                                                 enrollments.             election.             
----------------------------------------------------------------------------------------------------------------
*Refer to referenced regulation text for detail.                                                                
Note that different rules apply to M+C MSA plans.                                                               

    As provided at Sec. 422.306(a)(2) to reflect the requirements in 
section 1854(a)(1)(B), M+C organizations must submit by May 1 of each 
year the enrollment capacity of each plan they offer. Section 422.60(b) 
then provides that if HCFA determines that the M+C plan has a capacity 
limit, the plan may limit the enrollment of M+C eligible individuals if 
the plan accepts first those individuals who elected the plan prior to 
the HCFA determination and then accepts others in a manner that does 
not discriminate on the basis of health status.
    We note that we have not included regulation text to address the 
last sentence of section 1851(g)(2) regarding ``nonrepresentative'' 
enrollment. As written, the sentence disallows a capacity limit if 
enrollment would become substantially nonrepresentative of the Medicare 
population in the plan's service area, as determined in accordance with 
regulations of the Secretary. We cannot envision circumstances under 
which the imposition of a capacity limit on enrollment would by itself 
lead to an enrollment ``substantially non-representative'' of the 
Medicare population in an M+C plan's service area. We particularly 
cannot envision circumstances under which the non-representativeness of 
enrollment would be so ``substantial'' as to justify possible risks to 
patient access and quality of services as the result of overloaded 
capacity. We accordingly are not promulgating regulations at this time 
implementing the authority in the last sentence in section 1851(g)(2). 
We invite comments on this provision, and would consider including 
guidance on this matter in a final regulation based upon comments 
received.
    At Sec. 422.60(c) we indicate requirements for the election form. 
The form must comply with HCFA instructions regarding content and 
format, must be completed and signed by the beneficiary (or the 
individual who will soon be entitled to Medicare benefits), and must 
include authorization for disclosure and exchange of necessary 
information between HCFA and the M+C organization. Persons who assist 
beneficiaries in completing forms must sign the form and indicate their 
relationship to the beneficiary. The forms must also be filed and 
retained by the M+C organization.
    In general, and as indicated by our requirement that the 
beneficiary complete and sign the form, we believe that an M+C eligible 
individual should personally complete and sign any election form or 
disenrollment request (referenced at Sec. 422.66(b)) whenever possible. 
If for some reason a beneficiary is unable to sign for himself or 
herself, we recognize and defer to state laws on who may sign for other 
persons, which is also the policy in the Section 1876 program.
    In Sec. 422.60(d), we specify that an election is considered to 
have been made on the date it is received by the M+C organization. We 
believe it is necessary that we define ``when an election is made'' 
because it is a determining factor in establishing the effective date 
of M+C plan coverage. Note that HCFA's liability for payment is not as 
of the election date, but rather, is as of the effective date of 
coverage. Effective dates of coverage are specified at Sec. 422.68.
    We have also set forth at Sec. 422.60(e) a process for handling of 
forms, including for providing written notification of acceptance or 
denial in the M+C plan.
6. Election of Coverage Under an M+C Plan (Sec. 422.62)
    Section 1876 background: Section 1876(c)(3)(A)(i) requires that 
HMOs and CMPs hold an open enrollment period for Medicare beneficiaries 
of at least 30 consecutive days during each contract year to qualify 
for a Medicare contract. For Medicare beneficiaries who enroll during 
the open enrollment period, Sec. 417.450(a)(2) states that the 
effective date of coverage cannot be earlier than the first month, nor 
later than the third month, after the month in which HCFA received the 
information necessary to include the beneficiary in its records. In 
Sec. 417.450(b), HCFA reserves the option to approve a later month if 
requested by the organization and the beneficiary. HMOs and CMPs can 
also offer continuous open enrollment outside of the 30-day period.
    In the M+C program under section 1851(a)(1), M+C eligible 
individuals may elect to receive Medicare benefits under original 
Medicare or through election of an M+C plan. Section 1851(e) describes 
the various election periods available to M+C eligible individuals. 
Many of these provisions allow the individual to ``change the election 
under subsection (a)(1)'' during these periods. If section 1851(a)(1) 
were read narrowly, it arguably would only allow an eligible individual 
to change between original Medicare or the M+C program under Part C. We 
have taken a broader approach in interpreting section (a)(1) to allow 
eligible individuals to not only make a change between the original 
Medicare program and an M+C plan, but also among M+C plans. Therefore, 
an M+C eligible individual

[[Page 34979]]

who changes his or her election may change from an M+C plan to original 
Medicare, from an M+C plan to another M+C plan or from original 
Medicare to an M+C plan.
    The BBA establishes specific parameters in which elections can be 
made and/or changed. Individuals who wish to elect an M+C plan or 
subsequently change their election, must do so during the periods 
established under section 1851(e). That section requires that elections 
or changes in election be made during the following periods: The 
initial coverage election period, continuous open enrollment periods, 
an annual coordinated election period or special election periods. Note 
that the Medigap implications of a change of election to original 
Medicare are discussed at section II.B.12 (Extended Period of 
Guaranteed Access to Medigap Plans) of this preamble.
    a. Initial Coverage Election Period. Section 1851(e)(1) requires 
that the Secretary specify an initial coverage election period during 
which an individual who is initially entitled to Part A and enrolled in 
Part B may elect an M+C plan. The statute further stipulates that if an 
individual elects an M+C plan during that period, coverage under the 
plan will become effective as of the first day on which the individual 
may receive that coverage. We believe that Congress intended that we 
give a newly eligible individual the opportunity to be enrolled in an 
M+C plan as soon as he or she would be entitled to actually receive 
both Medicare Part A and Part B coverage.
    In other contexts, we have interpreted the concept of ``entitled'' 
to mean that an individual has met all of the necessary requirements 
for a benefit (that is, is eligible for the benefit), and has actually 
applied for and been granted coverage. An individual is considered to 
be ``enrolled'' under section 1837, on the other hand, when he or she 
has applied for Part B coverage (or is deemed to have applied). Under 
some situations, an individual may apply for or be deemed to have 
applied for Part B before he or she is actually entitled to receive 
coverage. For example, if an individual applies for Part B coverage and 
becomes ``enrolled'' after he or she reaches age 65, the individual may 
not actually be entitled to Part B coverage under section 1838 until 
one or several months after the month of application and enrollment. If 
we were to interpret section 1851(e)(1) to give effect to an M+C plan 
election when an individual has only enrolled in Part B, he or she 
could be entitled to the benefits of the M+C plan before actually being 
entitled to Medicare Part B coverage. In order to avoid such a result, 
we have interpreted ``enrolled'' in Part B as ``entitled'' to Part B.
    We believe our interpretation is consistent with section 
1851(e)(1), which requires the Secretary to specify an initial coverage 
election period that would result in coverage under the plan becoming 
effective as of the first day on which the individual may receive that 
coverage.
    In establishing the initial coverage election period we considered 
the statutory process of entitlement to Part A and enrollment in Part 
B. Section 226 of the Act provides that individuals who are age 65 and 
entitled to retirement benefits under title II or the Railroad 
Retirement Board Act and those who are under age 65 and have been 
entitled (or deemed entitled) to disability benefits under title II or 
the Railroad Retirement Board Act for 24 months shall be entitled to 
Part A under the Medicare program and eligible to enroll in Part B. 
Part A coverage is effective the month an individual attains age 65, or 
the 25th month he or she is entitled to disability benefits. If an 
individual is entitled to disability or retirement benefits at least 3 
months before reaching age 65 or, in the case of a disabled individual, 
three months before the 25th month in which he or she is entitled to 
disability benefits, the individual is deemed enrolled in Part B at 
that time. Under section 1838, Part B is effective with the month an 
individual reaches age 65 or in the 25th month he or she is entitled to 
disability benefits.
    In order for an individual to have coverage under an M+C plan 
effective as of the first day on which the individual may receive such 
coverage, the individual must elect an M+C plan before he or she is 
actually entitled to Part A and Part B coverage. We have therefore 
defined the initial coverage election period as the 3-month period that 
begins 3 months prior to the month the individual is first entitled to 
both Part A and Part B and ends the last day of the month preceding the 
month of entitlement.
    This approach also permits individuals who do not enroll in Part B 
at initial eligibility (i.e. at age 65 or in the 25th month of 
disability entitlement) to elect an M+C plan at the time of subsequent 
enrollment in Part B. Section 1837(i) provides for a special enrollment 
period for individuals who defer enrollment in Part B because they are 
covered under a group health plan based on their own employment or that 
of a spouse (in the case of the disabled, the employment may be that of 
any family member). Enrollment in Part B may occur during any month the 
individual is covered under the group health plan based on current 
employment or during the 8-month period that begins the first full 
month the individual is no longer covered under the group health plan 
based on current employment. Under section 1838(e), Part B coverage is 
effective the first day of the month the application is filed or, at 
the individual's option, the first day of any of the following three 
months when enrollment occurs while the individual is covered under the 
group health plan based on current employment or during the first full 
month when not so covered. Therefore, an individual may file an 
application for Part B up to three months in advance of entitlement. 
Consequently, individuals who enroll in Part B during the special 
enrollment period may elect an M+C plan during the 3-month period prior 
to entitlement to Part B.
    Additionally, section 1837(e) allows individuals who fail to enroll 
for Part B during their initial enrollment period (3 months before they 
are entitled to Part A or within 3 months after the month they are 
entitled to Part A) to enroll for Part B during a general enrollment 
period, which runs from January through March of every year, with 
coverage effective July 1 of the year of enrollment. In this case, the 
Part B application may be filed up to 6 months in advance of the month 
of entitlement. (Individuals who enroll in a general enrollment period 
are subject to an increased premium under section 1839(b), measured by 
the length of the delay in enrollment.)
    In order to be consistent with the 3 month periods that can occur 
between timely enrollment for Part B and actual entitlement in existing 
sections of the Medicare statute, we have limited the period during 
which an individual may elect an M+C plan to the 3-month period prior 
to actual entitlement to Part B. We believe that this correlation with 
the 3-month period will be administratively more efficient than a 
shorter or longer time period.
    b. Annual Coordinated Election Period. Section 1851(e)(6) 
establishes that organizations offering M+C plans in January, 1999 must 
open enrollment to Medicare beneficiaries in November, 1998. In 
addition, section 1851(e)(3) establishes the month of November of each 
year beginning in 1999 as the annual coordinated election period.
    During the month of November, an M+C eligible individual may elect 
an M+C plan or change his or her election. Thus, the section 1876 
requirement that plans be open any 30-day period is replaced by a 
requirement that plans

[[Page 34980]]

have to be open for enrollment during the month of November.
    c. Open Enrollment Periods. Section 1851(e)(2) establishes open 
enrollment periods during which M+C eligible individuals may elect an 
M+C plan, if it is open to new enrollees, or change their elections. 
M+C individuals may not, however, as provided in section 1851(e)(5), 
elect an M+C MSA plan during open enrollment periods.
    Note that as provided by section 1851(e)(6) and stated at 
Sec. 422.60(a)(2), M+C organizations may, but are not required, to 
offer continuous open enrollment during open enrollment periods. This 
is similar to the section 1876 policy which also allowed, but did not 
require, continuous open enrollment outside of a 30-day period.
    Section 1851(e)(2)(A) establishes that at any time during calendar 
years 1998 through 2001, there will be no limit on the number of 
elections or changes that an M+C eligible individual can make.
    Section (e)(2)(B) establishes the first six months of 2002, 
(January through June) as the open enrollment period for that year. An 
M+C eligible individual may elect an M+C plan or change his or her 
election, but only once during the first six months of the calendar 
year.
    Section (e)(2)(C) establishes the first three months of each year 
(January through March) beginning 2003, as the open enrollment period. 
An M+C eligible individual may elect an M+C plan or change his or her 
election, but only once during the first three months of the calendar 
year.
    Section 1851(e)(2)(B)(i) allows that an individual who becomes an 
M+C eligible individual in 2002 and elects an M+C plan or original 
Medicare, to change that election once during the first 6 months of M+C 
eligibility in 2002. Beginning in the year 2003 and thereafter, a newly 
eligible individual who has made an election may change that election 
once during the first 3 months of M+C eligibility in that year. 
Consequently, those who become M+C eligible individuals late during the 
year may not have a full 6-month or 3-month open enrollment period. For 
example, an individual who becomes eligible in August 2002 has an open 
enrollment period of 5 months, August through December. The sixth 
month, January, does not occur during 2002 and cannot qualify as part 
of the open enrollment period.
    The limit to one change during the open enrollment periods in the 
first six months of 2002 and the first three months of subsequent years 
does not apply to changes in elections that an individual makes during 
an annual coordinated election period or during a special election 
period.
    In Sec. 422.62, paragraphs (a)(4)(ii) and (5)(ii), we have 
interpreted the 6 and 3 month periods ``in which the individual is an 
M+C eligible individual'' in section 1851, paragraphs (e)(2)(B)(i) and 
(e)(2)(C)(i), as the periods that begin with the month the individual 
is first ``entitled to both Part A and Part B.'' The statute defines 
``eligible for Medicare+Choice'' as eligible for Part A and enrolled in 
Part B, a definition that we have reflected in Sec. 422.50(a)(1); 
however, this definition could cause problems for newly eligible 
individuals during the open enrollment period.
    For example, individuals who are newly eligible for M+C in the year 
2002 under section 1851(e)(2)(B) will have 6 months, beginning with 
their eligibility for M+C, to change their election. If we start 
counting this period from the time individuals enroll in Part B, some 
will have little or no opportunity to change. Some of these individuals 
may not actually be entitled to receive benefits for a delayed period, 
which can be up to 6 months after they have enrolled if they have 
enrolled during a general election period. Hence, the opportunity to 
change could have no meaning, with the open enrollment period expiring 
before the individuals have actually received any M+C coverage.
    d. Special Election Periods. Section 1851(e)(4) establishes special 
election periods beginning in 2002, during which M+C eligible 
individuals may disenroll from an M+C plan or elect another M+C plan. 
Special election periods are available if: (1) The service area or 
continuation area is reduced or the plan terminates or is terminated in 
the area in which the individual resides; (2) the individual moves out 
of the plan's service area and the plan does not offer, or the 
individual does not elect, the continuation of enrollment feature, or 
there is some other change of circumstances specified by HCFA; (3) the 
individual demonstrates to HCFA, in accordance with guidelines 
established by HCFA, that the M+C organization offering the plan 
substantially violated a material provision of its contract with regard 
to the individual or the organization, its agent, representative, or 
plan provider materially misrepresented the plan's provisions in 
marketing the plan to the individual; or (4) the individual meets such 
other exceptional conditions specified by HCFA.
    The last paragraph in section 1851(e)(4) provides that, effective 
January 1, 2002, an individual who, upon first becoming eligible for 
benefits under Part A at age 65, enrolls in an M+C plan (other than an 
M+C MSA plan), may discontinue the election and elect original Medicare 
at any time during the 12 month period beginning on the effective date 
of the M+C election. We have interpreted this provision to apply to 
individuals who elect an M+C plan (other than an M+C MSA plan) during 
the initial enrollment period, as defined under section 1837(d), that 
surrounds their 65th birthday. This period begins 3 months before and 
ends 3 months after the month of an individual's 65th birthday. We 
believe that this interpretation fulfills the intention of the statute, 
which is to provide this special election period to individuals who, 
upon turning 65 and first becoming entitled to Medicare, elect an M+C 
plan. Our interpretation takes into account the fact that many, if not 
most, individuals will be making an election during an initial 
enrollment period, rather than during the month that they turn 65.
    e. Special Enrollment and Disenrollment Rules for M+C MSA Plans. 
Section 1851(e)(5) establishes special rules for individuals enrolling 
in M+C MSAs. M+C eligible individuals may elect the M+C MSA option only 
during an initial coverage election period or during November of any 
year, beginning in 1998. M+C MSA enrollees may discontinue their 
election only during November of 1998, during annual coordinated 
election periods in November of each subsequent year, and during 
special election periods described in the first sentence of section 
1851(e)(4). Individuals who elect an M+C MSA for the first time during 
the annual coordinated election periods that begin in November of 1999 
may revoke their election if they do so before December 15 of the year 
in which they make the election, i.e., before the M+C MSA coverage 
begins. M+C MSA plans are described in detail at the end of this 
preamble.
7. Information about the M+C Program (Sec. 422.64)
    Once these regulations are effective and M+C plans are approved by 
HCFA, eligible Medicare beneficiaries will be able to choose to receive 
their Medicare benefits from a new array of health care options. New 
options will include coordinated care plans such as Health Maintenance 
Organizations, Preferred Provider Organizations, Provider Sponsored 
Organizations, as well as Private Fee for Service Plans and Medical 
Savings Accounts. Medicare beneficiaries will still be able to choose 
to remain in original Medicare. These choices are designed to offer 
Medicare beneficiaries a marketplace of options

[[Page 34981]]

similar to those available to the non-Medicare population.
    Under section 1851(d)(2), the Secretary is obligated to mail an 
``open season notification'' at least 15 days before the beginning of 
each annual coordinated election period to each M+C eligible individual 
residing in an area and, to the extent practicable, to a newly eligible 
individual not later than 30 days before the individual's initial 
coverage election period. The notice must include certain general 
information listed in section 1851(d)(3) and a list of plans and 
certain plan comparisons as described in section 1851(d)(4). Section 
1851(d)(1) requires that HCFA provide for activities to broadly 
disseminate information to beneficiaries and prospective beneficiaries 
on their coverage options under M+C, and section 1851(d)(5) requires 
HCFA to maintain a toll-free line for M+C inquiries and an Internet 
site through which individuals can obtain electronic information.
    To promote informed choice, HCFA will provide access, via the 
Internet and through distribution of print materials, to information 
about original Medicare and M+C options. In accordance with section 
1851(d)(3) and reflected in Sec. 422.64(c), HCFA will provide general 
information to M+C eligible individuals with respect to benefits 
available under Part A and Part B of original Medicare, including 
covered services, beneficiary cost-sharing, such as deductibles, 
coinsurance, and copayment amounts, including any beneficiary liability 
for balanced billing. Such general information will also include 
instructions on how to exercise election options under M+C; procedural 
rights including the grievance and appeals procedures for original 
Medicare and M+C and the individual's right to be protected against 
discrimination based on health status related factors under section 
1852(b), including the fact that an M+C organization may terminate its 
contract, refuse to renew its contract, or reduce the service area 
included in its contract and the effect this may have on the 
individuals enrolled in the M+C plan. Finally, a general description of 
the benefits, enrollment rights, and other requirements applicable to 
Medicare supplemental policies under section 1882, including Medicare 
Select, will be included.
    Under section 1851(d)(4) and reflected in Sec. 422.64(c)(6), HCFA 
will also provide information to M+C eligible individuals comparing M+C 
plan options, including the benefits covered under the M+C plan; 
covered services beyond those provided under original Medicare; and 
beneficiary cost-sharing including maximum limitations on out-of-pocket 
expenses and, in the case of an MSA plan or M+C private fee-for-service 
plan, differences in cost-sharing, premiums, and balance billing as 
compared to other M+C plans and whether the organization offering the 
plan includes mandatory supplemental benefits in addition to its base 
benefit package or offers optional supplemental benefits and the 
premiums and other terms and conditions for such coverage. The M+C 
monthly basic beneficiary premium and M+C monthly supplemental 
beneficiary premium, if any for the plan or, in the case of an MSA 
plan, the M+C monthly MSA premium, will also be included. M+C eligible 
individuals will also be informed about the extent to which they may 
obtain benefits through out-of-network health care providers; the 
extent to which they may select among health care providers and the 
types of providers participating in the plan's network. M+C eligible 
individuals will be informed of the M+C organization's coverage of 
emergency and urgently needed care, service area of the plan, and, to 
the extent available, M+C plan quality and performance indicators.
    The information comparing plan options is crucial to empowering 
beneficiaries with the knowledge that will help them evaluate M+C 
options and make informed decisions based on their individual needs. We 
wish to make clear that our provision of comparative data is intended 
neither to encourage or discourage beneficiaries from choosing one 
health care plan over another nor to favor a choice of an M+C plan over 
original Medicare.
    We invite the public to comment or to provide specific guidance on 
the types of information that should be made available to 
beneficiaries. Once we have worked out what specific information we 
will require within the above categories, we will post these at our 
Internet site.
    The Internet site, www.Medicare.gov, is a Medicare beneficiary-
centered consumer website designed to provide a broad array of 
information on program benefits, health system performance, health care 
choices, healthy behaviors and health promotion. This site will be 
continuously improved to meet the mandate in section 1851(d)(2)(C) that 
we provide information in a style and format that is easy to 
understand. If necessary, we will publish regulations and allow for OMB 
review, pursuant to the requirements of the Paperwork Reduction Act of 
1995.
    HCFA's ``Medicare Compare,'' the Managed Care Plans Comparison 
Database, will be available on the Internet for public use. ``Medicare 
Compare'' provides a wealth of information on health care plans, 
allowing users to ``comparison shop'' for plans. Users can look up 
information in different areas, by state, county or zip code. They can 
also compare costs for premiums and types of services offered. The 
information in the database will be updated quarterly. Plan specific 
quality performance measures from the HEDIS information set and the 
Consumer Assessment of Health Plans Survey (CAHPS) will be incorporated 
into information provided to beneficiaries once the data and results 
have been validated and determined to be accurate and reliable. HCFA is 
committed to using a public process to determine information and data 
specifications, including the details of what information will need to 
be collected and the methods of collection to determine the remaining 
unspecified data elements that organizations are required to submit. 
HCFA will work collaboratively with organizations involved with quality 
and performance standards and measurements, including performance 
measurement experts, public and private purchasers, and beneficiary 
representatives in this process. In addition, HCFA will hold public 
meetings to invite interested parties to comment and provide input in 
the process of determining the data specifications for additional 
performance information, e.g., data about appeals or health outcome 
measures. Finally, HCFA will publish a notice regarding plan data 
elements to be collected and a summary of public processes used to 
determine the data elements in question and this document would be 
available at the discretion of the requestor. Educational information 
will be made available on the Internet site to prepare consumers on how 
to use this information when comparing plans and in making decisions 
about their health care.
    In support of efforts to promote informed choice, HCFA will also 
maintain a toll-free line for M+C information.
    Under section 1851(e)(3)(D), we are required to provide in the fall 
of 1998 for a ``Special Information Campaign'' in the form of an 
educational and publicity campaign that informs M+C eligible 
individuals about the availability of M+C plans offered in different 
areas, and about the election process. Section 1851(e)(3)(C) requires 
that we provide for a nationally coordinated educational and publicity 
campaign about M+C plans and the election process in November of each 
year, beginning in 1999. We may conduct these campaigns

[[Page 34982]]

using health fairs, as well as other methods for distributing 
information.
8. Coordination of Enrollment and Disenrollment Through M+C 
Organizations (Sec. 422.66)
    a. Enrollment. Section 1851 (c)(1) and (c)(2) provide that 
individuals who wish to elect an M+C plan may do so through filing an 
appropriate election form with the organization during an election 
period specified in section 1851(e), and reflected in Sec. 422.62. 
Section 1851(c)(1) requires that the Secretary establish a process 
through which elections in M+C plans are made. Therefore, we reserve 
the right to develop and provide additional mechanisms for electing an 
M+C plan. We have provided instructions on how M+C organizations must 
process elections at Sec. 422.60(e). If necessary, we will publish 
regulations and allow for OMB review, pursuant to the requirements of 
the Paperwork Reduction Act of 1995.
    b. Disenrollment. Section 1876 background: Under section 
1876(c)(3)(B), which covers disenrollment from HMOs and CMPs, a 
Medicare beneficiary can disenroll from an HMO or CMP at any time. 
Under the HMO and CMP regulations in Sec. 417.461(a), an enrollee who 
wishes to disenroll may, at any time, give the organization a signed, 
dated request in the form and manner we specify. The beneficiary can 
request a certain disenrollment date, but it can be no earlier than the 
first day of the month following the month in which the organization 
receives the disenrollment request. Under section 9312(h) of the 
Omnibus Budget Reconciliation Act of 1986, Medicare beneficiaries are 
also permitted to disenroll from an eligible organization under Section 
1876 at a local Social Security office.
    Section 417.461(b) describes the responsibility of the HMO or CMP 
to promptly submit a disenrollment notice to HCFA and provide the 
enrollee with a copy of the request for disenrollment and, in the case 
of a risk HMO or CMP, an explanation of the date of disenrollment. 
Section 417.461(c) provides that HMOs and CMPs must reimburse HCFA in 
cases where a disenrollment notice is not submitted timely to HCFA.
    Currently, when an individual enrolls in one HMO or CMP while still 
enrolled in another, we regard this action as a disenrollment from the 
first HMO or CMP, and automatically amend our enrollment records to 
reflect the disenrollment. We do this so that the beneficiary does not 
have to both submit a disenrollment request to the first HMO or CMP, 
and an enrollment request to the new HMO or CMP.
    To reflect these current policies, Sec. 422.66(b)(1) provides that 
an individual who wishes to disenroll may change his or her election in 
the following manner: (i) Elect a different M+C plan during an election 
period specified in Sec. 422.62 or (ii) submit a signed and dated 
request for disenrollment to the M+C organization during an election 
period specified in Sec. 422.62. HCFA also reserves the right to 
develop and provide additional mechanisms for disenrollments in 
accordance with section 1851(c). Note that the Medigap implications of 
a change of election to original Medicare are discussed at section 
II.B.12 (Extended Period of Guaranteed Access to Medigap Plans) of this 
preamble.
    At Sec. 422.66(b)(2) we specify that a disenrollment request is 
considered to have been made on the date it is received by the M+C 
organization. Note that HCFA's liability for payment ends not on the 
date the disenrollment request is received by the M+C organization, but 
rather, as of the date of disenrollment. The date of disenrollment is 
determined at Sec. 422.68 for changes made by enrollees during coverage 
election periods and at Sec. 422.74 for disenrollments made by M+C 
organizations.
    At Sec. 422.66(b)(3) and (4) we are continuing the Sec. 417.461(b) 
and (c) requirements for M+C organizations to provide timely notice of 
disenrollment to HCFA and to provide the enrollee with a copy of the 
disenrollment request with information on the date of disenrollment and 
any lock-in requirements of the plan that apply until the effective 
date of disenrollment. We also state that disenrollment requests must 
be filed and retained as specified in HCFA instructions.
    The regulation also provides that if the M+C organization fails to 
submit a correct and complete disenrollment notice to us promptly, the 
M+C organization must reimburse us for any capitation payments it has 
received after the month in which we would have stopped payment, had 
the M+C organization met the requirement.
    c. Retroactive Disenrollment. Section 1876 background: In the case 
of section 1876 contractors, HCFA has permitted beneficiaries to be 
retroactively disenrolled from an HMO or CMP if it determines that 
there never was a legally valid enrollment, or a valid request for 
disenrollment was properly made but not processed or acted upon.
    In the M+C program, HCFA will continue to consider retroactive 
disenrollments in cases in which we determine that there never was a 
legally valid enrollment, or a valid request for disenrollment was made 
but not processed or acted upon. We have reflected this provision in 
Sec. 422.66(b)(5).
    d. Fee-for-Service Election by Default. Section 1851(c)(3)(A)(i) 
establishes that newly eligible enrollees who do not choose an M+C plan 
during the initial coverage election period are deemed to have chosen 
original Medicare. We have reflected this provision in Sec. 422.66(c).
    e. Seamless Continuation of Coverage (Conversions). Section 1876 
background: In regulations at Sec. 417.432, an HMO/CMP is required to 
accept any individual who was already enrolled in the HMO/CMP for the 
month immediately prior to the month in which he or she was entitled to 
both Part A and Part B, or entitled to Part B only. HCFA refers to such 
enrollments as ``conversions'' or ``age-ins.'' The individual's 
effective month of enrollment in the HMO or CMP as a Medicare enrollee 
is effective the month in which he or she is entitled to both Medicare 
Parts A and B, or Part B only.
    With the enactment of BBA, a new section 1851(c)(3)(A)(ii) is added 
to the statute that gives the Secretary discretion to establish 
procedures under which individuals who are enrolled in a health plan 
offered by an M+C organization at the time of their initial coverage 
election periods will ``default'' to or be deemed to have elected an 
M+C plan offered by the M+C organization, unless these individuals 
elect a different option. We have chosen not to have individuals 
default to the M+C plan offered by the organization. At this time we do 
not have a mechanism in place to capture the information we would need 
to implement such a process. A default process would require that M+C 
eligible individuals as well as their relevant health plan information 
be identified and captured prior to the individual's initial coverage 
election period. At present, we do not have access to information on 
which health plans individuals are enrolled in because such plans are 
private health plans. In addition, we are not given any information if 
individuals have not previously filed for title II (Social Security) 
and/or title XVIII (Medicare) benefits.
    One option that we may consider would be to specify that M+C 
organizations which have individuals enrolled in private health plans 
must notify such individuals 4 months preceding the month in which the 
individual becomes an M+C eligible individual of their opportunity to 
``age-in'' to the M+C plan or to select another option. This would give 
the individual

[[Page 34983]]

the opportunity to select from a range of health care options in a 
manner that would facilitate seamless continuation of coverage. M+C 
organizations would be required to transmit to us the necessary plan 
information for those individuals who are interested in exercising 
their opportunity to ``age-in''. HCFA would then have the information 
necessary to ``deem'' or ``default'' M+C eligible individuals into the 
appropriate M+C plan. We request public comments on this issue and will 
issue further clarification in the final rule. In the interim, we have 
retained the conversion of enrollment process described in Sec. 417.432 
with conforming changes.
    In Sec. 422.66(d) we specify that M+C plans must accept any 
individual who is enrolled in a health plan (other than an M+C plan) 
offered by the same M+C organization, during the month immediately 
preceding the month in which the individual is entitled to both Part A 
and Part B. Conversion may occur if the individual resides in the 
service area or continuation area of the plan and regardless of whether 
an individual has ESRD. We limit conversions to individual in a service 
area and continuation area in order to ensure that enrollees have 
access to the full range of services offered by the plan. This policy 
is also reflected in the section describing eligibility to elect a plan 
(Sec. 422.50(a)(2) and (a)(3)). Therefore, an M+C organization's 
obligation to accept current enrollees extends to enrollees in a 
service area or a continuation area, or who developed ESRD while 
enrolled with the organization under a private health plan. Converted 
beneficiaries who reside out of the plan's service area or who have 
ESRD cannot, however, later elect to enroll in a plan offered by 
another M+C organization unless they meet the statutory requirements at 
sections 1851(b)(1)(A) and 1851(a)(e)(B).
    In addition, we allow M+C organizations to reserve vacancies for 
their plans to accommodate conversions in recognition that M+C 
organizations must accept conversions. We require the individual who is 
converting to file an election form in accordance with 
Sec. 422.60(c)(1). We also stipulate that the M+C organization may not 
disenroll the individual except under the conditions described in 
Sec. 422.74.
    f. Maintenance of Enrollment. The statute provides at section 
1851(c)(3)(B) that an individual who has made an election or is deemed 
to have made an election is considered to have continued to make that 
election until the individual changes it or the M+C plan is 
discontinued or no longer serves the area in which the individual 
resides. We have stated this rule at Sec. 422.66(e).
9. Effective Dates of Coverage and Change of Coverage (Sec. 422.68)
    Section 1851(f) establishes the effective dates for elections and 
changes to elections made during the various enrollment periods. Note 
that the Medigap implications of a change of election to original 
Medicare are discussed at section II.B.12 (Extended Period of 
Guaranteed Access to Medigap Plans) of this preamble.
    Section 1851(f)(1) states that an election made during the initial 
coverage election period will take effect on the date the individual 
becomes entitled to Part A and enrolled under Part B, but gives the 
Secretary discretion to interpret this provision in a manner, 
consistent with section 1838, that prevents retroactive coverage. We 
are interpreting ``enrolled in Part B'' as ``entitled to Part B'' in 
order to avoid retroactive coverage in an M+C plan that an individual 
might receive after enrolling in Part B but prior to the time the 
individual is actually entitled to Part B benefits. Therefore, we have 
established that an election made during the initial coverage election 
period is effective the first day of the month of entitlement to both 
Part A and Part B.
    Under section 1851(f)(3), an election or change of election made 
during an annual coordinated election period is effective the first day 
of the following calendar year. We have reflected this provision in 
Sec. 422.68(b).
    Under section 1851(f)(2), an election or change of election made 
during an open enrollment period is effective the first day of the 
first calendar month following the month in which the election is made. 
We have reflected this provision in Sec. 422.68(c).
    Under section 1851(f)(4), an election that occurs as the result of 
a special election period is effective, to the extent practicable, in a 
manner determined by HCFA to promote continuity of coverage. We have 
reflected this provision in Sec. 422.68(d).
    At Sec. 422.68(e) we are stating that an election of original 
Medicare made during a special election period by an individual age 65 
as provided at Sec. 422.62(c) is effective the first day of the first 
calendar month following the month in which the election is made.
10. Disenrollment by the M+C Organization (Sec. 422.74)
    Section 1851(g)(3) specifies that M+C organizations may only 
disenroll individuals from an M+C plan for the following reasons: the 
individual fails to pay any basic and supplemental premiums on a timely 
basis; the individual engages in disruptive behavior; or the M+C 
organization terminates its coverage of all M+C eligible individuals in 
the area in which the individual resides.
    In Sec. 422.74, we have set forth the conditions under which M+C 
organizations can disenroll individuals. Section 1851(g)(3)(A) provides 
that, except as provided in section 1851(g)(3)(B), ``a Medicare+Choice 
organization may not for any reason terminate'' an individual's 
enrollment in ``a Medicare+Choice plan it offers.'' [Emphasis added.] 
We have included the three grounds for termination set forth in section 
1851(g)(3)(B) in Sec. 422.74. With respect to the ground in section 
1851(g)(3)(B)(ii), under which an enrollee can be disenrolled for 
``disruptive behavior'' as specified in standards established in 
regulations, we have implemented this ground for termination in two 
separate provisions. First, under Sec. 422.74(b)(1)(ii), we refer to an 
individual who meets general standards for disruptiveness set forth in 
Sec. 422.74(d)(2). Section 422.74(d)(2) refers to behavior of an 
individual that is ``disruptive, unruly, abusive, or uncooperative to 
the extent that his or her continued enrollment * * * seriously impairs 
the M+C organization's ability to furnish services. * * *'' We also 
separately refer to a different kind of ``disruption'' or failure to 
``cooperate''; namely, fraud or abuse of the enrollee's enrollment 
card. This ground for termination is also based on section 
1851(g)(3)(B)(ii), and standards for disenrollment on this basis are 
also included in Sec. 422.74(d), in a separate paragraph (3).
    In addition to implementing the grounds in section 1851(g)(3)(B), 
we also provide in Sec. 422.74 for the termination of individuals who 
are no longer eligible for enrollment in the M+C plan, because they 
have left the area, lost entitlement to Medicare, or died. We believe 
that the prohibition in section 1851(g)(3)(A) on terminating an 
enrollee on grounds other than those set forth in paragraph (B) applies 
only to individuals who are otherwise eligible for enrollment in the 
plan. Clearly, if an individual does not meet the threshold 
requirements for eligibility, disenrollment is not only permissible but 
required.
    We have established specific guidelines in Sec. 422.74(d)(1) that 
the M+C organization must follow when disenrollment is based on failure 
to pay basic and supplemental premiums, including the requirement to 
send a notice of nonpayment within 20 days after the date that 
delinquent charges

[[Page 34984]]

are due. The notice must alert the individual that he or she is 
delinquent on a premium payment, provide the individual with an 
explanation of the disenrollment procedures and any lock-in provisions 
of the plan, and advise the individual that failure to pay the premiums 
within the 90-day grace period will result in termination of M+C 
coverage.
    Note that in the section 1876 program, disenrollment for non-
payment of premiums is treated differently. At Sec. 417.460(c)(2), if a 
beneficiary pays the basic premium and other charges, but fails to pay 
the premium for optional supplemental benefits, the organization can 
discontinue the optional benefits, but cannot disenroll the 
beneficiary. However, under section 1851(g)(3)(B)(i), an M+C 
organization may terminate an election of a plan if any M+C monthly 
basic and supplemental beneficiary premiums are not paid on a timely 
basis.
    We have retained the current processes described in Sec. 417.460 
for disenrollment for disruptive behavior and fraud and abuse. In the 
case of disenrollment for disruptive behavior, the M+C organization 
must ascertain that the individual's behavior is not related to the use 
of medical services or to diminished mental capacity. If an individual 
is disenrolled for disruptive behavior, HCFA will review the 
documentation submitted by the M+C organization and the beneficiary to 
determine whether the disenrollment requirements have been met.
    We have included a qualifier for disenrollment when the individual 
no longer resides in the M+C plan's service area to conform to section 
1851(b)(1)(B), which permits plans to offer a continuation of 
enrollment feature if the individual moves out of the service area. We 
have modified the existing regulatory text at Sec. 417.460(h) which 
requires disenrollment when the individual loses entitlement to Part B 
benefits, to require disenrollment when an individual loses entitlement 
to Part A or Part B benefits. We have also addressed the process for 
disenrollment for plan termination or area reduction.
    For all disenrollment situations, except those due to the death of 
the individual or loss of Part A or Part B benefits, we require M+C 
organizations to provide the individual with a written notice of the 
disenrollment that includes an explanation of why the M+C organization 
is planning to disenroll the individual and a description of the 
individual's right to a hearing under the M+C organization's grievance 
procedures.
    The statute provides at section 1851(g)(3)(C) that individuals who 
are disenrolled from an M+C plan due to disruptive behavior or failure 
to pay basic or supplementary premiums will be deemed to have elected 
original Medicare. We have treated fraud and abuse by the enrollee in 
the same manner as other forms of disruptive behavior, with the 
individual being disenrolled into the original Medicare program. We 
believe that the result should be comparable because, in both cases, 
the individual's disruptive behavior has given the organization cause 
for the disenrollment. Individuals who lose entitlement to Part A or 
Part B benefits default to original Medicare because they no longer 
meet the requirements to receive Medicare benefits through an M+C plan, 
which requires entitlement to Part A and enrollment in Part B.
    As previously discussed, special election periods are available to 
individuals who are disenrolled (or who disenroll) because of plan 
termination or service area or continuation area reduction or because 
they no longer reside in the M+C plan's service area or continuation 
area. Section 1851(g)(3)(C)(ii), however, stipulates that individuals 
who are disenrolled and who do not make an election during the special 
election period are deemed to have elected original Medicare.
11. Approval of Marketing Materials and Application Forms (Sec. 422.80)
    Section 1851(h) contains requirements related to marketing by M+C 
organizations. These provisions are implemented in Sec. 422.80. Section 
422.80(a) implements the requirement in section 1851(h)(1) that all 
marketing material and application forms be submitted to HCFA for 
approval 45 days before distribution, and that such materials may only 
be used if HCFA does not disapprove such use by the end of this 45 day 
period. In section 422.80(b), we define ``marketing materials'' which 
must be submitted for approval under Sec. 422.80(a).
    Section 1851(h)(2) requires that M+C standards under section 1856 
include guidelines for review of marketing materials under section 
1851(h)(1) and Sec. 422.80(a). Section 422.80(c) contains guidelines 
for HCFA's review of marketing materials under Sec. 422.80(a). As 
provided for in section 1852(b)(2), these guidelines include existing 
marketing guidelines for HMOs and CMPs in Sec. 417.428, which have been 
in effect since the inception of the existing Medicare risk contracting 
program.
    Section 1851(h)(3) provides that, if HCFA has not disapproved the 
distribution of marketing materials or forms with respect to an M+C 
plan in an area, HCFA is deemed not to have disapproved the 
distribution in all other areas covered by the M+C plan and 
organization except with regard to any portion of the material or form 
that is specific to the particular area. This ``deemed approval,'' or 
``1 stop-shopping,'' provision is included in the statute to address 
the needs of M+C organizations that operate in multiple states and 
within multiple HCFA Regional Office (RO) regulatory districts. Under 
the section 1876 program, a marketing piece submitted for HCFA review 
in multiple ROs was often susceptible to different regulatory 
interpretations by different RO staff; this occurrence could result in 
approval by one RO and a request for revisions by another RO. This 
phenomenon was primarily the result of RO staffs working within the 
environment of either an ``emerging'' market area or a ``mature'' area. 
The speed of review and approval of marketing materials should be 
enhanced by implementation of this statutory requirement.
    Section 1851(h)(4) provides that M+C organizations shall conform to 
``fair marketing standards'' included in the ``standards under section 
1856,'' and requires that these standards prohibit an organization from 
providing cash or other monetery inducements for enrollment. Standards 
under section 1854(h)(4) are set forth in Sec. 422.80(e). Again, as 
provided in section 1856(b)(2), these standards include existing 
section 1876 standards.
    Section 1851(h)(4)(B) indicates that the fair marketing standards 
``may include a prohibition against an M+C organization (or agent of 
such an organization) completing any portion of any election form used 
to carry out elections under this section on behalf of any 
individual.'' However, we have decided at this time not to prohibit an 
M+C organization (or agent of such an organization) from assisting 
beneficiaries in completing the election form. We recognize and 
understand that we must provide accommodations for persons with 
disabilities and for situations in which such a prohibition could 
represent a potential physical burden to beneficiaries. However, in 
general, we believe that it is good practice that the M+C eligible 
individual should complete and sign the election form. Currently, we 
have no way to check for any plan impropriety, especially in situations 
where beneficiaries require help in completing the enrollment form, 
except beneficiary allegations and requests for disenrollment. While we 
cannot

[[Page 34985]]

quantify the amount of inappropriate behavior, we know that some plans 
have completed election forms for beneficiaries fraudulently or have 
convinced beneficiaries to sign forms without explaining to them the 
contents and telling them the form is for enrollment (U.S. General 
Accounting Office report: ``HCFA Should Release Data To Aid Consumers, 
Prompt Better HMO Performance'', HS-97-23, October 1996.) Therefore, we 
request public comment on this issue and will provide further guidance 
in the final rule.
    In the interim, we are providing at Sec. 422.60(c) that persons who 
assist beneficiaries in completing forms should sign the form and 
indicate their relationship to the beneficiary. In addition, we 
encourage M+C organizations to use neutral parties such as family 
members, ombudsmen or counseling programs for those individuals who 
require assistance in completing forms.
    Finally, in Sec. 422.80(f), we specify that HCFA may permit M+C 
organizations to develop marketing materials designed for members of an 
employer group who are eligible for employer-sponsored benefits through 
the M+C organization, and to furnish these materials only to such group 
members. While such materials must be submitted for approval under 
paragraph (a), HCFA will only review portions of these materials that 
relate to M+C plan benefits.
12. Medigap
    Prior to the enactment of the BBA, Federal law provided only one 
opportunity for a Medicare beneficiary to purchase a Medicare 
supplement (Medigap) policy on a ``guaranteed issue'' basis. (Generally 
this means that the insurance company cannot deny the application, or 
charge extra, based on the individual's health experience.) This 
opportunity was during the 6-month period beginning with the date a 
beneficiary is both age 65 or over, and enrolled in Medicare Part B. 
Amendments made by the BBA now specify additional situations in which 
beneficiaries will, after July 1, 1998, be guaranteed access to certain 
types of Medigap policies on a guaranteed issue basis if they apply 
within 63 days after losing other coverage, and submit evidence of the 
date the prior coverage terminated. The law also requires the entity 
that provided the prior coverage to notify beneficiaries of these 
rights.
    Therefore, while this regulation does not implement the Medigap 
provisions of the BBA, it is important to be aware of the implications 
for M+C organizations, since some of the situations covered by the 
Medigap provisions involve beneficiaries who leave M+C plans and return 
to original Medicare. The situations that will give rise to the 
obligation to notify the beneficiary will include, for example, 
termination of coverage by an M+C plan, or loss of coverage under an 
M+C plan due to a change in the individual's place of residence. The 
beneficiary also will have the right to guaranteed issue of a Medigap 
policy if he or she either enrolls in an M+C plan upon first becoming 
eligible for Medicare at age 65, or enrolls after previously being 
covered under a Medigap policy, and later disenrolls from the M+C plan 
within 12 months of the effective date of the M+C enrollment.
    Because the Medigap provisions establish specific time deadlines 
for beneficiaries who wish to take advantage of these new rights, 
prompt action by M+C organizations to notify beneficiaries of their 
rights, and by HCFA to provide accurate evidence of recently terminated 
coverage, will be essential. CFA is committed to providing 
beneficiaries whose M+C coverage terminates under the specified 
circumstances with timely and accurate evidence of the recently 
terminated coverage. There are a number of ways in which we are 
considering providing the necessary evidence, including enabling 
Medigap insurers to query HCFA systems, if privacy and security issues 
can be resolved. HCFA is seeking comments on the most effective way to 
coordinate with Medigap insurers in order to protect beneficiaries' 
rights under the statute, and promote continuity of care.
    We also urge M+C organizations to keep in mind that they will be 
obligated to notify beneficiaries whose coverage terminates of their 
rights under the Medigap provisions. Those provisions are complex--only 
certain beneficiaries will be entitled to guaranteed issue of Medigap 
policies, and their choice of policies will depend on the precise 
reason for termination of their coverage under the M+C plan. Further 
guidance is available from the National Association of Insurance 
Commissioners (NAIC), which on April 29, 1998 issued a revised Model 
regulation that incorporated the Medigap changes made by the BBA.

C. Benefits and Beneficiary Protections

1. General Requirements (Sec. 422.100)
    Subpart C of these regulations details the scope of benefits a 
Medicare beneficiary is entitled to receive when electing coverage 
through an M+C plan. The statutory authority for most of the provisions 
of subpart C is found in section 1852, which outlines benefit 
requirements and provides authority for beneficiary protections under 
Medicare Part C. Many of the statutory provisions are the same as, or 
similar to, benefit provisions of section 1876. Therefore, much of the 
regulatory language of part 417 is retained for purposes of 
establishing M+C standards, as provided for in section 1856(b)(2) 
(which directs that the M+C standards be based on the analogous 
standards established under section 1876).
    A principal difference between section 1876 provisions and the 
newly enacted law is that the new law permits a wider range of types of 
entities to assume risk for the coverage of benefits for Medicare 
enrollees. Section 1876 limited the Medicare contract option to 
organizations that operated as entities accepting full-risk, prepaid 
capitation for the provision of a comprehensive range of services and 
defined ``eligible organizations'' as a Federally qualified HMO (under 
title XIII of the Public Health Service Act) or a competitive medical 
plan (CMP). Except in a very few instances where waivers were granted 
during years when such waivers were authorized, the organizations had 
to offer such a product in the commercial marketplace in order to have 
a Medicare contract. From the point of view of benefit requirements 
imposed on plans, the new types of network plans are subject to the 
same benefit requirements applicable to organizations that would have 
met the definition of ``eligible organization'' under section 1876 
(HMOs and CMPs). The requirements under the new law for network plans 
are in many cases identical to the requirements under section 1876.
    While adding PPOs, indemnity insurers, and provider-sponsored 
organizations to the range of entities eligible for Medicare contracts, 
the BBA also permits non-network plans, such as private fee-for-service 
plans and M+C non-network MSA plans, to assume prepaid, capitated risk 
for services used by enrollees of these organizations. Medicare 
beneficiaries who elect these plans are not subject to the same 
constraints in use of providers that exist in network plans. Therefore, 
the benefit requirements applicable to these plans, and cost-sharing 
requirements, may be very different from those that apply to network 
plans. This section of the preamble mainly discusses the requirements 
for network plans. Sections III and IV of the preamble provide more 
extensive information about benefit requirements applicable to non-
network M+C MSA plans and to

[[Page 34986]]

private fee-for-service plans, respectively.
    All M+C organizations are required to cover the full range of 
Medicare benefits that enrollees would otherwise have been able to 
receive under original Medicare, subject to certain rules regarding 
available networks of providers. M+C organizations are further required 
to cover Medicare preventive benefits with the same frequency that they 
are covered under original Medicare (e.g., annual screening mammography 
examinations). Beneficiaries may be required to contribute to the cost 
of covered services in the form of cost-sharing provided for under the 
M+C plan. Beneficiaries may have to cover all costs until a deductible 
is met (including the high deductible provided for under an MSA plan 
(see section III of this preamble)), a percentage of costs in the form 
of coinsurance, or a fixed amount for services, in the form of a 
copayment. As discussed in subpart G below, there are limits that apply 
to the cost-sharing that can be imposed on beneficiaries under M+C 
plans. For benefits that are covered under original Medicare, the 
benefits must be obtained through providers meeting the conditions of 
participation of the Medicare program.
    Organizations with network plans, which include coordinated care 
plans and network M+C MSA plans, are required to provide these services 
directly or through arrangements (i.e., written agreements with 
providers) in order to meet the availability and accessibility 
requirements of section 1852(d)(1) and Sec. 422.112, discussed below.
    In some situations, an M+C organization, for its network plan or 
plans, may be required to assume liability for services provided to 
Medicare enrollees through noncontracting providers. Under 
Sec. 422.100(b), the organization is required to assume financial 
responsibility for the following items and services obtained from a 
provider that does not contract with the M+C organization:
     Emergency services as defined in Sec. 422.2;
     Urgently needed services as defined in Sec. 422.2;
     Renal dialysis services provided while the enrollee was 
temporarily outside the M+C plan's service area;
     Post-stabilization care as described in 
Sec. 422.100(b)(iv); and
     For both network and non-network plans, services denied by 
the M+C organization and found upon appeal (under subpart M of this 
part) to be services the enrollee was entitled to have furnished or 
paid for by the M+C organization.
    The requirements that the M+C organization assume financial 
liability for renal dialysis services, and post-stabilization care are 
new requirements introduced by the BBA that were not included in 
section 1876 requirements. The BBA also revised the definition of 
emergency services, as discussed elsewhere in the preamble.
    ``Post-stabilization care'' (also referred to in the Act as 
``maintenance care'') means medically necessary, non-emergency services 
needed to ensure that the enrollee remains stabilized from the time 
that the treating hospital requests authorization from the M+C 
organization until--
     The enrollee is discharged;
     A plan physician arrives and assumes responsibility for 
the enrollee's care; or
     The treating physician and plan agree to another 
arrangement.
    Section 422.100(b)(1)(iv) provides that an M+C organization is 
responsible for the cost of post-stabilization care provided outside 
the plan if they were pre-approved, if they were not pre-approved 
because the organization did not respond to the request by the provider 
of post-stabilization care services for pre-approval within 1 hour 
after the organization was asked to approve post-stabilization care, or 
if the M+C organization could not be contacted for pre-approval. M+C 
organization liability will extend until the organization has contacted 
the hospital to arrange for discharge or transfer. These requirements 
reflect comments we received on post-stabilization care in response to 
the Federal Register notice of January 20, 1998. The majority of 
commenters advocated that we establish a timeframe for an M+C 
organization's response to a request for approval. Because we agree 
that an untimely response to a request for approval would unduly delay 
the delivery of the post-stabilization care services, thereby 
compromising their effectiveness, we have established a 1-hour 
timeframe in the regulation as an enrollee protection. Because a 
completely accurate assessment of an enrollee's need for post-
stabilization care services cannot be made until the enrollee is 
stabilized, we expect that the provider of the post-stabilization care 
services will not request the M+C organization's approval of the 
services until after the enrollee is stabilized, at which time enough 
details about the enrollee's condition should be known to allow the 
organization to make an informed decision on whether to approve the 
care almost immediately. We welcome comments on this issue.
    In the case of payments to noncontracting providers for covered 
items and services, the M+C organization's obligation is met when it 
provides for payment in an amount the provider would have received 
under original Medicare (including payment from the organization and 
beneficiary cost-sharing under the plan).
    The benefits offered by an M+C plan may be divided into two major 
components, ``basic benefits'' and ``supplemental benefits.'' Basic 
benefits in an M+C plan include all Medicare-covered services (except 
hospice) and additional benefits. Basic benefits are discussed below, 
and special rules for M+C enrollees electing hospice are set forth in 
Sec. 422.266 and discussed in section II.F.9. of this preamble. 
Supplemental benefits include both mandatory and optional supplements, 
which we also discuss below.
    Section 1852(a)(1) stipulates that M+C organizations offering an 
M+C plan (or plans) must offer it to all Medicare beneficiaries 
eligible to elect the plan who reside in the service area of the M+C 
plan at a uniform premium with uniform cost sharing. An organization 
may offer more than one plan in the same service area. The premium and 
cost-sharing may vary among plans within the same organization. We will 
review each M+C plan offered by the same organization to ensure that it 
is not designed to promote discrimination, discourage enrollment, steer 
specific subsets of Medicare beneficiaries to particular M+C plans, or 
inhibit access to services.
2. Requirements Relating to Basic Benefits (Sec. 422.101)
    With the exception of special rules concerning hospice care and M+C 
coverage that begins during an inpatient hospital stay (described in 
Secs. 422.266 and 422.264, respectively), a Medicare enrollee is 
entitled to have the M+C organization provide all Medicare-covered 
services that are available in the geographic area in which services 
are covered under the plan.
    M+C organizations are required to provide their enrollees with 
services covered under original Medicare and available to beneficiaries 
residing in the geographic area in which services are covered under the 
plan, as we provide at Sec. 422.101(a). Organizations must also abide 
by our national coverage decisions, as well as specific written 
policies of the Medicare carrier or intermediary with jurisdiction for 
claims (if the encounter had occurred under original Medicare) in the

[[Page 34987]]

geographic area served by the plan. (These policies are sometimes 
called ``local medical review determinations.'') In cases where 
services are covered under the plan in an area that includes 
jurisdictions of more than one contractor for original Medicare, and 
the contractors have different medical review policies, the plan must 
apply the medical review policies of the contractor in the area where 
the beneficiary lives.
    In addition, the organization is required to provide ``additional 
benefits,'' which include health care services not covered by Medicare, 
as well as reductions in premiums or cost sharing for covered services. 
As discussed in section II.A of this preamble, we use the term ``basic 
benefits'' to encompass all Medicare-covered benefits (except hospice 
services) and additional benefits. These benefits are determined by our 
approval of an M+C organization's Adjusted Community Rate (ACR) 
proposal for a given M+C plan and must be provided uniformly to all 
Medicare enrollees electing that plan. Additional benefits are 
generated when the average payment rate for a plan exceeds the adjusted 
community rate, thereby producing a surplus known as the ``excess 
amount.'' (See section II.F of this preamble for a more thorough 
discussion of the requirements that apply to additional benefits, which 
are set forth under Sec. 422.312.)
    In the case of an M+C private fee-for-service plan or a non-network 
M+C MSA plan, the obligation to cover Medicare services is not limited 
to services available in the plan's approved service area. Rather, in 
this context, we interpret ``geographic area served by the plan'' in 
section section 1852(a)(1)(A) to mean the area within which the M+C 
private fee-for-service or non-network M+C MSA plan enrollee has the 
right to receive covered services under the plan.
    Under our authority in section 1856(b)(1) to establish standards 
under the M+C program, Sec. 422.100(h) establishes special rules for 
influenza vaccine, pneumococcal vaccine, and screening mammography. 
Section 422.100(h)(2) prohibits enrollee cost-sharing for influenza 
vaccine and pneumococcal vaccine. Under original Medicare, there is no 
cost-sharing imposed on these items, and we believe congressional 
intent is for Medicare beneficiaries to have maximum possible access to 
both vaccines. We note that original Medicare provides for beneficiary 
payment of coinsurance for mammography screening; therefore, a plan may 
also impose copayment or coinsurance for this service.
    Also note that beneficiaries under original Medicare may ``self-
refer'' and directly access screening mammography and influenza 
vaccine. We have established a similar standard in Sec. 422.100(h)(1) 
for M+C enrollees.
3. Supplemental Benefits (Sec. 422.102)
    Section 1852(a)(3) provides for supplemental benefits. These 
benefits are health care items and services beyond the basic benefits 
described above and are categorized as either mandatory or optional.
    Mandatory supplemental benefits are benefits not included in basic 
benefits which must be purchased by all beneficiaries who enroll in the 
M+C plan under which they are included. Mandatory supplemental benefits 
may be offered under coordinated care plans and fee-for-service plans 
only, and must be approved by HCFA. HCFA will approve such benefits 
unless we determine that they would substantially discourage enrollment 
in the plan. Specifically, we will determine whether the inclusion of 
the mandatory supplemental benefits would discourage particular 
subcategories of Medicare beneficiaries from enrolling (e.g., those 
residing in certain parts of a plan service area). These benefits are 
addressed in Sec. 422.102(a).
    Section 1852(a)(3)(C) provides that nothing in paragraph (3) of 
section 1852(a), addressing supplemental benefits, shall be construed 
to prevent a fee-for-service plan from offering supplemental benefits 
covering the balance billing permitted under section 1852(k)(2)(A)(i) 
and Sec. 422.216(b)(1) and additional services. See discussion of M+C 
private fee-for-service plans in section IV of this preamble. The only 
provision in section 1852(a)(3) that could possibly be construed to 
prevent a private fee-for-service plan from offering such benefits 
would be the right of the Secretary, and of HCFA under these 
regulations, to disapprove mandatory supplemental benefits. We 
accordingly wish to make it clear that HCFA will not disapprove such 
benefits in the case of a private fee-for-service plan. (As discussed 
below in subpart G, HCFA does not have the right to review or approve 
the amount that a private fee-for-service plan charges for supplemental 
benefits.) We believe that the foregoing statement is sufficient to 
give effect to section 1852(a)(3)(C).
    Optional supplemental benefits are benefits beyond basic benefits 
that may be purchased by an M+C plan enrollee at his or her option. If 
a plan offer optional supplemental benefits, it must offer those 
benefits to all enrollees in the M+C plan. While optional supplemental 
benefits may be offered under all types of plans, in the case of MSA 
plans, there are limits, discussed in section III of the preamble, on 
the nature of optional supplemental benefits that can be offered.
    Under mandatory supplemental benefits for coordinated care plans, 
an M+C organization may require an enrollee who elects an M+C plan to 
accept and pay for items and services beyond basic benefits if he or 
she wants to enroll in a particular M+C plan. If an organization 
requires supplemental benefits, it must do so uniformly for all 
Medicare beneficiaries enrolled in that plan. As provided for at 
section 1852(a)(3)(A), we will approve such offerings unless we 
determine that would substantially discourage enrollment in the plan. 
We will determine whether the mandatory supplemental benefits would 
discourage subcategories of Medicare beneficiaries from enrolling 
(e.g., those residing in certain parts of a plan's service area).
    An organization may also offer optional supplemental benefits 
within an M+C plan. In this case, the beneficiary is free to choose to 
accept or decline the supplement. In the case of both mandatory and 
optional supplemental benefits, the benefits are paid for by (or on 
behalf of) the individual electing the M+C plan.
    Sections 422.103 and 422.104, addressing benefits under MSA plans 
generally, and optional supplemental benefits under an MSA plan, are 
discussed in section III. below.
4. Special Rules for Point-of-Service (POS) Option (Sec. 422.105)
    This section of the rule codifies our existing policy for point-of-
service plans. Because these policies have not previously appeared in 
regulations, we welcome comments.
    A POS benefit is an option that an M+C organization may offer 
through an M+C coordinated care plan or network M+C MSA plan to provide 
Medicare enrollees with additional choice in obtaining specified health 
care items and services from entities that do not have a contract with 
the M+C organization. A coordinated care plan may offer a POS option as 
an additional benefit, a mandatory supplemental benefit, or an optional 
supplemental benefit. A network MSA plan may only offer a POS option as 
a supplemental benefit.
    Under POS, the health plan generally provides partial reimbursement 
to enrollees for items and services obtained from non-network 
providers. The enrollee may be required to pay a premium for the 
benefit unless the

[[Page 34988]]

benefit is offered as an additional benefit. The Act contains two 
mentions of the term ``point of service'' as it relates to M+C plans. 
Section 1851(a)(1)(A) states that an HMO may include a POS option, and 
section 1852(c)(1)(C), requires disclosure to enrollees of ``any point-
of-service option (including the supplemental premium for such 
option).'' Therefore, the Act indicates that HMOs could offer POS 
products, and that there could be a supplemental enrollee premium for 
such a product.
    We currently permit HMOs and CMPs to offer POS products. There is 
no specific statutory reference to such a product in section 1876; the 
statutory basis for allowing Medicare HMOs to provide POS products lies 
in the additional and supplemental benefit offerings an HMO may have 
under section 1876. We believe that under the structure of the M+C 
program, any coordinated care plan or network M+C MSA plan may offer a 
POS product.
    The regulations at Sec. 422.105 governing the POS benefit are 
largely a restatement of our previously issued guidelines. In issuing 
the guidelines, we were particularly concerned with assuring the 
continued accessibility and availability of medically necessary care 
within the Medicare plan's approved network. We also emphasized that 
organizations are responsible for: members' continuity of care; 
ensuring beneficiaries are fully informed about how the POS benefit 
would be implemented; and the potential financial liability of the 
individual. We also required organizations to provide data to us about 
the POS benefit, including expenditures and levels of POS utilization, 
and the effect on the financial status of the organization. Moreover, 
the guidelines required the plans to maintain a record-keeping system 
to make information on utilization of the POS benefit available to plan 
providers. These previous operational policy requirements are carried 
over into Sec. 422.105.
    There are some changes in Sec. 422.105 to the guidelines we issued 
under section 1876, however. One has to do with POS coverage available 
for in-network items and services. Under the guidelines, we permitted 
HMOs and CMPs to include network providers who could be paid through 
the POS option. These regulations eliminate that option. Additionally, 
under Sec. 422.105, we will now require plans to place a cap on a 
beneficiary's total annual financial liability under a POS benefit. In 
another change, we are eliminating separate solvency standards for POS 
products. Each of these changes is discussed below.
    Although HCFA guidelines did permit a Medicare beneficiary to use a 
POS option to seek, for example, ``direct access'' to a specialist 
within the plan's network, and thereby avoid any prior authorization 
requirement or other plan rules relating to access to particular 
providers, we believe such a feature of a POS option is inconsistent 
with the concept of a network plan and not a desirable feature of a POS 
option. The basic access and availability requirements both of sections 
1876 and 1852(d) require that benefits be made available, through 
providers selected by the M+C organization, in a manner that ensures 
availability, accessibility and continuity of care. If the care an 
individual seeks from a network provider is necessary care, the 
individual should be able to obtain that care through the network, 
following network rules. Although the enrollee might not receive 
treatment from the particular provider he or she prefers, the 
organization and its contractors are obligated to make covered services 
available to all enrollees through network providers. We do not believe 
it is appropriate to use the POS benefit to circumvent network rules.
    In Sec. 422.105 we also specify that an M+C organization offering a 
POS benefit establish an annual limit on a beneficiary's maximum 
financial liability when using a POS benefit. We require a financial 
limit to alert beneficiaries to their maximum potential financial 
liability in using their POS benefit. We consider it a critical part of 
beneficiary information that enrollees are clearly informed about all 
of their potential costs when enrolling in an M+C plan.
    Another change from existing policy in Sec. 422.105 is the 
elimination of the additional solvency requirements that have been 
imposed under the POS guidelines (though reporting requirements 
relating to solvency remain). The Act gives the States primary 
responsibility for setting and enforcing solvency standards for M+C 
plans (other than a provider-sponsored organization with a waiver of 
the State licensure requirement), and our imposition of additional 
solvency requirements on POS products is inconsistent with the States' 
responsibility. (In fact, because of solvency concerns, many States 
require licensure as an indemnity insurer if an HMO wishes to offer a 
POS product.) We will continue to require M+C organizations to comply 
with this reporting requirement, as was the case with Medicare 
contractors under section 1876. This reporting requirement is not 
superseded by the Act's preemption provision relating to benefits in 
section 1856(b)(3)(B).
5. Special Arrangements With Employer Groups (Sec. 422.106)
    An M+C organization may negotiate with an employer group to provide 
benefits to Medicare members of the employer group who are enrolled in 
an M+C plan offered by the organization and these benefits must be 
provided uniformly to members of the group. While these negotiated 
employer group benefits may be designed to complement benefits 
available to Medicare beneficiaries enrolled in the plan, they are 
offered by the employer group independently as the product of private 
negotiation. These benefits may include contributions on the employee 
group member's behalf toward M+C plan premiums or cost-sharing for 
which the Medicare eligible group member is responsible, or benefits 
not covered by the M+C plan, for which premiums and cost-sharing may be 
charged. We do not review such employer group benefits, premiums, or 
cost-sharing amounts.
6. Medicare Secondary Payer (MSP) Procedures (Sec. 422.108)
    As specified in section 1852(a)(4), if a Medicare enrollee receives 
covered items and services from an M+C organization for which the 
enrollee is entitled to benefits under a State or Federal workers' 
compensation law or plan, any no-fault insurance, or any liability 
insurance policy or plan (including a self-insured plan), the M+C 
organization may charge the insurance carrier, employer or other entity 
that is responsible to pay for the provision of those items and 
services. The M+C organization may also charge the Medicare enrollee to 
the extent that the enrollee has been paid by the carrier, employer, or 
other entity for those items and services. In addition, an M+C 
organization may charge a group health plan or large group health plan 
for items and services for which Medicare is a secondary payor.
    In this area, pursuant to section 1856(b) (1) and (2), we are 
retaining for M+C organizations the requirements that applied to HMOs 
and CMPs under part 417.
7. Effect of National Coverage Determinations (NCDs) (Sec. 422.109)
    This provision implements section 1852(a)(5). Under this rule, M+C 
organizations are not required to assume risk for the costs of certain 
``significant cost'' NCDs until an adjustment has

[[Page 34989]]

been made in the per capita rate to reflect the NCD. A national 
coverage determination is a national policy statement regarding the 
coverage status of a specified service that HCFA makes as a program 
memorandum or manual instruction. The term does not include coverage 
changes mandated by statute. Past NCDs have included items such as 
heart transplants.
    On February 22, 1994 HCFA published a notice of proposed rule 
making (NPRM) to define ``significant cost'' and other requirements for 
NCDs as they applied to section 1876 risk contracting plans. With one 
exception discussed below, we are including in this rule the policies 
included in the February 22, 1994 proposed rule. For example, we have 
maintained the definition of ``significant cost'' as $100,000 for a 
single NCD service for calendar years 1998 and 1999. We are providing 
for an automatic adjustment of a single service threshold amount to 
reflect rising costs, and will adjust the dollar threshold by the 
national per capita growth percentage used to calculate the annual 
capitation rates to pay M+C organizations. We are also providing an 
alternative definition for lower cost services that will affect a large 
number of beneficiaries. For the cost of all of the services furnished 
nationwide as a result of a particular NCD, we have redefined 
significant cost as 0.1 percent of the national standardized annual 
capitation rate (which is used in calculating the annual capitation 
rates used to pay M+C organizations) multiplied by the total number of 
Medicare beneficiaries nationwide for the applicable calendar year.
    This rule also describes how the NCD will be provided to M+C plan 
enrollees during the period the M+C organization is not at risk for the 
new or expanded benefit established by the NCD, including procedures to 
pay M+C organizations and the policies affecting beneficiary liability. 
It is in this area that this rule differs from the February 22, 1994 
proposed rule. That proposed rule reflected the NCD provision that 
applied to HMOs with risk contracts under section 1876. There is one 
key difference between the NCD provision in section 1876 and the NCD 
provision under the new M+C. Like the new NCD provision in section 
1852(a)(5), section 1876(c)(2)(B) provided that services required under 
certain mid-year NCDs were excluded from risk contracts until the first 
year in which payment for the services is reflected in capitation 
payments. However, under Section 1876(a)(6), original Medicare coverage 
of such NCD services was identified as an exception to the rule that 
only the risk-contracting HMO could receive Medicare payment on behalf 
of one of its enrollees. Therefore, an HMO enrollee was not required to 
receive NCD services excluded from the HMO's contract through the HMO, 
and could receive the services either from the HMO or from any other 
Medicare provider, and Medicare would pay. This was reflected in the 
February 2, 1994 proposed rule.
    Under the M+C program, however, there is no similar exception for 
excluded NCD services providing that only an M+C organization may be 
paid by Medicare on behalf of an enrollee in an M+C plan offered by 
that organization. We believe that this difference reflects Congress' 
intent that beneficiaries be required to receive services through their 
M+C organization, under the same rules that apply to any other non-
urgent and non-emergency services. Under the new NCD provision, only 
the method that HCFA pays the organization for the services, and the 
cost-sharing that applies to such services differs from other services. 
If the excluded NCD services are received from, or through, the M+C 
organization, the organization will be paid on a fee-for-service basis 
for those services. If the services are not available from the plan, 
the organization will pay the authorized provider after receiving fee-
for-service from the intermediaries or carriers.
    Pursuant to our authority under section 1856(b)(1), we are 
expressly requiring that the M+C organization provide the NCD services 
in question on a fee-for-service basis.
8. Discrimination Against Beneficiaries Prohibited (Sec. 422.110)
    The current rule reflects section 1852(b), and the details provided 
in Sec. 422.110 are consistent with existing policy and regulation. In 
general, M+C organizations may not discriminate among Medicare 
beneficiaries based on health-related factors with the exception that 
organizations may not enroll new beneficiaries with end-stage renal 
disease. For further discussion of discrimination provisions affecting 
M+C enrollees with ESRD, see the discussion in section II.B.1 of this 
preamble.
9. Disclosure Requirements (Sec. 422.111)
    In section 1852(c), the Act lists several areas where an M+C 
organization must disclose specific information to each M+C plan 
enrollee. These requirements are, in large part, a codification of 
existing program administration requirements under section 1876, and we 
detail these requirements in Sec. 422.111 of the regulations. In 
general, an M+C organization is required to provide in a clear, 
accurate, and standardized form information relating to: service area; 
benefits access; out-of-area coverage; emergency coverage; supplemental 
benefits; prior authorization rules; plan grievance and appeals 
procedures; disenrollment rights and responsibilities; and information 
about the M+C organization's quality assurance program.
    M+C organizations are also required to provide further information 
on a beneficiary's request, which we also detail in Sec. 422.111 of the 
regulation text. These ``upon request'' requirements include: general 
coverage and comparative plan information; information on utilization 
control procedures; information on grievances and appeals; information 
on the financial condition of the M+C organization; and a summary of 
physician compensation arrangements.
10. Access to Services (Sec. 422.112)
    The requirements of section 1852(d) of the Act (concerning access 
to services) are being implemented through this rule, in part, by 
applying existing regulations and policies pursuant to our authority in 
section 1856(b)(1) to establish standards under the M+C program. We are 
also addressing recommendations from the President's ``Consumer Bill of 
Rights and Responsibilities'' (CBRR), and incorporating the ``Quality 
Improvement System for Managed Care'' (QISMC) standards.
    For example, our existing policy shaped the language in 
Sec. 422.112(a)(1)(i) requiring M+C organizations to maintain and 
monitor a network of appropriate providers, supported by written 
agreements sufficient to certify beneficiary access to covered 
services. The CBRR shaped the access to (and continuity of) specialist 
services text in Sec. 422.112(a), as well as provisions for provider 
credentialing and timeliness of access, among other consumer 
protections. We also include a provision at Sec. 422.112(a)(4)(vii)for 
M+C organizations to ensure ``cultural competency'' in the provision of 
health care. This provision reflects CBRR recommendations that M+C 
organizations make a particular effort to ensure that enrollees with 
limited English proficiency, limited education, or other socioeconomic 
disadvantages receive the health care to which they are entitled.
    The Consumer's Bill of Rights and Responsibilities also recommends 
that women be able to choose a women's

[[Page 34990]]

health care specialist within network for the provision of routine and 
preventive women's health care services. In support of this 
recommendation, Sec. 422.112(a)(1)(iii)(A) requires M+C network plans 
to provide direct access to a women's health specialist within the 
network for routine and preventive women's health care services 
provided as basic benefits, as defined in Sec. 422.2. We note that 
coverage of routine and preventive health services under original 
Medicare is limited. For example, original Medicare covers a screening 
pap smear and a screening pelvic exam, including a clinical breast 
exam, once every 3 years under normal circumstances. M+C plans must 
cover routine and preventive health services with at least the same 
frequency as they are covered under original Medicare and may offer 
expanded services in these areas as additional benefits.
    M+C plans satisfy the requirement in Sec. 422.112(a)(1)(iii)(A) by 
providing direct access to gynecologists, certified nurse midwives, and 
other qualified health care providers for provision of routine and 
preventive women's health services. At the same time, M+C plans are 
required to provide women enrollees with continued access to their 
primary care physician to ensure continuity of care. We welcome 
comments on this issue.
    In Sec. 422.112(a)(1)(iii)(B), we require that plans have HCFA-
approved procedures--
     To identify Medicare enrollees with complex or serious 
medical conditions;
     For assessment of those conditions, including medical 
procedures to diagnose and monitor them on an ongoing basis; and
     For establishment and implementation of a treatment plan 
appropriate to those conditions, with an adequate number of direct 
access visits to specialists to accommodate the treatment plan. To meet 
these requirements and those of Sec. 422.112(a)(5)(v)(A), M+C plans 
must conduct a baseline and establish a treatment plan for people with 
complex or serious medical conditions. This assessment should be 
completed within timeframes deemed appropriate by M+C plans based on 
the needs of its enrollees, but, in general, should occur within 90 
days of the effective date of enrollment.
    Section 422.112(a)(5)(v)(A) also requires M+C plans to conduct a 
baseline health assessment for all new Medicare enrollees (i.e., not 
limited to those with complex or serious medical conditions) in a 
timely manner. We believe that this initial assessment should also be 
performed based on timelines deemed appropriate by the plan, but not 
later than 90 days after the effective date of enrollment. We welcome 
comments regarding timely baseline assessments both for new enrollees 
and those with complex or serious medical conditions.
    Note that, as indicated in the heading of Sec. 422.112(a), some 
access provisions apply only to network organizations, (i.e., 
coordinated care plans and network MSAs), while others 
(Sec. 422.112(b)) apply to all M+C organizations.
    Section 422.112(b) states that M+C organizations must provide 
coverage of emergency services and urgently needed services even in the 
absence of the organization's prior approval and without regard to the 
provider's contractual relationship with the M+C organization. For 
definitions of emergency and urgently needed services, see Sec. 422.2.
    This section continues the prohibition at Sec. 417.414(c)(1) on 
prior authorization requirements for emergency services as explicitly 
provided by 1852(d) and continues the Sec. 417.414(c)(1) regulatory 
prohibition on prior authorization requirements for urgently-needed 
services. This section also establishes a prohibition on prior 
authorization requirements for emergency services provided within the 
plan because the prohibition on prior authorization at section 1852(d) 
applies to services provided both within and outside the organization.
    Consistent with the new definition of ``emergency medical 
condition'' in section 1852(d)(3)(B), we are codifying longstanding 
HMO/CMP Manual policy (Sec. 2104) of prohibiting retrospective denial 
for services which appeared, to the prudent layperson, to be 
emergencies, but which turn out to be nonemergency in nature.
    We are establishing that when a physician or other representative 
affiliated with the organization instructs the enrollee to seek 
emergency services within or outside the organization, the organization 
is responsible for payment for medically necessary emergency services 
provided to the enrollee.
    We are codifying in regulation an HMO/CMP Manual policy (Sec. 2104) 
specifying that the decision of the examining physician treating the 
individual enrollee prevails regarding when the enrollee may be 
considered stabilized for discharge or transfer.
    We are establishing limits on cost-sharing for emergency services 
obtained outside of the M+C plan's provider network equal to of the 
lesser of $50 or what the organization may charge for emergency 
services provided within the plan's provider network. We are imposing 
this requirement in order to facilitate and ensure access to covered 
emergency services provided other than through the organization. We do 
not view this requirement as overly burdensome. A review of 1997 data 
on what Medicare HMOs and CMPs charged for emergency services found 
that 93 percent of contracts charged $50 or less. We believe that it 
may be appropriate to lower this limit or eliminate cost-sharing 
altogether, and would welcome comments on this subject.
    Note that an M+C organization's failure to provide medically 
necessary emergency services could result in intermediate sanctions for 
failing to provide coverage, or payment, or through actions (such as a 
prospective refusal of payment) that could result in discharge or 
transfer of an unstabilized patient. The new coverage requirements for 
M+C enrollees do not affect the rights of all persons (whether or not 
they are Medicare beneficiaries) to receive emergency services at any 
Medicare-participating hospital that offers emergency services (under 
the patient ``anti-dumping'' statute in section 1867).
11. Access to Services Under an M+C Private Fee-for-Service plan 
(Sec. 422.114)
    In the case of an M+C organization that offers an M+C private fee-
for-service plan, that organization must demonstrate that it has a 
sufficient number and range of providers willing to furnish items and 
services under the plan. An M+C organization meets this requirement if, 
with respect to a particular category of providers, the organization 
has:
     Payment rates that apply under original Medicare for the 
provider and service in question;
     Contracts or agreements with a sufficient number and range 
of providers to furnish the items and services covered under the M+C 
private fee-for-service plan; or
     A combination of the two.
    Additionally, an M+C private fee-for-service plan must permit 
enrollees to obtain items and services from any entity that is 
authorized to provide items and services under Medicare Parts A and B 
and agrees to provide services under the terms of the M+C private fee-
for-service plan. For a fuller discussion of M+C private fee-for-
service plans, see section IV of this preamble.
12. Confidentiality and Accuracy of Enrollee Records (Sec. 422.118)
    M+C organizations are required to safeguard the confidentiality and

[[Page 34991]]

accuracy of enrollee records that identify a particular enrollee, 
including both medical documents and enrollment information. An M+C 
organization may circulate this information within the organization to 
coordinate care for a Medicare enrollee. The M+C organization may not, 
however, circulate this information outside the organization without 
specific authorization from the Medicare enrollee. M+C organizations 
are prohibited from selling (or circulating outside the organization) 
names and addresses of enrollees for any purpose, including scientific 
study.
    Additionally, the M+C organization must maintain records in an 
accurate and timely manner and ensure timely access to enrollees who 
wish to examine their records. Moreover, the M+C organization must 
abide by all Federal and State laws regarding confidentiality and 
disclosure for mental health records, medical records, other health 
information, and enrollee information.
13. Information on Advance Directives (Sec. 422.128)
    Advance directives are documents signed by a patient that explain 
the patient's wishes concerning a given course of medical care should a 
situation arise where he or she is unable to make these wishes known. 
The M+C organization is responsible for documenting advance directives 
in a prominent part of the Medicare beneficiary's medical record. 
Accordingly, pursuant to our authority in section 1856(b)(1) and (2) to 
establish M+C standards, we are retaining for M+C organizations the 
requirements that applied to HMOs and CMPs under part 417.
14. Protection Against Liability and Loss of Benefits (Sec. 422.132)
    Each M+C organization must adopt and maintain satisfactory 
arrangements to protect Medicare enrollees from incurring liability for 
payment of any fees that are the legal obligation of the M+C 
organization. By reference in Sec. 417.407(f) (implementing regulations 
for section 1876), enrollee protections described in Sec. 417.122 are 
unchanged by the BBA, and their application to M+C organizations are 
carried forward in this section.
    Medicare law requires that Medicare contracting M+C organizations 
make Medicare covered services ``available and accessible.'' Section 
1852(d)(1), in describing access to services, allows M+C organizations 
to select the providers from whom benefits may be obtained so long as 
``the organization makes such benefits available and accessible to each 
individual electing the plan within the plan service area with 
reasonable promptness * * * '' We believe these sections require health 
plans to provide the same accessibility afforded by HCFA to 
beneficiaries under original Medicare.

D. Quality Assurance

1. Overview
    Subpart D of part 422 contains the quality assurance requirements 
for M+C organizations. These requirements implement and are based on 
the provisions of section 1852(e) of the Act. They also incorporate the 
requirements of section 1851(d)(4)(D), which provides that the 
information made available to Medicare beneficiaries for plan 
comparison purposes should include plan quality and performance 
indicators, to the extent available. Section 1852(e)(1) sets forth the 
general rule that each M+C organization must establish an ongoing 
quality assurance program, consistent with implementing regulations, 
for the health care services it provides to enrollees in the 
organization's M+C plans. The rest of section 1852(e) contains the 
required elements of the quality assurance program, requirements for 
external review, and provisions concerning the use of accreditation 
organizations to determine compliance with the quality assurance 
requirements.
    The provisions of section 1852(e) represent a significant expansion 
in the scope of the statutory quality assurance provisions applicable 
to managed care organizations that contract with the Medicare program. 
Existing section 1876(c)(6) contains a general requirement similar to 
that of section 1852(e)(1) that an organization must have a quality 
assurance program, but it provides very limited guidance as to the 
nature of this program. The only required elements of a quality 
assurance program under section 1876(c)(6) are that it stress health 
outcomes and include physician review of the procedures used in the 
provision of health care services. Like section 1876(c)(6), existing 
quality assurance regulations (Sec. 417.418 and, by reference, 
Sec. 417.106(a)) contain few detailed requirements concerning quality 
assurance. The regulations basically restate the statutory requirements 
relating to health outcomes and physician review and then add two broad 
requirements regarding data collection and the need for written 
procedures for taking remedial action.
    In contrast, section 1852(e) sets forth a series of specific 
elements that now must be addressed in an M+C organization's quality 
assurance program. As discussed in detail below, these requirements 
focus on the need for an M+C organization, with respect to each M+C 
plan that it offers, to operate an outcome-oriented quality assessment 
and performance improvement program that achieves demonstrable 
improvements, across a broad spectrum of care and services, in the 
health, functional status, and satisfaction of its enrollees. (Note 
that some of the specific performance improvement requirements of the 
statute do not apply to M+C non-network MSA plans or PFFS plans, as 
addressed under Sec. 422.152(e).) The collection, evaluation, and 
reporting of the data necessary to demonstrate quality improvements are 
also critical elements of each M+C organization's quality-related 
responsibilities.
2. Origins of the Quality Assessment and Improvement Requirements
    The regulations to implement sections 1852(e)(1) and (2) and 
section 1851(d)(4)(D) incorporate each of the explicit statutory 
requirements into new subpart D. Consistent with our explicit statutory 
authority under section 1851(e), these regulations include additional 
detail to clarify how an M+C organization can meet the statutory 
requirements. Like Congress, we recognize that the state of the art in 
quality assurance has evolved from a problem-focused approach, with an 
emphasis on remedial action, to a proactive approach aimed at achieving 
continuous, systemic quality improvement. In recent years, HCFA, the 
States, and other managed care purchasers have been involved in a 
series of initiatives aimed at improving the quality of care and 
services provided to managed care enrollees. Examples of such efforts 
include:
     The Quality Assurance Reform Initiative (QARI), which 
developed and tested standards for States to use in monitoring and 
improving quality in Medicaid contractors, with a particular emphasis 
on plans' own internal quality improvement efforts.
     Uniform data collection and reporting instruments, such as 
the Health Plan Employer Data and Information Set (HEDIS 3.0), which 
was developed by the National Committee for Quality Assurance (NCQA). 
Use of HEDIS 3.0 is now a contract requirement for Medicare risk-based 
managed care plans, under section 1876 and is intended to allow 
assessment and comparison of plan performance.
     Projects to enhance the role of Medicare Peer Review 
Organizations (PROs) in evaluating and improving managed care plan 
quality, including

[[Page 34992]]

the development and testing of a minimum set of performance evaluation 
measures and quality improvement projects developed through 
collaboration between PROs and managed care organizations. States have 
undertaken similar efforts through Medicaid External Quality Review 
Organizations (EQROs).
    Among the most comprehensive of recent quality-related initiatives 
is the Quality Improvement System for Managed Care (QISMC). During the 
past 2 years, HCFA has been working closely with other Federal and 
State officials, as well as representatives of beneficiary advocacy 
groups and the managed care industry, to develop quality standards that 
can better ensure that managed care organizations that contract with 
HCFA protect and improve the health and satisfaction of their 
enrollees. QISMC is the product of these efforts. Originally drafted 
based on the authority of section 1876, it builds on a variety of 
recent HCFA and State efforts, like those mentioned above, to promote 
the assessment and improvement of managed care quality. The QISMC 
standards are in the final stages of development at this time and are 
being modified to reflect the quality-related requirements under the 
BBA. Once QISMC is complete, we believe it will offer a uniform set of 
quality standards that can be used by HCFA and the State Medicaid 
agencies to determine whether a managed care organization can meet the 
quality assurance requirements necessary to become and remain eligible 
to enter into a Medicare or Medicaid contract.
    The QISMC initiative is substantially in accord with the quality 
assurance requirements of new section 1851(e). For example, both the 
statutory requirements and the QISMC quality standards emphasize 
measurement of health outcomes, consumer satisfaction, the 
accountability of managed care organizations for achieving ongoing 
quality improvement, the need for intervention to achieve this 
improvement, and the importance of data collection, analysis, and 
reporting. Moreover, as noted above, representatives of all segments of 
the managed care community have contributed to the development of 
QISMC, and generally support HCFA's intention to eventually require 
managed care organizations to meet the QISMC standards. Given the 
shared goals of the BBA and QISMC standards, and HCFA's implementation 
plans for QISMC, we believe it is appropriate to establish new M+C 
quality assurance regulations that reflect those QISMC standards that 
mirror the intent of the statute. Although we have not included in the 
regulations the level of detail embodied in QISMC, we have attempted to 
build into the regulations some principles from QISMC that can guide 
M+C organizations in meeting the quality requirements established by 
the statute. For example, Sec. 422.152(d) establishes objective 
standards concerning the improvement projects that are required of M+C 
organizations, in accordance with the statutory requirements concerning 
an organization's responsibility to take action to improve quality 
(such as section 1852(e)(2)(A)(xi) of the Act.
    Although QISMC remains an evolving document, several of the 
discussions below of the ways in which organizations can meet the M+C 
quality requirements are informed to some degree by the underlying 
details contained in QISMC. Also, as discussed below, we anticipate 
that requirements pertaining to a plan's quality assessment and 
performance improvement responsibilities may be implemented as part of 
the M+C contracting process. QISMC standards may be a guide in 
implementing the requirements in the BBA and these regulations. 
Eventually, we believe QISMC can serve to define what HCFA's 
expectations are with regard to an M+C organization's quality 
assessment and improvement responsibilities. (A copy of the most recent 
version of QISMC is available at HCFA's website, www.hcfa.gov/quality/
qlty-3e.htm.)
3. Quality Assessment and Performance Improvement Requirements 
(Sec. 422.152)
    This section of the regulation implements paragraphs (e)(1) and (2) 
of section 1852. Subject to certain exceptions for M+C PFFS and non-
network MSA plans, which are discussed below, the statute requires that 
an organization's quality assurance program meet the following 
requirements with respect to each plan that it offers:
    (i) Stress health outcomes and provide for the collection, 
analysis, and reporting of data (in accordance with a quality 
measurement system that HCFA recognizes) that will permit measurement 
of outcomes and other quality indices.
    (ii) Monitor and evaluate high-volume and high-risk services and 
the care of acute and chronic conditions.
    (iii) Evaluate the continuity and coordination of the care that 
enrollees receive.
    (iv) Be evaluated on an ongoing basis as to its effectiveness.
    (v) Include measures of consumer satisfaction.
    (vi) Provide HCFA access to the information it needs to monitor and 
ensure the quality of the care provided.
    (vii) Provide for physicians and other health care professionals to 
review the process followed in providing health care services.
    (viii) Establish written protocols for utilization review, based on 
current standards of medical practice.
    (ix) Have mechanisms to detect both underutilization and over 
utilization of services.
    (x) Establish or alter practice parameters when areas needing 
improvement are identified.
    (xi) Take action to improve quality and assess the effectiveness of 
that action through systematic follow-up.
    (xii) Make available to HCFA information on quality and outcomes 
measures to facilitate beneficiary comparisons and choice of health 
care options (in such form and on such quality and outcomes measures as 
HCFA determines is appropriate).
    As noted above, section 1852(e)(1) also requires that the 
organization's quality assurance program be consistent with any 
regulation developed by HCFA. Therefore, Sec. 422.152 reflects the 
statutory requirements listed above, as well as those implementing 
requirements that are consistent with, and necessary to accomplish, the 
intent of the Act. While certain requirements in section 1852(e)(2) 
that expressly refer to ``improvement'' in quality do not apply to all 
types of M+C plans, we believe that all of the requirements in section 
1852(e) are geared toward improving quality, not simply monitoring it. 
For this reason, we are using the term ``quality assessment and 
performance improvement program'' to refer to the program that is 
required of all M+C plans, which section 1852(e)(1) refers to as a 
``quality assurance program.'' We accordingly use the term ``quality 
assessment and performance improvement program'' in the heading of 
Sec. 422.152 and in the general rule at Sec. 422.152(a).
    a. Requirements for M+C Coordinated Care Plans and Network MSA 
Plans. Sections 422.152(b) through (d) set forth requirements that M+C 
organizations must meet with respect to M+C coordinated care plans and 
network MSA plans. As alluded to above, as directed by section 1852(e), 
these requirements reflect a departure from the problem-focused 
approach to ensuring quality that was prevalent in the past. Thus, 
under these regulations, it will no longer be sufficient for 
organizations to identify and correct problems in their operations--
they must now focus on systemic quality

[[Page 34993]]

improvement as well. This approach is also consistent with HCFA's 
responsibility to demand value in the form of positive outcomes from 
the organizations with which we contract.
    To implement this approach, Sec. 422.152(b) establishes two basic 
quality assessment and performance improvement requirements: (1) 
measurement and reporting of performance; and (2) conducting 
performance improvement projects that achieve, through ongoing 
measurement and intervention, demonstrable and sustained improvement in 
significant aspects of both clinical care and nonclinical care areas 
that can be expected to affect health outcomes and member satisfaction. 
The specific requirements associated with the measurement and reporting 
of performance and the execution of performance improvement projects 
are set forth under Sec. 422.152(c) and (d), as discussed in detail 
below. Before turning to that discussion, however, we note that 
Sec. 422.152 also incorporates statutory requirements from section 
1852(e)(2)(viii), (ix), and (xii), as listed above, concerning written 
utilization review protocols, the identification of underutilization 
and overutilization of services, and the availability of information on 
quality and outcome measures as needed to facilitate beneficiary 
comparisons and choices among M+C plans.
    b. Performance Measurement and Reporting. Section 422.152(c) 
elaborates on paragraph (b)(1) by requiring that the organization: (1) 
measure and report its performance to HCFA using measures required by 
HCFA, and (2) for M+C coordinated care plans, achieve any minimum 
performance levels that may be established locally, regionally, or 
nationally by HCFA. The first requirement is based directly on the 
requirement under section 1852(e)(2)(A)(i) of the Act concerning 
outcome measurement and reporting. Thus, it applies both to M+C 
coordinated care plans and network MSA plans (as well as to M+C non-
network MSA plans and PFFS plans, as discussed below in section 
II.D.2.d of the preamble). The second requirement enables HCFA to 
evaluate a plan's ability to meet the objectives of sections 
1852(e)(2)(A)(x) and (xi) of the Act concerning quality assessment and 
improvement. It also reflects HCFA's responsibility to require that the 
services we purchase meet minimum quality standards. (We note that 
although the requirements of sections 1852(e)(2)(A)(x) and (xi) of the 
Act apply to M+C network MSA plans as well as to M+C coordinated care 
plans, we are not requiring in this interim final rule that M+C network 
MSA plans achieve minimum performance levels. In keeping with the 
demonstration status of the M+C MSA plans, we intend to evaluate the 
performance of these plans in the context of the evaluation provisions 
of section 1851(b)(4)(B) of the Act.)
    Health plan performance measurement and reporting is in its early 
stages. Consensus regarding what aspects of plan performance can and 
should be measured, how this information should be reported, how it 
should be audited, and which measures are collectible for which types 
of organizations, is only now being developed. HCFA, large private 
purchasers, managed care organizations, and others have made important 
progress in defining and measuring health plan performance. This 
regulation must move us toward enhancing health plan accountability 
while leaving flexibility for the specific reporting and performance 
requirements to progress as we learn more about performance 
measurement. We want to be able to respond rapidly to new developments 
in the state of the art of quality measurement and improving 
performance levels.
    We do not intend to adopt a ``one size fits all'' approach that 
assumes that reporting under all types of M+C plans will be possible in 
the same manner for all measures. We will balance our efforts to 
increase uniformity to facilitate consumer comparison of plans with 
sensitivity to the different organizational structures of plans and 
their different abilities to affect provider behavior.
    In general, an M+C organization should not be held accountable for 
improving services that it does not promise to provide under a plan, 
nor for reporting information to which it does not reasonably have 
access under a plan. At the same time, an organization should be held 
accountable for improving plan performance with respect to the benefits 
provides under the M+C program and all applicable M+C standards, and 
for having the information needed to maintain and improve the quality 
of the services it delivers or arranges for. Organizations should be 
expected to improve their capacity to collect and analyze information 
about the delivery of M+C benefits, consistent with changes that are 
occurring in the health plan market place. We believe that Congress 
intended us to take the actions that any prudent purchaser would take 
to hold M+C organizations accountable for the benefits they promise to 
provide under a plan.
    For these reasons, we are not specifying the particular measures 
for which reporting will be required or the minimum performance levels 
that M+C coordinated care plans will be expected to achieve. Instead, 
the regulation clarifies the general clinical and nonclinical areas to 
be addressed by the performance reporting, such as effectiveness of 
care, use of services, and access to services. The performance measures 
to be reported and the minimum performance standards that the M+C plan 
or plans offered by an organization will be required to meet will be 
addresses on an organization and plan-specific basis, as described 
below.
    Section 422.152(c)(1) establishes that standard performance 
measures may be specified in data collection and reporting instruments 
required by HCFA. For example, as mentioned earlier, HCFA has already 
begun requiring reporting of standardized quality measurement data 
through instruments such as HEDIS  3.0, as well as 
reporting of standardized consumer satisfaction data through the 
Consumer Assessment of Health Plans Study (CAHPS). We expect that in 
contract year 1999, the standard performance measures for M+C 
organizations will include most HEDIS measures and a member survey, 
with the possibility of additional measures. (Where data on particular 
measures are not reasonably available with respect to a given plan, 
organizations can report ``not available''. HCFA will work with M+C 
organizations to identify those measures for which data are and are not 
reasonably available for a given plan.) To the extent that we do 
include HEDIS measures, we will use the HEDIS measurement 
specifications. Before the beginning of the next contract year, we will 
decide on the measures on which reporting will be required for contract 
year 1999 and will notify organizations of those measures through the 
contracting process.
    We expect to develop a core set of measures on which reporting will 
be required under all plans. We also expect to identify additional 
reporting requirements to reflect the plan's characteristics (such as 
supplemental benefits, type of delivery system) and past performance.
    In adopting minimum performance requirements for coordinated care 
plans, we intend to ensure that the targets are achievable, meaningful, 
and equitable. We intend to move toward minimum uniform national 
performance standards

[[Page 34994]]

based on what plans across the nation are able to achieve.
    We expect to start with standards that are adjusted to reflect 
performance in the plan's region and the individual plan's or 
organization's historical performance (or performance in Medicare fee-
for-service where the plan has no history). Performance requirements 
will be established only for measures for which there are sufficient 
historical data available to establish regional standards based on 
actual performance of a number of plans. (We will therefore require 
reporting on measures for which performance standards have not been 
established.) Other criteria will also guide the selection of measures 
for which minimum performance levels will be established, including 
their significance for the health of the enrolled population under a 
plan and the likelihood that they fairly reflect the organization's 
performance.
    Because the process of identifying achievable, meaningful and 
equitable minimum performance levels will require a significant amount 
of data collection and analysis, we expect that it will be several 
years before a full complement of minimum performance levels can be 
established. At this point, it is uncertain whether any minimum 
performance levels will be established for the 1999 contract year. We 
will identify minimum performance levels on a measure by measure basis, 
after evaluating baseline data and the distribution of organization 
performance and considering potential opportunities for improvement. 
The process of identifying minimum performance levels will evolve as 
new methods of performance measurement develop.
    HCFA is committed to public involvement in the selection of 
measurement topics. HCFA will also work collaboratively with 
organizations involved with quality and performance standards and 
measurements, including performance measurement experts, health plans, 
public and private purchasers and beneficiary representatives in the 
selection of specific measures and setting of minimum performance 
levels. As we develop minimum performance standards, we will consider 
how our goal of maintaining maximum consumer choice in the M+C program 
should affect our expectations concerning plan performance.
    When we have identified minimum performance levels, we plan to 
establish them prospectively upon contract initiation and renewal, so 
that an organization will have the entire contract year in which to 
take action to meet them. By the end of the contract year, the 
organization must meet any identified minimum performance levels. In 
some cases, we believe that the next contract year will have already 
begun by the time HCFA learns whether the organization has met the 
minimum performance levels established for the previous year. 
Therefore, we specify that HCFA may decline to renew an organization's 
contract in the year that HCFA determines that the organization failed 
to meet the minimum performance levels, even if the failure itself was 
in the prior contract year.
    c. Performance Improvement Projects. Section 422.152(d) establishes 
the requirements for performance improvement projects, beginning with 
the requirement that performance improvement projects focus on 
specified areas of clinical and nonclinical services. It also explains 
that HCFA will set M+C organizational and plan-specific requirements 
for the number and distribution of these projects among the required 
areas. In addition, it authorizes HCFA to direct an M+C organization to 
undertake specific performance improvement projects and participate in 
national and State-wide performance improvement projects. Section 
422.152(d) reflects many of the provisions of section 1852(e)(2) of the 
statute, including for example the requirements for projects in areas 
such as high-volume and high-risk services and continuity and 
coordination of care (sections 1852(e)(2)(A)(ii) and (iii), 
respectively).
    Section 422.152(d)(1) explains what is meant by a project. All 
projects must involve the measurement of performance, system 
interventions (including the establishment or alteration of practice 
parameters), improving performance, and systematic follow-up on the 
effect of the interventions.
    Section 422.152(d)(2) requires that projects address the entire 
population to which the performance measure is relevant. Thus, once a 
topic has been selected, the organization must assure that its 
measurement and improvement efforts are at least plan-wide. (Note that 
we do not intend to prohibit an M+C organization from conducting 
performance improvement projects that would cut across plans.) We 
expect that, to the extent feasible, each project should reach all 
enrollees and providers in the plan network who are involved in the 
aspect of care or services to be studied. This does not mean that a 
project must involve review of the performance of each provider who 
furnishes the services that are the subject of the project, or that it 
must survey every affected enrollee. Sampling is acceptable if the 
organization can demonstrate that its samples are genuinely random. An 
organization could do so by showing, for example that:
     Each relevant provider and enrollee has a chance of being 
selected; no provider or enrollee is systematically excluded from the 
sampling.
     Each provider serving a given number of enrollees has the 
same probability of being selected as any other provider serving the 
same number of enrollees.
     Providers and enrollees who were not included in the 
sample for the baseline measurement have the same chance for being 
selected for the follow-up measurement as providers and enrollees who 
were included in the baseline.
    Section 422.152(d)(3) states that HCFA will establish M+C 
organizational and M+C plan-specific obligations for the number and 
distribution of projects among the required clinical and non-clinical 
areas. Sections 422.152(d)(4) and (5) then specify the minimum clinical 
and nonclinical focus areas that must be addressed through these 
projects. These minimum focus areas are:
     Clinical areas--prevention and care of acute and chronic 
conditions; high volume services and high risk services; continuity and 
coordination of care.
     Nonclinical areas: appeals, grievances, and other 
complaints; access and availability of services.
    Note that these areas represent minimum requirements, and 
organizations are likely to carry out projects in other areas in order 
to meet their contractual performance improvement obligations. The 
length of the performance improvement cycle, that is, the period of 
time during which an organization must conduct a project that 
demonstrates improvement in each of the required focus areas, will be 
one of the contractual performance improvement obligations. Within each 
clinical and nonclinical focus area, an organization will have 
considerable freedom to select its own particular topics for 
measurement and improvement, so that it can initiate projects relating 
to aspects of care and services that are significant for its plan-
specific population. Our goal is to achieve a balance between 
encouraging flexibility and innovation and ensuring that every 
organization conducts meaningful projects over a broad spectrum of care 
and services. As noted above, however, there may be instances where it 
is necessary for HCFA to direct the organization to address a specific

[[Page 34995]]

topic within a given focus area. Thus, Sec. 422.152(d)(6)(i) provides 
that, in addition to requiring that an organization initiate its own 
performance improvement projects, HCFA may direct an organization to 
conduct particular performance improvement projects that are specific 
to the organization. We believe this could be necessary, for example, 
when an organization demonstrates a significant weakness in a 
particular performance area, but the area is not addressed in the 
organization's own performance improvement projects. Similarly, 
Sec. 422.152(d)(6)(ii) provides that HCFA may require an organization 
to participate in national or statewide performance improvement 
projects. These performance improvement projects would focus on aspects 
of care that we believe are of high priority, and would be designed by 
HCFA (or possibly by other entities, such as the external quality 
review organizations affiliated with Medicaid managed care 
organizations).
    In general, we believe that when an organization initiates a 
project, the clinical or nonclinical issue selected for study should 
affect a substantial portion of the plan's M+C enrollees (or a 
specified subpopulation of enrollees) and have a potentially 
significant impact on enrollee health, functional status, or 
satisfaction. There may be instances in which less frequent conditions 
or services warrant study, as when data show a pattern of unexpected 
adverse outcomes; however, the prevalence of a condition or volume of 
services involved should be sufficient to permit meaningful study.
    A project topic may be suggested by patterns of inappropriate 
utilization--for example, frequent use of the emergency room by 
enrollees with a specific diagnosis. However, the project should be 
focused clearly on identifying and correcting deficiencies in care or 
services that might have led to this pattern, such as inadequate access 
to primary care, rather than on utilization and cost issues alone. This 
is not to say that an organization may not make efforts to address 
overutilization, but only that such efforts may not meet the 
requirements of Sec. 422.152, unless the primary objective is to 
improve outcomes. Thus, it would be acceptable for a project to focus 
on patterns of overutilization that present a clear threat to health or 
functional status, for example, a high risk of iatrogenic problems or 
other adverse outcomes.
    Because the achievement of demonstrable improvement is a central 
criterion in the evaluation of projects, the projects should 
necessarily address areas in which meaningful improvement can be 
effected through system interventions by the organization. Thus, 
organizations should focus on areas in which there is significant 
variation in practice and resulting outcomes within a plan, or in which 
performance as a whole falls below acceptable benchmarks or norms.
    Organizations are encouraged to undertake complex projects or 
innovative projects that have a high risk of failure but that offer 
potential for making a significant difference in the health or 
functional status of enrollees. We recommend that M+C organizations 
look to the independent quality review and improvement organizations 
with which they have agreements (see the discussion below about the 
external review requirements of Sec. 422.154) for assistance in 
designing and executing performance improvement projects.
    Section 422.152(d)(7) requires that an organization assess 
performance for each project using one or more quality indicators, that 
are objective, clearly defined, and based on current clinical knowledge 
or health services research. In accordance with the emphasis section 
1852(e)(2)(A)(i) places on outcomes, the regulation requires that the 
quality indicators measure outcomes such as changes in health status, 
functional status, and enrollee satisfaction, or measure valid proxies 
of these outcomes. We recognize that relatively few existing 
standardized performance measures actually address outcomes. For 
example, of the 16 effectiveness measures in HEDIS 3.0, only one 
(health of seniors) is truly outcome-based. Even when outcome measures 
are available, their utility as quality indicators for projects may be 
limited if the outcomes are dictated largely by factors outside the 
organization's control.
    Therefore, we do not require that quality indicators be limited to 
outcome measures. Process measures are acceptable so long as the plan 
can show that they are valid proxies, that is, there is strong clinical 
evidence that the process being measured is meaningfully associated 
with outcomes. To the extent possible, this determination should be 
based on published guidelines that support the association and that 
cite evidence from randomized clinical trials, case control studies, or 
cohort studies. An M+C organization may furnish its own similar 
evidence of association between a process and an outcome, as long as 
this association is not contradicted by a published guideline. Although 
published evidence is generally required, there may be certain areas of 
practice for which empirical evidence of process/outcome linkage is 
limited. At a minimum, an organization should be able to demonstrate 
that there is a consensus among relevant practitioners as to the 
importance of a given process.
    While we consider enrollee satisfaction an important aspect of 
care, improvement in satisfaction may not be the sole demonstrable 
outcome of a project in any clinical focus areas. Some improvement in 
health or functional status must also be measured. (Note that this 
measurement can rely on enrollee surveys that address topics in 
addition to satisfaction. For example, self-reported health status may 
be an acceptable indicator.) For projects in the nonclinical areas, use 
of health or functional status indicators is generally preferred, 
particularly for projects addressing access and availability. However, 
there may be some nonclinical projects for which enrollee satisfaction 
indicators alone are sufficient.
    Section 422.152(d)(8) requires that performance assessment be based 
on systematic, ongoing collection and analysis of valid and reliable 
data. Data will most commonly be derived from administrative data 
generated by an organization's health information system or from review 
of medical records. (In assessing nonclinical services, other sources 
such as enrollee or provider surveys may be appropriate.) When data are 
derived from the health information system, their reliability is 
obviously a function of the general reliability of the system. When 
data are derived from direct review of medical records or other primary 
source documents, steps must be taken to assure that the data are 
uniformly extracted and recorded. Appropriately qualified personnel 
must be used; this will vary with the nature of the data being 
collected and the degree of professional judgment required. We expect 
there to be clear guidelines or protocols for obtaining and entering 
the data; this is especially important if multiple reviewers are used 
or if data are collected by multiple subcontractors. Inter-reviewer 
reliability should be assured through, for example, repeat reviews of a 
sample of records.
    Section 422.152(d)(9) requires that interventions achieve 
improvement that is significant and sustained over time. In general, we 
will judge improvement to be significant when a benchmark level of 
performance is achieved in the percentage of enrollees who exhibit a 
negative outcome defined by the indicator.
    Again, specific acceptable performance measures will be defined for 
each M+C organization and M+C

[[Page 34996]]

plan. Currently, we are considering requiring a 10 percent reduction in 
negative outcomes as evidence of significant improvement. An 
organization would meet this requirement if, for example, its flu 
immunization rate under a plan is 80 percent in the baseline and 
increases to 82 percent, because the percentage of enrollees not 
immunized has dropped from 20 percent to 18 percent, a 10 percent 
reduction. A plan whose baseline rate was 60 percent would have to 
reach 64 percent (a reduction in nonimmunized enrollees from 40 percent 
to 36 percent).
    We are considering requiring a 10 percent reduction in adverse 
outcomes as evidence of significant improvement for several reasons. 
First, the use of a constant percentage reflects the likelihood that 
change is harder to achieve when an organization's baseline performance 
is already superior. Thus, under a plan with an 80 percent immunization 
rate, we would expect a 2 percentage point improvement, while under a 
plan with a 60 percent rate, a 4 percentage point improvement would be 
expected. Second, the 10 percent level is consistent with results HCFA 
has observed in successful improvement projects sponsored by the 
agency. Finally, we believe that smaller improvements would generally 
be of little clinical significance. We invite comment on the issue of 
whether Sec. 422.152(d)(9) should be revised to provide for a 10 
percent reduction in adverse outcomes.
    Note that improvement in an indicator is not necessarily the same 
as improvement in the health or functional status of enrollees. For 
example, the ``health of seniors'' indicator under HEDIS 3.0 will 
track, over time, changes in the functional status of elderly 
enrollees. Each enrollee's functional status may remain stable or 
actually decline. However, an organization would demonstrate 
improvement on the indicator if it slowed the rate of decline, whether 
or not it actually improved enrollees' functional status. HCFA is 
considering judging improvement to be sustained under a plan if it can 
be demonstrated through continued measurement that performance gains 
have endured for at least one year.
    We recognize that many organizations still have limited experience 
in conducting well-designed performance improvement projects, and that 
any given project may take some time to produce measurable improvement. 
Therefore, we intend to permit a gradual phase-in of the number of 
focus areas for which improvement must be demonstrated consistent with 
the individual circumstances of an M+C organization.
    Section 422.152(d)(10) concludes the performance improvement 
requirements by providing explicitly that an organization must report 
the status and results of each project to HCFA upon request. This 
requirement is necessary to implement the reporting requirements 
embodied in sections 1852(e)(2)(A)(vi) and (xii) and 1851(d)(4)(D) and 
(d)(7), which call for HCFA to make available to M+C eligible 
individuals information comparing M+C plan options, including 
information on quality and performance.
    d. Requirements for M+C Private Fee-for-Service and Non-Network MSA 
Plans. In enacting the quality assurance provisions of the BBA, 
Congress recognized that not all of the quality assessment and 
performance improvement activities that are appropriate for a plan with 
a defined provider network would be appropriate for an M+C non-network 
MSA plan or an M+C private fee-for-service plan. (Section 1852(e)(2)(C) 
defines a non-network MSA plan as an MSA plan that does not provide any 
of the covered benefits through a defined set of providers under 
contract to the organization or under arrangements made by the 
organization, and we have incorporated this provision into 
Sec. 422.4(a)(2)(ii).) As a result, section 1852(e)(2)(B) establishes 
different required elements of a quality assessment and performance 
improvement program depending on the type of plan involved. 
Specifically, the Act exempts M+C non-network MSA and PFFS plans from 
the requirements of paragraphs (e)(2)(A)(vii) through (xii) of section 
1852, which include the utilization review requirements discussed above 
as well as the explicit requirement to take action to improve quality 
and assess the effectiveness of such action through systematic follow-
up. However, the statute continues to require that organizations 
offering these types of plans stress outcomes, provide for the data 
collection, analysis, and reporting necessary to measure outcomes, and 
monitor and ensure the quality of care they provide.
    Consistent with the statute, the specific requirements to achieve 
minimum performance levels and undertake performance improvement 
projects will not apply to M+C non-network MSA and PFFS plans. Both 
requirements are derived primarily from the statutory requirements from 
which these types of plans have been exempted (that is, sections 
1852(e)(2)(A)(x) and (xi). Instead, we have established separate 
requirements that apply for these types of plans under Sec. 422.152(e). 
These requirements parallel the requirements for other types of plans 
to the extent permitted under the statute. For example, 
Sec. 422.152(e)(1) requires that under these plans, an organization 
must measure its performance, using standard measures established or 
adopted by HCFA. These measures will focus on the prevention and care 
of acute and chronic conditions, high-volume and high-risk services, 
and enrollee satisfaction. We invite comment on whether additional 
areas for standard measures should be added to Sec. 422.152(e)(1). 
Section 422.152(e)(2) requires evaluation of the continuity and 
coordination of care that enrollees receive. Together, the requirements 
under Sec. 422.152(e)(1) and (2) reflect the requirements of paragraphs 
(e)(2)(A)(i), (ii), (iii), and (v) of section 1852.
    Sections 1852(e)(2)(B)(ii) and (iii) specify that if an M+C non-
network MSA or PFFS plan has written protocols for utilization review, 
those protocols must be based on current standards of medical practice, 
and have mechanisms to evaluate utilization services and inform 
providers and enrollees of the results of such evaluation. These 
requirements are incorporated into Sec. 422.152(e)(3).
    e. Requirements for All Plans: Health Information. In order to 
support the measurement of performance levels and the conduct of its 
performance improvement projects, if applicable, all plans must 
maintain a health information system that collects, analyzes, 
integrates, and reports data. This requirement is covered at 
Sec. 422.152(f). Although an encounter data system may often be the 
most efficient means of meeting the requirements of this standard, the 
plan may use any methods or procedures for the collection of quality 
data, so long as it can demonstrate that its system achieves the 
objectives of the requirement.
    The strategy of relying on performance measurement and performance 
standards to assess and improve quality is heavily dependent on the 
validity of the data collected and reported by plans. Therefore, 
Sec. 422.152(f)(1)(ii) requires that an organization ensure that the 
information received from its providers is reliable and complete. If 
the organization receives individual encounter data directly from 
providers, it must have a system for comparing reported data to a 
sample of medical records, to verify the accuracy and timeliness of 
reporting or transmission. The objective is to assure that, to the 
extent feasible, there is a

[[Page 34997]]

one-to-one correspondence between items included in an organization's 
summary data and specific services entered in medical records or 
equivalent source documents. (That is, no reported service was not 
performed, and no service performed was not reported.) If the 
organization receives aggregate information, instead of individual 
patient encounter reporting, from any provider, under a plan the 
organization must approve the provider's own system for collecting, 
recording, aggregating, and reporting the data, and must assure that 
the provider has its own mechanisms for validation. Identified 
deficiencies in reported data should be addressed through provider 
education or other corrective action. The organization's process for 
recredentialing or recontracting with practitioners and providers 
should specify the actions to be taken in the event of ongoing failure 
by a contractor to meet the organization's health information 
standards.
    In addition to requiring that the information collected be accurate 
and complete, Sec. 422.152(f)(1)(iii) requires that the organization 
make all information collected available to HCFA. This requirement 
reflects section 1852(e)(2)(A)(vi), which recognizes that HCFA cannot 
adequately monitor and ensure the quality of health care services 
without access to appropriate information. For example, access to this 
information will allow HCFA to validate the accuracy and completeness 
of the information and to evaluate performance improvement projects. 
Note that although HCFA may disclose whether an organization has met 
its requirements for performance improvement, we will not make public 
the results of an organization's performance improvement projects, as 
these results may involve enrollee-specific information.
    f. Program Review. Section 422.152(f)(2) requires that for each 
plan an organization have a process for formal evaluation, at a minimum 
annually, of the impact and effectiveness of the quality assessment and 
performance improvement program strategy. The evaluation should assess 
both the progress in implementing the strategy and the extent to which 
the strategy is in fact promoting the development of an effective 
quality assessment and performance improvement program. It should 
consider whether quality-related activities in the organization's 
workplan are being completed on a timely basis or whether commitment of 
additional resources is necessary. The evaluation should include 
recommendations for needed changes in program strategy or 
administration. These recommendations should be forwarded to and 
considered by the policymaking body of the organization. These 
requirements reflect the evaluation provisions of section 
1852(e)(2)(A)(iv).
4. External Review (Sec. 422.154)
    Section 1852(e)(3) requires, subject to the exceptions discussed 
below, that each M+C organization, for each M+C plan it operates, have 
an agreement with an independent quality review and improvement 
organization (review organization) approved by HCFA to perform 
functions of the type described in part 466 of chapter 42, which 
establishes review responsibilities for utilization and quality control 
Peer Review Organizations (PROs). This requirement appears in 
Sec. 422.154(a).
    PROs are physician-sponsored or physician-access organizations that 
review services ordered or furnished by other practitioners in the same 
professional field for the purpose of determining whether such services 
are or were reasonable or medically necessary, and whether the quality 
of such services meets professionally recognized standards of health 
care. Because PROs generally are already accomplished at the activities 
the statute requires of review organizations, HCFA will approve as 
review organizations the PROs and PRO-like entities who are currently 
under contract with HCFA to perform the functions of part 466. The 
current PRO contract will expire on March 31, 1999. The entities 
awarded the next contract, known as the Sixth Scope of Work, will be 
approved to serve as review organizations as of April 1, 1999.
    An important element of both the current and next contract is a 
strategy to continuously improve quality of care and strengthen the 
ability of health care organizations and practitioners to assess and 
improve their own performance. Under this strategy, known as the Health 
Care Quality Improvement Program, part 466 contractors use statistical 
information to examine medical processes and outcomes of health care 
and provide feedback to providers so that this information can be used 
to benchmark progress toward improved practice and outcomes.
    HCFA will establish guidelines for the agreements between M+C 
organizations and review organizations modeled on the guidelines found 
in part 466. The guidelines will specify that an M+C organization must 
allocate adequate space for the review organization to carry out its 
review (during the period of the review); and that the organization 
must provide enrollee care data and other pertinent data to the review 
organization on a timely basis as needed to facilitate making its 
determinations. These requirements appear in Sec. 422.154(b)(1).
    With respect to M+C non-network MSA and PFFS plans, for which 
utilization review is not a requirement, section 1852(e)(3)(A) of the 
statute exempts organizations from the requirement that there be an 
agreement with a review organization. Section 1852(e)(3)(B) also 
provides an exemption for review organization activities with respect 
to accredited plans that HCFA determines would be duplicative of 
activities conducted as part of the accreditation process. In the case 
of review of quality complaints, this exemption does not apply, 
however, and the requirement for investigation by the review 
organization would apply even with respect to an accredited plan. This 
exemption appears in Sec. 422.154(b)(2). While the statute only 
mandates that the Secretary exempt accredited plans from the 
duplicative review by review organizations, we believe that the same 
logic extends to review activities that would be duplicative of HCFA 
monitoring review. Thus, pursuant to our general authority under 
section 1856(b)(1) to establish standards under Part C, we are 
providing in Sec. 422.154(b)(2) that M+C organizations are also exempt 
from review by a review organization that would be duplicative of HCFA 
monitoring review.
    Under section 1852(e)(3)(C), HCFA may waive the requirement that an 
M+C organization have an agreement with a review organization if HCFA 
determines that an organization has consistently maintained an 
excellent record of quality assessment and performance improvement and 
compliance with the other requirements of this part. As discussed in 
detail above, Sec. 422.152 establishes requirements for a plan's 
quality assessment and performance improvement (QAPI) program. After 
the rule is effective, and HCFA has had the opportunity to assess QAPI 
implementation, we will be in a position to establish waiver criteria, 
which we intend to promulgate through notice and comment rulemaking.
5. Deemed Compliance Based on Accreditation (Secs. 422.156 Through 
422.158)
    a. Compliance Deemed on the Basis of Accreditation (Sec. 422.156). 
Section 1852(e)(4) gives HCFA the authority to deem that an M+C 
organization meets certain requirements if the M+C organization is 
accredited and

[[Page 34998]]

periodically reaccredited by a private organization under a process 
that HCFA has determined ensures that the M+C organization, as a 
condition of accreditation, meets standards that are no less stringent 
than the applicable HCFA requirements. We do not believe that HCFA 
could effectively determine whether a potentially unlimited number of 
small, regional accreditation organizations meet the standard in 
section 1852(e)(4). Section 422.156 accordingly limits the deeming 
provided for under section 1852(e)(4) to national accreditation 
organizations. National accreditation organizations are those that 
offer accreditation services that are available in every State to every 
organization wishing to obtain accreditation status.
    The process that HCFA will use to deem compliance with M+C 
requirements will mirror the process used for deeming compliance with 
fee-for-service requirements, because that process is equally 
applicable to the managed care setting. Therefore, many of the 
requirements of this section, as well as those in Secs. 422.157 and 
422.158, are essentially restatements of their fee-for-service 
equivalents in subpart A of part 488 of existing Medicare regulations.
    Section 422.156(a) specifies the conditions under which an M+C 
organization may be deemed to meet the HCFA requirements permitted to 
be deemed under section 1852(e)(4). (These requirements are identified 
in the regulations at Sec. 422.156(b).) The first condition is that the 
M+C organization be fully accredited (and periodically reaccredited) by 
a private, national accreditation organization approved by HCFA. Only 
full accreditation offers HCFA adequate assurance that the M+C 
organization meets the applicable HCFA requirements. M+C organizations 
that are conditionally or provisionally accredited (or the equivalent 
thereof) by their accreditation organization do not meet all of their 
accreditation organization's requirements, and for this reason, will 
not be deemed to meet the HCFA requirements. The second condition is 
that the M+C organization be accredited using the standards approved by 
HCFA for the purposes of assessing the M+C organization's compliance 
with Medicare requirements. Given that certain accreditation 
organizations have multiple accreditation processes (for example, other 
product lines aside from their Medicare product line), this requirement 
is necessary to ensure that only M+C organizations with the appropriate 
accreditation are deemed to meet HCFA requirements.
    Section 422.156(b) specifies the requirements that may be deemed. 
In accordance with the statute, these include the quality assessment 
and performance improvement requirements of Sec. 422.152, and the 
requirements of Sec. 422.118 related to confidentiality and accuracy of 
enrollee records. An M+C organization accredited by an approved 
accreditation organization may be deemed to meet any or all of these 
requirements, depending on the specific requirements for which its 
accreditation organization's request for approval was granted.
    Given the complexity and breadth of the benefits and services 
offered under the M+C program, we believe that we should analyze the 
standards applied by accreditation organizations on a standard-by-
standard basis. In the past, in the context of original fee-for-service 
Medicare, we have taken an ``all or nothing'' approach in approving 
accreditation organizations. If an organization was approved, it was 
approved for purposes of all requirements, and all requirements were 
accordingly deemed. Since section 1852(e)(4) refers to deeming of ``the 
requirements involved,'' however, we intend under this authority to 
determine on a standard-by-standard basis whether an accreditation 
organization applies and enforces requirements no less stringent than 
those in part 422 with respect to the standard at issue. We will 
determine the scope of the accreditation organization's approval (and 
thus the extent to which M+C organizations accredited by the 
organization are deemed to meet HCFA requirements) based on a 
comparison of the accreditation organization's standards, and its 
procedures for assessing compliance, with the deemable HCFA 
requirements and our own decision-making standards.
    As mentioned above, the requirements that may be deemed are the 
quality assessment and performance improvement requirements of 
Sec. 422.152, and the confidentiality and accuracy of enrollee records 
requirements of Sec. 422.118. We will approve an accreditation 
organization only for those requirements for which it applies and 
enforces standards that are as least as stringent as the HCFA 
requirements. For instance, Sec. 422.152(e) requires that an M+C 
organization conduct performance improvement projects that achieve 
significant and sustained improvement. An accreditation organization 
will not be approved for this requirement unless we determine that, as 
a condition of accreditation, the accreditation organization's 
requirements concerning the conduct of performance improvement projects 
are as rigorous as the HCFA requirements, with a similar emphasis on 
outcomes. We will make such determinations on the basis of the 
application materials submitted by accreditation organizations seeking 
HCFA approval in accordance with Sec. 422.158. We would also do surveys 
to validate the accreditation organization's enforcement on a standard-
by-standard basis.
    Section 422.156(c) establishes when deemed status is effective. 
Deemed status is effective on the later of the following dates: the 
date on which the accreditation organization is approved by HCFA, or 
the date that the M+C organization is accredited by the accreditation 
organization.
    Section 422.156(d) establishes the obligations of deemed M+C 
organizations. An M+C organization deemed to meet Medicare requirements 
must submit to surveys to validate its accreditation organization's 
accreditation process, and authorize its accreditation organization to 
release to HCFA a copy of its most current accreditation survey, 
together with any information related to the survey that HCFA may 
require (including corrective action plans and summaries of unmet HCFA 
requirements.) These two activities are part of HCFA's ongoing 
oversight strategy for ensuring that the accreditation organization 
applies and enforces its accreditation standards in a manner comparable 
to HCFA's.
    Section 422.156(e) addresses removal of deemed status. HCFA will 
remove part or all of an M+C organization's deemed status if: (1) HCFA 
determines, on the basis of its own survey or the results of the 
accreditation survey, that the M+C organization does not meet the 
Medicare requirements for which deemed status was granted; (2) HCFA 
withdraws its approval of the accreditation organization that 
accredited the M+C organization; or (3) the M+C fails to meet the 
requirements of paragraph (d) of this section.
    The final paragraph, Sec. 422.156(f), explains that HCFA retains 
the authority to initiate enforcement action against any M+C 
organization that it determines, on the basis of its own survey or the 
results of the accreditation survey, no longer meets the Medicare 
requirements for which deemed status was granted. We expect the 
accreditation organization to have a system in place for enforcing 
compliance with its standards, perhaps sanctions for motivating 
correction of deficiencies, but HCFA cannot delegate to the 
accreditation organization the authority to impose the intermediate

[[Page 34999]]

sanctions established by section 1857(g) or termination of the M+C 
contract.
    b. Accreditation organizations (Sec. 422.157). This section of the 
regulation discusses three conditions for HCFA approval of an 
accreditation organization. HCFA may approve an accreditation 
organization if the organization applies and enforces standards for M+C 
organizations that are at least as stringent as Medicare requirements 
(as discussed above); the organization complies with the application 
and reapplication procedures set forth in Sec. 422.158, ``Procedures 
for approval of accreditation as a basis for deeming compliance;'' and, 
the organization is not controlled by the managed care organizations it 
accredits, as defined at 42 CFR 413.17. Control exists if the 
accredited organizations have the power, directly or indirectly, to 
significantly influence or direct the activities or policies of the 
accreditation organization. We have included this requirement to 
preclude any conflict of interest that should compromise the integrity 
of the accreditation process.
    Section 422.157(b) describes notice and comment procedures. Because 
the approval of an accreditation organization could have broad impact 
upon large numbers of organizations, providers, and consumers, we are 
providing notice and comment opportunities similar to those provided in 
the fee-for-service arena. HCFA will publish a proposed notice in the 
Federal Register whenever it contemplates approving an accreditation 
organization's application for approval. The proposed notice will 
specify the basis for granting approval; describe how the accreditation 
organization's accreditation program meets or exceeds all of the 
Medicare requirements for which HCFA would deem compliance on the basis 
of accreditation; and provide opportunity for public comment. HCFA will 
publish a final notice in the Federal Register whenever it grants an 
accreditation organization's request for approval. Publication of the 
final notice will occur after HCFA has reviewed the public comments 
received in response to the proposed notice. The final notice will 
specify the effective date of the approval, and the term of approval, 
which will not exceed 6 years.
    Section 422.157(c) establishes ongoing accreditation organization 
responsibilities. These responsibilities largely parallel those 
currently imposed upon accreditors under original Medicare. One 
exception is the requirement at Sec. 422.157(c)(4) that an 
accreditation organization notify HCFA in writing within 3 days of 
identifying, with respect to an accredited M+C organization, a 
deficiency that poses immediate jeopardy to the M+C organization's 
enrollees or to the general public. Although the existing counterpart 
for this requirement under original Medicare (Sec. 488.4(b)(3)(vii)) 
allows an accreditation organization 10 days to provide this notice, we 
believe that a 3-day time period will better enable HCFA to take any 
necessary action to protect the health and safety of enrollees or the 
general public in a situation that poses immediate jeopardy. (Note that 
we also intend to address this issue in our planned comprehensive 
revision of the deeming requirements under original fee-for-service 
Medicare.)
    Section 422.157(d) establishes specific criteria and procedures for 
continuing oversight and for withdrawing approval of an accreditation 
organization. Oversight consists of equivalency review, validation 
review, and onsite observation.
    Equivalency review. HCFA compares the accreditation organization's 
standards and its application and enforcement of those standards to the 
comparable HCFA requirements and processes when HCFA imposes new 
requirements or changes its survey process; an accreditation 
organization proposes to adopt new standards or changes in its survey 
process; or the term of an accreditation organization's approval 
expires.
    Validation review. HCFA or its agent may conduct a survey of an 
accredited organization, examine the results of the accreditation 
organization's own survey, or attend the accreditation organization's 
survey, in order to validate the organization's accreditation process. 
At the conclusion of the review, HCFA identifies any accreditation 
programs for which validation survey results indicate (1) a 20 percent 
rate of disparity between certification by the accreditation 
organization and certification by HCFA or its agent on standards that 
do not constitute immediate jeopardy to patient health and safety if 
unmet; or (2) indicate any disparity at all on standards that 
constitute immediate jeopardy to patient health and safety if unmet. 
Our beneficiary-centered approach to managed care oversight dictates 
zero tolerance of accreditation organization failures to identify 
noncompliance that expose beneficiaries to such serious risks. At the 
conclusion of a validation review, HCFA also identifies any 
accreditation programs for which validation survey results indicate, 
irrespective of the rate of disparity, that there are widespread or 
systematic problems in an organization's accreditation process such 
that accreditation no longer provides assurance that the Medicare 
requirements are met or exceeded. Accreditation programs identified as 
noncompliant through validation review may be subject to withdrawal of 
HCFA approval.
    Onsite observation. HCFA may conduct an onsite inspection of the 
accreditation organization's operations and offices to verify the 
organization's representations and assess the organization's compliance 
with its own policies and procedures. The onsite inspection may 
include, but is not limited to, reviewing documents, auditing meetings 
concerning the accreditation process, evaluating survey results or the 
accreditation status decision making process, and interviewing the 
organization's staff.
    Notice of intent to withdraw approval. If a comparability review, 
validation review, onsite observation, or HCFA's daily experience with 
the accreditation organization suggests that an accreditation 
organization is not meeting the requirements of this subpart, HCFA 
gives the organization written notice of its intent to withdraw 
approval.
    HCFA may withdraw its approval of an accreditation organization at 
any time if we determine that deeming based on accreditation no longer 
guarantees that the M+C organization meets the Medicare requirements, 
and failure to meet those requirements could jeopardize the health or 
safety of Medicare enrollees or constitute a significant hazard to the 
public health; or the accreditation organization has failed to meet its 
obligations under Secs. 422.156, 422.157, 422.158.
    The final provision of Sec. 422.157(d) addresses reconsideration. 
An accreditation organization dissatisfied with a determination to 
withdraw HCFA approval may request a reconsideration of that 
determination in accordance with subpart D of part 488 of this chapter.
    c. Application and reapplication procedures for accreditation 
organizations (Sec. 422.158). As mentioned, the process that HCFA will 
use to deem compliance with M+C requirements is virtually identical to 
the process that is being used for deeming compliance with fee-for-
service requirements. This section of the regulation is modeled on 
Sec. 488.4, ``Application and reapplication procedures for 
accreditation organizations.'' One requirement that appears in 
Sec. 422.158 does not appear in Sec. 488.4 is the requirement that an

[[Page 35000]]

accreditation organization applying for approval of deeming authority 
submit the name and address of each person with an ownership or control 
interest in the accreditation organization. Such information will be 
used to determine whether the accreditation organization is controlled 
by the organizations it accredits, for the purposes of Sec. 422.157. 
The remaining requirements of this section, which pertain to other 
required information and materials, the mechanics of the approval 
process, and the reconsideration of an adverse determination, are 
essentially restatements of the requirements of Sec. 488.4.

E. Relationships With Providers

    Subpart E focuses on requirements for relationships between M+C 
organizations and health care professionals with whom they contract or 
enter agreements to provide services to Medicare beneficiaries enrolled 
in an M+C plan. These requirements encourage communication, 
coordination, and cooperation between organizations and health care 
professionals on plan rules and policies. This subpart also includes 
other new provider protections enacted as part of the BBA; incorporates 
provisions affecting health professionals that are consistent with the 
recommendations contained in the Consumer Bill of Rights and 
Responsibilities, as recommended by the President's Advisory Commission 
on Consumer Protection and Quality in the Health Care Industry, the 
model act adopted by the National Association of Insurance 
Commissioners, credentialing standards of nationally accepted 
accrediting bodies, and QISMC standards; and incorporates policies 
already applicable to provider and plan relationships included in the 
current part 417 or other policy issuances. In February 1998, an 
executive order was issued directing the Secretary to comply to the 
extent possible through administrative activities with the standards 
contained within the Consumer Bill of Rights presented to the President 
in November 1997. Many of the issues were addressed in the BBA and 
implementation of the regulations will expand compliance with the 
directive.
1. Participation Procedures (Sec. 422.202)(a))
    Section 1852(j)(1) requires an M+C organization that offers 
benefits under an M+C plan through agreements with physicians to 
establish reasonable procedures relating to their participation under 
the plan. This is a new federal requirement for Medicare contracting 
managed care organizations. Current rules in part 417 do not mandate 
that HMOs/CMPs adopt provider participation rules. However, some 
Medicare contractors have adopted provider participation policies in 
response to state laws or plan policies.
    We are interpreting this provision to apply to all M+C 
organizations that operate M+C plans providing benefits through a 
limited network of contracting health care professionals or groups of 
health care professionals, that is, all types of M+C coordinated care 
plans, such as HMOs, PPOs, etc., as well as network M+C MSA plans. In 
the case of M+C private fee-for-service plans and non-network M+C MSA 
plans, there are no limits on the number of health professionals who 
may provide services covered under the M+C plan, as long as they accept 
the plan's terms and conditions for payment. These plans in essence 
operate on an ``any willing provider'' approach to which the procedures 
in section 1852(j)(1) would not be relevant. Since any provider has the 
right to participate, rules requiring a notice of adverse participation 
decisions, and appeals from such decisions could have no applicability. 
It also would not be feasible to provide the notices required under 
section 1852(j)(1) and Sec. 422.202(a) (discussed below) to the 
virtually unlimited number of providers who would be entitled to 
provide services to a M+C private fee-for-service or non-network M+C 
MSA plan enrollees.
    The statutory requirements in section 1852(j)(1) focus on three 
procedural aspects--ensuring that providers are aware of the plan 
participation rules; requiring written notice when participation 
decisions are adverse; and affording the provider an opportunity to 
appeal adverse plan participation decisions. The statute specifies that 
these procedures apply to plan relationships with physicians. In 
reviewing the model act of the National Association of Insurance 
Commissioners (NAIC), QISMC standards, and many state laws and 
regulations, we found that these procedural protections generally have 
been applied to all health care professionals who are responsible for 
delivering services to beneficiaries of the plan, not just physicians. 
Since Medicare-payments can be made to practitioners other than 
physicians and since M+C organizations may furnish services utilizing a 
range of licensed health care professionals, we believe it is 
appropriate to apply these requirements to all health care 
professionals if coverage for their services is provided under the M+C 
plan. For purposes of Sec. 422.202 and Sec. 422.204, these include, but 
are not limited to, a physician, podiatrist, optometrist, chiropractor, 
psychologist, dentist, physician assistant, physical or occupational 
therapist, speech-language pathologist, audiologist, nurse 
practitioner, clinical nurse specialist, certified nurse anesthetist, 
and certified nurse-midwife and licensed certified social worker. Thus, 
under our authority under section 1856(b)(1) to establish standards for 
M+C organizations, Sec. 422.202 requires that all professionals as 
listed above should be provided with rules of participation, written 
notices of participation decisions and an appeal process.
    With regard to types of procedures that are subject to disclosure, 
written notification and appeal requirements, we are adopting a broad 
definition of procedures that might affect participation in the plan or 
network. In Sec. 422.202 we specify that procedural requirements should 
include any rules that affect the process of direct delivery of 
services by a health professional to a Medicare beneficiary. The 
examples include terms of payment, utilization review, quality 
improvement programs, credentialing, data reporting, confidentiality, 
guidelines or criteria for furnishing services, and other rules related 
to administrative policy. All of these procedures affect how a health 
care professional would participate in a plan and should therefore be 
divulged up front prior to a health care professional's agreement to 
participate in the plan. In addition, we believe that full disclosure 
in advance, to potential participating health care professionals, of 
the broad range of procedures relating to participation should reduce 
subsequent challenges or appeals. While the disclosure requirement in 
Sec. 422.202(a)(1) does not apply directly to M+C private fee-for-
service plans, as discussed below, M+C organizations offering such 
plans will be required to make the information described in 
Sec. 422.202(a)(1) available to providers treating enrollees of the 
plan.
    Section 1852(j) requires the provision of written notice of the 
participation rules. We are requiring in Sec. 422.202 that any material 
changes in rules must be provided in writing in advance of 
implementation. Such advance communication would enable health care 
professionals to evaluate their continued participation prior to 
instituting a formal appeal process regarding any rules they believe 
are adverse. This benefits M+C organizations and providers in allowing 
the health care professional to judge what is adverse as this can vary 
among

[[Page 35001]]

individual health care professionals; what is adverse to one physician 
or health care professional may not be adverse to another.
2. Consultation (Sec. 422.202(b))
    Consistent with section 1852(j)(2), Sec. 422.202(b) requires an M+C 
organization to consult with physicians or relevant health care 
professionals who have entered into participation agreements/contracts 
with the organization regarding the organization's medical policy, 
quality and medical management procedures. Pursuant to our authority in 
section 1856(b)(1) to establish standards under the M+C program, in 
addition to requiring consultation on any aspect of clinical policy, we 
have included three specific standards relating to the development of 
practice guidelines--(1) practice guidelines and utilization management 
guidelines must be based on reasonable medical evidence or consensus of 
relevant practitioners, developed in consultation with participating 
practitioners, and reviewed and updated periodically; (2) the 
guidelines must be communicated to practitioners and, as appropriate, 
enrollees; and (3) decision making in utilization management, enrollee 
education, interpretation of covered benefits, and other areas to which 
the guidelines are applicable must be consistent with the guidelines. 
These three standards are taken from QISMC discussed in section II.D. 
of this preamble. These national standards also are consistent with the 
NAIC model act and language adopted for state laws regarding managed 
care. We believe these standards ensure that practitioners are fully 
consulted in all aspects of the use of practice guidelines from 
development to application.
3. Treatment of Subcontracted Networks (Sec. 422.202 (c))
    In today's business environment, managed care organizations 
delegate not only the provision of services to subcontracted networks, 
but also a variety of policy making and implementation 
responsibilities. Each health care professional is an integral part of 
the organization's health care delivery system, whether he contracts 
directly with the organization or through an intermediary entity, such 
as an Independent Practice Association (IPA). Therefore, under our 
authority in section 1856(b)(1) to establish M+C standards, in 
Sec. 422.202(c) we require provider protections not only for direct 
contracting physicians and health care professionals but also for all 
subcontracted arrangements. Extension of the BBA provisions to 
subcontracts means that providers within subnetworks (e.g. an IPA) 
receive the rules of participation, written notices, and have an 
opportunity to appeal. Thus, health care professionals within the 
subcontracted groups should be included in the procedures established 
for participation appeals and in the formulation of medical policy for 
the organization. In cases where subnetworks maintain most of the 
medical records for the Medicare beneficiaries they serve, it is 
essential that the formulation of policy includes all of the resources 
that contribute to fair and equitable treatment for beneficiaries. We 
also believe that subnetworks should have the ability to grieve or 
appeal decisions for the providers within their subnetworks.
4. Provider Credentialing and Provider Rights (Sec. 422.204)
    Section 422.204(a), ``Basic Requirements,'' states that the M+C 
organization must have a system for credentialing physicians and other 
health care professionals. The M+C organization must ensure that 
providers meet applicable State and Federal requirements. Basic 
benefits must be provided through, or payments must be made to, 
providers that meet applicable requirements of title XVIII and part A 
of title XI of the Act. Also, in the case of providers meeting the 
definition of ``provider of services'' in section 1861(u), basic 
benefits may only be provided through such providers if they have a 
provider agreement with HCFA permitting them to provide services under 
original Medicare. An M+C organization may not employ or contract with 
providers excluded from participation in Medicare. M+C organizations, 
at a minimum, should check the OIG website at http://www.dhhs.gov/
progorg/oig for the listing of excluded providers and entities. These 
requirements are promulgated pursuant to our authority under section 
1856(b)(1) to establish M+C standards by regulation, and are based on 
(1) the requirement in section 1852(a)(1) of the Act that Medicare 
covered services be furnished through Medicare qualified providers, (2) 
existing requirements in Sec. 417.416, and (3) detailed standards 
developed under QISMC, discussed in section D. above.
    Section 422.204(b), ``Discrimination Prohibited,'' prohibits M+C 
organizations from discriminating with respect to provider 
participation, provider reimbursement, or provider indemnification to 
any provider acting within the scope of his license or certification 
under applicable State law, solely on the basis of such license or 
certification. These requirements are based on section 1852(b)(2). This 
does not prohibit plans from including providers only to the extent 
necessary to meet the needs of the plan's enrollees, ensure quality and 
control costs, and does not prohibit an organization from reimbursing 
different specialty providers differing fees for their services. It is 
however, the responsibility of the organization to adopt policies 
related to participation, reimbursement, and indemnification based on 
reasonable criteria. Organizations may want to consider such measures 
as health outcomes, satisfaction surveys, market saturation of the 
provider type or other legitimate reasons.
    Under Sec. 422.204(c), ``Denial, suspension, or termination of a 
contract,'' organizations offering coordinated care or network MSA 
plans are required to provide information on their plan participation 
criteria and an appeals process for participation decisions, including 
decisions involving denial, suspension or termination of contracts. We 
have incorporated the timeframes for contract termination notification 
between the M+C organization and its providers contained within the 
NAIC model act. As discussed in section C. above, we have incorporated 
similar timeframes for notice to enrollees about changes in the 
provider network, including changes that result from a termination 
covered under Sec. 422.204(c).
    The notice and appeals requirements in this part are based on the 
requirement in section 1852(j)(1)(C), requiring a process for appealing 
adverse participation decisions, and, as noted above, on the NAIC model 
act, and our authority under section 1856(b)(1) to establish standards 
under Part C.
5. Interference With Health Care Professionals' Advice to Enrollees 
Prohibited (Sec. 422.206)
    Section 422.206 (a) incorporates the requirements set forth in 
section 1852(j)(3)(A). This section prohibits an M+C organization from 
interfering with the advice of a health care professional to an 
enrollee who is his or her patient. Thus the health professional may 
act within his or her scope of practice in advising the enrollee about 
their health status, all relevant medical or treatment options 
available regardless of whether care or treatment is provided under the 
plan. For purposes of Sec. 422.206, the term health care professional 
includes those listed in section 1852(j)(3)(D) of the Act. Pursuant to 
our authority in section 1852(b)(1) to establish standards

[[Page 35002]]

under the M+C program, Sec. 422.206(a) includes standards from the 
Consumer Bill of Rights that further delineate the types and mode of 
communication between patients and health care providers regarding 
health care treatment options within which interference is prohibited. 
While the scope of this section governs communication regarding care or 
treatment advice, we recognize that patients seek advice from 
physicians regarding insurance coverage choices as well as treatment 
option choices. Physicians can disclose their participation in M+C 
organizations, however, we are concerned about any inappropriate 
steerage based on knowledge of a beneficiary's health status or the 
physician's financial interest. Program instructions will be issued as 
HCFA continues to clarify policy in the area of provider marketing and 
the role of physicians and other health care professionals in 
disseminating M+C information to beneficiaries.
6. Conscience Protection (Sec. 422.206)
    Section 422.206(b) incorporates the requirements of section 
1852(j)(3)(B). The regulations state that the prohibition against 
interference with the content of advice a health care provider gives to 
enrollees regarding medical treatment should not be construed as 
requiring counseling by a professional or a referral to a service by 
that professional, if there is an objection based on moral or religious 
grounds, and the M+C organization fulfills certain notification 
requirements to prospective and current enrollees. The regulation 
incorporates the notification process and time frames included in the 
law and clarifies that the plan must also notify HCFA at the time of 
application and within 10 days of submitting its ACR proposal. With 
respect to current enrollees, the organization is eligible for the 
exception to the rule in Sec. 422.206(a)(1) if it provides notice 
within 90 days after adopting the policy at issue; however, under 
Sec. 422.111(d), notice of such a change must be provided in advance.
7. Physician Incentive Plans (Secs. 422.208 and 422.210)
    Consistent with section 1852(j)(4), regulations at Secs. 422.208 
and 422.210 outline the limitations on the operation of physician 
incentive plans. The provisions in this section are the same as those 
previously included in Sec. 417.479 with some reduction in the amount 
of data that must be disclosed by the organization. HCFA has determined 
that the capitated data is no longer required because other sources of 
data, such as encounter data required by the Act and the National Data 
Reporting Requirements (NDRR) are available. The provisions are 
consistent with the provisions under section 1852(j)(4) which prohibit 
specific payments as a disincentive to provide services to an 
individual enrollee and which place limits on the transfer of 
substantial financial risk for referral services to physicians or 
physician groups contracting with the M+C organization. The provisions 
in these sections apply to all coordinated care and network MSA plans. 
M+C private fee-for-service plans are prohibited from having a 
physician incentive plan because they may not place their providers at 
financial risk. The physician incentive plans regulations require that 
M+C organizations conduct customer satisfaction surveys of both 
enrollees and disenrollees if any physician or physician group in an 
M+C organization's network is placed at substantial risk for referral 
services as defined in Sec. 422.208. (Please note that there are at 
least two other uses of the term ``substantial financial risk'' 
contained in legislation or regulation. Specifically, section 216 of 
the Health Insurance Portability and Accountability Act of 1996 
addressing safe harbors from the anti-kickback statute and the 
determination of substantial financial risk related to PSOs (63 FR 
18124, April 14, 1998)) M+C organizations may satisfy their requirement 
for enrollee surveys either by their mandated inclusion in HCFA's 
national administration of the Consumer Assessments of Health Plans 
Study (CAHPS) or, if the organization is excluded from CAHPS due to not 
having contracted with us for at least one year, by conducting their 
own surveys.
8. Limitation on Provider Indemnification (Sec. 422.212)
    Section 422.212 prohibits an M+C organization from having a 
provider, or group of providers, indemnify the organization against any 
liability arising from the organization's denial of medically necessary 
care. This prohibition is a very narrow exception for a civil action 
brought by, or on behalf of, an enrollee where the damage is due to a 
determination by the M+C organization to deny medically necessary care. 
The regulation includes the statutory language from section 1852(j)(5) 
without elaboration.
9. Special Rules for Services Provided by Noncontract Providers 
(Sec. 422.214)
    Consistent with section 1852(k) and section 4002(e), the 
regulations in Sec. 422.214 require any health care provider that does 
not have a contract establishing payment amounts for services furnished 
to a beneficiary enrolled in an M+C coordinated care plan to accept as 
payment in full, the amounts that could have been collected if the 
beneficiary were enrolled in original Medicare. An M+C organization 
(other than an M+C MSA plan) satisfies its liability for Medicare 
covered services if the provider receives the total amount that would 
have been received if the beneficiary were enrolled in original 
Medicare. This amount equals the total of Medicare's payment (including 
any applicable deductible and coinsurance amounts) and any balance 
billing amount that would have been allowed by original Medicare. In 
the case of a participating physician or supplier, this amount would 
equal the Medicare fee schedule amount for the service. For a 
nonparticipating physician, this amount would equal 115 percent of the 
fee schedule amount for nonparticipating physicians (which is 95 
percent of the fee schedule amount applicable to participating 
physicians). Of these amounts, the provider could collect from the M+C 
plan enrollee the cost sharing amount required under the M+C plan, as 
approved by HCFA under subpart G of part 422 and the remainder from the 
M+C organization.
    Section 1866(a)(1)(O) places a limitation on what a provider of 
services (as defined in section 1861(u)) must accept as payment in full 
for services furnished to an M+C plan enrollee. The limit is applicable 
to those institutional type providers of service that do not have in 
effect a contract with the M+C organization establishing payment 
amounts for services furnished to an enrollee. The limitation equals 
the amount that would have been payable for a beneficiary enrolled in 
original Medicare less any payments that could be collected directly 
from Medicare representing graduate medical education (both direct and 
indirect).
10. Special Rules for M+C Private Fee-for-Service Plans
    Special rules for M+C private fee-for-service plans are discussed 
in section IV of this preamble.
11. Exclusion of Services Furnished Under a Private Contract 
(Sec. 422.220)
    Section 422.220 prohibits an M+C organization offering an M+C plan 
from paying for services furnished to an

[[Page 35003]]

enrollee by a physician or other health care professional who has 
signed a private contract as described in section 1802(b). Section 4507 
of the BBA specifies that nothing in title XVIII of the Act shall 
prohibit a physician or practitioner from privately contracting with a 
beneficiary to furnish services for which no claim shall be submitted 
to Medicare and no Medicare payment shall be made directly or 
indirectly or by any organization paid by Medicare where the physician 
or practitioner has opted out of Medicare for 2 years. Therefore, no 
payment may be made by an M+C organization for services furnished to 
Medicare enrollees by a physician or practitioner who opts out of 
Medicare where he or she has signed a private contract with an 
enrollee. There is one exception: the physician or practitioner who has 
opted out of Medicare may not ask a beneficiary who requires emergency 
or urgent care to sign a private contract. Therefore, where a physician 
or practitioner who has opted out of Medicare provides emergency or 
urgent care to an enrollee of an M+C organization, the organization 
must pay for the emergency or urgent care the enrollee required. For 
purposes of this provision, we consider ``urgent care'' to mean 
urgently needed services as defined in Sec. 422.2.
12. M+C Plans and the Physician Referral Prohibition
    One other item that relates to M+C organizations but is not 
contained within the part 422 regulations is the physician referral 
prohibition.
    a. The prepaid health plan exception: Under section 1877, if a 
physician or a member of a physician's immediate family has a financial 
relationship with a health care entity (through an ownership interest 
or a compensation relationship), the physician may not refer Medicare 
patients to that entity for any of 11 designated health services, 
unless an exception applies. Under an exception in section 1877(b)(3), 
the prohibition on referrals does not apply to services furnished by 
certain prepaid health plans. To qualify for the exception, the 
services must be furnished by one of the following organizations to its 
enrollees:
     Organizations with a contract under section 1876, which 
authorizes us to enter into contracts with HMOs and competitive medical 
plans (CMPs) to furnish covered items and services on a risk-sharing or 
reasonable cost basis.
     Organizations with health care prepayment plans, as 
described in section 1833(a)(1)(A), which authorizes payment for 
Medicare Part B services to prepaid health plans on a reasonable cost 
basis.
     Organizations receiving payments on a prepaid basis under 
a demonstration project under section 402(a) of the Social Security 
Amendments of 1967 or section 222(a) of the Social Security Amendments 
of 1972.
     Qualified health maintenance organizations, within the 
meaning of section 1310(d) of the Public Health Service Act.
    As discussed in section I. of this preamble, beginning in January 
1999, the new M+C program replaces the HMO and CMP risk contracting 
program provided for in section 1876.
    In enacting the BBA, Congress failed to revise section 1877(b)(3) 
to except the services furnished under M+C coordinated care plans. We 
believe that this must have been an oversight, since Congress expressed 
no intention in the legislative history for the BBA of subjecting 
existing managed care entities to the self-referral law. In addition, 
subjecting physicians who have an ownership interest in an M+C 
organization offering a coordinated care plan in which the physicians 
participate, to the self-referral rules would be contradictory to 
Congress' purposes in establishing PSOs as coordinated care plans. PSOs 
are defined in the BBA provisions as entities that must be organized 
and operated by a provider (which may be a physician) or a group of 
affiliated health care providers (which may include physicians). These 
providers must share a substantial financial risk for the provision of 
items and services and have at least a majority financial interest in 
the entity. The self-referral provisions, on the other hand, are 
specifically designed to discourage physician ownership of entities 
that provide a broad range of services to Medicare beneficiaries.
    b. No risk of program or patient abuse exception--Coordinated Care 
Plans: Although there is no statutory exception for services furnished 
under coordinated care plans, section 1877(b)(4) allows us to create an 
exception to the referral prohibition for a financial relationship 
which the Secretary determines, and specifies in regulations, does not 
pose a risk of program or patient abuse. An example of program abuse is 
Medicare payment for unnecessary services. We will pay M+C 
organizations for enrollees in coordinated care plans on a capitated 
basis and beneficiaries will be responsible for premiums and cost 
sharing. Section 1854 limits HCFA's capitation amount and the total 
amount of beneficiary premiums and cost-sharing. Because M+C 
organizations offering coordinated care plans will not be paid for each 
additional service they provide, we believe that there is no risk of 
over-utilization of services. Because HCFA's capitation amount and the 
total amount of beneficiary premiums and cost sharing is limited, we 
believe that there is no risk of program or patient abuse.
    Therefore, we are excluding from the physician referral prohibition 
services furnished under a coordinated care plan to an enrollee. This 
exception applies in all cases in which a physician has an ownership 
interest in or a compensation relationship with the M+C organization 
offering the coordinated care plan. We are making a change in the 
regulation text at Sec. 411.355(c)(5).
    c. No risk of program or patient abuse exception--M+C MSA Plans: 
M+C organizations offering an M+C MSA plan are paid a fixed capitation 
amount for beneficiaries enrolled in the plan, and section 1853(a) 
limits HCFA's capitation amount and section 1859(a)(3)(A) limits the 
amount that M+C organizations under M+C MSA plans will pay entities for 
furnishing covered services. Section 1859(a)(3)(B) limits the annual 
deductible amount. However, the Act does not similarly limit the amount 
that a beneficiary will have to pay as premiums and costsharing; that 
is, there is no limit on beneficiary balance billing by the entities 
that furnish health care services. See section IV. below. Thus, 
although there is no risk of program abuse, there is a risk of patient 
abuse. Therefore, we are not excluding from the physician referral 
prohibition services furnished under an M+C MSA.
    d. No risk of program or patient abuse exception--Private fee-for-
service plans: Section 1853(a) also limits HCFA's capitation amount to 
be paid to M+C organizations under private fee-for-service-plans. 
Because there will not be excessive payments by the Medicare program, 
there is no risk of program abuse. However, section 1859(b)(2)(A) 
provides that the plans will pay an individual or entity furnishing 
services on a fee-for-service basis. Since beneficiaries are 
responsible for coinsurance amounts, copayments, and balance billing 
amounts under private fee-for-service plans (see section IV. of this 
preamble), beneficiaries are subject to added out-of-pocket liability 
if physicians providing services under a fee-for-service plan order 
additional unneeded services in order to obtain additional fee-for-
service payments from the M+C organization offering the private fee-
for-service plan. Thus,

[[Page 35004]]

although there is no risk of program abuse in this case, excessive 
Medicare payment, there is a risk of patient abuse. Therefore, we are 
not excluding from the physician referral prohibition services 
furnished under a private fee-for-service plan.

F. Payments to M+C Organizations

1. General Provisions (Sec. 422.250)
    Subpart F of part 422 sets forth rules that govern Medicare payment 
to M+C organizations, including the methodology used to calculate M+C 
capitation rates. These rules also apply for 1998 under section 1876 
risk contracts.
    Payments and Adjustments: We provide in Sec. 422.250(a)(1) that, 
with the exception of payments under M+C MSA plans and payments for 
ESRD enrollees in all other plans, which we discuss below, we will pay 
M+C organizations for each enrollee in an M+C plan they offer, a 
monthly payment that is equal to 1/12th of the county-wide (or, in the 
case of ESRD enrollees, 1/12th of the State rate) ``capitation rate'' 
under Sec. 422.252 that applies for the county in which the enrollee 
lives, adjusted by demographic factors applicable to that enrollee. 
Effective January 1, 2000, however, section 1853(a)(3)(C) directs us to 
implement a risk adjustment methodology that accounts for variation in 
per capita cost based on health status and demographic factors. 
Implementation of health status risk adjusters has implications for M+C 
plan data submissions, and we discuss this issue further below.
    In addition to health status and demographic risk adjustments, we 
make an adjustment, under Sec. 422.250(a)(2)(i)(A), to the payment rate 
for M+C enrollees with end-stage renal disease (ESRD). Under 
Sec. 422.250(a)(2)(i)(B), we make an adjustment that is the equivalent 
to a 50 cent reduction for each renal dialysis treatment that we will 
use to help pay for the ESRD network program in the same manner as 
other reductions are used in original Medicare. Finally, under 
Sec. 422.250(b), we provide for making retroactive adjustments to the 
aggregate monthly payment to an M+C organization to reflect any 
difference between the actual number of enrollees and the number upon 
which we had based the organization's advance monthly payment.
    Under Sec. 422.250(a)(2)(ii) for M+C MSA plan enrollees, we make a 
monthly payment to the M+C organization as described above less the 
amount (if any) identified in Sec. 422.262(c)(1)(ii) to be deposited in 
the M+C MSA. In addition, we deposit in the M+C MSA the lump sum 
amounts (if any) determined in accordance with Sec. 422.262(c). See 
section III. below for a more complete discussion of payments under M+C 
MSA plans.
    In Sec. 422.250(a)(2)(iii), we provide for adjustments to be made 
to payments under RFB plans (which are limited to members of a 
religious and fraternal benefit plan) to ensure that the payment level 
is appropriate for the actuarial characteristics and experience of [RFB 
plan] enrollees.
    Payment Areas: In Sec. 422.250(c)(1), we reflect the general rule, 
under section 1853(d) of the Act, that the M+C payment area is a county 
or equivalent area specified by HCFA. Under Sec. 422.250(c)(2), in the 
case of beneficiaries with ESRD, the payment area is the State or 
equivalent area we specify. Additionally, in a significant change to 
payment area policy from the section 1876 program, section 1853(d)(3) 
permits Governors of States to request that we approve alternative 
geographic areas for payment rates. These alternatives are either a 
single State-wide M+C payment area or a metropolitan-based system in 
which all nonmetropolitan areas within the State constitute a single 
payment area, and any of the following constitutes a separate M+C 
payment area:
     All portions of each single metropolitan statistical area 
within the State.
     All portions of each primary metropolitan statistical area 
within each consolidated metropolitan statistical area within the 
State.
     A consolidation of noncontiguous counties.
    Section 1853(d)(3) directs us to approve a Governor's request; 
however, this section of the Act also directs us to subject these 
requests to a budget neutrality requirement, and any payment for 
alternative geographic areas cannot exceed the aggregate payments for 
that State absent the adjustment. Additionally, the Governor's request 
must be submitted to us no later than February 1 of the year preceding 
the contract year. This provision is implemented in Sec. 422.250(e).
2. Annual Capitation Rates (Sec. 422.252)
    Among the more significant payment changes in section 1853 is the 
incremental separation of capitated Medicare payments from local fee-
for-service rates. Previously, Medicare had paid risk contractors 
according to the Adjusted Average Per Capita Cost (AAPCC) payment 
methodology. The AAPCC was based on Medicare fee-for-service 
expenditures by county and was used to pay risk contractors through 
December 31, 1997. These fee-for-service expenditures were adjusted for 
demographic factors (that is, age; sex; institutional, welfare, and 
employment status).
    The AAPCC had been legitimately criticized for its wide range of 
payment rates among geographic regions--in some cases it varied by over 
20 percent between adjacent counties. It was also criticized for its 
poor risk adjustment capabilities and inappropriate provision of 
graduate medical education funds to some Medicare risk plans. Moreover, 
the AAPCC was criticized for setting erratic annual payment updates, 
which often made it difficult for contracting health plans to engage in 
long-term business planning. The BBA introduces a new payment 
methodology that addresses these and other concerns, and we discuss 
them in detail below.
    ``Greater of'' Payment Rate: Since January 1, 1998, Medicare 
capitation rates paid to section 1876 risk contractors for each 
calendar year have been the greater of a blended capitation rate, a 
minimum amount rate, or a minimum percentage increase. This same 
methodology will apply to payments under M+C contracts.
     The blended capitation rate is a blend of the area-
specific (local) rate and the national rate, with the latter adjusted 
for input prices. The blended capitation rate is then adjusted by a 
budget neutrality factor.
     The minimum amount rate will equal $367 per month per 
enrollee in 1998 for all areas in the 50 States and the District of 
Columbia. Outside the 50 States and the District of Columbia, the rate 
is not to exceed 150 percent of the 1997 AAPCC for those areas. The 
minimum amount rate will be adjusted each year using the update factors 
described below. (On an individual basis, our monthly payment may be 
more or less than the minimum amount due to the demographic or other 
risk factors applicable to that individual used to adjust the minimum 
amount rate.)
     The minimum percentage increase is 2 percent. The minimum 
percentage increase rate for 1998 is 102 percent of the 1997 AAPCC. 
Thereafter, it is 102 percent of the prior year's rate.
3. Calculation and Adjustment Factors (Sec. 422.254)
    Blend of Area-Specific and National Percentages: The 1997 AAPCC 
capitation rates serve as the base for both the area-specific rates in 
the blend and the minimum percentage increase rates. Section 1853(c)(2) 
stipulates that the blended area-specific/national rate

[[Page 35005]]

(discussed further below) will be implemented over a 6 year transition 
period from 1998 through 2002 according to the following schedule:

 90 percent area-specific/10 percent national in 1998
 82 percent area-specific/18 percent national in 1999
 74 percent area-specific/26 percent national in 2000
 66 percent area-specific/34 percent national in 2001
 58 percent area-specific/42 percent national in 2002
 50 percent area-specific/50 percent national in 2003 and 
thereafter.

    Section 1853(c)(6) also provides for a ``national per capita M+C 
growth percentage.'' Each year, from 1998 through 2002, this national 
growth percentage is applied to the national and local components of 
the blended rate and to the floor rate (discussed below). The national 
per capita growth percentage is HCFA's projection of per capita 
expenses, reduced by the following amounts established in section 
1853(c)(6): 0.8 percentage points in 1998 and 0.5 percentage points 
each year from 1999 through 2002. After 2002, the reduction amount is 
zero. This provision is implemented in Sec. 422.254(d).
    As indicated above, the blended rates are adjusted by a budget 
neutrality factor. Section 1853(c)(5) provides for a ``budget 
neutrality'' adjustment to the blended capitation rate under 
Sec. 422.252(a), designed to ensure that the aggregate amount paid 
under the M+C payment methodology equals the amount that would have 
been paid if payments were based entirely on area-specific rates (as 
they were under section 1876(a)). The statute requires that this budget 
neutrality adjustment apply only to the blended capitation rate under 
Sec. 422.252(a), rather than to the final capitation rate under 
Sec. 422.252. Since the capitation rate is based upon the highest of 
the blended capitation rate, the minimum payment, and the prior year's 
payment plus 2 percent, the budget neutrality adjustment cannot produce 
any further savings once the blended capitation rate is reduced to the 
point where it is lower than the other two amounts in every county. 
This is what happened for 1998 and 1999. For these years, the budget 
neutrality adjustment reduced the blended rate to the point where no 
county's payment rate is based upon the blended rate, since one of the 
two other rates is higher in every county. Yet, even with this 
reduction, the goal of the budget neutrality provision in section 
1853(c)(5) was not met for 1998 and 1999. We are considering seeking a 
statutory change to address this problem.
    Area-Specific Component of the Blended Capitation Rate: Above we 
discussed the relationship between area-specific and national rates and 
how they are intended to develop into a 50/50 balance by the year 2003. 
Here we discuss features of the area-specific (local) rate and, 
directly below, features of the national rate.
    In 1998, the base for the area-specific rate is the 1997 AAPCC, 
adjusted for 20 percent of the indirect medical education/direct 
graduate medical education (GME) carve-out. This is a significant 
change to payment policy under section 1876 Medicare ``risk'' 
contracts. In accordance with section 1853(c)(3)(B), under 
Sec. 422.254(e)(2), we will remove all graduate medical education 
payments in the base rate between 1998 and 2002 on the following 
schedule: 20 percent in 1998; 40 percent in 1999; 60 percent in 2000; 
80 percent in 2001; and 100 percent in 2002 and thereafter. These GME 
funds will be removed from the area-specific portion of the blended 
rate. Since the national portion of the blend is computed based on the 
adjusted local rates, it also reflects removal of these GME funds. 
Teaching hospitals will be paid directly for the GME costs associated 
with Medicare managed care enrollees under Sec. 412.322.
    Additionally, pursuant to section 1853(c)(3)(C)(ii), in 
Sec. 422.254(e)(3), to the extent we estimate that the 1997 per capita 
base rate reflects payments to State hospitals under section 
1814(b)(3), we will make appropriate adjustments to the M+C payment 
rate. Payments are made to hospitals located in Maryland under this 
provision.
    Finally, pursuant to section 1853(c)(3)(D), in Sec. 422.254(e)(4), 
we provide that HCFA may substitute a rate for the 1997 capitation rate 
a rate that is more representative of the costs of the enrollees in the 
area if the 1997 rate varied by more than 20 percent from the 1996 
rate.
    National Component of the Blended Capitation Rate: The national 
component of the blended capitation rate has two major features: (1) 
the national standardized annual capitation rate; and (2) the national 
input-price-adjusted capitation rate.
    The national standardized annual capitation rate is a weighted 
average of all area-specific rates adjusted for risk factor weights 
used to calculate payments as though all eligible individuals were 
members of an M+C plan. The calculation for the national standardized 
annual capitation rate is described at Sec. 422.254(f).
    The input-price-adjusted annual national capitation rate is 
adjusted for geographic variation in the prices of goods and services 
used to produce medical services and is the sum of the products of 
three amounts:
     The national standardized annual capitation rate for the 
year, which consists of the weighted average of all area-specific 
capitation rates.
     The proportion of the rate that is attributable to each 
type of service.
     An index that reflects (for that year and that type of 
service) the relative input price of services in the area, as compared 
to the national average input price for these services.
    The input-price-adjusted annual national capitation rate is 
described in Sec. 422.254(g).
4. Adjustments to Capitation Rates and Aggregate Payments 
(Sec. 422.256)
    Beginning with 1999 payment rates, we will adjust all area-specific 
and national capitation rates (and beginning with the 2000 payment 
rates, the minimum amount rate) for the previous year to reflect any 
differences between the projected national per capita growth 
percentages and the current estimates of those percentages.
    We will also adjust for national coverage determinations (NCD) that 
were significant cost as defined in Sec. 422.109 and defined above. An 
NCD is a national policy statement regarding the coverage status of a 
specified service that we make under administrative authority and 
publish in the Federal Register as a notice of HCFA Ruling. (The term 
does not include coverage changes mandated by statute.)
    If we determine that the cost of furnishing a service subject to an 
NCD is ``significant,'' we will adjust capitation rates for the next 
calendar year to take into account the cost of that service. Until the 
new capitation rates are in effect, the M+C organization would be paid 
through original Medicare for the provision of such services.
    Risk Adjustment: Section 1853(a)(3) requires us to develop and 
submit to the Congress, by March 1, 1999, a report on a proposed method 
of risk adjustment of M+C payment rates. We are also required to 
implement a risk-adjustment methodology for payment periods beginning 
on or after January 1, 2000. We provide for such risk adjustment in 
Sec. 422.256(d). Under the previous payment methodology, the AAPCC, we 
used a demographic risk adjuster that has been criticized as an 
inadequate predictor of health care costs.

[[Page 35006]]

Nonetheless, until the new risk adjustment methodology is implemented 
in 2000, we will be using the same demographic adjusters used under the 
AAPCC method to make demographic adjustments under Sec. 422.256(c) to 
the capitation rate determined under Sec. 422.252. Section 
1853(a)(3)(C) specifically directs HCFA to implement health-status 
based risk adjusters, as well as ``other demographic factors.'' Section 
1853(a)(3)(D) requires that, with the exception of enrollees in M+C RFB 
plans, the same risk adjustment methodology be used for all enrollees 
in M+C plans, regardless of plan type. The implementation of health-
status based risk adjusters has major implications for M+C 
organizations' data requirements, as discussed directly below.
5. Encounter Data (Sec. 422.257)
    Section 1853(a)(3)(B) addresses the collection of encounter data 
from M+C organizations needed to implement the risk adjustment 
methodology. The Act requires that the collection of inpatient hospital 
data for discharges beginning on or after July 1, 1997 and allows the 
collection of other data no earlier than July 1, 1998. The statutory 
language is tied to the creation of risk-adjusted payment rates, as 
defined at Sec. 422.256(c) and (d) of this rule. Requirements 
concerning collection of encounter data apply to M+C organizations with 
respect to all their M+C plans, including and private fee-for-service 
plans.
    There are two different ways encounter data are used for risk-
adjustment purposes. To calculate payment rates, encounter data are 
necessary to tie payment to expected patient resource use using 
diagnosis codes. The initial risk-adjusted payment will be based on 
inpatient hospital encounter data. However, use of an inpatient-based 
system in the long run has two major weaknesses: (1) It provides M+C 
organizations with an incentive to hospitalize their enrollees in order 
to receive additional payment; and (2) a risk-adjustor system based 
only on inpatient hospital diagnosis codes will not allow more accurate 
payment for the chronically-ill-but-not-hospitalized. For both of these 
reasons, we have developed a more comprehensive risk-adjustment 
methodology that uses diagnosis data from physician services and 
hospital outpatient department encounters. In addition, physician 
services data include data from limited license practitioners, such as 
clinical psychologists and nurse midwives who provide services 
independently, but do not include nonprofessional services ordered by 
physicians as a result of the initial physician services furnished, 
such as laboratory services and durable medical equipment.
    Encounter data are also necessary to ``recalibrate'' any risk-
adjusted payment model. Recalibration is necessary to adjust the 
payment models for improved coding. For example, upcoding may occur if 
plans improve coding of beneficiary diagnoses and, as a result, the 
average use of resources for enrollees in a particular category may be 
less than when the relative payment rates were determined. When this 
happens, the average actual expenditures per enrollee for these 
diagnoses are less than the average expenditures used to assign the 
original payment weights. The result is overpayment for some diagnoses 
in the risk adjustment model. To account for possible coding changes, 
all risk adjustor payment model diagnosis weights would be 
recalculated, or ``recalibrated'' based on encounter data gathered 
after implementation of risk adjustment. A preferred method for full 
recalibration requires that all services provided to each M+C plan 
enrollee be priced and the total cost of care determined for each 
enrollee. This approach would require that organizations submit 
encounter data for all services provided to each enrollee. An 
alternative approach would require the organizations to submit to HCFA 
the cost of providing medical care for each Medicare enrollee, but 
organizations might oppose such a requirement as too intrusive.
    While the purpose of collecting the encounter data will be to 
calculate risk-adjusted payments, there are a wide variety of other 
uses of whatever data we collect. Quality improvement targets can be 
identified using encounter data. Our ability to monitor the care 
received by M+C enrollees through targeted special studies (such as an 
examination of post-acute care utilization patterns) will be greatly 
enhanced by the availability of encounter data. Encounter data will 
also be useful for program integrity functions, both by providing 
additional utilization norms for original Medicare billing and by 
providing additional information regarding M+C organizations' behavior.
    Timing of Encounter Data Collection: The first issue to address 
with regard to data collection is the ability of the organizations to 
generate the necessary data and to ensure accurate transmission. While 
some organizations will be able to transmit encounter data quickly and 
with little difficulty, others will be further behind in their internal 
information systems development. To the extent that organizations have 
capitated arrangements with their providers, they may not currently 
require encounter-type data from those providers. The ability to 
generate encounter data may well vary by type of service provided as 
well as by type of organization submitting the data. All organizations 
will have to conform to the HIPAA information system standards 
regarding encounter data formats by 24 months (36 months for small 
organizations) after the effective date of the final rule (currently 
estimated to be published in the fall of 1998), so the main issues with 
regard to the organizations should be transition issues rather than 
long run implementation issues.
    HCFA has issued instructions delineating a specific timetable for 
M+C organizations to submit inpatient hospital data. M+C organizations 
will be required to select a fiscal intermediary designated by HCFA to 
transmit data.
    Given any start date, comprehensive risk-adjusted payments will be 
made about 3 years after the year of the initial collection of 
outpatient hospital and physician encounter data. Similarly, 
recalibration of the risk-adjusted payments to reflect managed care 
practice patterns could occur about 3 years after the complete data are 
collected. In order to minimize the period for which payments are 
determined based on inpatient hospital data only, we will provide 
advance notice to M+C organizations to collect and submit physician, 
outpatient hospital, SNF, and HHA data beginning no earlier than 
October 1, 1999; and all other data HCFA deems necessary beginning no 
earlier than October 1, 2000.
    Because M+C organization payments will depend on the data 
transmitted and because M+C organizations are the entities with which 
HCFA contracts, we will hold the M+C organization responsible for 
transmission of the data. If the M+C organization is held responsible, 
it follows that they should transmit the data directly, rather than 
monitoring the transmission by their providers. We will allow 
organizations to hire third party data transmitters, but the M+C 
organization will be responsible for the accuracy and completeness of 
the data transmitted.
    Data Format: The format of the data we will require will be 
identical to the data we require of original Medicare providers of 
similar services, because pricing of the data using original Medicare's 
methods is necessary for recalibration. The data will be processed 
using designated HCFA contractors. Providers are familiar with the HCFA

[[Page 35007]]

1500 (or its electronic equivalent) and the electronic UB-92 (or other 
electronic equivalent) through their original Medicare billings. In 
addition, organizations will have mechanisms in place to receive UB-92 
data from hospitals and send it to fiscal intermediaries by July 1, 
1998, because of the requirements for submission of inpatient encounter 
data. It would clearly be beneficial to all parties to use the UB-92 
and this transmission format for any other required data that is 
currently submitted on the UB-92 in original Medicare. There are no 
current organization-to-carrier links for data HCFA currently processes 
on the electronic version of the HCFA 1500. From the provider, 
contractor, and HCFA point of view, it is clear that use of the 
electronic version of the HCFA 1500 would minimize any data collection 
burden.
    Data Accuracy: Audit of the data will be necessary to ensure 
accuracy; any audit efforts will include medical record review for a 
portion of the submitted data. Statistical analysis (for example, 
examination of hospitalization rates for various organizations and 
inquiry into outliers) will be combined with traditional audit methods 
in order to maximize our examination of the data while managing the 
amount of contractor resources used for audit.
6. Announcement of Annual Capitation Rates and Methodology Changes 
(Sec. 422.258)
    Previously, under section 1876, we were required to announce 
Medicare risk contractor payment rates by the first week in September, 
no later than 45 days after publishing for comment our mid-July 
announcement of payment methodology changes. This schedule was designed 
to allow HMOs and CMPs time to consider the coming year's payment 
rates, decide about their continued participation in the Medicare 
program, calculate their Adjusted Community Rate (ACR) proposal, and, 
finally, afford us the time to approve or disapprove the ACR proposal 
prior to the January 1 contract effective date.
    Under section 1853(b)(1), starting in 1998, we must announce rates 
by March 1 of the year prior to the year the rates apply. We must 
include in this announcement a description of the risk and other 
factors and explain the methodology in sufficient detail to enable M+C 
organizations to compute monthly adjusted capitation rates for 
individuals in each of their payment areas.
    The March 1 announcement will ensure that subsequent events can 
occur to meet the November annual coordinated election period 
stipulated in section 1851(e)(3). As under prior law, 45 days prior to 
announcing payment rates on March 1, section 1853(b)(2) requires us to 
provide notice of changes in the methodology and assumptions used in 
the previous year.
7. Special Rules for Beneficiaries Enrolled in M+C MSA Plans 
(Sec. 422.262)
    The BBA establishes special rules for beneficiaries enrolled in M+C 
MSA plans, and we discuss them in detail under section III. below.
8. Special Rules for Coverage That Begins or Ends During an Inpatient 
Hospital Stay (Sec. 422.264)
    The BBA contains special payment rules for situations where an M+C 
enrollee's coverage begins or ends while the Medicare beneficiary is a 
hospital inpatient. Section 1853(g) provides that, where a beneficiary 
is receiving inpatient hospital services from a hospital covered under 
original Medicare's prospective payment system (PPS) or another M+C 
organization on the effective date his or her M+C election of a new M+C 
plan, payment for inpatient services (up until the date of discharge) 
would continue to be the responsibility of the original Medicare 
program or previous M+C organization. The M+C organization offering the 
newly elected M+C plan would not be responsible for inpatient hospital 
service payment until the date of discharge, and original Medicare or 
the previous M+C organization would pay the full amount for that 
beneficiary for that inpatient episode, even if it extends beyond the 
effective date of a beneficiary's M+C election.
    In the case of a beneficiary's M+C plan election ending while he or 
she is a hospital inpatient, the M+C organization remains responsible 
for payment for inpatient hospital services furnished by a hospital 
after expiration of enrollment up until the date of discharge. Payment 
for these services would not be made under Medicare's PPS system, and 
the responsible M+C organization would not receive any payment from us 
for the hospitalized individual during the period the individual was 
not enrolled.
9. Special Rules for Hospice Care (Sec. 422.266)
    Section 1853(h) of the BBA contains special provisions for Medicare 
beneficiaries who elect hospice care concurrent with their enrollment 
in an M+C organization. Specifically, an M+C organization must inform 
each Medicare enrollee eligible to elect hospice care under section 
1812(d)(1) about Medicare hospice programs within the M+C plan's 
service area. If it is common practice to refer patients to hospice 
areas outside the service area, the organization must inform the M+C 
enrollee of that as well. This information must be provided to 
beneficiaries in a manner that objectively presents all available 
hospice providers, including a statement of any ownership interest held 
by the M+C organization or a related entity. If the M+C organization 
has an ownership or other financial interest in one or more of the 
available hospice providers, M+C plan enrollees cannot be required to 
use that hospice provider.
    BBA payment provisions for hospice care state that our monthly 
payment to the M+C organization will be reduced to an amount equal to 
the adjusted excess amount in the M+C plan's approved ACR. Beyond the 
adjusted excess amount, we pay through original Medicare for hospice 
care furnished to the M+C plan enrollee. We also pay through original 
Medicare (to the M+C organization), for other Medicare-covered services 
furnished to the hospice patient.
    Unless the individual disenrolls from the M+C plan, an M+C enrollee 
electing hospice continues his or her enrollment in the plan and is 
entitled to receive through the plan any benefits, other than those 
that are the responsibility of the Medicare hospice.
10. Source of Payment (Sec. 422.268)
    As under the section 1876 risk program, we will determine which 
proportion of payments to M+C organizations comes from the Hospital 
Insurance Trust Fund (Part A) and which proportion of payments comes 
from the Supplementary Medical Insurance Trust Fund (Part B). We 
determine these proportions based on the actuarial value of total 
benefits under both parts.

G. Premiums and Cost-Sharing

    Subpart G of part 422 details provisions found in section 1854 for 
the M+C program. In this subpart we discuss how limits on M+C plan 
enrollee premiums and other cost sharing are established through the 
ACR approval process. The ACR process is applicable to all M+C plans 
except M+C MSA plans. M+C MSA plans are not required to submit an ACR, 
but other information must be submitted for HCFA's review (see 
discussion below). We discuss limitations that the process imposes on 
other cost-sharing that M+C organizations may impose on Medicare 
enrollees for the M+C plan they elect.

[[Page 35008]]

    Note that there are a number of terms pertinent to the following 
discussion, and they are defined in Sec. 422.302 of this rule. ACR and 
APR are terms that were used under section 1876 risk program. Section 
1854(b) discusses the definition of the terms relating to beneficiary 
premiums. The term additional revenues is discussed in detail in 
section 5 below.
    As under the section 1876 risk program, the ACR process under the 
BBA serves three important purposes. First, HCFA examines an M+C 
organization's ACR proposal for each M+C plan to determine whether 
Medicare payments in excess of the amount the organization would charge 
commercially for Medicare-covered benefits are passed on to 
beneficiaries in the form of added additional benefits. Second, we 
review ACR proposals to determine whether the structure of premiums, 
deductibles, copayment, and coinsurance charged to beneficiaries are 
within the limits established by law as required under section 
1854(f)(1)(A). Third, benefit package information is reviewed to 
determine whether the benefit package is in compliance with the 
principles contained in subpart C.
    We have taken into account that the M+C program is a significant 
departure from the section 1876 risk contracting program it replaces. 
Therefore, we are allowing a special period during which organizations 
will be able to add benefits (at no additional cost to the M+C plan 
enrollee) or lower premiums or cost-sharing mid-year. We also are 
providing for the submission of ACRs on a date other than May 1 if a 
contract will begin on a date other than January 1. The transition 
rules for this period are found in Sec. 422.300(b). This special period 
will end on December 31, 2001.
1. Rules Governing Premiums (Sec. 422.304)
    This section of the regulation implements provisions of the BBA 
relating to premiums paid by (or behalf of) beneficiaries. Each 
Medicare enrollee must be afforded the opportunity to pay the M+C plan 
premium on a monthly basis and, as under the section 1876 risk program, 
pursuant to Section 1128B(b) of the Act, the M+C organization may not 
provide for cash or other financial rebate as an inducement for 
enrollment (or for any other reason).
    As discussed in above, section 1852(a)(1) requires an M+C 
organization to include in its M+C plan all services covered under 
original Medicare (except hospice care) that are available to Medicare 
beneficiaries in the area in which services are covered under the M+C 
plan. In addition, additional benefits must be provided to all 
enrollees electing the M+C plan (see section 1854(f)(1)). Section 
1852(a)(3) allows an M+C organization to add supplemental benefits to 
the M+C plan either at the M+C organization's discretion (with our 
approval) or at the enrollee's election. For these benefits offered 
through a coordinated care plan, section 1854(e) does not allow the M+C 
organization in total, for the year, to impose a total average cost to 
the beneficiary, with an actuarial value greater than the actuarial 
value of original Medicare's deductibles and coinsurance for items and 
services covered by original Medicare plus the actuarial value approved 
through the ACR process for supplemental services. For M+C PFFS and M+C 
MSA plans, see discussion below.
    Section 1854(c) provides that M+C basic and supplemental 
beneficiary premiums and M+C MSA premiums may not vary among 
individuals enrolled in the plan. This means that all enrollees in a 
given M+C plan must be charged the same premium amount for basic 
benefits and for any supplemental benefits the M+C organization may 
choose to offer. In the case of coordinated care plans, this uniform 
premium counts toward an overall limit on the actuarial value of 
beneficiary liability in section 1854(e) (discussed further below). 
Thus, in the case of coordinated care plans, the actuarial value of any 
cost-sharing imposed under the plan would also be uniform, since a 
uniform premium would be subtracted from a uniform overall limit to 
determine the amount that can be charged in cost-sharing.
    We believe that section 1854(c) reflects congressional intent that 
all beneficiaries enrolled under a particular M+C plan pay the same 
amount. While cost-sharing amounts are not expressly mentioned, in the 
case of coordinated care plans, there is a uniform limit on the 
actuarial value of cost-sharing. Accordingly, pursuant to our authority 
in section 1856(b)(1) to establish M+C standards, we are providing in 
Sec. 422.304(b) that M+C organizations may not vary the level of 
copayments, coinsurance, or deductibles charged for basic benefits or 
supplemental benefits among individuals enrolled in an M+C plan.
2. Submission of Proposed Premiums and Related Information 
(Sec. 422.306)
    Section 1854(a) requires each M+C organization to submit no later 
than May 1 information about the M+C plan the organization wants to 
offer in the subsequent year. As under the Medicare section 1876 risk 
program, except in the case of M+C MSA plans, such information includes 
a complete description of the services included in the M+C plan, ACR 
and service area information, premium amounts, and descriptions of 
enrollee cost sharing. For M+C MSA plans, organizations have to submit 
the MSA premium that is used to determine the MSA deposit. No ACRs are 
required for M+C MSA plans. Pursuant to our authority in section 
1856(b)(1), we have added a new requirement that M+C organizations also 
submit information on amounts collected in the previous contract period 
for basic benefits. We have done this to assure Medicare enrollees are 
not being charged cost-sharing that exceeds the limits in section 
1854(e)(see Sec. 422.308).
    Section 422.306(a) reflects the requirement in section 1854(a)(1) 
that the information in paragraphs (b), (c), and (d) of Sec. 422.306 be 
submitted by May 1 of the year prior to the year for which the 
information is submitted. This information is needed timely in order 
for HCFA to comply with the requirement in subpart B that comparative 
information on M+C plans be provided to Medicare enrollees. As noted 
above, during the transition period prior to 2002 provided for in 
Sec. 422.300(b), M+C organizations may be permitted, at HCFA's 
discretion, to submit applications and ACR information on a flow basis 
and as discussed in section K below, under Sec. 422.504(d) contracts 
could begin on a date other than January 1. In such a case, benefit 
package and pricing structures must be approved before the contract can 
take effect. Beginning with the 2002 calendar year, however, anyone 
wishing to offer an M+C plan in that year must submit an ACR by May 1 
of the previous year (May 1, 2001 in the case of 2002).
    If the information submitted is not complete, accurate, or timely, 
HCFA has the authority to impose sanctions under subpart O or may 
choose not to renew the contract.
    We will review and approve all information submitted except for any 
amounts submitted by M+C MSA plans and premiums submitted by M+C 
private fee-for-service plans. Premiums and cost sharing will be 
reviewed in accordance with the rules established in Sec. 422.310. 
Benefits offered under the M+C plan will reviewed in accordance with 
the rules established in Subpart C.
3. Limits on Premiums and Cost-Sharing Amounts (Sec. 422.308)
    The rules in this section set the limits on the amount an M+C 
organization may charge a Medicare enrollee of an M+C plan. Section 
1854(b) specifies that

[[Page 35009]]

the premium that a beneficiary is charged under an M+C plan other than 
an M+C MSA plan is the M+C monthly basic premium, plus any M+C 
supplemental premium. In the case of an M+C MSA plan, the beneficiary 
is charged only any M+C supplemental premium that may apply. The limits 
of Medicare enrollee liability are:
     For M+C basic benefits (Medicare covered services and 
additional benefits) offered by coordinated care plans: 12 times the 
basic monthly premium, plus the actuarial value of plan cost-sharing 
(copayments, coinsurance, and deductibles) for the year, cannot exceed 
the actuarial value of original Medicare's deductibles and coinsurance 
for the year or, if less, the amount authorized to be charged in the 
ACR (see Sec. 422.310).
     For M+C basic benefits (Medicare covered services and 
additional benefits) offered by M+C private fee-for-service plans: the 
actuarial value of plan cost sharing (copayments, coinsurance, and 
deductibles) for the year, cannot exceed the actuarial value of 
original Medicare's deductibles and coinsurance for the year or, if 
less, the amount authorized to be charged in the ACR (see 
Sec. 422.310).
     For supplemental benefits offered by a coordinated care 
plan: 12 times the M+C monthly supplemental premium plus the actuarial 
value of plan cost sharing (copayments, coinsurance, and deductibles) 
cannot exceed the ACR for such benefit or, if less, the amount 
authorized to be charged in the ACR (see Sec. 422.310).
    It is possible for an M+C organization to have M+C plan enrollees 
that are entitled to Medicare Part B benefits only. Section 1876(k)(2) 
specifies that existing Part B enrollees under section 1876 risk 
contracts on December 31, 1998 may remain as enrollees of the 
organization in accordance with regulations under section 1856(b)(1) if 
the organization enters into an M+C contract on January 1, 1999. 
Pursuant to sections 1876(k)(2) and 1856(b)(1), this final rule 
provides for such continued Part B-only enrollment, and Sec. 422.308 
provides that the limit on enrollee charges is the same as the limit 
that applies to other enrollees, except that the limit is based only on 
the actuarial value of cost sharing paid under Part B of original 
Medicare.
    Also pursuant to our authority in sections 1876(k)(2) and 
1856(b)(1), in Sec. 422.308(a)(3), we impose a limit on the liability 
of Part B-only enrollees for an M+C organization's coverage of services 
that would be covered by Medicare Part A if the enrollee had Part A 
coverage. Specifically, we provide that the premium and cost sharing 
charged for such coverage may not exceed the lesser of what Medicare 
would pay an M+C plan in capitation for the services, plus the 
actuarial value of Medicare Part A deductibles and coinsurance, or the 
ACR for such services.
    The above-described limits on enrollee liability apply to enrollee 
costs incurred for services furnished by noncontracting providers as 
well as providers that contract with the M+C organization offering the 
M+C plan in which the beneficiary is enrolled. In the case of 
contracting providers, limits on enrollee liability would generally be 
delineated in the contract between the provider and the M+C 
organization. Also, in the case of most coordinated care plans (for 
example, HMOs), it could be assumed that most nonemergency services 
will be obtained through contract providers.
    Thus, to the extent an M+C coordinated care plan provides for 
different cost sharing in the case of noncontracting providers, it is 
not difficult to estimate the percentage of services that will be 
obtained at that level of cost sharing, when making the overall 
projection of the actuarial value of the cost sharing structure. In the 
case of M+C private fee-for-service plans, it is less clear to what 
extent noncontracting providers will be used, and the information on 
actual cost sharing from the prior year will be particularly valuable 
in assessing the accuracy of actuarial projections by the M+C 
organization. We note that in all cases, beneficiary liability is 
limited to the cost sharing provided for under the plan in the case of 
noncontract provider services. While sections 1852(k) and 1866(a)(1)(O) 
require noncontracting providers to accept as payment in full the 
amounts that they would be required to accept under original Medicare, 
balance billing to the beneficiary may be permitted under original 
Medicare but it is not permitted under the M+C plan in question. The 
M+C organization must hold beneficiaries harmless against any such 
balance billing. See section IV. below for a discussion of this issue 
in connection with M+C private fee-for-service plans and section III in 
connection with M+C MSA plans.
4. Incorrect Collections of Premiums and Other Cost Sharing 
(Sec. 422.309)
    This section contains procedures to be used in situations where an 
M+C organization collects more than the amount that is allowed to be 
charged to the Medicare enrollee. These procedures were developed using 
the rules previously applied under section 1876 and promulgated under 
our authority in section 1856(b)(1) to establish standards under Part 
C.
    Section 1857(d) requires that at least \1/3\ of the M+C 
organizations be audited for, among other things, data used in the 
submitted ACR and all charges to the M+C plan enrollee for benefits 
covered under the M+C plan. These audits may reveal that the M+C 
organization has been overcharging the M+C plan enrollees. Section 
422.309 requires the M+C organization to refund these over collections 
through an adjustment to current and future premiums allowed to be 
charged across all M+C plan enrollees.
    We note that in addition to the above requirements for refunding 
amounts incorrectly collected, an M+C organization that collects 
amounts in excess of those permitted is subject to intermediate 
sanctions and civil money penalties under subpart O. See section 
422.752(a)(2) and discussion below in section II. O. of the preamble. 
Refunding amounts improperly collected, at a minimum, would be a 
prerequisite to the lifting of such sanctions.
5. ACR Approval Process (Sec. 422.310)
    Section 1854 requires that an ACR proposal be submitted each year 
for each M+C coordinated care plan or M+C private fee-for-service plan, 
and that premiums be filed for MSA plans. Section 422.310 of this rule 
sets forth the rules M+C organizations must follow to determine the 
limits placed on an M+C plan's price structure (premiums, copayments, 
coinsurance, deductibles, etc.). Since this regulation was not 
published until after May 1, 1998, new requirements under this rule 
discussed below will apply to contract periods beginning on or after 
January 1, 2000. For contract periods beginning before January 1, 2000, 
M+C organizations shall use the rules promulgated in accordance with 
section 1876 for risk contractors to determine the limits placed on M+C 
plan's price structure.
    Under the existing ACR process, a M+C organization must establish 
an initial rate for non-Medicare enrollees for each M+C plan offered. 
This rate is determined through a community rating method (defined in 
section 1308 of the Public Health Service Act) or an aggregate premium 
method. The initial rate is then modified by the relative difference in 
utilization characteristics of the Medicare population compared to the 
non-Medicare population included in the initial rate. Additional 
adjustments may be made with our agreement. Those M+C organizations 
that do not have a non-Medicare

[[Page 35010]]

population cannot establish an initial rate. These M+C organizations 
will be allowed to use an estimate of the ACR value for a service or 
services offered using generally accepted accounting principles. These 
estimated values will be treated as additional adjustments for our 
review.
    The ACR computation places a limit on the beneficiary premiums and 
cost-sharing amounts of an M+C plan, and we will only approve the 
beneficiary premiums and cost-sharing amounts proposed by an M+C 
organization for a specific M+C plan if they do not exceed the ACR 
limits.
    As noted above, Sec. 422.310 contains new requirements for 
calculating ACRs that will require existing section 1876 contractors to 
change the methodology they have used to calculate their ACRs under 
section 1876. We recognize that section 1856(b)(2) provides that 
consistent with the requirements of Part C, standards established under 
Part C should be based on standards established under section 1876 to 
carry our analogous provisions of that section. The requirements in 
Sec. 422.310 are based on, and fully consistent with, the existing 
section 1876 requirements in Sec. 417.594. An M+C organization 
following the methodology set forth in Sec. 422.310 would fully comply 
with the existing ACR provisions in Sec. 417.594.
    However, based upon our years of experience under the section 1876 
program, we have determined that the language in Sec. 417.594 permitted 
HMOs and CMPs to use methods for calculating their ACRs that produced 
ACRs that we do not believe accurately reflected the statutory standard 
implemented in that section. Indeed, the existing methodology has been 
criticized by the General Accounting Office and the Office of the 
Inspector General as inaccurate, and subject to modification by 
organizations. The existing methodology also did not provide for 
necessary adjustments (for example, based upon changes in utilization 
assumptions in anticipation of changes in cost sharing structures, or 
changes in Medicare coverage) that we provide for in Sec. 422.310. 
Also, as discussed below, some of these changes accommodate the fact 
that some organizations do not maintain data used under the old 
methodology (service statistics) but do maintain data (cost data) used 
under the new methodology in Sec. 422.310. Finally, the existing ACR 
form necessarily has to be changed to adapt to the new options under 
the M+C program.
    For all of the above reasons and others discussed below, pursuant 
to our authority in section 1856(b)(1) to establish standards for M+C 
organizations, and consistent with the provision in section 1865(b)(2) 
that such standards be based on section 1876 standards, we have built 
on the existing ACR methodology in Sec. 417.594 but refined this 
methodology in order to ensure the accuracy of ACRs under the M+C 
program.
    Specifically, we have added the following new requirements to the 
provisions in Sec. 417.594:
    1. Revision of data requirements used to develop differences in 
utilization characteristics of the Medicare population from a relative 
service ratio to a relative cost ratio (for additional revenue, a 
relative excess revenue ratio) experienced in a prior period.
    2. Separation of the administrative component into two parts--an 
administrative cost component and a component that reflects revenues 
collected in excess of costs.
    3. Provision for an M+C organization to adjust for relative 
differences that the organization expects to encounter in the period 
covered by the ACR that were not reflected in the prior period. Below 
we discuss each in turn, including where the new process diverges from 
the former ACR methodology.
    Revision of Data Requirements Used to Develop Differences in 
Utilization Characteristics of the Medicare Population from a Service 
Ratio to a Cost Ratio Experienced in a Prior Period: Currently, risk 
contracting plans (HMOs) under section 1876 of the Act use a relative 
volume/complexity (V/C) factor to modify commercial premiums for each 
health care component (e.g. inpatient hospital, physician) to account 
for differences in utilization characteristics between commercial 
members and Medicare members. The modified commercial premium is the 
ACR value for that health care component applicable to the Medicare 
enrollee.
    Currently, HMOs are directed to develop the V/C factors using 
comparative service statistic ratios on a health care component basis. 
Service ratios require HMOs to supply a large amount of service 
statistics.
    Risk contractors assert that they, as a rule, do not keep service 
statistics in the same manner, format, and/or detail needed to compute 
these ratios. Some HMOs have resorted to using statistics gathered from 
one commercial package to be compared to all Medicare enrollee 
statistics. Others have used estimations of service statistics 
(especially for those services not offered by the HMO in the past).
    Managed care organizations keep detailed records on the cost of 
care included in the benefit packages sold. Since the cost of providing 
medical care is a function of both volume (number of services) and 
complexity (price of the service), M+C organizations could compare the 
direct cost of medical care (incurred in a previous period) between the 
organization's commercial and Medicare populations on an average per 
enrollee basis to account for differences in utilization 
characteristics of the respective populations. For those services not 
offered in the past, the M+C organization could use an estimate of the 
cost to establish an ACR value for the new service.
    We believe this modification of data requirements will make the ACR 
more accurate, easier to process, and ultimately, easier to verify. 
Costs could be compared from year to year to establish the 
reasonableness of the data provided. In addition, cost data as reported 
could be compared to other required reports and the organization's 
financial statements. Later, during monitoring visits, costs could be 
compared to the organization's financial records.
    This approach is justified in view of the expanded participation of 
different types of M+C plans authorized in the BBA. BBA provisions 
include organizations offering new types of M+C plans that may not have 
an enrolled commercial population and, without an enrolled commercial 
population, these organizations would be unable to complete the current 
ACR. Under the new method, these M+C organizations would be allowed to 
develop a cost estimate for the purpose of establishing an ACR value 
for the Medicare population.
    Separation of Administrative Component into Two Components--an 
Administrative Cost Component and a Component that Reflects Revenues 
Collected in Excess of Costs: Currently, HMOs are directed to bundle 
that part of the commercial premium that represents any excess revenue 
over expenses with administration into one component. In Sec. 422.302, 
we refer to the component of the premium that represents revenue in 
excess of costs incurred as ``additional revenues.'' Specifically, we 
define ``additional revenues'' to mean revenues collected or expected 
to be collected from charges for M+C plans offered by an M+C 
organization in excess of costs actually incurred or expected to be 
incurred. Additional revenues would include such things as revenues in 
excess of expenses of an M+C plan, profits, contribution to surplus, 
risk margins, contributions to risk reserves, assessments by a related 
entity that do

[[Page 35011]]

not represent a direct medical or related administrative cost, and any 
other premium component not reflected in direct medical care costs and 
administrative costs.) The combined component representing 
administrative and excess revenues was then converted to a Medicare 
value using the same method the HMO used to compute the amount for 
commercial enrollees. HMOs have consistently claimed they use a 
percentage method (For example, administration is calculated as a 
specific percentage of health care components). In effect, this 
increases the administration and additional revenues anywhere from 300 
percent to 500 percent for Medicare. In addition, this bundling assumes 
that both administration and additional revenues are similar in nature 
and should be treated the same.
    Under the new ACR, we are requiring M+C organizations to divide the 
administrative component into two parts and modify each part with a 
factor that is consistent with each part. We believe this will provide 
HCFA with data that is both more accurate and more useful.
    Administrative costs will be included in the ACR computation in the 
same manner as they are incurred in commercial premiums. M+C 
organizations will be required to reveal projected amounts of 
additional revenues to HCFA for each population group (commercial and 
Medicare). M+C organizations would be required to justify larger 
additional revenues projected for the Medicare population in relation 
to their commercial population.
    Construction of a Method for an Organization to Adjust for Relative 
Differences the Organization Expects to Encounter in the Period Covered 
by the ACR that Were not Reflected in the Prior Period: Section 1876 
allowed for modification of the initial rate by a relative factor of 
services furnished in a prior period. Implementing regulations did not 
allow for any other modifications to the initial rate in establishing 
the ACR for a service or services, and we have since recognized that 
additional modifications to the initial rate may be necessary. For 
example, Medicare coverage may be increased from one year to the next. 
If the organization did not provide the service in the past and no 
additional modifications to the initial rate were allowed, the 
organization could not adjust for the new service in its ACR. 
Organizations also had no method for making adjustments to take into 
account projected changes in utilization patterns that would result 
from changes in cost sharing amounts. We have included a provision in 
this rule to allow for such changes.
    M+C organizations will be allowed to further reduce the ACR values 
so that the ACR values equal the actuarial value of the charge 
structure of the M+C plan.
6. Requirement for Additional Benefits (Sec. 422.312)
    If the ACR calculation for an M+C plan produces an excess amount 
(the difference between the average of the M+C per capita rates of 
payment (APR) and the ACR value (less the actuarial value of original 
Medicare's deductibles and coinsurance)) for Medicare covered services, 
the M+C organization is required to use that amount as follows:
     First, the M+C organization may elect to contribute part 
or all of the excess amount to a stabilization fund;
     Second, the M+C organization may use the remainder to fund 
additional services not covered by Medicare; and
     Third, the M+C organization must use any remainder to 
reduce the premium and/or cost sharing allowed for services covered by 
original Medicare.
    A number of rules contained in this section were developed using 
the rules under section 1876, though certain changes to those rules 
were made to comply with new provisions in the BBA. For example, the 
rules for the stabilization fund under section 1876 were largely 
incorporated in this section. However, section 1854(f)(2) revised the 
time period and disposition of those funds at the end of that time 
period. We have incorporated these changes in Sec. 422.312(c).

H. Provider-Sponsored Organizations

    This interim final rule makes certain technical and conforming 
changes to existing subpart H of part 422. These changes are discussed 
in section II.R. of this preamble.

I. Organization Compliance With State Law and Preemption by Federal Law

1. State Licensure (Sec. 422.500)
    Among the organizational and financial requirements for M+C 
organizations, section 1855 of the Act requires that an organization 
shall 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. (An exception to the 
licensure requirement is made for PSOs, as provided for in part 422 
subpart H.) Section 1855(b) specifies the level of risk that an 
organization assumes under an M+C contract (i.e., full risk for the M+C 
benefit package), and the extent to which the organization may insure 
against such risk or may pass off all or part of the risk to 
subcontracting providers. The requirements of the statute result in a 
two-pronged test of appropriate licensure, consisting of the licensure 
requirement itself and a scope of licensure requirement.
    Licensure and Scope of Licensure: With regard to the licensure 
requirement, although the BBA uses the term ``licensure,'' we have 
interpreted the provision as requiring a license or some other type of 
certification (such as a certificate of authority) that represents 
permission granted by the appropriate State authority for the 
organization to operate within the State as a risk-bearing entity 
offering health insurance or health benefits. Having met the State 
licensure requirement, an organization must also show that the ability 
to offer an M+C plan of the type they wish to offer is within the scope 
of its State licensure or State authorization. For example, an 
organization that offers only a prepaid dental plan in a State could be 
licensed as a risk-bearing entity, but its licensure status may not 
permit the organization to offer a health benefits plan that includes a 
comprehensive range of services, as would be necessary under an M+C 
contract. Similarly, a State may require an organization that is a 
licensed HMO to obtain separate licensure as an indemnity insurer in 
order to offer an M+C point-of-service (POS) plan, on the basis that 
the HMO scope of licensure does not include the ability to offer what 
is considered an indemnity product. (A State's requirement that an 
organization have an indemnity license in order to offer a POS product 
is not superseded by the Federal preemption provisions discussed 
below.)
    In some States, a Medicaid HMO may operate without a license from 
the department of insurance or other State agency that licenses 
organizations offering health benefits or health insurance in the 
commercial and Medicare markets. The Medicaid plans operate under the 
authority of the State Medicaid agency, which may be the agency 
establishing solvency standards for such organizations, as required by 
section 1903(m)(1)(A)(ii). The State authorization for these plans may 
be viewed as a limited scope licensure, enabling plans to operate as 
Medicaid contractors only, and not in other segments of the health 
insurance market.
    To establish the licensure status of organizations, and in 
particular to determine compliance with scope of licensure 
requirements, we will require, as part of the application process for

[[Page 35012]]

new applicants, documentation that both the licensure and scope of 
licensure requirements are met. Organizations must provide verification 
from the appropriate State regulatory body authorized to license 
Medicare risk products demonstrating that the licensure status of the 
organization enables it to offer the M+C plan, or plans, it intends to 
offer. This would ensure that, in the case of an organization only 
authorized to offer a Medicaid plan, for example, solvency standards 
appropriate to an M+C product are met. In the case of non-commercially 
licensed entities, we are requiring that they obtain a special 
certification from the State that they meet appropriate solvency 
standards.
    As noted in the BBA, ``The fact that an organization is licensed in 
accordance with paragraph [1855(a)](1) does not deem the organization 
to meet other requirements imposed under this part'' (1855(a)(3)). That 
is, while the State licensure requirement is imposed on all plans as a 
prerequisite for contracting as an M+C organization, licensure in and 
of itself does not guarantee that an organization will be able to 
obtain an M+C contract. The organization must meet other applicable 
requirements of this part in order for us to grant an M+C contract.
2. Federal Preemption of State Law (Sec. 422.502)
    Section 1856(b)(3)(A) of the Act provides for a Federal preemption 
of State laws, regulations, and standards affecting any M+C standard if 
the State provisions are inconsistent with Federal standards (a 
preemption policy we refer to below as a general preemption). There is 
also a specific preemption of State laws (1856(b)(3)(B)) in three areas 
where Federal standards ``preempt the field''; that is, regardless of 
whether State laws are inconsistent or not, Federal standards preempt 
State law, regulations, and standards. The general and specific 
preemption of State law applies to ``Medicare benefits and Medicare 
beneficiaries,'' as stated in the conference report that accompanied 
the BBA. The BBA preemption provisions do not extend to non-Medicare 
enrollees or activities or non-Medicare ``lines of business'' of 
organizations that have M+C contracts.
    Prior to the BBA, section 1876 of the Act (governing Medicare risk 
and cost contracts with HMOs and competitive medical plans) did not 
contain any specific preemption provisions. However, section 1876 
requirements could preempt a State law or standard based on general 
constitutional Federal preemption principles, consistent with the 
provisions of Executive Order 12612 on Federalism. Under the guidelines 
of the Executive Order, section 1876 requirements did not preempt a 
State law or standard unless the law or standard was in direct conflict 
with the Federal law, or it prevented the organization from complying 
with the Federal law. Put another way, if Federal law permitted the HMO 
to do what State law required, there was no preemption. In practice, 
rarely, if ever, did Federal law preempt State laws affecting Medicare 
prepaid plans. For example, Medicare risk plans operating in States 
with mandated benefit laws were generally required to comply with such 
State laws. Compliance with the State mandated benefit law was not 
viewed as interfering with the ability of plans to function as Medicare 
risk contractors under Federal standards. (Because the BBA preemption 
applies only to M+C plans, this approach to preemption issues will 
continue to apply to cost contracts governed by section 1876 rules.)
    General Preemption: The general preemption provision of the BBA 
will be applied in the same way that the Executive Order has been 
applied, in that State laws or standards will be preempted only when 
they are inconsistent with M+C standards, as clearly indicated in the 
statute. Because the BBA requires that PSOs operating under a waiver of 
the State licensure requirement must comply with State quality and 
consumer protection standards, it seems clear that the Congress 
expected States, in some cases, to have more rigorous or more 
comprehensive standards for quality and consumer protection which would 
enhance, rather than duplicate or be subsumed under, the M+C standards 
for quality and consumer protection. Thus, unless one of the specific 
preemptions discussed below applies, State laws or standards that are 
more strict than the M+C standards would not be preempted unless they 
prevented compliance with the M+C requirements. This is consistent with 
the BBA conference report language that notes that State laws apply if 
they provide ``consumer protections in addition to, or more stringent 
than'' the BBA. The BBA also provides that the quality and consumer 
protection standards with which PSOs must comply include only those 
requirements ``generally applicable to M+C organizations and plans in 
the State'' which are ``consistent with the standards'' of the BBA. 
That is, there are likely to be quality and consumer protection 
standards imposed by States that all M+C plans must comply with, and 
for which there is no Federal preemption.
    Specific Preemption: Though the general preemption provision will 
be applied in the same way that the Executive Order has been applied, 
for the three areas in which the Congress provided for a specific 
preemption of State laws, the M+C standards supersede any State laws 
and standards. These three areas are:
     Benefit requirements:
     Requirements relating to inclusion or treatment of 
providers; and
     Coverage determinations (``including related appeals and 
grievance processes'').
    We are adopting a narrow interpretation of the applicability of the 
three areas of specific preemption, which we believe is justified by 
the conference report language and the overall structure of the BBA in 
its delineation of the relative roles of the State and Federal 
governments. Under the BBA, States have exclusive authority (other than 
in the case of PSOs) to make the determination of whether organizations 
are eligible to enter into M+C contracts, while under section 1876 of 
the Act, it was the Federal Government that designated ``eligible 
organizations'' (HMOs under title XIII of the Public Health Service Act 
(a Federal designation) or competitive medical plans (also a Federal 
designation)). Under section 1876, the Federal Government also 
determined solvency standards for organizations, while under the BBA 
this becomes a State responsibility (other than for PSOs). The 
conference report (p. 638) also clarifies the intended scope of 
preemption in the three specific areas. The report indicates the 
conferees seek to put M+C on a par with ``original fee-for-service,'' 
where the ``Federal government alone set legislative requirements 
regarding reimbursement, covered providers, covered benefits and 
services, and mechanisms for resolving coverage disputes.'' The 
conferees wish to ``[extend] the same treatment to private M+C plans 
providing Medicare benefits to Medicare beneficiaries.''
    Using the analogy of original Medicare, Federal law preempts State 
laws and standards in certain specific areas. Under original Medicare: 
States cannot specify what must be included as a Medicare benefit; 
States do not specify the conditions of participation of Medicare 
providers (though they license providers and practitioners and 
determine their scope of practice); States may not specify how a 
coverage determination is to be made with respect to whether or not the 
Medicare program covers a benefit; and a State

[[Page 35013]]

does not determine the type of appeal mechanism that is to be used to 
appeal a coverage decision made by a Medicare carrier or intermediary 
with respect to a Medicare benefit. For M+C plans, the specific 
preemption of State laws in the three areas would prevent, for example, 
the application of mandated benefits laws; ``any willing provider'' 
laws and other laws mandating the inclusion of specific types of 
providers or practitioners; or laws that supplant or duplicate the 
Medicare coverage determination and appeal process as it relates to 
coverage of benefits under the M+C contract. However, States may have 
various laws and requirements that could still apply to
     Benefits (for example, a plan could be required to have a 
toll free number to answer benefit questions),
     Providers and practitioners generally in the State (e.g., 
they must all be licensed by the State and comply with scope of 
practice laws), and
     Laws and standards which could apply to disputes between 
members and health plans, as discussed below.
    Under our narrow construction of the specific preemptions, and 
consistent with our definition of the term ``benefits'' at Sec. 422.2, 
the specific preemption of benefit laws does not extend to State laws 
and standards relating to cost sharing or other financial liability 
standards for enrollees of health plans, though we are inviting 
comments on our position, outlined below, that cost sharing should not 
fall under the benefits preemption, as well as comments on whether 
there are types of cost sharing that should or should not be included 
in the benefits preemption.
    Thus, a State law prescribing limits on cost sharing generally, or 
limits on cost sharing that can be imposed for specific benefits, would 
not be preempted. If the benefit to which the State cost sharing limits 
apply is not a Medicare covered benefit, however, the limits on cost 
sharing would only apply if the M+C organization chooses to offer the 
benefit in question. Thus, to the extent that limits on cost sharing 
are linked to a benefit mandate, the cost sharing limits could be seen 
to be indirectly ``preempted'' in that the obligation to provide the 
benefit to which they apply is preempted. If the M+C organization 
chooses not to provide the benefit that would otherwise be mandated 
under a preempted benefit mandate, the cost sharing limits that apply 
to that benefit would never come into play. We note that while cost 
sharing limits are not specifically preempted under the benefits 
preemption in section 1856(b)(3)(B)(i) and Sec. 422.402(b)(1), cost 
sharing limits are still subject to the general preemption in section 
1856(b)(3)(A) and Sec. 422.402(a). Thus, to the extent the cost sharing 
limit would be inconsistent with M+C provisions, it would be preempted. 
An example of State cost-sharing requirements being preempted because 
they are inconsistent with M+C provisions would be a State requirement 
that requires all insurers and health plans to pay 100 percent of the 
cost of a particular service (e.g., mammography screening or other 
preventive care). In the case of an M+C MSA plan, we would argue that 
the general preemption provision applies, because the State requirement 
is inconsistent with the basis structure of a high-deductible plan 
under which covered services are not payable under the plan until the 
deductible is met.
    To address a specific question that has arisen, State laws 
requiring direct access to particular providers (either contracted by 
the M+C organization or not under contract), and State laws requiring, 
for example, a second opinion from non-contracted physicians, would be 
superseded by the benefit and provider participation preemptions 
(though M+C standards in these regulations dealing with access to 
particular providers may have an effect that is similar to that of 
State laws that are superseded). This is because these requirements in 
essence mandate the ``benefit'' of access to a particular provider's 
services even where the services of that provider would not otherwise 
be a covered benefit.
    We are also adopting a narrow interpretation of the scope of 
preemption of coverage determinations. Coverage determinations are made 
initially by M+C organizations and may be appealed as provided for 
under subpart M of these regulations. Our view is that the types of 
decisions related to coverage included in this specific preemption are 
only those determinations that can be subject to the appeal process of 
subpart M. These are decisions about whether an item or service is 
covered under the M+C contract and the extent of financial liability 
beneficiaries have for the cost of covered services under their M+C 
plan. The Medicare appeal process applies to basic benefits, mandatory 
supplemental benefits, and optional supplemental benefits offered under 
an M+C contract. The specific preemption makes the Medicare appeal 
process the exclusive remedy for disputes over coverage determinations, 
displacing any State grievance or appeal process that might otherwise 
be available in such cases. However, the specific preemption does not 
preempt State remedies for issues other than coverage under the 
Medicare contract (i.e. tort claims or contract claims under State law 
are not preempted). The same claim or circumstance that gave rise to a 
Medicare appeal may have elements that are subject to State remedies 
that are not superseded. For example, an M+C organization's denial of 
care that a beneficiary believes to be covered care is subject to the 
Medicare appeals process, but under our interpretation of the scope of 
the specific preemption on coverage decisions, the matter may also be 
the subject of a tort case under State law if medical malpractice is 
alleged, or of a state contract law claim if an enrollee alleges that 
the M+C organization has obligated itself to provide a particular 
service under State law without regard to whether it is covered under 
its M+C contract.
    We are seeking public comments on our interpretation of the 
applicability of the three areas of pre-emption specifically the 
exclusion of cost sharing and financial liability standards from the 
federal pre-emption and the exclusion of direct access to particular 
providers.
    As noted above, where the BBA preempts State laws and standards, 
any Federal preemption based on the BBA applies only to the Medicare 
``line(s) of business'' of an M+C organization (i.e., Medicare 
enrollees). As such, there would be no Federal preemption of State laws 
which are applicable to other enrollees of the organization. 
Additionally, there would be no Federal preemption of State laws which 
are applicable to arrangements outside the scope of the BBA, such as 
arrangements between employers and M+C plans for the provision of 
negotiated employer group benefits discussed at Sec. 422.106 of these 
regulations. Neither the specific nor the general preemption would 
apply to any aspect of such arrangements.
3. Prohibition on State Premium Taxes (Sec. 422.404)
    Section 1854(g) of the Act, introduced in the BBA, provides that 
``No State may impose a premium tax or similar tax with respect to 
payments to M+C organizations under section 1853.'' Section 4002(b)(4) 
of the BBA makes the prohibition on premium taxes applicable to risk-
sharing contracts operating under section 1876 effective the date of 
enactment of the BBA. This prohibition does not apply to enrollee 
premium payments made to M+C plans, which are authorized under section 
1854.
    The regulations provide clarification on the applicability of the 
prohibition of State premium taxes. The BBA does not

[[Page 35014]]

define the term ``State,'' but elsewhere in the Medicare statute 
(1861(x), referring to 210(h) of the Act), the term ``State'' is 
defined to include the District of Columbia, the Commonwealth of Puerto 
Rico, the Virgin Islands, Guam, and American Samoa. The regulations 
include this definition of State for purposes of the scope of the 
premium tax prohibition.
    The BBA is also silent as to whether the prohibition of premium 
taxes includes county taxes or taxes by other governmental entities 
within a State. The Federal Employees Health Benefits Program (FEHBP) 
statute, on the other hand, has more specific language on the 
applicability of the exemption from premium taxes. The FEHBP statute 
specifically extends the prohibition to ``any political subdivision or 
other governmental authority'' of a State (5 U.S.C. 8909(f)(1)).
    The BBA conference report does not provide any clarification on 
this issue. However, a July 31, 1997 summary of the provisions of the 
BBA prepared by the Senate Finance Committee (``Summary: Health and 
Welfare Provisions in the Balanced Budget Act of 1997''), stated that 
``[t]he current law on federal preemption of state premium taxes or 
fees on Federal payments from the FEHBP to health plans will be 
extended to Federal payments to M+C plans and other health plans 
receiving capitated payments from the Medicare Trust Funds.'' Although 
the language of the BBA prohibition is not as specific as the FEHBP 
language, we are clarifying in these regulations that the prohibition 
does apply to any political subdivision or other governmental authority 
within a State. We believe such an interpretation is necessary because 
counties and other State authorities derive their powers from the 
State. Thus, any prohibition of State actions contained in a Federal 
statute should be interpreted as prohibitions on actions at any level 
of State government or any State or local governmental body within a 
State.
    The BBA does not define the phrase ``premium tax or other similar 
tax,'' other than by reference to the applicability of such a tax to 
revenue received from the Federal Government for health plan enrollees. 
Relying again on the FEHBP statute, we have included a provision in the 
regulations (Sec. 422.404(b) that serves to clarify the scope of what 
constitutes a prohibited premium tax. The FEHBP statute expressly 
permits States to impose taxes on the profits arising from 
participation as an FEHBP plan, to the extent that the tax on profits, 
or other taxes or fees, are general business taxes. We have included a 
similar exception because such taxes are not taxes applied directly and 
exclusively to premium revenues, and therefore should not be prohibited 
under section 1854(g).
    The BBA premium tax prohibition does not provide for any exception 
to the prohibition based on the purpose of the tax. For example, some 
States are using a broadly applicable premium tax to fund health care 
coverage for individual State residents who might otherwise be 
uninsured (e.g., financing a State high-risk pool), or to fund a State 
guaranty fund that could potentially benefit enrollees of an M+C plan 
in the event of insolvency. Although such premium taxes do provide a 
social good, and may yield a direct benefit to M+C organizations and 
their enrollees, there are no exceptions to the premium tax prohibition 
included in the BBA or in these regulations. By not having allowed any 
exceptions, we would note that, to the extent participation in a State 
guaranty fund is used as means of satisfying State (or Federal) 
requirements for protections in the event of insolvency, M+C 
organizations that would otherwise have participated in the guaranty 
fund by paying the premium tax are likely to be required to meet 
alternative insolvency requirements. An M+C organization may also 
choose to voluntarily pay premium taxes in order to participate in such 
a fund.

J. Subpart J of Part 422

    Subpart J of part 422 is being reserved.

K. Contracts with M+C Organizations

1. Definitions (Sec. 422.500)
    Section 422.500 of subpart K contains definitions germane to 
subpart K that address provisions pertaining to contracts with M+C 
organizations. These definitions, for the most part, have been imported 
from part 417 under our authority from section 1856(b)(2). The lone 
exception, Party of Interest has been clarified in paragraph (3) to 
include non-profit entities.
2. General Provisions (Sec. 422.501)
    Section 1857(a) provides that the Secretary will not permit an 
organization to operate as an M+C organization unless it has entered 
into a contract with HCFA. The statute also provides that the contract 
may cover more than one M+C plan.
    An applicant, however, must meet certain requirements before HCFA 
can consider entering into a contract with it. First, in accordance 
with section 1855(a)(1), the applicant must be licensed (or if the 
state does not license such entities, hold a certificate of authority/
operation) as a risk-bearing entity in the State in which it wishes to 
operate as an M+C organization; section 1855(a)(2), however, allows for 
a waiver of this requirement for Federally-waivered PSOs under certain 
circumstances. Second, the applicant must meet the minimum enrollment 
requirements specified at section 1857(b). These requirements provide 
that the organization must have at least 5,000 (or 1,500 if it is a 
Federally-waivered PSO) individuals receiving health benefits from the 
organization or at least 1,500 (or 500 if it is a PSO) individuals 
receiving benefits in a rural area. Section 1857(b)(3) gives the 
Secretary the authority to waive the minimum enrollment requirements 
for the first 3 contract years.
    Third, an M+C organization must demonstrate certain administrative 
and managerial capabilities that we believe are essential for HCFA to 
examine prior to agreeing to contract with any applicant as an M+C 
organization. For this reason, pursuant to section 1856(b)(2) which 
provides for the adoption of regulations implementing section 1876, we 
have adopted the administration and management requirements from 
Secs. 417.120 and 417.124 and have applied them to M+C organizations. 
In addition, pursuant to our authority in section 1856(b)(1) to 
establish standards under Part C by regulation, we will require that 
all M+C organizations establish a plan for complying with all 
applicable Federal and State standards. The compliance plan must 
include written policies, procedures, and standards of conduct, the 
designation of a compliance officer accountable to senior management of 
the organization, provisions for internal monitoring, auditing, 
accountability, and an adhered to process for reporting violations of 
law by the organization or their subcontractors.
    Further, pursuant to our authority in section 1856(b)(1) to 
establish standards for M+C organizations by regulation, we are in this 
rule establishing an additional condition for entering into an M+C 
contract. Under this rule, an entity that is accepting new enrollees 
under a section 1876 cost contract will be ineligible to enter into an 
M+C contract covering the area it serves under its cost contract. Our 
reason for establishing this rule is to eliminate the potential for an 
organization to encourage higher cost enrollees to enroll under its 
cost contract while healthy enrollees are enrolled in its risk-based 
M+C plan. This rule is consistent with our longstanding policy that 
entities not

[[Page 35015]]

have both a risk and cost contract under section 1876 in the same area.
    Further, we provide at Sec. 422.501(b) that in order to be eligible 
to contract as an M+C organization, an applicant organization that held 
a prior contract terminated by HCFA under Sec. 422.510 within the past 
five years.
    Section 1857(c)(5) authorizes the Secretary to enter into contracts 
with organizations without regard to provisions of law or regulations 
that the Secretary determines to be inconsistent with the furtherance 
of the purpose of Title XVIII of the Act. Based on this authority, we 
provide in Sec. 422.501(c) that HCFA may enter into contracts under 
part 422 without regard to the Federal and Departmental acquisition 
regulations set forth in title 48 of the CFR.
    Further, section 1857(d)(1) and (2) provide for the auditing of the 
financial records of at least one third of M+C organizations annually, 
and the inclusion of specified inspection and auditing rights in M+C 
contracts. We have incorporated these requirements in Sec. 422.501(d). 
We likewise specify related requirements that enable HCFA to do so.
    Since section 1857(a) allows that an M+C contract may cover more 
than one M+C plan, we have added paragraph (e), ``Severability of 
contracts,'' through our authority in section 1856(b)(1). The contract 
provides that upon HCFA's request (1) the contract will be amended to 
exclude any M+C plan or State-licensed entity specified by HCFA, and 
(2) a separate contract for any such excluded plan or entity would be 
deemed to be in place when such a request is made.

National Contracting

    The BBA does not specifically define or otherwise address the issue 
of national contracting. While we are interested in national 
contracting, we have not specified it in the regulations and welcome 
comment on this concept. One option we are considering would allow an 
M+C applicant to request that HCFA enter into a national contract with 
the applicant if the applicant holds license as a risk-bearing entity 
in each state where it operates or has a waiver as provided in 
Sec. 422.370. The applicant M+C organization would have the option of 
having a uniform premium and benefit plan across the country, with one 
service area and a national ACR proposal.
    We are considering a different concept of a national agreement with 
national chain organizations. This concept would apply to those chain 
organizations that enter into separate contracts in multiple States. 
The agreement would allow for the chain organization to establish a 
uniform policy across all of its states as to marketing, quality 
assurance, utilization review, claims processing, etc. HCFA would have 
to approve the national policy procedures. HCFA would continue to 
contract separately with individual, albeit related, M+C organizations 
affiliated through common ownership or control. We would continue to 
monitor operational activities for each organization in each State, but 
having approved national policy, our review at the State and local 
level would be reduced.
3. Contract Provisions (Sec. 422.502)
    Section 422.502 of this rule sets forth the provisions and related 
requirements for contracts between HCFA and M+C organizations. In 
general, Medicare beneficiaries may not elect to enroll in an M+C plan 
offered by an M+C organization, and no payment will be made to the M+C 
organization, unless the Secretary enters into a contract with the 
organization. The provisions that describe this relationship between 
the Secretary and the M+C organization are based on Part C of title 
XVIII of the Act and on Medicare contract requirements derived from 
subparts C and L of part 417.
    The provisions of the Act as added by the BBA are generally silent 
with regard to the specific provisions that must be included in the 
contract between the M+C organization and HCFA. The Act does, however, 
specify at section 1857(a) that the contract must provide that the 
organization agrees to comply with the applicable requirements, 
standards, and terms and conditions of payment of Part C of title XVIII 
of the Act. In addition, section 1857(e) provides that the contract 
shall contain such other terms and conditions not inconsistent with 
Part C of title XVIII of the Act that the Secretary may find necessary 
and appropriate. Included in Sec. 422.502(a), ``Agreement to comply 
with regulations and instructions,'' are the following contract 
conditions:
     The M+C organization must agree to accept new enrollments, 
make enrollments effective, process voluntary disenrollments, and limit 
involuntary disenrollments. The M+C organization agrees that it will 
comply with the prohibition in Sec. 422.108 on discrimination in 
beneficiary enrollment.
     The M+C organization must agree to provide the basic 
benefits as required under Sec. 422.101 and to the extent applicable, 
supplemental benefits under Sec. 422.102.
     The M+C organization must agree to provide access to 
benefits as required under subpart C of part 422. All benefits covered 
by Medicare must be provided in a manner consistent with professionally 
recognized standards of health care.
     The M+C organization agrees to disclose information to 
beneficiaries as required under Sec. 422.110.
     The M+C organization must agree to operate a quality 
assurance and performance improvement program, and to have an agreement 
for external quality review as required under subpart D of part 422.
     The M+C organization must agree to comply with all 
applicable provider requirements in subpart E of part 422, including 
provider certification requirements, anti-discrimination requirements, 
provider participation and consultation requirements, the prohibition 
on interference with provider advice, limits on provider 
indemnification, rules governing payments to providers, and limits on 
physician incentive plans.
     The M+C organization will agree to comply with all 
requirements in subpart M governing coverage determinations, 
grievances, and appeals.
     The M+C organization will comply with the reporting 
requirements in Sec. 422.516 and the requirements for submitting 
encounter data to HCFA in Sec. 422.257.
     The M+C organization agrees that it will be paid under the 
contract in accordance with the payment rules under subpart F of part 
422.
     The M+C organization will develop annual adjusted 
community rate proposals and submit all required information on 
premiums, benefits, cost sharing by May 1, as provided in subpart G of 
part 422.
     The M+C organization agree that its contract may be 
terminated or not renewed in accordance with subparts K and N of part 
422.
     The M+C organization will agree to comply with all 
requirements that are specific to a particular type of M+C plan, such 
as the special rules for private fee-for-service plans in Secs. 422.114 
and 422.216 and the M+C MSA requirements in Secs. 422.56, 422.103, and 
422.262.
     The M+C organization will agree to comply with the 
confidentiality and enrollee accuracy requirement in Sec. 422.118.
     The M+C organization agrees that complying with the 
aforementioned contract conditions is material to performance of the 
contract.
    Contract requirements that were either not required of HMOs and 
CMPs

[[Page 35016]]

under section 1876, or have been modified to implement the M+C program 
follow:
     The M+C organization must possess the capabilities to 
communicate with HCFA electronically.
     The M+C organization is required to provide prompt payment 
of covered services if these services are not furnished by a provider 
under contract or agreement in an M+C plan's health services delivery 
network. Under section 1876, the prompt payment requirement was limited 
to noncontracting providers. Section 1857(f) duplicates this 
requirement and adds to it the requirement that if the Secretary 
determines that an M+C organization fails to pay claims promptly, the 
Secretary may provide for direct payment of the amounts owed providers. 
When this occurs, the Secretary reduces the amount of the M+C 
organization's monthly payment to account for payments to these 
providers. We explain the full implications of this requirement in the 
discussion below pertaining to Sec. 422.520.
     Pursuant to our authority in section 1856(b)(1) to 
establish standards under Part C, we are requiring that M+C 
organizations maintain records for 6 years. The standard for retention 
of records for HMO and CMPs was 3 years. We are changing the retention 
period from 3 years to 6 years so as not to prematurely foreclose our 
ability to address fraudulent or other abusive activities.
     Pursuant to our authority at section 1856(b)(1) to 
establish standards under Part C, we specify requirements relating to 
M+C organizations providing access to facilities and records at 
Sec. 422.502(e). In this section we assert that M+C organizations allow 
HHS, the Comptroller General, or their designees to evaluate, through 
inspection or other means, all aspects of medical services furnished to 
Medicare beneficiary enrollees, the facilities of M+C organizations, 
and enrollment and disenrollment records of M+C organizations. We 
further provide that HHS, the Comptroller General, or their designees 
may audit, evaluate, or inspect all facilities and records as the 
Secretary may deem necessary to enforce an M+C contract. HHS's, the 
Comptroller General's, and designee's right to inspect such facilities 
and records extends through 6 years from the date of the contract 
period or completion of any inspection or audit activity, whichever is 
later. Exceptions to this 6-year inspection timeframe can occur in 
instances when: (1) HCFA determines there is a special need to retain 
particular records or a group of records for a longer period and 
notifies the M+C organization at least 30 days before the normal 
disposition date, (2) there has been a termination, dispute, or fraud 
or similar fault by the M+C organization, in which case the retention 
may be extended to 6 years from the date of any resulting final 
solution of the termination, dispute, or fraud or similar fault, or (3) 
HCFA determines that there is a reasonable possibility of fraud, in 
which case it may inspect, evaluate, and audit the M+C organization at 
any time.
     Pursuant to our authority in section 1856(b)(1) to 
establish standards under Part C, and the provision in section 
1856(b)(2) for adopting section 1876 standards, we have included 
certain disclosure requirements from Sec. 417.486 in Sec. 422.502(f). 
We have also included additional disclosure requirements to reflect new 
reporting requirements in Sec. 422.516.
     At Sec. 422.502(f)(2), we add the requirement that M+C 
plans submit to HCFA specific information necessary to evaluate and 
administer the program and to enable beneficiaries to exercise informed 
choice in obtaining Medicare services. Section 1851(d) authorizes the 
Secretary to obtain this information to enable HCFA to fulfill its 
responsibility to develop activities to disseminate broadly information 
to current and prospective Medicare beneficiaries in order to promote 
an active, informed selection among such options.
     Pursuant to section 1851(b)(4)(B), we have specified 
requirements at Sec. 422.502(b)(2)(vii) that M+C organizations offering 
MSA plans disclose to HCFA information that will enable HCFA to 
evaluate the impact of permitting enrollment in MSA plans.
     Enrollee financial protection provisions are addressed at 
Sec. 422.502(g). The first item protects beneficiary enrollees from 
incurring liability for payment of any fee that M+C organizations are 
legally obligated to bear. Section 422.502(g) contains the enrollee 
financial protection that has applied to HMO and CMP enrollees under 
Sec. 417.122 (a)(1), which was made applicable to all section 1876 
contractors under Sec. 417.407(f). The beneficiary protection at 
422.502(g)(1) is designed to protect beneficiary enrollees from being 
held financially responsible for fees for which the M+C organization is 
legally liable. Under the provision, we assert that M+C organizations 
protect beneficiary enrollees in two ways. First, through inclusion, 
hold harmless language in its written agreements with the providers 
that comprised the M+C plan's Medicare provider network. And pursuant 
to our rulemaking authority at section 1856(b)(1), we also specify that 
M+C organizations must indemnify beneficiary enrollees for the 
organization's legal obligations that are derived from health care 
services provided to enrollee beneficiaries by providers that have not 
entered into a written agreement to participate in the M+C 
organization's Medicare provider network. The beneficiary protection at 
422.502(g)(2) afford beneficiaries protection against loss of benefits 
for which the M+C organization is legally obligated to pay. Except in 
the case of PSOs that have been awarded Federal waivers (see subpart 
H), States have the primary responsibility under Part C for determining 
whether an M+C organization has sufficient reserves to assume the risk 
it takes on under an M+C contract. The State that licenses the entity 
under applicable State law determines whether an entity has sufficient 
financial reserves to enter into an M+C contract.
    Congress has given HCFA some ongoing responsibility concerning 
solvency, however. In section 1857(d)(4)(A)(i), M+C organizations are 
required to provide the Secretary with such information ``as the 
Secretary may require demonstrating that the organization has a 
fiscally sound operation.'' Accordingly, we believe that it is 
appropriate, under our authority in section 1856(b)(1) to establish 
standards under Part C to require (in Sec. 422.502(g)) that an entity 
that already has an M+C contract demonstrate to HCFA that it has 
protections in place ensuring that beneficiaries will not be held 
liable for the entity's debts. We believe that this can be seen as part 
of having a fiscally sound operation as provided for in section 
1857(d)(4)(A)(i).
     The subsection entitled ``Requirements of Other Laws and 
Regulations'' at Sec. 422.502(h) requires that contracts reflect the 
M+C organization's obligations under other laws, specifically, the 
Civil Rights Act of 1964, the Age Discrimination Act of 1975, the 
Americans with Disabilities Act, other laws applicable to recipients of 
Federal funds, and all other applicable laws and rules.
     Pursuant to our authority under section 1856(b)(1) to 
establish standards under Part C, paragraph (i) of Sec. 422.502 
contains requirements that apply to related entities, contractors, and 
subcontractors of an M+C organization. These requirements promote an 
M+C organization's accountability and program integrity.
    The requirements in paragraph (i) recognize that organizations that 
are likely to apply for M+C contracts commonly enter into business

[[Page 35017]]

relationships with entities that they placed under contract to perform 
certain functions that otherwise would be the responsibility of the 
organization to perform including management and provision of services. 
This section therefore addresses these relationships and establishes 
requirements that the M+C organizations must adhere to in order to 
provide HCFA assurances that the M+C organization will be accountable 
for all contract requirements.
    Specifically, this section gives HHS, the Comptroller General or 
their designee, the authority to audit, evaluate and/or inspect 
documents, papers, records of all of the organizations mentioned in 
Sec. 422.502(i); and to obtain information from the M+C organization 
and other entities described here, six years following the close of a 
contract or audit. Paragraph (i)(3) of Sec. 422.502 describes 
provisions that must be included in contracts and other written 
arrangements between M+C organizations and other entities described in 
this section.
     Section 422.502(j), which is derived from section 1857(e), 
states that the contract will contain other terms and conditions 
consistent with this part as HCFA may find necessary and appropriate.
     Under Sec. 422.502(k), we require that all M+C contracts 
be severable as discussed previously.
    Finally, pursuant to our authority in section 1856(b)(1) to 
establish standards under Part C by regulation, we are requiring in 
paragraphs (l) and (m) that an M+C organization request payment on 
document that certify the accuracy and completeness of relevant data as 
a condition for receiving its capitation payment and, in the case of 
the ACR, for retaining the portion of capitation payment associated 
with the ACR amount (rather than providing additional benefits). 
Section 422.502(b) also states that the M+C organization's CEO or CFO 
certify the accuracy of encounter data, and, in instances when 
encounter data are generated by a related entity, contractor, or 
subcontractor, such entity likewise certifies the accuracy of the 
encounter data.
    In all of these cases, when an M+C organization submits the data in 
question to HCFA, we believe that it is making a ``claim'' for 
capitation payment in the amount dictated by the data submitted, or in 
the case of the ACR submission, a ``claim'' to retain the portion of 
the capitation payment that is under the ACR amount, rather than 
providing additional benefits. We believe it is important that when an 
M+C organization is claiming payment (or the right to retain payment) 
in a particular amount based upon information it is submitting to HCFA, 
it should be willing to certify the accuracy of this information. We 
believe that these certifications will help ensure accurate data 
submissions, and assist HCFA and the Office of Inspector General in 
anti-fraud activities.
4. Effective Date and Term of Contract (Sec. 422.504)
    Section 1857(c) provides that each contract under section 1857 will 
be for a term of at least 1 year, as determined by the Secretary. This 
section also provides that the effective date and term of the contract 
will be specified in the contract, except that in no case will a 
contract under this section that provides for coverage under an M+C MSA 
plan be effective before January 1999 with respect to such coverage. 
Based on these provisions, Sec. 422.504(b) of this rule provides that 
beginning in 2002, contracts will be for a period of 12 months 
beginning on January 1 and ending on December 31. We include an 
exception at Sec. 422.504(d) which indicates that prior to January 1, 
2002, HCFA may at its discretion approve contracts for periods longer 
than 12 months, that begin on a date other than January 1.
    HCFA has decided not to exercise the discretion provided in section 
1857(a)(1) to make contracts automatically renewable (section 
1857(a)(1) provides that contracts ``may'' be automatically renewable 
from term to term.) Instead, we specify at Sec. 422.504(c) that the 
contract may be renewed annually only if HCFA affirmatively authorizes 
a renewal, and the M+C organization has not given HCFA a notice of 
nonrenewal. We believe that this approach is consistent with HCFA's 
role as a prudent purchaser and is in the best interest of the tax 
payer, the Medicare beneficiary and the Medicare program.
    Under the current 1876 risk contract program, HCFA receives 
applications on a continuous basis and also awards contracts on a 
continuous basis as soon as the review process is complete, and a 
decision for approval has been reached. We have decided to maintain 
this process for the next few years under the M+C program. The BBA, 
however, provides a framework that has encouraged us to consider 
changing this in the future. The requirements for a coordinated open 
enrollment policy and printed plan comparison charts and the advent of 
the lock-in periods starting in 2002 suggests that HCFA move toward a 
policy of establishing a cutoff date for awarding contracts annually. 
This cutoff date would be timed to ensure that all new plans are 
included in the printed plan comparison charts. If we established a 
cutoff phase, HCFA would implement this change to the application and 
award processes in the year 2001 in time for the first year of the 
lock-in. We invite comments on this issue.
5. Nonrenewal of Contract (Sec. 422.506)
    Section 422.506(a) discusses the process that an M+C organization 
must follow if it decides not to renew its contract. If the M+C 
organization does not want to renew its contract, it must notify HCFA 
in writing by May 1 of the year preceding the year that the M+C 
organization intends to no longer contract with HCFA. In addition, the 
M+C organization must notify each Medicare enrollee by mail at least 90 
days before the effective date of the nonrenewal. It must also notify 
the general public at least 90 days before the end of the current 
calendar year by publishing a notice in one or more of the newspapers 
of general circulation located in the M+C's geographic area.
    We also provide that HCFA may accept a nonrenewal notice of an M+C 
organization's decision not to renew its contract submitted after May 1 
if the M+C organization complies with the requirements concerning 
enrollee and public notification and acceptance would not otherwise 
jeopardize the effective and efficient administration of the Medicare 
program. The May 1 deadline is timed to coincide with the ACR 
submission and internal HCFA timelines that require the timely 
submission of information necessary for developing annual health fair/
open enrollment materials that will be made available to new and 
already-enrolled Medicare beneficiaries. We believe that the conference 
committee reports make it clear that the Congress intends for Medicare 
beneficiaries to make informed choice based on accurate, comparative 
M+C plan information. The Conferees further make it clear that the 
Secretary must take all steps necessary to ensure that all Medicare 
beneficiaries are provided the information needed to make informed 
choices about health coverage. We assert that the date-specific 
deadlines by which an M+C organization must notify HCFA of its decision 
not to renew its contract is a necessary step that promotes and 
represents the best intent of the law.
    Section 1857(c)(4) provides that the Secretary cannot enter into an 
M+C contract with an M+C organization if, within the preceding five 
years, that organization has had an M+C contract

[[Page 35018]]

that was ``terminated at the request of the organization,'' except ``in 
circumstances that warrant special consideration, as determined by the 
Secretary.'' While Congress used the word ``terminated'' rather than 
``nonrenewed,'' the only way that a contract could end solely ``at the 
request of the organization'' would be as the result of a notice of 
nonrenewal of the contract. In the case of a termination by mutual 
consent, discussed below, this only occurs if HCFA agrees that a 
termination of the contract is in the best interests of beneficiaries. 
Even in the case of a termination by the M+C organization under 
Sec. 422.512 (discussed below), an organization does not have the right 
simply to ``request'' termination of the contract. Rather, it must show 
HCFA noncompliance with HCFA's obligations. This has never happened 
under the Part 417 counterpart of this authority for an organization to 
terminate its contract (Sec. 417.494(c)). Thus, we have always 
interpreted similar language in section 1876 to apply when an 
organization nonrenews its contract. We therefore make this 
interpretation explicit in Sec. 422.506(a)(4).
    HCFA decision not to authorize renewal. In accordance with 
Sec. 422.506, contracts are renewed annually only if (1) HCFA informs 
the M+C organization that it authorizes a renewal and (2) the M+C 
organization has not provided HCFA with a nonrenewal notice. Section 
422.506(b)(1) provides that HCFA may decline to authorize a renewal of 
a contract for any of the following reasons:
     The M+C organization has not fully implemented or shown 
discernable progress in implementing quality improvement projects;
     The M+C organization demonstrates insufficient enrollment 
growth. As participation in the M+C program grows it is inevitable that 
some contracting entities will not enroll sufficient numbers of 
Medicare beneficiaries to justify the administrative costs associated 
with regulating meet the applicable minimum enrollment requirements at 
Sec. 522.514.
     For any of the reasons listed in Sec. 422.510(a) which 
would also permit HCFA to terminate the contract.
     The M+C organization has committed any of the acts in 
Sec. 422.752(a) which would support the imposition of intermediate 
sanctions or civil money penalties under Subpart O.
    We believe that these aforementioned reasons for not authorizing 
renewal of a contract are consistent with HCFA's intent to fulfill its 
role as a prudent purchaser of health care services.
    Section 422.506(b)(2) provides that if HCFA decides not to 
authorize the renewal of a contract, HCFA gives written notice to--
     The M+C organization by mail by May 1 of the current 
calendar year;
     The M+C organization's enrollees at least 90 days before 
the end of the current calendar year; and
     The general public, by publishing a notice in one or more 
newspapers of general circulation in each community or county located 
in the M+C organization's service area, at least 90 days before the end 
of the current calendar year.
    Section 422.506(b)(3) provides that HCFA give the M+C organization 
written notice of its right to appeal the nonrenewal decision in 
accordance with subpart N.
6. Modification or Termination of a Contract by Mutual Consent 
(Sec. 422.508)
    We provide guidance at Sec. 422.508(a) that allows for contract 
termination by mutual consent. If a contract is terminated by mutual 
consent, except as provided in the Sec. 422.508(b), the M+C 
organization must provide notice to its Medicare enrollees and the 
general public as provided in Sec. 422.512(b) (2), and (3). If the 
contract terminated by mutual consent is replaced on the following day 
by a new M+C contract, the notice specified above does not need to be 
provided.
    We have developed a mutual consent termination policy because we 
believe that there are circumstances under which an M+C organization 
may agree to a mutual termination by consent. This policy gives HCFA 
the option to offer this alternative to affected M+C organizations. 
Further, HCFA may decide that it is in the best interests of tax 
payers, Medicare beneficiaries and the Medicare program to agree to let 
an M+C organization terminate its contract midyear. Finally, we believe 
this policy accommodates M+C organizations that may wish to terminate 
their contract by mutual consent at the end of a calendar year and 
enter into a new 12 month contract year on January 1 during the years 
prior to 2002. We invite comment on this proposed policy.
    In Sec. 422.508, with some modifications, we have retained the 
provision for contract modification or termination by mutual consent 
that applies to contracts under section 1876. As under Sec. 417.494(a), 
contracts may be modified or terminated at any time by written mutual 
consent. The two changes we have made are that (1) we have changed the 
obligation to provide enrollees and the public with notice of a 
termination to conform to the 60-day notice requirement in 
Sec. 422.512(b) (2) and (3) (which retained the enrollee notice 
requirement in Sec. 417.484(c)(2)); and (2) we have provided for an 
exception to the notice requirement for cases in which a contract being 
terminated by mutual consent is being replaced by a new contract on the 
day the termination becomes effective. We continue to require that M+C 
organizations notify their Medicare beneficiary enrollees of any 
changes that may occur pursuant to a contract modification by mutual 
consent within timeframes specified by HCFA.
7. Termination of a Contract by HCFA (Sec. 422.510)
    Section 1857(c)(2) provides that the Secretary may at any time 
terminate an M+C organization contract if the Secretary determines that 
the M+C organization--
     Failed substantially to carry out the contract;
     Is carrying out the contract in a manner inconsistent with 
the efficient and effective administrative of Medicare Part C; or
     No longer substantially meet the applicable conditions of 
Medicare Part C.
    In addition to repeating the above statutory language, we are 
implementing this language by identifying specific circumstances that 
we believe constitute examples of an M+C organization substantially 
failing to carry out either its contract, or carrying out its contract 
in a manner that is inconsistent with the effective and efficient 
administration. Specifically, we have identified the following 
circumstances: The M+C organization commits or participates in 
fraudulent or abusive activities affecting the Medicare program; the 
M+C organization substantially fails to comply with requirements in 
Subpart M relating to grievances and appeals; the M+C organization 
fails to provide HCFA with valid encounter data as required under 
Sec. 422.257; the M+C organization fails to implement an acceptable 
quality assessment and performance improvement program as required 
under Subpart D; the M+C organization substantially fails to comply 
with the prompt payment requirements in Sec. 422.520; the M+C 
organization substantially fails to comply with the service access 
requirements in Sec. 422.112 or Sec. 422.114; the M+C organization 
fails to comply with the requirements of Sec. 422.208 regarding 
physician incentive plans.
    Section 1857(h)(2)provides authority for the Secretary to 
immediately terminate a contract with an M+C organization in instances 
where the

[[Page 35019]]

Secretary determines that a delay in termination resulting from 
compliance with the procedures in section 1857(h)(1) discussed below 
would pose an imminent and serious risk to the health of enrolled 
Medicare beneficiaries.
    We have implemented this authority as follows. First, 
Sec. 422.510(a)(5) provides for termination when an M+C organization 
experiences financial difficulties so severe that its ability to make 
necessary health services available is impaired to the point of posing 
an imminent and serious risk to the health of its enrollees, or when 
the organization otherwise fails to make services available to the 
extent that such a risk to health exists. Second, Sec. 422.510(b)(2) 
provides that a termination based on Sec. 422.510(a)(5) takes effect 
immediately. Third Sec. 422.510(c) provides that the opportunity for 
corrective action does not apply to a termination based upon 
Sec. 422.510(a)(5). And fourth, subpart N of part 422 provides that in 
the case of a termination based on Sec. 422.510(a)(5), a hearing is not 
provided until after the termination takes effect.
    Section 1857(h)(1) specifies procedures that must be followed 
before a termination by HCFA can take effect (unless the exception for 
an imminent and serious risk to health applies, as discussed above). We 
specify these requirements at Sec. 422.50(b)(1). Section 1857(h)(1)(A) 
requires that the M+C organization be provided with a ``reasonable 
opportunity to develop and implement a corrective action plan to 
correct the deficiencies'' that were the basis for a decision that 
grounds for termination existed under section 1857(c)(2). Section 
422.510(c) provides for such a corrective action opportunity, 
consistent with time frames specified in Subpart N, except in cases in 
which the termination is based upon Sec. 422.510(a)(5), and the 
``imminent and serious'' risk to health exception in section 1857(h)(2) 
applies.
    Section 1857(h)(1)(B) requires that the Secretary provide the M+C 
organization with ``reasonable notice and opportunity for hearing,'' 
including ``the right to appeal an initial decision * * * before 
terminating the contract.'' (Emphasis added.) Section 422.510(d) 
implements this provision by requiring that a notice of appeal rights 
under Subpart N be provided when a termination notice is sent to an M+C 
organization. This notice would specify that the termination would not 
be effective until after the hearing and appeal, except in the case of 
a termination under Sec. 422.510(a)(5).
    Also, in instances where it is necessary for HCFA to immediately 
terminate its contract with an M+C organization for violations 
prescribed in Sec. 422.510(a)(5), we specify in Sec. 422.510(b)(2) that 
if a termination notice is sent and takes effect in the middle of the 
month, HCFA has the right to recover a prorated share of its payment 
made to the M+C organization at the beginning of the month following 
notice of said termination.
8. Termination of a Contract by the M+C Organization (Sec. 422.512)
    Paragraph (a) of Sec. 422.512 provides that the M+C organization 
may terminate the contract if HCFA has failed substantially to carry 
out the terms of the contract. The paragraph (b) through (d) 
establishes requirements for giving notice, specifies when the 
termination is effective, and establishes when HCFA's liability for 
payment to the M+C organization ends. Paragraph (e) states that 
organizations that terminate their contract with HCFA cannot enter into 
an agreement with the Secretary for five years unless there are 
circumstances that warrant special consideration.
9. Minimum Enrollment Requirements (Sec. 422.514)
    The newly-created section 1857(b) of the Act specifies that HCFA 
may not enter into a contract with an M+C organization unless the 
organization has at least 5,000 enrollees (or 1,500 if it is a PSO), or 
at least 1,500 enrollees (or 500 if it is a PSO) if the organization 
primarily serves individuals residing outside of urbanized areas. We 
specify these requirements in Sec. 422.514(a).
    Section 1857(b) refers to individuals ``who are receiving health 
benefits through the organization.'' We considered interpreting 
receiving health ``benefits'' to mean more than simply receiving health 
services. A hospital or doctor can furnish health services on a fee-
for-service basis, or an organization can administer health benefits 
offered by an employer without actually providing ``benefits'' in the 
form of covered costs. We also recognize that some new organizations, 
both federally waivered PSOs and new state licensed entities, will 
apply to enter the M+C program. Thus, such an interpretation would 
allow some new entities to achieve the minimum enrollment requirement 
without having any or very little enrollment.
    The minimum enrollment requirement is an indicator that the 
organization applying for an M+C contract can handle risk and capitated 
payments and also is able to effectively manage a health care delivery 
system including the enrollment and disenrollment of beneficiaries and 
the timely payment of claims, provide quality assurance, and have 
systems to handle grievances and appeals. While having experience with 
risk based payments indicates the organization can handle risk, it does 
not provide any assurance that the organization can manage all the 
contractual requirements of an M+C organization.
    We realize that through the waiver process for federally waivered 
PSOs and the application process for all new entities we require 
reasonable assurance that the organization will be able to manage their 
contract. We do not want to add an additional barrier to entry for 
those organizations that have gone through the waiver process or state 
licensure but are still start-up organizations.
    We have decided to require that the minimum enrollment requirement 
can only be met counting enrollees in the particular organization. This 
will show the organization can handle risk and manage their system.
    Section 1857(b)(2) contains the statement that the term ``covered 
lives'' should be substituted for ``individuals'' in applying the 
minimum enrollment rule to MSA plans. As such, we will count covered 
lives for MSAs for purposes of meeting the minimum enrollment 
requirements.
    As stated earlier, section 1857(b)(3) allows M+C organizations to 
request a waiver of minimum enrollment requirements during the first 3 
contract years. Therefore, under Sec. 422.514(b) HCFA may waive the 
minimum enrollment requirement for 1 year to those organization that 
need a waiver provided such organizations satisfactorily demonstrate: 
prior experience with risk-based payment arrangements; the ability to 
bear financial risk under the M+C contract; and marketing and 
enrollment activities necessary to meet enrollment requirements 
specified at Sec. 422.514 (a)(1) and (a)(2). Both HCFA actuaries and 
the National Association of Insurance Commissioners recommend against 
entering into an contract with a applicant who does not project 
reaching 500 members within a short timeframe. HCFA will monitor 
closely the progress of organizations in meeting at least this goal 
during the first contract year.
    If the organization does not meet the applicable minimum enrollment 
requirement by the end of its first year of operation we may waive the 
requirements for an additional year if the organization meets the 
requirement specified in Sec. 422.514(b)(2):

[[Page 35020]]

     Requests an additional minimum enrollment waiver at least 
120 days before the end of the year;
     Continues to demonstrate an ability to meet its 
contractual obligations and bear financial risk; and,
     Demonstrates an acceptable marketing and enrollment 
process. The organization's enrollment projections for the second year 
of the waiver will become its enrollment standard.
    In paragraph Sec. 422.514(b)(3) we state that we will only approve 
a third and final waiver year if the organization has achieved the 
transitional enrollment standard that the organization projected in 
their marketing and enrollment plan required to receive a waiver for 
their second year.
    Finally, if an organization does not achieve the minimum enrollment 
requirement and is not operating with a minimum enrollment waiver, HCFA 
may elect not to renew the M+C organization's contract, we specify this 
at Sec. 422.514(c).
10. Reporting Requirements (Sec. 422.516)
    This M+C regulation contains a number of sections that specify 
information requirements for M+C organizations. This information is to 
be provided from organizations to HCFA (see Secs. 422.64, 422.502, and 
422.512), from HCFA to beneficiaries (see Sec. 422.64), and from the 
organizations to the beneficiaries (see Secs. 422.80 and 422.110).
    The following listing summarizes all the information required to be 
disclosed either to HCFA, to beneficiaries, or to both:

 Benefits
 Premiums
 Service area
 Quality and Performance: Outcomes, HEDIS, Disenrollment, 
satisfaction
 Supplemental benefits
 Access: Number, mix, and distribution of providers
 Out of area coverage
 Emergency care coverage
 Supplemental premiums
 Prior authorization rules
 Grievances and appeals procedures and data
 Quality assurance program
 Utilization controls
 Compensation methods
 Financial reports
 Encounter data
 Claims
 Enrollment

    These represent an extensive amount of information to be disclosed 
both to HCFA and to beneficiaries. M+C organizations need to be 
particularly aware of the many requirements to disclose information to 
beneficiaries as seen in Secs. 422.80 and 422.110. They will have to 
develop management information systems that meet these disclosure 
requirements. As it is, these sections specify the basic requirements 
as to information to be disclosed. HCFA will provide more detailed 
policy guidance on specific contents required for each of these data 
elements. These additional requirements will be developed with input 
from the public, such as plans, consumer groups, etc.
    M+C organizations also need to take into consideration in the 
development of these management information systems, that they will 
soon have to meet the requirements of the Administrative Simplification 
provisions of the Health Insurance Portability and Accountability Act 
of 1996. This act will result in regulations for data standards that 
effect all components of the health care system. The act will specify 
standards for the following types of transactions: claims, enrollment 
and disenrollment, eligibility, payments and remittances, premiums, 
first report of injury, claim status, referral, providers, patient 
identifiers, health plan identifiers, and code sets. The organizations 
will also need to be in compliance with year 2000 changes.
    Furthermore, M+C organizations will need to address the 
confidentiality and privacy provisions of these regulations and related 
regulations, meet the validation requirements associated with several 
of the data sets incorporated into this regulation, e.g, encounter data 
will need to be validated, and be capable of electronically 
transmitting this information to HCFA in the future, when such is so 
specified.
    Section 1857(d) contains several provisions involving the financial 
records and financial status of M+C organizations. As discussed above, 
paragraphs (1) and (2) of section 1857(d) provide for auditing and 
inspection of M+C organizations' financial records. The paragraph (4) 
in section 1857(d) specifically requires that organizations ``in 
accordance with regulations of the Secretary, report to the Secretary 
financial information,'' which ``shall include'' such information as 
the Secretary may require demonstrating that the organization has a 
fiscally sound operation. Under our authority at section 1856(b)(2) to 
adopt section 1876 standards, we have decided to implement this 
authority in part by requiring that M+C organizations comply with 
financial reporting requirements currently set forth in Sec. 417.126. 
These requirements are set forth in Sec. 422.516(a) and (b). We believe 
that requirements specified in section 1857(d)(1), which require HCFA 
to conduct annual audits of the financial records of M+C organizations, 
compel M+C organizations to provide all required information described 
at Sec. 422.516(a) and (b). Included in these requirements are--
     Requirement that M+C organizations develop and maintain a 
system for reporting information to HCFA, its enrollees and the general 
public, information described elsewhere in the regulation.
     A requirement that each M+C organization report to HCFA a 
description of significant business transactions.
     A requirement that each M+C organization submit combined 
financial statements to HCFA on a timely basis, as defined by HCFA.
     A requirement that for any employees' health benefits plan 
that includes an M+C organization in its offering, the M+C organization 
must furnish, upon request, the information the organization needs to 
fulfill its reporting and disclosure obligations (with respect to the 
particular M+C organization) under the Employee Retirement Income 
Security Act of 1974 (ERISA).
     A requirement that the organization notify HCFA regarding 
any loans or other special financial arrangements.
     A requirement that each M+C organization must make 
financial information available to enrollees upon request.
11. Prompt Payment Requirements (Sec. 422.520)
    Under Sec. 422.520, contracts with M+C organizations must specify 
that the M+C organization agrees to provide prompt payment of claims 
that have been submitted by providers for services and supplies 
rendered to Medicare enrollees when these services and supplies are not 
furnished by an organization-contracted provider. While this 
requirement closely follows requirements already in place for section 
1876 contractors, (including provisions pertaining to interest to be 
paid if timely payment is not made), section 1857(f) extends similar 
prompt payment requirements to claims submitted by Medicare 
beneficiaries enrolled in M+C private fee-for-service plans. Section 
422.520(a) contains this new section 1857(f) requirement, as well as 
the requirement that applies to non-contracting providers. Further, 
pursuant to our authority under section 1856(b)(1) to establish 
standards under Part C, we require organizations to act upon (either 
approve or deny, not

[[Page 35021]]

necessarily pay) all claims within 60 calendar days from the date of 
request. These claims include the remaining 5 percent of the clean 
claims not paid within 30 days as well as all other claims.
    In addition, pursuant to our authority in section 1856(b)(1) to 
establish standards under Part C, we are requiring in Sec. 422.520(b) 
that contracts or other written agreements between M+C organizations 
and providers and suppliers contain a ``prompt payment'' provision, the 
terms of which are developed and agreed to by the M+C organization and 
the relevant provider.
    Section 1857(f)(2) also contains another new provision that 
specifies that if the Secretary determines that the organization fails 
to make payments promptly to non-contracting providers and suppliers as 
required under section 1857(f)(1) (and Sec. 422.520(a)), the Secretary 
may provide for direct payments to affected providers and suppliers. We 
articulate these requirements in Sec. 422.520(c).

Special Rules for RFB Societies

    Enrollment restriction rules may be imposed by religious fraternal 
benefit society M+C organizations, provided the restriction of 
enrollment is consistent with the requirements identified in section 
1859(e) of the Act. The RFB M+C organizations must still meet the 
requirements for financial solvency. Moreover, the Secretary may adjust 
the M+C organization's payment to account for the unique actuarial 
characteristics of the individuals enrolled in the RFB M+C 
organization. We specify these requirements in Sec. 422.250(a).

L. Effect of Change of Ownership or Leasing of Facilities During Term 
of Contract

    This interim final rule applies to M+C organizations the provisions 
concerning the effect of change of ownership or leasing facilities 
during the term of the contract that are currently set forth with 
regard to HMOs and CMPs in subpart M of part 417 to M+C organizations. 
This is accomplished by designating Secs. 417.520 through 417.523 as 
Secs. 422.550 through 422.533 in a new subpart L in part 422 and making 
certain nomenclature changes. (A cross-reference to subpart L of part 
422 is included in subpart M of part 417 in order that these provision 
may continue to apply to Medicare contracts with HMOs and CMPs under 
section 1876.) We also revise redesignated Sec. 422.550 (formerly 
Sec. 417.520) to add that an M+C organization that has Medicare 
contract in effect and is considering or negotiating a change in 
ownership must provide to HCFA updated financial information and a 
discussion of the financial and solvency impact of the change of 
ownership on the surviving organization. We also add this requirement 
to redesignated Sec. 422.552 (formerly Sec. 417.522), which contains 
requirements relating to novation agreements.

M. Subpart M--Grievances, Organization Determinations, and Appeals 
(Secs. 422.560 Through 622)

1. Introduction
    Subpart M of part 422 implements sections 1852(f) and (g), which 
set forth the procedures M+C organizations must follow with regard to 
grievances, organization determinations, and reconsiderations and other 
appeals. Under section 1852(f), an M+C organization must provide 
meaningful procedures for hearing and resolving grievances between the 
organization (including any other entity or individual through which 
the organization provides health care services) and enrollees in its 
M+C plans. Section 1852(g) addresses the procedural requirements 
concerning coverage (``organization'') determinations and 
reconsiderations and other appeals. As discussed in detail below, only 
disputes concerning ``organization determinations'' are subject to the 
reconsideration and other appeal requirements under section 1852(g). In 
general, organization determinations involve whether an enrollee is 
entitled to receive a health service or the amount the enrollee is 
expected to pay for that service. All other disputes are subject to the 
grievance requirements under section 1852(f). For purposes of this 
regulation, a reconsideration consists of a review of an adverse 
organization determination (a decision that is unfavorable to the M+C 
enrollee, in whole or in part) by either the M+C organization itself or 
an independent review entity. We use the term ``appeal'' to denote any 
of the procedures that deal with the review of organization 
determinations, including reconsiderations, hearings before 
administrative law judges (ALJs), reviews by the Departmental Appeals 
Board (DAB) and judicial review.
    For the grievance, organization determination, and appeal 
requirements, an M+C organization must establish procedures that 
satisfy these requirements with respect to each M+C plan that it 
offers. These requirements generally are the same for each type of M+C 
plan--including M+C non-network MSA plans and M+C PFFS plans.
    The grievance, organization determination, and appeal requirements 
for M+C organizations that are set forth in this interim final rule are 
largely based on the existing rules for managed care organizations 
under part 417, Subpart Q, Beneficiary Appeals. This is in accord with 
section 1856(b)(2), which directs that the M+C standards be based on 
the analogous standards established under section 1876, as long as they 
are consistent with the requirements in part C. Moreover, we note that 
to some extent the statutory requirements themselves reflect policies 
contained in the existing part 417 requirements. For example, the 
requirements under section 1852(g)(3) concerning expedited organization 
determinations and reconsiderations essentially incorporate the 
expedited review procedures that were issued in HCFA's April 30, 1997 
final rule with comment (62 FR 23368). (That final rule established 
expedited review processes for organization and reconsidered 
determinations, and clarified that the definition of an organization 
determination includes discontinuations of service.)
    Thus, the significant differences between the grievance and appeal 
requirements that apply under the M+C program and the existing 
requirements in subpart Q of part 417 are: (1) changes that are 
explicitly mandated under the statute, such as the requirement under 
section 1852(g)(4) that HCFA contract with an independent outside 
entity to review coverage denials; and (2) changes that implement 
statutory intent, such as the reduced timeframe for reconsiderations, 
which is consistent with both the discretion provided under section 
1852(g)(2)(A) and Congress' expectations as stated in the BBA 
conference report. (As discussed below, the conference report states 
that the Conferees ``* * * assume that the Secretary will address the 
issue of [reconsideration] timeframes in the Part C regulations'' and 
intend that the Secretary adopt timeframes that are shorter than those 
in existing regulations. See H.R. Rep. No. 105-217, pg. 605 (1997).) 
The only other substantive changes contained in these requirements are 
the incorporation into the regulations of several limited policy 
clarifications that have been issued by HCFA as implementing 
instructions pursuant to our April 30, 1997 final rule. These changes 
are discussed in detail below.
    In addition to these limited substantive changes, we have also 
taken the opportunity to make numerous editorial and organizational 
changes in adopting the part 417 regulation language on beneficiary 
appeals for

[[Page 35022]]

purposes of the M+C program. For example, we have added material that 
summarizes the rights of M+C enrollees, and we have established 
distinct sections that clearly explain the timeframe and notice 
requirements for standard and expedited organization determinations. 
These types of changes do not affect the rights of beneficiaries or the 
responsibilities of M+C organizations with regard to grievances, 
organization determinations, and appeals, but we believe they can help 
to ensure that these rights and responsibilities are more clearly 
understood within the managed care community.
2. General Provisions (Secs. 422.560-522.562)
    Subpart M begins with an introductory section (Sec. 422.560) that 
simply sets out the statutory basis and scope for the requirements that 
follow. Although this material is generally shorter and more concise 
than the similar provisions of subpart Q in part 417, we are now 
specifying under Sec. 422.560(b) that the rules concerning notice of 
noncoverage on inpatient hospital care and immediate peer review 
organization (PRO) review procedures for noncoverage determinations 
fall within the scope of the M+C subpart M requirements.
    Section 422.561 then sets forth several definitions for terms used 
in the subpart. Note that some definitions previously located in 
subpart Q of part 417 (such as ``ALJ'') have now been included in 
Sec. 400.200, rather than in part 422, since they constitute 
definitions that apply for all Medicare and Medicaid purposes. Terms 
included here that are not defined in existing part 417 include 
``appeal,'' ``authorized representative,'' ``enrollee,'' ``grievance,'' 
and ``physician.'' For the most part, these definitions are self-
explanatory; they do not impose any new requirements on M+C 
organizations. For example, we clarify that an ``authorized 
representative'' is an individual authorized by an enrollee to act on 
his or her behalf in obtaining an organization determination, or in 
dealing with any levels of the appeal process, subject to the Social 
Security regulations in 20 CFR part 404, subpart R. We also specify 
that, for purposes of subpart M, the term ``enrollee'' includes an 
enrollee's authorized representative. Together, these definitions 
should clarify that the rights of enrollees with respect to grievance 
and appeal procedures can consistently be exercised for them by their 
authorized representatives, except where specifically proscribed in the 
regulations. We also establish that ``physician'' is defined according 
to section 1861(r), which is the standard definition for both original 
Medicare and the M+C program.
    Section 422.562, General Provisions, provides an overview of the 
rights and responsibilities of M+C organizations and M+C enrollees with 
respect to grievances, organization determinations, and appeals. The 
responsibilities of M+C organizations, under Sec. 422.562(a), 
essentially parallel those in existing Sec. 417.604(a). We have added a 
provision stating that if an M+C organization delegates any of its 
responsibilities under subpart M to another entity or individual 
through which the organization provides health care services, the M+C 
organization is ultimately responsible for ensuring that the applicable 
grievance and appeal requirements are still met. This concept is 
explicitly stated in section 1852(f) concerning grievance procedures, 
and we believe it is equally germane for purposes of organization 
determinations and appeals. An M+C organization's responsibility for 
functions that it delegates is also established under the contract 
requirements set forth in Sec. 422.502(i). (Although we do not 
encourage M+C organizations to delegate their grievance, organization 
determination or appeal responsibilities, we recognize that 
particularly for an M+C non-network MSA plan or an M+C PFFS plan, an 
organization offering such a plan may choose to delegate some of these 
responsibilities to local entities that can meet the applicable subpart 
M requirements.)
    Section 422.562(b) explains the basic rights of M+C enrollees under 
subpart M and provides regulatory references to the sections that fully 
explain the relevant rights. This section does not establish any rights 
beyond those now available under the part 417 rules, but consolidates 
general information about enrollees' rights into a central location in 
the regulations.
    Like the part 417 regulations, the general provisions section 
concludes with brief sections addressing the applicability of 
requirements in subpart M and the applicability of other regulations 
under title II of the Act.
3. Grievance Procedures (Sec. 422.564)
    As noted above, section 1852(f) requires that each M+C organization 
provide ``meaningful procedures for hearing and resolving grievances.'' 
There is no explicit indication in the statute of what constitutes a 
grievance; however, given the provision in section 1856(b)(2) for 
basing Part C standards on standards under section 1876, we have 
retained the meaning of grievance used in part 417. We have defined 
this term in Sec. 422.561 as any complaint or dispute other than one 
that involves an ``organization determination'' (as described under 
Sec. 422.566(b)).
    An enrollee might file a grievance if, for example, the enrollee 
received a service but believed that the demeanor of the person 
providing the service was insulting or otherwise inappropriate. Also, 
as specified under Secs. 422.570(d)(2)(ii) and 422.584(d)(2)(ii), 
grievance procedures would apply when an enrollee disagrees with an M+C 
organization's decision not to comply with an enrollee's request to 
expedite an organization determination or a reconsideration. Under 
Sec. 422.564(a), we are requiring that an M+C organization must resolve 
grievances in a timely manner and that procedures for doing so must 
comply with any guidelines established by HCFA. This guidance would 
include forthcoming instructions, rulemaking, and requirements built 
into HCFA's Quality Improvement System for Managed Care (QISMC). (See 
section II.D of this preamble for more information about QISMC.) 
Section 422.564(b) then clarifies that grievance procedures are 
separate and distinct from appeal procedures, which address 
organization determinations. We also clarify under Sec. 422.564(c) that 
the PRO complaint process under section 1154(a)(14) addresses quality 
issues, but is separate and distinct from the M+C organization's 
grievance procedures.
    Although we have not in the past outlined detailed requirements for 
a plan's grievance procedures, we considered doing so in this interim 
final rule as a means of implementing the requirement under section 
1852(f) for meaningful grievance procedures. Accordingly, we consulted 
with the managed care industry as well as beneficiary advocacy groups, 
reviewed comments we received from the public, and looked to recent 
standards in this area, such as those developed by the National 
Association of Insurance Commissioners (NAIC). (NAIC has developed and 
adopted a Model Grievance Act setting forth standards for grievance 
procedures that include timeframes for the resolution of quality-
related issues.) We also recognize that section 1852(c)(2)(C) requires 
organizations to provide data on the number of grievances and their 
disposition in the aggregate upon an enrollee's request, and we believe 
timely processing of grievances is necessary to assist in consistent 
data reporting. Thus, we considered requiring certain timeframes for

[[Page 35023]]

addressing grievances and contemplated further clarification of the 
definition of a grievance.
    However, due to limited time for rulemaking, input we received from 
the public opposing mandated grievance procedures, and our 
understanding that extensive research is underway concerning State 
grievance requirements (the results of which should be available in the 
very near future), we have decided not to prescribe specific timeframes 
for grievances in this rule and instead to consider doing so through 
proposed rulemaking. We plan to address such issues through a future 
proposed rule. At this time, we welcome comments on the necessary 
elements of a meaningful grievance procedure, including recommended 
timeframes, the types of issues that should be considered grievances, 
an expedited grievance process, independent review of grievances, 
reconsideration of grievances, and the type of notification enrollees 
should receive concerning the outcome of their grievance.
4. Organization Determinations (Secs. 422.566 Through 422.576)
    Section 1852(g) requires an M+C organization to establish 
procedures for hearing and resolving disputes between the organization 
and its Medicare enrollees concerning organization determinations. 
These rights are similar to those available to beneficiaries under 
original Medicare, except that under the M+C program the initial level 
of review is typically conducted by the organization itself rather than 
by a PRO, intermediary, or carrier.
    (For the convenience of the reader, we are presenting below a chart 
offering a sequential overview of the available procedures and related 
timeframes associated with service-related organization determinations 
and appeals. This chart is for illustrative purposes only, and certain 
details (such as when extensions are permissible and timeframes for 
requests for payment) have been omitted for ease of presentation. For a 
full description of the applicable requirements, please consult the 
preamble material that follows and the regulations set forth in subpart 
M of part 422. Although the chart reflects the maximum allowable 
timeframes available to an M+C organization under the M+C regulations 
(for service requests), we emphasize that the primary applicable 
requirement, as discussed in detail below, is that an M+C organization 
make a determination as expeditiously as the enrollee's health 
condition requires. In addition, note that maximum timeframes for an 
M+C organization to make a payment-related determination are somewhat 
longer than for service-related determinations, as is also discussed 
below.)

BILLING CODE 4120-01-P

[[Page 35024]]

[GRAPHIC] [TIFF OMITTED] TR26JN98.000



BILLING CODE 4120-01-C

[[Page 35025]]

    In accordance with section 1852(g)(1), Sec. 422.566 begins by 
specifying that an M+C organization must have a procedure for making 
timely organization determinations regarding the benefits an enrollee 
is entitled to receive and the amount, if any, that an enrollee must 
pay for a health service. We note that under section 1852(g)(1), the 
issues that must be addressed through an organization determination 
include an enrollee's entitlement to ``receive a health service under 
this section.'' (Emphasis added.) Section 1852(a) describes basic 
benefits that M+C organizations must offer, as well as supplemental 
benefits that organizations may offer. Supplemental benefits may either 
be provided to all enrollees on a mandatory basis (with the Secretary's 
approval) or provided at the enrollee's option. In both cases, the 
enrollee pays for supplemental benefits. Disputes involving 
supplemental benefits that are mandatory for all enrollees in a plan 
will be organization determinations and subject to the appeal process, 
as similar benefits were under part 417. We believe, however, that 
optional supplemental benefits should also be included in the meaning 
of ``health services under [section 1852]'' and disputes involving 
these types of benefits should be the subject of organization 
determinations and the appeal process. This policy, which is 
incorporated into Sec. 422.566(a), represents a departure from existing 
part 417 requirements, where disputes concerning optional supplemental 
benefits are not the subject of organization determinations and must be 
resolved only through grievance procedures. Section 422.566(b) then 
lists actions that are organization determinations, consistent with 
existing Sec. 417.606(a) (except for new language to reflect the 
inclusion of optional supplemental benefits and the explicit mention of 
payment for post-stabilization care, along with payment for emergency 
or urgently needed services, which appear already in Sec. 422.606(a)).
    Section 422.568 includes the standard timeframe and notice 
requirements for organization determinations. Note that this section, 
in conjunction with Secs. 422.570 and 422.572, reflect a major 
reorganization of the requirements in existing Secs. 417.608 and 
417.609. This reorganization was necessary both to help clarify the 
different timeframe and notice requirements that apply for expedited 
determinations as well as to facilitate the addition of several new BBA 
requirements (which are discussed below).
    The primary substantive change in Sec. 422.568 is the requirement 
under Sec. 422.568(a) that an M+C organization must make a 
determination with respect to an enrollee's request for service as 
expeditiously as the enrollee's health status requires, and in no case 
later than 14 calendar days after the organization receives the 
request. As discussed in detail below in section II.M.6 of this 
preamble, this new requirement emphasizes making determinations 
consistent with an enrollee's health needs, while also providing for a 
reduction in the maximum time allowed to make a determination from 60 
days, as reflected in Sec. 417.608(a), to 14 days. In conjunction with 
the reduced timeframe for making an organization determination, we are 
also providing that the M+C organization may extend the timeframe by up 
to 14 calendar days if the enrollee requests the extension or if the 
organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an 
M+C organization's decision to deny). The M+C organization must include 
written justification for the extension in the case file. The length of 
the extension period is consistent with the extensions currently 
allowed under part 417 for expedited organization determinations.
    We note that the maximum timeframes for both organization 
determinations and for reconsiderations are now reckoned in ``calendar 
days,'' as opposed to ``working days,'' in order to be unambiguous and 
consistent with the statute. In addition, under Sec. 422.568(b), we 
have specified that timeframes for requests for organization 
determinations on payment issues are identical to the ``prompt 
payment'' requirements set forth under Sec. 422.520. Thus, for issues 
relating to payment, the requirements are as follows: (1) For ``clean 
claims,'' an M+C organization must make a determination regarding the 
claim within HCFA's current ``clean claim'' rules, that is, 95 percent 
of clean claims must be paid within 30 calendar days after receipt of 
the request for payment. (As defined in Sec. 422.500, ``clean claims'' 
are claims that have no defect, impropriety, lack of any required 
substantiating documentation, or particular circumstances requiring 
special treatment that prevents timely payment.) (2) For all other 
claims, an M+C organization must make a determination regarding the 
claim within 60 calendar days after receipt of the request for payment.
    Consistent with section 1852(g)(1)(B), Sec. 422.568(c) and (d) 
require that an M+C organization issue written notification for all 
denials, including the specific reasons for the denial in 
understandable language, information regarding the enrollee's right to 
either an expedited or standard reconsideration, and a description of 
both the expedited and standard review processes, as well as the rest 
of the appeal process.
    Sections 422.570 and 422.572 set forth the requirements for M+C 
organizations with respect to expedited determinations. Section 
1852(g)(3)(A) specifically allows either an enrollee or a physician to 
request an expedited organization determination or reconsideration, 
regardless of whether the physician is affiliated with the M+C 
organization. We have reflected this provision in Secs. 422.570(a) (for 
expedited organization determinations) and 422.584(a) (for expedited 
reconsiderations). We have also addressed the issue of the 
circumstances under which a physician can request expedited review for 
an enrollee. HCFA currently allows any physician to request an 
expedited organization determination without being appointed as an 
enrollee's authorized representative. In contrast, HCFA requires that a 
physician be an enrollee's authorized representative in order for the 
physician to request an expedited reconsideration on the enrollee's 
behalf. We have made this distinction because, in the context of an 
organization determination, we regard the physician as a provider who 
is requesting a service for his or her patient. In the context of a 
reconsideration, on the other hand, we believe the physician is serving 
as the enrollee's representative in the first level of the appeal 
process.
    We have decided to continue this current policy, and have reflected 
in Sec. 422.570(a) that any physician can request an expedited 
organization determination, while Sec. 422.584(a) provides that a 
physician who requests an expedited reconsideration must be acting on 
behalf of the enrollee as an authorized representative. We would also 
like to make it clear that, in any case in which a physician is only 
supporting an enrollee's request for expedited review, the physician 
does not need to be the enrollee's authorized representative.
    As mentioned above, the requirements for expedited organization 
determinations and the like requirements for expedited reconsiderations 
were the subject of HCFA's April 30, 1997 final rule. Section 
1852(g)(3) is modeled to a large extent on our existing requirements. 
For example, section 1852(g)(3)(B)(ii)

[[Page 35026]]

explicitly states that an M+C organization must expedite its 
determination (or its reconsideration of a determination) if a 
physician has requested the expedited review and has indicated, either 
orally or in writing, that the application of a standard timeframe for 
a determination (or reconsideration) could seriously jeopardize the 
life or health of the enrollee or the enrollee's ability to regain 
maximum function. This new statutory provision reflects the current 
provisions in part 417. Sections 417.609(c)(4) and 417.617(c)(4) 
require that an HMO or CMP grant a physician's request for expedited 
review; however, they do not require that the physician make any 
statements about the enrollee's health, as the physician must under 
section 1852(g)(3)(B)(ii). In effect, the statute now requires that an 
M+C organization must expedite a determination at the physician's 
request, that is, providing that the physician's request indicates the 
possibility of serious jeopardy to the enrollee.
    Section 422.570(b)(2) specifies that a physician may provide 
written or oral support for a request for expedition, and under 
Sec. 422.570(c)(2)(ii), we clarify that when requests for expedited 
organization determinations are made or supported by a physician, the 
M+C organization must grant the request if the physician indicates that 
the enrollee's health could be jeopardized. In any case in which a 
physician has not initiated the request, but supports it, we regard the 
physician as having joined in the request and, in effect, as being a 
co-requestor. (We note that in a case when an enrollee submitted a 
request for an expedited organization determination but did not know 
that physician support could automatically expedite a determination, an 
enrollee or a physician may submit a subsequent request, including the 
physician's statement of support, for an expedited organization or 
reconsidered determination.)
    These sections also incorporate several details necessary to 
clarify current policy, such as the provision in Sec. 422.568(d)(1) 
that an M+C organization automatically transfer a denied request for an 
expedited organization determination to the standard 14-day timeframe 
described in Sec. 422.568(a), and the requirement under 
Sec. 422.570(d)(2)(ii) that an M+C organization inform the enrollee of 
the right to file a grievance if he or she disagrees with the M+C 
organization's decision not to expedite. We also require under 
Sec. 422.570(c)(1) that an organization establish an efficient and 
convenient means for individuals to submit oral or written requests for 
expedited organization determinations and document any oral requests. 
Generally, in accordance with the provisions of Sec. 422.570(b)(1), we 
would expect that such requests would be submitted directly to the M+C 
organization. However, because we recognize that some organizations may 
already have established or may wish to establish other convenient 
procedures for accepting oral and written requests for expedited 
review, we clarify under Sec. 422.570(b)(1) that procedures may involve 
submitting a request to another entity responsible for making the 
determination, as ``directed by the M+C organization.''
    Under section 1852(g)(3)(B)(iii), an M+C organization must notify 
the enrollee (and the physician involved, as appropriate) of an 
expedited determination. The requirement to notify the physician is 
similar to one in Sec. 417.609(c)(3), which requires of an HMO or CMP 
``notification of the enrollee, and the physician as appropriate.'' 
This requirement is set forth in Sec. 422.572(a). Section 
1852(g)(3)(B)(iii) also requires that the M+C organization notify the 
enrollee and physician of an expedited determination under time limits 
established by the Secretary, but not later than 72 hours after 
receiving the request (or receiving the information necessary to make 
the determination), or such longer period as the Secretary may permit 
in specified cases. Under this authority, we are able to retain in 
Sec. 422.572(a) the existing 72-hour timeframe for expedited review 
that appears in Sec. 417.609(c)(3). Also, we have exercised our 
discretion to allow in Sec. 422.572(b) an M+C organization to extend 
the 72-hour deadline for expedited review by up to 14 calendar days if 
the enrollee requests the extension or if the organization finds that 
additional information is needed and the delay is in the interest of 
the enrollee.
    Thus, the authority in section 1852(g)(3)(B) has allowed us to 
retain the recently promulgated regulations on expedited determinations 
with only a few clarifications and minor technical changes (for 
example, we have changed the 10 working day extension in 
Sec. 417.609(c)(3) to 14 calendar days, to be consistent with how we 
are counting days under the other section 1852 provisions). We have 
added to the regulation an example of the type of reason for which an 
extension may be granted, and we have specified that an M+C 
organization must notify an enrollee of a determination as 
expeditiously as the enrollee's health care needs require but no later 
than upon expiration of the extension.
    We have also added a provision in both Secs. 422.570(f) and 
422.584(f) to prohibit an M+C organization from taking or threatening 
to take any punitive action against a physician acting on behalf or in 
support of an enrollee in requesting an expedited organization 
determination or reconsideration. Since publication of our April 30, 
1997 final rule, several national organizations (including the American 
Medical Association and the American Association of Retired Persons) 
have expressed strong support for a general prohibition that would 
prevent retaliation against physicians who act on behalf of or in 
support of enrollees to expedite reviews. Moreover, we believe that 
this prohibition complements the anti-gag rules incorporated into 
subpart E of this interim final rule.
    Section 422.574 identifies the parties to an organization 
determination. The statute does not specify who can ask for an 
organization determination involving the rights of an M+C enrollee to 
certain health services. Section 1852(g) does specify that an M+C 
organization must reconsider a determination upon the request of the 
enrollee, and either the enrollee or a physician can request an 
expedited reconsideration. The enrollee specifically has the right to 
appeal a reconsidered determination under section 1852(g)(5), a 
provision that is almost identical to the appeal provision in section 
1876(c)(5)(B) for HMO and CMP enrollees.
    We are interpreting these provisions in the same manner as we 
interpreted them in part 417 to include not just the enrollee, but also 
to allow other parties to exercise those rights. Section 417.610 lists 
as parties to an organization determination not just the enrollee, but 
certain physicians and other providers who are assignees of the 
enrollee, legal representatives of a deceased enrollee's estate, and 
the broad category of any other entity determined to have an appealable 
interest in the proceeding. These parties can continue to have an 
interest in the proceedings throughout each level of an appeal. We have 
retained this provision in Sec. 422.574, except that we have modified 
Sec. 417.610(d) to include any provider or entity determined to have an 
appealable interest. We have also specifically excluded the M+C 
organization, since we believe that this entity constitutes the 
decision maker, and as such is not a party to an organization 
determination.

[[Page 35027]]

5. Reconsiderations by an M+C Organization (Secs. 422.578 Through 
422.590)
    If a decision regarding a request for payment or service is 
unfavorable (in whole or in part) to the enrollee, the enrollee or any 
other party to an organization determination as listed in Sec. 422.574 
who is dissatisfied with the organization determination may request 
that the M+C organization reconsider the decision. Reconsiderations 
represent the first step in the appeal process. The reconsideration 
process encompasses both standard and expedited reconsiderations, as 
described under Secs. 422.582 and 422.584. The timeframe and notice 
requirements for reconsiderations are set forth under Sec. 422.590.
    One important distinction between organization determinations and 
reconsiderations is that an M+C organization issues a reconsidered 
determination only if the reconsideration is entirely favorable to the 
enrollee. As discussed in detail below, Sec. 422.590(a)(1) now requires 
that with respect to standard reconsiderations concerning requests for 
service, an M+C organization must issue any determination that is 
entirely favorable to the enrollee as expeditiously as the enrollee's 
health condition requires but no later than 30 calendar days after it 
receives the request for reconsideration. (As with organization 
determinations, we are also providing under Sec. 422.590(a) that the 
M+C organization may extend the timeframe by up to 14 calendar days if 
the enrollee requests the extension or if the organization justifies a 
need for additional information and how the delay is in the interest of 
the enrollee.) Under Sec. 422.590(b)(1), for standard reconsiderations 
involving requests for payment, the M+C organization must issue any 
fully favorable determination no later than 60 calendar days from the 
date it receives the request for the reconsideration. In the case of 
expedited reconsiderations (which involve only requests for services), 
Sec. 422.590(d)(1) requires that an M+C organization issue any 
determination that is entirely favorable to the enrollee as 
expeditiously as the enrollee's health condition requires but no later 
than 72 hours after it receives the request for expedited 
reconsideration, again with the possibility of a 14-day extension as 
described in Sec. 422.590(d)(2). If, however, the M+C organization's 
reconsideration results in an affirmation, in whole or in part, of its 
original adverse organization determination, this decision is 
automatically subject to further review by an independent entity 
contracted by HCFA. (Again, the timeframe within which an M+C 
organization must reconsider a standard or expedited case has been tied 
to the enrollee's health needs for service requests, subject to either 
a 30-day or 72-hour maximum (with a possible 14-day extension), while 
the timeframe remains at 60 days for reconsideration requests involving 
payment.)
    Section 1852(g)(4) of the Act requires HCFA to contract with an 
independent, outside entity to review and resolve in a timely manner 
reconsiderations that affirm, in whole or in part, an M+C 
organization's denial of coverage. Thus, unless an organization 
completely reverses its coverage denial, the M+C organization must 
prepare a written explanation and refer the case to the independent 
review entity for a new and impartial determination concerning the 
payment or service at issue. This requirement is consistent with 
existing policy. Under Sec. 417.620, an HMO or CMP that recommends 
partial or complete affirmation of its adverse determination must 
prepare a written explanation and send the entire case to HCFA, so that 
HCFA can make the reconsidered determination. We have in the past 
contracted with an independent outside entity, the Center for Health 
Dispute Resolution (CHDR), to perform this function.
    For standard requests for services, Sec. 422.590(a)(2) requires 
that the M+C organization send the case to the independent review 
entity as expeditiously as the enrollee's health requires, but no later 
than 30 calendar days from the date it receives the request for a 
standard reconsideration (or the date of an expiration of an 
extension). For standard requests for payment, Sec. 422.590(b)(2) 
allows the M+C organization 60 calendar days from the date it receives 
the request to send the case to the independent review entity. In 
instances involving expedited requests for reconsideration, 
Sec. 422.590(d)(5) requires that the M+C organization forward its 
decision to the independent entity as expeditiously as the enrollee's 
health condition requires, but not later than within 24 hours of its 
affirmation of the adverse organization determination.
    Section 1852(g)(2)(B) requires that any reconsideration that 
relates to a determination to deny coverage based on a lack of medical 
necessity must be made only by ``a physician with appropriate expertise 
in the field of medicine which necessitates treatment.'' We have 
interpreted this requirement in Sec. 422.590(g)(2) to refer to a 
physician with an expertise in the field of medicine that is 
appropriate for the services at issue. The statute also requires that 
the physician be one other than the physician involved in the initial 
determination. We believe this requirement is implicit in the provision 
in Sec. 422.590(g)(1) that the reconsideration be conducted by a person 
not involved in making the organization determination.
    For the most part, the procedures outlined above are consistent 
with the existing part 417 requirements and are carried over into 
subpart M of part 422--all significant discretionary changes (such as 
the timeframe reductions) as well as statutory requirements (such as 
required physician review of certain coverage denials) are discussed in 
this preamble. We also are implementing several changes in the 
reconsideration requirements that are analogous to those described for 
organization determinations, such as the requirement under 
Sec. 422.584(d)(1) that an M+C organization automatically transfer a 
denied request for an expedited reconsideration to the standard 30-day 
timeframe described in Sec. 422.590(a). In addition, Sec. 422.590(e) 
requires that if an M+C organization refers a case to the independent 
entity, it must concurrently notify the enrollee of that action.
6. Reduction of Timeframes for Standard Organization Determinations and 
Reconsidered Determinations
    As noted above, section 1852(g)(1)(A) requires that M+C 
organizations make organization determinations ``on a timely basis.'' 
For standard (non-expedited) reconsiderations, section 1852(g)(2)(A) 
specifies that a decision must be made no later than 60 days after the 
enrollee's request, but the Act provides the Secretary with discretion 
to reduce the timeframe. Again, the BBA conference report (H.R. Rep. 
No. 105-217, at pg. 605 (1997)) indicates Congress' understanding that 
HCFA was developing proposed regulations that would reduce existing 
timeframes and that these efforts could instead be incorporated into 
the regulations implementing the M+C program. Consequently, we have 
decided to exercise such discretion and to reduce the timeframes within 
which M+C organizations must render both standard organization and 
reconsidered determinations involving requests for service.
    In researching this issue, we found widespread support for reducing 
timeframes for standard determinations in both medical journals and 
reports

[[Page 35028]]

from other independent entities. For example, the Physician Payment 
Review Commission's (PPRC) 1996 Annual Report to Congress listed ``the 
timeliness of the process, especially for pre-service denials'' as one 
of the areas requiring improvement in the current appeal process. PPRC 
reported that ``[c]onsiderable delays are built into the [appeal] 
process.'' Likewise, the Medicare Rights Center (MRC) recently 
recommended that HCFA require health plans to make non-expedited 
organization determinations within 10 days of receiving the request. 
The MRC also recommended that HCFA require health plans to make non-
expedited reconsiderations within 20 days.
    The 60-day timeframes in part 417 for organization and reconsidered 
determinations were based on the original fee-for-service Medicare 
appeal process. However, this process is mostly retrospective. In 
coordinated care plans, preservice requests for organization 
determinations exceed the number of retrospective requests. Reduced 
timeframes often are of critical importance--particularly when an 
individual is awaiting prior authorization for a service. Therefore, we 
believe there is a compelling need to reduce the current timeframe of 
60 days for determinations regarding the provision of services in M+C 
organizations.

Options Considered

    In developing this rule, we consulted with beneficiary advocacy 
groups and the managed care industry concerning several policy options, 
and reviewed comments received from the public. The groups agreed that 
the current 60-day timeframe to issue organization and reconsidered 
determinations was too long. A representative of HCFA's independent 
contractor, the Center for Health Dispute Resolution (CHDR), also 
agreed that 60 days was too long for processing determinations.
    Beneficiary advocacy groups indicated that the timeframe for 
rendering standard service-related organization determinations and 
reconsiderations should be no more than a total of 20-30 days. 
Advocates reported (and our research supports) that many States require 
determinations within 30 days. Additionally, beneficiary advocates 
indicated strong support for the judgment of the United States District 
Court for the District of Arizona in Grijalva, et al. v. Shalala (Civ. 
93-711, 1997). That case involved the appeal rights of Medicare 
beneficiaries who were members of HMOs and had their requests for 
services denied. The court's judgement in Grijalva prescribes various 
procedures to be used for beneficiary appeals in Medicare managed care 
programs, including the requirement that the HMO make a decision within 
5 days, with an opportunity for a 60-day extension if there are 
exceptional circumstances.
    Representatives of the managed care industry recommended that we 
adopt the National Committee for Quality Assurance's (NCQA) standard of 
10 working days (or 14 calendar days) for organization determinations--
with an opportunity for an extension. It was also noted that decisions 
on reconsiderations often take more time than organization 
determinations. The industry representatives agreed that, in many 
cases, plans process reconsiderations in less than 30 days, but that 
often times, additional time is needed to gather information (e.g., 
medical records). The industry representatives noted that in some 
instances, allowing extra time to collect information is advantageous 
to the beneficiary.
    Based on all of this information, we are implementing revised 
requirements from those in part 417 for an M+C organization when it 
issues standard organization determinations or reconsiderations. These 
revised requirements include a reduction in the maximum timeframes from 
60 days to 14 days for standard organization determinations involving 
requests for service, and from 60 days to 30 days for standard 
reconsiderations involving requests for service. (In both cases, 14-day 
extensions would be permissible under certain circumstances, as 
discussed above.) More important, Secs. 422.568 and 422.590 establish 
for the first time the requirement that M+C organizations make both 
their organization and reconsidered determinations as expeditiously as 
the enrollee's health condition requires. We believe that this emphasis 
on the health needs of the individual enrollee is consistent with the 
statutory requirement that determinations be made on a timely basis. 
Thus, the fact that an organization makes a determination on a service-
related issue within 14 days does not necessarily constitute compliance 
with the regulations if there is evidence that an earlier determination 
was necessary to prevent harm to the enrollee's health.
7. Reconsiderations by an Independent Entity (Secs. 422.592 and 
422.594)
    Section 1852(g)(4) requires the Secretary to contract with an 
independent, outside entity to review and resolve in a timely manner 
reconsiderations that affirm denial of coverage, in whole or in part. 
HCFA has held such a contract for services from an independent review 
entity for 9 years. Section 422.592 reiterates the statutory 
requirement. It also articulates the principle that the independent 
entity must conduct reviews as expeditiously as the enrollee's health 
requires, but not to exceed the deadlines specified in its contract 
with HCFA.
    For standard reconsiderations, the contractor historically has been 
able to process most cases within 30 days. We will require the 
contractor to meet the standard articulated for M+C organizations at 
section 422.590; that is, subject to considerations of medical 
exigency, the contractor must process standard reconsiderations within 
30 days, with the possibility of an extension. As part of our new 
requirement to collect and report information regarding beneficiary 
appeals, we will monitor all exceptions to deadlines and reasons for 
delay. In cases in which the delay is due to the failure of the M+C 
organization to supply the contractor with requested information in a 
timely manner, we will generally instruct the contractor to find in the 
beneficiary's favor on any issue that it cannot decide without the 
information in question. (When an M+C organization has conducted a 
reconsideration, it presumably will have already collected all the 
relevant documents and other information needed to make the decision. 
However, our experience demonstrates that the independent reviewer must 
sometimes request additional material in order to have a complete 
record of the dispute.)
    For expedited cases, we will require the contractor to make a 
decision as quickly as the enrollee's condition requires, or within 72 
hours (with the possibility of an extension under certain 
circumstances), in accordance with the expedited reconsideration 
requirements for M+C organizations under Sec. 422.590(d). As with 
standard reconsiderations, we will monitor cases that exceed this 
deadline along with the reasons for the delay. If any delay is due to 
the failure of the M+C organization to supply the contractor with 
requested information in a timely manner, we will generally instruct 
the contractor to find in the beneficiary's favor on any issue that it 
cannot decide without the information in question.
    In order to provide more guidance to both our contractor and the 
M+C organizations with which we will contract, we will work with them 
and other interested parties to develop common guidelines for 
identifying those cases that require immediate attention due to the 
enrollee's health condition.

[[Page 35029]]

These guidelines will build upon, but not be limited to, the criteria 
that M+C organizations must use to evaluate whether a case should be 
expedited, currently contained in Sec. 422.570(c)(2). We will issue 
this information as part of forthcoming manual instructions.
8. Administrative Law Judge (ALJ) Hearings, Departmental Appeals Board 
(DAB) Hearings, and Judicial Review (Secs. 422.600 Through 422.612)
    If the independent reviewer's reconsidered determination is not 
fully favorable to the enrollee, any of the parties listed in 
Sec. 422.574 has a right to request a hearing before an ALJ of the 
Social Security Administration if the amount remaining in controversy 
is $100 or more. (Note that the M+C organization does not have a right 
to request a hearing before the ALJ.) If the ALJ hearing does not 
result in a fully favorable determination, any party (including the M+C 
organization) may request that the Appeals Council of the DAB review 
the ALJ decision. Following the administrative review process, any 
party (including the M+C organization) is entitled to judicial review 
of the final determination if the amount remaining in controversy is 
$1,000 or more. In establishing the requirements for M+C organizations, 
we have clarified and adopted the existing requirements in part 417, 
with one exception. That is, consistent with section 1852(g)(5), we 
require under Sec. 422.612(a) that a party who wishes to request 
judicial review of an ALJ's decision must notify the other parties 
involved.
9. Effectuation of a Reconsidered Determination or Decision 
(Sec. 422.618)
    Based on public reaction to our April 30, 1997 final rule, we 
believe there may be a need for explicit regulatory requirements 
concerning an M+C organization's effectuation of (that is, an 
organization's compliance with) an appeal determination or decision. 
Therefore, we are including at Sec. 422.618 (and referencing at 
Sec. 422.590(a)(1) and (b)(1)) several requirements that constitute a 
restatement of HCFA's longstanding policy in this regard (with a 
corresponding timeframe reduction from 60 to 30 days in the case of 
service-related reconsiderations). (See sections 2405.4 and 2405.5 of 
the HMO/CMP Manual Transmittal 6, issued in March, 1991.) Specifically, 
Sec. 422.618(a)(1) requires that if, on reconsideration of a request 
for service, an M+C organization reverses its adverse organization 
determination, the organization must authorize or provide the service 
under dispute as expeditiously as the enrollee's health requires, but 
no later than 30 calendar days after the date the M+C organization 
receives the request for reconsideration (or no later than upon 
expiration of an extension described in Sec. 422.590(a)(1)). For 
reconsideration of requests for payment, Sec. 422.618(a)(2) requires 
that if an M+C organization reverses its adverse organization 
determination, the organization must pay for the service no later than 
60 calendar days after the date the M+C organization receives the 
request for reconsideration. Similarly, under Sec. 422.618(b), if an 
M+C organization's adverse organization determination is reversed in 
whole or in part by the independent entity's reconsideration or at a 
higher level of appeal, the M+C organization must pay for, authorize, 
or provide the service under dispute as expeditiously as the enrollee's 
health condition requires, but no later than 60 calendar days from the 
date the M+C organization receives notice reversing its organization 
determination. The M+C organization must also inform the independent, 
outside entity that it has effectuated the decision.
10. Noncoverage of Inpatient Hospital Care--Notice and PRO Review 
(Secs. 422.620 and 422.622)
    Under Sec. 422.620, we are largely incorporating the existing 
requirements under Sec. 417.440(f) concerning notice of noncoverage of 
inpatient hospital care. Section 417.440(f) requires that if an 
enrollee in an HMO or CMP is a hospital inpatient, the enrollee remains 
entitled to inpatient care until he or she receives notice that the 
care is no longer covered. We have revised this provision, however, to 
make it clear that inpatient services only continue to be covered until 
there is a notice of noncoverage in situations in which the hospital 
admission was authorized in the first instance by the M+C organization 
or in which the admission constituted emergency or urgently needed 
care, as described in Secs. 422.2 and 422.112(b). This clarification is 
warranted in light of the fact that an M+C organization offering an M+C 
non-network MSA or private fee-for-service plan has the right to deny 
coverage retroactively for a hospital stay involving nonemergency or 
nonurgently needed care on the grounds that it was not medically 
necessary. Also, this would make it clear that an M+C organization does 
not have to make payment under an MSA plan if the deductible has not 
been satisfied.
    Section 422.622 explains our requirements with respect to an 
enrollee's right to PRO review of a determination by an M+C 
organization or a hospital that inpatient care is no longer necessary.
    Under existing Sec. 417.605, Medicare managed care enrollees have 
two protections available to them when they believe they are being 
discharged prematurely from a hospital--immediate PRO Review or an HMO 
or CMP's internal expedited appeal process. Under Sec. 417.604(b), 
enrollees may elect one appeal right or the other; exercising one right 
eliminates the right to the other.
    We believe that the PRO review process offers significant 
advantages to enrollees, most significantly the protection from 
financial liability for a continued hospital stay until noon of the 
calendar day following the day the PRO notifies the enrollee of its 
review determination. Additionally, PROs generally communicate directly 
with the Medicare enrollee (or authorized representative) during the 
review, conduct their reviews of an alleged premature discharge within 
3 days, and use nurses and physicians to conduct the reviews. In 
contrast, enrollees who file for an expedited review with the managed 
care organization are not protected from financial liability during an 
appeal. The HMO or CMP has 72 hours to conduct the review. If the 
organization is unable to issue a fully favorable decision to the 
enrollee, the case file will be forwarded to the independent 
contractor.
    In developing the M+C requirements with respect to this issue, we 
considered whether the regulations should require enrollees of M+C 
organizations to exercise their right to immediate PRO review. We 
consulted with representatives of both the managed care industry and 
beneficiary advocates. The groups with which we consulted indicated 
that the immediate PRO review process appears to be a better option for 
the enrollee. As noted previously, PRO review provides financial 
protection, direct communication between the PRO and the enrollee, and 
a decision that is generally rendered more quickly than a managed care 
plan's determination. However, we were not certain whether we should 
limit beneficiaries to one option. Particularly in the event that an 
enrollee misses the deadline for filing with the PRO, we believe that 
the enrollee should retain the option of filing an expedited appeal 
with the M+C organization.
    Based on this review, we have concluded that the appropriate course 
is to draft the M+C requirements so as to make it clear that it is in 
the best interest of an M+C enrollee to request PRO review if the 
individual believes that he

[[Page 35030]]

or she is being discharged from a hospital prematurely. Thus, 
Sec. 422.622(a)(1) specifies that: ``An enrollee who wishes to appeal a 
determination by an M+C organization or hospital that inpatient care is 
no longer necessary must request immediate PRO review. * * * An 
enrollee who requests immediate PRO review may remain in the hospital 
without further financial liability [subject to the provisions of 
Sec. 422.622(c)]'' (until PRO review is completed). Section 
422.622(a)(2) then provides that an enrollee who fails to make a timely 
request for PRO review still has the option of requesting an expedited 
reconsideration from the M+C organization, although the financial 
liability protections associated with the PRO review process do not 
apply. We believe that this regulatory construction makes it clear that 
enrollees are expected, for their own benefit, to avail themselves of 
the PRO review process, but does not eliminate the fall-back option of 
the M+C organization's expedited review process for those enrollees who 
fail to request PRO review on a timely basis.
    We have made further revisions to the language in Sec. 417.605 to 
adapt this provision to the new M+C MSA and private fee-for-service 
plan options. As discussed above in connection with the notice of non-
coverage requirement in Sec. 422.620, under these plan options, an M+C 
organization may not be aware that an enrollee has been hospitalized, 
and has the right to deny coverage of such a hospitalization on the 
grounds that the stay was not medically necessary. Also, in the case of 
an enrollee in an M+C MSA plan, the individual may not have reached the 
deductible under the plan, and therefore payment for medically 
necessary hospital services shall be applied to the deductible. We thus 
have made it clear in Sec. 422.622(c)(1) that if an M+C organization 
did not authorize coverage of a hospital admission, and notifies the 
enrollee that a continued stay is not covered, the organization is not 
required to pay for services while the enrollee pursues an appeal with 
a PRO (that is, unless and until it is determined on appeal that the 
hospital stay should have been covered under the M+C plan). We have 
qualified this statement to provide that the M+C organization is 
obligated to pay for continued services if the enrollee was 
hospitalized in order to receive emergency services or urgently needed 
care as described in Secs. 422.2 and 422.112(b), since these services 
do not require prior authorization.
    In cases in which the hospital makes a determination that hospital 
services are no longer needed, section 1154(e)(4)(B) of the Act 
expressly precludes the hospital from charging a Medicare beneficiary 
for services during the period that a PRO is reviewing an appeal under 
section 1154(e). We have reflected this statutory provision in 
Sec. 422.622(c)(2).
11. Conclusion
    In developing the organization determination, appeal and grievance 
requirements for M+C organizations, we have undertaken a broad review 
of the existing Medicare managed care requirements. We have consulted 
with representatives of beneficiary advocacy groups and the managed 
care industry concerning several policy options. We believe that we 
have included in this interim final rule those improvements that were 
practical within the short timeframe allotted for rulemaking. In 
addition to the changes made in this rule, we intend to publish a 
notice of proposed rulemaking in the near future to implement a variety 
of other improvements in the M+C dispute resolution process.
    Therefore, we welcome comments, concerns, and ideas on all issues 
discussed in this interim final rule, as well as on the overall 
organizational changes incorporated into these regulations. In 
particular, as noted above, we would appreciate comments on whether 
HCFA should specify requirements (such as timeframes) for meaningful 
grievance procedures. We also are seeking additional comments on 
establishing effective and efficient parameters as to when a reduction 
in services (for example, a reduction in prescription dosage, skilled 
nursing facility coverage, home health care or outpatient visits) 
constitutes a denial that gives rise to an obligation to provide 
written notice. Comments are also welcome on whether notification 
requirements should apply in all instances of service discontinuations, 
as opposed to only when an enrollee indicates that he or she disagrees 
with such a discontinuation, as provided under Sec. 422.566(b)(4). 
Finally, we would appreciate input on categories of meaningful data 
elements for reporting plan-level grievances and appeals. We believe 
such comments can assist with our data collection and reporting efforts 
(as required by the BBA) and in promoting consistency at the plan level 
in data collection and reporting. We welcome all suggestions for other 
improvements to the M+C grievance, organization determination and 
appeal processes.

N. Medicare Contract Appeals

    Subpart N of this interim final rule sets forth procedures for 
making and reviewing the following contract determinations: (1) A 
determination that an entity is not qualified to enter into a contract 
with HCFA under Part C of title XVIII of the Act; (2) a determination 
to terminate a contract with an M+C organization; and (3) a 
determination not to authorize a renewal of a contract with an M+C 
organization. Pursuant to at section 1856(b)(2), which provides for the 
adoption of standards under section 1876 to implement analagous 
provisions in the new Part C, the procedures set forth in subpart N of 
part 422 are for the most part modeled after the contract appeal 
procedures currently in place with regard to HMO and CMP contracts 
under section 1876, which are set forth at 42 CFR part 417 subpart R. 
We describe below the provisions of new subpart N of part 422 that are 
not identical to 42 CFR part 417.
    Section 422.641 sets forth the contract determinations that are 
subject to the reconsideration and appeals procedures in subpart N.
    Section 422.644(a) specifies that when HCFA makes a contract 
determination, it provides the M+C organizations written notice 
specifying reasons for the determination and M+C organization rights 
pursuant to a reconsideration.
    Under, Sec. 422.644(d) a HCFA notice that it has decided not to 
authorize an M+C organization contract renewal is sent to the M+C 
organization by May 1 of the current contract year. (Note that while 
this notice informs an M+C organizations of its right to appeal a 
decision not to authorize a renewal, a contract will not be renewed 
unless an affirmative notice authorizing renewal is sent by HCFA. See 
Sec. 422.506(b)(2).) The May 1 deadline specified above should afford 
HCFA enough time to consider any M+C organization's request for 
reconsideration and still afford adequate time for HCFA to ensure the 
accuracy of its printed and electronic material utilized in the annual 
health fair.
    If HCFA decides to terminate a contract under Sec. 422.644(c) for 
reasons other than those specified at 422.510(a)(5) it must provide 
notice to the M+C organization by mail at least 90 days before the 
intended date of the termination. Consistent with section 1857(h)(2), 
which provides for immediate termination where there is an ``imminent 
and serious risk'' to enrollee health and pursuant to our rulemaking 
authority at section 1856(b)(1), in Sec. 422.644(c) we also provide a 
separate notice timeframe for immediate terminations discussed in

[[Page 35031]]

Sec. 422.510(a)(5). See section K of this preamble. Pursuant to 
violations described in Sec. 422.510(a)(5), HCFA will notify the M+C 
organization in writing that its contract has been terminated effective 
the date of the termination decision by HCFA. We believe that in 
instances where the life and physical well being of beneficiaries is in 
jeopardy, HCFA must have the ability to immediately sever its 
relationship with an M+C organization in order to protect beneficiaries 
and to safeguard taxpayer confidence in HCFA's administration of the 
Medicare program.
    Section 422.646 states that initial contract determinations are 
final and binding unless the determination is reconsidered in a manner 
consistent with applicable requirements described in Sec. 422.648. In 
Sec. 422.650(b) we have shortened the deadline for filing a request for 
reconsideration to 15 days from the sixty days allowed for HMOs and 
CMPs under Sec. 417.650(b), and have eliminated the provision made in 
Sec. 417.650(c) for a deadline extension for good cause. We believe the 
time frames afforded under Sec. 422.650 still provide M+C organizations 
sufficient time to prepare a request for reconsideration of the 
contract determination at issue, should the organization decide to do 
so.
    As in the case of the deadline for requesting reconsideration, and 
based on our rulemaking authority at section 1856(b)(1), in 
Sec. 422.662(b), we have shortened the 60 day time period for 
requesting a hearing under Sec. 417.662(b) to 15 days. We also have 
again eliminated ``good cause'' extension authority that was found in 
Sec. 417.662(c).
    Like Sec. 417.664(a), Sec. 422.664(a) provides that the effective 
date of a determination to terminate a contract will be postponed until 
after a final decision is rendered on any M+C organization appeal. 
Section 422.664(b) also follows Sec. 417.664(b) in providing that a 
request for a hearing will not postpone a decision not to authorize a 
contract renewal unless HCFA finds an extension of the contract past 
its expiration date consistent with the purposes of Part C. There are 
two significant differences between Sec. 417.664 and Sec. 422.664, 
however. First, as discussed below, Sec. 417.664 provides that in the 
case of a termination only, the general rule is that the termination 
will be postponed until after an additional post-hearing decision level 
of review required under section 1857(h)(1)(B). Second, Sec. 422.664(c) 
implements the ``imminent and serious risk to health'' exception in 
section 1857(h)(2), under which a termination can take effect 
immediately, and will not be postponed while an appeal is pursued. 
Specifically, when a contract termination decision is based upon 
Sec. 422.510(a)(5), discussed in section K above, the termination is 
effective immediately. While the M+C organization still has the right 
to appeal the termination, this appeal will not prevent the termination 
from taking effect.
    In Sec. 422.670, pursuant to our rulemaking authority at section 
1856(b)(1), we have added a requirement that the hearing officer 
establish a time and place for the hearing within 30 days of the date 
of their receipt of the request for a hearing. Again, this time 
constraint has been added because we believe it is necessary to impose 
time-weighted discipline on the reconsideration process that 
strengthens HCFA's enforcement capabilities while simultaneously 
enhancing beneficiary protections. Changing the time frame from the 
open-ended language provided under Sec. 417.670 to the 30-day time 
frame provided at Sec. 422.670 accomplishes these goals.
    In Sec. 422.692, we provide in the case of termination decisions 
only for an appeal from the hearing decision, as required under section 
1857(h)(2) before a termination can take effect. We have provided for 
review of a hearing officer's decision by the Administrator, under 
similar procedures to those used for the Administrator's review of 
decisions of the Provider Reimbursement Review Board pursuant to 
Sec. 405.1875.

O. Intermediate Sanctions

    The M+C organization actions subject to intermediate sanctions and 
civil money penalties are substantially the same as those established 
at Sec. 417.500 for section 1876 contracting plans. However, there are 
some exceptions. Since the 50/50 enrollment requirement has been 
dropped, so have the accompanying intermediate sanctions.
    The BBA also contains additional sanction authority not found in 
Sec. 417.500, which we are implementing in subpart O. First, the BBA 
retains and modifies new section 1876 intermediate sanction and civil 
money penalty authority originally enacted in the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA). This authority has 
not been implemented in Sec. 417.500. Under this new authority (in 
section 1876(i)(1) for HMOs and CMPs and in section 1857(g)(3) for the 
M+C program), intermediate sanctions and civil money penalties can be 
imposed on the same grounds upon which a contract could be terminated. 
See discussion of contract termination in sections K. and N. above. 
Under the section 1876 provision, the procedures now found in section 
1857(h)(1), discussed in section N. above, applied to the new HIPAA 
sanction authority, and had to be followed before sanctions based upon 
this new HIPAA authority could be imposed. Under the BBA, however, 
sanctions based on the grounds for termination in section 1857(c)(2) 
can be imposed on the same terms as the sanctions in Sec. 417.500. See 
section 1857(g)(3). As discussed above in section K., in 
Sec. 422.510(a)(4) through (a)(11), we have identified specific M+C 
organization behaviors that we believe meet one of the broad grounds 
for termination in section 1857(c)(2). Under the authority in section 
1857(g)(3) to impose sanctions where the grounds in section 1857(c)(2) 
exist, intermediate sanctions can be imposed for any of the violations 
identified in Sec. 422.510(a), and we so provide in Sec. 422.752(b).
    Finally, private fee for service plans are subject to intermediate 
sanctions if they fail to enforce the balance billing limit that 
applies to charges to plan members by contracting providers. See 
discussion of these provisions in section IV. of this preamble.
    The process for imposing all of the M+C intermediate sanctions will 
largely be the same as established under Sec. 417.500. Under this 
process, when HCFA determines that a sanctionable violation has 
occurred, it notifies the M+C organization that enrollment and 
marketing must be suspended (or, alternatively, in the case of some 
violations, payment for new enrollees will be suspended) in 15 days, 
unless the organization provides evidence that HCFA's determination is 
incorrect. There is an exception to this 15 day delay in the effective 
date of the sanctions if HCFA determines that the M+C organization's 
conduct poses a serious threat to an enrollee's health and safety. See 
Sec. 422.756(d)(2). In addition to or in place of these intermediate 
sanctions, civil money penalties may be imposed for the same underlying 
violations. For any of the violations that were previously set forth in 
Sec. 417.500, and are now in Sec. 422.752(a), the Office of Inspector 
General imposes civil money penalties in accordance with 42 CFR part 
1003. In the case of the new HIPAA sanction authority discussed above, 
HCFA imposes civil money penalties, with the exception of a 
determination under Sec. 422.510(a)(4), based upon fraudulent behavior 
by an M+C organization. In this latter case, OIG imposes civil money 
penalties.

[[Page 35032]]

P. Technical and Conforming Changes

    This interim final rule makes a number of technical and conforming 
changes to part 422 subpart H (which was established by an interim 
final rule published on April 14, 1998 (63 FR 18124) and amended by an 
interim final rule published on May 7, 1998 (63 FR 25360) For example, 
we remove the definition of ``health care provider'' from subpart H. We 
do this because this rule establishes a definition of ``provider'' in 
subpart A of part 422 for purposes of the entire part that is exactly 
the same as the definition of ``health care provider'' appearing in 
subpart H. Further, as a conforming change, we then change ``health 
care provider'' wherever it appears in subpart H to ``provider.''
    In addition to the additions and revisions to part 422 of our 
regulations discussed throughout this document, this interim final rule 
also makes a number of technical and conforming changes to the 
following parts of 42 CFR: 400, 410, 411, and 417. These changes, which 
are generally in the form of redesignations and nomenclature changes, 
are made in order to bring our regulations into conformity with the 
provisions of the section 4001 through 4006 of the BBA.
    We have also made a conforming change to 42 CFR part 403 ``Special 
Programs and Projects,'' with regard to Medicare supplemental policies. 
As Medicare does not cover the total cost of providing medical care, 
approximately 75 percent of Medicare beneficiaries purchase or have 
available through their own, or a spouse's employment or former 
employment, some type of private supplemental health insurance 
coverage. This kind of insurance helps to pay for expenses, services, 
and supplies that Medicare either does not cover or does not pay in 
full such as coinsurance or deductible charges, prescription drugs, and 
some long term care services. This coverage is ordinarily referred to 
as Medicare supplemental (Medigap) insurance. The BBA, in section 4003, 
provides that an M+C plan is not considered a Medicare supplementary 
policy. Therefore, we are revising Sec. 403.205 to specify that a 
Medicare supplemental policy does not include a M+C plan. We are aware 
of other provisions in that statute affecting the Medigap area, but 
those are included or will be covered under the National Association of 
Insurance Commissioners (NAIC) Model Standards in line with existing 
Sec. 403.210. NAIC works with us to annually update the Model Standards 
with regard to changes to the Medicare supplemental insurance area.

Q. Transition Information for Current Medicare Program

    Section 4002 of the BBA included a number of provisions that were 
effective upon enactment for eligible organizations with section 1876 
contracts or section 1833 agreements or that would alter the 
requirements for those contractors that remained in force following the 
implementation of the M+C program. The provisions that were effective 
upon enactment were conveyed to current contractors through operational 
policy letters (OPLs) numbered 61, 63, and 65 and available to the 
public on HCFA's Internet homepage. Most of the provisions convey 
automatically with the publication of the Part C regulations, either 
contained in the newly-established part 422 or contained in conforming 
changes to part 417, while others simply created operational impacts 
during the transition year of 1998.
    The BBA in section 4002(a) immediately changed the required 
enrollment composition of 50 percent Medicare and Medicaid, and 50 
percent commercial under section 1876 to: (1) Consider only Medicare 
members for 50 percent of the enrollment, and (2) permit waiver of the 
requirement when it is ``in the public interest.'' All enrollment 
composition requirements for Medicare contractors are eliminated 
beginning with contract periods on or after January 1, 1999.
    The BBA in section 4002(j) changed the definition of a health care 
prepayment plan (HCPP) to mean: (1) An organization that is Union or 
Employer sponsored; or (2) an organization that does not provide, or 
arrange for the provision of any inpatient hospital services. Current 
HCPPs must meet this definition on January 1, 1999 and new 1998 
applicants must meet the definition as of the effective date of the 
HCPP agreement. Also, as of January 1, 1999, HCPPs are not required to 
meet Medigap requirements.
    The BBA also affected section 1876 cost contracts. Upon enactment 
of the BBA (August 5, 1997), the Secretary may not enter into new 
section 1876 cost contracts, except for current HCPPs that converted to 
section 1876 cost contracts. Also, 1876 cost contracts may not be 
extended or renewed beyond December 31, 2002.

III. Medicare+Choice MSA Plans

A. Background

    As noted above, among the type of M+C options available under 
section 1851(a)(2) of the Act is an M+C MSA plan, that is, a 
combination of a high deductible M+C insurance plan and a contribution 
to an M+C MSA. Section 1859(b)(3)(A) of the Act defines an MSA plan as 
an M+C plan that:
     Provides reimbursement for at least all Medicare-covered 
items and services (except hospice services) after an enrollee incurs 
countable expenses equal to the amount of the plan's annual deductible.
     Counts for purposes of the annual deductible at least all 
amounts that would have been payable under original Medicare if the 
individual receiving the services in question was a Medicare 
beneficiary not enrolled in an M+C plan, including amounts that would 
be paid by the beneficiary in the form of deductibles or coinsurance.
     After the annual deductible is reached, provides a level 
of reimbursement equal to at least the lesser of actual expenses or the 
amount that would have been paid under original Medicare if the 
individual receiving the services in question was a Medicare 
beneficiary not enrolled in an M+C plan, including amounts that would 
be paid by the beneficiary in the form of deductibles or coinsurance.
    Eligible individuals may enroll in M+C MSA plans effective January 
1, 1999. Section 1859(b)(3)(B) sets the maximum annual deductible under 
an M+C MSA plan for 1999 at $6,000, with changes for future years to be 
based on the national per capita M+C growth percentage established 
under section 1853(c)(6). (See section II.F of this preamble.) In this 
interim final rule, we are seeking comment regarding establishing, 
pursuant to our general authority under section 1856(b)(1), a minimum 
deductible under an M+C MSA plan. As discussed below, one possibility 
would be to establish a minimum deductible equal to the projected 
actuarial value of the average per capita copayment under original 
Medicare, rounded to the nearest $50.
    Section 4006 of the BBA adds new section 138 of the Internal 
Revenue Code of 1986 containing Internal Revenue Service (IRS) rules 
concerning M+C MSAs. In general, an M+C MSA is a tax-exempt trust 
created solely for the purpose of paying the qualified medical expenses 
of the account holder. The account may be established only in 
connection with an M+C MSA plan, and must consist only of contributions 
from HCFA under the M+C program or of

[[Page 35033]]

transfers from another M+C MSA, if an enrollee has set up more than one 
M+C MSA. Section 138 also sets forth IRS rules concerning the 
distribution of MSA funds and tax penalties associated with the 
distribution of funds from an M+C MSA for purposes other than paying 
the qualified medical expenses of the account holder. (These provisions 
are discussed below in section III.J of this preamble.)
    In establishing the M+C MSA option, Congress specified under 
section 1851(b)(4) of the Act that the opportunity to enroll in an M+C 
MSA plan was available on a demonstration basis to up to 390,000 
enrollees through December 31, 2002. The Secretary is charged with 
regularly evaluating the impact of permitting enrollment in M+C MSA 
plans and with submitting a report to Congress by March 1, 2002, 
concerning the effects of the M+C MSA program and whether it should be 
extended beyond 2002.
    The introduction of M+C MSAs builds upon the private market MSA 
demonstration program now available to small employers and the self-
employed under the Health Insurance Portability and Accountability Act 
of 1996 (HIPAA). Like the HIPAA demonstration, the BBA conference 
report (H.R. 105-217, pg. 585) indicates that the introduction of M+C 
MSAs is premised on the need for beneficiaries to play a greater role 
in the health care purchasing decision. M+C MSAs offer beneficiaries 
incentives to ensure that the health care resources they need are 
allocated in an efficient manner. This increased consumer control is 
believed to have potential for discouraging the overutilization of 
health services.
    In implementing the BBA provisions concerning the M+C MSA 
demonstration, our primary objective is to allow a true test of the 
potential benefits of the MSA concept to the Medicare program and its 
beneficiaries. Thus, as with other parts of the M+C regulations, an 
underlying design principle has been to preserve as much flexibility as 
possible for organizations and providers in terms of service delivery 
arrangements, while still building in the protections intended under 
the BBA for M+C MSA enrollees and the Medicare trust fund. For the 
convenience of the reader, all portions of the M+C regulations that 
specifically concern M+C MSA plans and accounts are discussed below in 
this preamble; however, the M+C MSA regulations do not constitute a 
separate subpart of new part 422. This is because, except as noted 
below, the general M+C requirements throughout part 422 apply equally 
to M+C organizations that offer M+C MSA plans; thus it would be 
redundant to repeat all applicable requirements in a separate M+C MSA 
subpart.

B. General Provisions (Subpart A)

    Sections 422.2 and 422.4 set forth several definitions for terms 
connected with M+C MSA plans, including ``M+C MSA,'' ``M+C MSA plan,'' 
and ``MSA trustee.'' As noted in section II.D of this preamble, we also 
distinguish between a ``network'' and a ``non-network'' M+C MSA plan. 
The definitions consist of general meanings for these terms as used in 
the BBA and do not impose specific requirements. Thus, the definition 
for an MSA references the applicable requirements of sections 138 and 
220 of the Internal Revenue Code, and the M+C MSA plan definition 
references the applicable requirements of new part 422.
    The theory behind the new M+C MSA option is that a beneficiary will 
pay a lower monthly premium for a ``catastrophic'' insurance policy 
with a high deductible, and use the money deposited in his or her M+C 
MSA account to cover expenses during the extended period prior to this 
high deductible being reached. This concept is reinforced by the fact 
that Congress excluded from eligibility for M+C MSA plans individuals 
with ``first dollar'' health care coverage (such as, Medicaid-eligible 
individuals'--see discussion below), who would not be required to incur 
expenses during the significant period of time expected to transpire 
before the high M+C MSA plan deductible is met. This is also the reason 
that Congress amended the Medigap statute to preclude insurers from 
selling policies to enrollees in M+C MSA plans that would cover costs 
incurred before the high deductible is met. Indeed, the legislative 
history expressly refers to ``[p]rohibit[ing] the sale of certain 
[Medigap] policies to a person electing a high deductible plan,'' 
meaning an MSA plan. (H.R. Rep. No. 105-217, pg. 654 (1997). Emphasis 
added).
    Although Congress did not include a minimum deductible amount, we 
believe that the statutory scheme, and the above-quoted reference to a 
``high deductible plan'' in the Conference report, clearly imply that 
MSA plans would have a higher deductible than other plans. As noted 
above, we are seeking comment on providing for a minimum deductible 
based on the actuarial value of the average per capita cost-sharing 
under original Medicare rounded to the nearest $50. For 1999, this 
amount is $1,000. (Clearly, any deductible lower than the actuarial 
value of what original Medicare beneficiaries pay is not a ``high'' 
deductible.) We believe that a minimum deductible amount could ensure 
that M+C MSA plans comport with the ``high deductible'' design 
envisioned by Congress, without inappropriately limiting organizations' 
flexibility in designing M+C MSA plans. Without such a deductible, 
however, we are concerned that an organization could purport to offer 
an ``M+C network MSA plan'' that had such a low deductible that it 
would be impossible to distinguish from a coordinated care plan, 
although the plan would not be subject to the rules that Congress 
intended be applied to coordinated care plans. Therefore, in deciding 
whether to institute a minimum deductible for M+C MSA plans, we intend 
to examine any evidence that such abuses may be taking place, in 
addition to our review of public comments on the issue.
    The only other general requirement concerning M+C MSA plans is the 
incorporation under Sec. 422.4(a)(2) of the statutory provision 
(section 1851(a)(2)(B)) that one of the available alternatives under 
the M+C program is the combination of an M+C MSA plan with a 
contribution into an M+C MSA. Consistent with the statute, any State-
licensed risk-bearing entity could offer an M+C MSA plan, whether it is 
an HMO offering an ``M+C network MSA plan'' under which beneficiaries 
are limited to a limited network of providers for covered services 
after the deductible is met, or an indemnity plan covering services on 
a fee-for-service basis after the deductible is met.

C. Eligibility, Election and Enrollment Rules (Subpart B)

1. Eligibility and Enrollment (Sec. 422.56)
    Any individual who is entitled to Medicare under Part A, is 
enrolled under Part B, and is not otherwise prohibited (such as an ESRD 
patient), is eligible to enroll in an M+C plan. However, the statute 
places several limitations on eligibility to enroll in an M+C MSA plan. 
These limitations are set forth at Sec. 422.56 of the regulations. 
Section 422.56(a) indicates that M+C MSA plans are established on a 
demonstration basis and incorporates the statutory provisions of 
section 1851(b)(4), that is:
     No more than 390,000 individuals may enroll in M+C MSA 
plans.
     No individual may enroll on or after January 1, 2003, 
unless the enrollment is a continuation of an enrollment already in 
effect as of that date.
     No individual may enroll or continue enrollment for any 
year unless

[[Page 35034]]

he or she can provide assurances of residing in the United States for 
at least 183 days during that year.
    The 390,000 limit represents approximately 1 percent of the 
Medicare population. We do not intend to apply any State or regional 
limits on enrollment in M+C MSA plans, although we will monitor the 
number of enrollees on an ongoing basis. We believe it is unlikely that 
the number of applications for M+C MSAs will reach 390,000 in the first 
enrollment period, November, 1998. If necessary, however, we will 
accept applications for enrollment in M+C MSA plans on a first-come, 
first-served basis, with the first 390,000 applicants being allowed to 
enroll. We will notify organizations offering M+C MSA plans directly 
should the enrollment cap be reached.
    The only restrictions on enrollment in M+C MSA plans under 
Sec. 422.56(b) and (c) are those directly contemplated under section 
1851(b)(2) and (3) of the statute. Specifically, Sec. 422.56(b) states 
that an individual who is enrolled in a Federal Employee Health 
Benefits Program (FEHBP) plan, or is eligible for health care benefits 
through the Veterans Administration (VA) or the Department of Defense 
(DoD), may not enroll in an M+C MSA plan. The statute provides that the 
restriction on FEHBP enrollment may be eliminated if the Director of 
the Office of Management and Budget certifies to the Secretary that the 
Office of Personnel Management has adopted policies to ensure that the 
enrollment of FEHBP participants will not result in increased 
expenditures for health benefit plans. We intend to apply this same 
test for the enrollment restrictions that apply to VA and DoD-eligible 
individuals. In addition, Sec. 422.56(c) incorporates the statutory 
prohibition under section 1851(b)(3) on enrollment in M+C MSA plans by 
individuals who are eligible for Medicare cost-sharing under Medicaid 
State plans.
    Section 422.56(d) sets forth several additional restrictions on 
enrollment in M+C MSA plans that we believe are clearly consistent with 
statutory intent. These restrictions are discussed in detail below in 
section III.D.2 of this preamble, in the discussion of supplemental 
benefits under an M+C MSA plan.
2. Election (Sec. 422.62)
    Section 1851(e) of the Act establishes general rules concerning the 
time periods when a beneficiary may elect to enroll in an M+C plan, 
with special rules for M+C MSA plans set forth at section 1851(e)(5). 
Based on these provisions, Sec. 422.62(d) specifies that an individual 
may elect an MSA plan only during one of the following periods;
     An initial election period, that is, the 7-month period 
beginning 3 months before the individual is first entitled to parts A 
and B of Medicare.
     The annual coordinated election period in November of each 
year.
    Unlike for other M+C plans, an individual may discontinue election 
of an M+C MSA plan only during the annual coordinated election period. 
Thus, effective January 1, 1999, enrollees in M+C MSA plans are 
``locked in'' for 1 year, or for the remainder of the calendar year for 
elections during an initial election period that take effect other than 
on January 1. This lock-in rule contrasts sharply with the rules for 
other types of M+C plans, which provide for continuous open enrollment 
and disenrollment through December 31, 2001.
    There are two exceptions to this lock-in rule. First, as specified 
under section 1851(e)(5)(C) and codified at Sec. 422.62(d)(2)(ii), an 
individual who elects an M+C MSA plan during an annual election period 
in November of a given year, and has never before elected an M+C MSA 
plan, may revoke that election by submitting to the organization 
offering the plan a signed request or by filing the appropriate 
disenrollment form by December 15 of that year. In addition, we are 
providing at Sec. 422.58(d)(2) that an individual may disenroll from an 
M+C MSA plan during the special election periods prompted by 
circumstances such as termination of the plan, change in the 
individual's place in residence, etc., as spelled out under 
Sec. 422.62(b). As discussed in detail in section II.B of this 
preamble, section 1851(e)(4) provides that these special election 
periods are to take effect on January 1, 2002, in concert with the 
initial effective date for the lock-in rules for M+C plans other than 
MSA plans. Given that the lock-in rule for M+C MSA plans takes effect 
on January 1, 1999, we believe it is appropriate that the protections 
afforded by the special election period should be applicable at that 
time to individuals who elect M+C MSA plans.
3. Information About the M+C Program (Sec. 422.64)
    Section 1851(d) and Sec. 422.64 address the requirement that M+C 
organizations must provide the information that HCFA needs to help 
beneficiaries make informed decisions with respect to their available 
choices for Medicare coverage. The only M+C MSA-specific requirement 
involved here (also applicable for M+C private fee-for-service plans) 
is that the description of an M+C MSA plan's benefits should include 
differences in cost-sharing, premiums, and balance billing, as compared 
to other types of M+C plans (see Sec. 422.64(c)(7)(iv)). We believe 
that the purpose of this requirement is to make sure that beneficiaries 
are aware of the fundamental differences between M+C MSA or private 
fee-for-service plans and other types of M+C plans, rather than to 
present detailed information concerning the benefits, premiums, and 
copayments for all other specific M+C plans in the area. For compliance 
purposes, then we intend to evaluate the information submitted by 
organizations for MSA plans in these terms. We note that we would apply 
the same standard in determining compliance with the requirement of 
Sec. 422.110(b)(2)(ii) concerning an organization's responsibility to 
disclose to its enrollees a description of the benefits available under 
other types of plans.

D. Benefits (Subpart C)

1. Basic Benefits Under an M+C MSA Plan (Sec. 422.102)
    Section 422.102 incorporates the statutory requirements for M+C MSA 
plans defined under section 1859(b)(3) of the Act, as outlined above. 
Thus, Sec. 422.102(a) specifies that an MSA organization offering an 
MSA plan must make available to an enrollee, or provide reimbursement 
for, at least all Medicare-covered services (except for hospice 
services) after the enrollee's countable expenses reach the plan's 
annual deductible. We note that section 1859(b)(3)(A)(i) only uses the 
phrase ``provides reimbursement for'' the covered services, but the 
intent of the statute clearly includes situations where a network M+C 
MSA plan would either furnish the services directly or arrange for 
provision of the services. We believe that the phrase ``make available 
to the enrollee'' accounts for either of these situations.
    Section 422.102(b) then indicates that countable expenses must 
include the lesser of actual costs or all the amounts that would have 
been paid under original Medicare if the services were received by a 
Medicare beneficiary not enrolled in an M+C plan, including the amount 
that would have been paid by the beneficiary under his or her 
deductible and coinsurance obligation. In accordance with section 
1859(b)(3)(A)(ii) of the statute, under each MSA plan, an organization 
would have the discretion to define what it considers countable 
expenses, subject to the statutory threshold of the Medicare

[[Page 35035]]

payable amount. We would envision that M+C organizations offering MSA 
plans could provide that countable expenses would include a 
considerably broader range of services than does Medicare, including 
expenses for services that often would constitute supplemental health 
care benefits under other M+C plans, such as prescription drugs, dental 
services, or preventative care services. (As discussed below, section 
1852(a)(3)(B)(ii) prohibits an M+C MSA plan from providing most 
supplemental health care benefits before an individual reaches the 
annual deductible. However, counting the expenses for such services 
towards the annual deductible is permissible.) An M+C organization 
could also choose to provide that countable expenses under an M+C MSA 
plan would include a provider's full charges, rather than just the 
amount payable under the Medicare payment rate schedules.
    Section 422.102(c) provides that after the deductible is met, an 
M+C MSA plan pays the lesser of 100 percent of either the actual 
expense of the services or of the amounts that would have been paid 
under original Medicare if the services were received by a Medicare 
beneficiary not enrolled in an M+C plan, including the amount that 
would have been paid by the beneficiary under his or her deductible and 
coinsurance obligation. As discussed below in section III.F., M+C 
balance billing protections do not apply in this situation. Thus, 
unless explicitly included in the terms of the M+C MSA plan, any 
amounts billed in excess of 100 percent of this Medicare allowed amount 
would be the responsibility of the enrollee. In this provision, we have 
interpreted the language in section 1859(b)(3)(A)(iii)(II) referring to 
the ``amounts that would be paid (without regard to any deductibles and 
coinsurance) under parts A and B'' to mean the amount that would be 
paid if there were no beneficiary liability provided for in the form of 
deductibles and coinsurance--in other words, the full amount of the 
Medicare rate. We have put this a different way in Sec. 422.102(c), 
providing that the amount in question includes the amounts that the 
beneficiary would pay in deductibles and coinsurance. We considered 
interpreting ``without regard to any deductibles and coinsurance 
amounts'' to mean without counting the amounts original Medicare 
beneficiaries would pay in deductibles and coinsurance. We decided, 
however, that after a deductible of up to $6000, and with balance 
billing permitted, M+C MSA plans should be required to pay the full 
Medicare payment rate once the deductible is met. Again, an 
organization would be free to offer expanded benefits under an M+C MSA 
plan beyond the minimum requirements after the deductible is met, 
including supplemental benefits that it could not offer before the 
deductible is met.
    Section 422.103(d), concerning the annual deductible, is based on 
section 1859(b)(3)(B). As the statute specifies, the maximum annual 
deductible for an MSA plan for contract year 1999 is $6,000. In 
subsequent contract years, the maximum deductible may not exceed the 
maximum deductible for the previous contract year increased by the 
national per capita M+C growth percentage for the year. In calculating 
the maximum deductible for future years, HCFA will round the amount to 
the nearest multiple of $50.
    Another issue we examined in developing the regulations concerning 
the annual deductible for M+C MSA plans was whether to establish 
specific requirements on deductibles for individuals who enroll in M+C 
MSA plans effective other than on January 1 of a given year, that is, 
individuals who turn 65 and make midyear elections of an M+C MSA plan 
within their initial enrollment periods. Our primary alternatives on 
this issue were to: (1) require all M+C MSA plans to ``prorate'' the 
deductible, that is, reduce the amount of the deductible for midyear 
enrollees in proportion to the amount of the calendar year remaining or 
(2) allow insurers the flexibility to decide for themselves how to deal 
with partial year enrollees. Although the prorating alternative would 
reduce the cost-sharing burden on beneficiaries during the first 
partial year, and thus possibly make it more likely that an individual 
whose initial election period occurs late in the year would choose an 
M+C MSA plan, this option has several drawbacks. Few if any insurance 
carriers now prorate their deductibles for midyear enrollees, and we 
are reluctant to implement such an approach unilaterally, particularly 
since we have no evidence that the costs of implementing a prorated 
system would be exceeded by the benefits to beneficiaries in terms of 
reduced risk. Such a requirement could limit interest in establishing 
M+C MSA plans, if insurers believed that they could be placed at risk 
of the enrollment of individuals with low prorated deductibles who 
anticipate high cost short-term health care needs.
    Instead, we decided to allow insurers to decide for their M+C MSA 
plans how to deal with partial year enrollees. This should foster 
flexible approaches to this situation, with organizations making 
decisions based on their perceptions of the cost of implementation and 
the benefits to them in terms of attracting prospective enrollees. For 
example, an organization's plans could include a ``carry-over'' 
procedure. Under such a procedure, bills incurred during a specified 
period of one calendar year could be carried over to the following year 
and applied to the next year's deductible.
2. Supplemental Benefits (Secs. 422.102 and 422.103)
    Section 422.102 addresses the general M+C rules on supplemental 
benefits. Unlike other M+C plans, MSA plans are not permitted to 
include any mandatory supplemental benefits and are limited in terms of 
the optional supplementary benefits that can be offered. In accordance 
with section 1852(a)(3)(B)(ii), Sec. 422.103(a) specifies that an M+C 
MSA plan generally may not provide supplemental benefits that cover 
expenses that count toward the annual deductible. In addition, section 
4003(b) of the BBA added new section 1882 to the Act to prohibit the 
sale of most supplementary health insurance policies to individuals 
enrolled in M+C MSA plans. The only exceptions to this rule are spelled 
out in section 1882(u)(2)(B). These exceptions apply both for purposes 
of the prohibition on selling freestanding supplementary health 
insurance (or ``Medigap'' insurance), and for purposes of ``optional 
supplemental benefits'' offered under M+C MSA plans. These exceptions 
are reflected in Sec. 422.103(a)(2). Under Sec. 422.103(a)(2), the only 
types of policies that an enrollee in an M+C MSA plan may purchase that 
cover expenses that may count toward the annual deductible are as 
follows:
     A policy that provides coverage for accidents, disability, 
dental care, vision care, or long-term care.
     A policy in which substantially all coverage relates to 
liabilities incurred under workers' compensation laws, tort 
liabilities, or liabilities relating to use or ownership of property.
     A policy that provides coverage for a specified disease or 
illness or pays a fixed amount per day (or other period) for 
hospitalization. (Note that the fact that an organization offering an 
M+C MSA plan permits a particular expense to count toward the plan's 
annual deductible does not necessarily mean that such expenses are 
considered ``qualified medical expenses'' by the IRS.)
    The above restrictions on optional supplemental benefits and 
Medigap

[[Page 35036]]

coverage under section 1882, combined with Congress' explicit exclusion 
of individuals with ``first dollar'' health coverage under government 
programs (Medicaid, VA benefits, and FEHBP benefits--see section 
1851(b)(2) and (3) and discussion above), make it clear that Congress 
intended that individuals enrolled in M+C MSA plans would be required 
to use the money in their M+C MSA accounts to pay for services until 
the ``high deductible'' under the plan is met. While Congress addressed 
government programs under which expenses during the deductible would be 
covered, and prohibited the sale of new private supplemental insurance 
that would cover such deductible amounts (whether an optional 
supplemental benefit offered under an M+C MSA plan, or a freestanding 
``Medigap'' policy), some categories of individuals with first dollar 
coverage that would cover expenses that would count toward an M+C MSA 
plan deductible would remain eligible to enroll in M+C MSA plans absent 
a regulatory prohibition.
    We believe that it would give effect to clear congressional intent 
to expand the categories of individuals ineligible to enroll in M+C MSA 
plans to include the additional categories that Congress neglected to 
include. For example, while Congress prohibited the sale of private 
insurance covering expenses that count toward an M+C MSA deductible, it 
did not address individuals who may already have such coverage, 
including those who have first dollar Medigap coverage through their 
employer. In addition, individuals who have elected hospice coverage 
are also eligible for first dollar Medicare payment, without any 
qualification in the case of MSA plans. (See section 1853(h)(2)(A).) 
This is also inconsistent with Congress' intended design for the M+C 
MSA option. Pursuant to our authority under section 1856(b)(1) to 
establish M+C standards by regulation, we accordingly are providing in 
Sec. 422.56(d) that individuals with such health benefits are 
ineligible to elect an MSA plan.
    As mentioned above, M+C MSA plans may not provide any supplemental 
benefits, except those exempted, covering expenses that count towards 
the annual deductible. Once the deductible is reached, however, there 
are no limitations on the supplemental benefits a plan may offer, as 
long as the plan satisfies the requirements concerning making available 
basic part A and B Medicare services. We believe that a market may 
emerge for supplemental insurance policies in connection with M+C MSA 
high deductible insurance policies. We considered the possibility of 
establishing one or more sample benefit plans for use in conjunction 
with M+C MSA plans, similar to the limited number of standardized 
Medigap plans that are now offered. Although we are not doing so at 
this time, we welcome comments on the need for such uniform plans.

E. Quality Assurance (Subpart D)

    Like for other M+C plans, an organization offering an MSA plan must 
have an ongoing quality assessment and performance improvement program 
for the services furnished to M+C enrollees under the plan. As 
discussed in detail above, the quality assurance requirements that 
apply to an M+C MSA plan depend on whether the plan is a network model 
plan, that is, a plan that provides benefits either through contracting 
providers or under arrangements made by the plan, or a non-network 
plan. Consistent with section 1852(e)(2) of the Act, a network model 
M+C MSA plan must meet requirements similar to those that apply to all 
other M+C coordinated care plans (with the exception of the achievement 
of minimum performance levels); the statute and regulations establish 
different requirements for non-network M+C MSA plans. See section II.D 
of this preamble, and Sec. 422.152 of the regulations, for more 
information on this subject. Also, see section II.D. of the preamble 
and Sec. 422.154 for information on the external review requirements 
that apply to network M+C MSA plans. Under Sec. 422.154(b)(1), the 
external review requirements do not apply to non-network M+C MSA plans.

F. Relationships Between Plans and Participating Physicians (Subpart E)

    For the most part, subpart E of new part 422 does not establish any 
requirements that are specific to MSA plans. However, Sec. 422.214, 
``Special rules for services furnished by noncontract providers,'' does 
have implications for enrollees in MSA plans. The provisions of this 
section are based on section 1852(k) of the Act, beginning with the 
requirement under section 1852(k)(1) that for enrollees in M+C 
coordinated care plans, a physician that does not have a contract with 
the plan must accept as payment in full an amount no greater than the 
amount the physician could collect if the individual were under the 
fee-for-service Medicare program, including any applicable deductibles, 
coinsurance, or balance billing permitted by the plan. (See section 
1848(g) concerning the Medicare fee-for-service rules on limiting 
charges.) Section 1852(k)(2) then establishes balance billing limits 
for M+C private fee-for-service plans, as discussed in detail in 
section IV of this preamble and Sec. 422.216; however, the statute 
contains no balance billing protections for enrollees in M+C MSA plans.
    It is clear from the legislative history of the provisions imposing 
balance billing limits that the omission of any limits under M+C MSA 
plans was not inadvertent. Page 609 of the Conference Report (H.R. Rep. 
No. 105-217) refers to the House bill, which included across the board 
limits on what could be collected. The Senate amendment is described as 
including a ``[similar provision except that it excepts from the 
requirement * * * a[ ] fee-for-service plan as well as an MSA plan.'' 
The ``conference agreement'' is then described as ``including] the 
Senate provision with an amendment to provide for application of the 
provision to Medicare+Choice fee for service plans. * * *'' Thus, 
Congress clearly indicates that it provided for a balance billing limit 
for M+C coordinated care plans and private fee-for-service plans 
(albeit a different limit), but not for M+C MSA plans. On page 611, the 
Conference Report expressly states that the House bill provided that an 
``MSA plan * * * would not be subject to the * * * limitations on 
balance billing.'' The conference agreement indicates that it 
``includes'' this ``House bill'' position. In light of the absence of 
any statutory provision for a limit on balance billing under M+C MSA 
plans, and these clear statements of congressional intent that there be 
no such limits, we have not provided for any limits on balance billing 
under M+C MSA plans in these regulations.

G. Payments Under MSA Plans (Subpart F)

    Section 1853 describes the method to be used to calculate the 
annual M+C capitation rate for a given payment area (see section II.F 
of this preamble and Sec. 422.254). We apply the same methodology in 
determining the annual capitated rate associated with each M+C MSA plan 
enrollee. Thus, for calendar year 1999, the capitated rate will 
continue to be adjusted for the age, gender, Medicaid-eligibility, 
disability, institutional status, and employment of the individual 
beneficiary, with risk adjustment scheduled to begin on January 1, 
2000, as also discussed in detail in section II.F of this preamble.
    The special rules concerning the allocation of the M+C capitated 
amount for individuals enrolled in M+C MSA plans are set forth at 
section 1853. In

[[Page 35037]]

general, HCFA will allocate the capitated amount associated with each 
M+C MSA enrollee as follows:
     On a lump-sum basis at the beginning of the calendar year, 
pay into a beneficiary's M+C MSA an amount equal to the difference 
between the annual M+C capitation rate for the county in which the 
beneficiary resides and the M+C MSA premium filed by the organization 
offering the MSA plan (this premium is uniform for all enrollees under 
a single M+C MSA plan.) This results in a uniform amount being 
deposited in an M+C MSA plan enrollee's M+C medical savings account(s) 
in a given county, since the uniform premium amount will be subtracted 
from the uniform county-wide capitation rate for every enrollee in that 
county.
     On a monthly basis, pay to the M+C organization an amount 
equal to one-twelfth of the difference, either positive or negative, 
between the annual M+C capitation payment for the individual and the 
amount deposited in the individual's M+C MSA.
    Section 422.262 contains the regulations concerning the allocation 
of Medicare trust funds for enrollees in M+C MSA plans. First, under 
Sec. 422.262(a), an enrollee must establish an M+C MSA with a qualified 
trustee or custodian. An enrollee may establish more than one account, 
consistent with section 1853(e)(2)(B) of the Act, but must designate 
the particular account to which payments by HCFA are to be made. As 
specified under Sec. 422.262(b), a trustee can be a bank, insurance 
company, or anyone approved by the IRS to be a trustee of Individual 
Retirement Accounts. Section 422.262(b) also requires that M+C MSA 
trustees must register with HCFA, agree to comply with IRS rules 
concerning MSAs, and provide organizational information that HCFA may 
require.
    The specific requirements concerning the amount that HCFA pays into 
an individual's M+C MSA are spelled out at Sec. 422.262(c). We 
calculate the payment by first comparing the monthly premium for the 
M+C MSA plan to the county-wide capitation rate under Sec. 422.252 that 
is used in making payments to M+C organizations under other types of 
M+C plans (final payment to M+C organizations is based on this county-
wide capitation rate, adjusted by demographic factors). If the monthly 
premium is less than the monthly capitation rate for the county, HCFA 
deposits into the individual's M+C MSA a lump sum equal to the annual 
difference between these two amounts, that is, the monthly difference 
multiplied by 12, or by the number of months remaining in the calendar 
year when the individual becomes covered under the M+C MSA plan.
    The lump-sum payment is made in the first month of coverage under 
the M+C MSA plan, but HCFA makes no payment until the individual has 
not established an M+C MSA before the beginning of the month. Should an 
individual's coverage under an M+C MSA plan end before the end of a 
calendar year, HCFA will recover the excess portion of the lump-sum 
deposit attributable to the remaining months of that year.
    In summary, Medicare's contributions to an individual's M+C MSA are 
equal to the difference between the unadjusted county-wide capitation 
rate for the county in which the enrollee lives and the premium filed 
by the individual's high deductible M+C MSA plan. For example, if the 
annual Medicare payment rate for a county is $6,000 ($500 per month), 
and the annual premium for an M+C MSA insurance plan is $4800 ($400 
multiplied by 12), HCFA would deposit $1,200, in January, into the M+C 
MSA of each plan enrollee residing in that county. It would pay to the 
insurer (generally divided into 12 equal monthly payments) the 
difference between the demographically adjusted M+C payment amount for 
that individual and the MSA contribution. (See the example below.) The 
annual payment by HCFA represents the only permissible deposit into the 
individuals's M+C MSA, with the exceptions of transfers from another 
M+C MSA established by the same individual or interest or income that 
accrues to the account.

Example of Payments Under an M+C MSA Plan

Monthly premium for an M+C MSA plan..........................       $400
Monthly M+C county-wide capitation rate......................        500
Monthly demographically adjusted M+C payment for an                     
 individual beneficiary:                                                
    Individual A (65-year old beneficiary)...................        450
    Individual B (85-year old beneficiary)...................        700
                                                                        

A. Annual contribution to enrollee's M+C MSA =
    (M+C county-wide capitation rate-M+C MSA plan monthly premium)  x  
12. ($500-$400)  x  12 = $1,200
    B. Monthly payment to an M+C organization under an M+C MSA plan for 
an enrollee =
    Demographically adjusted M+C payment rate for an enrollee-Monthly 
contribution to the enrollee's M+C MSA plan
    Individual A: $450-$100 = $300
    Individual B: $700-$100 = $600

    In theory, payments to the plan for an individual enrollee could be 
positive or negative, depending on the relationship between a plan's 
premium and the capitation rate for a given county. If, in the example 
above, the M+C MSA plan premium were only $25 (rather than $400), the 
monthly contribution to an enrollee's M+C MSA would be $475 ($500-$25 = 
$475). For the 65-year old beneficiary (Individual A), the resultant 
payment to the plan would be a negative $25 ($450-$475 = (-$25)). Given 
that organizations offering M+C MSA plans likely will carefully assess 
payment ranges and demographic factors within their market areas before 
proposing a premium, we believe that a negative payment would be rare, 
but not impossible.)

H. Premiums (Subpart G)

    Section 1854 establishes the requirements for determination of the 
premiums charged to enrollees by M+C organizations. Like other M+C 
organizations, organizations offering M+C MSA plans in general must 
submit by May 1 of each year information concerning enrollment capacity 
and premiums. For M+C MSA plans, the information to be submitted 
includes the monthly M+C MSA plan premium for basic benefits and the 
amount of any beneficiary premium for supplementary benefits. These 
requirements are set forth under section 1854(a)(3) of the act and 
Sec. 422.306(c) of the regulations.
    Unlike for M+C coordinated care plans, section 1854(a)(5) Act 
expressly exempts M+C MSA plan premiums from review and approval by the 
Secretary. Section 1854(b)(1)(B) merely states that for M+C MSA plans, 
the monthly amount of the premium charged to an enrollee equals the M+C 
monthly supplemental beneficiary premium, if any. Although this 
provision effectively

[[Page 35038]]

precludes an organization offering an M+C MSA plan from charging an 
additional premium to an enrollee for basic Medicare benefits paid for 
through the capitated payment made by HCFA, the plan is free to set the 
basic and supplemental premium at whatever levels the market place will 
bear.
    The only statutory limitation placed on an M+C MSA plan's ability 
to establish premiums is the ``uniform premium'' requirement of section 
1854(c). The effect of this provision is that the monthly basic and 
supplementary premiums may not vary among individuals enrolled in an 
M+C MSA plan. (See the discussion of service area in section II.A. of 
this preamble.) Thus, insurers that want to charge different amounts 
for different benefits, according to geographic areas for example, 
could do so only by establishing multiple M+C MSA plans. Within a plan, 
however, payments into the M+C MSAs of individuals residing in the same 
county will be uniform; payments to the plans will vary for each 
individual.

I. Other M+C Requirements

    The remaining requirements under subpart 422 have few if any 
implications specific to M+C MSA plans. For example, the organizational 
and financial requirements, provisions on compliance with State law, 
contracting rules, and grievance and appeal requirements generally 
apply in equal measure to MSA plans as to other types of plans. More 
accurately, perhaps, these requirements primarily apply to the M+C 
organization, rather than the plan; thus, an organization offering any 
type of M+C plan must meet the applicable requirements.
    One issue that may require clarification, however, involves the 
provision of section 1856(b)(3)(B)(i) (and Sec. 422.402(b)) that any 
State standards relating to benefit requirements are superseded. We 
recognize that this provision means that State benefit rules will not 
apply (such as State laws that mandate first dollar coverage for 
particular benefits such as mammograms or other preventative services). 
Some States may not license entities to offer catastrophic coverage, 
and it is possible that M+C MSA plans could not be offered in that 
State. We welcome public comment on this issue.
    The only other sections of these regulations that contain 
requirements that are specific to M+C MSA plans are found in Subpart 
K--Contracts with M+C Organizations. First, in accordance with section 
1857(c)(3), Sec. 422.504(a) specifies that the effective date for a 
contract providing coverage under an M+C MSA plan may be no earlier 
than January 1, 1999.
    We note that Sec. 422.500(b)(2) authorizes HCFA to include in a 
contract any requirements that we find ``necessary and appropriate'' 
that are not inconsistent with the M+C statute and regulations. Given 
the demonstration basis of M+C MSA plans under section 1851(b)(4), and 
the corollary requirements for an evaluation and a report to Congress, 
we believe it may be necessary and appropriate to require that 
organizations offering M+C MSA plans provide HCFA with data that will 
enable us to evaluate M+C MSA plans in terms of selection, use of 
preventive care, access, and impact on the Medicare trust fund. We are 
now in the process of determining what, if any, specific data will be 
required with respect to M+C MSA plans (beyond the encounter data to be 
collected with respect to all M+C plans) to facilitate HCFA's 
evaluation. In Sec. 422.502(f)(2)(vii), we provide authority for HCFA 
to request data from M+C organizations offering MSA plans related to 
selection, use of preventive care, and access to services.

J. Tax Rules

    As mentioned earlier, section 4006 of the BBA added new section 138 
to the Internal Revenue Code (IRC) of 1986 concerning M+C MSAs. The 
regulations set forth in this interim final rule do not incorporate the 
IRC provisions on M+C MSAs. However, for the convenience of the reader, 
we are presenting here a brief summary of the tax rules associated with 
M+C MSAs. For a full explanation of the tax consequences of 
establishing a M+C MSA, we refer readers to sections 138 and 220 of the 
IRC and to the relevant IRS publications. (For more information, 
contact the IRS at (888) 477-2778 or through its website at 
www.irs.ustreas.gov.)
    When an individual joins an M+C MSA plan, HCFA makes a specified 
contribution, as explained above, into the M+C MSA designated by the 
individual. No other contribution may be made into the M+C MSA, and the 
contribution is not included in the taxable income of the account 
holder. Any income earned on amounts held in the M+C MSA are not 
currently included in taxable income, similar to an individual 
retirement account.
    Withdrawals from an M+C MSA are not considered taxable income if 
used for the ``qualified medical expenses'' of the account holder, 
regardless of whether the account holder is still enrolled in an M+C 
MSA plan at the time of the distribution. In general, ``qualified 
medical expenses'' are defined the same as under the IRS rules relating 
to itemized deductions for medical expenses. (See sections 213(d) and 
220(d)(2)(A) of the IRC and IRS publication 502, Medical and Dental 
Expenses.) For M+C MSA purposes, however, most health-related insurance 
premiums do not constitute qualified medical expenses, nor do amounts 
paid for the medical expenses of any individual other than the account 
holder. Also, keep in mind that the IRS definition of qualified medical 
expenses encompasses a broader range of items and services than are 
covered by Medicare, including for example prescription drugs and 
dental services. Thus, items that are considered qualified medical 
expenses by the IRS do not necessarily constitute countable expenses 
toward an M+C MSA plan's annual deductible.
    An enrollee in an M+C MSA plan may make withdrawals from an M+C MSA 
that are not used to pay for the qualified medical expenses of the 
account holder, but these withdrawals are included in the account 
holder's taxable income and may be subject to additional tax penalties 
under section 138(c)(2) of the IRC. The additional tax provisions do 
not apply to distributions following the disability (as defined in 
section 72(m)(7) of the IRC) or death of the account holder. Finally, 
under section 138(d) of the IRC a surviving spouse of an M+C MSA holder 
may continue the M+C MSA upon the death of the account holder, 
including making nontaxable withdrawals for the qualified medical 
expenses of the spouse or the spouse's dependents, but may not make new 
contributions to the M+C MSA. Again, we recommend contacting the IRS 
for further details.

K. Letters of Intent

    In closing, we wish to solicit letters of intent from organizations 
that intend to offer high deductible M+C MSA insurance plans to 
Medicare beneficiaries and/or to serve as M+C MSA trustees or 
custodians. A letter of intent to offer an M+C MSA plan should include 
basic information about the plan, the geographic area in which the plan 
intends to operate, the name, address, and telephone number of a 
contact person, so that beneficiaries can call the plan to verify 
whether the plan did, in fact, submit an application and receive our 
approval. This letter of intent must be received no later than July 31, 
1998.
    For prospective M+C MSA trustees, the letter of intent must include 
the name of the organization, the address, a contact person and 
telephone number,

[[Page 35039]]

funds routing number, Federal tax identification number, the geographic 
area the trustee will serve, a public information number for 
publication, and attestation that the organization is a chartered bank, 
licensed insurance company, or other entity qualified under section 
408(a)(2) or section 408(h) of the Internal Revenue Code to act as a 
trustee or custodian of an individual retirement account. For trustees, 
no further application to us will be required if the organization 
appears to be qualified based upon submitted information. Trustees that 
decide at a later date to participate will have to notify us before 
offering M+C MSAs.
    Statements of intent should be submitted to--Health Care Financing 
Administration, CHPP, Attn: Cynthia Mason, Room C4-17-27, 7500 Security 
Boulevard, Baltimore, Maryland 21244.
    A letter of intent in no way commits an organization to submit an 
application to offer an M+C MSA plan or serve as an M+C MSA trustee, 
nor does it preclude the submission of an application if a letter of 
intent is not submitted to us. As part of our information campaign, we 
plan to publish and disseminate the information we receive to inform 
beneficiaries of the plans that may be participating in the M+C MSA 
plan demonstration project.

IV. M+C Private Fee-for-Service Plans

1. Background and Definition of M+C Private Fee for Service Plans 
(Sec. 422.4(a)(3))

    As noted above, among the type of M+C options available under 
section 1851(a)(2) is an M+C private fee for service plan. An M+C 
private fee for service plan is an M+C plan like any other except where 
there are special rules and exceptions that apply to them. The effect 
of these special rules and exceptions is that we believe that M+C plans 
will function much like a traditional health insurance plan rather than 
a coordinated care plan nor a medical savings account. The law provides 
considerable flexibility in the creation of this M+C option and 
therefore, it is likely that M+C private fee for service plans will 
vary widely in how they function. Moreover, the law does not limit the 
premiums that an M+C organization may charge for an M+C private fee for 
service plan, thus making it very sensitive to market forces in its 
pricing, its benefits and its function.
    We propose to define an M+C private fee-for-service plan as being 
an M+C plan that pays providers of services at a rate determined by the 
plan on a fee-for-service basis without placing the provider at 
financial risk, does not vary the rates for a provider based on the 
utilization of that provider's services, and does not restrict 
enrollees' choice among providers who are lawfully authorized to 
provide the services and agree to accept the plan's terms and 
conditions of payment. This is the statutory definition of M+C private 
fee-for-service plan at 1859(b)(2)(A). The requirements these plans 
must meet to contract with HCFA as an M+C private fee-for-service plan 
are incorporated into the relevant sections of this regulation. An M+C 
private fee-for-service plan must meet all of the requirements for any 
other M+C plan, except to the extent that there are special rules for 
M+C private fee-for-service plans.

2. Quality Assurance (Secs. 422.152 and 422.154)

    The law exempts M+C private fee for service plans and non-network 
MSAs from some of the quality assurance requirements of the law. 
Moreover, the law exempts M+C private fee for service plans and non-
network MSAs from external quality review if they do not have written 
utilization review protocols. Specific discussion of the statute and 
the regulations that implement these provisions that apply to both M+C 
private fee for service plans and non-network MSAs are found in subpart 
D at sections 422.152 and 422.154. As with all other requirements for 
M+C organizations and M+C plans, those provisions of regulations that 
are not specific to coordinated care plans and MSAs also apply to M+C 
private fee for service plans.

3. Access to Services (Sec. 422.214)

    In Sec. 422.214 we implement the special requirements for access to 
health services that are contained in section 1852(d)(4). The law 
requires that the Secretary must assure that the M+C private fee-for-
service plan offers sufficient access to health care. Specifically, in 
Sec. 422.114(a) we require that an M+C organization that offers an M+C 
private fee-for-service plan must demonstrate to HCFA that it has 
sufficient number and range of health care providers willing to furnish 
services under the plan. Pursuant to the specific instructions of the 
law, under Sec. 422.114(a) HCFA will find that an M+C organization 
meets this requirement if, with respect to a particular category of 
provider, the plan has--
     Payment rates that are not less than the rates that apply 
under original Medicare for the provider in question;
     Contracts or agreements with a sufficient number and range 
of providers to furnish the services covered under the plan; or
     A combination of the above.
    Hence, an M+C private fee-for-service plan will be found to have 
met the access requirements for a category of services if it has 
sufficient numbers of providers under direct contract in its service 
area or, if not, it has payment rates that are equal to or higher than 
the original Medicare payment for the service. This access test must be 
met for each category of service established by HCFA on the M+C 
organization application. Clearly, if an M+C private fee-for-service 
plan has payment rates that are no lower than Medicare, it need not 
address if it has a sufficient number of providers of services. 
However, where the plan has payment rates that are less than the 
Medicare payment for that type of provider, the plan must demonstrate 
that it has sufficient number of providers of that type under direct 
contract. For purposes of making this judgement of sufficiency, HCFA 
will use the same standards for M+C private fee-for-service plans as 
for coordinated care plans. We see no basis to use different standards.
    In Sec. 422.114(b) we specify that the plan must permit the 
enrollees to receive services from any provider that is authorized to 
provide the service under original Medicare. This implements that part 
of section 1852(d)(4) that says that the access requirements cannot be 
construed as restricting the persons from whom enrollees of the M+C 
private fee-for-service plan may obtain covered services.

4. Physician Incentive Plans (Secs. 422.208 and 422.210)

    In Sec. 422.208(e) we specify that an M+C private fee-for-service 
plan may not use capitated payment, bonuses, or withholds in the 
establishment of the terms and conditions of payment. This is necessary 
to implement that part of the definition of an M+C private fee-for-
service plan that specifies that the plan must pay without placing the 
provider at financial risk. We believe that these physician incentives 
place the physician at financial risk and thus are not permitted by the 
law for M+C private fee-for-service plan payments. Capitation places 
physicians at risk because of the uncertainty of the extent to which 
the beneficiary will require the physician's time and services to 
provide an adequate level of service. Withholds from payment place the 
physicians at financial risk because of the uncertainty of what the 
ultimate payment for the

[[Page 35040]]

services furnished will be. Bonuses are essentially the same as 
withholds. In both the case of bonuses and withholds, the physicians 
knows the least amount that could be paid but in both cases, they face 
uncertainty about what the total payment from the plan would be for the 
services furnished.
5. Special Rules for M+C Private Fee-for-Service Plans (Sec. 422.216)
    In Sec. 422.216(a) we address payment to providers. Specifically in 
422.216(a)(1) we state that the M+C organization offering an M+C 
private-fee-for-service plan pays contract providers (including those 
that are deemed to have contract under Sec. 422.216(f)) on a fee-for-
service basis at a rate, determined under the plan, that does not place 
the provider at financial risk. This reflects the statutory definition 
of an M+C private fee-for-service plan.
    We also specify in Sec. 422.216(a)(1) that the payment rate 
includes any deductibles, coinsurance, and copayment imposed under the 
plan and must be the same for all providers paid pursuant to a contract 
whether or not the contract is signed or deemed to be in place as 
discussed below. This reflects our understanding of the meaning and use 
of these terms in common insurance use. It also reflects our belief 
that the plan rate (on which balance billing discussed below is based) 
is intended to be analogous to the Medicare allowed amount for a 
service, of which the deductible, coinsurance or copayment is a part. 
We think the deductible, and coinsurance or copayment is a part of the 
plan payment rate because deductibles have to be subtracted from that 
plan payment and because coinsurance is a percentage of the plan 
payment rate, thus being included within the rate by definition. We 
believe that the payment rate does not include balance billing because 
the common definition of balance billing under both original Medicare 
and common insurance is an amount above and beyond the payment rate 
established for the service. Balance billing is discussed in more 
detail below in (c) as a provider charge to enrollees.
    As noted above, we specify in Sec. 422.216(a)(1)(i) that a uniform 
payment rate must be established for a given item or service furnished 
under a contract, whether the contract is signed or deemed to exist 
(see discussion of deemed contracts below). In Sec. 422.216(b)(1)(i), 
we also require that the plan deductible, coinsurance or copayments and 
other beneficiary liability be uniform for services furnished by all 
contracting providers, whether contracts are signed or deemed to be in 
place. These two requirements are closely related, since permissible 
enrollee liability is linked by statute to the plan's payment rate. The 
balance billing limitation in section 1852(k)(2)(A) that applies to M+C 
private fee-for-service plans is based on the plan payment rate, which 
has deductible, copayment and coinsurance amounts built into it. In our 
view, therefore, the uniform cost-sharing rule in Sec. 422.216(b)(1)(i) 
follows from the uniform payment rate rule in Sec. 422.216(a)(1)(i).
    We believe that the uniform rate requirement in 
Sec. 422.216(a)(1)(i) is implicit in the definition of private fee-for-
service plans in section 1859(b)(2), which refers in the singular to 
reimbursing, hospitals physicians and other providers at ``a rate'' 
determined under the plan. The balance billing limit in section 
1852(k)(2)(A) even more explicitly supports a uniformity rule, in 
referring in the singular to ``a'' prepayment ``rate'' that is 
established under ``a contract (including [a deemed contract]). * * *'' 
Section 1852(k)(2)(A) thus makes clear that Congress contemplated that 
a single ``rate'' would be established for a given service, or for a 
service in a given area, under ``a contract,'' and that this rate would 
apply under the contract, ``including'' a contract deemed ``through the 
operation of subsection (j)(6)'' of section 1852 (discussed below).
    Even if the statute did not refer to a single rate that applies 
under a contract, and expressly include a deemed contract in this 
statement, we would exercise our authority under section 1852(b)(1) to 
impose a uniform rate and cost-sharing requirement. We understand from 
oral presentations and written comments received in response to the 
January 20, 1998 Federal Register notice (63 FR 2920), that some 
entities would like to establish different payment rates and enrollee 
cost-sharing for providers that sign contracts than those which would 
apply to providers deemed to have a contract. These entities indicated 
that they wanted to establish incentives to use the network of 
providers with signed contracts. We believe that it would be 
inconsistent with the scheme established by Congress to permit this.
    Under such an approach, the M+C organization would in essence be 
establishing a defined and limited network of preferred providers. 
Congress has applied a different set of rules to plans that employ 
provider networks, and exempted M+C private fee-for-service plans from 
these requirements. Indeed, a ``preferred provider organization'' (PPO) 
plan and ``point of service'' option are each expressly mentioned as 
examples of ``coordinated care plans'' subject to the quality assurance 
rules that apply to network plans, including network MSA plans. We 
believe that permitting private fee-for-service plans to have different 
cost-sharing amounts for providers with signed contracts would create a 
``loophole'' permitting organizations from offering network type PPO 
plans without complying with the quality assurance requirement that 
Congress intended to apply to network plans.
    In Sec. 422.216(a)(1)(ii) we specify that contracting providers 
must be paid on a fee-for-service basis. This is required by the 
definition of M+C private fee-for-service plans contained in 
1859(b)(2)(A).
    In Sec. 422.216(a)(1)(iii) we specify that the M+C organization 
must make the payment rate available to providers that furnish items or 
services that may be covered under the M+C private fee-for-service plan 
offered by the organization. We require this to ensure that the 
contracting providers will be advised or be able to acquire the amount 
of payment for the services they furnish to plan enrollees. This is 
particularly important given the plan's flexibility to set and change 
payment rates.
    In Sec. 422.216(a)(2) we specify that the M+C organization must pay 
a contract provider (including one deemed to have a contract) an amount 
that is equal to the payment rate described above less any applicable 
deductible, coinsurance or copayment. The M+C plan's share of the 
payment is the payment rate (which includes deductible, coinsurance and 
copayment as discussed above) less that enrollee's cost-sharing.
    In Sec. 422.216(a)(3) we also specify that the plan pays for 
services of noncontract providers in accordance with 
Sec. 422.100(b)(2).
    Section 1852(k)(2)(B)(i) specifies that the minimum payment rate 
for noncontracting providers of M+C private fee-for-service plans must 
be the payment rate set in 1852(a)(2)(A), the same payment rate that 
applies when coordinated care plans pay noncontracting providers for 
approved services. The provisions of 1852(a)(2)(A) are set in 
regulations at Sec. 422.100(b)(2) and thus that provision applies to 
the payment to noncontracting providers by M+C private fee-for-service 
plans. Thus, the plan must pay the provider at least the amount that 
the provider would have received under original Medicare, including any 
allowed balance billing amounts. The provider must accept this amount, 
together with allowable cost

[[Page 35041]]

sharing paid by the enrollee, as payment in full.
    In Sec. 422.216(b) we address provider charges to enrollees. 
Specifically in Sec. 422.216(b)(1) we state that a contract provider 
(including one that is deemed to have a contract under paragraph (f) 
(discussed below) may charge the enrollee no more than the deductible, 
coinsurance, copayment, and balance billing amounts permitted under the 
plan, that the plan must have the same cost-sharing for deemed contract 
providers as for contract providers and that the plan may permit 
balance billing no greater than 15 percent of the payment rate for the 
service.
    The provisions regarding what enrollees may be charged are based on 
our interpretation of section 1852(k)(2)(A)(i) that says that a 
provider shall accept as payment in full ``* * * an amount not to 
exceed (including any deductibles, coinsurance, copayments, or balance 
billing otherwise permitted under the plan) an amount equal to 115 
percent of such payment rate.'' We believe that the intent of this 
provision is that the plan may, but is not required to, permit the 
provider to collect balance billing equal to but not in excess of 15 
percent of the plan payment rate. We believe that the intent of the 
section was to permit a balance billing provision that mirrors that 
which currently exists section 1848(g) with respect to services paid 
under the Medicare fee schedule for physician services for 
beneficiaries who are enrolled in original Medicare.
    We recognize, however, that the inclusion of the words ``balance 
billing otherwise permitted under the plan'' in the second parentheses 
in section 1852(k)(2)(A)(i) could be construed, if read literally, to 
permit the 115 percent limit on enrollee liability for balance billing 
to be applied to a payment ``rate'' that already included balance 
billing ``otherwise provided for'' in the plan.
    This interpretation would in effect have created two balance 
billing amounts: one balance billing amount within the payment rate 
(that would be above and beyond the deductible, coinsurance and 
copayment) and another balance billing amount based upon the payment 
rate (effectively a balance billing amount as a percentage of another 
balance billing amount). This is a convoluted result that we do not 
believe was intended. In addition to producing a convoluted result, the 
above reading of the reference to balance billing in the second 
parenthetical in section 1852(k)(2)(A)(i) would permit M+C 
organizations to avoid the limitation on enrollee liability in section 
1854(e)(4), which applies only to deductibles, coinsurance, and 
copayments. See section G. below. If an M+C organization offering a 
private fee-for-service plan could ``provide for'' balance billing 
amounts in its payment rate, such amounts would not count towards the 
overall limit on enrollee liability in section 1854(e)(4). This could 
result in unlimited enrollee liability if such unlimited ``plan'' 
balance billing amounts were coupled with balance billing of 115 
percent of rates that include the plan balance billing.
    The provision that requires that the plan establish the same cost-
sharing for the services of deemed contract providers as for contract 
providers is discussed above in its relationship to Sec. 422.216(a)(1).
    In Sec. 422.216(b)(1)(iii) we specify that the M+C organization 
must specify in the contract the deductible, coinsurance, copayment, 
and balance billing permitted under the plan for services furnished by 
a contracting provider (including a deemed contract under paragraph 
(f)). We believe it is important to ensure that the providers who 
furnish services are explicitly aware of the amounts they can collect 
from enrollees since there are potential penalties for violation of 
these limits.
    In Sec. 422.216(b)(1)(iv) we specify that an M+C organization is 
subject to intermediate sanctions under Sec. 422.752(a)(7), under the 
rules in subpart O of part 422, for failing to enforce limits on 
beneficiary liability that apply to contract (including deemed 
contract) providers. This implements section 1852(k)(2)(A)(i).
    In Sec. 422.216(b)(2) we specify that a noncontract provider may 
charge the enrollee no more than the cost-sharing established under the 
M+C private fee-for-service plan limited as specified in 
Sec. 422.308(b). This requirement implements section 1852(a)(2), which 
applies to all M+C plans other than MSA plans, and which is referenced 
in section 1852(k)(2)(B)(i), which applies specifically to payments to 
non-contract providers under M+C private fee-for-service plans. Section 
1852(a)(2) requires that M+C organizations provide for payment to non-
contracting providers of an amount, representing the sum of payment 
from the organization and any cost-sharing provided for under the M+C 
plan, that is at least equal to the total dollar amount of payment that 
would be authorized to be paid under parts A and B, including any 
balance billing permitted under such parts. We have defined ``cost-
sharing'' in section 422.2 as including only deductibles, copayments 
and coinsurance, and not balance billing amounts. Because section 
1852(a)(2)(A)(i) uses the term cost-sharing, we believe that it 
requires that M+C organizations make payment in an amount that, when 
combined with deductible amounts, coinsurance or copayments provided 
for under the M+C plan, at least equals the amount the individual or 
entity would be able to collect under original Medicare, as we have 
provided in section Sec. 422.216(b)(3). This means that enrollees must 
be held harmless against any balance billing by non-contracting 
providers.
    While Sec. 1852(a)(2) thus limits enrollee liability to deductible, 
coinsurance, and copayment amounts (and does not permit enrollee 
liability for balance billing in the case of non-contracting 
individuals or entities), it does not contain any limit on the amount 
of enrollee liability that can be imposed under a M+C private fee-for-
service plan for services furnished by a non-contracting provider. 
While section 1854(e)(4) limits the actuarial value of cost-sharing 
overall, it does not limit the amount that can be charged for a 
particular service, except as specified elsewhere in this rule, for 
example limits for emergency services as established in section 
422.112(b). Hence, except for limits specified elswhere in this rule, 
M+C organizations that offer M+C private fee-for-service plans will be 
able to establish cost-sharing for services of non-contracting 
providers without regard to a specific limit per service.
    In Sec. 422.216(c)(1) we specify that an M+C organization that 
offers an M+C private fee-for-service plan must enforce the limit 
specified in paragraph (b)(1) of this section. We also specify in 
Sec. 422.216(b)(1)(iv) that if the M+C organization fails to enforce 
the limit as required by paragraph (c)(1) of this section, the 
organization is subject to intermediate sanctions under subpart O of 
this part. We intend to leave to the organization's discretion the 
means by which it will enforce the limits on charges to enrollees. 
However, through the ongoing monitoring of the M+C private fee-for-
service plan, HCFA will review the means by which the plan is enforcing 
the limits on charges to enrollees by looking at the extent of 
complaints from enrollees and the action the M+C organization takes to 
resolve them, both systematically and individually.
    In Sec. 422.216(c)(2) we specify that an M+C organization that 
offers an M+C private fee for service plan must monitor the amount 
collected by non-contract providers to ensure that those amounts do not 
exceed the amounts

[[Page 35042]]

permitted to be collected under paragraph (b)(2) of this section. The 
M+C organization must develop and document violations specified in 
instructions and must forward documented cases to HCFA. HCFA may impose 
the sanctions provided in section 1848(g)(1)(B). These are the 
penalties that apply to nonparticipating physicians who fail to abide 
by the limiting charge under original Medicare.
    In Sec. 422.216(d) we specify that the M+C organization that offers 
an M+C private fee-for-service plan must provide to plan enrollees an 
appropriate explanation of benefits that includes a clear statement of 
the enrollee's liability, including any liability for balance billing 
consistent with this section. Section 1852(k)(2)(C)(i) requires that 
the plan must notify the enrollee of balance billing that can be 
collected by the provider. We believe that it would be misleading for 
this notice to be limited to the balance billing that can be collected 
by the provider since the provider may also be able to collect 
deductible, coinsurance and or a copayment from the enrollee (depending 
upon the plan's policy) and that therefore the plan should notify the 
enrollee of all cost-sharing and balance billing that can be collected 
by the provider so that there is no confusion.
    We also specify that, in its terms and conditions of payment to 
hospitals, the M+C organization must require a hospital, if it imposes 
balance billing, to provide to the enrollee, before furnishing any 
services for which balance billing could amount to $500 or more, notice 
that balance billing is permitted for those services and a good faith 
estimate of the likely amount of balance billing, based on the 
enrollee's presenting condition. Section 1852(k)(2)(C)(ii) requires 
that such a notice be furnished by a hospital for inpatient services 
and permits the Secretary to require such a notice for other hospital 
services at a tolerance to be set by the Secretary. We believe that 
this requirement was included in the law because of the potential for 
the balance billing provisions that apply to contracting providers to 
create quite large liability for enrollees of these plans. For example, 
if an M+C private fee-for-service plan permits a hospital to balance 
bill up to the 115 percent of plan payment rate that the law would 
permit, and the plan payment is $10,000 for the hospital stay, the 
enrollee would be liable for $1500 in balance billing in addition to 
the deductible, coinsurance and copayment the plan permits the hospital 
to collect.
    We specify that the advance notice requirements applies to all 
services furnished by a hospital because of the trend towards 
furnishing services on an outpatient basis that would previously have 
been furnished on an inpatient basis. These services can be very 
expensive and we believe that the enrollee has a need to know the cost-
sharing for these services in advance of receiving the services as for 
inpatient hospital services.
    We have set the tolerance at which the hospital must provide this 
advance notice at $500, which is the tolerance for nonparticipating 
physicians to provide advance notice of the nonparticipating 
physician's actual charge under section 1842(m)(1) for purposes of Part 
B of original Medicare.
    In Sec. 422.216(e) we specify that the M+C organization must comply 
with the coverage decisions, appeals, and grievances procedures of 
subpart M. This requires that the M+C organization, offering the M+C 
private fee-for-service plan, make coverage determinations on all 
services and that it must make a determination before the service is 
furnished if the enrollee or provider requests it. We believe that this 
requirement is necessary to enforce the provisions contained in section 
1852(g)(1)(A), which apply to all M+C organizations. Specifically, 
section 1852(g)(1)(A) requires that ``A Medicare+Choice organization 
shall have a procedure for making determinations regarding whether an 
individual enrolled with the plan of the organization under this part 
is entitled to receive a health service under this section and the 
amount (if any) that the individual is required to pay with respect to 
such services. Subject to paragraph (3), such procedures shall provide 
for such determinations to be made on a timely basis.'' Paragraph (3) 
is the expedited decision process.
    We recognize that providing advance determinations of coverage has 
not been a common feature of commercial fee-for-service plans in the 
past. However, the law's use of the present tense with regard to the 
requirement for coverage determinations and its reference to the 
expedited appeals process (which is intended to obtain a quick appeal 
of a denial of a service not yet furnished) clearly anticipates that 
there will be the opportunity for an advance determination of coverage 
for all M+C plans. Moreover, the opportunity to acquire an advance 
determination of coverage is particularly important since there is no 
protection from retroactive denial for enrollees in an M+C private fee-
for-service plan. This is a source of great risk for enrollees in M+C 
private fee-for service plans, who, unlike enrollees in coordinated 
care plans, may seek treatment from any licensed provider that agrees 
to accept the terms and conditions of the plan.
    While the opportunity for advance determinations of coverage 
presents the opportunity to minimize the risk by giving the enrollee 
and provider the opportunity to determine whether the plan will pay for 
the service and the amount for which the enrollee will be liable, it 
does not provide protection to the enrollee that is comparable to the 
protection provided by original Medicare under the provisions of 
section 1879 (which apply to assigned claims) and under 1842(l) (which 
apply to unassigned physician claims). These provisions hold the 
beneficiary without fault when a services is denied as not medically 
necessary to treat illness or injury unless the beneficiary was advised 
by the provider in advance of the service that Medicare would not pay 
and the beneficiary accepted liability if Medicare did not cover the 
service. These provisions also permit a physician to take assignment on 
a claim for Medicare services to be found to be not at fault and to be 
paid by Medicare for the noncovered service if he can demonstrate that 
he did not know and could not reasonably have known that the service 
was not covered.
    We considered and rejected imposing several requirements that would 
have provided Medicare beneficiaries with protection like that 
available under original Medicare. Specifically, we considered 
requiring that the M+C organization must require that contracting 
providers (including deemed contractors) submit claims for the services 
they furnish to enrollees. We also considered but rejected requiring 
the M+C organization to require that contracting providers (including 
deemed contractors) assume the responsibility for acquiring an advance 
determination of coverage from the plan or risk being unable to charge 
the enrollee if they did not notify the enrollee in advance of the 
service if the plan does not cover the care. This approach would have 
provided enrollees protection from the liability of full payment in the 
case of retroactive denials and would have given providers an 
opportunity to minimize their risk by acquiring advance approval of 
coverage.
    However, we decided that it would be contrary to the spirit and 
intent of the M+C fee-for-service legislation to impose these 
requirements on providers and plans, since they would make the plan 
much more like a coordinated care plan than like a traditional fee-for-
service plan. Moreover, such a construction would place the provider at 
financial risk, contrary to the

[[Page 35043]]

definition of an M+C private fee-for-service plan.
    Our silence in regulations on the claims filing requirements of M+C 
private fee-for-service plans and the absence of any explicit mechanism 
for providing protection to enrollees from retroactive denials of 
coverage does not foreclose the possibility that an M+C private fee-
for-service plan may choose to address these issues. For example, the 
M+C private fee-for-service plan may choose to include in its terms and 
conditions of payment a requirement that the provider must bill the 
plan for payment. Similarly, the M+C private fee-for-service plan may 
choose to provide some level of payment for services subject to 
retroactive denials as an additional benefit or as a supplemental 
benefit under the plan. This could be an attractive feature of the plan 
and a valuable benefit to enrollees.
    Although we are silent on these issues, we remain concerned about 
the absence of protections for beneficiaries who enroll in private-fee-
for-service plans. We are soliciting comments on these issues, and we 
are particularly interested in comments on whether to apply the 
protections discussed above as a requirement or how otherwise to 
protect the beneficiary from being financially at risk, while not 
creating undue burdens on providers and insurers.
    In Sec. 422.216(f) we specify that any provider that does not have 
a contract will be treated as having a contract in effect with the M+C 
organization offering the M+C private fee-for-service plan if the 
provider furnishing services (1) is aware that the beneficiary 
receiving the services is enrolled in the plan, and (2) before 
furnishing the services, has a reasonable opportunity to be informed 
about the terms and conditions of payment and coverage under the plan. 
Section 1852(j)(6) requires that we deem a noncontracting provider to 
be a contracting provider when these criteria are met. In 
Sec. 422.216(f) we further specify three general criteria, each of 
which must be met for a provider to be deemed to have a contract with 
the plan and which are discussed further in Sec. 422.216(g) and (h).
    In Sec. 422.216(f) we specify that for the deemed contract 
provision to apply the services must be covered under the plan and must 
be furnished to an enrollee of an M+C private fee-for-service plan, by 
a provider that does not have in effect a signed contract with the M+C 
organization. We also specify in Sec. 422.216(f)(2) that the provider 
must have been informed of the individual's enrollment in the plan and 
must have been informed or given a reasonable opportunity to obtain 
information about the terms and conditions of payment under the plan in 
a manner reasonably designed to effect informed agreement. The 
information must include the information described in 
Sec. 422.202(a)(1).
    In Sec. 422.216(g) and (h) we further clarify that the requirements 
of paragraph (f) of this section are met (and the noncontract provider 
is subject to the provisions for contracting entities) if the following 
conditions are met.
    Enrollment information must be provided by one of the following 
methods or a similar method:
     Presentation of an enrollment card or other document 
attesting to enrollment.
     Notice of enrollment from HCFA, a Medicare intermediary or 
carrier, or the M+C plan itself.
    We considered how best to ensure that the noncontracting provider 
would be advised that the enrollee is enrolled in the M+C private fee-
for-service plan. However, since there is no direct contract between 
the provider and the M+C private fee-for-service plan, it becomes 
incumbent upon the enrollee to advise the provider of the enrollment. 
Even where the provider had previously been notified of the 
beneficiary's enrollment in the M+C private fee-for-service plan (e.g. 
at the time of a previous service), the provider cannot automatically 
assume that the beneficiary is enrolled in the plan and may not be able 
to learn the beneficiary's enrollment status prior to providing 
services. This occurs because, before 2002, beneficiaries can disenroll 
from M+C plans at any time, either voluntarily or involuntarily by 
moving out of the service area. After that date, the beneficiary can 
disenroll within the first 3 months of the year or at any time if they 
move out of the service area. Hence, there are very few times that a 
noncontracting provider can know with certainty that the beneficiary 
remains enrolled in the M+C private fee-for-service plan based on 
previous knowledge of enrollment. If the provider fails to acquire 
current enrollment information from the enrollee or the plan at the 
time of each service, we do not see how he or she can be held to have 
met the first test of ``deemed contract status'': knowing that the 
beneficiary is enrolled in the plan.
    To be a deemed contractor, the provider or supplier who knows that 
the patient is enrolled in the plan must either have been given 
information on payment terms and conditions or must have had a 
reasonable opportunity to learn such terms and conditions of plan 
payment. Under that circumstance, treatment of the patient implies 
consent to the terms and conditions of plan payment.
    To meet the requirement of having been given information on payment 
terms and conditions, we specify in paragraph (h)(1) that the 
information must have been communicated to one of the following:
     The provider of the services.
     The provider's employer or billing agent.
     A partnership of which the provider is a member.
     Any party to which the provider makes assignment or 
reassigns benefits.
    We expanded the list of parties to whom the information must be 
provided beyond those of providers themselves in recognition that 
providers, and in particular, individual physicians and practitioners, 
seldom receive the insurance information that is sent to them and 
seldom complete and submit their own claims. By reassigning insurance 
benefits to other parties and by delegating the responsibility to 
complete and submit claims to other parties, they are, effectively, 
also delegating the authority to make decisions governing their payment 
for which they remain responsible.
    We also specify in paragraph (h)(1) that the information must have 
been transmitted via mail, FAX, electronic mail or telephone. 
Announcements in newspapers, journals, or magazines or on radio or 
television are not considered communication of the terms and conditions 
of payment. We specify how the information must have been provided 
because we have been asked if general distribution of information to 
the public (e.g. annual newspaper notice) is an acceptable notice to 
bind the provider to being considered to be a deemed contractor. We do 
not believe that it is reasonable for a plan to do a general public 
notice since the provider may not see it and has no way of relating 
that information to itself. However, where the plan has transmitted the 
information directly to the provider by mail, FAX, electronic mail or 
telephone, the statute's test of having been furnished the information 
to the provider has clearly been met.
    However, the law also provides that a provider that has a 
reasonable opportunity to acquire the terms and conditions of plan 
payment must be treated as if it were a contract provider. To implement 
this provision of the law, we further specify in paragraph (h)(2) that 
a provider that does not have a contract with the plan is deemed to 
have a contract with the plan if the plan has an acceptable procedure 
under which the provider could acquire the

[[Page 35044]]

terms and conditions of plan payment before providing services to the 
enrollee. Specifically, we say that this test is met where the M+C plan 
has in effect a procedure under which noncontract providers are advised 
how to request the payment information and the plan responds to the 
request before the provider furnishes the service. This procedure could 
be the inclusion of a toll free telephone number or E-mail address on 
the enrollment card for the provider's use in acquiring the terms and 
conditions of payment. Where the plan responds to the provider's 
request before the service is furnished, the provider would be treated 
as a contract provider if the provider subsequently furnishes the 
service to the enrollee, regardless of whether the provider agrees to 
accept the terms and conditions of the plan.
    The effect of these statutory provisions is that there are very few 
circumstances in which a provider would not be treated as if it had a 
contract with the plan. These would include but not be limited to the 
following:
     Where the beneficiary did not notify the provider of 
enrollment in the plan.
     Where the provider requested but was not furnished terms 
and conditions of payment in advance of the provision of services to a 
known enrollee.
     Where the plan did not have a process that provided terms 
and conditions of payment.
    We think that in most cases, plans will ensure that there is a 
procedure in place for providing this information before services are 
furnished. We think that the most likely circumstances in which a 
provider will be considered to be a noncontracting provider will be in 
cases of emergency where the provider has not previously been mailed 
the terms and conditions of payment under the plan or where the 
provider does not know that the beneficiary is enrolled in the plan.
    In Sec. 422.216(h)(2)(iii) we specify that the plan must include 
the following in the terms and conditions of plan payment that it must 
furnish to providers of services:
     Billing procedures.
     The amount the plan will pay towards the service.
     The amount the provider is permitted to collect from the 
enrollee.
     The information described in Sec. 422.202(a)(1).

V. Regulatory Impact Statement

A. Introduction

    We have examined the impact of this 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, public health and safety 
effects, distributive impacts, and equity). The RFA requires agencies 
to analyze options for regulatory relief of small businesses. For 
purposes of the RFA, small entities include small businesses, non-
profit organizations and governmental agencies. Most hospitals and most 
other providers and suppliers are small entities, either by nonprofit 
status or by having revenues of $5 million or less annually.
    Section 1102(b) of the Social Security Act requires us to prepare a 
regulatory impact analysis for any proposed rule that 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 603 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.
    The Unfunded Mandates Reform Act (Public Law 104-4) requires that 
agencies prepare an assessment of anticipated costs and benefits before 
proposing any rule that may result in an annual expenditure by State, 
local and tribal governments, in the aggregate, or by the private 
sector, of $100,000,000 or more (adjusted annually for inflation). This 
rule does not impose any mandates on State, local, or tribal 
governments, or the private sector that will result in an annual 
expenditure of $100,000,000 or more.
Summary of the Interim Final Rule
    As discussed in detail above, this rule implements the M+C program 
as directed by the BBA of 1997. The primary objective of the M+C 
program is to increase the number and types of health plan choices 
available to Medicare beneficiaries.
    Since the implementation of section 114 of the Tax Equity and 
Fiscal Responsibility Act of 1982 (TEFRA 82) (Public law 97-248), the 
Medicare program has offered beneficiaries a prepaid capitated option 
through HMOs and CMPs paid on a full risk basis. Enrollment by Medicare 
beneficiaries in Medicare managed care risk plans has grown to over 4.5 
million enrollees. The number of plans increased 31 percent in CY 1995, 
36 percent in CY 1996, and 31 percent in CY 1997. With the 
implementation of the M+C program, we expect that the rate of growth of 
beneficiaries enrolling in capitated plans will continue.
    The M+C program authorizes HCFA to contract with several new types 
of entities not previously available to Medicare beneficiaries such as 
provider sponsored organizations, preferred provider organizations, 
entities offering an ``MSA plan'' and a contribution into an M+C 
medical savings account (MSA), and M+C private fee-for-service plans. 
These new options will provide Medicare beneficiaries with a broad 
range of health insurance alternatives like those available in the 
private sector. Based on current growth rates and other information 
discussed later, we estimate that anywhere from 160 to 800 new entities 
may apply to contract with HCFA as M+C organizations.
    By expanding choices and providing extensive educational materials 
through a coordinated open enrollment period, it is expected that 
beneficiaries will choose plans and health delivery systems that will 
maximize the benefits to these individuals.
    The BBA also revamped the payment methodology for entities 
receiving capitated payments from Medicare. These payment changes were 
intended primarily to insure that the amounts paid to M+C organizations 
were fair and equitable to both the Medicare Trust Funds and to the 
participating organizations. Although Medicare's capitation rates had 
been set at 95 percent of expected costs based on actual fee-for-
service costs, there is significant evidence that Medicare has paid 
more for enrollees in the managed care program than it would have paid 
in the fee-for-service program. This is due primarily to the favorable 
selection that these plans have experienced. The new payment rules slow 
the annual increase M+C organizations would have received under the old 
payment methodology. In addition, there has long been concern regarding 
the regional variation in payment rates, particularly between urban and 
rural counties. Because the capitated payment rates had been based upon 
the fee-for-service payments, the capitated rates not only included the 
variation in local prices, they also reflected different fee-for-
service practice patterns in each region. To level out the variation in 
payment rates, the new methodology uses a blend of local and national 
rates and input price adjustments to insure the payments more closely 
reflect the different prices in the region while giving less weight to 
the different utilization rates. Finally, to insure that the new 
options would be

[[Page 35045]]

viable in all parts of the country a floor on capitated payments was 
introduced.
Summary of Discussion of Impact
    We believe that the overall impact of this regulation should be 
beneficial to Medicare beneficiaries by providing them with more 
options to receive health care. However, although many of the 
provisions in this regulation are intended to assist beneficiaries by 
providing them with comparative information, we are concerned that the 
many new choices and types of plans may prove confusing even for the 
most knowledgeable consumers. Reductions in capitated payment amounts 
in what are now relatively higher payment areas may result in reduced 
benefits for beneficiaries. Providers (especially rural providers) 
should benefit from this regulation because they can contract directly 
with HCFA under the PSO provisions. New contracting entities will 
benefit as the Medicare statute has not previously permitted entities 
that were not state licensed HMOs or CMPs to participate in the 
Medicare managed care program. Providers could be negatively impacted 
if they contract with M+C organizations by the degree that any 
reduction in the rate of growth in payments to M+C organizations will 
be passed on to them. We also recognize that existing contractors and 
States may be adversely affected but cannot quantify to what degree. 
This impact analysis will focus on the provisions of the BBA and this 
regulation that significantly alter the risk program we have been 
administering since 1985. The major differences between the section 
1876 risk program and the M+C program are:
    The coordinated open enrollment and public education campaign:

New payment methodology for contracting plans
Introduction of New Contracting Entities
    Provider Sponsored Organizations
    Medicare Savings Account Plans
    Private Fee-for-Service Plans
New Quality Standards

    Our analysis will assess the impact these changes will have on 
Medicare beneficiaries, the Medicare Trust Funds, providers, managed 
care entities, and States. Whenever possible, we will use appropriate 
methods for assessing the impact quantitatively. However, because of 
the large number of unknowns--such as the prospective number of 
contracting organizations--this analysis relies upon many simplifying 
assumptions.

B. Coordinated Open Enrollment and Public Education Campaign

    Section 1851 directs HCFA to hold annual coordinated open 
enrollment periods beginning in November 1999 (all plans will also be 
open to enrollment in November 1998) to allow eligible beneficiaries 
the opportunity to enroll in M+C organizations. It also directs HCFA to 
broadly disseminate information to current and prospective Medicare 
beneficiaries on the coverage options available in order to promote an 
active, informed selection among such options. At least 15 days before 
each annual, coordinated election period, HCFA will send to each 
eligible individual a notice containing information in order to assist 
the individual in making an election. This information describes M+C 
options as well as original Medicare. In addition, M+C organizations 
are directed to provide plan-specific information.
    The public education campaign will include information on covered 
benefits, cost sharing and balance billing liability under the original 
Medicare program; election procedures; grievance and appeals rights 
under the original Medicare fee-for-service program and the new M+C 
program; information on Medigap and Medicare SELECT; and the 
beneficiary's right to be protected against discrimination based on 
health status.
    The costs of the coordinated open enrollment and public education 
campaign will be borne primarily by the participating M+C plans. 
Section 4001 of the BBA added a new section 1857(e)(2) to the Social 
Security Act that establishes a fee requirement under which M+C 
organizations and section 1876 contractors must contribute their pro 
rata share, as determined by the HCFA, of costs related to enrollment, 
dissemination of information, and the counseling and assistance 
programs.
    The annual fee will be assessed by HCFA on all participating 
organizations. The amount of the user fee will vary year to year as 
determined through the appropriations process. The BBA authorized 
ceiling amounts of $200 million in FY 98, $150 million in FY 99, and 
$100 million annually in FY 2000 and beyond. However, in FY 1998 HCFA 
was authorized to collect only $95 million through the appropriations 
process.
    On December 2, 1997 HCFA gave notice of our methodology of 
assessing current contractors for their pro rata share of the expenses 
associated with the CY 1998 information campaign. To determine each 
organization's share, we divided the total amount appropriated for the 
information campaign by the total projected revenues for the first 9 
months of CY 98. The resulting percentage was deducted from the 
payments to contracting organizations.
    We explored several alternatives to this methodology. One option 
was to assess each organization on a per capita basis (by number of 
Medicare enrollees). Another option was to assess each organization on 
the percentage of revenue they received from capitated Medicare 
payments, but have a cap on the highest amount any organization would 
pay.
    We rejected both of these methodologies as not consistent with the 
goals of the BBA. One of the primary effects of the reformed payment 
methodology of the BBA was to even out variation between high and low 
payment areas. By charging a per capita amount, those organizations 
that are located in areas that have a high payment rate would pay a 
reduced percentage of their revenue. Or put another way, we deemed that 
if an organization received a higher payment per person, it should pay 
a correspondingly higher user fee for its share of the education 
campaign. We also decided not to put a cap on the assessment any 
organization would receive based on the premise that only large 
organizations would receive the benefit of a cap and smaller 
organizations would have to pay more to make up the difference. This 
did not seem fair or consistent with our intention of encouraging the 
creation of new contracting entities and spurring competition in areas 
with lower payment rates.
    As stated in the interim final rule (M+C Program: Collection of 
User Fees from M+C Plan and Risk-Sharing Contractors (42 CFR 417.470-
417.472)), we will establish a fee percentage rate and collect the fees 
over nine consecutive months beginning with January until the 
assessment limit has been reached. The following table illustrates the 
method by which we will calculate the fee percentage rate, provides the 
rate for FY 1998, and sets forth projections for FY 1999-2002.

[[Page 35046]]



    Table 1.--Collection of Contributions From Organizations for Costs Relating to Information Dissemination    
----------------------------------------------------------------------------------------------------------------
                                Projected                                                                       
                               fiscal year     Projected      Projected                  Fee amount             
                                  total         medicare       medicare     Authorized   secretary    percentage
                                 medicare      payment to     payment to    assessment  is directed       of    
                                payment to   organizations  organizations   amount (in   to collect  projected 9-
                              organizations  per month (in  over 9 months  millions of      (in         month   
                               (in millions   millions of    (in millions    dollars)   millions of    payment  
                               of dollars)    dollars) \2\   of dollars)       \4\        dollars)              
                                   \1\                           \3\                        \5\                 
----------------------------------------------------------------------------------------------------------------
FY 1998.....................        30,000          2,465         22,181           200           95         .428
FY 1999.....................        38,000          3,167         28,500           150          150         .526
FY 2000.....................        47,000          3,917         35,250           100          100         .284
FY 2001.....................        63,000          5,250         47,250           100          100         .212
FY 2002.....................        64,000          5,333         48,000           100          100        .208 
----------------------------------------------------------------------------------------------------------------
\1\ Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Year 1999-2008. January 1998.  
\2\ Projected total fiscal year payment divided by 12 (months).                                                 
\3\ Projected monthly payment amount multiplied by 9 (months).                                                  
\4\ New Section 1857(e)(2)(D) of the Social Security Act, as added by the BBA (Public Law 105-33).              
\5\ For purposes of these projections, we have assumed that Congress will include the full amount authorized    
  under the BBA.                                                                                                

    As noted in the interim final rule published on December 2, 1997, 
we believe that assessing the fees to reflect an organization's pro 
rata share of the expenses associated with the information campaign 
will require the deduction of only a very small percentage of any 
organization's total annual Medicare payments. For example, in FY 1998 
the percentage fee assessment is 0.428 percent--less than one-half of 
one percent. In subsequent fiscal years the fees as a percentage of 
Medicare payments will likely represent an even smaller percentage of 
the Medicare payments as the number of eligible organizations increase 
and the existing organizations experience enrollment growth.
Information Campaign
    In general, we believe that this investment in new forms of 
information dissemination should be beneficial to Medicare 
beneficiaries, contracting organizations, and the Medicare program. By 
providing extensive educational materials, it is expected that 
beneficiaries will choose organizations and health delivery systems 
that will maximize the benefits for them. Finally, while organizations 
face an assessment fee to support information campaign activities, it 
comprises a very small proportion of their revenue from the Medicare 
program and could serve to enhance their marketing efforts and to save 
marketing expenditures.
    HCFA's information dissemination activities provided for under this 
regulation encompass a variety of interventions, including mailings of 
standardized, comparative information about coverage options, an 
Internet web site with such information, and a toll-free telephone line 
for beneficiary inquiries. In addition, the regulation provides for 
information dissemination activities to be undertaken by M+C 
organizations, including mailings to Medicare enrollees of plan-
specific information and the provision of additional information upon 
request by Medicare eligible individuals.
    In order for market competition to work effectively, consumers must 
have information about their choices in order to make good decisions. 
The information dissemination efforts provided for under this 
regulation will give Medicare beneficiaries information about the 
Medicare market, enabling them to compare fee-for-service coverage to 
managed care coverage, as well as coverage under different M+C 
organizations.
    The Medicare program and managed care arrangements are inherently 
complex subjects, and it is challenging to communicate information that 
is meaningful and accurate. Many studies have shown that Medicare 
beneficiaries' level of understanding of how the Medicare program works 
today is very low (GAO, 1996) and this lack of understanding could be 
compounded by the introduction of a new array of choices if 
beneficiaries lack sufficient information or lack the skills or 
understanding necessary to use available information.
    For example, studies have found that many individuals who 
disenrolled from Medicare risk HMOs misunderstood the nature of the 
plan, such as the lock-in feature. (OIG, 1997; GAO, 1996; IOM, 1996). 
As Medicare beneficiaries become better informed about the Medicare 
program generally and their options under M+C specifically, they will 
be able to make more informed decisions about meeting their health care 
needs, leading to fewer disenrollments based on misunderstandings. 
Disenrollment can be costly for plans. In 1996, a GHAA study estimated 
that disenrollment costs plans close to $1,300 per Medicare 
disenrollee. (GHAA, 1996)
    While enhancing beneficiary choice is positive and providing 
beneficiaries with information on their choices is necessary, we are 
concerned that Medicare beneficiaries, especially in areas where 
several M+C organizations are operating, may experience information 
overload. Beneficiaries may have great difficulty in understanding the 
different types of plans available to them in their area or 
understanding the different benefit packages plans may offer. 
Beneficiaries will be required to assess their health needs in relation 
to the benefits being offered and they may well have to choose among a 
wide array of different benefit packages. These will be difficult 
choices and some beneficiaries may not choose the option best suited to 
their individual needs.
    We believe important secondary effects may ensue as well. To date, 
plans have competed primarily on the basis of price and benefits. Broad 
dissemination of plan-specific information, including quality measures, 
should encourage competition among organizations based on quality 
factors, in addition to price and benefits. As Medicare beneficiaries 
become more familiar with health plans, their expectations of plan 
performance and quality services will increase. Enhanced beneficiary 
awareness will provide an incentive to plans to improve in areas that 
beneficiaries demonstrate are important to their decision making, such 
as the availability of certain providers and positive customer service 
experiences.
    Moreover, beneficiaries will be better health care consumers in 
general if they understand their rights under managed

[[Page 35047]]

care and how to make a plan work for them. As Medicare enrollees 
receive more information and become more active decision makers on plan 
options, we believe they will also become more informed and active 
decision makers with respect to meeting their personal medical needs. 
More informed and active decision making on the part of enrollees will, 
in turn, facilitate plans' efforts to manage the delivery of 
appropriate, high quality health care services.
    In addition, it should be noted that the information campaign is 
designed to reach all Medicare beneficiaries, and it is likely that, to 
the extent that this encourages growth in the M+C program, 
organizations will be well positioned to take advantage of the 
expanding market. Since the number of organizations and total revenues 
over which the BBA fee collections will be spread is likely to continue 
to rise with increased participation in the M+C program in future 
years, we believe the regulatory impact of the selected option for 
imposition of fees on M+C organizations will not be significant. 
Moreover, M+C organizations will benefit from the increased visibility 
they will receive through the focused information campaign each open 
enrollment season.
    Aside from the benefits of the public education campaign there are 
benefits derived from the coordinated open enrollment for contracting 
organizations, beneficiaries, and to a lesser degree the Medicare Trust 
Funds, as discussed below.
Coordinated Open Enrollment and Beneficiary Lock-In
    We anticipate that the transition into a coordinated open 
enrollment period and the beneficiary lock-in will be beneficial to M+C 
organizations in their efforts to attract and retain Medicare 
enrollees. It also will allow them to maximize their visibility as 
beneficiaries focus on information about plans during a single, 
coordinated period. An annual open enrollment period may present a 
challenge for start-up organizations that did not have the benefit of 
adding enrollment during continuous open enrollment periods available 
before 2002. However, the M+C beneficiary lock-in will provide a more 
stable enrollment base for all participating organizations.
    Current contractors have conveyed that continuous open enrollment, 
which was prevalent prior to passage of the BBA, provided an incentive 
for beneficiaries that exhaust extra benefits offered by one HMO/CMP to 
switch to another HMO/CMP or back to traditional fee-for-service 
Medicare. This behavior provides a disincentive for M+C organizations 
to offer extra benefits, and we anticipate that M+C organizations will 
be more likely to offer extra benefits if concerns about enrollees 
disenrolling upon exhausting a benefit are diminished.
    Moreover, as the lock-in is phased in, organizations offering M+C 
plans will operate within a framework that supports their efforts to 
manage the delivery of health care services. For example, if 
beneficiaries are not moving in and out of a plan, the M+C organization 
offering the plan will be better able to track a beneficiary's 
utilization of services over time. The lock-in will encourage plans to 
invest more in preventive health services or screening of new 
enrollees, because it increases the likelihood that the plan will 
retain its members long enough to benefit from eventual savings due to 
reduced morbidity. (PPRC, 1996)
    We also note that M+C organizations will have to address the 
potential staffing and administrative requirements associated with a 
lock-in and a compressed enrollment period, such as how to staff 
appropriately to handle inquiries during the open enrollment period, 
how to process new enrollees when enrollment begins, and how to conduct 
initial physical histories and review medications for new enrollees. 
Therefore, there will be added burdens on the M+C organizations as they 
experience administrative and clinical burdens in implementing the 
lock-in. M+C organizations may have to hire temporary staff and this 
would be a cost to them (PPRC, 1996)
    Although beneficiaries will have less flexibility with a lock-in 
period, they will also benefit from a coordinated open enrollment 
period because it provides a framework conducive to informed decision 
making. Similar to the experience of many individuals in the private 
sector, beneficiaries will receive extensive information each year, 
allowing them to compare all options simultaneously. By receiving 
standardized, comparative information during an annual, coordinated 
period, beneficiaries will find it easier to make appropriate choices 
among competing plans and between these plans and traditional Medicare 
fee-for-service. An annual coordinated open enrollment period will 
maximize the opportunity for all beneficiaries to make decisions that 
best meet their own needs.
    Some beneficiaries may be more reluctant to enroll in an M+C 
organization if they must remain enrolled for extended length of time. 
The Office of Inspector General surveyed a two-stage random sample of 
4,065 enrollees and disenrollees from 40 Medicare risk HMOs to compare 
their responses and to gain greater insight into HMO issues. The 
majority of beneficiaries surveyed stated that their most important 
reason for joining an HMO was their desire for more affordable health 
care. Only 17 percent of beneficiaries said they would be more hesitant 
to join an HMO if they did not have the option to disenroll at will. 
(OIG 1998) (see Table 2).

         Table 2.--Effect of Mandatory One-Year Enrollment--1996        
                              [In percent]                              
------------------------------------------------------------------------
                                      All       Enrollees   Disenrollees
------------------------------------------------------------------------
If beneficiary had to stay in                                           
 HMO for one year, the effect on                                        
 the enrollment decision would                                          
 be:                                                                    
    --more likely to join.......           34           34            22
    --less likely to join.......           17           16            33
    --no effect on decision.....           49           49            45
------------------------------------------------------------------------
Source: U.S. Department of Health and Human Services, Office of the     
  Inspector General, Beneficiary Perspectives of Risk HMOs 1996, OEI-06-
  95-00430 (March 1998).                                                

    Beneficiaries retain the protection of the right to disenroll where 
the M+C organization's misrepresentation or the beneficiary's 
misunderstanding results in an enrollment that should not have 
occurred. In addition, the year-long opportunity for newly eligible 
aged individuals to disenroll and return to original Medicare is a 
particularly valuable protection for many beneficiaries who may be just 
beginning to understand the implications of new

[[Page 35048]]

options. ( Newly eligible disabled beneficiaries are not afforded this 
option.) Beneficiary protections are enhanced by guaranteed issue of 
Medigap policies for first-time M+C enrollees who gave up supplemental 
coverage upon enrolling in an M+C organization and disenroll within 12 
months, and for newly eligible aged beneficiaries who enroll in an M+C 
organization at age 65 and disenroll within twelve months of becoming 
eligible for Medicare.
    Finally, we believe the lock-in will benefit the Medicare Trust 
Funds. The General Accounting Office found that the flexibility for 
beneficiaries to disenroll at will can cause problems for the Medicare 
program. (GAO, 1997) For example, beneficiaries could decide to use an 
M+C plan or other private plans while in relatively good health but 
disenroll to fee-for-service when their health care needs increased. 
The result could be a disproportionate number of less healthy 
beneficiaries in the fee-for-service sector, excess payments to HMOs, 
and unnecessary Medicare spending. We believe that the nine-month lock-
in period will help reduce risk selection and, consequently, reduce the 
current problem of paying monthly premiums for beneficiaries while they 
are healthy but paying traditional claims when they become ill and 
disenroll from a managed care plan.

C. New Payment Methodology for M+C Plans

    Section 1853 directs HCFA to modify the payment methodology for 
entities receiving capitated payments from Medicare. These payment 
changes are intended to: promote savings, reduce geographic variation 
in the rates, and stimulate the growth of new entities to serve 
Medicare beneficiaries in historically underserved areas. As described 
above, beginning in 1998, monthly county rates are the greatest of: (1) 
a minimum payment amount (of $367 in 1998); (2) a minimum percentage 
increase of 2 percent over the preceding year's payment for the area; 
and (3) a blend of the area-specific rate and an input-price adjusted 
national rate, further adjusted by a budget neutrality adjustment. The 
area-specific portion of the blended rates and the minimum payment 
amount are updated each year by the national average per capita 
Medicare growth rate (with specified reductions from 1998-2002).
    Payment changes to M+C organizations figure prominently in reducing 
overall Medicare spending and postponing the depletion of the Medicare 
Trust Fund from 2001 to 2010. The CBO estimates that the BBA reduces 
Medicare spending by $116.4 billion dollars between 1998 and 2002. An 
estimated $22.5 billion, or almost 20 percent of total Medicare savings 
under the BBA, is attributable to payments to M+C organizations. Much 
of the savings is attributable to lower payment rates in the original 
Medicare program. Additionally, removal of GME and IME from the 
capitated payments to M+C organizations represents a redirection of $4 
billion, which would be paid directly to providers. All told, the BBA 
payment changes are estimated to reduce annual spending increases for 
both the M+C program and original Medicare from 8.5 percent to about 5 
percent a year between 1997 and 2002.
    The new payment methodology will lessen the significant geographic 
variation in payments by reducing the influence of factors that cannot 
be explained by geographic differences in medical input prices. Under 
the pre-BBA methodology, capitation amounts were based on actual per 
capita costs for original Medicare in each enrolled's county of 
residence. Under the BBA formula, adjustments for input prices is 
specifically included in the computation of blended rates, but the 
influence of practice pattern differences is gradually minimized 
through the payment blending. Over the period 1998-2002, each county's 
blended payment amount is increasingly based upon a standardized rate 
that reflects practice patterns across the country. In this way, the 
new methodology attempts to achieve a more equitable distribution of 
payments, and will hopefully encourage plans to focus on implementation 
of quality-based, cost-effective treatment methods.
    One of the chief considerations in restructuring the payment 
methodology was evidence that Medicare managed care organizations have 
attracted healthier and therefore less expensive enrollees than fee-
for-service organizations. In its 1996 Annual Report to Congress the 
PPRC reported on a study of enrollees in Medicare risk plans between 
1989 and 1994. This study showed that those enrolled in managed care 
plans cost the Medicare program only 63 percent as much as the average 
Medicare beneficiary during the six months preceding enrollment when 
both groups were enrolled in traditional Medicare. In contrast, persons 
who disenrolled and returned to traditional fee-for-service Medicare 
cost the program 160 percent as much as the average beneficiary in the 
six months following disenrollment. In its December, 1997 study, the 
Congressional Budget Office estimated that Medicare paid 6-8 percent 
more for enrollees in risk-based HMOs than it would have paid for those 
enrollees under fee-for-service Medicare. Although prior law did set 
Medicare capitation rates 5 percent below fee-for-service payments 
under original Medicare, this reduction was not enough to compensate 
for favorable risk selection. The new methodology mandated by the BBA 
requires risk adjustment beginning in the year 2000.
    Medicare managed care enrollment has grown steadily in recent 
years. However, most of the growth has been concentrated in urban 
areas. Between December of 1990 and December of 1997, enrollment in 
risk contracts grew from 3.3 percent of Medicare beneficiaries to 14.0 
percent. Twenty-four percent of beneficiaries residing in large urban 
areas with a population of 1 million or more were enrolled in a 
Medicare risk plan in June of 1997. Twelve percent of beneficiaries 
residing in areas adjacent to large urban areas and smaller 
metropolitan areas, and less than 3 percent of Medicare beneficiaries 
residing in rural areas, were enrolled in a Medicare risk plan. 
Approximately thirty-three percent of Medicare beneficiaries reside in 
an area that is not served by any Medicare managed care organization.
    We assessed the impact of the payment methodology by first 
considering the overall impact and then considering the impact of 
changes in payment on specific entities. The potential overall impacts 
of changes in payment are: reductions in spending; redistribution of 
payments; increases in enrollment in M+C plans; changes in the 
distribution of enrollment in M+C plans; and the creation of a more 
competitive market offering a wider range of choices for Medicare 
beneficiaries.
    We have identified the types of entities and individuals that will 
be directly affected by changes in payment. They include: 
beneficiaries, M+C organizations offering coordinated care plans 
(including current Medicare managed care contractors), and M+C 
organizations offering private fee-for-service plans or MSA plans, 
States, providers, and the Medicare Trust Funds.
    One clear impact of the revised payment methodology is decreased 
spending relative to estimates of spending under prior law. In its BBA 
analysis, CBO estimated that changes in payments to managed care plans 
save $22.5 billion between 1998-2002. As stated earlier, these savings 
contribute significantly toward efforts to extend the long-term 
solvency of the Medicare Part

[[Page 35049]]

A Trust Fund. Table 3 provides more recent alternative projections of 
$30 billion in savings between 1998-2003. (HCFA Office of the Actuary, 
3/98.)

    Table 3.--Projected Impact Due to Changes in Payment Methodology    
------------------------------------------------------------------------
                                                             Savings (in
                        Fiscal year                          billions of
                                                               dollars) 
------------------------------------------------------------------------
1998.......................................................          0.3
1999.......................................................          0.7
2000.......................................................          4.4
2001.......................................................          6.6
2002.......................................................          8.1
2003.......................................................          9.2
------------------------------------------------------------------------
*Includes risk adjustment.                                              
Source: HCFA Office of the Actuary, 3/98.                               

    As noted above, projected savings due to the change in the M+C 
payment methodology are also tied in part to the overall savings in 
Medicare created by BBA changes in payments to Medicare fee-for-service 
providers. Specifically, since the National Per Capita M+C growth 
factor (NGP) is defined as the ``projected per capita rate of growth in 
Medicare expenditures'' reduced by the BBA's specified percentage 
reduction, the NGP will include the impact of reductions and/or slower 
increases to provider payments in the original Medicare program.
    Another factor that affects the amount of savings is the minimum 
payment amount and the minimum percentage increase. Because the payment 
methodology does not allow for reduction of the floor and minimum 
payment increases, budget neutrality, which is achieved by reducing or 
increasing the blended rates, may not be achieved in all years where 
the computation requires a reduction in the blended rates. This 
situation occurred in the calculation of the 1998 and 1999 rates, when 
no county received the blended rate because the budget neutrality 
adjustment brought all rates to an amount below the amount of the 
minimum 2 percent increase. See discussion in Section II.F. above.
    It is clear that one aspect of the new payment methodology, the 
floor, actually increases spending compared to prior law. CBO estimates 
that increasing payments to the floor counties will cost $2.2 billion 
more than expected under previous law over the 5-year period of 1998-
2002. However, increasing payment to floor counties meets important 
policy objectives in that by reducing payment disparities it is hoped 
that more choices will become available in under-penetrated areas.
    The payment methodology has removed some of the variation in 
payment rates by increasing payment rates in lower payment counties 
through use of a minimum payment amount. In the future, blending will 
further reduce variation by reducing the influence of local fee-for-
service costs in the blended rates. Table 4 shows the impact of the 
payment methodology by location. The floor rate increased payments 
significantly in rural areas and in some urban counties as well.

              Table 4.--Average and Range of Medicare County Payment Rates, by Location, 1997-1998              
----------------------------------------------------------------------------------------------------------------
                                                                                   1997 Range       1998 Range  
                                                1997 Average     1998 Average      (Low:High)       (Low:High)  
----------------------------------------------------------------------------------------------------------------
All Counties................................              470              484          221:767          367:783
Central Urban...............................              546              557          349:767          367:783
Other Urban.................................              440              452          256:728          367:742
Urban Fringe................................              394              413          231:693          367:707
Other Rural.................................              371              397          221:647          367:660
----------------------------------------------------------------------------------------------------------------
Source: MEDPAC, March 1998 Report to Congress: Medicare Payment Policy.                                         

    A further change in the methodology is the graduate medical 
education (GME) carve-out. While the removal of GME does not generate 
savings for the Medicare trust fund or Medicare GME, it does reduce 
capitation rates in counties that historically received GME payments 
(except in counties where the minimum payment amounts apply). In 
general, GME carve-outs disproportionately affect urban managed care 
organizations because urban counties house more teaching hospitals. 
Table 5 shows the 1995 GME percentages in urban and rural counties.

 Table 5.--Estimated Graduate Medical Education Payment Reductions as a 
  Proportion of Medicare Risk Payment Rates by Urban and Rural Location 
                           (percentage), 1995                           
------------------------------------------------------------------------
Location                   GME  percentage                              
----------------------------------------------------------              
All                                                                     
 Countie                                                                
 s......  3.4                                                           
Urban                                                                   
 Countie                                                                
 s......  3.8                                                           
  Centra                                                                
   l                                                                    
   Urban  5.3                                                           
  Other                                                                 
   Urban  3.1                                                           
Rural                                                                   
 Countie                                                                
 s......  2.1                                                           
  Urban                                                                 
   Fring                                                                
   e....  2.2                                                           
  Other                                                                 
   Rural  1.9                                                           
------------------------------------------------------------------------
Source: PPRC, 1997 Annual Report to Congress, Chapter 3, p. 62.         

    We anticipate that these changes to the variations payment will 
affect the enrollment distribution of M+C enrollees.
    The methodology has already increased capitation levels in rural 
areas now receiving the payment floor, in some counties significantly. 
HCFA's Office of the Actuary currently predicts that the blended rates 
will begin in CY 2000, which should increase rates in some rural areas 
that received the 2 percent increase in 1998 and 1999. In fact, to the 
extent that blended rates are eventually applied under the budget 
neutrality rules, the blended rate will gradually elevate payments to 
counties that have an area-specific payment that is below the national 
average as adjusted for input prices.
    The improved incentives in rural counties should prompt M+C 
organizations to contract in these areas. Greater participation of 
managed care plans in rural counties should spur increases in M+C 
enrollment in the long run. CBO expects an incremental gain of 3 
percent market share for coordinated care plans by 2002. This growth 
occurs, for the most part, in non-urban areas. It

[[Page 35050]]

is expected that higher payments in rural areas will encourage M+C 
organizations to offer plans in these areas. In particular, PSOs were 
included as an M+C option in part because of the belief that rural 
providers might organize M+C organizations in their areas which, 
because of their smaller population bases, generally have not been as 
attractive to managed care plans for commercial or Medicare business.
    Table 6 provides a profile of the distribution of risk contractors 
and enrollment prior to passage of the BBA.

                    Table 6.--Distribution of Medicare Risk Enrollment, and Risk Contractors                    
----------------------------------------------------------------------------------------------------------------
                                                                                         Percent of   Percent of
                                                 Percent of    Percent of   Percent of    counties     counties 
                                               beneficiaries    counties     counties   offering 2-    offering 
                   Location                    in risk plans   offering 0   offering 1    4  risk    more than 5
                                                   (6/97)      risk plans   risk plan    plans  (6/   risk plans
                                                                 (6/97)       (6/97)        97)         (6/97)  
----------------------------------------------------------------------------------------------------------------
Urban (MSA of 1 million or more).............            24             0            2           19           79
Other Urban (surrounding counties or smaller                                                                    
 MSA)........................................          11.8            27           12           34           27
Fringe Urban (rural areas bordering MSA).....           2.6            71           18           11            1
Other rural areas............................           1.1            91            6            3            0
----------------------------------------------------------------------------------------------------------------
Source: MEDPAC 1997 Chartbook.                                                                                  

    It is expected that as more M+C organizations enter the Medicare 
market, competitive pressures will increase. As the payment changes are 
implemented and geographic variation in payment levels is reduced, the 
profitability of M+C organizations will be driven less by where they 
deliver services, and more by how well they deliver services. An 
organization's success will depend on the quality of services offered, 
the extent and clarity of an organization's communications with 
beneficiaries, the ability of a plan to effectively manage the 
provision of care to Medicare beneficiaries, and the satisfaction 
levels of Medicare enrollees in a plan, as well as the benefits offered 
and the premiums charged. These competitive forces should provide 
increased access to high quality services under capitated plans for 
Medicare beneficiaries.
    For beneficiaries in rural areas we believe the overall impact of 
these changes should make participation in the M+C program a more 
viable option. Conversely, as payment rates become less robust in urban 
areas and margins decrease, some coordinated care plans may choose to 
reduce benefits, or increase premiums. Reductions in benefits or 
increases in premiums would have a negative impact on beneficiaries.
    We should also note here that oftentimes we look at payment as a 
driving force in the Medicare program as a whole. While the increased 
payment to rural counties should on its face provide an incentive for 
organizations to offer their services and products in rural areas, that 
may not always be the case. That is, some may assume that when Medicare 
pays coordinated care plans considerably more than the average per 
capita fee-for-service cost in a geographic area, as it does in many of 
the payment floor counties, this would cause organizations to rush to 
enter into contracts in these areas. However, plans may decide that the 
smaller pool of potential enrollees (and hence the smaller pool over 
which to spread risk) do not justify either their added financial risk 
or the proportionally larger start up and marketing costs associated 
with launching a plan in a rural area.
    We believe and Congress intended that these increases for rural 
counties would stimulate the growth of capitated plans in these areas. 
However, there still is a large degree of uncertainty over the actual 
effects of the BBA changes for rural areas. In the end only M+C 
organizations can really determine if the payment levels justify their 
costs.

D. Introduction of New Contracting Entities

    In general, we believe that new entities will be formed to serve 
the Medicare market. As discussed above, the new payment methodology 
and the availability of PSO and MSA plans should stimulate the private 
sector's development of entities to compete for Medicare beneficiaries. 
While estimates of the development of new entities are somewhat 
speculative, the following are our best estimates based on currently 
available information, enrollment projections, informal surveys and 
discussions with industry representatives.
    Provider Sponsored Organizations: The Congressional Budget Office 
projects that PSO enrollment will reach a 3 percent share of Medicare 
beneficiaries, or about 1 million beneficiaries, by 2002 and that a 
significant portion of the PSO enrollment will be in rural areas (CBO, 
1997).
    Currently, there are approximately 5.5 million beneficiaries 
enrolled in 307 Medicare risk products, which is an average of 
approximately 8,000 enrollees per Medicare risk plan. We believe that 
CBO's projections, presented in the following table, represent a good 
estimate of the approximate number of new PSO plans that will be 
established. Some industry analysts have projected a higher level of 
certified PSOs than projected by CBO. While we believe it is highly 
unlikely that as many as 25 PSOs will be certified by the end of 1998, 
we believe that CBO's projections for 1999 and thereafter are 
reasonable.

------------------------------------------------------------------------
              Enrollment estimate                   Year       New PSOs 
------------------------------------------------------------------------
100,000.......................................         1998           25
400,000.......................................         1999           50
600,000.......................................         2000           75
800,000.......................................         2001          100
1,000,000.....................................         2002          125
------------------------------------------------------------------------
Source of enrollment estimate: CBO, 1997.                               

    As a secondary impact, the M+C program could result in expanded 
availability of PSOs, particularly in rural areas. That is, PSOs that 
are successful in their Medicare contracts may decide to expand into 
the commercial market. In turn, if commercial payers learn of their 
success in serving the Medicare population, they may have more 
confidence in the ability of PSOs to assume and manage risk and may, 
therefore, be more interested in contracting with them.
    Private Fee-For-Service Plans: The Congressional Budget Office 
projected that no Medicare beneficiaries will enroll in private fee-
for-service plans, and no reliable estimates for the number of likely 
private fee-for-service market entrants are available. However, we have 
received some expressions of

[[Page 35051]]

interest from insurance carriers and others regarding how these plans 
will work and whether there is an opportunity to serve Medicare 
beneficiaries. If offered, we would expect them to be most attractive 
to wealthier beneficiaries because of their anticipated higher premiums 
and other out-of-pocket costs. While private fee-for-service plan 
providers are allowed to engage in limited balance billing, there is no 
statutory limit on premiums that a plan may charge beneficiaries.
    Medical Savings Account Plans: The Congressional Budget Office 
estimated that 390,000 Medicare beneficiaries will enroll in M+C MSA 
plans by 2000. This is the statutory limit for the total number of 
beneficiaries that can enroll in the MSA demonstration. While there are 
no reliable estimates on the number of organizations that will offer 
M+C MSAs, we expect that many organizations offering MSA plans in the 
commercial marketplace will offer MSA plans in the Medicare market as 
well.
    According to a recent General Accounting Office study, 57 carriers, 
including three HMOs, offered MSA plans in the commercial market as of 
the summer of 1997. Blue Cross & Blue Shield plans represented almost 
one-third of the plans offered in the market. At that time, an 
additional fifteen carriers and eight HMOs indicated an interest in 
offering MSA plans. However, commercial enrollment in MSA plans has 
been considerably lower than had been anticipated. While the 
demonstration project under the Health Insurance Portability and 
Accountability Act allowed for 750,000 MSAs to be sold, as of June 30, 
1997, only 17,145 individuals had enrolled in these new products, 
according to the Internal Revenue Service.
    The GAO found that the complexities surrounding the tax 
implications of an MSA product, increased time necessary to explain the 
product to customers, and lower commissions to brokers/agents for 
selling a high deductible product have contributed to the low number of 
plans sold. However, some of these complexities may be mitigated under 
the BBA, as beneficiaries are barred from contributing their own money 
to the medical savings account, and they will receive extensive 
information about MSA plans as part of the annual information campaign 
on their M+C options.
Impact of New Contracting Entities
    Beneficiaries may benefit from competitive pressures on M+C 
organizations to compete on such factors as reduced premiums, extra 
benefits, and quality. However, the difference between out-of-pocket 
costs under managed care plans and the traditional fee-for-service 
program may decrease as M+C payments moderate. Under the Medicare risk 
program, beneficiaries enrolled in risk HMOs generally have had lower 
out-of-pocket costs than beneficiaries in the traditional Medicare fee-
for-service sector. For example, a recent study by the American 
Association of Retired Persons projected that beneficiaries enrolled in 
a Medicare managed care plan will spend an average of 16 percent of 
their annual income, or $1,775, on out-of-pocket health care costs, in 
1997. This is compared to the estimated out-of-pocket expenses for 
Medicare fee-for-service beneficiaries, which were projected on average 
to be 21 percent of their annual income, or $2,454, on out-of-pocket 
costs. (AARP, 1997).
    We also anticipate that many providers will have new opportunities 
to serve Medicare beneficiaries, such as through provider sponsored 
organizations or through strategic partnerships with other coordinated 
care plans seeking to enter new markets. As M+C enrollment grows, 
providers will find it increasingly important to their business to 
participate in an M+C network as many of their patients will be locked 
into these networks. In turn, we believe M+C organizations will seek to 
contract with providers that are capable of serving both their 
commercial and Medicare populations.
    Finally, the M+C program will most affect those states in which the 
greatest market opportunities for newly created M+C organizations 
exist. Oversight and licensing responsibilities will likely increase 
for such states as newly created M+C organizations, such as PSOs, seek 
to serve the Medicare market. The BBA increases the workload for States 
only to the extent that new organizations will begin operating in the 
State. It is likely that States will also have to monitor the 
compliance of PSOs that have a waiver of State licensure in the case of 
quality and consumer protection standards. This constitutes an 
additional workload of partial monitoring of plans that are not subject 
to State solvency requirements.
    Many states will be confronted with issues on licensing of PSOs, 
whether by bringing such entities under existing HMO laws and 
regulations or establishing separate PSO licensing provisions. In a 
recent report, the National Association of Insurance Commissioners 
reported that ten states have already enacted state-level PSO 
regulation (NAIC, 1997), and the National Council for State 
Legislatures reports that thirteen states currently are considering PSO 
legislation.
    States will also have to integrate PSOs into their state guaranty 
fund or other mechanism for protecting beneficiaries against insolvent 
plans. While this will not be a new function, it is expected to 
increase the amount of regulatory oversight necessary due to new market 
entrants and could place burdens on a state's ability to protect 
consumers if PSOs become insolvent.
    Finally, the preemption of state mandated benefit and provider 
participation laws will lead to mandated benefits being applied to a 
smaller number of State residents. However, states may still enforce 
any laws relating to cost-sharing for a benefit included in an M+C 
contract as well as any laws restricting balance billing practices by 
providers. Moreover, we believe that few states will be impacted by the 
BBA's prohibition on state imposition of premium taxes on payments to 
Medicare risk contracts/M+C organizations. While almost all states 
impose premium taxes on insurers generally (and nineteen states have 
specific premium tax schedules for HMOs), it is our understanding that 
most states have not subjected Medicare revenue to a premium tax and 
that many states specifically exempt Medicare payments to HMOs from any 
premium tax.

E. New Quality Standards

    Each M+C organization must have arrangements for an ongoing quality 
assessment and performance improvement program for health care services 
it provides to Medicare beneficiaries enrolled in the M+C plans. The 
quality assurance program for an M+C organization must, among other 
things: (1) stress health outcomes and provide for the collection, 
analysis, and reporting of data to permit measurement of outcomes and 
other indices of the quality of M+C organizations and organizations; 
(2) include measures of consumer satisfaction; (3) provide the 
Secretary with such access to information collected as appropriate to 
monitor and ensure the quality of care; (3) provide review by 
physicians and other health care professionals of the process followed 
in the provision of health care services; (4) provide for the 
establishment of written protocols for utilization review, based on 
current standards of medical practice; (5) have mechanisms to detect 
both underutilization and overutilization of services; (6) take action 
to improve quality and assess the effectiveness of that action through 
systematic follow-up; and (7) make available information

[[Page 35052]]

on quality and outcomes measures to facilitate beneficiary comparison 
and choice of health coverage options.
    An M+C organization is deemed to have met the quality assessment 
and performance improvement requirements if the organization is 
accredited (and periodically reaccredited) at a level acceptable to the 
Secretary by a national, private accrediting organization approved by 
the Secretary. Deemed M+C organizations must meet certain requirements, 
including submitting to surveys to validate its accreditation 
organization's process and authorizing its accreditation organization 
to release to HCFA a copy of its most current accreditation survey and 
any information related to the survey as required by HCFA.
    Accrediting organizations will have to meet certain requirements in 
order to receive approval as well as ongoing requirements to maintain 
its approved status.
    The quality assurance and performance improvement requirements 
under this regulation provide that each M+C organization achieve 
minimum performance levels on standardized quality measures. They also 
require that organizations conduct performance improvement projects 
that achieve, through ongoing measurement and intervention, 
demonstrable and sustained improvement in significant aspects of 
clinical care and non-clinical services that can be expected to affect 
health outcomes and member satisfaction. This approach to ensuring 
quality reflects the expansion in recent years of the problem-focused 
approach that was prevalent in the past to include a focus on 
systematic quality improvement as well.
    We believe that the quality assessment and performance improvement 
requirements under this regulation will not impose significantly new 
burdens on most M+C organizations.
    First, as discussed in detail in section III D of this preamble, 
requirements under this regulation build on a variety of HCFA and State 
Medicaid agency efforts to promote the assessment and improvement of 
quality in plans contracting with Medicare and Medicaid, including:
     The Quality Improvement System for Managed Care (QISMC), 
an initiative with state and federal officials, beneficiary advocates, 
and the managed care industry to develop a coordinated quality 
oversight system to reduce duplicative or conflicting efforts and that 
has an emphasis on demonstrable and measurable improvement.
     Initiatives to improve accountability by requiring uniform 
collection and reporting of data to allow assessment of plan 
performance and to facilitate comparisons among plans, such as the 
Health Plan Employer Data and Information Set (HEDIS 3.0).
     Projects to enhance the role of Medicare Peer Review 
Organizations (PROs) in evaluating and improving managed care plan 
quality, including the development and testing of a minimum set of 
performance evaluation measures and quality improvement projects 
developed through collaboration between PROs and the managed care 
industry.
    Second, we anticipate that many new M+C organizations will be 
offered by organizations currently participating as Medicare risk 
contractors. While we acknowledge that many organizations have not 
developed the capacity to fully meet the pre-BBA requirements, we 
believe that this regulation does not create substantially new demands 
for building new administrative and information systems necessary to 
meet the quality assessment and performance improvement requirements 
for M+C products, as such organizations already are subject to similar 
requirements as section 1857 contractors. Moreover, we will build into 
the contract process a gradual phase-in of the number of focus areas 
for which a plan must demonstrate improvement to allow sufficient time 
for a plan to implement and conduct well-designed improvement projects.
    Third, we anticipate that many organizations seeking to offer M+C 
products will have had to invest in administrative and information 
systems to meet the requirements of other purchasers and State 
regulators, diminishing burdens this regulation might otherwise have 
imposed. This is true even for provider-sponsored organizations that 
seek a federal waiver from state solvency requirements, as such 
entities are still subject to other state requirements, including a 
state's quality assessment and improvement requirements.
    We have built on efforts in other sectors in developing these 
quality assessment and performance improvement requirements in order to 
minimize the burden that these activities place on plans. (GAO, 
September 1996; NCQA, 1997), such as:
     Many employers and cooperative group purchasing groups and 
some States already require that organizations be accredited by the 
National Committee on Quality Assurance, the Joint Commission on 
Accreditation of Healthcare Organizations, the American Healthcare 
Accreditational Commission, or other independent bodies.
     Many also require that organizations report their 
performance on HEDIS, FACCT, or other measures and conduct enrolled 
surveys using the CAHPS or other instruments. For example, NCQA 
estimates that more than 90 percent of plans are collecting some or all 
of HEDIS data for their commercial population. (NCQA, 1997)
     States have heightened their regulatory efforts through 
insurance or licensing requirements, and the National Association of 
Insurance Commissioners has developed model acts on network adequacy, 
quality assessment and improvement, and utilization review.
    Another important mechanism in avoiding duplication of effort and 
unnecessary administrative burdens with respect to internal quality 
assurance requirements is the ``deemed'' status afforded organizations 
for each standard that is accredited by a national, private accrediting 
organization.
    Fourth, we have worked closely with private-sector leaders in 
health plan performance and quality measurement to avoid duplication of 
effort and promote standardization in measurement approaches. (GAO, 
September 1996) For example, we convened advisory groups of managed 
care organizations, State and Federal purchasers and regulators, 
beneficiary advocates, and experts in mental health and substance abuse 
services and relied heavily on the insight and expertise of these 
groups in refining standards and guidelines.
    Fifth, measuring and reporting plan-and provider-specific 
information will allow plans and networks to compare themselves to 
competitors, track their own performance over time, and so drive their 
own internal quality improvement programs. (Palmer, 1997). Moreover, 
plans will have added incentives to initiate performance improvement 
projects that will lead to more cost-effective delivery of health care 
services, such as influenza immunization outreach efforts which lead to 
lower complications and treatment of influenza-related conditions or 
improving access to primary care to reduce inappropriately frequent use 
of the emergency room by enrollees. This regulation allows plans the 
freedom to select its own particular topics for measurement and 
improvement so that each plan can conduct projects relating to aspects 
of care and services that are significant for its own population.
    Although the quality standards under this regulation are not 
substantially

[[Page 35053]]

different from requirements already in place, we recognize that some 
M+C organizations may need to invest in administrative and/or 
information systems necessary to comply with the existing as well as 
the M+C standards. Additionally, while some plans may be tempted to 
invest their resources into the areas in which they must measure and 
demonstrate improved performance at the expense of other parallel 
quality initiatives, we have designed the quality assessment and 
performance improvement requirements under this regulation to be as 
flexible as possible and encourage plans to work with HCFA in 
developing long-range goals for projects.
    Our role in overseeing compliance with the quality standards 
interrelates with our efforts to sponsor an annual information campaign 
that coincides with the open enrollment period for M+C organizations 
and is an important augmentation to those efforts. These efforts are 
designed to ensure that all organizations in the M+C program have the 
organizational structure and operational capacity to provide quality 
health care to Medicare beneficiaries and to ensure that beneficiaries 
have accurate information on quality to guide their health plan 
selections.

F. Conclusion

    We expect that this rule overall will have a positive impact on the 
Medicare program, Medicare beneficiaries, providers, rural providers 
and suppliers, and entities that have not previously contracted with 
us. However, some current managed care contractors will experience a 
decrease in the capitated payments they otherwise would have received 
without passage of the BBA, possibly resulting in reduced benefits for 
Medicare enrollees. States will also have to develop mechanisms to 
license new risk bearing entities known as provider sponsored 
organizations after 3-year waivers.

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 11 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 10 working days of 
publication of this document 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 summarized and discussed 
below.

Application Requirements (Sec. 422.6)

    In order to obtain a determination on whether it meets the 
requirements to become an M+C organization and is qualified to provide 
a particular type of M+C plan, an entity, or an individual authorized 
to act for the entity (the applicant) must complete an application, in 
the form and manner required by HCFA, including all of the requirements 
set forth in Sec. 422.6.
    In order to contract with us under the M+C program, organizations 
are required to complete an application to demonstrate their capability 
of carrying out the requirements of the Medicare program. Completing an 
application requires the capability of organizations to adhere to 
Medicare program guidelines and demonstrate to HCFA by in-house 
documentation that such capability exists. In prior years, applicants 
were required to complete applications forms (HCFA 901-903) to obtain a 
Medicare contract under section 1876 of the program. The application 
having OMB clearance #0938-0470 estimated that approximately 100 hours 
would be required to complete an application. We believe the new 
applications are quite similar and therefore estimate that 100 hours 
will be required to complete an application under the Medicare + Choice 
program. We project approximately 100 applications a year requiring 
10,000 hours of time by all applicants on an annual basis.

Eligibility To Elect an M+C Plan (Sec. 422.50)

    A beneficiary must complete and sign an election form and gives 
information required for enrollment.
    The burden associated with this requirement is the time it takes 
for a beneficiary to complete an enrollment form. The enrollment form 
varies for each organization, but similar identifying information is 
collected. It is estimated that it will take 2,000,000 beneficiaries 
(based on 2,012,025 enrollments in calendar year 1997) 10 minutes for 
an annual burden of 20,000,000 minutes = 333,000 hours.

Continuation of Enrollment (Sec. 422.54)

    An M+C organization that wishes to offer a continuation of 
enrollment option must submit their marketing materials to HCFA for 
approval, which meet the requirements set forth in this section, that 
describe the option and the M+C organization's assurances of access to 
services as set forth in this section and, an M+C organization that 
offers a continuation of enrollment option must convey all enrollee 
rights conferred under this rule.
    The burden associated with this requirement is captured below in 
Sec. 422.64.

Election Process (Sec. 422.60)

    The election form must be completed and signed by the M+C eligible 
individual beneficiary (or the individual who will soon become entitled 
to Medicare benefits) and include authorization for disclosure and 
exchange of necessary information between HCFA and the M+C 
organization.
    The burden associated with this requirement is captured above in 
the Sec. 422.50 discussion.
    The M+C organization must file and retain M+C plan election forms 
for the period specified in HCFA instructions, and submit beneficiary 
M+C plan and optional supplemental benefit elections to HCFA.
    The burden associated with this requirement is the time required 
for each organization to perform record

[[Page 35054]]

keeping on each application filed. It is estimated that it will take 
each organization 5 minutes for each of 2,000,000 beneficiaries (based 
on 2,012,025 enrollments in calendar year 1997). The total annual 
burden is estimated at 10,000,000 minutes = 167,000 hours. On average, 
M+C organizational level burden is 167,000/450 (100 new/350 current) = 
371 annual hours. In addition, it is estimated to take each M+C 
organization 4 hours per month to electronically submit a subset of 
beneficiary M+C plan and optional supplemental benefit election 
information to HCFA, for a total annual burden of 21,600 hours.
    The M+C organization must give the beneficiary prompt written 
notice of acceptance or denial in a format specified by HCFA that meets 
the requirements set forth in this section.
    The burden associated with each organization providing the 
beneficiary prompt written notice, performed by an automated system, is 
estimated at 1 minute per application processed. The annual total 
burden is estimated at 2,000,000 minutes = 33,000 hours. On average, 
M+C organizational level burden is 33,000/450 (100 new/350 current) = 
73 annual hours.
    Within 30 days from receipt of the election form (or from the date 
a vacancy occurs for an individual who was accepted for future 
enrollment), the M+C organization must transmit the information 
necessary for HCFA to add the beneficiary to its records as an enrollee 
of the M+C organization.
    The burden associated with electronic submission of information to 
HCFA is estimated at 1 second per application processed, for an annual 
burden of 2,000,000 minutes = 33,000 hours. On average, M+C 
organizational level burden is 33,000/450 (100 new/350 current) = 73 
annual hours.

Election of Coverage Under an M+C Plan (Sec. 422.62)

    Except as provided in paragraph (d)(2)(ii) of Sec. 422.62, an 
individual may disenroll from an M+C MSA plan only during an annual 
election period or the special election period described in paragraph 
(b) of this section. However, an individual who elects an M+C MSA plan 
during an annual election period and had never before elected an M+C 
MSA plan may revoke that election, no later than December 15 of that 
same year, by submitting to the organization that offers the M+C plan a 
signed and dated request in the form and manner prescribed by HCFA or 
by filing the appropriate disenrollment form through other mechanisms 
as determined by HCFA.
    The burden associated with this requirement is the time required 
for each beneficiary to complete a disenrollment form. It is estimated 
that about 5 percent of the maximum number of beneficiaries permitted 
to choose an MSA (390,000) would disenroll (19,500) and each 
disenrollment form would take 4 minutes to complete, for an annual 
burden of 78,000 minutes = 1,300 hours.

Information About the M+C Program (Sec. 422.64)

    Each M+C organization must provide, on an annual basis and in a 
format and using standard terminology that may be specified by HCFA, 
the information necessary that meets the general and content 
requirements set forth in Sec. 422.6, to enable HCFA to provide to 
current and potential beneficiaries the information they need to make 
informed decisions with respect to the available choices for Medicare 
coverage.
    The burden associated with this requirement is the time required 
for the organization to provide the information to HCFA. It is 
estimated that it will take 450 (100 new/350 current) organizations 12 
hours for an annual burden of 5,400 hours. In addition, it is estimated 
that on an annual basis it will take 4 hours for an estimated 50 
organizations to modify and submit their revised materials to HCFA for 
review for a annual burden of 200 hours.

Coordination of Enrollment and Disenrollment Through M+C Organizations 
(Sec. 422.66)

    An individual who wishes to elect an M+C plan offered by an M+C 
organization may make or change his or her election during the election 
periods specified in Sec. 422.62 by filing the appropriate election 
form with the organization or through other mechanisms as determined by 
HCFA.
    An individual who wishes to disenroll from an M+C plan may do so by 
(1) electing a different M+C plan by filing the appropriate election 
form with the M+C organization or through other mechanisms as 
determined by HCFA, (2) submitting a signed and dated request for 
disenrollment to the M+C organization in the form and manner prescribed 
by HCFA or, (3) filing the appropriate disenrollment form through other 
mechanisms as determined by HCFA.
    The burden associated with electing a different plan is included in 
422.50. The burden associated with disenrolling is the time to complete 
a disenrollment form. It is estimated that 720,000 disenrollments 
(based on the number of disenrollments in calendar 1997) will take 2 
minutes each for an annual burden of 1,440,000 minutes = 2,400 hours. 
On average, M+C organizational level burden is 2,400/450 (100 new/350 
current) = 5 annual hours.
    The M+C organization must submit each disenrollment notice to HCFA 
promptly.
    The burden associated with electronic submission of information to 
HCFA is estimated at 1 second per disenrollment processed, for an 
annual burden of 1,200 minutes = 20 hours.
    On average, M+C organizational level burden is 1,200/450 (100 new/
350 current) = 3 annual hours.
    In the case of a plan where lock-in applies, the M+C organization 
must provide the enrollee with a statement explaining that he or she 
remains enrolled until the effective date of disenrollments, and until 
that date, neither the M+C organization nor HCFA pays for services not 
provided or arranged for by the M+C plan in which the enrollee is 
enrolled.
    The burden associated with each organization providing the 
beneficiary prompt written notice of disenrollment and lock-in, 
produced by an automated system, is estimated at 1 minute per 
disenrollment processed, for an annual burden of 720,000 minutes = 
1,200 hours. On average, M+C organizational level burden is 1,200/450 
(100 new/350 current) = 3 annual hours.
    The M+C organization must file and retain disenrollment requests 
for the period specified in HCFA instructions.
    The burden associated for each disenrollment request is the time 
required for each organization to perform recordkeeping on each 
disenrollment request filed. It is estimated that it will take 5 
minutes for 720,000 disenrollments processed for an annual burden of 
3,600,0000 minutes = 60,000 hours. On average, M+C organizational level 
burden is 6,000/450 (100 new/350 current) = 13 annual hours.

Disenrollment by the M+C Organization (Sec. 422.74)

    If the disenrollment is for any of the reasons specified in 
paragraphs (b)(1) through (b)(2)(i) and (b)(3) of Sec. 422.74, that is, 
other than death or loss of entitlement to Part A or Part B, the M+C 
organization must give the individual a written notice of the 
disenrollment with an explanation of why the M+C organization is 
planning to disenroll the individual. The notice must be mailed to the 
individual before submission of the disenrollment notice to HCFA and 
include an explanation of the individual's right to a hearing under the

[[Page 35055]]

M+C organization's grievance procedures.
    There is a burden associated with the requirement for the 
organization to notify the beneficiary about an involuntary 
disenrollment, and to separately notify the beneficiary of the 
effective date of the disenrollment. It is estimated that less than 100 
such notices will be issued and that each notice will take 1 minute for 
an annual burden of less than 100 minutes = or less than 1.5 hours.
    A M+C organization may disenroll an individual from the M+C plan 
for failure to pay any basic and supplementary premiums if the M+C 
organization sends a written notice of nonpayment to the enrollee 
within 20 days of the date that the delinquent charges were due stating 
that nonpayment of premiums will not automatically result in 
disenrollment and information about the lock-in requirements of the M+C 
plan.
    There is a burden associated with the requirement for the 
organization to notify the beneficiary and it is estimated that less 
than 500 of these requests occur annually at 1 minute per notification, 
resulting in an estimated burden of 500 minutes, or approximately 80 
hours.
    A M+C organization may disenroll an individual from the M+C plan if 
the individual's behavior is disruptive, unruly, abusive, or 
uncooperative to the extent that his or her continued enrollment in the 
plan seriously impairs the M+C plan's ability to furnish services to 
either the particular individual or other individuals enrolled in the 
plan. The M+C organization must document the enrollee's behavior, its 
own efforts to resolve any problems, and any extenuating circumstances, 
as described in paragraphs (d)(2)(i) through (d)(2)(iii) of this 
section. And, a M+C organization must submit documentation related to 
the proposed disenrollment and any information submitted by the 
beneficiary, to HCFA for review to determine whether the M+C 
organization has met the disenrollment requirements.
    The burden associated with this requirement is the time for the 
organization to document the behavior of the beneficiary and document 
the efforts of the organization to resolve any problems and provide 
information to HCFA concerning the involuntary disenrollment request. 
The burden reflects documentation and transmission of documentation to 
HCFA by the managed care plans. It is estimated that less than 100 such 
requests occur annually (based on estimate of regional office 
collection of such information), and it is estimated that each request 
will take 1 hour to manually collect the data and 15 minutes to 
transmit the data to HCFA, for a burden of 125 hours.
    A M+C organization must report to the Office of the Inspector 
General of the DHHS any disenrollment based on fraud or abuse by the 
individual.
    There is a burden associated with the requirement for the 
organization to report to the Office of the Inspector General any 
disenrollment based on fraud or abuse by the individual. It is 
estimated that only 1% of all involuntary disenrollments, or 10 involve 
fraud or abuse, and the reporting burden would be 1 minute each, for a 
total burden of less than 1 hour.
    If a M+C organization terminates or is terminated or the service 
area or continuation area are reduced with respect to all M+C enrollees 
in the area in which they reside, the M+C organization must give each 
Medicare enrollee a written notice of the effective date of the plan 
termination or area reduction and a description of alternatives for 
obtaining benefits under the M+C program. The notice must be sent 
before the effective date of the plan termination or area reduction.
    The burden associated with this requirement is captured below in 
Sec. 422.506.

Approval of Marketing Materials and Election Forms (Sec. 422.80)

    At least 45 days before the date of distribution the M+C 
organization must submit any marketing material or election form to 
HCFA for review. The materials must be in a format and using standard 
terminology specified by HCFA, that meet the requirements specified in 
this section.
    The burden associated with this requirement is captured above in 
Sec. 422.64.
    A M+C organization must notify the general public of its enrollment 
period (whether time-limited or continuous) in an appropriate manner, 
through appropriate media, throughout its enrollment area.
    We anticipate notification to the general public would be through a 
general circulation newspaper and would require 8 hours of burden per 
organization to modify their enrollment period bulletin and seek 
publication in a local newspaper, for an annual burden of 3,600 hours.

Special Rules for Point of Service Option (Sec. 422.105)

    M+C organizations must maintain written rules on how to obtain 
health benefits through the POS benefit. While the maintenance of 
written rules is a recordkeeping requirement subject to the PRA, the 
burden associated with this requirement is exempt from the PRA, as 
defined in 5 CFR 1320.3(b)(2) and (b)(3).
    The M+C organization must provide to beneficiaries enrolling in a 
plan with a POS benefit an ``evidence of coverage'' document, or 
otherwise provide written documentation, that specifies all costs and 
possible financial risks to the enrollee, including the requirements 
set forth in (d)(2)(i) through (d)(2)(iv) of this section.
    The burden associated with this requirement is captured above in 
Sec. 422.64.
    An M+C organization that offers a POS benefit must report data on 
the POS benefit in the form and manner prescribed by HCFA.
    The special rules for M+C organizations offering a POS benefit as 
stipulated in Sec. 422.105 requires that M+C organizations provide to 
HCFA POS data relating to the utilization of the POS benefit by plan 
members. This is not a new data requirement since M+C organizations 
that offer a POS benefit would need to have this data in the normal 
course of business in order to pay POS claims. We estimate that 
providing this data to HCFA would require 1 hour per quarterly 
submission. Thus, the annual burden would be 1 hour  x  4 = 4 hours per 
MCO in providing the required POS data.

Disclosure Requirements (Sec. 422.111)

    An M+C organization must disclose the information specified in 
Sec. 422.64 and in paragraph (b) of Sec. 422.111 to each enrollee 
eligible for or electing an M+C plan it offers. The information must be 
in clear, accurate, and standardized form, and provided at the time of 
enrollment and at least annually thereafter. The burden associated with 
this requirement is captured above in Sec. 422.64.
    If an M+C organization intends to change its rules for an M+C plan, 
it must submit the changes for HCFA review under the procedures of 
Sec. 422.80. The burden associated with this requirement is reflected 
in Sec. 422.80 above.
    The plan must also give notice to all enrollees 30 days before the 
intended effective date of the changes. The burden associated with this 
requirement is reflected above in Sec. 422.80.
    The M+C organization must make a good faith effort to provide 
written notice of a termination of a contracted provider within 15 
working days of receipt or issuance of a notice of termination, as 
described in

[[Page 35056]]

Sec. 422.204(c)(4), to all enrollees who are patients seen on a regular 
basis by the provider whose contract is terminating, irrespective of 
whether the termination was for cause or without cause. When a contract 
termination involves a primary care professional, all enrollees who are 
patients of that primary care professional must also be notified.
    HCFA has no basis to calculate the burden impact imposed by these 
requirements. Therefore, we explicitly seek comment on the impact of 
this notification requirement.

Access to Services (Sec. 422.112)

    In the case of involuntary termination of an M+C plan or 
specialist(s) for a reason other than for cause, the M+C organization 
must inform beneficiaries of their right to maintain access to 
specialists and provide the names of other M+C plans in the area that 
contract with specialists of the beneficiary's choice, as well as an 
explanation of the process the beneficiary would need to follow should 
he or she decide to return to original Medicare.
    The requirements imposed by this section would be pursuant to an 
administrative action and therefore are exempt from the PRA as defined 
in 5 CFR 1320.4.
    An M+C plan seeking a service area expansion must demonstrate that 
the number and type of providers available to plan enrollees are 
sufficient to meet projected needs of the population to be served. The 
burden associated with meeting this requirement is captured above in 
422.6.
    An M+C plan must demonstrate to HCFA that its providers are 
credentialed through the process set forth at Sec. 422.204(a). The 
burden associated with meeting this requirement is captured above in 
422.6.
    Plans must have procedures approved by HCFA for (1) identification 
of individuals with complex or serious medical conditions; (2) 
assessment of those conditions, including medical procedures to 
diagnose and/or monitor them on an ongoing basis; and (3) establishment 
of a treatment plan appropriate to those conditions, with an adequate 
number of direct access visits to specialists to accommodate the 
treatment plan. Treatment plans must be time-specific and updated 
periodically by the PCP.
    Plans must also; (1) establish written standards for the timeliness 
of access to care and member services that meet or exceed standards 
established by HCFA, (2) continuously monitor and document the timely 
access to care and member services within a plan's provider network to 
ensure compliance with these standards, and take corrective action as 
necessary, (3) establish written policies and procedures (coverage 
rules, practice guidelines, payment policies, and utilization 
management) that allow for individual medical necessity determinations, 
and (4) ensure that providers consider and document beneficiary input 
into the provider's proposed treatment plan.
    Plans must maintain written procedures to ensure that; (1) the M+C 
organization and its provider network have the information required for 
effective and continuous patient care and quality review, including 
procedures to ensure that, each provider, supplier, and practitioner 
furnishing services to enrollees maintains an enrollee health record in 
accordance with standards established by the M+C organization, taking 
into account professional standards; appropriate and confidential 
exchange of information among provider network components, (2) written 
procedures to ensure that enrollees are informed of specific health 
care needs that require follow-up and receive, as appropriate, training 
in self-care and other measures they may take to promote their own 
health; and (4) documentation demonstrating that systems to address 
barriers to enrollee compliance with prescribed treatments or regimens.
    HCFA's believes these requirements are reasonable and customary 
business practices and the burden associated with these requirements is 
exempt from the PRA as defined in 5 CFR 1320.3(b)(2). Therefore, we are 
assigning one token hour of burden for these requirements. HCFA invites 
comment on the burden estimate associated with these requirements.

Confidentiality and Accuracy of Enrollee Records (Sec. 422.118)

    For any medical records or other health and enrollment information 
it maintains with respect to enrollees, an M+C organization must 
establish and maintain procedures set forth in (a) through (c) of this 
section.
    While the maintenance of health records is a recordkeeping 
requirement subject to the PRA, we believe the burden associated with 
this requirement is exempt from the PRA, as defined in 5 CFR 
1320.3(b)(2) and (b)(3), and assigning 1 token hour of burden for this 
requirement. We solicit comment on the burden associated with this 
requirement.

Information on Advance Directives (Sec. 422.128)

    Each M+C organization must maintain written policies and procedures 
that meet the requirements for advance directives, as set forth in 43 
CFR part 489 subpart I.
    An M+C organization must maintain written policies and procedures 
concerning advance directives with respect to all adult individuals 
receiving medical care by or through the M+C organization.
    An M+C organization must provide written information to those 
individuals with respect to the requirement set forth in this section.
    These requirements are identical to the requirements currently 
approved under OMB# 0938-0610, with an expiration date of July, 31, 
1999. Since the currently approved requirements encompass a larger 
universe of provider types then just managed care organizations it is 
difficult to estimate the burden on the M+C organizational level. 
However, the per beneficiary encounter burden is estimated to be 3 
minutes. In the near future, HCFA will revise this collection to 
capture this new provider type and resubmit the collection to OMB for 
approval.

Protection Against Liability and Loss of Benefits (Sec. 422.132)

    Each M+C organization must adopt and maintain arrangements 
satisfactory to HCFA to protect its enrollees from incurring liability 
for payment of any fees that are the legal obligation of the M+C 
organization. The burden associated with demonstrating this requirement 
is captured below under Sec. 422.306.
    Each M+C organization must have an insolvency protection plan that 
provides for continuation of benefits. Each plan must submit a 
insolvency plan to HCFA for approval. The reporting requirements are 
similar to the insolvency plan reporting requirements submitted by 1876 
plans. The burden associated with completing and submitting an 
insolvency plan is estimated to be 40 hours per plan on an annual 
basis. Therefore, the total annual burden associated with this 
requirement is 18,000 hours (40 hours x 450 plans (100 new/350 
current)). In the near future, HCFA will revise this collection to 
capture this new provider type and resubmit the collection to OMB for 
approval.

Quality Assessment and Performance Improvement Program (Sec. 422.152)

    The organization offering the plan must measure performance under 
the

[[Page 35057]]

plan, using standard measures required by HCFA, and report its 
performance to HCFA.
    All Medicare+Choice organizations and an organization offering an 
M+C non-network MSA plan or an M+C private fee-for-service plan will be 
required to measure performance under their plans, using standard 
measures required by HCFA, and report their performance to HCFA. 
Reporting will be required annually. The standard measures that will be 
required will most likely be those already captured in HEDIS and CAHPS, 
approved under OMB # 0938-0701. The currently approved annual per plan 
burden is estimated to be 400.53 hours. Therefore, the total burden 
associated with this requirement is 180,239 hours (400.53 hours  x  450 
plans (100 new/350 current)). In the near future HCFA will resubmit 
this collection to OMB for approval for use by M+C organizations.
    The organization must report the status and results of each 
performance improvement project to HCFA as requested.
    All Medicare+Choice organizations offering coordinated care plans 
will be required to undertake performance improvement projects relative 
to those plans. Each organization must report the status and results of 
each project to HCFA as requested. We expect that, in any given year, 
each organization will complete two projects, and will have two others 
underway, relative to each plan. We expect that we will request the 
status and results of each organization's projects annually. We 
estimate that it will take an organization 5 hours to prepare its 
report for each project. Therefore, we estimate that the total annual 
hours involved per plan to be 20 and an overall annual burden for all 
plans of 9,000 hours.
    For all types of plans that it offers, an organization must: (1) 
Maintain a health information system that collects, analyzes, and 
integrates the data necessary to implement its quality assessment and 
performance improvement program, (2) Ensure that the information it 
receives from providers of services is reliable and complete, and (3) 
Make all collected information available to HCFA.
    All M+C organizations must maintain a health information system, 
and must make all collected information available to HCFA. The 
requirement guarantees our access to organization information: it does 
not impose an obligation for routine organization submission of 
information. At this time, we do not anticipate requesting information 
other than that relating to the standard measures and performance 
improvement projects discussed above.

External Review (Sec. 422.154)

    Except as provided in paragraph (c) of Sec. 422.154, each M+C 
organization must, for each M+C plan it operates, have an agreement 
that meets the provisions of this section, with an independent quality 
review and improvement organization (review organization) approved by 
HCFA to perform functions of the type described in 42 CFR part 466 of 
this chapter.
    Most M+C organizations must have an agreement with a review 
organization approved by HCFA to perform functions of the type 
described in 42 CFR part 466. A similar requirement already exists for 
Medicare contracting HMOs, at Sec. 466.72. The burden estimate prepared 
for OMB submission #0938-0445 would also apply to the new requirement. 
The currently approved burden associated with this requirement on the 
organizational level is 10 hours every three years.
    In the near future HCFA will resubmit this collection to OMB for 
approval for use by M+C organizations.

Compliance Deemed on the Basis of Accreditation (Sec. 422.156)

    An M+C organization deemed to meet Medicare requirements must: (1) 
Submit to surveys by HCFA to validate its accreditation organization's 
accreditation process, and (2) authorize its accreditation organization 
to release to HCFA a copy of its most recent accreditation survey, 
together with any survey-related information that HCFA may require 
(including corrective action plans and summaries of unmet HCFA 
requirements).
    The burden associated with this requirement is captured below in 
Sec. 422.158.

Accreditation Organizations (Sec. 422.157)

    An accreditation organization approved by HCFA must undertake the 
following activities on an ongoing basis: (1) Provide to HCFA in 
written form and on a monthly basis all of the information required in 
paragraphs (c)(1)(i) through (c)(1)(v) of Sec. 422.157, (2) Within 30 
days of a change in HCFA requirements, submit to HCFA all of the 
information required in paragraphs (c)(2)(i) through (c)(2)(iii) of 
Sec. 422.157, (4) Within 3 days of identifying, in an accredited M+C 
organization, a deficiency that poses immediate jeopardy to the 
organization's enrollees or to the general public, give HCFA written 
notice of the deficiency, and (5) Within 10 days of HCFA's notice of 
withdrawal of approval, give written notice of the withdrawal to all 
accredited M+C organizations. The burden associated with this 
requirement is captured below in Sec. 422.158.

Procedures for Approval of Accreditation as a Basis for Deeming 
Compliance (Sec. 422.158)

    A private, national accreditation organization applying for 
approval must furnish to HCFA all of the information and materials 
referenced in this section. However, when reapplying for approval, the 
organization need furnish only the particular information and materials 
requested by HCFA.
    The BBA allows HCFA to deem that a M+C organization meets certain 
Medicare requirements if that organization is accredited by an 
accreditation organization approved by HCFA. We expect that four 
national accreditation organizations will eventually be approved. The 
application and oversight procedures that we have developed for deeming 
in the managed care arena mirror those already in place in the fee-for-
service arena as currently approved under OMB # 0938-0690. Therefore, 
much of the burden estimate prepared for the fee-for-service deeming 
regulations in 42 CFR part 488, Subpart A, would also apply here. The 
initial application burden associated with obtaining deeming authority 
is 96 hours every six years. Since we anticipate that four 
organizations will apply, the total burden is 386 hours over a six year 
period. The ongoing burden of supplying HCFA with data on the status of 
its deemed facilities is estimated to be 48 annual hours per deeming 
organization for a total annual burden of 192 hours. In the near future 
HCFA will resubmit this collection to OMB for approval of deeming in 
the managed care arena use.

Participation Procedures (Sec. 422.202)

    An M+C organization that operates a coordinated care plan or 
network MSA must provide for the participation of individual health 
care professionals and of the management and members of groups through 
reasonable written procedures that include the following; (1) written 
notice of rules of participation such as terms for payment, utilization 
review, quality improvement programs, credentialing, data reporting, 
confidentiality, guidelines or criteria for the furnishing of 
particular services, and other rules related to administrative policy, 
(2) written notice of material changes in participation rules before 
the changes are put into effect, (3) written notice of participation 
decisions that are adverse to health care professionals, (4) a process 
for appealing adverse

[[Page 35058]]

decisions, including the right of physicians and other health care 
professionals to present information and their views on the decision.
    The M+C organization must maintain documentation demonstrating 
that: (1) practice guidelines and utilization management guidelines 
meet the requirements of (1)(i) through (iv) of this section, (2) the 
guidelines have been communicated to providers and, as appropriate, to 
enrollees, (3) decisions with respect to utilization management, 
enrollee education, coverage of services, and other areas in which the 
guidelines apply are consistent with the guidelines, and (4) an M+C 
organization that operates an M+C plan through subcontracted physician 
groups or other subcontracted networks of health care professionals 
provided that the participation procedures in this section apply 
equally to physicians and other health care professionals within those 
subcontracted groups.
    The burden associated with these requirements is the time required 
to maintain documentation demonstrating that the requirements have been 
met and, as necessary, the time necessary to communicate the guidelines 
to providers and enrollees. HCFA believes that these requirements are 
reasonable and customary business practices and the burden of meeting 
these requirements is exempt from the PRA as stipulated under 5 CFR 
1320.3(b)(2). Therefore, we are assigning one token hour of burden to 
these requirements. We explicitly solicit comments on the burden 
associated with meeting these requirements.

Participation Contracts: Requirements and Prohibitions (Sec. 422.204)

    An M+C organization that operates a coordinated care plan or 
network MSA plan that provides benefits through contracting health care 
professionals must provide notice to contracting professionals when the 
organization denies, suspends, or terminates their agreement with the 
professional and include (1) the reason for the action, (2) the 
standards and the profiling data the organization used to evaluate the 
professionals, (3) the numbers and mix of health care professionals 
needed for the organization to provide adequate access to services, and 
(4) the professional's right to appeal the action and the timing for 
requesting a hearing. This is a new requirement.
    The burden associated with this requirement is the time required 
for organization to prepare a written notification of the denial, 
suspension, or termination of their agreement with the organization. In 
discussions with HCFA plan managers, it was predicted that .5 percent 
of all organizations (approximately 2 organizations) would find it 
necessary to take such action for about 1 percent of their contracted 
professionals within a single year and if the organization was already 
established and doing business. The range of number of contracted 
professionals extends from 3 contracted professionals to 67,000. 
Excluding outliers on both ends of the range, we estimate that an 
organization contracts with an average of 3,000 health care 
professionals. Using an estimate of 10 minutes per instance to generate 
and furnish a notice of such action, the total burden on known 
contractors (350) would be 2 organizations * 30 * 10 minutes = 600 
minutes or 10 hours annually.
    In addition, HCFA expects to receive approximately 100 additional 
applications for contracts with new entities to be processed in 1998 
for 1999. For organizations creating new networks, they would probably 
all have at least one instance of denial the first year affecting 
approximately 1 percent of the number of contracting professionals. 
Using an estimate of 10 minutes per instance to generate and furnish a 
notice of such action, the total burden on new contractors would be 100 
organizations * 30 * 10 minutes = 30,000 minutes or 500 hours. The 
total burden with current applications and expected applications for 
contracts would be 510 hours annually.
    The number of new organizations is expected to increase by 100, on 
an annual basis creating an expected burden for current contracts 
[350(*.005(organization-rounded to the nearest whole number) *30*10)/60 
= ]10 hours + new contracts [100*30*10 /60 =]500 hours = 510 hours.
    An M+C organization is required to notify any licensing or 
disciplinary bodies or other appropriate authorities when it suspends 
or terminates a contract with a health care professional because of 
deficiencies in the quality of care provided by the professional.
    The burden associated with this requirement is the time required 
for the organization to prepare a written notification to the 
appropriate authorities. No exact data is available to estimate how 
often this situation might occur. HCFA estimates that this situation 
might occur in 3 percent of the M+C organizations once during an annual 
period. The amount of time estimated to prepare the written 
notification is 10 minutes. The annual burden associated with this 
requirement is estimated to be [450 * .03 * 1 *10/60] = 2.25 hours.

Interference With Health Care Professionals' Advice to Enrollees 
Prohibited (Sec. 422.206)

    Section 422.206 prohibits the M+C organization from restricting the 
provision of treatment advice by health care professionals to 
enrollees. However, the prohibition against interference is not 
construed as requiring counseling by a professional or a referral to a 
service by that professional, if there is an objection based on moral 
and religious grounds. Section 422.206 implements a new disclosure 
requirement and requires M+C organizations to notify HCFA during the 
application process, and later to all current and prospective 
enrollees, through appropriate written means, if the organization has 
such a conscience protection policy regarding counseling in effect or 
if the policy is changed subsequent to the application. The expected 
number of M+C organizations exercising this option is not expected to 
exceed 10 in any given year. The amount of burden imposed in the 
application process, which is captured in the application burden and in 
the preparation of the contents of the subscriber agreement or member 
handbook or a subsequent written notice to enrollees is reflected above 
in Sec. 422.6 and Sec. 422.64.

Physician Incentive Plans: Requirements and Limitations (Sec. 422.208)

    An M+C organization must conduct periodic surveys of current and 
former enrollees where substantial financial risk exists.
    The burden associated with this requirement is captured below in 
Sec. 422.210.

Disclosure of Physician Incentive Plans (Sec. 422.210)

    Each M+C organization must provide to HCFA descriptive information 
about its physician incentive plan in sufficient detail to enable HCFA 
to determine whether that plan complies with the requirements of 
Sec. 422.208. Reporting should be on the HCFA PIP Disclosure Form (OMB 
No. 0938-0700). An M+C organization must disclose annually to HCFA the 
physician incentive arrangements that are effective at the start of 
each year.
    Sections 422.208 and 422.210 require disclosure of physician 
incentive plan information to HCFA or to States and to Medicare 
beneficiaries and the enrollee surveys required when plans put 
providers at substantial risk. This collection of information, 
Incentive Arrangement Form HCFA-R-201 and supporting regulations, used 
to monitor

[[Page 35059]]

physician incentive plans on an annual basis, is approved under OMB # 
0938-0700. In the near future HCFA will resubmit this collection to OMB 
for approval for use by M+C organizations.

Special Rules for M+C Private Fee-for-Service Plans (Sec. 422.216)

    The M+C organization must make information on its payment rates 
available to providers that furnish services that may be covered under 
the M+C private fee-for-service plan.
    We expect the M+CPFFS plan to provide written information to 
contracting providers and to make the information available via a 
website or toll free number to noncontracting providers who inquire. 50 
M+CPFFS plans (estimate of M+CPFFS plans in out years; in first year we 
may have none) will be required to provide 20,000 annual responses 
(about 1 million providers nationwide divided by 50 M+CPFFS plans) at 
an estimated 5 minutes per disclosure (average of phone calls, website 
time, mailing time for hard copies to contracting providers) for a 
total annual burden of 1,667 hours per provider and an overall annual 
burden of 83,350 hours.
    An M+C organization that offers an M+C fee-for-service plan must 
enforce the limit specified in paragraph (b)(1) of this section. 
Specifically, an M+C organization that offers an M+C private fee-for-
service plan must monitor the amount collected by non-contract 
providers to ensure that those amounts do not exceed the amounts 
permitted to be collected under paragraph (b)(2) of this section. The 
M+C organization must develop and document violations specified in 
instructions and must forward documented cases to HCFA.
    M+C private fee-for-service plans must investigate and send to HCFA 
documentation of excessive charges by providers. It is estimated that 
50 M+C private fee-for-service plans will have 10 cases per year, at 20 
hours per case (to contact the enrollee who complained, acquire and 
review documents, contact the provider, prepare report to HCFA). 
Therefore, the total burden associated with this requirement is 10 
cases  x  20 hours = 200 annual hours per plan, for a total annual 
burden of 10,000 hours.
    An M+C organization that offers an M+C private fee-for-service plan 
must provide to plan enrollees, for each claim filed by the enrollee or 
the provider that furnished the service, an appropriate explanation of 
benefits. The explanation must include a clear statement of the 
enrollee's liability for deductibles, coinsurance, copayment, and 
balance billing.
    This requirement is akin to the Medicare EOMB or summary statement 
and must be furnished on a regular basis for every claim paid or denied 
by the M+C private fee-for-service plan. It is estimated that 3 million 
notices will be disseminated by M+C private fee-for-service plans. This 
estimate is determined by; multiply 5000 enrollees per plan by 12 (one 
notice per month) or 60,000, multiplied by an estimated 50 plans for a 
total of 3 million notices. At an estimated 3 minutes of burden per 
notice, the total burden is 9 million minutes or 150,000 burden hours. 
On a plan level the average annual burden is estimated to be 3,000 
hours.
    In its terms and conditions of payment to hospitals, organization 
the hospital is required, if it imposes balance billing, to provide to 
the enrollee, before furnishing any services for which balance billing 
could amount to not less than $500: (1) Notice that balance billing is 
permitted for those services; (2) a good faith estimate of the likely 
amount of balance billing, based on the enrollees presenting condition; 
and (3) the amount of any deductible, coinsurance, and copayment that 
may be due in addition to the balance billing amount.
    It is estimated that 20,000 of 25,000 estimated hospitalizations 
will require these notices. The $500 tolerance will be exceeded each 
time the plan payment rate for the inpatient stay would exceed 
$3333.33--which is probably almost all of them--if the plan lets the 
hospital balance bill. At 5 minutes of burden per notice times 20,000 
annual notices, the total burden is 100,000 minutes or 1,667 hours of 
burden.

Encounter Data (Sec. 422.257)

    Each M+C organization must submit to HCFA (in accordance with HCFA 
instructions) all data necessary and as stipulated under this section 
to characterize the context and purpose of each encounter between a 
Medicare enrollee and a provider, supplier, physician, or other 
practitioner.
    The Act requires that the collection of inpatient hospital data for 
discharges beginning on or after July 1, 1997 and allows the collection 
of other data no earlier than July 1, 1998. The statutory language is 
clearly tied to the creation of risk-adjusted payment rates, as defined 
at Sec. 422.256 (c) and (d) of this rule. Requirements concerning 
collection of encounter data apply to M+C organizations with respect to 
all their M+C plans, including medical savings accounts (MSAs) and 
private fee-for-service plans.
    M+C organizations must submit data as follows: (1) Beginning on a 
date determined by HCFA, inpatient hospital care data for all 
discharges that occur on or after July 1, 1997.
    These requirements are approved under OMB # 0938-0711, with an 
expiration date of July 31, 1998. The burden associated with submitting 
data for inpatient hospital care data for all discharges that occur on 
or after July 1, 1997, is currently .5 minutes per EMC bill and 1 
minute per hard copy bill. Although there are currently three options 
for submitting bills, on average the total annual burden per plan is 
46.5 hours, with an overall burden of annual 32,833 hours.
    HCFA will provide advance notice to M+C organizations to collect 
and submit: (1) Physician, outpatient hospital, SNF, and HHA data 
beginning no earlier than October 1, 1999; and (2) all other data HCFA 
deems necessary beginning no earlier than October 1, 2000. We estimate 
the following burden for each category based on a projection of 15 
seconds per claim: Physician: 72 million claims = 300,000 hours 
Outpatient hospital: 12 million claims = 50,000 hours HHA, Hospice, 
SNF: 2.4 million claims = 10,000 hours All other: 24 million claims = 
100,000 hours
    We will implement this provision by providing for direct 
transmission from the provider to HCFA with common PC-based technology. 
It should be noted that prior to implementing the requirement for M+C 
organizations to collect and submit physician, outpatient hospital, 
SNF, and HHA data HCFA will amend OMB # 0938-0711 and seek OMB PRA 
approval. As part of the PRA process the public will be given several 
opportunities to comment, via Federal Register notification, on the 
proposed collection prior to OMB approval and implementation.
    M+C organizations and their providers and practitioners will be 
required to submit medical records for the validation of encounter 
data, as prescribed by HCFA.
    Currently HCFA plans on implementing this requirement pursuant to 
an administrative action or audit, based on data submitted to HCFA or 
one of its agents. Therefore, these requirements are currently not 
subject to the PRA as defined in 5 CFR 1320.4.
    However, if HCFA were to implement these requirements on a 
prospective basis, as part of a program oversight activity, we will 
amend OMB # 0938-0711 and seek OMB PRA approval. As part of the PRA 
process the public will be given several opportunities to comment, via 
Federal Register notification, on the proposed collection prior to OMB 
approval and implementation.

[[Page 35060]]

Special Rules for Beneficiaries Enrolled in M+C MSA Plans 
(Sec. 422.262)

    An entity that acts as a trustee for an M+C MSA must: (1) Register 
with HCFA, (2) certify that it is a licensed bank, insurance company, 
or securities broker, or other entity qualified, under sections 
408(a)(2) or 408(h) of the IRS Code, to act as a trustee, (3) agree to 
comply with the M+C MSA provisions of section 138 of the IRS Code of 
1986; and (4) Provide any other information that HCFA may require.
    An M+C organization offering an M+C MSA plan will have to register 
with HCFA for each beneficiary enrolled. This will require a short form 
that would take no more than five minutes to fill out. The Act limits 
the number of MSA enrollees to 390,000; therefore, with maximum 
participation, registration with HCFA would take 32,500 hours. (i.e., 
390,000 registration forms at 5 minutes each.)
    Items 2 and 3, above, are IRS requirements and entail no reporting 
requirements for HCFA. Under item 4, above, we anticipate no further 
M+C MSA reporting requirements at this time.

Special Rules for Hospice Care (Sec. 422.266)

    An M+C organization that has a contract under Subpart K of part 422 
must inform each Medicare enrollee eligible to elect hospice care under 
section 1812(d)(1) of the Act about the availability of hospice care 
(in a manner that objectively presents all available hospice providers, 
including a statement of any ownership interest in a hospice held by 
the M+C organization or a related entity) if: (1) A Medicare hospice 
program is located within the organization's service area, or (2) It is 
common practice to refer patients to hospice programs outside that 
area.
    At present, one-twentieth of one percent (three thousand) of 
Medicare managed care enrollees have elected the hospice option. We 
estimate that informing beneficiaries about their hospice choices would 
take about ten minutes. For three thousand beneficiaries, this 
represents a total burden of 500 hours. On a organizational level the 
annual burden would be 500 hours / 450 M+C organizations (100 new/350 
current) = 1.2 annual burden hours per entity.

Submission of Proposed Premiums and Related Information (Sec. 422.306)

    Not later than May 1 of each year, each M+C organization and any 
organization intending to contract as an M+C organization in the 
subsequent year must submit to HCFA, in the manner and form prescribed 
by HCFA, for each M+C plan it intends to offer in the following year: 
(1) The information specified in paragraph (b), (c), or paragraph (d) 
of this section for the type of M+C plan involved, and (2) The 
enrollment capacity (if any) in relation to the M+C plan and area.
    This collection effort will require the submission of benefit and 
pricing forms that will be used to price the benefit package sold and 
describe the benefit package being priced to Medicare beneficiaries. 
Both collection efforts will be completed at the same time, in order to 
approve both the benefit and pricing structure of a particular benefit 
package.
    Organizations submitting benefit and pricing forms would include 
all M+C organizations plus any organization intending to contract with 
HCFA as a M+C organization.
    The estimate of the hour burden of this collection of information 
is as follows:
    Pricing portion of the Adjusted Community Rate Proposal; 1 response 
per year per respondent  x  450 (350 current/100 new) annual 
respondents  x  100 hours of estimated burden per response = 45,000 
total annual burden hours.
    The Plan Benefit Package portion of the Adjusted Community Rate 
Proposal; 1 response per year per respondent  x  450 (350 current/100 
new) annual respondents  x  20 hours of estimated burden per response = 
9,000 total annual burden hours.

Requirement for Additional Benefits (Sec. 422.312)

    An M+C organization's request to make a withdrawal from the 
stabilization fund established for an M+C plan to be used during a 
contract period must be made in writing when the M+C organization 
notifies HCFA under Sec. 422.306 of its proposed premiums, other cost-
sharing amounts, and related information in preparation for its next 
contract period.
    The burden associated with this requirement is captured above in 
Sec. 422.306.

State Licensure Requirement (Sec. 422.400)

    Except in the case of a PSO granted a waiver under Subpart H of 
part 422, each M+C organization must: (1) Be licensed under State law, 
or otherwise authorized to operate under State law, as a risk-bearing 
entity (as defined in Sec. 422.2) eligible to offer health insurance or 
health benefits coverage in each State in which it offers one or more 
M+C plans; (2) If not commercially licensed, obtain certification from 
the State that the organization meets a level of financial solvency and 
such other standards as the State may require for it to operate as an 
M+C organization; and (3) Demonstrate to HCFA that--(i) The scope of 
its license or authority allows the organization to offer the type of 
M+C plan or plans that it intends to offer in the State; and (ii) If 
applicable, it has obtained the State certification required under 
Sec. 422.400(b).
    The regulations at Sec. 422.400 require health plans to demonstrate 
to HCFA that they meet the State licensure requirement of section 
1855(a)(1) of the Social Security Act. As explained in the preamble, 
organizations must meet both the basic requirement of State licensure 
as a risk-bearing entity, as well as the requirement that the scope of 
licensure be consistent with the type (or types) of M+C plan(s) the 
organization will be offering. We are asking new organizations (i.e., 
other than current contractors) to submit, as part of the process of 
applying for an M+C contract, a written certification showing the 
organization's licensure status. As of the date of publication of this 
interim final regulation, we are working with the National Association 
of Insurance Commissioners to develop a form that may be used to 
satisfy this requirement. A written statement containing the same type 
of information that is requested in the form we are developing would 
also suffice to show compliance with the statutory requirement.
    The written certification is a combination of information provided 
by the organization proposing to enter into an M+C contract, and 
information to be provided by the appropriate State regulatory body 
(e.g. the State department of insurance). This is necessary because the 
written certification serves two purposes. First, it provides us with 
written evidence of compliance with the State licensure requirement for 
all M+C plans an organization may wish to offer. Second, it serves to 
inform State regulators of the intention of organizations doing 
business within the State with regard to M+C offerings. The 
certification process enables the State to ensure that the organization 
is complying with the State's standards for licensure (for example, as 
noted in the preamble, an HMO that proposes to offer a Medicare point-
of-service (POS) product may be informed by the State that HMO 
licensure does not allow an organization to offer POS products, and 
that licensure as an indemnity insurer is required in that State in 
order to offer a POS product).
    The certification will have to be completed (or other written

[[Page 35061]]

documentation provided) only once by each M+C organization, unless the 
nature of the M+C plan(s) offered by the organization differ from the 
original certification (e.g., an HMO may decide at some later date, 
after its initial application to offer a POS product--though even in 
such a case, a new certification may not be necessary to the extent 
that we are aware that applicable State law does not require a 
different licensure status). We estimate that the time burden for the 
M+C organization is 10 minutes or less for completion of the 
certification form, or preparation of alternative written 
documentation. Similarly, we would estimate, that the time burden for 
the State regulatory body should be 15 minutes or less (including time 
necessary to verify information from electronic or paper files).
    Because we are estimating that there will be an average of 100 new 
applicants per year for M+C contracts over the next 5 years, and 
because this requirement will be imposed for nearly all organizations 
on a one-time basis, we estimate the annual total burden to be 25 
minutes per respondent  x  100 annual responses for a total of 42 
annual hours.

General Provisions (Sec. 422.501)/Contract Provisions (Sec. 422.502)

    In order to qualify as an M+C organization, enroll beneficiaries in 
any M+C plans it offers, and be paid on behalf of Medicare 
beneficiaries enrolled in those plans, an M+C organization must enter 
into a contract with HCFA.
    Since the contract requirements associated with these sections are 
reflective the requirements and associated burden set forth in other 
sections of Part 422, the remaining burden associated with the 
requirements of these sections is the time required for a M+C 
organizations to read and sign the contract. It is estimated that it 
will take 100 M+C organizations on an annual basis, 2 hours each for a 
total annual burden of 200 hours. However, we solicit comment on the 
burden associated with these sections as it relates to the burden of 
meeting the requirements of the contract as reflected elsewhere in this 
regulation.

Nonrenewal of Contract (Sec. 422.506)

    An M+C organization that does not intend to renew its contract, 
must notify HCFA, each Medicare enrollee, and the general public, 
before the end of the contract. Based on current experience HCFA 
receives 10 notifications of non-renewal on an annual basis. We 
estimate that the burden of notifying HCFA is 2 hours per notification 
for an annual burden of 20 hours.
    We estimate the burden associated with notifying enrollees would 
take 16 hours per plan to draft and disseminate through mass mailings 
information of changes to affected beneficiaries for an annual burden 
of 160 hours.
    We anticipate notification to the general public would be through 
the same notice published in a general circulation newspaper and would 
be an additional burden of 4 hours per organization for an annual 
burden of 40 hours.

Modification or Termination of Contract by Mutual Consent 
(Sec. 422.508)

    An M+C organization that modifies or terminates it contract by 
written mutual consent must notify HCFA, each Medicare enrollee, and 
the general public, within timeframes specified by HCFA. Based on 
current experience HCFA receives less then 10 notifications of 
Modification or termination on an annual basis that would require 
notification of Medicare enrollees or the general public. However, we 
estimate that the burden of notifying HCFA is 2 hours per notification 
for an annual burden of 20 hours.

Termination of Contract by HCFA (Sec. 411.510)

    If HCFA decides to terminate a contract for reasons other than the 
grounds specified in Sec. 422.510(a)(5), the M+C organization notifies 
its Medicare enrollees and the general public by publishing a notice in 
one or more newspapers of general circulation in each community or 
county located in the M+C organization's geographic area of the 
termination by mail and at least 30 days before the effective date of 
the termination. Based upon current experience this requirement is 
imposed pursuant to an administrative action against fewer than 10 
organizations on an annual basis. Therefore, these requirements are not 
subject to the PRA as defined in 5 CFR 1320.4 and 5 CFR 1320.3(c).

Termination of Contract by the M+C Organization (Sec. 422.512)

    The M+C organization may terminate the M+C contract if HCFA fails 
to substantially carry out the terms of the contract. The M+C 
organization must give advance notice as follows as required in 
paragraphs (a)(1) through (a)(3) of Sec. 422.512. In summary, an M+C 
organization that does not intend to renew its contract, it must notify 
HCFA, each Medicare enrollee, and the general public, before the end of 
the contract.
    Based upon current experience this requirement is imposed on fewer 
than 10 organizations on an annual basis. Therefore, these requirements 
are not subject to the PRA as defined in 5 CFR 1320.3(c).

Reporting Requirements (Sec. 422.516)

    Each M+C organization must report to HCFA annually, within 120 days 
of the end of its fiscal year (unless for good cause shown, HCFA 
authorizes an extension of time), the requirements in Sec. 422.516 
(b)(1) through (b)(3). The burden associate with these requirements is 
currently captured under form HCFA-906, OMB #0938-0469. Although the 
burden associated with the completion of the HCFA-906 differs by 
provider type, on average, the annual burden per provider is 17 annual 
hours, for a total burden of 3,130 hours. In the near future HCFA will 
resubmit this collection to OMB for approval for use by M+C 
organizations.
    For any employees' health benefits plan that includes an M+C 
organization in its offerings, the M+C organization must furnish, upon 
request, the information the plan needs to fulfill its reporting and 
disclosure obligations under the Employee Retirement Income Security 
Act of 1974 (ERISA). The M+C organization must furnish the information 
to the employer or the employer's designee, or to the plan 
administrator, as the term ``administrator'' is defined in ERISA.
    These reporting requirements are currently imposed by the 
Department of Treasury and therefore impose no addition burden.
    Each M+C organization must make the information reported to HCFA 
under Sec. 422.502(f)(1) available to its enrollees upon reasonable 
request. This burden associated with this requirement is imposed 
pursuant to the dissemination of enrollment/disenrollment information 
referenced in Subpart B of this regulation.
    Each organization must notify HCFA of any loans or other special 
financial arrangements it makes with contractors, subcontractors and 
related entities.
    The burden associate with these requirements is currently captured 
under form HCFA-906, OMB #0938-0469. In the near future HCFA will 
resubmit this collection to OMB for approval for use by M+C 
organizations.

Change of Ownership (Sec. 422.550)

    Sec. 422.550 is amended to require in paragraph (b) that an M+C 
organization must provide updated financial information and a 
discussion of the financial and solvency impact of the change of 
ownership on the surviving

[[Page 35062]]

organization. The burden associated with these requirements, which is 
estimated to take 10 hours per respondent  x  10 annual respondents, is 
currently captured under National Data Reporting Requirements, form 
HCFA-906, OMB #0938-0469. In the near future HCFA will resubmit this 
collection to OMB for approval for use by M+C organizations.

Sec. 422.562 General provisions.

    An M+C organization, with respect to each M+C plan that it offers, 
must establish and maintain written procedures related to; (1) the 
grievance procedures as described in Sec. 422.564, (2) making timely 
organization determinations, (3) an appeal process that meets the 
requirements of this Subpart for issues that involve organization 
determinations.
    In addition, an M+C organization must ensure that all enrollees 
receive written information about the grievance and appeal procedures 
that are available to them through the M+C organization and complaint 
process available to the enrollee under the PRO process as set forth 
under section 1154(a)(14) of the Act.
    While we believe the initial burden associated with meeting these 
requirements is captured elsewhere in this regulation, we solicit 
comment on the ongoing burden associated with maintaining and 
disseminating the information requirements set forth in this section.

Standard Timeframes and Notice Requirements for Organization 
Determinations (Sec. 422.568)

    When a party has made a request for a service, the M+C organization 
must notify the enrollee of its determination as expeditiously as the 
enrollee's health condition requires, but no later than 30 calendar 
days after the date the organization receives the request for a 
standard organization determination.
    If an M+C organization decides to deny service or payment in whole 
or in part, it must give the enrollee written notice of the 
determination.
    The burden associated with this requirement is discussed below in 
Sec. 422.572.

Expediting Certain Organization Determinations (Sec. 422.570)

    To ask for an expedited determination, an enrollee or a health care 
professional must submit an oral or written request directly to the M+C 
organization or, if applicable, to the entity responsible for making 
the determination, as directed by the M+C organization. A physician may 
provide oral or written support for a request for an expedited 
determination.
    If an M+C organization denies a request for expedited 
determination, it must give the enrollee prompt oral notice of the 
denial and follow up, within 2 working days, with a written letter 
that: (1) Explains that the M+C organization will process the request 
using the 30-calendar-day timeframe for standard determinations, (2) 
informs the enrollee of the right to file a grievance if he or she 
disagrees with the M+C organization's decision not to expedite; and (3) 
provides instructions about the grievance process and its timeframes.
    If an M+C organization grants a request for expedited 
determination, it must make the determination and give notice in 
accordance with Sec. 422.572.
    The burden associated with this requirement is discussed below in 
Sec. 422.572.

Timeframes and Notice Requirements for Expedited Organization 
Determinations (Sec. 422.572)

    Except as provided in paragraph (b) of Sec. 422.572, an M+C 
organization that approves a request for expedited determination must 
make its determination and notify the enrollee (and the physician as 
warranted by the patient's medical condition or situation) of its 
decision, whether adverse or favorable, as expeditiously as the 
enrollee's health condition requires, but not later than 72 hours after 
receiving the request.
    The M+C organization may extend the 72-hour deadline by up to 14 
calendar days if the enrollee requests the extension or if the 
organization finds that it needs additional information and the delay 
is in the interest of the enrollee (for example, the receipt of 
additional medical evidence may change an M+C organization's decision 
to deny). The M+C organization must notify the enrollee of its 
determination before or immediately upon expiration of the extension.
    If the M+C organization first notifies an enrollee of its expedited 
determination orally, it must mail written confirmation to the enrollee 
within 2 working days of the oral notification.
    Organizations that contract with HCFA under the M+C program are 
required to implement procedures for making timely organization 
determinations and for resolving reconsiderations and other levels of 
appeals with respect to these determinations. In general, organization 
determinations involve whether an enrollee is entitled to receive a 
health service or the amount the enrollee is expected to pay for that 
service. A reconsideration consists of a review of an adverse 
organization determination (a decision by an M+C organization that is 
unfavorable to the M+C enrollee, in whole or in part) by either the M+C 
organization itself or an independent review entity. We use the term 
``appeal'' to denote any of the procedures that deal with the review of 
organization determinations, including reconsiderations, hearings 
before administrative law judges (ALJs), reviews by the Departmental 
Appeals Board (DAB) and judicial review. As discussed in detail in 
section II.M of this preamble, the organization determination and 
appeal requirements for M+C organizations that are set forth in this 
interim final rule are largely based on the existing rules for managed 
care organizations under Part 417, Subpart Q, Beneficiary Appeals.
    Sections 422.568, 422.570, and 422.572 contain the applicable 
requirements for initial organization determinations, which include 
submission of an oral or written request from an enrollee, and 
notification procedures that the M+C organization must follow when it 
makes a determination. We estimate that approximately 20 percent of the 
approximately 1 million M+C enrollees may make a request for an 
organization determination in a year, with an estimated burden of 2 
minutes per request. Estimated notification burden associated with 
these requests is 5 minutes per request. The total overall annual 
burden for enrollee requests and organizational notification burden is 
33,333 hours and 83,333 hours respectively.

Request for a Standard Reconsideration (Sec. 422.582)

    A party to an organization determination must ask for a 
reconsideration of the determination by filing a written request with: 
(1) The M+C organization that made the organization determination; (2) 
an SSA office; or (3) in the case of a qualified railroad retirement 
beneficiary, an RRB office.
    If the 60-day period in which to file a request for a 
reconsideration has expired, a party to the organization determination 
may file a request for reconsideration with the M+C organization, SSA, 
or an RRB office. If SSA or RRB receives a request, it forwards the 
request to the M+C organization for its reconsideration. The request 
for reconsideration and to extend the timeframe must: (1) Be in 
writing; and( 2) state why the request for reconsideration was not 
filed on time.

[[Page 35063]]

    The party who files a request for reconsideration may withdraw it 
by filing a written request for withdrawal at one of the places listed 
in paragraph (a) of this section.
    The burden associated with this requirement is discussed below in 
Sec. 422.602.

Expediting Certain Reconsiderations (Sec. 422.584)

    To ask for an expedited reconsideration, an enrollee or a health 
care professional (on behalf of an enrollee) must submit an oral or 
written request directly to the M+C organization or, if applicable, to 
the entity responsible for making the reconsideration, as directed by 
the M+C organization. A physician may provide oral or written support 
for a request for an expedited reconsideration.
    If an M+C organization denies a request for expedited 
reconsideration, it must take the following actions: (1) Automatically 
transfer a request to the standard timeframe and make the determination 
within the 45-day timeframe established in Sec. 422.590(a); (2) give 
the enrollee prompt oral notice, and follow up, within 2 working days, 
with a written letter that--(i) Explains that the M+C organization will 
process the enrollee's request using the 45-day timeframe for standard 
reconsiderations, (ii) informs the enrollee of the right to file a 
grievance if he or she disagrees with the organization's decision not 
to expedite, and (iii) provides instructions about the grievance 
process and its timeframes.
    If an M+C organization grants a request for expedited 
reconsideration, it must conduct the reconsideration and give notice in 
accordance with Sec. 422.590(d).
    The burden associated with this requirement is discussed below in 
Sec. 422.602.

Timeframes and Responsibility for Reconsiderations (422.590)

    If the M+C organization makes a reconsidered determination that 
affirms, in whole or in part, its adverse organization determination, 
it must prepare a written explanation and send the case file to the 
independent entity contracted by HCFA as expeditiously as the 
enrollee's health condition requires, but no later than 45 calendar 
days from the date it receives the request for a standard 
reconsideration. The organization must make reasonable and diligent 
efforts to assist in gathering and forwarding information to the 
independent entity.
    If the M+C organization affirms, in whole or in part, its adverse 
organization determination, it must prepare a written explanation and 
send the case file to the independent entity contracted by HCFA no 
later than 60 calendar days from the date it receives the request for a 
standard reconsideration. The organization must make reasonable and 
diligent efforts to assist in gathering and forwarding information to 
the independent entity.
    If the M+C organization fails to provide the enrollee with a 
reconsidered determination within the timeframes specified in paragraph 
(a) or paragraph (b) of this section, or to obtain a good cause 
extension described in paragraph (e) of this section, this failure 
constitutes an affirmation of its adverse organization determination, 
and the M+C organization must submit the file to the independent entity 
in the same manner as described under paragraphs (a)(2) and (b)(2) of 
this section.
    The M+C organization may extend the 72-hour deadline by up to 14 
calendar days if the enrollee requests the extension or if the 
organization finds that it needs additional information and the delay 
is in the interest of the enrollee (for example, the receipt of 
additional medical evidence may change an M+C organization's decision 
to deny). The M+C organization must notify the enrollee of its 
determination before or immediately upon expiration of the extension.
    If the M+C organization first notifies an enrollee orally of a 
completely favorable expedited reconsideration, it must mail written 
confirmation to the enrollee within 2 working days.
    If, as a result of its reconsideration, the M+C organization 
affirms, in whole or in part, its adverse expedited organization 
determination, the M+C organization must submit a written explanation 
and the case file to the independent entity contracted by HCFA within 
24 hours. The organization must make reasonable and diligent efforts to 
assist in gathering and forwarding information to the independent 
entity.
    If the M+C organization refers the matter to the independent entity 
as described under this section, it must concurrently notify the 
enrollee of that action.
    If the M+C organization fails to provide the enrollee with the 
results of its reconsideration within the timeframe described in 
paragraph (d) of this section, this failure constitutes an adverse 
reconsidered determination, and the M+C organization must submit the 
file to the independent entity within 24 hours of expiration of the 
timeframe set forth in paragraph (d) of this section.
    The burden associated with this requirement is discussed below in 
Sec. 422.602.

Notice of Reconsidered Determination by the Independent Entity 
(Sec. 422.594)

    When the independent entity makes the reconsidered determination, 
it is responsible for mailing a notice of its reconsidered 
determination to the parties and for sending a copy to HCFA.
    See discussion below.

Request for an ALJ Hearing (Sec. 422.602)

    A party must file a written request for a hearing at one of the 
places listed in Sec. 422.582(a) or with the independent, outside 
entity. The organizations listed in Sec. 422.582(a) forward the request 
to the independent, outside entity, which is responsible for 
transferring the case to the appropriate ALJ hearing office.
    Sections 422.582, 422.584, and 422.590 contain the applicable 
requirements for reconsiderations by an M+C organization of adverse 
organization determinations. The required procedures generally involve 
a written request from an enrollee, preparation of a brief written 
explanation and case file by the M+C organization, and notification of 
the decision by the M+C organization. Only about 0.5 percent of 
organization determinations, [that is, about 20,000 cases per year], 
ever reach the reconsideration stage. For these cases, we estimate a 
burden on the requesting enrollee of approximately 20 minutes per case 
and a burden on the M+C organization of approximately 4 hours, 
including both information collection and notification. Note that 
Sec. 422.590 specifies that if an M+C organization affirms, in whole or 
in part, its adverse organization determination, it must forward the 
case to an independent entity contracted by HCFA for further review. We 
estimate that approximately 50 percent (10,000) of reconsidered cases 
result in a decision that is adverse to the enrollee, and thus review 
by the independent entity. For these cases, we estimate an additional 
burden on the M+C organization of approximately 2 hours per case. Thus, 
the estimated total annual burden on M+C organizations associated with 
reconsiderations is 100,000 hours (4 hours times 20,000 cases plus 2 
hours times 10,000 cases).
    About 30 percent of reconsideration requests that reach the 
independent entity level are resolved fully in favor of the enrollee. 
For the other 7,000 cases, an enrollee may pursue additional appeals, 
beginning with an appeal to an ALJ. Only about 10 percent of these 
cases are appealed to the ALJ, and for these 700 cases, we estimate an

[[Page 35064]]

incremental burden of 20 minutes on the enrollee to make the request 
for an appeal under Sec. 422.602, and 2 hours on the M+C organization 
for additional information collection associated with the appeal. 
Finally, under Secs. 422.608 and 422.612, enrollees or M+C 
organizations may appeal ALJ decisions to the Departmental Appeal 
Board, and subsequently request judicial review. We would estimate an 
incremental burden of an additional 2 to 4 hours per case, with only 
about 20 DAB cases and 10 judicial review cases per year.

How M+C Organizations Must Notify Enrollees of Noncoverage of Inpatient 
Hospital Care (Sec. 422.620)

    The M+C organization must give the enrollee written notice that 
includes the following: (1) The reason why inpatient hospital care is 
no longer needed, (2) the effective date of the enrollee's liability 
for continued inpatient care, and (3) the enrollee's appeal rights. If 
the M+C organization allows the hospital to determine whether inpatient 
care is necessary, the hospital obtains the concurrence of the 
contracting physician responsible for the enrollee's hospital care or 
of another physician as authorized by the M+C organization, and 
notifies the enrollee, following the procedures set forth in 
Sec. 412.42(c)(3) of this chapter.
    The burden associated with this requirement is discussed below in 
Sec. 422.622.

Requesting Immediate PRO Review of Noncoverage of Inpatient Hospital 
Care (Sec. 422.622)

    For the immediate PRO review process, the enrollee must submit the 
request for immediate review in writing or by telephone to the PRO that 
has an agreement with the hospital under Sec. 466.78 of this chapter by 
noon of the first working day after he or she receives written notice 
that the M+C organization or hospital has determined that the hospital 
stay is no longer necessary.
    Under Sec. 422.620, an M+C organization is required to provide an 
M+C enrollee, before a hospital discharge, with a written notice of 
noncoverage if it decides that inpatient care is no longer necessary. 
Section 422.622 provides the procedures that are to be followed if an 
enrollee by the enrollee and the M+C organization if the enrollee 
wishes to request PRO review of the M+C organization's decision. We 
estimate that there will be no more than 1,000 of these type of cases 
per year under the M+C program. We estimate that the reporting burden 
for an M+C organization to provide written notice of noncoverage to be 
approximately 10 minutes per notice; for an M+C enrollee to complete a 
request for immediate PRO review to be approximately 10 minutes per 
request; and for the M+C organization to submit requested medical 
information to the PRO, to be approximately 2 hours per response.
    In response to a request from the M+C organization, the hospital 
must submit medical records and other pertinent information to the PRO 
by close of business of the first full working day immediately 
following the day the organization makes its request.
    Given that this requirement is imposed pursuant to an 
administrative action against an organization, this requirement is not 
subject to the PRA as defined in 5 CFR 1320.4.

Request for Reconsideration (Sec. 422.650)

    A request for reconsideration must be made in writing and filed 
with any HCFA office within 15 days from the date of the notice of the 
initial determination. Based upon current experience this requirement 
is imposed pursuant to an administrative action against fewer than 10 
organizations on an annual basis. Therefore, these requirements are not 
subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.
    The M+C organization or M+C contract applicant who filed the 
request for a reconsideration may withdraw it at any time before the 
notice of the reconsidered determination is mailed. The request for 
withdrawal must be in writing and filed with HCFA. Based upon current 
experience this requirement is imposed pursuant to an administrative 
action against fewer than 10 organizations on an annual basis. 
Therefore, these requirements are not subject to the PRA as defined in 
5 CFR 1320.3(c) and 5 CFR 1320.4.

Request for Hearing (Sec. 422.662)

    A request for a hearing must be made in writing and filed by an 
authorized official of the applicant entity or M+C organization that 
was the party to the determination under appeal. The request for a 
hearing must be filed with any HCFA office within 15 days after the 
date of receipt of the notice of initial or reconsidered determination.
    Based upon current experience this requirement is imposed pursuant 
to an administrative action against fewer than 10 organizations on an 
annual basis. Therefore, these requirements are not subject to the PRA 
as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Disqualification of Hearing Officer (Sec. 422.668)

    A hearing officer may not conduct a hearing in a case in which he 
or she is prejudiced or partial to any party or has any interest in the 
matter pending for decision.
    If the hearing officer does not withdraw, the objecting party may, 
after the hearing, present objections and request that the officer's 
decision be revised or a new hearing be held before another hearing 
officer. The objections must be submitted in writing to HCFA.
    Based upon current experience these requirements are imposed 
pursuant to an administrative action against fewer than 10 
organizations on an annual basis. Therefore, these requirements are not 
subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Time and Place of Hearing (Sec. 422.670)

    The hearing officer fixes a time and place for the hearing, which 
is not to exceed 30 days from the receipt of the request for the 
hearing, and sends written notice to the parties. The notice also 
informs the parties of the general and specific issues to be resolved 
and information about the hearing procedure.
    Based upon current experience these requirements are imposed 
pursuant to an administrative action against fewer than 10 
organizations on an annual basis. Therefore, these requirements are not 
subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Record of Hearing (Sec. 422.686)

    A complete record of the proceedings at the hearing is made and 
transcribed and made available to all parties upon request. Based upon 
current experience these requirements are imposed pursuant to an 
administrative action against fewer than 10 organizations on an annual 
basis. Therefore, these requirements are not subject to the PRA as 
defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Notice and Effect of Hearing Decision (Sec. 422.690)

    As soon as practical after the close of the hearing, the hearing 
officer issues a written decision that: (1) Is based upon the evidence 
of record, and (2) contains separately numbered findings of fact and 
conclusions of law. And, the hearing officer provides a copy of the 
hearing decision to each party. Based upon current experience these 
requirements are imposed pursuant to an administrative action against 
fewer than 10 organizations on an annual basis. Therefore, these 
requirements are

[[Page 35065]]

not subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Effect of Revised Determination (Sec. 422.698)

    The revision of an initial or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec. 422.662. Based upon current 
experience these requirements are imposed pursuant to an administrative 
action against fewer than 10 organizations on an annual basis. 
Therefore, these requirements are not subject to the PRA as defined in 
5 CFR 1320.3(c) and 5 CFR 1320.4.
    As a note, the public will be afforded several subsequent comment 
periods in future publications of Federal Register notices announcing 
our intention to seek OMB approval of standardized information 
collection requirements such as the ACR and contractor application 
forms 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 for these collection requirements and any 
currently approved forms that are related to 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-1030, 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. Responses to Comments

    Because of the large number of items of correspondence we normally 
receive on a rule, we are not able to acknowledge or respond to them 
individually. We will, however, consider all comments that we receive 
by the date specified in the DATES section of this preamble, and, if we 
proceed with a subsequent document, we will respond to the comments in 
that document.

VIII. Waiver of Proposed Rulemaking and Waiver of Delayed Effective 
Date

    Because the Secretary is exercising discretion in implementing 
sections 1851 through 1857 and section 1859 of the Act, ordinarily we 
would publish a notice of proposed rulemaking and afford a period for 
public comments. Further, we generally provide for final rules to be 
effective no sooner than 30 days after the date of publication unless 
we find good cause to waive the delay. However, section 1856(b)(1) of 
the Act requires that these regulations be published by June 1, 1998, 
and provides that in order to carry out this requirement we may 
promulgate regulations that take effect on an interim basis, after 
notice and pending opportunity for public comment.
    On January 20, 1998, we published a notice in the Federal Register 
in which we requested public comments on the implementation of the M+C 
program. We received approximately 90 items of correspondence in 
response to that notice. Further, on February 4, 1998, we held a public 
meeting to discuss issues and concerns from plans, providers, 
beneficiaries, and other interested parties on the requirements and 
implementation of the Medicare+Choice program. Approximately 600 
individuals representing managed care organizations, local governmental 
agencies, and advocacy groups attended that meeting.
    Because of the need to publish regulations timely and in light of 
the fact that we previously provided opportunity for public comment, we 
find good cause to waive the notice of proposed rulemaking and to issue 
this final rule on an interim basis. We are providing a 90-day comment 
period for public comment. We also find good cause to waive the delay 
in the effective date of this rule.

IX. Effect of the Contract With America Advancement Act of 1996 
(Public Law 104-121)

    This rule has been determined to be a major rule as defined in 
Title 5, United States Code, section 804(2). Ordinarily under 5 U.S.C. 
801, as added by section 251 of Public Law 104-121, a major rule shall 
take effect 60 days after the later of (1) the date a report on the 
rule is submitted to the Congress, or (2) the date the rule is 
published in the Federal Register. However, section 808(2) of Title 5, 
United States Code, provides that, notwithstanding 5 U.S.C. 801, a 
major rule shall take effect at such time as the Federal agency 
determines if for good cause the agency finds that notice and comment 
procedures are impracticable, unnecessary, or contrary to the public 
interest. As explained above, for good cause we find that it was 
impracticable, unnecessary, or contrary to the public interest to 
complete notice and comment procedures before publication of this rule. 
Accordingly, pursuant to 5 U.S.C. 808(2), these regulations are 
effective on July 27, 1998.

BILLING CODE 4120-01-P
    42 CFR Chapter IV is amended as set forth below.

A. Part 400

PART 400--INTRODUCTION; DEFINITIONS

    1. The authority citation for part 400 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh) and 44 U.S.C. chapter 35.

    2. In Sec. 400.200, the definition for ``PRO'' is revised and the 
following definitions are added in alphabetical order to read as 
follows.


Sec. 400.200  General definitions.

* * * * *
    ALJ stands for administrative law judge.
* * * * *
    NCD stands for national coverage determination.
* * * * *
    Peer review organization means an organization that has a contract 
with HCFA, under part B of title XI of the Act, to perform utilization 
and quality control review of the health care furnished, or to be 
furnished, to Medicare beneficiaries.
    PRO stands for peer review organization.
* * * * *
    RRB stands for Railroad Retirement Board.
* * * * *
    3. In Sec. 400.202 a definition of ``national coverage 
determination'' is added in alphabetical order to read as follows.


Sec. 400.202  Definitions specific to Medicare.

* * * * *
    National coverage determination (NCD) means a national policy 
determination regarding the coverage status of a particular service, 
that HCFA

[[Page 35066]]

makes under section 1862(a)(1) of the Act, and publishes as a Federal 
Register notice or HCFA Ruling. (The term does not include coverage 
changes mandated by statute.)
* * * * *

B. Part 403

PART 403--SPECIAL PROGRAMS AND PROJECTS

    1. The authority citation for part 403 continues to read as 
follows:

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

    2. In Sec. 403.205, paragraph (d) introductory text is revised to 
read as follows:


Sec. 403.205  Medicare supplemental policy.

* * * * *
    (d) Medicare supplemental policy does not include a Medicare+Choice 
plan or any of the following health insurance policies or health 
benefit plans:
* * * * *
C. Part 410

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

    1. The authority citation for part 410 continues to read as 
follows:

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

    2. Part 410 is amended as set forth below.
    a. Section 410.57 is revised to read as follows:


Sec. 410.57  Pneumococcal vaccine and flu vaccine.

    (a) Medicare Part B pays for pneumococcal vaccine and its 
administration when reasonable and necessary for the prevention of 
disease, if the vaccine is ordered by a doctor of medicine or 
osteopathy.
    (b) Medicare Part B pays for the influenza virus vaccine and its 
administration.
    b. Section 410.152 is amended to add a paragraph (1) to read as 
follows:


Sec. 410.152  Amounts of Payment.

* * * * *
    (1) Amount of payment: Flu vaccine. Medicare Part B pays 100 
percent of the Medicare allowed charge.

D. Part 411

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT

    1. The authority citation for part 411 continues to read as 
follows:

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


Sec. 411.15  [Amended]

    2. In Sec. 411.15, in paragraph (e), the following changes are 
made:
    a. The ``and'' at the end of paragraph (e)(2) is removed.
    b. A semicolon and the word ``and'' are added at the end of 
paragraph (e)(3).
    c. A new paragraph (e)(4) is added, to read as follows:


Sec. 411.15  Particular services excluded from coverage.

* * * * *
    (e) * * *
    (4) Influenza vaccinations that are reasonable and necessary for 
the prevention of illness.
* * * * *
    3. In Sec. 411.355, a new paragraph (c)(5) is added, to read as 
follows:


Sec. 411.355  General exceptions to referral prohibitions related to 
both ownership/investment and compensation.

* * * * *
    (c) * * *
    (5) A coordinated care plan (within the meaning of section 
1851(a)(2)(A) of the Act) offered by an organization in accordance with 
a contract with HCFA under section 1857 of the Act and part 422 of this 
chapter.
* * * * *
E. Part 417

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

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

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

    2. Section 417.402 is revised to read as follows:


Sec. 417.402  Effective date of initial regulations.

    (a) The changes made to section 1876 of the Act by section 114 of 
the Tax Equity and Fiscal Responsibility Act of 1982 became effective 
on February 1, 1985, the effective date of the initial implementing 
regulations.
    (b) The changes made to section 1876 of the Act by section 4002 of 
the Balanced Budget Act (BBA) of 1997 are incorporated in section 422 
except for 1876 cost contracts. Upon enactment of the BBA (August 5, 
1997) no new cost contracts or service area expansions are accepted by 
HCFA except for current Health Care Prepayment Plans that may convert 
to 1876 cost contracts. Also, 1876 cost contracts may not be extended 
or renewed beyond December 31, 2002.
    3. In Sec. 417.413, paragraphs (d)(1) and (d)(2) introductory text 
are revised and new paragraphs (d)(2) (iii) and (d)(8) are added to 
read as follows:


Sec. 417.413  Qualifying condition: Operating experience and 
enrollment.

* * * * *
    (d) Standard: Composition of enrollment. (1) Requirement. Except as 
specified in paragraphs (d)(2) and (e) of this section, not more than 
50 percent of an HMO's or CMP's enrollment may be Medicare 
beneficiaries.
    (2) Waiver of composition of enrollment standard. HCFA may waive 
compliance with the requirements of paragraph (d)(1) of this section if 
the HMO or CMP has made and is making reasonable efforts to enroll 
individuals who are not Medicare beneficiaries and it meets one of the 
following requirements:
* * * * *
    (iii) The HMO or CMP requests waiver of the composition rule 
because it is in the public interest. The organization provides 
documentation that supports one of the following:
    (A) The organization serves a medically underserved rural or urban 
area.
    (B) The organization demonstrates a long-term business and 
community service commitment to the area.
    (C) The organization believes that a waiver is necessary to promote 
managed care choices in an area with limited or no managed care 
choices.
* * * * *
    (8) Termination of composition standard. The 50 percent composition 
of Medicare beneficiaries terminates for all managed care plans on 
December 31, 1998.
* * * * *
    4. In Sec. 417.426, a new paragraph (a)(4) is added to read as 
follows:


Sec. 417.426  Open enrollment requirements.

    (a) Basic requirements. * * *
    (4) An HMO or CMP with a risk contract must accept applications 
from eligible Medicare beneficiaries during the month of November 1998.
* * * * *
    5. Section 417.428 is revised to read as follows:

[[Page 35067]]

Sec. 417.428  Marketing activities.

    The requirements and prohibitions set forth in Sec. 422.80 of this 
chapter, for M+C organizations, apply also to HMOs and CMPs with 
contracts under section 1876 of the Act.
    6. In Sec. 417.472, paragraph (h) is revised to read as follows:


Sec. 417.472  Basic contract requirements.

* * * * *
    (h) Collection of fees from risk HMOs and CMPs. (1) The rules set 
forth in Sec. 422.10 of this chapter for M+C plans also apply to 
collection of fees from risk HMOs and CMPs.
    (2) In applying the part 422 rules, references to ``M+C 
organizations'' or ``M+C plans'' must be read as references to ``risk 
HMOs and CMPs''.

Subpart M--[Amended]

    7. Sections 417.520, 417.522 and 417.523 of subpart M are 
redesignated as Secs. 422.550, 422.522 and 422.553 in a new subpart L 
in part 422, and the heading for the new subpart L to part 44 is added 
to read ``Change of Ownership and Leasing of Facilities: Effect on 
Medicare Contract, under part 422, Medicare+Choice Program''.
    8. A new Sec. 417.520 is added to subpart M to read as follows:


Sec. 417.520  Effect on HMO and CMP contracts.

    (a) The provisions set forth in subpart L of part 422 of this 
chapter also apply to Medicare contracts with HMOs and CMPs under 
section 1876 of the Act.
    (b) In applying these provisions, references to ``M+C 
organizations'' must be read as references to ``HMOs and CMPs''.
    (c) In Sec. 422.550, reference to ``subpart K of this part'' must 
be read as reference to ``subpart L of part 417 of this chapter''.
    (d) In Sec. 422.553, reference to ``subpart K of this part'' must 
be read as reference to ``subpart J of part 417 of this chapter''.
    9. In Sec. 417.584, a new paragraph (e) is added to read as 
follows:


Sec. 417.584  Payment to HMOs or CMPs with risk contracts.

* * * * *
    (e) Determination of rate for calendar year 1998. For calendar year 
1998, HMOs or CMPs with risk contracts will be paid in accordance with 
principles contained in subpart F of part 422 of this chapter.

Subpart Q--[Amended]

    10. In subpart Q, Secs. 417.600 through 417.638 are removed.
    11. A new Sec. 417.600 is added to subpart Q as follows:


Sec. 417.600  Beneficiary appeals and grievances.

    (a) The rights, procedures, and requirements relating to 
beneficiary appeals and grievances set forth in subpart M of part 422 
of this chapter also apply to Medicare contracts with HMOs and CMPs 
under section 1876 of the Act.
    (b) In applying those provisions, references to section 1852 of the 
Act must be read as references to section 1876 of the Act; and 
references to M+C organizations as references to HMOs and CMPs.
    12. In Sec. 417.800 paragraph (a) introductory text is republished 
and the definition for ``Health care prepayment plan'' is revised to 
read as follows:


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

    (a) Definitions: As used in this subpart, unless the context 
indicates otherwise--
* * * * *
    Health care prepayment plan (HCPP) means an organization that--
    (1) Is union or employer sponsored;
    (2) Does not provide, or arrange for the provision of any in 
patient hospital services. Current HCPPs must meet this definition on 
January 1, 1999 and 1998 applicants must meet the definitions as of the 
effective date of the HCPP agreement. As of January 1, 1999, HCPPs are 
not required to meet Medigap requirements.
    (3) Is responsible for the organization, financing and delivery of 
covered Part B services to a defined population on a prepayment basis;
    (4) Meets the conditions specified in paragraph (b) of this 
section; and
    (5) Elects to be reimbursed on a reasonable cost basis.
* * * * *
BILLING CODE 4120-01-M

F. Part 422

PART 422--MEDICARE+CHOICE PROGRAM

    1. The authority citation continues to read as follows:

    Authority: Secs. 1102, 1851 through 1857, 1859, and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395w-21 through 1395w-27, and 
1395hh).

    2. Subparts A through G are added as follows:

Subpart A--General Provisions

Sec.
422.1  Basis and scope.
422.2  Definitions.
422.4  Types of M+C plans.
422.6  Application requirements.
422.8  Evaluation and determination procedures.
422.10  Cost-sharing in enrollment-related costs.

Subpart B--Eligibility, Election, and Enrollment

422.50  Eligibility to elect an M+C plan.
422.54  Continuation of enrollment
422.56  Limitations on enrollment in an M+C MSA plan.
422.57  Limited enrollment under M+C RFB plans.
422.60  Election process
422.62  Election of coverage under an M+C plan.
422.64  Information about the M+C program.
422.66  Coordination of enrollment and disenrollment through M+C 
organizations.
422.68  Effective dates of coverage and change of coverage.
422.74  Disenrollment by the M+C organization.
422.80  Approval of marketing materials and application forms.

Subpart C--Benefits and Beneficiary Protections

422.100  General requirements.
422.101  Requirements relating to basic benefits.
422.102  Supplemental benefits.
422.103  Benefits under an M+C MSA plan.
422.104  Special rules for supplemental benefits for M+C MSA plans.
422.105  Special rules for point of service option.
422.106  Special arrangements with employer groups.
422.108  Medicare secondary payer (MSP) procedures.
422.109  Effect of national coverage determinations (NCDs).
422.110  Discrimination against beneficiaries prohibited.
422.111  Disclosure requirements.
422.112  Access to services.
422.114  Access to services under an M+C private fee-for-service 
plan.
422.118  Confidentiality and accuracy of enrollee records.
422.128  Information on advance directives.
422.132  Protection against liability and loss of benefits.

Subpart D--Quality Assurance

422.152  Quality assessment and performance improvement program.
422.154  External review.
422.156  Compliance deemed on the basis of accreditation.
422.157  Accreditation organizations.
422.158  Procedures for approval of accreditation as a basis for 
deeming compliance.

Subpart E--Relationships With Providers

422.200  Basis and scope.
422.202  Participation procedures.
422.204  Provider credentialing and provider rights.
422.206  Interference with health care professionals' advice to 
enrollees prohibited.

[[Page 35068]]

422.208  Physician incentive plans: requirements and limitations.
422.210  Disclosure of physician incentive plans
422.212  Limitations on provider indemnification.
422.214  Special rules for services furnished by noncontract 
providers.
422.216  Special rules for M+C fee-for-service plans.
422.220  Exclusion of services furnished under a private contract.

Subpart F--Payments to Medicare+Choice Organizations

422.249  Terminology
422.250  General provisions.
422.252  Annual capitation rates.
422.254  Calculation and adjustment factors.
422.256  Adjustments to capitation rates and aggregate payments.
422.257  Encounter data.
422.258  Announcement of annual capitation rates and methodology 
changes.
422.262  Special rules for beneficiaries enrolled in M+C MSA plans.
422.264  Special rules for coverage that begins or ends during an 
inpatient hospital stay.
422.266  Special rules for hospice care.
422.268  Source of payment and effect of election of the M+C plan 
election on payment.

Subpart G--Premiums and Cost-Sharing

422.300  Basis and scope.
422.302  Terminology.
422.304  Rules governing premiums and cost-sharing.
422.306  Submission of proposed premiums and related information.
422.308  Limits on premiums and cost-sharing amounts.
422.309  Incorrect collections of premiums and cost-sharing.
422.310  Adjusted community rate (ACR) approval process.
422.312  Requirement for additional benefits.

Subpart A--General Provisions


Sec. 422.1  Basis and scope.

    (a) Basis. This part is based on the indicated provisions of the 
following sections of the Act:

1851--Eligibility, election, and enrollment.
1852--Benefits and beneficiary protections.
1853--Payments to Medicare+Choice (M+C) organizations.
1854--Premiums.
1855--Organization, licensure, and solvency of M+C organizations.
1856--Standards.
1857--Contract requirements.
1859--Definitions; enrollment restriction for certain M+C plans.

    (b) Scope. This part establishes standards and sets forth the 
requirements, limitations, and procedures for Medicare services 
furnished, or paid for, by Medicare+Choice organizations through 
Medicare+Choice plans.


Sec. 422.2  Definitions.

    As used in this part--
    ACR stands for adjusted community rate.
    Additional benefits are health care services not covered by 
Medicare, and reductions in premiums or cost-sharing for Medicare 
covered services, funded from adjusted excess amounts as calculated in 
the ACR.
    Adjusted community rate (ACR) is the equivalent of the maximum 
amount allowed under Sec. 422.310.
    Arrangement means a written agreement between an M+C organization 
and a provider or provider network, under which--
    (1) The provider or provider network agrees to furnish for a 
specific M+C plan(s) specified services to the organization's M+C 
enrollees;
    (2) The organization retains responsibilities for the services; and
    (3) Medicare payment to the organization discharges the enrollee's 
obligation to pay for the services.
    Balance billing generally refers to an amount billed by a provider 
that represents the difference between the amount the provider charges 
an individual for a service and the sum of the amount the individual's 
health insurer (for example, the original Medicare program) will pay 
for the service plus any cost-sharing by the individual.
    Basic benefits means all Medicare-covered benefits, except hospice 
services, and additional benefits.
    Benefits are health care services that are intended to maintain or 
improve the health status of enrollees, for which the M+C organization 
incurs a cost or liability under an M+C plan, and that are approved in 
the Benefit/ACR process.
    Coinsurance is a fixed percentage of the total amount paid for a 
health care service that can be charged to an M+C enrollee on a per-
service basis.
    Copayment is a fixed amount that can be charged to an M+C plan 
enrollee on a per-service basis.
    Cost-sharing includes deductibles, coinsurance, and copayments.
    Emergency medical condition means a medical condition manifesting 
itself by acute symptoms of sufficient severity (including severe pain) 
such that a prudent layperson, with an average knowledge of health and 
medicine, could reasonably expect the absence of immediate medical 
attention to result in--
    (1) Serious jeopardy to the health of the individual or, in the 
case of a pregnant woman, the health of the woman or her unborn child;
    (2) Serious impairment to bodily functions; or
    (3) Serious dysfunction of any bodily organ or part.
    Emergency services means covered inpatient and outpatient services 
that are--
    (1) Furnished by a provider qualified to furnish emergency 
services; and
    (2) Needed to evaluate or stabilize an emergency medical condition.
    Licensed by the State as a risk-bearing entity means the entity is 
licensed or otherwise authorized by the State to assume risk for 
offering health insurance or health benefits coverage, such that the 
entity is authorized to accept prepaid capitation for providing, 
arranging, or paying for comprehensive health services under an M+C 
contract.
    M+C stands for Medicare+Choice.
    M+C eligible individual means an individual who meets the 
requirements of Sec. 422.50.
    M+C organization means a public or private entity organized and 
licensed by a State as a risk-bearing entity (with the exception of 
provider-sponsored organizations receiving waivers) that is certified 
by HCFA as meeting the M+C contract requirements.
    M+C plan means health benefits coverage offered under a policy or 
contract by an M+C organization that includes a specific set of health 
benefits offered at a uniform premium and uniform level of cost-sharing 
to all Medicare beneficiaries residing in the service area of the M+C 
plan.
    M+C plan enrollee is an M+C eligible individual who has elected an 
M+C plan offered by an M+C organization.
    Mandatory supplemental benefits are services not covered by 
Medicare that an M+C enrollee must purchase as part of an M+C plan that 
are paid for directly by (or on behalf of) Medicare enrollees, in the 
form of premiums or cost-sharing.
    MSA stands for medical savings account.
    MSA trustee means a person or business with which an enrollee 
establishes an M+C MSA. A trustee may be a bank, an insurance company, 
or any other entity that--
    (1) Is approved by the Internal Revenue Service to be a trustee or 
custodian of an individual retirement account (IRA); and
    (2) Meets the requirements of Sec. 422.262(b).
    Original Medicare means health insurance available under Medicare 
Part A and Part B through the traditional fee-for service payment 
system.
    Optional supplemental benefits means health benefits normally not 
covered by Medicare purchased at the option of the M+C enrollee and 
that are

[[Page 35069]]

paid for directly by (or on behalf of) the Medicare enrollee, in the 
form of premiums or cost-sharing. These services may be grouped or 
offered individually.
    Point of service (POS) is a benefit option that an M+C coordinated 
care plan can offer to its Medicare enrollees as an additional, 
mandatory supplemental, or optional supplemental benefit. Under the POS 
benefit option, the M+C plan allows members the option of receiving 
specified services outside of the M+C plan's provider network. In 
return for this flexibility, members typically have higher cost-sharing 
requirements for services received and, where offered as a mandatory or 
optional supplemental benefit, may also be charged a premium for the 
POS benefit option.
    Provider means--
    (1) Any individual who is engaged in the delivery of health care 
services in a State and is licensed or certified by the State to engage 
in that activity in the State; and
    (2) Any entity that is engaged in the delivery of health care 
services in a State and is licensed or certified to deliver those 
services if such licensing or certification is required by State law or 
regulation.
    Provider network means the providers with which an M+C organization 
contracts or makes arrangements to furnish covered health care services 
to Medicare enrollees under an M+C coordinated care or network MSA 
plan.
    Religious and Fraternal (RFB) Society means an organization that--
    (1) Is described in section 501(c)(8) of the Internal Revenue Code 
of 1986 and is exempt from taxation under section 501(a) of that Act; 
and
    (2) Is affiliated with, carries out the tenets of, and shares a 
religious bond with, a church or convention or association of churches 
or an affiliated group of churches.
    RFB plan means a coordinated care plan that is offered by an RFB 
society.
    Service area means a geographic area approved by HCFA within which 
an M+C eligible individual may enroll in a particular M+C plan offered 
by the organization. For coordinated care plans and network medical 
savings account (MSA) plans only, the service area also is the area 
within which a network of providers exists that meets the access 
standards in Sec. 422.112. The service area also defines the area where 
a uniform benefit package is offered. In deciding whether to approve a 
service area proposed by an M+C organization for an M+C plan, HCFA 
considers the M+C organization's commercial service area for the type 
of plan in question (if applicable), community practices generally, 
whether the boundaries of the service area are discriminatory in 
effect, and, in the case of coordinated care and network MSA plans, the 
adequacy of the provider network in the proposed service area. HCFA may 
approve single county M+C non-network MSA plans even if the M+C 
organization has a different commercial service area.
    Urgently needed services means covered services provided when an 
enrollee is temporarily absent from the M+C plan's service (or, if 
applicable, continuation) area (or, under unusual and extraordinary 
circumstances, provided when the enrollee is in the service or 
continuation area but the organization's provider network is 
temporarily unavailable or inaccessible) when such services are 
medically necessary and immediately required--
    (1) As a result of an unforeseen illness, injury, or condition; and
    (2) It was not reasonable given the circumstances to obtain the 
services through the organization offering the M+C plan.


Sec. 422.4  Types of M+C plans.

    (a) General rule. An M+C plan may be a coordinated care plan, a 
combination of an M+C MSA plan and a contribution into an M+C MSA 
established in accordance with Sec. 422.262, or an M+C private fee-for-
service plan.
    (1) A coordinated care plan. A coordinated care plan is a plan that 
includes a network of providers that are under contract or arrangement 
with the organization to deliver the benefit package approved by HCFA.
    (i) The network is approved by HCFA to ensure that all applicable 
requirements are met, including access and availability, service area, 
and quality.
    (ii) Coordinated care plans may include mechanisms to control 
utilization, such as referrals from a gatekeeper for an enrollee to 
receive services within the plan, and financial arrangements that offer 
incentives to providers to furnish high quality and cost-effective 
care.
    (iii) Coordinated care plans include health maintenance 
organizations (HMOs), provider-sponsored organizations (PSOs) and 
preferred provider organizations (PPOs), RFBs, and other network plans 
(except network MSA plans).
    (2) A combination of an M+C MSA plan and a contribution into the 
M+C MSA established in accordance with Sec. 422.262. (i) M+C MSA plan 
means a plan that--
    (A) Pays at least for the services described in Sec. 422.101, after 
the enrollee has incurred countable expenses (as specified in the plan) 
equal in amount to the annual deductible specified in Sec. 422.103(d); 
and
    (B) Meets all other applicable requirements of this part.
    (ii) An M+C MSA plan may be either a network plan or a non-network 
plan.
    (A) M+C network MSA plan means an MSA plan under which enrollees 
must receive services through a defined provider network that is 
approved by HCFA to ensure that all applicable requirements are met, 
including access and availability, service area, and quality.
    (B) M+C non-network MSA plan means an MSA plan under which 
enrollees are not required to receive services through a provider 
network.
    (iii) M+C MSA means a trust or custodial account--
    (A) That is established in conjunction with an MSA plan for the 
purpose of paying the qualified expenses of the account holder; and
    (B) Into which no deposits are made other than contributions by 
HCFA under the M+C program, or a trustee-to-trustee transfer or 
rollover from another M+C MSA of the same account holder, in accordance 
with the requirements of sections 138 and 220 of the Internal Revenue 
Code.
    (3) M+C private fee-for-service plan. An M+C private fee-for-
service plan is an M+C plan that--
    (i) Pays providers of services at a rate determined by the plan on 
a fee-for-service basis without placing the provider at financial risk;
    (ii) Does not vary the rates for a provider based on the 
utilization of that provider's services; and
    (iii) Does not restrict enrollees' choices among providers that are 
lawfully authorized to provide services and agree to accept the plan's 
terms and conditions of payment.
    (b) Multiple plans. Under its contract, an M+C organization may 
offer multiple plans, regardless of type, provided that the M+C 
organization is licensed or approved under State law to provide those 
types of plans (or, in the case of a PSO plan, has received from HCFA a 
waiver of the State licensing requirement). If an M+C organization has 
received a waiver for the licensing requirement to offer a PSO plan, 
that waiver does not apply to the licensing requirement for any other 
type of M+C plan.


Sec. 422.6  Application requirements.

    (a) Scope. This section sets forth application requirements for 
entities that seek a contract as an M+C organization offering an M+C 
plan.

[[Page 35070]]

    (b) Completion of an application. (1) In order to obtain a 
determination on whether it meets the requirements to become an M+C 
organization and is qualified to provide a particular type of M+C plan, 
an entity, or an individual authorized to act for the entity (the 
applicant) must complete a certified application, in the form and 
manner required by HCFA, including the following:
    (i) Documentation of appropriate State licensure or State 
certification that the entity is able to offer health insurance or 
health benefits coverage that meets State-specified standards 
applicable to M+C plans, and is authorized by the State to accept 
prepaid capitation for providing, arranging, or paying for the 
comprehensive health care services to be offered under the M+C 
contract; or
    (ii) Federal waiver as described in subpart H of this part.
    (2) The authorized individual must describe thoroughly how the 
entity and M+C plan meet, or will meet, the requirements described in 
this part.
    (c) Responsibility for making determinations. HCFA is responsible 
for determining whether an entity qualifies as an M+C organization and 
whether proposed M+C plans meet the requirements of this part.
    (d) Resubmittal of application. An application that has been denied 
by HCFA may not be resubmitted for 4 months after the date of the 
notice from HCFA denying the application.
    (e) Disclosure of application information under the Freedom of 
Information Act. An applicant submitting material that he or she 
believes is protected from disclosure under 5 U.S.C. 552, the Freedom 
of Information Act, or because of exceptions provided in 45 CFR part 5 
(the Department's regulations providing exceptions to disclosure), 
should label the material ``privileged'' and include an explanation of 
the applicability of an exception described in 45 CFR part 5.


Sec. 422.8  Evaluation and determination procedures.

    (a) Basis for evaluation and determination. (1) HCFA evaluates an 
application for an M+C contract on the basis of information contained 
in the application itself and any additional information that HCFA 
obtains through on-site visits, public hearings, and any other 
appropriate procedures.
    (2) If the application is incomplete, HCFA notifies the entity and 
allows 60 days from the date of the notice for the entity to furnish 
the missing information.
    (3) After evaluating all relevant information, HCFA determines 
whether the entity's application meets the applicable requirements of 
Sec. 422.6.
    (b) Use of information from a prior contracting period. If an 
entity has failed to comply with the terms of a previous year's 
contract with HCFA under title XVIII of the Act as an HMO, competitive 
medical plan, health care prepayment plan, or M+C organization or an 
entity has failed to complete a corrective action plan during the term 
of the contract, HCFA may deny an application based on the entity's 
failure to comply with that prior contract with HCFA even if the entity 
meets all of the current requirements.
    (c) Notice of determination. HCFA notifies each entity that applies 
for an M+C contract under this part of its determination and the basis 
for the determination. The determination may be approval, intent to 
deny, or denial.
    (d) Approval of application. If HCFA approves the application, it 
gives written notice to the M+C organization, indicating that it meets 
the requirements for an M+C contract.
    (e) Intent to deny. (1) If HCFA finds that the entity does not 
appear to meet the requirements of an M+C organization and appears to 
be able to meet those requirements within 60 days, HCFA gives the 
entity notice of intent to deny qualification and a summary of the 
basis for this preliminary finding.
    (2) Within 60 days from the date of the notice, the entity may 
respond in writing to the issues or other matters that were the basis 
for HCFA's preliminary finding and may revise its application to remedy 
any defects HCFA identified.
    (f) Denial of application. If HCFA denies the application, it gives 
written notice to the M+C organization indicating--
    (1) That the M+C organization does not meet the contract 
requirements under part C of title XVIII of the Act;
    (2) The reasons why the M+C organization does not meet the contract 
requirements; and
    (3) The M+C organization's right to request reconsideration in 
accordance with the procedures specified in subpart N of this part.
    (g) Oversight of continuing compliance. (1) HCFA oversees an 
entity's continued compliance with the requirements for an M+C 
organization.
    (2) If an entity no longer meets those requirements, HCFA 
terminates the contract in accordance with Sec. 422.510.


Sec. 422.10  Cost-sharing in enrollment-related costs.

    (a) Basis and scope. This section implements that portion of 
section 1857 of the Act that pertains to cost-sharing in enrollment-
related costs. It sets forth the procedures that HCFA follows to assess 
the required fees on M+C plans offered by M+C organizations.
    (b) Purpose of assessment. Section 1857(e)(2) of the Act authorizes 
HCFA to charge and collect from each M+C plan offered by an M+C 
organization its pro rata share of fees for administering section 1851 
of the Act, relating to dissemination of enrollment information; and 
section 4360 of the Omnibus Budget Reconciliation Act of 1990, relating 
to the health insurance counseling and assistance program.
    (c) Applicability. The fee assessment also applies to those 
demonstrations for which enrollment is effected or coordinated under 
section 1851 of the Act.
    (d) Collection of fees--(1) Timing of collection. HCFA collects the 
fees over nine consecutive months beginning with January of each fiscal 
year.
    (2) Amount to be collected. The aggregate amount of fees for a 
fiscal year is the lesser of the following:
    (i) The estimated costs to be incurred by HCFA in that fiscal year 
to carry out the activities described in paragraph (b) of this section.
    (ii) The amount authorized in the DHHS appropriation for the fiscal 
year.
    (e) Assessment methodology. (1) The amount assessed is a percentage 
of the total Medicare payments to each organization. HCFA determines 
the percentage rate using the following formula:

    A times B divided by C where--
    A is the total of the estimated January payments to all 
organizations subject to assessment;
    B is the nine-month (January through September) assessment 
period; and
    C is the total assessment amount authorized for the particular 
fiscal year in accordance with paragraph (d)(2) of this section.

    (2) HCFA determines each organization's pro rata share of the 
annual fee on the basis of that organization's calculated monthly 
payment amount during the nine consecutive months beginning with 
January. HCFA calculates each organization's monthly pro rata share by 
multiplying the established percentage rate by the total monthly 
calculated Medicare payment amount to the organization as recorded in 
HCFA's payment system on the first day of the month.
    (3) HCFA deducts the organization's fee from the amount of Federal 
funds otherwise payable to the organization for that month under the 
M+C program.
    (4) If assessments reach the amount authorized for the year before 
the end of

[[Page 35071]]

September, HCFA discontinues assessment.
    (5) If there are delays in determining the amount of the annual 
aggregate fees specified in paragraph (d)(2) of this section or the fee 
percentage rate specified in paragraph (e), HCFA may adjust the 
assessment time period and the fee percentage amount.

BILLING CODE 4120-01-P

Supbart B--Eligibility, Election, and Enrollment


Sec. 422.50  Eligibility to elect an M+C plan.

    (a) an individual is eligible to elect an M+C plan if he or she--
    (1) Is entitled to Medicare under Part A and enrolled in Part B 
(except that an individual entitled only to Part B and who is (or was) 
enrolled in an HMO or CMP with a risk contract under part 417 of this 
chapter on December 31, 1998 may continue to be enrolled in the M+C 
organization may continue to be enrolled in the M+C organization as an 
M+C plan enrollee);
    (2) Has not been medically determined to have end-stage renal 
disease, except that an individual who develops end-stage renal disease 
while enrolled in an M+C plan or in a health plan offered by the M+C 
organization offering an M+C plan in the service area or continuation 
area in which the individual resides may continue to be enrolled in the 
M+C organization as an M+C plan enrollee;
    (3) Resides in the service area of the plan, except that an 
individual who resides in a continuation area of an M+C plan while 
enrolled in a health plan offered by the M+C organization may continue 
to be enrolled in the M+C organization as an M+C plan enrollee;
    (4) Completes and signs an election form and gives information 
required for enrollment; and
    (5) Agrees to abide by the rules of the M+C organization after they 
are disclosed to him or her in connection with the election process.
    (b) An M+C eligible individual may not be enrolled in more than one 
M+C plan at any given time.


Sec. 422.54  Continuation of enrollment.

    (a) Definition. Continuation area means an additional area (outside 
the service area) within which the M+C organization furnishes or 
arranges for furnishing services to its continuation-of-enrollment 
enrollees. Enrollees must reside in a continuation area on a permanent 
basis. A continuation area does not expand the service area of any 
plan.
    (b) Basis rule. An M+C organization may offer a continuation of 
enrollment option to enrollees when they no longer reside in the 
service area of a plan and permanently move into the geographic area 
designated by the M+C organization as a continuation of enrollment 
area. The intent to no longer reside in an area and permanently live in 
another area is verified through documentation that establishes 
residency, such as, driver's license, voter registration.
    (c) General requirements. (1) An M+C organization that wishes to 
offer a continuation of enrollment option must meet the following 
requirements:
    (i) Obtain HCFA's approval of the continuation area, the marketing 
materials that describe the option, and the M+C organization's 
assurances of access to services.
    (ii) Describe the option(s) in the member materials it offers and 
make the option available to all enrollees residing in the continuation 
area.
    (2) An enrollee who moves out of the service area and into the 
geographic area designated as the continuation area has the choice of 
continuing enrollment or disenrolling from the plan.
    (d) Specific requirements--(1) Basic benefits. The M+C organization 
must, at a minimum, provide or arrange for the Medicare-covered 
benefits described in Sec. 422.101(a).
    (2) Reasonable access. The M+C organization must ensure reasonable 
access in the continuation area--
    (i) Through contracts with providers, or through direct payment of 
claims that satisfy the requirements in Sec. 422.100(b)(2), to other 
providers who meet requirements in subpart E of this part; and
    (ii) By ensuring that the access requirements of Sec. 422.112 are 
met.
    (3) Reasonable cost-sharing. For services furnished in the 
continuation area, an enrollee's cost-sharing liability is limited to--
    (i) The cost-sharing amounts required in the M+C plan's service 
area (in which the enrollee no longer resides) if provided by contract 
providers;
    (ii) The cost-sharing amounts required by the continuation area 
plan if provided through agreements with another M+C plan; or
    (iii) The amount for which a beneficiary would be liable under 
original Medicare if noncontracting providers furnish the services.
    (4) Protection of enrollee rights. An M+C organization that offers 
a continuation of enrollment option must convey all enrollee rights 
conferred under this rule, with the understanding that--
    (i) The ultimate responsibility for all appeals and grievance 
requirements remain with the organization that is receiving payment 
from HCFA; and
    (ii) Organizations that require enrollees to give advance notice of 
intent to use the continuation of enrollment option, must stipulate the 
notification process in the marketing materials.
    (e) Capitation payments. HCFA's capitation payments to all M+C 
organizations, for all Medicare enrollees, are based on rates 
established on the basis of the enrollee's permanent residence, 
regardless of where he or she receives services.


Sec. 422.56  Limitations on enrollment in an M+C MSA plan.

    (a) General. An individual is not eligible to elect an M+C MSA 
plan--
    (1) If the number of individuals enrolled in M+C MSA plans has 
reached 390,000;
    (2) Unless the individual provides assurances that are satisfactory 
to HCFA that he or she will reside in the United States for at least 
183 days during the year for which the election is effective; or
    (3) On or after January 1, 2003, unless the enrollment is the 
continuation of an enrollment in effect as of that date.
    (b) Individuals eligible for or covered under other health benefits 
program. An individual who is enrolled in a Federal Employee Health 
Benefit plan under 5 U.S.C. chapter 89, or is eligible for health care 
benefits through the Veteran's Administration under 10 U.S.C. chapter 
55 or the Department of Defense under 38 U.S.C. chapter 17, may not 
enroll in an M+C MSA plan.
    (c) Individuals eligible for Medicare cost-sharing under Medicaid 
State plans. An individual who is entitled to coverage of Medicare 
cost-sharing under a State plan under title XIX of the Act is not 
eligible to enroll in an M+C MSA plan.
    (d) Other limitations. An individual who receives health benefits 
that cover all or part of the annual deductible under the M+C MSA plan 
may not enroll in an M+C MSA plan. Examples of this type of coverage 
include, but are not limited to, primary health care coverage other 
than Medicare, current coverage under the Medicare hospice benefit, 
supplemental insurance policies not specifically permitted under 
Sec. 422.103, and retirement health benefits.


Sec. 422.57  Limited enrollment under M+C RFB plans.

    An RFB society that offers an M+C RFB plan may offer that plan only 
to members of the church, or convention or group of churches with which 
the society is affiliated.

[[Page 35072]]

Sec. 422.60  Election process.

    (a) Acceptance of enrollees: General rule. (1) Except for the 
limitations on enrollment in an M+C MSA plan provided by 
Sec. 422.62(d)(1) and except as specified in paragraph (a)(2) of this 
section, each M+C organization must accept without restriction (except 
for an M+C RFB plan as provided by Sec. 422.57) individuals who are 
eligible to elect an M+C plan that M+C organization offers and who 
elect an M+C plan during initial coverage election periods, annual 
election periods, and special election periods specified in Sec. 422.62 
(a)(1), (a)(2), and (b).
    (2) M+C organizations must accept elections during the open 
enrollment periods specified in Sec. 422.62(a)(3), (a)(4), and (a)(5) 
if their M+C plans are open to new enrollees.
    (b) Capacity to accept new enrollees. (1) M+C organizations must 
submit information on enrollment capacity of plans they offer by May 1 
of each year as provided by Sec. 422.306(a)(2).
    (2) If HCFA determines that an M+C plan offered by an M+C 
organization has a capacity limit, and the number of M+C eligible 
individuals who elect to enroll in that plan exceeds the limit, the M+C 
organization offering the plan may limit enrollment in the plan under 
this part, but only if it provides priority in acceptance as follows:
    (i) First, for individuals who elected the plan prior to the HCFA 
determination that capacity has been exceeded, elections will be 
processed in chronological order by date of receipt of their election 
forms.
    (ii) Then for other individuals in a manner that does not 
discriminate on the basis of any factor related to health as described 
in Sec. 422.110.
    (c) Election forms. (1) The election form must comply with HCFA 
instructions regarding content and format and have been approved by 
HCFA as described in Sec. 422.80. The form must be completed and signed 
by the M+C eligible individual beneficiary (or the individual who will 
soon become entitled to Medicare benefits) and include authorization 
for disclosure and exchange of necessary information between the U.S. 
Department of Health and Human Services and its designees and the M+C 
organization. Persons who assist beneficiaries in completing forms must 
sign the form and indicate their relationship to the beneficiary.
    (2) The M+C organization must file and retain election forms for 
the period specified in HCFA instructions.
    (d) When an election is considered to have been made. An election 
in an M+C plan is considered to have been made on the date the election 
form is received by the M+C organization.
    (e) Handling of election forms. The M+C organization must have an 
effective system for receiving, controlling, and processing election 
forms. The system must meet the following conditions and requirements:
    (1) Each election form is dated as of the day it is received.
    (2) Election forms are processed in chronological order, by date of 
receipt.
    (3) The M+C organization gives the beneficiary prompt written 
notice of acceptance or denial in a format specified by HCFA.
    (4) In a format specified by HCFA, a notice of acceptance--
    (i) Promptly informs the beneficiary of the date on which 
enrollment will be effective under Sec. 422.68; and
    (ii) If the M+C plan is enrolled to capacity, explains the 
procedures that will be followed when vacancies occur.
    (5) A notice of denial explains the reasons for denial in a format 
specified by HCFA.
    (6) Within 30 days from receipt of the election form (or from the 
date a vacancy occurs for an individual who was accepted for future 
enrollment), the M+C organization transmits the information necessary 
for HCFA to add the beneficiary to its records as an enrollee of the 
M+C organization.


Sec. 422.62  Election of coverage under an M+C plan.

    (a) General: Coverage election periods--(1) Initial coverage 
election period. The initial coverage election period is the period 
during which a new M+C eligible individual may make an initial 
election. This period begins 3 months prior to the month the individual 
is first entitled to both Part A and Part B and ends the last day of 
the month preceding the month of entitlement.
    (2) Annual election period. (i) Beginning in 1999, the month of 
November is the annual election period for the following calendar year. 
Organizations offering M+C plans in January 1999 must open enrollment 
to Medicare beneficiaries in November 1998.
    (ii) During the annual election period, an individual eligible to 
enroll in an M+C plan may change his or her election from an M+C plan 
to original Medicare or to a different M+C plan, or from original 
Medicare to an M+C plan.
    (3) Open enrollment and disenrollment opportunities through 2001. 
From 1998 through 2001, the number of elections or changes that an M+C 
eligible individual may make is not limited (except as provided for in 
paragraph (d) of this section for M+C MSA plans). Subject to the M+C 
plan being open to enrollees as provide under Sec. 422.60(a)(2), an 
individual eligible to elect an M+C plan may change his or her election 
from an M+C plan to original Medicare or to a different M+C plan, or 
from original Medicare to an M+C plan.
    (4) Open enrollment and disenrollment during 2002. (i) Except as 
provided in paragraphs (a)(4)(ii) and (a)(4)(iii) of this section, an 
individual who is eligible to elect an M+C plan in 2002 may elect an 
M+C plan or change his or her election from an M+C plan to original 
Medicare or to a different M+C plan, or from original Medicare to an 
M+C plan, but only once during the first 6 months of the year.
    (ii) Newly eligible M+C individual. An individual who becomes an 
M+C eligible individual during 2002 may elect an M+C plan or original 
Medicare and then change his or her election once during the period 
that begins the month the individual is entitled to both Part A and 
Part B and ends on the last day of the 6th month of such entitlement, 
or on December 31, whichever is earlier. The individual can change the 
election from an M+C plan to original Medicare or to a different M+C 
plan, or from original Medicare to an M+C plan during this period.
    (iii) The limitation to one election or change in paragraphs 
(a)(4)(i) and (a)(4)(ii) of this section does not apply to elections or 
changes made during the annual election period specified in (a)(2) of 
this section or during a special enrollment period specified in 
paragraph (b) of this section.
    (5) Open enrollment and disenrollment beginning in 2003. (i) For 
2003 and subsequent years, except as provided in paragraphs (a)(5)(ii) 
and (a)(5)(iii) of this section, an individual who is eligible to elect 
an M+C plan may elect an M+C plan or change his or her election from an 
M+C plan to original Medicare or to a different M+C plan, or from 
original Medicare to an M+C plan, but only once during the first 3 
months of the year.
    (ii) Newly eligible M+C individual. An individual who becomes an 
M+C eligible individual during 2003 or later may elect an M+C plan or 
original Medicare and then change his or her election once during the 
period that begins the month the individual is entitled to both Part A 
and Part B and ends on the last day of the 3rd month of such 
entitlement, or on December 31, whichever is earlier. The individual 
can change the election from an M+C plan to original Medicare or to a 
different

[[Page 35073]]

M+C plan, or from original Medicare to an M+C plan during this period.
    (iii) The limitation to one election or change in paragraphs 
(a)(5)(i) and (a)(5)(ii) of this section does not apply to elections or 
changes made during the annual election period specified in paragraph 
(a)(2) of this section or during a special election period specified in 
paragraph (b) of this section.
    (b) Special election periods. Effective as of January 1, 1999 for 
M+C plans, and as of January 1, 2002, for all MSA other types of M+C 
MSA plans, an individual may at any time (that is, not limited to the 
annual election period) discontinue the election of an M+C plan offered 
by an M+C organization and change his or her election, in the form and 
manner specified by HCFA, from an M+C plan to original Medicare or to a 
different M+C plan under any of the following circumstances:
    (1) HCFA has terminated the organization's contract for that plan 
or the organization has terminated or discontinued offering the plan in 
the service area or continuation area in which the individual resides.
    (2) The individual is not eligible to remain enrolled in the plan 
because of a change in his or her place of residence to a location out 
of the service area or continuation area or other change in 
circumstances as determined by HCFA but not including terminations 
resulting from a failure to make timely payment of an M+C monthly or 
supplemental beneficiary premium, or from disruptive behavior.
    (3) The individual demonstrates to HCFA, in accordance with 
guidelines issued by HCFA, that--
    (i) The organization offering the plan substantially violated a 
material provision of its contract under this part in relation to the 
individual, including, but not limited to the following:
    (A) Failure to provide the beneficiary on a timely basis medically 
necessary services for which benefits are available under the plan.
    (B) Failure to provide medical services in accordance with 
applicable quality standards; or
    (ii) The organization (or its agent, representative, or plan 
provider) materially misrepresented the plan's provisions in marketing 
the plan to the individual.
    (4) The individual meets such other exceptional conditions as HCFA 
may provide.
    (c) Special election period for individual age 65. Effective 
January 1, 2002, an M+C eligible individual who elects an M+C plan 
during the initial coverage election period, as defined under section 
1837(d) of the Act, that surrounds his or her 65th birthday (this 
period begins 3 months before and ends 3 months after the month of the 
individual's 65th birthday) may discontinue the election of that plan 
and elect coverage under original Medicare at any time during the 12-
month period that begins on the effective date of enrollment in the M+C 
plan.
    (d) Special rules for M+C plans--(1) Enrollment. An individual may 
enroll in an M+C plan only during an initial or annual election period 
described in paragraphs (a)(1) and (a)(2) of this section or during 
November 1998.
    (2) Disenrollment. (i) Except as provided in paragraph (d)(2)(ii) 
of this section, an individual may disenroll from an M+C plan only 
during--
    (A) November 1998;
    (B) An annual election period; or
    (C) The special election period described in paragraph (b) of this 
section.
    (ii) Exception. An individual who elects an M+C MSA plan during an 
annual election period and has never before elected an M+C MSA plan may 
revoke that election, no later than December 15 of that same year, by 
submitting to the organization that offers the M+C MSA plan a signed 
and dated request in the form and manner prescribed by HCFA or by 
filing the appropriate disenrollment form through other mechanisms as 
determined by HCFA.


Sec. 422.64  Information about the M+C program.

    (a) Source of information. Each M+C organization must provide, on 
an annual basis and in a format and using standard terminology that may 
be specified by HCFA, the information necessary to enable HCFA to 
provide to current and potential beneficiaries the information they 
need to make informed decisions with respect to the available choices 
for Medicare coverage.
    (b) Timing and recipients of the information. HCFA mails a notice 
containing the information described in paragraph (c) of this section--
    (1) At least 15 days before each annual election period, to each 
individual eligible to elect an M+C plan; and
    (2) To the extent practicable, not later than 30 days before his or 
her initial coverage election period to each individual who will become 
eligible to elect an M+C plan.
    (c) Content of notice--(1) Benefits under original Medicare. (i) 
Covered services.
    (ii) Beneficiary cost sharing, such as deductibles, coinsurance, 
and copayment amounts.
    (iii) Any beneficiary liability for balance billing.
    (2) Enrollment procedures. Information and instructions on how to 
exercise election options under this subpart.
    (3) Rights. A general description of procedural rights (including 
grievance and appeals procedures) under original Medicare and the M+C 
program and the right to be protected against discrimination based on 
factors related to health status in accordance with Sec. 422.110.
    (4) Medigap and Medicare Select. A general description of the 
benefits, enrollment rights, and requirements applicable to Medicare 
supplemental policies under section 1882 of the Act, and provisions 
relating to Medicare Select policies under section 1882(t) of the Act.
    (5) Potential for contract termination. The fact that an M+C 
organization may terminate or refuse to renew its contract, or reduce 
the service area included in its contract, and the effect that any of 
those actions may have on individuals enrolled in that organization's 
M+C plan.
    (6) Comparative information. A list of M+C plans that are or will 
be available to residents of the service area in the following calendar 
year, and, for each available plan, information on the aspects 
described in paragraphs (c)(7) through (c)(11) of this section, 
presented in a manner that facilitates comparison among the plans.
    (7) Benefits. (i) Covered services beyond those provided under 
original Medicare.
    (ii) Any beneficiary cost sharing.
    (iii) Any maximum limitations on out-of-pocket expenses.
    (iv) In the case of an M+C MSA plan, the amount of the annual MSA 
deposit and the differences in cost-sharing, enrollee premiums, and 
balance billing, as compared to M+C plans.
    (v) In the case of a M+C private fee-for-service plan, differences 
in cost-sharing, enrollee premiums, and balance billing, as compared to 
M+C plans.
    (vi) The extent to which an enrollee may obtain benefits through 
out-of-network health care providers.
    (vii) The types of providers that participate in the plan's network 
and the extent to which an enrollee may select among those providers.
    (viii) The coverage of emergency and urgently needed services.
    (8) Premiums. (i) The M+C monthly basic beneficiary premiums.
    (ii) The M+C monthly supplemental beneficiary premium.
    (9) The plan's service area.
    (10) Quality and performance indicators for benefits under a plan 
to

[[Page 35074]]

the extent they are available as follows (and how they compare with 
indicators under original Medicare):
    (i) Disenrollment rates for Medicare enrollees for the 2 previous 
years, excluding disenrollment due to death or moving outside the 
plan's service area, calculated according to HCFA guidelines.
    (ii) Medicare enrollee satisfaction.
    (iii) Health outcomes.
    (iv) Plan-level appeal data.
    (v) The recent record of plan compliance with the requirements of 
this part, as determined by the Secretary.
    (vi) Other performance indicators.
    (11) Supplemental benefits. Whether the plan offers mandatory 
supplemental benefits or offers optional supplemental benefits and the 
premiums and other terms and conditions for those benefits.
    (d) Format and updating. The information is written and formatted 
using language that is easily understandable, and is updated at least 
annually.
    (e) Mailing. The mailing is coordinated, to the extent practicable, 
with the mailing of the annual notice of Medicare benefits under 
section 1804 of the Act.


Sec. 422.66  Coordination of enrollment and disenrollment through M+C 
organizations.

    (a) Enrollment. An individual who wishes to elect an M+C plan 
offered by an M+C organization may make or change his or her election 
during the election periods specified in Sec. 422.62 by filing the 
appropriate election form with the organization or through other 
mechanisms as determined by HCFA.
    (b) Disenrollment--(1) Basic rule. An individual who wishes to 
disenroll from an M+C plan may change his or her election during the 
election periods specified in Sec. 422.62 in either of the following 
manners:
    (i) Elect a different M+C plan by filing the appropriate election 
form with the M+C organization or through other mechanisms as 
determined by HCFA.
    (ii) Submit a signed and dated request for disenrollment to the M+C 
organization in the form and manner prescribed by HCFA or file the 
appropriate disenrollment form through other mechanisms as determined 
by HCFA.
    (2) When a disenrollment request is considered to have been made. A 
disenrollment request is considered to have been made on the date the 
disenrollment request is received by the M+C organization.
    (3) Responsibilities of the M+C organization. The M+C organization 
must--
    (i) Submit a disenrollment notice to HCFA within 15 days of 
receipt;
    (ii) Provide the enrollee with a copy of the request for 
disenrollment; and
    (iii) In the case of a plan where lock-in applies, also provide the 
enrollee with a statement explaining that he or she--
    (A) Remains enrolled until the effective date of disenrollment; and
    (B) Until that date, neither the M+C organization nor HCFA pays for 
services not provided or arranged for by the M+C plan in which the 
enrollee is enrolled; and
    (iv) File and retain disenrollment requests for the period 
specified in HCFA instructions.
    (4) Effect of failure to submit disenrollment notice to HCFA 
promptly. If the M+C organization fails to submit the correct and 
complete notice required in paragraph (b)(3)(i) of this section, the 
M+C organization must reimburse HCFA for any capitation payments 
received after the month in which payment would have ceased if the 
requirement had been met timely.
    (5) Retroactive disenrollment. HCFA may grant retroactive 
disenrollment in the following cases:
    (i) There never was a legally valid enrollment.
    (ii) A valid request for disenrollment was properly made but not 
processed or acted upon.
    (c) Election by default: Initial coverage election period. An 
individual who fails to make an election during the initial coverage 
election period is deemed to have elected original Medicare.
    (d) Conversion of enrollment (seamless continuation of coverage)--
(1) Basic rule. An M+C plan offered by an M+C organization must accept 
any individual (residing in the service area or continuation area of 
the M+C plan) who is enrolled in a health plan offered by an M+C 
organization (regardless of whether the individual has end-stage renal 
disease) during the month immediately preceding the month in which he 
or she is entitled to both Part A and Part B as provided by 
Sec. 422.50(a)(2) and (a)(3).
    (2) Reserved vacancies. Subject to HCFA's approval, an M+C 
organization may set aside a reasonable number of vacancies in order to 
accommodate enrollment of conversions. Any set aside vacancies that are 
not filled within a reasonable time must be made available to other M+C 
eligible individuals.
    (3) Effective date of conversion. Unless the individual chooses to 
disenroll from the health plan offered by the M+C organization, the 
individual's conversion to an M+C enrollee is effective the month in 
which he or she is entitled to both Part A and Part B.
    (4) Prohibition against disenrollment. The M+C organization may 
disenroll an individual who is converting under the provisions of 
paragraph (a) of this section only under the conditions specified in 
Sec. 422.74.
    (5) Election form. The individual who is converting must complete 
and sign an election form as described in Sec. 422.60(c)(1).
    (6) Submittal of information to HCFA. The M+C organization must 
transmit the information necessary for HCFA to add the individual to 
its records as specified in Sec. 422.60(e)(6).
    (e) Maintenance of enrollment. An individual who has made or is 
deemed to have made an election under this section is considered to 
have continued to have made that election until either of the 
following, whichever occurs first:
    (1) The individual changes the election under this section.
    (2) The elected M+C plan is discontinued or no longer serves the 
service area in which the individual resides, and the organization does 
not offer or the individual does not elect the option of continuing 
enrollment, as provided in Sec. 422.54.


422.68  Effective dates of coverage and change of coverage.

    (a) Initial coverage election period. An election made during an 
initial coverage election period as described in Sec. 422.62(a)(1) is 
effective as of the first day of the month of entitlement to both Part 
A and Part B.
    (b) Annual election periods. For an election or change of election 
made during an annual election period as described in 
Sec. 422.62(a)(2), coverage is effective as of the first day of the 
following calendar year.
    (c) Open enrollment periods. For an election or change of election 
made during an open enrollment period as described in Sec. 422.62(a)(3) 
through (a)(5), coverage is effective as of the first day of the first 
calendar month following the month in which the election is made.
    (d) Special election periods. For an election or change of election 
made during a special election period as described in Sec. 422.62(b), 
the effective date of coverage shall be determined by HCFA, to the 
extent practicable, in a manner consistent with protecting the 
continuity of health benefits coverage.
    (e) Special election period for individual age 65. For an election 
of coverage under original Medicare made during a special election 
period for an individual age 65 as described in

[[Page 35075]]

Sec. 422.62(c), coverage is effective as of the first day of the first 
calendar month following the month in which the election is made.


Sec. 422.74  Disenrollment by the M+C organization.

    (a) General rule. Except as provided in paragraphs (b) through (d) 
of this section, an M+C organization may not--
    (1) Disenroll an individual from any M+C plan it offers; or
    (2) Orally or in writing, or by any action or inaction, request or 
encourage an individual to disenroll.
    (b) Basis for disenrollment--(1) Optional disenrollment. An M+C 
organization may disenroll an individual from an M+C plan it offers in 
any of the following circumstances:
    (i) Any monthly basic and supplementary beneficiary premiums are 
not paid on a timely basis, subject to the grace period for late 
payment established under paragraph (d)(1) of this section.
    (ii) The individual has engaged in disruptive behaviors specified 
at paragraph (d)(2) of this section.
    (iii) The individual provides fraudulent information on his or her 
election form or permits abuse of his or her enrollment card as 
specified in paragraph (d)(3) of this section.
    (2) Required disenrollment. An M+C organization must disenroll an 
individual from an M+C plan it offers in any of the following 
circumstances:
    (i) The individual no longer resides in the M+C plan's service area 
as specified in paragraph (d)(4) of this section, and optional 
continued enrollment has not been offered or elected pursuant to 
Sec. 422.54.
    (ii) The individual loses entitlement to Part A or Part B benefits 
as described in paragraph (d)(5) of this section.
    (iii) Death of the individual as described in paragraph (d)(6) of 
this section.
    (3) Plan termination or reduction of service area or continuation 
area. An M+C plan offered by an M+C organization that terminates with 
respect to all M+C individuals in the area where the individual resides 
or is terminated or reduces service area or continuation area must 
comply with the process for disenrollment set forth at paragraph (d)(7) 
of this section.
    (c) Notice requirement. If the disenrollment is for any of the 
reasons specified in paragraphs (b)(1) through (b)(2)(i) and (b)(3) of 
this section, that is, other than death or loss of entitlement to Part 
A or Part B, the M+C organization must give the individual a written 
notice of the disenrollment with an explanation of why the M+C 
organization is planning to disenroll the individual.
    (1) The notice must be mailed to the individual before submission 
of the disenrollment notice to HCFA.
    (2) The notice must include an explanation of the individual's 
right to a hearing under the M+C organization's grievance procedures.
    (d) Process for disenrollment--(1) Monthly basic and supplementary 
premiums are not paid timely. An M+C organization may disenroll an 
individual from the M+C plan for failure to pay any basic or 
supplementary premiums if the M+C organization--
    (i) Makes a reasonable effort to collect unpaid premium amounts by 
sending a written notice of nonpayment to the enrollee within 20 days 
after the date that the delinquent charges were due--
    (A) Alerting the individual that the premiums are delinquent;
    (B) Providing the individual with an explanation of the 
disenrollment procedures and any lock-in requirements of the M+C plan; 
and
    (C) Advising that failure to pay the premiums within the 90-day 
grace period will result in termination of M+C coverage;
    (ii) Only disenrolls a Medicare enrollee when the organization has 
not received payment within 90 days after the date it has sent the 
notice of nonpayment to the enrollee; and
    (iii) Gives the individual a written notice of disenrollment that 
meets the requirements set forth in paragraph (c) of this section.
    (2) Disenrollment for disruptive behavior--(i) Basis for 
disenrollment. An M+C organization may disenroll an individual from the 
M+C plan if the individual's behavior is disruptive, unruly, abusive, 
or uncooperative to the extent that his or her continued enrollment in 
the plan seriously impairs the M+C plan's ability to furnish services 
to either the particular individual or other individuals enrolled in 
the plan.
    (ii) Effort to resolve the problem. The M+C organization must make 
a serious effort to resolve the problems presented by the individual, 
including the use (or attempted use) of the M+C organization's 
grievance procedures. The beneficiary has a right to submit any 
information or explanation that he or she may wish to submit to the M+C 
organization.
    (iii) Consideration of extenuating circumstances. The M+C 
organization must establish that the individual's behavior is not 
related to the use of medical services or to diminished mental 
capacity.
    (iv) Documentation. The M+C organization must document the 
enrollee's behavior, its own efforts to resolve any problems, and any 
extenuating circumstances, as described in paragraphs (d)(2)(i) through 
(d)(2)(iii) of this section.
    (v) HCFA review of the M+C organization's proposed disenrollment. 
(A) HCFA decides after reviewing the documentation submitted by the M+C 
organization and any information submitted by the beneficiary (which 
the M+C organization must forward to HCFA) whether the M+C organization 
has met the disenrollment requirements.
    (B) HCFA makes the decision within 20 working days after receipt of 
the documentation and notifies the M+C organization within 5 working 
days after making its decision.
    (vi) Effective date of disenrollment. If HCFA permits an M+C 
organization to disenroll an individual for disruptive behavior, the 
termination is effective the first day of the calendar month after the 
month in which the M+C organization gives the individual written notice 
of the disenrollment that meets the requirements set forth in paragraph 
(c) of this section.
    (3) Individual commits fraud or permits abuse of enrollment care. 
(i) Basis for disenrollment. An M+C organization may disenroll the 
individual from an M+C plan if the individual--
    (A) Knowingly provides, on the election form, fraudulent 
information that materially affects the individual's eligibility to 
enroll in the M+C plan; or
    (B) Intentionally permits others to use his or her enrollment card 
to obtain services under the M+C plan.
    (ii) Notice of disenrollment. The M+C organization must give the 
individual a written notice of the disenrollment that meets the 
requirements set forth in paragraph (c) of this section.
    (iii) Report to HCFA. The M+C organization must report to HCFA any 
disenrollment based on fraud or abuse by the individual.
    (4) Individual no longer resides in the M+C plan's service area--
(i) Basis for disenrollment. Unless continuation of enrollment is 
elected under Sec. 422.54, the M+C organization must disenroll an 
individual who moves out of a plan's service area if the M+C 
organization establishes, on the basis of a written statement from the 
individual, or other evidence acceptable to HCFA, that the individual 
has moved out of a plan's service area for over 12 months.
    (ii) Notice of disenrollment. The M+C organization must give the 
individual a written notice of the disenrollment that

[[Page 35076]]

meets the requirements set forth in paragraph (c) of this section.
    (5) Loss of entitlement to Part A or Part B benefits. If an 
individual is no longer entitled to Part A or Part B benefits, HCFA 
notifies the M+C organization that the disenrollment is effective the 
first day of the calendar month following the last month of entitlement 
to Part A or Part B benefits.
    (6) Death of the individual. If the individual dies, disenrollment 
is effective the first day of the calendar month following the month of 
death.
    (7) Plan termination or area reduction. (i) If the plan terminates 
or is terminated or the service area or continuation area are reduced 
with respect to all M+C enrollees in the area in which they reside, the 
M+C organization must give each Medicare enrollee a written notice of 
the effective date of the plan termination or area reduction and a 
description of alternatives for obtaining benefits under the M+C 
program.
    (ii) The notice must be sent before the effective date of the plan 
termination or area reduction.
    (e) Consequences of disenrollment--(1) Disenrollment for non-
payment of premiums, disruptive behavior, fraud or abuse, loss of Part 
A or Part B. An individual who is disenrolled under paragraph 
(b)(1)(i), (b)(1)(ii), (b)(1)(iii), or paragraph (b)(2)(ii) of this 
section is deemed to have elected original Medicare.
    (2) Disenrollment based on plan termination, area reduction, or 
individual moves out of area. (i) An individual who is disenrolled 
under paragraph (b)(2)(i) or (b)(3) of this section has a special 
election period in which to make a new election as provided in 
Sec. 422.62(b)(1) and (b)(2).
    (ii) An individual who fails to make an election during the special 
election period is deemed to have elected original Medicare.


Sec. 422.80  Approval of marketing materials and election forms.

    (a) HCFA review of marketing materials. An M+C organization may not 
distribute any marketing materials (as defined in paragraph (b)), or 
election forms, or make such materials or forms available to 
individuals eligible to elect an M+C plan, unless--
    (1) At least 45 days before the date of distribution the M+C 
organization has submitted the material or form to HCFA for review 
under the guidelines in paragraph (c); and
    (2) HCFA has not disapproved the distribution of the material or 
form.
    (b) Definition of marketing materials. Marketing materials include 
any informational materials targeted to Medicare beneficiaries which:
    (1) Promote the M+C organization, or any M+C plan offered by the 
M+C organization;
    (2) Inform Medicare beneficiaries that they may enroll, or remain 
enrolled in, an M+C plan offered by the M+C organization;
    (3) Explain the benefits of enrollment in an M+C plan, or rules 
that apply to enrollees;
    (4) Explain how Medicare services are covered under an M+C plan, 
including conditions that apply to such coverage;
    (5) Examples of marketing materials include, but are not limited 
to:
    (i) General audience materials such as general circulation 
brochures, newspapers, magazines, television, radio, billboards, yellow 
pages, or the internet.
    (ii) Marketing representative materials such as scripts or outlines 
for telemarketing or other presentations.
    (iii) Presentation materials such as slides and charts.
    (iv) Promotional materials such as brochures or leaflets, including 
materials for circulation by third parties (e.g., physicians or other 
providers).
    (v) Membership communication materials such as membership rules, 
subscriber agreements (evidence of coverage), member handbooks, and 
newsletters.
    (vi) Letters to members about contractual changes; changes in 
providers, premiums, benefits, plan procedures etc.
    (vii) Membership or claims processing activities (e.g., materials 
on rules involving non-payment of premiums, confirmation of enrollment 
or disenrollment, or annual notification information).
    (c) Guidelines for HCFA Review. In reviewing marketing material or 
election forms under paragraph (a) of this section, HCFA determines 
that the marketing materials:
    (1) Provide, in a format (and, where appropriate, print size), and 
using standard terminology that may be specified by HCFA, the following 
information to Medicare beneficiaries interested in enrolling:
    (i) Adequate written description of rules (including any 
limitations on the providers from whom services can be obtained), 
procedures, basic benefits and services, and fees and other charges.
    (ii) Adequate written description of any supplemental benefits and 
services.
    (iii) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each.
    (iv) Any other information necessary to enable beneficiaries to 
make an informed decision about enrollment.
    (2) Notify the general public of its enrollment period (whether 
time-limited or continuous) in an appropriate manner, through 
appropriate media, throughout its service and continuation area.
    (3) Include in the written materials notice that the organization 
is authorized by law to refuse to renew its contract with HCFA, that 
HCFA also may refuse to renew the contract, and that termination or 
non-renewal may result in termination of the beneficiary's enrollment 
in the plan.
    (4) Contain no statements that are inaccurate or misleading or 
otherwise make misrepresentations.
    (5) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.
    (d) Deemed approval (one-stop shopping). If HCFA has not 
disapproved the distribution of marketing material or forms submitted 
by an M+C organization with respect to an M+C plan in an area, HCFA is 
deemed not to have disapproved the distribution in all other areas 
covered by the M+C plan and organization except with regard to any 
portion of the material or form that is specific to the particular 
area.
    (e) Standards for M+C organization marketing.
    (1) In conducting marketing activities, M+C organizations may not:
    (i) Provide for cash or other monetary rebates as an inducement for 
enrollment or otherwise. This does not prohibit explanation of any 
legitimate benefits the beneficiary might obtain as an enrollee of the 
M+C plan, such as eligibility to enroll in a supplemental benefit plan 
that covers deductibles and coinsurance, or preventive services.
    (ii) Engage in any discriminatory activity such as, for example, 
attempts to recruit Medicare beneficiaries from higher income areas 
without making comparable efforts to enroll Medicare beneficiaries from 
lower income areas.
    (iii) Solicit door-to-door for Medicare beneficiaries.
    (iv) Engage in activities that could mislead or confuse Medicare 
beneficiaries, or misrepresent the M+C organization, the M+C 
organization may not claim that it is recommended or endorsed by HCFA 
or Medicare or that HCFA or Medicare recommends that the beneficiary 
enroll in the M+C plan. It may, however, explain that the organization 
is approved for participation in Medicare.
    (v) Distribute marketing materials for which, before expiration of 
the 45-day

[[Page 35077]]

period, the M+C organization receives from HCFA written notice of 
disapproval because it is inaccurate or misleading, or misrepresents 
the M+C organization, its marketing representatives, or HCFA.
    (2) In its marketing, the M+C organization must:
    (i) Demonstrate the HCFA's satisfaction that marketing resources 
are allocated to marketing to the disabled Medicare population as well 
as beneficiaries age 65 and over.
    (ii) Establish and maintain a system for confirming that enrolled 
beneficiaries have in fact, enrolled in the M+C plan, and understand 
the rules applicable under the plan.
    (f) Employer group retiree Marketing. HCFA may permit M+C 
organizations to develop marketing materials designed for members of an 
employer group who are eligible for employer-sponsored benefits through 
the M+C organization, and to furnish these materials only to such group 
members. While such materials must be submitted for approval under 
paragraph (a) of this section, HCFA will only review potions of these 
materials that related to M+C plan benefits.

BILLING CODE 4120-01-M

Subpart C--Benefits and Beneficiary Protections


Sec. 422.100  General requirements.

    (a) Basic rule. Subject to the conditions and limitations set forth 
in this subpart, an M+C organization offering an M+C plan must provide 
enrollees in that plan with coverage of the basic benefits described in 
Sec. 422.101 (and, to the extent applicable, the benefits described in 
Sec. 422.102) by furnishing the benefits directly or through 
arrangements, or by paying for the benefits. HCFA reviews these 
benefits subject to the requirements of Sec. 422.100(g) and the 
requirements in subpart G of this part.
    (b) Services of noncontracting providers and suppliers.  (1) An M+C 
organization must make timely and reasonable payment to or on behalf of 
the plan enrollee for the following services obtained from a provider 
or supplier that does not contract with the M+C organization to provide 
services covered by the M+C plan:
    (i) Emergency services as defined in Sec. 422.2.
    (ii) Urgently needed services as defined Sec. 422.2.
    (iii) Renal dialysis services provided while the enrollee was 
temporarily outside the plan's service area.
    (iv) Post-stabilization care services that were--
    (A) Pre-approved by the organization; or
    (B) Were not pre-approved by the organization because the 
organization did not respond to the provider of post-stabilization care 
services' request for pre-approval within 1 hour after being requested 
to approve such care, or could not be contacted for pre-approval.
    (v) Services for which coverage has been denied by the M+C 
organization and found (upon appeal under subpart M of this part) to be 
services the enrollee was entitled to have furnished, or paid for, by 
the M+C organization.
    (2) An M+C plan (other than an M+C MSA plan) offered by an M+C 
organization satisfies paragraph (a) of this section with respect to 
benefits for services furnished by a noncontracting provider if that 
M+C plan provides payment in an amount the provider would have received 
under original Medicare (including balance billing permitted under 
Medicare Part A and Part B).
    (c) Types of benefits. An M+C plan may include two types of 
benefits:
    (1) Basic benefits as defined in Sec. 422.2.
    (2) Supplemental benefits, which consist of--
    (i) Mandatory supplemental benefits as defined in Sec. 422.2; and
    (ii) Optional supplemental benefits as defined in Sec. 422.2.
    (d) Availability and structure of plans. An M+C organization 
offering an M+C plan must offer it--
    (1) To all Medicare beneficiaries residing in the service area of 
the M+C plan;
    (2) At a uniform premium; and
    (3) With a uniform level of cost-sharing, as defined in Sec. 422.2.
    (e) Terms of M+C plans. Terms of M+C plans described in 
instructions to beneficiaries, as required by Sec. 422.111, will 
include basic and supplemental benefits and terms of coverage for those 
benefits.
    (f) Multiple plans in one service area. An M+C organization may 
offer more than one M+C plan in the same service area subject to the 
conditions and limitations set forth in this subpart for each M+C plan.
    (g) HCFA review and approval of M+C plans. HCFA reviews and 
approves each M+C plan to ensure that the plan does not--
    (1) Promote discrimination;
    (2) Discourage enrollment;
    (3) Steer specific subsets of Medicare beneficiaries to particular 
M+C plans; or
    (4) Inhibit access to services.
    (h) Benefits affecting screening mammography, influenza vaccine, 
and pneumococcal vaccine. (1) Enrollees of M+C organizations may 
directly access (through self-referral) screening mammography and 
influenza vaccine.
    (2) M+C organizations may not impose cost-sharing for influenza 
vaccine and pneumococcal vaccine.
    (i) Requirements relating to Medicare conditions of participation. 
Basic benefits must be provided through providers meeting the 
requirements in Sec. 422.204(a)(3).
    (j) Choice of practitioners. Consistent with the requirements of 
Sec. 422.204 relating to the prohibition of discrimination against 
providers, if more than one type of practitioner is qualified to 
furnish a particular service, the M+C organization may select the type 
of practitioner to be used.


Sec. 422.101  Requirements relating to basic benefits.

    Except as specified in Sec. 422.264 (for entitlement that begins or 
ends during a hospital stay) and Sec. 422.266 (with respect to hospice 
care), each M+C organization must--
    (a) Provide coverage of, through the provision of or payment for, 
all services that are covered by Part A and Part B of Medicare (if the 
enrollee is entitled to benefits under both parts) or by Medicare Part 
B (if entitled only under Part B) and that are available to 
beneficiaries residing in the geographic area in which services are 
covered under the M+C plan (or to Part A and Part B services obtained 
outside the geographic area if it is common practice to refer patients 
to sources outside that geographic area); and
    (b) Comply with--
    (1) HCFA's national coverage decisions; and
    (2) Written coverage decisions of local carriers and intermediaries 
with jurisdiction for claims in the geographic area in which services 
are covered under the M+C plan.


Sec. 422.102  Supplemental benefits.

    (a) Mandatory supplemental benefits. (1) Subject to HCFA's 
approval, an M+C organization may require Medicare enrollees of an M+C 
plan other than an MSA plan to accept and pay for services in addition 
to those included in the basic benefits described in Sec. 422.101.
    (2) If the M+C organization imposes mandatory supplemental 
benefits, it must impose them on all Medicare beneficiaries enrolled in 
the M+C plan.
    (3) HCFA approves mandatory supplemental benefits if it determines 
that imposition of the mandatory benefits will not substantially 
discourage Medicare beneficiaries from enrolling in the M+C plan.
    (b) Optional supplemental benefits. Except as provided in 
Sec. 422.104 in the

[[Page 35078]]

case of MSA plans, each M+C organization may offer (for election by the 
enrollee and without regard to health status) services that are in 
addition to those included in the basic benefits described in 
Sec. 422.101 and any mandatory supplemental benefits described in 
paragraph (a) of this section. Optional supplemental benefits must be 
offered to all Medicare beneficiaries enrolled in the M+C plan.
    (c) Payment for supplemental services. All supplemental benefits 
are paid for directly by (or on behalf of) the enrollee of the M+C 
plan.


Sec. 422.103  Benefits under an M+C MSA plan.

    (a) General rule. An M+C organization offering an M+C MSA plan must 
make available to an enrollee, or provide reimbursement for, at least 
the services described under in Sec. 422.101 after the enrollee incurs 
countable expenses equal to the amount of the plan's annual deductible.
    (b) Countable expenses. An M+C organization offering an M+C MSA 
plan must count toward the annual deductible at least all amounts that 
would be paid for the particular service under original Medicare, 
including amounts that would be paid by the enrollee as deductibles or 
coinsurance.
    (c) Services after the deductible. For services received by the 
enrollee after the annual deductible is satisfied, an M+C organization 
offering an M+C MSA plan must pay, at a minimum, the lesser of the 
following amounts:
    (1) 100 percent of the expense of the services.
    (2) 100 percent of the amounts that would have been paid for the 
services under original Medicare, including amounts that would be paid 
by the enrollee as deductibles and coinsurance.
    (d) Annual deductible. The annual deductible for an M+C MSA plan--
    (1) For contract year 1999, may not exceed $6,000; and
    (2) For subsequent contract years may not exceed the deductible for 
the preceding contract year, increased by the national per capita 
growth percentage determined under Sec. 422.252(b).


Sec. 422.104  Special rules on supplemental benefits for M+C MSA plans.

    (a) An M+C organization offering an M+C MSA plan may not provide 
supplemental benefits that cover expenses that count towards the 
deductible specified in Sec. 422.103(d).
    (b) In applying the limitation of paragraph (a) of this section, 
the following kinds of policies are not considered as covering the 
deductible:
    (1) A policy that provides coverage (whether through insurance or 
otherwise) for accidents, disability, dental care, vision care, or 
long-term care.
    (2) A policy of insurance in which substantially all of the 
coverage relates to liabilities incurred under workers' compensation 
laws, tort liabilities, liabilities relating to use or ownership of 
property, and any other similar liabilities that HCFA may specify by 
regulation.
    (3) A policy of insurance that provides coverage for a specified 
disease or illness or pays a fixed amount per day (or other period) of 
hospitalization.


Sec. 422.105  Special rules for point of service option.

    (a) A POS benefit is an option that an M+C organization may offer 
in an M+C coordinated care plan or network M+C MSA plan to provide 
enrollees with additional choice in obtaining specified health care 
services from individuals or entities that do not have a contract with 
the M+C organization to provide service through the M+C coordinated 
care plan or network M+C MSA plan offering the POS option. The plan may 
offer a POS option--
    (1) Under a coordinated care plan only as an additional benefit as 
described in Sec. 422.312;
    (2) Under a coordinated care plan only as a mandatory supplemental 
benefit as described in Sec. 422.102(a); or
    (3) Under a coordinated care plan or network MSA plan as an 
optional supplemental benefit as described in Sec. 422.102(b).
    (b) Approval required. An M+C organization may not implement a POS 
benefit until it has been approved by HCFA.
    (c) Ensuring availability and continuity of care. An M+C network 
plan that includes a POS benefit must continue to provide all benefits 
and ensure access as required under this subpart.
    (d) Enrollee information and disclosure. The disclosure 
requirements specified in Sec. 422.111 apply in addition to the 
following requirements:
    (1) Written rules. M+C organizations must maintain written rules on 
how to obtain health benefits through the POS benefit.
    (2) Evidence of coverage document. The M+C organization must 
provide to beneficiaries enrolling in a plan with a POS benefit an 
``evidence of coverage'' document, or otherwise provide written 
documentation, that specifies all costs and possible financial risks to 
the enrollee, including--
    (i) Any premiums and cost-sharing for which the enrollee is 
responsible;
    (ii) Annual limits on benefits and on out-of-pocket expenditures;
    (iii) Potential financial responsibility for services for which the 
plan denies payment because they were not covered under the POS 
benefit, or exceeded the dollar limit for the benefit; and
    (iv) The annual maximum out-of-pocket expense an enrollee could 
incur.
    (e) Prompt payment. Health benefits payable under the POS benefit 
are subject to the prompt payment requirements in Sec. 422.520.
    (f) POS Related Data. An M+C organization that offers a POS benefit 
must report data on the POS benefit in the form and manner prescribed 
by HCFA.


Sec. 422.106  Special arrangements with employer groups.

    An M+C organization may negotiate with an employer group to provide 
benefits to members of the employer group who are enrolled in an M+C 
plan offered by the organization. While these negotiated employer group 
benefits may be designed to complement the benefits available to 
Medicare beneficiaries enrolled in the M+C plan, they are offered by 
the employer group independently as the product of private negotiation. 
Examples of such employer-benefits include the following:
    (a) Reductions in the portion of the premium that the M+C 
organization charges to the beneficiary.
    (b) Reductions in portion of other cost sharing amounts the M+C 
organization charges to the beneficiary.
    (c) The addition of benefits that may require additional premium 
and cost sharing. The addition of benefits and the charges for those 
benefits are not subject to HCFA review or approval.


Sec. 422.108  Medicare secondary payer (MSP) procedures.

    (a) Basic rule. HCFA does not pay for services to the extent that 
Medicare is not the primary payer under section 1862(b) of the Act and 
part 411 of this chapter.
    (b) Responsibilities of the M+C organization. The M+C organization 
must, for each M+C plan--
    (1) Identify payers that are primary to Medicare under section 
1862(b) of the Act and part 411 of this chapter;
    (2) Determine the amounts payable by those payers; and
    (3) Coordinate its benefits to Medicare enrollees with the benefits 
of the primary payers.
    (c) Charges to other entities. The M+C organization may charge, or 
authorize a provider to charge, other individuals or entities for 
covered Medicare services

[[Page 35079]]

for which Medicare is not the primary payer, as specified in paragraphs 
(d) and (e) of this section.
    (d) Charge to other insurers or the enrollee. If a Medicare 
enrollee receives from an M+C organization covered services that are 
also covered under State or Federal workers' compensation, any no-fault 
insurance, or any liability insurance policy or plan, including a self-
insured plan, the M+C organization may charge, or authorize a provider 
to charge any of the following--
    (1) The insurance carrier, the employer, or any other entity that 
is liable for payment for the services under section 1862(b) of the Act 
and part 411 of this chapter.
    (2) The Medicare enrollee, to the extent that he or she has been 
paid by the carrier, employer, or entity for covered medical expenses.
    (e) Charge to group health plans (GHPs) and large group health 
plans (LGHPs). An M+C organization may charge a GHP or LGHP for 
services it furnishes to a Medicare enrollee who is also covered under 
the GHP or LGHP and may charge the Medicare enrollee to the extent that 
he or she has been paid by the GHP or LGHP.


Sec. 422.109  Effect of national coverage determinations (NCDs).

    (a) If HCFA determines and announces that an NCD meets the criteria 
for ``significant cost'' described in paragraph (c) of this section, an 
M+C organization is not required to assume risk for the costs of that 
service until the contract year for which the annual M+C capitation 
rate is determined on a basis that includes the cost of the NCD 
service.
    (b) The M+C organization must furnish, arrange or pay for an NCD 
``significant cost'' service prior to the adjustment of the annual M+C 
capitation rate. The following rules apply to such services:
    (1) Medicare payment for the service is:
    (i) In addition to the capitation payment to the M+C organization; 
and
    (ii) Made directly by the fiscal intermediary and carrier to the 
M+C organization in accordance with original Medicare payment rules, 
methods, and requirements.
    (2) NCD costs for which HCFA intermediaries and carriers will not 
make payment and are the responsibility of the M+C organization are--
    (i) Services necessary to diagnose a condition covered by the NCD;
    (ii) Most services furnished as follow-up care to the NCD service;
    (iii) Any service that is already a Medicare-covered service and 
included in the annual M+C capitation rate; and
    (iv) Any service, including the costs of the NCD service itself, to 
the extent the M+C organization is already obligated to cover it as an 
additional benefit under Sec. 422.312 or supplemental benefit under 
Sec. 422.102.
    (3) NCD costs for which HCFA intermediaries and carriers make 
payment are--
    (i) Costs relating directly to the provision of services related to 
the NCD that were noncovered services prior to the issuance of the NCD; 
and
    (ii) A service that is not included in the M+C per capita payment 
rate.
    (4) If the M+C organization does not provide or arrange for the 
service consistent with HCFA's NCD, enrollees may obtain the services 
through qualified providers not under contract to the M+C organization, 
and the organization will pay for the services consistent with 
Sec. 422.109(c).
    (5) Beneficiaries are liable for Part A deductible and any 
applicable coinsurance amounts.
    (c) The term ``significant cost'' as it relates to a particular NCD 
means either of the following:
    (1) The average cost of furnishing a single service exceeds a cost 
threshold that--
    (i) For calendar years 1998 and 1999, is $100,000;
    (ii) For calendar year 2000 and subsequent calendar years, is the 
preceding year's dollar threshold adjusted to reflect the national per 
capita growth percentage described in Sec. 422.254(b).
    (2) The estimated cost of all of Medicare services furnished 
nationwide as a result of a particular NCD represents at least 0.1 
percent of the national standardized annual capitation rate (see 
Sec. 422.254(f)), multiplied by the total number of Medicare 
beneficiaries nationwide for the applicable calendar year.


Sec. 422.110  Discrimination against beneficiaries prohibited.

    (a) General prohibition. Except as provided in paragraph (b) of 
this section, an M+C organization may not deny, limit, or condition the 
coverage or furnishing of benefits to individuals eligible to enroll in 
an M+C plan offered by the organization on the basis of any factor that 
is related to health status, including, but not limited to the 
following:
    (1) Medical condition, including mental as well as physical 
illness.
    (2) Claims experience.
    (3) Receipt of health care.
    (4) Medical history.
    (5) Genetic information.
    (6) Evidence of insurability, including conditions arising out of 
acts of domestic violence.
    (7) Disability.
    (b) Exception. An M+C organization may not enroll an individual who 
has been medically determined to have end-stage renal disease. However, 
an enrollee who develops end-stage renal disease while enrolled in a 
particular M+C organization may not be disenrolled for that reason. An 
individual who is an enrollee of a particular M+C organization, and 
resides in the M+C plan service area at the time he or she first 
becomes M+C eligible, is considered to be ``enrolled'' in the M+C 
organization for purposes of the preceding sentence.
    (c) Plans are required to observe the provisions of the Civil 
Rights Act, Age Discrimination Act, and Americans with Disabilities Act 
(see Sec. 422.501(h)).


Sec. 422.111  Disclosure requirements.

    (a) Detailed description of plan provisions. An M+C organization 
must disclose the information specified in Sec. 422.64 and in paragraph 
(b) of this section--
    (1) To each enrollee electing an M+C plan it offers;
    (2) In clear, accurate, and standardized form; and
    (3) At the time of enrollment and at least annually thereafter.
    (b) Content of plan description. The description must include the 
following information:
    (1) Service area. The M+C plan's service area and any enrollment 
continuation area.
    (2) Benefits. The benefits offered under the plan, including 
applicable conditions and limitations, premiums and cost-sharing (such 
as copayments, deductibles, and coinsurance) and any other conditions 
associated with receipt or use of benefits; and for purposes of 
comparison--
    (i) The benefits offered under original Medicare, including the 
content specified in Sec. 422.64(c);
    (ii) For an M+C MSA plan, the benefits under other types of M+C 
plans; and
    (iii) The availability of the Medicare hospice option and any 
approved hospices in the service area, including those the M+C 
organization owns, controls, or has a financial interest in.
    (3) Access. The number, mix, and distribution (addresses) of 
providers from whom enrollees may obtain services; any out-of network 
coverage; any point-of-service option, including the supplemental 
premium for that

[[Page 35080]]

option; and how the M+C organization meets the requirements of 
Secs. 422.112 and 422.114 for access to services offered under the 
plan.
    (4) Out-of-area coverage. Out-of-area coverage provided by the 
plan.
    (5) Emergency coverage. Coverage of emergency services, including--
    (i) Explanation of what constitutes an emergency, referencing the 
definitions of emergency services and emergency medical condition at 
Sec. 422.2;
    (ii) The appropriate use of emergency services, stating that prior 
authorization cannot be required;
    (iii) The process and procedures for obtaining emergency services, 
including use of the 911 telephone system or its local equivalent; and
    (iv) The locations where emergency care can be obtained and other 
locations at which contracting physicians and hospitals provide 
emergency services and post-stabilization care included in the M+C 
plan.
    (6) Supplemental benefits. Any mandatory or optional supplemental 
benefits and the premium for those benefits.
    (7) Prior authorization and review rules. Prior authorization rules 
and other review requirements that must be met in order to ensure 
payment for the services. The M+C organization must instruct enrollees 
that, in cases where noncontracting providers submit a bill directly to 
the enrollee, the enrollee should not pay the bill, but submit it to 
the M+C organization for processing and determination of enrollee 
liability, if any.
    (8) Grievance and appeals procedures. All grievance and appeals 
rights and procedures.
    (9) Quality assurance program. A description of the quality 
assurance program required under Sec. 422.152.
    (10) Disenrollment rights and responsibilities.
    (c) Disclosure upon request. Upon request of an individual eligible 
to elect an M+C plan, an M+C organization must provide to the 
individual the following information:
    (1) The information required under Sec. 422.64(c).
    (2) The procedures the organization uses to control utilization of 
services and expenditures.
    (3) The number of disputes, and the disposition in the aggregate, 
in a manner and form described by the Secretary. Such disputes shall be 
categorized as
    (i) Grievances according to Sec. 422.564; and
    (ii) Appeals according to Sec. 422.578 et. seq.
    (4) A summary description of the method of compensation for 
physicians.
    (5) Financial condition of the M+C organization, including the most 
recently audited information regarding, at least, a description of the 
financial condition of the M+C organization offering the plan.
    (d) Changes in rules. If an M+C organization intends to change its 
rules for an M+C plan, it must--
    (1) Submit the changes for HCFA review under the procedures of 
Sec. 422.80; and
    (2) Give notice to all enrollees 30 days before the intended 
effective date of the changes.
    (e) Changes to provider network. The M+C organization must make a 
good faith effort to provide written notice of a termination of a 
contracted provider within 15 working days of receipt or issuance of a 
notice of termination, as described in Sec. 422.204(c)(4), to all 
enrollees who are patients seen on a regular basis by the provider 
whose contract is terminating, irrespective of whether the termination 
was for cause or without cause. When a contract termination involves a 
primary care professional, all enrollees who are patients of that 
primary care professional must also be notified.


Sec. 422.112  Access to services.

    (a) Rules for coordinated care plans and network M+C MSA plans. An 
M+C organization that offers an M+C coordinated care plan or network 
M+C MSA plan may specify the networks of providers from whom enrollees 
may obtain services if the following conditions are met:
    (1) The M+C organization ensures that all covered services, 
including additional or supplemental services contracted for by (or on 
behalf of) the Medicare enrollee, are available and accessible under 
the plan. To do this, the M+C organization must do the following:
    (i) Maintain and monitor a network of appropriate providers that is 
supported by written agreements and is sufficient to provide adequate 
access to covered services to meet the needs of the population served. 
These providers are typically utilized in the network as primary care 
providers (PCPs), specialists, hospitals, skilled nursing facilities, 
home health agencies, ambulatory clinics, and other providers.
    (ii) Select the panel of PCPs from which the enrollee selects a 
PCP.
    (iii) Provide or arrange for necessary specialty care, and in 
particular--
    (A) Women enrollees may choose direct access to a women's health 
specialist within the network for women's routine and preventive health 
care services provided as basic benefits (as defined in Sec. 422.2) 
while the plan maintains a PCP or some other means for continuity of 
care; and
    (B) Plans must have procedures approved by HCFA for--
    (1) Identification of individuals with complex or serious medical 
conditions;
    (2) Assessment of those conditions, including medical procedures to 
diagnose and monitor them on an ongoing basis; and
    (3) Establishment and implementation of a treatment plan 
appropriate to those conditions, with an adequate number of direct 
access visits to specialists to accommodate the treatment plan. 
Treatment plans must be time-specific and updated periodically by the 
PCP.
    (2) In the case of involuntary termination of an M+C plan or 
specialist(s) for a reason other than for cause, the M+C organization 
must do the following:
    (i) Inform beneficiaries, at the time of termination, of their 
right to maintain access to specialists.
    (ii) Provide the names of other M+C plans in the area that contract 
with specialists of the beneficiary's choice, as well as an explanation 
of the process the beneficiary would need to follow should he or she 
decide to return to original Medicare.
    (iii) If seeking a service area expansion for an M+C plan, 
demonstrate that the number and type of providers available to plan 
enrollees are sufficient to meet projected needs of the population to 
be served.
    (iv) Demonstrate to HCFA that its providers in an M+C plan are 
credentialed through the process set forth at Sec. 422.204(a).
    (v) Establish written standards for--
    (A) Timeliness of access to care and member services that meet or 
exceed standards established by HCFA. Timely access to care and member 
services within a plan's provider network must be continuously 
monitored to ensure compliance with these standards, and the M+C 
organization must take corrective action as necessary;
    (B) Policies and procedures (coverage rules, practice guidelines, 
payment policies, and utilization management) that allow for individual 
medical necessity determinations; and
    (C) Provider consideration of beneficiary input into the provider's 
proposed treatment plan.
    (vi) Ensure that the hours of operation of its M+C plan providers 
are convenient to the population served by the plan and do not 
discriminate against Medicare enrollees.
    (vii) Ensure services are provided in a culturally competent manner 
to all enrollees, including those with limited

[[Page 35081]]

English proficiency or reading skills, diverse cultural and ethnic 
backgrounds, and physical or mental disabilities.
    (viii) Make plan services available 24 hours a day, 7 days a week, 
when medically necessary.
    (ix) Provide coverage for emergency and urgent care services in 
accordance with paragraph (b) of this section.
    (3) The M+C organization must ensure continuity of care and 
integration of services through arrangements that include, but are not 
limited to--
    (i) Use of a practitioner who is specifically designated as having 
primary responsibility for coordinating the enrollee's overall health 
care;
    (ii) Policies that specify whether services are coordinated by the 
enrollee's primary care practitioner or through some other means;
    (iii) An ongoing source of primary care, regardless of the 
mechanism adopted for coordination of services;
    (iv) Programs for coordination of care that coordinate services 
with community and social services generally available through 
contracting or noncontracting providers in the area served by the M+C 
plan, including nursing home and community-based services;
    (v) Procedures to ensure that the M+C organization and its provider 
network have the information required for effective and continuous 
patient care and quality review, including procedures to ensure that--
    (A) An initial assessment of each enrollee's health care needs is 
completed within 90 days of the effective date of enrollment.
    (B) Each provider, supplier, and practitioner furnishing services 
to enrollees maintains an enrollee health record in accordance with 
standards established by the M+C organization, taking into account 
professional standards; and
    (C) Appropriate and confidential exchange of information among 
provider network components;
    (vi) Procedures to ensure that enrollees are informed of specific 
health care needs that require follow-up and receive, as appropriate, 
training in self-care and other measures they may take to promote their 
own health; and
    (vii) Systems to address barriers to enrollee compliance with 
prescribed treatments or regimens.
    (b) Special rules for all M+C organizations for emergency and 
urgently needed services. (1) The M+C organization covers emergency and 
urgently needed services--
    (i) Regardless of whether the services are obtained within or 
outside the organization; and
    (ii) Without required prior authorization.
    (2) The M+C organization may not deny payment for a condition 
that--
    (i) Is an emergency medical condition as defined in Sec. 422.2; or
    (ii) A plan provider or other M+C organization representative 
instructs an enrollee to seek emergency services within or outside the 
plan.
    (3) The physician treating the enrollee must decide when the 
enrollee may be considered stabilized for transfer or discharge, and 
that decision is binding on the M+C organization.
    (4) For emergency services obtained outside the M+C plan's provider 
network, the organization may not charge the enrollee more than $50 or 
what it would charge the enrollee if he or she obtained the services 
through the organization, whichever is less.


Sec. 422.114  Access to services under an M+C private fee-for-service 
plan.

    (a) Sufficient access. (1) An M+C organization that offers an M+C 
private fee-for-service plan must demonstrate to HCFA that it has 
sufficient number and range of providers willing to furnish services 
under the plan.
    (2) HCFA finds that an M+C organization meets the requirement in 
paragraph (a)(1) of this section if, with respect to a particular 
category of health care providers, the M+C organization has--
    (i) Payment rates that are not less than the rates that apply under 
original Medicare for the provider in question;
    (ii) Contracts or agreements with a sufficient number and range of 
providers to furnish the services covered under the M+C private fee-
for-service plan; or
    (iii) A combination of paragraphs (a)(2)(i) and (a)(2)(ii) of this 
section.
    (b) Freedom of choice. M+C fee-for-service plans must permit 
enrollees to obtain services from any entity that is authorized to 
provide services under Medicare Part A and Part B and agrees to provide 
services under the terms of the plan.


Sec. 422.118  Confidentiality and accuracy of enrollee records.

    For any medical records or other health and enrollment information 
it maintains with respect to enrollees, an M+C organization must 
establish procedures to do the following:
    (a) Safeguard the privacy of any information that identifies a 
particular enrollee. Information from, or copies of, records may be 
released only to authorized individuals, and the M+C organization must 
ensure that unauthorized individuals cannot gain access to or alter 
patient records. Original medical records must be released only in 
accordance with Federal or State laws, court orders, or subpoenas.
    (b) Maintain the records and information in an accurate and timely 
manner.
    (c) Ensure timely access by enrollees to the records and 
information that pertain to them.
    (d) Abide by all Federal and State laws regarding confidentiality 
and disclosure for mental health records, medical records, other health 
information, and enrollee information.


Sec. 422.128  Information on advance directives.

    (a) Each M+C organization must maintain written policies and 
procedures that meet the requirements for advance directives, as set 
forth in subpart I of part 489 of this chapter. For purposes of this 
part, advance directive has the meaning given the term in Sec. 489.100 
of this chapter.
    (b) An M+C organization must maintain written policies and 
procedures concerning advance directives with respect to all adult 
individuals receiving medical care by or through the M+C organization.
    (1) An M+C organization must provide written information to those 
individuals with respect to the following:
    (i) Their rights under the law of the State in which the 
organization furnishes services (whether statutory or recognized by the 
courts of the State) to make decisions concerning their medical care, 
including the right to accept or refuse medical or surgical treatment 
and the right to formulate advance directives. Providers may contract 
with other entities to furnish this information but remain legally 
responsible for ensuring that the requirements of this section are met. 
The information must reflect changes in State law as soon as possible, 
but no later than 90 days after the effective date of the State law.
    (ii) The M+C organization's written policies respecting the 
implementation of those rights, including a clear and precise statement 
of limitation if the M+C organization cannot implement an advance 
directive as a matter of conscience. At a minimum, this statement must 
do the following:
    (A) Clarify any differences between institution-wide conscientious 
objections and those that may be raised by individual physicians.

[[Page 35082]]

    (B) Identify the state legal authority permitting such objection.
    (C) Describe the range of medical conditions or procedures affected 
by the conscience objection.
    (D) Provide the information specified in paragraph (a)(1) of this 
section to each enrollee at the time of initial enrollment. If an 
enrollee is incapacitated at the time of initial enrollment and is 
unable to receive information (due to the incapacitating condition or a 
mental disorder) or articulate whether or not he or she has executed an 
advance directive, the M+C organization may give advance directive 
information to the enrollee's family or surrogate in the same manner 
that it issues other materials about policies and procedures to the 
family of the incapacitated enrollee or to a surrogate or other 
concerned persons in accordance with State law. The M+C organization is 
not relieved of its obligation to provide this information to the 
enrollee once he or she is no longer incapacitated or unable to receive 
such information. Follow-up procedures must be in place to ensure that 
the information is given to the individual directly at the appropriate 
time.
    (E) Document in a prominent part of the individual's current 
medical record whether or not the individual has executed an advance 
directive.
    (F) Not condition the provision of care or otherwise discriminate 
against an individual based on whether or not the individual has 
executed an advance directive.
    (G) Ensure compliance with requirements of State law (whether 
statutory or recognized by the courts of the State) regarding advance 
directives.
    (H) Provide for education of staff concerning its policies and 
procedures on advance directives.
    (I) Provide for community education regarding advance directives 
that may include material required in paragraph (a)(1)(i) of this 
section, either directly or in concert with other providers or 
entities. Separate community education materials may be developed and 
used, at the discretion of the M+C organization. The same written 
materials are not required for all settings, but the material should 
define what constitutes an advance directive, emphasizing that an 
advance directive is designed to enhance an incapacitated individual's 
control over medical treatment, and describe applicable State law 
concerning advance directives. An M+C organization must be able to 
document its community education efforts.
    (2) The M+C organization--
    (i) Is not required to provide care that conflicts with an advance 
directive; and
    (ii) Is not required to implement an advance directive if, as a 
matter of conscience, the M+C organization cannot implement an advance 
directive and State law allows any health care provider or any agent of 
the provider to conscientiously object.
    (3) The M+C organization must inform individuals that complaints 
concerning noncompliance with the advance directive requirements may be 
filed with the State survey and certification agency.


Sec. 422.132  Protection against liability and loss of benefits.

    Enrollees of M+C organizations are entitled to the protections 
specified in Sec. 422.502(g).

Subpart D--Quality Assurance


Sec. 422.152  Quality assessment and performance improvement program.

    (a) General rule. Each M+C organization that offers one or more M+C 
plans must have, for each of those plans, an ongoing quality assessment 
and performance improvement program that meets the applicable 
requirements of this section for the services it furnishes to its M+C 
enrollees.
    (b) Requirements for M+C coordinated care plans and network M+C MSA 
plans. An organization offering an M+C coordinated care plan or M+C 
network MSA plan must do the following:
    (1) Meet the requirements in paragraph (c)(1) of this section 
concerning performance measurement and reporting. With respect to an 
M+C coordinated care plan, an organization must also meet the 
requirements of paragraph (c)(2) of this section concerning the 
achievement of minimum performance levels. The requirements of 
paragraph (c)(2) of this section do not apply with respect to an M+C 
MSA plan.
    (2) Conduct performance improvement projects as described in 
paragraph (d) of this section. These projects must achieve, through 
ongoing measurement and intervention, demonstrable and sustained 
improvement in significant aspects of clinical care and nonclinical 
care areas that can be expected to have a favorable effect on health 
outcomes and enrollee satisfaction.
    (3) In processing requests for initial or continued authorization 
of services, follow written policies and procedures that reflect 
current standards of medical practice.
    (4) Have in effect mechanisms to detect both underutilization and 
overutilization of services.
    (5) Make available to HCFA information on quality and outcomes 
measures that will enable beneficiaries to compare health coverage 
options and select among them, as provided in Sec. 422.64(c)(10).
    (c) Performance measurement and reporting. The organization 
offering the plan must do the following:
    (1) Measure performance under the plan, using standard measures 
required by HCFA, and report its performance to HCFA. The standard 
measures may be specified in uniform data collection and reporting 
instruments required by HCFA, and will relate to--
    (i) Clinical areas including effectiveness of care, enrollee 
perception of care, and use of services; and
    (ii) Nonclinical areas including access to and availability of 
services, appeals and grievances, and organizational characteristics.
    (2) Achieve any minimum performance levels that HCFA establishes 
locally, regionally, or nationally with respect to the standard 
measures.
    (i) In establishing minimum performance levels, HCFA considers 
historical plan and original Medicare performance data and trends.
    (ii) HCFA establishes the minimum performance levels prospectively 
upon contract initiation and renewal.
    (iii) The organization must meet the minimum performance levels by 
the end of the contract year.
    (iv) In accordance with Sec. 422.506, HCFA may decline to renew the 
organization's contract in the year that HCFA determines that it did 
not meet the minimum performance levels.
    (d) Performance improvement projects. (1) Performance improvement 
projects are organization initiatives that focus on specified clinical 
and nonclinical areas and that involve the following:
    (i) Measurement of performance.
    (ii) System interventions, including the establishment or 
alteration of practice guidelines.
    (iii) Improving performance.
    (iv) Systematic follow-up on the effect of the interventions.
    (2) Each project must address the entire population to which the 
measurement specified in paragraph (d)(1)(i) of this section is 
relevant.
    (3) HCFA establishes M+C organization and M+C plan-specific 
obligations for the number and distribution of projects among the 
required clinical and nonclinical areas, in accordance with paragraphs 
(d)(4) and (d)(5) of this section, to ensure that the projects are 
representative of the entire spectrum of clinical and nonclinical care 
areas associated with a plan.

[[Page 35083]]

    (4) The required clinical areas include:
    (i) Prevention and care of acute and chronic conditions.
    (ii) High-volume services.
    (iii) High-risk services.
    (iv) Continuity and coordination of care.
    (5) The required nonclinical areas include:
    (i) Appeals, grievances, and other complaints.
    (ii) Access to, and availability of, services.
    (6) In addition to requiring that the organization initiate its own 
performance improvement projects, HCFA may require that the 
organization--
    (i) Conduct particular performance improvement projects that are 
specific to the organization; and
    (ii) Participate in national or statewide performance improvement 
projects.
    (7) For each project, the organization must assess performance 
under the plan using quality indicators that are--
    (i) Objective, clearly and unambiguously defined, and based on 
current clinical knowledge or health services research; and
    (ii) Capable of measuring outcomes such as changes in health 
status, functional status and enrollee satisfaction, or valid proxies 
of those outcomes.
    (8) Performance assessment on the selected indicators must be based 
on systematic ongoing collection and analysis of valid and reliable 
data.
    (9) Interventions must achieve improvement that is significant and 
sustained over time.
    (10) The organization must report the status and results of each 
project to HCFA as requested.
    (e) Requirements for non-network M+C MSA plans and M+C private fee-
for-service plans. An organization offering an M+C non-network MSA plan 
or an M+C private fee-for-service plan must do the following:
    (1) Measure performance under the plan using standard measures 
required by HCFA and report its performance to HCFA. The standard 
measures may be specified in uniform data collection and reporting 
instruments required by HCFA and will relate to--
    (i) Prevention and care of acute and chronic conditions;
    (ii) High-volume services;
    (iii) High-risk services; and
    (iv) Enrollee satisfaction.
    (2) Evaluate the continuity and coordination of care furnished to 
enrollees.
    (3) If the organization uses written protocols for utilization 
review, the organization must--
    (i) Base those protocols on current standards of medical practice; 
and
    (ii) Have mechanisms to evaluate utilization of services and to 
inform enrollees and providers of services of the results of the 
evaluation.
    (f) Requirements for all types of plans--(1) Health information. 
For all types of plans that it offers, an organization must--
    (i) Maintain a health information system that collects, analyzes, 
and integrates the data necessary to implement its quality assessment 
and performance improvement program;
    (ii) Ensure that the information it receives from providers of 
services is reliable and complete; and
    (iii) Make all collected information available to HCFA.
    (2) Program review. For each plan, there must be in effect a 
process for formal evaluation, at least annually, of the impact and 
effectiveness of its quality assessment and performance improvement 
program.


Sec. 422.154  External review.

    (a) Basic rule. Except as provided in paragraph (c) of this 
section, each M+C organization must, for each M+C plan it operates, 
have an agreement with an independent quality review and improvement 
organization (review organization) approved by HCFA to perform 
functions of the type described in part 466 of this chapter.
    (b) Terms of the agreement. The agreement must be consistent with 
HCFA guidelines and include the following provisions:
    (1) Require that the organization--
    (i) Allocate adequate space for use of the review organization 
whenever it is conducting review activities; and
    (ii) Provide all pertinent data, including patient care data, at 
the time the review organization needs the data to carry out the 
reviews and make its determinations.
    (2) Except in the case of complaints about quality, exclude review 
activities that HCFA determines would duplicate review activities 
conducted as part of an accreditation process or as part of HCFA 
monitoring.
    (c) Exceptions. The requirement of paragraph (a) of this section 
does not apply for an M+C private fee-for-service plan or a non-network 
M+C MSA plan if the organization does not carry out utilization review 
with respect to the plan.


Sec. 422.156  Compliance deemed on the basis of accreditation.

    (a) General rule. An M+C organization may be deemed to meet any of 
the requirements of paragraph (b) of this section if--
    (1) The M+C organization is fully accredited (and periodically 
reaccredited) by a private, national accreditation organization 
approved by HCFA; and
    (2) The accreditation organization used the standards approved by 
HCFA for the purposes of assessing the M+C organization's compliance 
with Medicare requirements.
    (b) Deeming requirements. The following requirements are deemable:
    (1) The quality assessment and performance improvement requirements 
of Sec. 422.152.
    (2) The confidentiality and accuracy of enrollee records 
requirements of Sec. 422.118.
    (c) Effective date of deemed status. The date on which the 
organization is deemed to meet the applicable requirements is the later 
of the following:
    (1) The date on which the accreditation organization is approved by 
HCFA.
    (2) The date the M+C organization is accredited by the 
accreditation organization.
    (d) Obligations of deemed M+C organizations. An M+C organization 
deemed to meet Medicare requirements must--
    (1) Submit to surveys by HCFA to validate its accreditation 
organization's accreditation process; and
    (2) Authorize its accreditation organization to release to HCFA a 
copy of its most recent accreditation survey, together with any survey-
related information that HCFA may require (including corrective action 
plans and summaries of unmet HCFA requirements).
    (e) Removal of deemed status. HCFA removes part or all of an M+C 
organization's deemed status for any of the following reasons:
    (1) HCFA determines, on the basis of its own survey or the results 
of the accreditation survey, that the M+C organization does not meet 
the Medicare requirements for which deemed status was granted.
    (2) HCFA withdraws its approval of the accreditation organization 
that accredited the M+C organization.
    (3) The M+C organization fails to meet the requirements of 
paragraph (d) of this section.
    (f) Enforcement authority. HCFA retains the authority to initiate 
enforcement action against any M+C

[[Page 35084]]

organization that it determines, on the basis of its own survey or the 
results of an accreditation survey, no longer meets the Medicare 
requirements for which deemed status was granted.


Sec. 422.157  Accreditation organizations.

    (a) Conditions for approval. HCFA may approve an accreditation 
organization with respect to a given standard under this part if it 
meets the following conditions:
    (1) In accrediting M+C organizations, it applies and enforces 
standards that are at least as stringent as Medicare requirements with 
respect to the standard or standards in question.
    (2) It complies with the application and reapplication procedures 
set forth in Sec. 422.158.
    (3) It is not controlled, as defined in Sec. 413.17 of this 
chapter, by the entities it accredits.
    (b) Notice and comment--(1) Proposed notice. HCFA publishes a 
proposed notice in the Federal Register whenever it is considering 
granting an accreditation organization's application for approval. The 
notice--
    (i) Specifies the basis for granting approval;
    (ii) Describes how the accreditation organization's accreditation 
program meets or exceeds all of the Medicare requirements for which 
HCFA would deem compliance on the basis of the organization's 
accreditation; and
    (iii) Provides opportunity for public comment.
    (2) Final notice. (i) After reviewing public comments, HCFA 
publishes a final Federal Register notice indicating whether it has 
granted the accreditation organization's request for approval.
    (ii) If HCFA grants the request, the final notice specifies the 
effective date and the term of the approval, which may not exceed 6 
years.
    (c) Ongoing responsibilities of an approved accreditation 
organization. An accreditation organization approved by HCFA must 
undertake the following activities on an ongoing basis:
    (1) Provide to HCFA in written form and on a monthly basis all of 
the following:
    (i) Copies of all accreditation surveys, together with any survey-
related information that HCFA may require (including corrective action 
plans and summaries of unmet HCFA requirements).
    (ii) Notice of all accreditation decisions.
    (iii) Notice of all complaints related to deemed M+C organizations.
    (iv) Information about any M+C organization against which the 
accrediting organization has taken remedial or adverse action, 
including revocation, withdrawal or revision of the M+C organization's 
accreditation. (The accreditation organization must provide this 
information within 30 days of taking the remedial or adverse action.)
    (v) Notice of any proposed changes in its accreditation standards 
or requirements or survey process. If the organization implements the 
changes before or without HCFA approval, HCFA may withdraw its approval 
of the accreditation organization.
    (2) Within 30 days of a change in HCFA requirements, submit to 
HCFA--
    (i) An acknowledgment of HCFA's notification of the change;
    (ii) A revised cross-walk reflecting the new requirements; and
    (iii) An explanation of how the accreditation organization plans to 
alter its standards to conform to HCFA's new requirements, within the 
time-frames specified in the notification of change it receives from 
HCFA.
    (3) Permit its surveyors to serve as witnesses if HCFA takes an 
adverse action based on accreditation findings.
    (4) Within 3 days of identifying, in an accredited M+C 
organization, a deficiency that poses immediate jeopardy to the 
organization's enrollees or to the general public, give HCFA written 
notice of the deficiency.
    (5) Within 10 days of HCFA's notice of withdrawal of approval, give 
written notice of the withdrawal to all accredited M+C organizations.
    (d) Continuing Federal oversight of approved accreditation 
organizations. This paragraph establishes specific criteria and 
procedures for continuing oversight and for withdrawing approval of an 
accreditation organization.
    (1) Equivalency review. HCFA compares the accreditation 
organization's standards and its application and enforcement of those 
standards to the comparable HCFA requirements and processes when--
    (i) HCFA imposes new requirements or changes its survey process;
    (ii) An accreditation organization proposes to adopt new standards 
or changes in its survey process; or
    (iii) The term of an accreditation organization's approval expires.
    (2) Validation review. HCFA or its agent may conduct a survey of an 
accredited organization, examine the results of the accreditation 
organization's own survey, or attend the accreditation organization's 
survey, in order to validate the organization's accreditation process. 
At the conclusion of the review, HCFA identifies any accreditation 
programs for which validation survey results--
    (i) Indicate a 20 percent rate of disparity between certification 
by the accreditation organization and certification by HCFA or its 
agent on standards that do not constitute immediate jeopardy to patient 
health and safety if unmet;
    (ii) Indicate any disparity between certification by the 
accreditation organization and certification by HCFA or its agent on 
standards that constitute immediate jeopardy to patient health and 
safety if unmet; or
    (iii) Indicate that, irrespective of the rate of disparity, there 
are widespread or systematic problems in an organization's 
accreditation process such that accreditation no longer provides 
assurance that the Medicare requirements are met or exceeded.
    (3) Onsite observation. HCFA may conduct an onsite inspection of 
the accreditation organization's operations and offices to verify the 
organization's representations and assess the organization's compliance 
with its own policies and procedures. The onsite inspection may 
include, but is not limited to, reviewing documents, auditing meetings 
concerning the accreditation process, evaluating survey results or the 
accreditation status decision making process, and interviewing the 
organization's staff.
    (4) Notice of intent to withdraw approval. If an equivalency 
review, validation review, onsite observation, or HCFA's daily 
experience with the accreditation organization suggests that the 
accreditation organization is not meeting the requirements of this 
subpart, HCFA gives the organization written notice of its intent to 
withdraw approval.
    (5) Withdrawal of approval. HCFA may withdraw its approval of an 
accreditation organization at any time if HCFA determines that--
    (i) Deeming based on accreditation no longer guarantees that the 
M+C organization meets the M+C requirements, and failure to meet those 
requirements could jeopardize the health or safety of Medicare 
enrollees and constitute a significant hazard to the public health; or
    (ii) The accreditation organization has failed to meet its 
obligations under this section or under Sec. 422.156 or Sec. 422.158.
    (6) Reconsideration of withdrawal of approval. An accreditation 
organization dissatisfied with a determination to withdraw HCFA 
approval may request a reconsideration of that determination in 
accordance with subpart D of part 488 of this chapter.

[[Page 35085]]

Sec. 422.158  Procedures for approval of accreditation as a basis for 
deeming compliance.

    (a) Required information and materials. A private, national 
accreditation organization applying for approval must furnish to HCFA 
all of the following information and materials. (When reapplying for 
approval, the organization need furnish only the particular information 
and materials requested by HCFA.)
    (1) The types of M+C plans that it would review as part of its 
accreditation process.
    (2) A detailed comparison of the organization's accreditation 
requirements and standards with the Medicare requirements (for example, 
a crosswalk).
    (3) Detailed information about the organization's survey process, 
including--
    (i) Frequency of surveys and whether surveys are announced or 
unannounced.
    (ii) Copies of survey forms, and guidelines and instructions to 
surveyors.
    (iii) Descriptions of--
    (A) The survey review process and the accreditation status decision 
making process;
    (B) The procedures used to notify accredited M+C organizations of 
deficiencies and to monitor the correction of those deficiencies; and
    (C) The procedures used to enforce compliance with accreditation 
requirements.
    (4) Detailed information about the individuals who perform surveys 
for the accreditation organization, including--
    (i) The size and composition of accreditation survey teams for each 
type of plan reviewed as part of the accreditation process;
    (ii) The education and experience requirements surveyors must meet;
    (iii) The content and frequency of the in-service training provided 
to survey personnel;
    (iv) The evaluation systems used to monitor the performance of 
individual surveyors and survey teams; and
    (v) The organization's policies and practice with respect to the 
participation, in surveys or in the accreditation decision process by 
an individual who is professionally or financially affiliated with the 
entity being surveyed.
    (5) A description of the organization's data management and 
analysis system with respect to its surveys and accreditation 
decisions, including the kinds of reports, tables, and other displays 
generated by that system.
    (6) A description of the organization's procedures for responding 
to and investigating complaints against accredited organizations, 
including policies and procedures regarding coordination of these 
activities with appropriate licensing bodies and ombudsmen programs.
    (7) A description of the organization's policies and procedures 
with respect to the withholding or removal of accreditation for failure 
to meet the accreditation organization's standards or requirements, and 
other actions the organization takes in response to noncompliance with 
its standards and requirements.
    (8) A description of all types (for example, full, partial) and 
categories (for example, provisional, conditional, temporary) of 
accreditation offered by the organization, the duration of each type 
and category of accreditation and a statement identifying the types and 
categories that would serve as a basis for accreditation if HCFA 
approves the accreditation organization.
    (9) A list of all currently accredited M+C organizations and the 
type, category, and expiration date of the accreditation held by each 
of them.
    (10) A list of all full and partial accreditation surveys scheduled 
to be performed by the accreditation organization as requested by HCFA.
    (11) The name and address of each person with an ownership or 
control interest in the accreditation organization.
    (b) Required supporting documentation. A private, national 
accreditation organization applying or reapplying for approval must 
also submit the following supporting documentation:
    (1) A written presentation that demonstrates its ability to furnish 
HCFA with electronic data in HCFA compatible format.
    (2) A resource analysis that demonstrates that its staffing, 
funding, and other resources are adequate to perform the required 
surveys and related activities.
    (3) A statement acknowledging that, as a condition for approval, it 
agrees to comply with the ongoing responsibility requirements of 
Sec. 422.157(c).
    (c) Additional information. If HCFA determines that it needs 
additional information for a determination to grant or deny the 
accreditation organization's request for approval, it notifies the 
organization and allows time for the organization to provide the 
additional information.
    (d) Onsite visit. HCFA may visit the accreditation organization's 
offices to verify representations made by the organization in its 
application, including, but not limited to, review of documents, and 
interviews with the organization's staff.
    (e) Notice of determination. HCFA gives the accreditation 
organization a formal notice that--
    (1) States whether the request for approval has been granted or 
denied;
    (2) Gives the rationale for any denial; and
    (3) Describes the reconsideration and reapplication procedures.
    (f) Withdrawal. An accreditation organization may withdraw its 
application for approval at any time before it receives the formal 
notice specified in paragraph (e) of this section.
    (g) Reconsideration of adverse determination. An accreditation 
organization that has received notice of denial of its request for 
approval may request reconsideration in accordance with subpart D of 
part 488 of this chapter.
    (h) Request for approval following denial. (1) Except as provided 
in paragraph (h)(2) of this section, an accreditation organization that 
has received notice of denial of its request for approval may submit a 
new request if it--
    (i) Has revised its accreditation program to correct the 
deficiencies on which the denial was based;
    (ii) Can demonstrate that the M+C organizations that it has 
accredited meet or exceed applicable Medicare requirements; and
    (iii) Resubmits the application in its entirety.
    (2) An accreditation organization that has requested 
reconsideration of HCFA's denial of its request for approval may not 
submit a new request until the reconsideration is administratively 
final.

Subpart E--Relationships with Providers.


422.200  Basis and scope.

    This subpart is based on sections 1852(a)(1), (a)(2), (b)(2), 
(c)(2)(D), (j), and (k) of the Act; section 1859(b)(2)(A) of the Act; 
and the general authority under 1856(b) of the Act requiring the 
establishment of standards. It sets forth the requirements and 
standards for the M+C organization's relationships with providers 
including physicians, other health care professionals, institutional 
providers and suppliers, under contracts or arrangements or deemed 
contracts under M+C private fee-for-service plans. This subpart also 
contains some requirements that apply to noncontracting providers.

[[Page 35086]]

Sec. 422.202  Participation procedures.

    (a) Notice and appeal rights. An M+C organization that operates a 
coordinated care plan or network MSA plan must provide for the 
participation of individual health care professionals, and the 
management and members of groups of health care professionals, through 
reasonable procedures that include the following:
    (1) Written notice of rules of participation such as terms for 
payment, utilization review, quality improvement programs, 
credentialing, data reporting, confidentiality, guidelines or criteria 
for the furnishing of particular services, and other rules related to 
administrative policy.
    (2) Written notice of material changes in participation rules 
before the changes are put into effect.
    (3) Written notice of participation decisions that are adverse to 
health care professionals.
    (4) A process for appealing adverse decisions, including the right 
of physicians and other health care professionals to present 
information and their views on the decision. In the case of a 
termination of a provider contract by the M+C organization, this 
process must conform to the rules in Sec. 422.204(c).
    (b) Consultation. The M+C organization must consult with the 
physicians, and other health care professionals who have agreed to 
provide services under an M+C plan offered by the organization, 
regarding the organization's medical policy, quality assurance program, 
and medical management procedures and ensure that the following 
standards are met:
    (1) Practice guidelines and utilization management guidelines--
    (i) Are based on reasonable medical evidence or a consensus of 
health care professionals in the particular field;
    (ii) Consider the needs of the enrolled population;
    (iii) Are developed in consultation with contracting health care 
professionals; and
    (iv) Are reviewed and updated periodically.
    (2) The guidelines are communicated to providers and, as 
appropriate, to enrollees.
    (3) Decisions with respect to utilization management, enrollee 
education, coverage of services, and other areas in which the 
guidelines apply are consistent with the guidelines.
    (c) An M+C organization that operates an M+C plan through 
subcontracted physician groups or other subcontracted networks of 
health care professionals must provide that the participation 
procedures in this section apply equally to physicians and other health 
care professionals within those subcontracted groups.


Sec. 422.204  Provider credentialing and provider rights.

    (a) Basic requirements. An M+C organization must follow a 
documented process with respect to providers and suppliers who have 
signed contracts or participation agreements that--
    (1) For providers (other than physicians and other health care 
professionals) requires determination, and redetermination at specified 
intervals, that each provider--
    (i) Licensed to operate in the State, and in compliance with any 
other applicable State or Federal requirements; and
    (ii) Reviewed and approved by an accrediting body, or meets the 
standards established by the organization itself;
    (2) For physicians and other health care professionals, including 
members of physician groups, covers--
    (i) Initial credentialing that includes written application, 
verification of licensure and other information from primary sources, 
disciplinary status, eligibility for payment under Medicare, and site 
visits as appropriate. The application must be signed and dated and 
include an attestation by the applicant of the correctness and 
completeness of the application and other information submitted in 
support of the application;
    (ii) Recredentialing at least every 2 years that updates 
information obtained during initial credentialing and considers 
performance indicators such as those collected through quality 
assurance programs, utilization management systems, handling of 
grievances and appeals, enrollee satisfaction surveys, and other plan 
activities, and that includes an attestation of the correctness and 
completeness of the new information; and
    (iii) A process for receiving advice from contracting health care 
professionals with respect to criteria for credentialing and 
recredentialing; and
    (iv) Requiring that, to the extent applicable, the requirements in 
paragraphs (a)(2)(i) and (a)(2)(iii) of this section are satisfied; and
    (3)(i) Specify that basic benefits must be provided through, or 
payments must be made to, providers that meet applicable requirements 
of title XVIII and part A of title XI of the Act. In the case of 
providers meeting the definition of ``provider of services'' in section 
1861(u), basic benefits may only be provided through such providers if 
they have a provider agreement with HCFA permitting them to provide 
services under original Medicare.
    (ii) Ensures compliance with the requirements at Sec. 422.752(a)(8) 
that prohibit employment or contracts with individuals (or with an 
entity that employs or contracts with such an individual) excluded from 
participation under Medicare and with the requirements at Sec. 422.220 
regarding physicians and practitioners who opt out of Medicare.
    (b) Discrimination prohibited--(1) General rule. An M+C 
organization may not discriminate, in terms of participation, 
reimbursement, or indemnification, against any health care professional 
who is acting within the scope of his or her license or certification 
under State law, solely on the basis of the license or certification.
    (2) Construction. The prohibition in paragraph (b)(1) of this 
section does not preclude any of the following by the M+C organization:
    (i) Refusal to grant participation to health care professionals in 
excess of the number necessary to meet the needs of the plan's 
enrollees (except for M+C private-fee-for-service plans, which may not 
refuse to contract on this basis).
    (ii) Use of different reimbursement amounts for different 
specialties.
    (iii) Implementation of measures designed to maintain quality and 
control costs consistent with its responsibilities.
    (c) Denial, suspension, or termination of contract. The 
requirements in this paragraph (c) apply to an M+C organization that 
operates a coordinated care plan or network MSA plan providing benefits 
through contracting providers.
    (1) Notice to health care professional. An M+C organization that 
denies, suspends, or terminates an agreement under which the health 
care professional provides services to M+C plan enrollees must give the 
affected individual written notice of the following:
    (i) The reasons for the action.
    (ii) The standards and the profiling data the organization used to 
evaluate the health care professional.
    (iii) The numbers and mix of health care professionals the 
organization needs.
    (iv) The affected health care professional's right to appeal the 
action and the process and timing for requesting a hearing.
    (2) Composition of hearing panel. The M+C organization must ensure 
that the majority of the hearing panel members are peers of the 
affected health care professional.

[[Page 35087]]

    (3) Notice to licensing or disciplinary bodies. An M+C organization 
that suspends or terminates a contract with a health care professional 
because of deficiencies in the quality of care must give written notice 
of that action to licensing or disciplinary bodies or to other 
appropriate authorities.
    (4) Timeframes. An M+C organization and a contracting provider must 
provide at least 60 days written notice to each other before 
terminating the contract without cause.


Sec. 422.206  Interference with health care professionals' advice to 
enrollees prohibited.

    (a) General rule. (1) An M+C organization may not prohibit or 
otherwise restrict a health care professional, acting within the lawful 
scope of practice, from advising, or advocating on behalf of, an 
individual who is a patient and enrolled under an M+C plan about--
    (i) The patient's health status, medical care, or treatment options 
(including any alternative treatments that may be self-administered), 
including the provision of sufficient information to the individual to 
provide an opportunity to decide among all relevant treatment options;
    (ii) The risks, benefits, and consequences of treatment or non-
treatment; or
    (iii) The opportunity for the individual to refuse treatment and to 
express preferences about future treatment decisions.
    (2) Health care professionals must provide information regarding 
treatment options in a culturally-competent manner, including the 
option of no treatment. Health care professionals must ensure that 
individuals with disabilities have effective communications with 
participants throughout the health system in making decisions regarding 
treatment options.
    (b) Conscience protection. The general rule in paragraph (a) of 
this section does not require the M+C plan to cover, furnish, or pay 
for a particular counseling or referral service if the M+C organization 
that offers the plan--
    (1) Objects to the provision of that service on moral or religious 
grounds; and
    (2) Through appropriate written means, makes available information 
on these policies as follows:
    (i) To HCFA, with its application for a Medicare contract, or 
within 10 days of submitting its ACR proposal, as appropriate.
    (ii) To prospective enrollees, before or during enrollment.
    (iii) With respect to current enrollees, the organization is 
eligible for the exception provided in paragraph (a)(1) of this section 
if it provides notice within 90 days after adopting the policy at 
issue; however, under Sec. 422.111(d), notice of such a change must be 
given in advance.
    (c) Construction. Nothing in paragraph (b) of this section may be 
construed to affect disclosure requirements under State law or under 
the Employee Retirement Income Security Act of 1974.
    (d) Sanctions. An M+C organization that violates the prohibition of 
paragraph (a) of this section or the conditions in paragraph (b) of 
this section is subject to intermediate sanctions under subpart O of 
this part.


Sec. 422.208  Physician incentive plans: requirements and limitations.

    (a) Definitions. In this subpart, the following definitions apply:
    Bonus means a payment made to a physician or physician group beyond 
any salary, fee-for-service payments, capitation, or returned withhold.
    Capitation means a set dollar payment per patient per unit of time 
(usually per month) paid to a physician or physician group to cover a 
specified set of services and administrative costs without regard to 
the actual number of services provided. The services covered may 
include the physician's own services, referral services, or all medical 
services.
    Physician group means a partnership, association, corporation, 
individual practice association, or other group of physicians that 
distributes income from the practice among members. An individual 
practice association is defined as a physician group for this section 
only if it is composed of individual physicians and has no subcontracts 
with physician groups.
    Physician incentive plan means any compensation arrangement to pay 
a physician or physician group that may directly or indirectly have the 
effect of reducing or limiting the services provided to any plan 
enrollee.
    Potential payments means the maximum payments possible to 
physicians or physician groups including payments for services they 
furnish directly, and additional payments based on use and costs of 
referral services, such as withholds, bonuses, capitation, or any other 
compensation to the physician or physician group. Bonuses and other 
compensation that are not based on use of referrals, such as quality of 
care furnished, patient satisfaction or committee participation, are 
not considered payments in the determination of substantial financial 
risk.
    Referral services means any specialty, inpatient, outpatient, or 
laboratory services that a physician or physician group orders or 
arranges, but does not furnish directly.
    Risk threshold means the maximum risk, if the risk is based on 
referral services, to which a physician or physician group may be 
exposed under a physician incentive plan without being at substantial 
financial risk. This is set at 25 percent risk.
    Substantial financial risk, for purposes of this section, means 
risk for referral services that exceeds the risk threshold.
    Withhold means a percentage of payments or set dollar amounts 
deducted from a physician's service fee, capitation, or salary payment, 
and that may or may not be returned to the physician, depending on 
specific predetermined factors.
    (b) Applicability. The requirements in this section apply to an M+C 
organization and any of its subcontracting arrangements that utilize a 
physician incentive plan in their payment arrangements with individual 
physicians or physician groups. Subcontracting arrangements may include 
an intermediate entity, which includes but is not limited to, an 
individual practice association that contracts with one or more 
physician groups or any other organized group such as those specified 
in Sec. 422.4.
    (c) Basic requirements. Any physician incentive plan operated by an 
M+C organization must meet the following requirements:
    (1) The M+C organization makes no specific payment, directly or 
indirectly, to a physician or physician group as an inducement to 
reduce or limit medically necessary services furnished to any 
particular enrollee. Indirect payments may include offerings of 
monetary value (such as stock options or waivers of debt) measured in 
the present or future.
    (2) If the physician incentive plan places a physician or physician 
group at substantial financial risk (as determined under paragraph (d) 
of this section) for services that the physician or physician group 
does not furnish itself, the M+C organization provides aggregate or 
per-patient stop-loss protection in accordance with paragraph (f) of 
this section, and conducts periodic surveys in accordance with 
paragraph (g) of this section.
    (3) For all physician incentive plans, the M+C organization 
provides to HCFA the information specified in Sec. 422.210.
    (d) Determination of substantial financial risk--(1) Basis. 
Substantial financial risk occurs when risk is based on the use or 
costs of referral services,

[[Page 35088]]

and that risk exceeds the risk threshold. Payments based on other 
factors, such as quality of care furnished, are not considered in this 
determination.
    (2) Risk threshold. The risk threshold is 25 percent of potential 
payments.
    (3) Arrangements that cause substantial financial risk. The 
following incentive arrangements cause substantial financial risk 
within the meaning of this section, if the physician's or physician 
group's patient panel size is not greater than 25,000 patients, as 
shown in the table at paragraph (f)(2)(iii) of this section:
    (i) Withholds greater than 25 percent of potential payments.
    (ii) Withholds less than 25 percent of potential payments if the 
physician or physician group is potentially liable for amounts 
exceeding 25 percent of potential payments.
    (iii) Bonuses that are greater than 33 percent of potential 
payments minus the bonus.
    (iv) Withholds plus bonuses if the withholds plus bonuses equal 
more than 25 percent of potential payments. The threshold bonus 
percentage for a particular withhold percentage may be calculated using 
the formula--Withhold % = -0.75 (Bonus %) +25%.
    (v) Capitation arrangements, if--
    (A) The difference between the maximum potential payments and the 
minimum potential payments is more than 25 percent of the maximum 
potential payments;
    (B) The maximum and minimum potential payments are not clearly 
explained in the contract with the physician or physician group.
    (vi) Any other incentive arrangements that have the potential to 
hold a physician or physician group liable for more than 25 percent of 
potential payments.
    (e) An M+C fee-for-service plan may not operate a physician 
incentive plan.
    (f) Stop-loss protection requirements. (1) Basic rule. The M+C 
organization must assure that all physicians and physician groups at 
substantial financial risk have either aggregate or per-patient stop-
loss protection in accordance with the following requirements:
    (2) Specific requirements. (i) Aggregate stop-loss protection must 
cover 90 percent of the costs of referral services that exceed 25 
percent of potential payments.
    (ii) For per-patient stop-loss protection if the stop-loss 
protection provided is on a per-patient basis, the stop-loss limit 
(deductible) per patient must be determined based on the size of the 
patient panel and may be a combined policy or consist of separate 
policies for professional services and institutional services. In 
determining patient panel size, the patients may be pooled in 
accordance with paragraph (g) of this section.
    (iii) Stop-loss protection must cover 90 percent of the costs of 
referral services that exceed the per patient deductible limit. The 
per-patient stop-loss deductible limits are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                 Separate           Separate    
                       Panel size                         Single combined     institutional       professional  
                                                             deductible         deductible         deductible   
----------------------------------------------------------------------------------------------------------------
1-1,000................................................             $6,000            $10,000             $3,000
1,001-5,000............................................             30,000             40,000             10,000
5,001-8,000............................................             40,000             60,000             15,000
8,001-10,000...........................................             75,000            100,000             20,000
10,001-25,000..........................................            150,000            200,000             25,000
>25,000................................................              (\1\)              (\1\)              (\1\)
----------------------------------------------------------------------------------------------------------------
\1\ None.                                                                                                       

    (g) Pooling of patients. Any entity that meets the pooling 
conditions of this section may pool commercial, Medicare, and Medicaid 
enrollees or the enrollees of several M+C organizations with which a 
physician or physician group has contracts. The conditions for pooling 
are as follows:
    (1) It is otherwise consistent with the relevant contracts 
governing the compensation arrangements for the physician or physician 
group.
    (2) The physician or physician group is at risk for referral 
services with respect to each of the categories of patients being 
pooled.
    (3) The terms of the compensation arrangements permit the physician 
or physician group to spread the risk across the categories of patients 
being pooled.
    (4) The distribution of payments to physicians from the risk pool 
is not calculated separately by patient category.
    (5) The terms of the risk borne by the physician or physician group 
are comparable for all categories of patients being pooled.
    (h) Periodic surveys of current and former enrollees. An M+C 
organization must conduct periodic surveys of current and former 
enrollees where substantial financial risk exists. These periodic 
surveys must--
    (1) Include either a sample of, or all, current Medicare/Medicaid 
enrollees in the M+C organization and individuals disenrolled in the 
past 12 months for reasons other than--
    (i) The loss of Medicare or Medicaid eligibility;
    (ii) Relocation outside the M+C organization's service area;
    (iii) For failure to pay premiums or other charges;
    (iv) For abusive behavior; and
    (v) Retroactive disenrollment.
    (2) Be designed, implemented, and analyzed in accordance with 
commonly accepted principles of survey design and statistical analysis;
    (3) Measure the degree of enrollees/disenrollees' satisfaction with 
the quality of the services provided and the degree to which the 
enrollees/disenrollees have or had access to the services provided 
under the M+C organization; and
    (4) Be conducted no later than 1 year after the effective date of 
the M+C organization's contract and at least annually thereafter.
    (i) Sanctions. An M+C organization that fails to comply with the 
requirements of this section is subject to intermediate sanctions under 
subpart O of this part.


Sec. 422.210  Disclosure of physician incentive plans

    (a) Disclosure to HCFA--(1) Basic requirement. Each M+C 
organization must provide to HCFA descriptive information about its 
physician incentive plan in sufficient detail to enable HCFA to 
determine whether that plan complies with the requirements of 
Sec. 422.208. Reporting should be on the HCFA PIP Disclosure Form (OMB 
No. 0938-0700).
    (2) Content. The information must include at least the following:
    (i) Whether services not furnished by the physician or physician 
group are covered by the incentive plan.
    (ii) The type or types of incentive arrangements, such as, 
withholds, bonus, capitation.

[[Page 35089]]

    (iii) The percent of any withhold or bonus the plan uses.
    (iv) Assurance that the physicians or physician group has adequate 
stop-loss protection, and the amount and type of stop-loss protection.
    (v) The patient panel size and, if the plan uses pooling, the 
pooling method.
    (vi) If the M+C organization is required to conduct enrollee 
surveys, a summary of the survey results.
    (3) When disclosure must be made to HCFA. An M+C organization must 
disclose annually to HCFA the physician incentive arrangements that are 
effective at the start of each year. In addition, HCFA does not approve 
an M+C organization's application for a contract unless the M+C 
organization discloses the physician incentive arrangements effective 
for that contract.
    (b) Disclosure to Medicare beneficiaries--Basic requirement. An M+C 
organization must provide the following information to any Medicare 
beneficiary who requests it:
    (1) Whether the M+C organization uses a physician incentive plan 
that affects the use of referral services.
    (2) The type of incentive arrangement.
    (3) Whether stop-loss protection is provided.
    (4) If the M+C organization was required to conduct a survey, a 
summary of the survey results.


Sec. 422.212  Limitations on provider indemnification.

    An M+C organization may not contract or otherwise provide, directly 
or indirectly, for any of the following individuals, organizations, or 
entities to indemnify the organization against any civil liability for 
damage caused to an enrollee as a result of the M+C organization's 
denial of medically necessary care:
    (a) A physician or health care professional.
    (b) Provider of services.
    (c) Other entity providing health care services.
    (d) Group of such professionals, providers, or entities.


Sec. 422.214  Special rules for services furnished by noncontract 
providers.

    (a) Services furnished to enrollees of coordinated care plans by 
providers. (1) Any provider (other than a provider of services as 
defined in section 1861(u) of the Act) that does not have in effect a 
contract establishing payment amounts for services furnished to a 
beneficiary enrolled in an M+C coordinated care plan must accept, as 
payment in full, the amounts that the provider could collect if the 
beneficiary were enrolled in original Medicare.
    (2) Any statutory provisions (including penalty provisions) that 
apply to payment for services furnished to a beneficiary not enrolled 
in an M+C plan also apply to the payment described in paragraph (a)(1) 
of this section.
    (b) Services furnished by providers of service. Any provider of 
services as defined in section 1861(u) of the Act that does not have in 
effect a contract establishing payment amounts for services furnished 
to a beneficiary enrolled in an M+C coordinated care plan must accept 
as payment in full the amounts (less any payments under 
Secs. 412.105(g) and 413.86(d)) that it could collect if the 
beneficiary were enrolled in original Medicare.


Sec. 422.216  Special rules for M+C private fee-for-service plans.

    (a) Payment to providers--(1) Payment rate. (i) The M+C 
organization must establish uniform payment rates for items and 
services that apply to all contracting providers, regardless of whether 
the contract is signed or deemed under paragraph (f) of this section.
    (ii) Contracting providers must be reimbursed on a fee-for-service 
basis.
    (iii) The M+C organization must make information on its payment 
rates available to providers that furnish services that may be covered 
under the M+C private fee-for-service plan.
    (2) Payment to contract providers. For each service, the M+C 
organization pays a contract provider (including one deemed to have a 
contract) an amount that is equal to the payment rate under paragraph 
(a)(1) of this section minus any applicable cost-sharing.
    (3) Noncontract providers. The organization pays for services of 
noncontract providers in accordance with Sec. 422.100(b)(2).
    (4) Service furnished by providers of service. Any provider of 
services as defined in section 1861(u) of the Act that does not have in 
effect a contract establishing payment mounts for services furnished to 
a beneficiary enrolled in an M+C private fee-for-service plan must 
accept as payment in full the amounts (less any payments under 
Secs. 412.109(g) and 413.86(d) of this chapter) that it could collect 
if the beneficiary were enrolled in original Medicare.
    (b) Charges to enrollees--(1) Contract providers. (i) Contract 
providers and ``deemed'' contract providers may charge enrollees no 
more than the cost-sharing and, subject to the limit in paragraph 
(b)(1)(ii) of this section, balance billing amounts that are permitted 
under the plan, and these amounts must be the same for ``deemed'' 
contract providers as for those that have signed contracts in effect.
    (ii) The organization may permit balance billing no greater than 15 
percent of the payment rate established under paragraph (a)(1) of this 
section.
    (iii) The M+C organization must specify the amount of cost-sharing 
and balance billing in its contracts with providers and these amounts 
must be the same for ``deemed'' contract providers as for those that 
have signed contracts in effect.
    (iv) The M+C organization is subject to intermediate sanctions 
under Sec. 422.752(a)(7), under the rules in subpart O of this part, if 
it fails to enforce the limit specified in paragraph (b)(1)(i) of this 
section.
    (2) Noncontract providers. A noncontract provider may not collect 
from an enrollee more than the cost-sharing established by the M+C 
private fee-for-service plan as specified in Sec. 422.308(b).
    (c) Enforcement of limit--(1) Contract providers. An M+C 
organization that offers an M+C fee-for-service plan must enforce the 
limit specified in paragraph (b)(1) of this section.
    (2) Noncontract providers. An M+C organization that offers an M+C 
private fee-for-service plan must monitor the amount collected by 
noncontract providers to ensure that those amounts do not exceed the 
amounts permitted to be collected under paragraph (b)(2) of this 
section. The M+C organization must develop and document violations 
specified in instructions and must forward documented cases to HCFA.
    (d) Information on enrollee liability--(1) General information. An 
M+C organization that offers an M+C fee-for-service plan must provide 
to plan enrollees, for each claim filed by the enrollee or the provider 
that furnished the service, an appropriate explanation of benefits. The 
explanation must include a clear statement of the enrollee's liability 
for deductibles, coinsurance, copayment, and balance billing.
    (2) Advance notice for hospital services. In its terms and 
conditions of payment to hospitals, the M+C organization must require 
the hospital, if it imposes balance billing, to provide to the 
enrollee, before furnishing any services for which balance billing 
could amount to not less than $500--
    (i) Notice that balance billing is permitted for those services;
    (ii) A good faith estimate of the likely amount of balance billing, 
based on the enrollees presenting condition; and

[[Page 35090]]

    (iii) The amount of any deductible, coinsurance, and copayment that 
may be due in addition to the balance billing amount.
    (e) Coverage determinations. The M+C organization must make 
coverage determinations in accordance with subpart M of this part.
    (f) Rules describing deemed contract providers. Any provider 
furnishing health services to an enrollee in an M+C private fee-for-
service plan, and who has not previously entered into a contract or 
agreement to furnish services under the plan, is treated as having a 
contract in effect and is subject to the limitations of this section 
that apply to contract providers if the following conditions are met:
    (1) The services are covered under the plan and are furnished--
    (i) To an enrollee of an M+C fee-for-service plan; and
    (ii) Provided by a provider including a provider of services (as 
defined in section 1861(u) of the Act) that does not have in effect a 
signed contract with the M+C organization.
    (2) Before furnishing the services, the provider--
    (i) Was informed of the individual's enrollment in the plan; and
    (ii) Was informed (or given a reasonable opportunity to obtain 
information) about the terms and conditions of payment under the plan, 
including the information described in Sec. 422.202(a)(1).
    (3) The information was provided in a manner that was reasonably 
designed to effect informed agreement and met the requirements of 
paragraphs (g) and (h) of this section.
    (g) Enrollment information. Enrollment information was provided by 
one of the following methods or a similar method:
    (1) Presentation of an enrollment card or other document attesting 
to enrollment.
    (2) Notice of enrollment from HCFA, a Medicare intermediary or 
carrier, or the M+C organization itself.
    (h) Information on payment terms and conditions. Information on 
payment terms and conditions was made available through either of the 
following methods:
    (1) The M+C organization used postal service, electronic mail, FAX, 
or telephone to communicate the information to one of the following:
    (i) The provider.
    (ii) The employer or billing agent of the provider.
    (iii) A partnership of which the provider is a member.
    (iv) Any party to which the provider makes assignment or reassigns 
benefits.
    (2) The M+C organization has in effect a procedure under which--
    (i) Any provider furnishing services to an enrollee in an M+C 
private fee-for-service plan, and who has not previously entered into a 
contract or agreement to furnish services under the plan, can receive 
instructions on how to request the payment information;
    (ii) The organization responds to the request before the entity 
furnishes the service; and
    (iii) The information the organization provides includes the 
following:
    (A) Billing procedures.
    (B) The amount the organization will pay towards the service.
    (C) The amount the provider is permitted to collect from the 
enrollee.
    (D) The information described in Sec. 422.202(a)(1).
    (3) Announcements in newspapers, journals, or magazines or on radio 
or television are not considered communication of the terms and 
conditions of payment.
    (i) Provider credentialing requirements. Contracts with providers 
must provide that, in order to be paid to provide services to plan 
enrollees, providers must meet the requirements specified in 
Sec. 422.204(a)(1) and (a)(1)(iii).


Sec. 422.220  Exclusion of services furnished under a private contract.

    An M+C organization may not pay, directly or indirectly, on any 
basis, for services (other than emergency or urgently needed services 
as defined in Sec. 422.2) furnished to a Medicare enrollee by a 
physician (as defined in section 1861(r)(1) of the Act) or other 
practitioner (as defined in section 1842(b)(18)(C) of the Act) who has 
filed with the Medicare carrier an affidavit promising to furnish 
Medicare-covered services to Medicare beneficiaries only through 
private contracts under section 1802(b) of the Act with the 
beneficiaries. An M+C organization must pay for emergency or urgently 
needed services furnished by a physician or practitioner who has not 
signed a private contract with the beneficiary.

Subpart F--Payments to Medicare+Choice Organizations


Sec. 422.249  Terminology.

    In this subpart--
    (a) The terms ``per capita rate'' and ``capitation rate'' (see 
Sec. 422.252) are used interchangeably; and
    (b) In the term ``area-specific,'' ``area'' refers to any of the 
payment areas described in Sec. 422.250(c).


Sec. 422.250  General provisions.

    (a) Monthly payments--(1) General rule. Except as provided in 
paragraph (a)(2) of this section, HCFA makes advance monthly payments 
equal to \1/12\th of the annual M+C capitation rate for the payment 
area described in paragraph (c) of this section adjusted for such 
demographic risk factors as an individual's age, disability status, 
sex, institutional status, and other such factors as it determines to 
be appropriate to ensure actuarial equivalence. Effective January 1, 
2000, HCFA adjusts for health status as provided in Sec. 422.256(c). 
When the new risk adjustment is implemented, \1/12\th of the annual 
capitation rate for the payment area described in paragraph (c) of this 
section will be adjusted by the risk adjustment methodology under 
Sec. 422.256(d).
    (2) Special rules. (i) Enrollees with end-stage renal disease. (A) 
For enrollees determined to have end-stage renal disease (ESRD), HCFA 
establishes special rates that are determined under an actuarially 
equivalent approach to that used in establishing the rates under 
original Medicare.
    (B) HCFA reduces the payment rate by the equivalent of 50 cents per 
renal dialysis treatment. These funds will be used to help pay for the 
ESRD network program in the same manner as similar reductions are used 
in original Medicare.
    (ii) MSA enrollees. For MSA enrollees, HCFA makes advanced monthly 
payments as described in paragraph (a)(1) less the amount (if any) 
identified in Sec. 422.262(c)(1)(ii) to be deposited in the M+C MSA. In 
addition, HCFA deposits in the M+C MSA the lump sum amounts (if any) 
determined in accordance with Sec. 422.262(c).
    (iii) RFB plan enrollees. For RFB plan enrollees, HCFA adjusts the 
capitation payments otherwise determined under this subpart to ensure 
that the payment level is appropriate for the actuarial characteristics 
and experience of these enrollees. Such adjustment can be made on an 
individual or organization basis.
    (b) Adjustment of payments to reflect number of Medicare 
enrollees--General rule. HCFA adjusts payments retroactively to take 
into account any difference between the actual number of Medicare 
enrollees and the number on which HCFA based an advance monthly 
payment.
    (c) Payment areas--(1) General rule. Except as provided in 
paragraph (e) of this section, the M+C payment area is a county or an 
equivalent geographic area specified by HCFA.
    (2) Special rule for ESRD enrollees. For ESRD enrollees, the M+C 
payment

[[Page 35091]]

area is a State or other geographic area specified by HCFA.
    (d) Terminology. As used in paragraph (e) of this section, 
``metropolitan statistical area,'' ``consolidated metropolitan 
statistical area,'' and ``primary metropolitan statistical area'' mean 
any areas so designated by the Secretary of Commerce.
    (e) Geographic adjustment of payment areas. For contract years 
beginning after 1999--
    (1) State request. A State's chief executive may request, no later 
than February 1 of any year, a geographic adjustment of the State's 
payment areas for the following calendar year. The chief executive may 
request any of the following adjustments to the payment area specified 
in paragraph (c)(1) of this section:
    (i) A single Statewide M+C payment area.
    (ii) A metropolitan-based system in which all nonmetropolitan areas 
within the State constitute a single payment area and any of the 
following constitutes a separate M+C payment area:

BILLING CODE 4120-01-P

    (A) All portions of each single metropolitan statistical area 
within the State.
    (B) All portions of each primary metropolitan statistical area 
within each consolidated metropolitan statistical area within the 
State.
    (iii) A consolidation of noncontiguous counties.
    (2) HCFA response. In response to the request, HCFA makes the 
payment adjustment requested by the chief executive.
    (3) Budget neutrality adjustment for geographically adjusted 
payment areas. If HCFA adjusts a State's payment areas in accordance 
with paragraph (e)(2) of this section, HCFA at that time, and each year 
thereafter, adjusts the capitation rates so that the aggregate Medicare 
payments do not exceed the aggregate Medicare payments that would have 
been made to all the State's payments areas, absent the geographic 
adjustment.
    (f) Determination and applicability of payment rates. (1) All 
payment rates are annual rates, determined and promulgated no later 
than March 1st, for the following calendar year.
    (2) For purposes of paragraphs (b) and (c) of Sec. 422.252, except 
as provided in Sec. 422.254(e)(4), the ``capitation payment rate for 
1997'' is the rate determined under section 1876(a)(1)(c) of the Act.


Sec. 422.252  Annual capitation rates.

    Subject to the adjustments specified in this subpart, the annual 
capitation rate for a particular payment area is equal to the largest 
of the following:
    (a) Blended capitation rate. The blended capitation rate is the sum 
of--
    (1) The area-specific percentage (specified in Sec. 422.254(a)) for 
the year multiplied by the annual area-specific capitation rate for the 
payment area as determined under Sec. 422.254(e) for the year, and
    (2) The national percentage (specified in Sec. 422.254(a)) for the 
year multiplied by the national input-price-adjusted capitation rate 
for the payment area as determined under Sec. 422.254(g) for the year.
    (3) Multiplied by the budget neutrality adjustment factor 
determined under Sec. 422.254(d).
    (b) Minimum amount rate. (1) For 1998--
    (i) For the 50 States and the District of Columbia, the minimum 
amount rate is 12 times $367.
    (ii) For all other jurisdictions the minimum amount rate is the 
lesser of the rate described in (b)(1)(i) or 150 percent of the 
capitation payment rate for 1997.
    (2) For each succeeding year, the minimum amount rate is the 
minimum amount rate for the preceding year, increased by the national 
per capita growth percentage (specified in Sec. 422.254(b)) for the 
year.
    (c) Minimum percentage increase rate. (1) For 1998, the minimum 
percentage increase rate is 102 percent of the annual capitation rate 
for 1997.
    (2) For each succeeding year, the minimum percentage increase rate 
is 102 percent of the annual capitation rate for the preceding year.


Sec. 422.254  Calculation and adjustment factors.

    The following are the factors used in calculating the per capita 
payment rates:
    (a) Area-specific and national percentages. For purposes of 
Sec. 422.252(a)(1), the area-specific percentage and the national 
percentage, for each year, are as follows:

------------------------------------------------------------------------
                                                     Area-              
                                                   specific    National 
------------------------------------------------------------------------
For 1998........................................          90          10
For 1999........................................          82          18
For 2000........................................          74          26
For 2001........................................          66          34
For 2002........................................          58          42
For years after 2002............................          50          50
------------------------------------------------------------------------

    (b) National per capita growth percentage. For purposes of 
Sec. 422.252(a)(2),
    (1) The national per capita growth percentage for a year is HCFA's 
estimate of the rate of growth in per capita expenditures, reduced by 
the percentage points specified in paragraph (b)(2) of this section for 
the year. HCFA may make separate estimates for aged enrollees, disabled 
enrollees, and enrollees who have ESRD.
    (2) The percentage points that HCFA uses to reduce its estimates 
are as follows:
    (i) For 1998, 0.8 percentage points.
    (ii) For years 1999-2002, 0.5 percentage points.
    (iii) For years after 2002, 0 percentage points.
    (c) Medical education payment adjustments. For purposes of 
paragraph (e)(2) the medical education payment adjustments are amounts 
that HCFA estimates were payable to teaching hospitals during 1997 
for--
    (1) the indirect costs of medical education under section 
1886(d)(5)(B) of the Act; and
    (2) The direct costs of graduate medical education under section 
1886(h) of the Act.
    (d) General budget neutrality factor. For each year, HCFA applies a 
budget neutrality factor to the blended capitation rates under 
Sec. 422.252(a) so that the estimated aggregate payments made under 
this part equal the estimated aggregate payments that would have been 
made if based entirely on area-specific capitation rates.
    (e) Annual Area-specific capitation rate (1) Basic rule. Subject to 
the provisions of paragraphs (e)(2) and (e)(3) of this section, the 
annual area-specific capitation rate for a particular payment area is--
    (i) For 1998, subject to paragraph (e)(4) of this section, the per 
capita rate determined for that area for 1997 under section 
1876(a)(1)(c) of the Act, increased by the national per capita growth 
percentage for 1998; and
    (ii) For a subsequent year, the area-specific capitation rate 
determined for the previous year, increased by the national per capita 
growth percentage for the year.
    (2) Exclusion of medical education costs. In calculating the area-
specific capitation rates, the following percentages of the amounts 
estimated by HCFA under Sec. 422.254(c) as medical education payment 
adjustments to hospitals, are excluded:

For 1998.................................  20 percent.                  
For 1999.................................  40 percent.                  
For 2000.................................  60 percent.                  
For 2001.................................  80 percent.                  
For years after 2001.....................  100 percent.                 
                                                                        

    (3) Payments under the State hospital reimbursement system. To the 
extent that HCFA estimates that a 1997 per

[[Page 35092]]

capita rate reflects payments to hospitals under section 1814(b)(3) of 
the Act, HCFA makes a payment adjustment that is comparable to the 
adjustment that would have been made under paragraph (e)(2) of this 
section if the hospitals had not been reimbursed under section 
1814(b)(3) of the Act.
    (4) Areas with highly variable per capita rates. With respect to a 
payment area for which the per capita rate for 1997 varies by more than 
20 percent from the per capita rate for 1996, HCFA may substitute for 
the 1997 rate a rate that is more representative of the costs of the 
enrollees in the area.
    (f) National standardized annual capitation rate. The national 
standardized annual capitation rate is equal to--
    (1) The sum, for all payment areas, of the products of--
    (i) The annual area-specific capitation rate and
    (ii) The average number of Medicare beneficiaries residing in the 
area multiplied by the average of the risk-factor weights used to 
adjust payments under Sec. 422.256(c);
    (2) Divided by the sum, for all payment areas, of the products 
specified in paragraph (f)(1)(ii) of this section for all payment 
areas.
    (g) The input-price-adjusted annual national capitation rate--(1) 
General rule. The input-price-adjusted annual national capitation rate 
for a M+C payment area for a year is equal to the sum, for all the 
types of Medicare services (as classified by HCFA), of the product (for 
each service) of--
    (i) The national standardized annual M+C capitation rate 
(determined under paragraph (f) of this section) for the year;
    (ii) The proportion of such rates for the year which is 
attributable to such type of services; and
    (iii) An index that reflects (for that year and that type of 
services) the relative input price of such services in the area 
compared to the national average input price for such services.
    (2) HCFA may, subject to the special rules for 1988, use indices 
that are used in applying or updating national payment rates for 
particular areas and localities.
    (3) Special rules for 1988. In applying this paragraph for 1998--
    (i) Medicare services are classified as Part A and Part B services;
    (ii) The proportion attributable to Part A services is the ratio 
(expressed as a percentage) of the national average per capita rate of 
payment for Part A services for 1997 to the national average per capita 
rate of payment for Part A and Part B services for that year;
    (iii) The proportion attributed to part B services is 100 percent 
minus the ratio described in paragraph (g)(3)(ii) of this section;
    (iv) For Part A services, 70 percent of the payments attributable 
to those services are adjusted by the index used under section 
1886(d)(3)(E) of the Act to adjust payment rates for relative hospital 
wage levels for hospitals located in the particular payment area; and
    (v) For part B services--
    (A) 66 percent of payments attributable to those services are 
adjusted by the index of the geographic area factors under section 
1848(e) of the Act used to adjust payment rates for physician services 
in the particular payment area; and
    (B) Of the remaining 34 percent, 40 percent is adjusted by the 
index specified in paragraph (g)(3)(iv) of this section.


Sec. 422.256  Adjustments to capitation rates and aggregate payments.

    (a) Adjustment for over or under projection of national per capita 
growth percentages. (1) Beginning with rates for 1999, HCFA adjusts all 
area-specific and national capitation rates for the previous year to 
reflect any differences between the projected national per capita 
growth percentages for that year and previous years, and the current 
estimates of those percentages for such years.
    (2) Beginning with rates for 2000, HCFA also adjusts the minimum 
amount rate (calculated under Sec. 422.252(b)) in the same manner.
    (b) Adjustment for national coverage determination (NCD) services. 
If HCFA determines that the cost of furnishing an NCD service is 
``significant,'' HCFA adjusts capitation rates for the next calendar 
year to take account of the cost of that service. Until the new 
capitation rates are in effect, the M+C organization is paid for the 
``significant cost'' service on a fee-for-service basis as provided 
under section 422.105(b).
    (c) Risk adjustment: General rule. Capitation payments are adjusted 
for age, gender, institutional status, and other appropriate factors, 
including health status.
    (d) Risk adjustment: Health status--(1) Data collection. To adjust 
for health status, HCFA applies a risk factor based on data obtained in 
accordance with Sec. 422.257.
    (2) Initial implementation. HCFA applies this adjustment factor to 
payments beginning January 1, 2000.
    (3) Uniform application. Except as provided for M+C RFB plans under 
Sec. 422.250(a)(2)(iii), HCFA applies this adjustment factor to all 
types of plans.


Sec. 422.257  Encounter data.

    (a) Data collection: Basic rule. Each M+C organization must submit 
to HCFA (in accordance with HCFA instructions) all data necessary to 
characterize the context and purposes of each encounter between a 
Medicare enrollee and a provider, supplier, physician, or other 
practitioner.
    (b) Types of service and timing of submittal. M+C organizations 
must submit data as follows:
    (1) Beginning on a date determined by HCFA, inpatient hospital care 
data for all discharges that occur on or after July 1, 1997.
    (2) HCFA will provide advance notice to M+C organizations to 
collect and submit data for services that occur on or after July 1, 
1998, as follow:
    (i) Physician, outpatient hospital, SNF, and HHA data beginning no 
earlier than October 1, 1999; and
    (ii) All other data HCFA deems necessary beginning no earlier than 
October 1, 2000.
    (c) Sources and extent of data. (1) To the extent required by HCFA, 
the data must account for services covered under the original Medicare 
program, for Medicare covered services for which Medicare is not the 
primary payor, or for other additional or supplemental benefits that 
the M+C organization may provide.
    (2) The data must account separately for each provider, supplier, 
physician, or other practitioner that would be permitted to bill 
separately under the Medicare fee-for-service program, even if they 
participate jointly in the same encounter.
    (d) Other data requirements. The data must--
    (1) Conform to the requirements for equivalent data for Medicare 
fee-for-service when appropriate, and to all relevant national 
standards; and
    (2) Be submitted electronically to the appropriate HCFA contractor.
    (e) Validation of data. M+C organizations and their providers and 
practitioners will be required to submit medical records for the 
validation of encounter data, as prescribed by HCFA.
    (f) Use of data. HCFA uses the data obtained under this section to 
determine the risk adjustment factor that it applies to annual 
capitation rates under Sec. 422.256(c). HCFA may also use the data for 
other purposes.


Sec. 422.258  Announcement of annual capitation rates and methodology 
changes.

    (a) Capitation rates. (1) No later than March 1 of each year, HCFA 
announces to M+C organizations and other interested parties the 
capitation rates for the following calendar year.

[[Page 35093]]

    (2) HCFA includes in the announcement a description of the risk and 
other factors and explains the methodology in sufficient detail to 
enable M+C organizations to compute monthly adjusted capitation rates 
for individuals in each of its payment areas.
    (b) Advance notice of changes in methodology. (1) No later than 
January 15 of each year, HCFA notifies M+C organizations of changes it 
proposes to make in the factors and the methodology it used in the 
previous determination of capitation rates.
    (2) The M+C organizations have 15 days to comment on the proposed 
changes.


Sec. 422.262  Special rules for beneficiaries enrolled in M+C MSA 
plans.

    (a) Establishment and designation of medical savings account (MSA). 
A beneficiary who elects coverage under an M+C MSA plan--
    (1) Must establish an M+C MSA with a trustee that meets the 
requirements of paragraph (b) of this section; and
    (2) If he or she has more than one M+C MSA, designate the 
particular account to which payments under the M+C MSA plan are to be 
made.
    (b) Requirements for MSA trustees. An entity that acts as a trustee 
for an M+C MSA must--
    (1) Register with HCFA;
    (2) Certify that it is a licensed bank, insurance company, or other 
entity qualified, under sections 408(a)(2) or 408(h) of the IRS Code, 
to act as a trustee of individual retirement accounts;
    (3) Agree to comply with the M+C MSA provisions of section 138 of 
the IRS Code of 1986; and
    (4) Provide any other information that HCFA may require.
    (c) Deposit in the M+C MSA. (1) The payment is calculated as 
follows:
    (i) The monthly M+C MSA premium is compared with \1/12\ of the 
annual capitation rate for the area determined under Sec. 422.252.
    (ii) If the monthly M+C MSA premium is less than \1/12\ of the 
annual capitation rate, the difference is the amount to be deposited in 
the M+C MSA for each month for which the beneficiary is enrolled in the 
MSA plan.
    (2) HCFA deposits the full amount to which a beneficiary is 
entitled under paragraph (c)(1)(ii) of this section for the calendar 
year, beginning with the month in which M+C MSA coverage begins.
    (3) If the beneficiary's coverage under the M+C MSA plan ends 
before the end of the calendar year, HCFA recovers the amount that 
corresponds to the remaining months of that year.


Sec. 422.264  Special rules for coverage that begins or ends during an 
inpatient hospital stay.

    (a) Applicability. This section applies to inpatient services in a 
``subsection (d) hospital'' as defined in section 1886(d)(1)(B) of the 
Act.
    (b) Coverage that begins during an inpatient hospital stay. If 
coverage under an M+C plan offered by an M+C organization begins while 
the beneficiary is an inpatient in a subsection (d) hospital--
    (1) Payment for inpatient services until the date of the 
beneficiary's discharge is made by the previous M+C organization or 
original Medicare, as appropriate.
    (2) The M+C organization offering the newly-elected M+C plan is not 
responsible for the inpatient services until the date after the 
beneficiary's discharge; and
    (3) The M+C organization offering the newly-elected M+C plan is 
paid the full amount otherwise payable under this subpart.
    (c) Coverage that ends during an inpatient hospital stay. If 
coverage under an M+C plan offered by an M+C organization ends while 
the beneficiary is an inpatient in a subsection (d) hospital--
    (1) The M+C organization is responsible for the inpatient services 
until the date of the beneficiary's discharge;
    (2) Payment for those services during the remainder of the stay is 
not made by original Medicare or by any succeeding M+C organization 
offering a newly-elected M+C plan; and
    (3) The M+C organization that no longer provides coverage receives 
no payment for the beneficiary for the period after coverage ends.


Sec. 422.266  Special rules for hospice care.

    (a) Information. An M+C organization that has a contract under 
subpart K of this part must inform each Medicare enrollee eligible to 
elect hospice care under section 1812(d)(1) of the Act about the 
availability of hospice care (in a manner that objectively presents all 
available hospice providers, including a statement of any ownership 
interest in a hospice held by the M+C organization or a related entity) 
if--
    (1) A Medicare hospice program is located within the plan's service 
area; or
    (2) It is common practice to refer patients to hospice programs 
outside that area.
    (b) Enrollment Status. Unless the enrollee disenrolls from the M+C 
plan, a beneficiary electing hospice continues his or her enrollment in 
the M+C plan and is entitled to receive, through the M+C plan, any 
benefits other than those that are the responsibility of the Medicare 
hospice.
    (c) Payment. During the time the hospice election is in effect, 
HCFA's monthly capitation payment to the M+C organization is reduced to 
an amount equal to the adjusted excess amount determined under 
Sec. 422.312. In addition, HCFA pays through the original Medicare 
program (subject to the usual rules of payment)--
    (1) The hospice program for hospice care furnished to the Medicare 
enrollee; and
    (2) The M+C organization, provider or supplier for other Medicare-
covered services furnished to the enrollee.


Sec. 422.268  Source of payment and effect of election of the M+C plan 
election on payment.

    (a) Source of payments. Payments under this subpart, to M+C 
organizations or M+C MSAs, are made from the Federal Hospital Insurance 
Trust Fund or the Supplementary Medical Insurance Trust Fund. HCFA 
determines the proportions to reflect the relative weight that benefits 
under Part A, and benefits under Part B represents of the actuarial 
value of the total benefits under title XVIII of the Act.
    (b) Payments to the M+C organization. Subject to Secs. 412.105(g) 
and 413.86(d) of this chapter and Secs. 422.105, 422.264, and 422.266, 
HCFA's payments under a contract with an M+C organization (described in 
Sec. 422.250) with respect to an individual electing an M+C plan 
offered by the organization are instead of the amounts which (in the 
absence of the contract) would otherwise be payable under original 
Medicare for items and services furnished to the individual.
    (c) Only the M+C organization entitled to payment. Subject to 
Sec. 422.262, 422.264, 422.266, and 422.520 of this part and sections 
1886(d)(11) and 1886(h)(3)(D) of the Act, only the M+C organization is 
entitled to receive payment from HCFA under title XVIII of the Act for 
items and services furnished to the individual.

BILLING CODE 4120-01-M

Subpart G--Premiums and Cost-Sharing


Sec. 422.300  Basis and scope.

    (a) General. This subpart is based on section 1854 of the Act. It 
sets forth the requirements and limitations for payments by and on 
behalf of Medicare beneficiaries who elect an M+C plan.
    (b) Transition period. For contract periods beginning before 
January 1,

[[Page 35094]]

2002, HCFA applies the following special rules.
    (1) M+C organizations may, with HCFA's agreement, modify an M+C 
plan offered prior to January 1, 2002 by--
    (i) Adding benefits at no additional cost to the M+C plan enrollee; 
and
    (ii) Lowering the premiums approved through the ACR process;
    (iii) Lowering other cost-sharing amounts approved through the ACR 
process.
    (2) For contracts beginning on a date other than January 1 
(according to Sec. 422.504(d)), M+C organizations may submit ACRs on a 
date other than May 1 approved by HCFA.


Sec. 422.302  Terminology.

    As used in this subpart, unless specified otherwise--
    Additional revenues are revenues collected or expected to be 
collected from charges for M+C plans offered by an M+C organization in 
excess of costs actually incurred or expected to be incurred. 
Additional revenues would include such things as revenues in excess of 
expenses of an M+C plan, profits, contribution to surplus, risk 
margins, contributions to risk reserves, assessments by a related 
entity that do not represent a direct medical or related administrative 
cost, and any other premium component not reflected in direct medical 
care costs and administrative costs.
    APR stands for the M+C plan's average per capita rates of payment. 
The APR is the average amount the M+C organization estimates HCFA will 
pay (without any needed offsets or reductions, such as, those required 
by Sec. 422.250(a)(2)(ii) for M+C MSA plan enrollees) for the period 
covered by the ACR for all of the Medicare beneficiaries electing the 
M+C plan.
    M+C monthly basic beneficiary premium means, with respect to an M+C 
coordinated care plan, the amount authorized to be charged under 
Sec. 422.308(a)(1) for the plan, or, with respect to a M+C private fee-
for-service plan, the amount filed under Sec. 422.306(d)(1).
    M+C monthly supplemental beneficiary premium means, with respect to 
an M+C coordinated care plan, the amount authorized to be charged under 
Sec. 422.308(a)(2) for the M+C plan, or, with respect to an MSA or an 
M+C private fee-for-service plan, the amount filed under 
Sec. 422.306(c)(2) or Sec. 422.306(d)(2).
    M+C monthly MSA premium means, with respect to an M+C plan, the 
amount of such premium filed under Sec. 422.306(c)(1).


Sec. 422.304  Rules governing premiums and cost-sharing.

    (a) Monthly premiums. The monthly premium charged to the 
beneficiary is--
    (1) For an individual enrolled in an M+C plan (other than an M+C 
MSA plan) offered by an M+C organization, the sum of the M+C monthly 
basic beneficiary premium plus the M+C monthly supplemental beneficiary 
premium (if any); or
    (2) For an individual enrolled in an M+C MSA plan offered by an M+C 
organization, the M+C monthly supplemental beneficiary premium (if 
any).
    (b) Uniformity. The M+C monthly basic beneficiary premium, the M+C 
monthly supplemental beneficiary premiums, and the M+C monthly MSA 
premium of an M+C organization may not vary among individuals enrolled 
in the M+C plan. In addition, the M+C organization may not vary the 
level of copayments, coinsurance, or deductibles charged for basic 
benefits or supplemental benefits (if any), among individuals enrolled 
in the M+C plan.
    (c) Timing of payments. The M+C organization must permit payments 
of M+C monthly basic and supplemental beneficiary premium on a monthly 
basis and may not terminate coverage for failure to make timely 
payments except as provided in Sec. 422.74(b)(1).
    (d) Monetary inducements prohibited. An M+C organization may not 
provide for cash or other monetary rebates as an inducement for 
enrollment or for any other reason or purpose.


Sec. 422.306  Submission of proposed premiums and related information.

    (a) General rule. (1) Not later than May 1 of each year, each M+C 
organization and any organization intending to contract as an M+C 
organization in the subsequent year must submit to HCFA, in the manner 
and form prescribed by HCFA, for each M+C plan it intends to offer in 
the following year--
    (i) The information specified in paragraph (b), (c), or paragraph 
(d) of this section for the type of M+C plan involved; and
    (ii) The service area and enrollment capacity (if any).
    (2) If the submission is not complete, timely, or accurate, HCFA 
has the authority to impose sanctions under Subpart O of this part or 
may choose not to renew the contract.
    (b) Information required for coordinated care plans--(1) Basic 
benefits. For basic benefits, the following information is required:
    (i) The ACR as specified in Sec. 422.310.
    (ii) The M+C monthly basic beneficiary premium.
    (iii) A description of cost-sharing to be imposed under the plan, 
and its actuarial value.
    (iv) A description of any additional benefits to be provided 
pursuant to Sec. 422.312 and the actuarial value determined for those 
benefits.
    (v) Amounts collected in the previous contract period for basic 
benefits.
    (2) Supplemental benefits. For supplemental benefits, the following 
information is required:
    (i) The ACR.
    (ii) The M+C monthly supplemental beneficiary premium.
    (iii) A description of supplemental benefits being offered, the 
cost sharing to be imposed, and their actuarial value.
    (iv) Amounts collected in the previous contract period for 
supplemental benefits.
    (c) Information required for MSA plans. (1) The monthly MSA premium 
for basic benefits.
    (2) The M+C monthly supplementary beneficiary premium for 
supplemental benefits.
    (3) A description of all benefits offered under the M+C MSA plan.
    (4) The amount of the deductible imposed under the plan.
    (5) Amounts collected in the previous contract period for 
supplemental benefits.
    (d) Information required for M+C private fee-for-service plans. (1) 
The information specified under paragraph (b)(1) of this section.
    (2) The amount of the M+C monthly supplemental beneficiary premium.
    (3) A description of all benefits offered under the plan.
    (4) Amounts collected in the previous contract period for basic and 
supplemental benefits.
    (e) HCFA review--(1) Basic rule. Except as specified in paragraph 
(e)(2) of this section, HCFA reviews and approves or disapproves the 
information submitted under this section.
    (2) Exception. HCFA does not review or approve or disapprove the 
following information:
    (i) Any amounts submitted with respect to M+C MSA plans.
    (ii) The M+C monthly basic and supplementary beneficiary premiums 
for M+C private fee-for-service plans.


Sec. 422.308  Limits on premiums and cost sharing amounts.

    (a) Rules for coordinated care plans--(1) For basic benefits, the 
M+C monthly basic beneficiary premium (multiplied by 12) charged, plus 
the actuarial value of the cost-sharing applicable, on average, to 
beneficiaries enrolled under this part may not exceed the annual 
actuarial value of the deductibles and

[[Page 35095]]

coinsurance that would be applicable, on average, to beneficiaries 
entitled to Medicare Part A and enrolled in Medicare Part B if they 
were not enrollees of an M+C organization as determined in the ACR 
under Sec. 422.310. For those M+C plan enrollees that are enrolled in 
Medicare Part B only, the M+C monthly basic beneficiary premium 
(multiplied by 12) charged, plus the actuarial value of the 
deductibles, coinsurance and copayments applicable, on average, to 
those beneficiaries enrolled under this part may not exceed the annual 
actuarial value of the deductibles and coinsurance that would be 
applicable, on average, to beneficiaries enrolled in Medicare Part B if 
they were not enrollees of an M+C organization as determined in the ACR 
under Sec. 422.310.
    (2) For supplemental benefits, the M+C monthly supplemental 
beneficiary premium (multiplied by 12) charged, plus the actuarial 
value of its cost-sharing, may not exceed the amounts approved in the 
ACR for those benefits, as determined under Sec. 422.310 on an annual 
basis.
    (3) Coverage of Part A services for Part B-only Medicare enrollees. 
If an M+C organization furnishes coverage of Medicare Part A-type 
services to a Medicare enrollee entitled to Part B only, the M+C plan's 
premium plus the actuarial value of its cost-sharing for these services 
may not exceed the lesser of--
    (i) The APR that is payable for these services for those 
beneficiaries entitled to Part A plus the actuarial value of Medicare 
deductibles and Coinsurance for the services;
    (ii) or the ACR for such services.
    (b) Rule for M+C private fee-for-service plans. The average 
actuarial value of the cost-sharing for basic benefits may not exceed 
the actuarial value of the cost-sharing that would apply, on average, 
to beneficiaries entitled to Medicare Part A and enrolled in Medicare 
Part B if they were not enrolled in an M+C plan as determined in the 
ACR under Sec. 422.310.
    (c) Special rules for determination of actuarial value. If HCFA 
determines that adequate data are not available to determine actuarial 
value under paragraph (a) or (b) of this section, HCFA may make the 
determination with respect to all M+C eligible individuals in the same 
geographic area or State or in the United States, or on the basis of 
other appropriate data.


Sec. 422.309  Incorrect collections of premiums and cost-sharing.

    (a) Definitions. As used in this section--
    (1) Amounts incorrectly collected
    (i) Means amounts that:
    (A) Exceed the limits imposed by Sec. 422.308;
    (B) In the case of a M+C private fee-for-service plan, exceed the 
M+C monthly basic beneficiary premium or the M+C monthly supplemental 
premium submitted under Sec. 422.306; and
    (C) In the case of a M+C MSA plan, exceed the M+C monthly 
supplemental premium submitted under Sec. 422.306 and the deductible 
for basic benefits; and
    (ii) Includes amounts collected from an enrollee who was believed 
not entitled to Medicare benefits but was later found to be entitled.
    (2) Other amounts due are amounts due for services that were--
    (i) Emergency, urgently needed services, or other services obtained 
outside the M+C plan; or
    (ii) Initially denied but, upon appeal, found to be services the 
enrollee was entitled to have furnished by the M+C organization.
    (b) Basic commitments. An M+C organization must agree to refund all 
amounts incorrectly collected from its Medicare enrollees, or from 
others on behalf of the enrollees, and to pay any other amounts due the 
enrollees or others on their behalf.
    (c) Refund methods--(1) Lump-sum payment. The M+C organization must 
use lump-sum payments for the following:
    (i) Amounts incorrectly collected that were not collected as 
premiums.
    (ii) Other amounts due.
    (iii) All amounts due if the M+C organization is going out of 
business or terminating its M+C contract for an M+C plan(s).
    (2) Premium adjustment or lump-sum payment, or both. If the amounts 
incorrectly collected were in the form of premiums, or included 
premiums as well as other charges, the M+C organization may refund by 
adjustment of future premiums or by a combination of premium adjustment 
and lump-sum payments.
    (3) Refund when enrollee has died or cannot be located. If an 
enrollee has died or cannot be located after reasonable effort, the M+C 
organization must make the refund in accordance with State law.
    (d) Reduction by HCFA. If the M+C organization does not make the 
refund required under this section by the end of the contract period 
following the contract period during which an amount was determined to 
be due an enrollee, HCFA reduces the premium the M+C organization is 
allowed to charge an M+C plan enrollee by the amounts incorrectly 
collected or otherwise due. In addition, the M+C organization would be 
subject to sanction under Subpart O for failure to refund amounts 
incorrectly collected from M+C plan enrollees.


Sec. 422.310  Adjusted community rate (ACR) approval process.

    (a) General rule. (1) Except with respect to M+C MSA plans, each 
M+C organization must compute a separate ACR for each M+C coordinated 
care or private fee-for-service plan offered to Medicare beneficiaries. 
In computing the ACR, the M+C organization calculates an initial rate 
(for years after 1999, using the methods described in paragraph (b), 
for 1999, under Sec. 417.594(b)) that represents the ``commercial 
premium'' the M+C organization would charge its general non-Medicare 
eligible enrollment population for the basic benefits, and any 
mandatory supplemental benefits covered under the M+C plan. The M+C 
organization should also calculate a separate initial rate (using the 
same approach) for each optional supplemental benefit package it offers 
under an M+C plan. For years after 1999 the M+C organization then 
either adjusts that rate by the factors specified in paragraph (c) of 
this section or requests that HCFA adjust the rate in accordance with 
the procedures specified in paragraph (c)(6) of this section. For 1999, 
adjustments are made under section 417.594(c). All data submitted as 
part of the ACR process is subject to audit by HCFA or any person or 
organization designated by HCFA.
    (2) To calculate the adjusted excess described in section 422.312, 
the M+C organization or HCFA further reduces the rate for Medicare-
covered services by the actuarial value of applicable Medicare 
coinsurance and deductibles.
    (3) Separate ACRs must be calculated for Part A and Part B 
enrollees and Part B-only enrollees for each M+C plan offered, and for 
each optional supplemental benefit option.
    (4) In calculating its initial rate, the M+C organization must 
identify and take into account anticipated revenue collectible from 
other payers for those services for which Medicare is not the primary 
payer as described in Sec. 422.108.
    (5) Except as provided in paragraph (a)(6) of this section, the M+C 
organization must have an adequate accounting system that is accrual 
based and uses generally-accepted accounting principles to develop its 
ACR.
    (6) For M+C organizations that are part of a government entity that 
uses a cash basis of accounting, ACR cost data

[[Page 35096]]

developed on this basis is acceptable. However, only depreciation on 
capital assets, rather than the expenditure for the asset, is 
acceptable.
    (b) Initial rate calculation for years after 1999. (1) The M+C 
organization's initial rate for each M+C plan is calculated on a 12-
month basis for non-Medicare enrollees, using either, at the M+C 
organization's election--
    (i) A community rating system (as defined in section 1308(8) of the 
PHS Act, other than subparagraph (C)); or
    (ii) A system, approved by HCFA, under which the M+C organization 
develops an aggregate premium for each M+C plan for all enrollees of 
that M+C plan that is weighted by the size of the various enrolled 
groups and individuals that compose the M+C organization's enrollment 
in that M+C plan. For purposes of this section, enrolled groups are 
defined as employee groups or other bodies of subscribers (including 
individual subscribers) that enroll in the M+C plan on a premium basis.
    (2) Regardless of which method the M+C organization uses to 
calculate its initial rate, the initial rate must be equal to the 
premium the M+C organization would charge its non-Medicare enrollees on 
a yearly basis for services included in the M+C plan.
    (3) Except as provided in paragraph (b)(4) of this section, the M+C 
organization must identify in its initial rate calculation for an M+C 
plan, the following components whose rates must be consistent with 
rates used by the M+C organization in calculating premiums for non-
Medicare enrollees:
    (i) Direct medical care.
    (ii) Administration.
    (iii) Additional Revenues.
    (iv) Enrollee cost sharing (for example, deductibles, coinsurance, 
or copayments) for Medicare-covered services and for additional and 
supplemental benefits.
    (4) An M+C organization that does not usually separate its premium 
components as described in paragraph (b)(3) of this section may 
calculate its initial rate with the methods it uses for its other 
enrolled groups if the M+C organization provides HCFA with the 
documentation necessary to support any adjustments the M+C organization 
makes to the initial rate in accordance with paragraph (c)(5) of this 
section.
    (5) The initial rate calculation must not carry forward any losses 
experienced by the M+C organization during prior contract periods. The 
M+C organization must submit supporting documentation to assure HCFA 
that ACR values do not include past losses but only premiums for 
covered services, additional services, and supplemental benefits for 
the upcoming 12-month period.
    (c) Adjustment factors for years after 1999. Adjustment factors are 
designed to adjust on a component basis the initial rate calculated 
under paragraph (b) of this section to reflect differences in 
utilization characteristics of the M+C organization's Medicare 
enrollees electing an M+C plan using a relative cost ratio. Adjustment 
factors are as follows:
    (1) Direct medical care. The relative cost ratio for direct medical 
care for an M+C plan is determined by comparing the direct medical care 
costs actually incurred on an accrual basis during the most recently 
ended calendar year prior to submission of the ACR for Medicare 
enrollees that elected the M+C plan to the direct medical care costs of 
non-Medicare enrollees incurred over the same period. The non-Medicare 
enrollees included in this computation must be consistent with the non-
Medicare enrollees included in the initial rate computation.
    (2) Administration. The relative cost ratio for Administration for 
an M+C plan is determined by comparing the administrative costs 
actually incurred on an accrual basis during the most recently ended 
calendar year prior to submission of the ACR for Medicare enrollees 
that elected the M+C plan to the administrative costs of non-Medicare 
enrollees incurred over the same period. The non-Medicare enrollees 
included in this computation must be consistent with the non-Medicare 
enrollees included in the initial rate computation.
    (3) Additional revenues. The relative cost ratio for additional 
revenues for an M+C plan is determined by comparing the additional 
revenues collected on an accrual basis during the most recently ended 
calendar year prior to submission of the ACR for Medicare enrollees 
that elected the M+C plan to the additional revenues of non-Medicare 
enrollees collected over the same period. The non-Medicare enrollees 
included in this computation must be consistent with the non-Medicare 
enrollees included in the initial rate computation.
    (4) Additional adjustments. Additional adjustments may be necessary 
if the M+C organization, with agreement of HCFA, determines that the 
adjustment of the initial rate by the relative cost ratios does not 
represent an accurate ACR value of the initial rate component. 
Adjustments will be allowed that are designed to reduce ACR values to 
equal the actuarial value of the M+C plan charge structure.
    (5) Supporting documentation. All adjustments made by the M+C 
organization must be accompanied by adequate supporting data. If an M+C 
organization does not have sufficient enrollment experience to develop 
this data, it may, during its initial contract period use reasonable 
estimates acceptable to HCFA to establish its ACR values.
    (6) Adjustment by HCFA. If it is determined that the M+C 
organization does not have adequate data to adjust the initial rate 
calculated under paragraph (b) of this section to reflect the 
utilization characteristics of Medicare enrollees, HCFA adjusts the 
initial rate. HCFA adjusts the rate on the basis of differences in the 
utilization characteristics of--
    (i) Medicare and non-Medicare enrollees in other M+C plans; or
    (ii) Medicare beneficiaries in the M+C organization's area, State, 
or the United States who are eligible to elect an M+C plan and other 
individuals in that same area, State, or the United States.
    (d) Special rules for certain organizations. An M+C organization 
that does not have non-Medicare enrollees or sufficient Medicare 
enrollment experience to adequately calculate ACR values may calculate 
its ACR using estimates described in paragraphs (a)(1) and (a)(2) of 
this section as an additional adjustment described in paragraph (c)(4) 
of this section.
    (1) The M+C organization may use an estimate of the ACR value for 
the direct medical and administrative components of a service or 
services offered using generally-accepted accounting principles.
    (2) The M+C organization may use an estimate of the ACR value for 
the additional revenue component of a service or services offered based 
on the lesser of (if the information is available)--
    (i) The average of additional revenues received through risk 
payments for health services contracted to be furnished to an enrolled 
population of other organizations;
    (ii) The average of additional revenues received for health 
services furnished; or
    (iii) A reasonable estimate of additional revenues of other M+C 
organizations in the general marketplace.
    (e) Adjustment by HCFA. If HCFA finds that there is insufficient 
enrollment experience to determine the APR or ACR for a M+C plan at the 
beginning of a contract period, HCFA may--
    (1) Determine the APR based on the enrollment experience of other 
M+C organizations;

[[Page 35097]]

    (2) Determine ACR using data in the general commercial marketplace; 
or
    (3) Determine either or both rates using the best available 
information, which may include enrollment experience of other M+C 
organizations and section 1876 risk contractors.
    (f) HCFA review. (1) The M+C organization's methodology and 
computation of its ACR are subject to review and approval by HCFA. When 
the M+C organization submits the ACR computation, it must include 
adequate supporting data. Except as provided in Sec. 422.306(e)(2), 
HCFA authorizes the M+C organization to collect premiums and other cost 
sharing amounts described in Sec. 422.306 that are equal to the amounts 
calculated in the ACR.
    (2) If the M+C organization is dissatisfied with an HCFA 
determination that the M+C organization's computation is not 
acceptable, the M+C organization may within 2 weeks after the date of 
receipt of notification of this determination, file a request for a 
hearing with HCFA. The request must state why the M+C organization 
believes the determination is incorrect and must be accompanied by any 
supporting evidence the M+C organization wishes to submit. The hearing 
is conducted by a hearing officer designated by HCFA under the hearing 
procedures described in subpart N.


Sec. 422.312  Requirement for additional benefits.

    (a) Definitions. As used in this section--
    (1) Excess amount is the amount by which the APR exceeds the 
actuarial value of the Medicare covered services required under 
Sec. 422.101(a), as determined on the basis of the ACR determined under 
Sec. 422.310, as reduced for the actuarial value of the cost-sharing 
under Medicare Parts A and B. A separate excess amount must be 
determined for Part B-only enrollees.
    (2) Adjusted excess amount is the excess amount minus any amount 
withheld and reserved for the organization in a stabilization fund, as 
provided in paragraph (c) of this section.
    (b) Requirement for additional benefits. If there is an adjusted 
excess amount for the plan it offers, the M+C organization must--
    (1) Provide additional benefits with an actuarial value (less the 
actuarial value of any copayment or coinsurance associated with the 
benefit) which HCFA determines is at least equal to the adjusted excess 
amount; and
    (2) Provide those benefits uniformly for all Medicare enrollees 
electing the plan.
    (c) Stabilization fund. (1) An M+C organization may request for 
part of an excess amount to be withheld and reserved, for a specified 
number of contract periods, in the Federal Hospital Insurance Trust 
Fund, or the Federal Supplementary Insurance Trust Fund in the 
proportions that HCFA determines to be appropriate.
    (2) The reserved funds are to be used to stabilize and prevent 
undue fluctuations in the additional benefits that are required under 
this section and are provided during subsequent contract periods.
    (3) Any amounts not provided as additional benefits during the 
period specified by the M+C organization for which the stabilization 
fund is established, reverts for the use of the trust funds.
    (4) Establishment of a stabilization fund. An M+C organization's 
request to have monies withheld in a stabilization fund for a specific 
M+C plan must be made when the M+C organization notifies HCFA under 
Sec. 422.306 of its proposed premiums, other cost-sharing amounts, and 
related information in preparation for its next contract period.
    (i) Limit per contract period. Except as provided in paragraph 
(c)(4)(iii) of this section, HCFA does not withhold in a stabilization 
fund more than 15 percent of the excess amount for a given contract 
period.
    (ii) Cumulative limit. If HCFA has established a stabilization fund 
for an M+C plan, it does not approve a request for withholding made by 
that M+C organization for a subsequent contract period that would cause 
the total value of the stabilization fund to exceed 25 percent of the 
excess amount applicable to the M+C plan for that subsequent contract 
period.
    (iii) Exception. HCFA may grant an exception to the limit described 
in paragraph (c)(3)(i) of this section if the M+C organization can 
demonstrate to HCFA's satisfaction that the value of the additional 
benefits it provides to its Medicare enrollees electing this M+C plan 
fluctuates substantially in excess of 15 percent from one contract 
period to another.
    (iv) Interest. The amounts withheld in a stabilization fund are 
accounted for by HCFA in accounts for which interest does not accrue to 
the M+C organization.
    (5) Withdrawal from a stabilization fund. An M+C organization's 
request to make a withdrawal from the stabilization fund established 
for an M+C plan to be used during a contract period must be made when 
the M+C organization notifies HCFA under Sec. 422.306 of its proposed 
premiums, cost-sharing amounts, and related information in preparation 
for its next contract period.
    (i) Notification requirements. An M+C organization must--
    (A) Indicate how it intends to use the withdrawn amounts;
    (B) Justify the need for the withdrawal in terms of stabilizing the 
additional benefits it provides to Medicare enrollees;
    (C) Document the M+C plan's experience with fluctuations of revenue 
requirements relative to the additional benefits it provides to 
Medicare enrollees; and
    (D) Document its experience during the contract period previous to 
the one for which it requests withdrawal to ensure that the M+C 
organization will not be using the withdrawn amounts to refinance 
losses suffered during that previous contract period.
    (ii) Criteria for HCFA approval. HCFA approves a request for a 
withdrawal from a benefit stabilization fund for use during the next 
contract period only if--
    (A) The average of the APR for the M+C plan's next contract period 
of the M+C plan is less than that of the previous contract period;
    (B) The M+C plan's ACR for the next contract period is 
significantly higher than that of the previous contract period;
    (C) The M+C plan's revenue requirements for the next contract 
period for providing the additional benefits it provided during the 
previous contract period is significantly higher than the requirements 
for that previous period; or
    (D) The ACR for the next contract period results in additional 
benefits that are significantly less in total value than that of the 
previous contract period.
    (iii) Basis for denial. HCFA does not approve a request for a 
withdrawal from a stabilization fund if the withdrawal would allow the 
M+C organization to refinance prior contract period losses or to avoid 
losses in the upcoming contract period.
    (iv) Form of payment. Payment of monies withdrawn from a 
stabilization fund is made, in equal parts, as an additional amount to 
the monthly advance payment made to the M+C organization for Medicare 
beneficiaries electing the M+C plan during the period of the contract.
    (d) Construction. Nothing in this section may be construed as 
preventing an M+C organization from providing supplemental benefits in 
addition to those required under this section and

[[Page 35098]]

from imposing a premium for those supplemental benefits.

Subpart H--Provider-Sponsored Organizations

    3. Nomenclature change. Throughout subpart H, ``Medicare+Choice'', 
wherever it appears, is revised to read ``M+C''.
    4. Nomenclature change. Throughout subpart H, ``items and 
services'', wherever it appears, is revised to read ``services''.


Sec. 422.350  [Amended]

    5. In Sec. 422.350, the following changes are made:
    a. In paragraph (a)(1), ``hereinafter referred to as PSOs'' is 
revised to read ``(PSOs)''.
    b. The definition of ``capitated basis'' is removed and a 
definition of ``capitation payment'' is added in its place, to read as 
set forth below.
    c. In the definition of ``cash equivalent'', ``accounts 
receivables, which'' is revised to read ``accounts receivable that''.
    d. The definition of ``health care provider'' and the statement for 
``M+C'' are removed.
    e. In the definition of ``insolvency'', ``where'' is revised to 
read ``in which''.
    f. The definition of ``provider-sponsored organization is revised 
to read as set forth below.


Sec. 422.350  Basis, scope, and definitions.

* * * * *
    Capitation payment means a fixed per enrollee per month amount paid 
for contracted services without regard to the type, cost, or frequency 
of services furnished.
* * * * *
    Provider-sponsored organization (PSO) means a public or private 
entity that--
    (1) Is established or organized, and operated, by a health care 
provider or group of affiliated health care providers;
    (2) Provides a substantial proportion (as defined in Sec. 422.352) 
of the health care services under the M+C contract directly through the 
provider or affiliated group of providers; and
    (3) When it is a group, is composed of affiliated providers who--
    (i) Share, directly or indirectly, substantial financial risk, as 
determined under Sec. 422.356, for the provision of services that are 
the obligation of the PSO under the M+C contract; and
    (ii) Have at least a majority financial interest in the PSO.


Sec. 422.352  [Amended]

    6. In Sec. 422.352, the following changes are made:
    a. In paragraph (a)(1) ``such licensure'' is revised to read 
``State licensure'', and ``section 1855(a)(2) of the Act'' is revised 
to read ``Sec. 422.370''.
    b. In paragraph (b)(2), ``as defined in Sec. 422.354'' is removed.
    c. Paragraph (c) is revised to read as follows:


Sec. 422.352  Basic requirements.

* * * * *
    (c) Rural PSO. To qualify as a rural PSO, a PSO must--
    (1) Demonstrate to HCFA that--
    (i) It has available in the rural area, as defined in 
Sec. 412.62(f) of this chapter, routine services including but not 
limited to primary care, routine specialty care, and emergency 
services; and
    (ii) The level of use of providers outside the rural area is 
consistent with general referral patterns for the area; and
    (2) Enroll Medicare beneficiaries, the majority of which reside in 
the rural area the PSO serves.


Sec. 422.354  [Amended]

    7. In Sec. 422.354, the following changes are made:
    a. In the introductory text, ``of by two or more'' is revised to 
read ``of two or more''.
    b. In paragraphs (a)(1), (a)(2), and (c), the parenthetical phrases 
are removed.
    c. Paragraph (b) is revised to read as follows:


Sec. 422.354  Requirements for affiliated providers.

* * * * *
    (b) Each affiliated provider of the PSO shares, directly or 
indirectly, substantial financial risk for the furnishing of services 
the PSO is obligated to provide under the contract.
* * * * *


Sec. 422.356  [Amended]

    8. In Sec. 422.356, in paragraph (a)(3)(ii), ``Agreement by the 
affiliated provider'' is revised to read ``Affiliated providers 
agree''.


Sec. 422.370  [Amended]

    9. In Sec. 422.370 the following changes are made:
    a. In the introductory text, the word ``as'' is revised to read 
``to offer''.
    b. Paragraphs (1) and (2) are redesignated as paragraphs (a) and 
(b).
    10. Sec. 422.372 is revised to read as follows:


Sec. 422.372  Basis for waiver of State licensure.

    (a) General rule. Subject to this section and to paragraphs (a) and 
(e) of Sec. 422.374, HCFA may waive the State licensure requirement if 
the organization has applied (except as provided in paragraph (b)(4) of 
this section) for the most closely appropriate State license or 
authority to conduct business as an M+C plan.
    (b) Basis for waiver of State licensure. Any of the following may 
constitute a basis for HCFA's waiver of State licensure.
    (1) 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.
    (2) Denial of application based on discriminatory treatment. The 
State has--
    (i) Denied the license 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
    (ii) Required, as a condition of licensure that the organization 
offer any product or plan other than an M+C plan.
    (3) Denial of application based on different solvency requirements. 
(i) The State has denied the 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
    (ii) HCFA determines that the State has imposed, as a condition of 
licensure, any documentation or information requirements relating to 
solvency or other material requirements, procedures, or standards 
relating to solvency that are different from the requirements, 
procedures, or standards set forth by HCFA to implement, monitor, and 
enforce Secs. 422.380 through 422.390.
    (4) State declines to accept licensure application. The appropriate 
State licensing authority has given the organization written notice 
that it will not accept its licensure application.
    11. In Sec. 422.374, paragraph (b) is revised to read as follows:


Sec. 422.374  Waiver request and approval process.

* * * * *
    (b) HCFA gives the organization written notice of granting or 
denial of waiver within 60 days of receipt of a substantially complete 
waiver request.
* * * * *
    12. In Sec. 422.384, paragraph (b)(3) is revised to read as 
follows:


Sec. 422.384  Financial plan requirement.

* * * * *
    (b) * * *

[[Page 35099]]

    (3) Cash-flow statements;
* * * * *
    13. Nomenclature change: Throughout subpart H, the phrase ``health 
care provider'', wherever it appears, is revised to read ``provider''.
    14. Subpart I is added as follows:

Subpart I--Organization Compliance with State Law and Preemption by 
Federal Law

Sec.
422.400 State licensure requirement.
422.402 Federal preemption of State law.
422.404 State premium taxes prohibited.

Subpart I--Organization Compliance with State Law and Preemption by 
Federal Law


Sec. 422.400  State licensure requirement.

    Except in the case of a PSO granted a waiver under subpart H of 
this part, each M+C organization must--
    (a) Be licensed under State law, or otherwise authorized to operate 
under State law, as a risk-bearing entity (as defined in Sec. 422.2) 
eligible to offer health insurance or health benefits coverage in each 
State in which it offers one or more M+C plans;
    (b) If not commercially licensed, obtain certification from the 
State that the organization meets a level of financial solvency and 
such other standards as the State may require for it to operate as an 
M+C organization; and
    (c) Demonstrate to HCFA that--
    (1) The scope of its license or authority allows the organization 
to offer the type of M+C plan or plans that it intends to offer in the 
State; and
    (2) If applicable, it has obtained the State certification required 
under paragraph (b) of this section.


Sec. 422.402  Federal preemption of State law.

    (a) General preemption. Except as provided in paragraph (b) of this 
section, the rules, contract requirements, and standards established 
under this part supersede any State laws, regulations, contract 
requirements, or other standards that would otherwise apply to M+C 
organizations and their M+C plans only to the extent that such State 
laws are inconsistent with the standards established under this part. 
This preemption of State laws and other standards applies only to 
coverage pursuant to an M+C contract, and does not extend to benefits 
outside of such contract or to individuals who are not M+C enrollees of 
an organization with an M+C contract.
    (b) Specific preemption. As they might otherwise apply to the M+C 
plans of an M+C organization in a State, State laws and regulations 
pertaining to the following areas are specifically preempted by this 
part:
    (1) Benefit requirements, such as mandating the inclusion in an M+C 
plan of a particular service, or specifying the scope or duration of a 
service (for example, length of hospital stay, number of home health 
visits). State cost-sharing standards with respect to any benefits are 
preempted only if they are inconsistent with this part, as provided for 
in paragraph (a) of this section.
    (2) Requirements relating to inclusion or treatment of providers 
and suppliers.
    (3) Coverage determinations (including related appeal and grievance 
processes for all benefits included under an M+C contract). 
Determinations on issues other than whether a service is covered under 
an M+C contract, and the extent of enrollee liability under the M+C 
plan for such a service, are not considered coverage determinations for 
purposes of this paragraph.
    (c) Except as provided in paragraphs (a) and (b) of this section, 
nothing in this section may be construed to affect or modify the 
provisions of any other law or regulation that imposes or preempts a 
specific State authority.


Sec. 422.404  State premium taxes prohibited.

    (a) Basic rule. No premium tax, fee, or other similar assessment 
may be imposed by any State, the District of Columbia, the Commonwealth 
of Puerto Rico, the Virgin Islands, Guam, and American Samoa, or any of 
their political subdivision or other governmental authorities with 
respect to any payment HCFA makes on behalf of M+C enrollees under 
subpart F of this part.
    (b) Construction. Nothing in this section shall be construed to 
exempt any M+C organization from taxes, fees, or other monetary 
assessments related to the net income or profit that accrues to, or is 
realized by, the organization from business conducted under this part, 
if that tax, fee, or payment is applicable to a broad range of business 
activity.
    Subpart J [Reserved]
    15. Subpart J is reserved.
    16. Subpart K is added as follows:

Subpart K--Contracts With Medicare+Choice Organizations

Sec.
422.500  Definitions.
422.501  General provisions.
422.502  Contract provisions.
422.504  Effective date and term of contract.
422.506  Nonrenewal of contract.
422.508  Modification or termination of contract by mutual consent.
422.510  Termination of contract by HCFA.
422.512  Termination of contract by the M+C organization.
422.514  Minimum enrollment requirements.
422.516  Reporting requirements.
422.520  Prompt payment by M+C organization.
422.524  Special rules for RFB societies.

Subpart K--Contracts With Medicare+Choice Organizations


Sec. 422.500  Definitions.

    For purposes of this subpart, the following definitions apply:
    Business transaction means any of the following kinds of 
transactions:
    (1) Sale, exchange, or lease of property.
    (2) Loan of money or extension of credit.
    (3) Goods, services, or facilities furnished for a monetary 
consideration, including management services, but not including--
    (i) Salaries paid to employees for services performed in the normal 
course of their employment; or
    (ii) Health services furnished to the M+C organization's enrollees 
by hospitals and other providers, and by M+C organization staff, 
medical groups, or independent practice associations, or by any 
combination of those entities.
    Clean Claim means a claim that has no defect, impropriety, lack of 
any required substantiating documentation, or particular circumstance 
requiring special treatment that prevents timely payment.
    Party in interest includes the following:
    (1) Any director, officer, partner, or employee responsible for 
management or administration of an M+C organization.
    (2) Any person who is directly or indirectly the beneficial owner 
of more than 5 percent of the organization's equity; or the beneficial 
owner of a mortgage, deed of trust, note, or other interest secured by 
and valuing more than 5 percent of the organization.
    (3) In the case of an M+C organization organized as a nonprofit 
corporation, an incorporator or member of such corporation under 
applicable State corporation law.
    (4) Any entity in which a person described in paragraph (1), (2), 
or (3) of this definition:
    (i) Is an officer, director, or partner; or
    (ii) Has the kind of interest described in paragraphs (1), (2), or 
(3) of this definition.
    (5) Any person that directly or indirectly controls, is controlled 
by, or is under common control with, the M+C organization.
    (6) Any spouse, child, or parent of an individual described in 
paragraph (1), (2), or (3) of this definition.
    Related entity means any entity that is related to the M+C 
organization by common ownership or control and--

[[Page 35100]]

    (1) Performs some of the M+C organization's management functions 
under contract or delegation;
    (2) Furnishes services to Medicare enrollees under an oral or 
written agreement; or
    (3) Leases real property or sells materials to the M+C organization 
at a cost of more than $2,500 during a contract period.
    Significant business transaction means any business transaction or 
series of transactions of the kind specified in the above definition of 
``business transaction'' that, during any fiscal year of the M+C 
organization, have a total value that exceeds $25,000 or 5 percent of 
the M+C organization's total operating expenses, whichever is less.


Sec. 422.501  General provisions.

    (a) Basic rule. In order to qualify as an M+C organization, enroll 
beneficiaries in any M+C plans it offers, and be paid on behalf of 
Medicare beneficiaries enrolled in those plans, an M+C organization 
must enter into a contract with HCFA.
    (b) Conditions necessary to contract as an M+C organization. Any 
entity seeking to contract as an M+C organization must:
    (1) Be licensed by the State as a risk bearing entity in each State 
in which it seeks to offer an M+C plan as defined in Sec. 422.2.
    (2) Meet the minimum enrollment requirements of Sec. 422.514, 
unless waived under Sec. 422.514(b).
    (3) Have administrative and management arrangements satisfactory to 
HCFA, as demonstrated by at least the following:
    (i) A policy making body that exercises oversight and control over 
the M+C organization's policies and personnel to ensure that management 
actions are in the best interest of the organization and its enrollees.
    (ii) Personnel and systems sufficient for the M+C organization to 
organize, plan, control, and evaluate financial and marketing 
activities, the furnishing of services, the quality assurance program, 
and the administrative and management aspects of the organization.
    (iii) At a minimum, an executive manager whose appointment and 
removal are under the control of the policy making body.
    (iv) A fidelity bond or bonds, procured and maintained by the M+C 
organization, in an amount fixed by its policymaking body but not less 
than $100,000 per individual, covering each officer and employee 
entrusted with the handling of its funds. The bond may have reasonable 
deductibles, based upon the financial strength of the M+C organization.
    (v) Insurance policies or other arrangements, secured and 
maintained by the M+C organization and approved by HCFA to insure the 
M+C organization against losses arising from professional liability 
claims, fire, theft, fraud, embezzlement, and other casualty risks.
    (vi) A compliance plan that consists of the following:
    (A) Written policies, procedures, and standards of conduct that 
articulate the organization's commitment to comply with all applicable 
Federal and State standards.
    (B) The designation of a compliance officer and compliance 
committee that are accountable to senior management.
    (C) Effective training and education between the compliance officer 
and organization employees.
    (D) Effective lines of communication between the compliance officer 
and the organization's employees.
    (E) Enforcement of standards through well-publicized disciplinary 
guidelines.
    (F) Provision for internal monitoring and auditing.
    (G) Ensures prompt response to detected offenses and development of 
corrective action initiatives.
    (H) An adhered-to process for reporting to HCFA and/or the OIG 
credible information of violations of law by the M+C organization, 
plan, subcontractors or enrollees for a determination as to whether 
criminal, civil, or administrative action may be appropriate. With 
respect to enrollees, this reporting requirement shall be restricted to 
credible information on violations of law with respect to enrollment in 
the plan, or the provision of, or payment for, health services.
    (4) Not accept new enrollees under a section 1876 reasonable cost 
contract in any area in which it seeks to offer an M+C plan.
    (5) The M+C organization's contract must not have been terminated 
by HCFA under Sec. 422.510 within the past 5 years.
    (c) Contracting authority. Under the authority of section 
1857(c)(5) of the Act, HCFA may enter into contracts under this part 
without regard to Federal and Departmental acquisition regulations set 
forth in title 48 of the CFR and provisions of law or other regulations 
relating to the making, performance, amendment, or modification of 
contracts of the United States if HCFA determines that those provisions 
are inconsistent with the efficient and effective administration of the 
Medicare program.
    (d) Protection against fraud and beneficiary protections. (1) HCFA 
annually audits the financial records (including data relating to 
Medicare utilization, costs, and computation of the ACR) of at least 
one-third of the M+C organizations offering M+C plans. These auditing 
activities are subject to monitoring by the Comptroller General.
    (2) Each contract under this section must provide that HCFA, or any 
person or organization designated by HCFA has the right to:
    (i) Inspect or otherwise evaluate the quality, appropriateness, and 
timeliness of services performed under the M+C contract;
    (ii) Inspect or otherwise evaluate the facilities of the 
organization when there is reasonable evidence of some need for such 
inspection; and
    (iii) Audit and inspect any books, contracts, and records of the 
M+C organization that pertain to--
    (A) The ability of the organization to bear the risk of potential 
financial losses, or
    (B) Services performed or determinations of amounts payable under 
the contract.
    (e) Severability of contracts. The contract must provide that, upon 
HCFA's request--
    (1) The contract will be amended to exclude any M+C plan or State-
licensed entity specified by HCFA; and
    (2) A separate contract for any such excluded plan or entity will 
be deemed to be in place when such a request is made.


Sec. 422.502  Contract provisions.

    The contract between the M+C organization and HCFA must contain the 
following provisions:
    (a) Agreement to comply with regulations and instructions. The M+C 
organization agrees to comply with all the applicable requirements and 
conditions set forth in this part and in general instructions. An M+C 
organization's compliance with paragraphs (a)(1) through (a)(13) of 
this section is material to performance of the contract. The M+C 
organization agrees--
    (1) To accept new enrollments, make enrollments effective, process 
voluntary disenrollments, and limit involuntary disenrollments, as 
provided in subpart B of this part.
    (2) That it will comply with the prohibition in Sec. 422.108 on 
discrimination in beneficiary enrollment.
    (3) To provide--
    (i) The basic benefits as required under Sec. 422.100 and, to the 
extent applicable, supplemental benefits under Sec. 422.101; and

[[Page 35101]]

    (ii) Access to benefits as required under subpart C of this part;
    (iii) In a manner consistent with professionally recognized 
standards of health care, all benefits covered by Medicare.
    (4) To disclose information to beneficiaries in the manner and the 
form prescribed by HCFA as required under Sec. 422.110;
    (5) To operate a quality assurance and performance improvement 
program and have an agreement for external quality review as required 
under subpart D of this part;
    (6) To comply with all applicable provider requirements in subpart 
E of this part, including provider certification requirements, anti-
discrimination requirements, provider participation and consultation 
requirements, the prohibition on interference with provider advice, 
limits on provider indemnification, rules governing payments to 
providers, and limits on physician incentive plans;
    (7) To comply with all requirements in subpart M of this part 
governing coverage determinations, grievances, and appeals;
    (8) To comply with the reporting requirements in Sec. 422.516 and 
the requirements in Sec. 422.257 for submitting encounter data to HCFA;
    (9) That it will be paid under the contract in accordance with the 
payment rules in subpart F of this part;
    (10) To develop its annual ACR, and submit all required information 
on premiums, benefits, and cost-sharing by May 1, as provided in 
subpart G of this part;
    (11) That its contract may not be renewed or may be terminated in 
accordance with this subpart and subpart N of this part.
    (12) To comply will all requirements that are specific to a 
particular type of M+C plan, such as the special rules for private fee-
for-service plans in Secs. 422.114 and 422.216 and the MSA requirements 
in Secs. 422.56, 422.103, and 422.262; and
    (13) To comply with the confidentiality and enrollee record 
accuracy requirements in Sec. 422.118.
    (14) An M+C organization's compliance with paragraphs (a)(1) 
through (a)(13) and (c) of this section is material to performance of 
the contract.
    (b) Communication with HCFA. The M+C organization must have the 
capacity to communicate with HCFA electronically.
    (c) Prompt payment. The M+C organization must comply with the 
prompt payment provisions of Sec. 422.520 and with instructions issued 
by HCFA, as they apply to each type of plan included in the contract.
    (d) Maintenance of records. The M+C organization agrees to maintain 
for 6 years books, records, documents, and other evidence of accounting 
procedures and practices that--
    (1) Are sufficient to do the following:
    (i) Accommodate periodic auditing of the financial records 
(including data related to Medicare utilization, costs, and computation 
of the ACR) of M+C organizations.
    (ii) Enable HCFA to inspect or otherwise evaluate the quality, 
appropriateness and timeliness of services performed under the 
contract, and the facilities of the organization.
    (iii) Enable HCFA to audit and inspect any books and records of the 
M+C organization that pertain to the ability of the organization to 
bear the risk of potential financial losses, or to services performed 
or determinations of amounts payable under the contract.
    (iv) Properly reflect all direct and indirect costs claimed to have 
been incurred and used in the preparation of the ACR proposal.
    (v) Establish component rates of the ACR for determining additional 
and supplementary benefits.
    (vi) Determine the rates utilized in setting premiums for State 
insurance agency purposes and for other government and private 
purchasers; and
    (2) Include at least records of the following:
    (i) Ownership and operation of the M+C organization's financial, 
medical, and other record keeping systems.
    (ii) Financial statements for the current contract period and six 
prior periods.
    (iii) Federal income tax or informational returns for the current 
contract period and six prior periods.
    (iv) Asset acquisition, lease, sale, or other action.
    (v) Agreements, contracts, and subcontracts.
    (vi) Franchise, marketing, and management agreements.
    (vii) Schedules of charges for the M+C organization's fee-for-
service patients.
    (viii) Matters pertaining to costs of operations.
    (ix) Amounts of income received by source and payment.
    (x) Cash flow statements.
    (xi) Any financial reports filed with other Federal programs or 
State authorities.
    (e) Access to facilities and records. The M+C organization agrees 
to the following:
    (1) HHS, the Comptroller General, or their designee may evaluate, 
through inspection or other means--
    (i) The quality, appropriateness, and timeliness of services 
furnished to Medicare enrollees under the contract;
    (ii) The facilities of the M+C organization; and
    (iii) The enrollment and disenrollment records for the current 
contract period and six prior periods.
    (2) HHS, the Comptroller General, or their designees may audit, 
evaluate, or inspect any books, contracts, medical records, patient 
care documentation, and other records of the M+C organization, related 
entity, contractor, subcontractor, or its transferee that pertain to 
any aspect of services performed, reconciliation of benefit 
liabilities, and determination of amounts payable under the contract, 
or as the Secretary may deem necessary to enforce the contract.
    (3) The M+C organization agrees to make available, for the purposes 
specified in paragraph (d) of this section, its premises, physical 
facilities and equipment, records relating to its Medicare enrollees, 
and any additional relevant information that HCFA may require.
    (4) HHS, the Comptroller General, or their designee's right to 
inspect, evaluate, and audit extends through 6 years from the final 
date of the contract period or completion of audit, whichever is later 
unless--
    (i) HCFA determines there is a special need to retain a particular 
record or group of records for a longer period and notifies the M+C 
organization at least 30 days before the normal disposition date;
    (ii) There has been a termination, dispute, or fraud or similar 
fault by the M+C organization, in which case the retention may be 
extended to 6 years from the date of any resulting final resolution of 
the termination, dispute, or fraud or similar fault; or
    (iii) HCFA determines that there is a reasonable possibility of 
fraud, in which case it may inspect, evaluate, and audit the M+C 
organization at any time.
    (f) Disclosure of information. The M+C organization agrees to 
submit--
    (1) To HCFA, certified financial information that must include the 
following:
    (i) Such information as HCFA may require demonstrating that the 
organization has a fiscally sound operation.
    (ii) Such information as HCFA may require pertaining to the 
disclosure of ownership and control of the M+C organization.
    (2) To HCFA, all information that is necessary for HCFA to 
administer and evaluate the program and to simultaneously establish and 
facilitate a process for current and prospective

[[Page 35102]]

beneficiaries to exercise choice in obtaining Medicare services. This 
information includes, but is not limited to:
    (i) The benefits covered under an M+C plan;
    (ii) The M+C monthly basic beneficiary premium and M+C monthly 
supplemental beneficiary premium, if any, for the plan or in the case 
of an MSA plan, the M+C monthly MSA premium.
    (iii) The service area and continuation area, if any, of each plan 
and the enrollment capacity of each plan;
    (iv) Plan quality and performance indicators for the benefits under 
the plan including --
    (A) Disenrollment rates for Medicare enrollees electing to receive 
benefits through the plan for the previous 2 years;
    (B) Information on Medicare enrollee satisfaction;
    (C) Information on health outcomes;
    (D) The recent record regarding compliance of the plan with 
requirements of this part, as determined by HCFA; and
    (E) Other information determined by HCFA to be necessary to assist 
beneficiaries in making an informed choice among M+C plans and 
traditional Medicare;
    (v) Information about beneficiary appeals and their disposition;
    (vi) Information regarding all formal actions, reviews, findings, 
or other similar actions by States, other regulatory bodies, or any 
other certifying or accrediting organization;
    (vii) For M+C organizations offering an MSA plan, information 
specified by HCFA for HCFA's use in preparing its report to the 
Congress on the MSA demonstration, including data specified by HCFA in 
the areas of selection, use of preventative care, and access to 
services.
    (viii) To HCFA, any other information deemed necessary by HCFA for 
the administration or evaluation of the Medicare program.
    (3) To its enrollees all informational requirements under 
Sec. 422.64 and, upon an enrollee's, request the financial disclosure 
information required under Sec. 422.516.
    (g) Beneficiary Financial Protection. The M+C organization agrees 
to comply with the following requirements:
    (1) Each M+C organization must adopt and maintain arrangements 
satisfactory to HCFA to protect its enrollees from incurring liability 
for payment of any fee that are the legal obligation of the M+C 
organization. To meet this requirement the M+C organization must--
    (i) Ensure that all contractual or other written arrangements with 
providers prohibit the organization's providers from holding any 
beneficiary enrollee liable for payment of any such fees; and
    (ii) Indemnify the beneficiary enrollee for payment of any fees 
that are the legal obligation of the M+C organization for services 
furnished by providers that do not contract, or that have not otherwise 
entered into an agreement with the M+C organization, to provide 
services to the organization's beneficiary enrollees.
    (2) The M+C organization must provide for continuation of enrollee 
health care benefits--
    (i) For all enrollees, for the duration of the contract period for 
which HCFA payments have been made; and
    (ii) For enrollees who are hospitalized on the date its contract 
with HCFA terminates, or, in the event of an insolvency, through 
discharge.
    (3) In meeting the requirements of this paragraph (g), other than 
the provider contract requirements specified in paragraph (g)(1) of 
this section, the M+C organization may use--
    (i) Contractual arrangements;
    (ii) Insurance acceptable to HCFA;
    (iii) Financial reserves acceptable to HCFA; or
    (iv) Any other arrangement acceptable to HCFA.
    (h) Requirements of other laws and regulations. (1) The M+C 
organization agrees to comply with--
    (i) Title VI of the Civil Rights Act of 1964 as implemented by 
regulations at 45 CFR part 84;
    (ii) The Age Discrimination Act of 1975 as implemented by 
regulations at 45 CFR part 91;
    (iii) The Americans With Disabilities Act; and
    (iv) Other laws applicable to recipients of Federal funds; and
    (v) All other applicable laws and rules.
    (2) M+C organizations receiving Federal payments under M+C 
contracts, and related entities, contractors, and subcontractors paid 
by an M+C organization to fulfill its obligations under its M+C 
contract are subject to certain laws that are applicable to individuals 
and entities receiving Federal funds. M+C organizations must inform all 
related entities, contractors and subcontractors that payments that 
they receive are, in whole or in part, from Federal funds.
    (i) M+C organization relationship with related entities, 
contractors, and subcontractors. (1) Notwithstanding any 
relationship(s) that the M+C organization may have with related 
entities, contractors, or subcontractors, the M+C organization 
maintains ultimate responsibility for adhering to and otherwise fully 
complying with all terms and conditions of its contract with HCFA.
    (2) The M+C organization agrees to require all related entities, 
contractors, or subcontractors to agree that--
    (i) HHS, the Comptroller General, or their designees have the right 
to inspect, evaluate, and audit any pertinent contracts, books, 
documents, papers, and records of the related entity(s), contractor(s), 
or subcontractor(s) involving transactions related to the M+C contract; 
and
    (ii) HHS', the Comptroller General's, or their designee's right to 
inspect, evaluate, and audit any pertinent information for any 
particular contract period will exist through 6 years from the final 
date of the contract period or from the date of completion of any 
audit, whichever is later.
    (3) All contracts or written arrangements between M+C organizations 
and providers, related entities, contractors, or subcontractors must 
contain the following:
    (i) Enrollee protection provisions that provide--
    (A) Consistent with paragraph (g)(1) of this section, arrangements 
that prohibit providers from holding an enrollee liable for payment of 
any fees that are the obligation of the M+C Organization; and
    (B) Consistent with paragraph (g)(2) of this section, provision for 
the continuation of benefits.
    (ii) Accountability provisions that indicate that--
    (A) The M+C organization oversees and is accountable to HCFA for 
any functions or responsibilities that are described in these 
standards; and
    (B) The M+C organization may only delegate activities or functions 
to a provider, related entity, contractor, or subcontractor in a manner 
consistent with requirements set forth at paragraph (i)(4) of this 
section.
    (iii) A provision requiring that any services or other activity 
performed by a related entity, contractor or subcontractor in 
accordance with a contract or written agreement will be consistent and 
comply with the M+C organization's contractual obligations.
    (4) If any of the M+C organizations' activities or responsibilities 
under its contract with HCFA are delegated to other parties, the 
following requirements apply to any related entity, contractor, 
subcontractor, or provider:
    (i) Written arrangements must specify delegated activities and 
reporting responsibilities.

[[Page 35103]]

    (ii) Written arrangements must either provide for revocation of the 
delegation activities and reporting requirements or specify other 
remedies in instances where HCFA or the M+C organization determine that 
such parties have not performed satisfactorily.
    (iii) Written arrangements must specify that the performance of the 
parties is monitored by the M+C organization on an ongoing basis.
    (iv) Written arrangements must specify that either--
    (A) The credentials of medical professionals affiliated with the 
party or parties will be either reviewed by the M+C organization; or
    (B) The credentialing process will be reviewed and approved by the 
M+C organization and the M+C organization must audit the credentialing 
process on an ongoing basis.
    (v) All contracts or written arrangements must specify that the 
related entity, contractor, or subcontractor must comply with all 
applicable Medicare laws, regulations, and HCFA instructions.
    (5) If the M+C organization delegates selection of the providers, 
contractors, or subcontractor to another organization, the M+C 
organization's written arrangements with that organization must state 
that the HCFA-contracting M+C organization retains the right to 
approve, suspend, or terminate any such arrangement.
    (j) Additional contract terms. The M+C organization agrees to 
include in the contract such other terms and conditions as HCFA may 
find necessary and appropriate in order to implement requirements in 
this part.
    (k) Severability of contracts. The contract must provide that, upon 
HCFA's request--
    (1) The contract will be amended to exclude any M+C plan or State-
licensed entity specified by HCFA; and
    (2) A separate contract for any such excluded plan or entity will 
be deemed to be in place when such a request is made.
    (l) Certification of data that determine payment. As a condition 
for receiving a monthly payment under subpart F of this part, the M+C 
organization agrees that its chief executive officer (CEO) or chief 
financial officer (CFO) must request payment under the contract on a 
document that certifies the accuracy, completeness, and truthfulness of 
relevant data that HCFA requests. Such data include specified 
enrollment information, encounter data, and other information that HCFA 
may specify.
    (1) The CEO or CFO must certify that each enrollee for whom the 
organization is requesting payment is validly enrolled in an M+C plan 
offered by the organization and the information relied upon by HCFA in 
determining payment is accurate.
    (2) The CEO or CFO must certify that the encounter data it submits 
under Sec. 422.257 are accurate, complete, and truthful.
    (3) If such encounter data are generated by a related entity, 
contractor, or subcontractor of an M+C organization, such entity, 
contractor, or subcontractor must similarly certify the accuracy, 
completeness, and truthfulness of the data.
    (m) Certification of accuracy of ACR. The M+C organization agrees, 
as a condition for retaining (and not providing additional benefits 
with) payment amounts below the amount of its ACR, that the information 
in its ACR submission is accurate and fully conforms to the 
requirements in Sec. 422.310.


Sec. 422.504  Effective date and term of contract.

    (a) Effective date. The contract is effective on the date specified 
in the contract between the M+C organization and HCFA and, for a 
contract that provides for coverage under an MSA plan, not earlier than 
January 1999.
    (b) Term of contract. Except as provided in paragraph (d) of this 
section, each contract is for a period of 12 months beginning on 
January 1 and ending on December 31.
    (c) Renewal of contract. In accordance with Sec. 422.506, contracts 
are renewed annually only if--
    (1) HCFA informs the M+C organization that it authorizes a renewal; 
and
    (2) The M+C organization has not provided HCFA with a notice of 
intention not to renew.
    (d) Exception. Prior to January 1, 2002, at HCFA's discretion, a 
contract may be for a term longer than 12 months and may begin on a 
date specified by HCFA other than January 1.


Sec. 422.506  Nonrenewal of contract.

    (a) Nonrenewal by an M+C organization. (1) An M+C organization may 
elect not to renew its contract with HCFA as of the end of the term of 
the contract for any reason provided it meets the timeframes for doing 
so set forth in paragraphs (a)(2) and (a)(3) of this section.
    (2) If an M+C organization does not intend to renew its contract, 
it must notify--
    (i) HCFA in writing, by May 1 of the year in which the contract 
would end;
    (ii) Each Medicare enrollee, at least 90 days before the date on 
which the nonrenewal is effective. This notice must include a written 
description of alternatives available for obtaining Medicare services 
within the service area, including alternative M+C plans, Medigap 
options, and original Medicare and must receive HCFA approval.
    (iii) The general public, at least 90 days before the end of the 
current calendar year, by publishing a notice in one or more newspapers 
of general circulation in each community located in the M+C 
organization's service area.
    (3) HCFA may accept a nonrenewal notice submitted after May 1 if--
    (i) The M+C organization notifies its Medicare enrollees and the 
public in accordance with paragraph (a)(2)(ii) and (a)(2)(iii) of this 
section; and
    (ii) Acceptance is not inconsistent with the effective and 
efficient administration of the Medicare program.
    (4) If an M+C organization does not renew a contract under this 
paragraph (a), HCFA will not enter into a contract with the 
organization for 5 years unless there are special circumstances that 
warrant special consideration, as determined by HCFA.
    (b) HCFA decision not to renew. (1) HCFA may elect not to authorize 
renewal of a contract for any of the following reasons:
    (i) The M+C organization has not fully implemented or shown 
discernable progress in implementing quality improvement projects as 
defined in Sec. 422.152(d).
    (ii) The M+C organization's level of enrollment or growth in 
enrollment is determined by HCFA to threaten the viability of the 
organization under the M+C program and or be an indicator of 
beneficiary dissatisfaction with the M+C plan(s) offered by the 
organization.
    (iii) For any of the reasons listed in Sec. 422.510(a), which would 
also permit HCFA to terminate the contract.
    (iv) The M+C organization has committed any of the acts in 
Sec. 422.752(a) that would support the imposition of intermediate 
sanctions or civil money penalties under subpart O of this part.
    (2) Notice. HCFA provides notice of its decision whether to 
authorize renewal of the contract as follows:
    (i) To the M+C organization by May 1 of the contract year.
    (ii) If HCFA decides not to authorize a renewal of the contract, to 
the M+C organization's Medicare enrollees by mail at least 90 days 
before the end of the current calendar year.
    (iii) If HCFA decides not to authorize a renewal of the contract, 
to the general public at least 90 days before the end of the current 
calendar year, by publishing a notice in one or more newspapers of

[[Page 35104]]

general circulation in each community or county located in the M+C 
organization's service area.
    (3) Notice of appeal rights. HCFA gives the M+C organization 
written notice of its right to appeal the decision not to renew in 
accordance with Sec. 422.644.


Sec. 422.508  Modification or termination of contract by mutual 
consent.

    (a) A contract may be modified or terminated at any time by written 
mutual consent.
    (1) If the contract is terminated by mutual consent, except as 
provided in paragraph (b) of this section, the M+C organization must 
provide notice to its Medicare enrollees and the general public as 
provided in Sec. 422.512(b)(2) and (b)(3).
    (2) If the contract is modified by mutual consent, the M+C 
organization must notify its Medicare enrollees of any changes that 
HCFA determines are appropriate for notification within timeframes 
specified by HCFA.
    (b) If the contract terminated by mutual consent is replaced the 
day following such termination by a new M+C contract, the M+C 
organization is not required to provide the notice specified in 
paragraph (a)(1) of this section.


Sec. 422.510  Termination of contract by HCFA.

    (a) Termination by HCFA. HCFA may terminate a contract for any of 
the following reasons:
    (1) The M+C organization has failed substantially to carry out the 
terms of its contract with HCFA.
    (2) The M+C organization is carrying out its contract with HCFA in 
a manner that is inconsistent with the effective and efficient 
implementation of this part.
    (3) HCFA determines that the M+C organization no longer meets the 
requirements of this part for being a contracting organization.
    (4) The M+C organization commits or participates in fraudulent or 
abusive activities affecting the Medicare program, including submission 
of fraudulent data.
    (5) The M+C organization experiences financial difficulties so 
severe that its ability to make necessary health services available is 
impaired to the point of posing an imminent and serious risk to the 
health of its enrollees, or otherwise fails to make services available 
to the extent that such a risk to health exists.
    (6) The M+C organization substantially fails to comply with the 
requirements in subpart M of this part relating to grievances and 
appeals.
    (7) The M+C organization fails to provide HCFA with valid encounter 
data as required under Sec. 422.257.
    (8) The M+C organization fails to implement an acceptable quality 
assessment and performance improvement program as required under 
subpart D of this part.
    (9) The M+C organization substantially fails to comply with the 
prompt payment requirements in Sec. 422.520.
    (10) The M+C organization substantially fails to comply with the 
service access requirements in Sec. 422.112 or Sec. 422.114.
    (11) The M+C organization fails to comply with the requirements of 
Sec. 422.208 regarding physician incentive plans.
    (b) Notice. If HCFA decides to terminate a contract for reasons 
other than the grounds specified in Sec. 422.510(a)(5), it gives notice 
of the termination as follows:
    (1) Termination of contract by HCFA. (i) HCFA notifies the M+C 
organization in writing 90 days before the intended date of the 
termination.
    (ii) The M+C organization notifies its Medicare enrollees of the 
termination by mail at least 30 days before the effective date of the 
termination.
    (iii) The M+C organization notifies the general public of the 
termination at least 30 days before the effective date of the 
termination by publishing a notice in one or more newspapers of general 
circulation in each community or county located in the M+C 
organization's service area.
    (2) Immediate termination of contract by HCFA. (i) For terminations 
based on violations prescribed in Sec. 422.510(a)(5), HCFA notifies the 
M+C organization in writing that its contract has been terminated 
effective the date of the termination decision by HCFA. If termination 
is effective in the middle of a month, HCFA has the right to recover 
the prorated share of the capitation payments made to the M+C 
organization covering the period of the month following the contract 
termination.
    (ii) HCFA notifies the M+C organization's Medicare enrollees in 
writing of HCFA's decision to terminate the M+C organization's 
contract. This notice occurs no later than 30 days after HCFA notifies 
the plan of its decision to terminate the M+C contract. HCFA 
simultaneously informs the Medicare enrollees of alternative options 
for obtaining Medicare services, including alternative M+C 
organizations in a similar geographic area and original Medicare.
    (iii) HCFA notifies the general public of the termination no later 
than 30 days after notifying the plan of HCFA's decision to terminate 
the M+C contract. This notice is published in one or more newspapers of 
general circulation in each community or county located in the M+C 
organization's service area.
    (c) Corrective action plan--(1) General. Before terminating a 
contract for reasons other than the grounds specified in paragraph 
(a)(5) of this section, HCFA provides the M+C organization with 
reasonable opportunity, not to exceed timeframes specified at subpart N 
of this part, to develop and receive HCFA approval of a corrective 
action plan to correct the deficiencies that are the basis of the 
proposed termination.
    (2) Exception. If a contract is terminated under 
Sec. 422.510(a)(5), the M+C organization will not have the opportunity 
to submit a corrective action plan.
    (d) Appeal rights. If HCFA decides to terminate a contract, it 
sends written notice to the M+C organization informing it of its 
termination appeal rights in accordance with subpart N of this part.


Sec. 422.512  Termination of contract by the M+C organization.

    (a) Cause for termination. The M+C organization may terminate the 
M+C contract if HCFA fails to substantially carry out the terms of the 
contract.
    (b) Notice. The M+C organization must give advance notice as 
follows:
    (1) To HCFA, at least 90 days before the intended date of 
termination. This notice must specify the reasons why the M+C 
organization is requesting contract termination.
    (2) To its Medicare enrollees, at least 60 days before the 
termination effective date. This notice must include a written 
description of alternatives available for obtaining Medicare services 
within the services area, including alternative M+C plans, Medigap 
options, original Medicare and must receive HCFA approval.
    (3) To the general public at least 60 days before the termination 
effective date by publishing an HCFA-approved notice in one or more 
newspapers of general circulation in each community or county located 
in the M+C organization's geographic area.
    (c) Effective date of termination. The effective date of the 
termination is determined by HCFA and is at least 90 days after the 
date HCFA receives the M+C organization's notice of intent to 
terminate.
    (d) HCFA's liability. HCFA's liability for payment to the M+C 
organization ends as of the first day of the month

[[Page 35105]]

after the last month for which the contract is in effect.
    (e) Effect of termination by the organization. HCFA does not enter 
into an agreement with an organization that has terminated its contract 
within the preceding 5 years unless there are circumstances that 
warrant special consideration, as determined by HCFA.


Sec. 422.514  Minimum enrollment requirements.

    (a) Basic rule. Except as provided in paragraph (b) of this 
section, HCFA does not enter into a contract under this subpart unless 
the organization meets the following minimum enrollment requirement--
    (1) At least 5,000 individuals (or 1,500 individuals if the 
organization is a PSO) are enrolled for the purpose of receiving health 
benefits from the organization; or
    (2) At least 1,500 individuals (or 500 individuals if the 
organization is a PSO) are enrolled for purposes of receiving health 
benefits from the organization and the organization primarily serves 
individuals residing outside of urbanized areas as defined in 
Sec. 412.62(f) (or, in the case of a PSO, the PSO meets the 
requirements in Sec. 422.352(c)).
    (3) Except as provided for in paragraph (b) of this section, an M+C 
organization must maintain a minimum enrollment as defined in 
paragraphs (a)(1) and (a)(2) of this section for the duration of its 
contract.
    (b) Minimum Enrollment Waiver. (1) For an organization that does 
not meet the applicable requirement of paragraph (a) of this section at 
application for an M+C contract or during the first 3 years of such 
contract, HCFA may waive the minimum enrollment requirement as provided 
for below. To receive a waiver, an organization must demonstrate to 
HCFA's satisfaction that it is capable to administering and managing an 
M+C contract and is able to manage the level of risk required under the 
contract. Factors that HCFA will take into consideration in making this 
evaluation include the extent to which--
    (i) The organization management and providers have previous 
experience in managing and providing health care services under a risk-
based payment arrangement to at least as many individuals as the 
applicable minimum enrollment for the entity as described in paragraph 
(a) of this section, or
    (ii) The organization has the financial ability to bear financial 
risk under an M+C contract. In determining whether an organization is 
capable of bearing risk, HCFA considers factors such as the 
organization's management experience as described in paragraph 
(b)(1)(i) of this section and stop-loss insurance that is adequate and 
acceptable to HCFA; and,
    (iii) The organization is able to establish a marketing and 
enrollment process that will allow it to meet the applicable enrollment 
requirement specified in paragraph (a) of this section prior to 
completion of the third contract year.
    (2) If an M+C organization fails to meet the enrollment requirement 
in the first year, HCFA may waive the minimum requirements for another 
year provided that the organization--
    (i) Requests an additional minimum enrollment waiver no later than 
120 days before the end of the first year;
    (ii) Continues to demonstrate it is capable of administering and 
managing an M+C contract and is able to manage the level of risk; and,
    (iii) Demonstrates an acceptable marketing and enrollment process. 
Enrollment projections for the second year of the waiver will become 
the organization's transitional enrollment standard.
    (3) If an M+C organization fails to meet the enrollment requirement 
in the second year, HCFA may waive the minimum requirements for the 
third year only if the organization has attained the transitional 
enrollment standard as described in paragraph (b)(2)(iii) of this 
section.
    (c) Failure to meet enrollment requirements. HCFA may elect not to 
renew its contract with an M+C organization that fails to meet the 
applicable enrollment requirement in paragraph (a) of this section


Sec. 422.516  Reporting requirements.

    (a) Required information. Each M+C organization must have an 
effective procedure to develop, compile, evaluate, and report to HCFA, 
to its enrollees, and to the general public, at the times and in the 
manner that HCFA requires, and while safeguarding the confidentiality 
of the doctor-patient relationship, statistics and other information 
with respect to the following:
    (1) The cost of its operations.
    (2) The patterns of utilization of its services.
    (3) The availability, accessibility, and acceptability of its 
services.
    (4) To the extent practical, developments in the health status of 
its enrollees.
    (5) Information demonstrating that the M+C organization has a 
fiscally sound operation.
    (6) Other matters that HCFA may require.
    (b) Significant business transactions. Each M+C organization must 
report to HCFA annually, within 120 days of the end of its fiscal year 
(unless for good cause shown, HCFA authorizes an extension of time), 
the following:
    (1) A description of significant business transactions (as defined 
in Sec. 422.500) between the M+C organization and a party in interest.
    (2) With respect to those transactions--
    (i) A showing that the costs of the transactions listed in 
paragraph (c) of this section do not exceed the costs that would be 
incurred if these transactions were with someone who is not a party in 
interest; or
    (ii) If they do exceed, a justification that the higher costs are 
consistent with prudent management and fiscal soundness requirements.
    (3) A combined financial statement for the M+C organization and a 
party in interest if either of the following conditions is met:
    (i) Thirty-five percent or more of the costs of operation of the 
M+C organization go to a party in interest.
    (ii) Thirty-five percent or more of the revenue of a party in 
interest is from the M+C organization.
    (c) Requirements for combined financial statements. (1) The 
combined financial statements required by paragraph (b)(3) of this 
section must display in separate columns the financial information for 
the M+C organization and each of the parties in interest.
    (2) Inter-entity transactions must be eliminated in the 
consolidated column.
    (3) The statements must have been examined by an independent 
auditor in accordance with generally accepted accounting principles and 
must include appropriate opinions and notes.
    (4) Upon written request from an M+C organization showing good 
cause, HCFA may waive the requirement that the organization's combined 
financial statement include the financial information required in this 
paragraph (c) with respect to a particular entity.
    (d) Reporting and disclosure under ERISA. (1) For any employees' 
health benefits plan that includes an M+C organization in its 
offerings, the M+C organization must furnish, upon request, the 
information the plan needs to fulfill its reporting and disclosure 
obligations (with respect to the particular M+C organization) under the 
Employee Retirement Income Security Act of 1974 (ERISA).
    (2) The M+C organization must furnish the information to the 
employer or the employer's designee, or to the plan administrator, as 
the term ``administrator'' is defined in ERISA.

[[Page 35106]]

    (e) Loan information. Each organization must notify HCFA of any 
loans or other special financial arrangements it makes with 
contractors, subcontractors and related entities.
    (f) Enrollee access to Information. Each M+C organization must make 
the information reported to HCFA under Sec. 422.502(f)(1) available to 
its enrollees upon reasonable request.


Sec. 422.520  Prompt payment by M+C organization.

    (a) Contract between HCFA and the M+C organization.
    (1) The contract between HCFA and the M+C organization must provide 
that the M+C organization will pay 95 percent of the ``clean claims'' 
within 30 days of receipt if they are submitted by, or on behalf of, an 
enrollee of an M+C private fee-for-service plan or are claims for 
services that are not furnished under a written agreement between the 
organization and the provider.
    (2) The M+C organization must pay interest on clean claims that are 
not paid within 30 days in accordance with sections 1816(c)(2)(B) and 
1842(c)(2)(B).
    (3) All other claims must be approved or denied within 60 calendar 
days from the date of the request.
    (b) Contracts between M+C organizations and providers and 
suppliers. Contracts or other written agreements between M+C 
organizations and providers must contain a prompt payment provision, 
the terms of which are developed and agreed to by both the M+C 
organization and the relevant provider.
    (c) Failure to comply. If HCFA determines, after giving notice and 
opportunity for hearing, that an M+C organization has failed to make 
payments in accordance with paragraph (a) of this section, HCFA may 
provide--
    (1) For direct payment of the sums owed to providers, or M+C 
private fee-for-service plan enrollees; and
    (2) For appropriate reduction in the amounts that would otherwise 
be paid to the organization, to reflect the amounts of the direct 
payments and the cost of making those payments.


Sec. 422.524  Special rules for RFB societies.

    In order to participate as an M+C organization, an RFB society--
    (a) May not impose any limitation on membership based on any factor 
related to health status; and
    (b) Must offer, in addition to the M+C RFB plan, health coverage to 
individuals who are members of the church or convention or group of 
churches with which the society is affiliated, but who are not entitled 
to receive benefits from the Medicare program.

Subpart L--Effect of Change of Ownership or Leasing of Facilities 
During Term of Contract

    17. Nomenclature change. Throughout newly designated subpart L, 
``HMO or CMP'' is revised to read ``M+C organization'' wherever it 
appears.
    18. Nomenclature change. Throughout newly designated subpart L, 
``HMO's or CMP's'' are revised to read ``M+C organization'' and ``M+C 
organization's'' respectively.


Sec. 422.550  [Amended]

    19. In Sec. 422.550, the following changes are made:
    a. In paragraph (b), the following sentence is added at the end: 
``The M+C organization must also provide updated financial information 
and a discussion of the financial and solvency impact of the change of 
ownership on the surviving organization.''
    b. In paragraphs (c)(2) and (e), ``Sec. 417.522'' is revised to 
read ``Sec. 422.552''.
    c. In paragraph (d)(2), ``subpart L'' is revised to read ``subpart 
K''.


Sec. 422.552  [Amended]

    20. In Sec. 422.552, in paragraph (a)(1), the following sentence is 
added at the end: ``The M+C organization also provides HCFA with 
updated financial information and a discussion of the financial and 
solvency impact of the change of ownership on the surviving 
organization.''


Sec. 422.553  [Amended]

    21. In Sec. 422.553, ``subpart J'' is revised to read ``subpart 
K''.
    22. Subparts M through O are added to read as follows:

Subpart M--Grievances, Organization Determinations and Appeals

Sec.
422.560  Basis and scope.
422.561  Definitions.
422.562  General provisions.
422.564  Grievance procedures.
422.566  Organization determinations.
422.568  Standard timeframes and notice requirements for 
organization determinations.
422.570  Expediting certain organization determinations.
422.572  Timeframes and notice requirements for expedited 
organization determinations.
422.574  Parties to the organization determination.
422.576  Effect of an organization determination.
422.578  Right to a reconsideration.
422.580  Reconsideration defined.
422.582  Request for a standard reconsideration.
422.584  Expediting certain reconsiderations.
422.586  Opportunity to submit evidence.
422.590  Timeframes and responsibility for reconsiderations.
422.592  Reconsideration by an independent entity.
422.594  Notice of reconsidered determination by the independent 
entity.
422.596  Effect of a reconsidered determination.
422.600  Right to a hearing.
422.602  Request for an ALJ hearing.
422.608  Departmental Appeals Board review.
422.612  Judicial review.
422.616  Reopening and revising determinations and decisions.
422.618  How an M+C organization must effectuate reconsidered 
determinations or decisions.
422.620  How M+C organizations must notify enrollees of noncoverage 
of inpatient hospital care.
422.622  Requesting immediate PRO review of noncoverage of inpatient 
hospital care.

Subpart N--Medicare Contract Appeals

422.641  Contract determinations.
422.644  Notice of contract determination.
422.646  Effect of contract determination.
422.648  Reconsideration: Applicability.
422.650  Request for reconsideration.
422.652  Opportunity to submit evidence.
422.654  Reconsidered determination.
422.656  Notice of reconsidered determination.
422.658  Effect of reconsidered determination.
422.660  Right to a hearing.
422.662  Request for hearing.
422.664  Postponement of effective date of contract determination 
when a request for a hearing with respect to a contract 
determination is filed timely.
422.666  Designation of hearing officer.
422.668  Disqualification of hearing officer.
422.670  Time and place of hearing.
422.672  Appointment of representatives.
422.674  Authority of representatives.
422.676  Conduct of hearing.
422.678  Evidence.
422.680  Witnesses.
422.682  Discovery.
422.684  Prehearing.
422.686  Record of hearing.
422.688  Authority of hearing officer.
422.690  Notice and effect of hearing decision.
422.692  Review by the Administrator.
422.694  Effect of Administrator's decision.
422.696  Reopening of contract or reconsidered determination or 
decision of a hearing officer or the Administrator.
422.698  Effect of revised determination.

Subpart O--Intermediate Sanctions

422.750  Kinds of sanctions.
422.752  Basis for imposing sanctions.
422.756  Procedures for imposing sanctions.
422.758  Maximum amount of civil money penalties imposed by HCFA.
422.760  Other applicable provisions.

[[Page 35107]]

Subpart M--Grievances, Organization Determinations and Appeals


Sec. 422.560  Basis and scope.

    (a) Statutory basis. (1) Section 1852(f) of the Act provides that 
an M+C organization must establish meaningful grievance procedures.
    (2) Section 1852(g) of the Act establishes requirements that an M+C 
organization must meet concerning organization determinations and 
appeals.
    (b) Scope. This subpart sets forth--
    (1) Requirements for M+C organizations with respect to grievance 
procedures, organization determinations, and appeal procedures.
    (2) The rights of M+C enrollees with respect to organization 
determinations, and grievance and appeal procedures.
    (3) The rules concerning notice of noncoverage of inpatient 
hospital care.
    (4) The rules that apply when an M+C enrollee requests immediate 
PRO review of a determination that he or she no longer needs inpatient 
hospital care.


Sec. 422.561  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Appeal means any of the procedures that deal with the review of 
adverse organization determinations on the health care services an 
enrollee is entitled to receive or any amounts the enrollee must pay 
for a service, as defined under Sec. 422.566(b). These procedures 
include reconsiderations by the M+C organization, and if necessary, an 
independent review entity, hearings before ALJs, review by the 
Departmental Appeals Board (DAB), and judicial review.
    Authorized representative means an individual authorized by an 
enrollee to act on his or her behalf in obtaining an organization 
determination or in dealing with any of the levels of the appeal 
process, subject to the rules described in 20 CFR part 404, subpart R, 
unless otherwise stated in this subpart.
    Enrollee means an M+C eligible individual who has elected an M+C 
plan offered by an M+C organization, or his or her authorized 
representative.
    Grievance means any complaint or dispute other than one involving 
an organization determination, as defined in Sec. 422.566(b).
    Physician has the meaning given the term in section 1861(r) of the 
Act.


Sec. 422.562  General provisions.

    (a) Responsibilities of the M+C organization. (1) An M+C 
organization, with respect to each M+C plan that it offers, must 
establish and maintain--
    (i) A grievance procedure as described in Sec. 422.564 for 
addressing issues that do not involve organization determinations;
    (ii) A procedure for making timely organization determinations; and
    (iii) Appeal procedures that meet the requirements of this subpart 
for issues that involve organization determinations; and
    (2) An M+C organization must ensure that all enrollees receive 
written information about the--
    (i) Grievance and appeal procedures that are available to them 
through the M+C organization; and
    (ii) Complaint process available to the enrollee under the PRO 
process as set forth under section 1154(a)(14) of the Act.
    (3) In accordance with subpart K of this part, if the M+C 
organization delegates any of its responsibilities under this subpart 
to another entity or individual through which the organization provides 
health care services, the M+C organization is ultimately responsible 
for ensuring that the entity or individual satisfies the relevant 
requirements of this subpart.
    (b) Rights of M+C enrollees. In accordance with the provisions of 
this subpart, enrollees have the following rights:
    (1) The right to have grievances between the enrollee and the M+C 
organization heard and resolved, as described in Sec. 422.564.
    (2) The right to a timely organization determination, as provided 
under Sec. 422.566.
    (3) The right to request an expedited organization determination, 
as provided under Sec. 422.570.
    (4) If dissatisfied with any part of an organization determination, 
the following appeal rights:
    (i) The right to a reconsideration of the adverse organization 
determination by the M+C organization, as provided under Sec. 422.578.
    (ii) The right to request an expedited reconsideration, as provided 
under Sec. 422.584.
    (iii) If, as a result of a reconsideration, an M+C organization 
affirms, in whole or in part, its adverse organization determination, 
the right to an automatic reconsidered determination made by an 
independent, outside entity contracted by HCFA, as provided in 
Sec. 422.592.
    (iv) The right to an ALJ hearing if the amount in controversy is 
$100 or more, as provided in Sec. 422.600.
    (v) The right to request DAB review of the ALJ hearing decision, as 
provided in Sec. 422.608.
    (vi) The right to judicial review of the hearing decision if the 
amount in controversy is $1000 or more, as provided in Sec. 422.612.
    (c) Limits on when this subpart applies. (1) If an enrollee 
receives immediate PRO review (as provided in Sec. 422.622) of a 
determination of noncoverage of inpatient hospital care--
    (i) The enrollee is not entitled to review of that issue by the M+C 
organization; and
    (ii) The PRO review decision is subject only to the appeal 
procedures set forth in part 473 of this chapter.
    (2) If an enrollee has no further liability to pay for services 
that were furnished by an M+C organization, a determination regarding 
these services is not subject to appeal.
    (d) When other regulations apply. Unless this subpart provides 
otherwise, the regulations in 20 CFR, part 404, subparts J and R 
(covering, respectively, the administrative review and hearing process 
and representation of parties under title II of the Act), apply under 
this subpart to the extent they are appropriate.


Sec. 422.564  Grievance procedures.

    (a) General rules. (1) Each M+C organization must provide 
meaningful procedures for timely hearing and resolution of grievances 
between enrollees and the organization or any other entity or 
individual through which the organization provides health care services 
under any M+C plan it offers.
    (2) Grievance procedures must meet any guidelines established by 
HCFA.
    (b) Distinguished from organization determinations and appeals. 
Grievance procedures are separate and distinct from organization 
determinations and appeal procedures, which address organization 
determinations.
    (c) Distinguished from the PRO complaint process. Under section 
1154(a)(14) of the Act, the PRO must review beneficiaries' written 
complaints about the quality of services they have received under the 
Medicare program; this process is separate and distinct from the 
grievance procedures of the M+C organization.


Sec. 422.566  Organization determinations.

    (a) Responsibilities of the M+C organization. Each M+C organization 
must have a procedure for making timely organization determinations (in 
accordance with the requirements of this subpart) regarding the 
benefits an enrollee is entitled to receive under an M+C plan, 
including basic benefits as described under Sec. 422.100(c)(1) and 
mandatory and optional supplemental benefits as described under 
Sec. 422.102, and the amount, if any, that the enrollee is required to 
pay for a health service. The M+C organization must have a

[[Page 35108]]

standard procedure for making determinations, in accordance with 
Sec. 422.568, and an expedited procedure for situations in which 
applying the standard procedure could seriously jeopardize the 
enrollee's life, health, or ability to regain maximum function, in 
accordance with Secs. 422.570 and 422.572.
    (b) Actions that are organization determinations. An organization 
determination is any determination made by an M+C organization with 
respect to any of the following:
    (1) Payment for emergency services, post-stabilization care, or 
urgently needed services.
    (2) Payment for any other health services furnished by a provider 
other than the M+C organization that the enrollee believes--
    (i) Are covered under Medicare; or
    (ii) If not covered under Medicare, should have been furnished, 
arranged for, or reimbursed by the M+C organization.
    (3) The M+C organization's refusal to provide services that the 
enrollee believes should be furnished or arranged for by the M+C 
organization when the enrollee has not received the services outside 
the M+C organization.
    (4) Discontinuation of a service, if the enrollee disagrees with 
the determination that the service is no longer medically necessary.
    (c) Who can request an organization determination. Any of the 
parties listed in Sec. 422.574 can request an organization 
determination, with the exception that only the parties listed in 
Sec. 422.570(a) can request an expedited determination.


Sec. 422.568  Standard timeframes and notice requirements for 
organization determinations.

    (a) Timeframe for requests for service. When a party has made a 
request for a service, the M+C organization must notify the enrollee of 
its determination as expeditiously as the enrollee's health condition 
requires, but no later than 14 calendar days after the date the 
organization receives the request for a standard organization 
determination. The M+C organization may extend the timeframe by up to 
14 calendar days if the enrollee requests the extension or if the 
organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an 
M+C organization's decision to deny). The M+C organization must notify 
the enrollee of its determination as expeditiously as the enrollee's 
health condition requires, but no later than upon expiration of the 
extension.
    (b) Timeframe for requests for payment. The M+C organization must 
process requests for payment according to the ``prompt payment'' 
provisions set forth in Sec. 422.520.
    (c) Written notification for denials. If an M+C organization 
decides to deny service or payment in whole or in part, it must give 
the enrollee written notice of the determination.
    (d) Content of the notice. The notice of any denial under paragraph 
(c) of this section must--
    (1) State the specific reasons for the denial in understandable 
language;
    (2) Inform the enrollee of his or her right to a reconsideration;
    (3) Describe both the standard and expedited reconsideration 
processes, including the enrollee's right to and conditions for 
obtaining an expedited reconsideration for service requests, and the 
rest of the appeal process; and
    (4) Comply with any other requirements specified by HCFA.
    (e) Effect of failure to provide timely notice. If the M+C 
organization fails to provide the enrollee with timely notice of an 
organization determination as specified in this section, this failure 
itself constitutes an adverse organization determination and may be 
appealed.


Sec. 422.570  Expediting certain organization determinations.

    (a) Request for expedited determination. An enrollee or a physician 
(regardless of whether the physician is affiliated with the M+C 
organization) may request that an M+C organization expedite an 
organization determination involving the issues described in 
Sec. 422.566(b)(3) and (b)(4). (This does not include requests for 
payment.)
    (b) How to make a request. (1) To ask for an expedited 
determination, an enrollee or a physician must submit an oral or 
written request directly to the M+C organization or, if applicable, to 
the entity responsible for making the determination, as directed by the 
M+C organization.
    (2) A physician may provide oral or written support for a request 
for an expedited determination.
    (c) How the M+C organization must process requests. The M+C 
organization must establish and maintain the following procedures for 
processing requests for expedited determinations:
    (1) Establish an efficient and convenient means for individuals to 
submit oral or written requests. The M+C organization must document all 
oral requests in writing and maintain the documentation in the case 
file.
    (2) Promptly decide whether to expedite a determination, based on 
the following requirements:
    (i) For a request made by an enrollee the M+C organization must 
provide an expedited determination if it determines that applying the 
standard timeframe for making a determination could seriously 
jeopardize the life or health of the enrollee or the enrollee's ability 
to regain maximum function.
    (ii) For a request made or supported by a physician, the M+C 
organization must provide an expedited determination if the physician 
indicates that applying the standard timeframe for making a 
determination could seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial. If an M+C organization denies a 
request for expedited determination, it must take the following 
actions:
    (1) Automatically transfer a request to the standard timeframe and 
make the determination within the 14-day timeframe established in 
Sec. 422.568 for a standard determination. The 14-day period begins 
with the day the M+C organization receives the request for expedited 
determination.
    (2) Give the enrollee prompt oral notice of the denial and follow 
up, within 2 working days, with a written letter that--
    (i) Explains that the M+C organization will process the request 
using the 14-day timeframe for standard determinations;
    (ii) Informs the enrollee of the right to file a grievance if he or 
she disagrees with the M+C organization's decision not to expedite; and
    (iii) Provides instructions about the grievance process and its 
timeframes.
    (e) Action on accepted request for expedited determination. If an 
M+C organization grants a request for expedited determination, it must 
make the determination and give notice in accordance with Sec. 422.572.
    (f) Prohibition of punitive action. An M+C organization may not 
take or threaten to take any punitive action against a physician acting 
on behalf or in support of an enrollee in requesting an expedited 
determination.


Sec. 422.572  Timeframes and notice requirements for expedited 
organization determinations.

    (a) Timeframe. Except as provided in paragraph (b) of this section, 
an M+C organization that approves a request for expedited determination 
must make its determination and notify the enrollee (and the physician 
involved, as appropriate) of its decision, whether

[[Page 35109]]

adverse or favorable, as expeditiously as the enrollee's health 
condition requires, but no later than 72 hours after receiving the 
request.
    (b) Extensions. The M+C organization may extend the 72-hour 
deadline by up to 14 calendar days if the enrollee requests the 
extension or if the organization justifies a need for additional 
information and how the delay is in the interest of the enrollee (for 
example, the receipt of additional medical evidence from noncontract 
providers may change an M+C organization's decision to deny). The M+C 
organization must notify the enrollee of its determination as 
expeditiously as the enrollee's health condition requires, but no later 
than upon expiration of the extension.
    (c) Confirmation of oral notice. If the M+C organization first 
notifies an enrollee of its expedited determination orally, it must 
mail written confirmation to the enrollee within 2 working days of the 
oral notification.
    (d) How information from noncontract providers affects timeframes 
for expedited determinations. If an M+C organization must receive 
medical information from noncontract providers, the 72-hour period 
begins when the organization receives that information. Noncontract 
providers must make reasonable and diligent efforts to expeditiously 
gather and forward all necessary information in order to receive timely 
payment.
    (e) Content of the notice of expedited determination. (1) The 
notice of any expedited determination must state the specific reasons 
for the determination in understandable language.
    (2) If the determination is not completely favorable to the 
enrollee, the notice must--
    (i) Inform the enrollee of his or her right to a reconsideration;
    (ii) Describe both the standard and expedited reconsideration 
processes, including the enrollee's right to request, and conditions 
for obtaining, an expedited reconsideration, and the rest of the appeal 
process; and
    (iii) Comply with any other requirements specified by HCFA.
    (f) Effect of failure to provide a timely notice. If the M+C 
organization fails to provide the enrollee with timely notice of an 
expedited organization determination as specified in this section, this 
failure itself constitutes an adverse organization determination and 
may be appealed.


Sec. 422.574  Parties to the organization determination.

    The parties to the organization determination are--
    (a) The enrollee (including his or her authorized representative);
    (b) An assignee of the enrollee (that is, a physician or other 
provider who has furnished a service to the enrollee and formally 
agrees to waive any right to payment from the enrollee for that 
service);
    (c) The legal representative of a deceased enrollee's estate; or
    (d) Any other provider or entity (other than the M+C organization) 
determined to have an appealable interest in the proceeding.


Sec. 422.576  Effect of an organization determination.

    The organization determination is binding on all parties unless it 
is reconsidered under Secs. 422.578 through 422.596 or is reopened and 
revised under Sec. 422.616.


Sec. 422.578  Right to a reconsideration.

    Any party to an organization determination (including one that has 
been reopened and revised as described in Sec. 422.616) may request 
that the determination be reconsidered under the procedures described 
in Sec. 422.582, which address requests for a standard reconsideration. 
An enrollee or physician (acting on behalf of an enrollee) may request 
an expedited reconsideration as described in Sec. 422.584.


Sec. 422.580  Reconsideration defined.

    A reconsideration consists of a review of an adverse organization 
determination, the evidence and findings upon which it was based, and 
any other evidence the parties submit or the M+C organization or HCFA 
obtains.


Sec. 422.582  Request for a standard reconsideration.

    (a) Method and place for filing a request. A party to an 
organization determination must ask for a reconsideration of the 
determination by filing a written request with--
    (1) The M+C organization that made the organization determination;
    (2) An SSA office; or
    (3) In the case of a qualified railroad retirement beneficiary, an 
RRB office.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, a party must file a request for a reconsideration 
within 60 calendar days from the date of the notice of the organization 
determination. If the SSA or RRB receives a request, it forwards the 
request to the M+C organization for its reconsideration. The timeframe 
within which the organization must conduct its review begins when it 
receives the request.
    (c) Extending the time for filing a request.
    (1) General rule. If a party shows good cause, the M+C organization 
may extend the timeframe for filing a request for reconsideration.
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for a reconsideration has expired, a party 
to the organization determination may file a request for 
reconsideration with the M+C organization, SSA, or an RRB office. If 
SSA or RRB receives a request, it forwards the request to the M+C 
organization for its reconsideration. The request for reconsideration 
and to extend the timeframe must--
    (i) Be in writing; and
    (ii) State why the request for reconsideration was not filed on 
time.
    (d) Parties to the reconsideration. The parties to the 
reconsideration are the parties to the organization determination, as 
described in Sec. 422.574, and any other provider or entity (other than 
the M+C organization) whose rights with respect to the organization 
determination may be affected by the reconsideration, as determined by 
the entity that conducts the reconsideration.
    (e) Withdrawing a request. The party who files a request for 
reconsideration may withdraw it by filing a written request for 
withdrawal at one of the places listed in paragraph (a) of this 
section.


Sec. 422.584  Expediting certain reconsiderations.

    (a) Who may request an expedited reconsideration. An enrollee or a 
physician (regardless of whether he or she is affiliated with the M+C 
organization) may request that an M+C organization expedite a 
reconsideration of a determination that involves the issues described 
in Sec. 422.566(b)(3) and (b)(4). (This does not include requests for 
payment.) A physician that requests an expedited reconsideration must 
be acting on behalf of the enrollee as an authorized representative.
    (b) How to make a request. (1) To ask for an expedited 
reconsideration, an enrollee or a physician acting on behalf of an 
enrollee must submit an oral or written request directly to the M+C 
organization or, if applicable, to the entity responsible for making 
the reconsideration, as directed by the M+C organization.
    (2) A physician may provide oral or written support for a request 
for an expedited reconsideration.
    (c) How the M+C organization must process requests. The M+C 
organization must establish and maintain the

[[Page 35110]]

following procedures for processing requests for expedited 
reconsiderations:
    (1) Handling of requests. The M+C organization must establish an 
efficient and convenient means for individuals to submit oral or 
written requests, document all oral requests in writing, and maintain 
the documentation in the case file.
    (2) Prompt decision. Promptly decide on whether to expedite the 
reconsideration or follow the timeframe for standard reconsideration 
based on the following requirements:
    (i) For a request made by an enrollee, the M+C organization must 
provide an expedited reconsideration if it determines that applying the 
standard timeframe for reconsidering a determination could seriously 
jeopardize the life or health of the enrollee or the enrollee's ability 
to regain maximum function.
    (ii) For a request made or supported by a physician, the M+C 
organization must provide an expedited reconsideration if the physician 
indicates that applying the standard timeframe for conducting a 
reconsideration could seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial. If an M+C organization denies a 
request for expedited reconsideration, it must take the following 
actions:
    (1) Automatically transfer a request to the standard timeframe and 
make the determination within the 30-day timeframe established in 
Sec. 422.590(a). The 30-day period begins the day the M+C organization 
receives the request for expedited reconsideration.
    (2) Give the enrollee prompt oral notice, and follow up, within 2 
working days, with a written letter that--
    (i) Explains that the M+C organization will process the enrollee's 
request using the 30-day timeframe for standard reconsiderations;
    (ii) Informs the enrollee of the right to file a grievance if he or 
she disagrees with the organization's decision not to expedite; and
    (iii) Provides instructions about the grievance process and its 
timeframes.
    (e) Action following acceptance of a request. If an M+C 
organization grants a request for expedited reconsideration, it must 
conduct the reconsideration and give notice in accordance with 
Sec. 422.590(d).
    (f) Prohibition of punitive action. An M+C organization may not 
take or threaten to take any punitive action against a physician acting 
on behalf or in support of an enrollee in requesting an expedited 
reconsideration.


Sec. 422.586  Opportunity to submit evidence.

    The M+C organization must provide the parties to the 
reconsideration with a reasonable opportunity to present evidence and 
allegations of fact or law, related to the issue in dispute, in person 
as well as in writing. In the case of an expedited reconsideration, the 
opportunity to present evidence is limited by the short timeframe for 
making a decision. Therefore, the M+C organization must inform the 
parties of the conditions for submitting the evidence.


Sec. 422.590  Timeframes and responsibility for reconsiderations.

    (a) Standard reconsideration: Request for services.
    (1) If the M+C organization makes a reconsidered determination that 
is completely favorable to the enrollee, the M+C organization must 
issue the determination (and effectuate it in accordance with 
Sec. 422.618(a)) as expeditiously as the enrollee's health condition 
requires, but no later than 30 calendar days from the date it receives 
the request for a standard reconsideration. The M+C organization may 
extend the timeframe by up to 14 calendar days if the enrollee requests 
the extension or if the organization justifies a need for additional 
information and how the delay is in the interest of the enrollee (for 
example, the receipt of additional medical evidence from noncontract 
providers may change an M+C organization's decision to deny). For 
extensions, the M+C organization must issue and effectuate its 
determination as expeditiously as the enrollee's health condition 
requires, but no later than upon expiration of the extension.
    (2) If the M+C organization makes a reconsidered determination that 
affirms, in whole or in part, its adverse organization determination, 
it must prepare a written explanation and send the case file to the 
independent entity contracted by HCFA as expeditiously as the 
enrollee's health condition requires, but no later than 30 calendar 
days from the date it receives the request for a standard 
reconsideration (or no later than the expiration of an extension 
described in paragraph (a)(1) of this section). The organization must 
make reasonable and diligent efforts to assist in gathering and 
forwarding information to the independent entity.
    (b) Standard reconsideration: Request for payment. (1) If the M+C 
organization makes a reconsidered determination that is completely 
favorable to the enrollee, the M+C organization must issue its 
reconsidered determination to the enrollee (and effectuate it in 
accordance with Sec. 422.618(a)) no later than 60 calendar days from 
the date it receives the request for a standard reconsideration.
    (2) If the M+C organization affirms, in whole or in part, its 
adverse organization determination, it must prepare a written 
explanation and send the case file to the independent entity contracted 
by HCFA no later than 60 calendar days from the date it receives the 
request for a standard reconsideration. The organization must make 
reasonable and diligent efforts to assist in gathering and forwarding 
information to the independent entity.
    (c) Effect of failure to meet timeframe for standard 
reconsideration. If the M+C organization fails to provide the enrollee 
with a reconsidered determination within the timeframes specified in 
paragraph (a) or paragraph (b) of this section, this failure 
constitutes an affirmation of its adverse organization determination, 
and the M+C organization must submit the file to the independent entity 
in the same manner as described under paragraphs (a)(2) and (b)(2) of 
this section.
    (d) Expedited reconsideration--(1) Timeframe. Except as provided in 
paragraph (d)(2) of this section, an M+C organization that approves a 
request for expedited reconsideration must complete its reconsideration 
and give the enrollee (and the physician involved, as appropriate) 
notice of its decision as expeditiously as the enrollee's health 
condition requires but no later than 72 hours after receiving the 
request.
    (2) Extensions. The M+C organization may extend the 72-hour 
deadline by up to 14 calendar days if the enrollee requests the 
extension or if the organization justifies a need for additional 
information and how the delay is in the interest of the enrollee (for 
example, the receipt of additional medical evidence from noncontract 
providers may change an M+C organization's decision to deny). The M+C 
organization must notify the enrollee of its determination as 
expeditiously as the enrollee's health condition requires but no later 
than upon expiration of the extension.
    (3) Confirmation of oral notice. If the M+C organization first 
notifies an enrollee orally of a completely favorable expedited 
reconsideration, it must mail written confirmation to the enrollee 
within 2 working days.
    (4) How information from noncontract providers affects timeframes 
for expedited reconsiderations. If the M+C organization must receive 
medical information from noncontract providers, the 72-hour period 
begins when the

[[Page 35111]]

organization receives the information. Noncontract providers must make 
reasonable and diligent efforts to expeditiously gather and forward all 
necessary information in order to receive timely payment.
    (5) Affirmation of an adverse expedited organization determination. 
If, as a result of its reconsideration, the M+C organization affirms, 
in whole or in part, its adverse expedited organization determination, 
the M+C organization must submit a written explanation and the case 
file to the independent entity contracted by HCFA as expeditiously as 
the enrollee's health condition requires, but not later than within 24 
hours of its affirmation. The organization must make reasonable and 
diligent efforts to assist in gathering and forwarding information to 
the independent entity.
    (e) Notification of enrollee. If the M+C organization refers the 
matter to the independent entity as described under this section, it 
must concurrently notify the enrollee of that action.
    (f) Failure to meet timeframe for expedited reconsideration. If the 
M+C organization fails to provide the enrollee with the results of its 
reconsideration within the timeframe described in paragraph (d) of this 
section, this failure constitutes an adverse reconsidered 
determination, and the M+C organization must submit the file to the 
independent entity within 24 hours of expiration of the timeframe set 
forth in paragraph (d) of this section.
    (g) Who must reconsider an adverse organization determination. (1) 
A person or persons who were not involved in making the organization 
determination must conduct the reconsideration.
    (2) When the issue is the M+C organization's denial of coverage 
based on a lack of medical necessity, the reconsidered determination 
must be made by a physician with expertise in the field of medicine 
that is appropriate for the services at issue.


Sec. 422.592  Reconsideration by an independent entity.

    (a) When the M+C organization affirms, in whole or in part, its 
adverse organization determination, the issues that remain in dispute 
must be reviewed and resolved by an independent, outside entity that 
contracts with HCFA.
    (b) The independent outside entity must conduct the review as 
expeditiously as the enrollee's health condition requires but must not 
exceed the deadlines specified in the contract.
    (c) When the independent entity conducts a reconsideration, the 
parties to the reconsideration are the same parties listed in 
Sec. 422.582(d) who qualified during the M+C organization's 
reconsideration, with the addition of the M+C organization.


Sec. 422.594  Notice of reconsidered determination by the independent 
entity.

    (a) Responsibility for the notice. When the independent entity 
makes the reconsidered determination, it is responsible for mailing a 
notice of its reconsidered determination to the parties and for sending 
a copy to HCFA.
    (b) Content of the notice. The notice must--
    (1) State the specific reasons for the entity's decisions;
    (2) If the reconsidered determination is adverse (that is, does not 
completely reverse the M+C organization's adverse organization 
determination), inform the parties of their right to an ALJ hearing if 
the amount in controversy is $100 or more;
    (3) Describe the procedures that a party must follow to obtain an 
ALJ hearing; and
    (4) Comply with any other requirements specified by HCFA.


Sec. 422.596  Effect of a reconsidered determination.

    A reconsidered determination is final and binding on all parties 
unless a party files a request for a hearing under the provisions of 
Sec. 422.602, or unless the reconsidered determination is revised under 
Sec. 422.616.


Sec. 422.600  Right to a hearing.

    (a) If the amount remaining in controversy is $100 or more, any 
party to the reconsideration (except the M+C organization) who is 
dissatisfied with the reconsidered determination has a right to a 
hearing before an ALJ. The M+C organization does not have the right to 
request a hearing before an ALJ.
    (b) The amount remaining in controversy, which can include any 
combination of Part A and Part B services, is computed in accordance 
with Sec. 405.740 of this chapter for Part A services and Sec. 405.817 
of this chapter for Part B services.
    (c) If the basis for the appeal is the M+C organization's refusal 
to provide services, HCFA uses the projected value of those services to 
compute the amount remaining in controversy.


Sec. 422.602  Request for an ALJ hearing.

    (a) How and where to file a request. A party must file a written 
request for a hearing at one of the places listed in Sec. 422.582(a) or 
with the independent, outside entity. The organizations listed in 
Sec. 422.582(a) forward the request to the independent, outside entity, 
which is responsible for transferring the case to the appropriate ALJ 
hearing office.
    (b) When to file a request. Except when an ALJ extends the 
timeframe as provided in 20 CFR 404.933(c), a party must file a request 
for a hearing within 60 days of the date of the notice of a 
reconsidered determination.
    (c) Parties to a hearing. The parties to a hearing are the parties 
to the reconsideration, the M+C organization, and any other person or 
entity whose rights with respect to the reconsideration may be affected 
by the hearing, as determined by the ALJ.
    (d) When the amount in controversy is less than $100. (1) If a 
request for a hearing clearly shows that the amount in controversy is 
less than $100, the ALJ dismisses the request.
    (2) If, after a hearing is initiated, the ALJ finds that the amount 
in controversy is less than $100, he or she discontinues the hearing 
and does not rule on the substantive issues raised in the appeal.


Sec. 422.608  Departmental Appeals Board (DAB) review.

    Any party to the hearing, including the M+C organization, who is 
dissatisfied with the ALJ hearing decision, may request that the DAB 
review the ALJ's decision or dismissal. Regulations located at 20 CFR 
404.967 through 404.984 regarding SSA Appeals Council Review apply to 
DAB review for matters addressed by this subpart.


Sec. 422.612  Judicial review.

    (a) Review of ALJ's decision. Any party, including the M+C 
organization, may request judicial review (upon notifying the other 
parties) of an ALJ's decision if--
    (1) The DAB denied the party's request for review; and
    (2) The amount in controversy is $1,000 or more.
    (b) Review of DAB decision. Any party, including the M+C 
organization, may request judicial review (upon notifying the other 
parties) of the DAB decision if--
    (1) It is the final decision of HCFA; and
    (2) The amount in controversy is $1,000 or more.
    (c) How to request judicial review. A party must file a civil 
action in a district court of the United States in accordance with 
section 205(g) of the Act (see 20 CFR 422.210 for a description of the 
procedures to follow in requesting judicial review).


Sec. 422.616  Reopening and revising determinations and decisions.

    (a) An organization or reconsidered determination made by an M+C

[[Page 35112]]

organization, a reconsidered determination made by the independent 
entity described in Sec. 422.592, or the decision of an ALJ or the DAB 
that is otherwise final and binding may be reopened and revised by the 
entity that made the determination or decision, under the rules in 
Sec. 405.750 of this chapter.
    (b) Reopening may be at the instigation of any party.
    (c) The filing of a request for reopening does not relieve the M+C 
organization of its obligation to make payment or provide services as 
specified in Sec. 422.618.
    (d) Once an entity issues a revised determination or decision, any 
party may file an appeal.


Sec. 422.618  How an M+C organization must effectuate reconsidered 
determinations or decisions.

    (a) Reversals by the M+C organization--(1) Requests for service. 
If, on reconsideration of a request for service, the M+C organization 
completely reverses its organization determination, the organization 
must authorize or provide the service under dispute as expeditiously as 
the enrollee's health condition requires, but no later than 30 calendar 
days after the date the M+C organization receives the request for 
reconsideration (or no later than upon expiration of an extension 
described in Sec. 422.590(a)(1)).
    (2) Requests for payment. If, on reconsideration of a request for 
payment, the M+C organization completely reverses its organization 
determination, the organization must pay for the service no later than 
60 calendar days after the date the M+C organization receives the 
request for reconsideration.
    (b) Reversals other than by the M+C organization. If the M+C 
organization's organization determination is reversed in whole or in 
part by the independent outside entity or at a higher level of appeal, 
the M+C organization must pay for, authorize, or provide the service 
under dispute as expeditiously as the enrollee's health condition 
requires, but no later than 60 calendar days from the date it receives 
notice reversing the organization determination. The M+C organization 
must also inform the independent, outside entity that the organization 
has effectuated the decision.


Sec. 422.620  How M+C organizations must notify enrollees of 
noncoverage of inpatient hospital care.

    (a) Enrollee's entitlement. Where an M+C organization has 
authorized coverage of the inpatient admission of an enrollee, either 
directly or by delegation (or the admission constitutes emergency or 
urgently needed care, as described in Secs. 422.2 and 422.112(b)), the 
enrollee remains entitled to inpatient hospital care until he or she 
receives notice of noncoverage of that care.
    (b) Physician concurrence required. Before the M+C organization 
gives notice of noncoverage as described in paragraph (c) of this 
section, the physician who is responsible for the enrollee's hospital 
care must concur.
    (c) Notice to the enrollee. The M+C organization must give the 
enrollee written notice that includes the following:
    (1) The reason why inpatient hospital care is no longer needed.
    (2) The effective date of the enrollee's liability for continued 
inpatient care.
    (3) The enrollee's appeal rights.
    (4) Comply with any other requirements specified by HCFA.
    (d) Physician concurrence when a hospital determines if care is 
necessary. If the M+C organization allows the hospital to determine 
whether inpatient care is necessary, the hospital obtains the 
concurrence of the contracting physician responsible for the enrollee's 
hospital care or of another physician as authorized by the M+C 
organization, and notifies the enrollee, following the procedures set 
forth in Sec. 412.42(c)(3) of this chapter.


Sec. 422.622  Requesting immediate PRO review of noncoverage of 
inpatient hospital care.

    (a) Enrollee's right to review or reconsideration. (1) An enrollee 
who wishes to appeal a determination by an M+C organization or hospital 
that inpatient care is no longer necessary must request immediate PRO 
review of the determination in accordance with paragraph (b) of this 
section. An enrollee who requests immediate PRO review may remain in 
the hospital with no additional financial liability as specified in 
paragraph (c) of this section.
    (2) An enrollee who fails to request immediate PRO review in 
accordance with the procedures in paragraph (b) of this section may 
request expedited reconsideration by the M+C organization as described 
in Sec. 422.584, but the financial liability rules of paragraph (c) of 
this section do not apply.
    (b) Procedures enrollee must follow. For the immediate PRO review 
process, the following rules apply:
    (1) The enrollee must submit the request for immediate review--
    (i) To the PRO that has an agreement with the hospital under 
Sec. 466.78 of this chapter;
    (ii) In writing or by telephone; and
    (iii) By noon of the first working day after he or she receives 
written notice that the M+C organization or hospital has determined 
that the hospital stay is no longer necessary.
    (2) On the date it receives the enrollee's request, the PRO must 
notify the M+C organization that the enrollee has filed a request for 
immediate review.
    (3) The M+C organization must supply any information that the PRO 
requires to conduct its review and must make it available, by phone or 
in writing, by the close of business of the first full working day 
immediately following the day the enrollee submits the request for 
review.
    (4) In response to a request from the M+C organization, the 
hospital must submit medical records and other pertinent information to 
the PRO by close of business of the first full working day immediately 
following the day the organization makes its request.
    (5) The PRO must solicit the views of the enrollee who requested 
the immediate PRO review.
    (6) The PRO must make a determination and notify the enrollee, the 
hospital, and the M+C organization by close of business of the first 
working day after it receives all necessary information from the 
hospital, or the organization, or both.
    (c) Liability for hospital costs--(1) When the M+C organization 
determines that hospital services are not, or are no longer, covered. 
(i) Except as provided in paragraph (c)(1)(ii) of this section, if the 
M+C organization authorized coverage of the inpatient admission 
directly or by delegation (or the admission constitutes emergency or 
urgently needed care, as described in Secs. 422.2 and 422.112(b)), the 
organization continues to be financially responsible for the costs of 
the hospital stay when a timely appeal is filed under paragraph (a)(1) 
of this section until noon of the calendar day following the day the 
PRO notifies the enrollee of its review determination. If coverage of 
the hospital admission was never approved by the M+C organization (or 
the admission does not constitute emergency or urgently needed care, as 
described in Secs. 422.2 and 422.112(b)), the M+C organization is 
liable for the hospital costs only if it is determined on appeal that 
the hospital stay should have been covered under the M+C plan.
    (ii) The hospital may not charge the M+C organization (or the 
enrollee) if--

[[Page 35113]]

    (A) It was the hospital (acting on behalf of the enrollee) that 
filed the request for immediate PRO review; and
    (B) The PRO upholds the noncoverage determination made by the M+C 
organization.
    (2) When the hospital determines that hospital services are no 
longer required. If the hospital determines that inpatient hospital 
services are no longer necessary, and the enrollee could not reasonably 
be expected to know that the services would not be covered, the 
hospital may not charge the enrollee for inpatient services received 
before noon of the calendar day following the day the PRO notifies the 
enrollee of its review determination.

Subpart N--Medicare Contract Determinations and Appeals


Sec. 422.641  Contract determinations.

    This subpart establishes the procedures for making and reviewing 
the following contract determinations:
    (a) A determination that an entity is not qualified to enter into a 
contract with HCFA under Part C of title XVIII of the Act.
    (b) A determination to terminate a contract with an M+C 
organization in accordance with Sec. 422.510(a).
    (c) A determination not to authorize a renewal of a contract with 
an M+C organization in accordance with Sec. 422.506(b).


Sec. 422.644  Notice of contract determination.

    (a) When HCFA makes a contract determination, it gives the M+C 
organization written notice.
    (b) The notice specifies--
    (1) The reasons for the determination; and
    (2) The M+C organization's right to request reconsideration.
    (c) For HCFA-initiated terminations, HCFA mails notice 90 days 
before the anticipated effective date of the termination. For 
terminations based on initial determinations described at 
Sec. 422.510(a)(5), HCFA immediately notifies the M+C organization of 
its decision to terminate the organization's M+C contract.
    (d) When HCFA determines that it will not authorize a contract 
renewal, HCFA mails the notice to the M+C organization by May 1 of the 
current contract year.


Sec. 422.646  Effect of contract determination.

    The contract determination is final and binding unless--
    (a) The determination is reconsidered in accordance with 
Secs. 422.648 through 422.658;
    (b) A timely request for a hearing is filed under Sec. 422.662; or
    (c) The reconsideration decision is revised as a result of a 
reopening under Sec. 422.696.


Sec. 422.648  Reconsideration: Applicability.

    (a) Reconsideration is the first step for appealing a contract 
determination specified in Sec. 422.641.
    (b) HCFA reconsiders the specified determinations if the M+C 
organization files a written request in accordance with Sec. 422.650.


Sec. 422.650  Request for reconsideration.

    (a) Method and place for filing a request. A request for 
reconsideration must be made in writing and filed with any HCFA office.
    (b) Time for filing a request. The request for reconsideration must 
be filed within 15 days from the date of the notice of the initial 
determination.
    (c) Proper party to file a request. Only an authorized official of 
the entity or M+C organization that was the subject of a contract 
determination may file the request for reconsideration.
    (d) Withdrawal of a request. The M+C organization or M+C contract 
applicant who filed the request for a reconsideration may withdraw it 
at any time before the notice of the reconsidered determination is 
mailed. The request for withdrawal must be in writing and filed with 
HCFA.


Sec. 422.652  Opportunity to submit evidence.

    HCFA provides the M+C organization or M+C contract applicant and 
the HCFA official or officials who made the contract determination 
reasonable opportunity to present as evidence any documents or written 
statements that are relevant and material to the matters at issue.


Sec. 422.654  Reconsidered determination.

    A reconsidered determination is a new determination that--
    (a) Is based on a review of the contract determination, the 
evidence and findings upon which that was based, and any other written 
evidence submitted before notice of the reconsidered determination is 
mailed, including facts relating to the status of the M+C organization 
subsequent to the contract determination; and
    (b) Affirms, reverses, or modifies the initial determination.


Sec. 422.656  Notice of reconsidered determination.

    (a) HCFA gives the M+C organization or M+C contract applicant 
written notice of the reconsidered determination.
    (b) The notice--
    (1) Contains findings with respect to the M+C organization's 
qualifications to enter into or remain under a contract with HCFA 
pursuant to Part C of title XVIII of the Act;
    (2) States the specific reasons for the reconsidered determination; 
and
    (3) Informs the M+C organization or M+C contract applicant of its 
right to a hearing if it is dissatisfied with the determination.


Sec. 422.658  Effect of reconsidered determination.

    A reconsidered determination is final and binding unless a request 
for a hearing is filed in accordance with Sec. 422.662 or it is revised 
in accordance with Sec. 422.696.


Sec. 422.660  Right to a hearing.

    The following parties are entitled to a hearing:
    (a) An applicant entity that has been determined in a reconsidered 
determination to be unqualified to enter into a contract with HCFA 
under Part C of the Act.
    (b) An M+C organization whose contract with HCFA has been 
terminated or has not been renewed as a result of a contract 
determination as provided in Sec. 422.641.


Sec. 422.662  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be made in writing and filed by an authorized official of the 
applicant entity or M+C organization that was the party to the 
determination under appeal. The request for a hearing must be filed 
with any HCFA office.
    (b) Time for filing a request. A request for a hearing must be 
filed within 15 days after the date of the notice of contract or 
reconsidered determination.
    (c) Parties to a hearing. The parties to a hearing must be--
    (1) The parties described in Sec. 422.660;
    (2) At the discretion of the hearing officer, any interested 
parties who make a showing that their rights may be prejudiced by the 
decision to be rendered at the hearing; and
    (3) HCFA.


Sec. 422.664  Postponement of effective date of a contract 
determination when a request for a hearing with respect to a contract 
determination is filed timely.

    (a) HCFA postpones the proposed effective date of the contract 
determination to terminate a contract with an M+C organization until a 
hearing decision is reached and affirmed by the Administrator following 
review under Sec. 422.692 in instances where an M+C organization 
requests review by the Administrator; and
    (b) HCFA extends the current contract at the end of the contract 
period (in the

[[Page 35114]]

case of a determination not to renew) only--
    (1) If HCFA finds that an extension of the contract will be 
consistent with the purpose of this part; and
    (2) For such period as HCFA and the M+C organization agree.
    (c) Exception: A contract terminated in accordance with 
Sec. 422.510(a)(5) will be immediately terminated and will not be 
postponed if a hearing is requested.


Sec. 422.666  Designation of hearing officer.

    HCFA designates a hearing officer to conduct the hearing. The 
hearing officer need not be an ALJ.


Sec. 422.668  Disqualification of hearing officer.

    (a) A hearing officer may not conduct a hearing in a case in which 
he or she is prejudiced or partial to any party or has any interest in 
the matter pending for decision.
    (b) A party to the hearing who objects to the designated hearing 
officer must notify that officer in writing at the earliest 
opportunity.
    (c) The hearing officer must consider the objections, and may, at 
his or her discretion, either proceed with the hearing or withdraw.
    (1) If the hearing officer withdraws, HCFA designates another 
hearing officer to conduct the hearing.
    (2) If the hearing officer does not withdraw, the objecting party 
may, after the hearing, present objections and request that the 
officer's decision be revised or a new hearing be held before another 
hearing officer. The objections must be submitted in writing to HCFA.


Sec. 422.670  Time and place of hearing.

    (a) The hearing officer fixes a time and place for the hearing, 
which is not to exceed 30 days from the receipt of the request for the 
hearing, and sends written notice to the parties. The notice also 
informs the parties of the general and specific issues to be resolved 
and information about the hearing procedure.
    (b) The hearing officer may, on his or her own motion, or at the 
request of a party, change the time and place for the hearing. The 
hearing officer may adjourn or postpone the hearing.
    (c) The hearing officer will give the parties reasonable notice of 
any change in time or place of hearing, or of adjournment or 
postponement.


Sec. 422.672  Appointment of representatives.

    A party may appoint as its representative at the hearing anyone not 
disqualified or suspended from acting as a representative before the 
Secretary or otherwise prohibited by law.


Sec. 422.674  Authority of representatives.

    (a) A representative appointed and qualified in accordance with 
Sec. 422.672 may, on behalf of the represented party--
    (1) Gives or accepts any notice or request pertinent to the 
proceedings set forth in this subpart;
    (2) Presents evidence and allegations as to facts and law in any 
proceedings affecting that party; and
    (3) Obtains information to the same extent as the party.
    (b) A notice or request sent to the representative has the same 
force and effect as if it had been sent to the party.


Sec. 422.676  Conduct of hearing.

    (a) The hearing is open to the parties and to the public.
    (b) The hearing officer inquires fully into all the matters at 
issue and receives in evidence the testimony of witnesses and any 
documents that are relevant and material.
    (c) The hearing officer provides the parties an opportunity to 
enter any objection to the inclusion of any document.
    (d) The hearing officer decides the order in which the evidence and 
the arguments of the parties are presented and the conduct of the 
hearing.


Sec. 422.678  Evidence.

    The hearing officer rules on the admissibility of evidence and may 
admit evidence that would be inadmissible under rules applicable to 
court procedures.


Sec. 422.680  Witnesses.

    (a) The hearing officer may examine the witnesses.
    (b) The parties or their representatives are permitted to examine 
their witnesses and cross-examine witnesses of other parties.


Sec. 422.682  Discovery.

    (a) Prehearing discovery is permitted upon timely request of a 
party.
    (b) A request is timely if it is made before the beginning of the 
hearing.
    (c) A reasonable time for inspection and reproduction of documents 
is provided by order of the hearing officer.
    (d) The hearing officer's order on all discovery matters is final.


Sec. 422.684  Prehearing.

    The hearing officer may schedule a prehearing conference if he or 
she believes that a conference would more clearly define the issues.


Sec. 422.686  Record of hearing.

    (a) A complete record of the proceedings at the hearing is made and 
transcribed and made available to all parties upon request.
    (b) The record may not be closed until a hearing decision has been 
issued.


Sec. 422.688  Authority of hearing officer.

    In exercising his or her authority, the hearing officer must comply 
with the provisions of title XVIII and related provisions of the Act, 
the regulations issued by the Secretary, and general instructions 
issued by HCFA in implementing the Act.


Sec. 422.690  Notice and effect of hearing decision.

    (a) As soon as practical after the close of the hearing, the 
hearing officer issues a written decision that--
    (1) Is based upon the evidence of record; and
    (2) Contains separately numbered findings of fact and conclusions 
of law.
    (b) The hearing officer provides a copy of the hearing decision to 
each party.
    (c) The hearing decision is final and binding unless it is reversed 
or modified by the Administrator following review under Sec. 422.692, 
or reopened and revised in accordance with Sec. 422.696.


Sec. 422.692  Review by the Administrator.

    (a) Request for Review by Administrator. An M+C organization that 
has received a hearing decision upholding a contract termination 
determination may request review by the Administrator within 15 days of 
receiving the hearing decision as provided under Sec. 422.690(b).
    (b) Review by the Administrator. The Administrator shall review the 
hearing officer's decision, and determine, based upon this decision, 
the hearing record, and any written arguments submitted by the M+C 
organization, whether the termination decision should be upheld, 
reversed, or modified.
    (c) Decision by the Administrator. The Administrator issues a 
written decision, and furnishes the decision to the M+C organization 
requesting review.


Sec. 422.694  Effect of Administrator's decision.

    A decision by the Administrator under section 422.692 is final and 
binding unless it is reopened and revised in accordance with 
Sec. 422.696.


Sec. 422.696  Reopening of contract or reconsidered determination or 
decision of a hearing officer or the Administrator.

    (a) Initial or reconsidered determination. HCFA may reopen and 
revise an initial or reconsidered determination upon its own motion 
within one year of the date of the notice of determination.
    (b) Decision of hearing officer. A decision of a hearing officer 
that is

[[Page 35115]]

unfavorable to any party and is otherwise final may be reopened and 
revised by the hearing officer upon the officer's own motion within one 
year of the notice of the hearing decision. Another hearing officer 
designated by HCFA may reopen and revise the decision if the hearing 
officer who issued the decision is unavailable.
    (c) Decision of Administrator. A decision by the Administrator that 
is otherwise final may be reopened and revised by the Administrator 
upon the Administrator's own motion within one year of the notice of 
the Administrator's decision.
    (d) Notices. (1) The notice of reopening and of any revisions 
following the reopening is mailed to the parties.
    (2) The notice of revision specifies the reasons for revisions.


Sec. 422.698  Effect of revised determination.

    The revision of a contract or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec. 422.662.

Subpart O--Intermediate Sanctions


Sec. 422.750  Kinds of sanctions.

    (a) The following intermediate sanctions and civil money penalties 
may be imposed:
    (1) Civil money penalties ranging from $10,000 to $100,000 
depending upon the violation.
    (2) Suspension of enrollment of Medicare beneficiaries.
    (3) Suspension of payment to the M+C organization for Medicare 
beneficiaries who enroll.
    (4) Require the M+C organization to suspend all marketing 
activities to Medicare beneficiaries for the M+C plan subject to the 
intermediate sanctions.
    (b) The enrollment, payment, and marketing sanctions continue in 
effect until HCFA is satisfied that the deficiency on which the 
determination was based has been corrected and is not likely to recur.


Sec. 422.752  Basis for imposing sanctions.

    (a) All intermediate sanctions. For the violations listed below, 
HCFA may impose any of the sanctions specified in Sec. 422.750 on any 
M+C organization that has a contract in effect. The M+C organization 
may also be subject to other applicable remedies available under law.
    (1) Fails substantially to provide, to an M+C enrollee, medically 
necessary services that the organization is required to provide (under 
law or under the contract) to an M+C enrollee, and that failure 
adversely affects (or is substantially likely to adversely affect) the 
enrollee.
    (2) Imposes on M+C enrollees premiums in excess of the monthly 
basic and supplemental beneficiary premiums permitted under section 
1854 of the Act and Subpart G of this part.
    (3) Expels or refuses to reenroll a beneficiary in violation of the 
provisions of this part.
    (4) Engages in any practice that could reasonably be expected to 
have the effect of denying or discouraging enrollment of individuals 
whose medical condition or history indicates a need for substantial 
future medical services.
    (5) Misrepresents or falsifies information that it furnishes--
    (i) To HCFA; or
    (ii) To an individual or to any other entity.
    (6) Fails to comply with the requirements of Sec. 422.204, which 
prohibits interference with practitioners' advice to enrollees.
    (7) Fails to comply with Sec. 422.216, which requires the 
organization to enforce the limit on balance billing under a private 
fee-for service plan.
    (8) Employs or contracts with an individual who is excluded from 
participation in Medicare under section 1128 or 1128A of the Act (or 
with an entity that employs or contracts with such an individual) for 
the provision of any of the following:
    (i) Health care.
    (ii) Utilization review.
    (iii) Medical social work.
    (iv) Administrative services.
    (b) Suspension of enrollment and marketing. If HCFA makes a 
determination under Sec. 422.510(a), HCFA may impose the intermediate 
sanctions in Sec. 422.756(c)(1) and (c)(3).


Sec. 422.756  Procedures for imposing sanctions.

    (a) Notice of Sanction and opportunity to respond--(1) Notice of 
sanction. Before imposing the intermediate sanctions specified in 
paragraph (c) of this section HCFA--
    (i) Sends a written notice to the M+C organization stating the 
nature and basis of the proposed sanction; and
    (ii) Sends the OIG a copy of the notice.
    (2) Opportunity to respond. HCFA allows the M+C organization 15 
days from receipt of the notice to provide evidence that it has not 
committed an act or failed to comply with the requirements described in 
Sec. 422.752, as applicable. HCFA may allow a 15-day addition to the 
original 15 days upon receipt of a written request from the M+C 
organization. To be approved, the request must provide a credible 
explanation of why additional time is necessary and be received by HCFA 
before the end of the 15-day period following the date of receipt of 
the sanction notice. HCFA does not grant an extension if it determines 
that the M+C organization's conduct poses a threat to an enrollee's 
health and safety.
    (b) Informal reconsideration. If, consistent with paragraph (a)(2) 
of this section the M+C organization submits a timely response to 
HCFA's notice of sanction, HCFA conducts an informal reconsideration 
that:
    (1) Consists of a review of the evidence by an HCFA official who 
did not participate in the initial decision to impose a sanction; and
    (2) Gives the M+C organization a concise written decision setting 
forth the factual and legal basis for the decision that affirms or 
rescinds the original determination.
    (c) Specific sanctions. If HCFA determines that an M+C organization 
has acted or failed to act as specified in Sec. 422.752 and affirms 
this determination in accordance with paragraph (b) of this section, 
HCFA may--
    (1) Require the M+C organization to suspend acceptance of 
applications made by Medicare beneficiaries for enrollment in the 
sanctioned M+C plan during the sanction period;
    (2) In the case of a violation under Sec. 422.752(a), suspend 
payments to the M+C organization for Medicare beneficiaries enrolled in 
the sanctioned M+C plan during the sanction period; and
    (3) Require the M+C organization to suspend all marketing 
activities for the sanctioned M+C plan to Medicare enrollees.
    (d) Effective date and duration of sanctions--(1) Effective date. 
Except as provided in paragraph (d)(2) of this section, a sanction is 
effective 15 days after the date that the organization is notified of 
the decision to impose the sanction or, if the M+C organization timely 
seeks reconsideration under paragraph (b) of this section, on the date 
specified in the notice of HCFA's reconsidered determination.
    (2) Exception. If HCFA determines that the M+C organization's 
conduct poses a serious threat to an enrollee's health and safety, HCFA 
may make the sanction effective on a date before issuance of HCFA's 
reconsidered determination.
    (3) Duration of sanction. The sanction remains in effect until HCFA 
notifies the M+C organization that HCFA is satisfied that the basis for 
imposing the

[[Page 35116]]

sanction has been corrected and is not likely to recur.
    (e) Termination by HCFA. In addition to or as an alternative to the 
sanctions described in paragraph (c) of this section, HCFA may decline 
to authorize the renewal of an organization's contract in accordance 
with Sec. 422.506(b)(2) and (b)(3), or terminate the contract in 
accordance with Sec. 422.510.
    (f) Civil Money Penalties. (1) If HCFA determines that an M+C 
organization has committed an act or failed to comply with a 
requirement described in Sec. 422.752, HCFA notifies the OIG of this 
determination, and also notifies OIG when HCFA reverses or terminates a 
sanction imposed under this part.
    (2) In the case of a violation described in paragraph (a) of 
Sec. 422.752, or a determination under paragraph (b) of Sec. 422.752 
based upon a violation under Sec. 422.510(a)(4) (involving fraudulent 
or abusive activities), in accordance with the provisions of 42 CFR 
parts 1003 and 1005, the OIG may impose civil money penalties on the 
M+C organization in accordance with parts 1003 and 1005 of this title 
in addition to, or in place of, the sanctions that HCFA may impose 
under paragraph (c) of this section.
    (3) In the case of a determination under paragraph (b) of 
Sec. 422.752 other than a determination based upon a violation under 
Sec. 422.510(a)(4), in accordance with the provisions of 42 CFR parts 
1003 and 1005, HCFA may impose civil money penalties on the M+C 
organization in the amounts specified in Sec. 422.758 in addition to, 
or in place of, the sanctions that HCFA may impose under paragraph (c) 
of this section.


Sec. 422.758  Maximum amount of civil money penalties imposed by HCFA.

    If HCFA makes a determination under Sec. 422.752(b), based on any 
determination under Sec. 422.510(a) except a determination under 
Sec. 422.510(a)(4), HCFA may impose civil money penalties in the 
following amounts:
    (a) If the deficiency on which the determination is based has 
directly adversely affected (or has the substantial likelihood of 
adversely affecting) one or more M+C enrollees--$25,000 for each 
determination.
    (b) For each week that a deficiency remains uncorrected after the 
week in which the M+C organization receives HCFA's notice of the 
determination--$10,000.


Sec. 422.760  Other applicable provisions.

    The provisions of section 1128A of the Act (except subsections (a) 
and (b)) apply to civil money penalties under this subpart to the same 
extent that they apply to a civil money penalty or procedure under 
section 1128A of the Act.

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

    Dated: June 17, 1998.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: June 18, 1998.
Donna E. Shalala,
Secretary.
[FR Doc. 98-16731 Filed 6-19-98; 11:35 am]
BILLING CODE 4120-01-P