[Federal Register Volume 67, Number 171 (Wednesday, September 4, 2002)]
[Rules and Regulations]
[Pages 56618-56685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-22316]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 403



Medicare Program; Medicare-Endorsed Prescription Drug Card Assistance 
Initiative; Final Rule

  Federal Register / Vol. 67, No. 171 / Wednesday, September 4, 2002 / 
Rules and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 403

[CMS4027F]
RIN 0938AL25


Medicare Program; Medicare-Endorsed Prescription Drug Card 
Assistance Initiative

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule describes the Department of Health and Human 
Services' (HHS) Medicare-Endorsed Prescription Drug Card Assistance 
Initiative, and sets forth the necessary requirements to participate in 
the initiative.

EFFECTIVE DATE: This final rule is effective November 4, 2002.

FOR FURTHER INFORMATION CONTACT: Teresa DeCaro, (410) 7866604.

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 152507954. 
The cost for each copy is $9. Please specify the date of the issue 
requested and enclose a check or money order payable to the 
Superintendent of Documents, or enclose your Visa or Master Card number 
and expiration date. Credit card orders can also be placed by calling 
the order desk at (202) 5121800 (or toll free at 18882936498) or by 
faxing to (202) 5122250. You can also view and photocopy the Federal 
Register document at most libraries designated as Federal Depository 
Libraries and at many other public and academic libraries throughout 
the country that receive the Federal Register. This Federal Register 
document is also available from the Federal Register online database 
through GPO Access, a service of the U.S. Government Printing Office. 
The Web site address is http://www.access.gpo.gov/nara/index.html.
    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

Table of Contents

I. Background
    A. Purpose of the Initiative
    B. Statutory Basis for the Initiative
    1. Section 4359 of the Omnibus Budget Reconciliation Act of 1990
    2. Sections 1102, 1140, and 1871 of the Social Security Act
    C. July 2001 Program Superceded
    D. Objectives and Major Aspects of the Initiative
    1. Objectives
    2. Summary of Major Policies in the Final Rule in Response to 
Public Comments
    E. Conditions of Endorsement and the Endorsement Initiative
    1. General
    2. Beneficiary Eligibility and Enrollment
    3. Card Sponsor Organization, Structure, and Experience
    a. Years of Experience and Covered Lives
    b. Financial Integrity and Business Ethics
    c. Enrollment Exclusivity
    4. Formulary and Discounts to Beneficiaries
    5. Manufacturer Rebates and Discounts
    6. Access to Retail Pharmacies
    a. Pharmacy Network
    b. Home Delivery
    c. Institutional Pharmacies
    7. Other Drug-Related Items and Services Under the Endorsement 
and Items and Services Outside the Scope of the Endorsement
    8. Card Program Administration and Customer Service
    a. Enrollment and Enrollment Fee
    b. Call Center
    c. Information and Outreach
    d. Privacy
    e. Customer Complaints
    9. Administrative Consortium
    a. General Comments
    b. Enrollment Exclusivity
    c. Review of Information and Outreach Materials
    d. Price Comparison
    e. Advisory Board
    10. Our Educational Efforts
    11. Oversight and Reporting
    a. Reporting
    b. Other Oversight
    12. Other
    a. Standardized Identification Cards
    b. Best Price
    c. Partnering with States
    d. Managed Care Organizations
    e. Blood Glucose Monitoring Equipment and Supplies
    f. Low-Income Only Programs
    13. Mechanics of Endorsement
II. Provisions of the Proposed Rule
III. Provisions of the Final Rule
IV. Collection of Information Requirements
V. Regulatory Impact Analysis and Regulatory Flexibility Act 
Analysis
    A. Overall Impact
    B. Unfunded Mandates Reform Act
    C. Federalism
    D. Limitations of Our Analyses
    E. Impact of the Rebate and Discount Requirements
    1. Medicare Beneficiary Estimated Enrollment
    2. Estimated Portion of Drug Spending Included
    3. Estimated Beneficiary Savings
    4. Projection Assumptions
    5. Anticipated Effects on Medicare Beneficiaries
    6. Anticipated Effects on the Medicare Program
    7. Anticipated Effects on National Retail Prescription Drug 
Spending
    8. Regulatory Flexibility Act Analysis of Effects on Small 
Entities
    a. General
    b. Estimated Impact on Small Entities
    c. Number of Small Entities Affected
    d. Average Estimated Economic Impact on Small Pharmacies
    e. Sensitivity Analysis
    f. Small Rural Hospitals
    F. Alternatives Considered Relative to Pharmacies, Particularly 
Small Pharmacies
    G. Estimated Costs and Anticipated Benefits
    1. Private Sector Administrative Consortium, Its Start-Up and 
Activities
    2. Production and Distribution of Information and Outreach 
Materials
    3. Customer Service Call Center
    4. Other Considerations Concerning Production and Distribution 
of Information and Outreach Materials and the Customer Service Call 
Center
    5. Total Estimated Major Administrative Costs to Card Sponsors
    6. Manufacturer Rebates or Discounts
    7. Medicare's Beneficiary Education and Outreach Plans
    H. Conclusion to Impact Analysis Regulation Text

I. Background

A. Purpose of the Initiative

    The purpose of this final rule on the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative is to assist Medicare 
beneficiaries in making optimal use of their Medicare-covered services 
and to provide Medicare beneficiaries with information, counseling and 
education on private sector plans and opportunities available to them 
to lower their prescription drug costs. There already exist a number of 
private sector tools--such as formularies, use of generic drugs, and 
negotiation of discounts or rebates--for obtaining prescription drugs 
at discounted prices. Also, a number of commercial products and drug 
discount programs already exist that offer discounts to seniors and 
others. This final rule and initiative will recognize those drug 
discount programs that offer features we believe are most useful to 
beneficiaries, and will educate Medicare beneficiaries about the 
methods used in the private sector to lower prescription drug costs. 
This will assist beneficiaries in making optimal use of their Medicare 
covered services.
    While Medicare generally does not cover the purchase of outpatient 
prescription drugs, Medicare Part B, in section 1832 of the Social 
Security Act (the Act), provides benefits for a variety of other 
outpatient services and procedures, including physician office visits 
and services for which a

[[Page 56619]]

prescription drug order is a critical component of the service 
provided. In 2000, the Medicare fee-for-service program paid for 
approximately 188 million physician office visits (for new and 
established patients) at a program cost of nearly $6.6 billion for the 
visits alone, not including other services such as lab tests or 
procedures. See Table 62, Health Care Financing Review, Medicare and 
Medicaid Statistical Supplement, 2002, unpublished. Our preliminary 
analysis of 2001 Medicare data indicates that fee-for-service 
beneficiaries had, on average, roughly 6 physician office visits per 
person.
    Over the last two decades, prescription drugs have played an 
increasingly critical role in these outpatient medical care settings 
and as such, prescription drugs are an integral part of the treatment 
plans that physicians develop for patients during office visits. 
According to an unpublished analysis by the National Center for Health 
Statistics of data from the 2000 National Ambulatory Medical Care 
Survey (NAMCS), approximately 70 percent of all physician office visits 
for individuals 65 years of age or older include the physician 
prescribing new or continued medications, or supplying or administering 
a prescription drug to the patient. Further, published NAMCS data 
indicate that the number of new drug prescriptions, renewals, or drug 
administrations per 100 physician office visits for patients 65 years 
of age or older has grown from roughly 150 in 1985 to nearly 200 in 
1999. See ``Advance Data From Vital and Health Statistics Number 322'', 
National Ambulatory Medicare Care Survey: 1999 Summary, July 2001.
    Despite the increasing importance of prescription drugs in medical 
treatment, our data indicate that over 9 million Medicare beneficiaries 
are without drug coverage. Many of these individuals also are either 
not aware of or do not have access to the private sector methods 
insurance companies and drug discount card programs use to lower drug 
costs. Even if beneficiaries are aware of prescription drug discount 
cards, they frequently do not have enough information to make a 
meaningful choice among available prescription drug discount cards. See 
for example, Kaiser Family Foundation, Prescription Drug Discount 
Cards: Current Programs and Issues, February 2002. These beneficiaries 
do not benefit from lower negotiated drug prices. This means that the 
nation's elderly without drug coverage, along with uninsured Americans, 
are likely paying the highest prices for drugs in the marketplace--
prices higher than those paid by working individuals, whose drugs are 
covered by group health insurance. The lack of drug coverage, combined 
with the high prices, means that some of these beneficiaries may not 
fill prescriptions or may have them filled less often because they 
cannot afford the cost. Failing to fill a prescription ordered by a 
doctor is not an optimal use of a physician visit paid for by the 
Medicare program.
    Providing education to seniors on ways to access more affordable 
prescription drugs--especially for those beneficiaries without drug 
coverage--will, we believe, allow Medicare beneficiaries to make more 
optimal use of their Medicare-covered services, such as the service of 
having a physician provide an examination and issue a prescription 
order. We believe that when beneficiaries do not comply with the 
prescription drug regimens ordered by their physicians as a result of 
an office visit because of lack of drug coverage or lack of affordable 
access to prescription drugs, beneficiaries are not making the most 
optimal use of their Medicare-covered physician visits and other 
outpatient services. There is evidence that large numbers of 
beneficiaries, particularly those without drug coverage, do not fill 
some prescriptions ordered by their physicians and skip doses to make 
their drugs last longer due to cost concerns. A recent study of 
Medicare beneficiaries in eight states found that among those without 
drug coverage, 25 percent reported not filling a prescription due to 
cost, and 27 percent reported skipping doses to make drugs last longer. 
These rates of noncompliance with physician prescribing orders were 
more than double the rates reported among beneficiaries with drug 
coverage. See Dana G. Safran, et al., ``Prescription Drug Coverage And 
Seniors: How Well Are States Closing the Gap?'' Health Affairs Web 
Exclusive W253 (July, 2002). Additional examples of related research 
are discussed in section I.B of this preamble, discussing the statutory 
basis for the initiative.
    Furthermore, analysis of 1997 and 1998 data from a nationally 
representative sample of Medicare beneficiaries shows that Medicare 
beneficiaries without drug coverage fill fewer prescriptions than those 
with drug coverage. See John A. Poisal and Lauren Murray, ``Growing 
Differences Between Medicare Beneficiaries With and Without Drug 
Coverage,'' 20 Health Affairs 74, (2001). Our more recent analysis of 
data from the 1999 Medicare Current Beneficiary Survey (MCBS) indicates 
that, overall, beneficiaries without drug coverage, on average, self-
report filling fewer prescriptions (17.7) than those with drug coverage 
(25.1). This phenomenon holds true even among groups of beneficiaries 
with large numbers of chronic conditions. For beneficiaries with five 
or more chronic conditions, those without drug coverage self-report, on 
average, filling approximately 38.7 prescriptions compared to 
beneficiaries with drug coverage, who self-report filling, on average, 
44.4 prescriptions.
    Not filling prescriptions, skipping doses, or cutting pills in half 
is referred to in the medical literature as ``medication 
noncompliance'' and can have adverse health effects. Medication 
noncompliance can lead to worsening health problems and the need for 
additional health care services. A study of prescription drug 
noncompliance among disabled adults found that about half of the 
individuals reporting medication noncompliance due to cost reported 
experiencing one or more health problems as a result, including pain, 
discomfort, disorientation, change in blood pressure or other vital 
signs, having to go a doctor or emergency room, or being hospitalized. 
See Jane Kennedy and Christopher Erb, ``Prescription Noncompliance Due 
to Costs Among Adults with Disabilities in the United States,'' 
American Journal of Public Health, July 2002. This study also cites 
other research indicating that medication noncompliance is a clinical 
problem, particularly related to chronic illnesses such as 
hypertension, and has been found to be a predictor of hospital 
admissions and emergency room visits in other studies. We believe that 
medication noncompliance can lead to additional Medicare program costs 
which burden the Medicare program, thus this final rule works towards 
furthering the interest of efficient program management.
    In addition, even Medicare beneficiaries without prescription drug 
coverage, but who can afford to pay out-of-pocket for prescription 
drugs, do not have access to the most sophisticated systems used in 
insured products to detect and provide information between pharmacies 
on drug interactions, interaction prevention, and allergy monitoring. 
Further, a substantial number of uninsured beneficiaries, or 
beneficiaries with capped prescription drug coverage, have little 
experience or knowledge on how they might lower their prescription drug 
costs, for example by obtaining a prescription drug discount card or by 
using generic equivalents.
    To fulfill the Medicare program goals and to educate Medicare 
beneficiaries on this important aspect of their care

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and treatment plans, this final rule creates a Medicare-Endorsed 
Prescription Drug Card Assistance Initiative. This initiative is 
intended to educate beneficiaries regarding the products and tools 
already available to them in the private sector for reducing their 
prescription drug costs, including the use of generic drugs. Our 
initiative is intended further to inform Medicare beneficiaries about 
how they can receive the types of price concessions that are typical of 
insurance products. This final rule does not, nor does it intend to, 
create a new Medicare benefit. The initiative merely creates a 
mechanism--the Medicare endorsement for qualifying drug discount 
cards--to recognize those programs with features we believe are most 
useful to beneficiaries, and to educate and assist Medicare 
beneficiaries in accessing the methods used in the private sector for 
lowering prescription drug costs. We believe that by educating 
beneficiaries about opportunities to access more affordable 
prescription drugs, beneficiaries will be more likely to be compliant 
with prescription drug treatment plans and consequently will make more 
optimal use of their Medicare-covered services. This initiative is 
consistent not only with the Secretary's duty under the Medicare 
program to educate beneficiaries, but is also consistent with the 
Secretary's duties under the Act to effectuate the purposes of the 
Medicare program.

B. Statutory Basis for the Initiative

1. Section 4359 of the Omnibus Budget Reconciliation Act of 1990
    As we explained in the preamble to the proposed rule published in 
the Federal Register on March 6, 2002 (67 FR 10262), the authority for 
this initiative is primarily based upon the educational and assistance 
authority found in section 4359(a) of the Omnibus Budget Reconciliation 
Act of 1990 (OBRA)(Pub. L. 101508). Under that section, the Secretary 
is authorized to ``establish a health insurance advisory service 
program * * * to assist Medicare-eligible individuals with the receipt 
of services under the Medicare and Medicaid programs and other health 
insurance programs.'' Section 4359(c)(1)(B) of OBRA authorizes the 
Secretary to ``provide for information, counseling, and assistance for 
Medicare-eligible individuals'' with respect to benefits, whether or 
not covered by Medicare. The statute is broadly written, with section 
4359(c) authorizing the Secretary to provide ``such other services as 
the Secretary deems appropriate to increase beneficiary understanding 
of, and confidence in, the Medicare program and to improve the 
relationship between beneficiaries and the program.'' Section 4359(f) 
of OBRA expressly anticipates that there will be ``other health 
insurance informational and counseling services'' for Medicare-eligible 
individuals.
    As we stated in the proposed rule, we believe that this initiative 
meets the definition of a beneficiary assistance program because it 
will assist Medicare beneficiaries not just with their utilization of 
Medicare-covered services, but also with the receipt of services common 
under other health insurance programs. Access to more affordable 
prescription drugs will assist beneficiaries in receiving services 
under Medicare and other health insurance programs, since access could 
lead them to more effectively or efficiently use Medicare services, 
such as physician or hospital services. In fact, as we state in one of 
the responses below, several studies have shown that access to lower-
price prescription drugs can result in more effective or efficient use 
of medical care. One study, which we discuss in more detail below, 
showed that such access resulted in a lower incidence of nursing home 
admissions. In addition, to the extent that better pricing on drugs 
leads beneficiaries to comply with the drug regimens prescribed by 
their physicians, this initiative results in beneficiaries making 
better use of their Medicare-covered physician visits.
    We also believe that this initiative will be a valuable educational 
tool for beneficiaries. It will improve their understanding of how to 
access better prescription drug prices, as well as increase their 
understanding of the private sector tools currently used to lower 
prescription drug costs and improve the quality of pharmaceutical 
services.
    Outpatient prescription drugs generally are not a covered benefit 
under Medicare. However, we believe that prescription drugs are so 
intertwined with other types of Medicare-covered care, such as 
physician visits and medical and surgical care that beneficiaries 
should receive information, counseling, and assistance regarding 
prescription drug discount programs. Section 4359(b) of OBRA instructs 
the Secretary to provide education and assistance not just about 
Medicare-covered benefits, but also about benefits not covered by the 
Medicare program. For several years we have offered Medicare 
beneficiaries education and assistance in accessing several non-covered 
benefits that are complimentary to Medicare, Medicaid, and other health 
insurance programs. Our ``Guide to Choosing a Nursing Home'' discusses 
long-term care options outside Medicare coverage, including assisted 
living, subsidized senior housing, and private long-term care 
insurance. We provide further education to beneficiaries regarding 
options for long-term care, such as adult day care and community-based 
services, many of which are not covered by Medicare. Finally, we 
provide educational assistance concerning prescription drugs. For 
example, the Medicare Web site (http://www.Medicare.gov) provides 
information on programs that offer discounts or free medication to 
individuals in need. Beneficiaries may access information on 
pharmaceutical companies or associations that offer assistance programs 
for those with low incomes, on available State assistance programs, or 
on community-based programs available in their area. This Web site also 
provides a link to an article on Internet pharmacies.
    Moreover, by enhancing the buying power and knowledge of 
beneficiaries, we believe that we will further the Congressional goal 
in section 4359(c) of OBRA of ``increas[ing] beneficiary understanding 
of, and confidence in, the Medicare program and * * * improv[ing] the 
relationship between beneficiaries and the program.''
    In one of the responses to comments below, we discuss studies by 
the Employee Benefits Research Institute that demonstrate a lack of 
confidence among older Americans in the ability to afford prescription 
drug costs. While beneficiary confidence in Medicare is already high, 
we believe such confidence will be enhanced by educating beneficiaries 
about discount drug programs and assisting them in obtaining discounted 
prices, as well as other valuable pharmacy services. This initiative 
will allow beneficiaries to make more efficient and effective use of 
their Medicare services, as well as benefits that may be available to 
them under Medigap plans, employer-sponsored group health plans, 
retiree health insurance, or other health insurance programs. We 
believe that the broad provisions of section 4359 of OBRA permit us to 
pursue these important objectives. (See Texas Gray Panthers v. 
Thompson, 139 F.Supp.2d 66, 76 (D.D.C. 2001), vacated and remanded on 
other grounds by 37 Fed. Appx. 542, 2002 WL 1359464 (D.C. Cir. May 17, 
2002) (finding that section 4359 of OBRA is ambiguous in defining what 
types of ``information, counseling, and assistance'' are to be 
provided, and therefore deferring to the Secretary's reasonable 
interpretation of the statute.))

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    Comment: Several commenters stated their belief that we lack the 
statutory authority to implement the program. Commenters proposed that 
section 4359 of OBRA is merely an educational resource for providing 
seniors with information regarding benefits and services available 
under Medicare and Medicaid. Commenters also stated that a district 
court previously stopped the drug card program due to lack of 
authority, and that because this program is allegedly similar to the 
proposed program, we need the Congress to grant specific statutory 
authority.
    Response: For the reasons stated in the preamble to the proposed 
rule, as well as in the preamble to this final rule, we believe that we 
possess the statutory authority to implement this initiative. We 
believe that section 4359 of OBRA is broad concerning the types of 
assistance that the Secretary may offer in order to improve beneficiary 
confidence in the Medicare program and to improve the relationship 
between beneficiaries and the program; and that therefore, the 
Secretary has the discretion to interpret section 4359 in a manner that 
will provide assistance to Medicare beneficiaries through this discount 
card initiative. If section 4359 were intended only for providing 
information, as one commenter suggests, then there would have been no 
need for the Congress to state that the beneficiary assistance program 
shall provide for ``information, counseling, and assistance for 
Medicare-eligible individuals.'' Section 4359(c) (emphasis added). The 
requirement that the beneficiary assistance program provide assistance, 
in addition to counseling and information, suggests that the Congress 
contemplated more than the provision of information. While the 
Congress's use of the term ``assistance'' would not provide authority 
to spend benefit dollars on prescription drugs, or to mandate discounts 
from manufacturers or pharmacies, this initiative does not impose 
requirement on any entities--it merely creates conditions that we will 
use to endorse card programs that we consider to be appropriate for 
beneficiaries. Thus, we believe that the Congress's use of the term 
``assistance'' suggests that the Secretary can assist beneficiaries by 
informing them of, and educating them about, the private sector 
discount cards that we believe include features most appropriate for 
beneficiaries. In 4359(c), the Congress also required the ``beneficiary 
assistance program [to] provide such other services as the Secretary 
deems appropriate.'' Id. (emphasis added). If the Congress had intended 
to limit the beneficiary assistance programs to providing information, 
then there would have been no need to include the ``other services'' 
language in the section. Finally, if the purpose of section 4359 were 
merely to increase beneficiary understanding of the Medicare program, 
then there would have been no need for the Congress to authorize the 
Secretary also to increase beneficiary ``confidence in'' the Medicare 
program and ``to improve the relationship between beneficiaries and the 
program.'' Id.
    Commenters are correct that a United States District Court judge, 
in National Ass'n of Chain Drug Stores v. Thompson, No. 011554 (D.D.C. 
2001), made a preliminary finding that section 4359 of OBRA did not 
provide the necessary legal authority for the program published in the 
Federal Register on July 18, 2001 (66 FR 37563). We respectfully 
disagree with that preliminary finding, but we have abided by it by 
ceasing all activity on any applications received in response to the 
application published in the summer of 2001. We anticipate that, if the 
plaintiffs believe that the final rule is substantially similar to the 
program published in the July 18, 2001 Federal Register, they will seek 
further judicial review, which could result in a delay in 
implementation.
2. Sections 1102, 1140, and 1871 of the Social Security Act
    Sections 1102, 1140, and 1871 of the Social Security Act (the Act), 
in conjunction with the authority provided by section 4359 of OBRA, 
lend further support to this initiative. Sections 1102 and 1871 of the 
Act provide the Secretary with general rulemaking authority. Section 
1102 of the Act provides the Secretary with the authority to publish 
such rules and regulations as ``may be necessary to the efficient 
administration of the functions with which'' he is charged. 
Facilitating beneficiary access to lower-cost prescription drugs, and 
improving their access to other valuable pharmacy services, will lead 
to greater efficiency in the Medicare program. For example, with 
improved access to prescription drugs, beneficiaries will be more 
inclined to follow their drug regimens, which could affect their need 
for Medicare-covered services.
    Prescription drugs are an integral part of treatment of medical 
problems, and Medicare beneficiaries are more likely to have multiple 
and complex medical problems. Therefore, easier access to drug price 
comparisons, greater beneficiary access to affordable prescription 
drugs and expertise on how to use them will lead to more effective and 
efficient use of items and services covered by the Medicare program. 
Courts have acknowledged that the authority under section 1102 of the 
Act is ``broad,'' (National Welfare Rights Organization v. Mathews, 533 
F.2d 637 (D.C. Cir. 1976)) and have even stated that a ``more plenary 
great (sic) of rule-making power would be difficult to devise.'' 
(Serritella v. Engleman, 339 F.Supp. 738, 752 (D.N.J.), aff'd per 
curiam, 462 F.2d 601 (3d Cir. 1972)).
    Section 1140 of the Act also supports this initiative. That 
section, among other things, prohibits misuse of the word, 
``Medicare,'' in a manner that a person knows or should know would 
convey the false impression that an item is approved, endorsed, or 
authorized by the Health Care Financing Administration (the predecessor 
to the agency CMS) or the Department of Health and Human Services. By 
prohibiting the use of the term ``Medicare'' to convey the false 
impression that an item is approved or endorsed by us, the statute 
implicitly recognizes that the impression may be accurate and 
authorized in some circumstances. Thus, section 1140 of the Act, in 
combination with the educational and assistance authority of section 
4359 of OBRA, as well as the general rulemaking authority of sections 
1102 and 1871 of the Act, provides further support for the Secretary to 
endorse qualified entities as being approved by the Medicare program.
    Comment: One commenter stated a belief that sections 1102 and 1871 
of the Act do not provide authority for this initiative, since the 
Secretary's general rulemaking authority is restricted by the 
substantive areas over which he is charged.
    Response: Sections 1102 and 1871 might not, by themselves, provide 
sufficient authority to implement the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative; however, in conjunction with OBRA 
section 4359, we believe that the general rulemaking authority provides 
the Secretary with authority to make rules that will further the goals 
of OBRA section 4359--that is, providing education and assistance to 
Medicare beneficiaries in their receipt of services under Medicare, 
Medicaid, and other health insurance programs; increasing beneficiary 
confidence in the Medicare program; and improving the relationship 
between Medicare and its beneficiaries by providing assistance on 
accessing lower cost drugs.
    As we stated in the preamble to the proposed rule, prescription 
drugs are such a critical component in today's health care delivery 
that we believe that

[[Page 56622]]

improved beneficiary access to prescription drugs will improve 
confidence in the Medicare program and improve the relationship between 
Medicare beneficiaries and the program. While studies show that 
Medicare beneficiaries are ``very satisfied'' with the Medicare system, 
we believe that evidence also shows that access to affordable 
prescription drugs would further boost confidence in Medicare. See 
Public Opinion Strategies and Peter D. Hart Research Associates, 
Medicare and Prescription Drug Focus Groups, Summary Report (July 
2001). A 2001 Health Confidence Survey conducted by the Employee 
Benefits Research Institute (EBRI), a private, nonprofit, nonpartisan 
public policy research organization, showed that 41 percent of 
respondents 65 and older were not confident they would be able to 
afford prescription drugs without financial hardship and that 
prescription drugs were their biggest concern. In the 2000 Health 
Confidence Survey, 50 percent of those surveyed responded that they 
were not too or not at all confident that, once eligible for Medicare, 
they would be able to afford prescription drugs without financial 
hardship. Again, prescription drugs were their largest concern (as 
compared to (a) the ability to get needed treatments; (b) freedom to 
choose a provider; and (c) ability to afford health care without 
financial hardship). The EBRI studies are available on the Web site, 
http://www.ebri.org/hcs/.
    As shown by these surveys, Medicare beneficiaries are concerned 
about the prescription drug costs they are facing and their ability to 
pay for the drugs. We believe that providing a method for accessing 
discounts on prescription drugs--discounts that are available to most 
other insured populations--could help to partially address this concern 
and will demonstrate to the Medicare population that the Department of 
Health and Human Services is taking some action to help beneficiaries 
alleviate their drug costs. Of course a drug discount is no substitute 
for a drug benefit, but in the absence of legislation authorizing a 
drug benefit, we believe that we can improve beneficiary confidence in 
the Medicare program and improve the relationship between beneficiaries 
and the Medicare program through this initiative. In addition to 
research supporting our conclusion that this initiative will increase 
beneficiary confidence in and improve the beneficiary relationship with 
the Medicare program, there is also evidence supporting our conclusion 
that access to prescription drugs is an integral part of the health 
care services delivered by the Medicare program, and that improving 
access to prescription drugs directly influences the effectiveness of 
Medicare-covered services.
    For example, one study found that patients with hypertension who 
lacked drug coverage were 1.4 times more likely than those with 
coverage not to purchase their anti-hypertension medications, thus 
potentially increasing their risk of more severe medical consequences 
(of beneficiaries with hypertension and without drug coverage, 21.8 
percent failed to purchase any hypertensive tablets during the year as 
compared to 17.1 percent of those with coverage--thus increasing the 
odds of failing to purchase any hypertensive medications by forty 
percent (adjusted odds ratio = 1.4, p=.002)). See Jan Blustein, ``Drug 
Coverage and Drug Purchases by Medicare Beneficiaries with 
Hypertension,'' 19 Health Affairs 219 (2000).
    Another study showed that Medicare beneficiaries without drug 
coverage used about 8 fewer prescriptions (or 33% fewer medications) 
than those with drug coverage. See John A. Poisal and Lauren Murray, 
``Growing Differences Between Medicare Beneficiaries With and Without 
Drug Coverage,'' 20 Health Affairs 74 (2001).
    A third study found that limiting access to medications among low-
income, elderly Medicaid patients increased rates of admission to 
nursing homes. The study analyzed Medicaid recipients aged 60 years or 
older who took three or more medications per month and at least one 
maintenance drug for chronic diseases. Limiting affordable access to 
prescription drugs for this population (through a reimbursement cap on 
medications) increased rates of admission to nursing homes. The authors 
concluded that for the sicker patients in the study, the limitation on 
medication more than ``double[d] the rate'' of admission in comparison 
to a group whose medications were not limited. See Stephen B. Soumerai 
et al., ``Effects of Medicaid Drug-Payment Limits on Admission to 
Hospitals and Nursing Homes,'' 325 New Engl. J. of Med. 1072, 1074 
(1991).
    Finally, a study in the December 2001 issue of the Journal of 
General Internal Medicine found that certain characteristics, such as 
minority ethnicity, and low income (defined as income less than 
$10,000) significantly increase the risk that an individual will 
restrict medications by, for example, skipping doses or avoiding taking 
medication altogether. For example, the odds of medication restriction 
in minority subjects were 10.3 times higher in those with no drug 
coverage than in those with full drug coverage. Similarly, the odds of 
medication restriction were 14.8 percent higher in low-income subjects 
with no drug coverage than in those with full drug coverage. The author 
of the study stated: ``Policies designed to limit medication use may 
have serious consequences for patients' health, resulting in increased 
emergency department visits, nursing home admissions, use of emergency 
mental health services and more.'' See Michael A. Steinman, et al., 
``Self-restriction of Medications Due to Cost in Seniors without 
Prescription Coverage,'' 16 Journal of General Internal Medicine 793799 
(Dec. 2001).
    Patients who skip doses or who do not take their full dose (by, for 
example, cutting pills in half) are not making the most effective use 
of their Medicare-covered services, in part, because they are not 
following their doctors' orders. Since a physician visit is a Medicare-
covered service, patients who do not follow the drug regimen their 
doctor prescribes are not getting the full benefit of the Medicare-
reimbursed physician visit.
    While providing information and educational assistance to 
beneficiaries which allows them to access lower cost prescription drugs 
is not the same as providing drug coverage, we believe the evidence 
supports our conclusion that making prescription drugs available and 
more affordable to beneficiaries will make other Medicare-covered 
services, such as physician visits, more effective.
    Comment: At least two commenters stated that section 1140 of the 
Act does not authorize the establishment of a prescription drug card 
program, and in fact, use of the Medicare name in connection with 
private prescription drug card programs will result in the kind of 
false impression or confusion that section 1140 is meant to prevent.
    Response: Section 1140 may not by itself authorize Medicare to 
endorse discount drug cards meeting certain criteria; however, we 
believe that section 1140 indicates that the Congress recognizes that 
in some cases endorsements by the Medicare program may be warranted. 
The fact that section 1140(a) prohibits using the word Medicare ``in a 
manner which such person knows or should know would convey, or in a 
manner which reasonably could be interpreted or construed as conveying, 
the false impression that such item is approved, endorsed, or 
authorized by the . . . Health Care Financing Administration,

[[Page 56623]]

or the Department of Health and Human Services,'' provides evidence 
that the Congress understood that in some cases use of the word 
Medicare by private parties and organizations will be approved by the 
Secretary. Therefore, we cited section 1140 as further support for the 
initiative. Thus, while section 1140 would not necessarily 
independently authorize the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative, in conjunction with OBRA section 4359 and 
sections 1871 and 1102 of the Act, we believe it provides further 
support to the initiative.
    We do not believe that this initiative will lead to false 
impressions prohibited by section 1140, since only programs that meet 
the criteria of this final rule, and that enter into an agreement with 
us, will be endorsed and approved. Thus, there will not be confusion or 
false impressions regarding Medicare endorsement, since such programs 
will, in fact, be endorsed. In fact, in order to ensure that the 
Medicare name is only used in appropriate circumstances, this final 
rule creates specific criteria for use of the Medicare name.
    Comment: Some commenters stated that Congressional bills proposing 
discount card programs similar to the one in the proposed rule show 
that we lack statutory authority to implement the discount card. In 
addition, Congressional proposals or enactments to establish an 
outpatient drug benefit for seniors show that we are not authorized to 
implement the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative.
    Response: We do not think that current legislative proposals have 
much bearing on the Secretary's authority to implement the proposed 
initiative. Because bills are introduced by individual members, and not 
passed by the Congress as a whole, they are not viewed as reflecting 
the collective intent of Congress. Proposed legislation is viewed as a 
``particularly dangerous ground'' upon which to base an interpretation 
of prior statutes. (Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 
633, 650 (1990) (discussing interpretive value of failed legislative 
proposals)). Even if there were some way to divine a clear statement of 
congressional intent from proposed bills in Congress, later 
congressional interpretations of statutes passed by earlier Congresses 
``[are] of little assistance'' when construing the statute's scope. 
(Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 
511 U.S. 164, 185 (1994)) (citation omitted).
    In addition, we do not believe that previous proposals or 
enactments on an outpatient prescription drug benefit for Medicare 
beneficiaries would be relevant to this initiative. This initiative is 
not a drug benefit, since it does not require the expenditure of 
benefit dollars. The Administration continues to support modernizing 
the Medicare program by adding a drug benefit. However, in the interim, 
Medicare beneficiaries without drug coverage are paying some of the 
highest prices for drugs. This initiative will provide Medicare 
beneficiaries with the educational tools and assistance to obtain some 
relief on drug prices, until a Medicare drug benefit can be enacted.

C. July 2001 Program Superceded

    In July 2001, the President announced the Medicare-Endorsed 
Prescription Drug Discount Card program. A Federal district court 
preliminarily enjoined implementation of that program. National Ass'n 
of Chain Drug Stores v. Thompson, No. 011554 (D.D.C. 2001). In 
accordance with the judge's order, we ceased all work on implementing 
that program and did not make any Medicare endorsements on the basis of 
applications received in response to that program.
    On November 5, 2001, the district court in that case granted a 
Motion for Stay, staying the case while we submitted our new initiative 
for comment by publishing a proposed rule in the Federal Register on 
March 6, 2002 (67 FR 10262). This final rule describes a program that 
differs in important respects from the Administration's initial 
proposal from 2001, for example, by endorsing only those discount 
programs that demonstrate an ability to obtain manufacturer rebates or 
discounts and that can share, either directly or indirectly, a 
substantial portion of rebates with beneficiaries. Other changes 
include: additional reporting; endorsing only those cards where 
discounted prices remain stable for periods of 60 days; a more 
stringent access standard for rural and urban pharmacies; endorsing 
card programs with 3 years of experience; and allowing card sponsors to 
have two endorsed programs. If the plaintiffs in the previously 
mentioned district court case believe that this final rule is 
substantially similar to the President's initial program from 2001, 
they may seek further judicial review that could delay implementation 
of this final rule.

D. Objectives and Major Aspects of the Initiative

1. Objectives
    The objectives of this initiative are to:
    [sbull] Educate Medicare beneficiaries about private market methods 
available for securing discounts from manufacturers and other 
competitive sources on the purchase of prescription drugs.
    [sbull] Provide a mechanism for Medicare beneficiaries to gain 
access to the effective tools widely used by pharmacy benefit managers 
(PBMs) or insurers and pharmacies to obtain higher quality 
pharmaceutical care, for example, monitoring for drug interactions and 
allergies.
    [sbull] Publicize information (including drug-specific prices, 
formularies, and pharmacy networks) to facilitate easy consumer 
comparisons that will allow Medicare beneficiaries to choose the best 
card for them.
    [sbull] Promote participation of Medicare beneficiaries in 
effective prescription drug assistance programs, increasing the 
leverage and ability of these programs to negotiate manufacturer 
rebates or discounts for Medicare beneficiaries and to provide other 
valuable pharmacy services.
    [sbull] Improve beneficiaries' overall experience with Medicare by 
enhancing the quality and use of their Medicare-covered services 
through improved access to prescription drugs.
    [sbull] Endorse qualified private sector prescription drug discount 
card programs (either for profit or nonprofit), based on structure and 
experience; customer service; pharmacy network adequacy; ability to 
offer brand name and/or generic manufacturer rebates or discounts 
(passing through a substantial portion to beneficiaries, either 
directly or indirectly through pharmacies), and available pharmacy 
discounts; and permit endorsed entities to market their programs as 
Medicare-endorsed.
    [sbull] Assist Medicare beneficiaries in obtaining a low (in Year 
One, $25 maximum) or no-cost opportunity to enroll in a Medicare-
endorsed prescription drug discount card program.
    We solicited comments on all aspects of the proposed rule, and many 
commenters responded by discussing the basic issue of whether or not to 
implement the initiative.
    Comment: Some commenters expressed support for the initiative as an 
interim approach prior to enactment of a Medicare prescription drug 
benefit. Commenters indicated that the initiative would lay the 
groundwork for a Medicare sponsored drug benefit by

[[Page 56624]]

creating the necessary infrastructure, and that it would give seniors 
access to coordinated pharmaceutical care and utilization review. One 
commenter noted that the market-based, competitive initiative would 
teach beneficiaries and government officials valuable lessons about 
pharmaceutical benefit management--a building block in virtually every 
drug benefit proposal before the Congress.
    However, other commenters took issue with the initiative in general 
and other basic structural aspects of the initiative. One indicated 
that any long-term solution to high prescription drug prices should 
address the costs pharmacies pay manufacturers for drug products. 
Others indicated that the initiative should be run by the Federal 
government, and not private entities. Other commenters criticized the 
use of pharmaceutical benefit management organizations and their 
involvement in providing prescription drugs. Another commenter 
indicated that a better approach for an interim program would be a 
benefit that offers substantial coverage, not modest discounts, to 
those most in need.
    Response: As we indicate throughout this preamble, the President 
strongly supports the enactment of a Medicare prescription drug 
benefit. We agree with the commenters that the educational initiative 
of the Medicare endorsement of prescription drug discount cards is 
especially helpful in the absence of a Medicare drug benefit. We also 
agree that the initiative can help lay the groundwork for a 
prescription drug benefit by improving beneficiary knowledge related to 
purchasing prescription drugs and other prescription drug services, by 
increasing our experience with administration of prescription drug-
related programs, and by allowing the private sector to gain experience 
in working with the Medicare program and its beneficiaries. We also 
think the use of a competitive market-based approach that requires 
endorsed card sponsors to obtain manufacturer rebates or discounts and 
pass those through to beneficiaries, combined with the publishing of 
drug prices, will help to lower the drug prices beneficiaries face. We 
think that the endorsement qualification for manufacturer rebates or 
discounts can help to reduce the pressure on retail pharmacies to be 
the sole source of prescription drug discounts. We also agree that 
while the nature and degree varies, the major prescription drug benefit 
proposals being considered by the Congress place reliance on use of the 
private sector in administering a Medicare prescription drug benefit.
    Since the subject of this regulation is not a Medicare prescription 
drug benefit, we are not responding to the specific comments about the 
nature of a Medicare prescription drug benefit.
2. Summary of Major Policies in the Final Rule in Response to Public 
Comments
    We made a number of changes to this final rule in response to 
public comments, and we provide a general overview here of the major 
aspects of endorsement we have modified and those we have retained. Our 
specific responses to comments are discussed in greater detail later in 
the preamble.
    We are modifying the rebate requirements of the endorsement to 
assure that the rebates negotiated with manufacturers will be for brand 
name and/or generic drugs. As discussed in greater detail later in this 
preamble, we are also planning to propose in a forthcoming proposed 
rule recognizing, through our outreach and education efforts, those 
cards with the highest rebate levels passed on to beneficiaries.
    We will retain the endorsement's enrollment exclusivity provision 
as a criterion for endorsement, as we believe it is critical to the 
ability of card programs to successfully negotiate meaningful 
manufacturer rebates, and therefore provide meaningful assistance on 
drug prices to beneficiaries.
    We made changes to endorsement provisions of the drug categories 
list based on comments and analysis of the most recent data available 
to us on commonly used drugs.
    We will retain our proposal to endorse cards that charge a one-time 
enrollment fee of up to $25.
    We modified the endorsement's access standard to allow for greater 
access in both urban and non-urban areas, in order to assure 
beneficiary access to retail pharmacies, particularly community-based 
pharmacies in rural and urban areas.
    We will allow endorsed card sponsors to offer home delivery as an 
option, but card sponsors must meet the retail pharmacy access 
requirements for endorsement.
    As a condition of endorsement, card sponsors will agree to report 
on the participation of independent pharmacies.
    We will continue to require, as a condition of endorsement, that 
card sponsors demonstrate organizational capacity and experience, in 
order to ensure that we endorse only stable and reputable entities, 
with a capacity to enroll a large number of beneficiaries. However, we 
have modified our endorsement criteria to better strike a balance 
between this goal and our interest in promoting the inclusion of 
innovative programs. The experience criterion has been changed to 3 
years. The covered lives requirement has been changed to 1 million 
lives for either a national or regional program. The covered lives 
criterion has been de-linked from the 3-year experience requirement, 
providing more flexibility for entities to combine their capabilities 
and qualify for endorsement if the capacity for enrollment is provided 
through a separate organization than the one meeting the experience 
criterion.
    We did not modify our endorsement criteria for demonstrating 
financial stability because we believe they are understandable, 
demonstrable and appropriate, given the objectives of this initiative.
    We will retain as a condition of endorsement participation by a 
card program sponsor in an administrative consortium, and we will 
require endorsed card sponsors to operate a customer complaints 
process. In addition, we will recommend that the consortium of endorsed 
cards consider establishing an advisory board to provide it with 
guidance.
    We will retain the requirement that endorsed cards publish 
comparative price information. However, we have modified the price 
comparison methodology so that prices are expressed in dollars, and the 
comparison will include information about generic substitutes.
    Additionally, as discussed later in this preamble, as a condition 
of endorsement related to formularies and the publishing of prices, 
card sponsors must agree that a specific drug is not dropped from the 
formulary, nor its price increased for periods of at least 60 days 
starting on the first day of the program's operation, with 30 days 
notice to their network pharmacies, the consortium and us before making 
any changes.
    We will allow endorsed card sponsors to offer up to two programs 
with different designs, as long as each independently meet the 
conditions for endorsement.
    Endorsed cards will be required to report periodically certain 
information, in order to ensure that sponsors are accountable to us.
    As a condition for endorsement, card sponsors will be required to 
have call centers, open during usual business hours and operating in 
accordance with standard business practices, that are able to handle 
pharmacy questions.
    We specify that if a card sponsor's Medicare endorsement is 
terminated, the card sponsor will be required to

[[Page 56625]]

notify network pharmacies (in addition to beneficiaries), and contracts 
between the sponsor and the network for the purpose of this initiative 
will no longer be binding after a beneficiary notification period of 90 
days ends.
    We will retain the opportunity for both regional and national 
programs to qualify for endorsement. We also clarify that national or 
regional programs may include Puerto Rico, Guam and the U.S. 
territories.
    We have revised the timeline for applicants to allow a 6-month 
start-up from the time that endorsements are announced.

E. Conditions of Endorsement and the Endorsement Initiative

1. General
    We will endorse prescription drug card programs that meet defined 
requirements, and will permit successful applicants to market and label 
their programs as ``Medicare-endorsed.''
    To be endorsed, applicants that meet the criteria for endorsement 
will sign an agreement with us certifying that they will comply with 
all requirements in the agreement, including funding and operating an 
administrative consortium of endorsed card sponsors to perform certain 
administrative functions, implementing the program as described in the 
application, and operating consistently within the endorsement 
requirements.
    All applicants offering a prescription drug card program that apply 
for Medicare endorsement and meet or exceed these requirements for 
endorsement and sign the agreement will be Medicare-endorsed.
    The conditions for endorsement discussed in this section reflect 
our interpretations of the standards included in this final regulation.
    The Medicare-Endorsed Prescription Drug Card Assistance Initiative 
will publicize information that will allow Medicare beneficiaries to 
compare endorsed prescription drug card programs, assist Medicare 
beneficiaries in understanding and accessing private market methods for 
securing discounts and other valuable services associated with the use 
of prescription drugs, and raise beneficiary awareness of certain 
qualified prescription drug card programs available in the commercial 
market.
    Aspects of the initiative will include the ability of each 
Medicare-endorsed drug card program sponsor to:
    [sbull] Obtain manufacturer rebates or discounts on brand name and/
or generic drugs, and provide a substantial portion of the manufacturer 
rebates or discounts to beneficiaries, either directly or indirectly 
through pharmacies, in order to reduce the price beneficiaries pay for 
prescription drugs or enhance the pharmacy services they receive.
    [sbull] Enroll all Medicare beneficiaries who wish to participate.
    [sbull] Provide stable access to discounts on at least one brand 
name or generic prescription drug in each of the therapeutic drug 
classes, groups, and sub-groups representing prescription drugs 
commonly needed by Medicare beneficiaries.
    [sbull] Offer a broad national or regional contracted retail 
pharmacy network, providing convenient retail access.
    [sbull] Charge no fees to us, or any other Federal agency.
    [sbull] Charge a small one-time enrollment fee (of no more than $25 
per beneficiary in Year One) or no fee.
    [sbull] Provide customer service to beneficiaries, including 
enrollment assistance, toll-free telephone customer service help, and 
education about the card program services.
    [sbull] Provide access to other prescription drug services offered 
by the program for no additional fee, including drug-drug interaction 
monitoring and allergy alerts through detection systems linking 
pharmacies in the entire network.
    [sbull] Ensure that beneficiaries enroll in only one Medicare-
endorsed prescription drug discount card program at a time, to 
facilitate obtaining rebates or discounts from drug manufacturers on 
their behalf.
    [sbull] Protect the privacy of beneficiaries and beneficiary-
specific health information.
    [sbull] Agree to jointly administer, and abide by the guidelines 
of, a private administrative consortium of endorsed card sponsors 
funded by the sponsors, to perform administrative functions, consisting 
of publishing comparable information on drug prices, operating an 
enrollment exclusivity system, and, by the second year of the 
initiative, assuming review of information and outreach materials. We 
will recommend that the sponsors have the consortium consider 
establishing an advisory board to provide it with guidance.
    [sbull] Limit enrollment in its Medicare-endorsed discount card 
program(s) to Medicare beneficiaries only.
    We believe that this initiative will offer assistance to 
beneficiaries in accessing low-cost prescription drugs, as it will 
improve upon the current drug card market. The market-based design of 
this initiative, and its ability to mimic many of the important design 
features of an insured product, will facilitate Medicare-endorsed drug 
discount card programs having features that current market products 
generally do not have. This initiative will improve upon the current 
market in several important respects by:
    [sbull] Educating about the availability of discount card programs 
offered by stable and reputable firms with sufficient capacity to 
handle the Medicare population likely to enroll in a prescription 
discount card program.
    [sbull] Securing manufacturer rebates or discounts on brand name 
and/or generic drugs, and passing them through pharmacies or directly 
to beneficiaries, resulting in deeper discounts.
    [sbull] Providing price comparison information and educating 
Medicare beneficiaries about formularies, generic substitution, drug 
utilization review, and other ways of lowering prices and improving the 
quality of pharmacy services.
    [sbull] Ensuring that Medicare beneficiaries receive the lower of 
the negotiated drug discount card price or the pharmacy's lowest price 
to other cash paying customers.
    [sbull] Providing the opportunity for Medicare beneficiaries who 
participate in a card program to enroll in a low-or no-fee Medicare-
endorsed prescription drug card program.
    [sbull] Protecting the privacy of beneficiaries and their personal 
health information.
    [sbull] Assuring that discount card programs' information and 
outreach materials meet guidelines for appropriateness, completeness 
and understandability.
2. Beneficiary Eligibility and Enrollment
    As a condition of endorsement, card sponsors must agree to limit 
enrollment in their Medicare-endorsed prescription drug card programs 
to Medicare beneficiaries only. Card sponsors could request the 
beneficiary's Medicare number or use another means to assess Medicare 
eligibility, with data elements necessary to maintain the enrollment 
exclusivity system; however, we will not provide data or assistance to 
verify Medicare eligibility.
    Drug discount card program sponsors in this initiative will also be 
able to accept groups of enrollees from insurance groups, such as 
Medicare+Choice (M+C) plan members, Medigap enrollees, and 
beneficiaries with employer-sponsored retiree health insurance. Members 
who do not consent to group enrollment will be allowed to enroll 
individually in the endorsed program of their choice.
    We will allow card sponsors to have M+C organizations subsidize the 
enrollment fee and to offer the drug

[[Page 56626]]

discount card program as part of their Adjusted Community Rate filing, 
however they will not be allowed to require enrollment in a drug 
discount card program as a condition of enrollment in any of their M+C 
plans.
    Card sponsors will be required to ensure enrollment exclusivity, 
that is, that beneficiaries enroll in only one Medicare-endorsed card 
program at a time. Beneficiaries will always have the option to 
purchase drugs outside of a Medicare-endorsed card program and pay the 
retail price or a discount price secured through existing non-endorsed 
cards or some other means, as they do now.
    Comment: A number of commenters expressed support for the proposed 
requirement that enrollment in the initiative be limited to Medicare 
beneficiaries only. Two commenters stated that card sponsors should not 
be allowed to exclude certain beneficiaries or classes of 
beneficiaries. If a card sponsor is endorsed by Medicare, its program 
should be available to any and all Medicare beneficiaries. The 
commenters asked that we confirm this interpretation of the provision.
    Response: That is correct. Each card sponsor endorsed by Medicare 
to offer a discount card program must make its program available to all 
Medicare beneficiaries who wish to enroll.
    Comment: One commenter recommended that we consider for endorsement 
card sponsor programs that target Medicare beneficiaries without drug 
coverage rather than all Medicare beneficiaries. In addition, the 
commenter urged us to allow endorsement of card programs that target 
beneficiaries with incomes below a specified level, provided the cards 
meet solvency and other requirements.
    Response: Clearly, beneficiaries without drug coverage will realize 
the greatest benefit from this initiative. However, we believe that all 
beneficiaries should be informed of the initiative, and have the 
opportunity to participate, if they believe the initiative can be of 
benefit to them. We do not intend to exclude any Medicare beneficiary 
from participating in this initiative. The commenter's recommendation 
that we endorse card sponsor programs that target beneficiaries with 
incomes below a specified level is addressed elsewhere in this 
preamble.
    Comment: The proposed rule declared that we would not provide data 
or assistance to verify Medicare eligibility. A number of commenters 
expressed concern about the ability of card sponsors to ensure that 
only Medicare beneficiaries are enrolled in endorsed drug discount card 
programs, as required, without the benefit of adequate eligibility 
data.
    One commenter asserted that the need to verify Medicare eligibility 
without assistance from us would lead to unnecessary enrollment costs. 
Commenters strongly encouraged us to make Medicare electronic 
eligibility files available to endorsed card sponsors. Another 
commenter stated that the proposed policy may result in the enrollment 
of some otherwise ineligible individuals, either through fraudulent 
means or administrative errors.
    Response: We do not intend to provide access to electronic 
eligibility files to card sponsors for purposes of verifying Medicare 
eligibility. One of the administrative consortium's primary 
responsibilities is to operate an enrollment exclusivity system to 
ensure that Medicare beneficiaries are enrolled in only one endorsed 
discount card program at a time. We believe that it is appropriate for 
the administrative consortium, on behalf of the endorsed card sponsors, 
to determine the best method to validate Medicare eligibility in its 
role in operating and maintaining this system. Card sponsors could, for 
example, request the beneficiary's Medicare number to confirm Medicare 
eligibility. Such alternative approaches should not result in added 
expense and, when employed uniformly and vigilantly, the risk of 
enrolling ineligible individuals, particularly through administrative 
error, should be minimal.
    We do not believe we should share eligibility information because 
this is an endorsement initiative; it is not a benefit administered by 
us. The administrative consortium is not our contractor, but an 
external, independent entity. We have a duty to protect beneficiary-
specific information housed in this eligibility file, and we do not 
believe it is either appropriate or essential that we provide our 
eligibility files to the consortium for purposes of determining 
Medicare eligibility as part of this initiative.
3. Card Sponsor Organization, Structure, and Experience
    To be eligible for endorsement, applicants must demonstrate 3 years 
of private sector experience in the United States in pharmacy benefit 
management, the administration of drug discount cards, or low income 
drug assistance programs that provide prescription drugs at low or no 
cost. We require 3 years experience because the Medicare name is so 
well known and so important to beneficiaries that we do not want the 
name to be associated with any but the most stable and reputable 
organizations. The sponsors whose drug discount cards will be endorsed 
by Medicare should be those that have the experience and capacity to 
offer Medicare beneficiaries discounts and good customer service and 
will be likely to continue in the marketplace. The drug card industry 
is relatively new and has seen organizations entering and leaving the 
market in short periods of time. The 3 years of experience provides a 
sufficient amount of time to adequately demonstrate a reasonable track 
record of good performance and stability, taking into account the 
history of the pharmaceutical benefit management and discount card 
industries. Due to the evidence of market turnover in the discount card 
industry, we think that requiring anything less than 3 years experience 
will create the risk of having the Medicare name associated with other 
than stable and reputable organizations.
    In addition to the 3 years experience criterion, drug card program 
sponsors must, at the time of application for endorsement, operate a 
regional or national drug benefit, discount drug card, or low income 
drug assistance program that provides prescription drugs at low or no 
cost that serves at least 1 million covered lives. We interpret covered 
lives to mean discrete individuals who have signed enrollment 
agreements or paid an enrollment fee or insurance premiums, or some 
comparable documentation, which we will use for verification purposes. 
The organization with the 3 years experience does not have to be the 
same organization that serves the requisite covered lives. The covered 
lives criterion is not linked with the 3-year experience requirement, 
providing flexibility for entities to combine their capabilities, 
through a contract or other legal arrangement. An organization that has 
the requisite experience, but may not have the enrollment capacity, for 
example, may acquire this capacity under a contract for the purpose of 
administering its program.
    In order to qualify for Medicare endorsement, national program 
sponsors will have to operate in 50 States and Washington, DC. In order 
to balance the opportunity for smaller programs to qualify with the 
interest in assuring beneficiary access to network pharmacies when 
beneficiaries are traveling across a State line, regional program 
sponsors must include at least 2 contiguous States, with the exception 
of Hawaii and Alaska, because they do not share State borders; these 
States could partner with 2 or more contiguous States to form a 
regional program. Card programs that meet the national or

[[Page 56627]]

regional definition may also include the Commonwealth of Puerto Rico, 
Guam and the U.S. territories among the areas they serve as part of 
their national or regional program.
    As discussed in the impact analysis, we estimate that during the 
first year of operation, over 9 million beneficiaries may wish to 
enroll in a Medicare-endorsed discount card program. The capacity of a 
Medicare-endorsed discount card program sponsor to accept from 1 to 10 
percent of this volume is critical to implementing the Medicare-
Endorsed Prescription Drug Card Assistance Initiative. Endorsed card 
program sponsors will need to be capable of handling a large influx of 
enrollees over a relatively short period of time, to negotiate rebates 
or discounts with pharmaceutical manufacturers and discounts with 
retail pharmacies, and to handle the customer service needs of the 
enrollees. Current levels of covered lives provide evidence of 
organizational capacity to handle a large enrollment and provide 
customer service. As a percentage increase in enrollment for 
organizations with as many as 1 million covered lives, a potential 
enrollment of 100,000 to several hundred thousand individuals 
represents a sizable expansion over current operations.
    In examining our data on the number of covered lives served by a 
variety of organizations, we found that a standard of 1 million lives, 
whether for a regional or national program, strikes a balance between 
ensuring a competitive marketplace with a number of different options 
for Medicare beneficiaries and ensuring that organizations will have 
the capacity to handle a large increase in covered lives. We think the 
1 million lives criterion is the right threshold, but as the initiative 
evolves over the next year or so, we will continue to evaluate it and 
the 3 years experience criterion to see if they are barriers to entry 
for well qualified sponsors, affecting competition, and if so, we will 
consider revising them.
    Entities will be able to combine their capabilities to meet the 
various requirements for Medicare endorsement. In particular, the 3-
year experience requirement is not linked to the covered lives 
criterion or to capabilities such as operating a customer service 1800 
telephone line, providing flexibility for entities such as a chain 
pharmacy (with the requisite 3 years experience in operating a 
prescription discount card program and extensive pharmacy network that 
meets our access definition) to combine its capabilities, through a 
contract or other legal arrangement, and qualify for endorsement.
    The Medicare endorsement is intended for reputable organizations 
only that are prepared to administer a discount card program in 
accordance with all of the requirements of this initiative. If multiple 
organizations combine to meet the following requirements: years of 
experience and/or covered lives; establishing a pharmacy network; 
negotiating manufacturer discounts or rebates; conducting enrollment; 
and operating the customer service call center; we require evidence of 
legal arrangements between or among the entities. When multiple 
entities combine to meet these requirements, we require either 
contracts or signed letters of agreement to be submitted with the 
application. For the pharmacy network, we require one copy of each 
unique contract or signed letter of agreement used across the entire 
network. We require evidence in these documents that manufacturer 
rebates or discounts shared with the pharmacies will be passed through 
to the beneficiaries in lower prices or enhanced pharmacy services.
    At least the following additional requirements must be satisfied in 
each of the contracts or signed letters of agreement:
    [sbull] Clearly identifies the parties to the contract.
    [sbull] Describes the functions to be performed by the 
subcontractor.
    [sbull] Contains language that indicates that the subcontractor has 
agreed to participate in the discount card program.
    [sbull] Describes the payment the subcontractor will receive for 
performance under the contract, if applicable.
    [sbull] Be for a term of at least 15 months.
    [sbull] Be signed by a representative of each party with legal 
authority to bind the entity.
    [sbull] Contain language obligating the subcontractor to abide by 
State and Federal privacy requirements that apply to the card sponsor 
or other subcontractors, including the privacy and security provisions 
specified in this regulation.
    [sbull] Contain provisions in the pharmacy contracts that the 
contracts will no longer be binding after the program's obligation to 
operate under the endorsement ends.
    Where legal documentation is provided but does not constitute the 
actual contract for the purpose of operating the Medicare-endorsed 
prescription drug card program, we will allow the contract to be 
submitted following receipt of the Medicare endorsement, but we will 
not allow outreach and enrollment activities to begin until we 
determine that our requirements for legal agreements are satisfied.
    An organization or entity will be allowed to have operational 
responsibilities in more than one drug discount card program. However, 
an organization or entity may be the primary sponsoring organization or 
entity in only two card programs at any time.
    Additional requirements to assure that the Medicare endorsement 
will be provided to reliable and stable organizations include a 
demonstration of financial integrity and business ethics. We interpret 
this to mean that (1) the applicant; (2) any subcontractor or 
organization under other legal arrangement who (a) develops the 
pharmacy network, (b) handles the negotiation of rebates or discounts 
on behalf of the card sponsor, or (c) operates enrollment; and (3) the 
entity or entities that meet(s) the 3 years of experience and covered 
lives requirements meet(s) the following requirements:
    [sbull] Provide a summary of the history, structure and ownership, 
including a chart showing the structure of ownership, subsidiaries and 
business affiliations.
    [sbull] Provide the most recent audited financial statements 
(balance sheet, income statement, statement of cash flow along with 
auditor's opinions and related footnotes). Each of these entities must 
demonstrate that total assets are greater than total unsubordinated 
liabilities and that sufficient cash flow exists to meet obligations as 
they come due.
    [sbull] Report financial ratings, if any, for the past 3 years.
    [sbull] List past or pending investigations and legal actions 
brought against any of these entities (and parent firms if applicable) 
by any financial institution, government agency (local, State, or 
Federal) or private organization over the past 3 years on matters 
relating to health care and prescription drug services and/or 
allegations of fraud, misconduct, or malfeasance.
    Each applicant will be required to provide a brief explanation of 
each action, including the following:
    (a) Circumstances; (b) status (pending or closed); and (c) details 
as to resolution and any monetary damages, if closed. Additionally, we 
will conduct an independent investigation to include at least a review 
of Federal databases for issues related to any of these entities.
    As a condition of endorsement, card sponsors must also agree to 
enrollment exclusivity, because the low-or no-fee card program to be 
offered under the

[[Page 56628]]

initiative could lead beneficiaries to enroll in more than one 
Medicare-endorsed prescription drug card program. Multiple enrollments 
will dilute the negotiating leverage of each organization offering an 
endorsed discount card, thereby lowering the discounts from drug 
manufacturers available to beneficiaries. In order to maximize these 
discounts, each beneficiary who enrolls in an endorsed drug discount 
card program will be required to enroll exclusively in one Medicare-
endorsed card program, as is generally the case with programs that 
provide both discounts on, and insurance coverage of, prescription drug 
costs. A beneficiary enrolling for the first time in a Medicare-
endorsed prescription drug card program could enroll at any time of the 
year. Beneficiaries will be allowed to disenroll at any time and could 
elect another Medicare-endorsed prescription drug card program. 
However, the new enrollment will not become effective until the first 
day of the following January or July following the date of 
disenrollment, whichever came first, unless the program in which the 
beneficiary was enrolled is no longer operating under Medicare's 
endorsement, in which case the beneficiary could join another card 
program, to become effective immediately.
a. Years of Experience and Covered Lives
    We received a variety of comments concerning the years of 
experience and covered lives requirements for a Medicare endorsement.
    Comment: Among other provisions, the proposed rule proposed as a 
qualification criterion, that card sponsors have 5 years experience and 
either serve 2 million covered lives, if seeking endorsement for a 
national program, or 1 million covered lives for a regional program. 
These linked criteria were developed because years of experience and 
covered lives are among the criteria used by private sector companies 
in selecting a third party administrator to manage their pharmacy 
benefits. The criteria were designed to assure that only stable 
organizations that also had the capacity to handle large enrollment and 
provide customer service would be endorsed.
    While some commenters recognized the need to verify past 
experience, a number of commenters argued that the 5 years experience 
requirement is overly restrictive. Furthermore, according to the 
commenters, both the 5-year experience and covered lives requirements 
would exclude companies (including many chain pharmacy discount 
programs) that provide some of the best drug prices. Several commenters 
expressed concern that the 5 years experience criterion limits 
participation to large entities, and two commenters indicated that this 
requirement would foreclose new market entrants.
    Response: We agree with the comments regarding the 5 years 
experience requirement, and have modified this particular criterion to 
permit card sponsors with 3 years experience to qualify for 
endorsement. We believe that this modification effectively addresses 
commenter concerns yet continues to provide a sufficient amount of time 
to enable card sponsors to adequately demonstrate a reasonable track 
record of good performance and stability.
    Comment: A number of commenters questioned the appropriateness of 
the covered lives criterion. Two commenters pointed out that it would 
be difficult for all but the largest, most established PBMs or discount 
card sponsors to meet the covered lives requirement as specified in the 
proposed rule. One commenter recommended that we substitute 
``capability for processing ``x'' transactions'' for ``covered lives'' 
as a more relevant and appropriate qualification criterion. The basis 
for this recommendation is the commenter's belief that the number of 
processed transactions as a benchmark measures the capabilities of a 
pharmacy program administrator as well as the size, reach and scope of 
a program. According to the commenter, the number of covered lives 
indicates only the number of enrollees, whereas the number of processed 
transactions measures how many times those enrollees use their card. 
The commenter argues that card sponsors must have the demonstrated 
capability to process a large volume of transactions efficiently and 
accurately.
    Response: We believe the covered lives criterion is important, 
because it signals a card sponsor's capacity to execute large numbers 
of enrollments or provide customer service to a large population. As 
discussed elsewhere in this preamble, we have lowered the threshold for 
covered lives to 1 million covered lives, whether a program is regional 
or national. We believe this change provides a balance between the need 
to demonstrate capacity for large enrollment and customer service for a 
large population, and flexibility to enable recent and innovative 
programs that otherwise meet the provisions of this initiative to 
qualify for endorsement. We do not believe that the ability to handle a 
large number of transactions represents a direct measure of a card 
program sponsor's capacity to handle the high volume of enrollment that 
we expect from this initiative. However, we will continue to evaluate 
this as a proxy measure for enrollment capacity.
    We have also de-linked the covered lives criterion from the 
experience requirement, which would allow an organization that has the 
requisite experience, but may not have the enrollment or customer 
service capacities, to acquire these capacities under a contract for 
the purpose of administering its program.
    We think the 1 million lives criterion is the right threshold, but 
as the initiative evolves over the next year or so, we will continue to 
evaluate it and the 3 years experience criterion to see if they are 
barriers to entry for well qualified sponsors, affecting competition, 
and if so, we will consider revising them.
    Comment: One commenter asserted that, if discounts are a function 
of volume, we should design the Medicare-Endorsed Prescription Drug 
Card Assistance Initiative on a nationwide basis, rather than a 
regional basis.
    Response: Manufacturers will be interested in negotiating favorable 
terms on rebates with regional or national programs that are designed 
in a manner that influences market share. Volume is a consideration, 
but stable and exclusive enrollment are key to influencing market 
share. The success of card program features designed to steer usage, 
such as structure of the formulary, size of the pharmacy network and 
tools to educate and influence the behavior of beneficiaries and 
physicians, are dependent on beneficiaries staying in the program and 
being influenced by the program's incentives.
    We believe that regional programs, as we have described for the 
purpose of this initiative, can be competitive with national programs 
and therefore successful at garnering manufacturer rebates, if regional 
programs are designed to be attractive enough to beneficiaries to drive 
their enrollment rates. These sponsors will potentially design programs 
keeping in mind the unique characteristics of the beneficiaries, 
physicians and pharmacies residing in that region. Regional programs 
have the advantage over national programs of being closer to the 
attitudes and behaviors of these stakeholders and can design programs 
that specifically address dimensions of decision making unique to the 
area.

[[Page 56629]]

    Comment: A number of commenters encouraged us to include existing 
prescription drug card programs that are presently meeting certain 
criteria such as the following: (1) A nationwide network; (2) 
experience administering operational programs that process millions of 
transactions; (3) inclusion of a large number of drugs in multiple 
therapeutic classes covering conditions common to seniors; (4) 
technological infrastructure (including claims processing) that is in 
place and currently integrated with retail pharmacy; and (5) unlimited 
manufacturer and prescription drug product participation (no 
formulary).
    Response: As part of the application process, we will seek some of 
the following information as evidence of a sponsor's experience: (1) 
Experience in pharmacy benefit management, which includes conducting 
activities such as enrollment, adjudicating claims at point of service, 
claims processing, providing discounts, and working with a contracted 
network of pharmacies and with drug manufacturers; (2) experience 
providing a prescription drug discount program, including conducting 
activities such as enrollment, providing discounts, and either owning 
or working with a contracted network of pharmacies; or (3) experience 
providing low-income drug assistance programs that provide drugs at low 
or no cost, including eligibility determination, enrollment, and 
arranging for access to drugs at low or no cost. In addition, as stated 
elsewhere in the preamble, we have de-linked the covered lives 
criterion from the experience requirement, which will allow an 
organization that has the requisite experience, but may not have the 
enrollment or customer service capacities, to acquire these capacities 
under a contract for the purpose of administering its program.
    Comment: Two commenters recommended that we develop criteria that 
focus on value and cost savings for beneficiaries, not criteria, such 
as covered lives, that arbitrarily limit Medicare endorsements.
    Response: Part of our qualification criteria is a rebate 
requirement that is defined to promote competition among the card 
sponsor programs and drive competitive discounts. However, in addition 
to assuring that card sponsors are capable of offering reasonable 
discounts to beneficiaries, in order to safeguard both the Medicare 
name and beneficiaries, we also believe it is important to consider the 
stability and reputation of a card sponsor in determining whether that 
card sponsor is deemed worthy of endorsement. As we stated in section 
B.1 of this preamble, one of the goals of this initiative is to 
increase beneficiary confidence in the Medicare program and to improve 
the relationship between beneficiaries and the Medicare program. If we 
were to endorse a card program that could not handle the volume of 
covered lives that we expect from this initiative, or that went out of 
business soon after the announcement of endorsement, this would have a 
negative impact on beneficiary confidence and the relationship between 
the Medicare program and beneficiaries. Of course, by endorsing card 
programs, we cannot guarantee that they will remain in business; 
however, we believe that by endorsing card programs with substantial 
experience, we can help to maximize beneficiary confidence in this 
initiative and in the Medicare program as a whole.
    Comment: One commenter stated that the proposed rule effectively 
bars participation of Medicare beneficiaries who reside in Puerto Rico 
and the U.S. Territories. According to the commenter, Puerto Rico could 
not qualify for participation as either a national program, or a 
regional program, as defined in the proposed rule. Puerto Rico is not a 
State, and its geography dictates that it cannot be contiguous to any 
State, Guam or Territory. The geographical issue is also shared with 
Alaska and Hawaii.
    Response: In order to balance the opportunity for smaller programs 
to qualify with the interest in assuring beneficiary access to network 
pharmacies when beneficiaries are traveling across a State line, we 
modified the proposed policy to clarify that regional programs must 
include at least two contiguous States, with the exception of Hawaii 
and Alaska, since they do not share State borders; these States could 
partner with 2 or more contiguous States to form a regional program. We 
further clarified that for either a national or regional program, card 
programs may also include the Commonwealth of Puerto Rico, Guam and the 
U.S. Territories as part of their programs.
b. Financial Integrity and Business Ethics
    We received a number of comments related to expectations with 
regard to card sponsor financial integrity and business ethics.
    Comment: Commenters expressed concern about the general lack of 
detail in the financial solvency requirements for endorsed card 
sponsors in the proposed rule. Commenters maintained that, while a card 
sponsor must demonstrate that it is ``financially solvent,'' the 
proposed rule does not define the term. To safeguard against 
endorsement of financially unstable entities, commenters expressed the 
importance of explicitly including stringent, but fair financial 
solvency criteria.
    Response: We agree that stringent, but fair, financial solvency 
criteria must be clearly delineated in order to ensure that only the 
most financially stable entities are endorsed by Medicare to offer 
prescription drug discount card programs. We believe that the proposed 
rule did, in fact, clearly state the financial solvency criteria that 
potential card sponsors must meet in order to qualify for endorsement. 
For example, the proposed rule noted that the specific financial 
requirements would consist of the applicant effectively demonstrating 
that total assets exceed total unsubordinated liabilities. In addition, 
the applicant must demonstrate that it has sufficient cash flow to meet 
obligations as they come due. We retain these conditions in the final 
rule.
    In addition to these specific financial tests, the applicant must 
report any financial ratings secured over the past 3 years, as well as 
certain specified past or pending investigations over the past 3 years. 
As discussed earlier in the preamble, it was originally proposed that 
applicants would be required to provide any financial ratings secured 
over the past 5 years, as well as a list of past or pending 
investigations over the last 5 years; however, this requirement has 
been modified to be consistent with the new 3 years total experience 
requirement for card sponsors. This initiative is intended to increase 
beneficiary confidence in the Medicare program and to improve the 
relationship between beneficiaries and the Medicare program. To further 
that goal, we believe it is essential that we endorse only reputable 
organizations. We believe these requirements are explicit and 
reasonable to ensure, in combination with other card sponsor 
requirements, that only the most stable and reliable organizations are 
endorsed by Medicare to offer drug discount card programs.
    Comment: One commenter questioned the appropriateness of the 
requirement to provide the most recent audited financial statements. 
According to the commenter, privately held companies are not required 
to audit financial statements. Thus, this requirement would appear to 
limit participation to publicly held companies. If the intent were to 
obtain information regarding financial stability, the commenter would 
need to know what the minimum

[[Page 56630]]

qualification criteria are for approval of this part of the review.
    Response: As part of the application process, we are requesting 
that applicants submit their most recent financial statements because 
we want to have an independent audit from a third party rather than 
rely solely upon the sponsor's representations. We want to attract 
sponsors, including privately held companies, of a sufficient scope and 
organization that would, in the normal course of business, have had to 
produce an audit (for purposes of securing a loan, or the purchase of 
land, buildings or equipment). It was not our intent for this 
requirement to limit card participation to publicly held companies. We 
intentionally did not specify the source of requested financial ratings 
or how many ratings an applicant must produce in order to provide 
applicants greater flexibility in this regard.
    We are not in any way attempting to limit participation to publicly 
held companies; rather, we believe it is reasonable to presume that a 
wide variety organizations (for-profit entities, not-for-profit 
entities, PBMs, chain drug stores, insurance companies, etc.) may apply 
to receive Medicare endorsement. A variety of organizations submitted 
applications in response to the August 2, 2001 solicitation published 
on our web site at http://www.cms.gov.
    Comment: One commenter questioned the need for card sponsor 
applicants to provide a summary of the card sponsor's history, 
structure and ownership, including a chart depicting the structure of 
ownership, subsidiaries and business affiliations. This commenter 
requested a clarification of the minimum requirements for this part of 
the review. The commenter requested that we specify who would be 
responsible for the review, and their qualifications to render an 
opinion on the information provided.
    Response: This requirement is to disclose important aspects of a 
potential card sponsor's operating structure, (to ensure transparency 
of all applicable relationships that comprise the card sponsor entity 
and discount card program) including transparency of its ownership 
relationships and contracting hierarchy. This criterion, by itself, 
will not be the basis for making an endorsement decision, and 
therefore, we do not need to specify the minimum requirements for this 
part of the review as part of a solicitation to be issued.
    Comment: Two commenters suggested that we should have a means for 
monitoring solvency long after a sponsor files an application for 
endorsement. In addition, the commenters suggest that financial 
solvency should at least mean that a card sponsor must have more assets 
than liabilities, and that we should terminate the endorsement of any 
company that enters into bankruptcy.
    Response: For the reasons stated elsewhere in this preamble (see 
our responses to comments on Reporting), we do not believe that 
quarterly financial reporting from a sponsor is needed. The initial 
review of the application has two specific financial standards; that 
the applicant's total assets exceed total unsubordinated liabilities 
and that cash flow is sufficient to meet obligations as they come due. 
These standards are consistent with the Medicare+Choice requirements, 
and we believe that these standards are appropriate for this 
initiative.
    Also, as a provision of our agreement with an endorsed card 
sponsor, a card sponsor must notify us in advance of any change that 
materially affects its ability to perform under its agreement with us. 
This will include, for example, bankruptcy.
    In addition, we believe that a critical source of information will 
be complaints directed to the complaints tracking and management system 
to be developed and operated by us. In the event that a card sponsor 
has financial difficulties that affect the performance of its program, 
we are likely to uncover such problems based on follow-up of complaints 
reported to its complaint tracking system.
    Comment: Some commenters stated that the proposed rule should be 
revised to include objective business ethics guidelines, to safeguard 
the program. Other commenters point out that the proposed rule stated 
that a card sponsor must have a ``satisfactory record of integrity and 
business ethics.'' However, commenters maintain that these terms are 
undefined and we have not proposed a method for determining what is 
``satisfactory.''
    The commenters suggest a number of circumstances that would be 
reason for us to withhold or terminate endorsement, including for 
example, indictments, civil liability in cases involving antitrust 
violations, and fraud. In addition, they believed that card sponsors 
should be required to report to us any lawsuits or government 
investigations that involve allegations of ethical violations.
    Response: As part of the application process, potential card 
sponsors must provide a list of past or pending investigations and 
legal actions brought against the applicant organizations (and parent 
firms if applicable) by any financial institution, government agency 
(local, State, or Federal) or private organization over the past 3 
years on matters relating to health care and prescription drug services 
and/or allegations of fraud, misconduct, or malfeasance. As with 
requirements pertaining to financial solvency, information regarding 
past or pending investigations and legal actions apply to the applicant 
organization, as well as for each of any subcontractors or 
organizations under other legal arrangements with the applicant to 
develop the pharmacy network, to handle the negotiation of rebates or 
discounts on behalf of the card sponsor, or to operate enrollment, and 
including the entity (or entities) that meets the 3 years of experience 
and covered lives requirements. This information will be considered 
during the application review process by our contract specialists who 
routinely evaluate this type of information as part of a determination 
for entering into third party relationship with a contractor.
    Further, ongoing monitoring and enforcement of business ethics and 
integrity will be specified in the agreement entered into between us 
and the endorsed card sponsor.
c. Enrollment Exclusivity
    We received a number of diverse and conflicting comments with 
regard to the enrollment exclusivity policy.
    Comment: Three commenters supported the exclusivity policy, 
including one commenter who suggested a 1-year lock-in, to coincide 
with the Medicare open enrollment period. Nine commenters opposed the 
enrollment exclusivity provision. Many of these commenters expressed 
concern that the exclusivity provision will reduce access to the full 
range of discounts, with lock-in particularly problematic in the 
absence of any requirements for stability in formularies or prices. 
Some commenters not only questioned the assumption that enrollment 
exclusivity was needed to facilitate card sponsor negotiation of 
manufacturer rebates but also questioned whether manufacturers would 
provide substantial rebates, even with the exclusivity feature.
    One commenter noted the positive benefit that an exclusivity 
provision provides from a drug utilization and patient safety 
perspective but, on balance, expressed concern that enrollment 
exclusivity limited access to a wider range of lower-priced drugs.
    Response: We believe that enrollment exclusivity is needed to 
facilitate card sponsor negotiation of manufacturer rebates. We believe 
that beneficiaries in

[[Page 56631]]

a particular drug card program will have a strong incentive to purchase 
drugs on the formulary, and we believe manufacturers will be persuaded 
to provide significant rebates or discounts to card sponsors as a 
result. The enrollment exclusivity feature is expected to provide card 
sponsors a stronger negotiating leverage, thereby increasing the level 
of manufacturer rebates available to beneficiaries.
    Furthermore, we believe that concurrent enrollment in multiple drug 
card programs is potentially confusing to beneficiaries and will add an 
additional burden at the retail pharmacy level, because pharmacies will 
likely be approached by beneficiaries who will want to know which of 
their drug cards offers the best price on a particular drug.
    Under this initiative, card sponsors will be competing for a large 
number of new covered lives; potentially millions of Medicare 
beneficiaries. We believe that competition for share of beneficiaries 
will result in favorable formularies and prices across the card sponsor 
programs. Further, given that each card sponsor must provide a discount 
on a drug in each of the therapeutic classes indicated elsewhere in 
this preamble, beneficiaries will have access to discounts on a broad 
range of prescription drugs.
    In addition, we agree that, as part of an enrollment exclusivity 
provision, beneficiaries need some stability in formularies and prices. 
Consequently, as stated elsewhere in the preamble, we are revising our 
policy to specify that card sponsors must agree to publish prices on 
formulary drugs, and assure that a specific drug is not dropped from 
the formulary nor its price increased for periods of at least 60 days 
starting on the first day of the program's operation.
    Comment: One commenter maintains that tracking whether and how 
often enrollees switch to different card programs would be difficult 
administratively. The commenter questions whether: (1) A beneficiary 
would risk losing any expected discounts on prescription drugs if he or 
she were to unknowingly or unintentionally enroll in a different card 
program more often than is permitted; and (2) whether the beneficiary 
would be required to retroactively pay back any discounts received 
while incorrectly enrolled in the card program.
    Response: As stated elsewhere in the preamble, the responsibility 
for ensuring enrollment exclusivity rests with the administrative 
consortium. We would expect the process for ensuring enrollment 
exclusivity to be well defined and deliberate, with a specific focus on 
minimizing the potential for concurrent enrollments in multiple drug 
card programs. Under no circumstances would a beneficiary be required 
to retroactively pay back any discounts received while incorrectly 
enrolled in a drug card program.
4. Formulary and Discounts to Beneficiaries
    Each drug discount card program will be expected to provide a 
discount for at least one drug identified in the therapeutic classes, 
groups, and subgroups of drugs commonly needed by Medicare 
beneficiaries as listed in Table 1. This endorsement qualification is 
to assure that beneficiaries enrolling in Medicare-endorsed discount 
card programs will be offered discounts on many of the types of drugs 
most commonly needed. As some drugs can be classified into more than 
one category, a drug can be used only once to satisfy the criterion of 
providing a discount for a drug in a therapeutic class, group or 
subgroup. It is important to note that card sponsors have the 
flexibility to include as many drugs as they choose beyond the minimum 
number and types needed to satisfy this endorsement qualification 
criterion, and we expect that many card sponsors will choose to do so 
for purposes of attracting beneficiaries to their programs.
    Discount card program sponsors' formularies and prices may vary 
geographically. As a condition of endorsement, card sponsors must agree 
that a specific drug is not dropped from the formulary, nor its price 
increased, for periods of at least 60 days, starting on the first day 
of the program's operation. In addition, card sponsors will notify the 
pharmacy network, the consortium, and us of formulary and pricing 
changes 30 days in advance of the change.
    Also, card sponsors must guarantee that participating Medicare 
beneficiaries will receive, on all prescription drugs included under 
the card program at the point of sale, the lower of the discounted 
price available through the program or the price the pharmacy would 
charge a cash paying customer at that time. Pharmacies sometimes offer 
special prices on drugs for promotional purposes to the general public. 
If these prices are lower than the price that could be obtained through 
the drug card program, the card sponsor will be expected to arrange 
with its network pharmacies that these lower prices also be made 
available to Medicare beneficiaries to the extent the drugs are 
included in the card program's formulary.
    The listing of therapeutic classes, groups, and subgroups of drugs 
most commonly needed by Medicare beneficiaries is in Table 1. A revised 
Table 1 has been prepared incorporating the comments discussed below. 
In addition, the categories listing has been updated to reflect the top 
prescription drug utilization and spending data collected through the 
1999 Medicare Current Beneficiary Survey (MCBS). The Table 1 listing 
included in the proposed rule was based in part on the 1998 MCBS data. 
Also, working in consultation with Federal experts in pharmacology, the 
lists of new drugs approved by the Food and Drug Administration during 
1999, 2000, and 2001 were examined for purposes of identifying whether 
recently released drugs might have further implications for the drug 
categories to be included in the listing as those commonly needed by 
Medicare beneficiaries. We anticipate modifying these classes, groups, 
and subgroups over time in future solicitations to remain current with 
beneficiary use of drugs and changes in the market, including the 
emergence of new drug types and drugs removed from the market.
    The table below shows the drug therapeutic classes and groups (and 
in a few cases, subgroups) that contain the drugs most commonly needed 
by Medicare beneficiaries. A single drug cannot be used to count in 
more than one category for purposes of providing a discount on a drug 
in each one of the listed categories (for example, propranolol cannot 
be used for both antiarrhythmic agents and as a beta blocker).

  Table 1.--Therapeutic Classes and Groups/Subgroups of Drugs Commonly
                    Needed by Medicare Beneficiaries
------------------------------------------------------------------------
                                              Drug groups/subgroups
        Therapeutic drug classes            (subgroups where shown are
                                                    indented)
------------------------------------------------------------------------
Nutrients and Nutritional agents.......  Specialty multi-vitamin low in
                                          phosphorus

[[Page 56632]]

 
                                         Other
          Hematological Agents
                                         Hematopoietic Agents
                                         Antiplatelet Agents
                                         Anticoagulants
                                         Coumarin and Indandione
                                          Derivatives
                                         Hemorrheologic Agents
       Endocrine/Metabolic Agents
                                         Sex Hormones
                                          Estrogens
                                          Progestins
                                          Others
                                         Bisphosphonates
                                         Antidiabetic Agents
                                          Insulin
                                          Sulfonylureas
                                          Biguanides
                                          Thiazolidinediones
                                          Others
                                         Adrenocortical Steroids
                                         Thyroid Drugs
                                         Calcitonin-Salmon
                                         Agents for Gout
         Cardiovascular Agents
                                         Inotropic Agents
                                         Vasodilators
                                         Antiarrhythmic Agents
                                          Supraventricular, Prophylaxis
                                          Supraventricular, Treatment
                                          Ventricular, Prophylaxis
                                          Ventricular, Treatment
                                         Calcium Channel Blocking Agents
                                          Dihydropyridine
                                          Diphenylalkylamine
                                          Benzothiazepine
                                         Antiadrenergics/Sympatholytics
                                          Beta-Adrenegic Blocking Agents
                                          Cardioselective Beta-
                                          Adrenergic Blocking Agents
                                          Antiadrenergic Agents--
                                          Centrally Acting
                                          Antiadrenergic Agents--
                                          Peripherally Acting
                                          Other
                                         Renin Angiotensin System
                                          Antagonists
                                          Angiotensin--Converting Enzyme
                                          Inhibitors
                                          Angiotensin II Receptor
                                          Antagonists Antihypertensive
                                          Combinations
                                         Antihyperlipidemic Agents
                                          Bile Acid Sequestrants
                                          HMG--CoA Reductase Inhibitors
                                          Others
     Renal and Genitourinary Agents
                                         Anticholinergics
                                         Diuretics
                                          Thiazides and Related
                                          Diuretics
                                          Loop Diuretics
                                          Others
           Respiratory Agents
                                         Bronchodilators
                                          Sympathomimetic--Long Acting
                                          Sympathomimetic--Short Acting
                                          Xanthine Deriatives
                                         Leukotriene Modulators
                                         Respiratory Inhalant Products
                                          Corticosteroids
                                          Intranasal Steroids
                                          Mast Cell Stabilizers
                                          Others
                                         Antihistamines--Non-Sedating
                                         Cough Preparations
     Central Nervous System Agents
                                         Analgesics
                                          Narcotic

[[Page 56633]]

 
                                          Narcotic/sustained release
                                          Other
                                          Agents for Migraine
                                          Others
                                         Antiemetic/Antivertigo Agents
                                         Antianxiety Agents
                                         Antidepressants
                                          Selective Serotonin Reuptake
                                          Inhibitors
                                          Others
                                         Antipsychotic Agents
                                          Phenothiazines/Thioxanthenes
                                          Phenylbutylpiperadine
                                          Deriatives
                                          Indoles
                                          Atypical Antipsychotics
                                          Other Antipsychotic Agents
                                         Cholinesterase Inhibitors
                                         Sedatives and Hypnotics,
                                          Nonbarbiturate
                                         Anticonvulsants
                                          Iminostilbene
                                          Hydantoins
                                          Barbiturates
                                          Deoxybarbiturates
                                          Succinimides
                                          Valproic Acid
                                          Oxazolidinedione
                                          Benzodiazepines
                                          GABA Mediating Medications
                                          Other Anticonvulsants
                                         Antiparkinson Agents
        Gastrointestinal Agents
                                         Histamine H2 Antagonists
                                         Proton Pump Inhibitors
                                         GI Stimulants
                                         Salicylate Deriatives for
                                          Inflammatory Bowel Disease
        Systemic Anti-Infectives
                                         Penicillins
                                         Cephalosporins and Related
                                          Antibiotics
                                         Fluoroquinolones
                                         Quinolones
                                         Macrolides
                                         Sulfonamides
                                         Antivirals
                                         Antiretroviral Agents
                                         Tetracycline
   Biological and Immunologic Agents
                                          Immunologic Agents
                                          Immunosuppressives
                                          Immunomodulators
                                          Interferon Alpha
                                          Interferon Beta
                                          Other
         Dermatological Agents
                                         Anti-Inflammatory Agents
         Ophthalmic/Otic Agents
                                         Agents for Glaucoma
                                          Cholinergic
                                          Sympathomimetic
                                          Adrenergic Antagonists
                                          Prostaglandins
                                          Carbonic Anhydrase Inhibitors
                                         NonSteroidal Anti-Inflammatory
                                          Agents (NSAIDS)
                                         Anticholinergic
                                         Muscarinic Antagonists
                                         Glucocorticoids
                                         Anti-Infectives
                                         Mast-cell Stabilizers/
                                          Antihistamines
                                         Other Outpatient
                                          Ophthalmologics
Antineoplastic Agents..................  Alkylating Agents
                                         Antimetabolites
                                         Hormones

[[Page 56634]]

 
                                          Antiestrogens
                                          Aromatase inhibitors
                                          Antiandrogen
                                         Other Antineoplastics
           Rheumatologicals*
        (*Note: Gout agents and
  immunomodulators listed under other
              categories)
                                         Nonsteroidal Anti-Inflammatory
                                          Agents
                                         Cox-2 Inhibitors
                                         Other Rheumatologicals
------------------------------------------------------------------------
Sources: Drug Facts and Comparisons, A Wolters Kluwer Company, 2001
  edition; Pharmacological Basis of Therapeutics, Goodman and Gilman,
  9th edition (1996); Clinical Pharmacology, Melman and Morelli, 4th
  edition, 2000; USP 2002 United States Pharmacopeia.

    We received a number of comments related to the drug classes, 
groups and subgroups listing included in Table 1 of the proposed rule.
    Comment: One commenter indicated that the nationally recognized 
classification system used to develop the drug categories listing was 
not specified.
    Response: There are several nationally recognized systems used to 
classify drugs. At the bottom of Table 1 in the proposed rule, the drug 
classification sources that were consulted to develop the Table 1 drug 
category listing were indicated. We chose to predominantly rely on 
Drugs Facts and Comparisons as it is a system commonly used by 
pharmacists. Since there are several systems for classifying drugs, for 
the proposed rule listing we also consulted two other sources, Goodman 
and Gilman's Pharmacological Basis of Therapeutics, and Clinical 
Pharmacology, by Melman and Morelli.
    Comment: Another commenter suggested using the American Hospital 
Formulary system or the USP DI.
    Response: As noted above we have relied primarily on Drugs Facts 
and Comparisons because of its common usage in the context of retail 
pharmacy. Based on this comment, though, we did also examine the USP 
2002 by United States Pharmacopeia to assist in addressing some of the 
comments related to specificity of categories.
    Comment: Several commenters raised issues related to the 
specificity of the listing, indicating that the groups and subgroups 
were broad and nonspecific. They recommended that additional groups and 
subgroups should be established to more adequately reflect the full 
range of medicines. Some commenters suggested factors that should be 
considered, such as whether products are used to treat the same 
spectrum of disorders, patient outcomes are similar, differing 
mechanisms of action, significant side effects, and dosing frequencies. 
Another commenter thought that the approach of listing a single product 
for each category was not adequate from a therapeutic interchange 
perspective. Another commenter thought that the listing was not 
comprehensive enough and it did not address the needs of those who have 
sensitivity to certain drugs. Another commenter expressed concern that 
strict formularies may limit medications and not address the needs of 
the elderly population.
    Response: It is important to keep in mind that the classes, groups, 
and subgroups categories were developed in the context of a drug 
discount program, not a drug benefit. We think that this is a very 
important distinction. The drug category listing for Medicare 
endorsement of a drug discount card serves as a minimum criterion for 
qualification related to the number of drugs for which discounts need 
to be provided. (Card sponsors could provide discounts for more than 
one drug per category.) This is a different concept than coverage of 
drugs in the context of a drug benefit. Formulary design in the context 
of a drug benefit would need to be done in a different manner and would 
need to take into account benefit coverage policy issues. Since the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative is not a 
benefit, we do not think that coverage policy considerations are 
applicable. In addition, requiring discounts on all drugs would need to 
rely heavily on discounts from pharmacies rather than drug 
manufacturers.
    In developing the listing, we focused on drugs that are commonly 
used by Medicare beneficiaries, based on analysis of top utilization 
and spending data. We examined the levels of specificity in drug 
classifications in order to have groupings in which generally there 
will be multiple products. Educating beneficiaries on how to obtain 
better drug prices is the focus of the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative. We think this approach provides an 
adequate framework for beneficiaries to learn about use of drug 
formularies and choose between formulary options commonly available in 
the insurance market. Under this initiative, beneficiaries enrolled in 
Medicare-endorsed card programs will be free to purchase prescription 
drugs as they do today, but for at least some of their drugs that are 
included in the endorsed card sponsor's formulary, they would be able 
to obtain lower prices.
    Importantly, under the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative, beneficiaries will have ample choice and an 
opportunity to examine closely the differences between cards, including 
drug offerings and their associated prices. Some cards may offer fewer 
drugs, and as a consequence, garner deep discounts or rebates, while 
other cards may offer a broad range of drugs with a lower level of 
rebates or discounts. Under this initiative, beneficiaries will choose 
what they perceive as most valuable and gain experience to assist in 
making future choices. The marketplace will gain important experience 
designing drug products and services that meet the expectations and 
needs of the Medicare population.
    Comment: Three commenters recommended covering all drugs. One 
suggested this could be done by obtaining discounts from pharmacies 
rather than from manufacturers. Another suggested that there should be 
mandatory participation by manufacturers rather than voluntary, which 
results in a patchwork of covered and non-covered drugs. One commenter 
expressed support for having card sponsors provide a discount for at 
least

[[Page 56635]]

one drug identified in the therapeutic classes, groups and subgroups.
    Response: As noted previously, this initiative is distinct from a 
drug benefit. This initiative endorses private sector entities that 
meet certain minimum criteria. To require discounts on every drug might 
limit the rebates that will be available to card sponsors, and could 
result in lower discounts to beneficiaries for particular drugs. 
Moreover, we expect that market forces will operate to determine the 
number of drugs that will be offered in each therapeutic category. With 
regard to the comment on mandatory participation by drug manufacturers, 
we have no authority to mandate participation.
    Comment: Several commenters identified categories of drugs for 
which they thought more specificity was needed, including cardiac 
antiarrhythmic agents, bronchodilators, and antineoplastics. One 
commenter noted that certain classes of drugs used by the senior 
population were not on the Table 1 listing, specifically benign 
prostatic hyperplasia, Alzheimer's drugs, and ophthalmic drugs. The 
commenter also noted that within the category of thyroid drugs, 
separate groups should be identified for hypothryroidism and 
hyperthyroidism. Another commenter suggested that the antidepressants 
category broken out into ``selective serotonin reuptake inhibitors'' 
and ``others'' be further specified by also identifying a category for 
``serotonin and norepinephrine reuptake inhibitor (SNRI).''
    Response: Because cardiac arrhythimias, respiratory conditions 
treated by bronchodilators, and cancer conditions are common in the 
Medicare population, we re-examined these three categories. We agree 
with the commenters that in the case of antiarrhythmic agents and 
bronchodilators, additional specificity will be appropriate to take 
into account the differing underlying conditions (for example, atrial 
versus ventricular arrhythmias) and treatment mechanisms for these 
common disorders. Furthermore, there are multiple products used to 
treat these conditions. Consequently, we have revised the listing to 
provide more specificity related to antiarrhythmic agents and 
bronchodilators. Four subcategories are now shown for antiarrhythmic 
agents in Table 1 (supraventricular/prophylaxis, supraventricular/
treatment, ventricular/prophylaxis, and ventricular/treatment). For 
bronchodilators there are now three subcategories (sympathomimetic/long 
acting, sympathomimetic/short acting, and xanthine derivatives).
    In the case of antineoplastics, it is important to note that 
Medicare currently does cover many drugs in this class because they are 
provided as part of physician services. However, because of the 
development of newer types of oral antineoplastic agents, we have 
expanded the listing to include alkylating agents and also provided an 
``other antineoplastics'' category so the card sponsors will further 
need to provide a discount on an additional antineoplastic agent of 
their choosing.
    We also agree that the sex hormone category was broad and needed 
additional specificity to take into account such disorders as benign 
prostatic hyperplasia. The sex hormone group has been further divided 
into estrogens, progestins, and others.
    With regard to the comment on Alzheimer's drugs, the Table 1 
listing includes categories for antipsychotic drugs and cholinesterase 
inhibitors. These drugs are used in the treatment of individuals with 
Alzheimer's disease.
    With regard to the comment on ophthalmic agents, Table 1 in the 
proposed rule did include categories of ophthalmic agents, for example, 
drug agents to treat glaucoma, a common disorder in the Medicare 
population.
    Table 1 includes a category for thyroid drugs, and we do not 
believe we need to separately identify drugs for hypothryroidism and 
hyperthyroidism. The purpose of the Table 1 listing is to have sponsors 
include discounts on drugs that are commonly needed by the Medicare 
population. Only one of these conditions, hypothryroidism, is common in 
the Medicare population. Consequently, we do not think it is necessary 
to further break out the thyroid drug category. Card sponsors have the 
flexibility to choose the thyroid drug products that they think are 
most appropriate for inclusion in a Medicare endorsed discount card.
    As indicated previously, in developing the listing of drug classes, 
groups and subgroups for purposes of establishing a minimum level of 
drugs to be included in drug discount programs seeking Medicare 
endorsement, we focused on the most common prescription drug needs of 
the Medicare population. At the same time, we believe it is necessary 
to balance the drug categories listing with the design element that 
there generally needs to be multiple drug products in a given category. 
With regard to the comment for an additional breakout under the 
antidepressant category for serotonin and norepinephrine reuptake 
inhibitor (SNRI), we think this would be a very narrow grouping in 
terms of number of drugs within it. Consequently, we do not believe 
that a separate SNRI category should be included in the context of a 
discount card minimum listing. Card sponsors have the flexibility to 
include a discount for an SNRI drug under the ``other'' antidepressant 
subgroup if they desire. As mentioned previously, card sponsors have 
the flexibility to include as many drugs as they choose beyond the 
minimum number and types needed to satisfy the endorsement 
qualification criterion, and we expect that many card sponsors will 
choose to do so for purposes of attracting beneficiaries to their 
program.
    Comment: We also received a number of other comments regarding 
other issues related to card sponsors' formularies. Several commenters 
suggested that Medicare-endorsed card sponsors use interdisciplinary 
committees consisting of physicians, pharmacists, and other health 
professionals familiar with medication therapy to establish 
formularies. They suggested that these committees, commonly known as 
pharmacy and therapeutics (P&T) committees, should be independent and 
meet on a regular basis (for example, quarterly) to ensure access to 
the latest medical innovations, with decisions based on scientific and 
economic considerations that achieve appropriate, safe and cost 
effective drug therapy. One commenter submitted a set of principles 
that have been established regarding the composition and role of P&T 
committees. Another commenter suggested that if formularies vary 
geographically that a regionally based professionally qualified body 
should include practicing physicians using that formulary.
    One commenter raised the issue of providing for exceptions from a 
card sponsor's formulary when a physician determines that medical 
necessity dictates use of a non-formulary drug. The commenter suggested 
that formulary exceptions, while not necessarily provided at the same 
discount as formulary drugs, should be covered under the same cost-
sharing requirements as formulary drugs. The commenter also suggested 
that enrollees, or their physicians, have access to a timely, 
independent, objective third party appeal of formulary disputes, with 
resolution as rapid as patient's condition requires.
    One commenter indicated that we should provide, through the 
application review and acceptance process, that card sponsors 
adequately evaluate clinical considerations in drug selection and 
placement. The commenter suggested that sponsors should have to place 
on their formulary any product for

[[Page 56636]]

which they receive a discount or rebate that offers therapeutic 
advantage over other products in the same therapeutic class.
    Response: We recognize that P&T committees play an important role 
in the development of formularies for use in drug benefits. They are a 
common industry practice and various organizations have developed 
guidelines working with these committees. The Medicare endorsement, 
however, is related to discount card programs rather than a drug 
benefit, where coverage policy is involved. Given this distinction and 
the effects on beneficiary choice, we do not think that it is necessary 
to specify additional provisions regarding endorsed discount card 
sponsors use of P&T committees. Similarly, the issues of exceptions 
from the formulary, cost-sharing levels, and an appeals process related 
to formulary disputes are all formulary-related aspects that arise in 
the context of the use of formularies in a drug benefit and its related 
coverage policy. Finally, we think that the construction of the list of 
drugs to be included in the context of a drug discount card is 
different than for a drug benefit. We think that the commenter's 
suggestion is more appropriate in the context of a drug benefit in 
terms of inclusion of drugs that offer certain advantages over other 
drugs in the same therapeutic class. Beyond specifying the minimum 
number and types of drugs that need to be included for purposes of 
Medicare endorsement, we think that the decisions regarding which 
actual drugs are to be included under card sponsors' programs need to 
be left to the sponsors to determine based on their negotiations with 
drug manufacturers and pharmacies, and what they think they can offer 
to beneficiaries.
    Comment: A few commenters submitted comments related to generic 
drugs. One commenter noted the importance of physician involvement in 
decisions regarding generic substitution. The commenter also noted that 
since generic products can look different, it is important that there 
be proper labeling and explanation to the patient in order to avoid 
beneficiary confusion. Another commenter also noted the important role 
of medical practitioners in drug substitution. Another commenter 
indicated support for the language in the proposed rule supporting the 
use of generics, but noted that therapeutic safety and equivalency do 
need to be established for generic use. One commenter thought the 
proposed rule failed to provide specific incentives for the purchase of 
generic drugs when appropriate.
    Response: The Medicare endorsement of prescription drug discount 
programs is intended to better educate beneficiaries about how to lower 
their prescription drug costs. The educational initiative will include 
information about the use of generic drugs as one way that 
beneficiaries may be able to lower their prescription drug costs. The 
potential savings to beneficiaries provides the incentive to use 
generic products. As part of the educational effort, we would expect to 
inform beneficiaries of the need to talk with their physicians about 
the availability of generic products for the medications they are 
taking.
    Comment: The proposed rule provided that endorsed drug discount 
card programs be allowed to vary their formularies by geographic 
location and over the course of the endorsement period. Two commenters 
thought that card sponsors should not be allowed to vary formularies 
and prices geographically. There was concern that variation could cause 
confusion, with one commenter noting that this would be particularly 
true for beneficiaries who live in different places during the year.
    Response: Allowing formularies and prices to vary geographically 
simply recognizes that this is how the market currently works, and that 
there are variations. We think it is necessary to provide for 
geographic variation to provide flexibility to accommodate market 
conditions and competition. As part of both our and card sponsors' 
educational efforts, the presence of geographic variation will be 
communicated. In addition, an endorsed card sponsor needs to make 
available to beneficiaries, over its customer service telephone line, 
upon request, information about prices and formulary at the retail 
pharmacy level. Beneficiaries also need to be informed that a lower 
price could be available due to pharmacies having special sales. Under 
the Medicare-Endorsed Prescription Drug Card Assistance Initiative, the 
beneficiary is to get the lower of the negotiated discount price or the 
usual and customary price available at that point in time.
    Comment: Several commenters recommended that there be some 
stability over time in the formularies and in the prices, particularly 
because of the provision that beneficiaries can only be enrolled in one 
Medicare-endorsed card program at a time and can change among Medicare-
endorsed card programs twice a year, in January and June. One commenter 
noted that we should prohibit sponsors from altering coverage terms for 
any product if the change would be to the detriment of card enrollees. 
The proposed rule had provided that card sponsors report to the 
consortium any formulary or price change within 48 hours before the 
change became effective. Commenters suggested different possible 
periods of times for maintaining stability in formularies and prices, 
including 60 days, 90 days, 6 months related to the enrollment period, 
and for the entire period of the endorsement.
    Response: We agree that there is an important trade-off between 
having enrollment exclusivity for a period of time for purposes of 
market leverage and the need for some stability in formularies and 
prices that underlie beneficiaries' decisions regarding selection of 
card programs. We examined data reported by Express Scripts in its 2000 
and 2001 Drug Trends Reports on changes in the average wholesale price 
(AWP) for the top 50 common brand drugs. The data indicate that the AWP 
did not change that frequently during the course of the year, typically 
one or two times, with the most frequent number of changes being four. 
Consequently, we are revising our policy to indicate that if a card 
sponsor seeks Medicare endorsement, it needs to agree to publish prices 
on formulary drugs, and that a specific drug is not dropped from the 
formulary, nor its price increased for periods of at least 60 days, 
starting on the first day of the program's operation. Within this 
context, card sponsors could still add drugs or lower prices at 
anytime, since neither of these changes has a negative impact on 
beneficiaries. Card sponsors will need to notify their pharmacy 
network, the consortium, and us of formulary and pricing changes 30 
days in advance of those changes taking effect.
    Comment: One commenter recommended that we develop an annual report 
card on the impact of formularies on beneficiaries enrolled in the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative to 
better understand the impact of formularies on patient care. The 
commenter supports study by the industry and by us in this area.
    Response: We agree with the commenter that such studies could 
provide a valuable source of information for policymaking and for 
industry sponsors as they design their programs. We will have 
information from each card program about their formularies. We also 
intend to survey beneficiaries about their knowledge of various 
components of the drug card program, and their perceptions of, and 
experiences and satisfaction with, their discount drug card. This 
information

[[Page 56637]]

will allow us to assess how well beneficiaries understand the concept 
of a formulary under their discount card program and how this impacts 
their use of the card. As this body of knowledge needs time to develop, 
we do not intend to develop a report card on the impact of formularies 
on beneficiaries under this initiative.
5. Manufacturer Rebates or Discounts
    The name ``Medicare'' is extremely valuable and highly regarded by 
the nearly 40 million Medicare beneficiaries. Medicare focus groups 
have indicated that virtually all seniors recognize the name 
``Medicare''. We believe its name recognition is so strong that it is 
unlikely to be duplicated in the commercial market.
    As a result of the Medicare endorsement, Medicare name recognition, 
and education of Medicare beneficiaries, we believe that Medicare-
endorsed drug discount card program sponsors will have increased 
visibility for their discount drug programs, which will lead to 
significant enrollment by Medicare beneficiaries. The attributes of 
this initiative, coupled with exclusive enrollment, will provide card 
sponsors with the ability to negotiate significant drug manufacturer 
rebates or discounts. Competition among card sponsors and, in turn, 
drug manufacturers, will attract beneficiaries through lower prices and 
other valuable prescription related services and assure that a 
substantial portion of manufacturer rebates or discounts are shared 
with Medicare beneficiaries either directly or indirectly through 
pharmacies, thereby improving the assistance this initiative can offer 
to beneficiaries.
    In order for the endorsement initiative to ensure meaningful 
assistance on drug costs to Medicare beneficiaries, a condition of 
endorsement will be that card program sponsors meet the threshold of 
obtaining manufacturer rebates or manufacturer discounts on brand name 
and/or generic drugs. Medicare-endorsed discount card programs must 
pass a substantial share of those rebates or discounts through to 
beneficiaries either directly, or indirectly through pharmacies. Card 
sponsors will be required to have contractual arrangements with brand 
name and/or generic drug manufacturers for rebates or discounts and a 
contractual mechanism for passing on the bulk of rebates or discounts 
that are not required to fund operating costs to beneficiaries or 
pharmacies. Card sponsors will be required to have contractual 
agreements with pharmacies ensuring that the rebates or discounts be 
passed through to the Medicare beneficiaries in the form of lower 
prices or enhanced pharmacy services.
    Card sponsors must share with us a detailed description of their 
manufacturer rebate program as part of the application for endorsement. 
In describing their rebate program, card sponsors will share with us 
information such as the aggregate level of manufacturer rebates or 
discounts that they will secure from brand name and/or generic 
manufacturers, their expected total rebate or discount, the share that 
will be passed through to beneficiaries, and other information 
necessary to assess whether or not the requirement has been met. This 
descriptive approach provides card sponsors with maximum flexibility 
within the basic requirement to design a rebate program, to negotiate 
rebates with a broad range of manufacturers, and to negotiate a level 
of rebates or discounts that is commensurate with their card program 
design.
    We believe that competitive market forces will encourage endorsed 
card sponsors to secure the highest manufacturer rebates or discounts 
possible and pass those rebates through to enrollees, thereby 
maximizing the level of assistance provided to beneficiaries in 
lowering prices on prescription drugs. However, as a consequence of our 
consideration of public comments regarding this condition of 
endorsement, and in order to provide additional incentive for card 
sponsors to secure manufacturer rebates or discounts and pass them 
through to beneficiaries, we intend, in a future proposed rule, to 
propose a Gold Star policy. Under this proposed policy, we would award 
a Gold Star designation to those Medicare-endorsed discount card 
programs securing the highest levels of manufacturer rebates or 
discounts which are passed on to Medicare beneficiaries directly, or 
indirectly through pharmacies. Subject to the provisions of a future 
proposed and final rule, at the close of Year 1, we would anticipate 
awarding a Gold Star designation to no more than 10 percent of endorsed 
discount card programs which have secured and passed through the 
highest levels of manufacturer rebates or discounts. We would publicize 
this designation in beneficiary education materials, and card sponsors 
would be permitted to use the designation in information and outreach 
material.
    A proposed Gold Star designation could serve several purposes. 
First, it could assist in educating beneficiaries about the various 
price concessions contributing to the total discount. Second, it could 
encourage card sponsors to secure the highest manufacturer rebates or 
discounts possible from both brand name and generic manufacturers. 
Third, it could encourage card sponsors to pass along the highest 
possible level of rebates or discounts to beneficiaries, directly, or 
indirectly through pharmacies. While retail discounts are also an 
important part of providing reduced prices to Medicare beneficiaries, 
we believe that one of the improvements of this Medicare initiative 
over the current market is the emphasis on securing manufacturer 
rebates or discounts. As discussed elsewhere in the preamble, the 
requirements of Medicare endorsement are designed, in part, to maximize 
the ability of card sponsors to secure manufacturer rebates or 
discounts. We believe that special recognition of card programs for 
obtaining and passing through to beneficiaries the best manufacturer 
rebates or discounts through a potential Gold Star designation would be 
consistent with the goals of this market-based initiative.
    We believe that this overall approach to securing and passing along 
manufacturer rebates or discounts promotes better drug pricing for 
beneficiaries and may enhance pharmacy participation in a card 
sponsor's network.
    We received numerous public comments related to manufacturer 
rebates or discounts.
    Comment: Many commenters indicated that the final rule needs to 
clearly define ``substantial'', related to the level of rebate or 
discount card sponsors must secure from drug manufacturers (one 
indicated that 10% is not ``substantial'', two others indicated that 
each sponsor should show an ability to garner 10% average savings, and 
one commenter indicated that manufacturers should be required to offer 
a minimum discount in the range of 30%). Two commenters supportive of 
defining substantial recommended that we use the same rebate 
percentages required by Title XIX (Medicaid), two suggested the level 
of discounts offered by the Federal Supply Schedule, and one suggested 
the level secured by the Veterans Administration. One commenter 
suggested a minimum percentage payment from manufacturers, on a per 
prescription basis. Several commenters indicated that requiring a 
specific level of manufacturer rebate is not needed in a competitive 
marketplace as rebates or discounts will be reflected in fees and 
prices.

[[Page 56638]]

    Response: We agree that requiring a specific level of manufacturer 
rebates or discounts is not necessary in a competitive market. Card 
sponsors will submit to us as part of the application for endorsement a 
detailed description of their rebate program as described above. Card 
sponsors seeking endorsement must meet the threshold of securing brand 
name and/or generic manufacturer rebates or discounts. We believe that 
competition among card sponsors--assisted by the price comparison web 
site--will encourage card sponsors to negotiate the most favorable 
rebates or discounts possible. The policy is designed to allow 
competition among card programs to drive rebates rather than 
government-imposed conditions.
    We have deleted reference to the term ``substantial'' related to 
the level of manufacturer rebates or discounts card sponsors seeking 
endorsement must secure. We believe that the design of card sponsors' 
programs will determine the level of rebates they can secure, and that 
consumer preferences for formulary and pharmacy access will drive 
program design. We believe that market forces will come to bear on the 
level of manufacturer rebates secured by card sponsors. In addition, we 
believe that use of the term in this context may cause confusion as it 
is also used to describe the level of rebates or discounts we require 
be passed through to beneficiaries, either directly or through 
pharmacies. Given that the level of manufacturer rebates or discounts 
card sponsors may reasonably secure is different from the level of 
manufacturer rebates or discounts we require and expect will be passed 
through to beneficiaries, we are opting to not refer to both as 
substantial.
    We believe that this descriptive approach also keeps card sponsors 
from focusing on only meeting a minimal level of rebates. For example, 
if we set a minimum average manufacturer rebate level that all endorsed 
card sponsors must secure, card sponsors may focus on attaining that 
level rather than striving to exceed it. Once that minimum threshold is 
attained, card sponsors might be less inclined to pass along any 
additional rebates or discounts received from manufacturers. Further, 
in order to encourage card sponsors to secure and pass along a maximum 
level of manufacturer rebates or discounts, we will propose, in a 
forthcoming proposed rule, a Gold Star designation policy, rather than 
use a defined level as suggested by some commenters.
    Comment: Two commenters urged against requiring manufacturer 
rebates at all because they are unpredictable and unreliable. 
Commenters argued that if the amount of rebate on a particular drug 
changes, card sponsors may change their formularies. These changes 
might interfere with the patient/physician relationship, as changes in 
formularies might lead to drug switches.
    Response: Securing manufacturer rebates or discounts is a tool 
widely used in the private insured market today. Virtually all insured 
products with managed pharmacy benefits are able to secure manufacturer 
rebates in response to shifts in market share. This initiative seeks to 
harness the purchasing power of Medicare beneficiaries in order to 
effectively negotiate rebates or discounts with manufacturers, similar 
to insured products. We believe that physicians are familiar with the 
role of formularies in insured products, and the benefits that may 
accrue to their patients in sometimes switching to formulary drugs. 
Groups representing physicians have publicly supported this initiative, 
while expressing, among several concerns, the need for some stability 
in formularies and prices. While negotiated rebate or discount levels 
may change from time to time, this Medicare initiative will require 
that a specific drug offered under the card program is not dropped from 
the formulary, nor its price increased for periods of at least 60 days, 
starting on the first day of the program's operation, and that card 
sponsors notify pharmacies, the consortium and us of price changes 30 
days in advance of the change (see also the discussion of price 
stability in the previous section of this preamble).
    Comment: We received several comments indicating that the proposed 
rule did not specify a minimum total discount that sponsors must offer 
to beneficiaries, and that we should require a clearly defined level of 
savings under this initiative. One commenter indicated that the program 
must be structured to give beneficiaries the greatest price reduction 
possible.
    Response: We do not require that card sponsors offer a minimum 
total discount level in order to be eligible for Medicare endorsement. 
We believe that competition among card sponsors will encourage card 
sponsors to seek the highest total discount levels possible, given the 
broad retail pharmacy access standard they must meet in order to be 
considered for endorsement. In addition, we believe that card sponsors 
will design their programs differently, and that these differing 
designs may yield different discount levels. Some beneficiaries may 
prefer a card program with design features that may yield a lower 
discount level than other programs (for example, less emphasis on 
preferred drugs). We believe that permitting beneficiary choice among 
card designs, despite perhaps differing discount levels, is a positive 
feature we would want to preserve.
    We plan to issue a proposed rule on the Gold Star designation that 
could help maximize the total level of discounts available to Medicare 
beneficiaries.
    Comment: We also received numerous comments related to the level of 
manufacturer rebate or discounts we might expect under a Medicare 
discount card. Commenters indicated that this Medicare initiative will 
likely not garner rebates equivalent to those secured by funded 
products because there is little incentive to use one branded product 
over another; that rebates will not likely be greater than what is 
already available in the private market; and that rebates will likely 
fall below those recently announced by manufacturers for low-income 
beneficiaries. One commenter noted that manufacturers have given little 
or no rebates for discount card programs, due to lack of ability to 
show market share movement. One commenter indicated that the lower 
level of rebates expected may affect beneficiary satisfaction.
    Response: The level of manufacturer rebates or discounts a card 
sponsor secures will depend, in part, on the design of its discount 
card program. For example, programs that rely heavily on the use of 
formularies, that are successful at educating Medicare beneficiaries 
regarding the benefits of using formulary or preferred drugs, and that 
are successful at educating physicians about formulary alternatives 
when available will be able to secure larger rebates. These dynamics 
are also at play in insured, or funded, products. We recognize that the 
benefit to the beneficiary of using formulary or preferred drugs is 
much greater in an insured product because some or most of the cost of 
the drug is being paid by an insurer. We assume that manufacturer 
rebates or discounts under this initiative may be generally below that 
of insured products. However, we expect that prescription drug 
manufacturers will respond to the ability of card sponsors to move 
market share as a result of the major design features of this 
initiative (for example, education, exclusive enrollment, 6-month 
enrollment period, use of formularies or preferred drugs, and rebate 
and discount requirements). While manufacturers may not offer the same 
prices on all drugs as they do under their low income assistance

[[Page 56639]]

programs, we believe that manufacturers will offer Medicare 
beneficiaries the best prices possible, particularly when the card 
sponsors guarantee that rebates will be passed through to 
beneficiaries. A full discussion of our estimates of beneficiary 
savings under this initiative can be found in the Impact Analysis 
section of the preamble.
    Comment: We received a comment indicating that current discount 
card programs secure discounts from pharmacies only, and this program 
structure also finances discounts from community pharmacies.
    Response: We understand that the discount card programs prevalent 
in the market today generally do not secure manufacturer rebates or 
discounts and pass those savings on to enrollees either directly, or 
through pharmacies. We believe that this initiative is an improvement 
over the current market in this respect. Card sponsors seeking Medicare 
endorsement must secure rebates or discounts from brand name and/or 
generic prescription drug manufacturers and pass a substantial share of 
the savings through to beneficiaries. Medicare-endorsed discount card 
programs may not rely solely on discounts received from community 
pharmacies; endorsement is contingent, in part, on securing rebates or 
discounts from manufacturers. We believe that the Gold Star 
designation, discussed in greater detail elsewhere in the preamble and 
in a forthcoming proposed rule, would also help encourage card sponsors 
to seek and secure manufacturer rebates or discounts, and to pass those 
concessions on to beneficiaries directly, or indirectly through 
pharmacies.
    Comment: We requested comments on efforts to sustain the use of 
generic drugs in spite of manufacturers' rebates or discounts on brand 
name drugs. We wanted to better understand the effects of various 
levels of rebates or discounts and negotiating strategies on market 
competition and their impact on the use of generic drugs. Many 
commenters were supportive of encouraging the use of generic drugs when 
available. Several commenters stated that a substantial share of 
discounts on generic drugs secured by card sponsors should also be 
passed on to beneficiaries, and that this will increase the use of 
generics. However, there was disagreement among commenters regarding 
whether or not rebates, discounts, or other price concessions are 
commonly found in the generic drug market. One commenter indicated that 
rebates are greater for brand name drugs, which may dampen card 
sponsors' interest in encouraging the use of generics.
    Response: We believe that card sponsors should be encouraged to 
seek rebates or discounts on generic as well as brand name drugs and 
pass a substantial share of those savings through to Medicare 
beneficiaries. However, we understand that current industry standard 
practice does not necessarily include traditional rebates on generic 
drugs flowing through discount card sponsors or insurers. We have 
changed our rebate requirement to state that applicants for Medicare 
endorsement must secure rebates or discounts from brand name and/or 
generic drug manufacturers.
    This initiative will encourage the use of generics in other ways as 
well. For example, the price comparison web site will provide 
information about the availability of generics. In addition, we expect 
that the potential of generic drugs to reduce beneficiary out of pocket 
costs on drugs will be discussed in beneficiary education and outreach 
materials and activities.
    Comment: We received numerous comments related to the pass through 
of manufacturer rebates or discounts to beneficiaries directly or 
indirectly through pharmacies. Many commenters noted that the proposed 
rule did not define what level of manufacturer rebates or discounts 
would be passed on to beneficiaries. Many were supportive of our 
establishing a required percentage of rebates or discounts that must be 
passed through to beneficiaries but there was disagreement regarding 
what the level should be. For example, one commenter supports passing 
through 100% of savings offered by manufacturers, two proposed 
requiring that 90% be passed through, two proposed using Title 19 as a 
model, and one proposed requiring that pharmacists determine what 
portion of the rebate or discount should be kept by a card sponsor. One 
commenter indicated that, if endorsed, they anticipate passing through 
all or a majority of revenues in the form of lower drug prices. Several 
commenters stated that we should not require specific amounts of 
manufacturer rebates be passed through to beneficiaries directly or 
through pharmacies because competition among plans (market forces) will 
likely lead to rebates being passed through.
    Response: We require that Medicare-endorsed card sponsors pass 
along a substantial share of rebates or discounts received from brand 
name and/or generic drug manufacturers to beneficiaries, either 
directly or indirectly through pharmacies. Requiring that a particular 
percentage of rebates or discounts be passed through does not take into 
consideration the differing operating costs of individual card sponsors 
(card sponsors are permitted to use a portion of rebates or discounts 
to defray operating expenses). We want to encourage card sponsors to 
provide excellent customer service, negotiate fair dispensing fees, and 
provide quality assurance and drug utilization review programs that 
also are of benefit to beneficiaries. Placing an arbitrary limit on the 
percentage amount a card sponsor may retain to defray the costs of 
these worthwhile activities may not be in the best interest of 
beneficiaries. In addition, smaller or regionally operating card 
sponsors initially may not be able to pass through the same level of 
rebates or discounts on all drugs as their overhead costs as a 
percentage of rebates or discounts may be somewhat higher in some 
cases.
    We believe that competition among card sponsors will encourage card 
sponsors to pass along the maximum amount possible to beneficiaries. 
Simply, beneficiaries will most likely enroll in card programs with the 
best prices on the drugs they take, all other things being equal (for 
example, card program design and customer service). We also believe 
that prescription drug manufacturers may put pressure on card sponsors 
to pass along pricing concessions to enrollees. And, we believe that 
our proposed Gold Star designation policy, explained elsewhere in this 
preamble and in a forthcoming proposed rule, would encourage card 
sponsors to share the maximum amount of manufacturer rebates or 
discounts possible. We continue to use the term ``substantial'' in 
describing this requirement to indicate to card sponsors that we 
believe that most of the savings should be passed through, and that it 
is our expectation that rebates and discount revenues not used to 
defray operating expenses be passed through to beneficiaries, directly 
or through pharmacies.
    Comment: Several commenters are concerned that card sponsors could 
attribute most or all payments to overhead and avoid passing those 
payments on to beneficiaries directly or through pharmacies. While one 
comment was supportive of using manufacturer rebates to give pharmacies 
an incentive to participate, one commenter could not think of any case 
where insurers share a rebate with a retail or community pharmacy. One 
commenter indicated that there is no guarantee that rebates will be 
passed through pharmacies. One commenter offered that one way to assure 
that the discount is passed on to the consumer is to give card sponsors 
a fixed negotiating fee to improve the

[[Page 56640]]

probability that they will share discounts with small businesses.
    Response: We believe that competitive pressure will prevent card 
sponsors from retaining rebates and discounts for purposes other than 
operating expenses that benefit the beneficiary (for example, customer 
service, quality assurance activities, and pharmacy counseling). 
Beneficiaries will select card programs that offer the best overall 
value, including the lowest prices on drugs they take and other 
valuable services offered. If card sponsors fail to pass along rebates 
or discounts in a form that is obvious to beneficiaries, beneficiaries 
will enroll in a competing discount card program that offers more clear 
value to them. In addition, we believe that Medicare-endorsed discount 
card program sponsors would have an incentive to pass along as much of 
the rebate as possible to beneficiaries directly or through pharmacies 
if we incorporate our proposed Gold Star designation policy (described 
elsewhere in this preamble and in a forthcoming proposed rule) into 
this initiative.
    We agree with the commenter that currently, insurers do not pass 
rebates and discounts through to pharmacies. Insurers do not have an 
incentive to reduce the price to the enrollee directly or indirectly 
through the pharmacy. Generally, rebates are forfeited to the employer 
to reduce overall health care expenditures; there is no expectation 
that a substantial portion of the rebate will be passed through to the 
enrollee at the point of service or through pharmacies. In this 
initiative, we expect the consumer will take the place of the employer, 
and likely receive rebates and discounts from manufacturers.
    Comment: In a related matter, some commenters suggested that 
sponsors should be required to pass through to beneficiaries a portion 
of all payments received from manufacturers, not just a share of 
manufacturer rebates or discounts.
    Response: As a condition of endorsement, we will require card 
sponsors to pass through a substantial share of manufacturer rebates or 
discounts to beneficiaries directly or through pharmacies. Other 
payments and/or fees between the card sponsor and manufacturer that may 
be unrelated to moving market share in the context of this initiative 
are business matters between the card sponsor and manufacturer. This 
policy is consistent with current industry practice. Card sponsors are 
not precluded from using revenues from other sources to further lower 
prices or offer valuable pharmacy services. In addition, our proposed 
Gold Star designation policy, described in greater detail elsewhere in 
this preamble and in a forthcoming proposed rule, may provide an 
incentive for card sponsors to do that to the extent possible. We 
believe that competition among card sponsors, including publicly 
available price comparison information and, if ultimately incorporated 
into the initiative, our proposed Gold Star designation policy, will 
compel card sponsors to pass through a maximum amount of revenue from 
manufacturers.
    Comment: We received several comments indicating that reporting or 
disclosing rebates in advance is difficult because they are often 
determined retroactively, and operational challenges and challenges 
posed by compliance with the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA) (Pub. L. 104191) are large.
    Response: We agree that offering a lower price at the point of sale 
is a challenge, but we believe it is in the best interests of 
beneficiaries to receive the benefit of lower prices at the point of 
sale. We believe that the significant experience of the insured 
population with manufacturer rebates or discounts will provide the 
groundwork for estimating prices at the point of sale. Card sponsors 
will have had experience negotiating rebates or discounts with 
manufacturers, either in the discount card context or, more likely, in 
the context of an insured product. We believe that this experience, 
combined with the experience of negotiating discounts with retail 
pharmacies, will enable card sponsors to estimate the expected total 
discount in advance.
    Comment: One commenter said that any financial incentives on 
formulary drugs (such as manufacturer rebates) should not interfere 
with the delivery of quality care.
    Response: We agree. We expect that physicians will continue to 
prescribe medications that are appropriate for their patients, just as 
they do today.
6. Access to Retail Pharmacies
    To be eligible for endorsement, applicants must demonstrate that 
their national or regional prescription drug card program will offer 
Medicare beneficiaries convenient access to retail pharmacies. 
Convenient retail access means demonstrated contracts with retail 
pharmacies so that upon the start of outreach and enrollment in the 
discount card program at least 90 percent of Medicare beneficiaries, on 
average, in all Metropolitan Statistical Areas (MSAs) served by the 
program live within 5 miles of a contracted pharmacy (90/5) and at 
least 90 percent of Medicare beneficiaries, on average, in all non-MSAs 
live within 10 miles of a contracted pharmacy (90/10). We will require 
that this be demonstrated using mapping software, computed by using one 
hundred percent of beneficiary counts by zip code (provided by us).
    Tables generated by the mapping software to be submitted to us will 
include both the MSA and non-MSA level in each of the States covered 
under the card sponsor's program, along with information on the 
contracted pharmacies.
    In addition, as discussed later in this preamble, we will ask card 
sponsors to report on key aspects related to endorsement, such as 
aggregate level of manufacturer rebates, customer service, call center 
performance, complaints processes, and enrollment and disenrollment.
    Drug card program sponsors will not be permitted to offer a home 
delivery-only (mail order) option to Medicare beneficiaries, since most 
Medicare beneficiaries are accustomed to purchasing prescription drugs 
from a local pharmacy. However, to provide a choice to beneficiaries 
who prefer home delivery, endorsed drug card programs will be allowed 
to include an option to use home delivery via a mail order pharmacy, in 
addition to the required contracted retail pharmacy network. We will 
ask card sponsors to report on the aggregate level of rebates or 
discounts shared with beneficiaries, and participation of independent 
pharmacies in the card program's network.
    We also will not require drug discount card program sponsors to 
include institution-based pharmacies in their pharmacy networks; 
however, neither would we preclude their participation. 
Institutionalized beneficiaries whose prescription drugs are covered 
under Medicare Part A or Medicaid will not be able to use the drug 
discount cards for the covered drugs. This policy comports with the 
conditions of participation for long-term care facilities.
    Participation in a Medicare-endorsed discount card program may not 
always be useful or appropriate for institutionalized beneficiaries. 
However, there are circumstances in which beneficiaries have short 
stays in nursing facilities and could use the card while in the 
community. And, there are circumstances, specifically in assisted 
living facilities, where some beneficiaries purchase their drugs in the 
community and manage their own medication regimes. Therefore, both card 
sponsors and we will educate beneficiaries about the advantages and

[[Page 56641]]

disadvantages of enrollment in a discount card for institutionalized 
beneficiaries to support their making informed decisions.
a. Pharmacy Network
    Comment: Two commenters asserted that the 90/10 standard allows 
urban areas to be underserved. For example, a single pharmacy will 
satisfy the standard for all of New York City. In addition, the 
standard allows rural areas to be underserved because access 
calculations are aggregated. To correct these issues, the commenters 
recommend that, instead of a 90/10 standard, we should impose a 90/5 
standard, or less, depending on the concentration of pharmacies in a 
particular zip code. Another commenter expressed concern regarding the 
proposed access requirement, indicating that 10 miles can be a long 
distance for an elderly person or person with a disability who does not 
drive.
    Response: In recognition of the commenters' concerns, we have 
modified the 90/10 pharmacy access requirement to include a stricter 
access standard for MSAs and non-MSAs. This final rule defines retail 
pharmacy access to mean demonstrated contracts with retail pharmacies 
so that, upon the start of outreach and enrollment in the discount card 
program, at least 90 percent of Medicare beneficiaries, on average, in 
all MSAs served by the program live within 5 miles of a contracted 
pharmacy (90/5) and at least 90 percent of Medicare beneficiaries, on 
average, in all non-MSAs live within 10 miles of a contracted pharmacy 
(90/10). We believe that a 90/5 access standard will ensure that for 
urban areas, beneficiaries are within a reasonable distance from a 
pharmacy offering Medicare discounts, and that beneficiaries have 
choice regarding the pharmacies from which to purchase discounted 
drugs. Since the pharmacies in rural areas are not as concentrated, we 
required a 90/10 access standard for non-MSAs. The effect of this 
policy is to require greater pharmacy participation in both MSAs and 
non-MSAs than was originally proposed. This is because the MSA and non-
MSA access standard will be calculated based on MSAs only and non-MSAs 
only--and not the combination of non-MSAs and MSAs. We believe this 
standard will give beneficiaries access to pharmacies, while retaining 
the flexibility needed by card sponsors to have a sufficient number of 
pharmacies with which to contract for a network.
    Comment: The proposed rule highlighted the value of certain small, 
urban pharmacies that provide linguistically appropriate or culturally 
sensitive services to Medicare beneficiaries. We solicited comments 
regarding the role and importance of these pharmacies to underserved 
populations and other populations that may have special needs. We also 
solicited comments on how to maintain access to these pharmacies for 
Medicare beneficiaries who depend on them.
    One commenter noted that the health care system in the United 
States has come to rely on independent pharmacies and chain pharmacies, 
particularly in low income and rural areas. Two commenters stated that 
the proposed initiative would adversely impact small community 
pharmacies. One commenter stated that the initiative should provide 
more opportunities for card sponsors to partner with small retail 
pharmacies, particularly in low income and rural areas. Another 
commenter urged us to monitor card sponsors' programs to ensure that 
local retail pharmacies are, in fact, utilized. If utilization of mail 
order pharmacies, for example, becomes too high, retail pharmacies 
could be threatened.
    Response: We recognize the valuable role that rural and other small 
community pharmacies serve as part of today's health care system; what 
we estimate as the impact on these pharmacies is discussed elsewhere in 
the impact analysis.
    As indicated elsewhere in this preamble, we have modified our 
pharmacy access requirement for endorsement to provide additional 
opportunities for small retail pharmacies, particularly in both urban 
and rural areas, to be sought out and included in a drug card's 
network.
    In addition, as described elsewhere in the preamble, as part of our 
monitoring efforts, we will ask card sponsors to report on a number of 
items related to the operational aspects of their programs, including 
the participation of independent pharmacies in the card program's 
network.
    Concerning the impact of mail order on retail pharmacy utilization, 
as stated later in the preamble, we do not believe that this initiative 
will result in a significant diversion of beneficiaries to mail order. 
The majority of beneficiaries currently rely on retail pharmacy 
dispensing, and we do not believe this initiative will unduly influence 
beneficiary choices with regard to mail order and retail dispensing.
    Comment: We received a number of comments regarding pharmacy 
contracting as part of this initiative.
    One commenter urged us to provide specific direction on whether 
pharmacy network contracts for the Medicare-Endorsed Prescription Drug 
Card Assistance Initiative must be separate from pre-existing 
contractual arrangements. Similarly, the commenter asks us to clarify 
whether such contracts must specifically reference the Medicare 
program. In addition, the commenter asks that we clarify whether the 
network contracts must obligate participating pharmacies to remain in 
an approved discount card program for the duration of that program's 
endorsement. The commenter also recommends that we include all of the 
material requirements that will be imposed on organizations proposing 
to offer a discount card program.
    Response: As a condition for endorsement, card sponsors must 
execute pharmacy contracts that are specific to this initiative. In 
addition, we expect the term of these contracts to be in effect for the 
entire endorsement period. This is important to ensure that there are 
guaranteed network pharmacies for the duration of the endorsement 
period. These may be separate and distinct contracts, or renegotiated 
contracts with existing network pharmacies. We believe that this final 
rule includes all substantive requirements for card sponsors. There 
will be some procedural and interpretive details included in the 
solicitation for applications.
    Comment: One commenter points out that pharmacy network contracting 
specific to this program may not be completed at the time applications 
are submitted. Therefore, card sponsors should be permitted to provide 
in their applications information on the preliminary status of network 
contracting activities, including pending contracts. Approved 
applicants should be required, as a condition of final participation, 
to demonstrate after approval that their networks meet the specified 
standards.
    Response: We understand that in Year One of this initiative 
pharmacy network contracting may be incomplete as the application 
review process commences. For this reason, we will not permit card 
sponsors to begin outreach and enrollment until all card sponsor 
contracts with retail pharmacies have been executed.
    Comment: One commenter recommended that participation in this 
initiative be open to all pharmacy providers who are willing to accept 
the terms of participation, whether retail, mail order or specialty 
pharmacy. The commenter maintains that true patient choice will only be 
provided by allowing any pharmacy the option to participate, and 
prohibiting economic

[[Page 56642]]

incentives that cause patients to move from provider to provider.
    Another commenter argues that small pharmacies should be permitted 
to choose the card sponsor program(s) with which they would like to 
contract, especially those that serve rural or underserved areas. Yet 
another commenter states that the patient-pharmacist relationship is an 
important link in ensuring appropriate medication use and safety. 
Patients who develop a relationship with a single pharmacist or 
pharmacy should not be penalized for wanting to maintain that 
relationship.
    Response: We believe the stated access standards would necessitate 
contracting with a broad network of retail pharmacies.
    Given the access ratio standards and a provision that prohibits 
Medicare-endorsed card sponsor programs from offering mail order 
services only, we believe that most retail pharmacies will be invited 
and encouraged to participate in card programs' networks, particularly 
small pharmacies in rural and underserved areas. With respect to the 
comment that beneficiaries should not be penalized for wanting to 
maintain an existing relationship with a retail pharmacy, we expect 
that one of many considerations in selecting a card sponsor will be 
whether a particular retail pharmacy is part of a card sponsor's 
pharmacy network. Beneficiaries will have to weigh this, among a number 
of considerations, in the selection of a card sponsor program.
    Comment: One commenter asserts that, in order to meet the 90/10 
access standard, card sponsors may have to offer lower pharmacy 
discounts. Some card sponsors may prefer to limit the pharmacy network 
to produce the deepest possible discounts. The commenter suggests that 
we allow card sponsors the flexibility to design their programs to meet 
the needs of their members.
    Response: As part of its basic program, an endorsed card sponsor 
must meet the stated retail pharmacy access standards. However, card 
sponsors, if they choose, may design a program within the basic program 
that offers more restrictive pharmacy networks and/or formularies in 
order to optimize the level of discounts for beneficiaries.
    Comment: One commenter declared that we should utilize our Managed 
Care Pre-Implementation Review Guide in assessing the quality of and 
access to pharmacy services as part of the drug card initiative.
    Response: The Managed Care Pre-Implementation Review Guide to which 
the commenter refers is a document developed specifically for the 
1915(b) managed care waiver program in California, and is comprised of 
a series of questions regarding all aspects of a Medicaid managed care 
organization's structure and operations. The purpose of this guide is 
to assess the readiness of a managed care organization to begin 
operations. The section of the guide to which the commenter refers 
includes questions regarding the adequacy of a managed care plan's 
pharmacy benefits program, including oversight provisions, access and 
quality.
    We appreciate the commenter's suggestion; the Managed Care Pre-
Implementation Review Guide may be a useful consideration as we define 
our expectations with regard to the application review process as part 
of the solicitation.
b. Home Delivery
    Comment: One commenter indicated beneficiaries will be drawn to 
mail order because of financial incentives.
    Response: Medicare-endorsed card sponsors are not permitted to 
offer a mail order only product, but may offer a mail order option. 
According to analysis conducted for us by Booz-Allen-Hamilton, Medicare 
beneficiaries with insurance for prescription drugs through Health 
Maintenance Organizations (HMOs) are somewhat more likely than the 
commercially insured to use mail order in the current market (both in 
terms of use and spending). Given that this analysis is based on a 
population in a managed care plan, we may see less reliance on mail 
order in the population not insured for prescription drugs. In any 
event, while mail order may offer lower prices on some drugs, and may 
offer some beneficiaries more convenience than going to a pharmacy, we 
know that the vast majority of beneficiaries currently purchase their 
prescriptions through retail pharmacies. Beneficiaries may prefer 
interacting with pharmacists and pharmacy staff in person. To the 
extent that card sponsors and pharmacies offer additional incentives to 
use a retail pharmacy (for example, pharmacy counseling, and discounts 
on future purchases), beneficiaries may be inclined to continue to 
prefer retail outlets.
    Comment: A number of commenters indicated that, as discount card 
sponsors, PBMs would likely steer Medicare beneficiaries to mail order 
pharmacies, stating that the five largest PBMs control 90 percent of 
the mail order pharmacy business in the United States. According to the 
commenter, rather than pass through manufacturer payments directly to 
beneficiaries, these PBMs and other card sponsors will be tempted 
instead to pass these funds to their subsidiary mail pharmacies, with 
the justification that these payments serve to enhance network 
participation or provide drug utilization review or other pharmacy 
services to beneficiaries. The commenter asserts that the potential for 
misdirecting manufacturer payments could be reduced if we revised the 
rule to prohibit card sponsors from funneling manufacturer payments to 
pharmacies that the sponsors own or control. These commenters also 
noted that beneficiaries who are diverted to mail order pharmacies lose 
valuable face-to-face contact with a licensed pharmacist, resulting in 
a decline in quality of care for beneficiaries. One commenter stated 
that financial incentives to use mail order pharmacies through a 
discount card approach may limit a beneficiary's access to medication 
consultation services. According to the commenter, many beneficiaries 
depend on the face-to-face consultation and pharmacy counseling they 
receive from their community pharmacist, and studies show that these 
pharmacy services save the health care system millions of dollars each 
year. However, many beneficiaries could be enticed by the discounts 
offered to use mail order service. Another commenter urged us to 
monitor card sponsors' programs to ensure that local retail pharmacies 
are utilized. As an example, the commenter suggested that the existence 
of retail pharmacies could be threatened if utilization of mail order 
pharmacies increases significantly. In addition to a major loss of 
revenue, pharmacies will suffer from the government's intervention in 
this competitive marketplace and, according to the commenter, we should 
not endorse that outcome.
    Response: Beneficiaries today are making choices with regard to how 
they receive their medications, whether through home delivery (mail 
order) or retail pharmacies. Beneficiaries make these decisions based 
on individual preference. Most beneficiaries purchase their 
prescription drugs at retail pharmacies. While some beneficiaries may 
be most interested in deeper discounts that may be available through 
mail order dispensing, others may place greater value on the personal 
contact via retail pharmacies. By definition, those who elect to 
receive their medications through mail order give up the face-to-face 
contact they will otherwise have through the retail pharmacy outlet.
    Card sponsors will not be permitted to offer a program that only 
includes mail order because we recognize that

[[Page 56643]]

maintaining access to retail pharmacies is in the general best 
interests of beneficiaries, the majority of whom rely on retail 
pharmacies. However, to provide a choice to beneficiaries who prefer 
mail order, endorsed drug card programs will be allowed to include an 
mail order option, in addition to the required contracted retail 
pharmacy network. We believe that a number of card sponsor 
organizations will be endorsed to offer discount card programs as part 
of this initiative, and many of these card sponsors will offer a mail 
order option. We recognize that a number of large PBMs have wholly-
owned mail order subsidiaries. These are recognized as legitimate 
businesses, and we do not intend to prohibit lawful and valid business 
arrangements. This initiative is market based, and we believe that card 
sponsors will have a strong incentive to offer beneficiaries the best 
discounts possible through channels that beneficiaries prefer in order 
to attract beneficiaries and remain competitive.
    Mail order services have some real cost advantages over retail 
dispensing; these advantages are largely a function of the inherent 
operational and economic differences between mail and retail 
dispensing. However, mail order is not appropriate for all 
beneficiaries. For example, mail order is not well suited today to the 
dispensing of drugs for acute use, because these drugs are required 
immediately in most cases, and mail order involves a delay in receipt 
of drugs. While mail order can be particularly suited to dispensing of 
chronic drugs, and mail order services are, in fact, used by many 
beneficiaries with chronic conditions, we do not believe that this 
initiative will result in a significant diversion of beneficiaries to 
mail order. Retail pharmacies have some advantages over mail order that 
also translate into value from a beneficiary's perspective. Among them 
are face-to-face counseling and an opportunity to develop a clinically 
supportive role with a local pharmacist, and the capacity to 
immediately fill a prescription without delay in receipt, which is of 
particular need in the case of new and acute medications.
    The majority of beneficiaries currently rely on retail pharmacy 
dispensing, and we do not believe this initiative will unduly influence 
beneficiary choices with regard to mail order and retail dispensing.
    Comment: One commenter stated that card sponsors should be required 
to provide access to professional pharmacists who can answer questions 
for beneficiaries using mail order services. The commenter stated that 
responsible card sponsors already provide such services.
    Response: We are aware that States require mail order pharmacies to 
provide a means, for example, a toll-free hotline, for consumers to 
contact mail order pharmacists with questions they may have regarding 
their prescriptions. As the commenter indicated, responsible card 
sponsors already provide access to pharmacists, and we expect endorsed 
card sponsors that offer mail order services to provide access to a 
licensed pharmacist should there be inquiries that require clinical 
consultation.
    Comment: Two commenters point out that the geographic requirements 
recognize that beneficiaries need convenient access to community 
pharmacies and state that we should clarify that mail order pharmacies 
do not satisfy the access requirements.
    Response: The access standards, as detailed elsewhere in the 
preamble, pertain to contracted retail pharmacies in a given card 
sponsor's network only. While we expect that many card sponsor programs 
will offer a mail order option, mail order is not considered in the 
defined access ratio standard; the ratio measures access to a card 
sponsor's network retail pharmacies only.
c. Institutional Pharmacies
    In the proposed rule, we solicited comments on whether and how 
institutionalized beneficiaries who have access to institution-based 
pharmacies would be affected if they choose to participate in the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative, since 
institution-based pharmacies are explicitly not required in this 
program. We were also interested in better understanding whether and 
how institution-based pharmacies could participate in the drug card 
programs.
    Comment: A number of commenters urged us to consider excluding 
beneficiaries in long-term care facilities from this initiative. 
Commenters indicated that beneficiaries in long term care facilities 
have unique needs and receive their drugs from long term care 
pharmacies, which provide specialized services to this population in a 
closed system, and that the use of pharmacies external to this system 
could affect beneficiaries' health outcomes. Commenters also indicated 
that long-term care pharmacies obtain some of the lowest drug prices 
negotiated in the health care market. They also indicated that it will 
be inefficient and an unsafe practice to allow patients to obtain drugs 
outside of the carefully controlled distribution systems of long-term 
care facilities, which capture all the necessary data to support 
extensive review of patients' drug regimens by consultant pharmacists. 
They commented that Medicare conditions of participation provide for 
safe drug distribution practices, thereby making it possible for 
skilled nursing facilities and nursing facilities to determine how 
their patients can receive medications. The effect of these conditions 
of participation is that skilled nursing facilities and nursing 
facilities may restrict which pharmacies supply drugs and pharmacy 
services to their patients. Several of the commenters explicitly noted 
that they intended their comments to apply to assisted living 
facilities in addition to skilled nursing facilities and nursing 
facilities.
    Response: We agree with the commenters' interpretation of the 
conditions of participation for skilled nursing facilities and nursing 
facilities. Specifically, we agree that the conditions of participation 
provide for safe drug distribution practices, thereby making it 
possible for skilled nursing facilities and nursing facilities to 
control how their patients can receive medications, and that the effect 
of these conditions of participation is that skilled nursing facilities 
and nursing facilities may restrict which pharmacies supply drugs and 
pharmacy services to their patients. We believe our policy fully 
comports with Medicare and Medicaid conditions of participation for 
long term-care facilities. Therefore, we do not believe it is necessary 
to change our policy to exclude beneficiaries in long term care 
facilities from participating in the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative, since skilled nursing facilities and 
nursing facilities can and do control which pharmacies will provide 
drugs to beneficiaries during their stays in these facilities.
    Furthermore, we do not believe it is appropriate to exclude 
beneficiaries in skilled nursing facilities and nursing facilities 
outright. While, in general, it is not expected that institution-based 
pharmacies will be part of discount card pharmacy networks, we will not 
preclude their participation should an institution-based pharmacy elect 
to join a discount card's network. Further, while we agree that the use 
of a discount card by institutionalized beneficiaries may not be useful 
or appropriate for many individuals, we believe all beneficiaries 
should have the option of enrolling in a discount card, particularly 
since some beneficiaries have short stays in nursing facilities.
    Finally, it will be cumbersome to administer an exclusion from the 
drug card based on patient stay. In order to

[[Page 56644]]

specifically exclude institutionalized beneficiaries from participation 
in a Medicare endorsed discount card, we would have to ascertain 
whether they were residents of long term care institutions at a 
particular point in time and disqualify their participation upon 
admission if they had already obtained a card. We believe that 
establishing such an eligibility process will also be confusing to 
beneficiaries. Instead, we plan to educate institutionalized 
beneficiaries and their caregivers about this issue. Both we and card 
sponsors will have to educate beneficiaries about the advantages and 
disadvantages of a discount card for institutionalized beneficiaries, 
and emphasize that beneficiaries and their caretakers should consider 
each beneficiary's particular circumstances to determine whether 
participation in a Medicare-endorsed discount card is in the person's 
best interest.
    The education policy for beneficiaries residing in assisted living 
facilities will be different. Some residents of assisted living 
facilities purchase their drugs outside the facility's pharmacy and 
manage their own drug regimens. Also, Medicare has no regulatory 
jurisdiction over these facilities, as they are not Medicare providers, 
and the State regulations that guide prescription drug distribution and 
pharmacy practice in these institutions vary by State. We will advise 
beneficiaries or their caregivers to seek guidance from an 
administrator of the facility regarding whether their prescription 
drugs can be purchased at a pharmacy participating in the Medicare-
Endorsed Prescription Drug Card Assistance Initiative.
7. Other Drug-Related Items and Services Under the Endorsement and 
Items and Services Outside the Scope of the Endorsement
    Drug-related services, drug utilization review, and pharmacy 
counseling, that are not offered for an additional fee, could be 
offered as endorsed features of the program under this initiative. In 
addition, drug card sponsors could provide other services to 
beneficiaries who enroll in their card programs. These services could 
include both (a) drug-related services or items for a fee, such as 
disease management; and (b) non-drug-related services or items, whether 
for a fee or not, such as discounts on dental services and prescription 
eyeglasses. These services will not be covered by the Medicare 
endorsement and could not be described as Medicare-endorsed. Also, as 
described in the privacy section elsewhere in this preamble, card 
sponsors will need to seek beneficiary written authorization to market 
such services.
    Comment: We received a number of public comments regarding the 
valuable role pharmacists currently play in drug therapy management. 
Two commenters cited a number of studies that demonstrate the 
importance of pharmacy services. One commenter expressed concern that 
the proposed rule does not direct card sponsors to include coverage for 
pharmacy services as part of the program. In particular, the proposed 
rule does not ensure access to pharmacist-provided medication therapy 
management services. The commenter states that beneficiaries must have 
access to pharmacist services, including: self-management education and 
disease management, and asserts that pharmacist services must be 
recognized and paid for under the Medicare-Endorsed Prescription Drug 
Card Assistance Initiative.
    Response: While we were not provided with specific data concerning 
pharmacist reimbursement for counseling services, we have carefully 
reviewed a number of studies and also conducted additional analysis of 
available research.
    Under this initiative, we are recognizing that card sponsors may 
want to pass through a portion of rebates they garner from 
manufacturers to enhance the services beneficiaries receive from 
pharmacies. We believe that payment for such services under this 
initiative should be a contractual decision between a pharmacy and a 
card sponsor. We believe this is appropriate given the market-based 
approach of the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative. If card sponsors believe specific pharmacy services are 
marketable to beneficiaries, then we expect them to negotiate terms 
that are of interest to the pharmacists to assure this is highlighted 
as part of the discount card program.
    While we believe that beneficiaries will be most interested in 
their ability to obtain significant discounts and will base their card 
program decisions, in large part, on the level of discounts offered, we 
do believe that certain beneficiaries may place a higher value on card 
programs that offer enhanced pharmacy services. However, rather than 
mandate enhanced pharmacy services and associated payment for such 
services as part of this initiative, we believe that outreach and 
education efforts will be critical to make beneficiaries aware of the 
distinctions between card programs and, in particular, highlighting 
card programs that offer enhanced pharmacy services to beneficiaries.
    Meanwhile, the responsibility resides with the pharmacist community 
to continue research using well designed studies to demonstrate the 
cost effectiveness of pharmacy counseling at the point of retail sale. 
Much of the best designed and current research is focused on pharmacy 
counseling in the context of disease management and consultation with 
physicians for a selective population. This important work will help 
inform future policy making at least in the circumstances to which it 
pertains. Whether and how the findings from such studies translates 
into reimbursement options at the point of retail sale will also be of 
interest to the government.
    Comment: One commenter points to the statement in the proposed rule 
that beneficiaries without drug coverage often do not have access to 
valuable services offered by some drug benefit and assistance programs, 
including services such as drug interaction, allergy monitoring and 
advice on how medication needs might be met at a lower cost. One 
commenter disagrees with this statement. The commenter indicates that 
most States have taken the requirements of the Omnibus Budget 
Reconciliation Act of 1990 (OBRA), which mandates pharmacy cognitive 
services under the Medicaid program, and (either by statute or 
regulation) extended these activities to all citizens by imposing a 
patient counseling requirement. Thus, the incentive for the pharmacist 
to comply is to meet a statutory or regulatory requirement. Another 
commenter also cites OBRA, noting that this authority mandates 
pharmacists to provide consultation on all medications, along with 
patient drug history review and special pharmacy programs such as 
asthma, high blood pressure and diabetes education. According to the 
commenter, the benefit of these programs exists only because the 
pharmacist provides the data to perform these services. Pharmacists 
identify potential allergy or drug-interaction problems and work out a 
solution with the prescriber and the patient. The administrative entity 
does not perform this service.
    Response: We acknowledge that State laws and regulations prescribe 
various requirements for pharmacists related to such areas as 
prospective drug review, the provision of information on drug 
interactions, side effects and related information, and requiring the 
pharmacist to offer to counsel a patient who presents a prescription 
for filling. We recognize the role that pharmacists play in the 
provision of clinical services, including, for example, drug 
utilization review efforts and timely

[[Page 56645]]

detection of drug-drug interactions. We are also aware that pharmacies 
typically maintain electronic records to support these activities. 
However, third party administrative entities, such as pharmacy benefit 
managers (PBMs), are also able to warehouse data from across network 
pharmacies, providing a rich data source that is also available for 
examining patterns in utilization and monitoring drug-drug 
interactions. One of the benefits of this initiative could be that 
pharmacists are able to analyze a wider range of data, which is 
collected and warehoused by the card sponsors. We continue to believe 
that the Medicare-Endorsed Prescription Drug Card Assistance Initiative 
will enhance Medicare beneficiaries' access to these, and other, 
effective tools that are widely used in insured products and by 
pharmacies to obtain higher quality pharmaceutical care.
    Comment: A number of commenters cited the importance of safety 
measures as part of discount card programs. One commenter stated that 
card sponsors should be required to provide automated safety programs 
that prevent dangerous drug interactions. According to the commenter, 
responsible card sponsors already provide such services. The commenter 
maintains that the potential for preventable harm from medication 
errors is too great to allow card sponsors that do not have safety 
programs to participate in this initiative. Several commenters 
emphasized the value of a discount card initiative which includes 
safety measures that protect consumers from possible drug interactions 
and promote clinically appropriate drug therapy. Optional add-on 
programs not only improve patient health (for example, through disease 
management), but can also help manage patient costs by providing 
education on generic drugs.
    Response: We agree that safety programs that are designed to 
identify drug interactions and promote clinically appropriate drug 
therapy are generally provided by reputable card sponsors. We believe 
that market competition will drive card sponsors to design programs 
that include features that may be of interest to Medicare 
beneficiaries, such as those cited by the commenters. To the extent 
that these services will require added fees, these too will be 
permitted, provided the beneficiary provides written authorization for 
the use and disclosure of his or her personal information for this 
purpose.
    Comment: One commenter asserted that a Pharmacists' Reimbursement 
Committee must be established which, much like the Physicians' 
Reimbursement Committee under Medicare, would address issues of 
pharmacist reimbursement to ensure continued viability of the community 
pharmacies, specifically chain and independent pharmacies.
    Response: This is a beneficiary assistance initiative designed for 
card programs to compete on value. Establishing fees for community 
pharmacists is beyond the scope of this initiative.
    Comment: One commenter noted that pharmacists cannot be expected to 
counsel on the unique aspects of each individual card's rules and drug 
costs, as well as drug usage and quality.
    Response: We do not believe that the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative will substantially complicate the 
educational responsibilities of pharmacists. Presently, discount cards 
have disparate outreach approaches, terminology, and discounting 
methodologies. Under this initiative, endorsed cards will have certain 
required commonalities in all of these areas, as well as the national 
public education offered by us to support increased public awareness of 
discount cards in general. Therefore, we believe that pharmacists will 
not be unduly burdened by this initiative.
8. Card Program Administration and Customer Service
    As a condition of endorsement, card sponsors will have to agree to: 
(1) Charge a low or no enrollment fee to beneficiaries; (2) operate 
customer service call centers in accordance with standard business 
practices; (3) provide information and outreach to enrolled 
beneficiaries; (4) protect the privacy of beneficiaries' information; 
and (5) maintain a customer complaints system. Each of these 
requirements is discussed in this section.
    The one-time enrollment fee for any Medicare-endorsed drug discount 
card will be limited (a maximum of $25 in Year One), and we encourage 
Medicare-endorsed card program sponsors to keep their fees as close to 
zero as possible. We believe this limit will allow discount card 
program sponsors to recoup their administrative costs through the 
enrollment fee, if they so choose, so more of the manufacturer rebates 
can be passed on to beneficiaries, but the limit is not so prohibitive 
as to dissuade beneficiaries from enrolling in the drug discount card 
programs. If a beneficiary changes drug card programs (either 
voluntarily or because the drug card program no longer participates in 
the initiative), the beneficiary could be charged a separate one-time 
enrollment fee by the second drug card program.
    As a condition of endorsement, each endorsed card program sponsor 
must also maintain a toll-free customer call center to assist 
beneficiaries in understanding the drug card program offered. The call 
center must be open during usual business hours and provide customer 
telephone service in accordance with standard business practices. We 
interpret this to mean that the call center will be available at least 
Monday through Friday from 8:00 a.m. to 4:30 p.m. Eastern to Pacific 
Standard times for those zones in which the discount card program will 
operate. We also interpret the requirement that the call center be 
operated in accordance with standard business practices to mean that 70 
percent of customer service representatives' time will be spent 
answering telephones and responding to enrollee inquiries; 80 percent 
of all incoming customer calls will be answered within 30 seconds; the 
abandonment rate for all incoming customer calls will not exceed 5 
percent; and that there will be an explicit process for handling 
customer complaints. These standards are required or exceeded by the 
1800 Medicare call center contractors.
    Card sponsors must also have in place a convenient means for 
accommodating pharmacy inquiries regarding the card sponsor's program. 
Card sponsors could, for example, accommodate pharmacist inquiries by 
incorporating a specific number in the Interactive Voice Response (IVR) 
for the pharmacist to select so that hold times will be minimized (many 
pharmacies use this already for ease of access for physicians).
    We are aware that card sponsors, as part of their current business 
operations, generally have some established mechanism for responding to 
pharmacy inquiries. However, we do not intend to mandate a specific 
approach because we do not want to inadvertently force a higher cost 
solution. Instead, we will let individual card sponsors decide how to 
effectively address pharmacy inquiries.
    Medicare-endorsed discount drug card sponsors will need to provide 
Medicare beneficiaries with information and outreach regarding the 
endorsed features of the discount card program. We interpret this to 
mean that the endorsed card program sponsors must disclose, in customer 
appropriate printed material, to Medicare beneficiaries (prior to 
enrollment and after enrollment, upon request) a detailed description 
of the program that includes contracted pharmacies, enrollment fees (if 
any), drugs included, and their prices to reflect discounts that are 
provided to the consumer.

[[Page 56646]]

Information and outreach should include information regarding the tools 
used for lowering prices and improving the quality of pharmacy 
services, as well as the importance of maintaining current drug 
coverage and the availability of generic substitutes under the program.
    Guidance on what information to include in pre-enrollment and post-
enrollment materials will be provided in the guidelines for information 
and outreach materials to be produced by us and appended to the 
solicitation for applications for the Medicare endorsement. We 
anticipate that the information in these materials will also be made 
available on the drug card sponsors' web sites and through their 
enrollment and customer service phone lines.
    With the exception of advertising in print or broadcast media with 
a national audience, outreach to beneficiaries outside of a card 
sponsor's defined service area will be the basis for intermediate 
corrective actions or termination of endorsement by us. In addition, 
our guidelines for information and outreach materials will require that 
card sponsors clearly disclose the areas in which their endorsed 
programs are available to beneficiaries.
    In addition, card sponsors that provide additional prescription 
drug quality services for no additional fee, such as drug interaction, 
allergy alerts, and pharmacy counseling will be expected to educate 
beneficiaries about the role of, and availability of, these services, 
and provide information to us for use on our web site.
    Endorsed card programs will be required to accept all Medicare 
beneficiaries who wish to participate in the card program. We expect 
the endorsed drug discount card programs to maintain methods for 
enrollment similar to usual business practice--such as accepting 
enrollees through paper, telephone, fax or Internet.
    As a condition of endorsement we also expect card sponsors, as well 
as the administrative consortium (described later in this preamble), to 
protect the privacy of beneficiaries information. Generally, card 
sponsors, for the purpose of administering a discount card program, are 
not covered entities under the regulations implementing HIPAA at 45 CFR 
part 164 (Privacy Rule). In some circumstances, a card sponsor, for the 
purpose of administering a discount card program, could be a business 
associate to a covered entity under the Privacy Rule, for example, to 
the pharmacies in the card program's network, or to a health plan that 
engages in group enrollment as allowed under this initiative. To the 
extent that a card program is a business associate to a covered entity 
under the Privacy Rule, or in any other way the Privacy Rule is 
applicable, the privacy provisions under this initiative do not modify 
that applicability. We are incorporating certain provisions of the 
Privacy Rule into this initiative, regardless of whether the rule on 
its face would apply to card sponsors. The provisions of the Privacy 
Rule incorporated into this initiative will take effect--for purposes 
of this initiative--beginning at the time of the endorsement agreement. 
These provisions do not trigger the HIPAA enforcement mechanisms; 
enforcement is discussed elsewhere in this rule.
    Specifically, card sponsors will be required, as a term of 
endorsement, to agree to protect the privacy of Medicare beneficiary 
information consistent with the privacy provisions set forth in 45 CFR 
160.103, 160.202, 164.501 through 164.514, and 164.520. These sections 
concern consent, authorization, notice, public policy, permissible uses 
and disclosures, and limiting disclosure to the ``minimum necessary''. 
For purposes of this initiative, a card sponsor must consider itself a 
``covered entity'', as referenced in the Privacy Rule.
    Prior to enrollment, or at the time of enrollment, a card sponsor 
must notify each beneficiary of expected uses and disclosures of the 
beneficiary's protected health information, as well as of the 
beneficiary's rights and the card sponsor's duties with respect to such 
information. The notice must be in plain language and must contain 
sufficient detail to place the beneficiary on notice of the uses and 
disclosures permitted or required under this rule and other applicable 
law. (If changes are made to the Privacy Rule, these changes will be 
incorporated into this initiative.) Among these expected uses and 
disclosures are the routine uses and disclosures to operate the 
program. For the purpose of this initiative, routine uses and 
disclosures under health care operations are defined as the routine 
activities to operate the card program, including the provision of 
information and outreach activities, as provided in the Medicare 
endorsement agreement.
    As described elsewhere in this preamble, we will provide guidelines 
in the solicitation about the content, structure, and process of 
information and outreach for beneficiaries by card sponsors, including 
such things as use of the Medicare name, general information about the 
program, and card program features within the scope of the Medicare 
endorsement that card sponsors must agree to meet.
    Further, card sponsors must comply with the Privacy Rule provisions 
for obtaining written authorization for all uses and disclosures of 
protected health information, including the beneficiary's rights and 
the card sponsor's duties with respect to such information, provided in 
plain language and in sufficient detail to place the beneficiary on 
notice as required under the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative rule and other applicable law. Additionally, as 
provided in the Privacy Rule, provisions must be in the notice about 
how a beneficiary's authorization can be revoked.
    The requirement for authorization includes, but is not limited to, 
marketing. For the purposes of this initiative, marketing means any use 
or disclosure of protected health information considered outside the 
scope of the Medicare endorsement. As discussed elsewhere in this final 
rule, non-endorsed features include (a) prescription drug related 
products and services for an additional fee beyond the enrollment fee 
of up to $25 in Year One, such as disease management for a fee; and (b) 
non-prescription drug related products and services, such as discounts 
on eye wear and travel services.
    Card sponsors will be required to develop, implement and update 
periodically a written data security plan to assure that such 
information is secure from unauthorized disclosure, unauthorized 
modification, and destruction.
    In operating the enrollment exclusivity system, or in the conduct 
of any other activity that could involve the use or disclosure of 
Medicare beneficiaries' protected health information, the consortium 
will be considered, for the purpose of this initiative, a business 
associate, as defined by the Privacy Rule. Beginning with the formation 
and operation of the consortium, the consortium must develop, 
implement, and update periodically, a data security plan to assure that 
this information is secure from unauthorized disclosure, unauthorized 
modification, and destruction.
    Endorsed card sponsors must also establish and maintain a customer 
complaints process designed to track and address in a timely manner 
enrollees' complaints about any aspect of the card sponsor's 
operations. Card sponsors must comply with the customer complaints 
requirements as specified in their endorsement agreements with us.

[[Page 56647]]

a. Enrollment and the Enrollment Fee
    Comment: The proposed rule provided that card sponsors could charge 
no more than an initial $25 enrollment fee. In addition, the proposed 
rule sought comments regarding the advisability of permitting a nominal 
renewal fee of up to $15 in subsequent years of the initiative. 
Commenters expressed conflicting points of view regarding both card 
sponsors' ability to impose a maximum $25 enrollment fee in Year One of 
the initiative, as well as the need for and appropriateness of imposing 
a nominal renewal fee of up to $15 in subsequent years of the 
initiative.
    Most commenters supported both the proposed $25 initial enrollment 
fee as well as a renewal fee, with many expressing support for an 
annual renewal fee of as much as $25. These commenters argue that these 
fees are likely to be the principal sources of revenue for card 
sponsors in the absence of Federal funding to offset the administrative 
costs associated with the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative. Commenters asserted that enrollment costs 
identified in the proposed rule are significantly underestimated. As an 
example, one commenter pointed out that, while, on average, it may take 
card sponsors 15 minutes to enroll a beneficiary (as estimated in the 
proposed rule), each beneficiary will likely contact several of the 
endorsed programs to obtain information and materials before enrollment 
with one program. Therefore, the costs will likely be much more than 
the $11.62 enrollment cost referenced in the proposed rule, and this 
does not include expenses associated with the development of Internet, 
fax, telephone, and mail channels specific to the program. In addition, 
based on one commenter's experience, call center costs for individual 
enrollment are more than three times the cost per call of a typical 
group enrollment client, and experience shows that the senior 
population calls more frequently than other age groups, talk longer and 
prefers to speak to call center staff rather than use automated 
messaging systems, all of which increase operational costs.
    Other commenters believed that the $25 enrollment fee is excessive 
and is ``more than twice'' the actual enrollment costs that card 
sponsors will incur. These commenters did not believe an annual fee 
should be permitted.
    Response: We believe that the current policy of a one-time only 
enrollment fee up to $25 is reasonable and appropriate, as demonstrated 
in Section V.G of the regulatory impact analysis. While commenters 
correctly point out that a proportion of beneficiaries are likely to 
contact multiple endorsed card sponsors to obtain information and 
materials before deciding to enroll in a particular discount card 
program, we believe an enrollment fee up to $25 adequately accommodates 
these added costs. We are assuming that a large number of enrollments 
will be completed through a mail process, thus reducing the higher 
level of administrative costs that may be associated with enrollment 
via personal contact with customer service representatives.
    Furthermore, we believe an enrollment fee up to $25 will cover 
administrative costs. In addition, card sponsors will have the 
discretion to use a portion of negotiated rebates or discounts as 
necessary to fund operating costs. Therefore, the current policy of a 
one-time only enrollment fee (no annual renewal fees) will be 
maintained.
b. Call Center
    Comment: One commenter expressed support for the tracking of call 
center performance levels and believes the proposed standards of 
performance are generally acceptable. However, the commenter suggests 
that, before the standards of acceptable performance are finalized and 
implemented, actual experience with the program needs to be analyzed. 
The commenter recommends that card sponsors track and report call 
center performance levels for the first 6 months, and then be allowed 
to adjust any preliminary standards to make them more workable, if 
necessary.
    Response: We believe there should be concrete standards for card 
sponsor call centers. The qualification criteria that card sponsors 
must satisfy, including years experience, covered lives and financial 
criteria, have been carefully considered and serve to ensure that well 
established, stable organizations are endorsed by Medicare to offer 
discount card programs.
    Requirements for card sponsor call center operations are based on 
standard business practices, and card sponsors expected to qualify for 
Medicare endorsement should already be meeting these requirements. 
Based on the review of applications submitted in response to our 
solicitation for applications for Medicare endorsement issued on August 
2, 2001 on our Web site at http://www.cms.hhs.gov, potential card 
sponsors clearly expressed their ability to meet the defined customer 
service standards. In fact, many applicants indicated that their 
customer service centers currently exceed these standards.
    Comment: One commenter disagrees with the specific, quantifiable 
customer service requirements outlined in the proposed rule, including 
the requirement that 70 percent of customer representatives' time will 
be spent answering telephones and responding to enrollee inquiries. 
According to the commenter, this is not an industry standard. Private 
industry provides specific limitations of time off from work for 
vacation, sick and holidays and maintains strict guidelines in terms of 
tracking percent of work time in queue for customer service response.
    Response: The goal of this requirement is that 70 percent of a 
customer service representative's time while on the job is spent 
fielding incoming calls and inquiries.
    Comment: Two commenters suggested that card sponsor call centers 
should be responsible for pharmacies' questions.
    Response: We agree that card sponsors should have in place a 
convenient means for accommodating pharmacy inquiries regarding the 
card sponsor's program. Card sponsors could, for example, accommodate 
pharmacist inquiries by incorporating a specific number in the 
Interactive Voice Response (IVR) for the pharmacist to select so that 
hold times will be minimized (many pharmacies use this already for ease 
of access for physicians). We are aware that card sponsors, as part of 
their current business operations, generally have some established 
mechanism for responding to pharmacy inquiries. We do not intend to 
mandate a specific approach because we do not want to inadvertently 
force a higher cost solution; instead, individual card sponsors will 
have to provide information in their application for endorsement about 
how they will effectively address pharmacy inquiries.
    Comment: Two commenters suggest that call centers should operate 24 
hours per day. The commenters note that thousands of pharmacies across 
the country remain open all day and night because Medicare 
beneficiaries and other patients need convenient access to prescription 
drugs. Questions regarding prescription drugs can arise at all hours; 
therefore, call centers should remain open at all hours.
    Response: We do not agree that endorsed card sponsors should be 
required to provide 24-hour call center operations. According to 
analysis conducted for us by Booz-Allen-Hamilton, the numbers of 
pharmacies that operate on a 24-hour basis are a small subset of the 
total number of chain drug store outlets, differentiating themselves in 
the industry by providing

[[Page 56648]]

enhanced consumer convenience and value-added services such as drive-
through pharmacies or 24-hour services.
    Therefore, at this time, we do not believe there is sufficient 
justification to mandate 24/7 customer service for all card sponsors. 
We do agree, however, that the customer service component is critical 
to this initiative, and card sponsors will need to provide convenient 
access to customer services throughout their program area.
    We understand that a number of large PBMs currently provide 24/7 
customer service access, while others offer extended hours well beyond 
those required for this initiative. We will, however, monitor the 
adequacy of the card sponsor customer service requirements, and will 
consider modifying the present card sponsor customer service 
requirements if there is a demonstrated need as we gain experience with 
the program. The specific customer service requirements are delineated 
earlier in the preamble.
c. Information and Outreach
    Comment: Two commenters thought that we should prohibit card 
sponsors with regional programs from advertising their programs or 
their Medicare endorsement in print or broadcast advertisements that 
extend beyond their defined service areas for a Medicare-endorsed card 
program.
    Response: We agree with the commenters that regional card programs 
should not advertise their programs outside their defined service 
areas. With the exception of advertising in print or broadcast media 
with a national audience, outreach to beneficiaries outside of a card 
sponsor's defined service area could serve as the basis for corrective 
actions and/or termination of endorsement by us. In addition, our 
guidelines for information and outreach materials will require that 
card sponsors clearly disclose the areas in which their endorsed 
programs are available to beneficiaries.
d. Privacy
    Comment: We received a significant number of comments on privacy 
related provisions of the proposed rule. Several commenters indicated 
that potential drug card sponsors will prefer to operate under one set 
of privacy provisions in order to avoid operational inefficiencies and 
confusion. Of particular concern was the provision that will require 
obtaining written consent from beneficiaries regarding the expected 
uses and disclosures of their individually identifiable information. 
The commenters were concerned that because of this provision, the 
enrollment process--which otherwise could be conducted via telephone, 
fax, or electronically--will necessitate additional and potentially 
costly steps.
    Other commenters expressed concern about the lack of clarity and 
specificity regarding privacy protections for beneficiaries in the 
proposed rule, including: the need for specific limitations on what 
will be included among the expected uses and disclosures of 
individually identifiable information; whether beneficiaries will be 
provided notice of expected uses and disclosures of personal health 
information; whether the information about privacy provisions will be 
presented to beneficiaries in a manner that will be easily recognized 
and understood; and, whether beneficiaries who provide authorization 
for the use and disclosure of their personal health information will be 
allowed to revoke such authorization. These commenters stressed the 
importance of strong privacy protections under this initiative. Some 
commenters were concerned that the proposed rule's privacy provisions 
were not tied to HIPAA and, therefore, did not offer beneficiaries the 
same level of protection to which they would have been entitled under 
HIPAA. In particular, these commenters were concerned about drug card 
sponsors and pharmaceutical manufacturers inappropriately using and 
disclosing beneficiaries' individually identifiable information to 
market specific drugs and other profitable services.
    Response: We have significantly revised our privacy provisions for 
the Medicare-Endorsed Prescription Drug Card Assistance Initiative in 
response to public comment. These revisions reflect our understanding 
that companies with drug card programs will not qualify as covered 
entities under the Privacy Rule because of their drug card, but may be, 
in some circumstances, business associates of covered entities under 
the Privacy Rule. For example, drug card programs will be business 
associates of health plans where beneficiaries are group enrolled into 
a card program, and of pharmacies where the card sponsor performs drug 
utilization review or provides other health or business services as a 
feature of the endorsed program. Some companies sponsoring drug 
discount cards, however, may be covered entities due to other business 
activities. These revisions also reflect public comments and our 
understanding that without clear and specific privacy provisions that 
align with the Privacy Rule, there will be unintended gaps in privacy 
protections for beneficiaries' individually identifiable health 
information. Specifically, we require as a term of endorsement that 
card sponsors must agree to protect the privacy of Medicare beneficiary 
information, consistent with the privacy provisions set forth in 45 CFR 
160.103, 160.202, 164.501 through 164.514, and 164.520, including 
relevant subsequent changes to those provisions. These sections concern 
consent, authorization, notice, public policy, permissible uses and 
disclosures, and limiting disclosure to the ``minimum necessary''. For 
purposes of this initiative, a card sponsor must consider itself a 
``covered entity'' as referenced in the Privacy Rule. These provisions 
will go into effect beginning at the time of Medicare endorsement.
    We recognize that there could be circumstances wherein the sponsor 
of a card program could be operating under two sets of privacy 
provisions--that is, under the card program and in other lines of 
business--and that this could be costly and otherwise inefficient. We 
also share concerns expressed that beneficiaries need to understand and 
agree to the uses and disclosures of their protected health 
information. Since we believe that the privacy provisions under this 
initiative should be aligned with national policy concerning privacy as 
established in the Privacy Rule, we have revised the initiative to 
incorporate certain provisions of the Privacy Rule (along with any 
subsequent changes to those provisions).
    To protect against marketing of items or services outside of the 
scope of our endorsement, our definition of marketing for the purpose 
of this initiative includes any use or disclosure of protected health 
information considered outside the scope of the Medicare endorsement. 
Notice and written authorization will be required as stipulated in the 
Privacy Rule (along with any subsequent changes to those provisions), 
subject to our definition of marketing. The notice must contain 
reasonable provisions about how a beneficiary's authorization can be 
revoked.
    Finally, we provide that card sponsors will be required to develop, 
implement and update periodically a written security plan to assure 
that beneficiaries' protected health information is secure from 
unauthorized disclosure, unauthorized modification, and destruction.
    Comment: One commenter recommended that a card sponsor's failure to 
adhere to any of this final rule's privacy protections should 
constitute immediate grounds for withdrawal of the sponsor's Medicare 
endorsement.

[[Page 56649]]

    Response: We agree that failure to adhere to the privacy 
protections provided under this initiative is grounds for termination 
of a card sponsor's endorsement. As discussed elsewhere in this rule, 
in the case of termination, we reserve the right to require the card 
program to operate for 90 days to allow time for beneficiaries to 
identify and enroll in an alternative card program. We also reserve the 
right to fully consider the merits of any claim that a card sponsor has 
violated the privacy protections and whether corrective action or 
termination is the most appropriate course of action.
    Comment: One commenter noted that there are no limits in the 
proposed regulation text regarding what beneficiary information goes to 
the consortium or on how the consortium or its members use or disclose 
such information.
    Response: We make clear that in operating the enrollment 
exclusivity system or in the conduct of any other activity that could 
involve the use or disclosure of Medicare beneficiaries' protected 
health information, the consortium will be considered, for the purpose 
of this initiative, a business associate, as defined by the Privacy 
Rule. Beginning with the formation and operation of the consortium, the 
consortium will develop, implement, and update periodically a security 
plan to assure that beneficiaries' protected health information is 
secure from unauthorized disclosure, unauthorized modification, and 
destruction.
e. Customer Complaints
    Comment: One commenter thought that requiring that card sponsors 
have a formal grievance and appeals process was inappropriate. Because 
card sponsors will offer a discount card program and not a drug 
benefit, a grievance and appeals mechanism similar to that for a funded 
prescription drug benefit will create unrealistic expectations and 
confusion among beneficiaries and unnecessarily add to card sponsors' 
administrative costs. Instead of a formal grievance and appeals 
process, this commenter thought that we should simply require card 
sponsors to establish a process for addressing disputes. The presumed 
intent of a dispute resolution would be to help beneficiaries obtain 
their drugs expeditiously and simply.
    Response: We agree with the commenter that a formal appeals process 
is not necessary for discount card programs. We clarify our intended 
definition of a customer complaints process in Sec.  403.820 as a 
process ``designed to track and address in a timely manner enrollees'' 
complaints about any aspect of the drug card program.''
9. Administrative Consortium
    As a condition of endorsement, card sponsors must agree to 
participate in, abide by the rules of, and fund the administrative 
activities of a consortium. Beginning in Year One, the consortium will 
operate and maintain an enrollment exclusivity system and a Web site 
for comparing drug prices among the Medicare-endorsed discount card 
programs. Beginning in Year Two, the consortium's administrative 
activities will include review of card sponsors' information and 
outreach materials under guidelines produced by us. We expect the 
administrative consortium to be operational no later than the first day 
that Year One enrollment may begin.
    In structuring itself, we will also recommend that the consortium 
consider establishing an advisory board, comprised of beneficiary and 
other stakeholder representatives, such as pharmacists, physicians, and 
pharmacy benefit managers (PBMs), to provide guidance on the structure 
and operation of the consortium and publicly report on the performance 
of the consortium activities.
    The consortium must abide by Federal and State laws, including the 
privacy and security provisions established by the Secretary for the 
purpose of this initiative.
    The consortium will be financed by the Medicare-endorsed card 
sponsors. The administrative consortium will be free to use independent 
contractors to perform the review of information and outreach 
materials, as well as other consortium functions. As we explained in 
the preamble to the proposed rule, once card sponsors are endorsed, we 
will work with them to devise methods for funding and starting up the 
consortium. Card sponsors will be expected to share in start-up costs.
    Review of beneficiary information and outreach materials will 
become the responsibility of the administrative consortium beginning in 
Year Two of the initiative. In the first year of the initiative, we 
will be responsible for developing guidelines and reviewing card 
sponsors' information and outreach materials. Beginning in the second 
year of the initiative, the consortium will assume review of these 
materials using guidelines drafted by us. All materials to be reviewed 
for approval and that could therefore be used by the card sponsor will 
pertain only to the drug card initiative and to the card program and 
its features that are recognized by us as included under the Medicare 
endorsement. It is essential that information and outreach materials be 
reviewed to ensure that the Medicare name is not misused, for example, 
to market services unrelated to prescription drugs.
    We will also develop standards for use of a Medicare endorsement 
emblem and include them in the guidelines for information and outreach 
materials. To use the emblem on their cards, card sponsors will need to 
abide by the standards we develop, which will also cover the 
presentation of the emblem and other information on each program 
sponsor's discount card.
    The consortium's Web site for comparing prices must express drug 
prices in dollars for the purpose of comparing across endorsed card 
programs. The price comparison will also include information about 
generic substitutes. This comparative information will assist 
beneficiaries in deciding which Medicare-endorsed discount card will 
offer them the greatest financial advantage. We have also revised our 
policy from the proposed rule, so that a specific drug on the price 
comparison Web site is not dropped from the formulary, nor its price 
increased for periods of at least 60 days, starting on the first day of 
the program's operation. In addition, card sponsors will notify the 
pharmacy network, the consortium, and us of removals from the formulary 
or increases in prices 30 days in advance of the change.
    As discussed elsewhere in this preamble, card sponsors must also 
ensure that the consortium protects beneficiaries' protected health 
information, and therefore will be required to develop, implement and 
update periodically a data security plan that assures that 
beneficiaries' protected health information is secure from unauthorized 
use and disclosure, and unauthorized modification and destruction.
a. General Comments
    Comment: We received numerous comments about the cost of the 
consortium and its activities. They include: (1) The cost will erode 
the value of discounts to beneficiaries as discount card programs do 
not produce enough margin to fund the consortium and deliver meaningful 
savings to beneficiaries; (2) the costs of the consortium should be 
borne by us if associated with criteria required for the endorsement; 
(3) the costs for the consortium will limit participation by card 
sponsors by serving as a barrier to participation of not-for-profit and

[[Page 56650]]

community based organizations; (4) the costs of the consortium are, in 
some cases, duplicative of the card program's own infrastructure, and 
(5) to the extent that a card program could perform for itself the 
administrative activities of the consortium, then the consortium costs 
borne by that card program should be adjusted downward accordingly.
    Response: We will retain the requirement that endorsed card 
sponsors establish and fund an administrative consortium and the 
requirement that card sponsors fund it as a condition of endorsement. 
We believe that because the initiative is not a benefit, but instead a 
Medicare endorsement of private sector entities in order to educate and 
assist Medicare beneficiaries with their receipt of lower-priced 
prescription drugs, it is more appropriate for the private sector 
entities to operate the details of the initiative, including the 
consortium. We also think that card sponsors whose programs are 
competitively designed will have alternative sources of revenue that 
will more than offset the costs of the initiative through, for example, 
enrollment fees and negotiated manufacturer discounts and rebates on 
prescription drugs. Finally, many of the functions performed by the 
consortium, such as ensuring that information and outreach materials 
are accurate through the review process, providing a uniform mechanism 
for beneficiaries to compare prices through price comparison, and 
leveraging beneficiaries' negotiating power through enrollment 
exclusivity, will improve beneficiary confidence in the initiative and 
will thus improve beneficiary participation. This, in turn, should 
result in greater negotiating power for each of the card sponsors, and 
improve their ability to recoup costs of the consortium. We believe 
that the consortium function and its associated costs are appropriately 
borne by consortium and the card sponsors whose programs will benefit 
from the revenue stream generated under this initiative.
    We do not agree that the costs of the consortium will undermine the 
participation of not-for-profit and community based programs. If card 
programs can successfully demonstrate that they meet the other 
requirements provided in this rule, and if their program features are 
perceived by beneficiaries as valuable relative to competing card 
programs, then not-for-profit and community based programs should have 
similar opportunities as for-profit programs, through the revenue 
streams generated under the card program, to cover their administrative 
costs. While it may be true that some card programs could have 
administrative infrastructure similar to what may be developed and 
maintained by the consortium for the purpose of executing its 
functions, we do not believe that an individual card program sponsor 
can successfully fulfill the functions of the consortium on its own 
behalf, as the value of these functions requires coordination across 
the card programs. Nonetheless, perhaps the infrastructure could be 
utilized by the consortium to promote efficiencies, provided that the 
necessary legal and other arrangements are made to assure the 
legitimate operation of the consortium. Such a determination is up to 
the consortium and its members.
    Comment: A number of commenters expressed concern regarding the 
intersection between the consortium and antitrust laws. Commenters were 
concerned that if beneficiaries could only be in one endorsed card at a 
time, that might allow them to ``divide up the market for beneficiaries 
among themselves'' and violate antitrust laws. Commenters also 
expressed concern that the consortium's review of information and 
outreach materials in the second year of the program, or its posting of 
price information, could lead to potential antitrust violations.
    Response: The commenters' claim that the proposed rule allows 
Medicare-endorsed discount card program sponsors to illegally divide up 
the market for program beneficiaries ignores the functional reality of 
what was proposed. As we stated in the proposed rule, exclusive 
enrollment is based on the concern that ``multiple enrollments would 
dilute the negotiating leverage of each organization offering an 
endorsed discount card, thereby lowering the discounts from drug 
manufacturers available to beneficiaries'' (67 FR 10262, 10270).
    Far from authorizing program sponsors to divide up the market for 
beneficiaries, the proposed rule is premised on program sponsors 
competing to attract enrollees based primarily on comparative 
information on the prices offered to Medicare beneficiaries for drugs 
covered by the discount card. Therefore, to the extent Medicare-
endorsed discount card program sponsors are responsible for assuring 
enrollment exclusivity, they are merely implementing this requirement 
after competing successfully to attract enrollees over the plans' 
offerings. Such activity provides no support for the claim that the 
proposed rule allows the Medicare-endorsed discount card program 
sponsors to divide up the market for beneficiaries among themselves.
    In addition, we do not view the review of information and outreach 
materials or the posting of comparative price information as inherently 
anticompetitive. We expect that endorsed drug discount programs will 
need to work--perhaps with antitrust counsel--to ensure that the 
endorsed entities do not violate antitrust laws when they implement the 
review of information and outreach material or price comparison.
    Comment: One commenter stated that the final rule should more 
thoroughly address how the initiative is to be administered and what, 
if any, enforcement rights are being delegated to the consortium. The 
commenter also stated that there needs to be a more transparent 
exploration of how the consortium will work.
    Response: The consortium, not CMS, will determine the final designs 
and build and maintain the two systems associated with price comparison 
and assuring enrollment exclusivity. We will assist in developing 
options for the consortium to facilitate the start-up of the consortium 
and its activities. Beginning in Year Two, the consortium begins 
reviewing information and outreach materials using our guidelines. In 
addition to controlling the content of the guidelines in future years, 
even when the consortium is responsible for the review, we intend to 
transition the role of review to the consortium by conducting our own 
review on a sample of materials. Further, we reserve the right to spot 
check materials to assure that the consortium (and the card sponsors) 
are following the guidelines. While the final structure and operation 
of the consortium is the business of the consortium and its membership, 
we would intend to participate in the consortium activities on an ex 
officio and advisory basis. The other mechanism that we have for 
influencing the direction of the consortium is through the endorsement 
agreements with each of the card sponsors that may be revised annually, 
which will include terms for the sponsor's obligations to the 
consortium. The final structure and operations of the consortium cannot 
be made more transparent at this time, as endorsed card sponsors will 
ultimately be responsible for determining much of its design.
b. Enrollment Exclusivity
    Comment: A number of commmenters stated that the exclusivity system 
should be run by an entity other than the consortium, such as a third 
party which will not have access to any information about any 
enrollee's health or drugs purchased. One commenter

[[Page 56651]]

was concerned that if the consortium operates the exclusivity function, 
ineligible individuals may be enrolled through either fraudulent means 
or administrative errors if we are not going to check eligibility.
    Response: As discussed elsewhere in this rule, the consortium, in 
addition to each individual card sponsor, will be required to assure 
that the operation of the exclusivity system remains inside the privacy 
and security boundaries established under this final rule. Further, we 
believe that our complaints tracking system will be an important check 
to assure the confidence of the public in the operation of the 
enrollment exclusivity system. Given the public comments that we 
received in support of the consortium having an advisory board, we also 
believe that the consortium should consider an advisory board as 
another way to instill confidence in the public about consortium 
operations. We will monitor these sources of information and may 
implement a random check to assure the integrity of the system if this 
appears necessary.
c. Review of Information and Outreach Materials
    Comment: One commenter noted that there should be specific 
guidelines governing how we will monitor information and outreach 
materials to prevent unrealistic expectations among beneficiaries.
    Response: We agree with the commenter. We will develop information 
and outreach guidelines that card sponsors will be required to follow. 
Review of these materials, by us in Year One and by the consortium in 
Year Two, will be based on these guidelines. All materials to be 
reviewed for approval and that could therefore be used by the card 
sponsor will pertain only to the drug card initiative and to the card 
program and its features that are recognized by us as included under 
the Medicare endorsement.
    Comment: One commenter supported our requirements for prior review 
and approval of information and outreach materials based on our 
guidelines. One commenter opposed our requirement for prior review and 
approval of these materials because such review will be cumbersome and 
time consuming for card sponsors. Two commenters recommended that, 
instead, card sponsors file and use these materials based on our 
guidelines without prior approval, and that we audit these materials on 
an as-needed basis after their use.
    Response: We believe that prior review and approval of information 
and outreach materials is important under this initiative in order to 
protect beneficiaries' privacy and the Medicare name, as well as to 
ensure that materials used by the endorsed cards meet the guidelines 
that will delineate, among other things, what information must be 
provided to beneficiaries, what will be considered appropriate context, 
and how the Medicare name and emblem may be used. This will facilitate 
card sponsors gaining experience in developing materials for 
beneficiaries under our guidelines without putting these important 
objectives at risk.
    Comment: Two commenters thought that we should provide interested 
parties with an opportunity to review and comment on the proposed 
guidelines for information and outreach materials prior to finalizing 
the guidelines.
    Response: We believe the information and outreach material 
guidelines are interpretive rules that govern the presentation and 
content of materials, once a program has been endorsed. The 
solicitation for applications will contain the guidelines for 
information and outreach materials as an appendix, and the public will 
have time to submit comments and questions for clarification to us. We 
will take these comments and questions under advisement and make any 
necessary changes to the guidelines once the comment period has 
concluded.
    Comment: One commenter recommended that we require card sponsors to 
include a prominent statement in all their information and outreach 
materials that explains that the appearance of a drug on a card 
sponsor's formulary of discounted drugs does not mean that the drug is 
clinically superior to other products in that therapeutic grouping, and 
that clinical decisions about the proper drug for a beneficiary should 
be made by the treating physician in consultation with the beneficiary.
    Response: We agree with the commenter that this is an appropriate 
and important issue about which beneficiaries should be educated. We 
will take this recommendation under advisement as we work to finalize 
the guidelines for information and outreach materials.
    Comment: In support of pharmacy programs providing information 
about appropriate medication regimens, self monitoring, refill 
reminders, disease state information programs and drug therapy 
education, one commenter discussed the Medguide Action Plan developed 
by the Food and Drug Administration (FDA) in consultation with the 
industry as one model that could be used by the card programs to 
educate beneficiaries and included in expected uses and disclosure 
statements developed to protect the use of beneficiaries' personal 
information.
    Response: Beneficiary education is a key component of this 
initiative. We believe that our guidelines, which will assure that 
appropriate, complete and understandable information is provided to 
beneficiaries in a manner that also protects their privacy, as required 
under the privacy provisions of this initiative, are important. As we 
develop our guidelines for information and outreach materials, which 
will be included in the solicitation for applications, we will take 
this comment under advisement.
d. Price Comparison
    Comment: We received numerous comments on price comparison. Most 
commenters agreed that price comparison information could improve a 
beneficiary's ability to make an informed decision in choosing a 
discount card. One commenter claimed that comparative price information 
is more important to a cash-paying customer than to an insured 
customer. However, one commenter stated that price information reported 
by the individual card program should satisfy the requirement to 
provide information. Another commenter stated that retrospective 
pricing information (at the point of sale) from the card will provide 
the most meaningful information and will give the government the 
ability to audit and ensure that savings are passed to the beneficiary. 
Several commenters noted that comparisons of ever changing prices on 
the array of drugs and dosages that are available through standardized 
reporting procedures are among challenges that must be faced in order 
to develop an accurate and meaningful price comparison system. Other 
challenges include providing the information in a user friendly, 
understandable format. One commenter stated that overcoming these kinds 
of challenges to provide genuine comparative information is an 
impossible task. Commenters agreed that publishing discounts relative 
to the average wholesale price (AWP) will not be meaningful to 
beneficiaries and that price information is what is needed. One 
commenter said that restricting pricing disclosure to commonly used 
products, as was proposed in the proposed rule, would serve to protect 
established products to the detriment of their competitors, and that 
restricting the list of drugs may be construed by beneficiaries as 
Medicare endorsing these drugs. Several commenters said that generic or 
other alternative drug

[[Page 56652]]

therapies that may not be associated with a specific card's formulary 
should be provided so that beneficiaries know that an alternative is 
available, which may not be discounted as deeply as a brand name drug 
but could nonetheless be less expensive. Several commenters indicated 
the importance and value of working with the industry and beneficiaries 
to develop the comparison methodology and web site formats. One 
commenter stated that most people over 65 do not have access to the 
Internet; therefore, in addition to the web site, options need to be 
developed to get comparative information to beneficiaries through 
alternative communication channels.
    Response: We agree on the importance of comparative price 
information for beneficiaries to make an informed decision about 
joining a card program. We have revised our policy, which now provides 
that a specific drug offered under the card program is not dropped from 
the formulary, nor its price increased for periods of at least 60 days, 
starting on the first day of the program's operation. We also provide 
that comparisons will be based in dollars, not AWP discounts, and that 
information on generics will be provided. We do not agree that 
providing meaningful price comparisons is impossible, but we 
acknowledge the challenges raised in the comments and agree that 
developing a comparison price methodology with input from beneficiaries 
and industry stakeholders is important to assuring that the price 
comparison methodology is feasible operationally and meaningful. We 
also agree that alternative channels for providing price comparison 
information should be developed. We will work with the consortium to 
assist in developing a price comparison methodology, a design for a 
web-based price comparison system, and alternative channels for 
providing information. Work will be conducted with input from 
beneficiaries and the industry.
    Comment: In addition to prices, several commenters indicated the 
importance of providing other comparative information such as 
enrollment fees and the availability of patient management services.
    Response: This information will be provided through a number of 
communication channels, including on our Prescription Drug Assistance 
Program web site and by the card sponsors themselves for beneficiaries 
to use in making an informed decision about what card program to join.
e. Advisory Board
    Comment: We received several comments supporting an advisory board 
for the consortium and suggesting how it should be structured, who 
should be on the advisory board and whether we should be a member.
    Response: We agree that the consortium could benefit from having an 
advisory body representing beneficiaries and a cross-section of other 
stakeholders in the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative, and we will recommend that the consortium consider 
establishing an advisory board to provide it with guidance.
10. Our Educational Efforts
    We will educate beneficiaries about this initiative, both at the 
time it is announced and as part of ongoing education efforts 
thereafter. We will create and authorize the use of a Medicare-Endorsed 
Prescription Drug Card emblem. This emblem will be used to communicate 
that Medicare has endorsed a stable and reputable drug card. We will 
highlight this initiative in Medicare publications, such as brochures, 
and in the pre-enrollment package that is sent to all beneficiaries 
when they become eligible for Medicare. We will provide general 
information about the initiative on the Medicare Web site (http://
www.medicare.gov). We will post on our Web site information for each 
discount card program including: contact information, including toll 
free telephone numbers for individual programs, the program's web site, 
enrollment fee, and customer service hours.
    Since other prescription drug related services, such as drug 
interaction notification, drug allergy notification and pharmacy 
counseling, could improve the overall quality of the card program, we 
will identify these services on our web site as well, provided they are 
not associated with a separate fee. We will strive to educate Medicare 
beneficiaries that, generally, generic drugs are less expensive than 
brand name drugs, even those purchased at a discount. Among the 
messages we will disseminate to beneficiaries are: an emphasis on the 
importance of drug coverage, including the messages that beneficiaries 
should keep their existing coverage, or access coverage, for example, 
through a Medicare+Choice plan in their area, or through Medicaid if 
the beneficiary could qualify; that many Medicare+Choice plans and 
other health care insurance include a discount card program as an added 
feature to their benefit package and that beneficiaries should check 
with their plan to see if this is an integrated part of their benefit 
package; that beneficiaries who are admitted to long-term care 
facilities may not be able to benefit from a discount card if the 
facility is operating under policies that maintain a closed drug 
dispensing system; and that a Medicare endorsement does not constitute 
an endorsement of any particular drug over another, therefore, 
beneficiaries should consult with their physician and pharmacist to 
select the best drug for their particular needs. We will develop these 
messages and identify and develop other necessary messages into 
understandable and meaningful information for beneficiaries in order to 
maximize the value they get from their participation in this 
initiative.
    The information made available on our web site will also be 
available to Medicare beneficiaries through the toll-free Medicare 
information line (1800MEDICARE), which is available 24 hours per day, 7 
days a week. In addition, we will strive to disseminate information to 
community level organizations that represent the needs and the 
interests of the diverse Medicare beneficiary population.
    Comment: One commenter thought that there was no quality check in 
place to ensure that the best drug is being dispensed to beneficiaries, 
and that card sponsors should inform beneficiaries about any drug that 
offers an advantage. Another commenter made the point that 
beneficiaries should be educated that the drugs contained in a card 
sponsor's formulary are not necessarily clinically superior.
    Response: We will encourage participants in the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative to continue to rely on 
their doctor and pharmacist in selecting the best drugs for their 
condition, emphasizing that a drug's therapeutic effectiveness and its 
cost do not necessarily correlate, especially when a generic 
alternative is available. It is not unusual for alternative, less 
expensive drugs to provide the same clinical benefit as more expensive 
drugs. One of the important features of this initiative is that 
discount card programs and the consortium will make available price 
information that can be compared so that beneficiaries can discuss with 
their doctor and pharmacist similarly effective, but less expensive 
drugs as alternative therapies.
    Comment: One commenter noted that because manufacturer 
participation is voluntary, not mandatory, this initiative will result 
in a patchwork of covered and non-covered drugs, which will

[[Page 56653]]

create the need for a high level of consumer involvement in order to 
assure savings for beneficiaries' individual prescriptions. The 
commenter thinks that many seniors will not be familiar enough with the 
individual endorsed programs to enroll with a sponsor that covers their 
particular prescriptions and actually secure the initiative's intended 
savings.
    Response: We are committed to educating beneficiaries and assuring 
that they have timely and accurate information to address their drug 
discount questions. As part of this initiative, we will launch a 
widespread educational effort to address beneficiaries' questions and 
concerns in a variety of formats. Card sponsors will make available 
drug formulary and price information, and the consortium price 
comparison system will assist the public in determining which sponsors' 
endorsed cards are offering the largest discounts on any given drug. We 
are confident that when provided with the appropriate information, most 
beneficiaries and their families will make appropriate card elections 
based on an examination of pertinent health care needs. In the 
unfortunate case when a beneficiary chooses a prescription drug card 
program and is dissatisfied with its discounts, he or she may enroll in 
a different program, to become effective the first day of the following 
January or July, whichever comes first. Also, as we discuss elsewhere 
in this preamble, endorsed cards will be required to have discounts on 
a drug in the therapeutic categories most common to Medicare 
beneficiaries, thereby giving seniors access to discounts on a broad 
range of prescription drugs.
    Comment: One commenter thought patients' primary care physicians 
should be involved in educating seniors about their options.
    Response: As Medicare beneficiaries rely on their physicians for 
medical treatment and guidance, we agree that it will be helpful to 
beneficiaries if their physicians were familiar with this initiative. 
We plan to provide information to the physician community so they may 
help beneficiaries obtain lower prices for the prescription drugs they 
take. Several major national medical organizations provided comments in 
support of this initiative and we plan to work with these organizations 
to provide educational material to physicians.
    Comment: One commenter noted that due to the vast differences in 
educational attainment and literacy levels in the population that 
Medicare serves, print materials for consumers should be at the sixth 
grade reading level.
    Response: We agree that in order to be effective in getting 
information about this initiative out to the public, we have to be 
cognizant of our beneficiaries' needs, including literacy levels. We 
recognize the diversity of the Medicare population and it is a priority 
to effectively reach out to Medicare beneficiaries at all literacy 
levels. To this end, we utilize many information channels beyond print 
materials, including the toll-free 1800-MEDICARE help line and our 
annual fall television advertising campaign. When we do use print 
materials, we strive for a fifth grade reading level.
    Comment: One commenter recommended that education materials inform 
beneficiaries about Medicaid and other low-income assistance programs.
    Response: We are committed to educating Medicare beneficiaries 
about all avenues of assistance that may be available to them, 
including low income and drug assistance programs. On our Medicare Web 
site, http://www.medicare.gov, individuals can search the Prescription 
Drug Assistance Program database, which provides information on public 
and private programs that offer discounted or free medication, as well 
as Medicare health plans that include prescription coverage. The 
Prescription Drug Assistance Program database can be searched by 
geographic region to help Medicare beneficiaries find programs in their 
areas for which they may qualify.
    Comment: Three commenters suggest that, in order to get our message 
to all facets of the Medicare beneficiary population, we not limit 
information to the Internet and telephone, but that we also utilize 
community organizations, public buildings, and physician's offices to 
disseminate our educational messages.
    Response: We understand the divergent needs of the nation's 40 
million Medicare beneficiaries, and that a multi-faceted education 
program that recognizes different cognitive levels, literacy levels, 
languages, racial and ethic backgrounds and socioeconomic status is 
necessary as part of this initiative. We will support education on the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative via paid 
print media and television advertisements, disseminating information 
via our local information intermediaries in the State Health Insurance 
Programs (SHIPs) and via our national and regional partner 
organizations across the nation. These include a number of consumer 
advocates and organizations representing specific racial and ethnic 
backgrounds.
    Comment: One commenter expressed the concern that it would be the 
pharmacies, not policymakers, who would be largely responsible for 
explaining and discussing the costs of medication under the Medicare-
Endorsed Prescription Drug Card Assistance Initiative.
    Response: We recognize that pharmacists often serve as a source of 
information for people with Medicare, and pharmacists are likely to be 
approached by beneficiaries with questions about this initiative. The 
discount card market today is essentially unorganized, and consumers 
may have multiple discount cards. Therefore, consumers understandably 
ask questions about their discount card programs at the point of retail 
sale. We believe that certain features of this initiative, for example, 
enrollment exclusivity, and the focus on outreach and education, will 
minimize the need for beneficiaries to rely on their pharmacists for 
information about the endorsed card programs.
    We believe that beneficiaries will seek information largely from 
their card sponsors, as well as the Medicare program, because of our 
role in conducting national outreach and education activities. 
Therefore, we do not believe that pharmacies will be unduly burdened by 
this initiative.
11. Oversight and Reporting
    As a condition of endorsement, and in addition to the information 
that card sponsors will provide in their applications, card sponsors 
will be required to report on major features of their programs that 
correspond to the qualifications for endorsement, such as savings to 
beneficiaries and customer service, and we will ask card sponsors to 
certify the validity of their reported data. During the endorsement 
period, drug card program sponsors will be required to notify us of any 
material modifications to their programs if the modifications could put 
them at risk of no longer meeting any of the terms of endorsement.
    We will ask card sponsors to report on the aggregate level of 
rebates or discounts shared with beneficiaries and the participation of 
independent pharmacies in the card program's network.
    The information to be reported will generally consist of 
performance measures and indicators typically provided by third party 
administrators of pharmacy benefits in the current drug insurance 
industry.

[[Page 56654]]

    We will provide a reporting tool in the solicitation for a Medicare 
endorsement of discount card sponsors to ensure consistent and 
comparable reporting by card sponsors. In developing this tool, we will 
make an effort to minimize reporting burden on card sponsors. These 
reports will allow us to assess card sponsors' performance relative to 
the endorsement qualifications. We intend, after obtaining some 
experience, to report on our web site the card sponsor's performance on 
reliable quality and satisfaction standards pertaining to key aspects 
of the card program related to endorsement in order to help 
beneficiaries make informed decisions when choosing their discount card 
programs.
    We intend to develop and operate a complaint tracking system to 
monitor and manage complaints brought to our attention that are not 
satisfactorily resolved through the card sponsors' customer complaints 
process. We anticipate tracking complaints related to deceptive 
education, outreach, and enrollment practices, violations of the 
privacy provisions, persistent inconsistencies in formulary or pricing 
information compared to what is available at the point of sale, 
inadequate card sponsor customer service, persistent problems with 
pharmacy network services or providers, and any additional changes 
which put the card sponsor at risk of failing to continue to meet the 
endorsement requirements.
    We will also refer complaints to Federal and State authorities 
where violations of laws under the jurisdictions of these agencies are 
in question.
    We will reserve the right to terminate any endorsement at any time 
for violations of the terms of the endorsement, as well as to take 
appropriate intermediate corrective actions to correct persistent 
problems in a card sponsor's performance in cases in which immediate 
termination is not warranted.
    Card sponsors may also terminate the endorsement, but we will 
require a 90-day advance notice of termination to us. Also card 
sponsors must notify all Medicare enrollees of termination within 10 
days of either providing us with notice of termination, or within 10 
days of receiving a notice of termination from us. In addition, in 
cases in which a card sponsor chooses to terminate its participation in 
the initiative or in which we terminate a card sponsor, we will require 
that card sponsors provide beneficiaries with notice of termination at 
least 90 days before discount card program operations cease, and that 
card sponsors suspend information and outreach activities and 
enrollment after sending enrollees notice of termination.
    We will consider drug card program sponsor performance under an 
existing Medicare endorsement as one factor in determining eligibility 
for endorsement in future annual cycles.
a. Reporting
    Comment: One commenter indicated that rebate formulas should be 
open to all and not be considered proprietary, while several commenters 
indicated that rebates (and other proprietary information) are strictly 
confidential and should not be shared with us.
    Response: We agree that proprietary information should not be 
shared with the public. We do not consider all aspects of rebate 
reporting to be proprietary, including aggregate measures of rebates as 
a share of total savings to beneficiaries.
    Comment: One commenter asked if we will track how often enrollees 
switch to different programs.
    Response: We will track, in the aggregate, how many times 
beneficiaries switch to different programs. Data to support this 
analysis will be included in the expected uses and disclosures as part 
of normal operations of the enrollment exclusivity system. Also 
individual cards will be required to report enrollments and 
disenrollments.
    In the proposed rule, we requested comments on, and information 
about, available quality measurements, including whether they are 
standardized and reliable, how they are, or could be, reported, and 
whether they would be meaningful to beneficiaries in their selection of 
a drug discount card program.
    Comment: A number of commenters supported card sponsor reporting 
and monitoring of card sponsor performance on rebates or discounts to 
ensure that card sponsors are accountable to us for the manufacturer 
rebates or discounts they agree to pass on to beneficiaries. These 
commenters expressed various concerns and provided suggestions 
regarding how card sponsors should report this information to us, the 
types of information that should be reported to us, and how we should 
convey information about card program rebates or discounts to 
beneficiaries. Several commenters were opposed to card sponsor 
reporting on rebates or discounts, citing potential complications such 
as the proprietary nature of some of this information and the typically 
retrospective reporting of rebates. Two commenters discussed the need 
to find an appropriate balance in oversight of this initiative such 
that card sponsors worthy of endorsement were approved while avoiding 
excessive conditions of endorsement relating to program design and 
service delivery.
    Response: We agree that periodic reporting for card sponsors is 
necessary in order to monitor card sponsors' performance related to the 
qualifications for the Medicare endorsement and use of the Medicare 
name. We believe the reporting requirements should be balanced relative 
to the risks associated with this initiative in the event of poor 
performance, which do not include the loss of benefits under a 
beneficiary entitlement or to the Medicare trust funds. We plan to rely 
on a variety of mechanisms to ascertain performance of individual card 
programs and the initiative overall, including reviewing certified card 
sponsor reports, operating a complaints tracking system, and surveying 
beneficiaries. It is our position that reporting on aggregate levels of 
rebates or discounts will be necessary in order to ensure that card 
sponsors continue to meet the endorsement qualifications and provide 
the program they agree to in their endorsement agreement with us. We do 
not believe that all the information reported to us will be immediately 
useful to beneficiaries in their selection and use of a card program, 
but that generally information will be valuable to beneficiaries once 
reviewed and analyzed by us and ultimately disseminated in some form to 
beneficiaries.
    Comment: Two commenters supported measuring card sponsors' 
performance in terms of whether they achieve genuine cost savings for 
beneficiaries. They also recommended that we discontinue our 
endorsement of card programs that do not offer significant cost 
savings, that market more expensive brand name drugs instead of less 
expensive generic drugs, and that fail to pass manufacturer rebates on 
to beneficiaries. Another commenter suggested that, as part of 
oversight of card sponsors, we establish target generic utilization 
rates and evaluate sponsors' performance against those targets.
    Response: This program is an endorsement of private sector drug 
discount programs that meet our defined criteria. While we will 
maintain reporting and other minimal requirements, we believe the level 
of government involvement should be as minimal as possible. While we 
believe that reporting on the level of generic drug utilization rates 
may be informative for both beneficiaries and us, we do not think it is 
appropriate to impose certain thresholds on generic

[[Page 56655]]

drug utilization and to require reporting related to those thresholds. 
By providing useful information to beneficiaries so that they can make 
informed comparisons, card sponsors will compete on value to 
beneficiaries which we believe will drive programs to offer 
prescription drugs, pricing, and other services favorable to 
beneficiaries.
    Comment: One commenter recommended that we use the finalized 
section on ``Measuring Quality of and Access to Pharmacy Services in 
Managed Care Plans'' developed for HCFA's Managed Care Pre-
Implementation Review Guide. The commenter states that the guide 
measures quality of and access to pharmacy services in managed care 
plans and delineates the government's role in oversight, access to good 
patient care, and quality of pharmacy services.
    Response: We have reviewed this document, which appears to be a 
collection instrument for information regarding managed care plans' 
pharmacy network services. We agree that it captures important elements 
regarding the quality of and access to pharmacy services, and that some 
of these elements might be relevant to card sponsors' pharmacy 
networks. We will take the information in this document under 
advisement as we finalize the measures we will use to ensure that card 
sponsors continue to meet the endorsement qualifications.
    Comment: Two commenters recommend that we require sponsors to 
demonstrate their financial solvency by filing quarterly financial 
reports, and that such reports should be posted on the consortium's Web 
site.
    Response: We do not believe that quarterly financial reporting from 
a sponsor is needed. Applicants will be periodically reporting on 
certain performance-oriented data (for example, enrollment and 
disenrollment data, and complaints data reported to the card sponsor 
customer service centers). These data are likely to be more timely and 
useful indicators of specific service problems than evidence of 
financial problems reflected in historical financial reporting. Also, 
annual independently audited financial reports (balance sheet; revenue 
and expense statement; and a cash flow statement) will be required from 
the sponsor as part of the endorsement qualification application.
    Regarding the suggestion that we post quarterly financial reports 
on the consortium's Web site, it is not our intention to require that 
card sponsors post financial reports on the consortium Web site. We 
believe that beneficiaries will be interested in comparing program 
features, including specifically prices on drugs offered for a 
discount. We will monitor card sponsor financial status through the 
endorsement application process. Additionally, once endorsements are 
awarded, we intend to post on our Web site card sponsor-specific 
performance measures related to the operation of the program that are 
useful to beneficiaries. Further guidance on performance measures will 
be included in the solicitation for card program applications.
b. Other Oversight
    Comment: One commenter stated that Federal agencies should have 
jurisdiction and access to the necessary information to prevent abuse 
of the program or anticompetitive practices.
    Another organization commented that it could not discern any 
significant role for us in this initiative beyond simply selecting and 
endorsing card sponsors and providing informational materials.
    Response: We agree with the first commenter. We believe we have an 
important responsibility to beneficiaries to ensure that card sponsors 
continue to meet the qualifications for a Medicare endorsement after 
they have become Medicare endorsed. In order to protect the Medicare 
name and assure that the terms of the card sponsors' endorsement 
agreements are met, we must perform some level of oversight. This 
oversight will consist of: ensuring that card sponsors have a 
complaints process and provide periodic reports on various key aspects 
of the their program related to endorsement qualifications; considering 
a card sponsor's performance in future endorsement cycles; reviewing 
card sponsors' information and outreach materials in the first year of 
the endorsement to ensure that our guidelines are being followed; 
operating a complaints tracking and management process; taking any 
intermediate corrective actions we believe are necessary to improve 
deficiencies in a card sponsor's performance; and terminating the 
endorsement for persistent or egregious failure to comply with the 
qualifications for endorsement and the program that the card sponsor 
agrees to make available in its endorsement agreement.
    Comment: Two commenters recommended that we create a process for 
beneficiaries and others to submit complaints or evidence of card 
sponsor non-compliance and stated that a compliance review process is 
essential to ensuring that card programs and sponsors are, in fact, 
qualified for Medicare endorsement. In addition, the commenters thought 
that we should create an administrative process such that beneficiaries 
and pharmacies could challenge the representations made by card 
sponsors and the consortium in their information and outreach 
materials.
    Response: We agree with the commenters. As proposed in the proposed 
rule, we will develop and operate a system to track and manage 
complaints by beneficiaries and others. We expect that beneficiaries 
will first attempt to resolve their complaints through their card 
sponsor's customer complaints process. To the extent that beneficiary 
complaints are not satisfactorily resolved by the card sponsors and are 
called to our attention, our complaints tracking system will monitor 
and attempt to resolve those issues. Among the types of complaints we 
will track include those related to deceptive education, outreach, and 
marketing practices. We will use data from the complaints tracking 
system, as well as information reported to us on key aspects of card 
sponsors' programs, to ensure that card sponsors continue to meet the 
qualifications for endorsement.
    Comment: Two commenters recommended that we revise the regulation 
text in the final rule to mandate withdrawal of endorsement if a card 
sponsor fails to meet or maintain the standards for endorsement or 
makes false or misleading statements to beneficiaries or pharmacies.
    Response: We agree with the commenter that failing to meet the 
standards for endorsement or making false or misleading statements are 
potentially valid reasons for us to terminate an endorsement. However, 
we believe we should have the necessary flexibility to invoke 
intermediate corrective actions upon a card sponsor instead of 
automatically terminating the sponsor. We anticipate that there could 
be violations of the endorsement agreement that are not persistent or 
egregious enough to warrant immediate termination of a Medicare 
endorsement. To the extent that we can work with a card sponsor, for 
example, by taking intermediate corrective actions designed to ensure 
that card sponsor is able to correct its problem and bring the 
organization back into compliance with the terms of the endorsement 
agreement, we would like to maintain our flexibility to terminate an 
endorsement and maintain access to an otherwise useful card program for 
beneficiaries.
    Comment: One commenter recommended that card sponsors notify 
enrollees at least 90 days prior to a termination to enable 
beneficiaries to research other options and select an alternative 
discount card program.

[[Page 56656]]

    Response: We agree with the commenter that a 90-day advance notice 
of termination will facilitate the selection of a new card sponsor by 
beneficiaries. In Sec.  403.804 of the proposed rule, we require that 
card sponsors notify all Medicare enrollees of termination within 10 
days of either providing us with notice of termination, or within 10 
days of receiving a notice of termination from us. In addition, in 
cases in which a card sponsor chooses to terminate its participation in 
the initiative or in which we terminate a card sponsor, we will require 
that card sponsors provide beneficiaries with notice of termination at 
least 90 days before discount card program operations cease, and that 
card sponsors suspend outreach and enrollment after sending enrollees 
notice of termination.
    Comment: Two commenters asked that we provide more specificity 
regarding how we will measure a card sponsor's performance when 
deciding whether to re-endorse a card sponsor.
    Response: We will require that card sponsors report on key aspects 
related to endorsement, such as aggregate level of manufacturer 
rebates, customer service, and discount card program operations, such 
as call center performance, complaints processes, and enrollment and 
disenrollment. As stated earlier, we will provide a reporting tool in 
the solicitation for Medicare endorsement of discount card sponsors to 
ensure consistent and comparable reporting by card sponsors. In 
developing this tool, we will seek to minimize reporting burden on card 
sponsors. We will utilize this information, as well as any data trends 
captured through our complaints tracking system, as one factor in 
determining whether to endorse a card sponsor beyond the initial 
endorsement.
12. Other
a. Standardized Identification Cards
    Comment: Several commenters supported the use of standard benefit 
identification cards. Inconsistent or non-standard information can 
create barriers or delay in receiving necessary care, as well as 
inefficiencies for pharmacies, which must be able to process a variety 
of different cards with a variety of different formats and data fields. 
The commenters recommended that we adopt the identification card 
standards developed through the industry's national council for 
standards development, the National Council for Prescription Drug 
Programs (NCPDP). This council has broad representation from across the 
industry, as well as from relevant government agencies. It was noted 
that, since 1998, the industry has seen widespread implementation of 
the standardized ID card format with legislation for adopting these 
standards introduced or passed in 40 states. To date, 22 States have 
enacted legislation requiring the use of standardized cards.
    Response: We agree that standardized identification card technology 
has the potential to promote significant efficiencies in this industry. 
We will ask the consortium to determine whether a standardized 
identification card should be used by all Medicare-endorsed card 
programs. Since the industry has already established guidelines for 
standardization through NCPDP, the consortium and its membership are 
best situated to determine whether standardization will create an undue 
burden on any particular card program or members of its pharmacy 
network.
b. Best Price
    Comment: One commenter indicated that discount card sales should be 
exempt from Medicaid best price calculations; otherwise, manufacturers 
will keep discounts levels lower than they otherwise would.
    Response: We do not have statutory authority to exclude 
manufacturer prices under this initiative from the Medicaid best price 
calculation.
c. Partnering With States
    This initiative is targeted to the private sector marketplace and 
the conditions for endorsement are tailored to reflect the strengths of 
the private marketplace, as well as to protect the integrity of the 
initiative, beneficiaries, and the Medicare name.
    Under this initiative, States could partner with private drug card 
program sponsors by selecting a Medicare-endorsed program and offering 
its own endorsement, and having a distinct card. One restriction is 
that the endorsed card program must continue to operate in the State 
(as well as in the District of Columbia, Guam, the Commonwealth of 
Puerto Rico, and the U.S. Territories) as it is defined in the 
sponsor's agreement with us. Under this initiative, the endorsed 
discount card program will have to be made available to all Medicare 
beneficiaries in a State. The Medicare-Endorsed Prescription Drug Card 
Assistance Initiative may not be restricted to only certain Medicare 
beneficiaries, such as those age 65 and over, or those with certain 
levels of income. However, different populations could be segmented for 
information and outreach purposes, provided that such activities will 
not mislead or intentionally misrepresent to the public the nature of 
the endorsed program, and that such activities will include 
beneficiaries with disabilities, beneficiaries with End-Stage Renal 
Disease (ESRD), and beneficiaries age 65 and over.
    Comment: One commenter stated that partnering between States and 
endorsed card programs, as well as between purchasing groups, 
Medicare+Choice (M+C) and Medigap plans could be of benefit to 
beneficiaries, making it easier potentially to identify and enroll 
Medicare beneficiaries. The commenter also indicated that States may be 
interested in offering additional discounts through these cards. 
Another commenter supported Medicare endorsement of State based 
programs under provisions that maximize State experimentation which 
could allow certain discount card programs that do not meet the 
requirements of this rule (for example, to negotiate and share with 
beneficiaries manufacturer rebates) to possibly be a program for 
endorsement by a State.
    Response: We agree that there are potential synergies between 
States, private payers, including Medicare+Choice plans and the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative, that 
could benefit beneficiaries. To inform future policy making in this 
area, we will monitor what States and private payers, including 
Medicare+Choice plans, do to partner with Medicare-endorsed card 
programs, and how the rapidly evolving discount card market is used and 
influenced by these parties.
d. Managed Care Organizations
    Comment: One commenter recommended that, because managed care 
organizations (MCOs) currently offer drug discount cards, and because 
they have played a leadership role in providing beneficiaries access to 
prescription drugs, MCOs should have the option to participate in the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative or to 
continue to offer their discount programs independently. The commenter 
identified a number of the initiative's provisions that will have to 
change, so that MCOs will likely qualify for endorsement or simply to 
accommodate the structures and processes in place for their health 
plans.
    Response: We determined that MCOs should not be treated differently 
from other applicants for endorsement. As the commenter points out, 
prescription drug discount cards offered by managed care organizations 
are provided in the context of a system of care; the discount card is 
one of many integrated elements that allow managed access to a system

[[Page 56657]]

of care for a plan's enrollees. This is not unique to Medicare+Choice 
plans. Many employer and other types of health insurance use the 
leverage available to the plan through the volume the plan generates 
with enrollment and through drug utilization management schemes, in 
order to maintain low prices at the point of sale for an enrollee when, 
for example, drug coverage has been exhausted--this in effect serves 
the purpose of a discount card even though typically the enrollee does 
not have a separate card for discounts. We agree that discount cards 
provided in the context of a system of care are and should be a 
coordinated component of the health care benefit, with the health care 
benefit design driving the parameters of the drug discount program 
features. However, the target audience for this initiative is Medicare 
beneficiaries who do not have or want access to drug coverage or 
discounts in the context of a managed health care benefit; the 
requirements for this initiative have been established accordingly. As 
Medicare+Choice plans already have the imprimatur of Medicare's name, 
we believe that the best approach to recognizing that drug discounts 
may be a feature of a plan is to educate Medicare beneficiaries about 
that. We believe it is important to educate beneficiaries that drug 
coverage rather than discounts is likely to be of greatest benefit, and 
that many Medicare+Choice plans offer one or both.
e. Blood Glucose Monitoring Equipment and Supplies
    Comment: One commenter recommended that we clarify that applicants 
should not include as features in their programs self-monitoring blood 
glucose equipment and supplies. The commenter noted that glucose strips 
are already covered by Medicare and do not need to be part of the 
initiative. Further, to the extent that an applicant includes blood 
glucose test strips as a non-endorsed feature of their card programs, 
we should require that the supplier of such strips be recognized as a 
Medicare supplier and that claims for these services be filed as 
required by Medicare Part B rules.
    Response: We agree with the commenter that the Medicare endorsement 
of drug discount card programs is for prescription drug products. 
Glucose strips are already covered under Medicare and are not expected 
to be part of this initiative.
f. Low-Income-Only Programs
    We asked for comments regarding whether the Medicare drug card 
program could provide easier access for eligible beneficiaries to 
several recently announced drug manufacturer discount programs. Since 
January 2002, a number of manufacturers have announced discount 
programs designed to help low-income individuals access prescription 
drugs. Lilly, Pfizer and Novartis announced programs that feature a 
flat ``copay'' for each monthly supply of a particular drug. Seven 
manufacturers (Abbott Laboratories, AstraZeneca, Aventis, Bristol-Myers 
Squibb, GlaxoSmithKline, Johnson & Johnson, and Novartis) have 
partnered together to form Together Rx, which offers discounted prices 
to eligible persons. Individuals enrolling in these programs are able 
to purchase prescription drugs offered under the programs at discounted 
prices at retail pharmacies. Many other prescription drug manufacturers 
also offer programs designed to help low-income individuals, although 
many of these programs do not offer the discount at the point of sale. 
The income requirements of these programs differ somewhat among the 
programs, but all are targeted at low-income individuals without 
coverage from other sources.
    The Medicare web site and 1800MEDICARE already offer information 
about these programs. We plan to continue to highlight these programs 
in an attempt to raise beneficiary awareness about them. These programs 
may be of help to many low-income beneficiaries without drug coverage 
from another source.
    Comment: Two commenters indicated that we should provide for 
endorsement of prescription drug discount cards that are targeted to 
low-income beneficiaries. One commenter indicated that, if we consider 
Medicare endorsement of low-income card programs, the same level of 
patient protection and value should be expected of them (including plan 
standards, pharmacy network, formulary requirements and drug safety 
programs). Another commenter indicated that we should not offer 
endorsement to manufacturer-based plans that direct discounts to only 
or principally low-income individuals because these programs do not 
meet the requirements on endorsement, and doing so will not be in the 
best interests of this initiative.
    Response: Manufacturer-sponsored programs are welcome to apply for 
Medicare endorsement, but must meet the requirements that all card 
sponsors must meet to qualify for endorsement (for example, enroll all 
Medicare beneficiaries wishing to enroll and offer a discount on at 
least one drug in each of the therapeutic categories identified 
elsewhere in this preamble). We believe that all Medicare beneficiaries 
without prescription drug insurance would greatly benefit from being 
educated about methods of lowering their out of pocket costs for 
prescription drugs, and we will encourage all Medicare beneficiaries 
without prescription drug insurance coverage to consider enrolling in a 
Medicare-endorsed discount card program.
    This Administration strongly supports providing assistance for low-
income individuals regarding the purchase of prescription drugs. The 
President has proposed major programs to help low-income individuals 
gain access to prescription drug coverage (including Pharmacy Plus 
waivers under Medicaid, which has drawn much interest from states). The 
Administration continues to work with the Congress to enact 
prescription drug coverage for all Medicare beneficiaries in the 
context of overall Medicare reform, with additional assistance for low-
income beneficiaries. However, this initiative is intended to be of 
assistance to all Medicare beneficiaries without drug coverage, not 
only low-income beneficiaries.
    It is possible that manufacturer-sponsored discount programs could 
seek and secure Medicare endorsement of discount programs by making 
some changes to their programs, either alone or by partnering with 
other organizations. We believe that Medicare endorsement will help 
these programs reach as many eligible beneficiaries as possible.
    Comment: Several commenters suggested that initial efforts by 
Medicare (either in the context of a Medicare drug benefit or this 
initiative) should focus on low-income beneficiaries first.
    Response: As discussed above, we believe that all Medicare 
beneficiaries without prescription drug coverage could and should 
benefit from this particular initiative. This Administration has 
proposed and/or implemented a number of efforts to assist low-income 
individuals purchase prescription drugs. A Medicare drug benefit is not 
the subject of this final rule.
    Comment: One commenter indicated that the final regulation should 
expressly require existing manufacturer-sponsored patient assistance 
programs to continue.
    Response: These manufacturer-sponsors programs are voluntary 
efforts on the part of manufacturers. We do not have statutory 
authority to impose such a requirement.
    Comment: One commenter indicated that we should ensure that 
eligible low-

[[Page 56658]]

income seniors receive benefits through programs such as Medicaid 
before enrolling in a Medicare-endorsed discount card program.
    Response: We strongly support the efforts of states and others to 
conduct outreach to Medicaid-eligible individuals who are not currently 
enrolled in Medicaid. We do not require that card sponsors screen 
potential enrollees for Medicaid eligibility; we believe this is better 
done by the states. Part of the beneficiary education efforts we will 
undertake under this initiative will be to educate beneficiaries that 
if they have or are eligible for insurance coverage for prescription 
drugs, including Medicaid coverage, then they are better off having 
insurance coverage. We will be clear that this initiative is not 
insurance coverage, but a discount program. It is possible that our 
education efforts (that are the cornerstone of this initiative) will 
prompt some beneficiaries to consider whether or not they may be 
eligible for Medicaid, or state-sponsored low-income drug insurance 
programs.
13. Mechanics of Endorsement
    A solicitation for applications for Medicare endorsement will 
follow this final rule. In order to qualify for Medicare endorsement, 
applicants will be required to submit complete applications 60 days 
after the OMB-approved solicitation for applications is published. 
Following publication of the approved solicitation, the public will 
have time to comment and we will entertain any questions from potential 
applicants seeking clarification of the final application. All 
applicants who qualify for Medicare endorsement will be announced by 
the Administrator.
    The endorsement in Year One will be for a period of at least twelve 
months but fewer than 24 months. We anticipate card program sponsors 
will have six months following our announcement of endorsed programs to 
implement their card programs, including finalizing their pharmacy 
network contracts, negotiating manufacturer rebates or discounts, 
obtaining a signed agreement with us, operationalizing their call 
centers, obtaining approval for their information and education 
materials, and completing contracts for all aspects of the program as 
specified under the qualifications for endorsement. Sponsors will also 
use this time to organize and activate the administrative consortium.
    Comment: One commenter noted that the timeline in the proposed rule 
is unrealistic. We should instead establish a date at least 45 days 
before the first day outreach is allowed to announce the endorsement of 
card sponsors because card sponsors will need at least this much time 
to finalize their materials, obtain our comments and approval of their 
materials, incorporate any changes, secure internal legal review of any 
changes, and print information and education materials and enrollment 
kits. The commenter recommends that, if the program is ready for 
enrollment on October 1, 2002, endorsement should be granted no later 
than August 15, 2002 to avoid the possibility that card sponsors will 
be unprepared to provide information and education materials and 
enrollment kits to interested beneficiaries by October 1, 2002. 
Presuming that a 60-day response time is established for interested 
sponsors, and we require a reasonable amount of time to turn around 
public comments and review the proposals, the commenter recommends that 
the program begin no earlier than November 1, 2002.
    Response: We have revised our timeline and we anticipate card 
program sponsors will have six months following our announcement of 
endorsed programs to implement their card programs. We believe our new 
timeline addresses the commenter's concerns and provides potential card 
sponsors with ample time to implement their programs following our 
endorsement.

II. Provisions of the Proposed Rule

    In part 403 of Title 42 of the Code of Federal Regulations we 
proposed to add a new subpart H--Medicare-Endorsed Prescription Drug 
Card Assistance Initiative, the provisions of which were as follows:
    [sbull] We proposed to add a new Sec.  403.800 to describe the 
basis and scope of the initiative and set forth the requirements for 
the initiative.
    [sbull] We proposed to add a new Sec.  403.802 to define the 
initiative as a mechanism whereby we solicit applications for Medicare 
endorsement of prescription drug card programs, review them, offer 
agreements to program sponsors who meet all of the requirements for 
endorsement, and award Medicare endorsements to program sponsors who 
sign the agreement. We define a Medicare-endorsed prescription drug 
card program as a program developed by an organization or groups of 
organizations endorsed by us under the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative to educate Medicare beneficiaries about 
prescription drug programs available in the private marketplace and to 
provide prescription drug assistance cards to Medicare beneficiaries. 
We define the administrative consortium as a private entity financed by 
the Medicare-endorsed prescription drug card program sponsors to carry 
out a set of specific administrative tasks required under this 
initiative.
    [sbull] We proposed to add a new Sec.  403.804 to set forth the 
general rules for obtaining Medicare endorsement of prescription drug 
card programs, including meeting the requirements, submitting an 
application, and agreeing to the terms and conditions of the agreement 
with us.
    [sbull] We proposed to add a new Sec.  403.806 to set forth the 
requirements for eligibility for obtaining Medicare endorsement under 
the initiative.
    [sbull] We proposed to add a new Sec.  403.807 to set forth the 
application process for organizations wishing to obtain Medicare 
endorsement under the initiative.
    [sbull] We proposed to add a new Sec.  403.808 to set forth that 
each prescription drug card program sponsor eligible for Medicare 
endorsement must enter into an agreement with us agreeing to meet the 
terms and conditions in the agreement.
    [sbull] We proposed to add a new Sec.  403.810 to set forth the 
responsibilities of the administrative consortium.
    [sbull] We proposed to add a new Sec.  403.811 to set forth the 
requirement that a beneficiary only be allowed to be enrolled in one 
drug card program at a time.
    [sbull] We proposed to add a new Sec.  403.812 to set forth the 
conditions under which the Medicare endorsement will be withdrawn from 
an endorsed drug card program sponsor.
    [sbull] We proposed to add a new Sec.  403.820 to set forth our 
oversight and beneficiary education responsibilities.

III. Provisions of the Final Rule

    In part 403 of Title 42 of the Code of Federal Regulations, we are 
adding a new subpart H--Medicare-Endorsed Prescription Drug Card 
Assistance Initiative, the provisions of which are as follows:
    [sbull] We add a new Sec.  403.800 to describe the basis and scope 
of the initiative and set forth the requirements for the initiative.
    [sbull] We add a new Sec.  403.802 to define the initiative as a 
mechanism whereby we provide information, counseling, and assistance to 
beneficiaries by soliciting applications for Medicare endorsement of 
prescription drug card programs, reviewing them, offering agreements to 
program sponsors that meet all of the requirements for endorsement, and 
awarding Medicare endorsements to program sponsors who

[[Page 56659]]

sign the agreement, and educating beneficiaries about the options 
available to them in the private marketplace. We define a Medicare-
endorsed prescription drug card program as a program developed by an 
organization or group of organizations endorsed by us under the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative to 
educate Medicare beneficiaries about prescription drug programs 
available in the private marketplace and to provide prescription drug 
assistance cards to Medicare beneficiaries. We define the 
administrative consortium as a private entity established and financed 
by the Medicare-endorsed prescription drug card program sponsors to 
carry out a set of specific administrative tasks required under this 
initiative.
    [sbull] We add a new Sec.  403.804 to set forth the general rules 
for obtaining Medicare endorsement of prescription drug card programs, 
including meeting the requirements, submitting an application, and 
agreeing to the terms and conditions of the agreement with us.
    [sbull] We add a new Sec.  403.806 to set forth the requirements 
for eligibility for obtaining Medicare endorsement under the 
initiative.
    [sbull] We add a new Sec.  403.807 to set forth the application 
process for organizations wishing to obtain Medicare endorsement under 
the initiative.
    [sbull] We add a new Sec.  403.808 to set forth that each 
prescription drug card program sponsor eligible for Medicare 
endorsement must enter into an agreement with us agreeing to meet the 
terms and conditions in the agreement.
    [sbull] We add a new Sec.  403.810 to set forth the 
responsibilities of the administrative consortium.
    [sbull] We add a new Sec.  403.811 to set forth the requirement 
that a beneficiary only be allowed to be enrolled in one drug card 
program at a time.
    [sbull] We add a new Sec.  403.812 to set forth the conditions 
under which CMS may take intermediate actions or withdraw the Medicare 
endorsement.
    [sbull] We add a new Sec.  403.820 to set forth our oversight and 
beneficiary education responsibilities.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
    [sbull] The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    [sbull] The accuracy of our estimate of the information collection 
burden.
    [sbull] The quality, utility, and clarity of the information to be 
collected.
    [sbull] Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.

Section 403.804 General Rules for Medicare Endorsement

    In this final rule, the burden associated with the application for 
endorsement is addressed in the discussion in Sec.  403.806.
    In this final rule, under paragraphs (g) and (h) of Sec.  403.804, 
a Medicare-endorsed prescription drug card program sponsor may choose 
not to continue participation in the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative and will have to notify us of its 
decision. It will also have to notify its Medicare beneficiaries that 
they may enroll in an alternative Medicare-endorsed drug discount card 
program. This notice must be provided within 10 days of the effective 
date of termination.
    As stated in the final rule, we do not believe that 10 or more card 
program sponsors will terminate their agreement on an annual basis. 
Therefore, this requirement is not subject to the PRA in accordance 
with 5 CFR 1320.3(c). However, if in the future CMS has reason to 
believe that this collection requirement meets the definition under 5 
CFR 1320.3(c) we will submit this collection requirement to OMB for PRA 
approval.

Section 403.806 Requirements for Eligibility for Endorsement

    In this final rule, under paragraph (a) of this section, an 
applicant must submit an application demonstrating that it meets and 
will comply with the requirements described in this section.
    As stated in the final rule, the requirements described in this 
section include various disclosure, recordkeeping, and privacy 
policies. We anticipate that it will take each applicant approximately 
120 hours to complete each application. We anticipate that we will 
receive approximately 30 applications, for a total burden of 3,600 
hours.
    We generally believe that either the card sponsors or the 
contractors who administer the programs will be required under the 
Health Insurance Portability and Accountability Act of 1996 (HIPAA) to 
comply with the privacy provisions under HIPAA, either as a covered 
entity or as a business associate, as defined by HIPAA. Therefore, the 
burden associated with these collection requirements is captured under 
HIPAA compliance activities, and is transparent to the requirements 
referenced in this rule. Therefore, we assign one token hour of burden 
for these collection requirements. Based upon our knowledge of the 
industry, we have determined that fewer than 10 card sponsors would not 
be subject to HIPAA Privacy requirements and, therefore, not subject to 
the PRA as stipulated under 5 CFR 1320.3(c). In the future, if we 
anticipate that more than 10 card sponsors would not be subject to the 
HIPAA Privacy Rule, we will submit this collection requirement to OMB 
for approval.
    In paragraph (d)(2), the applicant must develop, implement, and 
update periodically a written data security plan. We consider this 
requirement to be a reasonable and customary function of a card 
sponsor. Therefore, this information collection requirement is exempt 
from the PRA, as stipulated under 5 CFR 1320.3(b)(2).

Section 403.808 Agreement Terms and Conditions

    In this final rule, under this section, in order to receive a 
Medicare endorsement, an applicant that complies with all of the 
application procedures and meets all of the requirements described in 
this subpart must enter into a written agreement with us. The agreement 
will include a statement by the applicant that it has met the 
requirements of this subpart and will continue to meet all requirements 
for so long as the agreement is in effect.
    It is anticipated that it will take each applicant approximately 8 
hours to complete the agreement. We anticipate that 15 card sponsors 
will enter into an agreement with us for a burden of 120 hours.
    We consider all of the information collection requirements 
associated with complying with this section to be usual and customary 
business, with the following exception. As stated elsewhere in the 
preamble, card sponsors may update their formularies and price lists 
six times per year. We consider maintenance of formulary and price data 
to be a reasonable and customary business practice; the only new 
requirement is the transmittal of such information to the 
administrative consortium. We believe it would take 15 minutes to 
transmit each formulary and

[[Page 56660]]

price change to the consortium. While we do not believe that a majority 
of card sponsors would change their formularies and prices as much as 
six times per year, for purposes of estimating the maximum burden 
associated with this requirement, we estimate that each of the 15 card 
sponsors would transmit data to the consortium 6 times per year, and 
estimate 15 minutes for each transmittal. Therefore, the maximum burden 
associated with this requirement is 22.5 hours.
    The total burden associated with card sponsors entering into a 
written endorsement agreement with us is 142.5 hours. This total 
includes the burden associated with each of the 15 card sponsors 
completing their agreements and the hours associated with the 
requirement, to be reflected in this agreement, that card sponsors 
provide formulary and price updates to the administrative consortium.

Section 403.810 Administrative Consortium Responsibilities and 
Oversight

    The administrative consortium will be responsible for a number of 
information collection requirements, as stipulated under this section.
    Since there will only be one administrative consortium under this 
initiative, these requirements are not subject to the PRA in accordance 
with 5 CFR 1320.3(c).

Section 403.811 Beneficiary Enrollment

    In this final rule, under this section, in paragraph (b), Group 
enrollment, card sponsors may accept group enrollment from health 
insurers. Card sponsors will be required to assure disclosure to 
Medicare beneficiaries of the intent to enroll them as a group. They 
must also assure disclosure to the beneficiaries of the enrollment 
exclusivity restrictions and other rules of enrollment of the 
initiative. The burden associated with these requirements is the time 
and effort required to disclose the information to beneficiaries before 
enrolling them in the drug card program.
    We believe these disclosures will be among other communications 
that the health insurer would usually and customarily provide at the 
time of enrollment or reenrollment of a beneficiary for their health 
insurance. As such, the only additional burden will be the cost of 
producing an insert that describes the discount card program and what 
enrollment into the card program means for the beneficiary. We estimate 
the burden of developing the insert to be 8 hours per health plan. We 
estimate that 178 plans may offer group enrollment into a Medicare-
endorsed prescription drug card program for a burden of 1,424 hours.

Section 403.820 Oversight and Beneficiary Education

    In the final rule, in paragraph (a) of this section, a Medicare-
endorsed prescription drug discount card program sponsor must report to 
us on the major features of its program(s) that correspond to the 
qualifications for endorsement.
    As stated in the final rule, the burden associated with this 
requirement is the time it would take to report to us. We believe that 
it would take approximately 45 minutes per report. We anticipate 
requiring 2 reports per year, per card sponsor, for 15 sponsors, for a 
total annual burden of 22.5 hours. This section also requires sponsors 
to establish and maintain a customer service process, which is designed 
to track and address in a timely manner enrollees' complaints about any 
aspect of the drug card program. While this requirement is subject to 
the PRA, we believe that sponsors maintain a customer service process 
as a matter of normal business practice. Therefore, we believe the 
burden associated with this requirement is exempt from the PRA as 
stipulated under 5 CFR 1320.3(b)(2).
    The total burden associated with the collection requirements 
referenced in this rule is 5,189 annual hours.
    We have submitted a copy of this final rule to OMB for its review 
of the information collection requirements in Sec. Sec.  403.804, 
403.806, 403.808, 403.810, 403.811, and 403.820. These requirements are 
not effective until they have been approved by OMB.
    If you have any comments on any of these information collection and 
recordkeeping requirements, please mail one original and three copies 
directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Office of Regulations Development 
and Issuances, 7500 Security Boulevard, Room N21426, Baltimore, MD 
212441850, Attn: John Burke, CMS4027F,
     and,
Office of Information and Regulatory Affairs, Office of Management and 
Budget, New Executive Office Building, Room 10235, Washington, DC 
20503, Attn: Brenda Aguilar, CMS Desk Officer.

V. Regulatory Impact Analysis and Regulatory Flexibility Act Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 1044), and Executive Order 13132.
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more annually). While the ultimate 
impact will depend upon the final designs of endorsed card sponsors' 
programs, our estimate (based on our assumptions about manufacturer 
discounts) is that the savings to beneficiaries under the Medicare-
Endorsed Prescription Drug Card Assistance Initiative will represent a 
total economic impact ranging from $1.214 billion to $1.619 billion in 
2004, the first full year of operation. In 2005, the total estimated 
savings to beneficiaries under the initiative will range from $1.364 
billion to $1.819 billion. In 2008 (the fifth year of the estimate 
period), total estimated savings to beneficiaries will range from 
$1.907 billion to $2.542 billion. This represents less than 1 percent 
of projected total retail prescription drug spending for 2004 ($203.8 
billion), 2005 ($227.8 billion), and 2008 ($309.3 billion) based on the 
most recent published projections released in March 2002 by our Office 
of the Actuary. Depending on the final design features and the 
magnitude of additional manufacturer discounts realized, actual savings 
to beneficiaries could be larger.
    This final rule is a major rule as defined in Title 5, United 
States Code, section 804(2). Accordingly, we have prepared an impact 
analysis for this final rule.

B. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. We have

[[Page 56661]]

determined that this final rule is not an unfunded mandate as defined 
by the UMRA. In particular, section 101 of the UMRA only requires 
estimation of direct costs to comply with the definition of a private 
sector unfunded mandate. While the rule will have an impact on the 
private sector, we do not expect that this will require direct costs or 
outlays approaching UMRA's $110 million threshold. In addition, this 
final rule does not mandate any requirements for State, local, or 
tribal governments.

C. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. This final rule will impose no direct costs on State and 
local governments, will not preempt State law, or have any Federalism 
implications. However, as noted earlier in this preamble, States may 
choose, on a voluntary basis, to partner with private drug card 
sponsors by selecting a Medicare-endorsed drug card program and 
offering State endorsement of it as well. This is a voluntary 
opportunity for States, and has no Federalism implications.

D. Limitations of Our Analyses

    The following analyses present projected effects of this final rule 
on Medicare beneficiaries, the Medicare program, total national retail 
prescription drug spending, small entities, and drug card sponsors.
    Because this will be the first year of the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative, we do not have the 
benefit of the experience of prior years. Therefore, we present a range 
rather than a single estimate for the impact of the prescription drug 
rebate and discount requirements of the initiative. Another limitation 
of this particular analysis is that our most recent available data on 
beneficiary use of prescription drugs come from self-reported survey 
data from the 1999 Medicare Current Beneficiary Survey (MCBS). We note, 
however, that we have updated our analysis from the proposed rule, 
which used 1998 data, with 1999 data that recently became available. 
The MCBS is a continuous multipurpose survey of a representative sample 
of the Medicare population. We have adjusted the data for trends in 
drug spending and for under reporting.
    Another limitation of our analysis is that we develop an estimate 
of the number of beneficiaries with standardized Medigap drug coverage 
who enroll in the initiative. This estimate, however, is imprecise. As 
discussed in more detail later in the analysis, we believe 
beneficiaries who have drug coverage through standardized Medigap 
policies are likely to enroll in the initiative. The MCBS provides data 
on the number of beneficiaries with ``individually purchased'' 
insurance policies, which includes but is not limited to the 
standardized Medigap policies. Using data on beneficiaries who have 
drug coverage through individually purchased insurance policies, we 
developed a rough estimate of the number of beneficiaries with Medigap 
standardized drug coverage by excluding from this group individuals who 
appeared unlikely to have standardized Medigap drug coverage. In 
particular, we excluded individuals whose out-of-pocket drug spending 
was less than $250 and whose individually purchased insurance plan 
covered some drug costs, since this is inconsistent with the benefit 
structure of the standardized Medigap plans. However, some 
beneficiaries with individually purchased policies that are not the 
standardized Medigap drug coverage policies are still likely to be 
included in our estimates. In addition, some beneficiaries have 
multiple sources of coverage, for example, some beneficiaries are 
enrolled in Medicare+Choice but also report having individually 
purchased supplemental insurance. Therefore, we also excluded anyone 
who was enrolled in Medicare+Choice during at least one month of the 
year since we believe that the drug coverage was more likely to come 
from a Medicare+Choice plan than from a Medigap plan.
    As we discuss later in this preamble, additional limitations to our 
analysis include that we have made no adjustments to take into account: 
current discounts obtained by some beneficiaries, possible effects of 
the initiative on beneficiary drug utilization, possible changes in the 
type of outlets through which beneficiaries purchase prescription 
drugs, or potential enrollment of low-income beneficiaries in the new 
manufacturer-sponsored cards. We did not believe that we had adequate 
data to inform assumptions concerning these issues.

E. Impact of the Rebate and Discount Requirements

1. Medicare Beneficiary Estimated Enrollment
    Although the Medicare-endorsed prescription drug card programs will 
be available to all Medicare beneficiaries, we believe that those most 
likely to benefit from the initiative will be the approximately 9 
million Medicare beneficiaries without prescription drug coverage at 
any point in a year (based on 1999 MCBS data). We anticipate that 
beneficiaries without prescription drug coverage who spend over $250 
per year (the point at which a $25 maximum enrollment fee could be 
recouped over a 1-year period assuming at least 10 percent savings) 
will be more likely to enroll than those with lower spending. To the 
extent that card sponsors offer lower or no-cost enrollment, we expect 
more beneficiaries to take advantage of the savings opportunity. We 
also anticipate that some beneficiaries will take into account that the 
$25 maximum fee is a one-time only fee (for as long as they remain in 
the same card program) when evaluating the net savings potential 
offered by Medicare-endorsed discount cards.
    In Table 2, we show the assumptions regarding the percentage of 
beneficiaries without drug coverage enrolling in a Medicare-endorsed 
drug card program. We assume that beneficiaries without drug coverage 
who have relatively higher drug spending will be more likely to enroll 
than those with generally very low or no spending. Based on the 
assumptions in Table 2 and the distribution of drug spending among 
beneficiaries without drug coverage, we estimate that about 75 percent 
of the beneficiaries without drug coverage will enroll in the Medicare-
endorsed drug card programs.
    Another group of beneficiaries likely to benefit from the Medicare-
endorsed discount card programs will be beneficiaries with Medigap drug 
coverage. The standardized Medigap plans that offer prescription drug 
coverage (standardized plans H, I, and J) are designed with a cap on 
the amount of drug spending covered by the plan. The drug benefit in 
standardized plans has a $250 deductible, 50 percent coinsurance, and a 
benefit cap of $1,500 (plans H and I) or $3,000 (plan J). Because many 
Medigap plans do not actively negotiate discounts for enrollees, we 
believe that Medicare beneficiaries with standardized Medigap drug 
coverage will benefit from a discount card program, particularly for 
spending above the benefit cap.
    Using the 1999 MCBS, we estimate that a little more than 2 million 
beneficiaries had drug coverage from a Medigap policy. We assume that 
95 percent of beneficiaries with Medigap drug coverage, regardless of 
expenditure level, will enroll in a Medicare-endorsed card program. We 
believe that

[[Page 56662]]

beneficiaries with Medigap coverage for prescription drugs will be more 
risk averse than the average beneficiary and will therefore be more 
likely to enroll in a drug discount card program.
    These estimates of Medicare beneficiary enrollment in the Medicare-
endorsed card programs are one of the elements in the Office of the 
Actuary's estimates of the impact of the initiative.

  Table 2.--Estimated Enrollment Rate of Medicare Beneficiaries with No
                       Drug Coverage 2004 to 2008
------------------------------------------------------------------------
                                                               Percent
                    Annual drug spending                      enrolling
------------------------------------------------------------------------
$0200.00...................................................           55
$200.01300.00..............................................           80
$300.01400.00..............................................           85
$400.01500.00..............................................           90
$500.01+...................................................           95
------------------------------------------------------------------------

    During the first half of 2002, several drug manufacturers 
established drug card programs that offer low-income Medicare 
beneficiaries without drug coverage significant discounts or low 
copayments on drugs they manufacture. Novartis, Pfizer, and Eli Lilly 
have each established co-pay cards. Seven drug manufacturers (Abbott 
Laboratories, AstraZeneca, Aventis, Bristol Myers, GlaxoSmithKline, 
Johnson & Johnson, and Novartis) have established Together Rx, a 
discount card. The income limits of the manufacturer cards vary, 
ranging from $18,000 to $28,000 for individuals and from $24,000 to 
$38,000 for couples. With these income criteria, millions of Medicare 
beneficiaries without drug coverage could be eligible for one or more 
of the manufacturer programs.
    While many beneficiaries who might benefit from the Medicare-
Endorsed Prescription Drug Card Assistance Initiative may also be 
eligible for the manufacturer card programs, we have not factored this 
into our assumptions concerning beneficiary enrollment in Medicare-
endorsed card programs for several reasons. First, it is unknown 
whether the manufacturer card programs will seek Medicare endorsement. 
If these programs do seek and obtain Medicare endorsement, their 
enrollees will be included in the enrollment count for the Medicare-
Endorsed Prescription Drug Card Assistance Initiative.
    Second, even if the manufacturer programs do not seek Medicare 
endorsement, available data suggest that, so far, enrollment in 
manufacturer card programs is a small portion of the total enrollment 
we expect in Medicare-endorsed discount card programs. Together Rx 
enrolled about 140,000 individuals as of August 2002, the Pfizer co-pay 
card enrolled 179,000 individuals as of July 2002, the Eli Lilly co-pay 
card enrolled 50,000 through May 2002, and the Novartis co-pay card 
enrolled 15,000 as of April 2002. We expect that some individuals have 
enrolled in more than one manufacturer program. Since these programs 
are in their infancy, their ultimate enrollment levels are unknown. 
Enrollment in these programs is also difficult to anticipate because 
means-tested programs do not typically garner full uptake among 
eligible populations. We will be interested to see over time how 
enrollment grows in the manufacturer drug card programs, the types of 
outreach conducted, and the results of those efforts.
    Finally, if manufacturer card programs do not seek Medicare 
endorsement, some beneficiaries may opt to enroll in both the 
manufacturer cards and a Medicare-endorsed drug card. Since the 
manufacturer cards provide savings only on specific manufacturers' 
drugs and the Medicare-endorsed cards have a low one-time fee, we 
believe that some beneficiaries, depending on the mix of prescription 
drugs they use, may find it beneficial to enroll in both types of 
programs.
    We received one comment concerning our assumptions about enrollment 
in Medicare-endorsed cards.
    Comment: One commenter stated that the assumptions about the 
percent of beneficiaries without drug coverage and with Medigap drug 
coverage that will enroll in the program were extremely optimistic.
    Response: As mentioned elsewhere in the preamble, we expect that 
Medicare-endorsed prescription drug card programs will obtain 
significant beneficiary enrollment due to the recognition and 
acceptance of the Medicare name among beneficiaries, the outreach and 
educational efforts planned, and the low enrollment fee. As shown in 
Table 2, the enrollment assumptions for beneficiaries without drug 
coverage are graduated based on the level of annual drug spending, 
ranging from 55 percent for those with spending not exceeding $200 to 
95 percent for those with spending exceeding $500. We assume 95 percent 
enrollment among beneficiaries with Medigap drug coverage, regardless 
of expenditure level, because we believe Medigap plans offering drug 
coverage tend to attract enrollees who either have high drug expenses 
or who are more risk averse than average. As stated previously, for a 
number of reasons, we have not incorporated the manufacturer drug card 
programs into our assumptions about beneficiary enrollment in Medicare-
endorsed card programs. In the future, as the new manufacturer programs 
gain operational experience and enrollment levels in these programs 
become clear, as well as their decision to participate in the Medicare 
initiative, we will be interested in assessing their effects on and 
interaction with the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative.
    While we expect there will be a phase-in of beneficiary enrollment 
in the Medicare-endorsed prescription drug card programs, we believe 
that because of the recognition and acceptance of the Medicare name and 
the educational efforts undertaken, beneficiaries wishing to enroll 
will do so over a relatively short period of time. For the purposes of 
this impact analysis, we assume full enrollment of 9.7 million 
beneficiaries by 2004. We use 2004 as the beginning point for the 
estimates because it will be the first full year of operation.
2. Estimated Portion of Drug Spending Included
    For purposes of estimating the impact of the Medicare-Endorsed 
Prescription Drug Discount Card Assistance Initiative, it is necessary 
to make some assumptions concerning the portion of spending that will 
be affected by the discounts under the drug card programs. The 
requirements for endorsement include provision of a discount on one 
brand name or generic drug in each therapeutic grouping commonly used 
by Medicare beneficiaries. However, we expect that the card programs 
probably will provide discounts on more than one drug per grouping and 
be highly likely to provide discounts on commonly used drugs.
    In the proposed rule, we estimated the percent of total drug 
spending accounted for by the most commonly used drugs among Medicare 
beneficiaries based on analysis of the top drugs in terms of both 
utilization and spending using the 1998 MCBS data (including a special 
analysis related to disabled beneficiaries). In this final rule, we 
update that analysis using 1999 MCBS data. As of 1999, the drugs most 
commonly used or having the greatest spending by Medicare beneficiaries 
accounted for approximately 70 percent of total drug spending for 
beneficiaries without drug coverage (which is up slightly from 66 
percent found in the analysis of 1998 MCBS data).
    The drug classification listing in Table 1, for which card sponsors 
must

[[Page 56663]]

include at least one drug, is more extensive than the specific top drug 
list that was used to estimate 70 percent. In addition, we assume that 
many card sponsors will choose to include more than one drug for the 
required drug grouping. Consequently, we set our lower bound estimate 
of the share of drug card enrollees' total drug spending that will be 
affected by the initiative at 75 percent, which is the same as the 
lower bound estimate used in the proposed rule. Since the percent of 
drug spending accounted for by the most commonly used drugs among 
Medicare beneficiaries increased only slightly from 1998 to 1999, we 
felt it was reasonable to maintain our 75 percent lower bound estimate 
from the proposed rule, particularly since we also use an upper bound 
estimate.
    We also assume that it is possible that programs will include a 
discount on all drugs. To calculate this upper bound, we assume that 
all beneficiary drug expenditures will be affected by the Medicare-
Endorsed Prescription Drug Card Assistance Initiative. We note, 
however, that we have made no adjustment to take into account that some 
beneficiaries currently receive discounts and that a large portion of 
the savings to beneficiaries will come from generic substitution and 
not just price reductions.
3. Estimated Beneficiary Savings
    An April 2000 study prepared by HHS entitled, ``A Report to the 
President: Prescription Drug Coverage, Spending, Utilization and 
Prices,'' indicated a significant price differential between 
individuals paying cash for prescriptions at a retail pharmacy versus 
individuals with insurance. This was true for both the Medicare and 
non-Medicare populations. According to the study, in 1999 the price 
paid by cash customers was nearly 15 percent more than the total price 
paid under prescription drug insurance, including the enrollee cost 
sharing. For 25 percent of the most commonly prescribed drugs, this 
price difference was higher--over 20 percent. Thus, in today's market, 
individual Medicare beneficiaries without drug coverage and the related 
market purchasing leverage, not only face having to pay the full cost 
for medications from their own pockets, but ironically are also charged 
the highest prices. Furthermore, the HHS study did not include the 
effect of rebates on total prices paid. It did, however, note industry 
experts as indicating that insurers and employers typically receive 70 
to 90 percent of the rebates negotiated for their enrollees. While 
currently, rebates in insured products may not necessarily reduce 
prices paid at the retail point of sale, the rebates do lower the per-
prescription cost for plan sponsors, and thus tend to lower premiums or 
program costs for insured beneficiaries.
    We anticipate that the estimated savings for Medicare beneficiaries 
in a Medicare-endorsed drug card program will be a first step toward 
the savings that could be achieved under an insurance product. Based on 
information on savings from insurance products and information on the 
current discount card market, we assumed that beneficiaries enrolling 
in the Medicare-endorsed prescription drug discount card programs will 
save, on average, between 10 and 13 percent of their total drug costs 
compared to their spending in the absence of this initiative. The 
percentage savings on particular prescription drugs will vary and may 
be substantially higher for certain products, particularly generics, 
due to their lower prices. While the impact analysis uses an assumption 
of savings of 10 to 13 percent off total drug spending, we believe that 
savings of 15 percent may be possible, depending on the ultimate design 
of card sponsors' programs. If Medicare-endorsed discount card programs 
rely heavily on the use of formularies, we expect that manufacturer 
rebates or discounts will be greater in response.
    The savings to beneficiaries will be attributable to the 
combination of lower prices paid at the point of sale as a result of 
manufacturer and pharmacy discounts, as well as the effects of 
beneficiary education leading to greater use of generic drugs and more 
effective management of prescription drug expenses by beneficiaries. 
Because pharmacy discounts are increasingly available to beneficiaries 
through existing voluntary card programs, we expect that manufacturer 
rebates or discounts and savings from a better understanding of generic 
alternatives and managing prescription drug expenses will be important 
sources of savings in this initiative. For purposes of calculating the 
estimates of beneficiary savings, we assumed an average overall drug 
spending savings to beneficiaries of 12.4 percent. These estimates do 
not take into account possible increased use of prescription drugs by 
Medicare beneficiaries resulting from paying reduced out-of-pocket 
amounts for drugs.
    In a December 2001 report from the General Accounting Office (GAO) 
entitled ``Prescription Drugs: Prices Available Through Discount Cards 
and From Other Sources'', the GAO collected specific price data on 12 
brand name and 5 generic commonly used prescription drugs from one 
regional and four large discount card programs, as well as pharmacies' 
prices for the same prescription drugs in four selected geographic 
areas. Some of the pharmacies' prices reported included pharmacy 
discounts; others did not. The GAO simply reported prices on the 17 
drugs; they did not calculate average discount card savings. The 
average discounts that could be calculated from the GAO reported data 
are difficult to compare to our estimate of roughly 10 to 13 percent 
savings off total beneficiary drug spending for several reasons.
    First, while the impact analysis is built on an assumption of 
savings of 10 to 13 percent off total drug spending, we believe that 
more savings may be possible, depending on the ultimate design of card 
sponsors' programs. If Medicare-endorsed discount card programs rely 
heavily on the use of formularies, we expect that manufacturer rebates 
or discounts will be greater in response.
    Second, savings for the initiative are not estimated on a per-
prescription basis. For certain drugs for which manufacturer rebates or 
discounts are secured, we expect to see, under this initiative, drug-
specific discounts comparable to insured products, which are often 25 
to 30 percent, or sometimes more, per prescription.
    Finally, the price data collected by the GAO do not include all 
drugs or indicate the relative market share that each drug represents; 
that is, they are not weighted. Savings estimates calculated by simply 
averaging selected drug prices do not account for the differences in 
utilization, and thus, market share.
    Because the Medicare-endorsed drug card programs will be modeled 
after insured products in terms of enrollment and the use of 
formularies, combined with the competitive model and the requirement of 
manufacturer rebates or discounts, we expect that the Medicare-endorsed 
drug card programs will achieve new beneficiary savings from 
manufacturer rebates or discounts. The share of savings will vary 
depending on the drug, but savings from manufacturers are expected to 
be substantially greater than those available through existing 
voluntary cards. According to the HHS study, industry experts report 
that private insurance plans garner rebates on individual brand name 
drugs ranging from 2 to 35 percent. We assume that the portion of 
beneficiary savings attributable to manufacturers may increase over 
time as competition forces

[[Page 56664]]

card sponsors to secure manufacturer rebates or discounts in order to 
remain competitive. To the extent that card program sponsors design 
formularies to mimic those of insured products, the ability to garner 
manufacturer rebates or discounts will increase.
    We received several comments concerning our estimates of the 
potential savings from the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative.
    Comment: Several commenters asserted that the Medicare-Endorsed 
Drug Card Assistance Initiative will provide fewer savings or no 
greater savings than can be obtained through shopping around or through 
senior discounts at community pharmacies. Another commenter contended 
that a well-designed discount card will yield tangible savings for 
beneficiaries.
    Response: We agree with the commenter who asserted that a discount 
card program has the potential to yield tangible savings for 
beneficiaries. We disagree with the commenters who claimed that the 
initiative will not yield greater savings than currently available 
through community pharmacies. We expect that the initiative will garner 
greater savings than typically available through community pharmacies 
due to the role of manufacturer rebates or discounts in the initiative. 
As a condition of endorsement, card sponsors must obtain manufacturer 
rebates or discounts on brand and/or generic drugs and pass a 
substantial share through to beneficiaries. As mentioned previously in 
the preamble, we believe card sponsors will have both the ability and 
the incentive to negotiate significant manufacturer rebates or 
discounts and pass them through to beneficiaries due to aspects of the 
initiative such as market leverage stemming from large enrollment, 
exclusivity, and market competition.
    Comment: One commenter asserted that discounts of 10 to 13 percent 
are minimal given that drug prices are rising at 17 percent per year.
    Response: According to National Health Expenditures data from our 
Office of the Actuary (OACT), prescription drug spending grew at 17 
percent between 1999 and 2000. A combination of increased prices, 
increased utilization, changes in the mix of drugs, and growth in the 
population resulted in the overall spending increase of 17 percent. 
Increased drug prices were responsible for slightly more than a quarter 
of the increase in drug spending between 1999 and 2000. By its 
structure, a discount card program provides assistance with 
prescription drug expenditures through discounted prices. We believe 
that the initiative, which is expected to yield average savings of 10 
to 13 percent, possibly up to 15 percent, will provide beneficiaries 
with needed assistance with prescription drug costs.
    Comment: One commenter asserted that discounts of 15 percent are 
unrealistic for pharmacy and drug stores that have profit margins of 2 
to 3 percent on average.
    Response: As mentioned elsewhere in the preamble, the average 
savings estimate of 10 to 13 percent, possibly up to 15 percent, does 
not reflect the expected level of pharmacy discounts. Rather, it 
reflects estimated combined savings from manufacturer rebates or 
discounts and pharmacy discounts, as well as increased use of generic 
drugs. We believe manufacturer discounts or rebates will be an 
important component of the savings from the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative as well as increased use 
of generics. As a condition of endorsement, card sponsors must obtain 
manufacturer rebates or discounts and pass a substantial share through 
to beneficiaries either directly or indirectly through pharmacies. We 
believe that competitive market forces, together with other aspects of 
the initiative, will encourage endorsed discount card programs to 
secure the highest manufacturer rebates or discounts possible and to 
pass those through to enrollees.
4. Projection Assumptions
    Since our data on Medicare beneficiary prescription drug spending 
are based on 1999 MCBS data, it is necessary to make several 
adjustments in order to prepare 2004 estimates. In order to trend 1999 
spending to 2004 dollars, we use prescription drug spending projections 
based on per capita drug expenditure growth from the Office of the 
Actuary's National Health Expenditure (NHE) Projections 1980 to 2011. 
These projections can be found on our Web site at: http://cms.hhs.gov/statistics/nhe/projections-2001/t11.asp.
    MCBS data on prescription drug utilization are self-reported by 
beneficiaries, and consequently are subject to under reporting. We are 
studying this under reporting in order to develop adjustment factors to 
be used for estimating purposes. For purposes of the estimates in this 
final rule, the spending data from the MCBS are adjusted to account for 
the estimated 16.4 percent in under reporting that has been identified 
through our research thus far.
    It is also necessary to adjust for growth in the Medicare 
beneficiary population. The adjustments are made based on the 
assumptions used for the Medicare Trustees Reports, March 26, 2002.
    These assumptions are detailed in Table 3, which shows the 
projected increase in Medicare enrollment and per capita drug 
expenditures from 1999 to 2004, and annually from 2004 to 2008, using 
1999 as the base year for the projections. As discussed in more detail 
in later sections of the impact analysis, the table also shows 
projections for total national aggregate retail drug expenditures, drug 
expenditures involved in the initiative, beneficiary savings from the 
initiative (both upper bound and lower bound estimates), and the impact 
of beneficiary savings as a percent of total national aggregate retail 
drug sales.
    As mentioned previously, beneficiary retail prescription drug 
spending involved in the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative is estimated using 1999 MCBS data, projected 
forward to 2004 to 2008 based on expected growth in per capita 
prescription drug spending and the Medicare population. For 
beneficiaries with Medigap coverage, estimated prescription drug 
spending involved in the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative may be understated because our projection method 
implicitly assumes that the Medigap drug benefit structure (deductible 
and coverage limits) grows as per capita spending grows. However, we 
believe that this does not significantly alter the overall findings in 
the impact analysis because it is likely counterbalanced by other 
assumptions that tend to overstate the discount card programs' impact 
on retail prescription drug sales through pharmacies. For example, as 
discussed subsequently, the use of National Health Accounts estimates 
of prescription drug spending net of manufacturer rebates provided to 
health insurers overstates the impact of the Medicare-endorsed drug 
cards on total pharmacy revenues.
    To estimate the impact of the initiative on national retail 
prescription drug sales, we use the Office of the Actuary's National 
Health Expenditures projections of retail prescription drug sales, 
which are part of the National Health Accounts. To prepare the 
estimates, OACT obtains data on prescription drug sales from a variety 
of sources, including the National Prescription Audit conducted by IMS 
Health. OACT has data on retail prescription drug spending through 
2000, and prepares 10-year projections.

[[Page 56665]]

OACT adjusts the data from the National Prescription Audit to take into 
account a number of factors. The major factors involved in these 
adjustments include: benchmarking to the Economic Census, subtracting 
prescription drug sales to nursing homes (which are accounted for in 
nursing home spending), and adjusting the data to subtract an estimate 
of manufacturer rebates provided to health insurers related to 
insurance coverage for prescription drugs. Thus, in some respects, the 
National Health Accounts' estimate of prescription drug spending 
reflects a sales level that is somewhat lower than the revenue actually 
received by pharmacies, drug stores, and other retail business outlets 
selling prescription drugs.
    Consequently, when National Health Accounts' figures are used as 
the denominator in calculating the percentage impact on revenues (as we 
do later in this impact analysis), the result is somewhat larger than 
is actually the case. Nevertheless, we believe that OACT's projections 
for prescription drug spending are the most appropriate to use for 
analysis of the impact of this initiative on prescription drug 
revenues. OACT's estimates are specific to the prescription drug 
market, and the National Health Accounts are recognized as a public 
source of data on health care spending.

                                           Table 3.--Estimated Impact
----------------------------------------------------------------------------------------------------------------
                                                   1999       2004       2005       2006       2007       2008
----------------------------------------------------------------------------------------------------------------
Total Medicare Enrollment (millions)..........       39.2       41.3       41.8       42.4       43.2       44.1
Increase in Total Medicare Enrollment.........  .........       5.4%       1.3%       1.4%       1.8%       2.1%
Increase in per Capita Drug Expenditures......  .........      88.2%      10.9%      10.1%       9.8%       9.7%
Total National Aggregate Retail Drug               $103.9     $203.8     $227.8     $252.9     $279.9     $309.3
 Expenditures ($ billions)....................
Projected Prescription Drug Spending Under the       $6.6      $13.1      $14.7      $16.4      $18.3      $20.5
 Drug Discount Card Programs ($ billions).....
Upper Bound Impact of Estimated Beneficiary     .........     $1,619     $1,819     $2,031     $2,269     $2,542
 Savings ($ millions).........................
Upper Bound Impact as a Percent of Total        .........      0.79%      0.80%      0.80%      0.81%      0.82%
 National Aggregate Retail Drug Expenditures..
Lower Bound Impact of Estimated Beneficiary     .........     $1,214     $1,364     $1,524     $1,702     $1,907
 Savings ($ millions).........................
Lower Bound Impact as a Percent of Total        .........      0.60%      0.60%      0.60%      0.61%     0.62%
 National Aggregate Retail Drug Expenditures..
----------------------------------------------------------------------------------------------------------------
Note: For 2004, the increase in Medicare enrollment and per capita drug expenditures shown in the table reflect
  the percent change between 1999 and 2004.

5. Anticipated Effects on Medicare Beneficiaries
    Among the primary purposes of the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative are to:
    [sbull] Educate beneficiaries about the private market methods for 
securing discounts on the purchase of prescription drugs.
    [sbull] Encourage beneficiary experience with the competitive 
discount approaches that are a key element of Medicare prescription 
drug benefit legislative proposals.
    [sbull] Assist beneficiaries in accessing lower cost prescription 
drugs through new competitive manufacturer rebates or discounts and 
better understanding of how to manage their prescription drug needs.
    We estimate that 9.7 million Medicare beneficiaries will enroll in 
Medicare-endorsed drug card programs by 2004. This figure is somewhat 
lower than was estimated in the proposed rule. The reason for the 
change is that we are now using the 1999 MCBS data as a basis for 
analysis, and a somewhat smaller number of Medicare beneficiaries did 
not have drug coverage in 1999. The 1999 MCBS are the most recent data 
available on drug coverage in the Medicare beneficiary population. It 
should be noted, however, that the 1999 data precede the changes that 
have occurred in drug coverage through the Medicare+Choice program, in 
which fewer beneficiaries are now enrolled.
    We anticipate that Medicare beneficiaries with no drug coverage who 
enroll in a Medicare-endorsed prescription drug card program will save 
between 10 and 13 percent of their total drug costs. However, this will 
vary by the mix of drugs beneficiaries use, and as noted previously, 
may be even higher depending on the ultimate program design used by 
card sponsors.
    Beneficiaries with Medigap insurance that includes drug coverage 
who enroll in a Medicare-endorsed drug card program will also 
experience savings, particularly before the Medigap drug deductible is 
reached, and after the spending cap is exceeded. We also believe that 
the education beneficiaries receive concerning drug prices, 
formularies, drug-to-drug interactions and other pharmacy counseling, 
generic substitution, and pharmacy networks, will provide an 
opportunity for beneficiaries to maximize their savings.
    As shown in Table 3, for the estimated 9.7 million beneficiaries 
who will enroll in the Medicare-endorsed drug card programs by 2004, 
the base for total drug expenditures involved in the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative is projected to be $13.1 
billion in 2004, $14.7 billion in 2005, and $20.5 billion in 2008 
before the savings achieved through the card initiative. Total 
estimated savings for these beneficiaries range from $1.214 billion to 
$1.619 billion in 2004, $1.364 billion to $1.819 billion in 2005, and 
$1.907 billion to $2.542 billion in 2008.
    Beneficiaries may be required to pay a one-time enrollment fee of 
up to $25 to join a Medicare-endorsed drug card program. If all 9.7 
million Medicare beneficiaries estimated to enroll by 2004 pay the 
maximum $25 enrollment fee (a scenario we do not expect because of 
competition among endorsed card programs), the total beneficiary 
savings will be reduced by a maximum of $270 million in 2004. (We note 
that these beneficiaries will have likely paid the enrollment fee in 
2003; however, we are counting that fee against savings in 2004 because 
it is the first full year of operation and the first year of our 5-year 
estimate period.) As mentioned earlier, to the extent that a 
beneficiary stays in the same drug card program beyond the first year, 
the more value the card represents in savings to the beneficiary. In 
2005, based on our estimates of growth in the Medicare population and 
the disenrollment rate (discussed later in this analysis), we estimate 
that if beneficiaries paid the maximum $25 enrollment fee, total 
beneficiary savings will be reduced by a maximum of $31 million in 
2005.
    A beneficiary enrolled in a Medicare-endorsed card program will be 
free to purchase prescription drugs outside the drug discount card 
program, either at a

[[Page 56666]]

non-network pharmacy or a non-formulary drug. Thus, beneficiaries 
without drug coverage who choose to enroll in an endorsed discount card 
program can only be helped by the educational efforts and savings from 
the initiative.
    We received one comment concerning support for this initiative from 
beneficiaries as well as pharmacies and drug stores.
    Comment: One commenter believes the initiative is ill conceived and 
does not have support from beneficiaries, pharmacists, or drug stores.
    Response: In response to the proposed rule, we received comments 
from representatives of beneficiaries, physicians, drug stores, 
pharmacies, and pharmacists as well as others. The majority of 
beneficiary and physician groups were supportive of the initiative.
    We received comments from a few chain and supermarket pharmacy 
companies as well as a number of representatives of pharmacies, drug 
stores, and pharmacists. Most of these commenters opposed the 
initiative, with one of the chief concerns being the financial impact 
of the initiative on pharmacies and drug stores. As mentioned later in 
the impact analysis, we have taken a number of steps to mitigate the 
financial impact of the initiative on pharmacies.
    We believe that the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative is a highly effective way to educate 
beneficiaries about the tools used by private insurance programs to 
lower the cost of prescription drugs. We believe that through real 
world experience with drug card programs, Medicare beneficiaries will 
be better educated about private sector approaches for lowering drug 
costs that are a key element of all Medicare prescription drug benefit 
legislative proposals. This initiative will also provide beneficiaries 
with immediate help with the cost of prescription drugs, and also will 
improve access to better quality prescription-drug-related services. We 
believe that access to prescription drugs is so fundamental in today's 
health care environment that beneficiaries should receive information 
and assistance regarding prescription drug discount programs until a 
Medicare prescription drug benefit is enacted and implemented.
6. Anticipated Effects on the Medicare Program
    We will be responsible for reviewing applications and awarding 
endorsements so that these card programs can begin operating to provide 
lower prices to cash paying beneficiaries. While not quantifiable, a 
positive impact of the rebate and discount requirements of the 
initiative will be to provide us with experience in understanding 
issues in the pharmaceutical industry before enactment of a Medicare 
drug benefit. We will increase our knowledge concerning pricing and 
payment issues, information technology requirements, and increasing the 
effectiveness of pharmacy quality improvement programs. The 
pharmaceutical industry will also gain more experience in working with 
the Medicare population before implementation of a drug benefit. We 
expect that this experience will make the transition to a Medicare 
prescription drug benefit faster and more efficient.
    Because this initiative is not a Medicare benefit, we do not 
anticipate any significant change in the Medicare baseline as a result 
of its implementation.
7. Anticipated Effects on National Retail Prescription Drug Spending
    Total national retail spending (spending for total population, not 
just Medicare beneficiaries) on prescription drugs is projected to be 
$203.8 billion in 2004, $227.8 billion in 2005, and $309.3 billion in 
2008. (http://www.cms.hhs.gov/statistics/nhe/projections-2001/t11.asp).
    In 2004, the first full year of the initiative, the total economic 
impact of the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative is estimated to range from $1.214 billion to $1.619 billion, 
representing 0.60 percent to 0.79 percent of total national aggregate 
retail prescription drug expenditures. In 2005, the total impact is 
estimated to range from $1.364 billion to $1.819 billion, or 0.60 
percent to 0.80 percent of total national aggregate retail expenditures 
for prescription drugs. In 2008, we estimate the total impact to range 
from $1.907 billion to $2.542 billion, or 0.62 percent to 0.82 percent 
of total national aggregate retail drug expenditures. Thus, the 
economic impact is estimated to be less than 1 percent of total retail 
prescription drug spending.
    We expect that the various sectors involved in the prescription 
drug industry will adjust to the impact without significant disruption, 
just as the industry adjusted to discounts being extended to the 
privately insured population during the 1990s. The 1990s saw a 
significant increase in reliance on pharmacy benefit management and the 
tools commonly used to manage pharmaceutical benefit costs.
    For example, evidence of market adjustment can be seen in the 
changes in pharmacies' acquisition costs during the 1990s. In the 
August 2001 HHS Office of Inspector General (OIG) Report entitled 
``Medicaid Pharmacy-Actual Acquisition Cost of Brand Name Prescription 
Drug Products,'' the OIG reports on changes in pharmacy acquisition 
costs for both single source and multi-source brand name drugs. The OIG 
uses the common industry pricing metric of average wholesale price 
(AWP). The findings from the OIG study indicate that the acquisition 
prices pharmacies face for a broad spectrum of brand name drugs have 
been declining as the percentage of AWP during the period 1994 to 1999. 
Based on 1994 pricing data, the OIG estimates that pharmacies acquired 
brand name drugs (both single source and multi-source) at a discount of 
18.30 percent below AWP. For 1999 pricing data, the OIG estimates a 
discount of 21.84 below AWP. The OIG reports that this represents an 
increase of 19.3 percent in the average discount below AWP for which 
pharmacies were able to purchase a mixture of single source and multi-
source brand name drugs. The OIG conducted a similar analysis on the 
pharmacy acquisition costs related to generic drugs. The OIG March 2002 
report ``Medicaid Pharmacy--Actual Acquisition Cost of Generic 
Prescription Drug Products'' reported that for generic drugs there was 
an increase of over 55 percent in the average discount below AWP from 
1994 to 1999 at which pharmacies were able to acquire generic drugs 
(from 42.45 percent below AWP in 1994 to 65.93 percent below AWP in 
1999). Thus, during the 1990s, as more customers secured discounts on 
the purchase of prescription drugs, pharmacies acquired drugs at larger 
discounts from AWP.
    The acquisition costs reported by the OIG are similar to those 
reported in the PricewaterhouseCoopers (PWC) study conducted for us 
entitled ``A Study of Pharmaceutical Benefit Management,'' June 2001. 
That study reported that pharmacies generally now acquire brand name 
drugs at AWP minus 20 to 25 percent. According to the PWC report, 
absent a discount arrangement (such as a pharmacy-sponsored senior 
discount), pharmacies, on average, sell to the uninsured population at 
full retail price, roughly AWP plus a dispensing fee (generally $2 to 
$3).
    We also believe that the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative will accelerate the use of generic drugs. The HHS 
study reports that, generally, pharmacies earn higher margins on 
generic drugs. In

[[Page 56667]]

addition, PWC found that generic manufacturers sometimes provide 
pricing incentives to pharmacies based on generic volume or market 
share. These are other examples of adjustments that take place related 
to the market place in pharmaceuticals.
    Our expectation is that the discounts offered by retail pharmacies 
and drug manufacturers will be no greater than the discounts already 
offered to insured individuals, including insured Medicare 
beneficiaries, unless there is a legitimate business reason for the 
pharmacies and the drug manufacturers to offer a greater discount. It 
is possible that the requirements of final price publication and the 
establishment of a large number of competing discount cards will lead 
to greater manufacturer discounts. We expect that access to modern 
competitive tools will assist in controlling prescription drug costs 
and improving the quality and efficiency of prescription drug services. 
We also expect that this initiative will somewhat level the playing 
field between the insured and uninsured, and the current differential 
in pricing between populations with drug coverage and Medicare 
beneficiaries without drug coverage will be ameliorated.
    Further, since this initiative is not a Medicare benefit, we do not 
expect that this effort will have any impact on the number of Medicare 
beneficiaries with drug coverage through employer-sponsored health 
insurance. We do not anticipate that employers will alter their drug 
coverage in response to this initiative.
    We received a few comments concerning the impact of the initiative 
on pharmacy and drug store revenues.
    Comment: A couple of commenters voiced concern that card sponsors 
that operate mail order pharmacies may steer business away from 
community pharmacies toward their mail order business, leading to a 
decline in revenues for community pharmacies.
    Response: We recognize the value of both in-person pharmacy 
services provided by community pharmacies and mail order pharmacy 
services. We believe that most Medicare beneficiaries rely on their 
community pharmacies, and thus mail order only programs are not 
permitted. We have included a specific retail pharmacy access standard 
for Medicare endorsement purposes, and in this final rule have provided 
for a more stringent standard for MSA geographic areas of 90 percent of 
beneficiaries being within 5 miles of a network pharmacy, and for non-
MSA areas 90 percent of beneficiaries being within 10 miles of a retail 
network pharmacy. We also believe that beneficiaries should have 
options of both retail and mail order available to them, and that 
beneficiary choice should dictate the venue through which they obtain 
pharmacy services. Thus, card sponsors have the option of also offering 
mail order services. Mail order pharmacy sales, like supermarket and 
mass merchant pharmacy sales, have been a growing share of total 
prescription drug sales in the U.S. over the last 10 years. These 
alternative sources for prescription drugs provide additional 
convenient access, and the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative is simply recognizing the nature of the existing 
market.
    Comment: A few commenters cited a claim by Stephen W. 
Schondelmeyer, Pharm.D., Ph.D., in his declaration in National 
Association of Chain Drug Stores v. Thompson, No. 011554 (D.D.C. 2001) 
that the initiative will cause $2 billion in revenue losses for 
pharmacies and result in 2,500 to 10,000 community pharmacy closures.
    Response: We note that Dr. Schondelmeyer's declaration cited by the 
commenters relates to the discount card initiative that was proposed in 
July 2001, and the initiative has been revised significantly since that 
time. Thus, the commenters are using an analysis that predates the 
proposed rule that we published in the Federal Register on March 6, 
2002 (67 FR 10262).
    Dr. Schondelmeyer's estimate of a $2 billion revenue impact on 
community pharmacies is substantially higher than our estimate for the 
combined beneficiary savings from manufacturer rebates or discounts and 
pharmacy discounts. From the information provided in Dr. 
Schondelmeyer's declaration that was cited by the commenters, we 
believe that his estimates significantly overstate the impact of the 
initiative on community pharmacies in several ways.
    First, his estimates are based on the assumption that the 
initiative will yield 15 to 25 percent savings, which will come 
entirely from pharmacy discounts--assumptions that are not reflective 
of the structure of the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative as described in this final rule. As we note 
elsewhere in this preamble, it is important to distinguish between 
estimated savings on individual drugs and savings calculated over total 
drug spending. While the initiative may yield savings of 15 to 25 
percent or even higher on specific drugs, overall the initiative is 
expected to generate average savings on beneficiaries' total drug 
spending of 10 to 13 percent, possibly up to 15 percent depending on 
the design of card sponsors programs (for example, the degree to which 
formularies are used).
    Second, Dr. Schondelmeyer also uses in his analysis an average 
utilization figure of 28.5 prescriptions for discount card enrollees. 
This level of utilization is characteristic of a population with drug 
coverage, and represents a utilization level that is higher than found 
in a population without drug coverage. Since individuals without drug 
coverage are expected to be the predominant group enrolling in the 
initiative, we believe Dr. Schondelmeyer's use of this higher 
utilization level is another factor contributing to the overestimate of 
impact.
    Dr. Schondelmeyer's assumptions concerning enrollment in the 
initiative may be another factor contributing to the overestimate. As 
discussed elsewhere in the preamble, we have projected that about 9.7 
million Medicare beneficiaries will enroll in the initiative by 2004. 
This represents about 75 percent of beneficiaries without drug coverage 
and 95 percent of beneficiaries with Medigap drug coverage. While we 
believe there will be significant enrollment because of the Medicare 
endorsement, we believe that enrollment above the level we assume would 
be unrealistic. Dr. Schondelmeyer indicates in his declaration that it 
would be reasonable to assume that between 7 and 15 million Medicare 
beneficiaries would enroll in the card programs. While the specific 
enrollment assumption Dr. Schondelmeyer uses in his impact estimates is 
not clear from his declaration, if he uses a figure in the middle to 
high end of the 7 to 15 million range, we believe that would be an 
overestimate.
    Additionally, Dr. Schondelmeyer, in his declaration, claims that 
discounts under the initiative will come entirely from pharmacies for 
several reasons including: the program announced in July 2001 did not 
require manufacturer rebates or discounts, discount card sponsors do 
not usually share manufacturer rebates or discounts with enrollees or 
pharmacies, and card sponsors will not have the technology to pass 
rebates or discounts through to enrollees. We agree that historically 
discount card sponsors have not passed manufacturer rebates or 
discounts through to enrollees or pharmacies, but we believe that the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative 
represents a significant improvement on the current market, with 
manufacturer rebates or discounts being an important component of

[[Page 56668]]

beneficiary savings. We have modified the initiative from that proposed 
in July 2001 and added a requirement that, as a condition of Medicare 
endorsement, card sponsors must obtain manufacturer rebates or 
discounts on brand name and/or generic drugs and pass a substantial 
share through to beneficiaries. Furthermore, we believe Medicare-
endorsed card sponsors will have both the ability and the incentive to 
negotiate significant manufacturer rebates or discounts and pass them 
through to beneficiaries due to aspects of the initiative such as 
market leverage stemming from large enrollment, exclusivity, and market 
competition. We also believe the recent development of manufacturer 
drug cards has demonstrated that technology does not pose a barrier to 
card sponsors passing through discounts to beneficiaries or pharmacies.
    Looking specifically at the estimates in Dr. Schondelmeyer's 
statement, we note that he provides some broad information about the 
assumptions used to develop his impact estimates, but does not document 
the specific assumptions used in the calculation of the $2 billion 
estimate. In addition, it is unclear on which year the $2 billion 
estimate is based. Possibly, Dr. Schondelmeyer is using 2000 data since 
he cites a figure of $140.7 billion for industry sales, which is 
consistent with 2000 data from the National Association of Chain Drug 
Stores.
    As mentioned previously in the preamble, we estimate that the 
initiative will result in beneficiary savings from a combination of 
manufacturers rebates or discounts and pharmacy discounts of $1.2 
billion to $1.6 billion in 2004, representing 0.60 to 0.79 percent of 
total national retail prescription drug sales. Dr. Schondelmeyer 
estimates a $2 billion dollar impact on community pharmacies alone. 
Using the total sales figure he provides of $140.7 billion, this 
represents 1.4 percent of industry sales.
    If, in fact, he is using 2000 data on which to base his estimate, 
for comparison purposes our estimate of savings in year 2000 dollars 
ranges from $719 to $958 million, representing 0.59 to 0.79 percent of 
total national aggregate retail prescription drug sales.
    In sum, we believe that Dr. Schondelmeyer's estimate of a $2 
billion impact on community pharmacies overestimates the impact of the 
initiative on community pharmacies described in this final rule. Dr. 
Schondelmeyer's analysis, cited by commenters, predates the 
initiative's provision related to manufacturer rebates or discounts and 
the recent developments of manufacturer discount programs. Dr. 
Schondelmeyer assumes higher overall savings than we expect from this 
initiative. He also assumes that all beneficiary savings will come as a 
result of pharmacy discounts. We disagree with this assumption because 
in the Medicare initiative, manufacturer rebates or discounts are a 
pre-requisite for endorsement, and thus will be an important source of 
beneficiary savings, along with increased use of generic drugs.
8. Regulatory Flexibility Act Analysis of Effects on Small Entities
    a. General
    The Regulatory Flexibility Act (RFA) requires agencies to determine 
whether a rule will have a significant economic impact on a substantial 
number of small entities. If a rule is expected to have a significant 
economic impact on a substantial number of small entities, the RFA 
requires that a regulatory flexibility analysis be performed.
    The Medicare-Endorsed Prescription Drug Card Assistance Initiative 
may involve some impact on a substantial number of small businesses. 
The current market for delivery of pharmaceutical products, by its 
nature involves small businesses, similar to other professional health 
care services such as physician services. The current health insurance 
market demonstrates that insurance companies, pharmaceutical benefit 
managers, and others such as health maintenance organizations (HMOs) 
have been able to enter into arrangements similar to those in this 
Medicare initiative involving the participation of large and small 
pharmacy and drug store firms. These arrangements have resulted in 
lower prescription drug prices being made available to consumers who 
have insurance coverage for prescription drugs. There is evidence that 
both large and small pharmacies and drug stores participate in these 
arrangements with pharmaceutical benefit managers, and that 
pharmaceutical benefit managers are able to offer (employer) clients 
pharmacy networks containing the majority of retail pharmacy outlets. 
In addition, many pharmacies, including small pharmacies, offer senior 
discounts, and doing so in the context of this Medicare initiative may 
not be significantly different than current practice for some 
pharmacies.
    The role of individual pharmacies, including small pharmacies, in 
this Medicare initiative is a critical one: they will be an integral 
part of the pharmacy networks of Medicare-endorsed card programs, 
serving Medicare beneficiaries at the point of retail sale. The 
objectives of the initiative and the related design requirements will 
preclude an individual pharmacy or drug store from operating the full 
scale of the contemplated drug card assistance initiative that will be 
necessary to obtain an endorsement. Individual pharmacies could 
participate in the initiative by voluntarily entering into a drug card 
program's network with other pharmacies. Individual pharmacies are not 
in a market position to meet the requirements for endorsement, 
including the ability to serve a large number of enrollees and to 
garner manufacturer rebates. Retail pharmacy chains could possibly be 
organized to meet the requirements of Medicare endorsement explained 
elsewhere in this final rule because of their size, type of experience 
and infrastructure.
    Convenient access to retail pharmacies, regardless of size or 
ownership, by Medicare beneficiaries will be an important feature of 
the initiative. As discussed elsewhere in this final rule, a discount 
card sponsor will have to have a contracted pharmacy network of 
sufficient size to demonstrate that at least 90 percent of Medicare 
beneficiaries in metropolitan areas served by the program live within 5 
miles of a contracted pharmacy (90/5) and at least 90 percent of 
Medicare beneficiaries in non-metropolitan areas served by the program 
live within 10 miles of a contracted pharmacy (90/10). This access 
ratio standard is consistent with the access standard of most insured 
products, and we believe it will require card sponsors to support an 
extremely broad network of retail pharmacies.
    Given the access ratio requirements and the provision that 
Medicare-endorsed programs will not be allowed to offer a mail order 
only option, we believe that most pharmacies and drug stores (both 
chain and independent) will be invited and encouraged to participate in 
card programs' networks, particularly small pharmacies in rural areas. 
This is generally the case in the current insured market, and we do not 
anticipate significantly narrower networks in the Medicare-endorsed 
card programs. There are over 55,000 retail pharmacies in the United 
States. According to a report prepared for us by PricewaterhouseCoopers 
(PWC) (``Study of the Pharmaceutical Benefit Management Industry,'' 
June 2001), pharmacy benefit managers (PBMs) offer, as a general 
practice, standard national pharmacy networks, with 42,000 pharmacies 
in the typical network. The PWC study also reports that one leading PBM 
has 50,000 pharmacies in its more restricted

[[Page 56669]]

network. Also, according to PWC, two large national PBMs have 98 
percent of all pharmacies in the United States in their standard 
networks.
    The inclusive access standard required for Medicare endorsement, 
coupled with the industry norm for pharmacy networks under insured 
products as reported by PWC, lead us to believe that a very large 
number of small pharmacies and drug stores will be included in the 
networks of Medicare-endorsed drug discount card programs. Further, we 
believe that small entities in rural areas especially will be included 
in order to meet the non-metropolitan 90/10 standard for endorsement. 
Card sponsors will be expected to report on the participation of 
independent pharmacies in their networks.
    We received a comment concerning the role of small pharmacies in 
the initiative and a comment about outreach to small pharmacies during 
the regulatory development process.
    Comment: One commenter voiced concern that small pharmacies and 
drug stores will have difficulty meeting the criteria for Medicare 
endorsement of card sponsors and asserted that we should consider 
alternatives such as endorsing small pharmacies as card sponsors or 
granting small pharmacies the right to join any card sponsor's drug 
card program. The commenter also recommended that we consider ways to 
facilitate small pharmacies pooling together for the purposes of 
obtaining Medicare endorsement, such as developing a database to help 
small pharmacies identify others that are interested in pooling 
together, offering small pharmacies guidance and templates related to 
pooling together, and minimizing administrative costs borne by small 
pharmacies pooling together.
    Response: As stated previously, small pharmacies will play a 
critical role in the initiative by being an integral part of the card 
sponsors' pharmacy networks. However, we do not believe that individual 
pharmacies are in a position to be a Medicare-endorsed card sponsor. 
Individual pharmacies will not have the capacity nor the market 
position to leverage the purchasing power of a large number of 
beneficiaries to obtain manufacturer rebates or discounts--one of the 
key objectives of the initiative. The commenter's proposal that small 
pharmacies and drug stores be permitted to join any card sponsors' 
program of their choosing is addressed in more detail elsewhere in the 
preamble. In short, we believe card sponsors will invite and encourage 
most pharmacies to participate in their card programs, making this 
proposal unnecessary.
    The commenter offered a number of suggestions for making it easier 
for small entities to pool together to become a Medicare-endorsed card 
sponsor. We have made several changes to the years of experience and 
covered lives criteria for endorsed card sponsors, making it easier for 
more organizations, including smaller entities pooling together and 
working with other organizations, to gain Medicare endorsement. These 
changes are discussed in more detail previously in this preamble.
    With respect to the commenter's suggestions that we create a 
database of small entities interested in pooling together and offer 
small pharmacies guidance and templates related to pooling together, we 
believe that this function in this private sector-based initiative is 
more appropriate for trade associations. However, with regard to 
guidance to potential applicants as discussed earlier in the preamble, 
following publication of the solicitation, we will entertain questions 
from potential applicants to clarify the final application 
requirements.
    Finally, with respect to the commenter's assertion that 
administrative costs borne by small pharmacies pooling together should 
be minimized, we believe that by pooling together, entities will be 
able to spread the administrative costs across a number of 
organizations, thereby reducing the burden on any one entity. In 
addition, card sponsors can charge beneficiaries a one-time $25 
enrollment fee and use manufacturer rebates to support administrative 
costs. As discussed elsewhere in this preamble, to the extent that 
small entities pooling together form regional card programs, they will 
be responsible for a smaller share of the initial start-up costs than 
national programs. The allocation of administrative costs beyond the 
initial start-up costs is left to the discretion of the consortium.
    Comment: One commenter stated that we had not adequately reached 
out to small businesses during the rulemaking process, as required by 
the RFA. The commenter encouraged us to conduct outreach and develop a 
dialogue with small businesses throughout the regulatory development 
process.
    Response: We believe that input from small business in the 
regulatory development process is important. We did receive comments 
from representatives of small businesses in response to the proposed 
rule. In addition, in May 2002, our Administrator made a presentation 
about the proposed Medicare-Endorsed Prescription Drug Card Assistance 
Initiative and other of our efforts to improve Medicare beneficiary 
access to prescription drugs, including a question and answer period, 
at the National Community Pharmacists Association's Annual Conference 
on National Legislation and Public Affairs. We also have met with the 
Small Business Administration to more generally look at how we can 
improve our process and analyses related to the Regulatory Flexibility 
Act.
b. Estimated Impact on Small Entities
    HHS uses as its measure of significant economic impact on a 
substantial number of small entities a change in revenues of more than 
3 to 5 percent. To assess whether the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative meets these HHS criteria, we estimated 
the number of small entities affected and the average percentage impact 
on revenues. We also conducted a sensitivity analysis to estimate the 
impact on revenues for pharmacies with a higher than average rate of 
customer participation in the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative. These analyses found that while the initiative 
is expected to have some impact on a substantial number of small 
entities, it is not expected to have a significant economic impact. 
Based on these analyses, we certify that the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative does not have a 
significant economic impact on a substantial number of small entities.
    As a result, we are not required to perform a regulatory 
flexibility analysis. Nevertheless, due to the concerns voiced by some 
commenters about the potential effects of the rule on small businesses, 
we have included in this section or in other sections of the preamble 
the various issues that are to be included in a regulatory flexibility 
analysis. To avoid repetition, we have not duplicated each of them 
here. In preceding sections of the preamble, we have included a 
description of the initiative and its objectives. In this and 
subsequent sections of the preamble, we include an estimate of the 
number of small entities affected and a description of the alternatives 
considered to minimize the economic impact on small pharmacies. We have 
not included a discussion of reporting, recordkeeping, and other 
compliance requirements for small pharmacies because we make no such 
requirements on small pharmacies--only for card sponsors.
    We received comments concerning the HHS standard for economic 
impact and concerning requirements related to regulatory flexibility 
analyses.

[[Page 56670]]

    Comment: Several commenters expressed concern that the HHS standard 
for significant economic impact does not take into account the impact 
on small pharmacies' and drug stores' profit margins and their 
financial viability.
    Response: HHS uses revenues rather than profit margins to estimate 
the economic impact of a rule on small entities because in our 
experience reliable data on profit margins are very difficult to 
obtain, while reliable data on revenues are much more readily available 
and straightforward.
    One example of the difficulties in obtaining reliable profit margin 
data and in how to interpret those data in the case of small businesses 
relates to how owners' salaries are treated. Profit margin estimates 
can vary substantially depending on how one considers the owner's 
salary relative to the profits of the business. For example, a 2002 
study on the pharmacy industry conducted by Booz Allen Hamilton for us 
cites data from the National Community Pharmacist Association (NCPA), 
which indicate that independent pharmacies had average profit margins, 
in 2000, of nearly 8 percent when owners' salaries were included and 
about 3 percent when owners' salaries were excluded. Furthermore, when 
the Internal Revenue Service (IRS) determines income tax liability for 
sole proprietorships, it considers the businesses incomes to be profits 
plus the owners' salaries. In the case of pharmacies and drug stores, 
IRS data on sole proprietorships show fairly similar profit margin 
levels with NCPA--about 7 percent including owners' salaries in the 
late 1990s. Thus, if profit margins were used to determine the economic 
impact of rules on small businesses, how the owners' salaries are 
treated could significantly alter findings. Furthermore, data are 
generally not available to separate the portion of an owner's salary 
that compensates for labor versus the portion that reflects profit 
taking in the form of salary, which makes developing an accurate 
estimate of small businesses' profit margins very difficult.
    While the HHS standard for significant economic impact focuses on 
revenues rather than profit margins, as stated elsewhere in the 
preamble, we have taken a number of steps to mitigate the financial 
impact on small pharmacies and drug stores.
    Comment: A few commenters asserted that the proposed rule should 
have included an initial regulatory flexibility analysis (IRFA). One of 
the commenters contended that the proposed rule did not certify that 
the Medicare-Endorsed Prescription Drug Card Assistance Initiative 
would not have a significant economic impact on a substantial number of 
small entities, and as a result an IRFA was required.
    Response: The proposed rule included an analysis of the effect of 
the initiative on pharmacies' and drug stores' revenues both on average 
and for pharmacies and drug stores with a higher than average share of 
their customers enrolled in the program. Based on these analyses, the 
proposed rule stated: ``the impact of the proposed Medicare endorsement 
initiative, on average, is estimated to be well below the 3 to 5 
percent of revenues that HHS uses as the measure of significant 
economic impact. Furthermore, our sensitivity analysis indicates that 
even taking into account significantly different market 
characteristics, and even if all of the impact were assumed to be 
coming from pharmacies rather than our proposed program design that 
requires manufacturer rebates or discounts, we did not generate a 
scenario that reaches the HHS test for significant economic impact.'' 
(67 FR 10281, March 6, 2002) Section 605(b) of the RFA permits an 
agency to certify in the proposed rule or the final rule. The final 
rule includes a certification.
c. Number of Small Entities Affected
    For purposes of the RFA, small entities include small businesses, 
nonprofit organizations, and small governmental jurisdictions. 
Individuals and States are not included in the definition of a small 
entity. The Small Business Administration (SBA), on its Web site 
(http://www.sba.gov/size/naicstb2-ret.html), provides a size standard 
for pharmacies and drug stores (NAICS code 446110 or SIC code 5912) of 
revenues of $6 million or less annually for the purpose of determining 
whether entities are small businesses. The revenue standard for small 
pharmacies and drug stores was recently increased from $5 million to $6 
million in February 2002 to account for inflation.
    To assess the number of small entities affected by this initiative, 
and the amount of revenue involved for these entities, we analyzed data 
from several sources. We examined data from the U.S. Census Bureau's 
1997 Economic Census (Table 4 on Retail Trade--Subject Series), which 
provides data on the number of pharmacies and drug stores by level of 
revenue. To identify small pharmacies and drug stores, we looked at 
firms with less than $5 million in revenues. Although SBA's revenue 
standard for small pharmacies and drug stores was increased to $6 
million in 2002 to account for inflation, we use $5 million as the 
standard in our analysis because we are working with 1997 data so an 
inflation adjustment is not needed. According to the Census Bureau 
data, there were a total of 20,815 business firms that were pharmacies 
and drug stores that operated for the entire year in 1997. Those 20,815 
firms operated 41,228 establishments (some entities selling 
prescription drug products are not included in this count, including 
supermarkets and mass merchants). Of the total firms, 20,126 (or 96.7 
percent) were firms that had sales of less than $5 million, and these 
same firms operated 21,226 establishments or 51.5 percent of the 
pharmacies and drug store class of trade in the Census Bureau data.
    In addition to traditional pharmacies and drug stores, prescription 
drugs are sold through supermarkets and mass merchants. The National 
Association of Chain Drug Stores (NACDS) offers data that include these 
outlets, so we examined this data source as well. The NACDS analyzes 
industry data from a variety of sources, including IMS Health, the 
National Council of Prescription Drug Programs, and American Business 
Information, and reports industry statistics on their Web site (http://www.nacds.org). For 1997, NACDS reports a total of 51,170 community 
retail pharmacy outlets, of which 20,844 were independent and 19,119 
were chain drug stores (for a total of 39,963)--a number very similar 
to the Census Bureau's 1997 count of 41,228 pharmacy and drug store 
establishments. We assume that there is a great deal of overlap between 
the 21,226 establishments that the Census Bureau identifies as those 
with sales of less than $5 million and the NACDS report of 20,844 
independent pharmacies in 1997. For 2001, NACDS reports 55,581 
community retail pharmacy outlets, of which 20,647 are identified as 
independent drug stores.
    In addition to the number of outlets, we examined revenues. The 
Census Bureau data indicate that, in 1997, total pharmacy and drug 
store sales for firms operating the entire year were $97.47 billion, of 
which firms with $5 million or less in sales accounted for 25.5 percent 
($24.82 billion). However, these sales include more than just 
prescription drugs, as most pharmacies and drug stores sell other 
products. Since firms may differ in the proportion of revenues obtained 
from prescription drugs, we think that the analysis should focus, to 
the extent possible, on revenues from prescription drugs, rather than 
the broader set of sales occurring through pharmacies and drug stores, 
so

[[Page 56671]]

we also examined information prepared by our Office of the Actuary 
(OACT). It is important to note that focusing only on prescription drug 
sales, rather than all sales through this class of trade, yields an 
estimated impact that is larger than the actual impact on total sales.
    From IMS' National Prescription Audit data obtained by OACT, it is 
possible to estimate the portion of sales occurring through independent 
and chain pharmacies. The data obtained by OACT do not permit analysis 
by firm size. However, these data are specific to prescription drug 
sales for a more recent time period. Furthermore, we believe that there 
is a great deal of overlap between the firms identified as independent 
pharmacies and the small pharmacy and drug store firms identified in 
the Census data. Consequently, we think that the data from the 
Prescription Drug Audit are an appropriate source for analysis.
    For 1997, those data indicate that 29.2 percent of sales were 
through independent drug stores--a figure slightly higher than the 
share (25.5 percent) indicated by the Census data. For 2001, the data 
obtained by OACT indicate that 23.7 percent of sales were through 
independent pharmacies. For purposes of calculating the share of 
revenues from prescription drug sales through small firms, we think it 
is reasonable to use the more recent estimate of prescription drug 
sales through independent pharmacies obtained from our analysis of the 
Prescription Drug Audit for 2001.
    The Census Bureau data contain information on supermarkets (NAICS 
code 445110) and mass merchants (discount or mass merchandising 
department stores-NAICS code 4521102, and warehouse clubs and 
superstores-NAICS code 45291). We assume that for both supermarkets and 
the mass merchants, prescription drug sales comprise a small share of 
sales, and consequently have not included them in this small business 
analysis. This assumption is supported by data from the Census Bureau, 
Prescription Drug Audit, and NACDS web site. The 1997 Census data 
indicate that total supermarket product sales were $351.4 billion. 
OACT's analysis of 1997 data from the Prescription Drug Audit indicates 
that $8.8 billion in prescription drug sales occurred through food 
stores, or 2.5 percent of total product sales. Similarly, the 1997 
Census data indicate that total product sales for these two categories 
of mass merchandisers were $208 billion. Since data from the 
Prescription Drug Audit obtained by OACT include mass merchants with 
other chain stores, we used prescription drug sales data from the NACDS 
web site. The NACDS web site indicates that prescription drug sales 
through the mass merchant category were $8.9 billion in 1997, or 4.3 
percent of total product sales. Furthermore, the fact that businesses 
are identified as supermarkets and mass merchandisers seems to indicate 
that prescription drugs are not their major line of trade.
    We received one comment concerning analysis of the number of small 
business affected by the initiative.
    Comment: One commenter asserted that the proposed rule did not 
include an assessment of the number of small entities affected by the 
proposed Medicare-Endorsed Prescription Drug Card Assistance 
Initiative, as required by the RFA.
    Response: Both the proposed rule and this final rule include an 
analysis of the number of small entities potentially affected by the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative. The 
number of small or independent pharmacies and drug stores affected is 
estimated using data from the Economic Census (1997) and NACDS (1997 
and 2001). Both of these data sources indicate that there are about 
21,000 small or independent pharmacies and drug stores in the United 
States.
d. Average Estimated Economic Impact on Small Pharmacies
    As indicated previously, HHS uses as its measure of significant 
economic impact on a substantial number of small entities a change in 
revenues of more than 3 to 5 percent. To develop an estimate of the 
impact of the initiative on prescription drug retail sales associated 
with small pharmacies and drug stores, we take our national estimates 
in Table 3 and make assumptions about the percent of total retail 
prescription drug sales through small pharmacies. In addition, we make 
assumptions about the distribution across large and small pharmacies 
and drug stores of prescription drug sales to Medicare-endorsed 
discount card enrollees.
    Assuming that 23.7 percent of total retail pharmacy sales are 
through small pharmacies (based on OACT's estimate of the share of 
total retail sales through independent pharmacies in 2001), the share 
of total national prescription drug sales through small pharmacies and 
drug stores will be $48.3 billion in 2004, $54.0 billion in 2005, and 
$73.3 billion in 2008. If we assume that the population most likely to 
enroll in the Medicare-endorsed drug discount card programs splits its 
purchases between large and small pharmacies in the same proportion as 
the total population, then the estimated sales involved in the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative through 
small pharmacies and drug stores will be $3.1 billion for 2004, $3.5 
billion in 2005, and $4.9 billion in 2008--accounting for less than 7 
percent of prescription drug sales. Consequently, the portion of the 
estimated beneficiary savings related to retail prescription drug sales 
occurring through small pharmacies and drug stores ranges from: $288 to 
$384 million in 2004, $323 to $431 million in 2005, and from $452 
million to $603 million in 2008. These amounts, as a share of the 
national retail prescription drug sales occurring through small 
pharmacies and drug stores, represent a range of 0.60 percent to 0.79 
percent in 2004, from 0.60 to 0.80 percent in 2005, and from 0.62 to 
0.82 percent in 2008.
    This is likely to be an overestimate of the economic impact on 
small pharmacies and drug stores, as this economic impact will not be 
borne entirely by pharmacies. Card sponsors will be required to obtain 
substantial manufacturer rebates or discounts that will defray the cost 
to pharmacies of providing discounts on retail drug prices. In 
addition, to the extent that the discount card programs achieve larger 
savings from drug manufacturers than are reflected in our estimate, the 
additional beneficiary savings could come from drug manufacturers and 
not local pharmacies. In addition, because of the education initiative, 
some of the savings to beneficiaries will come as a result of increased 
use of generic drugs.
    Other caveats to consider are the following: Our spending estimates 
assume no effects of the Medicare-Endorsed Prescription Drug Card 
Assistance Initiative on beneficiary drug use. It is possible that 
lower drug prices will lead to greater use, resulting in a smaller 
impact on pharmacy revenues. It is also possible that pharmacy services 
associated with the card will lead to some drug substitution, 
simplification of drug regimens, or avoidance of complications that 
require further drug therapy, leading to a somewhat greater impact on 
pharmacy revenues.
e. Sensitivity Analysis
    In order to assess the potential for differing distributional 
impacts among pharmacies, we conducted a sensitivity analysis. We 
estimate that the total prescription drug spending involved in the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative will 
comprise, on average, less than 7 percent of revenues, with the 
economic

[[Page 56672]]

impact of the initiative on total revenues related to prescription 
drugs estimated at less than 1 percent. For purposes of a sensitivity 
analysis, we estimate that in order to reach the HHS measure of 
significant economic impact of 3 to 5 percent of revenues, it will be 
necessary to have prescription drug revenues resulting from the 
initiative account for at least 24 percent of a business's revenues. In 
the sensitivity analysis, we developed a hypothetical geographic 
locality skewed to contain a very large share of Medicare beneficiaries 
who enroll in the initiative. Under this highly skewed assumption, we 
estimated a maximum share of 17.7 percent of a business's total 
prescription drug revenues would be associated with the Medicare-
endorsed discount card, with an economic impact of the initiative of 
2.2 percent of prescription drug sales.
    As noted previously, this economic impact will not be borne 
entirely by pharmacies, because card sponsors will be required to 
obtain manufacturer rebates or discounts that will defray the cost of 
pharmacies providing discounts on retail drug prices. In addition, part 
of the savings to beneficiaries also comes from increased use of 
generic drugs. Thus, the sensitivity analysis still yielded an impact 
level below the 3 to 5 percent of revenues used by HHS to measure 
significant economic impact. The following discussion describes the 
assumptions and supporting data used in the sensitivity analysis.
    In order to prepare the sensitivity analysis, we identified key 
variables that could change the market share of revenues accounted for 
by enrollees in this initiative and the consequent impact resulting 
from the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative. One key variable is the Medicare population as a portion of 
a pharmacy's geographic locality customer base. We assume that a 
pharmacy's customer base is derived in large part from the population 
in close geographic proximity to its business location. Therefore, we 
examined the variation in the geographic distribution of the Medicare 
population. On average nationally, Medicare beneficiaries were 13.6 
percent of the total population as of July 2000. Using several States 
with the highest Medicare population rates, we examined, at the county 
level, the percent of the population over age 65 based on Census Bureau 
data. For counties with high elderly population compositions, we 
obtained the actual counts of Medicare enrollment (aged and disabled) 
and calculated Medicare enrollment as a percentage of the counties' 
populations. Based on this analysis at the county level, we estimate in 
a high-end scenario that Medicare beneficiaries could potentially 
comprise up to approximately 36 percent of a geographic area's 
population.
    A second key variable that we assume could alter the revenues being 
impacted is the percent of the Medicare population in an area that may 
enroll in the Medicare-endorsed discount card programs. As discussed 
previously, we think that the beneficiaries most likely to enroll in 
the Medicare-endorsed discount card programs will be those without 
insurance coverage for prescription drugs (including those with 
supplemental insurance coverage that does not include prescription 
drugs) and those with Medigap drug coverage. In terms of demographic 
variables, the highest rates of Medicare beneficiaries without drug 
coverage occur among Medicare beneficiaries in non-metropolitan areas 
(36 percent as of 1999). Our analysis of the 1999 MCBS data also 
indicates that 13 percent of beneficiaries in non-metropolitan areas 
have individually purchased insurance policies that provide drug 
coverage. While individually purchased insurance policies include, but 
are not limited to, standardized Medigap policies, for the sake of 
creating an upper bound estimate of the percent of Medicare 
beneficiaries in a geographic area that might have Medigap standardized 
drug coverage, we use 13 percent.
    For purposes of a sensitivity analysis, we developed a hypothetical 
geographic location with a large share of Medicare beneficiaries that 
also had a high portion of beneficiaries without drug coverage. We 
assumed that 36 percent of people in the hypothetical geographic area 
were Medicare beneficiaries and 36 percent of those beneficiaries had 
no drug coverage. We also assumed that the hypothetical Medicare 
population would have a higher portion (13 percent) of beneficiaries 
who obtained drug coverage through Medigap.
    We estimate that nationally approximately 9.7 million Medicare 
beneficiaries will enroll in the Medicare-endorsed discount card 
programs by 2004, accounting for an estimated 3 percent of the total 
U.S. population. Adjusting the data, using the population and drug 
coverage weighting factors for the sensitivity analysis and using the 
overall uptake assumptions (about 75 percent overall uptake in the 
Medicare population without drug coverage and 95 percent in the Medigap 
population with drug coverage), results in the hypothetical area having 
approximately 14 percent of its total population participating in the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative. 
Therefore, about 86 percent of the total hypothetical area's population 
will not participate in the initiative, including both Medicare 
beneficiaries and non-Medicare beneficiaries.
    To estimate the impact of the initiative on prescription drug 
revenues in the hypothetical locality, we estimated the per capita drug 
spending for participants in the initiative and non-participants in the 
initiative in the hypothetical area. We estimated per capita drug 
spending to be $1,289 for participants and $1,001 for non-participants 
in the hypothetical locality in 2004. These figures differ from per 
capita estimates for participants and non-participants at the national 
level due to the skewed demographic composition of the hypothetical 
area (which would have a large Medicare population and have 
beneficiaries with Medigap drug coverage comprising a slightly greater 
share of drug discount card program participants than at the national 
level). The per capita spending estimates for both participants and 
non-participants include individuals without drug expenditures.
    For participants in the Medicare-endorsed prescription drug card 
programs, the per capita value consists of the estimated total spending 
for enrolled beneficiaries without drug coverage plus the share of 
spending for the Medigap enrollees that is purchased through the 
initiative, divided by the total number of participants.
    For purposes of calculating the per capita spending for non-
participants in the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative, we used prescription drug spending data from the National 
Health Accounts and estimates from the MCBS to develop per capita drug 
spending estimates for the non-Medicare population and for the Medicare 
population not participating in the initiative. These two per capita 
values for non-participants in the initiative were then weighted 
relative to the population distribution they represented in the 
hypothetical area's non-participant population to create a per capita 
drug spending for non-card participants.
    We then adjusted per capita drug spending for non-participants to 
include participants' drug spending that was not purchased through the 
discount card initiative (the portion of drug spending covered by 
Medigap plans) to yield an estimate of total drug spending outside of 
the drug discount card initiative. Consequently, this inclusion of the 
Medigap covered drug spending means that the per capita drug spending 
figure for non-participants is this adjusted per

[[Page 56673]]

capita (including the Medigap related spending) for the hypothetical 
area rather than the actual per capita for the non-participant 
population in the hypothetical area. For purposes of the sensitivity 
analysis calculation of the impact of the discount card initiative, we 
used the upper bound figure of all drug spending as a high-end 
assumption.
    The results of the sensitivity analysis are shown in Table 4. For 
the hypothetical area that is skewed to have a very high Medicare 
beneficiary population composition and a high enrollment in the 
discount card initiative, the negative impact on revenues from 
prescription drugs reached 2.2 percent, still below the HHS measure for 
significant economic impact of 3 to 5 percent of revenues. Furthermore, 
as noted above, not all of the 2.2 percent will be borne by the 
pharmacy, since discount card sponsors will be required to obtain 
manufacturer rebates or discounts and pass those through to 
beneficiaries and pharmacies in order to receive Medicare endorsement. 
In addition, part of the savings also comes as a result of beneficiary 
use of lower cost generic drugs.
    We recognize that reliance on nationally calculated per capita 
averages weighted for different demographic compositions has 
limitations, and pharmacies may have customer populations with per 
capita drug spending levels that differ from the population specific 
averages calculated at a national level. We solicited comments, and 
particularly data, that could help to inform further analysis of 
distributional effects. We also solicited comments and information on 
whether there is evidence that Medicare beneficiaries without drug 
coverage use small pharmacies and drug stores more or less than the 
share of revenues that these firms represent in terms of the overall 
market.
    Comment: We received only one comment germane to these issues. One 
commenter cited testimony in National Association of Chain Drug Stores 
v. Thompson, No. 011554 (D.D.C. 2001) by a pharmacy that claimed that 
almost all of its patients would be eligible for the initiative. The 
pharmacy testified that it delivered medicines to 20 long-term care 
facilities and 35 residences daily.
    Response: The pharmacy cited has a substantial long-term care 
business. We believe that the effect on the pharmacy will not be as 
significant as anticipated because we do not expect many long-term care 
facility residents to enroll in the Medicare-Endorsed Prescription Drug 
Card Assistance Initiative. As discussed in more detail elsewhere in 
the preamble, while long-term care facility residents are not 
prohibited from participating in this initiative, most residents of 
long-term care facilities will not benefit from the initiative. In 
addition, many long-term facility residents are Medicaid beneficiaries 
and have their prescription drugs paid for through that program. We 
plan to explicitly state in beneficiary outreach and educational 
materials that the initiative will not be beneficial for most long-term 
care facility residents.
    Because we received no other data or comments to inform the 
distributional analysis, we believe that the sensitivity analysis 
constitutes a strong test of the initiative's distributional effects. 
Furthermore, our sensitivity analysis indicates that even taking into 
account significantly different market characteristics, and even if all 
of the impact were assumed to be coming from pharmacies rather than our 
program design that requires manufacturer rebates or discounts, we did 
not generate a scenario that reaches the HHS test for significant 
economic impact.

                  Table 4.--National Average Versus Sensitivity Analysis--Hypothetical Example
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                 Discount  card
                             2004                               Discount  card        non-            Total
                                                                 participants     participants      population
----------------------------------------------------------------------------------------------------------------
National Average for Comparison Purposes:
    Percent of Total Population..............................             3.34            96.66           100.00
    Percent of Total Prescription Drug Sales.................             6.41            93.59           100.00
    Estimated Beneficiary Savings as a Percent of Drug Sales.            12.40             0.00             0.79
Hypothetical Example:
    Percent of Total Population..............................            14.30            85.70           100.00
    Percent of Total Prescription Drug Sales.................            17.68            82.32           100.00
    Estimated Beneficiary Savings as a Percent of Drug Sales.            12.40             0.00             2.19
----------------------------------------------------------------------------------------------------------------

    We received several comments concerning the potential impact of the 
initiative on small pharmacies.
    Comment: Several commenters expressed concern that the Medicare-
Endorsed Prescription Drug Card Assistance Initiative could have an 
adverse financial effect on small pharmacies and drug stores and could 
result in business closures. A few commenters contended that the 
initiative will adversely affect small community pharmacies' finances, 
resulting in less access to medicines or pharmacists services for 
beneficiaries, particularly, one commenter noted, in rural areas.
    Response: We believe that the Medicare-Endorsed Prescription Drug 
Card Assistance Initiative will not significantly harm the financial 
viability of small pharmacies and drug stores. The amount of revenue 
involved in the initiative and the amount of beneficiary savings 
expected represents a small share of overall national retail 
prescription drug sales. Total prescription drug spending for 
individuals expected to enroll in this initiative represents less than 
7 percent of national retail prescription drug sales, and estimated 
beneficiary savings from the initiative represents less than 1 percent 
of national retail prescription drug sales. In addition, there are many 
forces in today's market influencing the delivery of prescription 
drugs, including expansion in the types of sources through which 
individuals can obtain prescription drugs (for example, pharmacies in 
supermarkets and mass merchants, mail order pharmacies, and most 
recently, Internet pharmacies). Furthermore, prescription drugs are one 
of the fastest growing components of health care. Thus, pharmacy 
revenues can be expected to continue to grow because of increased 
spending on prescription drugs. Also, the savings to beneficiaries 
under this initiative will not be borne fully by pharmacies, but come 
in part from manufacturer rebates and discounts and increased use of

[[Page 56674]]

generics. As mentioned elsewhere in this preamble, manufacturer rebates 
and discounts will be an important component of the savings generated 
by this initiative.
    We have taken a number of steps to mitigate the effect of the 
initiative on small pharmacies and drug stores. This includes modifying 
the access ratio to 90/5 in metropolitan areas and 90/10 in non-
metropolitan areas, which makes it necessary for card sponsors to have 
a broad, inclusive pharmacy network; prohibiting Medicare-endorsed card 
sponsors from providing services only by mail order; requiring that 
card sponsors obtain manufacturer rebates or discounts and pass a 
substantial share through to beneficiaries directly or through 
pharmacies; and requiring card sponsors to sign contracts with 
pharmacies for their Medicare-endorsed discount card business separate 
from their other lines of business. Taken together, these features of 
the initiative give pharmacies negotiating leverage with card sponsors 
who need pharmacies in order to qualify for Medicare endorsement. The 
alternatives considered to mitigate the effect on small pharmacies are 
discussed in greater detail elsewhere in this preamble.
    We disagree with commenters who claimed that the initiative will 
result in less access to prescription drugs or pharmacist services, 
particularly in rural areas. We believe that the initiative promotes 
access to prescription drugs by offering beneficiaries reduced prices. 
The initiative also promotes access to pharmacy services by requiring 
that card sponsors pass a substantial share of manufacturer rebates or 
discounts on to beneficiaries directly or indirectly through 
pharmacies, with enhanced pharmacy services being one of the ways card 
sponsors can pass discounts on to beneficiaries. With respect to rural 
areas in particular, we expect that the discount card initiative will 
promote, not reduce, access in rural areas for the previously stated 
reasons. In addition, we expect that card sponsors will, as the current 
market does today, use special arrangements to encourage the 
participation of rural pharmacies, especially given the specific 90/10 
access standard for non-metropolitan areas. We also believe that this 
Medicare initiative can help the market place adjust to a future 
Medicare drug benefit.
    Comment: One commenter expressed concern that drug card sponsors 
might retain the manufacturer discounts or rebates, leaving small 
pharmacies and drug stores to absorb the full discount. The commenter 
recommended a fixed negotiating fee for card sponsors to prevent this 
from occurring.
    Response: Since this is an educational initiative based on current 
private market methods for lowering drug costs, we believe that a fixed 
negotiating fee for card sponsors is inappropriate. In addition, we 
believe that it is unnecessary because market competition among card 
sponsors will spur them to pass along the maximum amount possible of 
rebates and discounts to beneficiaries.
f. Small Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. This final rule will not 
affect small rural hospitals since the initiative will be directed at 
outpatient prescription drugs, not drugs provided during a hospital 
stay. Prescription drugs provided during hospital stays are covered 
under Medicare as part of Medicare payments to hospitals. Therefore, we 
are not providing an analysis.

F. Alternatives Considered Relative to Pharmacies, Particularly Small 
Pharmacies

    We considered alternatives to a number of decisions made during the 
development of this initiative, including several that are relevant to 
small pharmacies. Several policy decisions were made to mitigate the 
potential impact on small pharmacies and drug stores.
    We considered not pursuing this initiative at all. We clearly are 
committed to working with the Congress on a prescription drug benefit 
in the context of Medicare reform. We considered not pursuing any other 
immediate effort to assist and educate Medicare beneficiaries about how 
to lower their out-of-pocket costs before the enactment and 
implementation of a Medicare prescription drug benefit. However, we 
concluded that the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative is a highly effective way to educate beneficiaries about the 
tools used by private insurance programs to lower the cost of 
prescription drugs. We believe that through real world experience with 
drug discount card programs, Medicare beneficiaries will be better 
educated concerning the economic and quality decisions made by private 
sector purchasers and individuals with drug coverage. A Medicare 
prescription drug benefit will involve the private sector tools 
currently used by health insurers to lower prescription drug costs and 
provide higher quality pharmaceutical services. Experience through the 
Medicare-Endorsed Prescription Drug Card Assistance Initiative will 
better prepare Medicare beneficiaries, particularly those without drug 
coverage, to make informed decisions about which drug plan is best for 
them. Additionally, we will gain experience in educating Medicare 
beneficiaries about prescription drugs. Pursuing this initiative will 
also provide beneficiaries with immediate help with the cost of 
prescription drugs, and also will improve access to better quality 
prescription-drug-related services. We believe that access to 
prescription drugs is so fundamental in today's health care environment 
that beneficiaries should receive information and assistance regarding 
prescription drug discount programs until a Medicare prescription drug 
benefit is enacted and implemented.
    Since we believe it is in the best interest of Medicare 
beneficiaries to pursue this initiative, we considered alternatives to 
major features of the initiative to mitigate its potential effects on 
pharmacies. First, we considered whether or not to require Medicare-
endorsed card sponsors to secure manufacturer rebates. We decided that 
Medicare-endorsed card sponsors must meet the threshold of garnering 
manufacturer rebates or discounts from brand name and/or generic 
manufacturers. In deciding to require manufacturer rebates, we 
underscore our commitment to mitigating the effect on pharmacies and 
drug stores, particularly small entities. Since card sponsors will not 
rely solely on pharmacy discounts to compete for customers, pressure 
will be relieved from pharmacies. Card sponsors endorsed by Medicare 
will not be permitted to only negotiate discounts with retail 
pharmacies.
    In addition to requiring manufacturer rebates, we require that a 
substantial portion of manufacturer rebates and discounts be shared 
with beneficiaries, either directly or indirectly through pharmacies. 
Rebates and discounts may be shared in the form of lower prices, 
pharmacy counseling, incentives for pharmacy participation, or other 
valuable pharmacy services. Permitting card sponsors to use rebates to 
fund pharmacy services that ultimately benefit the beneficiary has the 
potential

[[Page 56675]]

to be a positive feature for both pharmacies and beneficiaries.
    Another feature that we think can be useful to securing 
manufacturer rebates or discounts and thus also mitigate the effects on 
small pharmacies is our proposal for a Gold Star designation, described 
elsewhere in this preamble and to be forthcoming in a notice of 
proposed rulemaking. Under this proposal, we would award a Gold Star to 
those Medicare-endorsed card sponsors securing the highest levels of 
manufacturer rebates or discounts and passing them through to 
beneficiaries. Thus, card sponsors would have additional incentives to 
pass through the highest possible share.
    We also considered permitting a mail order-only option. Mail order 
programs have some popularity and may be a convenient option for some 
beneficiaries. However, we decided not to propose a mail order-only 
option because we believe that requiring strong access to retail 
pharmacies will be in the best interests of beneficiaries, the majority 
of whom rely on retail pharmacies. Requiring retail access also 
mitigates the impact of the initiative on small pharmacies that rely on 
Medicare beneficiaries to make purchases on non-prescription drug items 
when they enter the pharmacy to fill prescriptions.
    We also considered alternatives to ensure access to pharmacies, 
including small pharmacies. The proposed rule proposed that for the 
area to be served by the card program sponsor (either national or 
regional), 90 percent of the beneficiaries would have to live within 10 
miles of a contracted pharmacy. However, in this final regulation, we 
change this standard to be 90 percent of the beneficiaries in 
metropolitan statistical areas (MSAs) must be within 5 miles of a 
participating pharmacy (90/5), while 90 percent of beneficiaries in 
non-MSAs must be within 10 miles of a participating pharmacy (90/10). 
This more stringent access standard requires card sponsors to establish 
more inclusive pharmacy networks in order to qualify for Medicare 
endorsement. Beneficiary access to retail pharmacies is a critical 
component of this initiative, and we believe that this new standard 
will preserve beneficiary access to the retail pharmacies that they 
trust. We believe that changing the access standard to provide for 
separate criteria for MSA and non-MSA geographic areas will help 
preserve participation of both small, inner-city pharmacies, some of 
which are culturally sensitive and linguistically appropriate to the 
needs of the diverse Medicare beneficiary population, as well as 
garnering the participation of small rural pharmacies that serve 
geographically dispersed populations.
    We also considered whether or not to require Medicare-endorsed card 
sponsors to have contractual arrangements with pharmacies, specifically 
incorporating elements relative to this Medicare initiative. We decided 
that card sponsors must have contractual arrangements with brand name 
and/or generic drug manufacturers for rebates or discounts and a 
contractual mechanism for passing on the bulk of rebates or discounts 
that are not required to fund operating costs to beneficiaries or 
pharmacies. In addition, card sponsors must have, specific to this 
Medicare initiative, contractual agreements with pharmacies ensuring 
that the rebates or discounts be passed through to the Medicare 
beneficiaries in the form of lower prices or enhanced pharmacy 
services. We believe that these provisions protect small pharmacies 
from changes being made in business relationships with card sponsors 
without the knowledge and permission of the pharmacy. It provides an 
opportunity for small pharmacies to negotiate payment for services 
provided to Medicare beneficiaries in the context of this initiative. 
The combination of the more stringent access standard discussed 
previously and the provision for pharmacy network contracts specific to 
the Medicare initiative provides pharmacies with additional negotiating 
leverage with card sponsors regarding participation in a card sponsor's 
pharmacy network. Card sponsors will be expected to report on the 
participation of independent pharmacies in their networks.
    Finally, we also considered whether or not to require that card 
sponsors negotiate discounts on all drugs. We decided to require that 
card sponsors offer a discount on at least one drug in the therapeutic 
categories representing the drugs most commonly needed by 
beneficiaries. This requirement relieves the pressure on pharmacies 
since card sponsors are less likely to negotiate discounts on every 
drug dispensed. In addition, it is not reasonable to expect that 
manufacturers will provide a rebate or discount on every drug since 
market share will not move if this is the case.
    As noted previously, we believe it is in the best interest of 
Medicare beneficiaries to pursue this initiative. In doing so, we 
believe we identified and incorporated major design features that are 
specifically directed at mitigating the potential impact on small 
pharmacies and drug stores.

G. Estimated Administrative Costs and Anticipated Benefits

    The following cost and benefit analysis is prepared in 2003 
dollars; it reflects the major administrative costs to discount card 
programs that are not a part of usual and customary practice, and the 
benefits we anticipate in the first and second years of this 
initiative. The major costs are associated with the start-up and 
activities of the administrative consortium, the production and 
distribution of information and outreach materials specific to the 
Medicare-endorsed discount card programs, and the operation of the 
customer service call centers. We did not estimate card sponsor costs 
associated with compliance with the privacy provisions under this rule 
because we believe card sponsors or organizations contracted by card 
sponsors to operate the drug card program will very likely be either a 
covered entity or business associate under the Privacy Rule and the 
costs for compliance will have already been incurred.
    We estimate significantly higher costs in Year One than in Year Two 
of implementation because of the start-up of the administrative 
consortium and a very large initial enrollment that is assumed in the 
first year only. One cost reflected in Year Two that is not in the Year 
One estimate is the review of card sponsors' information and outreach 
materials, which will be our responsibility the first year of the 
initiative; the administrative consortium will assume this 
responsibility in the second year.
    For purposes of this analysis, and consistent with the methodology 
used in the impact analysis, we assume that Year One enrollment is 
equal to 100 percent of the number of beneficiaries that the impact 
analysis assumes will be enrolled by the first full year of operation 
(9.7 million beneficiaries). We apply a 1.3 percent growth factor to 
estimate Year Two enrollment. The basis of this growth factor is Table 
3 of the Medicare Trustees Reports, March 26, 2002.
    Table 5 reports the per-card program sponsor costs and the per new 
enrollee costs for national and regional card programs for each group 
of administrative functions associated with a significant cost, as well 
as the total costs. These costs are also presented in relation to the 
number of new enrollees expected to enroll in each of Year One and Year 
Two to demonstrate these costs relative to one possible revenue stream 
for the card programs, a one-time enrollment fee of up to $25.

[[Page 56676]]

    While any entity that meets all of the requirements in this 
regulation will be eligible to enter into an agreement with us to 
receive a Medicare endorsement, for purposes of estimating these costs, 
we assume that 15 drug card programs will be endorsed. Of those 15, we 
assume, for the purpose of this analysis, that 10 will be national 
programs (including 50 States and Washington, DC) and 5 will be 
regional programs (including 4 States). We do not make adjustments for 
differences in Medicare population per State, which would cause the 
actual impact on regional programs to vary.
1. Private Sector Administrative Consortium, Its Start-Up and 
Activities
    Drug card sponsors are required, as a term of endorsement, to agree 
to, and demonstrate the ability to, jointly administer, abide by the 
guidelines of, and fund a private administrative consortium with other 
Medicare-endorsed prescription drug card sponsors. It is expected that 
the consortium will be fully operational when the card programs begin 
outreach and enrollment in Year One.
    Included in the following cost and benefit estimate are: (1) The 
start-up costs of the consortium and its activities, (2) staffing of 
the consortium, and (3) hardware costs for systems to be developed and 
maintained by the consortium.
    A cost estimate was produced for key activities associated with the 
start-up of the administrative consortium, and the development of the 
specifications and software to run the enrollment exclusivity system as 
well as the price comparison web site. These activities and their 
estimated costs include:
    [sbull] Analysis and development of recommendations for an 
appropriate organizational structure and governance, including review 
of legal considerations, $.48 million.
    [sbull] Specification of requirements for the enrollment 
exclusivity system and software development, $.35 million.
    [sbull] Options development for financial management for the 
administrative consortium, $.41 million.
    [sbull] Development of a transition plan from consortium formation 
through full operation, $.12 million.
    [sbull] Specification of requirements for the price comparison web 
site and software development, $.31 million.
    [sbull] Contract support to the consortium during transition for 
management functions, $.22 million.
    [sbull] Contract support for the consortium webmaster to implement 
the enrollment exclusivity system and the price comparison web site 
(hardware not included), $54,106.
    These activities and their estimated costs equal $1.94 million for 
the start-up of the administrative consortium.
    As an additional cost in the first year of operation, we assume 
that the administrative consortium will hire or retain the services of 
several professionals. We use national mean hourly wage data produced 
by the U.S. Department of Labor, Bureau of Labor Statistics, and 
reported in ``Occupational Employment Statistics, 2000 National 
Occupational Employment and Wage Estimates.'' Administrative consortium 
staff and their estimated 2000 national mean hourly wage rates are as 
follows:
    [sbull] Public Relations Manager--$29.54
    [sbull] Lawyer--$43.90
    [sbull] Computer Programmer--$29.31
    [sbull] Pharmacist--$33.39
    [sbull] Executive Secretary or Administrative Assistant--$15.63
    We age these wages to 2003 dollars using a 2001 adjustment of 5.6 
percent, a 2002 adjustment of 3.1 percent, and 2003 adjustment of 4.6 
percent found in Table III.A1 of the 2002 Annual Report of the Board of 
Trustees of the Federal Hospital Insurance Trust Fund (http://www.hcfa.gov/pubforms/tr/hi2002/tabiiial.htm). We adjust these wages 
upward to include compensation (non-wage benefits) using an adjustment 
factor of 1.357, based on Table 6 of a U.S. Department of Labor, Bureau 
of Labor Statistics report entitled ``Employer Costs for Employee 
Compensation--March 2002,'' which reports that national wages and 
salaries for white collar occupations represent 73.7 percent of total 
wages and compensation. We assume that the administrative consortium 
will hire or retain the services of each type of employee on a full-
time basis of 2,080 hours per year, except the lawyer and the 
pharmacist, whom we assume will work one-half of that time. These first 
year costs actually reflect a 15-month period to accommodate a 3-month 
consortium start-up before card programs becoming operational. 
Therefore, we have adjusted the first year estimates upward to reflect 
3 additional months of wages, compensation, overhead, and rent for the 
consortium staff. The estimated first year wages and compensation will 
therefore be as follows:
    [sbull] Public Relations Manager--$118,678
    [sbull] Lawyer (1/2 time)--$88,185
    [sbull] Computer Programmer--$117,754
    [sbull] Pharmacist (1/2 time)--$67,073
    [sbull] Executive Secretary--$62,794
    The estimated total first year costs for wages and compensation is 
$.45 million.
    We estimated overhead costs for these employees using a factor of 
.5 applied to the total wage and compensation rates for an additional 
amount of $.23 million. This amounts to a total of $.68 million for 
consortium staff wages and compensation and overhead. In Year Two, we 
expect these staff wages and compensation, as well as overhead costs to 
be equal to a 12-month period in Year One, $.54 million.
    We estimate the cost (in 2003 dollars) of leasing space for the 
administrative consortium staff of five using a 2002 estimate provided 
by a commercial real estate broker of $20 per square foot for full 
service space leased in a metropolitan area. We apply this rate to an 
estimated 150 square foot office per worker, an estimate provided by 
the staff of the Government Services Administration (GSA), over a 15-
month period for a total amount of $.23 million. In Year Two, costs 
associated with leasing space for the administrative consortium staff 
are based on a 12-month period, or $.18 million.
    Following are the systems specifications we used to estimate the 
costs of hardware to run an enrollment exclusivity system and a price 
comparison web site. One administrative responsibility of the 
consortium will be to ensure that beneficiaries are not enrolled in 
more than one Medicare-endorsed prescription drug card program at the 
same time. We assume that this will require the administrative 
consortium to develop and maintain a secure electronic enrollment 
exclusivity system that will be populated by and accessible only by the 
administrative consortium and endorsed sponsors; as stated previously, 
we assume 15 card sponsors will be endorsed.
    For the purpose of defining the capacity needed for this system, we 
also assume that the system will maintain a unique record for each 
beneficiary enrolled by a card sponsor. The record will contain such 
information as name, address, telephone number, a unique number 
identifier, date of enrollment, date of disenrollment, card program 
identifier, provision for enrollment changes, and whether the 
beneficiary was group enrolled through the sponsor. We estimate the 
number of system transactions, most of which will occur in any year in 
a 2-month period, based on the estimated 9.7 million beneficiaries who 
will likely join, adjusted for disenrollment and reenrollment as well 
as for lost cards as described below. We do not know what

[[Page 56677]]

the actual rate of voluntary disenrollment will be for this initiative; 
it could be lower or higher than the 2000 Medicare+Choice disenrollment 
rate used below, depending, for example, on how much a beneficiary's 
card program changes its formulary and drug prices within the limits we 
established and whether these changes affect the drugs the beneficiary 
takes. Also, the voluntary disenrollment rate will depend on the 
diligence of beneficiaries in tracking any changes to the formularies 
and drug prices of the card programs they join and the perceived value 
of these changes relative to comparable information available to them 
on other card programs.
    We assume that of the 9.7 million beneficiaries who will enroll in 
the first year, 11.5 percent will disenroll and reenroll in another 
Medicare-endorsed drug card program. This disenrollment and 
reenrollment adjustment is based on the 2000 Medicare+Choice voluntary 
disenrollment rate of 11.5 percent. We also assume that card sponsors 
will access the system to check enrollment records for an additional 10 
percent of beneficiaries for reasons such as a lost discount card. We 
assume the system will be updated in real time and be of web-based 
technology. We assume this system will be maintained by a webmaster 
hired by the administrative consortium. We also assume reports, such as 
enrollment rates in a particular time frame by a particular card and 
percent of beneficiaries enrolled as a group, could be generated off 
this system by the consortium's webmaster.
    Another administrative responsibility of the consortium will be to 
facilitate the publication of, or to publish, information, including 
comparative price information on discount drugs, that will assist 
beneficiaries in determining which Medicare-endorsed prescription drug 
card program is the most appropriate for their needs. This will require 
the administrative consortium to develop and maintain a web-based, 
searchable database accessible to the public so that interested 
Medicare beneficiaries or their advocates can access comparable price 
data on the drugs they take for the drug discount card programs 
available in their zip code area. We assume that each of 15 card 
sponsors will update its formulary and price lists six times a year. As 
indicated previously, we assume that 10 of the estimated 15 sponsors 
endorsed by Medicare will be national programs (having a network in all 
50 States and Washington, DC), and the remaining 5 programs will be 
regional programs (comprised of 4 States each). Because formularies 
could vary geographically, we assume that each card program will have a 
unique formulary and price list for each State, differentiated by urban 
and rural areas. Based on these numbers, we estimate that the price 
comparison web site will house as many as 1,060 unique formularies and 
pricing listings. We assume that only the administrative consortium 
will have direct interface with the system; card sponsors will submit 
files in a uniform format to the consortium's webmaster to be uploaded. 
We assume reports, such as price comparisons for a list of drugs within 
a geographic area, could be generated off this system by the 
consortium's webmaster.
    To fulfill these specifications for both the enrollment exclusivity 
and price comparison systems, our Office of Information Services (OIS) 
developed a cost estimate for the first year in the amount of $.44 
million for lowest common denominator technology which will permit the 
system to be hosted virtually anywhere by a professional Internet 
technology organization. The estimate includes the costs of a database 
server, redundant database server, application server, redundant 
application server, and the cost for an Internet service provider. 
Second year costs will be significantly less, $80,000, reflecting 
maintenance rather than purchase of hardware.
    A third responsibility of the administrative consortium will not 
begin until Year Two. The consortium will be responsible for ensuring 
the integrity of the information distributed by the Medicare-endorsed 
prescription drug discount card programs. We will conduct the 
information and outreach material review for the first year of 
endorsements. The administrative consortium's reviews in future years 
will be based on guidelines prepared by us. Based on a cost estimate 
developed by our Center for Beneficiary Choices (CBC), we assume that 
the cost of developing the guidelines will be $.24 million. We assume 
the cost of conducting the review from the estimated 15 endorsed 
sponsors and tracking the status of the review and approval process, 
including the cost of a database for this activity, will be $.29 
million. We assume that the cost of transitioning the review to the 
administrative consortium will be $45,320. We assume reporting on the 
status of the information and outreach material review and findings 
under the review will cost $29,870. This first year cost, totaling $.61 
million, will be borne by us in the context of our existing budget. In 
Year Two, information and outreach material review will be the 
consortium's responsibility, not ours, with the exception of costs 
associated with the development of the information and outreach 
guidelines and the costs associated with transitioning the information 
and outreach material review responsibility to the consortium. As 
noted, we will develop the information and outreach guidelines, not the 
consortium. Second year costs to be borne by the administrative 
consortium total $.32 million.
    The total estimated Year One cost to be borne across all Medicare-
endorsed card program sponsors for the administrative consortium start-
up, its staffing and administrative activities will be $3.29 million 
(this includes $1.94 million for start-up activities plus $.68 million 
for consortium staff wages and compensation and overhead plus $.44 
million for hardware plus $.23 million for leased space). We expect 
that drug card sponsors will share the costs of starting-up and 
maintaining the consortium and its activities. As shown in Table 5, we 
estimate the Year One per-card program sponsor costs for the 
administrative consortium, its associated start-up costs, and staffing 
and activities to be $.32 million for a national program, and $24,879 
for a regional program. We divide those total costs for the consortium 
by the estimated number of new enrollees per national and regional card 
in the same year, since it is our policy that a one-time enrollment fee 
of up to $25 can be charged to a beneficiary. This allows an 
examination of estimated administrative costs relative to estimated 
enrollment fees. The estimated per new enrollee cost of the consortium 
start-up and Year One administrative activities, is estimated to be 
$0.30.
    As stated previously, we estimate that the second year 
administrative consortium costs to be borne by all card sponsors of the 
consortium will be significantly lower than first year costs. 
Specifically, the relevant estimates for second year costs include: (1) 
Maintenance of the enrollment exclusivity and price comparison systems, 
$80,000; (2) information and outreach material review, $.29 million; 
(3) reporting on status of information and outreach material reviews 
and findings, $29,870; (4) consortium staff wages, compensation and 
overhead, $.54 million; and (5) leased space, $.18 million, for a total 
of $1.12 million. As shown in Table 5, for Year Two, we estimate the 
total per-card program sponsor costs for a national program will be 
$108,843, and for a regional

[[Page 56678]]

program to be $8,537, with a per new enrollee cost of $0.90.
    In these estimates for the administrative consortium and its 
activities, we have captured the activities required in the final 
regulation and have attempted to reflect the significant costs 
associated with them.
    We presume that sponsors will recover these costs in enrollment 
fees or by holding back a share of the pharmaceutical manufacturing 
rebates or discounts. The likely effect therefore is to either increase 
the one-time enrollment fee to as high as $25, or to lower the amount 
of the manufacturer rebates shared directly or indirectly with 
beneficiaries through pharmacies.
    We believe that card program sponsors will benefit in preparation 
for a future Medicare drug benefit by developing the infrastructure 
necessary for the activities detailed above.
    We believe that the administrative consortium's price comparison 
system and information and outreach material review will significantly 
assist beneficiaries as they seek information about selecting a drug 
discount card program. These activities will help beneficiaries make 
informed decisions and protect them from misleading information. 
Further, the role of the exclusivity system in ensuring that 
beneficiaries only belong to one drug discount card program at a time, 
as well as the price comparison information, will help optimize card 
sponsor negotiations for manufacturer rebates or discounts as sponsors 
compete for Medicare market share. Also, the secure exclusivity system 
will assist in protecting the privacy of beneficiary-specific 
information.
    In addition, we will benefit by learning from the implementation of 
the requirements involving information technology, information and 
outreach material review, beneficiary enrollment, and education using 
the price comparison web site and through the card programs' 
enrollment.
    There are several limitations to the consortium cost analysis. 
Since we have no experience implementing this initiative, our estimates 
of the number of card programs that will be endorsed is based on the 
number of applications we received during the 2001 solicitation process 
(28). While we did not complete our review of the applications before 
the initiative was enjoined by the court, we assume for estimating 
purposes that approximately half (15) would have been endorsed. If the 
number of actual endorsements is significantly lower or higher, then 
cost estimates for the consortium start-up and its administrative 
activities will be affected upward or downward accordingly. (This 
limitation also applies to the per-card cost estimates presented below 
for outreach and telephonic customer service.) Another limitation of 
the consortium cost estimate is that its actual organization and 
ongoing operations are not known at this time as these will be 
determined largely by representatives of the endorsed drug card 
sponsors.
    Comment: We received numerous comments on the costs of the 
consortium, which are summarized under the first comment in section 
I.D.9.a of this preamble.
    Response: Our response follows the summary of comments in section 
I.D.9.a of this preamble.
    Comment: Several commenters were concerned that two-thirds of the 
estimated $2.75 million for start-up and administrative activities of 
the consortium, as delineated in the proposed rule, will be spent on 
the enrollment exclusivity system.
    Response: Based on our estimates, we do not believe that the 
exclusivity system will require two-thirds of the estimated consortium 
costs. To qualify for Medicare endorsement, an applicant or its 
subcontractor must demonstrate experience with and substantial existing 
capacity for enrollment, as measured by the 1 million covered lives 
criterion. With this requirement for endorsement met, we believe that 
certain costs for ensuring exclusive enrollment, in particular, the 
costs associated with the enrollment process itself (not including 
outreach costs and costs associated with customer service call centers, 
which are addressed later in this analysis), will be part of usual and 
customary practice. Our costs reflect the development, maintenance, and 
operation of the enrollment exclusivity database only.
    We believe 50 percent of the costs we have identified for 
developing and maintaining the enrollment exclusivity and price 
comparison systems will be needed for enrollment exclusivity. Our 
estimate for specifying the requirements for the enrollment system and 
software development is $.35 million. Further, of the $.44 million we 
identified for the cost of hardware for the two systems, we estimate 
that 50 percent, or $.22 million will be for the enrollment exclusivity 
system hardware. In addition, 50 percent, or $40,000 will be necessary 
in Year Two for maintenance of the enrollment exclusivity system. We 
assume that the consortium will hire a full time computer programmer 
whose salary and compensation is estimated at $118,678 in Year One (for 
a 15 month period), and whose office space will cost approximately 
$46,350 for a 15-month period; we believe that 50 percent of the 
programmer's time in Year One (approximately $59,339) will be spent on 
enrollment exclusivity. Finally, we anticipate the need for some 
additional technical support for the implementation of this system, in 
the amount of $27,500 (one-half the cost of support for both the 
enrollment exclusivity and price comparison systems). These costs total 
$.74 million.
2. Production and Distribution of Information and Information and 
Outreach Materials
    Under this initiative, there will be a significant incremental cost 
associated with information and outreach materials for each Medicare 
beneficiary enrollee. For the purpose of this estimate, we assume that 
15 drug card programs will be endorsed. We assume that a total of 9.7 
million beneficiaries will enroll for the first time. Using the 2000 
Medicare+Choice (M+C) disenrollment rate, we assume an additional 11.5 
percent of these beneficiaries will disenroll and reenroll for a total 
of approximately 10.8 million enrollments in Year One.
    We develop an estimate that reflects three types of information and 
outreach material: pre-enrollment, post-enrollment, and an annual 
notice of changes to the program for beneficiaries who stay enrolled 
into a new year. The total number of pre-enrollment mailings sent out 
by card sponsors will be three times the number of beneficiaries 
enrolling in the initiative. Pre-enrollment mailings from a card 
program will include such items as a cover letter, membership form, 
privacy notice, a summary of card program features (including prices 
for selected drugs commonly used by the Medicare population), a 1-page 
listing of network pharmacies in the beneficiary's zip code area, and 
return envelope with postage paid.
    Further, we assume that 100 percent of beneficiaries who would 
actually enroll in each year will receive a post-enrollment package 
including items such as a cover letter, a prescription drug discount 
card, member handbook (including a complete directory of network 
pharmacies), and formulary applicable to the zip code area. Finally, we 
assume that currently enrolled beneficiaries will receive, beginning in 
Year Two, a package to include a cover letter and an annual notice of 
changes to the card program.
    Including the costs of printing these materials, mailing them, and 
paying for return mail of enrollment and notice forms, we estimate a 
total Year One cost of $38.09 million. We estimate a per

[[Page 56679]]

national card program cost of $3.66 million, per regional card program 
cost of $.29 million, and per new enrollee cost of $3.52.
    We estimate a total Year Two cost of $9.03 million. We estimate a 
cost per national program of $.87 million, per regional program of 
$68,157, and per new enrollee of $7.19.
3. Customer Service Call Center
    The following estimates reflect costs for both an interactive 
voice-response system and access to customer service representatives by 
telephone. We believe that beneficiaries will have access to a variety 
of communication channels for receiving card program information 
including: Medicare outreach and education through, for example, http://www.Medicare.gov and the Medicare toll-free telephone number (Medicare 
1800), the consortium price comparison web site, and the card program's 
own outreach through its web site, which could allow beneficiaries or 
their caregivers to request printed material or download it, or through 
its print material or its own customer service 1800 line. The cost of 
some of these information channels, such as Medicare 1800, will not be 
borne by the card programs, and information channels such as the 
printed information and outreach materials produced by the card program 
and an interactive web site maintained by the card program will likely 
be less expensive than the cost of the card program's 1800 customer 
service representative's time. Therefore, we assume that card programs 
will maximize their outreach through non-telephonic communication 
channels.
    We also assume that the card program's 1800 customer service line 
will include an interactive voice-response system where beneficiaries 
can receive basic information about the program and can order print 
material. We assume that 80 percent of beneficiaries or their 
caregivers will obtain print material through a communication channel 
that does not involve the card program's interactive voice-response 
system, and the remaining 20 percent will seek print material through 
the card program's interactive voice-response system. Additionally, we 
assume another 5 percent of enrolled beneficiaries will seek 
information through the card sponsor's interactive voice-response 
system that is not related to enrollment, but other types of 
straightforward requests, such as to receive an updated formulary 
listing. The following estimates reflect the marginal cost of each 
additional call, as we assume that each drug card program sponsor will 
already have the basic call center infrastructure in place. Using our 
experience, we estimate the cost of each additional interactive voice-
response call to be $3.
    For Year One, we estimate total per national card program costs for 
the interactive voice-response system of $.76 million, and per regional 
card program costs of $59,957. The estimated per new enrollee cost is 
$0.73.
    For Year Two, we estimate total per national card program costs for 
the interactive voice-response system of $.21 million and per regional 
card program costs of $16,812. The estimated per new enrollee cost is 
$1.77.
    In estimating the costs of access to customer service 
representatives by telephone, we assume that of the newly enrolled 
beneficiaries in a Medicare-endorsed card program in any given year, 20 
percent will speak to a customer service representative either for 
additional enrollment information or other general program information. 
For this analysis, a newly enrolled beneficiary could be a first-time 
enrollee or a beneficiary who has disenrolled and reenrolled in a 
different card program. We also assume that 11.5 percent of enrolled 
beneficiaries will disenroll, and that each of these beneficiaries will 
speak to a customer service representative. We assume one-half of these 
disenrollees (5.75 percent) will lodge a complaint through a customer 
service representative. In Year One, this represents a total of 
approximately 3.84 million calls, across all card programs. In Year 
Two, we make the same assumptions as for Year One. This amounts to a 
total of approximately 1.95 million calls across all card programs.
    To further build this estimate, we use wage and compensation data 
produced by the U.S. Department of Labor, Bureau of Labor Statistics. 
The national mean hourly wage rate of $12.75 for a customer service 
representative was taken from a report entitled, ``2000 National 
Occupational Employment and Wage Estimates, Office and Administrative 
Support Occupations.'' (http://www.bls.gov/oes/2000/oes_43Of.htm). We 
age this wage rate to 2003 using the same factors (5.6 percent for 
2001, 3.1 percent for 2002, and 4.6 percent for 2003) used to age the 
wages for the administrative consortium staff. We use a compensation 
factor of 1.357 obtained from the same report used to calculate 
compensation for the consortium staff, for a total 2003 wage and 
compensation rate of $40,979 per customer service representative. We 
apply a factor of .5 to this rate to provide an overhead amount of 
$20,489.
    We estimate lease space per customer service representative using 
150 square feet per office at $20 per square foot (in 2002 dollars) for 
full service space leased in a metropolitan area. This estimate was 
obtained from a commercial real estate broker. In 2003 dollars, we 
estimate a total per office amount of $37,080, for a 12-month period. 
The total cost per customer service representative for wages, 
compensation, overhead, and leased space will be $98,548.
    Assuming that each customer service representative works 7 hours 
per day, 5 days per week, 50 weeks per year, each representative will 
work 105,000 minutes per year. This will permit each representative to 
respond to 10,500 beneficiaries per year (105,000 divided by 10 minutes 
per call).
    We estimate for Year One that for all 3.84 million enrollees who 
will talk to a customer service representative, a total of 365 customer 
service representatives will be hired or retained across all Medicare-
endorsed card sponsors. As Table 5 shows, the estimated Year One cost 
for a national card program sponsor will be $3.46 million, and for a 
regional card program sponsor, $.27 million, with a per new enrollee 
cost of $3.33.
    In the second year, we estimate that approximately 1.95 million 
beneficiaries will talk to a customer service representative. The 
number of customer service representatives needed will be 185 across 
all card sponsors. As Table 5 shows, the estimated Year Two cost for a 
national card program sponsor will be $1.76 million, and for a regional 
card program sponsor, $.14 million, with a per new enrollee cost of 
$14.54.
4. Other Considerations Concerning Production and Distribution of 
Information and Outreach Materials and the Customer Service Call Center
    We presume that sponsors will recover their costs associated with 
the production and distribution of information and outreach materials 
and with the customer service call center by charging enrollment fees 
or by holding back a share of the pharmaceutical manufacturing rebates 
or discounts. The likely effect of these costs on a card sponsor, 
therefore, will be a decision to either increase the one-time 
enrollment fee to as high as $25, or to lower the amount of the 
manufacturer rebate or discount shared directly or indirectly with 
beneficiaries through pharmacies.
    We believe that beneficiaries will benefit significantly from 
access to print materials, an interactive voice-response system, and 
customer service

[[Page 56680]]

representatives to inform their decision about what card to join and to 
facilitate enrollment. We also believe that access to customer service 
representatives to manage complaints will improve the quality of the 
card program and serve to limit the number of disenrollments, as a 
person-to-person mechanism will be in place to handle beneficiaries' 
questions and concerns.
    Comment: We solicited comments on different methods to efficiently 
enroll beneficiaries in the context of our requirements to provide 
information and ensure that beneficiary personal information is kept 
confidential. We received several comments about our proposed 
requirement that written consent to the expected uses and disclosures 
of a beneficiary-specific information be obtained from each beneficiary 
and its effect on enrollment by telephone or Internet. Commenters 
indicated that obtaining written consent could require additional steps 
in the enrollment process, interfering potentially with an efficient 
enrollment system by requiring access to the enrollment database more 
than once to verify enrollment status and again to execute actual 
enrollment after receiving written consent. One commenter stated that 
enrollment should be effective at the same step in the enrollment 
process as the card program's procedure for verifying that the 
beneficiary is not already enrolled in another Medicare-endorsed card 
program, rather than at the time that written consent is obtained. 
Further, the commenters noted that this requirement for written consent 
is not consistent with pending regulations implementing the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), and that 
it is unnecessary.
    Response: Our policy concerning consent for expected uses and 
disclosures is discussed in section I.D.8.d of this preamble.
    Comment: One commenter stated that enrollment costs are higher than 
they would be without an enrollment exclusivity provision. Also, this 
commenter indicated that they would expect 5, not 15, minute phone 
calls by beneficiaries to the customer service 1800 line, as estimated 
in the proposed rule. One commenter indicated that enrollment costs 
estimated in the proposed rule are significantly underestimated; that, 
in addition to a 15 minute call, the commenter would expect 
beneficiaries unfamiliar with the program to call multiple times. Also, 
this same commenter pointed out that fax, phone, mail, and Internet 
channels specific to the program need to be developed and that these 
costs are not reflected in the estimate. One commenter stated that 
individual enrollment and the frequency and length of calls for the 
senior population are likely to have a significant cost impact on the 
call center. These commenters stated that these costs suggest an annual 
renewal fee of up to $25 should be allowed.
    Response: We agree that the enrollment costs as expressed in the 
exclusivity system and time and materials needed to inform 
beneficiaries about this requirement are higher than if enrollment 
exclusivity were not required; however, we believe that the benefit in 
negotiated rebates that will be shared with beneficiaries under this 
initiative far outweighs this additional cost. Concerning the estimated 
time for a customer service call, we believe that card sponsors will 
provide as much information through the most efficient communication 
channels to limit the potential impact on the customer service call 
center. We believe that a well thought out outreach strategy and the 
effective use of various communication channels, in addition to the 
information that we and the consortium's price comparison system make 
available, will serve to minimize the amount of time that is needed on 
the phone when a beneficiary does contact a customer service 
representative, as well as the portion of beneficiaries or their 
caregivers who will call to speak to a card sponsor's customer service 
representatives. In circumstances where the same beneficiary calls the 
call center, we believe each call will be for a different purpose, such 
as to clarify information to make an enrollment choice, to complain, or 
to disenroll. Our estimate accommodates what we believe is a reasonable 
expectation for multiple calls from a beneficiary. We did not include 
fax and Internet costs in this estimate because the use of these 
technologies by the card program sponsors is less expensive than the 
use of hard copy production and mail; therefore, we believe the costs 
of these communication channels are at least covered, if not over-
represented, in our information and outreach production and 
distribution cost estimate. Having estimated these major administrative 
costs and reflecting them in terms of new enrollees, we have 
demonstrated that these costs can be covered with a one-time enrollment 
fee of up to $25, leaving potentially substantial reserve to cover 
other, less significant costs not expressed in this estimate. 
Therefore, we do not agree that an annual fee is necessary to support 
the administrative costs of this initiative.
5. Total Estimated Major Administrative Costs to Card Sponsors
    This analysis is different from that of the proposed rule; it has 
been refined to more closely reflect alternative communication channels 
card sponsors are likely to employ to conduct outreach and enroll 
beneficiaries. Further, we significantly adjusted upward the size of 
the population in Year Two to accommodate communications attributable 
to disenrollments and complaints.
    As shown in Table 5, we have totaled all the costs for Year One and 
Year Two represented in this analysis: (1) the administrative 
consortium, its start-up and activities; (2) information and outreach 
materials (production and distribution); (3) and the customer service 
call center. We estimate total Year One costs of $85.33 million; these 
costs are to be borne by the endorsed card sponsors. We estimate a per 
national card sponsor cost of $8.21 million, and a per regional card 
sponsor cost of $.64 million, with a per new enrollee cost of $7.89.
    In the second year, we estimate total costs of $30.66 million 
across all card sponsors. We estimate a national card program sponsor 
cost of $2.95 million, and a regional card program sponsor of $.23 
million, with a per new enrollee cost of $24.41.
    For national and regional programs, this cost analysis for both the 
first and second year of operation demonstrates that a one-time 
enrollment fee of $25 (a new fee could be charged if the beneficiary 
switches programs) can cover the card program's major administrative 
costs, including costs associated with the operation of the consortium. 
Alternatively, a drug card program sponsor could choose to charge a 
lower or no enrollment fee and support operating expenses through a 
portion of the manufacturer rebates.
    The numbers in Table 5 do not add exactly due to rounding.

[[Page 56681]]



 Table 5.--Summary of Cost Estimates for Major Administrative Activities
------------------------------------------------------------------------
                                                              Per new
                                                           enrollee cost
                                                           (10.8 million
                                                           enrollments,
                Year one                    Per sponsor      including
                                               cost       first time and
                                                           disenrolled/
                                                            reenrolled
                                                          beneficiaries)
------------------------------------------------------------------------
Consortium its start-up and activities:
    National............................        $317,212           $0.30
    Regional............................         $24,879           $0.30
Information and outreach materials
 production & distribution:
    National............................      $3,664,892           $3.52
    Regional............................        $287,443           $3.52
Call Center--Interactive Voice Response
 (IVR):
    National............................        $764,452           $0.73
    Regional............................         $59,957           $0.73
Call Center--Customer service
 representative costs:
    National............................      $3,464,755           $3.33
    Regional............................        $271,746           $3.33
                                         -----------------
    Total:
        National........................      $8,211,311           $7.89
        Regional........................        $644,024           $7.89
------------------------------------------------------------------------


 
                                                              Per new
                                                           enrollee cost
                                                           (1.2 million
                                                           enrollments,
                Year two                    Per sponsor      including
                                               cost       first time and
                                                           disenrolled/
                                                            reenrolled
                                                          beneficiaries)
------------------------------------------------------------------------
Consortium its start-up and activities:
    National............................        $108,843            $.90
    Regional............................          $8,537            $.90
Information and outreach materials
 production & distribution:
    National............................        $869,000           $7.19
    Regional............................         $68,157           $7.19
Call Center--Interactive Voice Response
 (IVR):
    National............................        $214,352           $1.77
    Regional............................         $16,812           $1.77
Customer Service Call Center:
    National............................      $1,757,709          $14.54
    Regional............................        $137,859          $14.54
                                         -----------------
    Total:
        National........................      $2,949,903          $24.41
        Regional........................        $231,365          $24.41
------------------------------------------------------------------------

6. Manufacturer Rebates or Discounts
    We do not estimate the administrative costs of negotiating 
manufacturer rebates or discounts and sharing them with beneficiaries 
as we believe that the experience criteria for endorsement ensures that 
the infrastructure for this activity will already be available to the 
card sponsors and that this is part of usual and customary practice for 
the organizations likely to apply and be endorsed. We require that 
these rebates or discounts will have to be shared with beneficiaries 
either directly or indirectly through pharmacies. We anticipate that 
this requirement will promote better drug prices for beneficiaries or 
enhance pharmacy participation in a drug card program's network. 
Further, we anticipate that sharing indirectly with pharmacies could 
promote enhanced pharmacy services.
7. Medicare's Beneficiary Education and Outreach Plans
    Medicare beneficiaries will benefit from the education and outreach 
plans we outline in this final rule. In addition to information that we 
anticipate will be available through the endorsed card sponsors, the 
information we will impart on our web site, through brochures, and in 
beneficiary calls to the 1800Medicare telephone number will assist 
beneficiaries in gaining knowledge about whether and how to participate 
in a Medicare-endorsed prescription drug card program. In addition, 
beneficiaries will benefit from the basic information imparted 
regarding how to use tools to manage drug costs. Also, we will benefit 
from the infrastructure built for, and the experience gained from, 
educating beneficiaries about using private sector tools to lower their 
out-of-pocket prescription drug costs and enhance the pharmacy services 
they will receive in preparation for a Medicare prescription drug 
benefit.
    Comment:Two commenters made the point that development of new 
manufacturer discount cards, which

[[Page 56682]]

provide substantial savings to low-income Medicare beneficiaries, make 
the Medicare-Endorsed Prescription Drug Card Assistance Initiative 
unnecessary. The commenters indicate that the initiative will create 
additional administrative burden and may undermine the new manufacturer 
cards.
    Response: We agree generally that the new manufacturer discount 
cards can provide substantial savings to low-income Medicare 
beneficiaries. We disagree that their availability makes this 
initiative unnecessary. We believe there is important value for 
Medicare beneficiaries in the education and assistance made available 
under this initiative that does not exist in the current discount card 
market. We believe that enrollment exclusivity will provide meaningful 
savings and limit beneficiary confusion associated with beneficiary 
participation in multiple card programs. Further, there are a 
significant number of beneficiaries who do not qualify for manufacturer 
card programs who will benefit under this initiative. While we agree 
that there is administrative burden associated with this initiative, we 
believe there are counter costs in time and effort to beneficiaries and 
administrative inefficiencies in the performance of the discount card 
market associated with beneficiaries participating in multiple card 
programs that will be minimized by this initiative. Moreover, we have 
demonstrated that the administrative costs of this initiative will 
likely be more than offset through a one-time enrollment fee. We do not 
believe that this initiative will undermine manufacturer card programs, 
as they offer obvious and significant discounts for beneficiaries who 
qualify. Rather, some of the impediments to participation by 
beneficiaries in the manufacturer cards appear to be lack of uniformity 
in eligibility requirements, complexity of demonstrating eligibility, 
and perceived stigma associated with low-income initiatives. We believe 
our initiative offers an important new choice for beneficiaries that is 
not encumbered by these impediments.

H. Conclusion to Impact Analysis

    Evidence of trends in prescription drug use and spending, changes 
in pharmacy acquisition costs for drugs at a time of increased presence 
of pharmacy benefit management strategies, and strategies for varying 
drug prices and manufacturer rebates or discounts indicate a dynamic 
market that adjusts and returns to equilibrium. Pharmacy benefit 
management tools are a feature of the current prescription drug market 
and are used to lower drug costs. The implementation of the Medicare-
Endorsed Prescription Drug Card Assistance Initiative in this 
environment will educate Medicare beneficiaries and provide them with 
experience with the private sector tools used to lower drug prices.
    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 403

    Grant programs-health, Health insurance, Hospitals, 
Intergovernmental relations, Medicare, Reporting and recordkeeping 
requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR chapter IV, part 403 as set forth 
below:

PART 403--SPECIAL PROGRAMS AND PROJECTS

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

    Authority: 42 U.S.C. 1359b3 and secs. 1102 and 1871 of the 
Social Security Act (42 U.S.C. 1302 and 1395hh).

    2. Add a new subpart H, consisting of Sec. Sec.  403.800 through 
403.820, to part 403 to read as follows:
Subpart H--Medicare-Endorsed Prescription Drug Card Assistance 
Initiative
Sec.
403.800 Basis and scope.
403.802 Definitions.
403.804 General rules for Medicare endorsement.
403.806 Requirements for eligibility for endorsement.
403.807 Application process.
403.808 Agreement terms and conditions.
403.810 Administrative consortium responsibilities and oversight.
403.811 Beneficiary enrollment.
403.812 Withdrawal of endorsement.
403.820 Oversight and beneficiary education.

Subpart H--Medicare-Endorsed Prescription Drug Card Assistance 
Initiative


Sec.  403.800  Basis and scope.

    (a) Provisions of the legislation. This subpart implements, in 
part, the provisions of section 4359 of the Omnibus Budget 
Reconciliation Act of 1990 (OBRA). Section 4359 of OBRA requires the 
Secretary to establish a health insurance advisory service program (the 
beneficiary assistance program) to assist Medicare beneficiaries with 
the receipt of services (including both covered and uncovered benefits) 
under the Medicare and Medicaid programs and other health insurance 
programs. The subpart is also based on sections 1102 and 1871 of the 
Act.
    (b) Scope of subpart. This subpart sets forth the standards and 
procedures CMS uses to implement the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative.


Sec.  403.802  Definitions.

    For purposes of this subpart, the following definitions apply:
    Administrative consortium means a private entity established and 
financed by the Medicare-endorsed prescription drug card program 
sponsors to carry out a set of specific administrative tasks required 
under the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative.
    Applicant means the organization or entity (along with any 
subcontractors or others with whom it has legal arrangements for the 
purpose of meeting the requirements for endorsement) that is applying 
for Medicare endorsement of its prescription drug discount card 
program.
    Application means the document submitted to CMS by an applicant 
that demonstrates compliance with the requirements specified in this 
subpart in order to obtain Medicare endorsement of the applicant's drug 
card program.
    Formulary means the list of specific drugs for which the Medicare-
endorsed prescription drug card program offers discounts to Medicare 
beneficiaries enrolled in the Medicare-endorsed prescription drug card 
program.
    Medicare-Endorsed Prescription Drug Card Assistance Initiative 
means an effort whereby CMS provides information, counseling, and 
assistance to Medicare beneficiaries by soliciting applications for 
Medicare endorsement of prescription drug card programs, reviewing 
them, offering agreements to program sponsors that meet all of the 
requirements for endorsement, awarding Medicare endorsements to program 
sponsors who sign the agreement, and educating beneficiaries about the 
options available to them in the private marketplace.
    Medicare-endorsed prescription drug card program means a program 
developed by an organization or group of organizations, endorsed by CMS 
under the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative, to educate Medicare beneficiaries about tools to lower 
their prescription drug costs and to offer prescription drug discount 
cards to Medicare beneficiaries.
    Medicare-endorsed prescription drug card program sponsor means any 
applicant that has received endorsement

[[Page 56683]]

from Medicare for its prescription drug card program.
    Solicitation means a notice published in the Federal Register 
announcing a request for applications from applicants seeking Medicare 
endorsement for their prescription drug card programs.


Sec.  403.804  General rules for Medicare endorsement.

    (a) Applications. Applicants must submit applications by the 
deadline announced in the solicitation to participate in the Medicare-
Endorsed Prescription Drug Card Assistance Initiative and become a 
Medicare-endorsed prescription drug card program sponsor.
    (b) Number of programs sponsored. An organization or entity may 
sponsor no more than two drug card programs. The same organization or 
entity may have operational responsibilities in multiple drug card 
programs.
    (c) Requirements. In order to be eligible for endorsement, 
applicants must submit applications and meet all of the requirements 
specified in Sec.  403.806.
    (d) Eligibility to receive endorsement. Any applicant that submits 
an application by the deadline announced in the solicitation that 
contains all information necessary for CMS to determine whether the 
applicant meets all of the requirements in Sec.  403.806, and whose 
application meets all of the requirements in Sec.  403.806, will be 
eligible to enter into an agreement with CMS to receive a Medicare 
endorsement.
    (e) Period of endorsement. In Year One of the initiative, the 
Medicare endorsement will be effective for a period of at least 12 
months but fewer than 24 months. Beginning in Year Two, the endorsement 
will be effective at least 12 months, but fewer than 15 months. CMS 
will consider card program sponsor performance under an existing 
Medicare endorsement as a factor in determining eligibility for 
endorsement in future annual cycles.
    (f) Termination of endorsement by CMS. CMS may terminate the 
endorsement at any time.
    (g) Termination of participation by Medicare-endorsed drug card 
sponsor. A Medicare-endorsed prescription drug card program sponsor may 
choose not to continue participation in the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative.
    (h) Notification to beneficiaries of termination of participation. 
(1) In the event of termination of participation in the initiative by 
the drug card program sponsor, or termination by CMS, the Medicare-
endorsed prescription drug card program sponsor must notify all of its 
Medicare beneficiary enrollees in writing that they may enroll in an 
alternative Medicare-endorsed prescription drug card program. This 
notice must be provided by United States mail within 10 days of 
providing CMS with notice of termination or within 10 days of receiving 
notice of termination from CMS.
    (2) In the event of termination by the drug card program sponsor, 
or termination by CMS, drug card programs must remain available to 
beneficiaries for 90 days after beneficiaries are provided with notice 
of termination. In the event of termination by the drug card program 
sponsor, or termination by CMS, drug card program sponsors must suspend 
information and outreach and enrollment of beneficiaries once 
beneficiaries have been notified of the termination.


Sec.  403.806  Requirements for eligibility for endorsement.

    (a) General. To be eligible for Medicare endorsement, an applicant 
must submit an application by the deadline announced in the 
solicitation, demonstrating that it meets and will comply with the 
requirements described in this section.
    (b) Applicant structure, experience, and participation in 
administrative consortium. (1) A single organization or entity that is 
either the applicant or a subcontractor or under other legal 
arrangement with the applicant must have no less than 3 years 
experience in pharmacy benefit management, in administering a 
prescription drug discount program, or in administering a low income 
drug assistance program that provides prescription drugs at low or no 
cost;
    (2) A single organization or entity that is either the applicant or 
a subcontractor or under other legal arrangement with the applicant 
must, at the time of application for endorsement, manage at least 1 
million covered lives in an insured pharmacy benefit, prescription drug 
discount program, or a low income drug assistance program that provides 
prescription drugs at low or no cost.
    (3) A single organization or entity that is either the applicant or 
a subcontractor or under other legal arrangement with the applicant 
must--
    (i) Have a pharmacy network serving all 50 States and the District 
of Columbia to qualify as a national program; or
    (ii) Have a regional pharmacy network serving at least 2 contiguous 
States (with the exception of Hawaii and Alaska, which can partner with 
2 or more contiguous States) to qualify as a regional program.
    (4) The applicant must demonstrate that it is financially solvent.
    (5) The applicant must have a satisfactory record of integrity and 
business ethics.
    (6) The applicant must agree to, and demonstrate the ability to, 
jointly administer, abide by the guidelines of, and fund a private 
administrative consortium with other Medicare-endorsed prescription 
drug card program sponsors in accordance with the requirements of this 
subpart.
    (7) The applicant must comply with all applicable Federal and State 
laws.
    (c) Customer service. The applicant must comply with the following 
customer service requirements:
    (1) Limit its one time enrollment fee in Year One to no more than 
$25. In future years, CMS may adjust the fee based on a determination 
of what is a reasonable amount to defray costs of the applicant's 
administrative activities.
    (2) Enroll only Medicare beneficiaries, and all Medicare 
beneficiaries who wish to participate in its Medicare-endorsed 
prescription drug card program.
    (3) Provide information and outreach materials regarding its 
Medicare-endorsed prescription drug card program to all enrolled 
Medicare beneficiaries.
    (4) Maintain a toll free customer call center that is open during 
usual business hours and that provides customer telephone service, 
including to pharmacists, in accordance with standard business 
practices.
    (d) Privacy and confidentiality of beneficiary-specific 
information. (1) The applicant must comply, beginning at the time of 
Medicare endorsement, with 45 CFR 160.103, 160.202, 164.501 through 
164.514, and 164.520, subject to the following modifications:
    (i) All references to covered entities will be applicable to the 
drug card sponsor, and health care operations means the routine 
activities, including providing information and outreach, as provided 
under the Medicare endorsement; and
    (ii) For the purpose of authorization in 45 CFR 164.508, marketing 
means any use or disclosure of protected health information to be 
outside the scope of Medicare endorsement.
    (2) The applicant must develop and implement a written data 
security plan for protected health information.
    (3) The requirements of this paragraph (d) are enforceable by CMS 
under the provisions of Sec.  403.812.
    (4) Nothing in this paragraph (d) modifies the applicability of 45 
CFR 160.103, 160.202, 164.501 through

[[Page 56684]]

164.514, and 164.520 to organizations or entities independently subject 
to the mandates of the Health Insurance Portability and Accountability 
Act of 1996 (HIPAA).
    (e) Discounts, rebates, and access. The applicant must comply with 
the following discount, rebate, and access requirements:
    (1) Offer a discount on at least one brand name or generic 
prescription drug in each of the therapeutic drug classes, groups, or 
subgroups representing the prescription drugs commonly needed by 
Medicare beneficiaries.
    (2) Obtain pharmaceutical manufacturer drug rebates or discounts on 
brand name or generic drugs or both, and ensure that a substantial 
share is provided to beneficiaries either directly or indirectly 
through pharmacies.
    (3) Ensure that a specific drug offered under the program is not 
dropped from the formulary nor its price increased for periods of at 
least 60 days, starting on the first day of the program's operation, 
and notify CMS, the consortium, and the network pharmacies of these 
changes 30 days before the change becomes effective.
    (4) Guarantee that for the drugs for which the applicant will offer 
discounts, Medicare beneficiaries enrolled in its Medicare-endorsed 
prescription drug discount card program will receive the lower of the 
discounted price available through the program, or the price the 
pharmacy would charge a cash paying customer.
    (5) Have a national or regional contracted pharmacy network 
sufficient to ensure that pharmacies are locally accessible to 
beneficiaries where the drug discount card will be offered. At least 90 
percent of Medicare beneficiaries, on average, in all Metropolitan 
Statistical Areas (MSAs) served by the program must live within 5 miles 
of a contracted pharmacy; and at least 90 percent of Medicare 
beneficiaries, on average, in all non-MSAs served by the program must 
live within 10 miles of a contracted pharmacy.
    (6) Provide to the administrative consortium information on drugs 
and their pricing included in the applicant's formularies.


Sec.  403.807  Application process.

    (a) CMS will solicit applications through an application process.
    (b) CMS will review applications and determine whether the 
applicant has met and is able to comply with all of the requirements 
set forth in Sec.  403.806 to become Medicare-endorsed.
    (c) All applications that are submitted by the deadline announced 
in the solicitation and that demonstrate that the applicant has met and 
is able to comply with all of the requirements to become Medicare-
endorsed will be eligible to enter into an agreement to receive 
Medicare endorsement from CMS.


Sec.  403.808  Agreement terms and conditions.

    In order to receive a Medicare endorsement, an applicant that 
complies with all of the application procedures and meets all of the 
requirements described in this subpart must enter into a written 
agreement with CMS. The agreement must include a statement by the 
applicant that it has met the requirements of this subpart and will 
continue to meet all requirements as long as the agreement is in 
effect. The agreement must include a statement that the applicant will 
comply with information and outreach guidelines established by CMS.


Sec.  403.810  Administrative consortium responsibilities and 
oversight.

    (a) The administrative consortium will be responsible for--
    (1) Ensuring that beneficiaries are not enrolled in more than one 
Medicare-endorsed prescription drug card program at the same time;
    (2) Facilitating the publication of, or publishing, information, 
including comparative price information on discounted drugs, that 
assists beneficiaries in determining which Medicare-endorsed 
prescription drug card program is the most appropriate for their needs;
    (3) Ensuring the integrity of the information distributed by the 
Medicare-endorsed prescription drug card programs; and
    (4) Developing and implementing a written data security plan for 
protected health information; and
    (5) Abiding by applicable Federal and State laws.
    (b) In order to facilitate the formation of the administrative 
consortium and ensure that all functions are performed in a timely 
manner, CMS may assist in the start-up of the administrative consortium 
and perform any of the functions in this section for a transitional 
period of time.


Sec.  403.811  Beneficiary enrollment.

    (a) Individual enrollment. (1) Medicare beneficiaries who are 
enrolling in a Medicare-endorsed prescription drug card program for the 
first time may enroll at any time.
    (2) Once enrolled, a Medicare beneficiary may belong to only one 
Medicare-endorsed prescription drug card program at a time.
    (3) Once enrolled, and except as provided in paragraph (a)(4) of 
this section, enrollees may change enrollment to a different Medicare-
endorsed prescription drug card program, to be effective the first day 
of the following January or July following the request for change, 
whichever comes first.
    (4) If the Medicare endorsement of a prescription drug card program 
is terminated, either by CMS or by the sponsor, enrolled Medicare 
beneficiaries may enroll in a different Medicare-endorsed prescription 
drug card program to become effective immediately.
    (b) Group enrollment. (1) The prescription drug card program 
sponsor may accept group enrollment from health insurers and must 
ensure--
    (i) Disclosure to Medicare beneficiaries of the intent to enroll 
them as a group;
    (ii) Disclosure to beneficiaries of the enrollment exclusivity 
restrictions and other enrollment rules of the initiative;
    (2) Medicare+Choice (M+C) organizations may subsidize the 
enrollment fee and offer the drug card program as part of their 
Adjusted Community Rate filing, but may not require enrollment in a 
drug card program as a condition of enrollment in any of their M+C 
plans.


Sec.  403.812  Withdrawal of endorsement.

    If CMS obtains evidence that a Medicare-endorsed prescription drug 
card program or its sponsor has failed to meet any of the requirements 
for endorsement or has not complied with the agreement necessary to 
receive endorsement under this subpart, CMS may withdraw the 
endorsement. CMS may also take appropriate intermediate actions and may 
also refer the card program sponsor to appropriate Federal or State 
authorities, including the Office of Inspector General, for sanctions 
or prosecution under section 1140 of the Act.


Sec.  403.820  Oversight and beneficiary education.

    (a) The Medicare-endorsed prescription drug card program sponsor 
must report to CMS on a periodic basis on major features of its 
programs that correspond to the qualifications for endorsement, 
including savings to beneficiaries, customer service, and discount card 
program operations. Card program sponsors must certify the validity of 
their reported data.
    (b) The Medicare-endorsed prescription drug card program sponsor 
must establish and maintain a customer complaints process. This process 
must

[[Page 56685]]

be designed to track and address in a timely manner enrollees' 
complaints about any aspect of the drug card program.
    (c) CMS will conduct beneficiary education about, and oversight of, 
the Medicare-endorsed prescription drug card programs, as determined by 
CMS.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)
    Dated: August 21, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: August 21, 2002.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-22316 Filed 83002; 8:45 am]
BILLING CODE 412001P