SBA has received requests from the U.S. Department of Labor (DOL) and three other organizations to review the size standard used for Federal Job Corps Center contracts. DOL operates most Job Corps Centers though private sector companies. DOL had classified its Job Corps Centers contracts under the Facilities Support Services industry, NAICS code 561210, and applied the previous Base Maintenance size standard of $20 million in average annual receipts (as defined in 13 CFR 121.401). A potential offeror on a recent solicitation appealed this NAICS designation to SBA's Office of Hearings and Appeals (OHA). OHA rendered a decision that the Job Corps Center contract was not properly classified under the Base Maintenance sub-category of Facilities Support Services. (See NAICS Appeal of Global Solutions Network, Inc., SBA No. NAICS-4478, dated March 5, 2002.) For the appealed requirement, OHA determined that the proper classification for an activity that trains individuals in life skills and readies them for the job market through academic studies and/or technical training is Other Technical and Trade Schools, NAICS code 611519. The effect of this decision was to change the size standard for Job Corps Center contracts from $20 million to $5 million. (On February 22, 2002, an inflation adjustment increased the $5 million size standard for NAICS 611519 to $6 million and the $20 million size standard for Base Maintenance to $23 million. See 67 FR 3041, dated January 23, 2002.)

According to DOL, Job Corps Center contracts account for more than $900 million annually in contracting and represent about 60 percent of DOL's procurement expenditures. SBA agreed to review the size standard for Job Corps Centers because of the large amount of contracting in one specific activity and the significant change in the size standard resulting from the OHA decision. Based on our review, this rule proposes to establish a $30 million size standard specifically for DOL Job Corp Center contracts. The discussion below describes SBA's general methodology for reviewing size standards, the basis for creating an industry sub-category of Job Corps Centers, the data obtained on Job Corp Center contracts and on the bidders to these contracts, the analysis leading to the decision to propose $30 million, and the alternative size standards considered by SBA.

Size Standards Methodology: Congress granted SBA discretion to establish detailed size standards (15 U.S.C. 632(a)(2)). SBA's Standard Operating Procedure (SOP) 90 01 3, “Size Determination Program” (available on SBA's Web site at http:/www.sba.gov/library/soproom.html ) sets out four categories for establishing and evaluating size standards: (1) The structure of the industry and its various economic characteristics, (2) SBA program objectives and the impact of different size standards on these programs, (3) whether a size standard successfully excludes those businesses which are dominant in the industry, and (4) other factors if applicable. Other factors, including the impact on other agencies' programs, may come to the attention of SBA during the public comment period or from SBA's own research on the industry. No formula or weighting has been adopted so that the factors may be evaluated in the context of a specific industry. Below is a discussion of SBA's analysis of the economic characteristics of an industry, the impact of a size standard on SBA programs, and the evaluation of whether a firm at or below a size standard could be considered dominant in the industry under review.

Industry Analysis: Section 3(a)(2) of the Small Business Act (15 U.S.C. 632 (a)(2)), requires that size standards vary by industry to the extent necessary to reflect differing industry characteristic. SBA has two “base” or “anchor” size standards that apply to most industries—500 employees for manufacturing industries and $6 million in average annual receipts for nonmanufacturing industries. SBA established 500 employees as the anchor size standard for the manufacturing industries at SBA's inception in 1953 and shortly thereafter established a $1 million average annual receipts size standard for the nonmanufacturing industries. The receipts-based anchor size standard for the nonmanufacturing industries was adjusted periodically for inflation so that, currently, the anchor size standard $6 million. Anchor size standards are presumed to be appropriate for an industry unless its characteristics indicate that larger firms have a much greater significance within that industry than the “typical industry.”

When evaluating a size standard, the characteristics of the specific industry under review are compared to the characteristics of a group of industries, referred to as a comparison group. A comparison group is a large number of industries grouped together to represent the typical industry. It can be comprised of all industries, all manufacturing industries, all industries with receipt-based size standards, or some other logical grouping.

If the characteristics of a specific industry are similar to the average characteristics of the comparison group, then the anchor size standard is considered appropriate for the industry. If the specific industry's characteristics are significantly different from the characteristics of the comparison group, a size standard higher or, in rare cases, lower than the anchor size standard may be considered appropriate. The larger the differences between the specific industry's characteristics and the comparison group's characteristics, the larger the difference between the appropriate industry size standard and the anchor size standard. SBA will consider adopting a size standard below the anchor size standard only when (1) all or most of the industry characteristics are significantly smaller than the average characteristics of the comparison group, or (2) other industry considerations strongly suggest that the anchor size standard would be an unreasonably high size standard for the industry under review.

The primary evaluation factors that SBA considers in analyzing the structural characteristics of an industry are listed in 13 CFR 121.102 (a) and (b). Those factors include average firm size, distribution of firms by size, start-up costs, and industry competition. The analysis also examines the possible impact of a size standard revision on SBA's programs as an evaluation factor. SBA generally considers these five factors to be the most important evaluation factors in establishing or revising a size standard for an industry. However, it will also consider and evaluate other information that it believes relevant to the decision on a size standard for a particular industry. Public comments submitted on proposed size standards are also an important source of additional information that SBA closely reviews before making a final decision on a size standard. Below is a brief description of each of the five evaluation factors.

1. Average firm size is simply total industry receipts (or number of employees) divided by the number of firms in the industry. If the average firm size of an industry is significantly higher than the average firm size of a comparison industry group, this fact would be viewed as supporting a size standard higher than the anchor size standard. Conversely, if the industry's average firm size is similar to or significantly lower than that of the comparison industry group, it would be a basis to adopt the anchor size standard or, in rare cases a lower size standard.

2. The distribution of firms by size examines the proportion of industry receipts, employment, or other economic activity accounted for by firms of different sizes in an industry. If the preponderance of an industry's economic activity is by smaller firms, this tends to support adopting the anchor size standard. A size standard higher than the anchor size standard is supportable for an industry in which the distribution of firms indicates that economic activity is concentrated among the largest firms in an industry. In this rule, SBA is comparing the size of firms within an industry to the size of firms in the comparison group at which predetermined percentages of receipts are generated by firms smaller than a particular size firm. For example, assume for the industry under review that 50 percent of total industry receipts are generated by firms of $28.5 million in receipts and less. This contrasts with the comparison group (composed of industries with the nonmanufacturing anchor size standard of $6 million) in which firms of $5.8 million and less in receipts generated 50 percent of total industry receipts. Viewed in isolation, the higher figure for the industry under review suggests that a size standard higher than the nonmanufacturing anchor size standard may be warranted. Other size distribution comparisons in the industry analysis include 40 percent, 60 percent, and 70 percent, as well as the 50 percent comparison discussed above. Usually, SBA uses information based on the most recent economic census conducted by the Department of Commerce's Bureau of the Census. However, Job Corps Centers are germane to the Federal government and involve approximately 35 organizations and firms from various industries. Information specific to Job Corps Centers under NAICS code 611519 is not reflected in the latest census data. Therefore, SBA gathered pertinent data on the various firms in this industry, which it will use along with the Census data.

3. Start-up costs affect a firm's initial size because entrants into an industry must have sufficient capital to start and maintain a viable business. To the extent that firms entering into one industry have greater financial requirements than firms do in other industries, SBA is justified in considering a higher size standard. In lieu of direct data on start-up costs, SBA uses a proxy measure to assess the financial burden for entry-level firms. For this analysis, SBA has calculated nonpayroll costs per establishment for each industry. This is derived by first calculating the percent of receipts in an industry that are either retained or expended on costs other than payroll costs. (The figure comprising the numerator of this percentage is mostly composed of capitalization costs, overhead costs, materials costs, and the costs of goods sold or inventoried.) This percentage is then applied to average establishment receipts to arrive at nonpayroll costs per establishment (an establishment is a business entity operating at a single location). An industry with a significantly higher level of nonpayroll costs per establishment than that of the comparison group is likely to have higher start-up costs, which would tend to support a size standard higher than the anchor size standard. Conversely, if the industry showed a significantly lower nonpayroll costs per establishment when compared to the comparison group, the anchor size standard would be considered the appropriate size standard.

4. Industry competition is assessed by measuring the proportion or share of industry receipts obtained by firms that are among the largest firms in an industry. In this proposed rule, SBA compares the proportion of industry receipts generated by the four largest firms in the industry'generally referred to as the “four-firm concentration ratio”with the average four-firm concentration ratio for industries in the comparison groups. If a significant proportion of economic activity within the industry is concentrated among a few relatively large producers, SBA tends to set a size standard relatively higher than the anchor size standard in order to assist firms in a broader size range to compete with firms that are larger and more dominant in the industry. In general, however, SBA does not consider this to be an important factor in assessing a size standard if the four-firm concentration ratio falls below 40 percent for an industry under review, while its comparison groups also average less than 40 percent.

5. “Impact of size standard revisions on SBA programs” refers to the possible impact a size standard change may have on the level of small business assistance. This assessment most often focuses on the proportion or share of Federal contract dollars awarded to small businesses in the industry in question. In general, the lower the share of Federal contract dollars awarded to small businesses in an industry which receives significant Federal procurement revenues, the greater is the justification for a size standard higher than the existing one.

Another factor to evaluate the impact of a proposed size standard on SBA programs is the volume of guaranteed loans within an industry and the size of firms obtaining those loans. This factor is sometimes examined to assess whether the current size standard may be restricting the level of financial assistance to firms in that industry. If small businesses receive significant amounts of assistance through these programs, or if the financial assistance is provided mainly to small businesses much lower than the size standard, a change to the size standard (especially if it is already above the anchor size standard) may not be necessary.

The Other Technical and Trade Schools industry which OHA designated for Job Corps Center contracts comprises establishments primarily engaged in offering job or career vocational or technical courses that are not specifically designated under NAICS as industries in their own right. The curriculums offered by these schools are highly structured and specialized and lead to job-specific certification. Examples of these schools include truck driving schools, bartending schools, and graphic arts schools. These schools tend to offer trade specific training and certification, and are usually small. More than 95 percent of these firms have revenues at or below $6 million.

The DOL's Job Corps Centers, on the other hand, go beyond trade certification programs. Job Corps is a residential education and training program that helps students between the ages of 16 and 24 gain the experience they need to get a better job and take control of their lives. The mission is to prepare economically disadvantaged youth to obtain and hold gainful employment, pursue further education or training, or satisfy entrance requirements for careers in the Armed Forces. The centers provide comprehensive life skills training, comprehensive career preparation and development services which include academic, vocational, social and independent living skills, and career-readiness training and support services. The centers offer college preparatory training, military entrance training, career transition activities, and training and certification in a trade. Basic life-skills training include basic reading and math skills, English as a second language, dietary, dental, basic health, personal hygiene, as well as job life skills. The centers provide academic training that will lead to a high school diploma or equivalent and conduct training in computer skills, resume development, interview skills, and career development. Besides providing teachers for these requirements, several centers have agreements with local high schools as well as local community colleges. Centers also prepare interested participants for military service exams, and train students in various trades, including plumbing, carpentry, culinary arts, auto-mechanic, electrician, facilities maintenance, landscaping, brick masonry, etc. The Job Corps contractors are required to provide outreach activities and also to maintain the facility, purchase any equipment needed in the teaching of a trade (outfitting kitchens for culinary studies, purchasing heavy machinery for mechanical and automotive trades, etc. ), provide medical and dental facilities, and perform admission physicals which include drug and alcohol abuse screening.

The significantly broader scope of activities performed by Job Corps Center contractors as compared with the activities of all other trade schools within its industry supports a separate assessment of an appropriate size standard. Job Corps Centers are larger than the typical trade school, with an average yearly funding of $8.8 million for one center (yearly funding for each center ranges from $5 million to over $44 million). The average size trade school in NAICS 611519 is less than one million dollars.

Because the performance of Job Corps Center contracts is a segment of the Other Technical and Trade Schools industry, SBA's proposal includes a footnote to the table of size standards defining the activities covered. It explains that contracts for Job Corps Centers require the complete maintenance and operation of the centers. The activities involved include admissions activities, life skills training, educational activities, comprehensive career preparation activities, career development activities, career transition activities, as well as the management and support functions and services needed to operate and maintain the facility. SBA invites comment on this definition so that it is accurately depicts the scope of activities currently performed by Job Corps Center contractors.

The U.S. Bureau of the Census does not published specific data on firms engaged in the operation and management of Job Corps Centers. Also, companies that perform and compete for these Job Corp Center contracts operate primarily in industries outside of the Other Technical and Trade Schools industry. To assess a size standard for the operation and maintenance of Job Corps Centers, SBA collected contract and company data from DOL and Dun and Bradstreet (D&B). Tables 1-3 summarize these data.

SBA collected fiscal years 2000-01 data from the DOL on organizations who have contracts or who have submitted proposals on Job Corps Center requirements, and used information provided on D&B Information Reports on these organizations. A review of those organizations shows the following information. There are approximately 35 organizations in this activity. The organizations include for-profit businesses, the YWCA, businesses owned by Native American tribes and nations, and several non-profit establishments. There are 21 organizations currently under contract with DOL to operate Job Corps Centers. According to D&B reports, these organizations are in the following industries: Management of youth facilities, vocational rehabilitation, facilities maintenance, home health care services, human resource counseling, management consulting, and information retrieval. Seven organizations were awarded contracts under Small Business Set-Aside procedures with the contracting officer using the appealed NAICS code of 561210 and the previous Base Maintenance size standard of $20 million. Five of the organizations in this activity have receipts below $6 million, but only one of these currently has a Job Corps Center contract. In addition, D&B information shows that four of the five organizations have receipts below $1 million. These firms are in the following industries: temporary help services, construction, investigation services, and engineering and technical services.

Twenty six of the 35 organizations are listed with D&B. Two non-profit organizations do not have receipts and employees listed on their D&B reports, therefore, SBA has relevant information on 24 organizations. D&B reports on eight organizations show the number of employees but lacked information on those firms' receipts. For these eight organizations, SBA estimated their receipts based organizations in similar industries with similar employee counts.

SBA calculated the average characteristics of the 24 Job Corp Center organizations that provided D&B with receipt and employee information. Table 1 shows the mean and median values of these organizations. Because of the small number of organizations competing for Job Corps Center contracts, the mean values are inordinately influenced by a few very large firms. The median values are considered more reflective of the average characteristics of Job Corps Center firms and are used in the analysis of industry structure discussed later in this rule.

Tables 2 and 3 examine the distribution of firms in relation to receipts and number of employees. In addition, Table 2 contains information on the percentage distribution of Job Corps Center contract dollars by receipts size of the firm.

Evaluation of Size Standard for the Job Corps Center Sub-industry: Tables 4 and 5 below show the characteristics of the Job Corp Centers sub-industry and for two comparison groups. The first comparison group is comprised of all industries with a $6 million receipts-based size standard, referred to as the nonmanufacturing anchor group. Since SBA assumes that the $6 million anchor size standard is appropriate for a nonmanufacturing industry, this is the most logical set of industries to group together for the industry analysis to assess whether a size standard at the anchor size standard or higher is appropriate. The second comparison group consists of nonmanufacturing industries which have the highest levels of receipt-based size standards established by SBA, referred to as the nonmanufacturing higher-level size standard group. Size standards for these industries range from $21 million to $29 million. If an industry's characteristics are significantly larger than those of the nonmanufacturing anchor group, SBA will compare them to characteristics of the higher-level size standards group. By doing so, SBA can assess if a size standard among its highest receipts-based size standards is appropriate or an intermediate size standard between the anchor size standard and the range of higher size standards.

SBA examined economic data on the comparison group industries taken from a special tabulation of the 1997 Economic Census prepared under contract by the U.S. Bureau of the Census (Census). Data on Job Corps Centers contracts, contractors, and bidders were obtained from DOL and D&B, as described earlier. Industry Structure Consideration: Table 4 below examines the size distribution of firms. For this factor, SBA is evaluating the cumulative size of firm that account for predetermined percentages of total industry receipts (40 percent, 50 percent, 60 percent, and 70 percent). The table shows firms up to a specific size that, along with all other smaller firms, account for a specific percentage of total industry receipts. For the Job Corps Center bidders, the percentages reflect the value of awarded Job Corps Center contracts.

These data support a size standard significantly higher than $6 million for the Job Corps Centers industry. At a given coverage level the size of firms in the Job Corps Centers industry is substantially larger than in the two comparison groups. In relation to the nonmanufacturing anchor group, the Job Corp Center firms are 18 to 32 times larger, and almost double that of the higher-level size standard. Because the size distribution of Job Corps Centers firms is significantly higher than that of the nonmanufacturing anchor group, the analysis of this factor supports a size standard significantly above the $6 million nonmanufacturing anchor size standard and at or beyond the size standards of the higher-level size standard group.

Table 5 lists the two other evaluation factors of average firm size and the four-firm concentration ratio for the Job Corps Centers sub-industry and the comparison groups.

For Job Corps Centers, its average firm size in receipts is over 30 times larger than the average firm size in the nonmanufacturing anchor group and approximately six and one half times that of the higher-level size standards group. Moreover, its average firm size in employees is 19 to 37 times the average sizes of these two comparison groups. This factor is substantially higher than the comparison groups and supports a size standard far above $6 million. Because the size distribution of Job Corps Centers firms is significantly higher than that higher-level size standard group, this factor supports a size standard at or beyond the range of $21 million to $29 million.

The four-firm concentration ratio for Job Corps Center firms is about double that of the higher-level size standards group. This factor supports a size standard at least within the range of the higher-level size standards group.

The start-up costs evaluation factor is not analyzed since no data are not available for Job Corp Centers. However, the following discussion of program considerations addresses the issue of size of contract which indirectly relates to the start-up costs associated with Job Corps Centers.

SBA Program Considerations: SBA is proposing this rule to establish a size standard specifically for DOL's Job Corps Centers contracts. SBA's loan programs will be minimally affected as organizations participating in the Job Corps Centers primarily operate in other industries, namely facility support services, general construction, and home health care services.

SBA extensively reviewed the scope of Job Corp Centers and the organizations bidding on and winning these contracts. Since the beginning of the Job Corps Centers program, the Federal Government has relied on the private sector for the operation of most of these centers or parts of the centers. Since the inception of the Job Corps Centers program, DOL has contracted out the entire operation and maintenance of a facility. A Job Corps Center contract requires an organization to provide teachers, counselors, administrators and support personnel, outreach activities, medical and dental facilities; and perform admissions physicals, maintain the facility, and purchase any equipment needed in the teaching of a trade. Over the years the Job Corps program has developed many public-private partnerships with various trade unions, corporations, and organizations. Many trade unions provide teachers and provide opportunities for the participants to apprentice with master tradesmen. Because the mission of these centers prepares students for the job market, many of the functions of the centers are integrated as a teaching tool for the students. As an example, students interested in culinary arts studies will work in the cafeteria alongside chefs, or a student interested in learning the plumbing trade will work with the maintenance crews, gaining “hands-on” experience. This approach has been extremely successful in achieving the mission and goals of the Job Corps Center program.

DOL operates 118 Job Corps Centers, of which 88 centers are run by the private sector. All but two of these centers are residential where students are housed. Several centers operate as advanced centers. For example, the San Francisco center runs an advanced culinary institute that prepares participants with skills beyond the high school level. The yearly funding in fiscal year 2001 for these centers ranged from $5 million to more than $44 million for their residential centers, with an average yearly funding amounting to $8.8 million per year per center. Non-residential center contracts range from $4 million to more than $6 million.

Procurement statistics show that in fiscal year 2001, DOL expended $909.5 million in Job Corps Center contracts. There are 21 organizations currently under contract with DOL to operate Job Corps Centers. Seven firms were awarded their contracts under Small Business Set-Aside procedures. (For these set-aside contracts, DOL used the appealed NAICS code of 561210 and applied the previous $20 million size standard for Base Maintenance). These small businesses account for 6 percent of total Job Corps Center contract dollars.

The analysis of Job Corps Center contracts indicates that a size standard of $6 million inadequately identifies the smaller segment of organizations competing for and obtaining these types of contracts. A size standard of at least equal to the current Base Maintenance size standard of $23 million represents a more realistic and effective size standard. The size of winning contractors and the average size of Job Corps Center contracts support this assessment.

As discussed above, there are 21 organizations performing 88 Job Corps Center contracts. Table 6 below summarizes the size of the awardees and bidders on these contracts. Only one of the successful organizations has receipts below $6 million. This organization's contract is for $5.8 million per year. With a contract that is yearly funded just below the current $6 million size standard, this organization will probably outgrow the size standard by the end of its next fiscal year, potentially leaving no currently defined small Job Corps Center contractor eligible for future small business asides. Of four other organizations under $6 million in receipts competing for Job Corps Center contracts, none have been successful offerors.

Table 2 above shows that 80 percent of the value of Job Corps Center contracts were awarded to organization with receipts of $50 million or more. All of the awards to small business were made as set-aside awards. Only one percent of Job Corps Center contract dollars go to small businesses using a $6 million size standard. In addition, 49 percent of contract dollars were expended with firms and organizations that have over $100 million in receipts. This shows that a significant proportion of economic activity within the Job Corps Centers industry is concentrated among a few relatively large organizations.

Tables 7 and 8 below illustrate that firms that have been successful in winning Job Corps Center contracts are concentrated in industries that have size standards significantly greater than $6 million, such as general construction, facilities maintenance services, and home health care services. These observations provide further evidence that a size standard greater than $6 million is needed to attract the type of firms capable of performing the broad range of activities of Job Corp Centers.

The size of Job Corps Centers contracts explains to a great extent the pattern of awards by size of contractor. For an organization to perform on the average Job Corps Center contract of $8.8 million, it generally must be at least several times that size. Under the current $6 million size standard, if an organization receives an award for just one center, it is close to or over the current $6 million size standard. Those organizations under the current size standard would probably go over $6 million in receipts within a year if they receive any other substantial business. Thus, with a $6 million size standard, the opportunities for small businesses in this activity are severely limited.

Additionally, firms with receipts over $23 million currently handle from four to 22 Job Corps Centers. On average, they operate nine centers. Small businesses must be able to successfully compete with these large organizations, therefore, the size standard needs to be set at a threshold where these businesses can reach a competitive level. In discussions with DOL, an organization can achieve meaningful economies of scale by operating three to four centers. The total operational costs of three centers are $26.4 million (based on an average cost of $8.8 million per center), and indicates support of a size standard at that level as a viable alternative to the $6 million level.

Overview: Based on a review of each evaluation factor, SBA is proposing a $30 million size standard for Job Corps Centers. All of the factors support a size standard comparable to those of the nonmanufacturing higher-level size standard group, which ranges between $21 million to $29 million. Most factors support even a higher size standard. A $30 million size standard takes into consideration that a Job Corps Center organization achieves economics of scales operating three to four centers. This suggests a size standard of $26.4 million or more. Since organizations involved with Job Corps Center contracts have other operations, SBA also needs to take that fact into account in establishing a size standard for Job Corps Centers. A $30 million size standard provides small businesses the ability to compete and grow at an appropriate level without losing their small business status, but not to a level where a few firms would be able to control a significant portion of Federal contracts at the expense of other small businesses.

Dominant in Field of Operation: Section 3(a) of the Small Business Act defines a small concern as one that is (1) independently owned and operated, (2) not dominant in its field of operation and (3) within detailed definitions or size standards established by the SBA Administrator. SBA considers as part of its evaluation of a size standard whether a business concern at or below a proposed size standard would be considered dominant in its field of operation. This assessment generally considers the market share of firms at the proposed or final size standard or other factors that may show whether a firm can exercise a controlling influence on a national basis in which significant numbers of business concerns are engaged.

SBA has determined that no organization at or below the proposed size standard in the Job Corps Centers activities would be of a sufficient size to dominate its field of operation. For Job Corps Centers, an organization with $30 million in receipts could obtain about three percent of the total dollar value of Job Corps Center contracts. This level of market share effectively precludes an organization at or below the proposed size standard to exert a controlling effect on Job Corps Center contracts.

Alternative Size Standards: SBA concluded that a single size standard of $6 million was inadequate to define small businesses in the entire Other Technical and Trade Schools industry. The size standard would be too low for Job Corps Centers or too high for all other industry activities, such as job training facilities, marine navigation schools, and truck driving schools. Establishing two size standards for these industries would enable SBA to determine the most appropriate size standard for disparate segments of the industry.

SBA considered restoring the $20 million size standard for Job Corps Centers previously applied by DOL. After reviewing the industry data, in particular procurement data, which show the average Job Corp Center contract is for $8.8 million, SBA concluded that a $20 million size standard would not be adequate for Job Corps Centers. The adoption of this size standard would allow a firm to receive only two Job Corps Center contracts and be at risk of outgrowing its small business status before reaching sufficient economies to be competitive against the larger incumbent Job Corps Center contractors. Therefore, SBA decided against a $20 million size standard for Job Corps Centers since it would not allow sufficient growth and business development.

SBA welcomes public comments on its proposed size standard for Job Corps Centers. SBA is concerned with how the proposed size standards may negatively impact those qualified under the current size standard. Comments supporting an alternative to the proposal, including the $20 million, or the option of retaining the size standard at $6 million discussed above, should explain why the alternative would be preferable to the proposed size standard, and how the alternative impacts current small businesses.

The Office of Management and Budget (OMB) has determined that the proposed rule is not a “significant” regulatory action for purposes of Executive Order 12866. Size standards determine which businesses are eligible for Federal small business programs. For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA has determined that this rule would not impose new reporting or record keeping requirements. For purposes of Executive Order 13132, SBA has determined that this rule does not have any federalism implications warranting the preparation of a Federalism Assessment. For purposes of Executive Order 12988, SBA has determined that this rule is drafted, to the extent practicable, in accordance with the standards set forth in that order. Our Regulatory Impact Analysis follows.

SBA is chartered to aid and assist small businesses through a variety of financial, procurement, business development, and advocacy programs. To effectively assist intended beneficiaries of these programs, SBA must establish distinct definitions of which businesses are deemed small businesses. The Small Business Act (15 U.S.C. 632(a)) delegates to the SBA Administrator the responsibility for establishing small business definitions. It also requires that small business definitions vary to reflect industry differences. The preamble of this rule explains the approach SBA follows when analyzing a size standard for a particular industry. Based on that analysis, SBA believes that a size standard for Job Corps Centers is needed to better define small businesses engaged in these activities.

The most significant benefit to businesses obtaining small business status as a result of this rule is eligibility for Federal small business assistance programs. Under this rule, approximately 10 additional firms will obtain small business status and become eligible for these programs. These include Federal procurement preference programs for small businesses, 8(a) firms, small disadvantaged businesses (SDB), and small businesses located in Historically Underutilized Business Zones (HUBZone), as well as those for contracts awarded through full and open competition after application of the HUBZone or SDB price evaluation preference or adjustment. They may also become eligible for SBA financial assistance programs. Other Federal agencies use SBA size standards for a variety of regulatory and program purposes. SBA does not have information on each of these uses sufficient to evaluate the impact of size standards changes. However, in cases where SBA size standards are not appropriate, an agency may establish its own size standards with the approval of the SBA Administrator ( see 13 CFR 121.801). Through the assistance of these programs, small businesses may benefit by becoming more knowledgeable, stable, and competitive businesses.

The benefits of a size standard increase to a more appropriate level would accrue to three groups: (1) Businesses that benefit by gaining small business status from the proposed size standards and use small business assistance programs, (2) growing small businesses that may exceed the current size standards in the near future and who will retain small business status from the proposed size standards, and (3) Federal agencies that award contracts under procurement programs that require small business status.

Newly defined small businesses may benefit from SBA's financial programs, in particular its 7(a) Guaranteed Loan Program. Under this program SBA estimates that $700,000 in new Federal loan guarantees could be made to the newly defined small businesses. Because of the size of the loan guarantees, most loans are made to small businesses well below the size standard. Thus, increasing the size standard to include 10 additional businesses may result in only one or two small business guaranteed loans to businesses in this industry. As a guaranteed loan for larger firms averages $350,000 for firms in the Other Technical and Trade Schools industry and the Facilities Support Services industry, if two of the 10 business applied for a loan, SBA could expect to guarantee $700,000 in loans. However, most firms involved in Job Corps Centers are in other industries; thus their eligibility for SBA loan assistance would be under their primary NAICS industry. The newly defined small businesses would also benefit from SBA's economic injury disaster loan program. Since this program is contingent upon the occurrence and severity of a disaster, no meaningful estimate of benefits can be projected.

SBA estimates that firms gaining small business status could potentially obtain Federal contracts worth $53 million per year under the small business set-aside program, the 8(a) and HUBZone Programs, or unrestricted contracts. Federal agencies may benefit from the higher size standards if the newly defined and expanding small businesses compete for more set-aside procurements. The larger base of small businesses would likely increase competition and lower the prices on set-aside procurements. A larger base of small businesses may create an incentive for Federal agencies to set aside more procurements, thus creating greater opportunities for all small businesses. Other than small businesses with small business subcontracting goals may also benefit from a larger pool of small businesses by enabling them to better achieve their subcontracting goals at lower prices. No estimate of cost savings from these contracting decisions can be made since data are not available to directly measure price or competitive trends on Federal contracts.

To the extent that approximately 10 additional firms could become active in Government programs, this may entail some additional administrative costs to the Federal Government associated with additional bidders for Federal small business procurement programs, additional firms seeking SBA guaranteed lending programs, and additional firms eligible for enrollment in SBA's PRO-Net small business database. Among businesses in this group seeking SBA assistance, there will be some additional costs associated with compliance and verification of small business status and protests of small business status. These costs are likely to generate minimal incremental costs since mechanisms are currently in place to handle these administrative requirements.

The costs to the Federal Government may be higher on some Federal contracts as a result of this rule. With greater numbers of businesses defined as small, Federal agencies may choose to set aside more contracts for competition among small businesses rather than using full and open competition. The movement from unrestricted to set-aside is likely to result in competition among fewer bidders for a contract. Also, higher costs may result if additional full and open contracts are awarded to HUBZone and SDB businesses as a result of a price evaluation preference. However, the additional costs associated with fewer bidders are likely to be minor since, as a matter of policy, procurements may be set aside for small businesses or under the 8(a), and HUBZone Programs only if awards are expected to be made at fair and reasonable prices. In addition, the use of small business set-asides may encourage more competitors since small businesses would not have to compete against the major businesses in the industry.

The proposed size standard may have distributional effects among large and small businesses. Although the actual outcome of the gains and losses among small and large businesses cannot be estimated with certainty, several trends are likely to emerge. First, a transfer of some Federal contracts to small businesses from large businesses. Large businesses may have fewer Federal contract opportunities as Federal agencies decide to set aside more Federal procurements for small businesses. Also, some Federal contracts may be awarded to SDB or HUBZone businesses instead of large businesses since those two categories of small businesses are eligible for price evaluation preferences for contracts competed on a full and open basis. Similarly, currently defined small businesses may obtain fewer Federal contacts due to the increased competition from more businesses defined as small. As currently there is only one small business that has a contract for a Job Corps Center, this transfer will be offset by initiating a number of Federal procurements than can now be set aside for all small businesses. The potential transfer of contracts away from large and currently defined small businesses would be limited by the number of newly defined and expanding small businesses that were willing and able to sell to the Federal Government. The potential distributional impacts of these transfers could result in up to $53 million or 5.8 percent of total contract dollars of $909 million being transferred from large businesses to small businesses. SBA based this estimate on the per year funding of the firms that currently have Job Corps Center contracts, which would gain small business status if this proposed rule is adopted.

The revision to current size standard for Job Corps Centers is consistent with SBA's statutory mandate to assist small businesses. This regulatory action is in support of the Administration's objectives is to help individual small businesses succeed through fair and equitable access to capital and credit, Government contracts, and management and technical assistance. Reviewing and modifying size standards when appropriate ensures that intended beneficiaries have access to small business programs designed to assist them. Size standards do not interfere with State, local, and tribal governments in the exercise of their government functions. In a few cases, State and local governments have voluntarily adopted SBA's size standards for their programs to eliminate the need to establish an administrative mechanism for developing their own size standards.

Under the Regulatory Flexibility Act (RFA), this rule may have a significant impact on a substantial number of small entities engaged in Job Corps Center activities. As described in the above Regulatory Impact Analysis, this rule may impact small entities in two ways. First, small businesses interested in competing for Federal Job Corps Centers procurements reserved for small businesses, and SDB and HUBZone businesses eligible for price preferences, may face greater competition from newly eligible small businesses. Second, additional Federal procurements for the operation and management of Job Corps Centers may be set aside for small business as the pool of eligible small businesses expands. As discussed in the preamble, SBA estimates that firms gaining small business status could potentially obtain Federal contracts worth $53 million.

As Job Corps Center activity is limited to Federal procurements within DOL, SBA cannot guarantee that the proposed size standard will affect small businesses participating in programs of other agencies that use SBA size standards. As a practical matter, SBA cannot estimate the impact of a size standard change on each and every Federal program that uses its size standards. For this particular proposed rule, SBA did consult with DOL regarding a possible increase to the Job Corps Centers size standard. In cases where an SBA size standard is not appropriate, the Small Business Act and SBA's regulations allow Federal agencies to develop different size standards with the approval of the SBA Administrator (13 CFR 121.902). For purposes of a regulatory flexibility analysis, agencies must consult with SBA's Office of Advocacy when developing different size standards for their programs (13 CFR 121.902(b)(4)).

Immediately below, SBA sets forth an initial regulatory flexibility analysis (IRFA) of this proposed rule on the Job Corps Centers industry addressing the following questions: (1) what is the need for and objective of the rule; (2) what is SBA's description and estimate of the number of small entities to which the rule will apply; (3) what is the projected reporting, record keeping, and other compliance requirements of the rule; (4) what are the relevant Federal rules which may duplicate, overlap or conflict with the proposed rule; and (5) what alternatives will allow the Agency to accomplish its regulatory objectives while minimizing the impact on small entities?

A separate size standard for Job Corps Centers more appropriately defines the size of businesses in this industry activity that SBA believes should be eligible for Federal small business assistance programs. Currently, there are five firms in the Job Corps Centers activity that have revenues below $6 million size standard, however, only one of these firms has a contract for a Job Corps Center. This firm is likely to outgrow the current size standard within the next year as its current contract is for $5.8 million per year. This will leave only four firms below the size standard, all having revenues below $1 million. None of these firms have been successful in winning a Job Corps Center contract. This, along with the facts that the average contract funding is $8.8 million and the minimal funding for a Job Corps Center is $5 million for a residential center and $4 million for a non-residential center, indicates that the size standard for Job Corps Centers needs to be greater than the current $6 million.

SBA estimates that 35 organizations are engaged in the Job Corps Center industry, of which approximately 14 percent are small businesses currently at or just below the $6 million threshold. If this rule were adopted, 10 additional businesses would be considered small. Although this may not represent a substantial number of small businesses, SBA is preparing an IRFA to ensure that the impact on small businesses of higher size standards are known and being considered. These businesses would be eligible to seek available SBA assistance provided that they meet other program requirements.

Based on the relative size of these firms and SBA's knowledge of contracting in this area, SBA estimates that small business coverage could increase by $53.1 million or 5.8 percent of total revenues in this activity. SBA based this estimate on the per year funding of the firms that currently have Job Corps Center contracts, which would gain small business status if this proposed rule is adopted.

A new size standard does not impose any additional reporting, record keeping or compliance requirements on small entities. Increasing size standards expands access to SBA programs that assist small businesses, but does not impose a regulatory burden as they neither regulate nor control business behavior.

This proposed rule overlaps other Federal rules that use SBA's size standards to define a small business. Under section 632(a)(2)(C) of the Small Business Act, unless specifically authorized by statute, Federal agencies must use SBA's size standards to define a small business. In 1995, SBA published in the Federal Register a list of statutory and regulatory size standards that identified the application of SBA's size standards as well as other size standards used by Federal agencies (60 FR 57988, dated November 24, 1995). SBA is not aware of any Federal rule that would duplicate or conflict with establishing size standards.

As discussed in the preamble, SBA considered several alternative size standards and their implications on small businesses. First, SBA considered retaining a single size standard of $6 million for the Other Technical and Trade Schools industry. In researching firms engaged in the operation and maintenance of Job Corps Centers, SBA concluded that no single size standard could adequately define small business in the whole industry. The size standard would be either too low for Job Corps Centers or too high for other industry activities, such as graphics arts schools, real estate schools, and broadcasting schools. Establishing two size standards for this industry would enable SBA to determine the most appropriate size standard for disparate segments of the industry.

SBA also considered restoring the $20 million size standard for Job Corps Centers. However, as discussed in the preamble, this size standard would not allow for sufficient growth and development of a small Job Corps Center contractor. A firm would be at risk of losing its small business status if it received two average-size contracts.

By establishing the size standard at $30 million, SBA will create opportunities for the small businesses in an industry where only five firms are below the size standard. Of these five firms, four have revenues below $1 million and only one firm has a Job Corps Center contract. If SBA retains the current $6 million size standard, it will not accurately reflect the smaller segment of businesses that participate in operating and maintaining Job Corps Centers.

SBA welcomes comments on other alternatives that minimize the impact of this rule on small businesses and achieve the objectives of this rule. Those comments should describe the alternative and explain why it is preferable to the proposed rule.

Accordingly, for the reasons stated in the preamble, SBA proposes to amend part 121 of title 13 of the Code of Federal Regulations as follows:

SBA's small business size regulations (13 CFR part 121) are used to determine eligibility for all SBA and Federal programs that require an entity to be a small business concern. In the past, to be considered small, concerns were required to qualify under a particular size standard that corresponded to a four-digit Standard Industrial Classification (SIC) code. Effective October 1, 2000, to be considered small, concerns are required to qualify under a particular size standard that corresponds to the six-digit North American Industrial Classification System (NAICS) code. SBA published its final rule setting forth the various NAICS codes and corresponding size standards at 65 FR 30836 (May 15, 2000). SBA published a technical correction to the final at 65 FR 53533 (September 5, 2000). That final rule changed all references to SIC codes in part 121 to NAICS codes. This proposed rule would not change any size standards currently corresponding to specific NAICS codes.

With a few exceptions, SBA size standards are based on either average annual receipts or number of employees, depending on the industry. When measuring a concern's size, the receipts or employees of affiliated concerns are included. The proposed rule would modify the definitions of affiliation, annual receipts, and number of employees. The proposed changes to part 134 would clarify the jurisdiction of SBA's Office of Hearings and Appeals (OHA) and make certain technical amendments.

SBA proposes to amend § 121.102 by adding a new paragraph (d) that would recognize that there currently exists an internal Size Policy Board at SBA that is responsible for making recommendations to the Administrator on size standards, other size eligibility requirements, and size protest procedures. In addition, SBA proposes to amend § 121.103 to specifically incorporate into the definition of “affiliation” certain provisions that were previously contained in the regulations. Because there may have been some confusion regarding the more generalized affiliation language when SBA amended its regulations in 1996, SBA believes it is necessary to again specifically state other bases of possible affiliation in the regulations. The section would be revised to state that control may be affirmative or negative, provide an example of negative control, state that control may be exercised indirectly through a third party, and state that affiliation may be found under the totality of the circumstances even though no single factor is sufficient to constitute affiliation. These three changes codify long-standing OHA rulings. See, e.g., Size Appeal of Jensco Marine, Inc. , SBA No. SIZ-4330 (1998); Size Appeal of National Welders , SBA No. SIZ-4315 (1998); Size Appeal of First American Tax Valuation, Inc. , SBA No. SIZ-4206 (1996); and Size Appeal of Field Support Services, Inc. , SBA No. SIZ-4176 (1996). (OHA decisions cited in this preamble can be located at www.sba.gov/oha/searchpage.html or by contacting OHA by e-mail at oha@sba.gov or by phone at 202-401-8200.)

This proposed rule would change the title of § 121.103(b) from “ Exclusion from affiliation coverage ” to “ Exceptions to affiliation coverage ” for clarity. In addition, the proposed rule would amend § 121.103(b)(2) to clarify the exception to affiliation for Indian tribes (including Alaska Native Corporations), Community Development Corporations (CDCs) or Native Hawaiian Organizations (NHOs). Specifically, the proposed rule would specify that the exception applies whether the tribe, CDC or NHO owns the concern whose size is at issue directly, or through another entity, which is wholly-owned by the tribe, CDC or NHO. The proposed rule would also provide that affiliation could not be found among several tribally, ANC, CDC or NOH-owned concerns based on common management. This is an extension of the current regulation, which precludes affiliation based solely on common ownership. SBA believes that this change is particularly needed in the context of tribally-owned concerns where tribal board members often are also board members of tribally-owned concerns. SBA specifically asks for comments as to whether this exception from affiliation goes far enough, or whether SBA should provide the same exception to affiliation as that contained for the 8(a) program in § 124.109(c)(2)(iii). SBA notes, however, that the exception to affiliation for the 8(a) program is statutorily based, while the general exception contained in § 121.103(b)(2) is not.

The proposed rule would also add language to both § 121.103(b)(2) and (b)(6) to clarify that SBA may find affiliation other than through common ownership or common management, and with respect to approved mentor/prote ge relationships, other than on the basis of the mentor/prote ge agreement. This is not a change in policy, but a clarification of existing policy.

SBA proposes two changes to § 121.103(c). Section 121.103(c)(1) would be amended by adding the word “voting” to clarify that only voting stock is considered in determining affiliation. In addition, SBA proposes adding a sentence to § 121.103(c)(2) stating that the presumption of control may be rebutted by showing that control does not in fact exist. For example, in Size Appeal of Tri-Fuels, Inc. , SBA No. SIZ-3563 (1992), OHA held that the presumption that minority shareholders owning substantially equal blocks of stock each control a firm was rebutted where a shareholder's agreement specified that each of the shareholders could appoint one of five directors. The proposed rule would also add a new § 121.103(c)(3), which would provide that where a concern's voting stock is widely held and no single block of stock is large as compared with all other stock holdings, SBA will deem the concern's Board of Directors and its Chief Executive Officer (CEO) or President to have the power to control the concern in the absence of evidence to the contrary. In the absence of evidence to the contrary, SBA will find control in such circumstances to rest with the Board of Directors and with the highest ranking officer of the concern (either its CEO or President) because control of the concern must rest somewhere.

Section 121.103(d) discusses affiliation, which arises under stock options, convertible debentures, and agreements to merge. SBA gives present effect to all such arrangements in determining affiliation. SBA proposes to amend the section by setting forth exceptions to this “present effect” rule that have been developed by OHA rulings. See, e.g., Size Appeal of Consolidated Industries, Inc. , SBA No. SIZ-4235 (1997). One proposed exception would not give present effect to agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date. Another proposed exception would not give present effect to options, debentures, and agreements that are subject to conditions that are incapable of fulfillment, speculative, conjectural, remote, or unenforceable under state or Federal law.

Section 121.103(e) covers control through common management and would be amended to clarify that affiliation arises when an officer, director, managing member, or partner controls two concerns. Section 121.103(f) would expand the current regulation at § 121.103(a)(3) covering the concept of “identity of interest.” The concept is that two or more persons with an identity of interest, such as members of the same family or with common investments in more than one concern, may be treated as a single party for size determination purposes. See, Size Appeal of Golden Bear Arborists , SBA No. SIZ-1899 (1984). Although this provision was deleted as a separate basis for affiliation from part 121 in 1996, when SBA streamlined its regulations, see , 13 CFR 121.401(d) (1995), the concept remained under the “General Principles of Affiliation,” and OHA continues to use the identity of interest concept in ruling on affiliation issues. See, e.g., Size Appeal of Lyons Security Service, Inc. , SBA No. SIZ-4264 (1997). SBA believes that for purposes of clarity this rule should be explicitly set forth as a separate basis for finding affiliation in the size regulations.

SBA also proposes to add § 121.103(g), “Affiliation based on the newly organized concern rule.” This proposed section provides that affiliation may arise where former officers, directors, stockholders, managing members (in a limited liability corporation) or key employees of one concern organize a new concern in the same or related industry and serve as its officers, directors, stockholders, managing members or key employees, and the first concern will provide contractual, financial, or other assistance to the new concern. This provision also previously appeared in SBA's size regulations, and SBA believes that it is appropriate to add it back to the regulations as a separate basis for finding affiliation. SBA notes that even after the regulatory change removing the newly organized concern concept as a separate basis for finding affiliation, OHA has continued to use it from the general principles of affiliation contained in the regulations to find affiliation. See, e.g., Size Appeal of Lyons Security Service, Inc. , supra ; Size Appeal of Frontier Applied Sciences, Inc., SBA No. SIZ-4316 (1998).

SBA proposes to redesignate the joint venture regulation currently at § 121.103(f) to § 121.103(h), clarify it, and define its key terms. SBA receives numerous inquiries concerning the definition of the terms “joint venture” and “teaming arrangement.” Therefore, SBA proposes to add definitions of these terms in its regulations. SBA is using the definitions of these terms as set forth in parts 9 and 19 of the Federal Acquisition Regulation (FAR), title 48 of the Code of Federal Regulations, for consistency in the government contracting field. In addition, in § 121.103(h)(5), SBA proposes to add language clarifying that for size purposes a concern must include in its revenues its proportionate share of joint venture receipts, or in its total number of employees its proportionate share of joint venture employees. A concern that was found to be affiliated through the “ostensible subcontractor” rule cannot, however, claim that because SBA found there to be a joint venture in effect for a particular contract it can exclude the receipts/employees of its subcontractor ( i.e. , the ostensible subcontractor), which SBA deemed to be a joint venturer. SBA will exclude the proportionate share of receipts/employees only of true joint venture partners.

SBA is considering another change to the joint venture regulation, as well. SBA's regulations allow joint ventures to be considered small for larger procurements when certain requirements are met. See § 121.103(f)(3). In general, SBA regards joint ventures as short term relationships, which enable two or more concerns to enter into a business relationship to perform a specific contract. SBA is considering adopting a rule that would allow two or more small businesses to form a joint venture relationship that would go beyond a specific contract and still afford them the exclusion from affilation (if the other requirements are met). In other words, the joint venture could be an ongoing relationship that would allow the concerns to seek out several different larger contract opportunities and still get an exclusion from affiliation without requiring the entities to form a separate joint venture for each contract opportunity. SBA is specifically requesting comments on this proposal.

SBA proposes several changes to § 121.104, which pertain to how the annual receipts of a concern are calculated. On January 31, 1996, SBA amended its size regulations to simplify the method by which it determines average annual receipts (aar). Under the current regulations, SBA bases its calculation of a concern's aar solely on information contained in the concern's Federal income tax returns over its last three completed fiscal years. 61 FR 3280 (January 31, 1996). Previously, SBA could rely either on a concern's regular books of account or Federal income tax returns to determine a concern's aar. That policy change was made by SBA in an effort to simplify its size regulations by using the information a business concern reports to the Internal Revenue Service (IRS) for tax purposes to determine the annual receipts of a concern. The 1996 revisions also deleted SBA's requirement that a concern whose small business size status had been protested had to restate its receipts based on the accrual method of accounting if its books of account or tax returns were prepared using a different method of accounting. Since 1996, a number of issues have arisen concerning that revision and SBA now believes the public would benefit from additional regulatory guidance on these matters. In addition, OHA has rendered several significant rulings relating to the calculation of annual receipts and SBA believes these rulings should be codified in SBA's size regulations so the public is aware of them.

Thus, SBA is proposing to modify its definition of receipts in § 121.104(a)(1). This modification would identify the items on a Federal tax return that are to be used to calculate receipts. Currently, the regulation states that receipts consist of “total income” and “gross income” plus the “cost of goods sold.” Although these terms as defined by the IRS include income from all sources, SBA has received comments from some businesses stating that certain types of income not explicitly specified in the regulations could be excluded in determining receipts. To eliminate any such misinterpretation, SBA is proposing to remove the words “total income” and “gross income” and add in their place “gross receipts,” “gross sales,” and “other income.” This change in terminology merely lists the items on a Federal tax return that comprise all or part of total or gross income. In addition, SBA is proposing a revision to the definition of receipts to include interest, dividends, rents and royalties received by partnerships, S corporations, and sole proprietorships. For corporations, income from these sources is included in total income as reported on IRS Form 1120. However, for partnerships and S corporations, these items are reported separately from total income on Schedule K of IRS Form 1165 and 1120S, respectively, and on Schedule C or S of IRS Form 1040 for sole proprietorships. Business entities such as limited liability corporations (LLCs) can elect the tax entity (partnership, corporation, or disregarded entity) that best suits their need. This is often referred to as “check the box.” See 26 CFR 301.7701-3 (located at http://www.access.gpo.gov/nara/cfr/cfr-retrieve.html#page1 ) and IRS Form 8832 (located at http://www.irs.gov/forms_pubs/forms.html ). To be consistent with the corporate tax return, and to continue SBA's long-standing policy of including income from all sources in its definition of receipts, SBA proposes to revise § 121.104(a)(1) to specifically include these sources of income in the definition of receipts.

SBA also proposes to expand its exclusion of receipts received by an agent for another. The existing regulation allows this exclusion only for agents specifically identified in the regulation, such as a travel agent. While the proposed regulation would continue to list those agency-type business entities for which amounts collected for another would be excluded, it would also permit SBA to find a similar agent-type situation to be equally excluded. SBA's concern is that this provision be applied consistently. Thus, SBA would exclude amounts collected for another only when a specific type of business (or industry) deomonstrates that that is the practice in the industry. SBA would not exclude amounts based on specific facts of one business entity. This revision will eliminate the need to conduct a separate study and rulemaking to expand the list of agents that can exclude amounts they receive for another and apply a general principle in the case of agents.

Finally, SBA would also clarify this section to state that the only exclusions from the definition are those specifically provided for in the section and that all other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, and employee-based costs such as payroll taxes, may not be excluded from receipts. See, e.g., Size Appeal of Uniband, Inc. , SBA No. SIZ-4326 (1998); Size Appeal of Aliron International, Inc. , SBA No. SIZ-4317 (1998).

Proposed § 121.104(a)(1) would provide that the Federal income tax return and any amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern, and that SBA will not consider tax returns or amendments filed with the IRS after the initiation of a size determination. This proposed change would preclude a concern that is the subject of a size protest from providing revised Federal tax returns to SBA while a size determination or appeal is pending. If SBA were to accept amended tax returns prepared after initiation of a size determination, SBA would constantly be re-evaluating cases that had already been completed or that were substantially prepared. This would invariably lead to delays in the size determination process and, in the case of pending procurements, delays in contract award. A business concern is expected to base its small business self-certification on information existing at that time. This rule is in accord with OHA rulings that size status must be based on documents in existence and available as of the date of self-certification. See, e.g., Size Appeal of MTB Investments, Inc. , SBA No. SIZ-4239 (1997); Size Appeals of J.L. Associates, Inc. and HLJ Management Group, Inc. , SBA No. SIZ-3102 (1988). Where a concern is determined to be other than small, but legitimately erred in reporting its income on its Federal tax returns, it could subsequently request recertification as a small business from SBA based on amendments filed with the IRS. SBA then would be able to conduct a review of the amended returns without delaying the size determination or the Federal procurement process.

Proposed § 121.104(a)(2) would cover situations where a concern has not filed a Federal income tax return for one or more of its most recently completed three fiscal years. This proposed regulation is intended to codify OHA's ruling in Size Appeal of Troy Systems, Inc. , SBA No. SIZ-4296 (1998). In that appeal, a concern had not filed a Federal income tax return for its most recently completed fiscal year at the time it self-certified as small. The appellant argued that because the tax return was not available, it did not have to submit any information for that year. OHA rejected that argument. The proposed rule provides that in such a situation, SBA may use any other information that is available, such as an audited financial statement or affidavit from the concern's accountant or chief financial officer.

Section 121.104(b)(3) is the formula SBA uses to determine annual receipts when the concern has a “short year” (as defined by the IRS) as one of the years within the period of measurement. The proposed rule would not change the substance of the formula. It would merely clarify the language for ease of use.

Section 121.104(d) applies to the annual receipts of a concern's affiliates and requires the inclusion of an affiliate's receipts during the entire period of measurement, not just the period after affiliation arose. This rule has existed for many years and SBA proposes to simply clarify the language.

Section 121.106 addresses how SBA counts a concern's number of employees. SBA proposes to amend § 121.106(a) to clarify that SBA may utilize the same criteria used by the IRS for Federal income tax purposes in determining whether individuals are employees. See, e.g., IRS Publication 15A, “Employer's Supplemental Tax Guide” ( located at http://www.irs.gov/forms_pubs/forms.html ), which provides guidance on whether a person is a common-law employee, a statutory employee, a statutory nonemployee, or an independent contractor. In addition, SBA's proposed amendment states that it considers “leased” employees to be employees of the concern. The proposed rule continues to direct SBA to consider the totality of the circumstances when determining whether certain individuals are to be considered employees of the concern in question. This “totality of the circumstances” language stems from SBA Size Policy Statement No. 1, published in the Federal Register on February 20, 1986, 51 FR 6099, and that Size Policy Statement continues to have effect.

Further, SBA proposes to amend § 121.106(b)(4) by explicitly describing how employees of affiliates and former affiliates are treated, rather than simply referring to the manner in which annual receipts of affiliates and former affiliates are treated in § 121.104.

SBA also proposes to revise Footnote 14 to the Table of Small Business Size Standards by NAICS Industry in § 121.201. Specifically, the proposed revisions to Footnote 14(b) adds language to clarify that a Federal procurement involving a range of environmental services to restore a contaminated environment does not need to include remedial action as one of three activities to be classified under this size standard. SBA has learned that some Federal agencies have interpreted this footnote to require remedial action to be part of the procurement before it will classify the procurement under “Environmental Remediation Services.” This was not the intention of SBA when it established the size standard. SBA intended this size standard to apply to large scale, multi-disciplined procurements involving environmental remediation. To be classified under Environmental Remediation Services, a procurement must satisfy two requirements. First, the general purpose of the procurement is to restore a contaminated environment. Second, the procurement requires tasks to be performed in a range of activities which can be classified in three or more NAICS industries, or sub-industries which have separate size standards, and that no industry or sub-industry accounts for 50 percent or more of the procurement. The statement “the general purpose of the procurement must be to restore a contaminated environment” was intended to mean that the procurement would be associated with environment remediation by performing a range of activities that would contribute to the eventual cleanup of a site. To clarify SBA's intent, the footnote is revised by stating “the general purpose of the procurement must be to restore or directly support the restoration of a contaminated environment * * *.” Also, added is a list of activities usually associated with environmental remediation and related activities. This language makes clear that a procurement involving several activities, all in separate NAICS codes, that directly contribute to the eventual cleanup of a contaminated environment can be classified under this size standard, even though another procurement would be awarded to perform the actual cleanup.

SBA proposes to eliminate the existing dual size standard that currently applies to applicants for SBA financial assistance (§ 121.301(a)), and replace it with a single size standard requirement. Under the current regulation, an applicant for financial or disaster assistance must be small under two size standards. An applicant, along with its affiliates, must be small for the size standard for the industry in which the applicant alone is primarily engaged, and for the industry in which the applicant along with its affiliates is primarily engaged. Since most applicants are small businesses well below SBA's size standards, they generally do not have extensive affiliation relationships with other business concerns. Thus, SBA believes a dual size standard requirement is not needed for these programs. SBA also believes that the wording of the dual size standard is not clear, and has caused confusion as to its proper application. For these reasons, SBA is proposing a single size standard requirement in which a business concern eligible for financial and disaster assistance is a concern that, combined with its affiliates, does not exceed the size standard of the primary industry of the applicant concern alone.

Section 121.301(d)(1), which contains the size standard for surety bond guarantee assistance, would be amended by adding the words “together with its affiliates” to make it clear that the receipts of all affiliates must be included. This change is for clarity purposes only, as SBA always includes the receipts or employees of a concern's affiliates when determining the concern's size. SBA also proposes to revise § 121.301(e) to state that an applicant for financial assistance must use all of the assistance within a labor surplus area (LSA) in order to obtain the benefit of the 25% size standard differential. The current regulation does not clearly provide what percentage of work must be performed in an LSA. It has always been SBA's intent to require 100% of the assistance be used in an LSA in order to get the size differential, but a recent case has raised the question as to whether the regulation could be read to permit less than 100% of the assistance to be used in an LSA. This proposed change would clarify SBA's position in this regard.

Section 121.302 addresses when SBA determines the size status of an applicant for SBA financial assistance. The section would be amended to include a provision for financial assistance from a Small Business Investment Company (SBIC) licensee and from a New Markets Venture Capital Company.

Section 121.401, covering what procurement programs are subject to size determinations, would be amended for plain language purposes.

The proposed rule would amend the section heading for § 121.402 to read “What size standards are applicable to Federal Government Contracting programs?” In addition, SBA proposes to amend § 121.402(a) to state that a contracting officer (CO) must use the size standard in effect at the time the solicitation is issued. If SBA amends a size standard and it becomes effective after the solicitation is issued, then the CO would not be required to amend the solicitation and use the new size standard. However, the proposed regulation does note that if the size standard is amended and becomes effective before the date initial offers are due, the CO may modify the solicitation and use the new size standard. This has been a long-standing policy of SBA's, and SBA believes it should be specifically set forth in the regulations for clarity purposes.

Section 121.404 would be amended to add additional exceptions to the general rule that the size status of a concern is determined as of the date the concern submits a written self-certification that it is small to the procuring agency as part of its initial offer including price. Proposed § 121.404(a)(1) would provide that a concern applying to be certified as a Participant in SBA's 8(a) Business Development (8(a) BD) program, as a small disadvantaged business (SDB), or as a HUBZone small business must qualify as small as of the date of certification by SBA. This is not a change in SBA policy. SBA currently requires a concern to be small at the date of certification for these programs, but those regulatory requirements are contained in the program specific regulations only. The proposed rule would simply add those requirements to the size regulations as well. When requiring an 8(a) BD, HUBZone, or SDB applicant to be small for “its primary industry classification,” the concern's primary industry classification is determined by looking solely at the applicant concern ( i.e., by excluding its affiliates), but the size of the concern is determined by including the receipts or employees of all affiliates.

Another new exception would apply to the case where a solicitation is modified so that initial offers are no longer responsive to the solicitation. In such a case, proposed § 121.404(a)(4) would provide that a concern must recertify that it is small at the time it submits a responsive offer which includes price to the modified solicitation. SBA believes that this makes sense and flows from existing SBA policy. If a solicitation changes drastically so that a previous offer would no longer be responsive, it is in effect a new solicitation. As such, a firm must certify its status as a small business with respect to the new solicitation.

The proposed rule would also add an exception for the subcontracting program. Under proposed § 121.404(a)(5), for subcontracting purposes, a concern must qualify as small as of the date that it certifies that it is small for the subcontract. The date of offers for or the award of the prime contract are not relevant to whether a concern is small for a subcontract. In addition, the applicable size standard would be the size standard in effect at the time the concern self-certifies that it is small for the subcontract, not the size standard that may have been in effect when the prime contract was awarded or otherwise.

The proposed rule would add a final exception applying to two-step sealed bidding under subpart 14.5 of the FAR, 48 CFR. Under two-step sealed bidding, the proposed rule would require that a concern must qualify as small as of the date that it certifies that it is small as part of its step one proposal. SBA believes that it makes sense to establish size as of the date of the step one proposal in order to give certainty early on in the process who is and who is not eligible for such an award.

Proposed § 121.404(b) would specify that a concern that qualified as a small business at the time it receives a contract is considered to be a small business throughout the life of that contract. This is not a change in policy, but merely puts into the regulations SBA's long-standing position on this issue. Proposed § 121.404(c) covers the case where an existing contract is “renewed” by a procuring activity. SBA believes that the renewal of an existing contract is a term that is imprecisely used. Renewal should refer to a follow-on contract. In that case, the date at which size is determined is set by the general rule specified in § 121.404(a) ( i.e., the date that the concern submits a written self-certification that it is small to the procuring agency for the renewal contract). Sometimes the term “renewal” is incorrectly used where a procuring agency exercises an option. In that case, there is no new contracting action. The authority for the option relates back to the original contract. As set forth in proposed § 121.404(b), mentioned above, as long as a concern qualified as a small business at the time it receives a contract, it is considered to be a small business throughout the life of that contract. Therefore, a concern that was small at the time of award would always be considered a small business for purposes of any options relating to that contract. Proposed § 121.404(b) would specifically provide that where a concern grows to be other than small, the procuring agency may exercise options and still count the award as an award to a small business. SBA is, however, considering a rule which would place a limit on the amount of time a concern would be deemed a small business. Specifically, SBA is considering a separate rule making that would permit a procuring agency to treat a concern as a small business for no more than 5 years from the date of award.

Section 121.406(b)(1)(ii) would be amended to delete the requirement that a nonmanufacturer must normally sell the items being supplied to the general public. This rule was based on provisions of the Walsh-Healey Public Contracts Act, which permitted Federal acquisitions of supplies only from manufacturers or “regular dealers.” One of the requirements for being a regular dealer was to sell items to the general public. These provisions of the Walsh-Healey Act were repealed by the Federal Acquisition and Streamlining Act of 1994. SBA believes that requiring a firm to sell to the general public is overly restrictive. A firm may be a legitimate, viable business selling exclusively to government entities. SBA does not believe that a firm that sells only to the government should be excluded from being considered a small business just because it does not generally sell items to the general public. Therefore, so long as a firm normally sells the type of item either to public or private entities, it may qualify as a small business nonmanufacturer under SBA's size regulations. The proposed rule would also change the provision to require the concern to normally sell the same “type of item.” The current regulation simply states that a concern must sell “the items” being supplied. SBA believes that the current provision could be read to be overly restrictive. Under the proposed rule, a firm would not need to have a track record of selling the exact item, but only items of the same type.

The proposed rule would also add clarifying language to § 121.406(b)(2) to explain what a firm that makes changes to an item and then resells it must do in order to qualify as an eligible small business manufacturer. The current regulation states that firms that perform only minimal operations upon the item being procured do not qualify as manufacturers. The proposed rule adds language, which states that “[f]irms that add substances, parts, or components to an existing end-item to modify its performance will not be considered the end-item manufacturer where those identical modifications can be performed by and are available from the manufacturer of the existing end item.” If a firm adds something to an item that the manufacturer of that existing item does not provide, the firm will be considered the manufacturer of the ultimate end item ( i.e., the item plus the addition). For example, if firm A manufactures a saw, the Government wants to purchase a saw with a safety switch, and firm B adds a safety switch to the saw, firm B, and not firm A, will be considered the manufacturer of the end item ( i.e., saw with safety switch) provided firm A does not itself make or provide a saw with safety switch. Similarly, a firm that merely installs a video card that the manufacturer of a computer could have installed will not be considered the manufacturer of computer.

Currently, under § 121.410, a business concern is small for purposes of a subcontract awarded by a Federal prime contractor if: (a) For subcontracts of $10,000 or less, the concern bidding on the subcontract has 500 or fewer employees averaged over each pay period of the previous year, or, (b) for subcontracts of more than $10,000, the concern bidding on the subcontract is no larger than the size standard corresponding to the NAICS industry that best represents the scope of work of the subcontract.

This rule proposes to eliminate the 500-employee size standard provision for subcontracts of less than $10,000 and require that the size standard of the NAICS industry that best matches the purpose of the subcontract be used. This change merely adopts the size standard policy now in effect for subcontracts of $10,000 or greater.

SBA is proposing this change for two reasons. First, this proposed change makes the size standards requirements consistent for all prime Federal contracts and for subcontracts awarded by prime contractors. Under this policy, the small business status would not change depending on the size of a subcontract or whether the contract was awarded as a Federal prime contract or as a subcontract of a Federal prime contract. SBA is also concerned about inconsistencies of two-tiered subcontracting size standards. A prime contractor awarding a subcontract classified in a NAICS industry with a receipt-based size standard (primarily in the construction and service industries) will have a higher size standard associated with subcontracts of less than $10,000 than the size standard for the same type of subcontract but valued over $10,000. For example, a subcontract for analytical testing services falls under NAICS code 541620, Environmental Consulting Services, and SBA has established a size standard for this industry of $6 million in average annual receipts. If the value of the subcontract is more than $10,000, a small business is defined as one with $6 million or less in average annual receipts. A firm of this size has about 60 to 70 employees. Yet, under the current regulations, a subcontract of less than $10,000 allows firms of up to 500 employees to qualify as small businesses. SBA believes that one size standard should apply to the same type of subcontracts, regardless of their value.

Second, the two-tiered size standard based on the size of the subcontract is not widely known or followed by prime contractors and small businesses. SBA believes establishing a policy of having a consistent size standard requirement at the prime and subcontracting level is more desirable than retaining and educating the prime contractors and subcontractors about two-tiered size standards. Most prime contractors verify the status of their small business subcontractors based on the size standard of the subcontractor's primary NAICS industry or based on the size standard of the prime contract. These methods for ascertaining the small business status of a subcontractor lead to an incorrect small business determination in many cases, since the subcontractor must be small based on the industry of the subcontract, which is not necessarily the same as the primary industry of the subcontractor or the industry of the prime contract. SBA believes that the proposed change reflects how most prime contractors have been administratively determining the small business status of their subcontractors. Enforcing the current two-tiered size standard regulation would in essence subject prime contractors to a different size standard requirement than generally being followed. Thus, change should have little if any impact.

SBA invites comments to the elimination of the two-tiered subcontracting size standards requirement. SBA also welcomes suggestions on other approaches to size standards for the Subcontracting Program. Alternative size standards should address how they would be an improvement over the current and proposed subcontracting size standards and how they best protect the interests of small business.

Section 121.411 would be amended by deleting the words “Procurement Automated Source System (PASS)” and substituting the words “Procurement Marketing & Access Network (PRO-Net).” PASS no longer exists and has been replaced by PRO-Net. PRO-Net is an online database of information on thousands of small businesses. PRO-Net serves as a search engine for contracting officers, a marketing tool for small companies, and a “link” to procuring opportunities and other important information.

Sections 121.601 through 121.604 would be changed by removing all references to “Minority Enterprise Development” and “MED” and substituting “8(a) Business Development” and “8(a) BD.” SBA no longer uses the former terms.

The proposed rule would amend § 121.702(a) to recognize that for purposes of the SBIR program a joint venture is permitted where each entity to the venture is at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States. The current requirement does not contain such an exception for joint ventures, and requires 51 percent direct ownership by individuals who are U.S. citizens or permanent resident aliens in every case. This change is being made to make the size regulations consistent with a recent change made to the SBIR Policy Directive.

SBA proposes to amend § 121.1001 entitled “Who may initiate a size protest or request a formal size determination?” Section 121.1001(a)(1)(i) presently allows “any offeror” to file a size protest in connection with a particular procurement or sale. The purpose of the proposed regulation is to give standing to those concerns whose successful challenge would enable them to compete for award. This section would be changed to provide that “any offeror whom the contracting officer has not eliminated for reasons unrelated to size” may file a protest. An offeror that has been eliminated for reasons unrelated to size would not be able to compete for award if the protest were successful, and, thus, should not have standing to question another firm's size status. This change would codify long-standing OHA precedent on this issue. See, e.g., Size Appeal of Arcata Associates, Inc. , SBA No. SIZ-3377 (1990).

The proposed rule would amend § 121.1001(a)(5)(iii) applying to protests under the SDB program to delete the reference to the Associate Administrator (AA) for MED, and substitute the SBA Associate Administrator for 8(a) Business Development. Section 121.1001(a)(6)(iv), applying to protests under the HUBZone program, would be changed to delete the reference to the AA for Government Contracting and substitute SBA's AA for the HUBZone program. Section 121.1001(a)(7)(3), applying to any unrestricted Government procurement in which status as a small business may be beneficial, would be changed by deleting the reference to the AA for MED and substituting the SBA AA for 8(a) BD.

The proposed rule would add new paragraphs (b)(7), (b)(8) and (b)(9) to § 121.1001 to authorize SBA program personnel to request formal size determinations regarding a firm's status as small for SDB certification, HUBZone certification, and being listed as a small business on PRO-Net, respectively.

SBA proposes to add a new § 121.1004(a)(4) to cover instances where notification of contract award is posted on the Internet, as authorized under Simplified Acquisition Procedures (SAP). In such cases, SBA proposes that a size protest must be made to the contracting officer within five business days after the electronic posting. SBA also proposes to add a new § 121.1004(a)(5) that would provide that where no written notification is required, either prior to or at the time of award, a protest will be considered timely if filed within five days after receipt of verbal notification from the contracting officer or other agency representative. Under SAP, there is no requirement for the contracting officer to provide either pre-award or award notification to unsuccessful offerors. Consequently, the date of verbal notification or date of posting on the internet will be considered the start of the 5-day period allotted for a timely size protest. There may be other instances where there is no notice provided ( e.g. , award of a task order under a schedule contract), and this provision would apply there as well.

SBA proposes to amend § 121.1007 containing the requirement that a size protest must allege specific facts by restoring the six examples that were formerly found at § 121.1604(a) (1995). SBA has received comments that these examples were helpful in determining whether or not a particular protest satisfies the specificity requirement.

The proposed rule would amend § 121.1008, describing what occurs after SBA receives a size protest or request for formal size determination. The proposed rule would require the SBA Government Contracting Area Director to notify SBA's AA/8(a) BD, if a protest involves the size status of a concern that SBA has certified as a small disadvantaged business, and notify the appropriate SBA district office, if a protest pertains to the apparent successful offeror on a requirement that has been reserved for competition among eligible 8(a) Participants. Section 121.1008(d) would be amended by adding a sentence requiring a concern whose size status is at issue to furnish information about its alleged affiliates to SBA, notwithstanding any third party claims of privacy or confidentiality, because SBA does not disclose information obtained in the course of a size determination except as permitted by Federal law. This is intended to codify several OHA rulings. See, e.g., Size Appeal of Donovan Travel, Inc., d/b/a Carlson Wagonlit Travel , SBA No. SIZ-4270 (1997); Size Appeal of Quantrad Sensor, Inc., SBA No. SIZ-4255 (1997).

The proposed rule would add clarifying language to § 121.1009(b), “ Basis for determination .” Section 121.1009(g), “ Results of an SBA Size Determination ,” would be amended by making it clear that contract award may be made based on a formal size determination by a SBA Government Contracting Area Director. It would also be amended to provide that an OHA decision on appeal will apply to the pending acquisition or sale if the decision is received before award. OHA decisions received after contract award will not apply to that acquisition or sale unless the contracting officer agrees to apply the OHA decision to that acquisition or sale.

The proposed rule would amend § 121.1101 by adding a new second paragraph providing that OHA will not review a formal size determination where the contract has been awarded and the issues raised in a petition for review are contract specific, such as compliance with the nonmanufacturer rule or joint venture/ostensible subcontractor rule. This change would conform the size appeal regulation to the re-certification regulation at § 121.1010(b) and codify long-standing OHA rulings. See, e.g., Size Appeal of Lightcom International, Inc., SBA No. SIZ-4118 (1995).

Currently, § 121.1103 simply states that the procedures for NAICS code appeals are contained in section 19.303 of the Federal Acquisition Regulation (FAR), 48 CFR 19.303. SBA proposes to amend this section by setting forth in detail the specific procedures for NAICS code appeals rather than referring the reader to the FAR. The procedures set forth do not differ from those currently in the FAR.

Section 121.1205 would be amended by stating that a list of classes of products for which waivers of the Nonmanufacturer Rule have been granted may be obtained on SBA's Web site at www.sba.gov/GC/approved.html.

13 CFR part 134 contains rules of procedure governing cases before OHA, including size appeals and former SIC (now NAICS) code appeals. SBA is proposing several amendments to part 134, mainly to conform to the changes being proposed for part 121.

13 CFR 134.102 sets forth OHA's jurisdiction. The proposed rule would amend paragraph (k) to authorize an affected party to appeal a determination by the SBA Government Contracting Area Office as to whether two or more concerns are affiliated for purposes of SBA's financial assistance programs, or other programs for which an affiliation determination was requested. SBA financial assistance personnel may seek assistance from a Government Contracting Area Office in determining whether a loan applicant is affiliated with one or more other business entities. This may not be a “formal size determination” in the normal sense because the concerns even if affiliated may still qualify as small. However, this determination is necessary in order to determine whether the borrower, including the borrower's affiliates, has exceeded the $750,000 loan limit amount set forth in § 120.151 of this chapter. If the Area Office finds affiliation such that the borrower is determined to be ineligible to receive additional loan amounts, the firm may not currently appeal that determination to OHA as it is not a “formal size determination.” This change would permit such an appeal.

Section 134.314 would be amended by adding a provision that the appellant has the burden of proof, by a preponderance of the evidence, in both size and NAICS code designations. This provision was formerly in the size regulations ( see § 121.1707 (1995)), and since its deletion from the regulations, OHA has adopted this premise in its rulings. See, e.g., Size Appeal of Rebmar, Inc. , SBA No. SIZ-4173 (1996); SIC Appeal of The Scientific Consulting Group, Inc. , SBA No. SIZ-4186 (1996). SBA believes that it is appropriate to restore the provision to the regulations.

Finally, SBA proposes amending § 134.316(a) to state that an OHA judge will decline to decide substantive issues not properly raised on appeal, or which are abandoned, or have become moot. This would codify OHA precedent. See e.g., Size Appeal of Lightcom International Inc. , SBA No. SIZ-4118 (1995), Size Appeal of Infotec Development, Inc. , SBA No. SIZ-4197 (1996).

OMB has determined that this proposed rule does not constitute a “significant regulatory action” under Executive Order 12866. This rule would clarify SBA's procedural and definitional size rules. As such, the rule would have no effect on the amount or dollar value of any Federal contract requirements or of any financial assistance provided through SBA. Therefore, the rule is not likely to have an annual economic effect of $100 million or more, result in a major increase in costs or prices, or have a significant adverse effect on competition or the United States economy. In addition, the proposed rule does not create a serious inconsistency or otherwise interfere with an action taken or planned by another agency, materially alter the budgetary impact of entitlements, grants, user fees, loan programs or the rights and obligations of such recipients, nor raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA certifies that this rule, if adopted in final form, would not impose new reporting or record keeping requirements.

For purposes of Executive Order 12988, SBA has drafted this proposed rule, to the extent practicable, in accordance with the standards set forth in section 3 of that Order.

For purposes of Executive Order 13132, SBA has determined that this proposed rule has no federalism implications warranting the preparation of a Federalism Assessment.

SBA has determined that this proposed rule, if adopted in final form, will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612. Although the rule amends several definitions concerning the size of a business concern, the majority of these amendments are clarification of current policy.

For the reasons set forth in the supplementary information, SBA proposes to amend parts 121 and 134 of Title 13, Code of Federal Regulations, as follows:

The Federal Alcohol Administration Act (FAA Act) at 27 U.S.C. 205(e) requires that alcohol beverage labels provide the consumer with adequate information regarding a product's identity while prohibiting the use of deceptive information on such labels. The FAA Act also authorizes the Bureau of Alcohol, Tobacco and Firearms (ATF) to issue regulations to carry out the Act's provisions.

Regulations in 27 CFR part 4, Labeling and Advertising of Wine, allow the establishment of definitive viticultural areas. The regulations allow the name of an approved viticultural area to be used as an appellation of origin on wine labels and in wine advertisements. A list of approved viticultural areas is contained in 27 CFR Part 9, American Viticultural Areas.

Section 4.25a(e)(1), title 27 CFR, defines an American viticultural area as a delimited grape-growing region distinguishable by geographic features, the boundaries of which have been delineated in subpart C of part 9.

Section 4.25a(e)(2) outlines the procedure for proposing an American viticultural area. Any interested person may petition ATF to establish a grape-growing region as a viticultural area. The petition should include:

(a) Evidence that the name of the proposed viticultural area is locally and/or nationally known as referring to the area specified in the petition;

(b) Historical or current evidence that the boundaries of the viticultural area are as specified in the petition;

(c) Evidence relating to the geographical characteristics (climate, soil, elevation, physical features, etc. ) which distinguish the viticultural features of the proposed area from surrounding areas;

(d) A description of the specific boundaries of the viticultural area, based on features which can be found on United States Geological Survey (USGS) maps of the largest applicable scale; and

(e) A copy (or copies) of the appropriate U.S.G.S. map(s) with the boundaries prominently marked.

If this proposed viticultural area is approved, bottlers using brand names similar to the name of the viticultural area must review their existing products to insure that they are eligible to use the viticultural area's name as the appellation of origin. To be eligible, 85% of the grapes in the wine must be grown within the viticultural area. If a product is not eligible to use the viticultural area name as an appellation, the bottler must obtain approval of a label with a different brand name for that wine. (See 27 CFR 4.39(i).)

ATF has received a petition proposing a new viticultural area to be called “Bennett Valley.” The proposed 8,140-acre viticultural area is located in Sonoma County, California, just southeast of the city of Santa Rosa and approximately 45 miles northeast of San Francisco. Sonoma County is entirely within the North Coast viticultural area. The petitioned area is almost entirely within the Sonoma Valley viticultural area, with a small 281-acre overlap into the Sonoma Coast viticultural area. It also partially overlaps the Sonoma Mountain viticultural area, which is entirely within the Sonoma Valley area. Currently, there are 650 acres of planted vineyards in the proposed area.

This proposed viticultural area is about 5.5 miles long, northwest to southeast, 3.15 miles across at its widest point, and resembles the shape of a downward-pointing bullet. The floor of Bennett Valley runs the petitioned area's length, and Bennett Valley Road meanders from its northwest to southeast boundaries. This proposed viticultural area, including the surrounding hills and mountains, comprises the Matanzas Creek watershed. This creek flows west into the Russian River drainage system and eventually to the Pacific Ocean. The petition states that differences in topography, soils, and climate distinguish the proposed Bennett Valley viticultural area from the surrounding areas.

According to the petitioner, the area is locally known as Bennett Valley. The valley is named after James N. Bennett, an 1849 immigrant settler who arrived by wagon train. His arrival coincided with the 1849 Gold Rush that brought settlers to California, helping Bennett Valley grow as an agricultural region known for grapes, apples, hay, wheat, oats, barley, and livestock. The Bennett Valley Grange Hall was built in 1873, and it still stands on Grange Road within the proposed area as noted on the USGS Santa Rosa, CA, quadrangle map. The petition also includes an excerpt from the 1877 “Historical Atlas Map of Sonoma County,” which states that if Bennett Valley “has any specialty, it is for fruit and grape culture.”

The petition also offers documentation for the current usage of the proposed area's name. This includes references from a book by Don Edwards, “Making the Most of Sonoma County, A California Guide,” which states, “Bennett Valley—squeezed between Taylor Mountain and the Sonoma Mountains on the west, Bennett Peak (Yulupa to the Indians) and Bennett Ridge to the east—has been ranching and farming country since the days when Missourian William Bennett settled here.” The Bennett Valley Homeowner's Association's web site includes a boundary description similar to that of the proposed viticultural area. The Sonoma County telephone book has 24 business listings using the Bennett Valley name, including the Bennett Valley Union School District. The Bennett Valley School is identified on the USGS Santa Rosa, CA, quadrangle map just inside the proposed area's northwest boundary line. The petition also includes a reference to the Sonoma County government's Bennett Valley Area Plan. Only the Plan's northern-most portion, the petition notes, lies outside of the proposed viticultural area's boundaries.

The petition states that the proposed area's boundaries are based on historical and current viticulture, geographical features, and a unique microclimate. The petition lists 24 grape growers who are historically linked with Bennett Valley agriculture. In 1862, early settler Isaac DeTurk planted a 30-acre vineyard at the base of Bennett Mountain. By 1878, the petition adds, he was producing 100,000 gallons of wine from his own and purchased grapes at his winery located within the proposed area on Grange and Bennett Valley roads.

Modern accounts referenced in the petition indicate that, around the turn of the century, phylloxera disease killed some of Bennett Valley's estimated 2,000 vineyard-acres, while Prohibition ended the balance of the Valley's wine grape industry. A resurgence of wine grape growing in Bennett Valley started in 1975, the petition notes, when the Matanzas Creek Winery planted 20 acres of grapes. The proposed area now has approximately 650 vineyard-acres. Twelve of the thirteen petition signers are vineyard owners within the proposed area.

As described in the petition, the proposed boundaries of the Bennett Valley viticultural area are based on a combination of terrain and soil similarities, a climate with a strong coastal influence in a sheltered, inland location, and the common denominator of being within the Matanzas Creek watershed.

Bennett Valley is surrounded on three sides by the Sonoma Mountain Range and, on the north side, by the city of Santa Rosa. The mountainous boundaries, generally defined by ridgelines, indicate the outer limits of the Matanzas Creek watershed. Taylor and Bennett Mountains provide anchors for the proposed area's western and eastern boundary, respectively, while the 1,600-foot elevation line on Sonoma Mountain defines the southern boundary. Elevations within the proposed area range from 250 to 1,850 feet, with most vineyards between the 500 and 600-foot level.

The proposed area's northwestern boundary starts at Taylor Mountain's peak and continues straight northeast, coinciding with a portion of the Sonoma Valley viticultural area boundary line. The lower northern elevations open to the Santa Rosa Valley and city of Santa Rosa, where, at the northernmost point, the boundary line turns southeast at a 65-degree angle. The northeastern and eastern boundaries, primarily a series of straight lines connecting elevation points, follow the ridgelines through the peak of Bennett Mountain that outline the eastern side of the Matanzas Creek watershed.

The southern boundary follows the 1600-foot elevation line along Sonoma Mountain's north side and then a westerly straight line to a 900-foot elevation point. The southwestern boundary uses intersections and markers, within the Matanzas Creek watershed, to close the boundary line at Taylor Mountain. Crane Canyon, on the proposed area's southwestern side, provides an opening in the mountains for the cooling coastal fogs and breezes from the Pacific coast, which, according to the petitioners, moderate the Bennett Valley's climate.

The proposed Bennett Valley viticultural area's soils vary from the surrounding areas, the petition notes, due to the different composition percentages of its predominant Goulding-Toomes-Guenoc Association. The petition adds that there are differences in the distribution of Spreckels, Laniger, Haire, and Red Hill clay loam soils between the proposed area and nearby portions of the Sonoma Valley viticultural area. It also states that the soils in the Sonoma Mountain viticultural area, other than the overlapping portion, vary from those within the proposed Bennett Valley area.

The foothills soils, comprised primarily of the Goulding-Toomes-Guenoc Association, are of a volcanic origin that include lava flows, tuff beds and sandstone, gravel, and some conglomerate, according to the petitioner. The lower slopes and valley floor soils have more variety, including some of alluvial origin. The distribution of Spreckels loam, a well drained loam with clay subsoil, the petition states, is about 24 percent in the proposed Bennett Valley area, 27 percent in the Sonoma Mountain viticultural area, and almost 42 percent in the common area that overlaps the two areas.

The proposed Bennett Valley viticultural area has a unique microclimate, resulting from its sheltered inland location and access to coastal cooling elements, according to the petition. It notes that the broad and tall Sonoma Mountain diverts the foggy, south-to-north coastal breezes of the Petaluma gap to the north and into the Crane Canyon gap. This gap, between Sonoma Mountain and Taylor Mountain, funnels the coastal fog and winds into the Bennett Valley. Rainfall amounts in the Bennett Valley area are 17 to 25 percent higher than in the areas to the immediate north and east, according to the petition, which also quotes Valley residents who state that rainfall amounts vary with elevation and proximity to the mountains and their wind patterns.

The proposed Bennett Valley area is almost entirely within the Sonoma Valley viticultural area. The Sonoma Mountain viticultural area, which is totally within the larger Sonoma Valley viticultural area, overlaps 13.1 percent of the proposed Bennett Valley area. A small 3.4 percent of the proposed area overlaps into the Sonoma Coast viticultural area. The Sonoma Coast and the interior Sonoma Valley viticultural areas, both within the North Coast viticultural area, share a common boundary line along Sonoma Valley's western border. This common boundary line is the site of the petitioned boundary's small overlap into the Sonoma Coast area.

The following table summarizes the proposed 8,140-acre Bennett Valley viticultural area's overlaps with other, established viticultural areas:

The petitioner believes these overlapping acreages provide more of a transition than a definitive contrast between the proposed and established viticultural areas.

The proposed Bennett Valley viticultural area is 96.6 percent within the Sonoma Valley viticultural area. The petitioned Bennett Valley area occupies 7,859 acres, or approximately 7 percent, of the larger Sonoma Valley viticultural area's acreage. According to the petition, the Sonoma Valley viticultural area petition included the Bennett Valley due to its similar soil and climate. The Sonoma Mountain viticultural area is totally within, and located in the western portion of, the Sonoma Valley viticultural area.

The proposed Bennett Valley viticultural area overlaps 1,063 acres (13.1 percent of its territory) of the established Sonoma Mountain viticultural area, which is itself totally within the Sonoma Valley viticultural area. The overlap is in the southeast corner of the Bennett Valley area and the northwestern portion of the Sonoma Mountain area. The overlap is seen on the Glen Ellen and Kenwood USGS maps in Sections 11 through 14, T6N, R7W. The overlap is mainly that portion of the proposed Bennett Valley viticultural area north of the 1,600-foot elevation line on Sonoma Mountain in Sections 13, 14, and 23, and the land east of the common line between Sections 15 and 14, as shown on the Glen Ellen map. The northern limit of the overlap is the 800-foot elevation line from its southern most intersection with the common line between Sections 10 and 11 to its intersection with Bennett Valley Road, as shown on the Kenwood map.

According to the petition, the overlap area between the proposed Bennett Valley and the Sonoma Mountain viticultural areas contains common geographic features, such as the Matanzas Creek watershed, similar vineyard elevations, and the “thermal belt” phenomenon that drains cold air and fog from the upper mountain slopes to the lower elevations, which moderates temperatures at the lower levels. The thermal belt phenomenon is seen in this overlap due to its proximity to the Crane Canyon wind gap, which delivers the Pacific's cooling marine influence to the proposed area.

The petition also notes strong soil similarities in this overlapping area. For example, Goulding clay loam covers 30.2 percent of the proposed Bennett Valley area, 33.4 percent of this overlapping area, and from 7.4 to 49.8 percent of other sections of Sonoma County viticultural areas. Goulding cobbly clay loam covers 18.5 percent of the Bennett Valley area, 19.0 percent of the Sonoma Mountain overlap, and covers 10.8 to 43.1 percent of other areas.

The petition also quotes several Sonoma Mountain area grape growers who state that diverse growing conditions exist on different sides, and at various elevations, on Sonoma Mountain. Specifically, they note, the overlapping area benefits from the coastal influence and wind, which contrasts to the protected, warmer, eastern side of the mountain.

The proposed Bennett Valley viticultural area overlaps approximately 281 acres (3.4 percent of its territory) of the established Sonoma Coast viticultural area. This overlapping area is in two portions on the petitioned area's west side. The first is located north of Crane Canyon Road and can be found in Sections 9 and 8, T6N, R7W, on the Cotati and Santa Rosa USGS maps. The second is located in Sections 15 and 16, T6N, R7W, on the Cotati map. This section of the Sonoma Valley and Sonoma Coast viticultural areas common boundary line spans a remote section of the Sonoma Mountains, where, according to the petitioners, determining the exact limits of the Matanzas Creek watershed might have challenged previous petitioners in drawing the two areas' boundary lines.

The petitioners originally intended to follow the Sonoma Valley area's western border and not overlap into the Sonoma Coast area. However, in the overlap north of Crane Canyon Road, the petitioners discovered that the former George N. Whitaker vineyard, a historically significant Bennett Valley vineyard, straddled the common boundary line between the Sonoma Coast and Sonoma Valley viticultural areas. The vineyard, and the immediately surrounding land, is similar to the proposed Bennett Valley viticultural area due to its drainage into the Matanzas Creek watershed, its direct receipt of the cooling marine influence from the Crane Canyon gap, and terrain and soils that are consistent with petitioned area. To avoid again dividing this vineyard between two viticultural areas, the petitioners extended their boundary line about a quarter-mile west into the Sonoma Coast viticultural area, causing the small, 281-acre overlap.

The petitioner claims the terrain, soils, and microclimate of this Sonoma Coast overlap are consistent with the proposed Bennett Valley viticultural area. The area is totally within the Matanzas Creek watershed and on the Sonoma Valley side of the dividing ridge. The elevations, from 680 to 960 feet, are consistent with the surrounding petitioned areas. The Goulding soils predominate the overlapping area and are similar to the rest of the proposed Bennett Valley area. The Crane Canyon gap gives this overlap area the same cooling marine influence as the rest of the proposed area.

The proposed viticultural area is in Sonoma County, California. The four approved USGS maps for determining the boundary of the proposed Bennett Valley viticultural area are the Santa Rosa Quadrangle, California—Sonoma Co., 7.5 Minute Series, edition of 1994; Kenwood Quadrangle, California, 7.5 Minute Series, edition of 1954, photorevised 1980; Glen Ellen Quadrangle, California—Sonoma Co, 7.5 Minute Series, edition of 1954, photorevised 1980; and Cotati Quadrangle, California—Sonoma Co, 7.5 Minute Series, edition of 1954, photorevised 1980.

The proposed Bennett Valley area is of an irregular five-sided shape, resembling a downward-pointing bullet, with Taylor Mountain, the city of Santa Rosa, and Bennett Mountain to the north, while the large Sonoma Mountain anchors the south side. The proposed viticultural area is totally within the North Coast viticultural area, is almost entirely within the Sonoma Valley viticultural area, with a small overlap into the Sonoma Coast viticultural area. The proposed area also overlaps a portion of the Sonoma Mountain viticultural area, which is itself totally within the Sonoma Valley area.

ATF requests comments from all interested persons. Comments received on or before the closing date will be carefully considered. Comments received after that date will be given the same consideration if it is practical to do so. However, assurance of consideration can only be given to comments received on or before the closing date.

ATF is especially interested in comments about the small overlap into the Sonoma Coast viticultural area. This overlap departs from the common course of two established viticultural area boundary lines to avoid dividing an established vineyard that appears to meet the criteria of the Bennett Valley viticultural area. ATF is also interested in comments about the proposed area's overlap with the Sonoma Mountain viticultural area. Refer to the “Overlapping Areas” section of this document for more detailed information.

ATF will not recognize any submitted material as confidential and comments may be disclosed to the public. Any material that a commenter considers confidential or inappropriate for disclosure to the public should not be included in the comments. The name of the person submitting a comment is not exempt from disclosure.

By U.S. Mail: Written comments may be mailed to ATF at the address listed in the ADDRESSES section.

By Fax: Comments may be submitted by facsimile transmission to 202-927-8602, provided the comments: (1) Are legible; (2) are 8 1/2 ″ x 11″ in size, (3) contain a written signature, and (4) are five pages or less in length. This limitation is necessary to assure reasonable access to the equipment. Comments sent by fax in excess of five pages will not be accepted. Receipt of fax transmittals will not be acknowledged. Facsimile transmitted comments will be treated as originals.

By E-Mail: Comments may be submitted by e-mail to nprm@atfhq.treas.gov. E-mail comments must: contain your name, mailing address and e-mail address, and reference this notice number. We will not acknowledge the receipt of e-mail. We will treat comments submitted by e-mail as originals.

Comments may also be submitted using the comment form provided with the online copy of this proposed rule on the ATF Internet web site at http://www.atf.treas.gov.

By Public Hearing: Any person who desires an opportunity to comment orally at a public hearing on the proposed regulation should submit his or her request in writing to the Director within the 60-day comment period. The Director, however, reserves the right to determine, in light of all circumstances, whether a public hearing will be held.

You may view copies of the full comments received in response to this notice of proposed rulemaking by appointment at the ATF Reference Library, Room 6480, 650 Massachusetts Avenue, NW., Washington, DC 20226; telephone 202-927-7890. You may request copies of the full comments (at 20 cents per page) by writing to the ATF Reference Librarian at the above address.

For the convenience of the public, ATF will post comments received in response to this notice on the ATF web site. All comments posted on our web site will show the name of the commenter, but will have street addresses, telephone numbers, and e-mail addresses removed. We may also omit voluminous attachments or material that we do not consider suitable for posting. In all cases, the full comment will be available in the ATF library as noted above. To access online copies of the comments on this proposed rulemaking, visit http://www.atf.treas.gov/, and select “Regulations,” then “Notices of proposed rulemaking (alcohol),” and then click on the “View Comments” link for this notice.

The provisions of the Paperwork Reduction Act of 1995, 44 U.S.C. chapter 35, and its implementing regulations, 5 CFR part 1320, do not apply to this notice because no requirement to collect information is proposed.

ATF certifies that this proposed regulation will not have a significant impact on a substantial number of small entities. The establishment of a viticultural area is neither an endorsement nor approval by ATF of the quality of wine produced in the area, but rather an identification of an area that is distinct from surrounding areas. ATF believes the establishment of viticultural areas merely allows wineries to more accurately describe the origin of their wines to consumers, and helps consumers identify the wines they purchase. Thus, any benefit derived from the use of a viticultural area name is the result of a proprietor's own efforts and consumer acceptance of wines from that area.

No new requirements are proposed. Accordingly, a regulatory flexibility analysis is not required.

ATF has determined that this proposed regulation is not a significant regulatory action as defined by Executive Order 12866. Accordingly, this proposal is not subject to the analysis required by this Executive Order.

The principal author of this document is N. A. Sutton, Regulations Division (San Francisco), Bureau of Alcohol, Tobacco, and Firearms.

Title 27, Code of Federal Regulations, Part 9, American Viticultural Areas, is proposed to be amended as follows:

See the information provided in the direct final rule which is located in the rules section of the Federal Register .

See the information provided in the direct final rule which is located in the rules section of the Federal Register .

We published a document in the Federal Register on July 26, 2002 (67 FR 48839), announcing the establishment of the negotiated rulemaking committee to advise us on developing a proposed rule that would establish special payment provisions and requirements for suppliers of prosthetics and certain custom-fabricated orthotics under the Medicare program. The document also announced dates for the Committee's first two meetings on October 1 to 3, 2002, and October 29 to 31, 2002.

Through face-to-face negotiations, these meetings will help the Committee to reach consensus on the substance of the proposed rule. If consensus is reached, the Committee will transmit to us a report containing required information for developing a proposed rule, and we will use the report as the basis for the proposed rule. The Committee is responsible for identifying the key issues, gauging their importance, analyzing the information necessary to resolve the issues, arriving at a consensus, and recommending the text and content of the proposed regulation. Detailed information is available on the CMS Internet Home Page: http://cms.hhs.gov/faca/prosthetic/ or by calling the Federal Advisory Committee Hotline at (410) 786-9379.

The agendas for the January 5 and 6, 2002 and February 10 and 11, 2002 meetings will cover the following:

1. Review of the October 29 to 31 minutes (January 5 and 6) and review of the January 5 and 6 minutes (February 10 and 11).

2. Workgroup presentations on orthotics and prosthetics.

3. Consensus on workgroup items.

4. Development of new workgroups (as applicable).

5. Presentation by the American Society of Hand Therapists (January 5 and 6).

6. Public comment period.

All interested parties are invited to attend these public meetings, but attendance is limited to the space available. No advance registration is required. Seating will be available on a first-come first'served basis. Individuals requiring sign language interpretation for the hearing impaired or other special accommodations should contact Theresa Linkowich, at e-mail address tlinkowich@cms.hhs.gov, or call (410) 786-9249 at least 10 days before the meeting. The Committee has the authority to decide to what extent oral presentations by members of the public may be permitted at the meeting. Oral presentations will be limited to statements of fact and views, and shall not include any questioning of the Committee members or other participants unless the facilitators have specifically approved these questions. The number of oral presentations may be limited by the time available.

Interested parties can file statements with the Committee. Mail written statements to the following address: Federal Mediation and Conciliation Services, 2100 K Street, NW., Washington, DC 20427, Attention: Lynn Sylvester, or call Lynn Sylvester at (202) 606-9140.

Meetings will be held as necessary. We will publish notices of future meetings in the Federal Register . All future meetings will be open to the public without advance registration.

Inspection of Public Comments: Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, please call (410) 786-9994.

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 15250-7954. 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) 512-1800 (or toll-free at 1-888-293-6498) or by faxing to (202) 512-2250. The cost for each copy is $9. As an alternative, you can 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.

Section 1866(a)(1)(F) of the Social Security Act (the Act) requires a hospital, as a condition of Medicare participation, to enter into an agreement with a quality improvement organization (QIO), for the peer review of Medicare services provided by the hospital. ( Note: QIOs were formerly known as peer review organizations (PROs). We published a final rule with comment period on May 24, 2002 (67 FR 36539) changing the name to QIOs.) Our regulations at 42 CFR 476.78 provide that health care facilities that submit Medicare claims must cooperate in the conduct of QIO reviews, including providing the QIO with information necessary to its determinations. This often includes providing the QIO with photocopies of patients' medical records.

We published a final rule on October 20, 1992 in the Federal Register (57 FR 47779), following notice-and-comment rulemaking, which established a formula for calculating the rate of reimbursement for these photocopy costs incurred by hospitals. Using this formula, we set the rate at 7 cents per-page. The regulation requires us to determine a fixed payment amount per page by adding per-page labor costs and per-page supply costs. The regulation also provides for Medicare payment for the costs of first class postage for mailing records to QIOs. As discussed in detail in the October 20, 1992 final rule (57 FR 47779), the payment established by § 476.78 represents an additional payment to hospitals under the prospective payment system (PPS) for photocopy costs. Payment for the equipment and overhead costs associated with furnishing the QIO with required documentation is made under other Medicare payment provisions for capital-related costs and inpatient operating costs.

The formula for calculating the per-page reimbursement rate for photocopies is set forth at § 476.78(c), which provides:

Using this formula we established the per-page rate of 7 cents in the October 20, 1992 final rule. The validity of this rule and its reimbursement methodology were challenged in a certified class action by Medicare-participating hospitals, in the U.S. Court of Appeals for the Ninth Circuit. Queen of Angels/ Hollywood Presbyterian Medical Center v. Shalala, 65 F.3d 1472, 1476 (9th Cir. 1995). The Court of Appeals upheld the validity of our photocopy reimbursement methodology and sustained the lawfulness of the 7 cents per page rate established in the rule.

Due to increases in labor and supply costs, we are proposing to increase the reimbursement rate from 7 cents per page to 12 cents per page in accordance with the established court-approved methodology set forth in § 476.78(c).

Under the current regulation, we apply a uniform per-page rate on a nationwide basis to all PPS hospitals that have QIO agreements. We base the calculation on labor and supply costs. The calculation in the current rule, as discussed in the preamble to the October 20, 1992 rule, is based on the following:

• An operator will copy approximately 364,320 pages annually.

• The salary level of an operator is equivalent to a GS-5 experienced midlevel secretary ($17,686) plus 27.9 percent fringe benefits ($4,934) for a total salary of $22,620.

• Paper costs are 0.5 cents per page ($25 per case of paper with 5,000 sheets in a case).

• Toner and developer costs are 0.5 cents per page.

• The total cost per page is 7 cents.

We propose to increase the rate of QIO-related photocopy reimbursement from 7 cents to 12 cents per page. We calculated this rate by updating the salary, fringe benefits, and supply figures used in the October 20, 1992 final rule. In accordance with the methodology at § 476.78(c), we considered the following factors in calculating the proposed rate: (1) The labor costs associated with photocopying and (2) the costs of supplies.

Labor costs were calculated consistent with the methodology at § 476.78(c), first, by adding the annual salary of a photocopy machine operator with the costs of fringe benefits, and second, by dividing that sum by the number of pages that can reasonably be expected to be made in a year.

In the October 20, 1992 rule, we adopted the salary level for an experienced (GS-5) midlevel secretary in the Federal government as representative of that of a photocopy machine operator. Use of this figure approximated or exceeded the actual salary information for individuals performing these tasks that had been submitted by various commenters. Furthermore, we determined that use of this salary level yielded payments that were more than adequate to ensure a sufficient skill level. The annual salary of $17,686 used in the October 20, 1992 rule was derived from the U.S. Office of Personnel Management's 1992 General Schedule.

In this proposed rule, we would continue to deem the salary of a Federal GS-5 midlevel secretary as representative of a photocopy operator's salary; however, we would update the figure to take into account increases in the payment rate of a midlevel secretary. Thus, we are using the GS-5 annual salary of $28,727 derived from the U.S. Office of Personnel Management's 2002 General Schedule to calculate the revised rate.

In the October 20, 1992 final rule, we ascribed the fringe benefits of an employee to be 27.9 percent of the employee's salary, which was the standard percentage dictated by the cost principles set forth in the Office of Management and Budget (OMB) Circular A-76. While there may be other yardsticks to measure this component of costs, we find this to be a reasonable resource since the thrust of this OMB circular is to help the government compare potentially incurred costs to determine whether the costs can be more economically incurred internally or through contract with a commercial source. Therefore, we continue to use OMB Circular A-76 to calculate the annual fringe benefit cost. Accordingly, fringe benefits were calculated in this proposed rule based on 29.7 percent of the GS-5 salary as outlined in the OMB Circular A-76 Transmittal Memorandum 19—FY 2000 estimate. Thus, the annual fringe benefit cost is $8,532 ($28,727 * 29.7 percent).

In this proposed rule, we are using 364,320 pages per year in the calculation of the annual labor cost. In the October 20, 1992 rule, we determined that 364,320 was the number of pages that could reasonably be expected to be copied in a year. Earlier, in the proposed rule “Changes to Peer Review Organizations Regulations”, published on March 16, 1988 at 53 FR 8654, we had proposed the use of 748,000 pages per year in the calculation of the annual labor cost. This initial figure was determined based on copying documents at a rate of six pages per minute for each hour in an 8 hour day, 5 days a week, 52 weeks per year. The estimate was based on hand feeding of documents into the photocopying machine for duplication, although we recognized that there are many photocopying tasks that may be accomplished through automatic feeds. Automatic feeds greatly increase the number of pages that can be generated by a machine on an hourly basis, and as a result, greatly decrease the cost of photocopying per page.

In response to comments received on the March 16, 1988 proposed rule (53 FR 8654), we revised the 748,000 figure in the October 20, 1992 final rule to account for time spent by the photocopy machine operator in search and retrieval tasks, and time away from work on annual vacation, sick, and holiday leave. This resulted in a reduction from 748,000 to 364,320 in our estimate of the number of pages that may be reasonably expected to be made annually, and a corresponding increase in the per-page labor rate.

We are unaware of any significant changes in technology since the October 20, 1992 final rule (57 FR 47779) that would lead to either a significant decrease or increase in the annual number of pages that may be copied. Nor are we aware of any changes that would significantly increase or decrease the time allocated to search and retrieval tasks. Therefore, we continue to use the 364,320 figure to calculate the per-page labor cost in this proposed rule.

To determine the per-page labor cost, the total of salary ($28,727) and fringe benefits ($8,532) costs, which amount to $37,259, was divided by 364,320 pages, the number of copies made in a year, resulting in an annual labor cost per page of 10 cents ($37,259/364,320 pages).

In the October 20, 1992 final rule, supply costs were calculated based on 0.5 cents per page for paper and 0.5 cents per page for toner and developer. The paper cost was based on a cost of $25 per case of paper with 5,000 sheets in a case. The costs of toner and developer vary widely depending on the type of photocopy machine used. However, based on comments from hospitals and a large hospital association, it was determined at that time that a reasonable amount for toner and developer was 0.5 cents per page.

The total proposed supply cost is 2.3 cents per page. This is based on a per-page paper cost of 0.5 cents and a developer and toner cartridge cost of 1.8 cents per page. The paper costs were calculated based on $23 per case of paper with 5,000 sheets in a case. This equates to 0.5 cents per page ($23/5,000).

As previously stated, in the October 20, 1992 rule the toner and developer costs of 0.5 cents per page were determined on the basis of comments received on the proposed rule. In this rule, we have used an objective methodology to calculate the per-page cost for toner and developer that can also be used in future updates. We calculated these costs using estimates of the costs for toner cartridges and developer drums contained in the GSA supply catalogue, and on the basis of a photocopy machine producing 364,320 pages annually.

Consistent with § 476.78(c)(3), the payment rate per page is the total of the per-page labor cost and the per-page supply cost, which is equivalent to 12 cents. The established calculation methodology actually results in a cost of 12.3 cents per page, however, consistent with CMS policy and generally accepted mathematics principles, we chose to round down to 12 cents. We believe this decision is both reasonable and supportable, based on the fact that the higher amount substantially exceeds all published OMB inflation indexes, including the CPI-Wage index (photocopying expense is largely comprised of labor costs).

In addition to updating the rate of reimbursement for photocopies, we also propose to amend the existing regulation to permit the rate to be adjusted without undergoing notice-and-comment rulemaking each time it needs to be adjusted to reflect inflationary or technology changes.

We intend to review and adjust the rate periodically in accordance with the same factors considered in establishing the rate in the October 20, 1992 final rule and the updated rate in this proposed rule. This review will include an examination of the labor and supply components of the formula, and we will update the rate as necessary to account for significant inflationary changes to these components.

Absent some compelling reason, in future updates, we will continue to deem the salary and fringe benefits of a Federal government GS-5 midlevel secretary as representative of the salary and fringe benefits of a photocopy machine operator and use those values to calculate the reimbursement rate. Also, absent some compelling reason or major technological change that would lead to a significant increase or decrease in the number of pages that can be made annually, we will not change the number of pages used in calculating the rate.

We also propose to provide for the payment of the expenses of furnishing photocopies to QIOs, to other providers subject to a PPS (for example, skilled nursing facilities (SNFs) and home health agencies (HHAs)), in accordance with the rules established at § 476.78 for reimbursing PPS hospitals for these expenses.

Current regulations do not address reimbursement for providers other than hospitals for costs of photocopying medical records in cooperation with QIO review activities because in the past QIO review of providers other than hospitals was relatively insignificant. To the extent that this review activity took place, it was minimal, and the related costs were included on the provider's cost report. SNFs, HHAs, and other providers have recently converted from the cost-based reimbursement system to a PPS. Because QIO review of these providers has been minimal or nonexistent, costs related to this activity are not adequately reflected in the base PPS rate. Therefore, we believe it is appropriate to provide for a means of paying for these costs when they occur. To accomplish this change, we propose to replace the more narrow term “hospitals” with “providers,” in § 476.78(b)(2) and (c), to include other providers subject to a PPS.

Additionally, we propose revising the payment provisions for SNFs and HHAs by adding a paragraph at § 413.355 and § 484.265, that authorizes reimbursement for the costs of photocopying and mailing medical records required for QIO review, to SNFs and HHAs.

We also propose amending § 476.78(d) to provide that, as with other disputes regarding Medicare payment to providers, disputes concerning payments for costs related to QIO review under § 476.78 and the other payment provisions of the Medicare statute and regulations must be presented in accordance with the administrative and judicial review requirements of section 1878 of the Act and subpart R of 42 CFR part 405.

Under the Paperwork Reduction Act (PRA) of 1995, agencies are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved, section 3506(c)(2)(A) of the PRA of 1995 requires that we solicit comment on the following issues:

• Whether the information collection is necessary and useful to carry out the proper functions of the agency;

• The accuracy of the agency's estimate of the information collection burden;

• The quality, utility, and clarity of the information to be collected; and

• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

Section 476.78 of this regulation contains information collection requirements. In summary, § 476.78 requires providers to submit information to the QIO during the conduct of a QIO review. Because this information is collected during the conduct of an audit, investigation, and/or an administrative action, we believe these collection requirements are not subject to the PRA as stipulated under 5 CFR 1320.4.

If you have any comments on any of these information collection and record keeping requirements, please mail the original and 3 copies directly to the following:

Room N2-14-26, 7500 Security Boulevard, Baltimore, MD 21244-1850. Attn: John Burke CMS-3055-P; and

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

We have examined the impacts of this proposed rule as required by Executive Orders 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980 Pub. L. 96-354).

Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for rules that constitute significant regulatory action, including rules that have an economic effect of $100 million or more annually. This proposed rule is not a major rule in terms of the aggregate costs involved.

The 53 separate QIO contracts are awarded on a staggered 3-year basis. Current sixth scope of work contracts provide photocopy reimbursement costs of 7 cents per page. The total dollars budgeted were $8.6 million per year and the 3-year costs were $25.9 million. We estimate by the time this regulation is published in final, 19 QIOs will have completed their 6th round contracts and the other 34 will have less than 153 months (combined) out of a total of 636 months (for all 53 QIOs) remaining in the final year of their 6th round contracts. This translates to 24 percent of the final 6th round year. As such, we project this regulation will increase the costs in the last ( i.e. , current) year of the 6th scope of work by $1.5 million above the previous budgeted level of $8.6 million, to a total of $10.1 million. However, in future years—based on the full 12 months and all 53 QIOs under contract—the increase will be nearly $6.2 million annually.

Thus, we have determined that this proposed rule is not a major rule with economically significant effects because it would not result in increases in total expenditures of $100 million or more per year. We have also determined that it does not otherwise constitute significant regulatory action.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and governmental agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $5 million to $25 million or less annually (see 65 FR 69432). Individuals and States are not included in the definition of a small entity.

We generally prepare a regulatory flexibility analysis that is consistent with the RFA unless we certify that a rule will not have a significant impact on a substantial number of small entities. We have not prepared an analysis for the RFA because we have determined, and certify, that this proposed rule would have no significant economic impact on small entities. The proposed regulation would not impose any economic or operational regulatory burdens on small entities. The regulation would only assist providers in performing the tasks required under the QIO program sixth scope of work, by increasing the reimbursement for providing copies of documents to the QIOs.

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 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. We have not prepared an analysis for section 1102(b) of the Act because we have determined that this proposed regulation would not have a significant impact on the operations of small rural hospitals for the reasons stated above in our discussion of the RFA.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies prepare an assessment of anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million or more. We have determined that this proposed rule would not result in such an expenditure. Rather, the proposed rule would benefit providers by increasing the photocopy reimbursement rate.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a rule that imposes substantial direct compliance costs on State and local governments, preempts State law, or otherwise has Federalism implications. We have reviewed this proposed rule under the threshold criteria of Executive Order 13132 and have determined that it would not have a substantial direct effect on the rights, roles, and responsibilities of States or local governments.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV to read as follows:

Inspection of Public Comments: Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone (410) 786-9994.

Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, PO Box 371954, Pittsburgh, PA 15250-7954. 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) 512-1800 (or toll-free at 1-888-293-6498) or by faxing to (202) 512-2250. The cost for each copy is $9. As an alternative, you can 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.

Hospice care is an approach to health care that recognizes that the impending death of an individual warrants a change in focus from curative care to palliative care, that is, relief of pain and other symptoms. The emphasis of hospice care is on the control of pain and the furnishing of services that enable the beneficiary to remain at home as long as possible with minimal disruption to normal activities. A hospice uses an interdisciplinary approach to deliver medical, social, psychological, emotional, and spiritual services through the use of a broad spectrum of professional and other caregivers, with the goal of making the individual as physically and emotionally comfortable as possible. Counseling and respite services are available to the family of the hospice patient. Hospice programs consider both the patient and the family as the unit of care.

The Balanced Budget Act of 1997 changed and clarified numerous aspects of the Medicare hospice benefit including, the length of available benefit periods, the amount of annual updates, how local payment rates are determined, the time frame for physician certification, and what is considered a covered Medicare hospice service. Before explaining each change in detail, it is important to understand how the Medicare hospice benefit was structured prior to the BBA of 1997.

Section 1861(dd) of the Social Security Act (the Act) provides for coverage of hospice care for terminally ill Medicare beneficiaries who elect to receive care from a participating hospice. Beneficiaries are eligible to elect the Medicare hospice benefit if they are eligible for Medicare Part A; are certified as terminally ill by their personal physician, if they have one, and by the hospice medical director; and elect to receive hospice care from a Medicare-certified hospice. Section 1861(dd)(3)(A) of the Act defines terminally ill as a medical prognosis with a life expectancy of 6 months or less. This definition was clarified to provide for a life expectancy of “6 months or less if the illness runs its normal course” when we amended 42 CFR 418.3 in our December 11, 1990 final rule with comment period titled “Hospice Care Amendments: Medicare” (55 FR 50834).

A Medicare beneficiary who has elected the hospice benefit can receive care for specific lengths of time referred to as benefit periods. Under the Tax Equity and Fiscal Responsibility Act of 1982, hospice care was made available in three distinct benefit periods, the first two lasting 90 days, and the third lasting 30 days. The total amount of Medicare hospice coverage was 210 days. Because of the scientific difficulty in making a prognosis of 6 months or less, the 210-day limit was repealed by the Medicare Catastrophic Coverage Repeal Act of 1989 for services furnished on or after January 1, 1990. The benefit periods were restructured into two periods of 90 days duration, one period of 30 days duration, and a fourth period of unlimited duration. If a beneficiary voluntarily left the program or was discharged from it, he or she forfeited the remaining days in the benefit period. If this occurred during the fourth benefit period, the beneficiary could never again receive the Medicare hospice benefit. A beneficiary in the fourth benefit period who became ineligible for hospice care services because he or she no longer met the eligibility requirements would return to normal Medicare coverage and would never be eligible for the Medicare hospice program, even if his or her condition once again became terminal. This provision was amended by the BBA, as discussed below.

Once a patient elects Medicare hospice care, the patient gives up the right to have Medicare pay for hospice care furnished by any hospice provider other than the one that he or she has selected, unless the selected hospice provider arranges for services to be furnished by another provider or if the patient elects to change providers. Also during the benefit period, the beneficiary gives up the right to receive any other Medicare payment for services that are determined to be related to his or her terminal illness or other related conditions or that are duplicative of hospice care. Medicare will continue to pay for a beneficiary's covered medical needs unrelated to the terminal condition.

The Medicare hospice benefit includes nursing services, medical social services, physician services, counseling services including dietary and bereavement counseling, short-term inpatient care including respite care, medical appliances and drugs, home health aide and homemaker services, physical therapy, occupational therapy, and speech-language pathology services. Medicare-certified hospices furnish care using an interdisciplinary team of people who assess the needs of the beneficiary and his or her family and develop and maintain a plan of care that meets those needs.

Under section 1814(i) of the Act, Medicare payment for hospice care is based on one of four prospectively determined rates that correspond to four different levels of care for each day a beneficiary is under the care of the hospice. The four rate categories are routine home care, continuous home care, inpatient respite care, and general inpatient care. The prospective payment rates are updated annually and are adjusted by a wage index to reflect geographic variation. The payment rules are in our regulations at part 418, subpart G, “Payment for Hospice Care.”

As mentioned above, the Balanced Budget Act of 1997 (BBA) included a number of provisions affecting the Medicare hospice benefit. Additionally, the Balanced Budget Refinement Act (BBRA) of 1999 and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) of 2000 made some additional changes to the Medicare hospice benefit. This section will explain each change in detail and describe how these changes have been implemented. All of the BBA hospice provisions were implemented through a Program Memorandum (PM A-97-11) released in September 1997, which addresses all of the hospice-related BBA provisions, except the requirement for hospice data collection, the changes to the limitation of liability rules, the provision allowing contracting with physicians, and the new waivers for certain staffing requirements.

The provision allowing contracting with physicians and the new waivers for certain staffing requirements will be included in a proposed regulation to revise the hospice conditions of participation, which may be published in the near future. The limitation of liability rule changes were implemented through the Program Memorandum issued in September 1997. A hospice cost report for the hospice data collection was developed and issued in April 1999.

Section 4441(b) of the BBA amended section 1814(i) of the Act to require hospice management to submit cost data for each fiscal year beginning with fiscal year 1999. A hospice cost report to collect this information was developed and issued in April 1999. To allow hospices enough time to prepare for the new requirement, the implementation of the hospice cost report was delayed until cost reporting periods beginning on or after April 1, 1999.

Section 4442 of the BBA amended section 1814(i)(2) of the Act, effective for services furnished on or after October 1, 1997, to require that hospices submit claims for payment for hospice care furnished in an individual's home only on the basis of the geographic location at which the service is furnished. Previously, local wage index values were applied based on the geographic location of the hospice provider, regardless of where the hospice care was furnished. Hospices were able to inappropriately maximize reimbursement by locating their offices in high-wage areas and actually delivering services in a lower-wage area. Applying the wage index values for rate adjustments on the geographic area where the hospice care is furnished would provide a reimbursement rate that is a more accurate reflection of the wages paid by the hospice for the staff used to furnish care.

Section 4443 of the BBA amended sections 1812(a)(4) and 1812(d)(1) of the Act to provide for hospice benefit periods of two 90-day periods, followed by an unlimited number of 60-day periods. This amendment changed the previous hospice care benefit periods. Each period requires a physician to certify at the beginning of the period that the individual has a terminal illness with a prognosis that the individual's life expectancy is 6 months or less, should the illness run its normal course. Though it continues to be true that the remaining days in a benefit period are lost once a beneficiary revokes election of the hospice benefit or is discharged from the hospice, the restructured benefit periods will allow the beneficiary, or the hospice, to make this type of decision without placing the beneficiary at risk of losing hospice benefit periods in the future.

Section 4449 of the BBA indicated that the benefit period change applied to the hospice benefit regardless of whether or not an individual had made an election of the benefit period before the date of enactment. Therefore, beneficiaries who elected hospice before the BBA, and who, after the passage of the BBA, are discharged from hospice care because they are no longer terminally ill, could avail themselves of the benefit at some later date if they should become terminally ill again and otherwise meet the requirements of the Medicare hospice benefit. If the beneficiary had been discharged during the initial 90-day period, he or she would enter the benefit in the second 90-day period. If the discharge took place during the final 90-day period or any subsequent 60-day period, the beneficiary would enter the benefit in a new 60-day period. A beneficiary who had been discharged from hospice during the fourth benefit period before the enactment of the BBA would be eligible to access the benefit again, if certified as being terminally ill, and would begin in a new 60-day period. The 90-day periods would not be available again, as amended section 1812(d)(1) of the Act still provides only for two 90-day periods during an individual's lifetime. There is no limit on the number of 60-day periods available as long as the beneficiary meets the requirements for the hospice benefit.

Section 1861(dd)(1) of the Act lists the specific services covered under the Medicare hospice benefit. Because the hospice provider is responsible for the palliation and management of the patient's terminal illness, it has always been Medicare's policy that Medicare hospice includes not only those specific services listed in Section 1861(dd)(1) of the Act but also any service otherwise covered by Medicare that is needed for the palliation and management of the terminal illness. Section 4444 of the BBA reiterates this policy by amending Section 1861(dd)(1) of the Act.

A new subparagraph “I” has been added to the list of covered hospice services in section 1861(dd)(1) of the Act, effective April 1, 1998. This new provision states that any other service that is specified in the plan of care, and for which payment may otherwise be made under Medicare, is a covered hospice service. As explained, this change underscores our previous construction of the law as requiring that the hospice is responsible for furnishing any and all services indicated as necessary for the palliation and management of the terminal illness, and related conditions, in the plan of care. A Medicare beneficiary who elects hospice care gives up the right to have Medicare pay for services related to the terminal illness, or related conditions, outside of the hospice benefit. Section 1861(dd)(1) of the Act contains a list of services and therapies covered under the Medicare hospice benefit. This list does not include services like radiation therapy, which are often furnished by hospices for palliative purposes. This change clarifies that these additional necessary services are covered under the hospice benefit and cannot be billed separately to Medicare.

Section 4448 of the BBA amended section 1814(a)(7)(A)(i) of the Act to eliminate the specific statutory time frame for the completion of a physician's certification of terminal illness for admission to a hospice for the initial 90-day benefit period and to require only that certification be done “at the beginning of the period.” A literal interpretation of “at the beginning of the period,” that is, on the first day of the benefit period, would produce time frames that are more stringent than previous requirements. However, it appears that the congressional intent of this change was to give us the discretion, as we currently have with home health certifications, to require instead that hospice certifications be on file before a Medicare claim is submitted. Thus, section 4448 is titled “Extending the Period for Physician Certification of an Individual's Terminal Illness.”

Before the BBA, hospices were required to obtain, no later than 2 calendar days after hospice care was initiated, written certification that a person had a prognosis of a terminal illness with a life expectancy of 6 months or less. For the first benefit period, if the written certification could not be obtained within the 2 calendar days following the initiation of hospice care, a verbal certification could be made within 2 days following the initiation of hospice care, with a written certification not later than 8 calendar days after care was initiated. For subsequent benefit periods, written certification was required no later than 2 calendar days after the first day of each benefit period.

The new certification requirements also apply to individuals who had been previously discharged during a fourth benefit period and are being certified for hospice care again to begin in a new 60-day benefit period. Also, due to the restructuring of the benefit periods, any individual who revoked, or was previously discharged from, the hospice benefit, and then reelects to receive the hospice benefit in the next available benefit period, will need to be recertified as if entering the program in an initial benefit period. This means that the hospice must obtain verbal certification of terminal illness no later than 2 days after care begins, and written certification before the submission of a claim to the fiscal intermediary.

The provisions of the BBA discussed above, unless noted otherwise, became effective for services furnished on or after the date of enactment of the BBA, or August 5, 1997. Section 4444, the other services provision, was effective on April 1, 1998.

Section 322 of BIPA amended section 1814(a) of the Act by clarifying that the certification of an individual who elects hospice “* * * shall be based on the physician's or medical director's clinical judgment regarding the normal course of the individual's illness.” The amendment clarifies that the certification is based on a clinical judgment regarding the usual course of a terminal illness, and recognizes the fact that making medical prognostications of life expectancy is not always exact. This amendment at section 322(b) of BIPA clarifies and supports our current policy, which we are proposing to add to our regulations. The policy came about in response to Operation Restore Trust (ORT) and is discussed later in section III. B of this preamble. Briefly, ORT found that certification and recertification occurred without the documentation that would support the terminal illness prognosis. Accordingly, in 1995, we issued program memoranda requiring clinical findings and other documentation that support the medical prognosis. This documentation must accompany a certification and be filed in the patient's medical record.

We recognize that medical prognostications of life expectancy are not always exact, but the amendment regarding the physician's clinical judgment does not negate the fact that there must be a basis for a certification. A hospice needs to be certain that the physician's clinical judgment can be supported by clinical findings and other documentation that provide a basis for the certification of 6 months or less if the illness runs its normal course. A mere signed certification, absent a medically sound basis that supports the clinical judgment, is not sufficient for application of the hospice benefit under Medicare.

Section 322 of BIPA became effective for certifications made on or after the date of enactment, December 21, 2000.

We are proposing to make conforming changes to the Medicare hospice regulations to reflect the statutory changes discussed above. In addition, we are proposing to revise the regulation to reflect current policy on the documentation needed to support a certification of terminal illness, admission to Medicare hospice, and discharge from hospice. We are proposing to add one new requirement that would allow for discharges from hospice for cause under very limited circumstances.

We propose to amend 42 CFR chapter IV by revising part 418.

In § 418.21, we are revising paragraph (a) to make hospice benefit periods available in two 90-day periods followed by an unlimited number of 60-day periods (requirement of section 4443 of the BBA).

We are revising the cross reference in § 418.22(a)(1) from “§ 418.21” to “§ 418.21(a)” and removing the phrase “for two, three, or four periods” and replacing it with “for an unlimited number of periods” to reflect the changes in the hospice care election periods (requirement of section 4443 of the BBA). We are revising the basic requirement at paragraph (a)(2) to state that the hospice must obtain written certification before it submits a claim for payment (requirement of section 4448 of the BBA), and we are proposing to revise the exception at paragraph (a)(3) to state that, if the hospice cannot obtain the written certification within 2 calendar days, it must obtain an oral certification within 2 calendar days, and the written certification before it submits a claim for payment. Oral certifications, therefore, which are necessary only if the hospice is unable to obtain written certification within 2 calendar days of the start of the benefit period, would be required for each benefit period rather than for just the initial 90-day period. We are maintaining our requirement for verbal physician's certification no later than 2 days after hospice care begins because we continue to believe that proper and timely assessment of a patient's condition is of critical importance both to the hospice, which becomes responsible for the patient, and to the patient, who must have a sound basis for choosing palliative rather than curative care.

As a condition of eligibility for a Medicare hospice program, an individual must be entitled to Medicare Part A and be certified as terminally ill. The Act also requires that this certification be made in writing by either the hospice medical director or the physician member of the interdisciplinary group, and by the attending physician, if the patient has one. However, the law does not explicitly discuss what information a hospice physician needs to consider before making a certification of terminal illness.

Operation Restore Trust (ORT), a joint effort among the Centers for Medicare & Medicaid Services, the Office of the Inspector General, and the Administration on Aging to identify vulnerabilities in the Medicare program and to pursue ways to reduce Medicare's exposure to fraud and abuse, identified several areas of weakness in the hospice benefit, primarily in the area of hospice eligibility. In 1995, as a result of early ORT findings, we issued a letter to all Regional Offices and Regional Home Health Intermediaries (RHHIs) clarifying what should be included in a patient's medical record to support the certification of terminal illness. Subsequent ORT reports, and medical reviews conducted by RHHIs, have raised concerns about inappropriate certifications and recertifications and problems with a lack of documentation to support a prognosis of terminal illness. These reports and reviews found that certifications are being made for patients who are chronically ill but who are without complications or other circumstances that indicate a life expectancy of 6 months or less.

In response to these concerns, we are proposing to revise § 418.22(b) by adding introductory text, redesignating paragraph (b) as paragraph (b)(1), and adding an additional requirement for the content of certification as paragraph (b)(2). The introductory text will state that certification for the hospice benefit will be based upon the physician's or medical director's clinical judgment regarding the normal course of the individual's illness. In paragraph (b)(2), we propose requiring that specific clinical findings and other documentation supporting the medical prognosis accompany the written certification and be filed in the medical record as required under § 418.22(d).

In § 418.24, we are proposing to add to paragraph (c), “Duration of election,” a new paragraph (c)(3) to state that an election to receive hospice care will be considered to continue through the initial election period and through the subsequent election periods without a break in care as long as the individual is not discharged from the hospice under the provisions of § 418.26. This addition would clarify that only revocation by the beneficiary or discharge by the hospice terminates an election.

Also in response to concerns raised by ORT, we are proposing to establish general guidance on hospice admission procedures. Currently, there is no guidance in manuals or regulations regarding admission procedures. We are proposing to add a new § 418.25, “Admission to hospice care,” which would establish specific requirements to be met before a hospice provider admits a patient to its care.

Paragraph (a) would permit a hospice to admit a patient only on the recommendation of the medical director in consultation with the patient's attending physician, if any. We realize that many hospice patients are referred to hospice from various “nonmedical” sources. This is entirely appropriate; however, it is the responsibility of the medical director, in concert with the attending physician, to assess the patient's medical condition and determine if the patient can be certified as terminally ill.

Paragraph (b) would require that the hospice medical director consider at least the following information when making a decision to certify that a patient is terminally ill: diagnosis of the patient's terminal condition; any related diagnoses or comorbidities; and current clinically relevant findings supporting all diagnoses.

As with admission to hospice, the statute does not explicitly address when it is appropriate to discharge an individual from hospice care. Section 210 of the Medicare Hospice Manual (HCFA Pub. 21) explains that discharge is allowable only if the patient is no longer terminally ill or if the patient moves out of the service area.

We propose to add a new § 418.26, “Discharge from hospice care,” to specify when a hospice may discharge a patient from its care. Paragraph (a), “Reasons for discharge,” would specify that a hospice may discharge a patient if—

1. The patient moves out of the hospice's service area or transfers to another hospice;

2. The hospice determines that the patient is no longer terminally ill; or

3. The hospice determines, under a policy set by the hospice for the purpose of addressing “discharge for cause” that also meets the requirements discussed in the remainder of the new paragraph (a), that the patient's behavior is disruptive, abusive, or uncooperative to the extent that delivery of care to the patient or the ability of the hospice to operate effectively is seriously impaired. When the hospice seeks to discharge a patient, we would require it to make a serious effort to resolve the problem(s) presented by the patient's behavior or situation; ascertain that the patient's proposed discharge is not due to the patient's use of necessary hospice services; document the problem(s) and efforts made to resolve the problem(s) and enter this documentation into the patient's medical records; and obtain a written physician's order from the patient's attending physician and hospice medical director concurring with the discharge from the hospice.

Since the inception of the Medicare hospice program, we have received inquiries from hospices regarding patients and their family members or primary caregivers who elected hospice but subsequently became uncooperative or hostile (including threats of physical harm and to the extent that hospice staff could not provide care to the patient) when the facilities attempted to provide care. In the absence of regulations or guidance from Medicare regarding these situations, hospices were uncertain as to their authority to act to resolve this type of problem. We offered informal guidance that if the hospice had made a conscientious effort to resolve the problem and had documented that effort, and the patient refused to revoke the benefit voluntarily, a discharge would be indicated. Failure to revoke the benefit could place the patient in a compromised position in which the patient would not be able to receive services from the hospice but would at the same time be unable to obtain services under the standard Medicare program because of his or her hospice status. An additional concern is the issue of daily payments being made to a hospice when no services are being provided. We are interested in commenter responses to this proposed regulation, particularly as to whether it is needed, and, if it is, whether there are sufficient protections for patients in the proposed rule.

Paragraph (b), “Effect of discharge,” would specify that an individual, upon discharge from the hospice during a particular election period for reasons other than immediate transfer to another hospice is no longer covered under Medicare for hospice care and resumes Medicare coverage of the benefits waived under § 418.24(d). If the beneficiary becomes eligible for the hospice benefit at a future time, he or she would be able to elect to receive this benefit again.

Although the statute does not explicitly address when a hospice may discharge a patient from its care, we realize that there are certain instances in which it is no longer appropriate for a hospice to provide care to a patient. We have attempted to capture those instances with our proposal; nevertheless, we are requesting that commenters share their experiences regarding situations that have arisen that would fall into one of our proposed categories.

A decision that a hospice patient is no longer terminally ill is generally not made during one assessment. However, once it is determined that the patient is no longer terminally ill, the patient is no longer eligible to receive the Medicare hospice benefit. Currently, the regulations do not provide any time for discharge planning between the determination that the patient is no longer terminally ill and discharge from the benefit. Since the BBA has ended the limitation on available benefit periods during a beneficiary's lifetime, we expect to see an increase in the number of beneficiaries being discharged from, or revoking, the hospice benefit because they can no longer be certified as terminally ill. However, it is common for these beneficiaries to remain in medically fragile conditions and in need of some type of medical services in order to remain at home. It is important that hospice providers consider these needs so that support structures can quickly be put into place should the patient's prognosis improve.

Therefore, we are proposing to add a paragraph (c), “Discharge planning,” in new § 418.26. We would require at paragraph (c)(1) that the hospice have in place a discharge planning process that takes into account the prospect that a patient's condition might stabilize or otherwise change such that the patient cannot continue to be certified as terminally ill. Additionally, we are proposing at paragraph (c)(2) that the discharge planning process must ensure that planning for the potential of discharge includes consideration of plans for any necessary family counseling, patient education, or other services before the patient is discharged because he or she is no longer terminally ill.

Finally, § 418.28(b)(1) is revised to permit discharges for cause (under proposed § 418.26(a)(3)) if a patient refuses to sign a revocation statement. A signed revocation statement serves to protect hospice patients whose hospice may seek to discharge them because of possible higher costs associated with use of necessary services. Under current regulations, if a patient who otherwise would be discharged for cause were to refuse to sign a revocation statement, the hospice would be in the anomalous position of receiving daily payments from Medicare for a person who cannot receive services. Earlier in this section, the implications for the hospice and the beneficiary were discussed. Paragraph (b)(1) would permit waiver of a signed revocation if one is not obtainable in cases of discharge for cause. It is our intention to take all comments into account prior to finalizing the “discharge for cause” policy. If implemented, our utmost concern is that there are sufficient patient protections in place to ensure appropriate delivery of care and, if needed discharge planning.

We would add a new paragraph (i) to § 418.202 to state that any other service that is specified in the patient's plan of care as reasonable and necessary for the palliation and management of the patient's terminal illness and related conditions, and for which payment may otherwise be made under Medicare, is a covered hospice service. This change was made by section 4444 of the BBA and was a clarification of long-standing Medicare policy.

In addition to reflecting the payment changes required by the BBA, we are proposing to add a new paragraph (c) to § 418.301, “Basic rules.” This paragraph would restate the basic requirement, included in the provider agreement, that the hospice may not charge a patient for services for which the patient is entitled to have payment made under Medicare or for services for which the patient would be entitled to payment if the provider had completed all of the actions described in § 489.21. Since this requirement is currently included in the provider agreement, we would restate it in this part for clarification only.

We are adding a new paragraph (g) to § 418.302, “Payment procedures for hospice care,” to provide that payment for routine home care and continuous home care would be made on the basis of the geographic location where the service is provided (requirement of section 4442 of the BBA).

We would also update the rules found at § 418.304, “Payment for physician services,” to reflect current payment methodology for physician services under Medicare Part B. References to reimbursement based on reasonable charges would be replaced with references to the physician fee schedule. We would revise the first sentence of paragraph (b) to clarify that a specified Medicare contractor pays the hospice an amount equivalent to 100 percent of the physician fee schedule, rather than 100 percent of the physician's reasonable charge, for those physician services furnished by hospice employees or those under arrangement with the hospice. We would also revise the second sentence of paragraph (c) to specify that services of the patient's attending physician, if he or she is not an employee of the hospice or providing services under arrangements with the hospice, are paid by the carrier under the procedures in subpart A, part 414 of chapter IV.

Finally, in § 418.306, “Determination of payment rates,” we would revise paragraph (b)(3) and add new paragraphs (b)(4) and (b)(5) to set the payment rate in Federal fiscal years 1998 through 2002 as the payment rate in effect during the previous fiscal year increased by a factor equal to the market basket percentage increase minus 1 percentage point, with the exception that the payments for the first half of FY 2001 shall be increased 0.5 percent, and then increased an additional 5 percent over the above calculation. Payments for all of FY 2002 will be increased 0.75 percent.

Under the Paperwork Reduction Act of 1995 (PRA), we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection report should be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we solicit comments on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.

• The accuracy of our estimate of the information collection burden.

• The quality, utility, and clarity of the information to be collected.

• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

We are soliciting public comment on each of these issues for the following sections of this document that contain information collection requirements:

Sections 418.22 and 418.26 of this proposed regulation contain information collection requirements that are subject to review by OMB under the PRA.

The current collection requirements referenced in § 418.22 have been approved by OMB under approval number 0938-0302, with a current expiration date of January 31, 2003. However, this rule proposes a new collection requirement, which requires CMS to solicit comment on the new information collection requirement and resubmit 0938-0302 to OMB for review and approval, as a revision to a currently approved collection.

The newly proposed requirement as referenced under paragraph (b)(2) of this section stipulates that specific clinical findings and other documentation that support the medical prognosis must accompany the certification of terminal illness and must be filed in the medical record with the written certification as set forth in paragraph (d)(2) of this section.

While this requirement is subject to the PRA, we believe the burden associated with this requirement is exempt from the PRA as stipulated under 5 CFR 1320.3 (b)(2) and (b)(3) because the requirement is considered a reasonable and customary business practice and/or is required under State or local laws and/or regulations.

The requirement referenced in paragraph (a)(3)(iii) of this section requires the documentation of the problem(s) related to the patient and efforts made to resolve the problem(s) and enter this documentation into the patient's medical records.

The requirement referenced in paragraph (a)(3)(iv) of this section requires that a written physician's order from the patient's attending physician and hospice medical director concurring with discharge from hospice care be obtained and included in the patient's medical record.

While these requirements are subject to the PRA, we believe the burden associated with these requirements is exempt from the PRA as stipulated under 5 CFR 1320.3(b)(2) and (b)(3) because the requirements are considered reasonable and customary business practices and/or are required under State or local laws and/or regulations.

If you have any comments on any of these information collection and record keeping requirements, please mail the original and three copies directly to the following:

The provisions of this proposed rule are based upon provisions in the BBA, BBRA, and BIPA, with statutorily-set timeframes, and have already been implemented through program memoranda. These include changes in election periods; timing requirements for written certification; covered services; payment based upon site of service; and annual payment update amounts. Other proposed provisions address documentation supporting certification; admission requirements; discharge from hospice; and clarification of current policy that has not previously been captured in regulations.

We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980 Public Law 96-354). 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 in any one year). We have determined that this rule is not a major rule for the reasons discussed below.

The RFA requires agencies to analyze options for regulatory relief of small businesses, nonprofit organizations, and government agencies. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or having revenues of $25 million or less annually. For purposes of the RFA, all hospices are considered to be small entities. In 2001, there were approximately 2,277 Medicare-certified hospices. Of those 2,277, approximately 73 percent can be considered small entities because they were identified as being voluntary, government, or other agency.

Given the general lack of hospice data and the unpredictable nature of hospice care, it is extremely difficult to predict the savings or costs associated with the changes contained in this proposed rule. Originally, we estimated the Medicare hospice rate reductions required by section 4441(a) of the BBA would result in a $103 million savings to the Medicare program in FY 2002. Increases required by section 321 of BIPA, however, will add $37 million to Medicare program costs. While it is likely that all of the Medicare-certified hospices considered to be small entities have been required to make changes in their operations in some way due to the implementation of these statutory provisions and proposed changes, this NPRM does not propose any additional changes that are likely to significantly impact the operations of hospice providers. For these reasons, we certify that this proposed rule will not have a significant effect on a substantial number of small entities. However, we have prepared the following analysis to describe the impacts of this rule. This analysis, in combination with the rest of the preamble, is consistent with the standards for analysis set forth by the RFA and EO 12866.

In addition, 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 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. This proposed rule largely codifies existing hospice requirements and will not result in a significant impact on a substantial number of small rural hospitals. Therefore, no analysis is required.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. This proposed rule does not impose unfunded mandates, as defined by Section 202 of UMRA, as it will not result in the expenditure in any 1 year by either State, local or tribal governments, or by the private sector of $110 million.

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 proposed rule has no impact on State law. We have reviewed this proposed rule under the threshold criteria of Executive Order 13132 and we believe that it would not have substantial Federalism implications.

Section 1902(a)(13)(B) of the Act requires the Medicaid payment methodology for hospice care to be determined using the same methodology that is used for Medicare. State Medicaid programs with the optional Medicaid hospice benefit would be required to implement sections 4441(a) and 4442 of the BBA. We remain unaware of any impact of these provisions on State Medicaid programs since these provisions became effective. Nevertheless, it is possible that these payment-related provisions could impact particular State Medicaid programs. However, because each State Medicaid program is unique, it is impossible to quantify meaningfully, an estimate of the effect of the costs on State and local governments.

Given the general lack of hospice data and the unpredictable nature of hospice care, it is extremely difficult to quantify the impact this proposed rule would have on hospice providers. Nevertheless, we have tried to estimate the impact of the following changes on hospice providers. In general, we believe that the effect of the proposed rule will have minimal economic impact on hospice providers or on the regulatory burden of small business. In the following sections we have indicated implementation actions already taken, and anticipated effects the proposed rules may have.

The BBA required hospice providers to bill for routine and continuous home care based on the geographic location where the service was provided. We expect that Medicare would experience some savings with this provision; however, it is impossible to predict the size of the savings attributable to this provision. These Medicare savings may reflect a cost to hospice providers. This BBA change has been implemented through program memoranda. This proposed rule merely codifies this statutorily required change.

Medicare hospice is now available in two 90-day periods and an unlimited number of 60-day benefit periods. Because there is no longer a limit on the number of benefit periods available to a beneficiary, it is possible that this change would result in an increase in the number of revocations and reelections. However, we anticipate that this change would have a negligible effect on hospice providers. The change in benefit periods was implemented by a program memorandum issued shortly after passage of the BBA and has already been incorporated into hospice program operations.

The BBA clarified that the Medicare hospice benefit covers any service otherwise covered by Medicare and listed in the hospice plan of care as reasonable and necessary for the palliation and management of a terminal illness. This change should not generate any additional costs for Medicare hospices because it is merely a statutory clarification of existing Medicare policy. This clarification of covered hospice services was implemented through a program memorandum issued prior to the effective date set by the BBA, April 1, 1998 and is merely being codified by this regulation. It helped providers determine better the services they must provide.

The requirement that a written certification of terminal illness for admission to a hospice for the initial 90-day benefit period be on file before a claim for payment is submitted would not impose any additional costs on hospice providers and removes the problem of obtaining the written certification according to a rigid timeframe. This requirement would provide hospices with more flexibility to establish cost-efficient procedures for obtaining the required certifications. However, the proposed expansion of the requirement for verbal certifications to every benefit period may impose costs on hospice providers. Before enactment of the BBA, verbal certifications were required within 2 days of the start of care during the first benefit period if a written certification could not be obtained within those 2 days. We are proposing to require that, absent written certification, verbal certifications of terminal illness be obtained within those 2 days for each benefit period. Although we believe the impact of this proposal would be negligible, it is difficult to estimate the exact size of the impact of this proposal because some costs may be negated by the increased flexibility, and time, a hospice provider has in obtaining the required written certifications.

Additionally, we believe that the proposal to require that written certifications of terminal illness be accompanied by specific clinical findings and documentation supporting the prognosis would not impose any new costs on hospice providers. We released a policy memorandum in 1995 to all hospice providers, through the fiscal intermediaries, requesting that all hospices maintain documentation demonstrating a beneficiary's terminal status. Because it has been 6 years since we issued the policy calling for specific clinical findings and other documentation supporting the terminal prognosis, we do not anticipate that the requirement will alter hospices' current practices.

We believe that the proposed regulation describing admission responsibilities would impose no additional burden upon hospices. The responsibilities were referred to in various regulations, manuals, program memoranda, and other correspondence; this regulation brings them together in an organized rule. ORT and OIG investigations and reviews found that admission activities were not always executed fully, or when done, they were not always documented. This proposed regulation would specify the consultation between the attending physician and the hospice and its medical director that normally does or should take place when a physician seeks hospice care for his or her patient. The regulation would also describe the consideration that the medical director gives, when deciding upon certification, to the patient's diagnosis, related diagnoses, medical findings that support those diagnoses, the over all medical management needs of the patient, and the attending physician's future plans for the patient. We do not believe any new costs are associated with these proposed requirements, and the 1995 policy memorandum had made clear hospice admission responsibilities and the need to document their execution. We found that the hospice provider community was generally pleased that CMS had issued the guidance, which alleviated previous problems associated with admission of beneficiaries to hospice care.

This proposed regulation may add a small additional burden to hospices providing services to Medicare beneficiaries, but at the same time it also should reduce certain other burdens they may currently experience, particularly with respect to making appropriate discharges. In the absence of specific regulations, hospices have often been uncertain what to do when a patient appeared appropriate for discharge from the program. There was limited manual guidance, although following the ORT and OIG investigations, some additional information on the appropriate time to discharge patients was communicated to the hospice industry. Our proposal would incorporate discharge planning, a normal part of health care provision, into the hospice's care planning procedures. Regular, ongoing care planning, including the potential for discharge, has always been part of a hospice's responsibilities, and the regulation would simply recognize this responsibility. It is not a new additional burden.

Discharge for certain disruptive, abusive, or uncooperative patients would entail a small additional burden upon very few hospices, based on past discussions with some providers before preparation of this proposed rule. We believe the burden is small, because we have rarely received requests from hospices over the years for relief in cases involving this type of behavior. Elsewhere in this preamble, we have elicited input on this particular proposed rule, particularly with respect to protection of patients. We are aware of the burden that individual providers have had when faced with difficult patients, and this proposal would provide a way for them to resolve it, and, we believe, also lessen burdens currently experienced when trying to provide care to this type of patient.

The section of this proposed regulation that discusses the effect of discharge, that is, that a beneficiary discharged from hospice care immediately resumes full coverage under the regular Medicare program, has always been the law. However, it has not been stated in regulation in a straightforward manner, and doing so offers reassurance to both the beneficiary and the hospice that discharge from the hospice does not mean the loss of Medicare benefits. This section also assures a beneficiary that he or she may again elect hospice at any future time if he or she meets eligibility requirements.

We do not anticipate that this rule would have any effects on other provider types.

As discussed above, it is very difficult to estimate the size of any savings to the Medicare program attributable to this proposed rule. We have estimated that the hospice rate reduction for FY 1998 through FY 2002, as required by section 4441(b) of the BBA, section 131(a) of BBRA, and section 321 of BIPA, would result in a total savings of $108 million. Also, as discussed above, it is very difficult to estimate the size of any implementation costs to State Medicaid programs with optional Medicaid hospice benefits. However, it should be noted that the BBA provisions that State Medicaid programs are required to implement (rates of payment, payment based on location where care is furnished, other items and services, physician contracting) have been effective since August 5, 1997. Since that time, we have not received any correspondence from State Medicaid programs indicating that these provisions have had significant costs associated with implementation.

Most of the proposed regulations are mandated requirements of the BBA, BBRA, and BIPA, and have already been implemented by CMS Program Memoranda, published in the month after passage of the BBA, and the month after the passage of BIPA. BBRA changes only concerned hospice payment amounts but did not affect the basic law. Discharge for cause will enable us to implement policies that permit hospices to act in those rare events that indicate the need, but with protection for the beneficiary included in the rules. Alternatively, hospices may continue to address this particular problem without certainty as to their authority in these special situations. Other proposed regulations represent current policies that have been implemented and recognized by the industry, clarification of current regulations, or suggested policies that the industry and CMS believe may help improve the Medicare hospice program.

The general lack of hospice data and the unpredictable nature of hospice care have made it extremely difficult to predict the savings or costs associated with the changes contained in this proposed rule. However, we believe that the proposed changes would create very little, if any, new economic or regulatory burdens on hospice providers. These proposed changes are either statements of current policy or clarifications of policy that would benefit hospice providers. We believe that we have made every effort to mitigate the effects of these proposed changes on hospice providers.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

Because of the large number of items of correspondence we normally receive in response to Federal Register documents published for comment, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

For the reasons set forth in the preamble, 42 CFR, Chapter IV, part 418 is proposed to be amended as set forth below:

Inspection of Public Comments: Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone (410) 786-7197.

Copies: Additional copies of the Federal Register containing this proposed rule can be made 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.

Section 4321 of the Balanced Budget Act of 1997 (BBA), Pub. L. 105-33, was enacted by the Congress to improve the administration of the Medicare Program by enabling Medicare beneficiaries to make more informed choices about the providers from which they receive Medicare services. We believe that this provision was intended to address concerns that some hospitals were referring patients only to home health agencies (HHAs) in which they had a financial interest. Section 4321 of the BBA addresses both quality and program integrity concerns inherent in financial relationships among hospitals, HHAs, and other entities.

Section 4321(a) of the BBA requires that Medicare participating hospitals, as part of the discharge planning process, share with each beneficiary a list of Medicare-certified HHAs that serve the beneficiary's geographic area and which request to be listed. In addition, the statute prohibits hospitals from specifying that beneficiaries receive services from a particular HHA. Further, the statute requires that hospitals identify any HHA or other entity in which they have a disclosable financial interest or which have a financial interest in them, although it does not define what is meant by “financial interest.” The intent of section 4321(a) is to protect patient choice. Hospitals essentially have a captive population and, through the discharge planning process, can affect who provides posthospitalization services. CMS has already implemented the requirements of section 4321(a). A CMS directive was issued on October 31, 1997, and enforcement is carried out through the hospital survey and certification process. Moreover, the requirements of section 4321(a) are set forth in the proposed hospital conditions of participation, published on December 19, 1997 (62 FR 66726).

This proposed rule would establish a process for implementing sections 4321(b) and (c) of the BBA. Section 4321(b) of the BBA requires each Medicare participating hospital to maintain and disclose to the Secretary of Health and Human Services (the Secretary) the following information:

(1) The nature of any direct or indirect financial interest that exists among the hospital and those HHAs and other entities to which the hospital refers beneficiaries under a discharge plan.

(2) The number of beneficiaries who were discharged from the hospital and who were identified as requiring home health services.

(3) The percentage of those beneficiaries who received home health services from an HHA in which the hospital has a financial relationship.

Section 4321(c) of the BBA requires the Secretary to make available to the public the information disclosed under section 4321(b).

We are proposing a process for collecting and publicizing the information required by sections 4321(b) and (c) of the BBA.

Information regarding beneficiary utilization of hospital, HHA, and other services is readily available through the secure network governing the day-to-day claims processing operations of the Medicare Program. These claims data are available at the Medicare fiscal intermediaries and carriers as well as at the Centers for Medicare & Medicaid Services. We propose to use these data to identify hospital discharges and related, subsequent home health services. Further, these data will identify the hospitals, HHAs, and other entities that furnished the Medicare services.

We propose to allow hospitals to satisfy their financial disclosure obligations under the BBA through the Medicare provider enrollment process. The Medicare provider enrollment process already collects information that identifies financial relationships between hospitals, HHAs, and other entities. For example, when applying for a provider number for billing the Medicare program, a hospital must disclose the existence and nature of financial interests in HHAs and other entities. Accordingly, for the purpose of implementing section 4321(b) of the BBA, we propose to define a reportable “financial interest” as any financial interest that a hospital is required to report according to the provider enrollment process, which is governed by section 1124 of the Social Security Act (42 U.S.C. 1320a-3) and its implementing regulations and manual provisions. We do not believe, however, that section 4321 of the BBA should be interpreted to mean that the mere existence of a financial relationship between a hospital and an HHA constitutes a program abuse.

To implement sections 4321(b) and (c) of the BBA without placing any additional reporting burden on Medicare providers, we propose to systemically match and report information from the provider enrollment process on financial interests among hospitals, HHAs, and other entities with information from day-to-day Medicare claims processing on the utilization of home health services. We are soliciting comments on our proposed process, as well as alternative methods for collecting and reporting data.

Information collected under sections II.A and B of this preamble will be made available annually in January for the prior October through September period, on a hospital-by-hospital basis. For each hospital, we propose collecting and reporting: (1) The total number of hospital discharges that led to home health services; (2) the percentage of those discharged beneficiaries who received home health services from an HHA that had a direct or indirect financial relationship with the discharging hospital; (3) the name(s) of the HHA(s) and other entities for which a financial relationship with the hospital exists and for which posthospital services were furnished; and (4) the nature of the financial interest.

We will determine the most effective and efficient ways to make the required information available to the public. Consideration will be given to using websites as well as hardcopy distribution. The form and manner for making the information available will be guided by the need to reach as many beneficiaries as possible in order to assist them in making informed choices about who furnishes their health care services. As such, we invite comments as to the preferred medium for disseminating this information. We anticipate releasing the initial report during the first January that is at least 90 days after the publication of the final rule.

This document does not impose additional information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995. Information about hospital discharges and related home health services is available through Medicare claims processing systems and databases. Further, financial interest information is already available through the Medicare provider enrollment process.

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

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. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), 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 in any 1 year). This is not a major rule. It would not impose any additional costs on affected entities, as compliance with the statute and the rules proposed herein are possible through the management and disclosure of information already available to the Medicare Program. Some indeterminable benefits may result by enabling Medicare beneficiaries to make more informed choices about who furnishes their Medicare services. Therefore, no RIA is required.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $7.5 million or less annually. For purposes of the RFA, all hospitals, HHAs, and “other entities” are considered to be small entities. However, the nature of this proposed rule is such that no regulatory burden would be placed upon hospitals, HHAs, and other entities. Therefore, no regulatory relief options are considered.

In addition, 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 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. We certify that this proposed rule would not have a significant economic impact on a substantial number of small entities or a significant impact on the operations of a substantial number of small rural hospitals. Information needed to comply with the statute is already available through the Medicare claims processing and provider enrollment systems. Therefore, no regulatory impact analysis is required.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. This proposed rule would not have an impact on State, local, or tribal governments or on the private sector.

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 proposed rule would not have a substantial effect on State or local governments for the reasons noted above.

The anticipated effects on Medicare's beneficiaries would be an enhanced ability to make informed choices about the care they receive from HHAs and other entities upon discharge from a hospital. There are approximately 6,000 Medicare-certified hospitals and 6,900 Medicare-certified HHAs, of which approximately 2,000 are hospital-based. At this time, we have not compiled additional data that may identify other financial relationships between hospitals, HHAs, and other entities, as further defined under the provider enrollment guidelines.

The effect of this proposed rule on hospitals, HHAs, and other entities is uncertain, but the requirements set forth in this proposed rule would place no additional burden on these providers. A possible outcome might be to influence hospital referral patterns, thus having an impact on HHAs and other entities. The information made available in compliance with the statute and this proposed rule may impact beneficiary choices about who furnishes Medicare services to them and, in turn, may have an indeterminable impact on HHAs and other entities that receive/do not receive the beneficiary's “business” as a result.

This proposed rule would improve our information campaign to assist beneficiaries in their choices for health care delivery. In addition, the information made available through this proposed rule would serve to ensure that the financial interests between hospitals, HHAs, and other entities do not lead to program integrity abuses such as steering certain patients (for example, healthier patients) to certain HHAs (for example, hospital-owned). We do not believe, however, that section 4321 of the BBA should be interpreted to mean that the mere existence of a financial relationship between a hospital and an HHA constitutes a program abuse.

The effects on the Medicaid Program may be similar in that the information about financial relationships between hospitals, HHAs, and other entities would be made available to the public.

We considered requiring hospitals to collect and provide the information necessary for implementation of this proposed rule. We decided to collect the information from existing sources, however, in order to create a process that would not be burdensome to the entities involved. We request comments on our proposed process as well as on alternative approaches of collecting this information. We also invite public comment on what impact provision of this information might have on home health referrals or beneficiaries' choices of providers.

As described above, this proposed rule proposes a process for implementing the statutory requirements under sections 4321(b) and (c) of the BBA. This approach would enhance the information made available to Medicare beneficiaries and reduce potential program abuses by hospitals. Further, the proposed approach for complying with the relevant statutory provisions would place no additional burden on all affected entities or on any entity, which may be indirectly affected.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV, part 482 as set forth below:

Section 1007(a) of the Legal Services Corporation Act requires LSC to establish guidelines, including setting maximum income levels, for the determination of applicants' financial eligibility for LSC-funded legal assistance. Part 1611 implements this provision, setting forth the requirements relating to determination and documentation of client financial eligibility.

The current version of 1611 was adopted in 1983. In 1995, LSC published a proposed revision to part 1611 which represented a major overhaul of the regulation (60 FR 3798, January 15, 1995). The product of significant discussions and negotiation among LSC staff and representatives of the field, the proposed rule reflected an attempt to clarify and simplify the rule without changing most of the underlying policies and concepts of the rule. Following publication of the NPRM, however, no further action on the proposed revisions to part 1611 was taken. Many outstanding issues prompting the 1995 rulemaking remain extant and there are additional issues which have arisen since then. In addition, there are statutory changes which need to be incorporated into the regulation. In light of the above, the LSC Board of Directors identified 45 CFR part 1611, Eligibility, as an appropriate subject for rulemaking on January 27, 2001. On June 30, 2001, the LSC President and the Chair of the Operations and Regulations Committee of the Board of Directors made a determination to proceed with a Negotiated Rulemaking to consider amendments to part 1611. In accordance with the LSC Rulemaking Protocol, LSC published a notice in the Federal Register formally soliciting suggestions for appointment to the Negotiated Rulemaking Working Group from the regulated community, its clients, advocates, the organized bar and other interested parties (66 FR 46976, September 10, 2001).

After receiving submissions of interest, a Working Group was appointed. The members of the Working Group are: Legal Services Corporation, Washington, DC (represented by Mattie C. Condray, Senior Assistant General Counsel, Office of Legal Affairs; John Eidleman, Acting Vice President for Compliance and Administration; Anh Tu, Program Counsel, Office of Program Performance; and Danilo Cardona, Director, Office of Compliance and Enforcement); Legal Services Corporation, Office of Inspector General, Washington, DC (represented by Laurie Tarantowicz, Assistant Inspector General and Legal Counsel); Center for Law and Social Policy, Washington, DC (represented by Linda Perle, Senior Attorney—Legal Services); National Legal Aid and Defenders Association, Washington, DC (represented by Jon Asher, Member NLADA Regulations Committee and Executive Director of Colorado Legal Services); Legal Aid of North Carolina, Raleigh, NC (represented by George Hausen, Executive Director); Northwest Justice Project, Seattle, WA (represented by Deborah Perluss, Director of Advocacy/General Counsel); Blue Ridge Legal Services, Inc., Harrisonburg, VA (represented by John Whitfield, Executive Director); West Texas Legal Services, Fort Worth, TX (represented by Vernon Lewis, Deputy Director); Land of Lincoln Legal Assistance Foundation, Inc., Alton, IL (represented by Joseph Bartylak, Executive Director); Atlanta Legal Aid Society, Atlanta, GA (represented by Steven Gottlieb, Executive Director); and the American Bar Association's Standing Committee on Legal Aid and Indigents and Defendants (represented by Phyllis Holmen, Member SCLAID and Executive Director, Georgia Legal Services Program).

The Working Group held three meetings: January 7-8, 2002; February 11-12, 2002; and April 11-12, 2002. All three meetings were noticed in the Federal Register and were open to public observation. The Working Group conducted its work under the guidance of a professional facilitator. The facilitator, although selected by and under contract to LSC pursuant to LSC's Rulemaking Protocol, did not represent LSC on the Working Group and served as a neutral with the continuing support of the Working Group.

The Working Group developed a Draft NPRM which was considered by the Operations and Regulations Committee of the Board of Directors at its meeting on November 8, 2002. The Committee suggested two major revisions to the Draft NPRM (discussed below) and this NPRM (as revised) was approved for publication by the Board of Directors at its meeting on November 9, 2002. Except as noted, all of the specific proposed revisions contained herein represent the consensus opinion of the Working Group.

While specific revisions are discussed in greater detail in the Section-by-Section analysis, below, it should be noted that the proposed revisions reflect several overall goals of the Working Group: reorganization of the regulation to make it easier to read and follow; simplification and streamlining of the requirements of the rule to ease administrative burdens faced by LSC grantees in implementing the regulation and to aid LSC in enforcement of the regulation; and clarification of the focus of the regulation on the financial eligibility of applicants for LSC-funded legal services. In particular, LSC is proposing to significantly reorganize and simplify the sections of the rule which set forth the various requirements relating to establishment of recipient annual income and asset ceilings, authorized exceptions and determinations of eligibility. These changes are intended to improve the clarity of the regulation and include substantive changes to make intake simpler and less burdensome and basic financial eligibility determinations easier for recipients to make. LSC is also proposing to move the existing provisions on group representation, with some amendment, to a separate section of the regulation.

LSC also proposes to eliminate the retainer agreement requirement currently found at § 1611.8 of the regulation. The retainer agreement requirement was the subject of significant discussion in the Working Group. Representatives of the field agreed with the LSC representatives that a retainer agreement may be appropriate under certain circumstances, but argued that this regulatory requirement is not required by statute, is not justified under applicable rules of professional responsibility, may be unnecessarily burdensome in some instances and is not related to financial eligibility determinations. They contended that, barring a statutory mandate, decisions about the use of retainer agreements, like those involving many other matters relating to the best manner of providing high quality legal assistance, should be determined by a recipient's Board, management and staff, with guidance from the Corporation. They urged LSC to delete this requirement. The LSC representatives, however, were of the opinion that the existing provision in the regulations requiring the execution of retainer agreements is professionally desirable, authorized in accordance with LSC's mandate under section 1007(a)(1) of the Act to assure the maintenance of the highest quality of service and professional standards, and appropriate to assure that there are no misunderstandings as to what services are to be rendered to a particular client. Retainer agreements protect the attorney and recipient in cases of an unfounded malpractice claim and protect the client if the attorney and the recipient should fail to provide legal assistance measuring up to professional standards. In the end, the Working Group was unable to reach consensus on this issue and the Draft NPRM retained a provision generally requiring the execution of retainer agreements, along with proposing requirements for client service notices and PAI referral notices in lieu of retainer agreements under certain circumstances.

In its deliberations on the Draft NPRM, the Operations and Regulations Committee determined that while it agreed that retainer agreements are professionally desirable, it did not find it necessary, either by statute or policy, for LSC to continue to impose such a requirement on recipients. The Committee recommended that the entire proposed § 1611.7 in the Draft NPRM, entitled Retainer Agreements, Client Service Notices and Referral Notices, be stricken from the draft prior to publication. In approving the recommendation of the Committee, the Board directed that this action be taken and any conforming amendments necessary be made prior to publication of the NPRM for comment. This NPRM reflects this direction. LSC specifically invites comment on this issue.

One other general issue merits discussion. Section 509(h) of the FY 1996 LSC appropriations act, Pub. L. 104-134, provides that, among other records, eligibility records “shall be made available to any auditor or monitor of the recipient * * * except for such records subject to the attorney-client privilege.” This provision has been retained in each subsequent appropriations measure and continues to be in force. The Office of the Inspector General has been interested in having this language expressly incorporated into part 1611.

The Working Group took up the issue and discussed the fact that there is some measure of disagreement about the scope and extent of the access authority granted to the OIG by the statute. Mindful of this disagreement, the Working Group determined that an appropriate approach would be simply to propose language that tracked very closely that of the statute and the Working Group was close to reaching consensus on what would have been proposed § 1611.10, Access to Records. The Working Group acknowledged that such an approach would not settle all of the questions about the meaning of the access provisions, but agreed that it was the best way to incorporate the statutory requirements without causing undue delay in completing its work on this proposed rule. Simultaneously, however, in the course of a similar discussion taking place in a separate negotiated rulemaking on LSC's alien eligibility regulations, 45 CFR part 1626, it became apparent that the 1626 Working Group would not be able to agree to such an approach, with several participants favoring either leaving an access provision out of the regulation or drafting a provision that reflects a more thorough discussion and interpretation of 509(h).

This situation created a problem for LSC because LSC is not willing either to adopt two differing regulations implementing the same statutory provision, or to have an access to records provision relating to 1611 eligibility records but not an access to records provision relating to 1626 eligibility records when both regulations are in the process of revision. Either of these situations would invite unnecessary implementation problems for LSC, the OIG and recipients. Moreover, upon reflection LSC has determined that, as 509(h) covers significantly more than eligibility records, conducting a full discussion of the meaning of 509(h) in the context of either 1611 or 1626, which deal only with eligibility issues, is not appropriate. The OIG's authority under the statute is not affected by a decision not to incorporate express access to records provisions in either 1611 or 1626. Consequently, LSC does not propose to include regulatory language implementing 509(h) with respect to records covered by this part. Similarly, LSC does not propose to add language regarding 509(h) access to the retainer agreement, client service notice and referral notice provisions of proposed § 1611.7.

Although the field representatives to the Working Group concur in this decision, the OIG dissents. As noted above, the OIG has been interested in incorporating the 509(h) authority in the regulations for some time. The OIG disagrees with LSC's position that conducting a full discussion of the meaning of 509(h) in the context of either 1611 or 1626 is inappropriate. Rather, the OIG is of the opinion that since one of the goals of this rulemaking (and the 1626 rulemaking) is to clarify the requirements applicable to recipients relating to eligibility records and since access to eligibility records is provided by 509(h), the 1611 and 1626 negotiated rulemakings provide an opportunity to clarify the statutory authority. Failing a full discussion of 509(h) in the current regulatory context, the OIG believes that including an access provision which closely trackes the statutory language would make clear that the documentation and records recipients are required to maintain under parts 1611 and 1626 are eligibility records to which LSC has access under 509(h).

Moreover, the OIG is of the opinion that even if a consensus could not be reached during the negotiated rulemaking process, LSC nonetheless should include an access provision in the rule. Negotiated rulemaking has at its ultimate goal the resolution of differences of all issues by consensus. Yet, the negotiated rulemaking process anticipates that consenses may not be achieved on all issues, and in such cases, LSC, as the entity responsible for implementing the law, promulgates the rule it deems appropriate. The OIG believes this is especially warranted in the case of access, where the anticipated lack of ability to reach consensus highlights the very problem the rulemaking should address and resolve. The OIG notes that the discussions among the Working Group members make clear that there are differences in interpretation regarding the access to which LSC is authorized. The OIG further notes that those differences have resulted in problems and delays when access to grantee information is sought, causing the unnecessary expenditure of time and resources for all involved. The OIG believes that attempting to avoid the problem by not including an access provision in the rule resolves nothing.

LSC acknowledges that not including an access provision in § 1611 does not resolve the issues relating to the meaning and scope of the 509(h) access provision. Indeed, as noted above, LSC has determined that, as section 509(h) covers a range of records beyond financial eligibility records, it is not appropriate for LSC to use this rulemaking to explore and resolve these contentious and important issues.

LSC proposes to change the title of part 1611 from “Eligibility” to “Financial Eligibility.” This proposed change is intended, first, to make clear that with respect to individuals seeking LSC-funded legal assistance, the standards of this part deal only with the financial eligibility of such persons. LSC believes this change will help clarify that a finding of financial eligibility under part 1611 does not create an entitlement to service. Rather, financial eligibility is merely a threshold question and the issue of whether any otherwise eligible applicant will be provided with legal assistance is a matter for the program to determine with reference to its priorities and resources. In addition, this part does not address eligibility based on citizenship or alienage status; those eligibility requirements are set forth in part 1626 of LSC's regulations, Restrictions on Legal Assistance to Aliens.

LSC is proposing to revise this section to make clear that the standards of this part concern only the financial eligibility of persons seeking LSC-funded legal assistance and that a finding of financial eligibility under part 1611 does not create an entitlement to service. In addition, LSC proposes to remove the language in the current regulation referring to giving preferences to “those least able to obtain legal assistance.” Although the original LSC Act contained language indicating that programs should provide preferences in service to the poorest among applicants, that language was deleted when the Act was reauthorized in 1977 and has remained out of the legislation ever since. Thus, as there is no statutory basis for a preference for those least able to afford assistance and because LSC believes that the regulation should focus on financial eligibility determinations without reference to issues relating to service determinations, this language should be removed from the regulation. Finally, LSC proposes to add language specifying that this part also sets forth financial standards for groups seeking legal assistance supported by LSC funds.

LSC proposes to add definitions for several terms and to amend the definitions for each of the existing terms currently defined in the regulation. LSC believes that the new definitions and the amended definitions will help to make the regulation more easily comprehensible.

LSC proposes to add a definition of the term “applicable rules of professional responsibility” as that term appears in proposed § 1611.7, Change in Financial Eligibility Status. This definition is intended to make clear that the references in the regulation refer to the rules of ethics and professional responsibility applicable to attorneys in the jursidiction where the recipient either provides legal services or maintains its records.

Consistent with the intention throughout to keep the focus of the regulation on the standards and criteria for determining the financial eligibility of persons seeking legal assistance supported with LSC funds, LSC proposes to use the term “applicant” throughout the regulation to emphasize the distinction between applicants, clients, and persons seeking or receiving assistance supported by other than LSC funds. Accordingly, LSC proposes to add a definition of applicant providing that an applicant is an individual seeking legal assistance supported with LSC funds. Groups, corporations and associations would be specifically excluded from this definition, as the eligibility of groups would be addressed wholly within proposed § 1611.8.

Programs currently may provide legal assistance without regard to a person's financial eligibility under part 1611 when the assistance is supported wholly by non-LSC funds. LSC does not propose to change this (in fact, LSC proposes to restate this principle in proposed § 1611.4(a)) and believes that the use of the term applicant as proposed herein will help to clarify the application of the rule.

LSC proposes to add a definition of the term assets to the regulation. The proposed definition, “cash or other resources that are readily convertible to cash, which are currently and actually available to the applicant,” is intended to provide some guidance to programs as to what is meant by the term assets, yet provide considerable latitude to programs in developing a description of assets that addresses local concerns and conditions. The key concepts intended in this definition are (1) ready convertibility to cash; and (2) availability of the resource to the applicant.

Although the term is not defined in the regulation, current § 1611.6(c) states that “assets considered shall include all liquid and non-liquid assets. * * *” The intent of this requirement is that programs are supposed to consider all assets upon which the applicant could draw in obtaining private legal assistance. While there was no intent to change the underlying requirement, in discussing the issues of assets and asset ceilings in the Working Group it became apparent that the terms “liquid” and “non-liquid” were obscuring the understanding of the regulation. To some, the term “non-liquid” implied something not readily convertible to cash, while to others the term implied an asset that was simply something other than cash, without regard to the ease of convertibility of the asset. Thus, the Working Group decided that the terms “liquid” and “non-liquid” should be eliminated and that the regulation should focus instead on the ready convertibility of the asset to cash.

The other key concept in the definition of asset is the availability of the resource to the applicant. Although the current regulation notes that the recipient's asset guidelines “shall take into account impediments to an individual's access to assets of the family unit or household,” the Working Group was of the opinion that this principle could be more clearly articulated. LSC believes that the proposed language accomplishes that purpose.

LSC proposes to change the term that is used in the regulation from “governmental program for the poor” to “governmental program for low income individuals and families.” This change is not intended to create any substantive change in the current definition, but merely reflect preferred nomenclature.

LSC is proposing to add a definition of the term “governmental program for persons with disabilties.” LSC proposes to include in the authorized exceptions to the annual income ceilings an exception relating to applicants seeking to obtain or maintain govermental benefits for persons with disabilties. Accordingly, it is appropriate to include a proposed definition for this term. The proposed definition, “any Federal, State or local program that provides benefits of any kind to persons whose eligibility is determined on the basis of mental and/or physical disability,” is intended to be similar in structure and application to the definition of the term “governmental program for low income individuals and families.”

LSC proposes to revise the current definition of income to refer to the total cash receipts of a “household,” instead of a “family unit” and to make clear that programs have the discretion to define the term household in any reasonable manner. Currently, the definition of income refers to “family unit,” while the phrase “household or family unit” appears in the section on asset ceilings. It appears that there is no difference intended by the use of different terms in these sections and LSC believes that it is appropriate to simplify the regulation to use the same single term in each place, without creating a substantive change in the meaning of either term. LSC proposes to use “household” instead of “family unit” because it is a simpler, more accessible term.

As noted above, LSC does not intend the use of the term “household” to have a different meaning from the current term “family unit.” Under current guidance from the LSC Office of Legal Affairs, recipients have considerable latitude in defining the term “family unit”. Specificially, OLA External Opinion No. EX-2000-011 states:

Field representatives on the Working Group also suggested deleting the words “before taxes” from the definition of income. Such a change is desirable, they contend, because automatically deducted taxes are not available for an applicant's use and the failure to take current taxes into account in determining income has an adverse impact on the working poor. While it is undoubtedly true that automatically deducted taxes are not available to an applicant, LSC does not believe that the definition of income is the appropriate place in the regulation to deal with this problem. Taking the phrase “before taxes” out of the definition of income would effectively change the meaning of income from gross income to net income. The term income has meant gross income since the original adoption of the eligibility regulation in 1976. See 41 FR 51604, at 51606, November 23, 1976. The maximum income guidelines are based on gross income, as are the underlying DHHS Federal Poverty Guidelines amounts. Changing the definition of income effectively from gross to net would introduce two different uses of the term income into the regulations. LSC believes that this action would cause greater confusion. Moreover, LSC believes that the practical problem (that taxes, indeed, represent funds unavailable to the applicant), is better addressed by considering taxes a fixed debt or obligation which can be considered by the recipient in making financial eligibility determinations. LSC invites comment on this issue. This matter is presented in greater detail in the discussion of proposed § 1611.5, below.

In addition, LSC proposes to move the information on what is encompassed by the term “total cash receipts” into the definition of income. LSC believes that having this information in the definition of income, rather than in a separate definition will make the regulation easier to use, particularly as the term “total cash reciepts” is used only in the definition of income. In incorporating the language on “total cash reciepts,” LSC proposes to take the current defintion of the term without any substantive amendment, but reorganized to make it easier to understand. Specifically, LSC proposes to separate the definition into two sentences, one of which sets forth the list of things which are included in total cash receipts and one which sets forth those things which are specifically excluded from the definition of total cash receipts. It is worth noting that the sentence on items included is not intended to be exhaustive, while the sentence on items to be excluded is intended to be exhaustive.

Finally, LSC wishes to take this opportunity to restate in this preamble some guidance on the treatment of Indian trust fund monies in making income determinations. Several provisions of Federal law regulate whether or not income or interests in Indian trusts are taxable or should be considered as resources or income for federal benefits. Under the terms of those laws, LSC has determined that recipients may disregard up to $2000 per year of funds received by individual Native Americans that are derived from income or interests in Indian trusts from being considered income for the purpose of determining financial eligibility of Native American applicants for service, and that such funds or interests of individual Native Americans in trust or restricted lands should not be considered as a resource for the purpose of LSC eligibility. See LSC Office of Legal Affairs External Opinion 99-17, August 27, 1999.

As noted in External Opinion 99-17, the exclusion applies only to funds and other interests held in trust by the federal government and investment income accrued therefrom. The following have been found to qualify for the exclusion from income in determining eligibility for various government benefits: income from the sale of timber from land held in trust; income derived from farming and ranching operations on reservation land held in trust by the federal government; income derived from rentals, royalties, and sales proceeds from natural resources of land held in trust; sales proceeds from crops grown on land held in trust; and use of land held in trust for grazing purposes. On the other hand, per capita distributions of revenues from gaming activity on tribal trust property are not protected because such funds are not held in trust by the federal government. Thus, such distributions are considered to be income for purposes determining LSC financial eligibility.

LSC proposes to delete the definition of “total cash reciepts,” currently at § 1611.2(h), as a separately defined term in the regulation. Rather, LSC proposes to reorganize the information contained in the definition and move it directly into the definition of “income.” As noted above, the only place the term “total cash reciepts” is used is in the defintion of “income” and LSC believes that having a separate definition for “total cash reciepts” is cumbersome and unnecessary.

LSC proposes to create a new § 1611.3, Financial Eligibility Policies, based on requirements currently found in §§ 1611.5(a), 1611.3(a)-(c) and 1611.6. The new § 1611.3 would address in one section recipients' responsibilities for adopting and implementing financial eligibility policies. Under the proposed new section, the current requirement that recipients' governing bodies have to adopt policies for determining financial eligibility would be retained. LSC proposes, however, to change the current requirement for annual review of these policies and instead require recipients' governing bodies to conduct triennial reviews of policies. The Working Group agreed that an annual review was unnecessary and has tended to result in rather pro forma reviews of policies. In contrast, a triennial review requirement would be sufficient to ensure that financial eligibility policies remain relevant and would encourage a more thorough and thoughtful review when such review is undertaken. The section would also add an express requirement that recipients would be required to adopt implementing procedures. While this is already implicit in the current regulation, LSC believes it would be better for this requirement to be expressly stated. Such implementing procedures could be adopted either by a recipient's governing body or by the recipient's management.

Proposed § 1611.3 would also contain certain minimum requirements for the content of recipient's financial eligibility policies. Specifically, LSC proposes that the recipient's financial eligibility policy must:

• Specify that only applicants for service determined to be financially eligible under the policy may be further considered for LSC-funded service;

• Establish annual income ceilings of no more than 125% of the current Department of Health and Human Services Federal Poverty Guidelines amounts;

• Establish asset ceilings; and

• Specify that, notwithstanding any other provisions of the regulation or the recipient's financial eligibility policies, in assessing the financial eligibility of an individual known to be a victim of domestic violence, the recipient shall consider only the income and assets of the individual applicant and shall not consider any jointly held assets.

In addition, LSC proposes to permit recipients to adopt financial eligibility policies which provide for authorized exceptions to the annual income ceiling pursuant to proposed § 1611.5 and for waiver of the asset ceiling under unusual circumstances and when approved by the Executive Director or his/her designee. Finally, LSC proposes to permit recipients to adopt financial eligibility policies which permit financial eligibility to be established by reference to an applicant's receipt of benefits from a governmental program for low-income individuals or families consistent with proposed § 1611.4(b).

These proposed provisions are, with two exceptions, based directly on current requirements with a few substantive changes. First among the changes, recipients would no longer be required to routinely submit their asset ceilings to LSC. This requirement appears to serve little or no purpose, as compliance with this requirement has been spotty and LSC has taken no action to obtain the information from programs which have not automatically submitted it. Moreover, the information collected is not being put to any routine use. In addition, LSC has not had a parallel requirement for the submission of income ceilings. The Working Group determined that this requirement could be eliminated without any adverse effect on program compliance with or Corporation enforcement of the regulation.

Another substantive change is that recipients would be permitted to provide in their financial eligibility policies for the exclusion of (in addition to a primary residence, as provided for in the existing regulation) vehicles, assets used in producing income and other assets excluded from attachment under State or Federal law from the calculation of assets. In identifying other assets excluded from attachment under State or Federal law, LSC has in mind assets that are excluded from bankruptcy proceedings or other assets that may not be attached for the satisfaction of a debt, etc .

There was discussion within the Working Group about the appropriate scope of this provision. Field representatives suggested that the list of exclusions should be illustrative, and not exhaustive, allowing programs greater discretion in developing asset ceilings. LSC representatives, however, prefered to retain the approach in the current regulation in which the list of excludable assets is set forth in toto, to emphasize the policy that most assets are to be considered and to maintain a basic level of consistency nationally with respect to this issue. However, the LSC representatives agreed that the regulation could afford recipients some additional flexibility in developing asset ceilings, consistent with the policy articulated above. The Working Group believes that the proposed language meets those objectives, particularly in light of the proposed amendment to the asset ceiling waiver standard discussed below. LSC invites comment on whether the list should be illustrative or exhaustive. LSC also invites comment on whether additional specific assets should be included in the list of excludable assets and, if so, what items might be appropriate.

LSC is also proposing to change the asset ceiling waiver standard slightly. The current regulation permits waiver in “unusual or extremely meritorious situations;” the proposed rule would permit waiver in “unusual circumstances.” The Working Group determined that the current language is unnecessarily stringent and that it is unclear what the difference is intended to be between “unusual” and “extremely meritorious.” It was suggested in the Working Group that the standard should be “where appropriate.” LSC, however, felt that the regulation should continue to reflect the policy that waivers of the asset ceilings should only be granted sparingly and not as a matter of course. The Working Group agreed that the revised language accomplishes this goal, while providing some additional appropriate discretion to programs. In addition, where the current rule requires all waiver decisions to be made by the Executive Director, LSC proposes to permit those decisions to be made by the executive director or his/her designee. LSC believes it is important that a person in significant authority be involved in making asset ceiling waiver decisions, but recognizes that, especially as more programs consolidate and serve larger areas, it is important for programs to have the discretion to delegate certain authority to regional or branch office directors to increase administrative efficiency.

The first totally new element is the proposed language regarding victims of domestic violence. This proposal stems from LSC's FY 1998 appropriations law. Specifically, section 506 of that act provides:

Finally, the proposal to permit recipients to adopt financial eligibility policies which permit financial eligibility to be established by reference to an applicant's receipt of benefits from a governmental program for low-income individuals or families consistent with proposed § 1611.4(b) is also new. This proposal is discussed in greater detail below.

This proposed section would set forth the basic requirement that recipients may provide legal assistance supported with LSC funds only to those individuals whom the recipient has determined are financially eligible for such assistance pursuant to their program's policies, consistent with this part. This section also proposes to contain a statement that nothing in part 1611 prohibits a recipient from providing legal assistance to an individual without regard to that individual's income and assets if the legal assistance is supported wholly by funds from a source other than LSC (regardless of whether LSC funds were used as a match to obtain such other funds, as is the case with Title III or VOCA grant funds) and the assistance is otherwise permissible under applicable law and regulation. This proposed section would further provide that a recipient may find an applicant to be financially eligible if the applicant's assets are at or below the recipient's applicable asset ceiling level (or the ceiling has been properly waived) and the applicant's income is at or below the recipient's applicable income ceiling, or if one or more of the authorized exceptions to the ceiling applies. These provisions are based on existing provisions found in §§ 1611.3, 1611.4 and 1611.6. As revised, the new provisions do not represent a substantive change, but LSC believes having the basic statements as to who may be found to be financially eligible for assistance in one section makes the regulation much clearer. In addition, where the existing regulation uses a construction that speaks to when a recipient may provide legal assistance, the proposed new language emphasizes the point that the requirements speak only to determinations of financial eligibility and not to decisions regarding whether or not to actually provide legal assistance.

LSC also proposes to incorporate into this section two significant substantive changes to the regulation. First, LSC proposes to include a requirement that, in making financial eligibility determinations, a recipient shall make reasonable inquiry regarding sources of the applicant's income, income prospects and assets and shall record income and asset information in the manner specified for determining eligibility in proposed § 1611.6. This requirement would replace the process currently required by § 1611.5, whereby a recipient is effectively required to conduct a lengthy and often cumbersome inquiry as to the applicant's income, assets and income prospects, including inquiry into a detailed list of factors relating to an applicant's specific financial situation and ability to afford private counsel. The Working Group discussed this issue at length and representatives of the field noted that conducting such a detailed inquiry in most cases is a task which is often difficult to accomplish efficiently at the point of intake, especially as much of intake is performed by volunteers, interns or receptionists. Rather, many recipients, in practice, conduct a somewhat abbreviated version of the otherwise required process, inquiring into current income, assets, income prospects and probing for additional information on the basis of the responses provided, based upon the requirements of the regulation and their knowledge of the applicant base and local circumstances. This approach, the field representatives noted, is less prone to error and assists in fostering an appropriate attorney-client relationship with individuals accepted as clients. As LSC is not finding widespread instances of service being provided to financially ineligible persons, it was agreed that that the process required by the existing regulation is unduly complicated and that the simplified requirement proposed would be adequate to ensure that recipients are making sufficient inquiry into applicants' financial situations to determine financial eligibility status under the regulation while being less adminstratively burdensome for recipients and more conducive to the development of the attorney-client relationship. LSC also believes that adoption of the proposed streamlined eligibility determination process will aid the Corporation in conducting compliance reviews.

The other major change is that, consistent with proposed § 1611.3 as discussed above, if adopted, the regulation would permit recipients to determine an applicant to be financially eligible because the applicant's income is derived solely from a governmental program for low-income individuals or families, provided that the recipient's governing body has determined that the income standards of the governmental program are at or below 125% of the Federal Poverty Level amounts. For many recipients, a significant proportion of applicants rely on governmental benefits for low-income individuals and families as their sole source of income. In order to qualify for these benefits, such persons have already been screened and determined to be financially eligible for those benefits by the agency providing the benefits through an eligibility determination process that is stricter than the one required under LSC regulations. In Working Group discussions, many representatives of the field noted that if they could rely on the determinations made by these agencies without having to otherwise make an independent inquiry into financial eligibility, it would substantially ease the administrative workload involved in making eligibility determinations.

The Working Group also noted that current LSC practice permits recipients to determine that an applicant's assets are within the recipient's asset ceiling level without additional review if the applicant is receiving govermental benefits for low-income individuals and families, eligibility for which includes an asset test. Key to this practice is that the recipient's governing body has to take some identifiable action to recognize the asset test of the governmental benefit program being relied upon. This ensures that the eligibility standards of the other program have been carefully considered and are incorporated into the overall eligibility policies adopted and regularly reviewed by the governing body. As this practice has proved efficient and effective, it was determined that a parallel process could also be adopted for income screening and that these practices should be expressly included in the regulations. It is important to note that this provision would only apply to applicants whose sole income is derived from such benefits. Applicants who also have income derived from other sources would be subject to an independent inquiry and assessment of financial eligibility.

This proposed section provides for authorized exceptions to the annual income ceiling. The proposed language, like the current language of §§ 1611.4 and 1611.5, on which it is based, is permissive. A recipient would be free to include some, none, or all of the authorized exceptions discussed below in its financial eligibility policies. Thus, to the extent a recipient would choose to avail itself of the authority provided in this proposed section, a recipient would be permitted to determine an applicant to be financially eligible for assistance, notwithstanding that the applicant's income is in excess of the recipient's applicable income ceiling. In making such determinations, however, the recipient would have to detemine that the applicant's assets were at or below the recipient's applicable asset ceiling (or the ceiling would have had to have been waived). This requirement is consistent with the current regulation, but would be affirmatively stated for clarity.

Under the proposed section, there would be two situations in which an applicant's income could exceed the recipient's income ceiling without an absolute upper limit: (1) Where the applicant is seeking to maintain governmental benefits for low-income individuals and families; and (2) where the executive director (or his/her designee) determines, on the basis of documentation received by the recipient, that the applicant's income is primarily committed to medical or nursing home expenses and, in considering only that portion of the applicant's income which is not so committed, the applicant would otherwise be financially eligible.

The first instance would be a new addition to the regulation. Currently, an applicant seeking to obtain governmental benefits for low income persons may be deemed financially eligible if the applicant's income does not exceed 150% of the national eligibility level. The existing regulation, however, does not specifically address applicants seeking to maintain such benefits. Thus, under the current regulation, an applicant whose income is over the income ceiling but under 150% of the national eligibility level may be deemed financially eligible for assistance in obtaining benefits, but not for assistance in maintaining them. Thus, the applicant seeking assistance to maintain benefits would have to be turned down, but that same applicant could then be found financially eligible for assistance to re-obtain such benefits once the benefits were lost. Accordingly, LSC proposes to address this problem in the regulation. However, unlike the situation in obtaining the benefits, in seeking to maintain benefits LSC considers an upper limit on income unnecssary since in such cases the applicant's income will necessarily be rather limited (for the applicant to have been eligible in the first place for the benefits he or she is seeking to maintain).

The second instance is taken from § 1611.5(b)(1)(B) of the current regulation addressing instances in which the applicant's income is primarily devoted to medical or nursing home expenses and does not represent a substantive change in the current regulation. LSC does propose to specify in the regulation, however, that in such cases the recipient is still required to make a determination of financial eligibility with regard to the applicant's remaining income. The existing regulation could be read to permit an applicant with an income of $300,000 to be deemed financially eligible if $250,000 of the income is devoted to nursing home expenses, notwithstanding that the applicant's remaining income is $50,000—substantially in excess of the income ceiling. This situation is not intended, and, indeed, LSC has no reason to believe recipients are serving such persons. However, consistent with the overall goal of clarifying the regulation, LSC believes that a requirement that an applicant must be otherwise financially eligible considering only that portion of the applicant's income which is not devoted to medical or nursing home expenses should be clearly set forth in the regulation.

LSC also proposes to permit exceptions for certain situations in which the applicant's income is in excess of the recipient's applicable income ceiling, but does not exceed 200% of the applicable Federal Poverty Guideline amount. At the outset, LSC notes that this section also proposes to change the current upper income limit of 150% of the national income guidelines amount, which is 150% of 125% of the Federal Poverty Guideline amounts, or 187.5% of the Federal Poverty Guidelines amounts. Under the proposed new regulation, the upper limit would increase to 200% of the Federal Poverty Guidelines amounts. This change is being proposed to further simplify the language of the regulation and in recognition of the changing demographic of the legal services client base, which now increasingly includes the working poor. The Working Group discussed the fact that this action would slightly increase the pool of potential applicants for service but was of the opinion that this would not have a negative impact on the quantity or quality of services delivered.

Turning to the exceptions, LSC proposes to retain the current exception for individuals seeking to obtain governmental benefits for low-income individuals and families. Second, LSC proposes to add an exception for individuals seeking to obtain or maintain governmental benefits for persons with mental and/or physical disabilties. Many disability benefit programs provide only subsistance support and those individuals should be treated the same way as those seeking to obtain benefits available on the basis of financial need. However, many persons with disabilties who are eligible for disability benefits may not be particularly economically disadvantaged and should not be eligible for legal assistance simply by virtue of the eligibility for such disability benefits. Therefore, those applicants must have incomes below 200% of the applicable poverty level in order to be considered financially eligible for LSC-funded services.

Finally, the proposed regulation maintains the current authorized exceptions found in the factors listed in § 1611.5. Specifically, the recipient may determine an applicant whose income is below 200% of the applicable Federal Poverty Guidelines amount to be financially eligible for legal assistance supported with LSC funds based on one or more enumerated factors that affect the applicant's ability to afford legal assistance. As in the current regulation, recipients would not be required to apply these factors in a “spend down” fashion. That is, although recipients would be permitted to do so, they would not be required to determine that, after deducting the allowable expenses, the applicant's income is below the applicable income ceiling before determining the applicant to be financially eligible. The regulation would also be amended to clarify that the factors apply to the applicant and members of the applicant's household. The factors proposed are identical to the ones in the current regulation, with the following exceptions:

• The factor relating to medical expenses would be restated to make clear that it refers only to unreimbused medical expenses, but that medical insurance premiums are included;

• The factor relating to employment expenses would be reorganized for clarity and would expressly include expenses related to job training or educational activities in preparation for employment;

• The factor relating to expenses associated with age or disability would no longer refer to resident members of the family as a reference to the applicant or members of the applicant's household is proposed to be incorporated elsewhere in this section of the regulation;

• The factor relating to fixed debts and obligations would be amended to read only “fixed debts and obligations.”

With regard to “fixed debts and obligations,” the current regulation provides little guidance as to what is meant by this term, except to specifically include unpaid taxes from prior years. LSC proposes to simply use the term “fixed debts and obligations,” while providing guidance in the preamble as to what is encompassed by the term. LSC believes that this approach will provide recipients with flexibility in applying the rule, while providing for more guidance than could easily be contained in regulatory text.

Prior guidance from the LSC Office of Legal Affairs has stated that, “in the absence of any regulatory definition or guidance as to the meaning of “fixed debts and obligations,” the common meaning of the term applies” and that it encompasses debts fixed as to both time and amount. See Letter of November 1, 1993 from J. Kelly Martin, Assistant General Counsel to Stephen St. Hilaire, Executive Director, Camden Regional Legal Services, Inc. Examples of such “fixed debts and obligations” would include morgage payments, child support, alimony, and business equipment loan payments. LSC intends that this term should also include rent in addition to mortgage payments. Previous OLA opinions have addressed mortgage payments but not rent and rent has, heretofore, not been considered a fixed debt. LSC now sees no rational distinction between the two for the purposes of this regulation and therefore proposes to treat these expenses in a similar manner.

With respect to taxes, prior to 1983, part 1611 included current taxes along with past due unpaid taxes as a fixed debt. When the regulation was changed in 1983, the reference to taxes was amended to refer only to unpaid prior year taxes. This change was justified on the basis that the § 1611.5 factors were intended to account only for “special circumstances” affecting the ability to afford legal assistance. See 48 FR 54201 at 54203 (November 30, 1983). However, given that other types of expenses included in the list do not seem to be particularly “special” ( e.g. , mortgage payments; child care expenses), LSC no longer finds this explanation pursuasive. Rather, LSC believes that the exclusion of current taxes, but not prior unpaid taxes, from fixed debts and obligations has the effect of punishing those persons who are in compliance with the law in favor of persons who are delinquent in their legal responsibility to pay taxes. Moreover, as noted above, the legal services client base is increasingly comprises the working poor. Excluding current taxes from fixed debts has a disproportionate effect on applicants who work, versus applicants who do not work. Accordingly, LSC believes that including current taxes in fixed debts is appropriate to address this problem.

As noted above, the Working Group considered whether current taxes should just be excluded from the meaning of the term income, rather than including them as within the meaning of “fixed debts and obligations.” Although representatives of the field preferred the former approach, LSC representatives preferred the latter approach. The Corporation has always considered income to be gross income and the eligibility ceilings are based on a gross income standard. Similarly, taxes, whether paid or unpaid, have always been considered within the rubric of the fixed debts and obligations exception. By proposing to include current taxes within the meaning of fixed debts and obligations, LSC proposes to return to the prior usage of that term from 1976 through 1983. However, as noted above, LSC invites comment on this issue.

The term “fixed debts and obligations,” however, is not without limit. It is not intended to include expenses, such as food costs, utilities, credit card debt, etc. These types of debts are usually not fixed as to time and amount. Moreover, these sorts of expenses are typical living expenses which have not been, and are not intended to be, included as factors to be considered in assessing the financial eligibility of someone whose income exceeds the recipient's applicable annual income ceiling.

The Working Group considered whether there were additional factors which should be enumerated in this section and several members of the Working Group proposed adding other factors, such as utilities, to the list. Although the Working Group agreed in the end not to propose adding any additional factors, LSC specifically invites comment on this matter.

LSC proposes several revisions to this section. First, LSC proposes to delete the requirement in existing paragraph (a) of this section that LSC eligibililty forms and procedures must be approved by the Corporation. It has been LSC's experience that receiving the forms has not enhanced its ability to conduct oversight of recipients. These documents are readily available to LSC from recipients when needed. This requirement appears only to create unnecessary work for recipients and LSC staff without serving any policy purpose.

LSC also proposes to add a provision to the regulation making clear that a recipient agreeing to extend legal assistance to a client referred from another recipient may rely upon the referring program's determination of financial eligibility, provided that the referring program provides and the receiving program retains a copy of the intake form documenting the financial eligibility of the client. This is the currently accepted practice, but is addressed nowhere in the existing regulation. A similar provision was included in the 1995 NPRM.

LSC proposes to add language to this section to provide that if a recipient later learns of information which indicates that a client is not, in fact, financially eligible, the recipient must discontinue the representation consistent with the applicable rules of professional responsibility. This addition is being proposed because sometimes, after an applicant has been accepted as a client, the recipient discovers or the client discloses information that indicates that the client was not, in fact, financially eligible for service. This situation is not covered by the existing regulation because the client may not have experienced a change in circumstance, but rather the recipient has discovered new pertinent information about the client. LSC notes that the proposed language, like the current regulation, is not intended to require a recipient to make affirmative inquiry after accepting an applicant as a client for information that would indicate a change in circumstance or the presence of additional information regarding the client's financial eligibility.

The proposed regulation would require that when a client is found to be no longer financially eligible on the basis of later discovered information, the recipient shall discontinue representation supported with LSC funds, if discontinuing the representation is not inconsistent with applicable rules of professional responsibility. This proposed language is parallel to the current requirement regarding discontinuation of representation upon a change in circumstance. LSC wishes to note that, to the extent that discontinuation of representation is not possible because of professional responsibility reasons, a recipient may continue to provide representation supported by LSC funds. This is currently the case and LSC intends to make no change in the regulation on this point.

In addition, LSC proposes to change the name of this section from “change in circumstances” to “change in financial eligibility status” to reflect the addition of the later discovered information provision.

The subject of the eligibility of groups for legal assistance supported with LSC funds was one of intense discussion among the members of the Working Group. Prior to 1983, the regulation permitted representation of groups that were either primarily composed of eligible persons, or which had as their primary purpose the furtherance of the interests of persons in the community unable to afford legal assistance. In 1983, the regulation was amended to preclude the use of LSC funds for the representation of groups unless they were composed primarily of individuals financially eligible for service and to add a requirement that any group seeking representation demonstrate that it lacks the funds or the means to obtain the funds to retain private counsel.

Representatives from the field proposed that LSC revise the regulation to once again permit the representation of groups which, although not primarily composed of eligible persons, have as a primary function the delivery of services to, or furtherance of the interests of, persons in the community unable to afford legal assistance. Examples of such a group might be a food bank or a rural community development corporation working to develop affordable housing in an isolated community. Field representatives noted that in such cases, there may not be local counsel willing to provide pro bono representation and that the group might not otherwise be able to afford private counsel. Further, the field representatives noted that restricting recipients to representing with LSC funds only those groups primarily composed of eligible individuals prevents them from providing legal assistance in the most efficient manner possible as other groups may be better able to accomplish results benefitting more members of the eligible community than would representation of eligible individuals or groups composed primarily of such individuals. Field representatives also noted that the rule requires that the group would have to provide information showing that it lacks and has no means of obtaining the funds to retain private counsel, so that the rule would not permit representation of well funded groups.

The LSC representatives were concerned that allowing the use of LSC funds to support the representation of groups not composed primarily of eligible clients would be problematic. In the examples given, the “primary function” of the group is easily discernable. It may be the case, however, that there is or can be a wide variety of opinion on what the “primary function” of any group is and on what is “in the interests” of the eligible client community. The LSC representatives were concerned that the risk and effort related to articulating and enforcing a necessarily subjective standard would be inappropriate in this case. Rather, LSC representatives were of the opinion that already scarce legal services resources would be better devoted to providing assistance to eligible individuals or groups of eligible individuals. In the end, the Working Group did not achieve consensus on this issue and the Draft NPRM did not propose to permit the representation of groups other than those primarily composed of eligible individuals.

In its deliberations on the Draft NPRM, the Operations and Regulations Committee acknowledged the legitimacy of the concerns of the LSC representatives, but determined that the value of permitting the representation of groups having a primary function of providing services to, or furthering the interests of, those who would be financially eligible outweighed any risks attendant upon such representation. In approving the recommendation of the Committee, the Board directed that the Draft NPRM be amended to propose permitting such representation (including any conforming amendments necessary) prior to publication of the NPRM for comment. This NPRM reflects this direction. LSC specifically invites comment on this issue.

Accordingly, the proposed rule would permit a recipient to provide legal assistance supported with LSC funds to a group, corporation, association or other entity if the recipient has determined that the group, corporation, association or other entity lacks and has not practical means of obtaining private counsel in the matter for which representation is sought and any of the following:

(1) At least a majority of the group's members are financially eligible for LSC-funded legal assistance; or

(2) For a non-membership group, at least a majority of the individuals who are forming or operating the group are financially eligible for LSC-funded legal assistance; or

(3) The group has as its principal function or activity the delivery of services to those persons in the community who would be financially eligible for LSC-funded legal assistance; or

(4) The group has as its principal function or activity the furtherance of the interests of those persons in the community who would be financially eligible for LSC-funded legal assistance and the representation sought relates to such function or activity.

Finally, the proposed rule would retain and restate the current provision of the rule that nothing in this part prohibits a recipient from providing legal assistance to a group without regard to the nature or financial eligibility of the group, if the legal assistance is supported by funds from a source other than LSC, and is otherwise permissible under applicable law and regulation.

LSC notes that, as with other aspects of this rule, proposed § 1611.8 does not speak to eligibility of groups for legal assistance under other applicable law and regulations. For example, the eligibility of a group under proposed § 1611.8 does not address issues related to the eligibility of the group under part 1626 of the Corporation's regulations, concerning citizenship and alien status eligibility. Similarly, the fact that a recipient may determine a group to be eligible for legal assistance under this part, does not address other questions relating to permissibility of the representation ( i.e. , this part does not confer authority for the representation of group on restricted matters, such as class action lawsuits or redistricting matters, etc.)

The OIG dissents from the proposed § 1611.8. The OIG's position is that, in permitting the representation of groups without a determination of financial eligibility of all group members, the proposed rule allows the representation of ineligible individuals and, therefore, is inconsistent with the LSC Act. The OIG contends that the LSC Act contemplates the representation of individuals, rather than groups. The LSC Act declares Congress's finding that “there is a need to provide equal access to the system of justice in our Nation for individuals who seek redress of grievances,” Sec. 1001(1) (emphasis added). The LSC Act established the Corporation “for the purpose of providing financial support for legal assistance in noncriminal proceedings or matters to persons financially unable to afford legal assistance,” Sec. 1003(a) (emphasis added). The Corporation is required to “establish, in consultation with the Director of the Office of Management and Budget and with the Governors of the several states, maximum income levels (taking into account family size, urban and rural differences, and substantial cost-of-living variations) for individuals eligible for legal assistance under this title,” Sec. 1007(a)(2) (emphasis added.). In addition, the LSC authorizes the Corporation “to provide financial assistance to qualified programs furnishing legal assistance to eligible clients,” Sec. 1006(a)(1)(A), and defines an “eligible client” as “any person financially unable to afford legal assistance.” Sec. 1002(3). Although the LSC Act refers to “persons,” and certain groups, such as corporations may be recognized as “persons” under the law, loose associations of individuals seeking representation as a group are not. Such a group exists only because it has members, that is individuals each of whose financial eligibility can be determined in the same way as any other individual client.

The OIG also expressed concern that the proposed rule does not address another issue growing out of allowing group representation without determining the financial eligibility of all group members. Group membership may, and likely will, change. It is easy to envision a case where a group might be eligible for representation when the case is accepted, but the composition of the group changes and ineligible individuals become the majority of the membership. This is particularly true if, as the proposed rule allows, only more than 50 percent of the individuals must be eligible when the case is accepted. For example, if a recipient accepts as a client a group of 100 members, with 51 eligible and 49 ineligible members, the eligibility status of the group would change with the departure of but one eligible member. Thus, the OIG is of the opinion that allowing a mere majority of eligible individuals to determine the eligibility of the group, when there is a liklihood that the eligiblity status of the group could easily change during the course of the representation, is problematic.

LSC disagrees and believes that the proposed regulatory requirements are consistent with the applicable laws. In particular, LSC believes that the legislative history of the 1977 LSC Act amendments demonstrates that Congress contemplated the representation of groups. In discussing an amendment relating to the prohibition by recipients on organizing, Senator Riegle stated:

A similar clarification is made in section 9(c) (of the Senate Reauthorization Bill) regarding the prohibition on organizing activities. Legal Services should not directly organize groups. However, it should provide full representation, education and outreach to those organized groups who are made up of or which represent eligible clients. This section will remove any inhibition which may have been improperly used to prevent such full representation to groups of the poor.

In terms of demonstrating and documenting eligibility of a group, the proposed rule would require the program to collect information that reasonably demonstrates that the group meets the eligibility requirements. The OIG also dissents from this position and, for groups comprised of eligible individuals, if group representation as set out in the proposed rule is to be permitted, would require that the eligibility of a majority of the individuals in the group be documented in the same manner as is required for individual clients.

The proposed rule would allow recipients to determine the eligibility of groups by collecting “information that reasonably demonstrates that the group, corporation, association or other entity meets the eligibility requirements set forth herein.” If LSC determines that groups are eligible for federally funded legal assistance, then, as with individuals, the OIG believes that it is LSC's responsibility to set out the requirements by which such eligibility is to be determined. The OIG believes that the proposed rule does not provide sufficient guidance. In addition, by allowing representation of groups “primarily composed of individuals who are financially eligible for legal assistance,” but then allowing that determination of eligibility to be assessed by some undefined “reasonableness” standard (presumably something less than that which is required for a determination of the eligibility of individuals), the proposed rule may result in the representation of groups that are not in fact even primarily composed of eligible clients.

LSC disagrees and believes that the proposed regulatory requirements are consistent with the applicable laws. LSC further notes that the proposed rule would, essentially, codify the current practice relating to financial eligibility and representation of groups primarily composed of eligible individuals, which has not proven to be problematic in the way envisioned by the OIG. LSC does not see why it would prove any more problematic for demonstrating the eligibility of groups which have as a primary function the delivery of services to, or furtherance of the interests of, those who would be financially eligible for legal assistance.

For reasons set forth in the preamble, LSC proposes to amend 45 CFR part 1611 by revising §§ 1611.1 through 1611.8 to read as follows:

Cost-reimbursement contracts containing award fees typically provide for an award fee payment no more frequently than every 6 months. This practice may place an undue financial burden on an otherwise successfully performing contractor. Therefore, the proposed rule provides for the payment of provisional award fees within an evaluation period, prior to an interim or final evaluation for that period. The provisional payments are based on (1) successful evaluations for prior evaluation periods, and (2) the fee determining official's expectation that payment of provisional fee amounts will not reduce the overall effectiveness of the award fee incentive.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

DoD does not expect this rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. , because the rule applies only to cost-plus-award-fee contracts. Most contracts awarded to small entities use simplified acquisition procedures or are awarded on a competitive, fixed-price basis. Therefore, DoD has not performed an initial regulatory flexibility analysis. DoD invites comments from small businesses and other interested parties. DoD also will consider comments from small entities concerning the affected DFARS subpart in accordance with 5 U.S.C. 610. Such comments should be submitted separately and should cite DFARS Case 2001-D013.

The Paperwork Reduction Act does not apply because the rule does not impose any information collection requirements that require the approval of the Office of Management and Budget under 44 U.S.C. 3501, et seq.

Therefore, DoD proposes to amend 48 CFR Part 216 as follows:

1. The authority citation for 48 CFR Part 216 continues to read as follows:

The clause at DFARS 252.226-7001, Utilization of Indian Organizations and Indian-Owned Economic Enterprises—DoD Contracts, provides for incentive payments to contractors, and subcontractors at any tier, that use Indian organizations and Indian-owned economic enterprises as subcontractors. Paragraph (e) of the clause presently addresses incentive payments under cost-type, cost-plus-incentive-fee, fixed-price incentive, and firm-fixed-price contracts. Application of the Indian Incentive Program is not limited to these contract types; therefore, this proposed rule eliminates the references to contract types to avoid any misconceptions regarding contract types that are not listed.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

DoD does not expect this rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. , because the rule is a clarification of existing policy regarding the Indian Incentive Program. Therefore, DoD has not performed an initial regulatory flexibility analysis. DoD invites comments from small businesses and other interested parties. DoD also will consider comments from small entities concerning the affected DFARS subpart in accordance with 5 U.S.C. 610. Such comments should be submitted separately and should cite DFARS Case 2002-D013.

The Paperwork Reduction Act does not apply because the rule does not impose any information collection requirements that require the approval of the Office of Management and Budget under 44 U.S.C. 3501, et seq.

Therefore, DoD proposes to amend 48 CFR Part 252 as follows:

1. The authority citation for 48 CFR Part 252 continues to read as follows: