[Federal Register Volume 68, Number 240 (Monday, December 15, 2003)]
[Rules and Regulations]
[Pages 69840-69927]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30753]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 403 and 408



Medicare Program; Medicare Prescription Drug Discount Card; Interim 
Rule and Notice

  Federal Register / Vol. 68, No. 240 / Monday, December 15, 2003 / 
Rules and Regulations  

[[Page 69840]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 403 and 408

[CMS-4063-IFC]
RIN 0938-AM71


Medicare Program; Medicare Prescription Drug Discount Card

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

ACTION: Interim final rule with comment period.

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SUMMARY: Section 101, subpart 4 of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003, codified in section 1860D-
31 of the Social Security Act, provides for a voluntary prescription 
drug discount card program for Medicare beneficiaries entitled to 
benefits, or enrolled, under Part A or enrolled under Part B, excluding 
beneficiaries entitled to medical assistance for outpatient 
prescription drugs under Medicaid, including section 1115 waiver 
demonstrations. Eligible beneficiaries may access negotiated prices on 
prescription drugs by enrolling in drug discount card programs offered 
by Medicare-endorsed sponsors.
    Eligible beneficiaries may enroll in the Medicare drug discount 
card program beginning no later than 6 months after the date of 
enactment of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 and ending December 31, 2005. After December 
31, 2005, beneficiaries enrolled in the program may continue to use 
their drug discount card during a short transition period beginning 
January 1, 2006 and ending upon the effective date of a beneficiary's 
outpatient drug coverage under Medicare Part D, but no later than the 
last day of the initial open enrollment period under Part D.
    Beneficiaries with incomes no more than 135 percent of the poverty 
line applicable to their family size who do not have outpatient 
prescription drug coverage under certain programs--Medicaid, certain 
health insurance coverage or group health insurance (such as retiree 
coverage), TRICARE, and Federal Employees Health Benefits Program 
(FEHBP)--also are eligible for transitional assistance, or payment of 
$600 in 2004 and up to $600 in 2005 of the cost of covered discount 
card drugs obtained under the program. In most cases, any transitional 
assistance remaining available to a beneficiary on December 31, 2004 
may be rolled over to 2005 and applied toward the cost of covered 
discount card drugs obtained under the program during 2005. Similarly, 
in most cases, any transitional assistance remaining available to a 
beneficiary on December 31, 2005 may be applied toward the cost of 
covered discount card drugs obtained under the program during the 
transition period.
    The Centers for Medicare & Medicaid Services will solicit 
applications from entities seeking to offer beneficiaries negotiated 
prices on covered discount card drugs. Those meeting the requirements 
described in the authorizing statute and this rule, including 
administration of transitional assistance, will be permitted to offer a 
Medicare-endorsed drug discount card program to eligible beneficiaries. 
Endorsed sponsors may charge beneficiaries enrolling in their endorsed 
programs an annual enrollment fee for 2004 and 2005 of no more than 
$30; CMS will pay this fee on behalf of enrollees entitled to 
transitional assistance.
    To ensure that eligible Medicare beneficiaries take full advantage 
of the Medicare drug discount card program and make informed choices, 
CMS will educate beneficiaries about the existence and features of the 
program and the availability of transitional assistance for certain 
low-income beneficiaries; and publicize information that will allow 
Medicare beneficiaries to compare the various Medicare-endorsed drug 
discount card programs.

DATES: Effective Date: The provisions of this interim final rule with 
comment period are effective December 15, 2003.
    Comment date: Comments will be considered if we receive them no 
later than 5 p.m. on January 14, 2004, at the appropriate address, as 
provided below.

ADDRESSES: In commenting, please refer to file code CMS-4063-IFC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    Mail written comments (1 original and 3 copies) to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-4063-FC, P.O. Box 8013, 
Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (1 original and 3 copies) to one of the following addresses: 
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or Room C5-14-03, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for commenters wishing to retain a proof of 
filing by stamping in and retaining an extra copy of the comments being 
filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Teresa DeCaro, (410) 786-6604.

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 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 $10. 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.
    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) 786-7197.

[[Page 69841]]

    To assist readers in referencing sections contained in this 
document, we are providing the following Table of Contents of the 
preamble.

Table of Contents

I. Background
    A. Statutory Basis for the Program
    B. Purpose of the Program
    C. Relationship to Medicare-Endorsed Prescription Drug Card 
Assistance Initiative
II. Provisions of the Interim Final Rule with Comment Period
    A. Eligibility and Enrollment
    1. Eligibility for the Medicare Prescription Drug Discount Card 
and Transitional Assistance Program
    2. Eligibility for Transitional Assistance
    3. Enrollment in an Endorsed Program
    4. Applying for Transitional Assistance
    5. Reconsideration of Eligibility
    6. Disenrollment and Enrollment in Another Endorsed Program
    B. General Rules about Solicitation, Application, and Medicare 
Endorsement Period
    C. Sponsor Requirements for Eligibility for Endorsement under 
the Medicare Drug Discount Card and Transitional Assistance Program
    1. Applicant Structure and Experience
    a. 3 Years of Private Sector Experience
     b. 1 Million Covered Lives
    c. Demonstration of Financial Stability and Business Integrity
    d. Contracts with Subcontractors and Pharmacies
    2. Service Area
    3. Pharmacy Network Access
    4. Prescription Drug Offering
    a. Covered Discount Card Drugs
    b. Formulary and Minimum Prescription Drug Offerings
    c. Pricing
    d. Transitional Assistance
    5. Products and Services Inside and Outside the Scope of the 
Endorsement
    6. Eligibility and Enrollment Responsibilities
    a. Eligibility and Enrollment Process
    b. Standard Enrollment Form
    c. Transition Period
    d. Enrollment Fee
    e. Disenrollment
    7. Information and Outreach, and Other Customer Service
    a. Information and Outreach
    b. Call Center
    c. Reduction of Medication Errors and Adverse Drug Reactions
    8. Grievance Process
    9. HIPAA Administrative Simplification Provisions and Other 
Marketing and Security Provisions
    a. General
    b. Overview of HIPAA Administrative Simplification Regulations
    c. HIPAA Privacy Rule
    d. Administrative Data Standards
    e. National Identifiers
    f. Security
    10. Document Retention
    11. Endorsed Sponsor Reporting
    D. CMS Reimbursement of Transitional Assistance
    E. CMS-Provided Beneficiary Education
    F. CMS Oversight and Monitoring
    1. General
    a. Marketing and Enrollment Policies
    b. Transitional Assistance Payments
    2. Intermediate Sanctions
    3. Civil Monetary Penalties
    4. Termination by CMS
    5. Termination by Endorsed Sponsor
    6. Termination by Mutual Consent
    G. Special Rules Concerning Medicare Managed Care Organizations
    1. General Requirements for Medicare Managed Care Organizations
    2. Special Rules for Applicants Seeking to Offer Exclusive Card 
Programs
    a. Endorsement Requirements for Applicants Seeking to Offer 
Exclusive Card Programs
    b. Enrollment and Enrollment Fees in Exclusive Card Programs
    c. Application Process
    H. Special Rules Concerning States
    1. State Pharmacy Assistance Programs
    2. Optional State Payment of Enrollment Fee
    3. Optional State Payment of Coinsurance
    4. State Data
    I. Special Rules Concerning Pharmacies Serving Long-term Care 
Residents, or Operated by the Indian Health Service, Indian Tribes 
and Tribal Organizations, and Urban Indian Organizations
    J. Special Rules Concerning Territories
    1. Background
    2. Discount Card
    3. Transitional Assistance
    K. Special Rules and Part B Premium and Appropriations
III. Regulatory Impact Analysis and Regulatory Flexibility Act 
Analysis Regulation Text

I. Background

A. Statutory Basis for the Program

    The purpose of this interim final rule is to establish requirements 
for the Medicare Prescription Drug Discount Card and Transitional 
Assistance Program (hereafter referred to as the ``Medicare drug 
discount card program''). This program was established by section 101, 
subpart 4, of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003, and is codified in section 1860D-31 of the 
Social Security Act (the ``Act'').
    Section 1860D-31(a)(2)(A) of the Act requires us to ensure that 
eligible Medicare beneficiaries have access to negotiated prices for 
prescription drugs and transitional assistance under the Medicare 
discount card program within 6 months of the date of enactment of the 
program's authorizing statute. To enable us to meet this implementation 
deadline, the statute authorizes us to issue this interim final rule, 
which is effective immediately on an interim basis, as of the date of 
publication. Although the rule will be effective prior to receipt of 
public comments, we will accept comments on this interim final rule 
during a 30-day comment period and may, at a future date, revise this 
regulation based on the comments we receive. In addition, we will 
continue to monitor the implementation of this program during its 
operation. If we become aware of operational difficulties in the 
program, or of activities resulting in fraud, waste, or abuse we may 
revise the policies announced in this rule using appropriate 
procedures.
    Section 105(c) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 provides for expedited implementation by--
    [sbull] Exempting the Medicare drug discount card program from the 
requirements of the Paperwork Reduction Act, including the public 
comment and Federal clearance processes associated with it;
    [sbull] Exempting the drug discount card program from the 
requirement in the Congressional Review Act for a 60-day delayed 
effective date for major rules (5 U.S.C. 801(a)(3)(A)), and from the 
requirement under the Administrative Procedure Act (5 U.S.C. 553(d)) 
that regulations not become effective until 30 days after their 
publication.
    [sbull] Allowing the Secretary of the Department of Health and 
Human Services (hereinafter the ``Secretary'') to enter into contracts 
without regard to provisions of law or regulation governing the 
performance, amendment, or modification of contracts that may be 
inconsistent with furthering the Medicare drug discount card program.
    [sbull] As provided under sections 105(c)(4)(A) and (B) of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 
prohibiting judicial review of a CMS determination not to endorse a 
sponsor applicant and providing that, in the event any provision of 
section 1860D-31 of the Act is enjoined, the order will not affect the 
remaining provisions of section 1860D-31.
    To meet the six-month implementation deadline, we will pursue a 
compressed timeframe for soliciting and reviewing endorsed sponsor 
applications.

B. Purpose of the Program

    Congress intended for the Medicare drug discount card program to 
serve as a transitional program providing Medicare beneficiaries with 
immediate assistance with prescription drug costs during calendar year 
(CY) 2004 and CY 2005 while preparations are made for implementation of 
the Medicare drug benefit under Medicare part D in 2006. Medicare 
currently does not cover the

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cost of outpatient drugs, with a few exceptions. In directing us to 
establish the Medicare drug discount card program, Congress sought to 
provide Medicare beneficiaries--particularly those lacking outpatient 
drug coverage--with access to negotiated prices on prescription drugs 
through enrollment in Medicare-endorsed drug discount card programs 
operated by endorsed sponsors. In addition, to help low-income 
beneficiaries meet their drug costs, Congress authorized up to $600 of 
annual transitional assistance that eligible beneficiaries may apply 
toward the cost of covered discount card drugs purchased under the 
program.
    The Medicare drug discount card program is designed to increase 
beneficiaries' access to low-cost prescription drugs by building upon 
best practices in the private drug benefit market today.

C. Relationship to Medicare-Endorsed Prescription Drug Card Assistance 
Initiative

    On September 4, 2002, we published a final rule (67 FR 56618) 
establishing the Medicare-Endorsed Prescription Drug Card Assistance 
Initiative based primarily on the educational and assistance authority 
in section 4359 of the Omnibus Budget Reconciliation Act of 1990 (OBRA) 
(Pub. L. 101-508). Similar to the Medicare drug discount card program, 
this initiative called for us to endorse private sector prescription 
drug card programs that met certain criteria, including offering 
Medicare beneficiaries discounted drug prices through retail pharmacy 
networks that met our access standards. On January 8, 2003, we posted a 
solicitation of application.
    On January 23, 2003, the Federal Court for the District of Columbia 
enjoined us from proceeding with the initiative. In accordance with the 
court order, we withdrew the solicitation, ceased all work on the 
initiative, and neither received any applications nor made any 
endorsements on the basis of the September 4, 2002 rule.
    The Medicare drug discount card program described in this rule is 
based on entirely different statutory authority--the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003--than the 
2002 initiative and has significantly different features than the 
earlier initiative, most notably the provision of transitional 
assistance to eligible beneficiaries. Therefore, parties interested in 
the implementation and operation of the Medicare drug discount card 
program should not refer to the September 4, 2002 final rule or the 
January 8, 2003 solicitation for guidance on the program that we will 
implement under the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003. Also, by publishing this interim final rule 
with comment under the authority of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003, we hereby withdraw the 
regulation and solicitation published September 4, 2002 and January 8, 
2003, respectively.

II. Provisions of the Interim Final Rule With Comment Period

A. Eligibility and Enrollment

    Sections 1860D-31(b)(1) and (2) of the Act establish the 
eligibility criteria for the Medicare drug discount card program and 
for transitional assistance, which we have incorporated into Sec.  
403.810(a) and Sec.  403.810(b) of our regulations. Section 1860D-
31(f)(1)(A) of the Act directs the Secretary to specify the procedures 
for determining a beneficiary's eligibility for the Medicare drug 
discount card program or transitional assistance and section 1860D-
31(c)(1) directs the Secretary to establish a process for eligible 
beneficiaries enrolling in, and disenrolling from, an endorsed program. 
Sections 403.810 and 403.811 of our regulations set forth these 
procedures. The obligations of endorsed sponsors related to eligibility 
determinations and enrollment are discussed in section II.C.6 of this 
document.
1. Eligibility for the Medicare Prescription Drug Discount Card and 
Transitional Assistance Program
    In accordance with section 1860D-31(b)(1) of the Act, a Medicare 
beneficiary is eligible for the Medicare drug discount card if the 
beneficiary is entitled to benefits, or enrolled, under Medicare Part A 
or enrolled under Medicare Part B, and does not already receive drug 
coverage through a State medical assistance plan under either a Title 
XIX program or under a demonstration program that is approved by us 
under sections 1115(a)(1) and (2) of the Act, hereinafter referred to 
as a ``section 1115 waiver demonstration.''
    The benefit package available to beneficiaries enrolled in section 
1115 waiver demonstrations varies, with some demonstrations offering 
comprehensive outpatient prescription drug coverage and others offering 
more limited or no outpatient drug coverage. Section 1860D-31(b)(1)(B) 
of the Act provides that beneficiaries entitled to ``any'' medical 
assistance for outpatient prescribed drugs under a section 1115 waiver 
demonstration are ineligible for the Medicare drug discount card 
program. We interpret this section as rendering ineligible for the 
program all beneficiaries enrolled in a section 1115 waiver 
demonstration program with some outpatient drug coverage, even if 
limited coverage. Beneficiaries enrolled in a section 1115 waiver 
demonstration that does not provide outpatient drug coverage are 
eligible for the program provided they meet all other eligibility 
criteria. Similarly, beneficiaries enrolled in Medicaid under title XIX 
of the Act who do not receive outpatient drug coverage may be eligible 
for the program.
    We have the authority to establish procedures for eligibility 
determinations under section 1860D-31(f)(1)(A) of the Act. Under this 
authority and in the interest of promoting efficient administration of 
the program, we specify in Sec.  403.810(d) of our regulations that 
beneficiaries determined eligible for the program will remain eligible 
for the entire period of their enrollment. We therefore provide in 
section 403.810(a) of the regulations that a beneficiary is eligible 
for the Medicare drug discount card program if he or she satisfies the 
above requirements at the time of applying to enroll in the program. 
Consequently, once a beneficiary has been determined eligible for the 
Medicare drug discount card program, he or she will remain eligible for 
the duration of the program unless he or she disenrolls from an 
endorsed program and is ineligible for a special election period that 
would allow the individual to enroll in another program in accordance 
with Sec.  403.811(b)(2) of the regulations, as discussed below in 
section II.A.6, or if involuntarily disenrolled as provided in Sec.  
403.811(b)(6). If, after such a disenrollment from the Medicare drug 
discount card program in 2004, a beneficiary wishes to later re-enroll 
in the program, he or she must re-apply and re-qualify for the program 
for 2005.
    Section 1860D-31(b)(4) directs the Secretary to issue appropriate 
rules addressing the eligibility of medically needy beneficiaries, as 
described in section 1902(a)(10)(C) of the Act, for the Medicare drug 
discount card program. Medically needy beneficiaries will be treated 
the same as all other beneficiaries applying for the program and 
therefore will be eligible for the program if at the time of applying 
for the program they meet the eligibility criteria set forth in Sec.  
403.810(a) of the regulations.
    Medicare beneficiaries residing in the U.S. territories, which 
include American Samoa, Commonwealth of the Northern Mariana Islands, 
Guam, Puerto

[[Page 69843]]

Rico, and Virgin Islands, are eligible to enroll in an endorsed 
program. Whereas Medicare beneficiaries residing in the 50 States and 
the District of Columbia are ineligible for the Medicare drug discount 
card program if they have outpatient prescription drug coverage under 
Medicaid or a section 1115 waiver demonstration, as provided in Sec.  
403.817(d) of our regulations and as discussed in section II.J. of this 
document, Medicare beneficiaries residing in the territories who also 
receive outpatient prescription drug coverage under Medicaid or a 
Medicaid section 1115 waiver are eligible for the Medicare drug 
discount card program.
2. Eligibility for Transitional Assistance
    Under section 1860D-31(b)(2) of the Act, and as provided in Sec.  
403.810(b) of our regulations, a beneficiary is eligible to receive 
transitional assistance if the beneficiary is eligible for the Medicare 
drug discount card program and meets the following requirements:
    (1) The beneficiary resides in one of the 50 States or the District 
of Columbia;
    (2) The beneficiary's income is not more than 135 percent of the 
poverty line applicable to the beneficiary's family size; and
    (3) The beneficiary does not have coverage for covered discount 
card drugs under one or more of the following sources: (a) TRICARE 
coverage under chapter 55 of title 10, (b) a Federal Employee's Health 
benefit plan under chapter 89 of title 5, or (c) a group health plan or 
health insurance coverage, as those terms are defined under section 
2791 of the Public Health Service Act (42 U.S.C. 300gg-91), other than 
a plan under Medicare Part C or a group health plan or health insurance 
coverage consisting solely of excepted benefits, as that term is 
defined under section 2791 of the Public Health Service Act (42 U.S.C. 
300gg-91(c)).
    The poverty line is defined in section 673(2) of the Community 
Services Block Grant Act, 42 U.S.C. 9902(2), and is revised annually by 
the Secretary. Excepted benefits include, but are not limited to, 
medical supplemental insurance (Medigap insurance), limited scope 
dental or vision benefits, liability insurance (for example, automobile 
insurance), coverage for a specific disease or illness, and workers' 
compensation insurance.
    Under section 1860D-31(f)(2)(B) of the Act, beneficiaries who have 
been verified as eligible for transitional assistance will be 
considered so eligible for the entire period of their enrollment in any 
endorsed program. We therefore provide in Sec.  403.810(b) of the 
regulations that a beneficiary is eligible for transitional assistance 
if he or she satisfies the above requirements at the time of applying 
for transitional assistance. Thus, we specify in 403.810(d) that once a 
beneficiary has been determined eligible for transitional assistance, 
he or she will remain eligible for transitional assistance for the 
duration of the beneficiary's enrollment in the Medicare drug discount 
card program. A beneficiary will no longer be eligible for transitional 
assistance if he or she disenrolls from the program; specifically, if 
he or she disenrolls from an endorsed program and is ineligible for a 
special election period that would allow the individual to enroll in 
another endorsed program in accordance with Sec.  403.811(b)(2) of the 
regulations, as discussed below in section II.A.6.
    Although beneficiaries with outpatient drug coverage under a group 
health plan or health insurance coverage generally are ineligible for 
transitional assistance, as noted above, the statutory definition of 
transitional assistance eligible beneficiaries carves out from this 
exclusion outpatient drug coverage under a Part C plan described in 
section 1851(a)(2) of the Act or a policy consisting solely of excepted 
benefits. Consequently, provided that they meet all other eligibility 
criteria, beneficiaries with outpatient drug coverage under a Part C 
plan or a policy consisting solely of excepted benefits, such as 
Medigap, are still eligible for transitional assistance even if their 
employer pays all or a portion of the premium for such plans or 
policies.
    Section 1860D-31(f)(1)(B) of the Act gives the Secretary the 
authority to define ``income'' and ``family size'' as it pertains to 
determinations of a beneficiary's eligibility for transitional 
assistance. Income refers to the amount, type, and ownership of income 
that will be counted in determining whether an applicant's income is no 
more than 135 percent of the poverty line for the beneficiary's family 
size. For purposes of the Medicare drug discount card program, we have 
defined ``income'' as including the components of adjusted gross 
income, as defined under 26 U.S.C. 62, and, to the extent not included 
in the components of AGI retirement and disability benefits, or, if the 
beneficiary is married, the sum of such income for both the beneficiary 
and his or her spouse.
    Family size means the number of beneficiaries by which 135 percent 
of the poverty line must be adjusted to determine the income threshold 
the beneficiary's income may not exceed in order to be eligible for 
transitional assistance. For purposes of this program, we have defined 
``family size'' as one for unmarried individuals and two for 
individuals who are married. This definition is based on the rules of 
the Supplemental Security Income (SSI) program established under title 
XVI of the Act. While the SSI program does not actually define 
``family'' or ``family size,'' it makes eligibility determinations 
based in part on whether a beneficiary is single or married. The income 
definition above is not based on the SSI definition because the 
systems-based process we intend to use to determine eligibility for 
transitional assistance is different from the interview determination 
process used to determine eligibility for SSI, and from the process we 
will use under Part D. For this short-term program, the statute directs 
us to determine eligibility based on self-certification, with CMS to 
perform eligibility verifications via computer matching of Federal 
databases, as discussed below. We will not use an individual 
determination process as SSI uses; hence we have chosen a simpler 
definition than the elaborate definition SSI uses.
    In section 1860D-31(f) of the Act, the statute directs us to 
determine eligibility based on self-certification, with CMS to verify 
self-certified eligibility through data matching. We have developed an 
information system for verifying beneficiaries' eligibility for the 
Medicare drug discount card program. Among other functions, this system 
will verify, to the extent possible, that the income of beneficiaries 
applying for transitional assistance does not exceed 135 percent of the 
poverty line for their family size. As provided in section 1860D-
31(f)(3) of the Act, this system relies on income and retirement 
benefit information provided by the Internal Revenue Service (IRS) and 
the Social Security Administration, and may include additional data 
sources as they become available.
    As part of the standard enrollment form, a beneficiary must 
certify, under penalty of perjury that, to the best of the 
beneficiary's knowledge, the information about his or her current 
income status and outpatient prescription drug coverage, as provided on 
the form, is accurate. If we are unable to conclusively verify whether 
an individual's income is no more than 135 percent of the poverty line 
for his or her family size, we may request that the beneficiary provide 
us with additional financial information. In Sec.  403.810(f)(2) of our 
regulations, we reserve the right to make the provision of this 
additional information a condition of receiving transitional 
assistance.
    Section 1860D-31(f)(3)(C)(i) of the Act gives the Secretary the 
authority to find

[[Page 69844]]

that Medicare beneficiaries eligible under title XIX as Qualified 
Medicare Beneficiaries (QMBs), Specified Low-Income Medicare 
Beneficiaries (SLMBs), or as Qualifying Individuals (QIs) satisfy the 
income threshold requirement for eligibility for transitional 
assistance. Therefore, Sec.  403.810(c) of our regulations specifies 
that these individuals by definition will be deemed to have met the 
income threshold requirement for transitional assistance. However, 
these individuals must meet the other eligibility criteria set forth in 
Sec.  403.810(b) of our regulations to be determined eligible for 
transitional assistance.
    Section 1860D-31(b)(4) directs the Secretary to issue appropriate 
rules addressing the eligibility of medically needy beneficiaries, as 
described in section 1902(a)(10)(C) of the Act, for transitional 
assistance. Medically needy beneficiaries will be treated the same as 
all other beneficiaries applying for transitional assistance and 
therefore will be eligible for transitional assistance if at the time 
of applying for transitional assistance they meet the eligibility 
criteria set forth in Sec.  403.810(b) of the regulations. An 
individual who is already enrolled in an endorsed discount card program 
and subsequently qualifies for outpatient drug coverage under Medicaid 
as a medically needy beneficiary, will not be disenrolled or denied 
transitional assistance solely because he or she is now receiving 
outpatient drug coverage under Medicaid.
    Under Sec.  403.810(b)(2) of our regulations, residents of the 
territories are not eligible for transitional assistance under the 
Medicare drug discount card program. However, under section 1860D-
31(j)(2) of the Act, and as provided in Sec.  403.817(e) of our 
regulations, a territory may establish its own transitional assistance 
plan. As discussed in section II.J. of this document, a territory 
choosing to establish its own transitional assistance plan may offer 
transitional assistance to any individual entitled to benefits, or 
enrolled, under Medicare Part A or enrolled under Medicare Part B, 
whose income is no more than 135 percent of the poverty line for the 
individual's family size, regardless of whether that individual 
receives outpatient drug coverage under Medicaid or a section 1115 
waiver demonstration.
    As specified in section 1860D-31(g)(6) of the Act and provided in 
Sec.  403.810(e) of our regulations, any benefits received under the 
Medicare drug discount card program will not be taken into account in 
determining a beneficiary's eligibility for, or the amount of benefits 
under, any other Federal program.
3. Enrollment in an Endorsed Program
    Section 1860D-31(c)(1) of the Act requires the Secretary to 
establish a process through which beneficiaries enroll in endorsed 
programs. Section 403.811(a) of our regulations specifies the 
programmatic requirements of this process.
    We anticipate that endorsed sponsors will begin enrolling eligible 
beneficiaries in their endorsed programs no later than six months after 
enactment of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003.
    Throughout this document, when we refer to a beneficiary, enrollee, 
or individual in the context of taking action regarding the Medicare 
drug discount card program, such as applying for the discount card, 
transitional assistance, or reconsideration, we also mean the 
individual's authorized representative. This representative can 
complete an enrollment form on a individual's behalf, certify the 
accuracy of its content, authorize CMS to verify the individual's 
eligibility information, conduct other enrollment and disenrollment 
transactions, and otherwise represent the individual with regard to 
this program. Our regulations at Sec.  403.806(l) specify the way 
endorsed sponsors must treat authorized representatives.
    Under the authority in section 1860D-31(c)(1)(A) of the Act, we 
provide in Sec.  403.811(a)(5) of our regulations, that an individual 
who is not currently enrolled in an endorsed card program can enroll in 
any endorsed program serving residents of their State at any time 
during the enrollment period. As provided in section 1860D-31(c)(1) of 
the Act and Sec.  403.811(a)(6) of our regulations, an individual may 
only enroll in one endorsed program at a time. Relying on the authority 
in section 1860D-31(c)(1) of the Act, we provide in Sec.  403.811(a)(7) 
of our regulations that an individual can enroll in one endorsed 
program per year during the enrollment period. Finally, Sec.  
403.811(a)(9) of our regulations specifies that no new enrollment or 
changing of endorsed card election can occur during the transition 
period.
    Under section 1860D-31(c)(1)(A) of the Act, and as provided in 
Sec.  403.811(a)(10) of our regulations, a discount card eligible 
individual not already enrolled in an endorsed program may enroll in 
any endorsed program serving residents of the State in which the 
beneficiary resides, with the exception of beneficiaries enrolled in 
certain Part C or reasonable cost reimbursement plans offering 
``exclusive card programs.'' (A Part C organization as described in 
section 1851(a)(2)(A) of the Act that offers enrollment in a 
coordinated care plan or an organization that offers enrollment under a 
reasonable cost reimbursement plan described in section 1876(h) of the 
Act are hereinafter referred to as ``Medicare managed care 
organizations'' and the plans they offer, ``Medicare managed care 
plans,'' respectively.) An ``exclusive card sponsor'' is a Medicare 
managed care organization that offers an endorsed program with 
enrollment limited to members of one or more of its Medicare managed 
care plan(s). Under section 1860D-31(c)(1)(E) of the Act, members of 
Medicare managed care plans offered by exclusive card sponsors that 
include access to an exclusive card program as part of the plan's 
benefit package, may only enroll in such exclusive card programs. 
Medicare managed care organizations as card sponsors, including 
exclusive card sponsors, are discussed in section II.G. of this 
document.
    As part of our verification system, we will verify whether each 
beneficiary seeking enrollment receives outpatient drug coverage under 
Medicaid or a section 1115 waiver demonstration, is enrolled in another 
endorsed program, or is a member of a Medicare managed care plan 
offering an exclusive card program. This system will include files 
provided to us by the State Medicaid programs and a database for 
tracking beneficiaries' enrollment and disenrollment from endorsed 
programs.
    If a beneficiary wishes to apply for transitional assistance when 
he or she applies to enroll in an endorsed program, the endorsed 
sponsor may not enroll the beneficiary in its endorsed program until 
the beneficiary is determined eligible for transitional assistance. If 
the beneficiary is determined ineligible for transitional assistance 
and still wishes to enroll in the endorsed sponsor's endorsed program, 
the sponsor must provide the beneficiary with an opportunity to 
actively choose to enroll in the drug card only through enrollment 
processes as specified by the Secretary and permitted by the endorsed 
sponsor. This requirement is specified in Sec.  403.811(a)(3) of our 
regulations. We create this requirement because we believe a 
beneficiary's eligibility or ineligibility for transitional assistance 
may influence his or her decision to enroll in the Medicare drug 
discount card program and which endorsed program he or she selects.

[[Page 69845]]

    Section 1860D-31(c)(2) of the Act provides that endorsed sponsors 
may charge an annual enrollment fee up to, but no more than, $30 per 
year. Discount card enrollees, other than transitional assistance 
enrollees, must pay this fee to their endorsed sponsors. We discuss 
enrollment fees in greater detail in section II.C.6. of the document.
    A discount card enrollee will remain enrolled in the same endorsed 
program for CYs 2004 and 2005 and the transition period unless the 
beneficiary changes endorsed programs following the annual coordinated 
election period, the beneficiary disenrolls, or the endorsed card 
program terminates, as provided in Sec.  403.811(a)(8) of our 
regulations. This means that a beneficiary remaining enrolled in an 
endorsed program with an annual enrollment fee from CYs 2004 to 2005 is 
responsible for paying any new annual enrollment fee for 2005.
    Section 1860D-31(c)(4) of the Act gives the Secretary the 
discretion to establish the date upon which access to an endorsed 
program's negotiated prices will take effect. We specify in Sec.  
403.811(a)(11) of our regulations that the date upon which the 
beneficiary can access negotiated prices is the date when a 
beneficiary's enrollment in an endorsed program becomes effective.
    Under the Secretary's authority to develop an enrollment process 
under section 1860D-31(c)(1) of the Act, and as stated in Sec.  
403.814(b)(5) of the regulations, if a Medicare managed care 
organization limits enrollment in an exclusive card program to members 
of one or more of its Medicare managed care plans, we will permit the 
Medicare managed care organization to automatically enroll, or group 
enroll, into its exclusive card program eligible individuals enrolled 
in the Medicare managed care plan(s), unless such beneficiaries 
affirmatively notify the Medicare managed care organization of their 
desire not to enroll in its exclusive card program. Prior to group 
enrolling such beneficiaries in its exclusive card program, the 
Medicare managed care organization must notify its eligible members of 
its intent to do so and inform them of their right not to enroll. As 
provided in Sec.  403.814(b)(6) of our regulations, a member 
affirmatively electing not to enroll in the exclusive card program 
offered as part of the benefit package available through his or her 
Medicare managed care plan is ineligible to enroll in any other 
endorsed program.
    We believe our permitting group enrollment will not limit the 
voluntary nature of this program because section 1860D-31(c)(1)(E) of 
the Act restricts members of a Medicare managed care plan offering an 
exclusive card program to enrollment in the exclusive card program. In 
addition, group enrollment will not impose on these beneficiaries any 
unwanted cost without consent since they will have the opportunity to 
decline enrollment in the exclusive card program.
4. Applying for Transitional Assistance
    As provided in Sec.  403.811(a)(12) of our regulations, 
beneficiaries may apply for transitional assistance at the same time 
that they apply for enrollment in the Medicare drug discount card 
program, or after they have already enrolled in the program. We permit 
beneficiaries to apply for transitional assistance at any time because 
discount card enrollees may, following their enrollment in the program, 
have a change in their economic circumstances or outpatient drug 
coverage that would qualify them for transitional assistance.
    Beneficiaries wishing to receive transitional assistance must 
complete the standard enrollment form for transitional assistance, 
which is described in greater detail in section II.C.6. of this 
document. The standard enrollment form will require the beneficiary to 
indicate all elements necessary to determine eligibility, including, 
but not limited to, the amount of the beneficiary's income (or, for 
married individuals, the beneficiary and spouse's combined income), the 
beneficiary's family size, and whether the beneficiary has outpatient 
prescription drug coverage under certain sources.
    As required by section 1860D-31(f)(2)(A) of the Act, a beneficiary 
applying for transitional assistance must certify, on the standard 
enrollment form, under penalty of perjury or similar sanction for false 
statements, that to the best of the beneficiary's knowledge the 
information he or she provides is accurate. We therefore require in 
Sec.  403.810(b)(5) of our regulations that beneficiaries wishing to 
receive transitional assistance sign the enrollment form. This 
signature represents the beneficiary's certification that the 
information provided on the form is accurate to the best of the 
beneficiary's knowledge, as well as his or her consent to our verifying 
the accuracy of the information provided, including verification of the 
beneficiary's income using Federal sources of income data. 
Consequently, beneficiaries wishing to apply for transitional 
assistance must submit to the endorsed sponsor a dated and signed 
enrollment form by mail or, at the endorsed sponsor's discretion, by 
facsimile.
a. Coinsurance
    Under section 1860D-31(g)(1)(B) of the Act and as provided in Sec.  
403.808(e) of our regulations, a transitional assistance enrollee is 
entitled to have payment made of 90 or 95 percent, depending on the 
beneficiary's income, of the charges incurred for covered discount card 
drugs obtained through the Medicare drug discount card program, up to 
the total amount of transitional assistance available to that 
beneficiary. Transitional assistance enrollees with incomes greater 
than 100 percent but no more than 135 percent of the poverty line 
applicable to their family size are responsible for paying 10 percent 
of the charge for covered discount card drugs obtained under the 
program. Transitional assistance enrollees with income not greater than 
100 percent of the poverty line applicable to their family size are 
responsible for paying 5 percent of the charge for a covered discount 
card drug.
b. Proration
    Section 1860D-31(g)(2)(A) of the Act provides that transitional 
assistance beneficiaries may receive up to $600 each year in 
transitional assistance. However, section 1860D-31(g)(2)(B) of the Act 
permits us to prorate the amount of transitional assistance available 
to beneficiaries applying for transitional assistance. We do not intend 
to prorate transitional assistance amounts in 2004 in recognition that 
it may take time for our education campaign to reach all beneficiaries 
and that beneficiaries need sufficient opportunity to learn about the 
Medicare drug discount card program without penalty. As provided in 
Sec.  403.808(b) of our regulations, we will prorate the transitional 
assistance available to eligible enrollees applying for transitional 
assistance in 2005 based on the beneficiary application date according 
to the schedule set forth in Table 1. The beneficiary application date 
is the date upon which the endorsed sponsor receives from the 
beneficiary the complete enrollment form for transitional assistance. 
Beneficiaries disenrolling from an endorsed program for reasons that 
warrant a special election period, however, are not considered to have 
left the transitional assistance program and are not subject to 
proration should they elect another endorsed program during CY 2005.
    We elect to prorate transitional assistance in 2005 because we 
believe that, by 2005, beneficiaries will have had ample time to learn 
about the

[[Page 69846]]

Medicare drug discount card program. In addition, prorating 
transitional assistance encourages transitional assistance eligible 
beneficiaries to enroll in the Medicare drug discount card program as 
early as possible in order to maximize their transitional assistance 
amount, which in turn will increase the volume of covered discount card 
drugs obtained under an endorsed program and enhance an endorsed 
sponsor's ability to negotiate deeper discounts for discount card 
enrollees. We will calculate the amount of transitional assistance a 
transitional assistance enrollee may receive and notify endorsed 
sponsors of this amount.

                    Table 1.--2005 Proration Schedule
------------------------------------------------------------------------
                                                                 Amount
                 Beneficiary application date                   payable
------------------------------------------------------------------------
January 1-March 31, 2005.....................................       $600
April 1-June 30, 2005........................................        450
July 1-September 30, 2005....................................        300
October 1-December 31, 2005..................................        150
------------------------------------------------------------------------

    In accordance with section 1860D-31(g)(2)(A)(ii)(II) of the Act, 
and as provided in Sec.  403.808(f) of our regulations, any 
transitional assistance remaining available to a transitional 
assistance enrollee on December 31, 2004 may be rolled over to 2005 and 
applied toward the cost of covered discount card drugs obtained under 
the Medicare drug discount card program during 2005. As provided in 
Sec.  403.811(b)(5) of our regulations, transitional assistance 
enrollees who disenroll from the Medicare drug discount card program in 
2004 and who are not eligible for a special election period as provided 
in Sec.  403.811(b)(2) of our regulations, however, may not rollover 
any unused transitional assistance if they re-enroll in the program in 
2005. Any transitional assistance remaining available to a transitional 
assistance enrollee on December 31, 2005 may be applied toward the cost 
of covered discount card drugs obtained under the program during the 
transition period provided the transitional assistance enrollee remains 
enrolled in the program through the end of 2005 and during the 
transition period.
    As required by section 1860D-31(c)(2)(E) of the Act and as provided 
for in Sec.  403.808(c) of our regulations, CMS will pay to an endorsed 
sponsor the annual enrollment fee, if any, for its transitional 
assistance enrollees.
    Section 1860D-31(c)(4) of the Act gives the Secretary the 
discretion to establish the date upon which access to transitional 
assistance through an endorsed program will take effect. As specified 
in Sec.  403.811(a)(11) of our regulations, transitional assistance 
will be made available to beneficiaries determined eligible for 
transitional assistance beginning on the effective date of their 
enrollment in the transitional assistance program specified in their 
transitional assistance eligibility determination notice.
5. Reconsideration of Eligibility
    As discussed above, section 1860D-31(f) of the Act also provides 
for an eligibility determination process consisting of self-
certification and, at the discretion of the Secretary, verification 
through data matching. For beneficiaries applying for the Medicare drug 
discount card program, we will verify their eligibility for the program 
by reviewing State data, for example, on beneficiaries with outpatient 
drug coverage under Medicaid or a section 1115 waiver demonstration. 
For beneficiaries applying for transitional assistance, we will verify 
their income by reviewing our data on their income and other retirement 
and disability benefits.
    Section 1860D-31(f)(4) of the Act requires the Secretary to 
establish a reconsideration process for beneficiaries initially 
determined ineligible for transitional assistance. Under our authority 
to establish procedures for determining beneficiaries' eligibility for 
the Medicare drug discount card program, as provided for in section 
1860D-31(f)(1)(A) of the Act, we also will establish a reconsideration 
process for beneficiaries initially determined ineligible for the 
program. Accordingly, as provided in Sec.  403.810(g)(1) of our 
regulations, every beneficiary determined ineligible for the program 
and/or transitional assistance can request that we reconsider this 
determination.
    A beneficiary will be given specific instructions on how to request 
reconsideration when he or she is notified of our negative eligibility 
determination. We will provide standardized language for this notice in 
the information and outreach materials that will accompany the 
solicitation, as discussed in section II.C.7. of this document. As 
provided in Sec.  403.810(g)(2) of our regulations, reconsideration 
requests must be filed within 60 days from date of notice of a negative 
eligibility determination, unless the individual can demonstrate good 
cause for why the 60-day time frame should be extended.
    Section 1860D-31(f)(4)(B) of the Act authorizes the Secretary, and 
Sec.  403.810(g)(4) of our regulations provides that the Secretary will 
enter into a contract for the performance of reconsiderations. We will 
contract with an independent entity to conduct reconsiderations on our 
behalf. Finally, Sec.  403.810(g)(3) of our regulations provides that 
beneficiaries requesting reconsideration may provide, in writing, to 
our reconsideration contractor additional documentary evidence or an 
explanation about his or her eligibility. The reconsideration 
contractor will provide the beneficiary a written final eligibility 
determination.
6. Disenrollment and Enrollment in Another Endorsed Program
    In accordance with section 1860D-31(c)(1)(D)(i) of the Act, Sec.  
403.811(b)(1) of our regulations provide that a discount card enrollee 
may voluntarily disenroll from an endorsed program at any time; 
however, such a beneficiary may only enroll in another endorsed program 
without having to re-apply and re-qualify under two conditions--during 
the annual coordinated election period or during a special election 
period, as described below.
    Section 1860D-31(c)(1)(C)(ii) of the Act and Sec.  403.811(a)(7) of 
our regulations provide that beneficiaries enrolled in an endorsed 
program in 2004 may elect to change endorsed programs during the annual 
coordinated election period from November 15 through December 31, 2004. 
The effective date of an enrollment election made during the annual 
coordinated election period will be January 1, 2005.
    Under section 1860D-31(c)(1)(C)(i) of the Act, and as provided in 
Sec.  403.811(a)(7) of the regulations, discount card eligible 
individuals generally may enroll in only one endorsed program during a 
calendar year. Beneficiaries voluntarily disenrolling from an endorsed 
program during the enrollment period, and not changing programs during 
the annual coordinated election period, may immediately enroll in 
another endorsed program during the enrollment period only under 
limited circumstances. Section 1860D-31(c)(1)(C)(iii) of the Act 
authorizes the Secretary to establish exceptions to the limitation of 
enrolling in only one endorsed card program per year. As specifically 
permitted by section 1860D-31(c)(1)(C)(iii) of the Act and as set forth 
in Sec.  403.811(b)(2) of our regulations, a beneficiary disenrolling 
from an endorsed program for any of the following reasons is awarded a 
special election period and may enroll in another endorsed program at 
any time in the enrollment period.

[[Page 69847]]

    (1) The beneficiary moved outside his or her endorsed program's 
service area;
    (2) The beneficiary changed his or her residence to or from a long-
term care facility;
    (3) The beneficiary enrolled in or disenrolled from a Part C plan 
or a Medicare cost plan; or
    (4) Other exceptional circumstances as determined by the Secretary.
    In addition, we will permit beneficiaries to enroll in new endorsed 
programs if their prior endorsed program terminates or they enroll in 
or disenroll from a reasonable cost reimbursement plan.
    We consider a discount card enrollee who disenrolls for reasons 
other than those provided above to have left the Medicare Drug Discount 
Card program entirely, as provided in Sec.  403.810(d) of our 
regulations. As permitted under sections 1860D-31(c)(1)(D)(i) and 
(f)(2)(B) of the Act and as provided in our regulations at Sec.  
403.811(b)(4), beneficiaries voluntarily disenrolling from an endorsed 
program in 2004 other than for one of the above reasons, or who are 
involuntarily disenrolled, must re-apply as if they were new to the 
program for the Medicare Drug Discount Card Program for 2005 if they 
wish to enroll in another endorsed program. The earliest an individual 
may re-apply for the Medicare Prescription Drug Discount Card is during 
the annual coordinated election period. Because an individual may only 
enroll in one endorsed card program in each calendar year, as provided 
in Sec.  403.811(a)(7) of our regulations, beneficiaries voluntarily 
disenrolling from an endorsed program in 2005, other than for one of 
the above reasons, or who are involuntarily disenrolled, cannot 
reenroll in an endorsed card program. Individuals disenrolling for any 
reason during the transition period cannot re-enroll.
    With respect to beneficiaries enrolling in or disenrolling from a 
Part C plan or reasonable cost reimbursement plan, section 1860D-
31(c)(1)(C)(iii) of the Act permits but does not mandate that we allow 
these beneficiaries to disenroll from their current endorsed program 
and enroll in another endorsed program during a special election 
period. Beneficiaries enrolling in or disenrolling from a Medicare 
managed care plan offering an exclusive card program will be 
automatically disenrolled from their endorsed programs, as they will no 
longer be eligible for such endorsed programs under Sec.  
403.814(b)(6)(i) of our regulations. We believe that Medicare 
beneficiaries entering and leaving a Part C plan or a Medicare cost 
plan without an exclusive card program will wish to choose an endorsed 
program based on the benefit package under their current health 
coverage, including other Part C plans and Medicare cost plans, and 
that this benefit package may change when beneficiaries enroll in or 
disenroll from a Part C plan or Medicare cost plan. To promote 
beneficiaries' coordination of their health benefits, we will allow 
beneficiaries enrolling in or disenrolling from any Part C plan or a 
Medicare cost plan to disenroll from their current endorsed program and 
enroll in another endorsed program during a special election period.
    We will automatically disenroll beneficiaries from an endorsed 
program if their endorsed program terminates, the beneficiary enrolls 
in or disenrolls from a Medicare managed care plan offering an 
exclusive card program, or the beneficiary elects another endorsed 
program during the Annual coordinated election period. All other 
beneficiaries wishing to disenroll from their endorsed program must 
notify their endorsed sponsor of their intent, and, if they wish to 
enroll in another endorsed program during a special election period, 
provide the endorsed sponsor their reason for disenrollment.
    As required in section 1860D-31(c)(1)(D)(ii) of the Act, and as 
specified in Sec.  403.811(b)(6) of our regulations, an endorsed 
sponsor may involuntarily disenroll any discount card enrollee, other 
than a transitional assistance enrollee, if the discount card enrollee 
fails to pay any annual enrollment fee charged by the endorsed sponsor.
    As provided in Sec.  403.811(b)(7) of our regulations and as 
discussed under section II.C.6 of this document, a discount card 
enrollee who changes endorsed programs during a special election period 
may be charged a separate annual enrollment fee by the endorsed sponsor 
operating the newly selected endorsed program.
    Under section 1860D-31(g)(2)(E) of the Act and Sec.  403.811(b)(5) 
of our regulations, transitional assistance enrollees who disenroll 
from their endorsed programs generally will forfeit any transitional 
assistance remaining available to them at the time of their 
disenrollment. Transitional assistance enrollees who disenroll during 
the first year of the program and are ineligible for a special election 
period must re-apply and re-qualify for transitional assistance for the 
second year of the program should they wish to receive additional 
transitional assistance. The earliest an individual may re-apply for 
the Transitional Assistance Program for 2005 is through their re-
enrollment in an endorsed card program during the annual coordinated 
election period. Any transitional assistance provided to these 
individuals during the second year of the program may be prorated 
depending on when they re-apply for transitional assistance in 
accordance with Sec.  403.808(b) of our regulations.
    Section 1860D-31(g)(2)(E) of the Act gives the Secretary the 
discretion to identify exceptions to this policy. As specified in Sec.  
403.808(f) of our regulations, we will permit transitional assistance 
enrollees who change their endorsed program during the annual 
coordinated election period or who enroll in another endorsed program 
during a special election period to carryover to their newly selected 
endorsed program any transitional assistance remaining available to 
them at the time of their disenrollment from their former endorsed 
program.

B. General Rules About Solicitation, Application, and Medicare 
Endorsement Period

    We will solicit applications from entities seeking to offer 
beneficiaries negotiated prices on covered discount card drugs. We will 
endorse applicants' drug discount card programs that meet the 
requirements discussed below, and will permit successful applicants to 
market and label their programs as ``Medicare-approved.''
    Although under section 1860D-31(h)(2)(D)(ii) of the Act we have the 
discretion to limit the number of endorsed sponsors in a State to two, 
we will endorse all applicants that, together with their subcontractors 
and other entities with which they have entered into a legal 
arrangement to operate an endorsed program (hereinafter collectively 
referred to as ``subcontractors''), meet or exceed the requirements for 
endorsement and sign our endorsed sponsor contract. We will also select 
a limited number of applicants for special endorsement. Endorsed 
sponsors receiving special endorsement are, for the purpose of 
fulfilling their responsibilities as special endorsed sponsors, exempt 
from meeting certain conditions of endorsement provided they agree to:
    [sbull] Apply transitional assistance toward the cost of covered 
discount card drugs obtained from pharmacies serving residents of 
skilled nursing facilities and nursing facilities (hereafter referred 
to as ``long-term care pharmacies'') and/or pharmacies serving American 
Indians or Alaska Natives (AI/ANs) operated by the Indian Health 
Service, Indian tribe and tribal organizations, or urban Indian 
organizations (hereinafter referred to as ``I/T/U pharmacies''); and/or

[[Page 69848]]

    [sbull] Offer an endorsed program in all the U.S. territories.
    We will select applicants for special endorsement based on a 
competitive process, with consideration given to which applicants can 
best serve these populations. Applicants seeking special endorsement 
also must apply and, except in specified circumstances, meet the 
requirements for basic endorsement; however sponsors seeking special 
endorsement may request waivers of requirements, allowing, for example, 
an applicant to apply for special endorsement solely for the purpose of 
long-term care pharmacy business to the exclusion of all other types of 
pharmacies. The requirements and procedures related to special 
endorsements are discussed in further detail in sections II.I. and 
II.J. of this document.
    Except as provided in section 403.804 (c)(2) of our regulations and 
discussed below in section II. O.2.C. of the preamble, we anticipate 
that endorsed sponsors may begin information and outreach activities, 
as well as enrollment activities as early as Spring 2004, and expect 
that these activities will begin no later than 6 months from the date 
of enactment of the Act; we reserve the right to terminate an endorsed 
sponsor's endorsement if the endorsed sponsor is not ready to fully 
operate its endorsed program and begin information and outreach 
activities by the 6 month deadline. The date upon which we will permit 
an endorsed sponsor to begin these activities will depend on its 
satisfaction of certain conditions, including--

    [sbull] Finalizing pharmacy network contracts;
    [sbull] Negotiating manufacturer rebates or discounts;
    [sbull] Entering into an endorsed sponsor contract with us;
    [sbull] Operationalizing call centers;
    [sbull] Entering into all subcontracts necessary to ensure full 
compliance with the conditions of endorsement;
    [sbull] Obtaining our approval of all information and outreach 
materials; and
    [sbull] Establishing and obtaining CMS approval of a system for 
conducting electronic transactions with us (or our subcontractor), 
including successful testing of such system.

As stated above, we expect these requirements to be met within 6 months 
of enactment, and may terminate an endorsed sponsor's endorsement if 
the requirements are not met by this time. These requirements are 
discussed in greater detail below.
    A solicitation for applications for Medicare endorsement under the 
Medicare drug discount card program will follow publication of this 
interim final rule. We expect to publish the solicitation on or near 
the date of publication of this rule. Following publication of the 
solicitation, potential applicants seeking clarification on the 
application process and requirements for endorsement may submit 
questions to us. In addition, we will hold a pre-application conference 
for potential applicants approximately 2 weeks after publication of the 
solicitation.
    In order to ensure that we successfully implement the Medicare drug 
discount card program no later than 6 months after enactment of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 
we anticipate that applicants will first need to submit completed 
applications to CMS within 45 days after the publication date of the 
solicitation. Applicants must certify that based on best knowledge, 
information, and belief, the reported information is accurate, 
complete, truthful, and supportable.
    We will require applicants to provide with their applications 
certain information and test files, as specified in the solicitation. 
Such information and files will be used by us to expedite our 
implementation of the data systems necessary to support enrollment in 
the Medicare drug discount card program, determinations of 
beneficiaries' eligibility for transitional assistance, and comparison 
of endorsed programs negotiated prices.
    Medicare endorsement of a sponsor's drug discount card will be 
valid for the duration of the Medicare drug discount card program, 
which in accordance with section 1860D-31(a)(2)(C)(i)(I) of the Act 
will terminate on December 31, 2005. Section 1860D-31(a)(2)(C)(ii) of 
the Act authorizes the Secretary to issue rules governing the 
transition period, including rules ensuring that the balance of any 
transitional assistance remaining available to a transitional 
assistance enrollee on January 1, 2006 remain available during the 
transition period. Under this authority we require endorsed sponsors to 
continue operating their endorsed program during the transition period, 
including ensuring that their card enrollees have access to negotiated 
prices and that transitional assistance enrollees can apply any 
transitional assistance remaining available to them toward the cost of 
covered discount card drugs obtained under the program during the 
transition period.
    See section II.F. of this document for a discussion of termination 
of an endorsed sponsor's endorsement.
    Section 403.804(d) of our regulations specifies that as a condition 
of endorsement, an endorsed sponsor must sign a contract. The contract 
signature will certify that the endorsed sponsor will comply with all 
requirements set forth in the contract, will implement its endorsed 
program in accordance with the program description contained in its 
application, and will operate its endorsed program consistent with the 
requirements set forth in the Act, this rule, and all other applicable 
Federal and State laws, including administering transitional assistance 
for eligible enrollees and conducting information and outreach 
activities consistent with our guidelines.

C. Sponsor Requirements for Eligibility for Endorsement Under the 
Medicare Drug Discount Card and Transitional Assistance Program

    Section 1860D-31(a)(1)(A) of the Act requires the Secretary to 
endorse qualified applicants seeking to offer endorsed discount card 
programs to Medicare beneficiaries. Section 1860D-31 of the Act sets 
forth specific requirements that applicants must satisfy to be eligible 
for endorsement and that endorsed sponsors must meet to retain their 
endorsement. In addition, section 1860D-31(h)(8) of the Act authorizes 
the Secretary to prescribe additional requirements of endorsement that 
the Secretary concludes protect and promote the interests of 
beneficiaries. Accordingly, we require applicants seeking endorsement 
under the Medicare drug discount card program to demonstrate that they 
meet a series of requirements related to--

    [sbull] Organizational structure and experience;
    [sbull] Service area;
    [sbull] Pharmacy network access;
    [sbull] Administering transitional assistance;
    [sbull] Prescription drug offering;
    [sbull] Eligibility and enrollment processes;
    [sbull] Customer service, including information and outreach;
    [sbull] Grievance processes;
    [sbull] HIPAA administrative simplification provisions and other 
marketing and security provisions;
    [sbull] Document retention; and
    [sbull] Data reporting to CMS.

In this section of the document we describe these conditions for 
endorsement.
    Special rules govern Medicare managed care organizations wishing to 
limit enrollment in their endorsed programs to members of one or more 
of their Medicare managed care plans.

[[Page 69849]]

Rules governing these exclusive card programs are discussed in section 
II.G. of this document.
    Applicants seeking special endorsement--that is, applicants wishing 
to offer an endorsed program in the U.S. territories and/or applicants 
willing to include within their pharmacy networks' long-term care and/
or I/T/U pharmacies--also are subject to special rules, as set forth in 
Sec.  403.816 and Sec.  403.817 of our regulations and discussed in 
sections II.I and II.J of this document.
1. Applicant Structure and Experience
    Under section 1860D-31(h)(1)(A) of the Act, the Secretary is 
authorized to designate the type of non-governmental entities that are 
appropriate to act as endorsed sponsors, which may include pharmacy 
benefit management companies, wholesale or retail pharmacy delivery 
systems, insurers (including insurers offering Medicare supplemental 
policies), and Part C plans. Although we have the authority to limit 
the types of entities that may act as endorsed sponsors, the only 
specific structural requirement for a sponsor is that it be a non-
governmental, single legal entity doing business in the United States. 
We choose not to impose other structural requirements at this time 
because our conditions for endorsement ensure that applicants, either 
individually or through subcontracts, will have the necessary 
experience and integrity to act as endorsed sponsors. Thus, as long as 
an applicant can meet our conditions for endorsement through 
subcontracting, except as stated above, we do not mandate the legal 
form of the endorsed sponsor.
    Although only one legal entity may act as the applicant, our 
regulations at Sec.  403.804(c)(1) permit applicants to combine their 
capabilities with other entities in order to meet the requirements for 
endorsement. As further discussed below, applicants must include 
documentation related to their legal arrangements with subcontractors.
    As specified in section 1860D-31(h)(1)(B) of the Act, an applicant 
is eligible for endorsement under the Medicare drug discount card 
program if the applicant, together with its subcontractors, has 
demonstrated experience and expertise in operating a drug discount card 
or similar program and meets certain requirements related to business 
stability and integrity. We interpret this provision to mean that 
applicants, together with their subcontractors, must: (1) Demonstrate 3 
years of private sector experience in pharmacy benefit management; (2) 
currently serve at least 1 million covered lives; and (3) demonstrate 
fiscal stability and business integrity, as provided in Sec.  
403.806(a) and Sec.  403.806(b) of our regulations. Medicare managed 
care organizations offering exclusive card programs, while required to 
comply with most of the conditions related to applicant structure, are 
subject to alternative requirements, as discussed in greater detail in 
section II.G. of this document.
a. 3 Years of Private Sector Experience
    Section 403.806(a)(2) of the regulations provides that each 
applicant, together with its subcontractors, must have 3 years of 
private sector experience within the United States in the following:
    [sbull] Adjudication and processing of claims at the point of sale;
    [sbull] Negotiating with prescription drug manufacturers and others 
for rebates and discounts on prescription drugs; and
    [sbull] Administration and tracking of an individual subsidy or 
benefit in real time.
    We require that this experience must have occurred in the United 
States to ensure that the applicant, together with its subcontractors, 
is familiar with applicable Federal laws, including those enforced by 
the Food and Drug Administration. We believe requiring 3 years prior 
experience will ensure that endorsed sponsors are able to quickly 
establish their endorsed programs, thereby promoting implementation of 
the Medicare drug discount card program within 6 months of enactment of 
the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003. In addition, the 3 years prior experience requirement ensures 
that endorsed sponsors have the necessary experience and capacity to 
offer card enrollees quality discounts and customer service. Moreover, 
given the relative newness of the drug card industry and high market 
turnover, we believe requiring less than 3 years experience would 
create an untenable risk of having the Medicare name associated with 
less than stable and reputable organizations.
b. 1 Million Covered Lives
    In addition to requiring 3 years of relevant experience, our 
regulations at Sec.  403.806(a)(3) require that a single entity which 
is either the applicant or a subcontractor operate a pharmacy benefit 
program, a drug discount card, a low-income drug assistance program, or 
a similar program that serves at least 1 million covered lives.
    We interpret covered lives to mean discrete individuals who have 
signed enrollment agreements with or paid (or have paid on their 
behalf) an enrollment fee or insurance premium to the applicant (or its 
subcontractors), or some comparable documentation. An applicant must 
include in its application documentation demonstrating that the 
applicant meets this requirement. If an applicant contracts with other 
entities for purposes of administering an endorsed program, the entity 
satisfying the 1 million covered lives requirement need not be the same 
entities satisfying the 3 years experience requirement. We choose not 
to link the 1 million covered lives requirement with the 3-year 
experience requirement in order to provide entities the flexibility to 
combine their capabilities. For example, an entity with the requisite 
experience may not have the enrollment capacity, but may acquire this 
capacity by contracting with another entity for purposes of 
administering the endorsed program. (A single entity, however, must 
meet the 1-million covered lives requirement. Therefore, an entity with 
600,000 covered lives could not combine with an entity with 400,000 
covered lives and meet the conditions for endorsement.)
    As discussed in the impact analysis, we estimate that during the 
first year of the Medicare drug discount card program, over 7 million 
beneficiaries may wish to enroll in the program, and anticipate that 
endorsed sponsors should have the capacity to accept between 1 to 10 
percent of this volume. This influx of Medicare beneficiaries--100,000 
to several hundred thousand beneficiaries--enrolling in an endorsed 
program would represent a sizable expansion over most card programs' 
current operations. Our 6-month implementation timeline requires that 
endorsed sponsors be able to quickly accommodate this potentially large 
influx of enrollees over a relatively short period of time. Current 
levels of covered lives provides evidence of an applicant's immediate 
capacity to do so.
    In examining our data on the number of covered lives served by a 
variety of organizations, we found that a standard of 1 million lives 
strikes a balance between ensuring a competitive marketplace with a 
number of different endorsed programs available to Medicare 
beneficiaries and ensuring that endorsed sponsors have the capacity to 
handle a large influx of card enrollees.

[[Page 69850]]

c. Demonstration of Financial Stability and Business Integrity
    As required by section 1860D-31(h)(1)(B) of the Act, and as 
provided for in Sec.  403.806(b)(1) of our regulations, an applicant 
must demonstrate the financial stability and business integrity of 
itself, and any of its subcontractors on which the applicant relies 
to--
    (1) Develop the pharmacy network;
    (2) Handle the negotiation of drug rebates or discounts;
    (3) Administer enrollment, including transitional assistance 
eligibility determinations;
    (4) Administer transitional assistance; or
    (5) Meet the 3-years of experience and/or covered lives 
requirements.

    The application should include the following documents or 
information for the applicant and each of these subcontractors:
    [sbull] A summary of the entity's history, structure, and 
ownership, including a chart showing the structure of ownership, 
subsidiaries, and business affiliations;
    [sbull] The most recent audited financial statements (balance 
sheet, income statement, statement of cash flow along with auditor's 
opinions, and related footnotes), which must demonstrate that the 
entity's total assets are greater than total unsubordinated liabilities 
and that the entity has sufficient cash flow to meet its obligations as 
they come due;
    [sbull] Financial ratings, if any, for the past 3 years; and
    [sbull] Listing of past or pending investigations (if known to the 
entity) and legal actions brought against the entity (and its parent 
entities, if applicable) by any financial institution, government 
agency (local, State, or Federal), or private organization over the 
past 3 years on matters relating to health care and prescription drug 
services and/or allegations of fraud, misconduct, or malfeasance. The 
application should include a brief explanation of each action, 
including the following: (1) Circumstances giving rise to the action; 
(2) the action's status (pending or closed); and (3) if closed, details 
as to resolution of the action and any monetary damages.
    Additionally, we plan to conduct an independent investigation of 
each entity, with respect to the above factors, which will include a 
review of Federal databases available to us that may contain 
information pertaining to legal issues involving the entity.
    In deciding whether to endorse an applicant with a record of legal 
actions brought against it, we will evaluate that record based on 
factors that include: (1) Whether the action is a pending investigation 
or has resulted in a settlement or judgment against the applicant, (2) 
whether the settlement or judgment has been issued recently (for 
example, within the past 3 years), (3) whether the conduct on which the 
judgment or settlement was based involved allegations of fraud or 
abuse, (4) whether the conduct was related to reimbursement for health 
care services or products, and (5) whether the applicant is currently 
operating under a corporate integrity agreement with the DHHS Office of 
the Inspector General.
    We require the applicant to demonstrate the business stability and 
integrity of the applicant and these subcontractors to ensure that we 
endorse only those endorsed sponsors that will be reliable, stable, and 
operate with integrity. We believe the specific requirements are an 
appropriate method for determining the business integrity and financial 
stability of an applicant and its subcontractors. For example, by 
requiring that assets exceed liabilities, we increase the likelihood 
that an endorsed sponsor will remain in the Medicare drug discount card 
program for the life of the program. Similarly, reviewing financial 
ratings and past or pending investigations allows us to represent to 
our beneficiaries that we have endorsed applicants that are financially 
sound and committed to a high level of business integrity.
    As discussed elsewhere in this document, an applicant that is a 
Medicare managed care organization offering an exclusive card program 
will be deemed to have met these business stability and integrity 
requirements through its compliance with Sec.  422.400, if a Part C 
plan, or Sec. Sec.  417.120 and 417.122, if a Medicare cost plan.
    Following its receipt of endorsement, as provided in Sec.  
403.806(b)(2) of our regulations, an endorsed sponsor (including both 
the applicant and its subcontractors) must continue to operate with 
fiscal stability and business integrity, in accordance with the same 
standards applicable to the applicant. Also, we require at Sec.  
403.806(c) that endorsed sponsors comply with all applicable Federal 
and State laws, including the Federal anti-kickback statute, section 
1128B(b) of the Act (42 U.S.C. 1320a-7b(b)). As provided in Sec.  
403.806(b)(3) of our regulations, Medicare endorsement of a discount 
card program shall not be construed to express or imply any opinion 
that an endorsed sponsor or any subcontractor is in compliance with or 
not liable under the False Claims Act, Federal anti-kickback statute, 
or other laws, regulations, or policies regarding improper billing, 
claims submission, or related conduct.
d. Contracts With Subcontractors and Pharmacies
    Although only one legal entity may act as the applicant, our 
regulations at Sec.  403.804(c)(1) permit applicants to combine their 
capabilities with other entities in order to meet the requirements for 
Medicare endorsement. As will be further described in the solicitation, 
applicants must include documentation, including contracts or signed 
letters of agreement, related to their legal arrangements with these 
subcontractors if the applicant has combined with such entities to meet 
the following requirements--

    [sbull] Years of experience and/or covered lives;
    [sbull] Establishing a pharmacy network or home delivery through 
mail order;
    [sbull] Negotiating manufacturer discounts or rebates;
    [sbull] Conducting enrollment and transitional assistance 
eligibility;
    [sbull] Administering transitional assistance;
    [sbull] Operating the customer service call center;
    [sbull] Administering a grievance process; and
    [sbull] Developing information and outreach materials.

    The contracts or signed letters of agreement must--

    [sbull] Clearly identify the parties to the contract;
    [sbull] Describe the functions to be performed by the 
subcontractor;
    [sbull] Contain language indicating that the subcontractor has 
agreed to participate in the Medicare drug discount card program 
(except for a network pharmacy if the existing contract would allow 
participation in this program);
    [sbull] Describe any payment the subcontractor will receive under 
the contract;
    [sbull] Extend for the lifetime of the Medicare drug discount card 
program;
    [sbull] Be signed and executed by representatives of each party 
with legal authority to bind the party;
    [sbull] Require the subcontractor to comply with State and Federal 
privacy and security requirements applicable to the endorsed sponsor or 
the subcontractor, and our marketing and document retention 
requirements, including the requirements provided in Sec.  403.812 and 
Sec.  403.813 of our regulations and discussed in section II.C.9. of 
this document.

    In addition, as will be further explained in the solicitation, an 
endorsed sponsor also must include in

[[Page 69851]]

its contracts with pharmacies participating in its network such terms 
and conditions as necessary to ensure that the endorsed sponsor meets 
all requirements for endorsement. This includes the requirement that 
subcontractors comply with all applicable Federal and State laws 
(including the anti-kickback law). Each application for endorsement 
must include one sample copy of every customized contract or letter of 
agreement used across the entire network. That is, we are asking to see 
every version of the contracts/letters of agreement across the network.
    If the applicant is unable to provide with its application final 
versions or templates of letters of agreement or contracts that 
represent the exact terms and conditions under the program with each of 
its subcontractors and pharmacies satisfactory to CMS, the applicant 
may submit revised documentation following receipt of the Medicare 
endorsement. We expect the applicant, however, to provide such 
documentation no later than 6 months after the date of enactment of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 
and we reserve the right to revoke endorsement if the materials are 
submitted later. In addition, an applicant may not commence outreach 
and enrollment activities prior to our receipt of such documentation 
and our determination that such documentation meets our requirements. 
The 6-month deadline and prohibition on outreach and enrollment 
activities may be waived for endorsed sponsors receiving special 
endorsement for the purpose of fulfilling obligations related to 
special endorsement provided such sponsors make a good faith effort to 
meet these documentation requirements as soon as possible, as provided 
in Sec.  403.816 and Sec.  403.817.
2. Service Area
    As provided in section 1860D-31(h)(3) of the Act, if an endorsed 
program enrolls beneficiaries residing in any part of a State, the 
program must permit any discount card eligible beneficiary residing in 
any portion of the State to also enroll in its endorsed program. We 
interpret this to mean, and provide in Sec.  403.806(f)(1) of our 
regulations, that a State is the smallest service area permitted under 
the Medicare drug discount card program. Accordingly, an endorsed 
program may not limit enrollment to only a portion of a State, with the 
exception of exclusive card programs, which, as discussed in section 
II.G. of this document, may limit their service area to the service 
area of the Medicare managed care plan(s) whose members may enroll in 
the exclusive card program (which may include part of a State). 
Further, an endorsed program's service area could be regional, meaning 
it operates in more than one State (contiguous or not). In addition, we 
define ``national'' endorsed programs as endorsed programs operating in 
each of the 50 States and the District of Columbia; an endorsed program 
that does not operate in each of the 50 States and the District of 
Columbia may not describe itself as a ``national'' endorsed program. 
Finally, an endorsed program may not operate outside of the 50 States 
and the District of Columbia, with the exception of sponsors receiving 
special endorsement permitting them to operate in the territories, as 
discussed in section II.J of this document.
3. Pharmacy Network Access
    As provided in section 1860D-31(e)(1)(B) of the Act, an endorsed 
discount card sponsor must ensure that its card enrollees have 
convenient access to covered discount card drugs at negotiated prices 
by securing the participation in its network of a sufficient number of 
pharmacies that dispense drugs (other than solely by mail order) 
directly to card enrollees. Specifically, consistent with the statement 
of work of solicitation MDA906-03-R-0002 of the Department of 
Defense under the TRICARE Retail Pharmacy (TRRx) as of March 13, 2003, 
we are requiring in Sec.  403.806(f)(3) of our regulations that, at all 
times during the program, beginning upon the date an endorsed sponsor 
initiates its outreach and enrollment activities--
    [sbull] In urban areas served by the endorsed program, at least 90 
percent of Medicare beneficiaries, on average, live within 2 miles of a 
pharmacy participating in the endorsed program's network;
    [sbull] In suburban areas served by the endorsed program, at least 
90 percent of Medicare beneficiaries, on average, live within 5 miles 
of a pharmacy participating in the endorsed program's network; and
    [sbull] In rural areas served by the endorsed program, at least 70 
percent of Medicare beneficiaries live, on average, within 15 miles of 
a pharmacy participating in the endorsed program's network.
    For the purposes of meeting these access standards, as also defined 
in the statement of work of solicitation MDA906-03-R-0002 of 
the Department of Defense--
    [sbull] Urban is defined as a five-digit ZIP Code in which the 
population density is greater than 3,000 persons per square mile;
    [sbull] Suburban is defined as a five-digit ZIP Code in which the 
population density is between 1,000 and 3,000 persons per square mile; 
and
    [sbull] Rural is defined as a five-digit ZIP Code in which the 
population density is less than 1,000 persons per square mile.
    The endorsed sponsor must meet or exceed these access standards at 
the endorsed program level, that is, across the entire geographic 
region serviced by the endorsed program. Only pharmacies that are under 
contract and are not mail order can be included in the count.
    As we will explain further in the solicitation, applicants must 
demonstrate their capacity to satisfy the pharmacy network access 
standard using mapping software, provided by us, which will compute 
beneficiaries' access to the pharmacies participating in the 
applicant's network using one hundred percent of beneficiary counts 
(that is, the entire beneficiary population) by zip code. These data 
and the population density information will be provided by CMS on 
request. Tables generated by the mapping software must be included with 
the application and must include the urban, suburban, and rural areas 
in each of the States covered under the applicant's drug discount card 
program.
    As discussed in greater detail in II.J. of this document, endorsed 
programs receiving special endorsement to operate in the territories 
may exclude the territories from the calculation as to whether the 
endorsed sponsor meets the above pharmacy access standard.
    Exclusive card programs are not required to meet these same 
pharmacy access standards; rather, as discussed in greater detail in 
section II.G. of this document, exclusive card programs will be subject 
to an alternative access standard.
    In accordance with section 1860D-31(e)(1)(B) of the Act, Sec.  
403.806(f)(4) of the regulations provides that endorsed sponsors will 
not be permitted to offer a mail order only option to their card 
enrollees. However, because some card enrollees may prefer to obtain 
their drugs from mail order pharmacies, endorsed programs will be 
allowed to offer a home delivery option via a mail order pharmacy, in 
addition to including their retail pharmacy in their networks. As 
discussed in greater detail in II.J. of this document, we may waive 
this requirement to allow mail order only in the territories for 
endorsed programs receiving special endorsement to operate in the 
territories.

[[Page 69852]]

4. Prescription Drug Offering
a. Covered Discount Card Drugs
    Endorsed sponsors must offer their card enrollees discounts on 
covered discount card drugs. Section 1860D-31(a)(4)(A) of the Act 
states that the term ``covered discount card drug'' has the same 
meaning given the term ``covered Part D drug'' in section 1860D-2(e) of 
the Act. Section 1860D-2(e), in turn, is based on sections 
1927(k)(2)(A)(i), (A)(ii), and (A)(iii) of the Act. This definition is 
incorporated into Sec.  403.802 of our regulations under the definition 
of ``covered discount card drug.'' The definition applies only to the 
following types of prescription drugs:
    (1) FDA-approved drugs;
    (2) Drugs used or sold prior to the enactment of the Drug 
Amendments of 1962 (Pub. L. 87-781); and
    (3) Drugs described in section 107(c)(3) of the Drug Amendments of 
1962 and any drug for which the Secretary has determined there is a 
compelling justification for its medical need.
    If the Secretary has determined, in the context of the Medicaid 
program, that there is a compelling justification for the medical need 
of a drug, such drug will be incorporated into our definition of 
``covered discount card drug'' for purposes of this program.
    Section 1860D-2(e) of the Act also includes in the definition of 
``covered discount card drug'' a biological product which (1) may only 
be dispensed upon prescription, (2) is licensed under section 351 of 
the Public Health Service Act (42 U.S.C. 262) and (3) is produced at an 
establishment licensed under each section to produce that product. 
Vaccines licensed under section 351 of the Public Health Service Act 
also are ``covered discount card drugs.'' Finally, section 1860D-2(e) 
of the Act includes insulin in the definition of covered discount card 
drug.
    Necessary medical supplies associated with the injection of insulin 
are also included in this definition. We interpret necessary medical 
supplies for this purpose to include syringes, needles, alcohol swabs, 
and gauze. We do not consider test strips or lancets to be supplies 
associated with injection since these supplies are more directly 
related to testing.
    The definition of covered discount card drug includes drugs when 
they are used for a medically accepted indication. The term ``medically 
accepted indication'' is defined in section 1927(k)(6) of the Act and 
generally means any use of a covered drug which is approved under the 
Federal Food, Drug, and Cosmetic Act, or the use of which is supported 
by one or more citations included or approved for inclusion in any of 
the following compendia: American Hospital Formulary Service Drug 
Information; United States Pharmacopoeia-Drug Information; the DRUGDEX 
Information System; and American Medical Association Drug Evaluations. 
While we do not expect endorsed sponsors to collect diagnosis 
information to confirm diagnoses associated with every dispensed drug, 
endorsed sponsors should make an effort to responsibly comply with this 
provision.
    Section 1860D-2(e)(2)(A) of the Act categorically excludes from the 
definition of ``covered discount card drug'' the following drugs or 
classes of drugs, or their medical uses, and we have no authority to 
alter this Congressional exclusion:

    [sbull] Agents when used for anorexia, weight loss, or weight gain.
    [sbull] Agents when used to promote fertility.
    [sbull] Agents when used for cosmetic purposes or hair growth.
    [sbull] Agents when used for the symptomatic relief of cough and 
colds.
    [sbull] Prescription vitamins and mineral products, except prenatal 
vitamins and fluoride preparations.
    [sbull] Nonprescription drugs.
    [sbull] Outpatient drugs for which the manufacturer seeks to 
require associated tests or monitoring services be purchased 
exclusively from the manufacturer or its designee as a condition of 
sale.
    [sbull] Barbiturates.
    [sbull] Benzodiazepines.
    Additionally, as provided in section 1860D-2(e)(2)(B) of the Act, a 
drug prescribed for a card enrollee that would otherwise be a covered 
discount card drug will not be considered a covered discount card drug 
if payment for that drug, as prescribed and dispensed or administered 
to the card enrollee, is available under Part A or Part B of Medicare 
(or would be available except for application of a deductible). That 
is, for prescribed drugs that may be payable under Medicare Part A or 
Part B, Medicare participating pharmacies should bill Medicare for the 
drug, and not the card enrollee or, in the case of transitional 
assistance enrollees, the endorsed sponsor, and non-Medicare 
participating pharmacies should refer the beneficiary to a Medicare 
participating pharmacy. When a pharmacy submits a claim under Medicare 
Part B, the rules applicable to pharmacies' claims adjudication under 
Part B will apply. Only after denial of a claim submitted under Part B 
may a pharmacy adjudicate a claim under the Medicare drug discount card 
program.
    Furthermore, endorsed discount card sponsors should not reconcile 
any claims under the Medicare drug discount card program previously 
rejected under Medicare Part A or Part B when the covered discount card 
drug was purchased by a non-pharmacy provider to provide to the card 
enrollee. For example, if a physician provides a drug to a card 
enrollee incident to an office visit that is not covered by Medicare 
Part B, then endorsed sponsors may not apply transitional assistance 
toward the cost of such drug.
b. Formulary and Minimum Prescription Drug Offerings
    Studies performed for the Department of Health and Human Services 
(BoozAllenHamilton, Pharmaceutical Industry Scan, August 6, 2002) have 
shown that one of the primary methods pharmacy benefit management 
companies and insurers negotiate drug discounts is through the 
establishment of a formulary. Through formularies that are properly 
structured, pharmacy benefit management companies, in consultation with 
a panel of physicians, pharmacists, and other health care 
professionals, establish clinically appropriate, safe, and cost-
effective lists of covered prescription drugs. While clinical 
appropriateness must be foremost in the development of a formulary, a 
properly designed formulary can also promote lower costs for 
beneficiaries as pharmaceutical manufacturers compete, using, among 
other things, rebates, volume discounts, and generic drugs to supply 
the drugs that meet the formulary requirements at the lowest price. 
Therefore, in Sec.  403.806(d)(1) of our regulations, we allow endorsed 
sponsors to establish formularies, whereby endorsed sponsors limit the 
set of drugs for which a discount is offered. However, even if an 
endorsed sponsor uses a formulary, it must permit transitional 
assistance enrollees to apply transitional assistance toward the cost 
of any covered discount card drug, including those not on the endorsed 
sponsor's formulary, offered by a pharmacy contracted by the sponsor 
for the endorsed discount card program's network. Our past research 
demonstrates that allowing sponsors to use a formulary will result in 
deeper discounts for card enrollees, and enhanced use of generic drugs, 
and we therefore have the authority to permit such formularies under 
section 1860D-31(h)(8) of the Act, as larger discounts and reduced 
prescription drug costs promote the interests of card enrollees.

[[Page 69853]]

    While we recognize the useful role of formularies in providing 
discounts to beneficiaries, we also want to insure that sponsors, in 
constructing their formularies, include, at a minimum, the types of 
drugs commonly needed by beneficiaries. In establishing a minimum 
requirement, it is not our intention to build the operating framework 
of a sponsor's formulary, but rather to present a floor, as we believe 
a minimum requirement is better than none at all. As provided in Sec.  
403.806(d)(2) of our regulations and consistent with promoting and 
protecting beneficiaries as specified in section 1860D-31(h)(8) of the 
Act, each endorsed discount card program will be required to provide a 
negotiated price for at least one drug in each of the lowest level 
categories under each of the therapeutic groupings (hereafter, 
collectively referred to as ``categories'') representing the drugs 
commonly needed by Medicare beneficiaries as listed in Table 2. This 
minimum requirement in no way precludes sponsors from adding additional 
categories or differentiating the categories we provide as they 
construct their formularies. In fact, we anticipate that sponsors would 
do that through their usual process involving a pharmacy and 
therapeutics committee. The categories in Table 2 were structured to 
ensure that beneficiaries enrolling in Medicare-endorsed discount card 
programs will be offered discounts on many of the types of drugs most 
commonly needed by the Medicare population. There are a total of 209 
categories (represented in italics within the table) for which card 
sponsors are required to offer a drug at a negotiated price. As some 
drugs can be classified into more than one category, a drug can be used 
only once to satisfy the criterion of providing a negotiated price for 
a drug in a category.
    Moreover, under the rationale that discounts on commonly used 
generic drugs are also typically made available under current industry 
practice, and that offering discounts on generics improves beneficiary 
understanding of sources of prescription drug discounts, we are 
requiring that endorsed sponsors provide discounts on a range of 
generic drugs. Specifically, sponsors must provide at least one generic 
drug for a negotiated price in at least 55 percent of the required 
categories (italicized in Table 2). Fifty-five percent represents about 
95 percent of those categories that include a Class A generic drug 
according to the FDA's Orange Book.
    We believe it is important that the Medicare name be associated 
only with endorsed programs that offer at least the types of drugs 
commonly needed by Medicare beneficiaries, while still maintaining the 
ability to negotiate discounts. Thus, we believe that requiring at 
least one drug per category, including generic drugs, strikes the 
proper balance between achieving drug discounts for card enrollees and 
offering some assurance that discounts will be available for the drugs 
Medicare enrollees most commonly need.
    It is important to note that endorsed sponsors have the flexibility 
to provide negotiated prices on as many drugs as they choose beyond the 
minimum number and types needed to satisfy this endorsement 
qualification criterion, and we expect that many endorsed sponsors will 
choose to do so in order to make their discount cards attractive to 
beneficiaries.
    We employed a contractor to provide technical assistance to develop 
the list of categories in Table 2.\1\ The following set of principles 
served to guide a comprehensive approach to develop the list of 
categories:
---------------------------------------------------------------------------

    \1\ Contract 500-02-0024 Modification 3, AMS, 
subcontracted to Navigant Consulting and Independent Pharmaceutical 
Consultants, Inc. Identification of Baseline Therapeutic Categories 
for the Medicare Drug Discount Card Program. December 5, 2003.
---------------------------------------------------------------------------

    [sbull] The category list is based on covered discount card drugs, 
as defined in section 1860D-2(e) of the Act, and also represents the 
types of drugs commonly needed by Medicare beneficiaries, as determined 
through analyses of survey data from the 2000 Medicare Current 
Beneficiary Survey, 2002-2003 Scott Levin-Verispan pharmacy data, and 
Food and Drug Administration information.
    [sbull] One category list will set minimum requirements for 
discount card offerings, regardless of whether an enrollee has access 
to transitional assistance funds. Importantly, provided that the drug 
is offered at the pharmacy, enrollees with transitional assistance can 
use these funds to purchase covered discount card drugs for which no 
discount is provided.
    [sbull] A given category could not contain only a single drug.
    [sbull] The list is intended to wrap around rather than represent 
existing Medicare Part B outpatient drug coverage.\2\ As such, drugs, 
biologicals, and vaccines administered in physician offices, hospital 
outpatient departments, dialysis centers, or provided outside of retail 
pharmacies were not reviewed unless they also can generally be obtained 
through retail pharmacies and appeared in data sources used to identify 
drugs commonly used by Medicare beneficiaries.
---------------------------------------------------------------------------

    \2\ Medicare coverage of outpatient drugs under Part B is 
principally for certain drugs and biologicals used in dialysis, 
cancer treatment, organ transplantation, certain vaccines and drugs 
used with DME such as infusion pumps and nebulizers.
---------------------------------------------------------------------------

    [sbull] In compliance with section 1860D-2(e) of the Act, non-
covered discount card drugs were excluded from review.
    To develop the listing of therapeutic categories of drugs most 
commonly needed by Medicare beneficiaries, we first analyzed drug 
utilization and expenditure data from the 2000 Medicare Current 
Beneficiary Survey (MCBS), a CMS-sponsored continuous, multipurpose 
survey of a nationally representative sample of aged, disabled, and 
institutionalized Medicare beneficiaries, to produce lists of the top 
200 drugs used based on number of prescriptions and the top 200 drugs 
used based on expenditures. Separate lists were compiled for elderly 
enrollees and disabled enrollees to ensure that important drugs for 
both populations were captured.
    We supplemented the list of commonly used drugs derived from the 
Medicare Current Beneficiary Survey by analyzing commercial datasets 
(Scott-Levin/Verispan Source Prescription Audit (SPA) and Physician 
Drug & Diagnosis Audit (PDDA)) for other commonly used drugs in the 
elderly populations. These data provide a comprehensive overview of the 
national performance of all prescription drugs dispensed by retail 
pharmacies for the 12-month period ending in May 2003. Utilization 
share percentages for people age 65 and over were applied to the data. 
Out of this data set, we obtained the top 200 drugs used based on 
number of prescriptions and the top 200 drugs used based on 
expenditures for the age 65 and over group. Prescription data is 
electronically collected on a monthly basis from approximately 35,000 
U.S. retail pharmacies, including chains, independents, mass 
merchandisers, and food stores. It is estimated that SPA data cover 
approximately 70 percent of all dispensed prescriptions in the U.S. The 
Scott-Levin PDDA database includes data from approximately 365,000 
office-based physicians in 29 specialties. Finally, to ensure that our 
list of commonly used drugs included new drugs and excluded retired and 
over-the-counter drugs (where over-the-counter drug is defined in our 
regulations at Sec.  403.802 to mean non-prescription drug), we 
consulted current Food and Drug Administration (FDA) materials, 
including the FDA's ``Additions/Deletions for Prescription and OTC Drug 
Product Lists'' for June 2002 through July 2003.
    After the list of drugs commonly needed by Medicare beneficiaries 
was

[[Page 69854]]

finalized, we assigned therapeutic class codes and sorted each drug 
into therapeutic classes. We accomplished this by using an enhanced 
classification tool made available from First DataBank. The First 
DataBank Enhanced Therapeutic Classification System (ETC) \3\ provides 
a method for classifying drugs and drug products into classes and sub-
classes using a parent-to-child relationship hierarchy. Using a 
combination of identifiers and formulation-based and name-based drug 
concepts, the system provides for maximum flexibility and allows for 
categorization of drugs into more than one therapeutic classification 
as necessary. The drugs were assigned to therapeutic categories and 
sub-categories based on National Drug Code and/or drug short name. The 
classification tool was then used to sort the listing of commonly used 
drugs according to therapeutic categories and sub-categories. The 
category list then underwent the following steps:
---------------------------------------------------------------------------

    \3\ According to First DataBank, the following sources were used 
in the compilation of data for the ETC: American Hospital Formulary 
Service (AHFS) Drug Information, Pharmacotherapy: A Pathophysiologic 
Approach, Martindale: The Extra Pharmacopeia, Applied Therapeutics: 
The Clinical Use of Drugs, Goodman and Gilman's The Pharmacological 
Basis of Therapeutics, Harrison's Principals of Internal Medicine, 
The Merck Manual of Diagnosis and Therapy, Current Medical Diagnosis 
and Treatment, The Merck Index, and manufacturer package inserts.
---------------------------------------------------------------------------

    [sbull] It was reviewed for major therapeutic classes that did not 
appear in the listing. In addition, non-covered discount card drugs 
were eliminated and drugs covered under Part B were flagged.
    [sbull] The revised draft classification and sub-classification 
system was reviewed by a pharmacy team, external to CMS, consisting of 
5 PhD and clinical pharmacists, and two geriatricians/internists, to 
determine the level of specificity required to ensure that the types of 
medications required by Medicare beneficiaries are represented. The 
category list was also compared with several commercial formulary 
categorization schemes.
    [sbull] Several non-CMS internal medicine physicians with 
specialties in geriatrics and several non-CMS specialists with 
expertise in serving Medicare beneficiaries, reviewed the 
specifications and drugs listed to ensure that the category list 
represents types of drugs that are commonly needed by the Medicare 
population, and to provide the guidance concerning the drugs they 
routinely prescribe to Medicare beneficiaries in their areas of 
specialization, for the consideration of sponsors in their development 
of formularies for the Medicare drug discount card program. A total of 
11 physicians took part in this review process.
    [sbull] CMS clinicians, including 2 pharmacists and a physician, 
conducted a final review of the categories. We then finalized the 
categories based on this input.
BILLING CODE 4120-01-P

[[Page 69855]]

[GRAPHIC] [TIFF OMITTED] TR15DE03.008


[[Page 69856]]


[GRAPHIC] [TIFF OMITTED] TR15DE03.009


[[Page 69857]]


[GRAPHIC] [TIFF OMITTED] TR15DE03.010


[[Page 69858]]


[GRAPHIC] [TIFF OMITTED] TR15DE03.011


[[Page 69859]]


[GRAPHIC] [TIFF OMITTED] TR15DE03.012


[[Page 69860]]


[GRAPHIC] [TIFF OMITTED] TR15DE03.013

BILLING CODE 4120-01-C

[[Page 69861]]

    In the interest of protecting beneficiaries' health, we believe 
there are several issues applicants should consider in developing their 
formularies, if they plan to use one. First, there are several 
medications that are not widely recommended for use in the elderly 
population based on their potential to cause adverse outcomes (Beers 
MH. Explicit criteria for determining potentially inappropriate 
medication use by the elderly. Arch Intern Med. 1997; 157:1531-1536). 
However, under certain clinical conditions, some of these medications 
may be appropriate for use in the elderly population. Endorsed sponsors 
should evaluate whether or not to include these drugs on their 
formularies, as well as ways in which to help reduce the potential for 
adverse drug reactions, described further in section II.C.7. of this 
document.
    Second, another key area for consideration by endorsed sponsors is 
the importance of ensuring that negotiated prices are available to 
special populations. Certain groups, such as beneficiaries who are HIV 
positive, beneficiaries with a mental illness, and beneficiaries with 
cancer may require treatment with a variety of specific medication 
combinations, which may not be easily substitutable. The medical 
treatment of these beneficiaries and other special populations may be 
significantly compromised if discounts are not made available on 
particular medications that they require.
    Finally, we believe endorsed sponsors should consider ensuring that 
there are appropriate selections and dosage forms of drugs within each 
class or subclass as needed (for example, long-acting versus short-
acting). In some cases, this might require more than one drug to 
satisfy a single subclass or group. Specifically, there are several 
therapeutic classes that contain both short-acting and long-acting 
medications. These medications commonly come in both standard oral 
dosage forms and time-release dosage forms.
    We are requesting that applicants address these issues in their 
applications if they will use a formulary so that we may have a fuller 
understanding of how drug discount card programs will address the needs 
of Medicare beneficiaries.
c. Pricing
    As provided in sections 1860D-31(e)(1)(A) and 1860D-31(h)(4) of the 
Act, and cited in Sec.  403.806(d)(1) of our regulations, each endorsed 
sponsor will be required to provide card enrollees access to negotiated 
prices on covered discount card drugs. Section 1860D-31(e)(1)(A)(ii) of 
the Act defines negotiated prices as taking into account negotiated 
price concessions (such as discounts, direct or indirect subsidies, 
rebates, and direct or indirect remunerations) for covered discount 
card drugs, and includes any dispensing fees for such drugs. Thus, as a 
general matter, to the extent discounts, rebates, subsidies or other 
price concessions are obtained by endorsed sponsors, the negotiated 
prices must take these concessions into account and some of the 
concessions should be shared with beneficiaries in the form of lower 
prices.
    In addition, section 1860D-31(i) of the Act specifically requires 
that endorsed sponsors disclose to us the percentage of manufacturer 
price concessions or rebates passed on to Medicare beneficiaries, with 
section 1860D-31(h)(4) of the Act requiring endorsed sponsors to pass 
these savings on to card enrollees. We interpret these provisions as 
reflecting Congressional intent that endorsed sponsors meet the 
threshold of obtaining some level of manufacturer rebates, discounts, 
or other price concessions on some covered discount card drugs. In 
addition, we believe requiring endorsed sponsors to obtain manufacturer 
rebates, discounts, or other price concessions on some covered discount 
card drugs will promote and protect the interests of Medicare 
beneficiaries.
    Therefore, as stated in Sec.  403.806(d)(6) of our regulations, as 
a condition of endorsement, endorsed sponsors must obtain manufacturer 
rebates, discounts, or other price concessions on at least some covered 
discount card drugs.
    In requiring endorsed sponsors to disclose to us the extent to 
which they pass through to card enrollees manufacturer discounts, 
rebates or other remunerations or price concessions, section 1860D-
31(i) of the Act anticipates that endorsed sponsors might not pass 
through to card enrollees 100 percent of such manufacturer price 
concessions. We therefore interpret section 1860D-31(h)(4) of the Act 
as requiring endorsed sponsors to pass through to card enrollees some, 
but not necessarily all, of these price concessions. Rather than 
establish minimum quantitative requirements for either the level of 
manufacturer rebates, discounts, or other price concessions endorsed 
sponsors must obtain or the share of such price concessions that must 
be passed through to card enrollees, we will allow endorsed sponsors to 
determine this in light of their understanding of consumer preferences 
and the impact of market forces on their business model. Research 
conducted for us has shown that pharmacy benefit managers frequently 
obtain and pass through substantial manufacturer rebates for their 
commercial populations (BoozAllenHamilton, Pharmaceutical Industry 
Scan, August 6, 2002). In addition, we believe that market competition 
will encourage endorsed sponsors to pass through to enrollees a high 
percentage of the rebates, discounts, or other remuneration or price 
concessions. In particular, our price comparison Web site, discussed in 
greater detail in section II.E. of this document, will promote 
competition by allowing beneficiaries to compare maximum negotiated 
prices for drugs under different endorsed programs. Further, as 
described below, endorsed sponsors' negotiated prices for covered 
discount card drugs will not be taken into account for the purposes of 
establishing the best price under section 1927(c)(1)(C) of the Act. We 
therefore anticipate that endorsed sponsors will pass a substantial 
share of manufacturer price concessions through to beneficiaries in the 
form of negotiated prices at the point of sale. We have chosen not to 
establish minimum threshold levels for manufacturer price concessions 
because doing so could have the unintended effect of undercutting 
market competition as endorsed sponsors might cluster their drug price 
offering around that threshold.
    We believe this approach provides endorsed sponsors with maximum 
flexibility within the basic program requirement in designing their 
endorsed program and negotiating price concessions with a broad range 
of manufacturers at levels that are commensurate with the structure of 
their endorsed programs.
    In recognition of current industry practice, we anticipate that the 
level of discount offered to card enrollees will vary across the full 
complement of covered discount card drugs offered at negotiated prices. 
Moreover, as provided in Sec.  403.806(d)(4) of our regulations, prices 
may vary across pharmacy contracts. We believe it is necessary to 
permit such price variation in order to provide endorsed sponsors 
sufficient flexibility to accommodate local market conditions and 
competition. As part of our educational efforts, we will explain to 
beneficiaries the possibility of price variation by pharmacy, and 
expect endorsed sponsors to do the same.
    Additionally, we will allow endorsed sponsors to vary prices and 
formularies by enrollee characteristics, such as transitional 
assistance eligibility status, to offer lower negotiated prices to low-

[[Page 69862]]

income card enrollees, or card enrollees with a particular disease. We 
believe this flexibility promotes the objective of improving 
beneficiaries' access to prescription drug discounts by allowing card 
sponsors to structure formularies and prices for these populations for 
whom prescription drug expenses are a significant burden. An endorsed 
sponsor choosing to incorporate this flexibility into its endorsed 
program must ensure that its alternative offerings do not restrict any 
card enrollee's access to its basic option should the card enrollee not 
wish to participate in the alternative offering.
    Further, CMS recognizes that endorsed sponsors may change their 
negotiated prices over time for legitimate business purposes. However, 
because beneficiaries are generally locked into the endorsed program of 
their choice for a calendar year, we would not want beneficiaries to 
enroll in cards with unrealistically low advertised prices, only to see 
those prices arbitrarily increase in subsequent weeks or months. 
Therefore, as provided in Sec.  403.806(d)(9) of our regulations, we 
require that, except during the week of November 15, 2004, (which 
coincides with the beginning of the annual coordinated election 
period), endorsed sponsors must ensure that any increase in the 
negotiated price does not exceed an amount proportionate to the change 
in the drug's average wholesale price (AWP), and/or an amount 
proportionate to the changes in the endorsed sponsor's cost structure, 
including material changes to any discounts, rebates, or other price 
concessions the endorsed sponsor receives from a pharmaceutical 
manufacturer or pharmacy. We will monitor whether negotiated prices 
decline in proportion to decreases in AWP.
    As discussed in section II.C.7. of the document, an endorsed 
sponsor must make available to its card enrollees, over its customer 
service telephone line, upon request, information about negotiated 
prices.
    Under section 1860D-31(h)(8) of the Act, and as provided in Sec.  
403.806(d)(7) of our regulations, endorsed sponsors must ensure that 
card enrollees are charged at the point of sale the lower of the 
negotiated price or the pharmacy's usual and customary price for a 
covered discount card drug. We expect an endorsed sponsor to arrange 
with its network and mail order pharmacies that if, at time of 
purchase, a drug's usual and customary price is lower than the 
negotiated price under the endorsed sponsor's endorsed program, the 
pharmacy will make available to card enrollees the lower usual and 
customary price.
    Additionally, as provided in section 1860D-31(d)(3) of the Act and 
stated in Sec.  403.806(d)(8) of our regulations, endorsed sponsors are 
required to ensure that pharmacies inform card enrollees of any 
differential between the price of the covered discount card drug to the 
card enrollee and the price of the lowest priced generic drug that is 
therapeutically equivalent and bioequivalent and available at that 
pharmacy. This information must be provided at the time the card 
enrollee purchases the drug, or in the case of drugs purchased by mail 
order, at the time of delivery of that drug. As permitted under 
sections 1860D-31(d)(3)(B) and 1860D-31(g)(5) of the Act, for the 
reasons discussed in section II.I. of this document, we exempt from 
this requirement covered discount card drugs obtained from long-term 
care pharmacies or I/T/U pharmacies.
    As provided in section 1860D-31(e)(1)(D) of the Act, the prices 
negotiated for covered discount card drugs under an endorsed discount 
card program (notwithstanding any other provision of law) will not be 
taken into account for the purposes of establishing the best price 
under section 1927(c)(1)(C) of the Act. Section 103(e) of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 amends 
section 1927(c)(1)(C)(i) of the Act by adding a new subparagraph (V) to 
exclude from best price any negotiated prices charged under an endorsed 
program. This exemption applies only to prices obtained from a drug 
manufacturer for the ingredient cost of the drug under the Medicare 
drug discount card program; prices negotiated for discount cards that 
are not Medicare endorsed programs would not meet the criteria of the 
exemption. Furthermore, since this rule relates to the Medicare drug 
discount card program, the rule does not address application of the 
best price rules to non-endorsed drug discount cards. We will not 
codify into regulation the statutory exemption from best price for 
negotiated prices under endorsed programs because we do not currently 
have regulations implementing section 1927(c)(1) of the Act.
 d. Transitional Assistance
    As discussed under section II.A. of this document, certain low-
income Medicare beneficiaries enrolled in the Medicare drug discount 
card program will be eligible to receive transitional assistance of up 
to $600 per year, which may be applied toward the cost of covered 
discount card drugs obtained under the program.
    Section 1860D-31(h)(1)(C) of the Act requires endorsed sponsors to 
administer the transitional assistance on our behalf and to demonstrate 
to the Secretary that they have satisfactory arrangements that account 
for the transitional assistance provided to transitional assistance 
enrollees. Therefore, as stated in Sec.  403.806(e) of our regulations, 
endorsed sponsors must:
    [sbull] Establish accounting procedures to manage the transitional 
assistance funds;
    [sbull] Ensure that transitional assistance is applied toward the 
lower of a covered discount card drug's negotiated price (if any) or 
usual and customary price;
    [sbull] Permit transitional assistance enrollees to apply 
transitional assistance toward the cost of any covered discount card 
drug obtained under the endorsed sponsor's endorsed program, regardless 
of whether that drug is on the endorsed sponsor's formulary (if any) or 
whether a discount has been negotiated for that drug.
    [sbull] As required under section 1860D-31(d)(2)(C) of the Act, 
make available electronically or by telephone at the point-of-sale of 
covered discount card drugs the amount of transitional assistance 
remaining available to the transitional assistance enrollee; and
    [sbull] As required under section 1860D-31(d)(2)(B) of the Act and 
discussed in section II.C.7. of this document, endorsed sponsors should 
inform transitional assistance enrollees of the endorsed sponsor's 
toll-free telephone number where they can obtain information on the 
amount of transitional assistance available to them.
    In tracking the amount of transitional assistance available to 
transitional assistance enrollees, endorsed sponsors must take into 
account that any transitional assistance remaining available to a 
beneficiary on December 31, 2004 should be rolled over to 2005 and 
applied toward the cost of covered discount card drugs obtained under 
the program during 2005, and any transitional assistance remaining 
available to a beneficiary on December 31, 2005 may be applied toward 
the cost of covered discount card drugs obtained under the program 
during the transition period.
    Endorsed sponsors must maintain a real-time claims adjudication 
system that, among other capabilities, will--
    [sbull] Communicate to pharmacies the applicable coinsurance 
rates-- 5 percent or 10 percent;
    [sbull] Ensure that transitional assistance is applied only toward 
the cost of

[[Page 69863]]

covered discount card drugs obtained under the program; and
    [sbull] Track the amount of transitional assistance available to 
each transitional assistance enrollee.
    We understand that in some circumstances real-time claims 
adjudication may not be possible, for instance, due to coordination of 
benefits issues. To accommodate these circumstances, endorsed sponsors 
must have the capacity to process claims off-line for transitional 
assistance.
    As discussed below in section II.G. of this document, exclusive 
card sponsors may permit their transitional assistance enrollees to 
apply transitional assistance toward any copayments, coinsurance, and 
deductible amounts for covered discount drug cards obtained under their 
Medicare managed care plan outpatient drug benefit. Medicare managed 
care organizations seeking to offer an exclusive card program must 
indicate in their applications their intent to permit transitional 
assistance enrollees to apply transitional assistance toward the cost 
of covered discount card drugs obtained under their Medicare managed 
care plan and explain their process for doing so.
    Applicants must include in their applications details on their 
proposed methods for managing and accounting for transitional 
assistance.
    As discussed in section II.C.6. of this document, endorsed sponsors 
will not be permitted to charge their transitional assistance enrollees 
any annual enrollment fee; rather, we will pay any enrollment fee on 
their behalf.
    Endorsed sponsors will be required to establish procedures for 
applying transitional assistance toward the cost of covered discount 
card drugs obtained by transitional assistance enrollees under the 
Medicare drug discount card program. Such procedures must include 
applying the coinsurance rules set forth in section 1860D-31(g)(1)(B) 
of the Act, as stated in Sec.  403.808(e) of our regulations and 
discussed in section II.A.4.a. of this document. Further, as stated in 
Sec.  403.806(e)(6) of our regulations, endorsed sponsors must ensure 
that transitional assistance is not applied to cover the portion of the 
negotiated price that transitional assistance enrollees are responsible 
for paying under the coinsurance rules. That is, endorsed sponsors must 
ensure that the amount of transitional assistance applied toward the 
cost of covered discount card drugs obtained by transitional assistance 
enrollees is the negotiated price (or usual and customary price, if 
lower) minus the coinsurance. For example, if a beneficiary has a $600 
transitional assistance balance and he or she obtains a covered 
discount card drug under the Medicare drug discount card program with a 
negotiated price of $100, the beneficiary would pay, depending on his 
or her income, a coinsurance of 5 percent or 10 percent ($5 or $10), 
the endorsed sponsor would pay the negotiated price minus the 
coinsurance amount ($95 or $90), and following the transaction, the 
amount of transitional assistance remaining available to the 
transitional assistance enrollee would be $505 or $510. In their 
applications, applicants must describe their approach for applying the 
coinsurance rules.
    Section 101(e)(2) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 exempts from the prohibition under 
section 1128B(b)(3) of the Act pharmacies who waive or reduce 
coinsurance for enrollees with transitional assistance provided such 
waiver or reduction meets the conditions in clauses (i) through (iii) 
of section 1128A(i)(6)(A). Thus, pharmacies participating in an 
endorsed program's network could not be criminally prosecuted under 
section 1128B(b)(3) of the Act for waiving or reducing coinsurance 
under the Medicare drug discount card program provided the pharmacies 
comply with the provisions of clauses (i) through (iii) of section 
1128A(i)(6)(A) of the Act, which include the following--
    [sbull] The waiver is not to be advertised;
    [sbull] The coinsurance is not routinely waived; and
    [sbull] The coinsurance is waived only after determining (in good 
faith) that--
    [sbull] The eligible beneficiary is in financial need; or
    [sbull] The pharmacy has made reasonable collection efforts but 
still failed to collect the coinsurance due.
    Pharmacies and endorsed sponsors seeking further guidance regarding 
waivers or reduction of coinsurance may request advisory opinions from 
the Office of the Inspector General. To request an advisory opinion, 
entities should submit an original and 2 copies of a written request 
that contains certain specified information to the following address:

Chief, Industry Guidance Branch, U. S. Department of Health and Human 
Services, Office of Inspector General, Office of Counsel to the 
Inspector General, Room 5527, Cohen Building, 330 Independence Avenue, 
SW., Washington, DC 20201.

    For more information on the advisory opinion process and the 
information included in the request, please refer to www.oig.hhs.gov/fraud/advisoryopinions.html.
    In addition, as discussed under section II.H. of this document, 
States may establish arrangements to pay directly to endorsed sponsors 
some or all of the coinsurance on behalf of transitional assistance 
enrollees in their State. If a pharmacy waives or reduces a 
transitional assistance enrollee's coinsurance amount or if the State 
pays some or all of the coinsurance, the endorsed sponsor must ensure 
that no more than 90 or 95 percent, as applicable, of the negotiated 
price is paid using transitional assistance funds.
5. Products and Services Inside and Outside the Scope of the 
Endorsement
    Section 1860D-31(e)(1)(C) of the Act prohibits an endorsed discount 
card sponsor (and any pharmacy included in the endorsed sponsor's 
network) from charging card enrollees any amount, other than the annual 
enrollment fee and negotiated prices (which include dispensing fees), 
for any items and services required to be provided by the endorsed 
sponsor under the Medicare drug discount card program. Therefore, our 
regulations at Sec.  403.806(h)(2) prohibit endorsed sponsors (and 
their network pharmacies) from charging any amount for required 
services other than the enrollment fee and negotiated prices. Required 
services include, for example--

    [sbull] Conducting enrollment;
    [sbull] Offering negotiated prices on covered discount card drugs;
    [sbull] Ensuring convenient pharmacy access;
    [sbull] Reducing the likelihood of medication errors and adverse 
drug interactions;
    [sbull] Providing customer service and information and outreach 
materials;
    [sbull] Providing a grievance mechanism; and
    [sbull] Administering transitional assistance.

    Section 1860D-31(h)(7)(A) of the Act allows endorsed sponsors to 
provide certain non-required services under their endorsements as well, 
but only if such products or services are directly related to a covered 
discount card drug, or are discounts for over-the-counter drugs (that 
is, non-prescription drugs). Thus, endorsed sponsors may voluntarily 
choose to provide under their Medicare endorsement discounts on over-
the-counter drugs, and products or services that are related to covered 
discount card drugs but which are not required services under the 
Medicare drug discount card program. For example, an endorsed sponsor 
might offer discounts on durable medical equipment that is related to a 
covered

[[Page 69864]]

discount card drug. Any product or service that is either not related 
to a covered discount card drug, or is not a discount for an over-the-
counter drug, could not be provided under the endorsement and would be 
considered outside the scope of a sponsor's Medicare endorsement.
    Although an endorsed sponsor (and pharmacies participating in their 
networks) may provide products and services related to covered discount 
card drugs and may offer discounts on over-the-counter drugs, our 
regulations provide at Sec.  403.806(h)(1) that endorsed sponsors (and 
pharmacies participating in their networks) may not offer any such 
product or service for an additional fee (nor may any of their 
subcontractors or pharmacies in the network charge an additional fee 
for services offered under the endorsement). Endorsed sponsors 
therefore must fund all such products and services (whether optional or 
required) through the enrollment fee, and, if necessary, through 
rebates, discounts, and other price concessions garnered from 
manufacturers and pharmacies. We believe that we have the authority to 
recognize as outside the scope of endorsement those products and 
services offered for an additional fee. Section 1860D-31(h)(8) of the 
Act charges us with protecting and promoting the interests of Medicare 
beneficiaries. Were we to allow endorsed sponsors to charge additional 
fees, we believe beneficiaries might, in effect, be charged annual 
enrollment fees higher than the $30 limit mandated by section 1860D-
31(c)(2)(B) of the Act, especially if endorsed sponsors were to 
condition enrollment in their endorsed programs on beneficiaries paying 
these additional fees. In addition, beneficiaries may be unable to 
access negotiated prices and transitional assistance, as intended by 
Congress, if endorsed sponsors require that they pay additional fees 
for optional products and services. Further, we believe permitting 
endorsed sponsors to charge additional fees could be confusing to 
beneficiaries. For example, beneficiaries may find it confusing and 
frustrating that endorsed sponsors can charge a diabetic an additional 
fee to access discounts on durable medical equipment related to drugs 
for diabetics when they cannot charge a case management fee related to 
helping the beneficiary manage his or her diabetes. Our beneficiary 
research has demonstrated that beneficiaries expect a discount card 
program to be simple to understand and easy to use (Bearing Point and 
Sutton Group. CMS Formative Research on Prescription Drug Shopping 
Habits: Round 1 Findings, Final. April 8, 2003). We believe that the 
most straightforward and easily understood structure for an endorsed 
program is one that provides all products and services related to 
covered discount card drugs and discounts on over-the-counter drugs for 
the single enrollment fee.
    We clarify that we do not intend to prohibit pharmacies from 
charging beneficiaries for drugs; rather, this policy concerns not the 
price of a drug itself, but products or services directly related to 
the drug and access to discounts on over-the-counter drugs. Pharmacies 
and endorsed sponsors therefore may charge beneficiaries negotiated 
prices for covered discount card drugs and discounted prices for over-
the-counter drugs.
    In accordance with section 1860D-31(h)(7)(B) of the Act, our 
regulations at Sec.  403.813(a) and Sec.  403.806(g)(5)(iv) provide 
that an endorsed sponsor's information and outreach materials may 
describe only those products or services within the scope of the 
Medicare endorsement; the information and outreach materials may not 
include descriptions of products or services offered by the endorsed 
sponsor outside the scope of the endorsement. Because only products and 
services that are both (1) related to a covered discount card drug or 
are discounts for over-the-counter drugs and (2) offered for no fee 
(other than the enrollment fee or negotiated prices) are considered 
within the scope of the Medicare endorsement, an endorsed sponsor's 
information and outreach materials may not include information on 
products or services offered for an additional fee. We interpret this 
to mean that endorsed sponsors may not commingle communications about 
endorsed sponsors' products or services offered outside the scope of 
endorsement with information and outreach materials describing products 
and services within the scope of endorsement. In addition, if endorsed 
sponsors offer for no additional fee non-required products and services 
related to covered discount card drugs or they offer discounts on over-
the-counter drugs, the endorsed sponsor must describe these products 
and services in its information and outreach materials, which are 
subject to our review as described in section II.C.7. of this document.
    Finally, as provided in Sec.  403.813(a)(1) and (2) and discussed 
in section II.C.9. of this document, an endorsed sponsor may not use or 
disclose a card enrollee's individually identifiable health information 
created, collected, or maintained under the Medicare drug discount card 
program for the purpose of marketing products or services offered 
outside the scope of endorsement.
6. Eligibility and Enrollment Responsibilities
    Sections 1860D-31(f)(1)(A) and (c)(1) of the Act direct the 
Secretary to establish procedures for determining beneficiaries' 
eligibility for the Medicare drug discount card program and 
transitional assistance and for enrolling eligible beneficiaries in 
endorsed programs. Sections 403.810 and 403.811 of our regulations set 
forth these procedures, which are discussed in part in section II.A. of 
this document. Endorsed sponsors are expected to implement these 
requirements as provided in Sec.  403.806(k) of the regulations. This 
section discusses the obligations of endorsed sponsors related to 
eligibility determinations and enrollment. Section 1860D-31(c)(1)(B) of 
the Act also requires endorsed sponsors to use a standard enrollment 
form, and section 1860D-31(c)(2) of the Act permits endorsed sponsors 
to charge an annual enrollment fee up to, but no more than, $30 per 
year. This section also discusses our rules pertaining to the standard 
enrollment form and annual enrollment fee.
a. Eligibility and Enrollment Process
    An endorsed sponsor may enroll a Medicare beneficiary in its 
endorsed program only after we verify the beneficiary's eligibility. We 
require endorsed sponsors to interact with CMS's enrollment systems to 
ensure that only eligible beneficiaries enroll in the Medicare drug 
discount card program; that beneficiaries enroll in only one endorsed 
program at a time and with few exceptions, in only one endorsed card 
program per year, as required under section 1860D-31(c)(1)(C)(i) of the 
Act and Sec.  403.811(a)(6) and (a)(7) of our regulations; and that 
members of a Medicare managed care plan offering an exclusive card 
program do not enroll in other endorsed programs.
    Medicare beneficiaries seeking to enroll in an endorsed sponsor's 
program must submit information to the endorsed sponsor by completing 
the standard enrollment form or by providing the necessary information 
to the sponsor via other means (for example, telephone, internet, or 
facsimile), as specified by CMS and permitted by the endorsed sponsor. 
Beneficiaries who wish to receive transitional assistance must complete 
the standard enrollment form for transitional assistance and submit 
this

[[Page 69865]]

form to their endorsed sponsor. We expect endorsed sponsors to promptly 
transmit to us all standard data elements captured on a beneficiary's 
completed enrollment form.
    Prior to transmitting to us any standard data elements, we expect 
that the endorsed sponsor will ensure that the beneficiary's enrollment 
form is complete. If a beneficiary's enrollment form is incomplete, the 
endorsed sponsor must promptly contact the beneficiary or return the 
beneficiary's incomplete application to him or her to obtain the 
missing information.
    In addition to reviewing an enrollment form for completeness, 
endorsed sponsors are expected to review whether an enrollment form on 
its face indicates that the beneficiary is ineligible for the Medicare 
drug discount card program or, if applicable, transitional assistance. 
Specifically, if the beneficiary is applying to enroll in the endorsed 
sponsor's endorsed program, the endorsed sponsor should review the 
enrollment form to determine whether:
    [sbull] The beneficiary resides within the endorsed program's 
service area; and
    [sbull] The beneficiary has any outpatient drug coverage under a 
State Medicaid plan (including a 1115 waiver).
    If the beneficiary is applying for transitional assistance, the 
endorsed sponsor must review the enrollment form to determine whether:
    [sbull] The beneficiary has signed the form;
    [sbull] The beneficiary's income as listed on the enrollment form 
exceeds 135 percent of the poverty line applicable to the beneficiary's 
family size;
    [sbull] The beneficiary has coverage for outpatient covered 
discount card drugs under one or more of the following sources: (a) 
TRICARE, (b) a Federal Employee's Health benefit plan, or (c) a group 
health plan or health insurance coverage other than a Part C plan or a 
group health plan consisting solely of excepted benefits, such as 
Medigap; and
    [sbull] The beneficiary does not reside in one of the 50 States or 
the District of Columbia.
    We also expect endorsed sponsors to determine the appropriate 
coinsurance level for each transitional assistance enrollee based on 
the income information he or she provides on the standard enrollment 
form.
    If the endorsed sponsor determines that the beneficiary is 
ineligible for its endorsed program or, if applicable, transitional 
assistance, the endorsed sponsor should promptly notify the beneficiary 
that he or she is not eligible. The endorsed sponsor may wish to 
discuss with the beneficiary whether the individual wishes to make any 
changes to his or her enrollment form. Otherwise, the endorsed sponsor 
is expected to issue a notice of negative eligibility determination, as 
discussed in greater detail below.
    As discussed in section II.A.3. of this document, if a beneficiary 
applies for transitional assistance when he or she applies for an 
endorsed program, the endorsed sponsor may not enroll the beneficiary 
in their endorsed program if the beneficiary is determined ineligible 
for transitional assistance. This requirement is specified in Sec.  
403.811(a)(3) of our regulations.
    We will inform an endorsed sponsor of beneficiaries' eligibility 
for the sponsor's endorsed program and, if applicable, transitional 
assistance. If a beneficiary is determined ineligible for the endorsed 
sponsor's program and/or transitional assistance, we will inform the 
endorsed sponsor of the reasons for the negative determination. We 
expect endorsed sponsors to promptly notify a beneficiary in writing of 
any negative eligibility determination made either as a result of the 
endorsed sponsor's initial review of an individual's complete 
enrollment form (or information submitted as part of the enrollment 
process) or of CMS' verification process. If the beneficiary has been 
determined ineligible for the sponsor's endorsed program and/or 
transitional assistance, the notice must communicate to the 
beneficiary--
    [sbull] The reason for the negative eligibility determination;
    [sbull] The beneficiary's right to request reconsideration of the 
eligibility determination and the process for doing so; and
    [sbull] If not determined eligible for transitional assistance, the 
beneficiary's option of enrolling in the endorsed program without 
access to transitional assistance.
    The model information and outreach materials that will accompany 
information and outreach guidelines referenced in section II.C.7. of 
this document will include model language for these notices, as 
discussed under section II.C.7. of this document. Our reconsideration 
process is discussed in greater detail under section II.A.5. of this 
document.
    The determination process for this program relies on self-
certification and verification. As discussed above in section II.A.2. 
of this document, if, as part of our verification process for 
transitional assistance , we are unable to verify a beneficiary's 
ability to meet the income threshold specified in Sec.  403.810(b)(3) 
of our regulations, we may direct endorsed sponsors to request that the 
beneficiary submit additional income information. Section 403.810(f)(2) 
of our regulations provides that CMS can require such beneficiaries to 
fulfill this request as one condition of eligibility for transitional 
assistance.
    Under section 1860D-31(c)(1)(A)(i) of the Act, and as provided in 
Sec.  403.811(a)(10) of our regulations, a discount card eligible 
individual may enroll only in an endorsed program serving residents of 
the State in which he or she resides. Therefore, an endorsed sponsor 
may only enroll in its endorsed program beneficiaries that are 
residents of a State within the endorsed program's service area. We 
expect the endorsed sponsor to advise beneficiaries that those who 
change their address to an address outside the endorsed program's 
service area during the year must disenroll from the endorsed program 
and request a special election period if they wish to enroll in a new 
card program whose service area includes their new address. The model 
information and outreach materials to be provided with the information 
and outreach guidelines will include model language addressing this 
issue. We also plan to educate beneficiaries that any discount card 
eligible individual planning to change residence during the year should 
enroll in a national endorsed program.
    As discussed under sections II.A.3. and II.G. of this document, 
Medicare managed care organizations may group enroll, into their 
exclusive card programs, eligible beneficiaries enrolled in those 
Medicare managed care plans that include access to an exclusive card 
program as part of the plan's benefit package. Prior to doing so, these 
organizations must notify affected plan members of their intent to 
enroll eligible beneficiaries as a group into their exclusive card 
program and grant beneficiaries ample opportunity to decline enrollment 
in the exclusive card program. We encourage organizations offering 
exclusive card programs to inform affected plan members that, if they 
decline enrollment in the exclusive card program, they will not be 
permitted to enroll in any other endorsed program.
    Under Sec.  403.814(b)(5)(iii) of our regulations, we permit 
exclusive endorsed sponsors electing to group enroll their plan members 
into their exclusive card program to use a modified version of the 
standard enrollment form provided such form has been submitted and 
approved by us along with the exclusive endorsed sponsor's other 
information and outreach materials. If a Medicare managed care 
organization group enrolls its plan members into its exclusive card

[[Page 69866]]

program, any transitional assistance eligible beneficiary must be 
afforded the opportunity to apply for transitional assistance.
    Section 1860D-31(c)(3) of the Act requires that endorsed sponsors 
issue a discount card to all of its discount card enrollees for use as 
proof of enrollment and to facilitate identification of the discount 
card enrollee and the appropriate endorsed program at the point of 
sale. Section 1860D-31(c)(3) of the Act gives the Secretary the 
discretion to specify a standard format for the discount cards. We 
require in Sec.  403.806(g)(4) of our regulations that all discount 
cards follow a standard format that complies with National Council for 
Prescription Drug Programs standards. We will further discuss this 
format in our information and outreach guidelines.
b. Standard Enrollment Form
    Section 1860D-31(c)(1)(B) of the Act requires endorsed sponsors to 
use a ``standard'' enrollment form that is specified by the Secretary. 
The standard enrollment form will collect eligibility data elements in 
a standard format for use by the endorsed sponsor and CMS in 
determining the beneficiary's eligibility for the Medicare drug 
discount card program and, if applicable, transitional assistance. We 
interpret the requirement for a standard enrollment form to mean that, 
although such forms do not have to be identical, an endorsed sponsor's 
enrollment form must contain certain data elements and language. These 
data elements will be specified in the information and outreach 
materials that accompany the solicitation, but will include:
    [sbull] Information on eligibility criteria for the Medicare drug 
discount card program and transitional assistance;
    [sbull] Documentation of a beneficiary's request for a 
determination of his or her eligibility for the Medicare drug discount 
card program and enrollment in the endorsed sponsor's endorsed program;
    [sbull] Documentation (in the form of a signature) of a 
beneficiary's request for a determination of his or her eligibility for 
transitional assistance and request for enrollment assuming eligibility 
determination is positive;
    [sbull] Beneficiary's income level and family size;
    [sbull] Authorization to verify the information reported on the 
enrollment form, including the beneficiary's income, if applicable; and
    [sbull] Certification of whether the beneficiary has outpatient 
prescription drug coverage under one or more of the following sources: 
(a) TRICARE, (b) a Federal Employee's Health benefit plan, or (c) a 
group health plan or health insurance coverage other than a Part C plan 
or a group health plan consisting solely of excepted benefits, such as 
Medigap.
    We have developed a standard enrollment form that is as easy to 
understand as possible. Endorsed sponsors may customize the layout, 
graphics, and language of their enrollment form so long as the form 
conforms to the requirements of this section and the information and 
outreach guidelines referenced in section II.C.7. of this document. An 
endorsed sponsor must submit to us its enrollment form along with its 
other information and outreach materials for our review and approval.
    As specified in Sec.  403.814(b)(5)(iii) of our regulations, a 
Medicare managed care organization offering an exclusive card program 
that wishes to group enroll its plan members into its exclusive card 
program may use a modified version of the standard form. Any such 
modifications must conform to the requirements we will specify in the 
information and outreach guidelines (see Sec.  403.806(g)(5)(i) of our 
regulations).
c. Transition Period
    As discussed in section II.B.2. of this document, we require 
endorsed sponsors to continue operating their endorsed program during 
the transition period, including providing its discount card enrollees 
access to negotiated prices during this period. In accordance with 
section 1860D-31(a)(2)(C)(ii)(II) of the Act, Sec.  403.811(c)(6) of 
our regulations specifies that endorsed sponsors may not charge an 
annual enrollment fee during the transition period. In addition, as 
provided in Sec.  403.808(f), endorsed sponsors must permit 
transitional assistance enrollees to apply any transitional assistance 
remaining available to them on December 31, 2005 toward the cost of 
covered discount card drugs obtained under the program during the 
transition period. Endorsed sponsors may not enroll any beneficiaries 
in their endorsed programs during the transition period.
d. Enrollment Fee
    Section 1860D-31(c)(2) of the Act provides that endorsed sponsors 
may charge an annual enrollment fee up to, but no more than, $30 per 
year.
    Section 1860D-31(c)(2)(c) of the Act requires that an endorsed 
sponsor charge all beneficiaries residing in the same State the same 
enrollment fee. As specified in Sec.  403.811(c)(4) of our regulations, 
for endorsed programs with service areas larger than a State, the 
endorsed sponsor may charge a different annual enrollment fee in each 
State of up to, but not more than, $30.
    Section 1860D-31(c)(2)(G) provides that the Secretary may establish 
special rules with respect to payment of any annual enrollment by 
discount card enrollees who enroll in a new endorsed program during a 
calendar year. As provided in Sec.  403.811(b)(7) of our regulations, 
when a discount card enrollee enrolls in a new endorsed program during 
a special election period, the endorsed sponsor of the new endorsed 
program may charge the discount card enrollee its annual enrollment 
fee. We allow the new endorsed sponsors to charge their annual 
enrollment fee because we believe that much of the enrollment fee 
covers the start-up costs of enrolling a beneficiary into an endorsed 
program.
    Section 1860D-31(c)(2)(G) of the Act allows the Secretary to 
provide special rules regarding payment of the enrollment fee for 
discount card eligible individuals, which include transitional 
assistance enrollees who enroll in a new endorsed program during the 
calendar year. For transitional assistance enrollees who change 
endorsed programs during a special election period, we will pay any 
annual enrollment fee charged by the new endorsed program. Further, 
section 1860D-31(c)(2)(C) of the statute and Sec.  403.811(c)(4) of the 
regulations provides for a uniform enrollment fee for all discount card 
enrollees. The requirement means that the Secretary will pay the same 
enrollment fee (if any) for individuals receiving transitional 
assistance that the endorsed sponsor is charging those not receiving 
transitional assistance and residing in the same State.
    Section 1860D-31(c)(2)(A) of the Act, as reflected in Sec.  
403.811(c)(3) of our regulations, prohibits an endorsed sponsor from 
prorating its annual enrollment fee for portions of a calendar year. 
Accordingly, an endorsed sponsor that charges an enrollment fee must 
charge its discount card enrollees the same enrollment fee in a given 
calendar year, regardless of when during the calendar year the discount 
card enrollee enrolls in the endorsed sponsor's endorsed program.
    Section 403.811(a)(2) of our regulations provides that if the 
beneficiary indicates on the enrollment form that he or she only seeks 
to enroll in the endorsed sponsor's endorsed program and is not seeking 
transitional assistance, the endorsed sponsor may charge the 
beneficiary an annual

[[Page 69867]]

enrollment fee in a form and manner determined by the endorsed sponsor.
    As discussed above in section II.A.3. of this document, and 
provided in Sec.  403.811 (a)(3) of our regulations, beneficiaries may 
not enroll in an endorsed sponsor's endorsed program when they also 
apply for transitional assistance, unless they are determined eligible 
for transitional assistance at the time of application. To ensure that 
a beneficiary does not pay any enrollment fee prior to a determination 
of his or her eligibility for transitional assistance, Sec.  
403.811(c)(2) of our regulations provides that endorsed sponsors may 
not charge beneficiaries applying for transitional assistance any 
annual enrollment fee at the time of application. Should a beneficiary 
be determined eligible for transitional assistance and enrolled in the 
endorsed program, the endorsed sponsor may then charge CMS any 
enrollment fee. Beneficiaries determined ineligible for transitional 
assistance may apply for enrollment in an endorsed drug discount card 
program and, if found eligible to enroll in the endorsed program, must 
pay the annual enrollment fee (if any) in a form and manner determined 
by the endorsed sponsor.
    As required in section 1860D-31(c)(2)(E) of the Act, and specified 
in Sec.  403.808(c) of our regulations, we will pay any annual 
enrollment fee on behalf of transitional assistance enrollees. Should a 
discount card enrollee be determined eligible for transitional 
assistance after already enrolling in an endorsed program, we will pay 
the annual enrollment fee and the endorsed sponsor must immediately 
refund to the discount card enrollee, or any State that has paid the 
enrollment fee on behalf of the card enrollee, any annual enrollment 
fee for the calendar year previously paid by the discount card enrollee 
or State. If the discount card enrollee is first determined eligible 
for transitional assistance in 2005, we will not pay any enrollment fee 
for 2004 and the endorsed sponsor will not be required to refund to the 
discount card enrollee any enrollment fee paid by him or her in 2004. 
This policy is incorporated into Sec.  403.811(c)(5) of our 
regulations.
    As discussed in greater detail in section II.H.2. of this document, 
under section 1860D-31(c)(2)(F) of the Act and Sec.  403.815(a) of our 
regulations, a State may pay some or all of any enrollment fee for some 
or all discount card enrollees (other than transitional assistance 
enrollees) residing in the State. As specified in Sec.  403.815(a)(1) 
of our regulations, these payment arrangements should be negotiated 
directly between the State and the endorsed sponsor.
 e. Disenrollment
    Section 1860D-31(c)(1)(D)(ii) of the Act and Sec.  403.811(b)(6) of 
our regulations permit an endorsed sponsor to involuntarily disenroll 
any discount card enrollee, other than a transitional assistance 
enrollee, who fails to pay the annual enrollment fee charged by the 
endorsed sponsor. We expect endorsed sponsors to provide discount card 
enrollees prior written notice before involuntarily disenrolling them 
for failure to pay the enrollment fee.
    Under section 1860D-31(c)(1)(D)(i) of the Act, a discount card 
enrollee also may voluntarily disenroll from an endorsed program at any 
time. Discount card enrollees generally must notify an endorsed sponsor 
of their desire to disenroll from the endorsed sponsor's endorsed 
program. We expect endorsed sponsors to promptly submit to CMS all 
disenrollment requests they receive. In addition, if an endorsed 
sponsor involuntarily disenrolls one of its discount card enrollees for 
failure to pay any enrollment fee, we expect the endorsed sponsor to 
promptly notify us of such disenrollment. As discussed above in section 
II.A.6. of this document, discount card enrollees who disenroll from a 
Medicare managed care plan offering an exclusive card program are no 
longer eligible for that exclusive card program. The exclusive endorsed 
sponsor must disenroll these beneficiaries from its exclusive card 
program.
    If a discount card enrollee contacts the endorsed sponsor in order 
to disenroll from an endorsed program, the endorsed sponsor is 
responsible for--
    [sbull] Disenrolling the discount card enrollee from its endorsed 
program and promptly notifying us of such disenrollment;
    [sbull] Determining whether the discount card enrollee is eligible 
for a special election period based on the reason provided for the 
disenrollment, if any; and
    [sbull] If the endorsed sponsor determines that a discount card 
enrollee is eligible for a special election period, promptly notifying 
us of this determination.
7. Information and Outreach, and Other Customer Service
 a. Information and Outreach
    Section 1860D-31(d)(2)(A) of the Act requires that each 
prescription drug card endorsed sponsor that offers an endorsed 
discount card program will make available to eligible beneficiaries for 
the discount card program (through the Internet and otherwise) 
information that the Secretary identifies as being necessary to promote 
informed choice among endorsed discount card programs including 
information on enrollment fees and negotiated prices for covered 
discount card drugs. Furthermore, section 1860D-31(h)(7)(A) of the Act 
limits drug card endorsed sponsors to providing under their 
endorsements only (1) products and services directly related to covered 
discount card drugs, or (2) discounts on over-the-counter drugs. 
Section 1860D-31(h)(7)(B) then prohibits endorsed sponsors from 
marketing--under their endorsements--any products and services other 
than those described in section 1860D-31(h)(7)(A).
    Under the above authority, we have drafted regulations which 
condition endorsement on card sponsors providing information and 
outreach according to our rules. To further explain these regulations 
and provide guidance to endorsed sponsors, we plan to publish 
information and outreach guidelines on our Web site at the same time we 
release the solicitation for applications. These information and 
outreach guidelines will provide further interpretations of our 
regulations and will contain the procedures endorsed sponsors can use 
to apply for and receive approval of their information and outreach 
materials.
    Our regulations at Sec.  403.806(g) contain our requirements for 
the information to be included in materials. Endorsed sponsors must 
provide to Medicare beneficiaries in their service area(s) information 
and outreach materials on the endorsed program, including discounts on 
over-the-counter drugs, if offered. Our regulations also incorporate 
the statutory requirement that information and outreach materials 
promote informed choice and contain information on enrollment fee and 
negotiated prices.
    As we will explain further in the information and outreach 
guidelines, we will implement and interpret these statutory and 
regulatory requirements by requiring endorsed sponsors to disclose to 
Medicare beneficiaries (prior to enrollment, after enrollment, and upon 
request) the following information at a minimum--
    (1) A detailed description of the program that includes information 
on how to become enrolled in a program, eligibility qualifications for 
transitional assistance, and how transitional assistance works;
    (2) A description of the services the sponsor provides for no 
additional fee,

[[Page 69868]]

such as drug interaction counseling or allergy alerts;
    (3) The availability of a grievance process and how it works;
    (4) If applicable, any special rules for beneficiaries in long term 
care facilities, American Indians/Alaska Natives who use I/T/U 
pharmacies, as well as residents of the U.S territories;
    (5) The toll-free telephone numbers described in Sec.  
403.806(g)(6) of our regulations;
    (6) A list of contracted pharmacies and prescription drugs offered 
for a negotiated price, how coinsurance works, and a guarantee that 
contracted pharmacies will provide the lower of the negotiated price or 
the usual and customary price;
    (7) Enrollment fees (if any);
    (8) A notice that drugs and prices may change or vary and a 
description of how the enrollee can obtain information regarding those 
changes and variations;
    (9) A clear description of the service area in which the endorsed 
program is available;
    (10) A privacy notice for protected health information. Further 
guidance will be provided in the information and outreach guidelines on 
the notice of privacy practices for protected health information; and
    (11) A description of any circumstances and special procedures that 
relate to potential transitional assistance enrollee liabilities 
stemming from procedures endorsed sponsors have in place to manage 
transitional assistance against an enrollee's cap or transitional 
assistance balance transfer to a newly elected endorsed program.
    Endorsed sponsors must also make available, upon request, the 
negotiated prices for prescription drugs.
    In addition to the above information, section 1860D-31(d)(2)(B) of 
the Act provides that an individual's transitional assistance balance 
must be available and provided as requested by toll-free line. Because 
this provision also requires that the toll-free line is publicized, we 
will require in the information and outreach guidelines that the toll-
free number be included in all media through which the sponsor 
communicates with beneficiaries (for example, magazines, television, 
newspapers, billboards, radio, pre-enrollment, or post-enrollment 
materials).
    Section 1860D-31(d)(2)(C) of the Act requires endorsed sponsors to 
make available, at the point of sale, information on the remaining 
balance of transitional assistance. Endorsed sponsors, therefore, must 
explain in their information and outreach materials that, at the point 
of sale, enrollees can request that network pharmacies determine--
either electronically or by telephone--how much of the enrollee's 
transitional assistance remains. Endorsed sponsors must also include 
information in the member handbook or summary of program features on 
how an enrollee can obtain his or her transitional assistance balance.
    Additionally, in accordance with section 1860D-31(d)(3) of the Act, 
information and outreach materials must explain how enrollees will be 
informed of the differential between the price of the drug to the 
enrollee and the price of the lowest priced therapeutically equivalent 
and bioequivalent generic covered discount card drug available at that 
pharmacy. Our forthcoming information and outreach guidelines will 
provide further detail on the method for communicating this information 
to beneficiaries, including to beneficiaries who purchase drugs through 
mail order.
    All information required to be included in information and outreach 
materials, must, as required under section 1860D-31(d)(2)(A) of the 
Act, be provided both through the Internet and through some tangible 
medium, such as mailings (see Sec.  403.806(g)(1) of our regulations). 
For information provided on the Internet, endorsed sponsors must 
establish a process for informing members when the web page was last 
updated, for example, by putting a date and disclaimer on the web page 
to promote beneficiary understanding that the information could be 
dated. In their applications, we require endorsed sponsors to 
demonstrate how they will maintain Web sites that provide information 
and outreach.
    In II.C.5. of this document, we discuss products and services 
considered inside and outside the scope of endorsement, and explain 
that products or services outside the endorsement may not be offered or 
marketed under the endorsement. We further explain in section II.C.9. 
of this document that marketing related to non-endorsed services will 
be prohibited, even if the endorsed sponsor obtains beneficiary consent 
to receive such marketing. In keeping with these rules, our information 
and outreach provisions provide that any communication provided by 
sponsors that would concern services outside the endorsement may not be 
co-mingled with information and outreach materials relating to endorsed 
items or services. Therefore, when endorsed sponsors are acting in 
their capacity as endorsed sponsors, and are using data or information 
they collected through the operation of their endorsed program, they 
may not co-mingle information and outreach materials on endorsed 
features with any materials on non-endorsed features. This, however, 
would not prohibit entities, when they are not acting in their capacity 
as endorsed sponsors, from publicizing their endorsed programs or 
providing information about such programs. Thus, for example, an 
exclusive card sponsor could describe its endorsed program in its 
Medicare managed care plan marketing materials if those materials are 
CMS-approved, but it could not describe its Medicare managed care plan 
general features in materials which are directed solely toward its 
endorsed program enrollee population.
    Our forthcoming information and outreach guidelines also will 
provide certain rules regarding the proper procedures for conducting 
information and outreach. For example, the guidelines will provide 
that, in conducting information and outreach, endorsed discount card 
sponsors may not engage in activities that could mislead or confuse 
beneficiaries or provide cash or other monetary rebates (for example, 
coupons or discounts on pharmacy products and services) as an incentive 
for enrollment.
    Section 1860D-31(c)(3) of the Act provides that each endorsed 
sponsor must issue to each enrollee a card in a standard format 
specified by the Secretary that establishes proof of enrollment and 
that can be used in a coordinated manner to identify the endorsed 
sponsor, program, and beneficiary (see also Sec.  403.806(g)(4) of our 
regulations). We will, in the information and outreach guidelines, 
provide guidance according to the requirements of the National Council 
for Prescription Drug Programs (NCPDP) for pharmacy identification 
cards. NCPDP is recognized as the industry standard for current 
prescription drug programs. We will review and approve pharmacy 
identification cards.
    Our information and outreach guidelines will also include standards 
for use of a Medicare endorsement emblem. Use of the emblem may occur 
only after written notification of endorsement. Endorsed discount card 
sponsors may use the emblem on information and outreach materials such 
as newsletters, discount cards, stationery, and other promotional items 
designed to inform Medicare beneficiaries about the program.
    Finally, as a condition of endorsement, we will require endorsed 
sponsors to file with us all information and outreach materials (See 
also Sec.  403.806(g)(5)). These materials will require our review and 
approval (within

[[Page 69869]]

the time period discussed below) prior to the endorsed sponsor being 
able to disseminate them. We believe there is sufficient authority in 
section 1860D-31 of the Act for us to require prior submission and 
review of information and outreach materials. For example, section 
1860D-31(d)(2) of the Act gives the Secretary the authority to identify 
the information necessary to be included in information and outreach 
materials to ``promote informed choice among endorsed discount card 
programs.'' In order to ensure that information and outreach materials 
are, in fact, promoting informed choice, we believe prior filing and 
review is necessary. Additionally, section 1860D-31(h)(8) of the Act 
authorizes us to craft conditions for endorsement that we believe would 
``protect and promote the interests of Medicare beneficiaries.'' We 
believe that ensuring that marketing materials contain the necessary 
information, adequately reflect the drug discount card program, and do 
not violate any of our conditions for endorsement will protect Medicare 
beneficiaries. Our review of these materials will ensure that 
beneficiaries are not misled or confused about the services offered by 
drug discount card programs, that beneficiaries receive the information 
necessary to make informed choices in their selection of a drug 
discount card program, and that the Medicare name is not misused--for 
example, to advertise services unrelated to this program.
    Therefore, we require in Sec.  403.806(g)(5) of our regulations 
that information and outreach materials must have our review and 
approval (within the time period discussed in Sec.  403.806(g)(5)(iii)) 
in order for them to be disseminated. We define information and 
outreach materials to include the same kinds of materials described in 
42 CFR Sec.  422.80(b) as well as enrollment forms, eligibility 
determination forms, membership cards, Web site content and any 
information on over-the-counter drugs (see also Sec.  403.806(g)(5)(v) 
of our regulations). Examples of information and outreach materials 
that will be reviewed include, but are not limited to--

    [sbull] General audience materials;
    [sbull] Telephone or sales scripts for presentations;
    [sbull] Presentation materials and slides;
    [sbull] Membership communications, such as member handbooks and 
letters regarding contractual changes in benefits, procedures, or 
enrollment fee;
    [sbull] Enrollment forms, eligibility determination forms, and 
membership cards;
    [sbull] Information regarding over-the-counter drugs offered for a 
discount; and
    [sbull] All forms of advertising, including television, radio, 
print, and Internet.
    In order for us to conduct our review, our regulations provide that 
all information and outreach materials must be submitted to us for 
approval 30 days before dissemination. We will include model language 
in our guidelines, and materials that use that model language will 
receive a streamlined review process and will be approved in fewer than 
30 days. Our guidelines will also include a File and Use Program, which 
will be another approach for streamlining the review process. Further 
guidance will be provided in the information and outreach guidelines 
regarding the criteria for the File and Use Program.
    The endorsed sponsor may disseminate the information and outreach 
materials if we do not disapprove the initial submission of these 
materials by the end of the 30-day period. This rule applies only to 
the initial submission of materials. Resubmission of materials (that 
is, submissions made after receiving comments or questions on the 
initial submission) will not be subject to the deemed approval rule in 
Sec.  403.806(g)(5)(iii) of our regulations.
    Exclusive card sponsors will have a modified review process that 
will facilitate the coordination of their information and outreach 
materials with the Medicare managed care plan marketing materials. 
Further details on the review process will be provided in the 
Information and Outreach Guidelines, the solicitation, and also in the 
pre-application conference that will be announced in the solicitation.
b. Call Center
    As stated in section 1860D-31(d)(2)(B) of the Act, each endorsed 
sponsor must have a mechanism (including a toll-free telephone number) 
for providing, upon request, specific information (such as negotiated 
prices and the amount of transitional assistance remaining available 
through the program) to their enrollees. Therefore, in Sec.  
403.806(g)(6), we are requiring that, as a condition of endorsement, 
each endorsed card endorsed sponsor must maintain a toll-free customer 
call center to assist beneficiaries in understanding the drug discount 
card program offered. The call center must be open during regular 
business hours and must provide customer telephone service in 
accordance with standard business practices. We interpret this to mean 
that the call center will be available at least Monday through Friday 
from 8 a.m. to 4:30 p.m. Eastern to Pacific Standard times for those 
zones in which the discount card program will operate. We also 
interpret the requirement that the call center will be operated in 
accordance with standard business practices to mean that--
    [sbull] 70 percent of customer service representatives' time while 
on the job will be spent answering telephones and responding to 
enrollee inquiries;
    [sbull] 80 percent of all incoming customer calls will be answered 
within 30 seconds;
    [sbull] The abandonment rate for all incoming customer calls will 
not exceed 5 percent; and
    [sbull] There will be an explicit process for handling customer 
complaints.
    These standards are required or exceeded by the 1-800 Medicare call 
center contractors.
    As stated earlier and included in Sec.  403.806(e)(5) of our 
regulations endorsed sponsors are required to provide through their 
toll-free numbers information on the amount of available transitional 
assistance (section 1860D-31(d)(2)(B) of the Act).
    Endorsed sponsors must also have in place a reliable means for 
accommodating pharmacy inquiries regarding the endorsed sponsor's 
program. We believe this requirement promotes and protects 
beneficiaries by ensuring that pharmacists can have their questions 
answered about the card program's drug offering on behalf of the 
beneficiary. Endorsed sponsors could, for example, accommodate 
pharmacist inquiries by incorporating a specific number in the 
Interactive Voice Response (IVR) for the pharmacist to select so that 
hold times will be minimized (many pharmacies use this already for ease 
of access for physicians). We are aware that endorsed sponsors, as part 
of their current business operations, generally have some established 
mechanism for responding to pharmacy inquiries. However, we do not 
intend to mandate a specific approach because we do not want to 
inadvertently force a higher cost solution. Instead, we will permit 
individual endorsed sponsors to decide on methods for effectively 
addressing pharmacy inquiries.
    Endorsed discount card programs may establish additional mechanisms 
for communicating with enrollees and pharmacies, such as e-mail or fax.
c. Reduction of Medication Errors and Adverse Drug Reactions
    In our regulations at Sec.  403.806(g)(7), we require that each 
endorsed discount

[[Page 69870]]

card program must provide a system to reduce the likelihood of 
medication errors and adverse drug interactions and to improve 
medication use (section 1860D-31(e)(2) of the Act). Endorsed sponsors 
have flexibility to design their own individual systems to accomplish 
these goals. We will require applicants to describe their systems and 
discuss how these goals will be accomplished. Published scientific and 
clinical literature should support the proposed approaches. If 
applicants have experience using their proposed systems to accomplish 
these goals, applications should describe past achievements in reducing 
medication errors and adverse drug interactions and in improving 
medication use.
8. Grievance Process
    Section 1860D-31(h)(5) of the Act specifies that endorsed sponsors 
must establish and maintain a grievance process to track and address in 
a timely manner enrollees' complaints about any aspect of the endorsed 
sponsor's operations. The grievance process does not include the 
reconsideration process, described in section 1860D-31(f)(4) of the Act 
and discussed in section II.A.5. of this document, which affords 
beneficiaries an opportunity to seek review of an initial determination 
that they are ineligible to receive transitional assistance or enroll 
in an endorsed program.
    A grievance is any card enrollee's complaint or dispute expressing 
dissatisfaction with the manner in which he or she has received 
services under an endorsed program. The subjects of a grievance may 
include the timeliness, appropriateness, access to, and/or setting of 
services provided by the endorsed sponsor, such as waiting times, 
demeanor of pharmacy or customer service staff, or disrespect shown a 
card enrollee. A grievance may also include a dispute concerning the 
endorsed sponsor's failure to offer discounts on particular covered 
discount card drugs, ensure its pharmacies charge a certain price for 
covered discount card drugs, apply transitional assistance toward the 
cost of a covered discount card drug obtained by a transitional 
assistance enrollee under the program, or correctly calculate the 
correct coinsurance amount for a covered discount card drug obtained by 
a transitional assistance enrollee.
    In Sec.  403.806(j) of our regulations, we require endorsed 
sponsors to maintain meaningful procedures for timely review and 
resolution of their card enrollees' grievances. We will publish more 
specific guidelines on grievance procedures in our solicitation. These 
guidelines will include the following features--
    (1) Endorsed sponsor's ability to collect information concerning 
the grievance;
    (2) Timely transmission of grievances to appropriate decision-
making levels within the endorsed sponsor's organization, including to 
any subcontractors;
    (3) Taking prompt and appropriate action to address a grievance, 
including conducting a full investigation of the grievance if 
warranted; and
    (4) Communication of the results of an investigation to all 
concerned parties, consistent with applicable State law.
9. HIPAA Administrative Simplification Provisions and Other Marketing 
and Security Provisions
a. General
    Section 1860D-31(h)(6)(A) of the Act provides that for the purpose 
of the Medicare drug discount card program, the operations of an 
endorsed program are covered functions and an endorsed sponsor is a 
covered entity for purposes of applying Part C of title XI and all 
regulatory provisions promulgated thereunder, including regulations 
(relating to privacy) adopted pursuant to the authority of the 
Secretary under section 264(c) of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA). We therefore provide in Sec.  
403.812(a) of our regulations that endorsed sponsors are covered 
entities and must comply with the standards, implementation 
specifications, and requirements in 45 CFR parts 160, 162, and 164 as 
set forth in Sec.  403.812 of our regulations. Section 403.812(a) of 
our regulations also provides that those functions of an endorsed 
sponsor the performance of which are necessary or directly related to 
the operations of the endorsed discount card program are covered 
functions for purposes of applying to endorsed sponsors the standards, 
implementation specifications, and requirements in 45 CFR parts 160, 
162, and 164.
    Section 1860D-31(h)(7)(B) of the Act provides that an endorsed 
sponsor only may market those products and services under its endorsed 
program that are directly related to a covered discount card drug, or 
discounts on non-prescription drugs to the extent such marketing is 
otherwise permitted under the Medicare discount drug card program, and 
the use of beneficiary information for such communications is permitted 
by the HIPAA Privacy Rule.
b. Overview of HIPAA Administrative Simplification Regulations
    The HIPAA Administrative Simplification Regulations are a suite of 
regulations that provide for the standardization of certain electronic 
financial and administrative health care transactions, as well as for 
the privacy and security of individually identifiable health 
information.\4\ The regulations apply to three types of entities, which 
collectively are termed ``covered entities''--health care providers who 
transmit protected health information in electronic form in connection 
with a transaction for which the Secretary has adopted a standard, 
health plans, and health care clearinghouses. Section 1860D-31(h)(6)(A) 
of the Act essentially specifies a fourth type of covered entity, the 
endorsed sponsors. Therefore, as a condition of endorsement, endorsed 
sponsors must comply with the HIPAA Administrative Simplification 
regulations in the manner described in Sec.  403.812 of our 
regulations.
---------------------------------------------------------------------------

    \4\ The suite includes regulations for the electronic health 
care transactions and code sets, unique health identifiers for 
health plans, health care providers, and employers, and security and 
privacy.
---------------------------------------------------------------------------

    Section 1860D-31(h)(6)(A) of the Act provides that only the 
endorsed sponsor's operations of an endorsed program are covered 
functions. Consequently, activities performed by an endorsed sponsor 
outside of the scope of its endorsement under the Medicare drug 
discount card program are not made covered functions by the Act. 
However, if these other activities would make the endorsed sponsor a 
health plan, covered health care provider, or health care 
clearinghouse, as currently defined by HIPAA, then the endorsed sponsor 
may otherwise be a covered entity that is subject to the Administrative 
Simplification regulations. An endorsed sponsor performing non-covered 
functions may declare itself a hybrid entity in accordance with 45 CFR 
164.105, with its health care component including any component 
performing operations that make the entity an endorsed sponsor.
    As provided in Sec.  403.812(f) of our regulations, nothing in this 
discussion or Sec.  403.812 of our regulations should be considered a 
modification of the HIPAA Administrative Simplification regulations or 
as otherwise affecting the applicability of the Administrative 
Simplification regulations to covered entities other than endorsed 
sponsors. Moreover, as provided in Sec.  403.812(f) of our regulations, 
if an endorsed sponsor is also a health plan, covered health care 
provider, or health care clearinghouse, the Administrative 
Simplification

[[Page 69871]]

regulations as set forth in parts 160, 162, and 164 will still govern 
the performance of those functions which make it a health plan, health 
care clearinghouse, or covered health care provider.
c. HIPAA Privacy Rule
    As covered entities, endorsed sponsors are responsible for 
complying with the HIPAA Privacy Rule. The Privacy Rule limits the uses 
and disclosures a covered entity may make with individually 
identifiable health information (known as protected health 
information), requires that safeguards be applied to the information to 
protect it, and gives individuals rights with respect to the protected 
health information about them, including rights to access and correct 
the information. Thus, endorsed sponsors are responsible for 
safeguarding the protected health information of beneficiaries of the 
program, and must limit the uses and disclosures made with the 
information to only those permitted by the Privacy Rule and these 
regulations. In addition, under the program, beneficiaries have certain 
rights to be informed of the uses and disclosures the endorsed sponsor 
is permitted or required to make with their protected health 
information, to access their records, and to have corrections made to 
their records, among other rights. See 45 CFR part 160 and subparts A 
and E of part 164 for the full set of standards, implementation 
specifications, and requirements of the Privacy Rule.
1. Endorsed Sponsors To Be Treated in Same Manner as Health Plans
    The standards, implementation specifications, and requirements in 
the HIPAA privacy regulations do not apply uniformly to all covered 
entities; rather, certain provisions apply only to one or two of the 
different types of covered entities. We believe we have the discretion 
to prescribe the manner in which the regulations will apply to endorsed 
sponsors, as section 1860D-31(h)(6)(A) is silent on this issue. 
Although endorsed sponsors are not by definition health plans under 
HIPAA, we believe that the HIPAA privacy regulations should apply to 
endorsed sponsors in the same manner as applicable to health plans 
because endorsed sponsors' operations more closely resemble those of 
health plans than health care clearinghouses or providers.
    Health plans are organizations that provide, or pay the cost of, 
``medical care,'' which is defined in section 2791(a)(2) of the Public 
Health Service Act (42 U.S.C. 300gg-91(a)(2)) as amounts paid for (1) 
the diagnosis, cure, mitigation, treatment, or prevention of disease, 
or amounts paid for the purpose of affecting any structure or function 
of the body; (2) amounts paid for transportation primarily for and 
essential to such medical care; or (3) amounts paid for insurance 
covering such medical care or transportation. As endorsed sponsors do 
not themselves provide or pay the cost of medical care, they are not by 
this definition health plans under HIPAA. However, endorsed sponsors 
resemble health plans in several respects.
    Whereas health plans typically negotiate discount rates for health 
care products and services, endorsed sponsors similarly will negotiate 
discounted prices for covered discount card drugs. In addition, health 
plans coordinate health care for its enrollees, in part by assessing 
the interaction of various modalities of treatment, which endorsed 
sponsors also provide albeit on a more limited basis by assessing and 
avoiding adverse drug interactions and providing educational activities 
that resemble some of a health plan's care coordination activities. 
Endorsed sponsors' processing payment for covered discount card drugs 
provided to transitional assistance enrollees is also somewhat similar 
to a health plan's payment infrastructure and processes, although 
unlike health plans, generally speaking, endorsed sponsors would not be 
bearing capitated risk under this program.
    In contrast, the functions performed by endorsed sponsors do not 
resemble the functions performed by health care providers or health 
care clearinghouses. A health care provider means a provider of 
services (as defined in section 1861(u) of the Act, 42 U.S.C. 
1395x(u)), a provider of medical or health services (as defined in 
section 1861(s) of the Act, 42 U.S.C. 1395x(s)), or any other person or 
organization who furnishes, bills, or is paid for health care in the 
normal course of business. Under the Medicare discount drug card 
program, endorsed sponsors will not provide medical or health services 
to beneficiaries, but instead will arrange for discount card enrollees 
to have access to negotiated prices and related products and services. 
A health care clearinghouse is a public or private entity that 
processes or facilitates the processing of health information received 
from another entity in a nonstandard format or containing nonstandard 
data content into standard data elements or a standard transaction or 
receives a standard transaction from another entity and processes or 
facilitates the processing of health information into nonstandard 
format or nonstandard data content for the receiving entity. Endorsed 
sponsors, however, will not be required to perform such services. 
Accordingly, except as otherwise provided and discussed below, Sec.  
403.812(b) of our regulations provide that the HIPAA privacy 
regulations will apply to endorsed sponsors in the same manner as they 
apply to health plans.
2. Waiver by the Secretary
    Section 1860D-31(h)(6)(B) provides that, in order to promote 
participation of endorsed sponsors in the Medicare drug discount card 
program, the Secretary may waive portions of the HIPAA Privacy Rule for 
a limited period of time as the Secretary deems appropriate. While the 
Secretary expects endorsed sponsors to be able to comply with the 
Privacy Rule and, therefore, does not at this time anticipate a need to 
exercise his waiver authority, the Secretary reserves the right to do 
so at a later time, if such waiver is deemed necessary to promote 
participation of endorsed sponsors in the Medicare drug discount card 
program.
3. Administering the Drug Card Program
    The Privacy Rule permits covered entities to use or disclose 
protected health information without individual authorization for 
health care treatment and payment activities, as well as for certain 
legal, financial, and administrative functions--known as health care 
operations--that support treatment and payment activities. To carry out 
their obligations under the Medicare drug discount card program, 
endorsed sponsors will have to conduct a number of activities 
pertaining to products and services offered under the endorsement that 
may involve the use or disclosure of beneficiary information. These 
activities and services will include processing beneficiary 
applications and enrollment in the program, reducing the likelihood of 
medication errors and adverse drug interactions, providing customer 
service and information and outreach materials, and administering 
transitional assistance. (For a description of the services required as 
part of the endorsement, see section II.C.5 of this document.) The use 
or disclosure of beneficiary protected health information for these 
activities are encompassed within the Privacy Rule's definition's of 
``payment'' and ``health care operations'' and, thus, may be conducted 
without beneficiary authorization.

[[Page 69872]]

4. Special Marketing Restrictions for Endorsed Sponsors
    Under the Medicare drug discount card program, as explained above, 
endorsed sponsors will be required to provide information and outreach 
about products and services offered under the endorsement. Section 
1860D-31(h)(7)(B) of the Act provides that an endorsed sponsor may only 
market those products and services directly related to a covered 
discount card drug, or discounts for non-prescription drugs to the 
extent such marketing is otherwise permitted under the Medicare drug 
discount drug card program and the Privacy Rule. Accordingly, Sec.  
403.813(a)(1) provides that an endorsed sponsor may only market those 
products and services offered within the scope of its endorsement, that 
is, products and services directly related to a covered discount card 
drug, and discounts for non-prescription drugs. Thus, only products and 
services offered by an endorsed sponsor within the scope of its 
endorsement may be included in an endorsed sponsor's information and 
outreach materials.
    As discussed in section II.C.5. of this document, products or 
services offered by an endorsed sponsor following termination of its 
endorsement or termination of the Medicare drug discount card program 
are considered outside the scope of endorsement. Therefore, Sec.  
403.813(b)(4) of our regulations provides that individually 
identifiable health information created, collected or maintained by an 
endorsed sponsor may not be used to market any product or service 
following termination of an endorsed sponsor's endorsement or the 
program.
    Under the Privacy Rule, most uses or disclosures of protected 
health information to make marketing communications require individual 
authorization. The Privacy Rule at 45 CFR 164.501, however, defines the 
term ``marketing'' to mean the making of a communication about a 
product or service that encourages the recipient of the communication 
to purchase or use the product or service, with the exception of 
communications that--
    (1) Describe a health-related product or service (or payment for 
such product or service) that is provided by, or included in a plan of 
benefits of, the covered entity making the communication;
    (2) Are for treatment of the individual; or
    (3) Are for case management or care coordination, or to direct or 
recommend alternative treatments, therapies, health care providers, or 
settings of care to the individual.
    Since information and outreach under the Medicare drug discount 
program is limited to communicating about products and services offered 
within the scope of endorsement, these activities fall within the 
exception to the definition of marketing under the Privacy Rule for 
describing health-related products or services provided by the covered 
entity. Thus, using or disclosing beneficiary protected health 
information to provide information and outreach is not marketing under 
the Privacy Rule, but rather, as described above, is permitted without 
beneficiary authorization as part of the endorsed sponsor's health care 
operations.
    To use or disclose protected health information to make 
communications that do not fall within the exceptions to the definition 
of ``marketing'' under the Privacy Rule at 45 CFR 164.501, a covered 
entity must obtain individual authorization in accordance with 45 CFR 
164.508(a)(3). However, section 1860D-31(h)(7)(B) of the Act limits the 
marketing that may be conducted by endorsed sponsors to only that which 
pertains to products and services offered under the Medicare drug 
discount program or discounts on over-the-counter drugs. For purposes 
of this marketing prohibition, we will consider a communication to be 
marketing if the communication is about a product or service and 
encourages recipients of the communication to purchase or use the 
product or service. Thus, a sponsor may not market if the marketing 
involves products or services falling outside the endorsed sponsor's 
endorsement, that is, services that do not directly relate to a covered 
discount card drug, or to discounts for a non-prescription drug. 
Section 403.813(a)(2) of our regulations expressly provides that an 
endorsed sponsor may not request of a drug card applicant or enrollee 
the use or disclosure of protected health information to market any 
products or services not offered under the program. Thus, endorsed 
sponsors may not market such products or services under Sec.  
403.806(d)(3) of our regulations even if they obtain authorization from 
discount card enrollees to do so, as permitted by the Privacy Rule. Due 
to this prohibition, endorsed sponsors are not permitted, at the time 
of enrollment or any other time, to ask beneficiaries if they would be 
interested in receiving marketing materials related to products and 
services offered outside the program. Similarly, endorsed sponsors may 
not commingle any information and outreach materials that describe 
their endorsed program with any marketing materials related to products 
and services offered outside the program.
    This prohibition applies regardless of whether the marketing of 
products or services outside the program involves the use or disclosure 
of protected health information of discount card enrollees. 
Accordingly, marketing of a product or service outside the program that 
does not involve the use of discount card enrollees' protected health 
information, such as advertising for contact lenses or travel on an 
endorsed sponsor's Web site, is not permitted under the Medicare drug 
discount card program, even though such marketing would not involve the 
use of protected health information.
    Many entities that sponsor an endorsed program also may engage in 
activities outside the Medicare drug discount card program. For 
example, a Part C organization may be both a sponsor of an endorsed 
program and operate a Part C plan. The marketing prohibition set forth 
under section 1860D-31(h)(7)(B) of the Act only applies to entities 
when acting in their capacity as an endorsed sponsor. Accordingly, 
although an entity in its endorsed sponsor capacity may not commingle 
with other marketing materials any information and outreach materials 
related to products and services offered under its endorsed program, it 
may commingle such materials when acting in another capacity, to the 
extent otherwise permitted under law. For example, a Part C 
organization which sponsors an endorsed program may, in its role as a 
Part C plan, commingle information and outreach materials describing 
its endorsed program with Part C plan marketing materials to the extent 
permitted under the Privacy Rule and the Part C marketing rules under 
Medicare Part C. We will deem an entity as acting in its capacity as an 
endorsed sponsor when it either (1) uses beneficiaries' information 
created, collected or maintained under its endorsed program to conduct 
marketing, or (2) targets its marketing to all or a subset of its 
discount card enrollees (or potential discount card enrollees). We will 
deem an entity as acting in another capacity when it (1) does not use 
beneficiaries' information created, collected or maintained under its 
endorsed program to conduct marketing, and (2) does not target its 
marketing to all or a subset of its discount card enrollees (or 
potential discount card enrollees). For example, we will consider a 
Part C organization as acting in its endorsed sponsor capacity if it 
targets its marketing to members of its

[[Page 69873]]

Part C plan who are also enrolled in its endorsed program, to the 
exclusion of other plan members. In contrast, we will consider a Part C 
organization as acting in its capacity as a Part C plan if it directs 
its marketing to all or a subset of its Part C plan membership, 
including those not enrolled in its endorsed program, and, to the 
extent it uses individual information, such information was not 
collected or maintained under the Part C organization's endorsed 
program. Similarly, we will consider an organization's Web site listing 
its full range of products and services, including but not limited to 
its endorsed program, as targeted to the public at-large; however, we 
will consider its web pages specifically describing its endorsed 
program as targeting potential discount card enrollees, and therefore 
such web pages may not include information related to products and 
services offered outside the scope of endorsement.
    Section 403.813(a) of our regulations is not enforceable under 
HIPAA but will be enforced by CMS under the Medicare drug discount card 
program.
5. Other Uses and Disclosures Without Authorization
    Under 1860D-31(i)(1) of the Act and as discussed in section II.A., 
II.C., and II.F. of this document, endorsed sponsors are required to 
disclose to the Secretary certain information, some of which may 
contain protected health information. The Privacy Rule at 45 CFR 
164.512(a) permits covered entities to use or disclose protected health 
information without individual authorization where the use or 
disclosure is required by other law. Thus, the Privacy Rule permits 
endorsed sponsors to make the required disclosures to the Secretary 
without beneficiary authorization. Similarly, the Privacy Rule at 45 
CFR 164.512(d) permits covered entities to use or disclose protected 
health information without individual authorization to a health 
oversight agency for oversight activities that are authorized by law. 
Both of these provisions would permit endorsed sponsors to provide CMS 
with the information needed for the Secretary's oversight and reporting 
requirements.
6. Uses and Disclosures Requiring an Authorization
    For uses and disclosures of protected health information that are 
not otherwise permitted under the Privacy Rule, an endorsed sponsor 
must obtain a beneficiary's written authorization for such uses or 
disclosures in accordance with 45 CFR 164.508. For example, a Medicare 
beneficiary may authorize the endorsed sponsor to disclose his/her 
protected health information to a third party, such as an employer. 
However, as explained above and provided for in Sec.  403.813(a)(2) of 
our regulations, an endorsed sponsor may not market products or 
services outside the scope of its endorsement under the Medicare drug 
discount card program even if it obtains from discount card enrollees 
authorization to do so. Additional information about this marketing 
prohibition can be found above in this section and also in section 
II.C.5 of this document.
7. Notice of Privacy Practices
    In accordance with the Privacy Rule at 45 CFR 164.520, prior to 
enrolling a beneficiary in its endorsed program, or at the time of 
enrollment, an endorsed sponsor must notify each beneficiary as to how 
the endorsed sponsor is permitted or required to use and disclose the 
beneficiary's protected health information, as well as of the 
beneficiary's rights and the endorsed sponsor's duties with respect to 
that information. The notice must be in plain language and clearly 
explain these rights and the uses and disclosures permitted or required 
under this rule and other applicable law, including that the endorsed 
sponsor may use or disclose protected health information to communicate 
about products and services offered by an endorsed sponsor inside, and 
only inside, the scope of its endorsement. The notice may be combined 
with other information and outreach materials, provided that the 
content requirements of the Privacy Rule are fully met.
8. Endorsed Sponsors as Business Associates
    As defined in the Privacy Rule, a business associate is a person or 
entity that performs or assists in the performance of certain functions 
or activities on behalf of, or provides certain services to, a covered 
entity, that involve the use or disclosure of individually identifiable 
health information. The Privacy Rule requires that the covered entity 
obtain satisfactory assurances, usually in the form of a written 
contract, from the business associate that the business associate will 
appropriately safeguard the protected health information it creates or 
receives on behalf of the covered entity. The contract or other written 
arrangement between the covered entity and its business associate must 
meet the requirements at 45 CFR 164.504(e).
    For purposes of administering transitional assistance, endorsed 
sponsors are business associates of CMS under the Privacy Rule. 
Transitional assistance will be a benefit offered and paid for by the 
Medicare program, a health plan, with CMS contracting with endorsed 
sponsors to administer transitional assistance on behalf of CMS in 
conjunction with their other responsibilities under the Medicare drug 
discount card program. As such, the contract between CMS and endorsed 
sponsors will include the terms necessary to satisfy the requirements 
of the Privacy Rule at 45 CFR 164.504(e).
    The application of the Privacy Rule to endorsed sponsors under our 
regulations does not affect business associate arrangements or 
requirements between the endorsed sponsor and one or more covered 
entities for activities that are outside of the endorsed drug card 
program. However, because an endorsed sponsor is also a covered entity, 
when an endorsed sponsor is acting as a business associate of another 
covered entity, the endorsed sponsor will violate the Privacy Rule if 
it violates its business associate contract with the other covered 
entity (see 45 CFR 164.502(e)(1)(iii)).
9. Enforcement by the HHS Office for Civil Rights
    The HHS Office for Civil Rights (OCR) is responsible for 
implementing and enforcing the HIPAA Privacy Rule. OCR has authority to 
investigate complaints and to conduct compliance reviews, and may 
impose civil money penalties on covered entities for violations where 
appropriate. Thus, any violations by an endorsed sponsor with respect 
to its obligations under the Privacy Rule as a covered entity are 
subject to such enforcement by OCR. OCR maintains a Web site with 
Frequently Asked Questions and other compliance guidance at http://hhs.gov/ocr/hipaa.
    OCR's enforcement authority pertains only to the HIPAA Privacy 
Rule. Thus, any violations with respect to compliance with the other 
HIPAA Administrative Simplification Rules or proper operation of an 
endorsed program will be enforced by CMS. In addition, if an endorsed 
sponsor's actions also violate the requirements of the Medicare drug 
discount card program, such actions also may be sanctioned under Sec.  
403.820(a) of our regulations. See section II.F. of this document for 
further information about CMS oversight and monitoring of endorsed 
sponsors.

[[Page 69874]]

d. Administrative Data Standards
    As covered entities, endorsed sponsors must comply with any 
applicable standards, implementation specifications, and requirements 
set forth in 45 CFR part 162, subparts I et seq., when conducting a 
transaction (as that term is defined under section 1173 (a) of the Act 
and 45 CFR 160.103) as of the compliance date of a final rule issued 
under that Part. In addition, such sponsors are business associates of 
the Medicare program (a health plan covered entity), as they perform 
certain administrative functions related to transitional assistance on 
our behalf. We will, therefore, require in our contracts with endorsed 
sponsors that, when conducting all or part of a transaction on our 
behalf, they comply with, and require their agents and subcontractors 
to comply with, all requirements under 45 CFR part 162 applicable to 
CMS as a covered entity.
e. National Identifiers
    As covered entities, endorsed sponsors must comply with the 
standards, implementation specifications, and requirements of 45 CFR 
parts 160 and 162, relating to the use of national identifiers, as of 
the compliance date of any final rule issued under part 162.
f. Security
    As covered entities, endorsed sponsors must comply with the 
standards, implementation specifications, and requirements of the HIPAA 
Security Rule (``Security Rule'') set forth in 45 CFR parts 160 and 
164, subparts A and C to ensure the confidentiality, integrity, and 
availability of all electronic protected health information they 
create, receive, maintain or transmit as of the compliance date of the 
final Security Rule (April 15, 2005). In addition, endorsed sponsors as 
covered entities must have appropriate administrative, technical and 
physical safeguards in place to protect the privacy of beneficiary 
information under 45 CFR 164.530(c) of the Privacy Rule. An applicant 
must include in its application the following:
    [sbull] An attestation that as of the date upon which it will begin 
enrollment activities, appropriate administrative, technical and 
physical safeguards will be in place to protect the privacy of 
protected health information in accordance with 45 CFR 164.530(c); and
    [sbull] An attestation that it will meet the standards, 
requirements, and implementation specifications as set forth in the 
Security Rule as of the date it begins enrolling beneficiaries in its 
endorsed programs, or, if the endorsed sponsor will be unable to 
provide this attestation, the applicant's plan for coming into 
compliance with the specifications as set forth in the Security Rule as 
of the compliance date for the Security Rule.
    Endorsed sponsors are encouraged, but not required, to use 
Information Security Program references as provided by the National 
Institute of Standards and Technology (NIST), in documenting their 
efforts to implement reasonable security measures.
    We believe these attestation requirements are critical to 
beneficiary confidence in the Medicare drug discount card program and 
their decision to enroll in an endorsed program. Furthermore, as 
endorsed sponsors are using the Medicare name and acting on our behalf 
in administering transitional assistance, we believe these requirements 
are important to promoting the continued confidence of beneficiaries in 
the Medicare program. We specifically require that applicants attest 
that they will be in compliance with the Security Rule as of their 
initiation of enrollment activities, or provide their plan for coming 
into compliance as of the compliance date. This approach will allow us 
to evaluate whether their information security measures will comply 
with the Privacy Rule standard under 45 CFR 164.530(c) and whether they 
will adequately protect the confidentiality, integrity, and 
availability of discount card enrollees' electronic protected health 
information.
10. Document Retention
    Section 403.813(b) of our regulations requires endorsed sponsors to 
retain records that they or their subcontractors create, collect, or 
maintain while participating in the Medicare drug discount card program 
for at least six years following termination of the transition period. 
This retention period may be extended by the Secretary if an endorsed 
sponsor's records relate to an ongoing investigation, litigation, or 
negotiation by the Secretary, the OIG, the Department of Justice, or a 
State, or such documents otherwise relate to suspicions of fraud and 
abuse or violations of Federal or State law.
    We recognize that under the Privacy Rule, CMS, as a covered entity, 
must require its business associates, upon termination of the contract, 
to return or destroy protected health information created or received 
in their capacity as business associates, or if such return or 
destruction is not feasible, to extend the contract protections to the 
retained information and limit further uses and disclosures to the 
purposes that made the return or destruction infeasible. Our record 
retention policy will make it infeasible for endorsed sponsors to 
return or destroy protected health information, as they will be 
required to retain all program information for at least six years after 
termination of the program. Therefore, as required by the Privacy Rule, 
the business associate contract protections for the retained 
information will continue to be applied and any further use or 
disclosure of the information will be limited to health care operations 
and health oversight activities that made return or destruction of the 
information infeasible, as well as other uses or disclosures that may 
be required by law.
    In addition, our record retention policy will require endorsed 
sponsors to continue to apply security and privacy protections to the 
record and the information contained therein to the same extent 
endorsed sponsors are required to do so prior to termination. We 
establish this requirement under the authority granted the Secretary 
under section 1860D-31(h)(8) of the Act to protect and promote the 
interests of beneficiaries. The interests of beneficiaries are 
furthered by continuing to protect the confidentiality, integrity, and 
availability of their protected health information for so long as these 
records are retained by an endorsed sponsor.
    We believe our retention policy is necessary to preserve our 
ability and that of other Federal and State agencies to exercise 
appropriate oversight over endorsed sponsors and protect the interests 
of beneficiaries. We believe six years represents an appropriate time 
period for this requirement because there is a six year statute of 
limitations on bringing actions for civil monetary damages under 
section 1860D-31(i)(3) of the Act against endorsed sponsors that 
knowingly engage in conduct that violates the requirements of section 
1860D-31 or our regulations. Our record retention policy is subject to 
enforcement under Sec.  403.820(a) of our regulations.
11. Endorsed Sponsor Reporting
    Section 1860D-31(h)(4) of the Act provides that endorsed sponsors 
shall pass on negotiated prices to discount card enrollees, including 
discounts with pharmacies and manufacturers, to the extent disclosed to 
the Secretary. Further, section 1860D-31(i)(1) of the Act provides that 
endorsed sponsors shall disclose to the Secretary (in a manner 
specified by the Secretary) information relating to program

[[Page 69875]]

performance, use of prescription drugs by discount card enrollees, the 
extent to which discounts, rebates or other remunerations or price 
concessions made available to the endorsed sponsor by a manufacturer 
are passed through to discount card enrollees through pharmacies or 
otherwise, and such other information as the Secretary may specify. As 
provided under these authorities and in order to promote and protect 
the interests of beneficiaries, endorsed sponsors are required to 
maintain for auditing purposes, data and other information that will 
accomplish oversight objectives.
    Additionally, we will collect information as part of our education 
and outreach efforts described in Section II.E, to provide 
beneficiaries comparative prices on covered discount card drugs across 
all endorsed programs.
    To meet these objectives, we specifically require in Sec.  
403.806(i) of our regulations that endorsed sponsors report certain 
types of information. Examples include:
    [sbull] Savings obtained through rebates, discounts, and other 
price concessions from pharmacies and manufacturers;
    [sbull] Savings shared with discount card enrollees by 
manufacturer, by all retail pharmacies, by all mail order pharmacies, 
and by all brand name and generic covered discount card drugs;
    [sbull] Dispensing fees;
    [sbull] Certified (by the chief financial officer) financial 
accounting records on transitional assistance used by the transitional 
assistance enrollees in each month;
    [sbull] Participant utilization and spending statements;
    [sbull] Performance on customer service metrics such as call center 
performance;
    [sbull] Grievance logs;
    [sbull] Compliance with the pharmacy network access standards; and
    [sbull] Notice of, and the rationale for, negotiated price 
increases, except for increases during the week of November 15, 2004, 
due to reasons other than changes in average wholesale price (AWP), 
including submission of an attestation that, based on best knowledge, 
information, and belief, the rationale for the price increase is 
accurate, complete, truthful, and supportable.
    In addition, to support our education and outreach efforts endorsed 
sponsors must report the following--
    [sbull] Customer service hours,
    [sbull] Customer service contact information,
    [sbull] Endorsed program Web site address,
    [sbull] Annual enrollment fee, and
    [sbull] Negotiated prices (including any applicable dispensing fee) 
for every covered discount card drug included in the endorsed program's 
offering.
    This is not an exhaustive list of the types of card program 
performance we will monitor and evaluate, as we will, as described in 
section II.F. of the preamble, also conduct activities independent of 
this information to, for example, monitor whether marketing materials 
are properly used; evaluate beneficiary experience under the endorsed 
programs; and conduct program integrity activities.
    The data and information that endorsed sponsors will be required to 
report consist of performance measures and indicators typically 
provided by third party administrators of pharmacy benefits in the 
current drug industry. Endorsed sponsors must certify the validity and 
completeness of the data and other information they report.
    Further, during the endorsement period, endorsed sponsors will be 
required to notify us of any material modifications to their endorsed 
programs if the modification could put them at risk of no longer 
meeting any of the terms of the endorsement.
    Section 1860D-31(i)(1) of the Act provides that section 
1927(b)(3)(D) of the Act, which guides the protection of proprietary 
pricing information under the Medicaid program, shall also apply to the 
drug pricing data (other than aggregated data) under the Medicare drug 
discount card program. Consistent with the requirements of 
1927(b)(3)(D) of the Act, we will handle any non-aggregated pricing 
information in a manner that ensures that the non-aggregated discounts 
or rebates or other remuneration or price concessions from 
manufacturers to endorsed sponsors, and reported by the endorsed 
sponsors, will not be made available in a format that discloses the 
identity of particular drugs, manufacturers, or wholesalers. However, 
the information may be disclosed in the circumstances described in 
section 1927(b)(3)(D)--
    (1) As the Secretary deems necessary to carry out section 1860D-31 
of the Act;
    (2) To permit the Comptroller General to review the information 
provided; and
    (3) To permit the Director of the Congressional Budget Office to 
review the information provided.
    We will provide a reporting tool to ensure consistent and 
comparable reporting by endorsed sponsors. In developing the tool, we 
will make an effort to minimize the reporting burden on endorsed 
sponsors.

D. CMS Reimbursement of Transitional Assistance

    All endorsed sponsors must enter into an agreement with CMS that 
will provide for reimbursement from CMS to endorsed sponsors for any 
transitional assistance applied toward the cost of covered discount 
card drugs obtained by transitional assistance enrollees in accordance 
with section 1860D-31(g)(3) of the Act. Under the contract, sponsors 
will submit requests to debit each enrollee's transitional assistance 
balance via the Department of Health and Human Services' Payment 
Management System. These amounts will be reported to CMS and used to 
reconcile payments, as provided in Sec.  403.822(c) of our regulations.
    Endorsed sponsors will be required to submit monthly reports 
detailing the total amount of transitional assistance applied toward 
the cost of covered discount card drugs obtained by transitional 
assistance enrollees. These reports will be reconciled against 
transitional assistance balance reports used to authorize payments to 
endorsed sponsors.
    Endorsed sponsors will only be reimbursed for transitional 
assistance applied toward the cost of covered discount card drugs for 
claims that are fully adjudicated for payment; we will not reimburse 
endorsed sponsors for pending claims. Further, as provided in Sec.  
403.822(e) of our regulations, Federal funding in excess of the amount 
of the balance included in CMS' systems is not permitted.
    We also expect endorsed sponsors to establish a process for holding 
pharmacies harmless, that is reimbursing pharmacies for their costs if 
the endorsed sponsor erroneously informs the pharmacy that the amount 
of transitional assistance remaining available to a transitional 
assistance enrollee is more than the amount actually available to the 
transitional assistance enrollee.
    As discussed above in section II.C.6. of this document, should a 
discount card enrollee be determined eligible for transitional 
assistance after already enrolling in an endorsed program, we will pay 
the annual enrollment fee and the endorsed sponsor must immediately 
refund to the card enrollee, or any State that has paid the enrollment 
fee on behalf of the discount card enrollee, any annual enrollment fee 
for the calendar year previously paid by the discount card enrollee or 
State. The endorsed sponsor would include this payment in its report to 
us for our reimbursement.
    Endorsed sponsors will be required to have a process for managing 
payment

[[Page 69876]]

against an individual's transitional assistance cap to ensure that not 
more than the amount of transitional assistance available is provided 
to the individual. Additionally, endorsed sponsors will need to have a 
process for managing transitional assistance in the event a 
transitional assistance enrollee switches endorsed discount card 
programs with a transitional assistance balance remaining. In this 
case, the endorsed sponsor must ensure that the amount of transitional 
assistance reported to CMS as remaining available for transfer to the 
new endorsed program is a final number; that is, CMS will not adjust 
the number at a later date to account for outstanding claims at the 
time the amount was reported, nor will CMS provide additional 
reimbursement to the endorsed sponsor to make up any difference. In 
their applications, applicants must describe their processes for (1) 
managing payment against transitional assistance caps, and (2) managing 
payment such that remaining transitional assistance balances reported 
to CMS at the time of an enrollee's disenrollment represent final 
amounts. If processes that endorsed sponsors put in place to manage 
payment in these cases could create a financial liability for a 
transitional assistance enrollee, endorsed sponsors will be required to 
inform these enrollees of such circumstances and any special 
procedures.
    Our procedures for reimbursing endorsed sponsors for transitional 
assistance will be discussed in further detail in the solicitation and 
pre-application conference.

E. CMS-Provided Beneficiary Education

1. General
    In accordance with section 1860D-31(d)(1) of the Act, we plan to 
disseminate to beneficiaries eligible for the discount card general 
information about the availability of the program and general program 
features, such as the limitation of enrollment to only one discount 
card at a time, the initial enrollment date, and the potential use of 
formularies containing the drugs on which discounts are available. We 
also plan to disseminate general information about the availability of 
transitional assistance and the qualifying standards for the 
assistance. In addition to the general information, we plan to 
disseminate specific comparison information to promote informed 
consumer choice among endorsed discount card programs, including--

    [sbull] Enrollment fee;
    [sbull] Customer service hours;
    [sbull] Contact information;
    [sbull] Program Web site; and
    [sbull] Negotiated prices, to include the dispensing fee.

    Finally, we plan to develop messages that are understandable and 
meaningful for beneficiaries to support specific information about the 
program in order to increase beneficiary knowledge about and motivation 
to consider this program.
    Section 1860D-31(d)(1)(C) of the Act states that both the general 
information and the specific comparative information should, ``to the 
extent practicable,'' be disseminated so that ``discount card eligible 
individuals are provided such information at least 30 days prior to the 
initial enrollment date.'' We will make available general program 
information and a subset of comparison information for each card 
program 30 days before the initial enrollment date and will coordinate 
later information dissemination activities with our annual coordinated 
education campaign on Medicare options. The provided comparison 
information will not contain negotiated prices. Provision of ``price 
comparison'' information to the public requires populating a database 
with data files from each endorsed sponsor, with a standard format and 
terminology, of negotiated prices, to include dispensing fee 
information for each covered discount card drug. To ensure the accuracy 
of prices on the Web site, endorsed sponsors must be allowed to 
validate their submitted price information. These activities cannot be 
completed before the start of the initial enrollment date. In the 30 
days prior to the initial enrollment date, discount card eligible 
individuals will be able to access specific prices by contacting 
endorsed sponsors through the contact information we will provide.
2. Medicare Web site and Toll-free Information Line
    Both general and comparison information will be made available to 
Medicare beneficiaries on our Web site, http://www.medicare.gov, as 
well as through the toll-free Medicare information line (1-800-
MEDICARE), which is available 24 hours per day, 7 days a week. To 
generate awareness about the program and resources available to answer 
consumer questions, we plan to use paid advertising, including 
television, to reach the general audience and the Hispanic market. We 
also expect a Medicare publication describing program features will be 
available on http://www.medicare.gov and through 1-800 Medicare 30 days 
prior to the initial enrollment date. We also expect to include an 
overview of this program in the 2005 Medicare & You handbook, which 
will reach beneficiaries in time to elect a new drug card for 2005. In 
addition, we will strive to disseminate information to community level 
organizations, State Health Insurance Assistance Programs, and our 
other partners that represent the needs and the interests of the 
diverse Medicare beneficiary population.
    To report on negotiated prices, as requested in section 1860D-
31(d)(1)(B)(i) of the Act, we will provide, through http://www.medicare.gov, a price comparison Web site that will include 
maximum, and possibly ranges of, negotiated prices, including the 
dispensing fee, in actual dollars for the purpose of comparing across 
endorsed discount card programs. These prices will reflect an estimate 
of the maximum price charged at the point of sale. This Web site should 
also include information about generic substitutes. All of this 
comparative information will assist beneficiaries in deciding which 
Medicare discount card will offer them the greatest financial 
advantage. We will provide education that drugs and prices may vary 
over time.
    As described in Sec.  403.806(i)(4)(v), to support the price 
comparison Web site, drug card sponsors may submit updated data files 
on a weekly basis to include information on customer service hours, 
contact information, program Web site, enrollment fee, and negotiated 
prices, including the dispensing fee. We will specify a standard file 
format and timing for submitting these data elements to us in the 
solicitation for endorsed sponsors. At a minimum, each file will 
include the maximum negotiated price for every covered discount card 
drug under the card program. As required in Sec.  403.806(d)(5) of our 
regulations, maximum negotiated prices available under the endorsed 
discount card program must match those reported on the price comparison 
Web site. We believe that a weekly update of information is frequent 
enough to allow endorsed sponsors to adjust to fluctuating supply 
prices, but also ensures that accurate price information is available 
to discount card eligible individuals and card enrollees at all times. 
The effort to allow more frequent updates is not practical because we 
must coordinate creating a new database of prices from all endorsed 
sponsors.
    As discussed in section II.C.7. of this document, in order to 
communicate the Secretary's endorsement of a prescription drug discount 
card program, as required in section 1860D-31(a)(1)(A) of the Act, we 
will create

[[Page 69877]]

and authorize the use of a Medicare-Endorsed Prescription Drug Card 
emblem. This emblem will be used to communicate that Medicare has 
endorsed a stable and reputable drug card. We will develop standards 
for use of the emblem to be included in the Information and Outreach 
Guidelines.
    In addition to answering beneficiary questions about the drug 
discount card program, the 1-800 MEDICARE call center will also log and 
help triage discount card members' complaints for resolution through 
the complaints tracking process discussed in greater detail under 
section II.F. of this document.
    Physicians and pharmacists are an important source of information 
for discount card eligible beneficiaries. Although not required by the 
legislation, we also plan to conduct provider outreach activities 
through a variety of channels to make physicians and pharmacists aware 
of this program and to educate them about the specific features. We 
hope that increased physician and pharmacist awareness will bolster 
beneficiary awareness and improve the quality of their card choice and 
their ultimate cost-savings. We also believe that physician and 
pharmacist promotion of the program will encourage low-income 
individuals to enroll and access the available transitional assistance.

F. CMS Oversight and Monitoring

1. General
    Consistent with section 1860D-31(i)(2) of the Act, we will develop 
a drug discount card program oversight system to ensure compliance with 
program requirements.
    We will develop and operate a complaint (also referred to as 
``grievance'') tracking system to monitor and manage complaints that 
are not satisfactorily resolved through the endorsed sponsors' customer 
complaints process. In accordance with section 1860D-31(d)(1)(D) of the 
Act, we will develop a system for collecting beneficiary complaints 
through our 1-800-MEDICARE toll-free telephone number. This system will 
likely be augmented by a system for gathering and responding to 
complaints acquired through the http://www.medicare.gov Web site as 
well as through Congressional and other types of correspondence. We 
will also analyze the reports provided by endorsed sponsors on their 
program performance. In addition, we plan to conduct mystery shopping 
and a beneficiary satisfaction survey. We plan to use these various 
sources of information to observe possible trends that indicate less 
than satisfactory performance, significant departures from the marketed 
card program offering, or fraud or other violations of State and 
Federal laws. We anticipate tracking complaints related to--
    [sbull] Deceptive marketing and enrollment practices;
    [sbull] Violations of the confidentiality provisions;
    [sbull] Persistent inconsistencies in formulary or pricing 
information compared to those available at the point of sale;
    [sbull] Inadequate endorsed sponsor customer service;
    [sbull] Persistent problems with pharmacy network services or 
providers;
    [sbull] Denying transitional assistance to qualified beneficiaries;
    [sbull] Arbitrary variations in negotiated prices offered; and
    [sbull] Any additional changes that put the endorsed sponsor at 
risk of failing to continue to meet the endorsement requirements.
    We will also refer complaints to Federal and State authorities when 
violations of laws under the jurisdictions of these agencies are in 
question.
a. Marketing and Enrollment Policies
    We will also review information from our own enrollment systems for 
data that may indicate endorsed sponsors' failure to comply with the 
program's marketing or enrollment policies. We will examine claims and 
pricing data reported by endorsed sponsors to determine whether 
enrollees are receiving the savings promised through their discount 
cards. Finally, we will review the grievance logs submitted by each of 
the endorsed sponsors to examine trends in types of complaints and to 
ascertain whether endorsed sponsors are responding appropriately to 
enrollee service complaints.
b. Transitional Assistance Payments
    We will also monitor the allocation and tracking of the annual 
transitional assistance payments for eligible enrollees. As a 
qualification for endorsement, under section 1860D-31(h)(1)(C) of the 
Act, endorsed sponsors are required to have satisfactory arrangements 
to account for the transitional assistance. To ensure that transitional 
assistance is made available on behalf of the proper beneficiaries and 
that it is used only to purchase covered discount card drugs, we will 
contract with auditors to analyze select claims and other information 
maintained by the sponsors related to the payment and tracking of the 
transitional assistance. As necessary, we will exercise our authority, 
under section 1860D-31(i)(2) of the Act, to conduct audits and to 
inspect the records of endorsed sponsors related to the operation of 
the drug discount card program.
2. Intermediate Sanctions
    Under section 1860D-31(i)(3) of the Act, we may impose intermediate 
sanctions against endorsed sponsors in the form of suspended marketing 
and enrollment activities in a manner similar to the sanctioning 
process under Part C. In Sec.  403.820(a)(3), we have identified the 
following bases related to significant performance requirements for the 
imposition of intermediate sanctions--
    (1) Substantial failure to maintain an adequate contracted retail 
pharmacy network;
    (2) Substantial failure to comply with our information and outreach 
guidelines;
    (3) Substantial failure to provide enrollees with negotiated prices 
consistent with information provided on our price comparison Web site 
and/or reported by the sponsor;
    (4) Except during the week of November 15, 2004 (which coincides 
with the beginning of the annual coordinated election period), 
substantial failure to ensure that the negotiated price for a covered 
discount card drug does not exceed an amount proportionately greater 
than the change in the drug's average wholesale price (AWP), and/or an 
amount proportionate to changes in the endorsed sponsor's cost 
structure (including material changes to any discounts, rebates, or 
other price concessions the endorsed sponsor receives from a 
pharmaceutical manufacturer or pharmacy);
    (5) Charging card program enrollees additional fees beyond the $30 
enrollment fee;
    (6) Charging transitional assistance enrollees any enrollment fee;
    (7) Charging a coinsurance rate higher than 10 percent for those 
above 100 percent of the poverty line and up to 135 percent of the 
poverty line, or charging a coinsurance rate higher than 5 percent for 
those at or below 100 percent of the poverty line;
    (8) Substantial failure to properly administer the transitional 
assistance funding for transitional assistance enrollees;
    (9) Substantial failure to provide us or our designees with 
requested information related to the endorsed sponsor's drug card 
operations;
    (10) Substantial failure to comply with the requirements of the

[[Page 69878]]

endorsement, including failing to perform the operational requirements 
of this program, or the failure to submit an acceptable plan of 
correction within the time frame specified by CMS; and
    Upon determining that at least one basis exists for imposing an 
intermediate sanction, our regulations at Sec.  403.820(a)(4) provide 
that we will notify the non-compliant endorsed sponsor of our intent to 
impose sanctions. The endorsed sponsor will have 15 days to challenge 
the accuracy of our finding. If the endorsed sponsor does not challenge 
the finding, the sanctions will go into effect 15 days after the 
endorsed sponsor received the sanction notice from us. If the endorsed 
sponsor does challenge the finding, we will notify the sponsor of the 
effective date in the reconsideration determination notice that we will 
send to the endorsed sponsor. Once intermediate sanctions are imposed, 
the endorsed sponsor will be required to demonstrate to us that it has 
come into compliance with card program requirements before the 
sanctions are lifted.
3. Civil Monetary Penalties
    Section 1860D-31(i)(3) of the Act authorizes the imposition of 
civil monetary penalties (CMP) against endorsed sponsors that knowingly 
engage in conduct that violates the requirements of section 1860D-31 of 
the Act or engage in false or misleading marketing practices. In Sec.  
403.820(b) of our regulations, we interpret this to mean that those 
endorsed sponsors that knowingly engage in conduct that violates the 
conditions of their endorsement agreement with us or that constitutes 
false or misleading marketing practices may be subject to CMPs.
    We have divided the sanction authority between CMS and the 
Department of Health and Human Services Office of the Inspector General 
(OIG). As in Part C, where CMP authority is shared between these two 
agencies, we have assigned sanction authority to OIG for those 
violations that concern misleading or defrauding a beneficiary. We have 
also assigned sanction authority to the OIG for misuse of transitional 
assistance funds. On the other hand, we will have the authority to 
impose CMPs in those instances where the endorsed sponsor's conduct 
constitutes non-compliance with an operational requirement not directly 
related to beneficiary protection. Accordingly, as provided in Sec.  
403.820(b)(1) of our regulations, OIG will have the authority to impose 
CMPs against an endorsed sponsor whom it determines has knowingly--
    (1) Misrepresented or falsified information in information and 
outreach or comparable material provided to a program enrollee or other 
persons;
    (2) Charged a program enrollee in violation of the terms of the 
endorsement contract; or
    (3) Used transitional assistance funds in any manner that is 
inconsistent with the purpose of the transitional assistance program.
    As provided in Sec.  403.820(b)(2) of our regulations, we will have 
the authority to impose CMPs for an endorsed sponsor's--
    (1) Substantial failure to maintain an adequate retail pharmacy 
network;
    (2) Substantial failure to comply with our information and outreach 
guidelines;
    (3) Substantial failure to provide us or our designees with 
requested information related to the endorsed sponsor's drug card 
operations;
    (4) Substantial failure to provide enrollees with levels of 
discounts or prices consistent with information provided in its 
marketing materials;
    (5) Charging card program enrollees additional fees beyond an 
enrollment fee, charging transitional assistance-qualified enrollees 
any enrollment fee, charging a co-payment higher than 10 percent for 
those above 100 percent of the poverty line and up to 135 percent of 
the poverty line, or charging a co-payment higher than 5 percent for 
those at or below 100 percent of the poverty line;
    (6) Substantial failure to administer properly the transitional 
assistance, including the charging of coinsurance, for the endorsed 
sponsor's eligible enrollees;
    (7) Except during the week of November 15, 2004 (which coincides 
with the beginning of the annual coordinated election period), 
substantial failure to ensure that the negotiated price for a covered 
discount card drug does not exceed an amount proportionate to the 
change in the drug's average wholesale price (AWP) and/or an amount 
proportionate to the changes in the endorsed sponsor's cost structure 
(including materials changes to any discounts, rebates, or other price 
concessions the sponsor receives from a pharmaceutical manufacturer or 
pharmacy); or
    (8) Any other failure to substantially comply with the requirements 
of the endorsement, or the failure to submit an acceptable plan of 
correction within the timeframe specified by CMS.
    The CMS and the OIG may impose CMPs of up to $10,000 per violation. 
We will impose CMPs and afford endorsed sponsor appeal rights according 
to the procedures stated in 42 CFR parts 1003 and 1005.
    We note that in addition to the sanctions described above, a card 
sponsor's misuse of the Medicare name or emblem may subject them to the 
penalties stated at 42 U.S.C. 1320b-10, which prohibits the misuse of 
the Medicare name or emblem. In general, the statute authorizes the OIG 
to impose penalties on any person who misuses the term, ``Medicare,'' 
or other names associated with DHHS in a manner which the person knows 
or should know gives the false impression that it is approved, 
endorsed, or authorized by DHHS. Offenders are subject to fines of up 
to $5000 per violation or, in the case of a broadcast or telecast 
violation, $25,000.
4. Termination by CMS
    Pursuant to section 1860D-31(i)(3) of the Act, and as provided in 
Sec.  403.820(c) we may terminate the contract of any endorsed sponsor 
upon a determination that the sponsor no longer meets the requirements 
for participation in the Medicare drug discount card program or that 
the sponsor has engaged in false or misleading marketing practices (for 
example, use of non-CMS-approved marketing materials, marketing outside 
the approved service area, use of beneficiary information to market 
services not directly related to the endorsed sponsor's Medicare card 
program). The bases stated above for the imposition of intermediate 
sanctions also serve as the bases for termination for failure to meet 
the requirements for participation in the Medicare drug discount card 
program. Prior to terminating a contract, we will afford the endorsed 
sponsor an opportunity to develop and execute a CMS-approved corrective 
action plan.
    We will afford an endorsed sponsor the opportunity to appeal our 
decision to terminate an endorsement contract as well as our decision 
not to enter into a contract with an entity that applied for 
endorsement. In each case, we will provide notice to the endorsed 
sponsor stating the reasons for terminating the contract or failing to 
endorse the program. These sponsors will have 15 days from the date of 
the notice to file a request in writing for reconsideration to us. We 
will then designate a hearing officer who is impartial and has no 
interest in the matter pending for decision. CMS and the sponsor will 
have the opportunity to submit evidence and participate in a hearing 
convened by the hearing officer. The hearing officer will issue a 
decision as soon as

[[Page 69879]]

practicable after the hearing. This decision is final and binding on 
the parties and, as provided in Sec.  403.820(f)(11) of our 
regulations, is not subject to judicial review.
    Endorsed sponsors whose endorsement we terminate must notify all of 
their card program enrollees in writing within 10 days of receiving our 
notice of termination.
5. Termination by Endorsed Sponsor
    An endorsed sponsor may terminate its contract with us in the event 
that we substantially fail to perform our obligations related to this 
program, as provided in Sec.  403.820(d). These obligations would 
include, but are not limited to, our operation of the drug card 
enrollment system, price comparison Web site, and reimbursement for 
transitional assistance, as well as payment of enrollment fees for 
beneficiaries eligible for transitional assistance and timely review of 
marketing materials. An endorsed sponsor entering into a contract with 
us has a reasonable business expectation that we will adequately 
support the operation of the discount card program and that it will not 
be held to the contract in the event that we are in significant breach 
of that contract. Accordingly, we are adopting this termination 
provision to promote the efficient administration of the Medicare drug 
discount card program, consistent with section 1102 of the Act.
    The endorsed sponsor will be required to provide a notice of 
termination to us 90 days prior to its intended effective date and to 
its enrollees by mail 60 days prior to the same date. The notice will 
provide affected enrollees with a description of remaining endorsed 
discount card programs available in its own area and the process for 
enrolling in a new endorsed discount card program.
6. Termination by Mutual Consent
    As provided in Sec.  403.820(e) of our regulations, CMS and an 
endorsed sponsor may agree to terminate or modify an existing contract. 
If a contract is terminated by mutual consent, the endorsed sponsor 
must follow the enrollee notice procedures as required in the case of a 
termination of the contract by an endorsed sponsor. We have adopted the 
provision, as specified in Sec.  403.820(e), for mutual modification or 
termination to address those circumstances when both parties may agree 
that a contract termination is in the best interests of the endorsed 
sponsor, taxpayers, Medicare beneficiaries, and the Medicare program, 
allowing us to terminate an endorsed sponsor's endorsement contract 
before its term expires. This is also a contracting provision that we 
are adopting to promote the efficient administration of the Medicare 
drug discount card program, consistent with section 1102 of the Act.

G. Special Rules Concerning Medicare Managed Care Organizations

1. General Requirements for Medicare Managed Care Organizations
    As discussed in section II.C.1 of this document and codified in 
Sec. Sec.  403.804(b) and 403.804(c) of our regulations, section 1860D-
31(h)(1)(A)(iv) of the Act provides that a Part C organization is 
eligible to be an endorsed sponsor if it meets the requirements for 
endorsement either individually or in combination with one or more 
other entities. Sections 403.804(b) and 403.804(c) of our regulations 
also make reasonable cost reimbursement plans eligible to be endorsed 
sponsors provided they meet the requirements for endorsement. Medicare 
managed care organizations--organizations offering coordinated care 
plans as described in section 1851(a)(2)(A) of the Act and reasonable 
cost reimbursement plans under section 1876(h) of the Act--qualifying 
for endorsement may offer their endorsed program to all discount card 
eligible individuals residing in their service area(s) or only to those 
discount card eligible individuals enrolled in one or more of the 
Medicare managed care organization's plan(s). All other Part C 
organizations qualifying for endorsement must offer their endorsed 
program to all discount card eligible individuals residing in their 
service area(s). Part C organizations and reasonable cost reimbursement 
contracts that offer an endorsed program to all discount card eligible 
individuals must meet the requirements for endorsement applicable to 
all other applicants endorsed sponsors. However, as discussed below in 
section II.G.2.a of this document, special rules apply to Medicare 
managed care organizations that limit enrollment in their endorsed 
program to members of one or more of their Medicare managed care plans.
    Under section 1860D-31(g)(7) of the Act, any nonuniformity in 
benefits offered by a Part C organization to its Part C plan members 
resulting from implementation of the Medicare drug discount card 
program, including payment or waiver of any enrollment fee for an 
endorsed program and limiting transitional assistance to transitional 
assistance enrollees, will not be taken into account in applying the 
requirement, set forth in section 1854(f)(1)(D) of the Act that any 
additional benefits offered by a Part C organization be provided 
uniformly to all Part C plan members. Accordingly, as provided in Sec.  
403.814(c) of our regulations, a Part C organization will not be 
violation of this uniformity of benefits rule if it:
    [sbull] Pays the annual enrollment fee, if any, for its Part C plan 
members choosing to enroll in an endorsed program--whether operated by 
the Part C organization or another endorsed sponsor--provided that any 
such benefit is reflected in the Part C plan's Adjusted Community Rate 
(ACR) filing;
    [sbull] Waives the annual enrollment fee for its Part C plan 
members enrolling in its endorsed program, provided that any such 
benefit is reflected in the Part C plan's Adjusted Community Rate (ACR) 
filing;
    [sbull] Provides transitional assistance to transitional assistance 
enrollees.
    Although section 1860D-31 of the Act does not explicitly state that 
it is creating an exception to the uniform premium rule under section 
1854(c) of the Act and 42 CFR 422.100(d)(2), it authorized Part C plans 
to offer non-uniform benefits that would be inconsistent with the rule. 
For the reasons set forth below, we believe that in doing so, Congress 
created a new implicit statutory exception to the uniform premium rule. 
Under the uniform premium rule, as implemented in regulations, a Part C 
organization must offer its Part C plan at a uniform premium, with 
uniform benefits and cost-sharing levels throughout the plan's service 
area (or segment of the plan's service area as provided in 42 CFR 
422.304(b)(2)). Absent an exception to this rule, a Part C organization 
offering its endorsed program to members of its Part C plan as an 
optional supplemental benefit would be required to offer the benefit to 
all of its members within the plan's service area (or segment of the 
service area), and charge them the same annual enrollment fee. However, 
as discussed above in section G.1. of this document, a Part C 
organization is prohibited by statute from offering its endorsed 
program to members of its Part C plan(s) that are not eligible for the 
Medicare drug discount card program. Similarly, a Part C organization 
offering an endorsed program may not collect an annual enrollment fee 
from transitional assistance enrollees, but instead must collect this 
fee from CMS. Consequently, a Part C organization offering an endorsed 
program to members of its Part C plan(s) cannot comply with the 
requirements of section 1860D-31 without violating the uniform premium 
rule.

[[Page 69880]]

    As discussed in Norman J. Singer's Statutes and Statutory 
Construction (6th ed.), where two statutory provisions irreconcilably 
conflict, courts generally hold that the more recently enacted 
statutory provision prevails. Applying this principle, we believe that 
in enacting the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003, Congress intended implicitly to except from 
the uniform premium rule under Part C any non-uniformity resulting from 
a Part C organization's implementation of its endorsed program. We 
further note that in section 1860D-31(g)(7) of the Act Congress clearly 
indicated its intent to allow non-uniformity in benefits among a Part C 
plan's members as a result of a Part C organization's implementation of 
its endorsed program. Accordingly, as provided in Sec.  403.814(c) of 
our regulations, a Part C organization would not be violation of the 
uniform premium rules under section 1854(c) of the Act and 42 CFR 
422.100(d)(2) if it:
    [sbull] Offers its endorsed program to members of its Part C plan 
who are discount card eligible individuals, to the exclusion of those 
members who are not discount card eligible individuals; or
    [sbull] Collects an annual enrollment fee only from discount card 
enrollees who are not eligible for transitional assistance.
    Section 18060D-31(a)(3) provides that discount card eligible 
individuals cannot be required to enroll in an endorsed program. In 
keeping with the voluntary nature of the Medicare discount drug card 
program, and as specified in Sec.  403.814(a) of our regulations, a 
Part C organization or reasonable cost reimbursement plan may not 
require enrollment in any endorsed program, whether operated by the 
organization or another entity, as a condition of enrollment in any of 
its Part C or reasonable cost reimbursement plans.
    In addition, a Part C or reasonable cost reimbursement organization 
may not require transitional assistance enrollees enrolled in its Part 
C or reasonable cost reimbursement plan to exhaust their transitional 
assistance prior to obtaining covered discount card drugs under any 
drug benefit offered by its Part C or reasonable cost reimbursement 
plan. We believe this policy is consistent with the Part C rules under 
42 CFR 422.100(d)(2) and section 1876(g)(2) of the Act which require 
that any additional benefit offered by a Part C or reasonable cost 
reimbursement plan must be offered uniformly to all plan members. 
Requiring transitional assistance enrollees to utilize their 
transitional assistance prior to obtaining covered discount card drugs 
under their Part C or reasonable cost reimbursement plan drug benefit 
would violate these uniformity of benefits rules because non-
transitional assistance enrollees would be entitled to obtain covered 
discount card drugs under the Part C or reasonable cost reimbursement 
plan drug benefit while transitional assistance enrollees would be 
prohibited from doing so until they exhaust their transitional 
assistance. In other words, non-transitional assistance enrollees would 
receive more generous drug coverage under the Part C or reasonable cost 
reimbursement plan than transitional assistance enrollees. (Section 
1860D-31(g)(7) of the Act waives the uniformity of benefits rule under 
Part C only for purposes of implementing the Medicare drug card 
program; that is, when non-uniformity directly results from 
implementation of the drug card statutory provisions. Because any 
requirement that transitional assistance enrollees first exhaust their 
transitional assistance would stem not from implementation of the 
Medicare drug discount card program but from the benefits package 
offered under a Part C plan, the uniformity of benefits waiver under 
section 1860D-31(g)(7) of the Act would not apply.) We also note that 
our prohibiting Part C organizations from requiring their transitional 
assistance enrollees to first exhaust their transitional assistance 
prior to utilizing their drug benefit under their Part C plan means 
Part C plans will not need to take transitional assistance into account 
in their annual ACR filings.
    As discussed in II.A.6. of this document and provided in our 
regulations at Sec.  403.811(b)(2)(iii), discount card enrollees may 
disenroll from their endorsed program and enroll in a new endorsed 
program during a special election period when enrolling in or 
disenrolling from a Part C or reasonable cost reimbursement plan 
offering an endorsed program, irrespective of whether the Part C or 
reasonable cost reimbursement plan offers an endorsed program of any 
kind. We will automatically disenroll card enrollees from their 
endorsed program when they enroll in or disenroll from a Medicare 
manage care plan offering an exclusive card program. Further, in 
accordance with our regulations at Sec.  403.808(f)(3), any 
transitional assistance remaining available to a transitional 
assistance enrollee electing to switch to a new endorsed program 
following his or her enrollment in or disenrollment from a Part C or 
reasonable cost reimbursement plan offering an endorsed program will 
follow the transitional assistance enrollee to his or her new endorsed 
program.
2. Special Rules for Applicants Seeking To Offer Exclusive Card 
Programs
a. Endorsement Requirements for Applicants Seeking To Offer Exclusive 
Card Programs
    Applicants seeking to offer an exclusive card program must indicate 
their intent to do so on their applications. For Medicare managed care 
organizations seeking to offer an exclusive card program, if the 
Medicare managed care organization combines with one or more other 
entities eligible to meet the requirements of endorsement, the Medicare 
managed care organization must be the applicant, as required under 
Sec.  403.814(b)(1) of our regulations. We require this because we want 
to ensure that our endorsed sponsor contract--and, ultimately, 
accountability for an endorsed program--is with the Medicare managed 
care organization itself, and not with any of the entities with which 
it combines to offer an endorsed program. If a Medicare managed care 
organization will not offer an exclusive card program, we will permit 
another entity with which the Medicare managed care organization 
combines to be the applicant.
    We will not require Medicare managed care organizations operating 
more than one Medicare managed care plan to offer its exclusive card 
program to members of all of its Medicare managed care plans; rather, 
the Medicare managed care organization may limit enrollment in its 
exclusive card program to members of only certain Medicare managed care 
plans it operates. Members of the organization's other Medicare managed 
care plans are free to enroll in any other endorsed program, including 
any non-exclusive endorsed program offered by the Medicare managed care 
organization, provided they meet the eligibility criteria for the 
program.
    Section 1860D-31(h)(9)(B) of the Act exempts exclusive card 
sponsors from certain requirements generally applicable to endorsed 
sponsors, including: (1) The requirement set forth in section 1860D-
31(h)(3) of the Act and Sec.  403.806(f)(1) and Sec.  403.806(f)(2) of 
our regulations concerning minimum service areas; and (2) the pharmacy 
access standard under section 1860D-31(e)(1)(B) of the Act and Sec.  
403.806(f)(3) of our regulations.
    Although a Medicare managed care organization may limit enrollment 
in its

[[Page 69881]]

exclusive card program to members of one or more of its Medicare 
managed care plans that include the exclusive card program as part of 
the plans' benefit package, the Medicare managed care organization must 
offer its exclusive card program to all discount card eligible 
individuals enrolled in those specific Medicare managed care plan(s). A 
Medicare managed care organization may not limit enrollment in its 
exclusive card program to only some discount card eligible individuals 
enrolled in those Medicare managed care plan(s) to the exclusion of 
other discount card eligible individuals because this would violate the 
uniformity of benefits provisions under section 1854(f)(1)(D) of the 
Act and 42 CFR 422.100(d)(2).
    We also implement the exception from pharmacy access standards in 
section 1860D-31(h)(9)(B)(ii) of the Act and Sec.  403.814(b)(3)(i) of 
our regulations by deeming exclusive card sponsors as having met such 
standards if--
    [sbull] The network is not limited to mail-order pharmacies; and
    [sbull] The network is equivalent to the pharmacy network under any 
outpatient drug benefit offered under the Medicare managed care 
organization's Medicare managed care plan which was previously approved 
by us under the Medicare Part C or Section 1876 rules.
    If the Medicare managed care organization does not offer a drug 
benefit under its Medicare managed care plan, we will evaluate whether 
the network provides sufficient access to covered discount card drugs 
at negotiated prices for discount card enrollees using the same 
considerations we currently use to evaluate Medicare managed care 
plans' other provider networks under 42 CFR 422.112.
    We are not applying the standards of Sec.  403.806(f)(3) of our 
regulation because these standards may be impracticable for exclusive 
card sponsors. Medicare managed care organizations currently do not 
have to follow these standards in establishing their pharmacy networks. 
We presume that many exclusive card sponsors will wish to use the same 
pharmacy networks under their endorsed program as they currently use to 
provide prescription drugs under any prescription drug benefit they may 
offer to their Medicare managed care plan members. Moreover, given the 
size of exclusive card sponsors' service areas relative to the 
statewide service areas of other sponsors, the pharmacy access 
standards contained in Sec.  403.806(f)(3) of our regulation may be too 
restrictive. In addition, Medicare managed care organizations that use 
plan-owned pharmacy networks would have a difficult time meeting these 
access standards.
    In addition to the requirements Congress specifically waived in 
section 1860D-31(h)(9)(B) of the Act, section 1860D-31(h)(9)(B)(iii) 
authorizes the Secretary to waive other endorsed sponsor requirements 
if those requirements are duplicative of or conflict with requirements 
applicable to Medicare managed care organizations under Part C (and the 
regulations promulgated thereunder) or section 1876 (and the 
regulations promulgated thereunder), as the case might be, or if waiver 
of the requirements would improve coordination of the benefits 
available under the Medicare drug discount card program and Medicare 
managed care plan programs. We believe the following requirements, 
discussed in section II.C of this document, are duplicative of, or 
conflict with, requirements applicable to Medicare managed care 
organizations under Medicare managed care plan programs, or that waiver 
of such requirements would improve coordination of the Medicare drug 
discount card program with Medicare managed care plan benefits--
    (1) The covered lives requirement in Sec.  403.806(a)(3) of the 
regulations;
    (2) The requirement set forth in Sec.  403.806(e)(2) of our 
regulations that transitional assistance be applied only toward costs 
incurred for covered discount card drugs obtained through the Medicare 
drug discount card program. Instead, we also permit transitional 
assistance to be used to pay for coinsurance, copayments, or other 
cost-sharing charged under a Medicare managed care plan drug benefit 
when beneficiaries purchase covered discount card drugs.
    In addition, although applicants seeking to offer an exclusive card 
program must meet the business integrity and financial stability 
requirements in Sec.  403.806(b) of our regulations, we will not 
require their applications to include the documentation we generally 
require of applicants to demonstrate compliance with this requirement, 
as described in section II.C.1. of this document, because such 
documentation would be duplicative of what these organizations already 
must demonstrate to us under the provisions of Part C and section 1876 
of the Act.
    We believe it is appropriate to waive the 1 million covered lives 
requirement for exclusive card programs because 1 million covered lives 
is more than most Medicare managed care organizations currently enroll 
in their Medicare managed care plans and is far higher than the minimum 
enrollment requirements for Medicare managed care organizations under 
42 CFR 422.514 and 42 CFR 417.413(b). Moreover, the service area for 
exclusive card programs will be limited to the affiliated Medicare 
managed care plan service area, which could be as low as several 
thousand individuals for some plans. Therefore, the 1 million covered 
lives standard potentially would conflict with the minimum enrollment 
requirements for Medicare managed care plans and pose challenges for 
certain Medicare managed care organizations seeking to coordinate 
benefits under their Medicare managed care plans and newly created 
endorsed programs. Our failure to waive the 1 million covered lives 
requirement for exclusive card programs likely would have the effect of 
excluding from the Medicare drug discount card program small Medicare 
managed care organizations that might otherwise meet the endorsement 
requirements.
    We believe it is appropriate to waive the transitional assistance 
requirements in Sec.  403.806(e)(2) of our regulations. We believe 
exclusive card sponsors should be permitted to apply transitional 
assistance toward any copay, coinsurance, and deductible amounts 
incurred by transitional assistance enrollees for covered discount card 
drugs obtained under their Medicare managed care plan's outpatient drug 
benefit in order to improve coordination between the benefits provided 
under their endorsed programs and Medicare managed care plans. Because 
of differences between the cost-sharing structure under a Medicare 
managed care plan's outpatient prescription drug benefit and the 
coinsurance requirements under the Medicare drug discount card program, 
as required under section 1860D-31(g)(1)(B) of the Act, transitional 
assistance enrollees could be responsible for a larger portion of a 
drug's costs if obtained under the Medicare managed care plan drug 
benefit than under the Medicare drug discount card program. Allowing 
transitional assistance enrollees to apply transitional assistance 
toward any cost-sharing amounts incurred for covered discount card 
drugs obtained under their Medicare managed care plan drug benefit 
would address this problem while allowing for more seamless drug 
coverage.
    Although applicants seeking to offer an exclusive card program must 
meet the business integrity and financial stability requirements under 
Sec.  403.806(b) of our regulations, we believe the process for 
demonstrating compliance with this requirement, as

[[Page 69882]]

described in section II.C.1 of this document, is duplicative of aspects 
of the qualification process that already exists under Part C and 
section 1876 of the Act. Medicare managed care organizations are 
currently required, under 42 CFR 422.400 or 42 CFR 417.120 and 42 CFR 
417.122, to be licensed under State law as risk-bearing entities or, 
alternatively, to obtain certification from a State that they meet the 
financial solvency and other standards that the State may require for 
the entity to operate as a managed care plan. Under these licensure or 
certification requirements, Medicare managed care organizations must 
demonstrate a level of business stability and integrity that generally 
exceeds our standards for endorsed program applicants. Because 
exclusive card sponsors already demonstrate business stability and 
integrity through alternative processes, neither they nor their 
subcontractors will be required to present documentation demonstrating 
they meet the business stability and financial stability requirement 
set forth in Sec.  403.806(b) of our regulations.
    In addition to the aforementioned waivers, we will allow applicants 
seeking to offer exclusive card programs to request in their 
applications for endorsement that we waive or modify additional 
requirements applicable to endorsed sponsors. Applicants making such 
requests must demonstrate that the requirements at issue are 
duplicative of, or conflict with, requirements applicable to Medicare 
managed care organizations under Part C, or that they interfere with 
coordination of the benefits offered under the Medicare drug discount 
card program with benefits provided under Part C. If we determine that 
waiver of any additional requirements applicable to endorsed sponsors 
would be appropriate with respect to exclusive card sponsors, the 
waivers will apply to all similarly situated exclusive card sponsors.
    We are considering providing a streamlined application process for 
applicants seeking to offer exclusive card programs that parallel the 
discount cards currently offered under their Medicare managed care 
plans. We will provide further guidance on this issue in the 
solicitation.
b. Enrollment and Enrollment Fees in Exclusive Card Programs
    As discussed in section II.A.3 of this document, and under section 
1860D-31(c)(1)(E) of the Act, discount card eligible individuals 
enrolled in a Medicare managed care plan offering an exclusive card 
program may only enroll in the exclusive card program and may not 
enroll in another endorsed sponsor's endorsed program. Discount card 
eligible individuals enrolled in Medicare managed care plans that do 
not offer an exclusive card program may enroll in any endorsed program 
available in their service area.
    As discussed above in section II.A.3 of this document and as 
described in Sec.  403.814(b)(5) our regulations, we will allow 
Medicare managed care organizations offering exclusive card programs to 
group enroll their eligible Medicare managed care plan members into 
their exclusive card programs--defined as simultaneous enrollment of 
all or many members of a Medicare managed care plan into an exclusive 
card program. However, prior to doing so, an exclusive card sponsor 
must disclose to its Medicare managed care plan members its intent to 
group enroll them into its exclusive card program and provide them the 
opportunity to actively decline such enrollment.
c. Application Process
    Section 403.804(a) of our regulations provides that only those 
applicants submitting their applications for endorsement of their 
prescription drug discount card programs by the deadline announced in 
the solicitation will be eligible for endorsement. However, in 
recognition of the advantages to members of Medicare managed care plans 
from improved coordination between the benefits available under the 
Medicare drug discount card program and their Medicare managed care 
plans, we will permit certain Medicare managed care organizations to 
apply for endorsement of their prescription drug card programs after 
the official application deadline.
    As discussed above, section 1860D-31(h)(9)(B)(iii) of the Act 
authorizes the Secretary to waive requirements applicable to endorsed 
sponsors for exclusive card sponsors if such waiver would improve 
coordination of the benefits available under the Medicare drug discount 
card program and Medicare managed care plan programs. One of the major 
features of the Medicare discount drug card program is that it allows 
Part C organizations to offer members in their plans a prescription 
drug plan that integrates access to negotiated prices and transitional 
assistance available under a drug card with the unique package of 
benefits available in that Part C plan, including any prescription drug 
benefit. Beneficiaries who choose to enroll in a new Medicare managed 
care plan should have the same access to these coordinated discount 
card programs as members of existing Part C plans. Therefore, as 
provided under Sec.  403.804(a)(2) of our regulations, we will permit 
an entity that is applying to enter into a new contract with CMS under 
Part C to offer a new coordinated care plan or plans, as described in 
section 1851(a)(2)(A) of the Act, to simultaneously apply to offer an 
exclusive card program. We will approve such organization's application 
to offer an exclusive card program provided we approve its Part C 
application, the Part C organization demonstrates to CMS that it meets 
all applicable requirements for endorsement, and the Part C 
organization is ready to initiate enrollment in and fully operate its 
exclusive card program upon approval of its Part C and endorsement 
applications.

H. Special Rules Concerning States

1. State Pharmacy Assistance Programs
    As described above in section II.A.1. of this document, under 
section 1860D-31(b)(1)(A)(ii) of the Act and Sec.  403.810(a)(2) of 
this regulation, beneficiaries with outpatient prescription drug 
coverage under Title XIX (Medicaid) or a section 1115 waiver 
demonstration are ineligible for the Medicare drug discount card 
program. Conversely, beneficiaries with outpatient prescription drug 
coverage under certain other sources may be eligible for the program 
provided they meet all other eligibility criteria. For example, many 
State and local governments provide outpatient prescription drug 
coverage to individuals through State pharmacy assistance programs 
(SPAP). Because these programs are operated separately from Title XIX 
and section 1115 waiver demonstrations and are funded in whole or in 
part by the State or local governments, without any Federal financial 
participation, individuals enrolled in these programs still may be 
eligible for the Medicare drug discount card program. The SPAPs have 
flexibility in deciding how to work in partnership with endorsed 
programs. For example, if a State has an SPAP operated by an entity 
that meets the requirements for endorsement under Sec.  403.800 through 
Sec.  403.822 of our regulations, that entity could apply to become an 
endorsed sponsor. However, the entity would be required to meet all 
requirements for endorsement, including the requirement that an 
endorsed sponsor offer its endorsed program to all discount card 
eligible individuals residing in the endorsed program's service area, 
which may include individuals not eligible for the

[[Page 69883]]

SPAP. Should this or any other requirement for endorsement conflict 
with the endorsed sponsor's arrangement with the State under its SPAP, 
the endorsed sponsor and State would have to resolve this conflict. 
Alternatively, a State could coordinate its SPAP with the Medicare drug 
discount card program by contracting with an endorsed sponsor to 
administer the SPAP and designing the SPAP benefits so as to wrap 
around the benefits offered under the Medicare drug discount card 
program, provided that the endorsed sponsor complies with all 
applicable requirements of section 1860D-31 of the Act and our 
regulations. Coordination between a SPAP and an endorsed program could 
promote their offering a seamless outpatient drug benefit to 
beneficiaries enrolled in both the SPAP and Medicare drug discount card 
program.
2. Optional State Payment of Enrollment Fee
    Section 1860D-31(c)(2)(F)(i) of the Act specifies that the 
Secretary will establish an arrangement under which a State voluntarily 
may provide for payment of some or all of the enrollment fee for some 
or all discount card enrollees in the State who are not transitional 
assistance enrollees. The portion of the enrollment fee paid by the 
State and the category of discount card enrollees (other than 
transitional assistance enrollees) entitled to State payment of all or 
some of their enrollment fees is left to a State's discretion. Any 
enrollment fee paid in whole or part by a State must be paid directly 
to the endorsed sponsor. We want to provide States flexibility in 
designing these arrangements to address circumstances particular to 
that State. Therefore, rather than prescribe a single, specific method 
for States to work in partnership with endorsed sponsors to pay the 
enrollment fee on behalf of discount card enrollees, we simply provide 
at Sec.  403.815(a)(1) of our regulations that States may enter into 
payment arrangements with endorsed sponsors to provide payment of some 
or all of the enrollment fee for discount card enrollees, provided the 
enrollment fee is paid directly by the State to the endorsed sponsor.
    Section 1860D-31(c)(2)(F)(ii) of the Act specifies that Federal 
matching payments will not be available under titles XIX and XXI for 
State expenditures for enrollment fees under the Medicare drug discount 
card program. To implement this requirement, we are setting forth a new 
provision at Sec.  403.815(a)(2) of our regulations that mirrors the 
statutory provision.
3. Optional State Payment of Coinsurance
    As discussed above, under section 1860D-31(g)(1)(B) of the Act, 
available transitional assistance may be applied toward 90 or 95 
percent of the cost of a covered discount card drug obtained under the 
Medicare drug discount card program, with the transitional assistance 
enrollees responsible for a 5 or 10 percent coinsurance amount, 
depending on their income, unless the pharmacy waives those coinsurance 
amounts. Section 1860D-31(g)(4)(B)(i) of the Act specifies that the 
Secretary must establish an arrangement under which a State may provide 
for payment of some or all of these coinsurance amounts for some or all 
transitional assistance enrollees residing in the State. If a State 
will pay all or some of these coinsurance amounts, the payment must be 
paid directly by the State to the pharmacy involved. We want to allow 
States flexibility in the design of these arrangements to address 
circumstances particular to that State. Therefore, rather than 
prescribe a single, specific method for States to work in partnership 
with pharmacies to pay coinsurance on behalf of transitional assistance 
enrollees, we are providing at Sec.  403.815(b)(1) of our regulation 
that States may enter into payment arrangements with pharmacies to 
provide payment of some or all of the coinsurance for transitional 
assistance enrollees, provided the coinsurance is paid directly by the 
State to the pharmacy involved. We leave it to the State's discretion 
whether it will pay all or a portion of these coinsurance amounts, as 
well as the category of transitional assistance enrollees entitled to 
State payment of all or some of their coinsurance.
    Under section 1902(a)(10)(E)(i) of the Act, States are required to 
pay the coinsurance obligations (as defined in section 1905(p)(3)(B) of 
the Act) for certain Medicare beneficiaries, with the Federal 
government, in turn, reimbursing States for a portion of these payment 
amounts. However, section 1860D-31(g)(4)(B)(ii) of the Act provides 
that any State expenditures for the coinsurance of transitional 
assistance enrollees will not be considered State expenditures for 
which Federal matching payments are available under titles XIX and XXI. 
To implement this requirement, we are setting forth a provision at 
Sec.  403.815(b)(2) of our regulations that mirrors the statutory 
provision.
    Section 1860D-31(g)(4)(B)(iii) of the Act provides that the 
coinsurance liability of transitional assistance enrollees is not a 
cost-sharing obligation set forth in section 1905(p)(3)(B) of the Act. 
This means that States are not required to pay the coinsurance 
liability incurred by transitional assistance enrollees who are also 
Qualified Medicare Beneficiaries (QMBs) (as defined in section 
1905(p)(1) of the Act) under the Medicaid program. To implement this 
requirement, we are setting forth a provision at Sec.  403.815(c) of 
our regulations that mirrors the statutory provision.
4. State Data
    As discussed in section II.A.1. of this document, under section 
1860D-31(b)(1) of the Act and Sec.  403.810(a)(2) of our regulations, 
beneficiaries residing in the 50 States or the District of Columbia 
with outpatient prescription drug coverage under Title XIX (Medicaid) 
or a section 1115 waiver demonstration are ineligible for the Medicare 
drug discount card program. As discussed in section II.A.2 of this 
document, we will verify beneficiaries' eligibility for the program. To 
perform this function, we require data from the 50 States and the 
District of Columbia that will allow us to identify those Medicare 
beneficiaries eligible under Medicaid or a section 1115 waiver 
demonstration for outpatient drug coverage. Section 1860D-
31(f)(3)(C)(ii) of the Act provides the 50 States and the District of 
Columbia must provide to us information relating to our verification 
process under the program, in the manner specified by us, as a 
condition of the provision of Federal financial participation to a 
State under Title XIX. Section 1935(a)(1) of the Act similarly 
conditions receipt of Federal financial assistance under Title XIX upon 
a State's provision this data. Finally, section 1902(a)(66) of the Act 
provides that a State plan under Title XIX must provide for making 
eligibility determinations under section 1935(a) of the Act, which as 
previously noted includes the provision of eligibility data to us. We 
will specify the data we require and the manner in which states should 
provide us the data in a future communication to the State Medicaid 
directors.
    Section 1935(a)(3) of the Act provides that amounts expended by a 
State in carrying out 1935(a) of the Act, including the provision of 
data related to our eligibility process, are State expenditures 
reimbursable under the ``appropriate paragraph'' of section 1903(a) of 
the Act, which sets forth the Federal share of State expenditures

[[Page 69884]]

under a State plan under Title XIX. As States' expenditures related to 
the provision of this data do not fall within the activities covered 
under sections 1903(a)(1) through (6) of the Act, we believe the only 
paragraph under section 1903(a) of the Act that would capture these 
expenditures is section 1903(a)(7) of the Act. Section 1903(a)(7) of 
the Act provides for a federal share of 50 percent for State 
expenditures ``found necessary by the Secretary for the proper and 
efficient administration of the State plan'' that are not already 
covered under sections 1903(a)(1) through (6) of the Act. Because 
States are required to provide us the eligibility data under their 
State plan, we believe related State expenditures are necessary for the 
proper administration of the State plan. Section 403.815(d)(2) of our 
regulations therefore provides that expenditures made by a State in 
connection with providing us eligibility data will be treated as State 
expenditures for which Federal matching payments are available under 
section 1903(a)(7) of the Act. Accordingly, States will be reimbursed 
50 percent of these expenditures.

I. Special Rules Concerning Pharmacies Serving Long Term Care Residents 
or Operated by the Indian Health Service, Indian Tribes and Tribal 
Organizations, and Urban Indian Organizations

    Section 1860D-31(g)(5)(A) of the Act provides that the Secretary 
shall establish procedures and may waive requirements as necessary to 
negotiate arrangements with sponsors to provide arrangements with 
pharmacies that support long term care facilities in order to ensure 
access to transitional assistance for transitional assistance eligible 
individuals who reside in long term care facilities.
    Further, section 1860D-31(g)(5)(B) provides that the Secretary 
shall establish procedures and may waive requirements to ensure that, 
for purposes of providing transitional assistance, Indian Health 
Service, Indian Tribe and Tribal Organization, and Urban Indian 
Organization (I/T/U) pharmacies have the opportunity to participate in 
the pharmacy networks of at least two endorsed discount card programs 
in each of the 50 States and the District of Columbia where such a 
pharmacy operates.
    In the United States, there are approximately 16,380 Medicare and 
Medicaid certified skilled nursing facilities and nursing facilities 
(source: On-Line Survey and Certification and Reporting (OSCAR) System, 
August, 2003). About 1.3 million Medicare beneficiaries are residents 
of extended-stay skilled nursing facilities and nursing facilities 
(Source: 2001 Medicare Current Beneficiary Survey). Among the 1.3 
million, the vast majority of these individuals (72 percent) are 
enrolled in both Medicare and Medicaid, and therefore will be 
ineligible for the Medicare endorsed discount card program if they have 
drug coverage through Medicaid. Of the remaining approximately 400,000 
Medicare nursing home residents, some portion--perhaps as many as 
200,000--may be eligible for transitional assistance under this 
program. Approximately 3,000 pharmacies support these facilities 
(source: American Society of Consultant Pharmacists, verbal 
communication, August 2003.).
    Generally speaking, long term care pharmacies provide access to 
prescription drugs to residents of skilled nursing facilities and 
nursing facilities through medical benefits that are coordinated by the 
long term care facilities in cooperation with the long term care 
pharmacies. Further, the medications provided are often specially 
packaged to provide quality control. These, among other circumstances, 
contribute to such pharmacies not being well integrated into the 
private networks maintained by the pharmacy benefit management 
industry. The provisions of section 1860D-31(g)(5)(A) of the Act 
provide an opportunity for long term care pharmacies to provide 
prescriptions to residents of long term care facilities through the 
usual distribution channels established by these facilities, while 
offsetting the cost borne by such residents when their medical coverage 
either does not apply or has been exhausted.
    We estimate that there are approximately 87,000 AI/ANs over the age 
of 65 who use the services of the Indian Health Service, and another 
20,000 or so such individuals who are under the age of 65 years and 
eligible for Medicare by virtue of a disability (source: Indian Health 
Service). Of the total, about 36,000 are covered by Medicaid and we 
estimate that a total of about 18,000 may be eligible for transitional 
assistance. There are 201 I/T/U pharmacies in 27 States, with 152 
operating in ambulatory settings and 49 operating in hospitals. Table 3 
depicts the number of these pharmacies by State.
    Generally speaking, I/T/U pharmacies provide access to prescription 
drugs off of the Federal Supply Schedule to AI/ANs, and these 
pharmacies are not well integrated into the private networks maintained 
by the pharmacy benefit management industry. The provisions of section 
1860D-31(g)(5)(B) of the Act provide an opportunity for I/T/U 
pharmacies to provide prescriptions to AI/ANs at the low Federal Supply 
Schedule rate, whereby coverage of the cost of such drugs would in Part 
Come from transitional assistance funds, and in part from Indian Health 
Service funds.
    To meet the requirements of section 1860D-31(g)(5) of the Act, we 
are strongly encouraging endorsed sponsors to offer a plan in their 
application for endorsement to include long term care and/or I/T/U 
pharmacies in their networks for the purpose of administering 
transitional assistance. As will be provided in greater detail in the 
solicitation, CMS intends to employ a competitive process to select for 
``special endorsement,'' among interested applicants, in each of the 50 
States and the District of Columbia, at least two applicants that, in 
accordance with Sec.  403.816(b)(2) of our regulations, agree to 
contract with any willing long term care pharmacy provider in the 
endorsed sponsors' service areas seeking to participate in their 
pharmacy networks. Similarly, CMS intends to select at least two 
applicants for ``special endorsement'' in each of the 50 States and the 
District of Columbia where I/T/U pharmacies operate, in accordance with 
Sec.  403.816(d)(2) of our regulations, to contract with any I/T/U 
pharmacy in the endorsed sponsors' service areas seeking to participate 
in their networks.
    Selection criteria will be further discussed in the solicitation 
and will include understanding and accommodation of, as well as prior 
experience with, the unique circumstances of these special pharmacies, 
the percent of all long term care and/or I/T/U pharmacies within the 
proposed service areas to be provided contracts, the expansiveness of 
the proposed service area, completeness and feasibility of the plan for 
favorable access, and timeliness of implementation. The selected 
applicants, also called special endorsed sponsors, will provide for 
terms in these special pharmacy contracts to accommodate certain unique 
attributes of these pharmacies, described below, which are intended to 
improve access to needed prescription drugs and transitional assistance 
by long term care residents and AI/ANs. Also, as described below, we 
will work closely with interested applicants and special endorsed 
sponsors to provide technical assistance and other incentives.
    As described above, the Secretary must ensure that transitional 
assistance-

[[Page 69885]]

eligible residents of long term care facilities have access to 
transitional assistance. Additionally, the Secretary must ensure that 
I/T/U pharmacies utilized by AI/ANs have the opportunity to participate 
in the pharmacy networks of at least two discount cards for the purpose 
of providing transitional assistance. We believe the best way to ensure 
that AI/ANs and residents of long term care facilities have the 
opportunity to receive transitional assistance is to promote a 
competition for ``special endorsement'' to serve these beneficiaries. 
We believe a competition among interested sponsors will encourage 
better, more thoughtful plans for access to a market generally untapped 
by the pharmacy benefit management industry.
    As discussed previously, pharmacies supporting long term care 
facilities and AI/ANs are not generally included in the traditional 
pharmacy networks of the pharmacy benefit management industry, thus 
representing potentially new lines of business for some applicants, or 
possibly leveraging an existing niche market for some pharmacy benefit 
management organizations. The competition will guarantee to the special 
endorsed sponsors additional covered lives, an opportune business 
strategy to grow enrolled lives and subsequent utilization, leading to 
additional revenues. A ``guaranteed'' volume of new covered lives would 
be needed to cover the fixed costs associated with starting up the 
special provisions of these special pharmacy contracts. We believe that 
the promise of a guaranteed volume for the winning applicant will be a 
critical factor in whether the applicant decides to submit a plan that 
covers long term care and/or I/T/U pharmacies. Without the competition, 
we think that there is a high risk of drug discount card program 
applicants not offering a plan. Literally speaking, we believe the 
competition is necessary to assure these populations will have access 
to any endorsed card program. Further, the competition will provide to 
the special endorsed sponsors a ``special endorsement'' they can 
market.
    An added benefit of the competition to beneficiaries is that the 
negotiations between these pharmacies and special endorsed sponsors to 
accommodate these pharmacies' special circumstances, along with 
technical assistance provided by CMS, can be accomplished relatively 
quickly compared to the process necessary if all endorsed sponsors had 
to accommodate these special circumstances. This will lead to a timely 
implementation of these special provisions, improving access to 
prescription drugs. In the case of long term care pharmacies, if 
interested pharmacy benefit management organizations with niche 
expertise in this area are able to meet our requirements and compete 
successfully for the special endorsement, then participation may also 
improve the timeliness of implementation and access to transitional 
assistance for long term care residents.
    The applicants selected for special endorsement will receive 
assistance and support from CMS in setting up special contracting 
arrangements with these pharmacies as needed. We intend to hold a 
special break out session at the pre-application conference and, to the 
extent that this would be useful to interested applicants and, if 
feasible, CMS would arrange for the participation of the long term care 
pharmacy industry and the Indian Health Service, to the extent 
possible, provide a list of all pharmacies that support long term care 
facilities and I/T/U pharmacies; provide for an expedited marketing 
review to the extent possible; and provide special recognition for 
these special endorsed sponsors on the CMS Web site that describes 
their programs.
    Additionally, as discussed in section II.C.1. of this document, 
endorsed sponsors must provide us with sample copies of their contracts 
with pharmacies participating in their network prior to commencing 
outreach and enrollment activities. Because the arrangements between 
special endorsed sponsors and long-term care and I/T/U pharmacies will 
present unique challenges and represent new types of arrangements for 
most special endorsed sponsors, special endorsed sponsors must only 
make a good faith effort to finalize these arrangements as soon as 
practicable; we will not require that these arrangements be finalized 
and approved by us prior to the start of the special endorsed sponsor's 
commencement of outreach and enrollment activities under its general 
endorsement, if applicable.
    One of the goals of the technical assistance will be to help 
special endorsed sponsors understand the operations of these pharmacies 
which may require that special contracting provisions be included in 
the contracts between the special endorsed sponsors and these 
pharmacies. Both types of pharmacies have a number of unique 
characteristics that distinguish them from other retail pharmacies that 
will be participating in the drug discount card program. For instance, 
I/T/U pharmacies purchase drugs off the Federal supply schedule; 
generally can only serve AI/ANs; are required by law to waive 
copayments; and generally stock a more limited range of drugs compared 
to other retail pharmacies. Further, a few may not have point of sale 
technology.
    Long term care pharmacies generally provide the drugs directly to 
the skilled nursing facilities and nursing facilities where the patient 
resides, not directly to the patient, under a medical benefit. They 
also engage in a significant coordination of benefits effort that would 
require at least some claims processed against the transitional 
assistance to be processed off-line, not in real time.
    Thus, as cited in Sec.  403.816 of our regulations, we may require 
of special endorsed sponsors certain contracting provisions. First, we 
will require that these sponsors contract with any willing provider of 
these types in their service areas (Sec.  403.816(b)(2) and Sec.  
403.816 (d)(2) of our regulations). Other likely special provisions in 
the contracts between special endorsed sponsors and these pharmacies 
include (Sec.  403.816(b)(4) and Sec.  403.816(d)(3) of our 
regulations):
    [sbull] For long term care: Long term care pharmacies are permitted 
to provide covered discount card drugs only to transitional assistance 
enrollees of the special endorsed sponsor's endorsed program who reside 
in long term care facilities served by the pharmacy; special endorsed 
sponsor may need to process special transaction type depending on 
whether the pharmacy is recognized under HIPAA as a retail pharmacy 
(that is, X12 versus NCPDP); and the special endorsed sponsor must 
agree to process ``late'' claims without penalty as payer of last 
resort after other insurance has been processed first.
    [sbull] For I/T/U pharmacies: the pharmacy generally can only serve 
AI/ANs (special endorsed sponsor must structure network and educate 
enrollees so that non-AI/ANs understand these pharmacies generally are 
not available to them); and pharmacy is not required to stock all 
drugs.
    An additional requirement, as provided in Sec.  403.816(b)(3) of 
the regulation, special endorsed sponsors for long term care residents 
will be required to process claims from any out-of-network long term 
care pharmacies that supply covered discount card drugs to long term 
care facility residents enrolled in the drug discount card program when 
such beneficiaries have a transitional assistance balance remaining. As 
residents in skilled nursing facilities and nursing facilities are 
generally required by these entities to use the facility's selected 
long term care pharmacy, this provision will

[[Page 69886]]

accommodate long term care pharmacies in the event they do not decide 
to join the special endorsed sponsor's network.
    Section 1860D-31(g)(5) of the Act grants the Secretary the 
authority to waive requirements of the Medicare drug discount card 
program as necessary to ensure that transitional assistance may be 
applied toward covered discount card drugs obtained from long-term care 
and I/T/U pharmacies. In recognition of the unique challenges facing 
special endorsed sponsors who agree to include these pharmacies in 
their pharmacy networks, we will waive application of certain 
requirements if doing so is necessary to: (1) Ensure that a sufficient 
number of applicants seek special endorsement; (2) enable the Medicare 
drug discount program to start within 6 months of enactment of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003; 
and (3) accommodate the unique needs of long-term care and I/T/U 
pharmacies.
    Section 403.806(e)(4) of our regulations require endorsed sponsors 
to ensure that their pharmacies make available to transitional 
assistance enrollees at the point of sale, either electronically or by 
telephone, the amount of transitional assistance remaining available to 
them. Because long-term care pharmacies may process claims off-line due 
to coordination of benefit issues, there may be a lag in updating the 
transitional assistance amount to reflect recent transactions involving 
transitional assistance funds. Consequently, transitional assistance 
enrollees could be informed that they have more transitional assistance 
available to them than actually available if prior claims are still 
pending. Because I/T/U pharmacies do not charge AI/ANs for drugs 
obtained by them, AI/ANs obtaining drugs from these pharmacies will not 
have any out-of-pocket expenditures, and therefore their drug 
purchasing decisions will not be influenced by the amount of 
transitional assistance remaining available to them. Therefore, as 
provided in Sec.  403.816(c)(ii) and Sec.  403.816(e)(ii) of our 
regulations, special endorsed sponsors are not required to ensure that 
their long-term care and I/T/U pharmacies make available to 
transitional assistance enrollees at the point of sale the amount of 
transitional assistance remaining available to them.
    In addition, section 1860D-31(g)(5) requires the availability of 
transitional assistance to long-term care residents and those using I/
T/U pharmacies, but it does not discuss negotiated prices. Therefore, 
under Sec. Sec.  403.816(c) and 403.816 (e) of our regulations, we 
provide that special endorsed sponsors will not be required to provide 
card enrollees access to negotiated prices at long-term care and I/T/U 
pharmacies. Special endorsed sponsors will be required to provide AI/
ANs access to negotiated prices through non-I/T/U pharmacies included 
in the endorsed sponsor's network. We believe that waiving this 
provision is consistent with the statute as provided in section 1860D-
31(g)(5) of the Act, and the resultant reduction in administrative 
burden is necessary so that applicants will be more likely to apply to 
become a special endorsed sponsor.
    As permitted under section 1860D-31(g)(5) of the Act, we will allow 
applicants seeking special endorsement to request that we waive 
application of one or more of the other requirements of the Medicare 
drug discount card program. For instance, an applicant that intends to 
solely contract with long term care pharmacies for the purpose of 
administering transitional assistance through special endorsement, but 
who is not interested in otherwise becoming an endorsed sponsor under 
the Medicare drug discount card program, might request general waivers 
of certain requirements pertaining to endorsement. In its application, 
the applicant must cite the statutory or regulatory provision(s) it 
wishes us to waive, and explain why: (1) Such waiver is necessary to 
enable the applicant to either initiate enrollment activities within 
six months of enactment of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 or accommodate the unique needs of long-
term care and/or I/T/U pharmacies; or (2) compliance with the 
requirement(s) in question would be impracticable or inefficient. 
Applicants also must provide an assessment of the impact of waiving the 
requirement(s) in question on long-term care residents and/or AI/ANs. 
If we grant the waiver, we will waive the applicable requirement(s) for 
all similarly situated applicants seeking special endorsement.

                   Table 3.--I/T/U Pharmacies by State
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska.........................................................       14
Alabama........................................................        1
Arizona........................................................       21
California.....................................................       11
Colorado.......................................................        2
Connecticut....................................................        1
Idaho..........................................................        3
Kansas.........................................................        3
Maine..........................................................        3
Michigan.......................................................        5
Minnesota......................................................        6
Mississippi....................................................        1
Montana........................................................       13
North Carolina.................................................        1
North Dakota...................................................        6
Nebraska.......................................................        3
New Mexico.....................................................       20
Nevada.........................................................        8
New York.......................................................        3
Oklahoma.......................................................       37
Oregon.........................................................        7
South Dakota...................................................       11
Texas..........................................................        1
Utah...........................................................        1
Washington.....................................................       11
Wisconsin......................................................        6
Wyoming........................................................        2
                                                                --------
    Total......................................................      201
------------------------------------------------------------------------

J. Special Rules Concerning Territories

1. Background
    As discussed above in section II.A. of this document, Medicare 
beneficiaries residing in the territories may be eligible for the 
Medicare drug discount card program, but are not eligible for 
transitional assistance under the program. However, as provided for 
under section 1860D-31(j)(2) of the Act, the territories may establish 
their own programs providing transitional assistance to low-income 
beneficiaries. This section first discusses special rules for 
applicants seeking to offer endorsed programs in the territories, 
followed by a discussion of the transitional assistance available to 
beneficiaries residing in the territories under programs established by 
the territories. As background, Table 4 provides the total number of 
Medicare beneficiaries in each of the U.S. Territories.

           Table 4.--Medicare Beneficiaries by U.S. Territory
------------------------------------------------------------------------
                                                               Total
                                                              Medicare
                        Territory                          beneficiaries
                                                            as of 07/01/
                                                                2003
------------------------------------------------------------------------
American Samoa...........................................         2,977
Commonwealth of the Northern Mariana Islands.............         1,257
Guam.....................................................         9,372
Puerto Rico..............................................       573,468
Virgin Islands...........................................       11,797
------------------------------------------------------------------------
Source: Medicare Enrollment Database

2. Discount Card
    Medicare beneficiaries residing in the U.S. territories, which 
include American Samoa, Commonwealth of the Northern Mariana Islands, 
Guam, Puerto Rico, and Virgin Islands, are eligible to enroll in the 
Medicare drug discount card program. Whereas Medicare beneficiaries 
residing in the 50 States or

[[Page 69887]]

the District of Columbia are ineligible for the program if they have 
outpatient prescription drug coverage under Medicaid or a section 1115 
waiver demonstration, section 1860D-31(j)(1) of the Act grants the 
Secretary the discretion to find Medicare beneficiaries residing in the 
territories eligible for the program even if they receive outpatient 
prescription drug coverage under Medicaid or a section 1115 waiver 
demonstration. As provided in Sec.  403.817(d) of our regulations, 
beneficiaries residing in the territories who have outpatient 
prescription drug coverage under these sources will be eligible for the 
program.
    To ensure that eligible individuals residing in the territories 
have access to endorsed programs offering negotiated prices, we will 
select for special endorsement at least one applicant to provide 
discounts for covered drugs in the territories. In accordance with 
Sec.  403.817(a) of our regulations, these applicants must agree to 
offer endorsed programs to residents of all the territories. Section 
1860D-31(j)(1) of the Act allows us to waive the requirement for two 
endorsed sponsors per State in section 1860D-31(h)(2)(D) of the Act, if 
necessary to secure access to negotiated prices for beneficiaries in 
the territories. Therefore, we will elect to limit the number of 
special endorsed sponsors operating in each of the territories to at 
least one in order to assure that a sufficient number of beneficiaries 
will enroll in special endorsed sponsors' endorsed programs in the 
territories, thereby justifying from a business perspective their 
offering such programs. We believe these volume considerations will be 
a critical factor in whether an applicant seeks special endorsement in 
the territories.
    We are concerned that in the absence of a competitive process for 
special endorsement in the territories, an insufficient number of 
applicants will seek to offer endorsed programs in the territories and 
we therefore will be unable to ensure that residents of the territories 
have access to negotiated prices.
    Selection criteria for special endorsement in the territories will 
include understanding, as well as prior experience with, the unique 
challenges of providing a drug discount card in the territories, the 
extensiveness of an applicant's pharmacy network in the territories, 
the feasibility of the applicant's plan for offering an endorsed 
program in the territories, and timeliness of implementation of its 
plan. We will further discuss the selection criteria and the 
competitive process for special endorsement in the solicitation.
    As permitted by section 1860D-31(j)(1) of the Act, we will waive 
certain sponsor requirements of the Medicare drug discount card program 
in the territories if doing so is necessary to: (1) Ensure that a 
sufficient number of applicants seek special endorsement in the 
territories; (2) enable the Medicare drug discount card program to 
start within six months of enactment of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003; and (3) accommodate the 
unique challenges faced by special endorsed sponsors in the 
territories.
    As provided in Sec.  403.817(c)(2) of our regulations, special 
endorsed endorsed sponsors in the territories will not be required to 
meet the pharmacy network access standard set forth in Sec.  403.806(f) 
of our regulations and as explained in section II.C.3 of this document. 
In addition, special endorsed sponsors are not required to maintain a 
service area covering an entire territory if it proves impracticable to 
do so, as otherwise required in Sec.  403.806(f)(2) of our regulations. 
The pharmacy access standard provides that the pharmacies included in 
an endorsed sponsor's network may not dispense drugs solely by mail-
order and must be located within certain distances of most 
beneficiaries. We waive the distance requirement because in some 
territories there are few retail pharmacies, and relative to pharmacies 
in the 50 States and the District of Columbia, these pharmacies 
generally are less inclined to participate in pharmacy networks 
established by pharmacy benefit managers, discount drug cards, and 
similar programs. Special endorsed sponsors therefore may be unable to 
secure the participation of a sufficient number of pharmacies in the 
territories to meet our pharmacy access standard. For this reason, if 
after a good faith effort a special endorsed sponsor in the territories 
is unable to secure the participation of a retail pharmacy in a 
particular locale, they may offer a mail-order only pharmacy in that 
locale. Because it may be impracticable to provide drugs by mail to 
residents in more remote areas within a territory, we do not require 
special endorsed sponsors to provide residents of these particular 
areas with access to mail-order pharmacies, but the special endorsed 
sponsor must demonstrate that a good faith effort has been made to 
provide residents of these remote areas with discounts through retail 
pharmacies, and must explain the reason why mail order is 
impracticable. Provided endorsed sponsors make a good faith effort to 
secure the participation in their networks of retail and mail-order 
pharmacies throughout a territory, we will deem the service area 
requirement set forth in Sec.  403.806(f)(2) and the network access 
requirement set forth in Sec.  403.806(f)(3) of our regulations to be 
met, as provided in Sec.  403.817(c)(2) of our regulations.
    In recognition of the special challenges involved in delivering 
mail-order drugs to residents of the territories, special endorsed 
sponsors will need to educate their card enrollees in the territories 
about any considerations they need to take into account to assure that 
they receive safe and timely access to their prescription drugs, such 
as the need to order their drugs in advance of their need for such 
drugs. We recognize that in some cases special packaging needs (for 
example, refrigeration) for particular covered discount card drugs may 
make it impracticable to ship specific medications to the territories. 
Card enrollees should be made aware of these limitations.
    As provided in Sec.  403.817(c)(1)(ii) of our regulations, special 
endorsed sponsors in the territories will not be required to comply 
with Sec.  403.806(d)(8) of our regulations requiring that retail 
pharmacies inform card enrollees of any differential between the price 
of the drug to the card enrollee under their endorsed program and the 
price to the card enrollee of the lowest priced generic covered 
discount card drug that is therapeutically equivalent and bioequivalent 
under the program. In recognition that few discount drug cards 
currently have contractual relationships with retail pharmacies in the 
territories, we are waiving this requirement to reduce the 
administrative complexity of special endorsed sponsors' contracts with 
participating retail pharmacies in the territories, which we believe we 
will enhance applicants' willingness to apply for special endorsement 
in the territories. However, mail-order drugs sent to residents in the 
territories should include this price differential information in the 
same manner such information is provided to card enrollees in the 50 
States and District of Columbia who obtain mail-order drugs under the 
program.
    Because the arrangements between special sponsors and pharmacies in 
the territories represent new types of arrangements for most special 
endorsed sponsors, as with special endorsed sponsors agreeing to 
include long-term care and for I/T/U pharmacies in their networks, we 
only require that special endorsed sponsors in the territories make a 
good faith effort to finalize these arrangements as soon as 
practicable; we

[[Page 69888]]

will not require that these arrangements be finalized and approved by 
us within 6 months after the date of enactment of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003.
    As permitted under section 1860D-31(j)(1) of the Act, we will allow 
applicants seeking special endorsement in the territories to request 
that we waive application of one or more of the other requirements of 
the Medicare drug discount card program. In its application the 
applicant must cite the statutory or regulatory provision(s) it wishes 
us to waive, and explain why: (1) Such waiver is necessary to enable 
the applicant to either initiate enrollment activities in the 
territories within six months of enactment of the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 or accommodate the 
unique needs of pharmacies in the territories; or (2) compliance with 
the requirement(s) in question would be impracticable or inefficient. 
Applicants also must provide an assessment of the impact of waiving the 
requirement(s) in question on beneficiaries residing in the 
territories. If we grant the waiver, we will waive the applicable 
requirement(s) for all similarly situated applicants seeking special 
endorsement.
    We will provide technical assistance to applicants seeking to offer 
endorsed programs in the territories, including holding a special 
break-out session at the pre-application conference. In addition, as 
additional incentives to encourage applicants to offer endorsed 
programs in the territories, we will, to the extent possible, provide 
expedited marketing review of special endorsed sponsors' information 
and outreach materials, and provide special recognition for these 
sponsors on the Medicare drug discount card Web site.
    Applicants should note that special endorsed sponsors in the 
territories will not be asked to administer transitional assistance on 
behalf of CMS; rather, transitional assistance provided to residents in 
the territories will be a separate program independently operated by 
each territory, as described below.
3. Transitional Assistance
    Section 1860D-31(j)(2)(A) of the Act provides that a territory may 
provide transitional assistance to some or all individuals residing in 
the territory who are entitled to benefits under part A or enrolled 
under part B with incomes no more than 135 percent of the poverty line 
for their family size, regardless of whether the individual receives an 
outpatient drug benefit under Medicaid or any other coverage sources 
(such as FEHBP, Tricare, or employer-sponsored health insurance). In 
accordance with section 1860D-31(j)(2)(B) of the Act, a territory 
wishing to provide transitional assistance to eligible beneficiaries 
must submit to CMS for our approval a plan describing its proposed 
transitional assistance program, including:
    [sbull] The territory's criteria and process for determining 
beneficiaries' eligibility for transitional assistance (including its 
definition of income and family size) for individuals who reside in the 
territories, who are entitled to benefits under Medicare Part A or 
enrolled under Medicare Part B, and who have income at or below 135 
percent of the poverty line for the contiguous United States; and
    [sbull] The process for ensuring that allotment provided to the 
territory under section 1860D-31(j)(2) of the Act will be used only to 
provided covered discount card drugs to those individuals determined 
eligible for transitional assistance; and
    [sbull] The territory's assurance that it will operate its 
transitional assistance plan as approved.
    Section 1860D-31(j)(2)(C) of the Act provides that territories with 
approved transitional assistance plans will receive in the aggregate 
$35 million for the duration of the Medicare drug discount card 
program, which will be allocated among such territories in the manner 
described below. Territories must submit their plans to CMS within 90 
days of the publication of this rule so as to allow us adequate time to 
review and approve their plans and determine each territory's allocated 
share of the $35 million.
    CMS may request reports or information to substantiate that the 
territories have administered the program consistent with the 
territory's approved transitional assistance plan.
    Section 1860D-31(j)(2)(D) of the Act provides that the Secretary 
shall calculate the portion of the $35 million allocated to a territory 
with an approved plan for transitional assistance by multiplying 
$35,000,000 by the ratio of--
    (1) The number of individuals who are entitled to benefits under 
part A or enrolled under part B and who reside in the territory (as 
determined by the Secretary as of July 1, 2003), to
    (2) The sum of such number for all territories with an approved 
plan under this program.
    Section 1860D-31(j)(2)(D) provides that amounts made available to a 
territory for transitional assistance which are not used to provide 
transitional assistance will be added to the amount available to that 
territory for purposes of carrying out the Medicare Part D drug 
benefit.

K. Special Rules and Part B Premium and Appropriations

    1860D-31(k)(2)(B) states that amounts payable from the Transitional 
Assistance Account shall not be taken into account in computing the 
actuarial rates or premium amounts under section 1839 of the Act. 
Similarly, section 105(a) amends section 1839(g) of the Act by ensuring 
that any estimations used to calculate the Part B monthly premium rate 
shall exclude estimates attributable to the Medicare prescription drug 
discount card and transitional assistance program under section 1860D-
31 of the Act. We have accordingly made changes to the regulations in 
42 CFR 408.20 to reflect these statutory provisions.

IV. Regulatory Impact Analysis and Regulatory Flexibility Act Analysis

A. Overall Impact

    We have examined the impacts of this rule under 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 annually). While the ultimate 
impact of this program will depend upon the final designs of endorsed 
discount card sponsors' programs, our estimate is that this rule is 
economically significant as measured by the $100 million standard. The 
savings to beneficiaries from discount card activities, including 
negotiated prices on prescription drugs and education about generic 
substitution by endorsed sponsors, will represent an economic impact 
ranging from $1.4 billion to $1.8 billion in the last nine months of 
2004 (assuming for the purposes of this impact analysis implementation 
beginning second quarter 2004), $2.0 billion to $2.7 billion in 2005, 
and $0.4 billion to $0.6 billion in the first four and one-half months 
of 2006. This impact would not affect the

[[Page 69889]]

Federal budget, but would be a transfer of money due to a decrease in 
the revenues of entities providing the supply of drugs to consumers. 
This represents at most 1.18 percent of projected total retail 
prescription drug spending during the respective periods of 2004 
($153.5 billion for the last nine months of the year), 2005 ($228.6 
billion), and 2006 ($95.3 billion for the first four and one-half 
months of the year), based on the most recent published National Health 
Expenditures projections (released in February 2003).
    In addition to savings from discount card activities, a subset of 
discount card enrollees--those who qualify for transitional 
assistance--are projected to save an additional $2.4 billion in 2004, 
$2.6 billion in 2005, and up to $0.1 billion in 2006 due to the annual 
$600 transitional assistance. Beneficiary savings from transitional 
assistance are funded through the Federal budget, so these savings are 
a transfer from budget revenue to beneficiaries.
    This rule also generates costs and benefits for drug sponsors in 
the new market created by the Medicare-endorsed drug discount card 
programs. Net benefits in this new market are generally projected to be 
positive but small relative to the savings generated for beneficiaries. 
The net present value benefits range from near zero to approximately 
$10 million.
    This rule is a major rule as defined in Title 5, United States 
Code, section 804(2). Accordingly, we have prepared an impact analysis 
for this rule.

B. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a rule that may result in 
expenditure in any one year by State, local, or tribal governments, in 
the aggregate, or by the private sector, of $110 million. The UMRA 
stipulates that this is a requirement before an agency promulgates a 
notice of proposed rulemaking or promulgates a final rule for which a 
notice of proposed rulemaking had previously been issued. Since 
Congress specifically authorized us to dispense with a notice of 
proposed rulemaking, we believe that the UMRA requirements do not apply 
to this rule. Regardless, we do not anticipate that this rule would 
impose costs approaching the $110 million UMRA threshold.
    While this rule does include a data reporting requirement for 
States, the State costs associated with this activity are expected to 
be relatively small. As discussed in this document, States will be 
required to provide data to CMS that will allow us to identify those 
beneficiaries who would be ineligible for the Medicare prescription 
drug discount card program due to the receipt of drug coverage through 
Medicaid or a section 1115 waiver demonstration. Aggregate State costs 
associated with this data reporting, including expenses related to data 
transmissions, quality assurance, and any needed systems changes, are 
expected to be substantially less than the $110 million UMRA threshold. 
Furthermore, as discussed in this document, States will receive Federal 
reimbursement for a share of these expenditures at the Federal matching 
rate for administrative expenses under 1903(a)(7).
    In terms of territories and tribal governments, this rule imposes 
no mandatory requirements for these entities, while offering them an 
additional source of funding that they can elect to take advantage of. 
As discussed in this document, funds are available for a territory to 
provide prescription drug assistance to eligible low-income 
beneficiaries in the territory, if they elect to do so and submit a 
plan to CMS about how they intend to do it. For tribal governments 
(specifically pharmacies operated by Indian Tribes and Tribal 
Organizations, and Urban Indian Organizations (as defined in section 4 
of the Indian Health Care Improvement Act)), the rule makes special 
provisions for these pharmacies to have the opportunity to participate 
in the networks of at least two endorsed programs in each of the 50 
States and the District of Columbia where such pharmacies operate.
    In addition, we have determined that this rule would not be an 
unfunded mandate related to the private sector as defined by the UMRA. 
In particular, section 101 of the UMRA only requires estimation of 
direct costs to comply with the definition of a private sector unfunded 
mandate. While the rule will have an impact on the private sector, we 
do not expect that this will require direct costs or outlays 
approaching UMRA's $110 million threshold.

C. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a rule that imposes substantial 
direct requirement costs on State and local governments, preempts State 
law, or otherwise has Federalism implications. As noted earlier in this 
document, a State may choose, on a voluntary basis, to partner with 
private drug card sponsors to coordinate its State Pharmacy Assistance 
Program with the Medicare prescription drug discount card program. 
States also have the option of paying for some or all of the enrollment 
fee for some or all non-transitional assistance eligible beneficiaries 
and the option of paying for some or all of the beneficiary coinsurance 
liability for some or all transitional assistance enrollees in a State. 
In addition, some States may decide to educate beneficiaries, 
particularly dual eligibles who would qualify for transitional 
assistance (that is, QMBs, SLMBs, & QIs without Medicaid drug coverage) 
and beneficiaries in State Pharmacy Assistance Programs, about benefits 
available through the Medicare prescription drug discount card program. 
All of these are voluntary opportunities for States, and have no 
Federalism implications. In addition, States with State Pharmacy 
Assistance Programs may realize savings related to the Medicare 
prescription drug discount card program to the extent that they provide 
for coordination of their program with the new Medicare program.
    We have also determined that this rule would not impose substantial 
direct requirement costs on State and local governments. As discussed 
above, States would likely incur some costs related to data submission 
activities, but these costs are expected to be small and substantially 
less than the $110 million UMRA threshold. Furthermore, CMS has taken a 
number of steps to minimize the costs related to this program for 
States. CMS has consulted with State Medicaid Directors on the data 
submissions process and what mechanisms would be least burdensome and 
costly to States. In addition, CMS has already held and plans to hold 
additional information sessions for State officials to help them 
anticipate and prepare for implementation of this program. Further, we 
are taking measures to ensure that States are provided with training 
materials and beneficiary resources so that States can have ready 
access to materials that they can use if they receive questions from 
beneficiaries about the program.

D. Limitations of Our Analyses

    The following analyses present projected effects of this rule on 
Medicare beneficiaries, the Medicare program, total national retail 
prescription drug spending, small entities, and endorsed sponsors. This 
section discusses limitations of the analyses conducted in especially 
sections E and I of this regulatory impact analysis.

[[Page 69890]]

    Because this will be the first year of the Medicare prescription 
drug discount card program, we do not have the benefit of the 
experience of prior years. Therefore, we present a range rather than a 
single estimate for the amount of beneficiary savings resulting from 
negotiated prices obtained by endorsed sponsors. Another limitation of 
this particular analysis is that our most recent available data on 
beneficiary use of prescription drugs come from self-reported survey 
data from the 2000 Medicare Current Beneficiary Survey (MCBS). The MCBS 
is a continuous multipurpose survey of a representative sample of the 
Medicare population. We have adjusted the data for projected growth in 
drug spending and for under reporting.
    Another limitation of our analysis is that we make no adjustments 
to the savings estimates to take into account that some beneficiaries 
who enroll in this program already receive sizable discounts on drugs, 
and thus the savings potential from this program may be overstated for 
these individuals. For example, estimated savings from discount card 
activities may be overstated for beneficiaries enrolled in Medicare 
managed care organizations and beneficiaries participating in 
manufacturer discount card programs, since both are likely to already 
receive significant discounts.
    As we discuss later in this document, other limitations to our 
analysis include that we have made no adjustments to take into account: 
possible effects of the program on beneficiary drug utilization and 
possible changes in the type of outlets through which beneficiaries 
purchase prescription drugs. We did not believe that we had adequate 
data to inform assumptions concerning these issues.
    Additional limitations of the analysis relate to our estimate of 
the number of beneficiaries who enroll in the Medicare prescription 
drug discount card program. First, our estimate of the number of 
beneficiaries with standardized Medigap drug coverage who will enroll 
in the Medicare prescription drug discount card program may be somewhat 
imprecise. As discussed in more detail later in the analysis, we 
believe some beneficiaries who have drug coverage through standardized 
Medigap policies are likely to enroll in the Medicare prescription drug 
discount card program. The MCBS provides data on the number of 
beneficiaries with ``individually purchased'' insurance policies, which 
includes but is not limited to the standardized Medigap policies. Using 
data on beneficiaries who have drug coverage through individually 
purchased insurance policies, we developed a rough estimate of the 
number of beneficiaries with Medigap standardized drug coverage by 
excluding from this group individuals who appeared unlikely to have 
standardized Medigap drug coverage. In particular, we excluded 
individuals whose out-of-pocket drug spending was less than $250 and 
whose individually purchased insurance plan covered some drug costs, 
since this is inconsistent with the benefit structure of the 
standardized Medigap plans. However, some beneficiaries with 
individually purchased policies that are not the standardized Medigap 
drug coverage policies are still likely to be included in our 
estimates. In addition, some beneficiaries have multiple sources of 
coverage, for example, some beneficiaries are enrolled in 
Medicare+Choice (M+C) but also report having individually purchased 
supplemental insurance. Therefore, we also excluded from the estimate 
of the number of beneficiaries with Medigap drug coverage anyone who 
was also enrolled in M+C during at least one month of the year since we 
believe that the drug coverage was more likely to come from a M+C plan 
than from a Medigap plan.
    Second, our enrollment estimates do not factor in the possibility 
that some Medicare managed care plans that are exclusive card sponsors 
may decide to group enroll all of their members into an endorsed 
discount card program that they are sponsoring. If this occurs, overall 
enrollment in the Medicare prescription drug discount card program may 
be somewhat higher than we have estimated. However, given that we are 
uncertain about the frequency with which this might occur, we have 
taken a conservative approach and used the same assumptions concerning 
enrollment rates for beneficiaries in M+C and Medicare Fee-For-Service. 
Savings estimates from discount card activities are unlikely to be 
affected by group enrollment since beneficiaries who might be 
recipients of group enrollment into an endorsed discount card program 
by a Medicare managed care organization are likely to have already been 
obtaining discounts on prescription drugs through their plan, so this 
would not represent new savings for these beneficiaries. However, it is 
possible that estimated savings from the $600 transitional assistance 
may be slightly understated due to this issue.
    Third, while we are able to exclude most beneficiaries who have 
drug coverage through Medicaid from our enrollment estimates (since 
these beneficiaries are ineligible for the drug card), difficulties 
with identifying those beneficiaries who have drug coverage through 
Medicaid via 1115 Pharmacy Plus Waivers means that some of these 
beneficiaries may not have been excluded from our enrollment estimates. 
Similarly, difficulties with precisely identifying in the data the 
source of a beneficiary's drug coverage, particularly TRICARE and 
employer-sponsored individually purchased Medigap coverage, means that 
some beneficiaries not eligible for transitional assistance (that is, 
those with TRICARE drug coverage) may not have been fully excluded from 
transitional assistance enrollment estimates, while some beneficiaries 
eligible for transitional assistance (that is, those with employer-
sponsored individually purchased Medigap drug coverage) may not have 
been fully incorporated into the transitional assistance enrollment 
estimates.
    Finally, as discussed later in this document, we did not make any 
differential assumptions concerning program uptake for beneficiaries 
currently enrolled in manufacturer discount card programs--that is, we 
assumed beneficiaries currently participating in manufacturer card 
programs will enroll in the Medicare prescription drug discount card 
program at the same rate as other beneficiaries. It is difficult to 
predict how both manufacturer card programs and beneficiaries currently 
enrolled in those programs will behave in terms of participation in the 
Medicare prescription drug discount card program. Consequently, it is 
possible that our enrollment estimates for this group of beneficiaries 
could be overstated or understated. Furthermore, as noted previously in 
this document, for beneficiaries currently enrolled in manufacturer 
card programs there are not likely to be significant additional savings 
beyond what they currently obtain; thus we may be overstating savings 
on their behalf to some extent. However, it should be noted that the 
manufacturer card programs generally cover a limited set of drugs, and 
the Medicare prescription drug discount card program may offer these 
beneficiaries discounts on a wider set of drugs.

E. Anticipated Effects on Medicare Beneficiaries

1. Enrollment Assumptions
    Although the Medicare prescription drug discount card program will 
be available to all Medicare beneficiaries except for those with drug 
coverage

[[Page 69891]]

through Medicaid, we anticipate that the discount card will have the 
highest uptake among those eligible for transitional assistance. As 
discussed in this document, beneficiaries are eligible for transitional 
assistance if their income does not exceed 135 percent of the official 
poverty line and they do not have drug coverage through Medicaid, 
employer sponsored insurance (except for employer purchased coverage 
under a Part C plan or employer purchased individual Medigap policies), 
the U.S. Office of Personnel Management, or TRICARE. Based on data on 
drug coverage and income from the MCBS and the Current Population 
Survey, we estimates that there will be about 7.2 million beneficiaries 
eligible for transitional assistance in 2004. Of the 7.2 million, we 
assume that 65 percent, or 4.7 million, would enroll in an endorsed 
discount card program in 2004. This uptake assumption was developed 
considering a variety of factors including: uptake rates in similar 
means-tested programs, the nature and duration of this program, and the 
eligibility and enrollment processes involved in this program.
    Among those beneficiaries not eligible for transitional assistance, 
we anticipate that those most likely to benefit from the program will 
be those without drug coverage. There are projected to be about 6.1 
million beneficiaries with incomes greater than 135 percent of the 
official poverty line and without drug coverage in 2004. We anticipate 
that the rate at which these beneficiaries enroll in the Medicare 
prescription drug discount card program will vary by their level of 
drug spending. In addition, we expect that the maximum $30 annual 
enrollment fee and the interim nature of this program (with 
implementation of a Medicare drug benefit scheduled to occur in less 
than 2 years) will factor into these beneficiaries' enrollment 
decision.
    In Table 5, we show the specific assumptions regarding the 
percentage of these beneficiaries enrolling in an endorsed discount 
card program. We assume that beneficiaries without drug coverage who 
have relatively higher drug spending will be more likely to enroll than 
those with generally very low or no spending. For example, we assume a 
5 percent enrollment rate among beneficiaries with spending not 
exceeding $200--the point at which the maximum $30 annual enrollment 
fee could be recouped assuming 15 percent savings. For beneficiaries 
with the highest levels of drug spending--more than $600--we assume a 
50 percent enrollment rate. Based on the assumptions in Table 5 and the 
distribution of drug spending among these beneficiaries without drug 
coverage, we estimate that about 35 percent of them will enroll in the 
Medicare prescription drug discount card program.
    Another group of beneficiaries likely to benefit from the Medicare 
prescription drug discount card program will be those with Medigap drug 
coverage. The standardized Medigap plans that offer prescription drug 
coverage (standardized plans H, I, and J) are designed with a cap on 
the amount of drug spending covered by the plan. The drug benefit in 
standardized plans has a $250 deductible, 50 percent coinsurance, and a 
benefit cap of $1,250 (plans H and I) or $3,000 (plan J). Because many 
Medigap plans do not actively negotiate discounts for enrollees, we 
believe that Medicare beneficiaries with standardized Medigap drug 
coverage will benefit from a discount card program, particularly for 
spending above the benefit cap.
    We project that there will be about 2.1 million beneficiaries who 
have incomes greater than 135 percent of the official poverty line and 
have drug coverage from a Medigap policy in 2004. Table 6 shows the 
assumptions regarding the percentage of these beneficiaries enrolling 
in an endorsed discount card program. Similar to the enrollment 
assumptions for beneficiaries without drug coverage, we assume that the 
enrollment rate for these beneficiaries with Medigap drug coverage 
varies by the level of drug spending. For beneficiaries with the 
highest levels of drug spending, we assumed a slightly higher uptake 
rate (60 percent) among those with Medigap drug coverage than among 
those without drug coverage (50 percent). We believe that beneficiaries 
with Medigap coverage for prescription drugs will be more risk averse 
than the average beneficiary and will therefore have a somewhat higher 
propensity to enroll.
    We assume that beneficiaries with Medigap drug coverage would use 
the drug card for spending exceeding the Medigap benefit cap. Thus, the 
table shows enrollment rate assumptions by the level of drug spending 
involved in the Medicare prescription drug discount card program (not 
by the level of total drug spending). Based on the assumptions in Table 
6 and the distribution of drug spending for these beneficiaries, we 
estimate that about 24 percent of these beneficiaries will enroll in 
the Medicare prescription drug discount card program. The 24 percent 
average enrollment rate stems from the fact that most beneficiaries 
with Medigap drug coverage have low levels of spending above the 
Medigap benefit cap, and thus we assume a low uptake rate for these 
individuals for this time limited program with an annual enrollment fee 
of up to $30.
    These estimates of Medicare beneficiary enrollment in the Medicare 
prescription drug discount card program are one of the elements in our 
estimates of the impact of the program.

  Table 5--Estimated Enrollment Rate of Medicare Beneficiaries With No
 Drug Coverage and With Income Greater Than 135 Percent of the Official
                        Poverty Line 2004 to 2005
------------------------------------------------------------------------
                                                               Percent
                    Annual drug spending                      enrolling
------------------------------------------------------------------------
0-200.00...................................................            5
200.01-300.00..............................................           10
300.01-400.00..............................................           20
400.01-500.00..............................................           30
500.01-600.00..............................................           40
600.01+....................................................           50
------------------------------------------------------------------------


    Table 6--Estimated Enrollment Rate of Medicare Beneficiaries With
  Medigap Drug Coverage and With Income Greater Than 135 Percent of the
                   Official Poverty Line 2004 to 2005
------------------------------------------------------------------------
 Annual drug spending subject to the Medicare drug discount    Percent
                            card                              enrolling
------------------------------------------------------------------------
$0-200.00..................................................            5
200.01-300.00..............................................           10
300.01-400.00..............................................           20
400.01-500.00..............................................           30
500.01-600.00..............................................           40
600.01-700.00..............................................           50
700.01+....................................................           60
------------------------------------------------------------------------

    As discussed previously in this document, we assume the same uptake 
rate in the Medicare prescription drug discount card program for 
beneficiaries currently participating in manufacturer discount card 
programs as for other beneficiaries. During the first half of 2002, 
several drug manufacturers established drug card programs that offer 
low-income Medicare beneficiaries without drug coverage significant 
discounts or low copayments on drugs they manufacture. Eli Lilly, 
Novartis, and Pfizer have each established co-pay cards. Eight drug 
manufacturers (Abbott Laboratories, AstraZeneca, Aventis, Bristol-Myers 
Squibb Company, GlaxoSmithKline, Janssen Pharmaceutical Products, L.P., 
Novartis, and Ortho-McNeil Pharmaceutical, Inc.) have established 
Together Rx, a discount card. In addition,

[[Page 69892]]

GlaxoSmithKline--one of the participants in Together Rx--also operates 
a separate discount card program. The income limits of the manufacturer 
cards vary, ranging from $18,000 to $30,000 for individuals and from 
$24,000 to $40,000 for couples. In terms of enrollment, Together Rx is 
the largest of these programs, reporting more than 1 million enrollees 
(as of September 2003). Enrollment for the other manufacturer card 
programs is reported to be more than 355,000 in the Pfizer card (as of 
May 2003), about 100,000 in the Eli Lilly card (as of October 2002), 
about 100,000 in the GlaxoSmithKline card (as of November 2002), and 
about 15,000 in the Novartis card (as of April 2002).
    Many beneficiaries who might benefit from the Medicare prescription 
drug discount card program may currently be enrolled in or eligible for 
manufacturer card programs. We use the same uptake assumptions for 
these beneficiaries as for the general beneficiary population, since it 
is difficult to predict how both manufacturer card programs and 
beneficiaries currently enrolled in those programs will behave in terms 
of participation in the Medicare prescription drug discount card 
program. For example, it is unknown whether the manufacturer card 
programs will seek Medicare endorsement. If these programs do seek and 
obtain Medicare endorsement, their enrollees will be included in the 
enrollment count for the Medicare prescription drug discount card 
program. On the other hand, if manufacturer card programs do not seek 
Medicare endorsement, some beneficiaries may opt to enroll in both the 
manufacturer cards and a Medicare endorsed discount card program. For 
example, we would expect that many low-income beneficiaries currently 
enrolled in manufacturer card programs would likely also enroll in an 
endorsed discount card program to take advantage of the $600 
transitional assistance. In addition, since the manufacturer cards 
provide savings only on specific drugs and endorsed programs have a low 
annual enrollment fee, we believe that some beneficiaries, depending on 
the mix of prescription drugs they use and their income levels, may 
find it beneficial to enroll in both types of programs as well.
    While we expect there will be a phase-in of beneficiary enrollment 
in the Medicare prescription drug discount card program, we believe 
that because of the recognition and acceptance of the Medicare name, 
the educational efforts undertaken, and the proration policy for the 
$600 transitional assistance discussed in this document, beneficiaries 
wishing to enroll will do so over a relatively short period of time. 
For the purposes of this impact analysis, we assume that the program is 
implemented beginning second quarter (April) 2004 and that all 
beneficiaries expected to enroll in 2004 do so at the program outset. 
For beneficiaries who become eligible for Medicare between April 2004 
and December 2005, we assume enrollment at the time they become 
Medicare eligible.
2. Beneficiary Savings Assumptions
    The Medicare prescription drug discount card program will generate 
two types of savings from the perspective of beneficiaries. First, 
beneficiaries enrolled in an endorsed discount card program will derive 
savings from discount card activities undertaken by endorsed sponsors, 
such as negotiating lower prices on prescription drugs and educating 
beneficiaries about generic equivalents. Second, for the subset of 
Medicare prescription drug discount card enrollees who qualify for the 
transitional assistance, they will also derive savings from the 
government funded $600 transitional assistance. For ease of reference 
in the remainder of the regulatory impact analysis, we will refer to 
these two different types of savings as ``savings from discount card 
activities'' and ``savings from transitional assistance,'' 
respectively.
a. Savings From Discount Card Activities
    An April 2000 study prepared by HHS entitled, ``A Report to the 
President: Prescription Drug Coverage, Spending, Utilization and 
Prices,'' indicated a significant price differential between 
individuals paying cash for prescriptions at a retail pharmacy versus 
individuals with insurance. This was true for both the Medicare and 
non-Medicare populations. According to the study, in 1999 the price 
paid by cash customers was nearly 15 percent more than the total price 
paid under prescription drug insurance, including the enrollee cost 
sharing. For 25 percent of the most commonly prescribed drugs, this 
price difference was higher--over 20 percent. Thus, in today's market, 
individual Medicare beneficiaries without drug coverage and the related 
market purchasing leverage, not only face having to pay the full cost 
for medications from their own pockets, but ironically are also charged 
the highest prices. Furthermore, the HHS study did not include the 
effect of rebates on total prices paid. It did, however, note industry 
experts as indicating that insurers and employers typically receive 70 
to 90 percent of the rebates negotiated for their enrollees. While 
currently, rebates in insured products may not necessarily reduce 
prices paid at the retail point of sale, the rebates do lower the per-
prescription cost for plan sponsors, and thus tend to lower premiums or 
program costs for insured beneficiaries.
    A March 2003 study by the Brandeis University Schneider Institute 
for Health Policy, entitled ``PBM-Administered Prescription Drug 
Discount Cards: Savings for Uninsured Seniors,'' examined 
administrative data on eight national drug discount card programs 
operated by 3 PBMs to analyze the level of discounts available through 
these types of discount programs. Looking at drugs most commonly used 
among individuals age 65 and over, the study found that on average the 
card programs provided discounts (over and above any other discounts 
uninsured individuals received at retail pharmacies) of 14 percent for 
brand drugs, 26 percent for generic drugs, and 15 percent overall.
    We anticipate that the estimated savings for Medicare beneficiaries 
from discount card activities, such as negotiated prices and education 
about generic substitution, under the Medicare drug discount card 
program will be a first step toward the savings that could be achieved 
under an insurance product. Based on information on savings from 
insurance products and information on the current discount card market, 
we assumed that beneficiaries enrolling in the endorsed programs will 
save as a result of discount card activities, on average, between 10 
and 15 percent of their total drug costs compared to their spending in 
the absence of this program. While savings of 10 to 15 percent are 
anticipated on total drug expenditures, the discounts on individual 
drugs will vary and may be substantially higher for certain products, 
particularly generics, due to their lower prices. If endorsed discount 
card programs rely heavily on the use of formularies, we expect that 
manufacturer rebates or discounts will be greater in response.
    The beneficiary savings from discount card activities will be 
attributable to the combination of lower prices paid at the point of 
sale as a result of manufacturer and pharmacy discounts, as well as the 
effects of beneficiary education leading to greater use of generic 
drugs and more effective management of prescription drug expenses by 
beneficiaries. Because pharmacy discounts are increasingly available to 
beneficiaries through existing voluntary card programs, we expect that 
manufacturer rebates or

[[Page 69893]]

discounts and savings from a better understanding of generic 
alternatives and managing prescription drug expenses will be important 
sources of savings in this program. For purposes of estimating 
beneficiary savings from discount card activities, we assume average 
overall savings of 15 percent off of drug spending. These estimates do 
not take into account the possible increased use of prescription drugs 
by Medicare beneficiaries resulting from paying reduced out-of-pocket 
amounts due to savings from discount card activities. They also do not 
take into account the likelihood that use of prescription drugs will 
increase somewhat in response to the $600 transitional assistance.
    In a December 2001 report from the General Accounting Office (GAO) 
entitled ``Prescription Drugs: Prices Available Through Discount Cards 
and From Other Sources,'' the GAO collected specific price data on 12 
brand name and 5 generic commonly used prescription drugs from one 
regional and four large discount card programs, as well as pharmacies' 
prices for the same prescription drugs in four selected geographic 
areas. In September 2003, GAO issued another report entitled 
``Prescription Drug Discount Cards: Savings Depend on Pharmacy and Type 
of Card Used.'' For 9 drugs (7 brand and 2 generic) commonly used by 
Medicare beneficiaries, the report provided the median price for each 
drug across five PBM-administered discount card programs and comparison 
data on the median retail pharmacy price for each drug in 3 geographic 
areas. In these studies, pharmacy prices were inclusive of senior 
discounts for those pharmacies that offered them. The GAO simply 
reported prices on each drug; they did not calculate average discount 
card savings. The average discounts that could be calculated from the 
GAO reported data are difficult to compare to our estimate of roughly 
10 to 15 percent savings off total beneficiary drug spending for 
several reasons.
    First, savings for the program are not estimated on a per-
prescription basis. For certain drugs for which manufacturer rebates or 
discounts are secured, we expect to see, under this program, drug-
specific discounts comparable to insured products, which are often 25 
to 30 percent, or sometimes more, per prescription.
    Second, the price data collected by the GAO do not include all 
drugs or indicate the relative market share that each drug represents; 
that is, they are not weighted. Savings estimates calculated by simply 
averaging selected drug prices do not account for the differences in 
utilization, and thus, market share.
    Finally, the Medicare prescription drug discount card program 
requires that endorsed discount card sponsors obtain manufacturer 
rebates or discounts and pass a share of the rebates or discounts 
through to beneficiaries in the form of lower prices. We believe that 
this differs from the practices of some of the discount card programs 
in the GAO studies. Two of the five programs in the 2003 GAO study 
reported that the pharmacy is not paid for any of the difference 
between the pharmacies' usual price and the price the cardholder pays.
    Because the endorsed discount card programs will be modeled after 
insured products in terms of enrollment and the use of formularies, 
combined with the competitive model and the requirement of manufacturer 
rebates or discounts, we expect that the endorsed programs will achieve 
new beneficiary savings from manufacturer rebates or discounts. The 
share of savings will vary depending on the drug, but savings from 
manufacturers are expected to be substantially greater than those 
available through existing voluntary cards. According to the HHS study, 
industry experts report that private insurance plans garner rebates on 
individual brand name drugs ranging from 2 to 35 percent. To the extent 
that endorsed discount card sponsors design formularies to mimic those 
of insured products, the ability to garner manufacturer rebates or 
discounts will increase.
    For purposes of estimating beneficiary savings, it is necessary to 
make some assumptions concerning the portion of spending that will be 
affected by discount card activities by endorsed sponsors such as 
negotiating lower prices and promoting generic substitution. The 
requirements for endorsement include provision of a discount on one 
brand name or generic drug in each therapeutic grouping commonly used 
by Medicare beneficiaries. However, we expect that endorsed programs 
probably will provide discounts on more than one drug per grouping and 
be highly likely to provide discounts on commonly used drugs.
    We have estimated the percent of total drug spending accounted for 
by the most commonly used drugs among Medicare beneficiaries based on 
analysis of the top drugs in terms of both utilization and spending 
using the 2000 MCBS data (including a special analysis related to 
disabled beneficiaries). As of 2000, the drugs most commonly used or 
having the greatest spending by Medicare beneficiaries accounted for 
approximately 72 percent of total drug spending for beneficiaries 
without drug coverage.
    The drug classification listing in Table 2, for which endorsed 
sponsors must include at least one drug, is more extensive than the 
specific top drug list that was used to estimate 72 percent. In 
addition, we assume that many endorsed sponsors will choose to include 
more than one drug for the required drug grouping. Consequently, we set 
our lower bound estimate of the share of drug card enrollees' total 
drug spending that will be affected by the program at 75 percent.
    We also assume that it is possible that endorsed programs will 
include a discount on all drugs. To calculate this upper bound, we 
assume that all beneficiary drug expenditures will be affected by the 
Medicare prescription drug discount card program. We note, however, 
that we have made no adjustment to take into account that some 
beneficiaries currently receive discounts and that some of the savings 
to beneficiaries will come from generic substitution and not just price 
reductions.
b. Savings From Transitional Assistance
    Those drug card enrollees who qualify for transitional savings will 
realize savings from the annual $600 transitional assistance. The 
aggregate amount of savings from the transitional assistance depends in 
part on the level of drug spending among these beneficiaries. Many of 
these beneficiaries will exhaust the $600 transitional assistance each 
year; however, those who do not will be allowed to roll over any 
unspent funds from one year to the next. While those beneficiaries with 
transitional assistance dollars remaining at the end of 2005 will be 
able to roll over the funds through the first four and one-half months 
of 2006 or up to the point that they enroll in Medicare Part D 
(whichever is earlier), it is likely that a small portion will not 
exhaust the transitional assistance dollars fully by the end of the 
program. Our estimates of total transitional assistance savings in each 
year take into account both this roll-over phenomenon and the 
likelihood that a small portion of beneficiaries will not exhaust the 
full transitional assistance by the end of the program. In estimating 
savings from the transitional assistance, we also factor in the 
proration policy and the tiered coinsurance.

[[Page 69894]]

3. Projection Assumptions
    Since our data on Medicare beneficiary prescription drug spending 
are based on 2000 MCBS data, it is necessary to make several 
adjustments in order to prepare 2004 estimates. In order to trend 2000 
spending to 2004 dollars, we use prescription drug spending projections 
based on per capita drug expenditure growth from the National Health 
Expenditure (NHE) Projections 2002 to 2012. These projections can be 
found on our Web site at: http://www.cms.hhs.gov/statistics/nhe/projections-2002/t11.asp.
    MCBS data on prescription drug utilization are self-reported by 
beneficiaries, and consequently are subject to under reporting. We are 
studying this under reporting in order to develop adjustment factors to 
be used for estimating purposes. For purposes of the estimates in this 
rule, the spending data from the MCBS has been increased by 20.5 
percent to adjust for under reporting that has been identified through 
our research thus far. It is also necessary to adjust for future growth 
in the Medicare beneficiary population. The adjustments are made based 
on the assumptions about growth in the overall Medicare population from 
the 2003 Medicare Trustees Reports and assumptions about growth in the 
dual eligible population (that is, the group of beneficiaries not 
eligible for the program).
    These assumptions are detailed in Table 7, which shows the 
projected increase in Medicare enrollment and per capita drug 
expenditures from 2000 to 2004, and annually from 2004 to 2006, using 
2000 as the base year for the projections. As discussed in more detail 
in later sections of the impact analysis, the table also shows 
projections for total national aggregate retail drug expenditures, drug 
expenditures involved in the program, beneficiary savings from discount 
card activities (both upper bound and lower bound estimates), the 
impact of beneficiary savings from discount card activities as a 
percent of total national aggregate retail drug sales, and estimated 
total beneficiary savings resulting from the transitional assistance.
    To estimate the impact of the program on national retail 
prescription drug sales, we use the Office of the Actuary's National 
Health Expenditures projections of retail prescription drug sales, 
which are part of the National Health Accounts. To prepare the 
estimates, OACT obtains data on prescription drug sales from a variety 
of sources, including the National Prescription Audit conducted by IMS 
Health. OACT has data on retail prescription drug spending through 
2001, and prepares 10-year projections. OACT adjusts the data from the 
National Prescription Audit to take into account a number of factors. 
The major factors involved in these adjustments include: benchmarking 
to the Economic Census, subtracting prescription drug sales to nursing 
homes (which are accounted for in nursing home spending), and adjusting 
the data to subtract an estimate of manufacturer rebates provided to 
health insurers related to insurance coverage for prescription drugs. 
Thus, in some respects, the National Health Accounts estimate of 
prescription drug spending reflects a sales level that is somewhat 
lower than the revenue actually received by pharmacies, drug stores, 
and other retail business outlets selling prescription drugs.
    Consequently, when National Health Accounts figures are used as the 
denominator in calculating the percentage impact on revenues (as we do 
later in this impact analysis), the result is somewhat larger than is 
actually the case. Nevertheless, we believe that these projections for 
prescription drug spending are the most appropriate to use for analysis 
of the impact of this program on prescription drug revenues. These 
estimates are specific to the prescription drug market, and the 
National Health Accounts are recognized as a public source of data on 
health care spending.

                                           Table 7.--Estimated Impact
----------------------------------------------------------------------------------------------------------------
                                                       2000         2004  (Apr-     2005  (Jan-     2006  (Jan-
                                                    (Baseline)         Dec)            May)            Dec)
----------------------------------------------------------------------------------------------------------------
Increase in Medicare Enrollment.................  ..............           4.6%*            1.4%            1.3%
Increase in Per Capita Drug Expenditures........  ..............          62.7%*           10.8%           10.2%
Total National Aggregate Retail Drug                      $121.5          $153.5          $228.6           $95.3
 Expenditures ($ billions)......................
Discount Card Enrollees Who Qualify for
 Transitional Assistance
                                                 ---------------------------------------------------------------
    Projected Number of Enrollees (millions)....  ..............             4.7             4.7             4.7
    Projected Prescription Drug Spending Under               6.2             8.0            11.9             2.5
     the Drug Discount Card Programs (billions).
    Lower & Upper Bound Beneficiary Savings from  ..............         0.9-1.2         1.3-1.8         0.3-0.4
     Discount Card Activities (billions)........
    Estimated Beneficiary Savings From            ..............             2.4             2.6             0.1
     Transitional Assistance (billions).........
Discount Card Enrollees Who Do Not Qualify for
 Transitional Assistance
                                                 ---------------------------------------------------------------
    Projected Number of Enrollees (millions)....  ..............             2.6             2.7             2.7
    Projected Prescription Drug Spending Under               3.2             4.1             6.1             1.3
     the Drug Discount Card Programs (billions).
    Lower & Upper Bound Beneficiary Savings from  ..............         0.5-0.6         0.7-0.9         0.1-0.2
     Discount Card Activities (billions)**......
Total--All Discount Card Enrollees
                                                 ---------------------------------------------------------------
    Projected Number of Enrollees (millions)....  ..............             7.3             7.4             7.4
    Projected Prescription Drug Spending Under               9.4            12.0            18.0             3.7
     the Drug Discount Card Programs (billions).
    Lower & Upper Bound Estimated Beneficiary     ..............         1.4-1.8         2.0-2.7         0.4-0.6
     Savings from Discount Card Activities (not
     including savings from $600 transitional
     assistance) (billions)**...................

[[Page 69895]]

 
    Lower & Upper Bound Impact of Beneficiary     ..............     0.88%-1.18%     0.89%-1.18%    0.44%-0.59%
     Savings from Discount Card Activities as a
     Percent of National Aggregate Retail Drug
     Expenditures...............................
----------------------------------------------------------------------------------------------------------------
* For 2004, the increase in Medicare enrollment and per capita drug expenditures shown in the table reflect the
  percent change between 2000 and 2004.
** These savings estimates do not take into account the costs associated with beneficiary enrollment fees.
  Beneficiary savings may be up to $0.08 billion lower in 2004 and 2005 due to the maximum annual enrollment
  fees of $30 that card sponsors may charge enrollees in those years who do not qualify for transitional
  assistance.
Note: Numbers may not sum due to rounding.

4. Impact Estimates
    We estimate that 7.3 million Medicare beneficiaries will be 
enrolled in endorsed discount card programs in the last nine months of 
2004 and 7.4 million in 2005. In addition, depending on when 
beneficiaries choose to enroll in Medicare Part D, it is possible that 
up to 7.4 million beneficiaries may be enrolled in endorsed discount 
card programs during at least some portion of the first four and one-
half months of 2006. For 2006, we assume that enrollees remain in the 
Medicare prescription drug discount card program on average for two and 
one-quarter months in 2006. Of the 7.3 million beneficiaries estimated 
to enroll in the Medicare prescription drug discount card program, an 
estimated 4.7 million would qualify for transitional assistance (as 
well as discount card savings) while an estimated 2.6 million would 
receive standard discount card services only.
    As discussed previously, we assume that Medicare beneficiaries 
enrolled in an endorsed discount card program will save between 10 and 
15 percent of their total drug costs as a result of savings from 
discount card activities (with 15 percent savings being assumed in the 
impact estimates). However, this will vary by the mix of drugs 
beneficiaries use, and as noted previously, may be even higher 
depending on the ultimate program design used by endorsed sponsors. It 
is also possible, as discussed previously in this document, that 
savings from discount card activities could be lower for some 
beneficiaries. For example, beneficiaries who currently may receive a 
sizeable discounts under manufacturer discount card programs may not 
experience additional discounts for those same drugs under the Medicare 
prescription drug discount card program.
    As shown in Table 7, for the estimated 7.3 million beneficiaries 
who will be enrolled in an endorsed discount card program in the last 
nine months of 2004 and the 7.4 million who are estimated to be 
enrolled in 2005 and the first part of 2006, the base for total drug 
expenditures involved in the Medicare prescription drug discount card 
program is projected to be $12.0 billion in the last nine months of 
2004, $18.0 billion in 2005, and $3.7 billion in the transition period 
in 2006 before the savings achieved through the program. Total 
estimated savings for these beneficiaries from discount card activities 
range from $1.4 billion to $1.8 billion in the last nine months of 
2004, $2.0 billion to $2.7 billion in 2005, and $0.4 billion to $0.6 
billion in the transition period in 2006. Furthermore, the subset of 
enrolled beneficiaries (an estimated 4.7 million) who qualify for 
transitional assistance are estimated to save an additional $2.4 
billion in 2004 (last nine months), $2.6 billion in 2005, and $0.1 
billion in 2006 (first four and one-half months) from the annual $600 
transitional assistance. Savings from transitional assistance in 2006 
are very small because they only reflect carryover spending for 
beneficiaries with low drug spending who do not exhaust the full 
transitional assistance during 2005.
    Beneficiaries may be required to pay an annual enrollment fee of up 
to $30 to join an endorsed discount card program. The Federal 
government pays the enrollment fee for beneficiaries who qualify for 
transitional assistance. If all of the non-transitional assistance 
eligible Medicare beneficiaries who are projected to enroll in the 
Medicare prescription drug discount card program (2.6 million 
beneficiaries in 2004 and 2.7 million in 2005) pay the maximum $30 
annual enrollment fee, the total beneficiary savings overall and 
specifically for this group of beneficiaries will be reduced by roughly 
$78 million in 2004 and $81 million in 2005.
    Regardless of whether or not endorsed sponsors charge the full $30 
enrollment fee, this is a voluntary program. Beneficiaries have a 
choice of which program to enroll in, or not to join a program at all. 
Therefore, beneficiaries will only join a program if their expected 
gain is greater than the enrollment fee. In addition, those who choose 
to enroll in an endorsed program will still be free to buy a drug at 
any price outside of the program, so they can only be helped by the 
estimated savings and educational efforts from the program.

F. Anticipated Effects on the Medicare Program

    Beneficiary savings from transitional assistance are funded through 
the Federal budget, while beneficiary savings from discount activities 
do not affect the Federal budget. We estimate that Medicare program 
spending will increase by $2.5 billion in calendar year (CY) 2004, $2.7 
billion in CY 2005, and $0.1 billion in CY 2006, due to the 
transitional assistance. The vast majority of this spending is for the 
$600 transitional assistance ($2.4 billion in 2004, $2.6 billion in 
2005, and 0.1 billion in 2006), with the remaining spending, $0.14 
billion in 2004 and 2005, for payment of the enrollment fee for 
transitional assistance eligible beneficiaries. In addition, we 
estimate that CMS' administrative expenses to implement this program 
will be $134 million.
    We also expect that the Medicare prescription drug discount card 
program will have several positive effects on the Medicare program. 
While not quantifiable, a positive impact of the rebate and discount 
reporting requirements of the program will be to provide us with 
experience in understanding issues in the pharmaceutical industry 
before implementation of a Medicare drug benefit. We will increase our 
knowledge concerning pricing and payment issues, information technology 
requirements, and increasing the effectiveness of pharmacy quality 
improvement programs. The pharmaceutical industry will also gain more 
experience in working with the Medicare population before 
implementation of a drug benefit. We expect that this experience will 
make the transition to a Medicare

[[Page 69896]]

prescription drug benefit faster and more efficient.

G. Anticipated Effects on National Retail Prescription Drug Spending

    Total national retail spending (spending for the total population, 
not just Medicare beneficiaries) on prescription drugs is projected to 
be $153.5 billion in 2004 (last nine months), $228.6 billion in 2005, 
and $95.3 billion in 2006 (first four-and-one-half months). (http://www.cms.hhs.gov/statistics/nhe/projections-2002/t11.asp).
    In the last nine months of 2004, the total economic impact of 
savings from discount card activities under the Medicare prescription 
drug discount card program is estimated to range from $1.4 billion to 
$1.8 billion, representing 0.88 percent to 1.18 percent of total 
national aggregate retail prescription drug expenditures during that 
period. In 2005, the total impact is estimated to range from $2.0 
billion to $2.7 billion, or 0.89 percent to 1.18 percent of total 
national aggregate retail expenditures for prescription drugs. In the 
first four-and-one-half months of 2006, we estimate the total impact to 
range from $0.4 to $0.6 billion, or 0.44 percent to 0.59 percent of 
total national aggregate retail drug expenditures during that period. 
Thus, the economic impact is estimated to be at most 1.18 percent of 
total retail prescription drug spending.
    One of the factors underlying these estimates of economic impact is 
our assumptions concerning enrollment in this program. While we believe 
that our uptake assumptions are reasonable estimates of the likely 
level of enrollment in this program, we have conducted an additional 
analysis to provide a sense of how these impact estimates would change 
if actual program uptake differed somewhat from the assumed levels. In 
the first 9 months of 2004, if program uptake was anywhere between 15 
percent below to 15 percent above the assumed levels, estimated savings 
from discount card activities would range from $1.2 billion to $2.1 
billion (assuming capita spending among enrollees remained unchanged), 
with these savings representing between 0.75 percent to 1.35 percent of 
national retail prescription drug sales in 2004.
    We expect that the various sectors involved in the prescription 
drug industry will adjust to the impact of this program without 
significant disruption, just as the industry adjusted to discounts 
being extended to the privately insured population during the 1990s. 
The 1990s saw a significant increase in reliance on pharmacy benefit 
management and the tools commonly used to manage pharmaceutical benefit 
costs.
    For example, evidence of market adjustment can be seen in the 
changes in pharmacies' acquisition costs during the 1990s. In the 
August 2001 HHS Office of Inspector General (OIG) Report entitled 
``Medicaid Pharmacy--Actual Acquisition Cost of Brand Name Prescription 
Drug Products,'' the OIG reports on changes in pharmacy acquisition 
costs for both single source and multi-source brand name drugs. The OIG 
uses the common industry pricing metric of average wholesale price 
(AWP). The findings from the OIG study indicate that the acquisition 
prices pharmacies face for a broad spectrum of brand name drugs have 
been declining as a percentage of AWP during the period 1994 to 1999. 
Based on 1994 pricing data, the OIG estimates that pharmacies acquired 
brand name drugs (both single source and multi-source) at a discount of 
18.30 percent below AWP. For 1999 pricing data, the OIG estimates a 
discount of 21.84 below AWP. The OIG reports that this represents an 
increase of 19.3 percent in the average discount below AWP for which 
pharmacies were able to purchase a mixture of single source and multi-
source brand name drugs. The OIG conducted a similar analysis on the 
pharmacy acquisition costs related to generic drugs. The OIG March 2002 
report ``Medicaid Pharmacy--Actual Acquisition Cost of Generic 
Prescription Drug Products'' reported that for generic drugs there was 
an increase of over 55 percent in the average discount below AWP from 
1994 to 1999 at which pharmacies were able to acquire generic drugs 
(from 42.45 percent below AWP in 1994 to 65.93 percent below AWP in 
1999). Thus, during the 1990s, as more customers secured discounts on 
the purchase of prescription drugs, pharmacies acquired drugs at larger 
discounts from AWP.
    The acquisition costs reported by the OIG are similar to those 
reported in the PricewaterhouseCoopers (PWC) study conducted for us 
entitled ``A Study of Pharmaceutical Benefit Management,'' June 2001. 
That study reported that pharmacies generally now acquire brand name 
drugs at AWP minus 20 to 25 percent. According to the PWC report, 
absent a discount arrangement (such as a pharmacy-sponsored senior 
discount), pharmacies, on average, sell to the uninsured population at 
full retail price, roughly AWP plus a dispensing fee (generally $2 to 
$3).
    We also believe that the Medicare prescription drug discount card 
program will accelerate the use of generic drugs. The HHS study reports 
that, generally, pharmacies earn higher margins on generic drugs. In 
addition, PWC found that generic manufacturers sometimes provide 
pricing incentives to pharmacies based on generic volume or market 
share. These are other examples of adjustments that take place related 
to the market place in pharmaceuticals.
    It is also possible that the requirements of price publication and 
the establishment of a large number of competing discount cards will 
lead to greater manufacturer discounts. We expect that access to modern 
competitive tools will assist in controlling prescription drug costs 
and improving the quality and efficiency of prescription drug services. 
We also expect that this program will somewhat level the playing field 
between the insured and uninsured, and the current differential in 
pricing between populations with drug coverage and Medicare 
beneficiaries without drug coverage will be ameliorated.
    Further, we do not expect that this program will have any impact on 
the number of Medicare beneficiaries with drug coverage through 
employer-sponsored health insurance. Since this program is short-term 
and it provides $600 transitional assistance only to a subset of 
beneficiaries (those with incomes that do not exceed 135 percent of the 
official poverty line), we do not anticipate that employers will alter 
their drug coverage in response to this program.

H. Analysis of Effects on Small Entities

    The Regulatory Flexibility Act (RFA) requires agencies to determine 
whether a rule will have a significant economic impact on a substantial 
number of small entities. If a rule is expected to have a significant 
economic impact on a substantial number of small entities, the RFA 
requires that a regulatory flexibility analysis be performed. However, 
the RFA stipulates that these requirements are applicable to a notice 
of proposed rulemaking or a rule for which an agency has published a 
notice of proposed rulemaking. Since Congress specifically authorized 
us to dispense with a notice of proposed rulemaking, we believe that a 
regulatory flexibility analysis is not required for this rule. 
Nevertheless, a regulatory flexibility analysis follows.
    The Medicare prescription drug discount card program may involve 
some impact on a substantial number of small businesses. The current 
market for delivery of pharmaceutical products, by its nature involves 
small businesses, similar to other professional health care services 
such as physician services. The current health insurance market

[[Page 69897]]

demonstrates that insurance companies, pharmaceutical benefit managers, 
and others such as health maintenance organizations (HMOs) have been 
able to enter into arrangements similar to those in this program 
involving the participation of large and small pharmacy and drug store 
firms. These arrangements have resulted in lower prescription drug 
prices being made available to consumers who have insurance coverage 
for prescription drugs. There is evidence that both large and small 
pharmacies and drug stores participate in these arrangements with 
pharmaceutical benefit managers, and that pharmaceutical benefit 
managers are able to offer (employer) clients pharmacy networks 
containing the majority of retail pharmacy outlets. In addition, many 
pharmacies, including small pharmacies, offer senior discounts, and 
doing so in the context of this Medicare program may not be 
significantly different than current practice for some pharmacies.
    The role of individual pharmacies, including small pharmacies, in 
this program is a critical one: they will be an integral part of the 
pharmacy networks of endorsed discount card programs, serving Medicare 
beneficiaries at the point of retail sale. The objectives of the 
program and the related design requirements will preclude an individual 
pharmacy or drug store from operating the full scale of contemplated 
activities that will be necessary to obtain an endorsement. Individual 
pharmacies could participate in the program by voluntarily entering 
into a drug card program's network with other pharmacies. Individual 
pharmacies are not in a market position to meet the requirements for 
endorsement, including the ability to serve a large number of enrollees 
and to garner manufacturer rebates. Retail pharmacy chains could 
possibly be organized to meet the requirements of Medicare endorsement 
explained elsewhere in this rule because of their size, type of 
experience and infrastructure.
    Convenient access to retail pharmacies, regardless of size or 
ownership, by Medicare beneficiaries will be an important feature of 
the program. As discussed elsewhere in this rule, a discount card 
sponsor will have to have a contracted pharmacy network of sufficient 
size to demonstrate that at least 90 percent of Medicare beneficiaries 
in urban areas served by the program live within 2 miles of a 
contracted pharmacy (90/2), at least 90 percent of Medicare 
beneficiaries in suburban areas served by the program live within 5 
miles of a contracted pharmacy (90/5), and at least 70 percent of 
Medicare beneficiaries in rural areas served by the program live within 
15 miles of a contracted pharmacy (70/15). These access ratio 
requirements, which are based on the Department of Defense TRICARE 
Retail Pharmacy (TRRx) program, are similar to the access standards in 
many commercial insured products and we believe they will require 
endorsed sponsors to support an extremely broad network of retail 
pharmacies.
    Given the access ratio requirements and the provision that endorsed 
programs will not be allowed to offer a mail order only option, we 
believe that most pharmacies and drug stores (both chain and 
independent) will be invited and encouraged to participate in endorsed 
programs' networks, particularly small pharmacies in rural areas. This 
is generally the case in the current insured market and the TRRx 
program, and we do not anticipate significantly narrower networks in 
the endorsed programs. There are over 55,000 retail pharmacies in the 
United States. According to a report prepared for us by 
PricewaterhouseCoopers (PWC) (``Study of the Pharmaceutical Benefit 
Management Industry,'' June 2001), pharmacy benefit managers (PBMs) 
offer, as a general practice, standard national pharmacy networks, with 
42,000 pharmacies in the typical network. Similarly, the Department of 
Defense reports that the TRRx program has more than 40,000 pharmacies 
in its network (as of June 2003). Furthermore, the PWC study reports 
that one leading PBM has 50,000 pharmacies in its more restricted 
network. Also, according to PWC, two large national PBMs have 98 
percent of all pharmacies in the United States in their standard 
networks.
    The inclusive access standard required for Medicare endorsement, 
coupled with the industry norm for broad pharmacy networks, lead us to 
believe that a very large number of small pharmacies and drug stores 
will be included in the networks of endorsed discount card programs. 
Further, we believe that small entities in rural areas especially will 
be included in order to meet the rural 70/15 standard for endorsement.
1. Estimated Impact on Small Entities
    HHS uses as its measure of significant economic impact on a 
substantial number of small entities a change in revenues of more than 
3 to 5 percent. To assess whether the Medicare prescription drug 
discount card program meets these HHS criteria, we estimated the number 
of small entities affected and the average percentage impact on 
revenues. We also conducted a sensitivity analysis to estimate the 
impact on revenues for pharmacies with a higher than average rate of 
customer participation in the Medicare prescription drug discount card 
program. These analyses found that while the program is expected to 
have some impact on a substantial number of small entities, it is not 
expected to have a significant economic impact. Based on these 
analyses, we certify that the Medicare prescription drug discount card 
program does not have a significant economic impact on a substantial 
number of small entities.
    As a result, even if the RFA applied to this rule (which as 
discussed previously, we believe it does not) we would still not be 
required to perform a regulatory flexibility analysis. Nevertheless, 
due to the possibility that concerns may be voiced by some about the 
potential effects of the rule on small businesses, we have included in 
this section or in other sections of this document the various issues 
that are to be included in a regulatory flexibility analysis. To avoid 
repetition, we have not duplicated each of them here. In preceding 
sections of this document, we have included a description of the 
program and its objectives. In this and subsequent sections of this 
document, we include an estimate of the number of small entities 
affected; an estimate of the economic impact on small pharmacies 
including a sensitivity analysis assessing the potential for 
differential distributional effects on small pharmacies; a discussion 
of reporting, recordkeeping, and other compliance requirements; and a 
description of the alternatives considered to minimize the economic 
impact on small pharmacies.
2. Number of Small Entities Affected
    For purposes of the RFA, small entities include small businesses, 
nonprofit organizations, and small governmental jurisdictions. 
Individuals and States are not included in the definition of a small 
entity. The Small Business Administration (SBA), on its Web site 
(http://www.sba.gov/size/naicstb2-ret.html), provides a size standard 
for pharmacies and drug stores (NAICS code 446110 or SIC code 5912) of 
revenues of $6 million or less annually for the purpose of determining 
whether entities are small businesses. The revenue standard for small 
pharmacies and drug stores was recently increased from $5 million to $6 
million in February 2002 to account for inflation.
    To assess the number of small entities affected by this program, 
and the amount of revenue involved for these

[[Page 69898]]

entities, we analyzed data from several sources. We examined data from 
the U.S. Census Bureau's 1997 Economic Census (Table 4 on Retail 
Trade--Subject Series), which provides data on the number of pharmacies 
and drug stores by level of revenue. To identify small pharmacies and 
drug stores, we looked at firms with less than $5 million in revenues. 
Although SBA's revenue standard for small pharmacies and drug stores 
was increased to $6 million in 2002 to account for inflation, we use $5 
million as the standard in our analysis because we are working with 
1997 data so an inflation adjustment is not needed. According to the 
Census Bureau data, there were a total of 20,815 business firms that 
were pharmacies and drug stores that operated for the entire year in 
1997. Those 20,815 firms operated 41,228 establishments (some entities 
selling prescription drug products are not included in this count, 
including supermarkets and mass merchants). Of the total firms, 20,126 
(or 96.7 percent) were firms that had sales of less than $5 million, 
and these same firms operated 21,226 establishments or 51.5 percent of 
the pharmacies and drug store class of trade in the Census Bureau data.
    In addition to traditional pharmacies and drug stores, prescription 
drugs are sold through supermarkets and mass merchants. The National 
Association of Chain Drug Stores (NACDS) offers data that include these 
outlets, so we examined this data source as well. The NACDS analyzes 
industry data from a variety of sources, including IMS Health, the 
National Council of Prescription Drug Programs, and American Business 
Information, and reports industry statistics on their Web site (http://www.nacds.org). For 1997, NACDS reports a total of 51,170 community 
retail pharmacy outlets, of which 20,844 were independent and 19,119 
were chain drug stores (for a total of 39,963)--a number very similar 
to the Census Bureau's 1997 count of 41,228 pharmacy and drug store 
establishments. We assume that there is a great deal of overlap between 
the 21,226 establishments that the Census Bureau identifies as those 
with sales of less than $5 million and the NACDS report of 20,844 
independent pharmacies in 1997. For 2002, NACDS reports 55,200 
community retail pharmacy outlets, of which 19,749 are identified as 
independent drug stores.
    In addition to the number of outlets, we examined revenues. The 
Census Bureau data indicate that, in 1997, total pharmacy and drug 
store sales for firms operating the entire year were $97.47 billion, of 
which firms with $5 million or less in sales accounted for 25.5 percent 
($24.82 billion). However, these sales include more than just 
prescription drugs, as most pharmacies and drug stores sell other 
products. Since firms may differ in the proportion of revenues obtained 
from prescription drugs, we think that the analysis should focus, to 
the extent possible, on revenues from prescription drugs, rather than 
the broader set of sales occurring through pharmacies and drug stores, 
so we also examined IMS' National Prescription Audit data obtained by 
our Office of the Actuary (OACT). It is important to note that focusing 
only on prescription drug sales, rather than all sales through this 
class of trade, yields an estimated impact that is larger than the 
actual impact on total sales.
    From the data obtained by OACT, it is possible to estimate the 
portion of sales occurring through independent and chain pharmacies. 
The data do not permit analysis by firm size. However, these data are 
specific to prescription drug sales for a more recent time period. 
Furthermore, we believe that there is a great deal of overlap between 
the firms identified as independent pharmacies and the small pharmacy 
and drug store firms identified in the Census data. Consequently, we 
think that the data from the Prescription Drug Audit are an appropriate 
source for analysis.
    For 1997, those data indicate that 29.2 percent of sales were 
through independent drug stores--a figure slightly higher than the 
share (25.5 percent) indicated by the Census data. For 2002, the data 
indicate that 23.5 percent of sales were through independent 
pharmacies. For purposes of calculating the share of revenues from 
prescription drug sales through small firms, we think it is reasonable 
to use the more recent estimate of prescription drug sales through 
independent pharmacies obtained from analysis of the Prescription Drug 
Audit for 2002.
    The Census Bureau data contain information on supermarkets (NAICS 
code 445110) and mass merchants (discount or mass merchandising 
department stores--NAICS code 4521102, and warehouse clubs and 
superstores--NAICS code 45291). We assume that for both supermarkets 
and the mass merchants, prescription drug sales comprise a small share 
of sales, and consequently have not included them in this small 
business analysis. This assumption is supported by data from the Census 
Bureau, Prescription Drug Audit, and NACDS Web site. The 1997 Census 
data indicate that total supermarket product sales were $351.4 billion. 
Analysis of 1997 data from the Prescription Drug Audit indicates that 
$8.8 billion in prescription drug sales occurred through food stores, 
or 2.5 percent of total product sales. Similarly, the 1997 Census data 
indicate that total product sales for the two categories of mass 
merchants, as defined by NAICS, were $208 billion. Since data from the 
Prescription Drug Audit include mass merchants with other chain stores, 
we used prescription drug sales data from the NACDS Web site. The NACDS 
Web site indicates that prescription drug sales through the mass 
merchant category were $9.6 billion in 1997, or 4.6 percent of total 
product sales. Furthermore, the fact that businesses are identified as 
supermarkets and mass merchandisers seems to indicate that prescription 
drugs are not their major line of trade.
3. Average Estimated Economic Impact on Small Pharmacies
    As indicated previously, HHS uses as its measure of significant 
economic impact on a substantial number of small entities a change in 
revenues of more than 3 to 5 percent. To develop an estimate of the 
impact of the program on prescription drug retail sales associated with 
small pharmacies and drug stores, we take our national estimates in 
Table 7 and make assumptions about the percent of total retail 
prescription drug sales through small pharmacies. In addition, we make 
assumptions about the distribution across large and small pharmacies 
and drug stores of prescription drug sales to endorsed discount card 
program enrollees.
    Assuming that 23.5 percent of total retail pharmacy sales are 
through small pharmacies (based on analysis of data from IMS' 
Prescription Drug Audit on the share of total retail sales through 
independent pharmacies in 2002), the share of total national 
prescription drug sales through small pharmacies and drug stores will 
be $36.1 billion in the last nine months of 2004, $53.7 billion in 
2005, and $22.4 billion in the first four and one-half months of 2006. 
If we assume that the population most likely to enroll in the Medicare 
prescription drug discount card program splits its purchases between 
large and small pharmacies in the same proportion as the total 
population, then the estimated sales involved in the Medicare 
prescription drug discount card program through small pharmacies and 
drug stores will be $2.8 billion in the last nine months of 2004, $4.2 
billion in 2005, and $0.9 billion in the first four and one-half months 
of 2006, accounting for less than 8 percent of prescription drug sales 
through small pharmacies. Consequently, the portion of the estimated 
beneficiary savings

[[Page 69899]]

from discount card activities occurring through sales in small 
pharmacies and drug stores ranges from: $0.32 to $0.42 billion in 2004 
(last nine months), $0.48 to $0.64 billion in 2005, and from $0.10 
billion to $0.13 billion in 2006 (first four and one-half months). 
These amounts, as a share of the national retail prescription drug 
sales occurring through small pharmacies and drug stores, represent a 
range of 0.88 percent to 1.18 percent in 2004, from 0.89 to 1.18 
percent in 2005, and from 0.44 to 0.59 percent in 2006.
    This is likely to be an overestimate of the economic impact on 
small pharmacies and drug stores, as this economic impact will not be 
borne entirely by pharmacies. Endorsed sponsors will be required to 
obtain manufacturer rebates or discounts that will defray the cost to 
pharmacies of providing discounts on retail drug prices. In addition, 
to the extent that the endorsed programs achieve larger savings from 
drug manufacturers than are reflected in our estimate, the additional 
beneficiary savings could come from drug manufacturers and not local 
pharmacies. In addition, because of the educational aspects of the 
program, some of the savings to beneficiaries will come as a result of 
increased use of generic drugs.
    Other caveats to consider are the following: Our spending estimates 
assume no effects of the Medicare prescription drug discount card 
program on beneficiary drug use. It is likely that the transitional 
assistance will lead to somewhat greater use of prescription drugs, 
resulting in a smaller impact on pharmacy revenues. In addition, it is 
possible that lower drug prices may lead to greater use of prescription 
drugs, possibly further reducing the impact on pharmacy revenues. On 
the other hand, it is possible that pharmacy services associated with 
the card will lead to some drug substitution, simplification of drug 
regimens, or avoidance of complications that require further drug 
therapy, leading to a somewhat greater impact on pharmacy revenues.
4. Sensitivity Analysis
    In order to assess the potential for differing distributional 
impacts among pharmacies, we conducted a sensitivity analysis. We 
estimate that the total prescription drug spending involved in the 
Medicare prescription drug discount card program will comprise, on 
average, less than 8 percent of revenues, with the economic impact of 
the discount card activities on total revenues related to prescription 
drugs estimated to be at most 1.18 percent. For purposes of a 
sensitivity analysis, we estimate that in order to reach the HHS 
measure of significant economic impact of 3 to 5 percent of revenues, 
it will be necessary to have prescription drug revenues resulting from 
the program account for at least 20 percent of a business's revenues. 
In the sensitivity analysis, we developed a hypothetical geographic 
locality skewed to contain a large Medicare beneficiary population with 
a large share of the beneficiary population having characteristics 
making them likely to enroll in this program. Under this highly skewed 
assumption, we estimated a maximum share of 15.7 percent of a 
business's total prescription drug revenues would be associated with 
the Medicare prescription drug discount card program, with the program 
having an economic impact of 2.36 percent of prescription drug sales.
    As noted previously, this economic impact will not be borne 
entirely by pharmacies, because endorsed sponsors will be required to 
obtain manufacturer rebates or discounts that will defray the cost of 
pharmacies providing discounts on retail drug prices. In addition, part 
of the savings to beneficiaries also comes from increased use of 
generic drugs. Nevertheless, the sensitivity analysis still yielded an 
impact level below the 3 to 5 percent of revenues used by HHS to 
measure significant economic impact. The following discussion describes 
the assumptions and supporting data used in the sensitivity analysis.
    In order to prepare the sensitivity analysis, we identified key 
variables that could change the market share of revenues accounted for 
by enrollees in this program and the consequent impact resulting from 
the Medicare prescription drug discount card program. One key variable 
is the Medicare population as a portion of a pharmacy's geographic 
locality customer base. We assume that a pharmacy's customer base is 
derived in large part from the population in close geographic proximity 
to its business location. Therefore, we examined the variation in the 
geographic distribution of the Medicare population. On average 
nationally, Medicare beneficiaries were 13.8 percent of the total 
population as of July 2000. Using several States with the highest 
Medicare population rates, we examined, at the county level, the 
percent of the population over age 65 based on Census Bureau data. For 
counties with high elderly population compositions, we obtained the 
actual counts of Medicare enrollment (aged and disabled) and calculated 
Medicare enrollment as a percentage of the counties' populations. Based 
on this analysis at the county level, we estimate in a high-end 
scenario that Medicare beneficiaries could potentially comprise up to 
approximately 36 percent of a geographic area's population.
    A second key variable that we assume could alter the revenues being 
impacted is the percent of the Medicare population in an area that may 
enroll in Medicare prescription drug discount card programs. As 
discussed previously, we think that the beneficiaries most likely to 
enroll in the program will be those beneficiaries with income less than 
or equal to 135 percent of the official poverty line who are eligible 
for the $600 transitional assistance, beneficiaries not eligible for 
transitional assistance who do not have insurance coverage for 
prescription drugs (including those with supplemental insurance 
coverage that does not include prescription drugs), and beneficiaries 
not eligible for transitional assistance who have Medigap drug 
coverage. To develop upper bound estimates for the percent of Medicare 
beneficiaries in an area who might fall into one of these three groups 
of potential enrollees, we use the prevalence rates of beneficiaries 
with these characteristics in non-metropolitan areas. Based on analysis 
of MCBS data for non-metropolitan areas, we assume that 21 percent of 
beneficiaries in the hypothetical geographic area were eligible for the 
$600 transitional assistance (compared with 18 percent nationally). We 
also assume that among beneficiaries in the hypothetical area, 20 
percent had no drug coverage and were ineligible for the transitional 
assistance (compared with 15 percent nationally), while another 8 
percent had Medigap drug coverage and were ineligible for the 
transitional assistance (compared with 5 percent nationally).
    Nationally, we estimate that more than 7 million Medicare 
beneficiaries will enroll in Medicare prescription drug discount card 
programs in 2004, accounting for an estimated 2.5 percent of the total 
U.S. population. Adjusting the data, using the population and drug 
coverage weighting factors for the sensitivity analysis and using the 
overall uptake assumptions (65 percent uptake among transitional 
assistance eligible beneficiaries, 35 percent uptake among 
beneficiaries not eligible for transitional assistance who do not have 
drug coverage, and 24 percent uptake among beneficiaries not eligible 
for transitional assistance who have Medigap drug coverage), results in 
the hypothetical area having approximately 8.15 percent of its total 
population participating in the Medicare prescription drug discount 
card program. Therefore, about 91.85 percent

[[Page 69900]]

of the total hypothetical area's population will not participate in the 
program, including both Medicare beneficiaries and non-Medicare 
beneficiaries.
    To estimate the impact of the program on prescription drug revenues 
in the hypothetical locality, we estimated the per capita drug spending 
for program participants and non-participants in the hypothetical area. 
We estimated per capita drug spending to be $2187 for participants and 
$1039 for non-participants in the hypothetical locality in 2004. These 
figures differ from per capita estimates for participants and non-
participants at the national level due to the skewed demographic 
composition of the hypothetical area (which would have a large Medicare 
population and have beneficiaries with Medigap drug coverage comprising 
a slightly greater share of drug discount card program participants 
than at the national level). The per capita spending estimates for both 
participants and non-participants include individuals without drug 
expenditures.
    For participants in the Medicare prescription drug discount card 
program, the per capita value consists of the estimated total spending 
for enrolled transitional assistance eligible beneficiaries, plus 
estimated total spending for enrolled beneficiaries not eligible for 
transitional assistance who do not have drug coverage, plus the share 
of spending for the Medigap enrollees that is purchased through the 
program, divided by the total number of participants.
    For purposes of calculating the per capita spending for non-
participants in the Medicare prescription drug discount card program, 
we used prescription drug spending data from the National Health 
Accounts and estimates from the MCBS to develop per capita drug 
spending estimates for the non-Medicare population and for the Medicare 
population not participating in the program. These two per capita 
values for non-participants were then weighted relative to the 
population distribution they represented in the hypothetical area's 
non-participant population to create a per capita drug spending 
estimate for non-card participants.
    We then adjusted per capita drug spending for non-participants to 
include participants' drug spending that was not purchased through the 
Medicare prescription drug discount card program (that is, the portion 
of drug spending covered by Medigap plans) to yield an estimate of 
total drug spending outside of the program. Consequently, this 
inclusion of the Medigap covered drug spending means that the per 
capita drug spending figure for non-participants is this adjusted per 
capita (including the Medigap related spending) for the hypothetical 
area rather than the actual per capita for the non-participant 
population in the hypothetical area. For purposes of the sensitivity 
analysis calculation of the impact of the program, we used the upper 
bound figure of all drug spending being effected by the program as a 
high-end assumption.
    The results of the sensitivity analysis are shown in Table 8. For 
the hypothetical area that is skewed to have a large Medicare 
beneficiary population with a large share of that beneficiary 
population having characteristics making them likely to enroll in this 
program, the negative impact on prescription drug revenues reached 2.36 
percent, still below the HHS measure for significant economic impact of 
3 to 5 percent of revenues. Furthermore, as noted above, not all of the 
2.36 percent will be borne by the pharmacy, since discount card 
sponsors will be required to obtain manufacturer rebates or discounts 
and pass those through to beneficiaries and pharmacies in order to 
receive Medicare endorsement. In addition, part of the savings also 
comes as a result of beneficiary use of lower cost generic drugs. 
Similar to the additional analyses performed earlier in this document 
looking at how varying the uptake assumptions by 15 percent would 
affect the impact on national retail prescription drug spending, we 
performed additional analyses here further skewing enrollment in this 
hypothetical area to assume 15 percent higher uptake rates among 
beneficiaries. Even under those assumptions, the economic impact on 
prescription drug revenues in the hypothetical area would still be 
below the HHS standard for significant impact of 3 to 5 percent of 
revenues.
    We recognize that reliance of the sensitivity analysis on 
nationally calculated per capita averages weighted for different 
demographic compositions has limitations, and pharmacies may have 
customer populations with per capita drug spending levels that differ 
from the population specific averages calculated at a national level. 
However, lacking such pharmacy level data, this sensitivity analysis 
represents our best estimate of the maximum potential effect of the 
program on small pharmacies and drug stores in a hypothetical area with 
substantially higher than average program enrollment.

                  Table 8.--National Average Versus Sensitivity Analysis--Hypothetical Example
----------------------------------------------------------------------------------------------------------------
                                                                                   Discount card
                                                                   Discount card       Non-            Total
                              2004                                 participants    participants     population
                                                                     (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
National Average for Comparison Purposes:
    Percent of Total Population.................................            2.49           97.51          100.00
    Percent of Total Prescription Drug Sales....................            7.84           92.16          100.00
    Estimated Beneficiary Savings From Discount Card Activities            15.00            0.00            1.18
     as a Percent of Drug Sales.................................
Hypothetical Example:
    Percent of Total Population.................................            8.15           91.85          100.00
    Percent of Total Prescription Drug Sales....................           15.73           84.27          100.00
    Estimated Beneficiary Savings From Discount Card Activities            15.00            0.00            2.36
     as a Percent of Drug Sales.................................
----------------------------------------------------------------------------------------------------------------

5. Reporting, Recordkeeping, and Other Compliance Requirements for 
Small Pharmacies
    Requirements related to reporting, recordkeeping, and other 
compliance activities for small pharmacies under this program are 
minimal. There are only two requirements of this type for pharmacies 
that participate in an endorsed discount card sponsor's network. 
Pharmacies are required to notify the beneficiary at the point of sale 
of the differential between the price of the drug to the beneficiary 
and the lowest priced generic covered drug under the program that is 
therapeutically equivalent and bioequivalent and available at the

[[Page 69901]]

pharmacy. While it is possible that this requirement could represent 
some burden, we anticipate that the burden would be at most marginal. 
The pharmacy community routinely indicates that it is common practice 
for pharmacies to promote the use of generic drugs. Thus, this 
requirement is unlikely to represent a change in current practice for 
most pharmacies. The costs of the systems infrastructure required to 
furnish this pricing information will be borne by endorsed sponsors. 
The only cost to pharmacies would be the time involved in conveying the 
information to the beneficiary, which we anticipated would be small.
    Pharmacies are also required upon request from the beneficiary to 
determine--either electronically or by telephone--how much of the 
beneficiary's transitional assistance dollars remain. The costs 
associated with this activity for pharmacies are expected to be small 
for several reasons. First, we anticipate that the costs associated 
with the development of the infrastructure for providing the balance of 
the transitional assistance dollars at the point of sale will be borne 
by endorsed sponsors, not network pharmacies. Second, we expect that 
the time involved in pharmacies determining the balance either 
electronically or by phone will be small. Finally, providing to 
beneficiaries the transitional assistance balance is not required to 
occur at the point of every sale, only at the beneficiary's request. 
Beneficiaries will have other options for accessing their card balances 
outside of the retail pharmacy, including through the endorsed 
sponsor's toll free line, which is likely to lessen the extent to which 
beneficiaries request balance determinations by pharmacies.
6. Small Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. This rule will not affect 
small rural hospitals since the program will be directed at outpatient 
prescription drugs, not drugs provided during a hospital stay. 
Prescription drugs provided during hospital stays are covered under 
Medicare as part of Medicare payments to hospitals. Therefore, we are 
not providing an analysis.
7. Alternatives Considered for, Especially, Small Pharmacies
    In developing this program, we recognized that the statute already 
provided for a number of major program features that act to mitigate 
the potential effects of this program on retail pharmacies, including 
small pharmacies. First, we interpret the statute as reflecting 
Congressional intent that endorsed sponsors obtain manufacturer 
rebates, discounts, or other price concessions on some covered discount 
card drugs and that endorsed sponsors pass through some of these price 
concessions to enrollees in the form of lower prices. In addition, as 
discussed elsewhere in this rule, prices under this program will not be 
taken into account for the purposes of establishing ``best price.'' 
Together, these program features relieve pressure from pharmacies, by 
ensuring that manufacturer rebates and discounts will be an important 
component of savings in this program and that endorsed sponsors will 
not rely solely on pharmacy discounts to compete for customers.
    Second, the statute prohibits a mail order-only option. Mail order 
programs have some popularity and may be a convenient option for some 
beneficiaries. However, the prohibition of mail order only programs 
ensures that strong access to retail pharmacies will be an important 
feature of this program.
    Finally, the program includes broad network access requirements 
that ensure that convenient access to retail pharmacies, including 
small pharmacies, will be a critical component of this program. 
Endorsed sponsors are required to have a pharmacy network of sufficient 
size to demonstrate that at least 90 percent of beneficiaries in urban 
areas served by the program live within 2 miles of a network pharmacy, 
at least 90 percent of beneficiaries in suburban areas served by the 
program live within 5 miles of a network pharmacy, and at least 70 
percent of beneficiaries in rural areas served by the program live 
within 15 miles of a network pharmacy. Given these network access 
requirements, coupled with the industry norm for broad pharmacy 
networks, and the prohibition of a mail order only option, we 
anticipate that a very large number of small pharmacies and drug stores 
will be included in the networks of endorsed sponsors.
    In addition to these statutory-related features of the program that 
mitigate its potential effects on pharmacies, we considered whether or 
not to require that endorsed sponsors negotiate discounts on all drugs. 
We decided to only require that endorsed sponsors offer a discount on 
at least one drug in the therapeutic categories representing the drugs 
most commonly needed by beneficiaries. Since endorsed sponsors are less 
likely to negotiate manufacturer discounts on every drug dispensed, we 
believe our decision not to require discounts on every drug relieves 
pressure on pharmacies to provide discounts.

I. Estimated Administrative Costs and Anticipated Revenues of Endorsed 
Card Sponsors

1. Introduction
    The statutory requirement that this program be provided by private, 
endorsed card sponsors places program success in providing savings and 
transitional assistance to Medicare beneficiaries on the participation 
of potential card sponsors. In light of this, we estimated the 
administrative costs and revenues faced by potential card sponsors to 
assess the willingness of private organizations to participate in the 
Medicare prescription drug discount card program. There are several 
incentives for organizations with pharmacy benefit management 
experience to choose to participate as endorsed card sponsors. We know 
that Medicare beneficiaries trust the Medicare name and are more 
confident about product offerings when they are Medicare approved or 
backed by the Medicare name. Receiving a Medicare endorsement will give 
potential card sponsors credibility with Medicare beneficiaries. In 
light of this, we believe that Medicare's endorsement of a discount 
program, and especially the availability of transitional assistance, 
will result in much greater enrollment with these organizations than 
the same entities might achieve if they decided to offer a discount 
program on their own. Greater enrollment means revenue from enrollment 
fees and more lives with which to negotiate manufacturer rebates. In 
addition, participation in the Medicare prescription drug discount card 
program may offer organizations the opportunity to gain experience 
working with Medicare beneficiaries and contracting with CMS prior to 
implementation of Medicare Part D.
    The following cost and benefit analysis reflects the estimated 
major administrative costs and benefits incurred by an endorsed sponsor 
to implement the Medicare prescription drug discount card program. The 
administrative costs include start-up and program implementation 
activities, the production and distribution of

[[Page 69902]]

information and outreach materials, eligibility determination and 
enrollment processing of beneficiaries, processing claims for retail 
and mail-order prescriptions, operation of a customer service call 
center, account maintenance, and logging and responding to beneficiary 
complaints and grievances. This analysis provides a range for each cost 
component, from low to high, that reflect possible endorsed sponsor 
differences in the level of technical efficiency and business 
investment decisions for offering the discussed initiative. For 
purposes of this analysis, estimated benefits are limited to the 
legislated enrollment fee, a maximum of $30 per year in 2004 and 2005. 
This analysis demonstrates that a maximum annual enrollment fee of $30 
can cover all or almost all administrative costs over the life of the 
program. Finally, we believe that the low costs estimated in this 
analysis maybe more accurate because CMS received many applications 
from potential card sponsors during our previous attempts to enact a 
fairly comparable program, suggesting that these organizations believed 
expected returns to be positive.
2. Sources of Administrative Cost Estimates
    We used several sources in estimating administrative costs for this 
analysis. First, CMS has extensive experience pricing and contracting 
for some of the activities we require of endorsed sponsors, 
specifically call center operations for the Medicare population and 
producing and mailing printed information and outreach materials. We 
thoroughly explored internal sources to estimate costs for information 
and outreach, and for call center and customer service activities.
    Early this year, 2003, as the President's plan for Medicare reform 
was being considered by Congress, CMS contracted for research of 
discount drug card call center operations to better inform our 
understanding of endorsed sponsor customer service and possible impacts 
on 1-800 Medicare.\5\
---------------------------------------------------------------------------

    \5\ The Health Strategies Consultancy LLC. Call Center 
Parameters and Regulatory Authority for Drug Discount Cards. May 20, 
2003.
---------------------------------------------------------------------------

    Other administrative costs of this program, such as account 
management and claims processing costs for pharmacy benefit management 
services, are not publicly available in a standardized format. In part, 
this is due to a general lack of transparency in the financial 
reporting of the pharmacy benefit management industry. Administrative 
cost information is considered proprietary by the industry and is not 
clearly itemized in financial reports.
    Of the information that is available, most is not standardized, and 
therefore, not readily compared across discount card programs. A 
pharmacy benefit management firm's administrative costs are unique to 
its business structure. The structure of pharmacy benefit management 
contracts also reduces the standardization of cost information. When 
bidding on a Request for Proposal by an employer or health insurer to 
provide pharmacy benefit management services, pharmacy benefit 
management firms typically offer a package of administrative costs, 
negotiated pricing for reimbursing drug costs, and rebate-sharing 
arrangements. The package approach often includes a comprehensive 
administrative fee that covers many bundled services, the content of 
which vary by organization and proposal. The multifarious rebate-
sharing arrangements unique to each pharmacy benefit management firm 
and other revenue flows mask the cost of some activities, contributing 
even more to reduced comparability. In short, payments for costs taken 
from multiple pharmacy benefit manager contracts cannot be readily 
compared. For example, a recent investor report by Credit Suisse First 
Boston demonstrates the impact of rebate-sharing arrangements on 
administrative costs. The authors cite variation in per claim 
processing costs paid by purchasers of $0.0 to $0.70.\6\
---------------------------------------------------------------------------

    \6\ Berg, Kevin and Noah Yosha. July 14, 2003. Pharmacy Benefit 
Managers and Specialty Pharmacies. Credit Suisse Equity Research for 
First Boston: 5.
---------------------------------------------------------------------------

    In order to best estimate these administrative costs, CMS 
contracted with an independent, management-consulting firm to provide 
technical support in developing estimates of administrative costs.\7\ 
For each of the major activities required to implement the Medicare 
prescription drug discount card program, we identified seven categories 
of economic costs that potential endorsed sponsors might incur in 
implementing this program. These costs are discussed in detail later in 
this analysis and presented in Table 9.
---------------------------------------------------------------------------

    \7\ Booze, Allen, and Hamilton. December 2003. Discount Card 
Administrative Costs to Support the Medicare Drug Discount Card 
Program. CMS contract number 500-97-0437, Task Order 2006.
---------------------------------------------------------------------------

    The consulting firm's analysis is based on interviews with 
officials representing State senior discount card programs and 
commercial organizations representing various categories of firms that 
provide drug card program administration, throughout the United States. 
These organizations include pharmacy benefit management firms 
(independent and owned by managed care organizations) and other 
commercial discount card program operators. In addition to conducting 
interviews, the consulting firm also consulted industry experts on 
purchasing pharmacy benefit management services.
    The consulting firm interpolated costs from more generalized cost 
information gathered in interviews about required labor and resources, 
in some instances, in order to estimate specific, comparable costs for 
all activities. This was necessary, in part, because commercial 
organizations were cautious about sharing costs and uncertain about the 
programmatic requirements of this regulation, which were not publicly 
available at the time that these interviews were conducted. Also, 
States and other purchasers did not always have the specific costs of 
components included in bundled administrative fees.
3. General Assumptions, Limitations, and Scope
    This program has two full operational years beginning in April 2004 
and ending mid-May 2006. Although the program does not start in 
January, we estimate costs for each calendar year of operation because 
calendar years correspond to the source of revenue, the annual 
enrollment fee, and to the coordination of the enrollment process with 
the Annual Coordinated Election Period for Medicare. We refer to the 
first nine months of 2004 as Year One, to 2005 as Year Two, and to the 
first four and one-half months of 2006 as the Transition Period. For 
Year One estimates, we adjust the costs associated with ongoing program 
operations, including claims processing, account maintenance, and 
responding to discount card enrollee complaints and grievances, to 
reflect the nine-month operating period.
    The four and one-half month transition period is a carryover period 
during the initial open enrollment period for the new Medicare Part D 
prescription drug benefit. During this period, no new enrollment is 
allowed in the Medicare prescription drug discount card program, no new 
transitional assistance is available, and endorsed sponsors may not 
charge an annual enrollment fee. Current discount card enrollees retain 
access to negotiated prices and transitional assistance enrollees may, 
in most instances, use the balance of transitional assistance funds not 
expended in Year Two to

[[Page 69903]]

assist with covering the costs of their covered discount card drugs 
obtained during the transition period. Therefore the costs reflected 
for this period include claims processing, account maintenance, 
customer service and call center operations, and responding to discount 
card enrollee complaints and grievances. We adjust all costs incurred 
in this period for an average enrollment length of two and one-quarter 
months, which is the same assumption made earlier in the beneficiary 
impact estimates to reflect declining enrollment in the Medicare 
prescription drug discount card program as individuals move to Part D.
    We assume that all endorsed sponsors, or at least one of their 
contractors, are experienced in pharmacy benefit management and have 
the infrastructure in place to implement this program. The applicant, 
or one of its subcontractors, at the time of application for 
endorsement must have three years experience in adjudicating and 
processing claims at the point of sale, negotiating with prescription 
drug manufacturers and others for rebates and discounts on 
prescriptions drugs, and administering an individual enrollee health 
care subsidy or benefit in real time. Further, the applicant, or at 
least one of its subcontractors, must serve at least 1 million covered 
lives. For this reason, some requirements of this program are part of 
standard business practices for administering a prescription drug 
benefit or assistance program and are associated with negligible 
additional costs.
    Activities already conducted as standard business practice include 
creating typical reports on discounts, pricing, and utilization for the 
client, providing counseling on generic substitution, establishing a 
pharmacy network, reimbursing network pharmacies for drugs covered by 
transitional assistance, drug utilization review, formulary management, 
and negotiating manufacturer and retail rebates. We assume marginal 
cost incurred for these activities, if any, will be captured in our 
estimates for account maintenance. Further, we believe that endorsed 
sponsors will be compliant with HIPAA because their other lines of 
business require such compliance. Regarding the HIPAA security rule, 
which is not enforceable until 2005, based on our discussions with 
potential endorsed sponsors, we assume they are already in compliance 
with these provisions under the privacy rule and are preparing to 
complete compliance with the security rule 2005 deadline for their 
other lines of business.
    We assume that total program enrollment is equal to 100 percent of 
the number of beneficiaries that the impact analysis estimates will be 
enrolled in each year of operation: 7.3 million in Year One, and 7.4 
million in Year Two and the Transition Period. We used a growth 
estimate of 1.4 percent to estimate enrollment in Year Two, which is 
the estimate for growth in Medicare Part B enrollment. Part E of this 
section discusses estimated program enrollment in greater detail. For 
some of our enrollment application, and information and outreach 
estimates, we assume that new enrollment in Year Two consists of those 
individuals the impact analysis anticipates enrolling in the program in 
Year Two and those individuals switching card programs. With regard to 
the latter, we assume that roughly 10 percent of enrollees will 
disenroll during Year One. As a simplifying assumption, we also assume 
that this same number re-enrolls in a different card in Year Two. We 
chose 10 percent as a modification of the 2001 Medicare managed care 
disenrollment rate of 13 percent because the rate reflects a continuous 
open enrollment policy. Our regulations limit enrollment to one 
endorsed program each year, with the option to elect another endorsed 
programs during the Annual Coordinated Election Period.
    Exclusive card sponsors are Medicare managed care organizations 
that limit their card program membership to their health plan 
membership. We have chosen not to present separate cost estimates for 
exclusive card sponsors for two reasons. First, we assume that we will 
largely be endorsing existing card programs already in operation by 
these organizations for their Medicare enrollees. Second, we believe 
that the costs for exclusive card sponsors will be lower than those 
incurred by other endorsed sponsors. Exclusive card sponsors can group 
enroll their Medicare managed care organization enrollees, a known 
population. They also will have lower costs for information and 
outreach since they already engage in marketing activities for their 
plan and can achieve efficiencies by including their discount card 
information with other outreach efforts. Since the costs of enrollment, 
and information and outreach are some of the highest cost components in 
Year One, we expect exclusive endorsed sponsors will have costs 
substantially lower than the maximum $30 enrollment fee.
    We estimate that 812,637 individuals will be enrolled in a discount 
drug card offered by an exclusive card sponsor in 2004, and 824,201 
individuals will be enrolled in an exclusive card program in Year 2005 
and the Transition Period. We derived this estimate by applying the 
proportion of individuals enrolled in a Medicare managed care plan 
(that is, Section 1876 cost plans, M+C plans, and preferred provider 
and most other managed care demonstrations) in the Medicare population, 
12 percent, to the number of individuals estimated to enroll in this 
initiative who are not enrolled in Medigap, 6.8 million in 2004 and 6.9 
million in 2005. Because we are not estimating costs for endorsed 
sponsors that are also managed care organizations, we removed these 
individuals from all enrollment assumptions made in this analysis.
    Throughout the discussion of individual costs, we present estimated 
costs for the whole program, by discount card enrollee, and for the 
average fee-for-service (FFS) endorsed sponsor (meaning a endorsed 
sponsor whose enrollment is made up mostly of beneficiaries in the 
original Medicare program) whose average enrollment is based on the 
total enrollment level calculated above divided by the number of FFS 
programs we expect will apply and meet the requirements for 
endorsement, as described below. In part, this is because our research 
on administrative costs suggests that experienced administrators of 
prescription drug benefits have comparable per discount card enrollee 
and per prescription variable costs for programs of different sizes 
that meet minimum endorsement requirements. However, endorsed sponsors 
have the option of proposing a program for a service area as small as a 
State.
    The remainder of this analysis examines the impact on endorsed 
sponsors that must comply with all components of this regulation and 
serve primarily beneficiaries in fee-for-service. This includes the few 
organizations that we expect may choose to offer a card for all 
Medicare beneficiaries rather than limit enrollment to their health 
plan membership. Only the latter are exclusive endorsed sponsors. 
Having removed individuals in exclusive card programs, we estimate per 
endorsed sponsor costs based on an average endorsed sponsor enrollment 
of 431,865 in Year One and 438,010 in Year Two and the Transition 
Period. We derived these numbers by dividing estimated enrollment less 
our estimates for exclusive card program enrollment by 15, or 6,477,973 
divided by 15 in Year One, and 6,570,150 divided by 15 in Year Two. In 
2001, we received 28 applications, with approximately one-half 
appearing to meet all of the

[[Page 69904]]

endorsement criteria to operate a discount card program.\8\
---------------------------------------------------------------------------

    \8\ On November 5, 2001, the Federal Court for the District of 
Columbia preliminarily enjoined CMS from proceeding with the 
administration's proposal for a Medicare-Endorsed Prescription Drug 
Discount Card program. In accordance with the court order, we 
withdrew the solicitation, all work on the initiative ceased. CMS 
did not make any Medicare endorsements on the basis of applications 
received. However, we had, at that time, completed our review of all 
applications and knew how many proposed programs would have been 
endorsed.
---------------------------------------------------------------------------

    This analysis estimates a range of high and low annual costs per 
discount card enrollee, per endorsed sponsor, and for the whole 
program, for each type of administrative cost incurred to implement 
this program. The ranges serve to illustrate the sensitivity of 
differences in possible administrative costs that are the result of 
various levels of industry experience and technological efficiency, and 
of business decisions about the level of investment for discretionary 
activities, such as information and outreach. For example, efficient 
pharmacy benefit management organizations with modern information 
systems that are currently operating a card program and that 
selectively target their marketing efforts are anticipated to have much 
lower costs than organizations that must program older mainframe 
systems, have less experience with direct enrollment, and make greater 
investments in information and outreach materials. Further, some 
organizations other than pharmacy benefit management firms that could 
qualify to be endorsed sponsors may have less experience in some areas 
of pharmacy management or may choose to outsource or partner with 
another organization for some activities, resulting in alternative, and 
possibly higher, cost structures.
    The following estimates were made in 2003 dollars and have been 
updated by 1.041 percent in Year One to reflect 2004 dollars, 1.085 
percent in Year Two to reflect 2005 dollars, and 1.132 percent to 
reflect 2006 dollars during the transition period. All dollar figures 
discussed in greater detail in the next section and presented in Table 
9 reflect the inflated rate for that identified year. Inflation 
estimates are based on those for labor in the general population from 
table III.A.1 of the 2003 Annual Report of the Board of Trustees, see 
http://www.cms.hhs.gov/publications/trusteesreport/2003/.

                              Table 9.--Administrative Costs and Benefits by Period
                          [Year one (nine months) administrative costs in 2004 dollars]
----------------------------------------------------------------------------------------------------------------
                                                 Costs per endorsed sponsor         Dollars per discount card
                                                     (431,865 enrolled)                     enrollee
                                             -------------------------------------------------------------------
                                                    Low              High             Low              High
----------------------------------------------------------------------------------------------------------------
 Program Implementatioon....................      $1,561,500       $3,123,000            $3.62            $7.23
 Information and Outreach...................       1,807,771        4,300,194             4.19             9.96
 Eligibility Determination and Enrollment          2,261,793        2,945,591             5.24             6.82
 Processing.................................
 Customer Service Operations................       2,899,735        4,366,461             6.71            10.11
 Claims Processing and Claims Adjudication..         541,677        1,764,862             1.25             4.09
 Account Maintenance........................       1,294,765        1,348,714             3.00             3.12
 Logging and Responding to Grievances.......          30,346           40,461             0.07             0.09
                                             -------------------------------------------------------------------
    Total Administrative Costs..............      10,397,588       17,889,284            24.08            41.42
     Maximum Revenue Stream from Enrollment       12,955,945       12,955,945            30.00            30.00
     Fee....................................
                                             -------------------------------------------------------------------
        Net Benefits........................       2,558,357       (4,933,339)            5.92           (11.42)
----------------------------------------------------------------------------------------------------------------


 
                                 [Year two administrative costs in 2005 dollars]
----------------------------------------------------------------------------------------------------------------
                                                 Costs per endorsed sponsor         Dollars per discount card
                                                     (438,010 enrolled)                     enrollee
                                             -------------------------------------------------------------------
                                                    Low              High             Low              High
----------------------------------------------------------------------------------------------------------------
 Program Implementation.....................              $0               $0            $0.00            $0.00
 Information and Outreach...................         858,543        1,513,041             1.96             3.45
 Eligibility Determination and Enrollment            302,577          393,446             0.69             0.90
 Processing.................................
 Customer Service Operations................         574,370          864,894             1.31             1.97
 Claims Processing and Claims Adjudication..         763,474        2,173,771             1.74             4.96
 Account Maintenance........................       1,824,925        1,900,963             4.17             4.34
Logging and Responding to Grievances........          42,772           57,029             0.10             0.13
                                             -------------------------------------------------------------------
    Total Administrative Costs..............       4,366,661        6,903,144             9.97            15.76
    Maximum Revenue Stream from Enrollment        13,140,301       13,140,301            30.00            30.00
     Fee....................................
                                             -------------------------------------------------------------------
        Net Benefits........................       8,773,640        6,237,156            20.03            14.24
----------------------------------------------------------------------------------------------------------------


[[Page 69905]]


 
              [Transition period (five and one-half months) administrative costs in 2006 dollars*]
----------------------------------------------------------------------------------------------------------------
                                                 Costs per endorsed sponsor         Dollars per discount card
                                                     (438,010 enrolled)                     enrollee
                                             -------------------------------------------------------------------
                                                    Low              High             Low              High
----------------------------------------------------------------------------------------------------------------
 Program Implementation.....................              $0               $0            $0.00            $0.00
 Information and Outreach...................               0                0             0.00             0.00
 Eligibility Determination and Enrollment                  0                0             0.00             0.00
 Processing.................................
 Customer Service Operations................         107,694          162,168             0.25             0.37
 Claims Processing and Claims Adjudication..         149,352          305,325             0.34             0.70
 Account Maintenance........................         356,996          371,871             0.82             0.85
 Logging and Responding to Grievances.......           8,367           11,156             0.02             0.03
                                             -------------------------------------------------------------------
    Total Administrative Costs..............         622,410          850,519             1.42             1.94
    Maximum Revenue Stream from Enrollment                 0                0             0.00             0.00
     Fee....................................
                                             -------------------------------------------------------------------
        Net Benefits........................        (622,410)        (850,519)           (1.42)           (1.94) 
----------------------------------------------------------------------------------------------------------------
* Costs assume an average of 2.25 months enrollment to match assumptions in section on beneficiary impact
  analysis.

4. Specific Assumptions For Administrative Cost Estimates
    In the following paragraphs, we discuss our assumptions for the 
estimates provided in Table 9 for the 7 major types of administrative 
costs anticipated for this program.
    (a) Start-up, program implementation costs for infrastructure 
enhancements, including software and hardware upgrades, programming for 
many operations, and systems integration;
    (b) Information and outreach activities, for example the production 
and distribution of pre-enrollment application materials and a post-
enrollment welcome kit with a discount card;
    (c) Eligibility determination and enrollment processing;
    (d) Call center and customer service operations, including handling 
calls asking for information and outreach materials and enrolling, 
where applicable;
    (e) Claims processing for administrating and adjudicating claims 
transactions;
    (f) Account maintenance, including staff time to run the program 
and updates to various systems, to provide typical industry data 
reports, including providing data to support the price comparison Web 
site; and
    (g) Logging and responding to beneficiary complaints and grievances 
for reasons other than eligibility.
a. Program Implementation
    Program implementation costs are those associated with setting up 
the necessary infrastructure, mostly information systems, to run the 
Medicare prescription drug discount card program.
    We do not believe that endorsed sponsors will need to purchase 
entirely new hardware or software. We believe that those organizations, 
with their subcontractors, that will be eligible for the endorsement 
already maintain the information system infrastructure, including 
hardware and software, necessary to house the information systems 
needed for this program. This infrastructure includes enrollment 
databases, claims processing and adjudication, third-party 
reimbursement, and call center operations. One exception is our 
requirement that endorsed sponsors pay to install CMS software and test 
connect with CMS data systems for exchanging eligibility and enrollment 
information. However, CMS will pay for the program sponsor T1 
connection and provide the ``connection software''. For this software, 
we estimate installation costs of no more than $1,500 per endorsed 
sponsor, or less than $0.01 per discount card enrollee, in 2003 
dollars.
    Endorsed sponsors will incur program implementation costs for 
programming or enhancing current software systems and conducting the 
systems integration necessary to accommodate the specific parameters of 
this program. Impacted software systems include current enrollment 
systems, drug price database, formulary management, pharmacy network 
database, call center software, accounting systems to track 
expenditures by beneficiary for the transitional assistance program, 
updates to claims processing to provide rebates at the point-of-sale, 
and setting up other data files associated with CMS reporting 
requirements.
    One representative of the pharmacy benefit management industry 
interviewed for CMS, anticipated information system enhancement costs, 
including upgrading and programming call center software, for a 
Medicare prescription discount card program, to between $4 million and 
$6 million for a program of 500,000 enrollees. Using our estimates of 
431,865 enrolled per endorsed sponsor, these fixed costs become an 
estimated per discount card enrollee annual cost between $9.26 and 
$13.89 dollars. These estimates reflect costs known to this 
organization as well as additional dollars to account for the 
uncertainty of making estimates without programmatic specifics.
    Interviews with other State and commercial discount card programs, 
provided estimates of labor type and time required to program software 
systems. Using the information, the consulting firm estimated start-up 
program implementation costs for information systems between $54.5 and 
$250 thousand in 2003 dollars. As an annual per discount card enrollee 
cost for the average endorsed sponsor, this program implementation 
estimate is negligible, ranging from $0.13 to $0.58. This program has 
unique aspects whose costs are not fully known. So as to accommodate 
for this and the limited experience that some types of firms may have 
with programming specific software systems and new programming, such as 
tracking beneficiary expenditure of transitional assistance, CMS has 
chosen to estimate program implementation costs that are a compromise 
of the higher cost estimates for program implementation anticipated by 
one organization and the lower costs estimated by the consulting firm. 
Specifically, we have chosen a per endorsed sponsor range between 1.5 
million and $3 million dollars for program implementation for Year One 
in 2003 dollars. We reduced the lowest industry number of $2 million by 
a rough $500 thousand for upgrading call center software, as the 
estimates for that

[[Page 69906]]

cost per call is reflected in section (d). We estimate that the 
aggregate program implementation cost across all endorsed sponsors in 
Year One is between $23 million and $47 million in 2004 dollars, with a 
per endorsed sponsor cost between $1.6 million and $3.1 million. This 
translates into a per discount card enrollee cost between $3.62 and 
$7.23. There are no program implementation costs for Year Two or the 
Transition Period.
b. Information and Outreach
    Under this initiative, there will be costs associated with 
information and outreach materials for each new discount card enrollee 
in Year One and costs associated with distribution of program materials 
to current discount card enrollees as well as to a small percentage of 
new discount card enrollees and disenrollees choosing to reenroll in 
Year Two. There are no information and outreach costs for the 
Transition Period as no new enrollment is allowed after December 31, 
2005. We assume that individuals will be notified that the Medicare 
prescription drug discount card program will end in 2006 through the 
annual notice of change mailed at the end of 2005.
    We develop a range of estimates that reflect the production and 
mailing of five types of information and outreach materials: a pre-
enrollment application kit with the standard enrollment form, a post-
enrollment welcome kit with the drug card, an annual notice of change, 
an eligibility determination, and mailing back incomplete applications 
that cannot be processed. These estimates do not include costs for 
information and outreach through mass media as this is not a 
requirement for endorsement.
    Information and outreach is an area where endorsed sponsors can 
choose to spend an extensive amount of money, depending on their long-
term business interests and plans. In their interviews with potential 
endorsed sponsors and comparable State programs, the consulting firm 
found large differences in information and outreach expenditures. For 
example, expenditure for mass media advertising quickly increases costs 
beyond those discussed here. The decision to invest in mass media 
advertising is ultimately that of the endorsed sponsor.
    CMS intends to assist endorsed sponsor information and outreach 
efforts by launching an education campaign about the new Medicare 
prescription drug discount card program. We plan on both television and 
print advertising. Further, we expect 1-800 MEDICARE to serve as the 
first source of information about the program. 1-800 MEDICARE provides 
interested individuals with decision support, helping them identify the 
programs that they are eligible to join. 1-800 MEDICARE also will mail 
interested individuals a booklet describing the Medicare prescription 
drug discount card program, transitional assistance, and how to enroll. 
For these reasons, we expect that at least some of the financial burden 
of generating awareness and educating Medicare beneficiaries about the 
program will not fall on endorsed sponsors, reducing costs for 
information and outreach.
    For low estimates, we used production costs based on prices from 
Federal contractors available through the General Services 
Administration and in-house mail estimates. We priced simple, low-end, 
serviceable materials with some color and limited design. For the high 
estimates, we substituted the costs quoted for application kits 
(overview materials and standard enrollment form) and welcome kits 
(member handbook and drug card) by organizations interviewed for CMS, 
for our in-house estimates. We assume these materials to be higher-end 
commercial products. Both low and high estimates include postage and 
use our in-house estimates for producing and mailing the other 
information and outreach materials: mailing eligibility determination 
notices, mailing back incomplete applications, and an annual notice of 
program changes for each year.
    Low and high estimates for producing and mailing a welcome kit to a 
new member were $1.20, the Government's estimate, and $2.00, which was 
based on costs reported by organizations interviewed for CMS. 
Organization estimates for providing a welcome kit ranged from $0.12 to 
$2.70 in 2003 dollars. However, most reported costs hovered between 
$1.00 and $1.50. The $2.70 cost was for a kit compiled on demand with 
few economies of scale, an approach we do not expect nor require 
endorsed sponsors to take. We chose an estimate of $2.00 because it was 
higher than most reported commercial costs but low enough to reflect 
the expected requirements of this program. We also believe that we have 
reduced the time endorsed sponsors may need to spend drafting marketing 
materials by providing model information and outreach materials with 
the solicitation.
    We used the same approach in our low and high estimates of 
application kits. Our government sources reported a cost of $0.65 to 
produce and mail an application kit to interested individuals. 
Commercial and State estimates for providing an application kit to 
interested individuals ranged from a low of $0.45 to $2.12. We chose a 
high estimate for the application kit of $2.00.
    We have assumed that the total number of pre-enrollment application 
kits mailed by endorsed sponsors will be three and one-half times the 
number of new beneficiaries enrolling in the program each year. This 
estimate is based on the midpoint of estimates gathered during 
interviews by the consulting firm. The firm found that card programs 
mailed applications to between two and five times the number of 
individuals enrolled in their program. For Year Two, this number is 
three and one-half times the number of individuals who are newly 
eligible for Medicare and the individuals reenrolling in Year Two after 
disenrolling in Year One.
    Because the standard enrollment form in the application kit has 
several required elements and because the Medicare population has lower 
literacy levels and greater cognitive difficulties than some 
populations, individuals may not properly complete the form for their 
first submission. The regulation requires endorsed sponsors to ensure 
the completeness of submitted applications. We have assumed information 
and outreach costs also include an estimate for mailing back 30 percent 
of applications.
    We assume that 100 percent of beneficiaries who would actually 
enroll in each year will receive a post-enrollment welcome kit. And, we 
assume that 100 percent of enrolled beneficiaries will receive an 
annual notice of change prior to the Annual Coordinated Election Period 
in each year. In 2005, this notice will inform discount card enrollees 
that the program is ending and direct them to information on Part D.
    We assume that 30 percent of all individuals will request an 
eligibility determination for transitional assistance and will not 
immediately enroll in an endorsed card program because they are not 
determined eligible for transitional assistance. This regulation 
requires that endorsed card sponsors not immediately enroll individuals 
who request transitional assistance at the time of enrollment if they 
are not determined eligible for such assistance. We chose 30 percent to 
capture a proportion of individuals ultimately choosing to enroll in 
the discount card after finding that they are not eligible for 
transitional assistance and a proportion of those never enrolling in 
the program who request transitional assistance, but are determined 
ineligible. In Year Two, we estimate that 30 percent of new discount 
card enrollees will request an eligibility determination, and we 
estimate an

[[Page 69907]]

additional five percent of those currently enrolled and not receiving 
transitional assistance will request an eligibility determination 
because their financial circumstances have changed during the year. For 
this 30 percent of individuals, this regulation requires endorsed 
sponsors to mail them a negative eligibility determination, and to 
inform them of access to the reconsideration process.
    We estimate a total information and outreach cost in Year One 
between $27 million and $65 million. We estimate a per endorsed program 
cost between $1.8 million and $4.3 million, and we estimate a per 
discount card enrollee cost between $4.19 and $9.96. These cost ranges 
are comparable to those estimated by the consulting firm for all 
marketing activities except mass media, between $0.84 and $7.02 per new 
member.
    We estimate a total Year Two cost for information and outreach 
between $12.9 and $22.7 million. We estimate a cost per endorsed 
sponsor between $0.86 million and $1.5 million, and a per discount card 
enrollee cost between $1.96 and $3.45. Reduced costs for information 
and outreach in Year Two reflect information and outreach to a more 
limited pool of individuals, those changing plans or becoming eligible 
for the Medicare program, spread across the entire enrollment of the 
endorsed program. Information and outreach activities are not required 
during the Transition Period.
c. Eligibility Determination and Enrollment Processing
    Endorsed discount endorsed sponsors will incur costs in 
administering the eligibility determination and enrollment processes as 
outlined in this regulation, but CMS has significantly reduced their 
potential role by assuming much of the burden of these activities. 
Specifically, we will develop an on-line enrollment and eligibility 
system against which endorsed sponsors can check the eligibility of 
individuals and enroll them in their endorsed programs. We also will 
handle any grievances about eligibility determinations and address 
requests for reconsideration of eligibility.
    As our own eligibility determination process for transitional 
assistance is means-tested, we believe that means-tested State senior 
discount card programs are the best source of information about the 
costs of conducting eligibility determination activities. The 
interviews of several State programs and their contracted pharmacy 
benefit management firms gathered actual cost information and/or labor 
time to estimate costs of eligibility and enrollment.
    To assess the sensitivity of our estimates, the consulting firm 
interviewed State programs that differed in the amount of documentation 
they required for an eligibility determination and in the level of 
verification activity required. Enrollment and eligibility activities 
for means-tested programs generally require some manual entry of 
information from an application or manual correction of scanned 
enrollment forms. Verification occurs either electronically or through 
manual review of multiple sources of income, family size, State 
residence, and health insurance. Some States require multiple forms of 
income documentation and manual review, while others accept the 
applicant's verbal certification that they meet income requirements. 
Sometimes States conduct these activities, and sometimes this activity 
is delegated to a private contractor providing pharmacy benefit 
management services.
    Endorsed sponsor responsibilities will include reviewing 
applications, ensuring that applications are complete, screening 
initial applications for transitional assistance, entering eligibility 
information into a database, electronically requesting a determination 
on eligibility and enrollment for an individual through CMS systems, 
maintaining an enrollment database, and issuing eligibility 
determination notices that refer individuals to the reconsideration 
process as appropriate. We assume that endorsed sponsors will ensure 
that submitted applications are complete, either by recontacting 
individuals submitting incomplete applications, or by mailing 
incomplete applications back to the applicant. We have accounted for 
these mailing and telephone costs under estimates for information and 
outreach, and for customer service.
    For those individuals applying for transitional assistance, we will 
require endorsed sponsors to first review applications for an 
individual's prescription drug coverage and the income level that the 
individual has certified as accurate, and identify individuals that 
need to be checked against CMS' eligibility and enrollment databases. 
The endorsed sponsor then will submit batch jobs of eligibility and 
enrollment requests through a telecommunications data connection with 
CMS, update their enrollment database with the results, and issue 
notices of eligibility determination and enrollment. The costs of 
mailing these notices are included in marketing estimates.
    We assume that endorsed sponsors will process a total of 8.34 
million applications in Year One. This application pool reflects 100 
percent of program enrollment (6.4 million), plus an estimated 
additional 30 percent of enrollment to capture costs for processing 
reapplications to enroll in the discount card after receiving a 
negative eligibility determination for transitional assistance. We use 
the same 30 percent assumption when we estimate the number of 
eligibility determination notices that endorsed sponsors will mail. We 
chose 30 percent to capture a proportion of individuals ultimately 
choosing to enroll in the discount card program after finding that they 
are not eligible for transitional assistance and a proportion of those 
never enrolling in the program who request transitional assistance, but 
are determined ineligible. We assume that endorsed sponsors will 
process a total 1.6 million applications in Year Two. This application 
pool consists of 100 percent of individuals choosing to disenroll in 
Year One and all newly eligible enrollees in Year Two, plus an 
additional 30 percent of this total for reapplications and individuals 
choosing not to enroll. We also assume an additional 5 percent of 
discount card enrollees who are not receiving transitional assistance 
will request an eligibility determination because their financial 
status changed during the previous year.
    From their interviews with State programs, the independent 
consulting firm estimates the cost of eligibility processing costs for 
a new application ranges from $3.87 to $16.68 in 2003 dollars. The low 
cost is from a State program that has self-certification of income and 
age, does not require review of any documentation for eligibility, and 
requires reporting of limited data elements on its enrollment form. The 
high cost is from a program that has a very complex eligibility process 
including requiring a breakdown of income and assets into categories, 
prospective adjustment of income for the coming year, and review of 
multiple documents demonstrating income, residency, health insurance, 
and age.
    We chose to use $3.87 as our low estimate of conducting eligibility 
determination and processing enrollment for a new application, because 
the process CMS has created does not require labor-intensive processes 
such as review of documents verifying income or family size or 
prospective adjustment of income, however, it is not a simple 
attestation process. We chose $5.04 as our high estimate because our 
requirements on

[[Page 69908]]

endorsed sponsors are significantly less burdensome than the manual 
processing implied by the $16.68 estimate and because the estimate of 
$5.04 reflects the proportion of the high cost that accounts for data 
entry and eligibility determination activities that CMS would require 
of endorsed card sponsors.
    We use the same cost estimate to approximate processing eligibility 
and enrollment requests for individuals applying for transitional 
assistance and those only applying to enroll in an endorsed program. We 
believe the amount of effort required to process applications for both 
populations is fairly comparable. If anything, we have slightly 
overestimated the cost of processing enrollment for individuals not 
applying for transitional assistance.
    Combining our assumptions about the number of applications in each 
year with our estimates of the costs to process a new application, we 
estimate an aggregate eligibility determination and enrollment 
processing cost across all sponsors for Year One between $34 million 
and $44 million. We estimate a per endorsed sponsor cost for Year One 
between $2.3 million and $3 million. This translates to a per discount 
card enrollee cost between $5.24 and $6.82. In Year Two, we estimate an 
aggregate program eligibility cost between $4.6 million and $5.9 
million, with a per endorsed sponsor cost between $303 thousand and 
$393 thousand. This translates to a per discount card enrollee cost 
between $0.69 and $0.90. As with other cost elements, Year Two costs 
are less because the cost to enroll the limited number of new discount 
card enrollees is spread across total program enrollees. We assume that 
there are no costs for eligibility determination and enrollment in the 
Transition Period.
d. Customer Service Call Center
    The following estimates reflect costs for both an interactive 
voice-response system and access to live customer service 
representatives by telephone. To accurately represent an endorsed 
sponsor's call center costs, we rely on interviews conducted for CMS by 
the independent consulting firm as well as the research on discount 
drug card call center operations that CMS sponsored earlier this year. 
We also rely on literature reflecting call volume within similar 
program offerings.
    We expect that Medicare beneficiaries will call an endorsed 
sponsor's customer service center for a variety of reasons. First, we 
believe that the majority of Medicare beneficiaries will call to gather 
additional information about the program and with questions about 
completing the enrollment form, especially those applying for 
transitional assistance. Our research on discount drug card call center 
operations also suggest that a small proportion of discount card 
enrollees call for more mundane reasons, including locating a network 
pharmacy, ordering a replacement card, and asking how to use the card 
when purchasing drugs. In addition to these reasons, we also expect 
that discount card enrollees will call to check drug prices, to 
disenroll, to file a grievance, and for those receiving transitional 
assistance, to check the balance of remaining funds.
    With regard to call volume, we assume that endorsed sponsors will 
receive calls equal to 1.5 times new enrollment in Year One. We believe 
that the majority of call volume will be the result of initial 
enrollment activities. Our research indicates that endorsed sponsors 
expect Medicare beneficiaries who are considering enrolling in a card 
to call around for price information prior to enrolling. The recent 
report on the Pfizer Share Card program indicates call volume of 
roughly 6 times total enrollment during the first year of operation. 
Although this call volume includes income eligibility pre-screening for 
all applicants.\9\ Further, both the independent consulting firm, 
Pfizer, and our own experience with 1-800 Medicare indicate that call 
volume increases after publicity and after information and outreach 
activities. We assume that endorsed sponsors will have call volume 
greater than enrollment but less than that documented by Pfizer for the 
following reasons.
---------------------------------------------------------------------------

    \9\ Pfizer U.S. Pharmaceuticals. Report to America. September 
2003.
---------------------------------------------------------------------------

    First, we assume that CMS' education efforts and the availability 
of 1-800 Medicare and http://www.Medicare.gov will help reduce call 
volume to endorsed sponsors. Specifically, we believe that the 
availability of pre-screening tools through http://www.Medicare.gov and 
through 1-800 Medicare will attract calls requesting pre-screening for 
information and eligibility that might otherwise be addressed to 
individual endorsed sponsors. We also believe CMS' provision of a price 
comparison Web site will reduce call volume to endorsed sponsors 
because it will help individuals to check prices before they choose a 
card and, after they are enrolled, to check for changes in discounted 
prices.
    We also assume that endorsed sponsors will take proactive measures 
to manage inquiries by discount card enrollees and others through 
communication channels other than the telephone. Our research on 
discount card call center operations suggests that endorsed sponsors 
can take several steps to preempt calls, including repetitive 
messaging, newsletters, Web sites, direct mail, and extensive FAQs 
(frequently asked questions) in information and outreach materials.
    In Year Two, we assume call volume will be 1.5 times new 
enrollment. We also assume that 30 percent of those receiving 
transitional assistance will call for reasons other than enrollment and 
that 20 percent of those enrolled only in the discount card will call 
for reasons other than enrollment. Research on drug card call centers 
conducted for CMS indicate much lower call volume, less than 10 percent 
of membership, from individuals enrolled in a discount drug card than 
call volume in a funded benefit, roughly 30 percent of membership.
    We assume that the endorsed sponsor's 1-800 customer service line 
will include an interactive voice-response system (IVR). An IVR system 
achieves call-savings by providing standard information without using 
the more expensive resources of a live customer service representative. 
If properly utilized, an IVR connected to various back office systems 
for immediate automated information retrieval, may help reduce 
significant call center costs to the sponsor. This allows for a good 
customer service tool, by giving callers responses to simple questions 
and easy access to various information. Many of the questions received 
by drug discount cards are questions that can be handled in the IVR, 
including requesting basic information about the program and 
enrollment, services, ordering replacement cards, checking for a 
network pharmacy, checking the discounted price of a specific drug, and 
checking account balances. We believe that the IVR will not be able to 
handle complex eligibility questions, questions regarding the balance 
of transitional assistance, and a range of other questions, such as a 
request for disenrollment.
    We assume that an endorsed sponsor's IVR system can handle 50 
percent of all incoming calls. We base this assumption on several 
sources. First, it has been CMS experience with 1-800 MEDICARE that 
traditionally 32 percent of all calls are handled in the IVR. Because 
1-800 Medicare handles a range of questions about the Medicare program, 
these calls are more likely, on average, to be time consuming as 1-800 
MEDICARE customer service

[[Page 69909]]

representatives support beneficiaries in understanding their options 
among endorsed cards and other pharmacy assistance alternatives. In 
addition, the research conducted for CMS on discount drug card call 
centers provides some information on the percentage of calls moving 
from the IVR to a customer service representative. Two large call 
centers reported that 30 and 60 percent of calls were handled in their 
IVR respectively.\10\ We believe 50 percent of calls reflects the 
simplicity of calls, other than those related to eligibility and 
transitional assistance, that endorsed sponsors will receive. We assume 
50 percent of calls are handled in the IVR for both years.
---------------------------------------------------------------------------

    \10\ The Health Strategies Consultancy LLC. Call Center 
Parameters and Regulatory Authority for Drug Discount Cards. May 20, 
2003.
---------------------------------------------------------------------------

    We estimate the cost of a completed call in the IVR to range 
between $0.10 and $.35 cents. These estimates reflect a range of 
differences in IVR structure and time.\11\ The independent consulting 
firm also estimated completed calls in the IVR to cost between $0.22 
and $0.30. These estimates are fully loaded and reflect the marginal 
cost of each additional call, as we assume that each endorsed sponsor 
or its subcontractor will already have the basic call center 
infrastructure for IVR in place.
---------------------------------------------------------------------------

    \11\ Personal communication with Elizabeth Herrell, Vice 
President, Customer Experience, Forrester Research. October 29, 
2003.
---------------------------------------------------------------------------

    Using call volume assumptions and IVR cost information, we estimate 
aggregate interactive voice-response system costs to range between $1 
million to 3.5 million dollars, with a per endorsed sponsor cost of $67 
thousand to $236 thousand dollars. The estimated per new discount card 
enrollee cost is between $0.16 and $0.55 dollars.
    For Year Two, we estimate aggregate interactive voice-response 
system costs range between $200 thousand and $701 thousand dollars, 
with a per endorsed sponsor cost of $13 thousand to $47 thousand 
dollars. The estimated per discount card enrollee cost is between $0.03 
and $0.11 dollars.
    We assume that calls to a customer service representative will 
average seven minutes in length. Interviews conducted by the 
independent consulting firm suggests that average talk-time for the 
senior population ranges from six to eight minutes. Our own internal 
experience with 1-800 Medicare confirms this analysis. Based on our 
assumptions about calls handled in the IVR, above, we assume that 50 
percent of all calls are passed through. In Year One, this represents a 
total of approximately 4.9 million calls, across all card programs. In 
Year Two, applying 50 percent to our total call volume estimates 
suggests that 924 thousand calls will be passed through to a customer 
service representative. As mentioned earlier, we assume that most of 
the first calls made by individuals will come into the Medicare 1-800, 
thereby reducing the call volume and thus costs to the endorsed 
sponsors.
    We estimate the fully loaded cost of a call to a live customer 
service agent per minute to range between $1.20 and $1.75. These 
estimates reflect a range of differences in IVR structure and time as 
well as CMS' experience contracting with call centers.\12\ These costs 
include the costs of overhead and labor for conducting call center 
operations. We assume these costs also include start-up costs, such as 
programming call center software, increasing seat licenses, computers, 
phones, phone lines and training customer service representatives. To 
avoid double counting, we do not include costs for setting up call-
center operations in our estimates of program implementation.
---------------------------------------------------------------------------

    \12\ Personal communication with Elizabeth Herrell, Vice 
President, Customer Experience, Forrester Research. October 29, 
2003.
---------------------------------------------------------------------------

    The estimated Year One customer service representative costs across 
all endorsed sponsors is between $42 million to $62 million dollars 
with a per endorsed sponsor cost of $2.8 million to $4.1 million 
dollars. This translates to a per discount card enrollee cost of $6.56 
to $9.56 dollars. The estimated Year Two cost across all sponsors will 
be $8.4 million to $12.3 million dollars, with a per endorsed sponsor 
cost of $561 thousand to $818 thousand dollars. This translates to per 
discount card enrollee costs between $1.28 and $1.87 dollars.
    The total IVR and customer representative service costs for Year 
One are between $44 million and $66 million across all sponsors, $2.9 
million to $4.4 million per endorsed sponsor, and $6.71 to $10.11 per 
discount card enrollee. This range of costs is slightly higher than the 
per member estimates captured by the consulting firm in their 
interviews with comparable drug card programs. They estimated between 
$1.44 and $8.04 per member. The total IVR and customer representative 
service costs for Year Two are between $8.6 million and $13 million 
across all endorsed sponsors, $574 to $865 thousand, and $1.31 to $1.97 
per discount card enrollee. For the Transition Period, the total IVR 
and customer representative service costs are estimated between $1.6 
million and $2.4 million across all endorsed sponsors, $108 thousand to 
$162 thousand per endorsed sponsor, and $0.25 to $0.37 per discount 
card enrollee.
e. Claims Processing
    The following estimates reflect costs for claims processing by the 
endorsed sponsors. Claims processing is the process performed by an 
endorsed sponsor to adjudicate a claim. It includes checking an 
eligibility database for program information, such as balance of 
transitional assistance; verifying prices; and conducting Drug 
Utilization Review (DUR). Consumer purchasing at a retail pharmacy is 
almost always an automated process, with adjudication happening at the 
point of sale. We anticipate that endorsed sponsors will use their 
computerized management information systems to perform claims 
processing. For purposes of this analysis, we assume that claims-
processing costs apply to processing all transactions, whether 
providing a discount or processing an actual claim against transitional 
assistance. Although processing a discount is generally less burdensome 
because it does not require financial reimbursement and associated 
reconciliation against third party payor funds, we have not reduced our 
transaction estimates to account for this difference. Research 
conducted for us concluded that the cost difference between these two 
types of claims would be negligible.
    Costs for processing claims in the literature range from $0.00 to 
$.70.\13\ But, as already noted, these costs are not the true economic 
cost of processing claims because they include the cost of other 
services, such as account maintenance, and rebate-sharing arrangements. 
Estimates of the cost of claims processing obtained through the 
interviews conducted for CMS revealed true costs ranging from $0.05 to 
$0.14 for electronic processing of a prescription in 2003 dollars. We 
used this same range for our estimates of processing electronic claims. 
Lastly, endorsed sponsors may choose to promote mail prescription 
services for their enrollees. Some mail prescription fulfillments may 
be as high as a 90-day supply and thus utilize one prescription. This 
results in one prescription processing cost, instead of three claims 
being processed, at a 30-day supply each, thereby substantially 
reducing the overall cost component on the endorsed sponsor's expense

[[Page 69910]]

structure. We do not figure this into pricing the claims processing 
cost described here.
---------------------------------------------------------------------------

    \13\ Berg, Kevin and Noah Yosha. July 14, 2003. Pharmacy Benefit 
Managers and Specialty Pharmacies. Credit Suisse Equity Research for 
First Boston.
---------------------------------------------------------------------------

    Some claims may be submitted on paper. Approximately one percent of 
all claims processed for a funded benefit are paper claims.\14\ In our 
estimates, we assume that any one endorsed sponsor will have to process 
one percent of their claims manually for their endorsed program. To 
process a paper claim, the endorsed sponsor must manually enter the 
information into the claims processing system. Cost estimates for 
processing paper claims range from $1.00 to $1.50 per claim.\15\ We 
used this same range of costs for our estimates of processing paper 
claims.
---------------------------------------------------------------------------

    \14\ Price Waterhouse Coopers. June 2001. Study of 
Pharmaceutical Benefit Management, CMS contract number 500-97-0399 
Task Order 0097: 76.
    \15\ Ibid.
---------------------------------------------------------------------------

    Section 1860D-31(g)(5) of the Act requires that transitional 
assistance through the endorsed sponsor be made available to 
beneficiaries who qualify for transitional assistance and reside in 
skilled nursing facilities and nursing facilities. These claims will be 
more difficult to process than electronic claims because they are 
likely to be submitted by pharmacies that are not in the endorsed 
sponsor's pharmacy network and with whom the endorsed sponsor may not 
have a formal relationship or electronic data exchange. We make this 
assumption because we believe that pharmacies in long-term care and 
skilled nursing facilities may not participate in an endorsed discount 
card program; institution-based pharmacies have less incentive than 
those in the community to join a discount card network.
    To address the specific structure of the long-term care pharmacy 
market, this regulation provides for CMS to award a ``special 
endorsement'' to endorsed sponsors competing for the opportunity to 
process claims from long-term care pharmacies. This competition limits 
the processing of claims from pharmacies serving long-term care and 
skilled nursing facilities to a few endorsed sponsors who have 
experience processing such claims and who can garner economies of 
scale. We expect that endorsed sponsors receiving a special endorsement 
will have some pharmacies serving long-term care and skilled nursing 
facilities in their pharmacy network. For purposes of this analysis, we 
assume that two of the anticipated fifteen endorsed sponsors receive a 
special endorsement from CMS. For each of these two ``special endorsed 
sponsors,'' we assume that they continue to enroll the average number 
of enrollees in a card program: 431,865 in Year One, and 438,010 in 
Year Two and Transition Period, but that a sizable proportion of those 
enrollees is institutionalized.
    We estimate that roughly 200 thousand institutionalized individuals 
will qualify for transitional assistance and use that transitional 
assistance at the pharmacy in their facility. This estimate is derived 
from the Medicare Current Beneficiary Survey (MCBS) and is used earlier 
in this document. We also estimate that this enrollment is split across 
the two special endorsed sponsors, thereby allocating 100 thousand 
enrollees to each special endorsed sponsor. This means that, roughly, 
one-quarter of the 430 thousand enrollees in a special card program are 
institutionalized. With regard to cost, we estimate that each of the 
special endorsed sponsors will receive about one-third of their claims 
for the institutionalized from long-term care pharmacies in their 
networks and that the cost per claim will be the same as processing any 
electronic in-network claim. Also, we assume that each card sponsor 
will achieve efficiencies in processing out-of-network claims from 
long-term care pharmacies. Without better estimates of the burden of 
processing out-of-network claims, we assume that the cost of processing 
such claims is similar to that for processing paper claims, between 
$1.00 to $1.50 per claim. In light of our assumption about available 
economies of scale, we assume a cost estimate of $1.00 for processing 
claims from out-of-network long-term care pharmacies.
    We make a base assumption that beneficiaries using a discount card 
will fill 27 prescriptions a year. We base this assumption on findings 
from CMS Office of the Actuary, which obtains data on prescription drug 
sales and prescription utilization from a variety of sources, including 
the National Prescription Audit conducted by IMS Health. These are the 
same numbers used in the Impact Analysis. In light of the nine-month 
operating period for Year One, we assume that discount card enrollees 
will fill an average of 20 prescriptions using their discount card in 
Year One. We assume they will fill all 27 prescriptions during Year Two 
and fill 5 prescriptions during the Transition Period.
    For the purpose of claims submitted against transitional assistance 
for beneficiaries in skilled nursing facilities and nursing facilities, 
we estimate that institutionalized individuals will fill an average of 
nine prescriptions for Year One and eight prescriptions for Year Two. 
This assumes that their long-term care pharmacy will only process 
claims against the balance of available transitional assistance. When 
the balance of transitional assistance becomes depleted for the year, 
we assume claims processing through the card program will cease. We 
derived nine and eight prescriptions by dividing $600 by an average 
prescription cost of $66 and $72, which is an average total 
prescription price of $46.99 (derived from self-reported beneficiary 
expenditures in MCBS 2000), adjusted to 2004 and 2005 dollars. We 
assume that institutionalized enrollees will not use their card during 
the Transition Period because they will have expended all of their 
transitional assistance in Year Two.
    Twenty prescriptions for each non-institutionalized enrollee and 
nine prescriptions for each institutionalized care enrollee translates 
to a total of 129 million prescriptions in Year One, with each of the 
13 endorsed sponsors processing 8.7 million prescriptions and each of 
the two special endorsed sponsors processing 7.6 million prescriptions. 
In Year Two, twenty-seven prescriptions per non-institutionalized 
enrollee and eight for institutionalized enrollees means a total of 174 
million prescription across all beneficiaries, with each of the 13 
endorsed sponsors processing 11.8 million prescriptions and each of the 
two special endorsed sponsors processing 10 million prescriptions. Five 
prescriptions for non-institutionalized enrollees in the Transition 
Period means a total of 32 million prescriptions for all enrollees will 
be processed, with each of the 13 endorsed sponsors processing 2.2 
million prescriptions and each of the two special endorsed sponsors 
processing 1.7 million prescriptions.
    We used the cost and prescription utilization estimates listed 
above to estimate costs for each of the 13 endorsed sponsors not 
processing claims from long-term care pharmacies. We assume that these 
endorsed sponsors only process in-network claims, both paper and 
electronic. For Year One, we estimate a per endorsed sponsor cost 
between $542 thousand and $1.4 million and a per enrollee cost between 
$1.25 and $3.24. For Year Two, we estimate a per endorsed sponsor cost 
between $763 thousand and $2 million and a per enrollee cost between 
$1.74 and $4.50. For the Transition Period, we estimate a per endorsed 
sponsor cost between $149 thousand and $386 thousand and a per enrollee 
cost between $0.34 and $0.88.
    We used the costs and prescription utilization estimates discussed 
above to

[[Page 69911]]

estimate costs for each of the two special endorsed sponsors. We assume 
that these special endorsed sponsors process in-network claims, both 
paper and electronic, and process out-of-network claims for two-thirds 
of their institutionalized enrollees. For Year One, we estimate a per 
endorsed sponsor cost between $1 million and $1.8 million and a per 
enrollee cost between $2.48 and $4.09. For Year Two, we estimate a per 
endorsed sponsor cost between $1.2 million and $2.2 million and a per 
enrollee cost between $2.75 and $4.96. For the Transition Period, we 
estimate a per endorsed sponsor cost between $120 thousand and $305 
thousand and a per enrollee cost between $0.28 and $0.70.
    To accurately represent the full range of possible costs faced by 
an endorsed sponsor, for our final estimates of claims processing, we 
use the lowest per sponsor cost estimate, the low costs faced by each 
of the 13 endorsed sponsors, as our low estimate. Similarly, we used 
the highest per endorsed sponsor cost estimate, the high costs faced by 
each of the two special endorsed sponsors, as our high estimate of 
claims processing costs.
    We estimate the total claims processing costs, including claims 
from pharmacies in long-term care facilities and paper claims, across 
all sponsors for Year One to be between $8 million and $22 million 
dollars, with a per endorsed sponsor cost between $542 thousand and 
$1.8 million dollars. This translates to a per discount card enrollee 
cost between $1.25 and $4.09 dollars. For Year Two, the total program 
cost is between $11.5 million and $30 million dollars, with a per 
endorsed sponsor cost between $763 thousand and $2.2 million dollars. 
This translates to a per discount card enrollee cost between $1.74 and 
$4.96 dollars. For the Transition Period, we estimate the total cost 
across all sponsors to be between $2.2 million and $5.6 million 
dollars, with a per endorsed sponsor cost between $149 thousand and 
$305 thousand dollars. This translates to a per discount card enrollee 
cost between $0.34 and $0.70 dollars.
f. Account Maintenance
    Endorsed programs generally require ongoing account maintenance to 
maintain and update eligibility databases, input changes to the 
formulary database, provide technology support, provide typical 
industry data reports, and manage customer service for the purchaser. 
Account maintenance does not include call center or information and 
outreach activities. The cost of account maintenance is fairly minimal 
and is often rolled into other costs, such as a claims-processing fee. 
This clarifies, in part, the higher observed claims processing costs 
observed in the literature than we are using in this analysis.
    The independent consulting firm gathered estimates of current 
account maintenance costs across commercial and State programs ranging 
from $2.28 per discount card enrollee per year to $3.84 per discount 
card enrollee per year in 2003 dollars. One firm that the consulting 
firm interviewed believed account maintenance costs for this program 
would be closer to $4.00 per discount card enrollee per year in 2003 
dollars. For purposes of these estimates, we used $3.84 per discount 
card enrollee for our low estimate and $4.00 per discount card enrollee 
as our high estimate.
    We believe these estimates capture the costs of producing data 
files for price comparison and the type of reporting that CMS requires 
to support monitoring. Further, the consulting firm found that most 
data related reports provided by sponsors to their clients, based on 
their clients' business needs, are negligible in cost. An example 
provided by the consulting firm includes a data file of all claims for 
a week long period. They Stated that the cost of such a report would be 
between $100 to $200 and would include the retail purchase price 
actually paid, the coded name and address of the store, and the name of 
the drug. The consulting firm indicated that some of the types of 
reporting likely to be required by CMS under the Medicare prescription 
drug discount card program would, in the private sector, be treated as 
a revenue generating product offering by sponsors. As such, sponsors 
would typically charge their clients according to the value, not cost 
that this data provides. In cases where the owner/producer of the data 
is providing the data reports as a subcontractor to a client of CMS, 
then whether the subcontractor chooses to charge the sponsor, at cost 
or profit, is a business and contract decision for these two entities, 
where, for example, the subcontractor is competing among other possible 
subcontractors for the volume of business that the name of the front 
organization may provide.
    Adjusting account maintenance for the nine-month operating period 
in Year One and for inflation, we estimate a per discount card enrollee 
cost for Year One ranging from $3.00 to $3.12. This translates to a 
total cost between $19.4 million and $20.2 million dollars for all 
endorsed sponsors in Year One, with a per endorsed sponsor cost between 
$1.3 million and $1.4 million. In Year Two, an aggregate account 
maintenance cost is between $27 million and $29 million dollars with a 
per endorsed sponsor cost between $1.8 million and $1.9 million 
dollars. This translates to a per discount card enrollee cost between 
$4.17 and $4.34 for Year Two. For the Transition Period, we estimate a 
total program cost between $5.4 million and 5.6 million dollars, with a 
per endorsed sponsor cost between $357 thousand and $372 thousand 
dollars and a per discount card enrollee cost between $0.82 and $0.85 
dollars.
g. Grievances
    We anticipate that endorsed sponsors will incur minimal costs 
providing an internal grievance mechanism to document and address 
discount card enrollee complaints. Our endorsement criteria require 
that endorsed sponsors maintain a grievance process dedicated to 
complaints by discount card enrollees only about program operations, 
not about requests for reconsideration of a negative eligibility 
determination. Within a traditional benefit, medical-related grievances 
are usually related to prior approval, medical necessity, or a previous 
complaint. In means-tested prescription assistance programs, appeals 
for negative eligibility determinations are also a common source of 
complaints.
    For this discount card program, discount drug endorsed sponsors 
will not need to address the traditional appeals of a funded benefit, 
those related to medical necessity determinations, or to address 
appeals for means-tested programs, those of eligibility determination. 
We expect grievances to be limited to programmatic issues such as 
pharmacy participation and the size of discounts. These issues are not 
complex and are straightforward to address.
    The consulting firm gathered estimates of grievance processing in 
State programs and reports and estimated that costs were less than 
$0.01 per discount card enrollee per month. In light of this 
information, we estimate a low of $0.09 and a high of $0.12 per 
discount card enrollee per year in 2003 dollars.
    For the nine-month operating period in Year One, we estimate a 
range of total program costs between $455 thousand and $606 thousand 
dollars. We estimate a per endorsed sponsor cost for grievances in Year 
One between $30 thousand and $40 thousand and a per discount card 
enrollee cost between $0.07 and $0.09. In Year Two, we estimate a total 
costs between $642 thousand and $855 thousand, a per

[[Page 69912]]

endorsed sponsor costs between $43 thousand and $57 thousand, and a per 
discount card enrollee cost between $0.10 and $0.13. For the Transition 
Period, we estimate a total cost between $126 thousand and $167 
thousand, a per endorsed sponsor cost between $8 and $11 thousand, and 
a per discount card enrollee cost between $0.02 and $0.03.

                        Table 10.--Net Present Value Analysis by Average Endorsed Sponsor
----------------------------------------------------------------------------------------------------------------
                                                Net present                                         Transition
                                                   value            Year 1           Year 2           period
----------------------------------------------------------------------------------------------------------------
Low.........................................
    Net Benefits from Table 9 in 2003                     NA       $2,457,596       $8,086,304        ($549,832)
     dollars................................
    Discounted by 3%........................       9,790,107        2,457,596        7,850,781         (518,269)
    Discounted by 7%........................       9,534,645        2,457,596        7,557,293         (480,244)
High........................................
    Net Benefits from Table 9 in 2003                     NA       (4,739,038)       5,748,531         (751,342)
     dollars................................
    Discounted by 3%........................         133,848       (4,739,038)       5,581,098         (708,212)
    Discounted by 7%........................         (22,830)      (4,739,038)       5,372,459         (656,251)
----------------------------------------------------------------------------------------------------------------


                               Table 11.--Cost Benefit Ratios by Endorsed sponsor
----------------------------------------------------------------------------------------------------------------
                                                                                                   Transition
                                                                 Year 1            Year 2            period
----------------------------------------------------------------------------------------------------------------
Benefits.................................................
    From Table 9 in 2003 Dollars.........................     $12,445,673          $12,110,876                $0
    Discounted by 3%.....................................     $12,445,673          $11,758,132                $0
    Discounted by 7%.....................................     $12,445,673          $11,318,576                $0
Costs....................................................
Low......................................................
    Cost Stream from Table 9 in 2003 Dollars.............       9,988,077            4,024,572           549,832
    Discounted by 3%.....................................       9,988,077            3,907,352           518,269
    Discounted by 7%.....................................       9,988,077            3,761,282           480,244
High.....................................................
    Cost Stream from Table 9 in 2003 Dollars.............      17,184,711            6,362,345           751,342
    Discounted by 3%.....................................      17,184,711            6,177,034           708,212
    Discounted by 7%.....................................      17,184,711            5,946,117           656,251
Present Value Benefit/Cost Ratios........................
    Low--3%..............................................               1.68  ................  ................
    Low--7%..............................................               1.67  ................  ................
    High--3%.............................................               1.01  ................  ................
    High--7%.............................................               1.00  ................  ................
----------------------------------------------------------------------------------------------------------------

    Table 9, which appears earlier in this document at the beginning of 
the discussion about individual administrative cost categories, 
presents cost estimates for endorsed sponsors for each cost component 
in nominal dollars, at both the program and per discount card enrollee 
levels, relative to the maximum annual enrollment fee of $30. The total 
low cost range represents the costs to a card sponsor incurring all low 
administrative costs, and the total high cost range represents the 
costs to a card sponsor incurring the highest administrative costs, 
including those associated with claims processing for special endorsed 
sponsors. We use the maximum annual enrollment fee as the only source 
of revenue for endorsed sponsors in this analysis to demonstrate that 
endorsed sponsors can cover their administrative costs with enrollment 
fee revenue. These estimates do not account for any costs of producing 
services that are not required for endorsement, but which could be 
offered to distinguish a drug card offering, such as disease-specific 
counseling or using mass media for information and outreach.
    In Year One, we estimate that endorsed sponsors with low costs can 
easily cover their costs if they charge the maximum annual enrollment 
fee of $30. An average endorsed sponsor with 431,865 beneficiaries 
enrolling and participating for nine-months, and low administrative 
costs could collect revenue of $12,955,945 and incur costs of 
$10,397,588 resulting in a profit of $2,558,357. We estimate that 
endorsed sponsors with high administrative costs and an average of 
431,865 beneficiaries enrolling and participating for nine-months could 
collect revenue of $12,955,945 and incur administrative costs of 
$17,889,284, resulting in a net loss of $4,933,339. Costs are higher 
than revenue for these endorsed sponsors because the costs associated 
with information and outreach, enrollment, and program implementation 
activities are loaded into Year One.
    In Year Two, we estimate that all endorsed sponsors will cover 
their administrative costs. We estimate that endorsed sponsors with low 
costs and an average of 438,010 enrolled could earn revenue of 
$13,140,301, if they charge the maximum annual enrollment fee, and will 
incur administrative costs of $4,336,661. This results in net revenue 
of $8,773,640. For the same year, we estimate that endorsed sponsors 
with high costs and an average of 438,010 enrolled could earn revenue 
of $13,140,301, if they charge the maximum annual enrollment fee, and 
will incur administrative expenses of $6,903,144. This results in net 
revenue of $6,237,156. For the Transition Period, we estimate that 
endorsed sponsors with low costs and 438,010 enrolled for an average of 
2.25 months will lose $622,410 and that endorsed sponsors with high 
costs and 438,010 enrolled for an average of 2.25 months will lose 
$850,519. Endorsed sponsors cannot charge an annual enrollment fee 
during the Transition Period.
    A present value calculation is appropriate when costs and benefits 
are realized in different years in order to standardize costs and 
benefits for the time-value of money. Table 2 calculates the net 
present value (NPV) of these streams of net benefits (provided in Table 
9), over the life of the program. In

[[Page 69913]]

their circular A-4, the Office of Management and Budget requires all 
benefit-cost analyses to use a 7 percent discount rate (r), which is 
the rate used to adjust cost and benefit streams for the time-value of 
money.\16\ We also calculated net benefits using a 3 percent discount 
rate. The Office of Management and Budget has indicated that a 3 
percent discount rate better approximates the individual rate of time 
preference.
---------------------------------------------------------------------------

    \16\ Office of Management and Budget, Circular A-4, September 
17, 2003.
---------------------------------------------------------------------------

    As noted in the introduction to this analysis, we believe that 
potential card sponsors will find it profitable to participate in this 
program. The cost of capital to a private firm choosing to implement 
this program is the interest rate of a corporate bond. Lehman Brothers 
estimate that AAA and A average corporate bond yields to maturity are 
2.89 percent and 3.93 percent respectively.\17\ These low rates also 
reflect the return on capital for such a short investment. The program 
will last roughly 24 months. In order to avoid the influence of 
inflation on nominal interest rates, in Tables 10 and 11 we have 
removed all inflation adjustments from cost estimates, adjusted the 
nominal benefit stream of enrollment fee revenue for inflation in 2004 
and 2005, and calculated present values in 2003 dollars. Net present 
value in Table 10 is calculated:
---------------------------------------------------------------------------

    \17\ Lehman Brothers Credit Index, Yield by Quality, September 
30, 2003.
---------------------------------------------------------------------------

NPV=Year1Net+[Year2Net/(1+r)]+ [Transition PeriodNet/(1+r)\2\]
    As shown in Table 10, a positive net present value exists for both 
the low and high cost estimates when discounted by 3 percent. A 
positive net present value exists for the low cost estimate when 
discounted by 7 percent, and a slightly negative net present value 
exists for the high cost estimate when discounted by 7 percent. 
Endorsed sponsors with modern information systems and experience 
administering pharmacy benefits, who also selectively target their 
information and outreach efforts will realize a large economic profit 
if they choose to charge the maximum enrollment fee of $30. We estimate 
that these endorsed sponsors could, in total, realize a net present 
value of approximately $9.5 million to $9.8 million over the life of 
the program. At a endorsed sponsor's option, to distinguish its 
endorsed program's offering, these profits could be channeled to deeper 
discounts on drugs or to additional drug-related products and services 
to benefit discount card enrollees.
    Endorsed sponsors using older mainframe systems, or who have less 
experience with direct enrollment, and who make greater investments in 
information and outreach materials, and who have chosen to be a special 
endorsed sponsor, can cover all or almost all of their costs if they 
choose to charge the maximum annual enrollment fee of $30. We stated 
earlier that we believe 3 percent to be an appropriate discount rate 
for this program. Using a 3 percent discount rate, we estimate that 
endorsed sponsors with the highest administrative costs could realize a 
net present value of $134 thousand with an annual enrollment fee of 
$30. However, using the higher discount rate of 7 percent results in a 
slight loss for endorsed card sponsors with the highest costs. Such a 
finding does not preclude these potential card sponsors from 
participating because they can choose to cover their administrative 
costs by passing less rebate and other price concession revenues on to 
their discount card enrollees in the form of higher negotiated prices.
    The highest cost estimates are for sponsors who receive a special 
endorsement to process claims for long-term care pharmacies. Sponsors 
with high administrative costs, excluding the effect of claims 
processing for LTC pharmacies, and dealing only with non-
institutionalized enrollees could easily cover their costs, realizing a 
net present value of $442 thousand to $601 thousand with an annual 
enrollment fee of $30. We also believe that endorsed sponsors stand to 
further benefit from the amortization of certain cost components, 
thereby yielding a more attractive net present value in both the low 
and high ranges.
    Calculating Benefit-Cost ratios is another means of assessing the 
profitability of a program. In Table 11 we estimate present value 
benefit-cost ratios. These are calculated by discounting costs and 
benefits for each year, summing over the years of the program and 
setting total present value benefits over total present value costs. As 
with the net present value calculations, we removed the effect of 
inflation from these estimates and calculate benefit-cost ratios in 
2003 dollars. For endorsed sponsors with low administrative costs, we 
estimate a benefit-cost ratio of approximately 1.68 for the 3 percent 
discount rate and 1.67 for the 7 percent discount rate, and for 
endorsed sponsors with high administrative costs, we estimate a 
benefit-cost ratio of 1.01 and 1.00 respectively. In both instances, 
the benefit-cost ratio equals or exceeds one, demonstrating the 
feasibility of programs offered by each type of endorsed sponsor 
relative to anticipated revenue.
    We have estimated costs for an average endorsed sponsor of 430 
thousand enrolled individuals. Realistically, enrollment may not be 
evenly distributed when this program is implemented. We expect that 
some national endorsed programs will garner a large proportion of 
discount card enrollees, and that their participation will fulfill the 
geographic requirement that discount card eligible individuals have 
access to at least 2 programs. We also expect that other endorsed 
programs will enroll the remainder. The benefit-cost ratio for high 
estimated costs at 430 thousand enrolled equals or exceeds one, 
indicating that profitability for a endorsed sponsor with very high 
administrative costs will depend on enrolling all anticipated 
enrollment. There is very little room to absorb the impact of reduced 
enrollment through enrollment fees alone. This is not because fixed 
costs are large, the endorsement criteria require endorsed sponsors to 
already have most of the infrastructure needed to offer a drug discount 
card. Rather it is because very high variable costs leave little room 
to spread these minimal fixed costs across a reduced level of 
enrollment.
    On the other hand, the benefit-cost ratios for low estimated costs, 
1.67 and 1.68, clearly demonstrates enough room to absorb the costs of 
reduced enrollment. We believe that efficient endorsed sponsors can 
easily reach profitability with a moderate level of enrollment. 
Efficiencies are not necessarily due to economies of scale and can be 
achieved through new technology and smarter business practices. 
Finally, if, for some reason, endorsed sponsors enroll fewer 
individuals than anticipated, costs could be recouped through rebate 
and other price concessions.
    This analysis has demonstrated that the maximum enrollment fee of 
$30 in Years One and Two gives endorsed sponsors with very different 
operating environments, levels of commitment, technological efficiency, 
and business investment strategies the flexibility to recoup their 
costs through enrollment revenue. Endorsed sponsors with the highest 
administrative costs can collect sufficient enrollment revenue to cover 
all or almost all of their expenditures. Card sponsors experiencing any 
minimal net loss can cover these costs with earnings from rebate 
dollars. Endorsed sponsors with lower administrative costs can easily 
collect sufficient enrollment revenue to cover

[[Page 69914]]

their administrative expenses and may be able to charge a lower 
enrollment fee or pass greater savings onto their discount card 
enrollees.

J. Conclusion to Impact Analysis

    In summary, more than 7 million Medicare beneficiaries are 
projected to enroll in the Medicare prescription drug discount card 
program. Savings to these beneficiaries from discount card activities 
are estimated to range from $1.4 billion to $1.8 billion in the last 
nine months of 2004, $2.0 billion to $2.7 billion in 2005, and $0.4 
billion to $0.6 billion in the transition period in 2006. About 4.7 
million of these beneficiaries are also expected to be enrolled in the 
transitional assistance program, with savings realized by these 
beneficiaries from transitional assistance estimated to be about $2.4 
billion in 2004, $2.6 billion in 2005, and $0.1 billion in the 
transition period in 2006.
    The Medicare prescription drug discount card program is not 
expected to have a significant economic impact on a substantial number 
of small pharmacies and drug stores. On average, estimated savings from 
discount card activities represent at most 1.18 percent of retail 
prescription drug revenues. Results from the sensitivity analysis found 
that even in a hypothetical geographic area with a larger than average 
proportion of residents likely to enroll in the Medicare prescription 
drug discount card program, savings from discount card activities 
represented less than 3 percent (2.36 percent) of total retail 
prescription drug sales.
    Furthermore, this economic impact will not be borne entirely by 
pharmacies, because endorsed sponsors will be required to obtain 
manufacturer rebates or discounts that will defray the cost of 
pharmacies providing discounts on retail drug prices.
    Finally, the analysis of administrative costs and revenue 
demonstrated that endorsed discount card sponsors with varied levels of 
administrative costs, ranging from low to high, would be able to recoup 
all or almost all of their costs through enrollment revenue (a maximum 
$30 enrollment fee in Years One and Two) alone. Furthermore, this 
analysis found that endorsed sponsors with lower administrative costs 
can easily collect sufficient enrollment revenue to cover their 
administrative expenses, and as a result may be able to charge a lower 
enrollment fee or pass greater savings onto their enrollees.

K. Alternatives Considered

    Most of the provisions related to the Medicare prescription drug 
discount card program are statutorily specified; however, there were a 
few policy areas where the Secretary was provided discretion and we 
considered alternatives to the proposed features. A number of the areas 
where we considered alternatives relate to applicant qualifications. 
The statute specifies that the Secretary may determine the types of 
non-governmental entities that are appropriate to act as endorsed 
sponsors, and these entities may include pharmacy benefit management 
companies, wholesale or retail pharmacy delivery systems, insurers 
(including insurers offering Medicare supplemental policies), and Part 
C plans. Although we have the authority to limit the types of entities 
that may act as endorsed sponsors, the only specific structural 
requirement for a sponsor is that it be a non-governmental, single 
legal entity doing business in the United States. We chose not to 
impose other structural requirements at this time because we believe 
our other conditions for endorsement ensure that applicants, either 
individually or through subcontracts, will have the necessary 
experience and integrity to act as endorsed sponsors. We did this to 
provide flexibility for a wider variety of applicants using combined 
capabilities to become card sponsors than are specifically identified 
in the statute.
    Another provision of the statute related to applicant 
qualifications is that an applicant is eligible for endorsement under 
the Medicare prescription drug discount card program if the applicant 
by itself, or together with subcontractors, demonstrates experience and 
expertise in operating a drug discount card or similar program and 
meets certain requirements related to business stability and integrity. 
We considered alternatives for how to interpret this provision. As 
discussed earlier in this document, we decided to interpret this 
provision to mean that applicants, together with their subcontractors, 
must have certain qualifications. First, is the qualification of 
demonstrating 3 years of private sector experience in pharmacy benefit 
management, including adjudication and processing of claims at the 
point of sale, negotiating with prescription drug manufacturers and 
others for rebates and discounts on prescription drugs, and 
administration and tracking of an individual subsidy or benefit in real 
time. All of these administrative functions are features that must be 
performed as part of this program. We did consider both shorter and 
longer periods of experience. We believe, however, that the 3 years 
prior experience strikes an appropriate balance to ensure that endorsed 
sponsors are able to quickly establish their endorsed programs, thereby 
promoting the statutory mandate to implement the Medicare drug discount 
card program within 6 months of enactment of the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003. In addition, the 3 
years prior experience requirement ensures that endorsed sponsors have 
the necessary experience and capacity to offer card enrollees quality 
discounts and customer service. Moreover, given the relative newness of 
the drug card industry and high market turnover, we believe requiring 
less than 3 years experience would create an untenable risk of having 
the Medicare name associated with less than stable and reputable 
organizations. Alternatively, requiring more than 3 years experience 
might be too limiting in terms of an applicant pool.
    In addition to requiring 3 years of relevant experience, we decided 
to require that a single entity which is either the applicant or a 
subcontractor operate a pharmacy benefit program, a drug discount card, 
a low-income drug assistance program, or a similar program that serves 
at least 1 million covered lives. We decided not to link the 1 million 
covered lives requirement with the 3-year experience requirement in 
order to provide entities the flexibility to combine their 
capabilities. For example, an entity with the requisite experience may 
not have the enrollment capacity, but may acquire this capacity by 
contracting with another entity for purposes of administering the 
endorsed program. As discussed previously in this document, given the 
potential level of enrollment in this program, we believe it is 
necessary that endorsed sponsors have the capacity to accept a large 
volume of enrollees. Furthermore, our 6-month statutorily mandated 
implementation timeline necessitates that endorsed sponsors be able to 
quickly accommodate a potentially large influx of enrollees over a 
relatively short period of time. Current levels of covered lives 
provides evidence of an applicant's immediate capacity to do so. In 
examining our data on the number of covered lives served by a variety 
of organizations, we found that a standard of 1 million lives strikes a 
balance between ensuring a competitive marketplace with a number of 
different endorsed programs available to Medicare beneficiaries and 
ensuring that endorsed sponsors have the capacity to handle a large 
influx of card enrollees.

[[Page 69915]]

    Another area where we considered alternatives relates to proration 
of the $600 transitional assistance. Section 1860D-31(g)(2)(A) of the 
Act provides that transitional assistance beneficiaries may receive up 
to $600 each year in transitional assistance. However, section 1860D-
31(g)(2)(B) of the Act permits us to prorate the amount of transitional 
assistance available to beneficiaries applying for transitional 
assistance. We considered whether or not to exercise this authority. We 
decided not to prorate transitional assistance amounts in 2004 in 
recognition that it may take time for our education campaign to reach 
all beneficiaries and that beneficiaries need sufficient opportunity to 
learn about the Medicare prescription drug discount card program 
without penalty. We did, however, decide to prorate the transitional 
assistance available to eligible enrollees applying for transitional 
assistance in 2005. We decided to prorate transitional assistance in 
2005 because we believe that, by 2005, beneficiaries will have had 
ample time to learn about the Medicare prescription drug discount card 
program. In addition, prorating transitional assistance encourages 
transitional assistance eligible beneficiaries to enroll in the 
Medicare prescription drug discount card program as early as possible 
in order to maximize their transitional assistance amount, which in 
turn will increase the volume of covered discount card drugs obtained 
under an endorsed program and enhance an endorsed sponsor's ability to 
negotiate deeper discounts for discount card enrollees.
    We also considered alternatives related to the requirements for the 
Secretary to establish procedures and negotiate arrangements with 
sponsors regarding pharmacies that support long term care facilities 
and I/T/U pharmacies. We considered whether to require all card 
sponsors to integrate pharmacies that support long term care facilities 
and, for sponsors serving the relevant states, I/T/U pharmacies into 
their networks. As discussed in greater detail previously in this 
document, we decided the best way to ensure that AI/ANs and residents 
of long term care facilities have the opportunity to receive 
transitional assistance is to promote a competition for ``special 
endorsement'' to serve these beneficiaries and to select at least two 
of the best plans for including each type of pharmacy, one type 
associated with long term care facilities, and the other being I/T/U 
pharmacies. We believe a competition among interested sponsors will 
encourage better, more thoughtful plans for access to a market 
generally untapped by the pharmacy benefit management industry. 
Pharmacies supporting long term care facilities and AI/ANs are not 
generally included in the traditional pharmacy networks of the pharmacy 
benefit management industry. To require that all sponsors provide for 
their inclusion would represent a significant new burden and could 
undermine the business case for participation by some potential 
applicants considering participation in the broader program. A similar 
set of considerations also applied to how to deal with the territories 
and our decision to limit the number of special endorsed sponsors 
operating in each of the territories to at least one in order to assure 
that a sufficient number of beneficiaries will enroll in special 
endorsed sponsors' endorsed programs in the territories. We were 
concerned that in the absence of this decision, an insufficient number 
of applicants would seek to offer endorsed programs in the territories 
and we therefore would be unable to ensure that residents of the 
territories have access to negotiated prices.

List of Subjects

42 CFR Part 403

    Grant programs-health, Health insurance, Hospitals, 
Intergovernmental relations, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 408

    Medicare.

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV, as follows:

PART 403--SPECIAL PROGRAMS AND PROJECTS

0
1. The authority citation for part 403 continues to read as follows:

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


0
2. Subpart H is revised to read as follows:

Subpart H--Medicare Prescription Drug Discount Card and Transitional 
Assistance Program
Sec.
403.800 Basis and scope.
403.802 Definitions.
403.804 General rules for solicitation, application and Medicare 
endorsement period.
403.806 Sponsor requirements for eligibility for endorsement.
403.808 Use of transitional assistance funds.
403.810 Eligibility and reconsiderations.
403.811 Enrollment, disenrollment, and associated endorsed sponsor 
requirements.
403.812 HIPAA privacy, security, administrative data standards, and 
national identifiers.
403.813 Marketing limitations and record retention requirements.
403.814 Special rules concerning Part C organizations and Medicare 
cost plans and their enrollees.
403.815 Special rules concerning States.
403.816 Special rules concerning long-term care and I/T/U 
pharmacies.
403.817 Special rules concerning the territories.
403.820 Sanctions, penalties, and termination.
403.822 Reimbursement of transitional assistance and associated 
sponsor requirements.

Subpart H--Medicare Prescription Drug Discount Card and 
Transitional Assistance Program


Sec.  403.800  Basis and scope.

    (a) Basis. This subpart is based on section 1860D-31 of the Social 
Security Act (the Act).
    (b) Scope. This subpart sets forth the standards and procedures CMS 
uses to implement the Medicare Prescription Drug Discount Card and 
Transitional Assistance Program.


Sec.  403.802  Definitions.

    For purposes of this subpart, the following definitions apply:
    Annual coordinated election period means the period beginning on 
November 15, 2004 and ending on December 31, 2004, during which a 
discount card enrollee may elect to disenroll from their current 
endorsed discount card program and elect enrollment in another endorsed 
discount card program effective January 1, 2005.
    Applicant means the non-governmental, single legal organization or 
entity doing business in the United States that is applying for 
Medicare endorsement of its prescription drug discount card program, as 
described in its application, to be operated by itself or in 
coordination with subcontractors.
    Application means the document submitted to CMS by an applicant 
that seeks to demonstrate the applicant's compliance with the 
requirements specified in this subpart in order to obtain Medicare 
endorsement of the applicant's prescription drug discount card program.
    Authorized representative means a person with legal authority to 
act on behalf of an individual in making decisions related to the 
individual's health care or the individual's

[[Page 69916]]

enrollment in, disenrollment from, and access to negotiated prices and 
transitional assistance under the Medicare Prescription Drug Discount 
Card and Transitional Assistance Program.
    Covered discount card drug means any of the following: a drug that 
may be dispensed only upon a prescription and that is described in 
sections 1927(k)(2)(A)(i) through (iii) of the Act; a biological 
product described in sections 1927(k)(2)(B)(i) through (iii) of the 
Act; insulin described in section 1927(k)(2)(C) of the Act; the 
following medical supplies associated with the injection of insulin: 
syringes, needles, alcohol swabs, and gauze; a vaccine licensed under 
section 351 of the Public Health Service Act; or any use of a covered 
discount card drug for a medically accepted indication (as defined in 
section 1927(k)(6) of the Act). The definition of covered discount card 
drug excludes the following: agents when used for anorexia, weight 
loss, or weight gain; agents when used to promote fertility; agents 
when used for cosmetic purposes or hair growth; agents when used for 
the symptomatic relief of cough and colds; prescription vitamins and 
mineral products, except prenatal vitamins and fluoride preparations; 
nonprescription drugs; outpatient drugs for which the manufacturer 
seeks to require that associated tests or monitoring services be 
purchased exclusively from the manufacturer or its designee as a 
condition of sale; barbiturates; and benzodiazepines.
    Discount card enrollee or enrollee or card enrollee means an 
individual described in Sec.  403.810(a) who elects to enroll in a 
Medicare-endorsed prescription drug discount card program.
    Effective date means the date on which an enrollment or 
disenrollment transaction becomes effective.
    Enrollment period means the period beginning on the initial 
enrollment date and ending on December 31, 2005.
    Exclusive card program means an endorsed discount card program that 
is offered by an exclusive card sponsor.
    Exclusive card sponsor means an endorsed sponsor that also operates 
one or more Medicare managed care plans and limits enrollment in its 
endorsed discount card program to individuals described in Sec.  
403.810(a) who are enrollees in one of the Medicare managed care plans 
it offers.
    Family size means one for individuals who are single, and two for 
individuals who are married.
    Federal Employee's Health Benefits Program plan means a plan under 
chapter 89 of title 5 of the United States Code including the Retired 
Federal Employee's Health Benefits Program.
    Formulary means the list of specific drugs from among covered 
discount card drugs for which an endorsed sponsor offers negotiated 
prices to Medicare beneficiaries enrolled in its Medicare-endorsed 
prescription drug discount card program.
    Group enrollment means simultaneous enrollment of all or some of 
the individuals described in sectioin 403.810(a) who are members of a 
Medicare managed care plan into the exclusive card program offered by 
the Medicare managed care organization.
    HIPAA means the Health Insurance Portability and Accountability Act 
of 1996, 42 U.S.C. 1320d and section 264 of Public Law 104-191.
    Income means the components of an individual's adjusted gross 
income (AGI), as defined under 26 U.S.C. section 62, and, to the extent 
not included in the components of AGI, retirement and disability 
benefits, or, if he or she is married, the sum of such income for the 
individual and his or her spouse.
    Initial enrollment date means the date established by the Secretary 
on which endorsed sponsors may begin accepting beneficiaries' standard 
enrollment forms.
    Initial enrollment year means the period beginning on the initial 
enrollment date and ending on December 31, 2004.
    I/T/U pharmacy means a pharmacy operated by the Indian Health 
Service, an Indian tribe or tribal organization, or an urban Indian 
organization, all of which are defined in section 4 of the Indian 
Health Care Improvement Act, 25 U.S.C. 1603.
    Long-term care facility means a skilled nursing facility, as 
defined in section 1819(a) of the Act, or nursing facility, as defined 
in section 1919(a) of the Act.
    Long-term care pharmacy means a pharmacy owned by or under contract 
with a long-term care facility to provide prescription drugs to the 
facility's residents.
    Medicare cost plan means an organization that offers enrollment 
under a reasonable cost reimbursement contract under section 1876(h) of 
the Act.
    Medicare managed care organization means a Part C organization 
offering a Part C plan described in section 1851(a)(2)(A) of the Act or 
a Medicare cost plan.
    Medicare managed care plan means a plan described in section 
1851(a)(2)(A) of the Act offered by a Part C organization or a Medicare 
cost plan.
    Medicare Prescription Drug Discount Card and Transitional 
Assistance Program or Medicare Drug Discount Card Program means the 
program established under section 1860D-31 of the Act.
    Medicare-endorsed prescription drug discount card program, or 
endorsed program, or endorsed discount card program means any 
prescription drug discount card program that has received Medicare 
endorsement and whose endorsed sponsor has entered into a contract with 
CMS.
    Medicare-endorsed prescription drug discount card sponsor, or 
endorsed sponsor, or endorsed discount card sponsor means any applicant 
that has received endorsement from Medicare and entered into a contract 
with CMS to operate an approved Medicare-endorsed discount card 
program.
    Negotiated price means the discounted price for a covered discount 
card drug offered by an endorsed sponsor, including any dispensing fee, 
which takes into account negotiated price concessions, such as 
discounts, direct or indirect subsidies, rebates, and direct or 
indirect remunerations.
    Network pharmacy means a licensed pharmacy that is not a mail order 
pharmacy and that is under contract with an endorsed sponsor to provide 
negotiated prices to its card enrollees and accept transitional 
assistance as payment for covered discount card drugs provided to its 
transitional assistance enrollees.
    New Medicare managed care organization means an entity applying for 
approval to enter into a new contract with CMS to offer a new, 
coordinated care plan or plans as described in section 1851(a)(2)(A) of 
the Act under Medicare Part C and an exclusive card program under the 
Medicare Drug Discount Card Program.
    Over-the-counter drug means a non-prescription drug.
    Part C organization means an organization offering a Part C plan.
    Part C plan means a plan described in section 1859(b)(1) of the 
Act.
    Pharmacy network means the group of network pharmacies under 
contract with an endorsed sponsor.
    Poverty line means the income level defined in section 673(2) of 
the Community Services Block Grant Act, 42 U.S.C. 9902(2), including 
any revision required by such section, applicable to the family size 
involved.
    Rural means a five-digit zip code in which the population density 
is less than 1000 persons per square mile.

[[Page 69917]]

    Second enrollment year means the period beginning on January 1, 
2005 and ending on December 31, 2005.
    Solicitation means the application materials identified in the 
notice CMS publishes in the Federal Register announcing its intention 
to accept and consider applications from applicants seeking Medicare 
endorsement for their prescription drug discount card programs.
    Special election period means the period beginning the day after 
the effective date of an individual's disenrollment from an endorsed 
discount card program for one of the reasons listed in Sec.  
403.811(b)(2). The length of any given election period will be 
specified by CMS in a form and manner that supports the goals of the 
Medicare Drug Discount Card Program.
    Special endorsed sponsor means an endorsed sponsor who has received 
special endorsement by CMS.
    Special endorsement means an endorsement granted under Sec.  
403.816 or Sec.  403.817.
    Standard enrollment form means an enrollment form or other approved 
process for enrolling individuals into an endorsed program that 
incorporates the standard elements provided by CMS.
    Subcontractor means an organization or entity doing business in the 
United States with which an applicant or endorsed sponsor enters into a 
contract or other legal arrangement in connection with the operation of 
a prescription drug discount card program.
    Suburban means a five-digit zip code in which the population 
density is between 1000 and 3000 persons per square mile.
    Transition period means the period beginning on January 1, 2006 and 
ending, for individuals enrolled for coverage under Part D, on the 
effective date of the individual's coverage, and for individuals not so 
enrolled, on the last day of the initial Part D open enrollment period.
    Transitional assistance means a subsidy that transitional 
assistance enrollees may apply toward the cost of covered discount card 
drugs in the manner described in Sec.  403.808(d).
    Transitional assistance effective date means the date on which a 
transitional assistance enrollee can access transitional assistance.
    Transitional assistance enrollee means an individual described in 
Sec.  403.810(b) who has applied for and been determined eligible for 
transitional assistance and has enrolled in a discount card program.
    Urban means a five-digit zip code in which the population density 
is greater than 3000 persons per square mile.


Sec.  403.804  General rules for solicitation, application and Medicare 
endorsement period.

    (a) Application. (1) Except as provided in paragraph (a)(2) of this 
section, an applicant must submit an application to CMS by the deadline 
announced in the solicitation to be eligible for Medicare endorsement 
of its prescription drug discount card program. The applicant must 
certify that based on best knowledge, information, and belief, the 
reported information is accurate, complete, truthful, and supportable.
    (2) A new Medicare managed care organization may simultaneously 
apply to offer a new Part C plan or plans and an exclusive card program 
after the deadline announced in the solicitation. New Medicare managed 
care organizations seeking endorsement of their prescription drug 
discount card programs must submit an application to CMS at the time 
that they submit their Part C applications. New Medicare managed care 
organizations will be eligible for endorsement provided CMS approves 
their Part C application, the new Medicare managed care organizations 
demonstrate to CMS that they meet the criteria under paragraph (b) of 
this section, and the new Medicare managed care organizations 
demonstrate that they will meet the requirements of paragraph (e)(2) of 
this section.
    (b) Eligibility to receive endorsement. Except as specified in 
Sec. Sec.  403.814, 403.816 and 403.817, an applicant will be eligible 
for endorsement if its application demonstrates to CMS's satisfaction 
that the applicant meets the requirements of Sec.  403.806(a) and Sec.  
403.806(b)(1) and that it would operate its endorsed program in a 
manner consistent with the requirements of Sec.  403.806(b)(2) and 
(b)(3) through Sec.  403.806(m). An applicant that submits a complete 
application that meets all of the requirements of this subpart will be 
eligible to enter into a contract with CMS to operate a Medicare-
endorsed prescription drug discount card program. Following the receipt 
of its Medicare endorsement, an endorsed sponsor must comply with the 
requirements of Sec.  403.806(b)(2) and (b)(3) through Sec.  403.806(m) 
through the end of the transition period.
    (c) Ability to subcontract with other organizations and entities. 
(1) An applicant for endorsement may demonstrate that it meets the 
requirements of this subpart by combining with subcontractors.
    (2) Any subcontracts must be in final form satisfactory to CMS, 
signed by all applicable parties, and filed with CMS before an endorsed 
sponsor will be permitted to engage in any enrollment or information 
and outreach.
    (3) Once endorsed, an endorsed sponsor must ensure that its 
subcontractors comply with all applicable requirements of this subpart.
    (d) Period of endorsement. An applicant eligible to receive 
endorsement will be required to sign a contract with CMS agreeing to 
operate its approved Medicare-endorsed prescription drug discount card 
program(s) until the end of the transition period.
    (e)(1) Except as provided in paragraph (e)(2) of this section, we 
expect an endorsed sponsor to be ready by June 8, 2004, to initiate 
enrollment and fully operate its endorsed program in compliance with 
the requirements of Sec.  403.806(b)(2) and (b)(3) through Sec.  
403.806(m).
    (2) A new Medicare managed care organization must be ready to 
initiate enrollment and fully operate its exclusive card program in 
compliance with the requirements of Sec. Sec.  403.806(b)(2) and (b)(3) 
through Sec.  403.806(m) upon approval of its Part C application and 
application for Medicare endorsement of its prescription drug discount 
card program.


Sec.  403.806  Sponsor requirements for eligibility for endorsement.

    Except as specified in Sec.  403.814, Sec.  403.816, and Sec.  
403.817, an endorsed sponsor must meet the following requirements:
    (a) Applicant experience. (1) An applicant must be a non-
governmental, single legal entity doing business in the United States.
    (2) An applicant must have 3 years of private sector experience in 
the United States in pharmacy benefit management, which is defined to 
mean--
    (i) Adjudicating and processing claims for drugs at the point of 
sale;
    (ii) Negotiating with prescription drug manufacturers and others 
for discounts, rebates, and/or other price concessions on prescription 
drugs; and
    (iii) Administering and tracking individuals' subsidies or benefits 
in real time.
    (3) A single legal entity which is either the applicant or a 
subcontractor must, at the time of application for Medicare 
endorsement, operate a pharmacy benefit program, a prescription drug 
discount card program, a low-income drug assistance program, or a 
similar program that serves at least 1 million covered lives.
    (b) Financial stability and business integrity. (1) An applicant 
must

[[Page 69918]]

demonstrate a satisfactory record of the financial stability and 
business integrity of itself, any subcontractors on whom the applicant 
relies to satisfy the 3 years experience requirement in paragraph 
(a)(2) of this section and the 1 million covered lives requirement in 
paragraph (a)(3) of this section, and any subcontractors engaged by the 
applicant to perform the following activities: develop the pharmacy 
network; negotiate with manufacturers or pharmacies for rebates, 
discounts, or other price concessions; handle eligibility for or 
enrollment in the endorsed sponsor's endorsed discount card program 
and/or transitional assistance; and administer transitional assistance.
    (2) An endorsed sponsor and any subcontractors described in 
paragraph (b)(1) of this section must maintain a satisfactory record of 
financial stability and business integrity during the term of the 
endorsed program.
    (3) Medicare endorsement of a discount card program shall not be 
construed to express or imply any opinion that an endorsed sponsor or 
any subcontractor of an endorsed sponsor is in compliance with or not 
liable under the False Claims Act, anti-kickback statute (section 
1128B(b) of the Act), or other legal authorities for any improper 
billing, claims submission, or related conduct.
    (c) Compliance with applicable law. An endorsed sponsor must comply 
with all applicable Federal and State laws, including the Federal anti-
kickback statute (section 1128B(b) of the Act).
    (d) Prescription drug offering. An endorsed sponsor must comply 
with the following discount, rebate, and formulary requirements:
    (1) Offer all of its discount card enrollees negotiated prices on 
covered discount card drugs, which may be limited to those covered 
discount card drugs included on the endorsed sponsor's formulary.
    (2) If the endorsed sponsor uses a formulary, offer a negotiated 
price on at least one covered discount card drug in each of the lowest 
level categories for each of the therapeutic groups representing the 
drugs most commonly needed by Medicare beneficiaries as determined by 
CMS. A specific covered discount card drug may not be used to fulfill 
this requirement for more than one category.
    (3) Offer a negotiated price on a generic drug in at least 55 
percent of the lowest level categories in each of the therapeutic 
groups representing the drugs most commonly needed by Medicare 
beneficiaries as determined by CMS.
    (4) In setting negotiated prices under this section, an endorsed 
sponsor may vary its prices and the drugs included on the formulary by 
pharmacy contract and enrollee characteristics, such as transitional 
assistance eligibility status.
    (5) Synchronize changes in the list of, and negotiated prices for, 
covered discount card drugs included in the endorsed sponsor's 
formulary with formulary and negotiated prices published on a price 
comparison Web site, as described in paragraph (i)(4)(v) of this 
section.
    (6) Obtain rebates, discounts, or other price concessions from 
manufacturers on covered discount card drugs and pass a share of such 
concessions to enrollees through negotiated prices.
    (7) Guarantee that network and mail order pharmacies provide the 
lower of the negotiated price or usual and customary price when a 
covered discount card drug for a negotiated price is available at the 
point of sale.
    (8) Guarantee that a network pharmacy, at the point of sale, inform 
a discount card enrollee of any differential between the price of a 
prescribed drug (if it is a covered discount card drug) and the price 
of the lowest priced generic covered discount card drug that is 
therapeutically equivalent and bioequivalent and available at such 
pharmacy. Mail order pharmacies are to provide this information at the 
time of delivery of the drug.
    (9) Except during the week of November 15, 2004 (which coincides 
with the beginning of the annual coordinated election period), ensure 
that any increase in the negotiated price for a covered discount card 
drug does not exceed an amount proportionate to the change in the 
drug's average wholesale price (AWP), and/or an amount proportionate to 
the changes in the endorsed sponsor's cost structure, including 
material changes to any discounts, rebates, or other price concessions 
the endorsed sponsor receives from a pharmaceutical manufacturer or 
pharmacy.
    (e) Transitional assistance administration. An endorsed sponsor 
must administer transitional assistance funds, including any roll-over 
funds as described in Sec.  403.808(f), for transitional assistance 
enrollees, through the following procedures:
    (1) Establish accounting procedures to manage the transitional 
assistance funds for each transitional assistance enrollee.
    (2) Ensure that transitional assistance funds are applicable to, 
and only to, all covered discount card drugs available at the endorsed 
sponsors' network and mail order pharmacies, regardless of formulary.
    (3) Ensure that, at network and mail order pharmacies, transitional 
assistance funds are applied at the lower of negotiated price (if any) 
and the pharmacy's usual and customary price.
    (4) Ensure that network pharmacies make available to the 
transitional assistance enrollee, electronically or by telephone, at 
the point-of-sale of covered discount card drugs, the amount of 
transitional assistance remaining available to the transitional 
assistance enrollee. Mail order pharmacies are to make this information 
available by telephone.
    (5) Maintain a toll-free telephone number that discount card 
enrollees may use to determine their transitional assistance balances.
    (6) Enforce coinsurance requirements described in Sec.  403.808(e) 
and ensure that the portion of the price paid through coinsurance is 
not deducted from the total transitional assistance funds available to 
the discount card enrollee.
    (f) Service area and pharmacy access. An endorsed sponsor must meet 
the following requirements for its service area and its pharmacy 
network:
    (1) The service area must cover one or more States.
    (2) The endorsed sponsor's discount card program must be available 
to all eligible individuals residing in each State in the endorsed 
sponsor's service area and may not be offered to individuals residing 
outside of the United States.
    (3) The endorsed sponsor must have a contracted pharmacy network, 
consisting of pharmacies other than mail-order pharmacies, sufficient 
to ensure that for beneficiaries residing in the endorsed sponsor's 
service area the following requirements are satisfied:
    (i) At least 90 percent of Medicare beneficiaries, on average, in 
urban areas served by the endorsed program, live within 2 miles of a 
network pharmacy;
    (ii) At least 90 percent of Medicare beneficiaries, on average, in 
suburban areas served by the endorsed program, live within 5 miles of a 
network pharmacy; and
    (iii) At least 70 percent of Medicare beneficiaries, on average, in 
rural areas served by the endorsed program, live within 15 miles of a 
network pharmacy.
    (4) The endorsed sponsor's pharmacy network may be supplemented by 
pharmacies offering home delivery via mail-order, provided the 
requirements of paragraph (f)(3) of this section are met.
    (g) Information and outreach and customer service. (1) An endorsed

[[Page 69919]]

sponsor must provide through the Internet and some other tangible 
medium (such as a mailing) to Medicare beneficiaries information and 
outreach materials describing its endorsed drug card program, including 
the following information--
    (i) The enrollment fee;
    (ii) Negotiated prices offered for covered discount card drugs;
    (iii) If offered, discounts on over-the-counter drugs;
    (iv) Any other products or services offered under the endorsement; 
and
    (v) Any other information that CMS determines is necessary for a 
full description of the endorsed discount drug card program.
    (2) An endorsed sponsor must include on a Web site the following:
    (i) Information regarding when the Web site was last updated; and
    (ii) A disclaimer that the information on the Web site may not be 
current.
    (3) An endorsed sponsor must use the following forms which 
incorporate standard elements provided by CMS:
    (i) An enrollment form (except as may be modified for an exclusive 
card sponsor as discussed in Sec.  403.814(b)(5)(iii); and
    (ii) An eligibility determination notice.
    (4) An endorsed sponsor must provide to each enrollee a card that 
complies with National Council for Prescription Drug Programs 
standards.
    (5) An endorsed sponsor must meet the following requirements for 
the review and approval of information and outreach materials:
    (i) Comply with the Information and Outreach Guidelines published 
by CMS; and
    (ii) Except as provided in paragraph (g)(5)(iii) of this section, 
not distribute any information and outreach materials until or unless 
they are approved by CMS.
    (iii) If CMS does not disapprove the initial submission of 
information and outreach materials within 30 days of receipt of these 
materials, then the materials will be deemed approved under paragraph 
(g)(5)(ii) of this section.
    (iv) Information and outreach materials may discuss only products 
or services inside the scope of endorsement, as described in paragraph 
(h) of this section.
    (v) Information and outreach materials include the same kinds of 
materials described in 42 CFR 422.80(b), as well as the enrollment 
form, eligibility determination form, and membership card described in 
paragraphs (g)(3) and (g)(4) of this section, Web site content, and 
information regarding discounts for over-the-counter drugs.
    (6) An endorsed sponsor must maintain a toll-free customer call 
center that is open during usual business hours and that provides 
customer telephone service, including to pharmacists, in accordance 
with standard business practices. The endorsed sponsor must inform 
enrollees that the toll-free telephone number provides information on 
the amount of remaining transitional assistance, in accordance with 
paragraph (e)(5) of this section.
    (7) An endorsed sponsor must provide a system to reduce the 
likelihood of medical errors and adverse drug interactions and to 
improve medication use.
    (h) Products and services inside and outside the scope of the 
endorsement. (1) An endorsed sponsor may provide, under the 
endorsement, only those products and services inside the scope of the 
endorsement, including conducting enrollment. An endorsed sponsor must 
ensure that discount card enrollees are not charged any additional fee 
(other than the enrollment fee allowed under Sec.  403.811(c)) for 
products or services inside the scope of the endorsement.
    (2) Products and services inside the scope of the endorsement are 
limited to--
    (i) Products or services offered for no additional fee, other than 
the enrollment fee allowed under Sec.  403.811(c), that are directly 
related to a covered discount card drug; or
    (ii) A discounted price for an over-the-counter drug.
    (i) Reporting. (1) An endorsed sponsor must report to CMS on a 
periodic basis information on the major features of the endorsed 
sponsor's programs that correspond to the qualifications for 
endorsement, including, but not limited to, information concerning--
    (i) Savings from pharmacies and manufacturers obtained through 
rebates, discounts, and other price concessions;
    (ii) Savings shared with discount card enrollees by manufacturer, 
by all retail pharmacies, by all mail order pharmacies, and by all 
brand name and all generic covered discount card drugs;
    (iii) Dispensing fees;
    (iv) Certified (by the chief financial officer) financial 
accounting records on transitional assistance used by the transitional 
assistance enrollees in each month;
    (v) Participant utilization and spending statements;
    (vi) Utilization and spending for selected drugs;
    (vii) Performance on customer service metrics such as call center 
performance;
    (viii) Grievance logs; and
    (ix) Endorsed sponsor's compliance with the pharmacy network access 
standards.
    (2) An endorsed sponsor must provide notice of, and the rationale 
for, negotiated price increases, except for increases during the week 
of November 15, 2004, due to reasons other than changes in average 
wholesale price (AWP).
    (3) An endorsed sponsor must certify that based on best knowledge, 
information, and belief, the reported information is accurate, 
complete, truthful, and supportable.
    (4) Through a price comparison Web site, an endorsed sponsor must 
report the following information:
    (i) Customer service hours;
    (ii) Customer service contact information;
    (iii) Endorsed program Web site address;
    (iv) Annual enrollment fee; and
    (v) Negotiated prices (including any applicable dispensing fee), 
for every covered discount card drug included in the discount card 
program's offering.
    (5) CMS may require endorsed sponsors to submit, in standard 
terminology, descriptions of other discount card related services they 
provide, such as pharmacist services.
    (j) Grievance process. An endorsed sponsor must establish and 
maintain a grievance process. This process must be designed to track 
and appropriately address in a timely manner enrollees' complaints 
about any aspect of their endorsed program for which the endorsed 
sponsor is responsible.
    (k) Eligibility, enrollment, and disenrollment. (1) An endorsed 
sponsor must make preliminary eligibility determinations in accordance 
with Sec.  403.810 and conduct enrollment and disenrollment in 
accordance with Sec.  403.811.
    (l) Authorized representative. An endorsed sponsor must treat an 
individual's authorized representative as the individual, if under 
applicable law, the authorized representative has the legal authority 
to act on behalf of the individual with respect to the action at issue.
    (m) Other. An endorsed sponsor must meet the requirements of 
Sec. Sec.  403.812, 403.813, and 403.822 of this subpart.


Sec.  403.808  Use of transitional assistance funds.

    (a) Individuals determined eligible for transitional assistance in 
2004. Subject to paragraph (d) of this section, an individual who, in 
calendar year 2004, is determined eligible for transitional assistance 
under Sec.  403.810(b) is entitled to the following:

[[Page 69920]]

    (1) $600 in calendar year 2004; and
    (2) $600 in calendar year 2005.
    (b) Individuals determined eligible for transitional assistance in 
2005. Subject to paragraph (d) of this section, an individual who, in 
calendar year 2005, is determined eligible for transitional assistance 
under Sec.  403.810(b) is entitled to one of the following amounts for 
calendar year 2005:
    (1) If the complete application for the individual's transitional 
assistance eligibility is received on or after January 1, 2005 and 
before April 1, 2005, $600.
    (2) If the complete application for the individual's transitional 
assistance eligibility is received on or after April 1, 2005 and before 
July 1, 2005, $450.
    (3) If the complete application for the individual's transitional 
assistance eligibility is received on or after July 1, 2005 and before 
October 1, 2005, $300.
    (4) If the complete application for the individual's transitional 
assistance eligibility is received on or after October 1, 2005 and on 
or before December 31, 2005, $150.
    (c) Payment of enrollment fee. An individual found eligible for 
transitional assistance is entitled to have CMS pay the annual 
enrollment fee to the endorsed sponsor on his or her behalf.
    (d) Conditions on use of transitional assistance. A transitional 
assistance enrollee may access the transitional assistance described in 
paragraphs (a) and (b) of this section only if the following conditions 
are met:
    (1) Except as provided in Sec.  403.814(b)(3)(v), the transitional 
assistance funds are applied toward the cost of a covered discount card 
drug obtained under the Medicare Prescription Drug Discount Card and 
Transitional Assistance Program;
    (2) The individual pays a coinsurance amount in accordance with 
Sec.  403.808(e);
    (3) The individual purchases the covered discount card drug on or 
after the individual's transitional assistance effective date; and
    (4) The individual is enrolled in the Medicare Prescription Drug 
Discount Card and Transitional Assistance Program on the date the 
individual's claim for the covered discount card drug is adjudicated.
    (e) Coinsurance. If sufficient transitional assistance funds are 
available, transitional assistance funds must be expended in accordance 
with the following:
    (1) For beneficiaries with incomes at or below 100 percent of the 
poverty line, 95 percent of the price of a covered discount card drug 
must be paid from the available transitional assistance funds.
    (2) For beneficiaries with incomes greater than 100 percent but at 
or below 135 percent of the poverty line, 90 percent of the price of a 
covered discount card drug must be paid from the available transitional 
assistance funds.
    (f) Rollover. An individual with transitional assistance retains 
access to any balance of transitional assistance not expended in a 
calendar year during the next calendar year, up to and including the 
transition period, if the individual--
    (1) Remains in his or her current endorsed discount card program;
    (2) Elects a new endorsed program in an Annual Coordinated Election 
Period; or
    (3) Is eligible for a Special Election Period under Sec.  
403.811(b)(2) and elects a new endorsed discount card program during 
such Special Election Period.


Sec.  403.810  Eligibility and reconsiderations.

    (a) Eligibility for an endorsed discount card program. An 
individual is eligible to enroll in an endorsed discount card program 
only if such individual meets the following conditions:
    (1) The individual is entitled to benefits, or enrolled, under 
Medicare Part A or enrolled under Medicare Part B; and
    (2) The individual, at the time of applying to enroll in an 
endorsed discount card program, is not enrolled in a State medical 
assistance program under Title XIX of the Act or under a waiver 
pursuant to section 1115 of the Act, under which the individual is 
entitled to any medical assistance for outpatient prescribed drugs as 
described in section 1905(a)(12) of the Act, except as allowed in Sec.  
403.817(d).
    (b) Eligibility for transitional assistance. An individual is 
eligible to receive transitional assistance if, at the time of applying 
for transitional assistance, the individual meets the following 
conditions:
    (1) The individual meets the conditions in paragraph (a) of this 
section;
    (2) The individual resides in one of the 50 States or the District 
of Columbia;
    (3) The individual's income is not more than 135 percent of the 
poverty line applicable to the individual's family size;
    (4) The individual does not have coverage for covered discount card 
drugs under one or more of the following sources:
    (i) A group health plan or health insurance coverage, as these 
terms are defined under section 2791 of the Public Health Service Act, 
other than a Part C plan or a group health plan consisting solely of 
excepted benefits (such as a Medigap plan) as the term is defined under 
section 2791 of the Public Health Service Act;
    (ii) Coverage provided under Chapter 55 of Title 10, United States 
Code, including TRICARE; or
    (iii) A Federal Employee's Health Benefits Program plan; and
    (5) The individual (or the individual's authorized representative) 
completes a standard enrollment form and signs and dates the form in 
accordance with Sec.  403.811(a)(4). By signing the form, the 
individual (or the individual's authorized representative) certifies, 
under penalty of perjury, that, to the best of the individual's 
knowledge, the information he or she provides on the form is accurate.
    (c) Special rule for QMBs, SLMBs and QIs. An individual is deemed 
to meet the income requirements in paragraph (b)(3) of this section if 
the individual is enrolled under Title XIX of the Act as a--
    (1) Qualified Medicare Beneficiary (QMB);
    (2) Specified Low-Income Medicare Beneficiary (SLMB); or
    (3) Qualified Individual (QI).
    (d) Duration of eligibility determinations. An individual 
determined eligible for the Medicare Prescription Drug Discount Card 
and Transitional Assistance Program and, in the case of transitional 
assistance enrollees, for transitional assistance, shall remain 
eligible for the Medicare Prescription Drug Discount Card and 
Transitional Assistance Program and, in the case of transitional 
assistance enrollees, for transitional assistance for the duration of 
the individual's enrollment in the Medicare Prescription Drug Discount 
Card and Transitional Assistance Program.
    (e) Drug card and transitional assistance benefits not treated as 
benefits under other Federal programs. Any benefits received under the 
Medicare Prescription Drug Discount Card and Transitional Assistance 
Program must not be taken into account in determining an individual's 
eligibility for, or the amount of benefits under, any other Federal 
program.
    (f) Verification of eligibility. (1) CMS will verify eligibility to 
enroll in an endorsed discount card program or to receive transitional 
assistance.
    (2) If CMS is unable to verify an individual's eligibility or 
ineligibility for transitional assistance, CMS can require the 
individual to provide additional income information in a form and 
manner specified by CMS as one condition of eligibility for 
transitional assistance.

[[Page 69921]]

    (g) Reconsideration. (1) If an individual is determined ineligible 
to enroll in an endorsed discount card program under paragraph (a) of 
this section or determined ineligible to receive transitional 
assistance under paragraph (b) of this section, the individual (or the 
individual's authorized representative) has a right to request that an 
independent review entity under contract with CMS reconsider the 
determination.
    (2) Reconsideration requests must be filed within 60 days from date 
of notice of an ineligibility determination, unless the individual (or 
the individual's authorized representative) can demonstrate good cause 
for why the 60-day time frame should be extended.
    (3) An individual (or the individual's authorized representative) 
may submit additional documentary evidence or an explanation about his 
or her eligibility in writing to the independent review entity, as part 
of the reconsideration process.
    (4) Reconsideration decisions shall be issued by the independent 
review entity in writing and contain an explanation of the reasoning of 
the decision.


Sec.  403.811  Enrollment and disenrollment and associated endorsed 
sponsor requirements.

    (a) Enrollment process. (1) An individual (or an individual's 
authorized representative) applying to enroll in an endorsed discount 
card program must complete a standard enrollment form or other method 
allowed by CMS and provide such information to the endorsed discount 
card program in which the individual wishes to enroll.
    (2) An individual electing to join an endorsed discount card 
program that charges an annual enrollment fee, and who is not applying 
for transitional assistance, must agree to pay the annual enrollment 
fee, if any, in a form and manner determined by the endorsed card 
sponsor.
    (3) An individual applying for transitional assistance at the time 
that they apply for enrollment in an endorsed discount card program may 
only enroll in the endorsed discount card program at that time if CMS 
determines that the individual is eligible for transitional assistance. 
Individuals not found eligible for transitional assistance may enroll 
in an endorsed discount card program without applying for transitional 
assistance after being notified of their ineligibility for transitional 
assistance.
    (4) An individual applying for transitional assistance must 
complete a standard enrollment form and sign and date the form, 
certifying, under penalty of perjury or similar sanction for false 
statements, as to the accuracy of the information provided on the 
standard enrollment form.
    (5) Except as provided in Sec.  403.811(b)(4), an individual who is 
not currently enrolled in an endorsed card program seeking to enroll in 
the Medicare Prescription Drug Discount Card and Transitional 
Assistance Program may do so at any time during the enrollment period.
    (6) An individual may not be enrolled in more than one endorsed 
discount card program at a time.
    (7) An individual may enroll in only one endorsed discount card 
program per year during the enrollment period. An individual enrolling 
during the initial enrollment year, with the exception of the 
circumstances under paragraph (b)(2) of this section, may change 
election for the second enrollment year during the annual coordinated 
election period. During the second enrollment year, an individual may 
enroll in only one endorsed discount card program, unless the 
individual meets the circumstances described in paragraph (b)(2) of 
this section.
    (8) An individual remains enrolled in an endorsed discount card 
program elected unless--
    (i) The individual is disenrolled under paragraph (b) of this 
section;
    (ii) The individual elects a new program during the Annual 
Coordinated Election Period; or
    (iii) The endorsed sponsor terminates its endorsed discount card 
program, or is terminated.
    (9) No new enrollment in an endorsed discount card program or 
changing election of an endorsed discount card program is allowed 
during the transition period.
    (10) Except as specified in Sec.  403.814(b)(6)(i), an individual 
may enroll in any endorsed discount card program, and only those 
endorsed discount card programs, offered in the individual's State of 
residence.
    (11) In order to access negotiated prices or transitional 
assistance, if applicable, an individual must be enrolled in an 
endorsed discount card program. Access to negotiated prices begins with 
the effective date of enrollment and ends with disenrollment. Access to 
transitional assistance begins with the transitional assistance 
effective date and ends for claims finalized on the date of 
disenrollment.
    (12) Except as provided in paragraph (b)(5) of this section, an 
individual may apply for transitional assistance at any time during the 
enrollment period.
    (b) Disenrollment process. (1) An enrollee may voluntarily 
disenroll at any time by notifying (or by having his authorized 
representative notify) the endorsed sponsor.
    (2) An enrolled individual who disenrolls during the enrollment 
period under the following circumstances is granted a Special Election 
Period in which the individual may enroll in another endorsed discount 
card program during the enrollment period:
    (i) A move of residence outside the service area of the current 
program;
    (ii) A change in residence to or from a long-term care facility;
    (iii) Enrollment in or disenrollment from a Part C plan or Medicare 
cost plan;
    (iv) An individual's current endorsed discount card program is 
terminated or terminates; or
    (v) Other exceptional circumstances, as defined by the Secretary.
    (3) Notification in order to effect a disenrollment is not required 
for an individual disenrolling from a terminating endorsed discount 
card program or enrolling in or disenrolling from a Medicare managed 
care plan offering an exclusive card program, or for individuals 
changing endorsed discount card programs during the Annual Coordinated 
Election Period.
    (4) A drug discount card enrollee who disenrolls from an endorsed 
discount card program other than for one of the reasons listed in 
paragraph (b)(2) of this section will no longer be determined eligible 
for the Medicare Prescription Drug Discount Card and Transitional 
Assistance Program and, if he or she disenrolls in 2004, must re-apply 
for the Medicare Prescription Drug Discount Card and Transitional 
Assistance Program should he or she wish to enroll in another endorsed 
discount card program for the second enrollment year.
    (5) An individual receiving transitional assistance who voluntarily 
disenrolls from an endorsed discount card program other than for one of 
the reasons listed in paragraph (b)(2) of this section will forfeit any 
transitional assistance remaining available to the individual on the 
date of disenrollment, and, if he or she disenrolls in 2004, must re-
apply for transitional assistance for 2005 in order to receive 
transitional assistance in 2005.
    (6) A discount card enrollee other than a transitional assistance 
enrollee may be involuntarily disenrolled from his or her endorsed 
discount card program for failure to pay the annual enrollment fee on a 
timely basis.
    (7) A discount drug card enrollee other than a transitional 
assistance enrollee may be charged another annual

[[Page 69922]]

enrollment fee each time the individual disenrolls from one endorsed 
discount card program and enrolls in another endorsed discount card 
program during the calendar year.
    (c) Enrollment fees. (1) An endorsed sponsor may charge an annual 
enrollment fee of no more than $30 to each individual enrolled in its 
endorsed discount card program.
    (2) An endorsed sponsor may not collect an enrollment fee from any 
individual applying for or receiving transitional assistance.
    (3) The annual enrollment fee must not be prorated for portions of 
the year.
    (4) An endorsed sponsor must charge a uniform enrollment fee to 
every discount card eligible individual, or to the Secretary in the 
case of individuals receiving transitional assistance, residing in a 
State.
    (5) An endorsed sponsor must refund any enrollment fee collected 
from a discount card enrollee, or any State that has paid the 
enrollment fee on behalf of the discount card enrollee, during the 
calendar year during which the individual is determined eligible to 
receive transitional assistance.
    (6) An endorsed sponsor may not charge an annual enrollment fee 
during the transition period.


Sec.  403.812  HIPAA privacy, security, administrative data standards, 
and national identifiers.

    (a) HIPAA covered entities. An endorsed sponsor is a HIPAA covered 
entity and must comply with the standards, implementation 
specifications, and requirements in 45 CFR parts 160, 162, and 164 as 
set forth in this section. Those functions of a endorsed sponsor the 
performance of which are necessary or directly related to the 
operations of the endorsed discount card program are covered functions 
for purposes of applying to endorsed sponsors the standards, 
implementation specifications, and requirements in 45 CFR parts 160, 
162, and 164.
    (b) HIPAA privacy requirements. An endorsed sponsor must comply 
with the standards, implementation specifications, and requirements in 
the Standards for Privacy of Individually Identifiable Health 
Information, 45 CFR parts 160 and 164, subparts A and E, in the same 
manner as a health plan, except to the extent such requirements are 
temporarily waived by the Secretary.
    (c) Security requirements. (1) Standard. An endorsed sponsor must 
comply with the applicable standards, implementation specifications, 
and requirements in the HIPAA Security Rule, 45 CFR parts 160 and 164, 
subparts A and C, in the same manner as other covered entities as of 
the compliance date of such Rule.
    (2) Attestation. An applicant in its application shall--
    (i) Attest that, as of the initial enrollment date, it will have in 
place appropriate administrative, technical, and physical safeguards to 
protect the privacy of protected health information in accordance with 
45 CFR 164.530(c); and
    (ii) Attest that its information security measures will meet the 
standards, implementation specifications, and requirements of 45 CFR 
part 164 subparts A and C as of the initial enrollment date, or, if 
unable to make this attestation, provide a plan for coming into 
compliance with these requirements by the compliance date of the 
Security Rule set forth in 45 CFR part 164, subpart C.
    (d) Administrative data standards. An endorsed sponsor must comply 
with any applicable standards, implementation specifications, and 
requirements in the Standards for Electronic Transactions under 45 CFR 
parts 160 and 162 subparts I through R.
    (e) Unique identifiers. An endorsed sponsor must comply with any 
applicable standards, implementation specifications, and requirements 
regarding standard unique identifiers under 45 CFR parts 160 and 162 as 
of the compliance date of any final rule for standard unique 
identifiers.
    (f) Applicability of other regulations. Nothing in this paragraph 
or in Sec.  403.813 shall be deemed a modification of parts 160, 162 
and 164 of title 45, Code of Federal Regulations or otherwise modify 
the applicability of such regulations to other organizations or covered 
entities independently subject to the mandates of HIPAA. If an endorsed 
sponsor is also a health plan, health care provider, or health care 
clearinghouse, nothing is this paragraph shall impair or otherwise 
affect the application of HIPAA or parts 160, 162 and 164 of title 45, 
Code of Federal Regulations to such entity and its performance of those 
functions which make such entity a health plan, health care provider, 
or health care clearinghouse.


Sec.  403.813  Marketing limitations and record retention requirements.

    (a) Marketing limitations. (1) An endorsed sponsor may only market 
those products and services offered under its endorsed program that are 
inside the scope of endorsement as defined in Sec.  403.806(h) and 
permitted under Sec.  403.812(b).
    (2) An endorsed sponsor may not request that a drug card enrollee 
or an individual seeking to enroll in its endorsed discount card 
program authorize the endorsed sponsor to use or disclose individually 
identifiable health information for purposes of marketing any product 
or service not allowed under paragraph (a)(1) of this section.
    (3) An endorsed sponsor may not co-mingle any materials related to 
the marketing of products and services allowed under paragraph (a)(1) 
of this section with other marketing materials.
    (4) Following termination of an endorsed sponsor's endorsement 
under Sec. Sec.  403.820(c), (d) or (e) or termination of the Medicare 
Drug Discount Card and Transitional Assistance Program, a drug card 
enrollee's individually identifiable health information collected or 
maintained by an endorsed sponsor may not be used or disclosed for 
purposes of marketing any product or service.
    (b) Record retention standard. (1) An endorsed sponsor must retain 
records that it creates, collects, or maintains while participating in 
the Medicare Drug Discount Card and Transitional Assistance Program as 
part of its operations of an endorsed program for at least 6 years 
following termination of such program, or, in the event the endorsed 
sponsor's endorsement is terminated under Sec.  420.820(c), (d), or (e) 
of this chapter at least 6 years following termination of such 
endorsement. The Secretary may extend the six-year retention period if 
an endorsed sponsor's records relate to an ongoing investigation, 
litigation, or negotiation by the Secretary, the Department of Health 
and Human Services Office of Inspector General, the Department of 
Justice, or a State, or such documents otherwise relate to suspicions 
of fraud and abuse or violations of Federal or State law.
    (2) For the period during which an endorsed sponsor retains records 
as specified in paragraph (b)(1) of this section, an endorsed sponsor 
must continue to apply security and privacy protections to such records 
and the information contained therein to the same extent endorsed 
sponsors are required to do so under Sec.  403.812(b) and Sec.  
403.812(c)(1) prior to termination.


Sec.  403.814  Special rules concerning Part C organizations and 
Medicare cost plans and their enrollees.

    (a) General requirements. (1) A Part C organization and Medicare 
cost plan may not require enrollment in an endorsed discount card 
program as a condition for enrollment in its Part C plan or Medicare 
cost plan.

[[Page 69923]]

    (2) A Part C organization may subsidize the enrollment fee for an 
endorsed discount card program, whether operated by the Part C 
organization or another endorsed sponsor, for individuals described in 
Sec.  403.810(a), provided that any such benefit is reflected in the 
Part C organization's Adjusted Community Rate filing.
    (b) Exclusive card sponsors. (1) A Medicare managed care 
organization may elect to become an exclusive card sponsor by limiting 
enrollment in its endorsed discount card program to individuals 
described in Sec.  403.810(a) who are enrolled in any of its Medicare 
managed care plans. The Medicare managed care organization must be the 
applicant for endorsement in order to offer an exclusive card program. 
Such an election must be made at the time of application for 
endorsement.
    (2) Except as noted in paragraphs (b)(3) and (b)(4) of this 
section, an exclusive card sponsor must comply with all requirements 
for endorsed sponsors noted in Sec.  403.804 and Sec.  403.806.
    (3) An exclusive card sponsor is deemed to meet or is exempt from 
certain specific requirements listed in Sec.  403.806 as follows:
    (i) An exclusive card sponsor is deemed to meet the pharmacy 
network requirement in Sec.  403.806(f)(3) if its pharmacy network is 
not limited to mail-order pharmacies and is equivalent to the pharmacy 
network used in its Medicare managed care plan and such pharmacy 
network has been approved by the Secretary, or, if its Medicare managed 
care plan does not use a pharmacy network, the Secretary determines 
that the pharmacy network provides sufficient access to covered 
discount card drugs at negotiated prices for discount card enrollees 
under the standard set forth under 42 CFR 422.112 for a Part C 
organization described in section 1851(a)(2)(A) of the Act, or under 42 
CFR 417.416(e) for a Medicare cost plan.
    (ii) An exclusive card sponsor is deemed to meet the service area 
requirements in Sec.  403.806(f)(1) and (f)(2) if it operates in a 
service area equivalent to its Medicare managed care plan's service 
area.
    (iii) An exclusive card sponsor is deemed to meet the requirement 
for financial stability and business integrity in Sec.  403.806(b) 
through compliance with Sec.  422.400 of this chapter (if a Part C 
organization described in section 1851(a)(2)(A) of the Act) or 
compliance with Sec.  417.120 and Sec.  417.122 of this chapter (if a 
Medicare cost plan).
    (iv) An exclusive card sponsor is deemed to meet the covered lives 
requirement in Sec.  403.806(a)(3).
    (v) An exclusive card sponsor is deemed to meet the requirements of 
Sec.  403.806(e)(2) if it ensures that transitional assistance funds 
are applied to, and only to, the cost to transitional assistance 
enrollees of any covered discount card drugs obtained from a network or 
mail order pharmacy included in the exclusive card sponsor's pharmacy 
network, and at the option of the exclusive card sponsor, any covered 
discount card drug obtained under an outpatient prescription drug 
benefit offered under the affiliated Medicare managed care plan, 
including any deductibles, co-payments, coinsurance, and other cost-
sharing amounts for which transitional assistance enrollees are 
responsible under the Medicare managed care plan's outpatient 
prescription drug benefit.
    (4) As the Secretary determines appropriate on a case-by-case 
basis, any additional requirements discussed in Sec.  403.804 and Sec.  
403.806, except for the requirements in Sec.  403.812 and Sec.  
403.813, may be waived or modified on behalf of an exclusive card 
sponsor if:
    (i) The requirements are duplicative of or conflict with the 
requirements that a Medicare managed care organization must meet either 
under Part C or under section 1876 of Title XVIII of the Act; or
    (ii) The waiver or modification is necessary to improve 
coordination between benefits under the Medicare Prescription Drug 
Discount Card and Transitional Assistance Program and the benefits 
either under Part C or under section 1876 of Title XVIII of the Act.
    (iii) The applicant seeking to become an exclusive card sponsor 
requests such waivers or modifications in writing in a manner required 
by the Secretary.
    (5) An exclusive card sponsor may conduct group enrollment 
according to the following rules:
    (i) The exclusive card sponsor must seek CMS verification that its 
Medicare managed care members are individuals described in Sec.  
403.810(a) and enroll such individuals as a group into its exclusive 
card program.
    (ii) The exclusive card sponsor must give all individuals it is 
enrolling as a group the opportunity to decline enrollment, and the 
opportunity to apply for transitional assistance.
    (iii) The exclusive card sponsor may use a modified version of the 
standard enrollment form described in Sec.  403.806(g)(3) or other CMS-
approved process for group enrollment in its endorsed discount card 
program.
    (6) An individual enrolled in a Medicare managed care plan offered 
by a Medicare managed care organization offering an exclusive card 
program to individuals enrolled in such Medicare managed care plan is 
subject to the following requirements:
    (i) The individual may enroll only in the endorsed discount card 
program offered by his or her Medicare managed care organization.
    (ii) If the exclusive card sponsor group elects to group enroll 
into an exclusive card program members of the Medicare managed plan, 
the individual must actively decline enrollment to avoid enrollment in 
the exclusive card program.
    (c) Non-uniformity of Benefits. Implementation of the Medicare 
Prescription Drug Discount Card and Transitional Assistance Program, 
including the provision of transitional assistance and the payment or 
waiver of any enrollment fee by a Part C organization, will not be 
taken into account in applying the uniform premium and uniform benefits 
requirement in sections 1854(c) and 1854(f)(1)(D) of the Act and 42 CFR 
422.100(d)(2) and 42 CFR 422.312(b)(2).


Sec.  403.815  Special rules concerning States.

    (a) Optional State payment of enrollment fee. (1) A State may enter 
into payment arrangements with endorsed sponsors to provide payment of 
some or all of endorsed discount card programs' enrollment fees for 
some or all of the State's individuals described in Sec.  403.810(a) 
who are not transitional assistance enrollees, provided the enrollment 
fees are paid directly by the State to the endorsed sponsor.
    (2) Expenditures made by a State for enrollment fees described in 
paragraph (a)(1) of this section must not be treated as State 
expenditures for which Federal matching payments are available under 
titles XIX or XXI of the Act.
    (b) Optional State payment of coinsurance. (1) A State may enter 
into payment arrangements with pharmacies to provide payment of some or 
all of coinsurance amounts described in Sec.  403.808(e) for some or 
all of the State's transitional assistance enrollees, provided the 
coinsurance amounts are paid directly by the State to the pharmacy.
    (2) Expenditures made by a State for coinsurance described in 
paragraph (b)(1) of this section must not be treated as State 
expenditures for which Federal matching payments are available under 
titles XIX or XXI of the Act.
    (c) Coinsurance for Qualified Medicare Beneficiaries. For 
transitional assistance enrollees who are qualified

[[Page 69924]]

Medicare beneficiaries, any coinsurance liability under Sec.  
403.808(e) must not be treated as Medicare cost-sharing coinsurance, 
under section 1905(p)(3)(B) of the Act, for which a State would 
otherwise be required to pay.
    (d) State data. (1) A State must provide data on a monthly basis in 
an electronic format as determined necessary by the Secretary to 
effectuate the verification of beneficiary eligibility for the Medicare 
Prescription Drug Discount Card and Transitional Assistance Program.
    (2) Expenditures made by a State in complying with the requirements 
of paragraph (d)(1) of this section will be treated as State 
expenditures for which Federal matching payments are available under 
section 1903(a)(7) of the Act.


Sec.  403.816  Special rules concerning long-term care and I/T/U 
pharmacies.

    (a) In general. (1) An applicant for endorsement may submit an 
application to become a special endorsed sponsor for long-term care 
and/or for I/T/U pharmacies.
    (2) Of qualified applicants, the Secretary will select at least two 
of the best-qualified applicants for special endorsement for long-term 
care and at least two of the best-qualified applicants for special 
endorsement for I/T/U pharmacies.
    (3) Applicants for special endorsement for long-term care must 
demonstrate in their applications that they meet the requirements in 
paragraph (b) of this section.
    (4) Applicants for special endorsement for I/T/U pharmacies must 
demonstrate in their applications that they meet the requirements in 
paragraph (d) of this section.
    (b) Long-term care. A special endorsed sponsor for long-term care 
must--
    (1) Apply transitional assistance toward the cost of covered 
discount card drugs obtained by transitional assistance enrollees who 
reside in long-term care facilities and who receive such prescription 
drugs through long-term care pharmacies;
    (2) Offer contractual arrangements to any long-term care pharmacy 
seeking reimbursement from transitional assistance for covered discount 
card drugs provided by such pharmacy to transitional assistance 
enrollees who reside in long-term care facilities;
    (3) Process any submitted claims from network pharmacies and out-
of-network long-term care pharmacies that supply covered discount card 
drugs to transitional assistance enrollees who reside in long-term care 
facilities, when such enrollees have unspent transitional assistance 
remaining;
    (4) Include special terms and conditions in its contracts with 
network pharmacies that are long-term care pharmacies to facilitate 
access to and the administration of transitional assistance to 
transitional assistance enrollees residing in long-term care 
facilities, including, but not limited to the following--
    (i) Waiving penalties against long-term care pharmacies for 
submitting late claims to the special endorsed sponsor due to the 
pharmacy's coordination of benefits activities; and
    (ii) Permitting a long-term care pharmacy to limit its services to 
only transitional assistance enrollees who reside in a long-term care 
facility served by the long-term care pharmacy.
    (5) Except as noted in paragraph (c) of this section, comply with 
all requirements for endorsed sponsors noted in Sec. Sec.  403.804 and 
403.806.
    (c) Waiver of requirements. (1) The following requirements will not 
apply to or will be waived for special endorsed sponsors providing 
transitional assistance to long-term care residents:
    (i) Section 403.806(d) (relating to the prescription drug offering) 
shall not apply to long-term care pharmacies in the special endorsed 
sponsor's network; and
    (ii) Section 403.806(e)(4) (requiring information about the amount 
of transitional assistance remaining) shall not apply to long-term care 
pharmacies in the special endorsed sponsor's network.
    (2)(i) As the Secretary determines appropriate on a case-by-case 
basis, any additional requirements discussed in Sec. Sec.  403.804 and 
403.806, except for the requirements in Sec. Sec.  403.812 and 403.813, 
may be waived or modified on behalf of a special endorsed sponsor for 
long-term care if the waiver or modification is--
    (A) Necessary to enable the applicant to either initiate enrollment 
activities under the special endorsement within 6 months of enactment 
of section 1860D-31 of the Act, or accommodate the unique needs of 
long-term care pharmacies; or
    (B) Compliance with the requirement(s) in question would be 
impracticable or inefficient.
    (ii) Applicants to become special endorsed sponsors for long-term 
care must request such waivers or modifications in writing in a manner 
required by the Secretary.
    (d) I/T/U pharmacies. A special endorsed sponsor for I/T/U 
pharmacies must--
    (1) Apply transitional assistance toward the cost of covered 
discount card drugs obtained by transitional assistance enrollees who 
are American Indians and Alaska Natives and who receive prescription 
drugs through I/T/U pharmacies as allowed under paragraph (d)(2) of 
this section;
    (2) Offer contractual arrangements to any I/T/U pharmacy that is in 
the special endorsed sponsor's service area and seeking reimbursement 
from transitional assistance for covered discount card drugs provided 
by such pharmacy to transitional assistance enrollees who are also 
American Indians/Alaska Natives;
    (3) Include special terms and conditions in its contracts with 
network I/T/U pharmacies to facilitate access to and the administration 
of transitional assistance for transitional assistance enrollees who 
are American Indians/Alaska Natives, including, but not limited to the 
following:
    (i) Permitting an I/T/U pharmacy to limit its services to only 
those transitional assistance enrollees who are American Indians/Alaska 
Natives, and
    (ii) Allowing an I/T/U pharmacy to select which drugs to stock, 
which may be a more limited set than other retail pharmacies.
    (4) Except as noted in paragraph (e) of this section, comply with 
all requirements for endorsed sponsors noted in Sec. Sec.  403.804 and 
403.806.
    (e) Waiver of requirements. (1) The following requirements will not 
apply to or will be waived for special endorsed sponsors providing 
transitional assistance through I/T/U pharmacies:
    (i) Section 403.806(d) (relating to the prescription drug offering) 
shall not apply to I/T/U pharmacies in the special endorsed sponsor's 
network; and
    (ii) Section 403.806(e)(4) (requiring information about the amount 
of transitional assistance remaining) shall not apply to I/T/U 
pharmacies in the special endorsed sponsor's network.
    (2)(i) As the Secretary determines appropriate on a case-by-case 
basis, any additional requirements discussed in Sec. Sec.  403.804 and 
403.806, except for the requirements in Sec. Sec.  403.812 and 403.813, 
may be waived or modified on behalf of a special endorsed sponsor for 
I/T/U pharmacies if the waiver or modification is--
    (A) Necessary to enable the applicant to either initiate enrollment 
activities under the special endorsement within 6 months of enactment 
of section 1860D-31 of the Act, or accommodate the unique needs of I/T/
U pharmacies; or
    (B) Compliance with the requirement(s) in question would be 
impracticable or inefficient.

[[Page 69925]]

    (ii) Applicants to become special endorsed sponsors for I/T/U 
pharmacies must request such waivers or modifications in writing in a 
manner required by the Secretary.


Sec.  403.817  Special rules concerning the territories.

    (a) In general. (1) An applicant for endorsement may submit an 
application to become a special endorsed sponsor for all of the 
territories.
    (2) Of qualified applicants, the Secretary will select at least one 
of the best-qualified applicants to receive a special endorsement for 
the territories.
    (3) Applicants for special endorsement for the territories must 
demonstrate in their applications that they meet the requirements in 
paragraph (b) of this section.
    (b) Requirements. (1) Negotiated prices. A special endorsed sponsor 
for residents of the territories must provide access to negotiated 
prices in the territories.
    (2) Transitional assistance. Any transitional assistance in the 
territories must be in accordance with paragraph (e) of this section.
    (3) Requirements, exception. Except as specified in paragraph (c) 
of this section, a special endorsed sponsor for the territories must 
meet the requirements of Sec. Sec.  403.804 and 403.806.
    (c) Waiver of requirements and alternative requirements. (1) 
Section 403.806(d)(8) (requiring information about price differentials) 
shall not apply to pharmacies located in the territories and which are 
in the special endorsed sponsor's pharmacy network.
    (2) Sections 403.806(f)(2) and (f)(3) will be deemed met if the 
special endorsed sponsor makes a good faith effort to secure the 
participation of retail and mail order pharmacies throughout a 
territory.
    (3)(i) As the Secretary determines appropriate on a case-by-case 
basis, any additional requirements discussed in Sec. Sec.  403.804 and 
403.806, except for the requirements in Sec. Sec.  403.812 and 403.813, 
may be waived or modified on behalf of a special endorsed sponsor for 
the territories if--
    (A) Such waiver is necessary to enable the applicant to either 
initiate enrollment activities under the special endorsement within 6 
months of enactment of section 1860D-31 of the Act, or accommodate the 
unique needs of pharmacies in the territories; or
    (B) Compliance with the requirement(s) in question would be 
impracticable or inefficient.
    (ii) Applicants to become special endorsed sponsors for the 
territories must request such waivers or modifications in writing in a 
manner required by the Secretary.
    (d) Other exceptions. A special endorsed sponsor for the 
territories may enroll in its endorsed discount card program Medicaid 
enrollees with coverage for outpatient prescription drugs, as described 
in Sec.  403.810(a)(2).
    (e) Transitional assistance provided by Territories. (1) 
Transitional assistance in the territories may be administered only 
according to a plan submitted by a territory and approved by CMS.
    (2) Territories choosing to provide transitional assistance must 
submit a plan to CMS within 90 days of the publication of this 
regulation. The plan must--
    (i) Describe how funds allocated to the territory are to be used to 
cover the cost of covered discount card drugs obtained by individuals 
who reside in the territory, who are entitled to benefits under 
Medicare Part A or enrolled under Medicare Part B, and who have income 
at or below 135 percent of the poverty line for the contiguous United 
States; and
    (ii) Describe how the territory will ensure that amounts received 
under the allotment are to be used only to provide covered discount 
card drugs to those individuals determined eligible for transitional 
assistance, as described in paragraph (e)(2)(i) of this section, and
    (iii) Provide such written assurance for the requirements in 
paragraph (e)(2)(ii) of this section.
    (3) CMS will review and approve plans submitted and make allotments 
to territories with approved plans.
    (4) CMS may request reports or information to substantiate that the 
territories have administered the program consistent with the 
territory's approved transitional assistance plan.


Sec.  403.820  Sanctions, penalties, and termination.

    (a) Intermediate sanctions. (1) For the violations listed in 
paragraph (a)(3) of this section, the following intermediate sanctions 
may be imposed on any endorsed sponsor:
    (i) Suspension of enrollment of Medicare beneficiaries.
    (ii) Suspension of information and outreach activities to Medicare 
beneficiaries.
    (2) Duration of sanctions. The intermediate sanctions continue in 
effect until CMS is satisfied that the deficiency on which the 
determination was based has been corrected and is not likely to recur.
    (3) Sanctionable violations. The violations for which intermediate 
sanctions may be imposed are as follows:
    (i) Substantial failure to maintain a contracted retail pharmacy 
network meeting the requirements of Sec.  403.806(f);
    (ii) Substantial failure to comply with CMS Information and 
Outreach Guidelines;
    (iii) Substantial failure to provide discount card enrollees with 
negotiated prices consistent with information reported to CMS for the 
price comparison Web site and/or reported by the endorsed sponsor;
    (iv) Except during the week of November 15, 2004 (which coincides 
with the beginning of the annual coordinated election period), 
substantial failure to ensure that the negotiated price for a covered 
discount card drug does not exceed an amount proportionate to the 
change in the drug's average wholesale price (AWP), and/or an amount 
proportionate to changes in the card sponsor's cost structure 
(including material changes to any discounts, rebates, or other price 
concessions the sponsor receives from a pharmaceutical manufacturer or 
pharmacy);
    (v) Charging drug card enrollees additional fees beyond a $30 
enrollment fee;
    (vi) Charging transitional assistance enrollees any enrollment fee;
    (vii) Charging a coinsurance more than 5 percent for those at or 
below 100 percent of the poverty line, or 10 percent for those above 
100 percent but at or below 135 percent of the poverty line;
    (viii) Substantial failure to administer properly the transitional 
assistance funding for transitional assistance enrollees;
    (ix) Substantial failure to provide CMS or its designees with 
requested information related to the endorsed sponsor's endorsed 
discount card operations; or
    (x) Failure to otherwise substantially comply with the requirements 
of this subpart, including failing to perform the operational 
requirements of this program or the failure to submit an acceptable 
plan of correction within the timeframe specified by CMS.
    (4) Written notice of proposed sanctions.
    (i) Prior to imposing sanctions, CMS will send a written notice to 
the endorsed sponsor stating the nature and basis of the proposed 
sanction.
    (ii) CMS will send a copy of the notice in paragraph (a)(4)(i) of 
this section to the Office of the Inspector General.
    (iii) CMS will allow the endorsed sponsor 15 days from the receipt 
of notice to provide evidence that it has not committed an act or 
omission that

[[Page 69926]]

may fairly be characterized as a basis for sanction.
    (iv) Should an endorsed sponsor present evidence described in 
paragraph (a)(4)(iii) of this section and by the time limit described 
in that paragraph, a CMS official not involved in the original sanction 
determination shall review the evidence and provide the endorsed 
sponsor a concise written decision setting forth the factual and legal 
basis for the decision that affirms or rescinds the original 
determination.
    (5) Effective date of sanction.
    (i) A sanction is effective 15 days after the date that the 
endorsed sponsor is notified of the sanction or, if the endorsed 
sponsor timely seeks reconsideration of that sanction decision, on the 
date specified in the notice of CMS's reconsideration determination.
    (ii) The sanction remains in effect until CMS notifies the endorsed 
sponsor that CMS is satisfied that the basis for imposing the sanction 
has been corrected and is not likely to recur.
    (b) Civil monetary penalties. (1) OIG penalties. The Office of the 
Inspector General (OIG) may impose civil monetary penalties in 
accordance with 42 CFR parts 1003 and 1005 in addition to, or in place 
of, sanctions that CMS may impose, as described in paragraph (a) of 
this section, against an endorsed sponsor whom it determines has 
knowingly--
    (i) Misrepresented or falsified information in information and 
outreach or comparable material provided to program enrollee or other 
persons;
    (ii) Charged a program enrollee in violation of the terms of the 
endorsement contract; or
    (iii) Used transitional assistance funds in any manner that is 
inconsistent with the purpose of the transitional assistance program.
    (2) CMS penalties. If CMS determines that an endorsed sponsor has 
engaged in conduct that it knows or should know constitutes a violation 
as described in paragraph (a)(3) of this section, where the failure to 
perform involves the operational requirements of the program, CMS may 
impose civil monetary penalties in accordance with 42 CFR parts 1003 
and 1005 in addition to, or in place of, the sanctions that CMS may 
impose, as described in paragraph (a) of this section.
    (3) CMS or the OIG may impose civil monetary penalties of no more 
than $10,000 for each violation.
    (c) Termination of endorsement by CMS. (1) CMS may terminate the 
endorsement contract at any time with notice on the following bases:
    (i) Any of the bases for the imposition of intermediate sanctions 
as stated in paragraph (a)(3) of this section; or
    (ii) The endorsed sponsor engaged in false or misleading 
information and outreach practices; or
    (iii) The endorsed sponsor fails to comply with the requirement of 
Sec.  403.804(e).
    (2) CMS shall provide the endorsed sponsor written notice of 
termination 30 days prior to the CMS-determined effective date of the 
termination at which time the endorsed sponsor must do the following:
    (i) Provide its discount card enrollees notice of the termination 
within 10 days of receiving notice from CMS;
    (ii) Continue to provide services to its discount card enrollees 
for 90 days after the discount card enrollees were sent the notice of 
termination from the endorsed sponsor; and
    (iii) Suspend all information and outreach and enrollment 
activities once enrollees have received the notice of termination.
    (3) Corrective action plan. Before terminating a contract, CMS 
shall provide the endorsed sponsor with reasonable opportunity to 
develop and receive CMS approval of a corrective action plan to correct 
the deficiencies that are the basis of the proposed termination.
    (d) Termination by endorsed sponsor--(1) Cause for termination. The 
endorsed sponsor may terminate its endorsement contract if CMS fails 
substantially to carry out the terms of the contract.
    (2) Card sponsor notice. The endorsed sponsor must give advance 
notice as follows:
    (i) To CMS, at least 90 days prior to the intended date of 
termination. This notice must specify the reasons why the endorsed 
sponsor is requesting contract termination; and
    (ii) To its discount card enrollees, by mail, at least 60 days 
prior to the termination effective date. This notice must include a 
written description of alternative endorsed discount card programs that 
serve the discount card enrollee's address.
    (3) Effective date of termination. The effective date of the 
termination is determined by CMS and is at least 90 days after the date 
CMS receives the endorsed sponsor's notice of intent to terminate.
    (e) Termination by mutual consent. (1) A contract may be modified 
or terminated at any time by written mutual consent.
    (2) If the contract is terminated by mutual consent, the endorsed 
sponsor must provide notice to its discount card enrollees as provided 
in paragraph (d)(2) of this section.
    (3) If the contract is modified by mutual consent, the endorsed 
sponsor must provide notice to its discount card enrollees of any 
changes that CMS determines are appropriate for notification within 
timeframes specified by CMS.
    (f) Appeal of contract determinations. (1) Scope. This section 
establishes the procedures for reviewing the following contract 
determinations:
    (i) A determination that an applicant is not qualified to enter 
into a contract with CMS under section 1860D-31 of the Act; and
    (i) A determination to terminate a contract with an endorsed 
sponsor in accordance with paragraph (c) of this section.
    (2) Notice of determination. When CMS makes an initial contract 
determination, it gives the endorsed sponsor or applicant written 
notice specifying--
    (i) The reasons for the determination; and
    (ii) The endorsed sponsor's or applicant's right to request 
reconsideration.
    (3) Effect of contract determination. The contract determination is 
final and binding unless a timely request for a reconsideration hearing 
is filed under this section.
    (4) Right to reconsideration. An endorsed sponsor whose contract is 
terminated or an applicant denied endorsement may request a hearing for 
reconsideration of the CMS contract determination.
    (5) Method and place for filing a request. A request for a 
reconsideration hearing must be made in writing and filed with the CMS 
Central Office.
    (6) Time for filing a request. The request for a reconsideration 
hearing must be filed within 15 days from the date of the notice of the 
initial determination.
    (7) Appointment of hearing officer. CMS shall appoint a hearing 
officer to conduct the reconsideration. The hearing officer shall be a 
representative of the Administrator and not otherwise a party to the 
contract determination.
    (8) Conduct of hearing. The endorsed sponsor or applicant may be 
represented by counsel and may present evidence and examine witnesses. 
A complete recording of the proceedings will be made and transcribed.
    (9) Reconsideration determination. A reconsideration determination 
is a new determination that--
    (i) Is based on a review of the contract determination, the 
evidence and findings upon which it was based, and

[[Page 69927]]

any other written evidence submitted before notice of the reconsidered 
determination is mailed, including facts relating to the status of the 
endorsed sponsor subsequent to the contract determination; and
    (ii) Affirms, reverses, or modifies the initial contract 
determination.
    (10) Notice of reconsidered determination. As soon as practicable 
after the close of the hearing, the hearing officer issues a written 
reconsideration determination that contains the following:
    (i) Findings with respect to the applicant's qualifications to 
enter into or an endorsed sponsor's qualifications to remain under a 
contract with CMS under section 1860D-31 of the Act;
    (ii) A statement of the specific reasons for the reconsidered 
determination.
    (11) Effect of reconsidered determination. A reconsidered 
determination is final and binding on the parties and is not subject to 
judicial review.
    (g) Compliance with HIPAA. Failure of an endorsed sponsor to comply 
with HIPAA and/or the standards, implementation specifications, and 
requirements in 45 CFR parts 160, 162, and 164, as established in Sec.  
403.812, shall be a violation of HIPAA and may be enforced under 
sections 1176 and 1177 of the Act.


Sec.  403.822  Reimbursement of transitional assistance and associated 
sponsor requirements.

    (a) A Transitional Assistance Account is created within the Federal 
Supplementary Medical Insurance Trust Fund and kept separate from all 
other funds within that fund.
    (b) The Managing Trustee of the Transitional Assistance Account 
shall pay on a monthly basis from the Account the amounts certified by 
CMS as necessary to make payments for transitional assistance as 
allowed in Sec.  403.808.
    (c) Endorsed sponsors must routinely account to CMS for the 
transitional assistance provided to the transitional assistance 
enrollees for finalized (not pending, or denied) claims up to the 
allowed balance provided by CMS to the sponsor.
    (d) Payment transactions will be audited by the Secretary or his 
agent.
    (e) Federal funding in excess of the amount of the balance included 
in CMS's system is not permitted.

PART 408--PREMIUMS FOR SUPPLEMENTARY MEDICAL INSURANCE

0
1. The authority citation for part 408 continues to read as follows:

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

0
2. Amend 408.20 to add new paragraphs (a)(5) and (b)(4) to read as 
follows:


Sec.  408.20  Monthly premiums.

    (a) * * *
    (5) The law was further amended in 2003 to ensure that amounts 
payable from the Transitional Assistance Account described in Sec.  
403.822 of this chapter shall not be taken into account in computing 
actuarial rates or premium amounts.
    (b) * * *
    (4) In no case shall payment made for transitional assistance costs 
under part 403, subpart H of this chapter be included in the formula 
used to calculate actuarial rates or standard monthly premiums.
* * * * *

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


    Dated: December 8, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: December 8, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-30753 Filed 12-10-03; 1:00 pm]
BILLING CODE 4120-01-P