[Federal Register Volume 69, Number 148 (Tuesday, August 3, 2004)]
[Proposed Rules]
[Pages 46866-46977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17228]



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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 417 and 422



Medicare Program; Establishment of the Medicare Advantage Program; 
Proposed Rule

  Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 417 and 422

[CMS-4069-P]

RIN 0938-AN06


Medicare Program; Establishment of the Medicare Advantage Program

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement provisions of the Social 
Security Act (the Act) establishing and regulating the Medicare 
Advantage (MA) program. The MA program was enacted in Title II of The 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA) (Pub. L. 108-173) on December 8, 2003. The MA program replaces 
the Medicare+Choice (M+C) program established under Part C of title 
XVIII of the Act, while retaining most key features of the M+C program.
    The MA program attempts to broadly reform and expand the 
availability of private health plan options to Medicare beneficiaries. 
See the ``Executive Summary'' in the SUPPLEMENTARY INFORMATION section 
for an outline of the key features of the MA program.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on October 4, 2004.

ADDRESSES: In commenting, please refer to file code CMS-4069-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on issues in 
this document to http://www.cms.hhs.gov/regulations/ecomments 
(attachments should be in Microsoft Word, WordPerfect, or Excel; 
however, we prefer Microsoft Word).
    2. By mail. You may mail written comments (one original and two 
copies) to the following address ONLY:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-4069-P, P.O. Box 8018, Baltimore, MD 
21244-8018.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
(410) 786-7195 in advance to schedule your arrival with one of our 
staff members. Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH 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 persons 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.
    All comments received before the close of the comment period are 
available for viewing by the public, including any personally 
identifiable or confidential business information that is included in a 
comment. After the close of the comment period, CMS posts all 
electronic comments received before the close of the comment period on 
its public website.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Eligibility, Election, and 
Enrollment--Lynn Orlosky, (410) 786-9064 or Randy Brauer, (410) 786-
1618.
    Benefits and Beneficiary Protections--Frank Szeflinski, (303) 844-
7119.
    Quality Improvement Program--Tony Hausner, (410) 786-1093.
    Submission of Bids, Premiums, and Plan Approval--Ann Hornsby, (410) 
786-1181.
    Payments to MA Organizations--Anne Hornsby, (410) 786-1181.
    Special Rules for MA Regional Plans--Marty Abeln, (410) 786-1032.
    Contracts with MA Organizations--Frank Szeflinski, (303) 844-7119.
    Beneficiary Appeals--Chris Gayhead, (410) 786-6429.
    General Information--(410) 786-1296.

SUPPLEMENTARY INFORMATION:
    Executive Summary: Beginning in 2006, the Medicare Advantage 
program would:
     Provide for regional plans that would make private plan 
options available to many more beneficiaries, especially those in rural 
areas.
     Expand the number of kinds of plans provided for, so that 
beneficiaries can choose from Health Maintenance Organizations, 
Preferred Provider Organization plans (the most popular type of 
employer-sponsored plan), Fee-for-Service plans, and Medical Savings 
Account plans, if available where the beneficiary lives.
     Enrich the range of benefit choices available to 
enrollees, including not only improved prescription drug benefits, but 
also other benefits not covered by traditional Medicare, and the 
opportunity to share in savings where plans can deliver benefits at 
lower costs.
     Provide incentives to plans, and add specialized plans, to 
coordinate and manage care in ways that comprehensively serve those 
with complex and disabling diseases and conditions.
     Use Open Season competition among plans to provide 
continuing pressure on plans to improve service, improve benefits, 
invest in preventive care, and hold costs down in ways that attract 
enrollees. These improvements would be fostered through enhanced and 
more stable payments to organizations, improvements in program design, 
introduction of new flexibility for plans, and reductions in 
impediments to plan participation. At the same time, the traditional 
Medicare program will be enhanced by addition of a prescription drug 
benefit, and beneficiaries will retain the ability to remain in or 
return to this enhanced Medicare if they prefer it to a private health 
plan.
     Advance the goal of improving quality and increasing 
efficiency in the overall health care system. Medicare is the largest 
payer of health care in the world. As such, Medicare can drive changes 
in the entire health care system. For example, as providers and health 
plans implement innovations, such as e-prescribing, that can result in 
improved quality of care for Medicare beneficiaries, these improvements 
would be passed on to other public health programs and commercial 
health care markets. Similarly, competing Medicare health plans will 
seek efficient ways to provide health care to their beneficiaries, such 
as through prevention and disease management

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strategies to avoid costly care in the future. These efficiencies will 
spill over into plans' commercial, Medicaid and other markets, driving 
changes in the overall health care system.
    Throughout the preamble we identify options and alternatives. We 
welcome comments and ideas on our approach and on alternatives to help 
us design the Medicare Advantage program to operate as effectively, 
successfully, and efficiently as possible in meeting the needs of 
Medicare beneficiaries.
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this proposed rule to assist us in fully 
considering issues and developing policies. You can assist us by 
referencing the file code CMS-4069-P and the specific ``issue 
identifier'' that precedes the section on which you choose to comment.
    Inspection of Public Comments: Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone (410) 786-7195.
    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/fr/index.html.

I. Background

A. Medicare Prescription Drug, Improvement, and Modernization Act of 
2003

    (If you choose to comment on issues in this section, please include 
the caption ``Background--Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003'' at the beginning of your comments.)
    Title II of MMA makes important changes to the current 
Medicare+Choice (M+C) program--it replaces M+C with a new Medicare 
Advantage (MA) program under Part C of Medicare. This title provides 
for additional opportunities for organizations to offer private plans 
to Medicare beneficiaries beginning in 2006. In an effort to increase 
beneficiary choice of plans across all regions of the country, 
including rural areas, Title II of the MMA establishes a MA regional 
contracting option. As discussed below, MA regional plans would be 
subject to somewhat different rules than MA local plans. MMA also 
provided extra incentives, such as a stabilization fund, bonus 
payments, and risk sharing to encourage organizations to participate as 
regional plans.
    The MMA also increases payments to MA organizations beginning in 
2004. The increased payments and other changes under MMA are intended 
to boost plan participation and thus offer more choice of plans to 
beneficiaries and improve health and overall health system efficiency. 
The MMA requires that increased payment amounts be used to increase 
benefits, reduce beneficiary costs, or enhance beneficiary access to 
services. As explained below, beginning in 2006, we would require MA 
organizations to submit ``bids'' for covering Medicare services, and if 
these bid amounts are below a benchmark amount established under the 
new law, this difference will be shared with enrollees. These 
provisions will potentially reduce Medicare costs.
    One of the principal goals of the MMA is to provide beneficiaries 
with a choice in how they get their Medicare benefits. Under the MA 
program, to the extent that all parts of the country have at least one 
regional plan, all beneficiaries would have a choice in how they get 
their Medicare benefits, whether through a Medicare Advantage plan or 
the traditional fee-for-service program. Also, depending on plan 
offerings in the area in which they reside, beneficiaries would have 
the choice of a variety of types of local coordinated care plans, such 
as health maintenance organizations (HMOs), provider-sponsored 
organizations (PSOs), and preferred provider organization plans (PPOs) 
including both regional and local PPOs, as well as Medical Savings 
Account (MSA) plans and private fee-for-service (PFFS) plans. In 
addition, the MMA permits us to contract with specialized MA plans that 
create plans for enrollees with special needs, such as 
institutionalized or Medicaid-eligible individuals, or those with 
severe or disabling chronic conditions.
    The competition among these various types of plan offerings in a 
region should improve health care quality for beneficiaries. Plans will 
have to compete not only on price but on quality to attract 
beneficiaries' enrollment and to keep them enrolled over time. Such 
competition based on quality should precipitate development and 
implementation of innovations to prevent chronic diseases and manage 
the care of diseases for Medicare enrollees and other enrolled 
populations.
    With these new and improved choices, Medicare beneficiaries, like 
Federal employees and retirees in the Federal Employees Health Benefits 
(FEHB) Program, would have the opportunity to obtain improved benefits, 
improved services, and reduced costs. However, those who prefer would 
be able to remain in traditional Medicare, enhanced by the new Part D 
drug benefit. All would have the opportunity to switch among plans, or 
to or from traditional Medicare, during the annual election period (or 
``open season'') in November and December. Over time, participating 
plans will be under continued pressure to improve their benefits, 
reduce their premiums and cost sharing, and improve their networks and 
services, in order to gain or retain enrollees. In addition, we would 
expect plans to use integrated health plan approaches such as disease 
prevention, disease management and other care coordination techniques. 
In doing so, integrated plans that combine the traditional Parts A and 
B of Medicare and the new Part D drug benefit and apply these 
innovative techniques may be able to pass on savings that may result 
from the care coordination to the enrollee through reduced premiums or 
additional benefits.
    Beginning in 2006, payments for local and regional MA plans would 
be based on competitive bids rather than administered pricing. MA 
organizations would submit an annual aggregate bid amount for each MA 
plan. An aggregate plan bid is based upon their determination of 
expected costs in the plan's service area for the national average 
beneficiary for providing non-

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drug benefits (that is, original Medicare (Part A and Part B) 
benefits), Part D basic prescription drugs, and supplemental benefits 
if any (including reductions in cost sharing). To determine an 
organization's payment, CMS would compare the non-drug portion of the 
aggregate bid to the local or regional plan benchmark, which is an 
average of county rates in the plan's service area. For a plan with a 
bid below its benchmark, CMS would pay the MA organization the total 
plan bid (for Parts A, B, and D benefits plus any supplemental bid 
amount), risk adjusted for the plan risk profile, plus the rebate 
amount. (The rebate amount is 75 percent of the difference between the 
plan bid and benchmark, and is used to provide mandatory supplemental 
benefits. The remaining 25 percent is retained by the Government.) For 
a plan with a bid equal to or above its benchmark, CMS would pay the MA 
organization the plan benchmark, risk adjusted.
    We would be able to negotiate bid amounts with plans in a manner 
similar to negotiations conducted by the Office of Personnel Management 
with Federal Employees Health Benefits (FEHB) plans. In the spirit of 
the FEHB process, CMS would work with plans to ensure benefit packages 
meet the needs of our population and that information is made available 
to beneficiaries so that they can make decisions about which plans best 
meet their needs.
    Finally, in conjunction with the new drug benefit required under 
Title I of MMA, which will be addressed in separate rulemaking, changes 
made in MMA to the M+C program (now called the MA program) are intended 
to bring about broad-based improvements to the Medicare program's 
benefit structure, including improved prescription drug coverage under 
the MA program. Organizations offering local and regional coordinated 
care MA plans must offer at least one plan with the Medicare 
prescription drug benefit or the actuarial equivalent.
    We have identified many areas in which we believe we can prevent or 
reduce unnecessary burden, duplication, or complexity either in 
interpreting the new MMA provisions or in modifying existing rules to 
accommodate Medicare Advantage reforms. In addition to those 
specifically discussed, we request suggestions for other burden-
reducing reforms or innovations we can incorporate in the final 
regulation that will improve the ability of plans to participate in the 
program without compromising quality or services.

B. Relevant Legislation

    (If you choose to comment on issues in this section, please include 
the caption ``Background--Relevant Legislation'' at the beginning of 
your comments.)
1. Balanced Budget Act of 1997
    Section 4001 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33) added sections 1851 through 1859 to the Social Security Act (the 
Act) establishing a new Part C of the Medicare program, known as the 
Medicare+Choice (M+C) program. Under section 1851(a)(1) of the Act, 
every individual entitled to Medicare Part A and enrolled under 
Medicare Part B, except for individuals with end-stage renal disease, 
could elect to receive benefits either through the original Medicare 
program or an M+C plan, if one was offered where he or she lived. The 
primary goal of the M+C program was to provide Medicare beneficiaries 
with a wider range of health plan choices through which to obtain their 
Medicare benefits. The BBA authorized us to contract with private 
organizations offering a variety of private health plan options for 
beneficiaries, including both traditional managed care plans (such as 
those offered by health maintenance organizations (HMOs)) that had been 
offered under section 1876 of the Act, and new options that were not 
previously authorized. Three types of M+C plans were authorized under 
the new Part C, as follows:
     M+C coordinated care plans, including HMO plans (with or 
without point-of-service options), provider sponsored organization 
(PSO) plans, and preferred provider organization (PPO) plans.
     M+C MSA plans (combinations of a high deductible M+C 
health insurance plan and a contribution to an M+C MSA).
     M+C private fee-for-service plans.
    The BBA changed the payment methodology to Medicare health plans 
and initially afforded beneficiaries more choice of plans nationally. 
However, payment rates grew modestly in relation to costs health plans 
incurred, resulting in fewer health plans participating in the M+C 
program, decreased choice of plans available to beneficiaries, and 
fewer extra benefits available to enrollees. Although there were large 
payment increases in rural areas as a result of the BBA provisions, 
access to Medicare coordinated care plans declined significantly in 
rural areas after 1997.
2. Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
and the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000
    The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113 (BBRA), amended the M+C provisions of the BBA. 
Many of these amendments were reflected in a final rule with comment 
period published in the Federal Register on June 29, 2000 (65 FR 
40170). In addition, the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000, Pub. L. 106-554 (BIPA), enacted 
December 21, 2000, further amended the M+C provisions of the BBA and 
BBRA. A final rule containing BIPA provisions was published on March 
22, 2002 (67 FR 13278).
    These laws enacted subsequent to the BBA made incremental changes 
to M+C payments and provided financial incentives to plans to 
participate in the M+C program. While these efforts helped stabilize 
the M+C program, they did not generally improve plan participation in 
the M+C program nor did they increase overall beneficiary enrollment or 
access to plans in rural areas.
    The specific sections of Part C of the Social Security Act that 
were impacted by the MMA are as follows:

Section 1851--Eligibility, election and enrollment.
Section 1852--Benefits and beneficiary protections.
Section 1853--Payments to MA organizations.
Section 1854--Premiums.
Section 1855--Organizational and financial requirements for MA 
organizations.
Section 1856--Establishment of standards.
Section 1857--Application procedures and contracts with MA 
organizations
Section 1858--Special rules for MA regional plans.
Section 1859--Definitions; Miscellaneous provisions.

    This proposed rule addresses the new MA provisions in Title II of 
MMA. Subtitle B--Immediate Improvements, contained in Title II, 
requires immediate payment adjustments for 2004 to MA plans. These 
payment adjustments were implemented in 2004 and payment adjustments 
for 2005 will be implemented in 2005. The requirement in 1858(a)(2)(D) 
to conduct a market survey and analysis before establishing MA regions 
is occurring concurrent with the publication of this proposed

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MA rule. Therefore, the announcement of the MA Regions will not be 
included in this proposed rule. As noted above, the provisions in Title 
I of the MMA will be set forth in a separate proposed rule.
    Provisions of the MMA addressed in this proposed rule outside of 
Title II include Section 722--Medicare Advantage Quality Improvement 
Program, of Title VII. They may be found under Subpart D--Quality 
Assurance.

C. Codification of Regulations

    (If you choose to comment on issues in this section, please include 
the caption ``Background--Codification of Regulations'' at the 
beginning of your comments.)
    The proposed regulations set forth here are codified in 42 CFR Part 
422--The Medicare Advantage Program. Note that the regulations for 
managed care organizations that contract with us under cost contracts 
will continue to be located in 42 CFR part 417, Health Maintenance 
Organizations, Competitive Medical Plans, and Health Care Prepayment 
Plans.

D. Organizational Overview of Part 422

    (If you choose to comment on issues in this section, please include 
the caption ``Background--Organizational Overview of Part 422'' at the 
beginning of your comments.)
    MMA amends the existing provisions of the Medicare statute found in 
Part C of Title XVIII, sections 1851 through 1859 of the Act, and adds 
a new section 1858 to the Act. This proposed rule covers a wide range 
of topics included in the existing part 422, including eligibility and 
enrollment, benefits and beneficiary protections, payment, contracting 
requirements, and grievances and appeals. We have generally retained 
the organization of the sections from part 422, except for reordering 
subparts F and G to place the bidding and payment provisions in 
sequential order. Where the MMA did not amend existing statute, this 
proposed rule does not set forth unchanged regulations text from the 
previous part 422. Thus, this proposed rule contains only the necessary 
revisions to existing part 422. In some subparts of part 422, the only 
changes are in nomenclature, that is, the replacement of M+C references 
with MA references. The regulations in those subparts, H, L, and N are 
not set forth in this proposed rule. The subparts with substantive 
changes are as follows:
    Subpart A--General provisions, establishment of the Medicare 
Advantage program, definitions, types of MA plans, and user fees.
    Subpart B--Requirements concerning beneficiary eligibility, 
election, and enrollment and disenrollment procedures.
    Subpart C--Requirements concerning benefits, access to services, 
coverage determinations, and application of special benefit rules to 
PPOs and regional plans.
    Subpart D--Quality improvement program, chronic care improvement 
program requirements, and quality improvement projects.
    Subpart E--Relationships with providers.
    Subpart F--Submission of bids, premiums, and related information 
and plan approval.
    Subpart G--Payments for MA organizations.
    Subpart I--Organization compliance with State law and preemption by 
Federal law.
    Subpart J--Special rules for MA regional plans, including the 
establishment of MA regions, stabilization fund, and risk sharing.
    Subpart K--Application and Contract requirements for MA 
organizations.
    Subpart M--Beneficiary grievances, organization determinations, and 
appeals.
    Subpart O--Intermediate Sanctions
    Each of these subparts is discussed below in section II of this 
preamble.

II. Provisions of the Proposed Rule

Part 417--Health Maintenance Organizations, Competitive Medical Plans, 
and Health Care Prepayment Plans

Subpart J--Qualifying Conditions for Medicare Contracts Extension of 
Reasonable Cost Contracts (Sec.  417.402)
    (If you choose to comment on issues in this section, please include 
the caption ``Extension of Reasonable Cost Contracts (Sec.  417.402)'' 
at the beginning of your comments.)
    Authority for cost HMOs/CMPs (cost plans) had been due to expire on 
December 31, 2004. Section 234 of the MMA modified section 1876(h)(5) 
of the Act to extend authority for cost plans beyond the previous limit 
of December 31, 2004. Section 234 of the MMA provides an initial 
extension of cost plans through December 31, 2007. It also provides for 
a continued extension of cost plans beyond December 31, 2007, under 
specific conditions.
    Effective for contract years beginning on or after January 1, 2008, 
cost plans may be extended where there are fewer than two coordinated 
care plan-model MA plans (as defined in section 1851(a)(2)(A)(i) of the 
Act) of the same type (that is, either two local or two regional plans) 
available to Medicare beneficiaries in the same service area. Both of 
the ``competing'' MA plans of the same type must meet minimum 
enrollment requirements for the entire previous year in order to 
trigger mandatory cost plan non-renewal or service area reduction. The 
minimum enrollment requirements of the ``competing'' MA plans that 
would trigger mandatory non-renewal or service area reduction for cost 
HMOs/CMPs are: (1) At least 5,000 enrollees for the portion of the 
service area that is within a metropolitan statistical area having more 
than 250,000 people and counties contiguous to such an area; and/or (2) 
at least 1,500 enrollees for any other portion of such service area.
    We interpret the statute to require cost plan service area 
reduction where there are two or more MA plans of the same type meeting 
minimum enrollment requirements competing for Medicare members in a 
portion of the cost plan's service area. An alternative reading of the 
statute might permit a cost plan to continue operating in its entire 
service area until such time as all parts of the cost plan's service 
area are subject to MA competition meeting applicable thresholds. We 
believe the approach we have taken is consistent with the stated intent 
in the Conference Agreement that cost plans be required to operate 
under the same provisions as other private plans that enter the cost 
plan's service area. We invite comment on the approach we have taken.
    We propose to permit existing cost plans to expand their service 
areas through September 1, 2006. Thereafter, service area expansion 
applications by cost HMOs/CMPs will be initially evaluated and accepted 
only when there are not two or more MA plans of the same type meeting 
minimum enrollment requirements in the area in which the cost plan 
proposes to expand.
    We incorporate these changes into regulation by removing obsolete 
text and by revising other portions of Sec.  417.402(b), and by adding 
a new Sec.  417.402(c).

Subpart A--General Provisions (Sec.  422.1)

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart A--General Provisions'' at the beginning of your 
comments.)
1. Overview
    Subpart A begins with a brief section (Sec.  422.1) that lists the 
statutory authority that is implemented in part 422 (sections 1851 
through 1859 of the Act).

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This proposed rule would amend Sec.  422.1(a) by adding the new section 
1858 of the Act, which would be implemented in proposed subpart J. 
Under Sec.  422.2, we set forth new definitions for terms used in part 
422 that we believe need clarification. These definitions provide the 
generally applied meaning for terms that are used throughout part 422. 
Where necessary, we have included in specific subparts of part 422 
definitions for terms used primarily in those subparts. As discussed 
below, Sec.  422.4 briefly describes the two new types of coordinated 
care MA plans provided for under section 1851(a)(2)(A) of the Act. The 
provisions formerly contained in Sec.  422.6 and Sec.  422.8 relating 
to application requirements and evaluation and determination procedures 
have been removed from subpart A and added as Sec.  422.501 and Sec.  
422.502 of subpart K. Thus, prospective MA plans may find all 
applications and contracting information organized in one place. 
Section 422.6 (formerly Sec.  422.10) describes the user fees 
associated with the Medicare Beneficiary Education and Information 
Campaign, required under section 1857(e)(2) of the Act.
2. Definitions (Sec.  422.2)
    In Sec.  422.2, we have included new definitions required under MMA 
and found under section 1859 of the Act. In addition, Sec.  422.2 
provides definitions that are not found in specific subparts of the 
regulation because they apply broadly to part 422. For example, in 
Sec.  422.2, we provide the definition of ``MA regional plans'' as set 
forth in section 1859 of the Act because this term is used throughout 
part 422. However, a definition like ``benchmark'' found in section 
1853 of the Act, that is specific to Sec.  422.258 et seq., is not 
described here but in that section. Finally, the statute specifies 
other new definitions under section 1859 of the Act, such as the 
definition of ``specialized MA plans,'' and they are incorporated into 
this section.
    We remove definitions for ``ACR'', ``Additional benefits,'' 
``Adjusted community rate,'' and ``M+C'' as these terms will not apply 
after 2006. We also revise several existing definitions to make them 
consistent with the MMA statute. For example, Mandatory supplemental 
benefits are redefined to incorporate language reflecting that these 
benefits may be paid for through premiums and cost sharing or through 
the application of a rebate, or both. Therefore, mandatory supplemental 
benefits are defined as health care services not covered by Medicare 
that an MA enrollee must purchase as part of an MA plan. Such benefits 
may include reductions in cost-sharing for benefits under the original 
Medicare fee-for-service program--and are paid for in the form of 
premiums and cost-sharing, or by an application of the beneficiary 
rebate rule in section 1854(b)(1)(C)(ii)(I) of the Act, or both.
    However, optional supplemental benefits retain the same definition 
as under the M+C program as health services not covered by Medicare 
that are purchased at the option of the MA enrollee and paid for in 
full, directly by (or on behalf of) the Medicare enrollee, in the form 
of premiums or cost-sharing. These services may be grouped or offered 
individually. Note that throughout the regulation, the phrase 
``supplemental benefits'' refers to both mandatory and optional 
supplemental benefits. The terms ``mandatory supplemental'' and 
``optional supplemental'' are used when referring specifically to one 
of the types of supplemental benefits.
    We have removed ``additional benefits'' from the definition of 
``basic benefits'' since MA plans will no longer offer additional 
benefits. In addition, we have replaced the word ``ACR'' process with 
the words ``annual bidding'' process in the definition of ``benefits'' 
to reflect the new bidding process for submission and approval of 
benefits. Finally, we have revised the definition of ``service area'' 
to incorporate the concept of the new MA regional plan's service area 
that consists of an entire region.
    Under section 1851(a)(2)(A) of the Act, two new types of 
coordinated care plans are established--Regional MA plans, which are 
regional PPO plans, and specialized MA plans for special needs 
individuals. First, we define an ``MA local area'' as a county or other 
area specified by us because it is important to distinguish an MA local 
area from an MA region.
    Next, we define an ``MA regional plan'' because it is a new type of 
coordinated care plan choice for beneficiaries. While PPOs first became 
a choice for beneficiaries under the BBA, they operated as ``local'' 
plans on a county (including multi-county) or partial county basis. The 
MA regional plan functions like a local PPO but must serve an entire 
region.
    In all, CMS will establish between 10 and 50 regions, as described 
in Sec.  422.455 (subpart J). A regional MA plan's service area is one 
or more entire MA regions. Thus, we define an ``MA regional plan'' as a 
private health plan that operates as a PPO, but serves an entire CMS-
designated region. Like local PPOs that may offer MA plans under the MA 
program, the regional PPOs must have a network of contracting providers 
that have agreed to a specific reimbursement for covered benefits that 
are offered by the MA regional plan, and must also provide for 
reimbursement for all covered benefits regardless of whether the 
covered benefits are provided through the network providers or outside 
of the network. MA regional plans are further described in Sec.  422.4 
below, which describes types of contracting options under the MA 
program.
    We define an ``MA local plan'' as one that is not an MA regional 
plan. Also defined under part 422 is the ``Prescription Drug Sponsor,'' 
``Prescription Drug Plan (PDP),'' and a ``Medicare Advantage 
Prescription Drug (MA-PD) plan.'' A sponsor must be a private entity 
that meets our requirements and standards. PDP sponsors may offer 
multiple plans throughout the country or in a region, but sponsors must 
submit an individual bid for each plan.
    An MA-PD plan is an MA plan that also provides qualified 
prescription drug coverage as found in Part D of the Act. An 
organization offering a coordinated care MA plan must have an MA-PD 
plan in each of the service areas in which it operates, as required 
under section 1860D-21(a)(1) and (2) of Part D of the Act.
    The other new type of contracting option available is a specialized 
MA plan for special needs individuals, as provided for under section 
231 of the MMA. Section 1851(a)(2)(A) of the Act is amended by adding a 
new clause (ii) providing for specialized MA plans for special needs 
beneficiaries. Those specialized MA plans are therefore to be treated 
as coordinated care plans. In section 1859(b)(6)(A) of the Act, 
specialized MA plans for special needs beneficiaries are defined to be 
MA plans that exclusively serve special needs individuals defined in 
section 1859(b)(6)(B) of the Act, described below.
    Currently, MA plans may not selectively limit enrollment to a 
subgroup, for example, institutionalized individuals (except for areas 
in which an organization is permitted to limit enrollment to retirees 
obtaining their employer/union coverage through an MA plan, as 
permitted through waivers authorized under section 1857(i)(1) of the 
Act). The establishment of specialized MA plans would allow MA plans to 
exclusively enroll special needs individuals in MA plans that have 
targeted clinical programs for these individuals.

[[Page 46871]]

    We may designate an MA plan as a specialized MA plan, if the plan 
``disproportionately'' serves special needs beneficiaries. We will 
establish quantitative criteria to be able to designate MA plans that 
disproportionately serve special needs beneficiaries as specialized MA 
plans. For example, one possible criterion might consider the presence 
of four or more chronic conditions for an enrollee to represent a 
``complex'' medical condition. Persons with complex medical conditions 
might be appropriately treated by a specialized MA plan. We may also 
establish criteria to validate that specialized MA plans have 
incorporated processes or clinical programs that are designed to 
address the unique needs of enrolled special needs beneficiaries. We 
expect to determine these criteria based on diagnosis data or other 
administrative data that we collect, such as diagnosis data for risk 
adjustment. In an effort to focus the care management on special needs 
individuals, a specialized MA plan may limit enrollment to special 
needs individuals beginning in January 2004 through December 2009, as 
described under Sec.  422.52.
    An issue related to specialized MA plans for special needs 
individuals is the availability of prescription drugs. Special needs 
individuals in particular need access to prescription drugs to manage 
and control their severe or disabling chronic conditions. From a 
disease management perspective, a non-prescription drug plan would not 
serve the interest of special needs individuals. Additionally, 
effective January 1, 2006, specific dual eligible individuals described 
in section 1935(c)(6)(A)(ii) of the Act are required to receive drug 
coverage solely through the Medicare Part D program. In other words, 
effective January 1, 2006, a full-benefit dual eligible who is also a 
Part D eligible individual will only be able to receive drug coverage 
through the Medicare Part D program. Eligibility for drugs under Title 
XIX will no longer be available for these individuals.
    Therefore, we propose that effective January 1, 2006, all special 
needs plans, as defined in section 1859(b)(6)(B) of the Act, will need 
to provide Part D coverage. Again, for individuals with special needs 
enrolled in a special needs plan, this would be the only means for them 
to receive their Part D coverage as they cannot receive it through an 
MA plan that does not offer prescription drug coverage. We would 
welcome comments on this proposed requirement. The authority for such a 
requirement is found in our establishing requirements for special needs 
individuals under section 1859(b)(6)(B)(iii) of the Act. In addition, 
we also are interested in receiving comments on the development of an 
HIV/AIDS special needs plan that would address the special health 
needs, including prescription drugs, of the Medicare-eligible 
population living with HIV/AIDS.
    Section 1859(b)(6)(B) of the Act identifies three types of special 
needs individuals as: Institutionalized individuals (as defined below); 
individuals entitled to medical assistance under a State plan under 
Title XIX; and such other individuals with severe or disabling chronic 
conditions as the Secretary determines would benefit from enrollment in 
such a plan.
    For the purpose of defining a special needs individual above, 
``institutionalized'' means to reside in a long-term care facility for 
more than 90 days as determined by the presence of a 90-day assessment 
in the Minimum Data Set (MDS). We are not at this time proposing a 
definition of ``severe or disabling chronic condition.'' However, we 
welcome comments on whether we should set standards for the designation 
of an individual with severe or disabling chronic conditions and what 
criteria should be used. For example, does the individual need medical 
management by a specialist (for example, endocrinologist or 
cardiologist)? Does the individual have complex medical conditions? 
Does the individual qualify for the plan's disease or case management 
program? Are there specific benefits or interventions provided to these 
individuals that are not provided to the general MA population?
    We would also welcome comments on whether we should allow 
specialized MA plans to exclusively enroll certain subgroups of 
Medicaid or institutionalized beneficiaries. If it were determined to 
be appropriate to enroll subgroups of either Medicaid or 
institutionalized beneficiaries, what would the appropriate subgroups 
be?
    We note that MMA allows for the enrollment of End-Stage Renal 
Disease (ESRD) beneficiaries in specialized MA plans designed for this 
population. Thus, ESRD beneficiaries for whom an MA plan would receive 
payment at the ESRD rates would be considered special needs individuals 
who would benefit from enrollment in a specialized MA plan.
    Finally, we would welcome comments on whether there are appropriate 
quality oversight mechanisms for specialized MA plans that would be 
appropriate to require to ensure that special needs individuals 
experience improved quality.
3. Types of MA Plans (Sec.  422.4)
    The MA program is intended to provide beneficiaries access to a 
wider array of private health plan choices than the existing plans 
under the M+C program and to increase the number of areas in which 
private health care options are available to Medicare beneficiaries. As 
under the M+C program, entities can contract with us to provide three 
general categories or types of plans: MA coordinated care plans, MA MSA 
plans, and MA PFFS plans. However, the establishment of the MA program 
is designed to afford beneficiaries two additional types of plan 
choices within the coordinated care plan category--regional PPO 
coordinated care plans as defined in Sec.  422.2 or specialized MA 
coordinated care plans, also defined in that section. These new MA 
coordinated care plan entities must conform to the contracting 
requirements described in Sec.  422.504 et seq.
    Section 520(a)(3) of the Medicare, Medicaid and SCHIP Balanced 
Budget Refinement Act of 1999 (BBRA) added section 1852(e)(2)(D) of the 
Act and defined Preferred Provider Organization plans (PPOs) under the 
MA program for purposes of quality assurance requirements. As we 
discussed in the preamble to the final rule with comment period titled, 
``Medicare Program; Medicare+Choice,'' published June 29, 2000 (65 FR 
41070), the definition of PPOs at section 1852(e)(2)(D) of the Act was 
explicitly for purposes of applying quality assurance requirements in 
1852(e)(2)(B) of the Act and was limited in its applicability to 
paragraph (2) of section 1852(e) of the Act. Before the BBRA, PPOs had 
been treated under the M+C statute and regulations in the same manner 
as all other M+C coordinated care plans for purposes of applying 
quality assurance requirements. In the June 29, 2000 final rule with 
comment period, we incorporated this new definition into the M+C 
regulations at Sec.  422.4 and by revising Sec.  422.152.
    The PPO plan definition added by section 520 of the BBRA included 
three elements. They were: The PPO (1) has a network of providers that 
have agreed to a contractually specified reimbursement for covered 
benefits with the organization offering the plan; (2) provides for 
reimbursement for all covered benefits regardless of whether those 
benefits are provided within the network of providers; and (3) is 
offered by an organization that is not licensed or organized under 
State law as a health maintenance organization.

[[Page 46872]]

    Because the definition of PPO plan in section 1852(e)(2)(D) only 
applies for the limited purpose of eligibility for PPO quality 
improvement requirements, we do not believe that the limitations in 
this definition should have been set forth in a generally applicable 
definition of PPO plan in Sec.  422.4, as is currently the case. We 
propose to clarify in regulation that it is solely for purposes of the 
application of the more limited quality assurance requirements in 
section 1852(e)(2)(B) of the Act that PPOs must be offered by MA 
organizations that are not licensed or organized under State law as a 
health maintenance organization. For PPO-type plans that are offered by 
MA organizations that are licensed or organized under State law as 
health maintenance organizations, the quality assurance requirements 
that apply to all other coordinated care plans in section 1852(e) of 
the Act also apply to those PPO type plans.
    Section 722 of the MMA, which amends section 1852(e) of the Act 
effective January 1, 2006, is consistent with this interpretation 
insofar as it limits the applicability of the definition of PPOs in 
section 1852(e)(3)(A)(iv) of the Act (which is the same definition 
currently appearing in section 1852(e)(2)(D) of the Act) to 
subparagraph (A) of paragraph 1852(e)(3) of the Act. Effective January 
1, 2006, MA organizations that offer MA local plans that are PPOs will 
only need to provide for the collection, analysis, and reporting of 
data that permit the measurement of health outcomes and other indices 
of quality insofar as services are furnished by providers that have 
contracted with the MA organization under those PPO plans. However, 
this exception to the normal rule in section 1852(e)(2) of the Act that 
data are to be collected from all clinical sources is afforded solely 
to PPOs that are offered by MA organizations that are not licensed or 
organized under State law as health maintenance organizations--section 
1852(e)(3)(A)(iv)(III) of the Act. To the extent that a local PPO is 
offered by an MA organization that is licensed or organized under State 
law as a health maintenance organization, the normal data collection, 
analysis, and reporting requirements in clause (3)(A)(i) continue to 
apply. We propose to modify the definition of PPOs in Sec.  422.4 to 
account for this more limited interpretation of State licensure 
requirements and to modify headings in Sec.  422.152(b) and (e).
    Another change in the type of MA plans authorized is the 
elimination of previous limits on enrollment in MA MSAs, described at 
Sec.  422.56. As directed by section 233 of the MMA, MA organizations 
are authorized to offer medical savings account (MSA) plans as a 
permanent option. A Medicare MSA plan combines a high-deductible 
insurance policy and a savings account for health care expenses. The 
Medicare program pays premiums for the insurance policies and makes a 
contribution to the beneficiaries' medical savings account (MSA). The 
beneficiaries use the money in their MSAs to pay for their health care 
before the high deductible is reached. The sum of the premium and the 
contribution to the account would equal the payment made by Medicare to 
any other MA plan for a beneficiary.
    By way of background, the Balanced Budget Act of 1997 (BBA) 
authorized a demonstration project for MSA plans when it created the 
Medicare+Choice program. MMA changes restrictive rules that governed 
the MSA demonstration. MMA eliminates the limits imposed on MSA plans 
by the BBA, including a time limit on enrollment and a limit on the 
number of beneficiaries who could enroll in such plans. It also 
exempted MSA plans from certain quality assurance requirements that the 
BBA applied to ``network'' MSA plans. The Congress made these changes 
in light of the fact that no MSA plans participated in the 
demonstration. We are particularly interested in comments on whether 
these changes are sufficient to attract MSA plan sponsors and 
beneficiary enrollment.
    Finally, we delete the descriptions of M+C network MSA plan and M+C 
non-network MSA plan as different types of plans at Sec.  
422.4(a)(2)(B)(ii), since the distinction between network and non-
network MSAs for the purpose of quality assurance requirements is no 
longer applicable.
4. Expansion of the Beneficiary Education and Information Campaign 
``User Fees'' (Sec.  422.6, formerly Sec.  422.10)
    The last section of subpart A contains regulations implementing the 
user fees provided for in section 1857(e)(2) of the Act. MMA expands 
the user fee to include PDP sponsors as well as MA plans as 
contributors. The expansion of the user fee recognizes the increased 
Medicare beneficiary education activities that we would require around 
the new prescription drug benefit. In 2006 and beyond, user fees will 
help to offset the costs of educating over 41 million beneficiaries 
about the drug benefit through written materials such as a publication 
describing the drug benefit, internet sites, and other media. For 
example, CMS will develop a prescription drug price comparison Web site 
for beneficiary use. We may also provide information to beneficiaries 
on quality measures, networks, and other dimensions.
    Additionally, as before, the user fee would pay for the ongoing 
costs of the national beneficiary education campaign that includes 
developing and disseminating print materials, the 1-800 telephone line, 
community based outreach to support State health insurance programs 
(SHIPs), and other enrollment and information activities required under 
section 1851 of the Act and counseling assistance under section 4360 of 
the Omnibus Budget Reconciliation Act of 1990 (Pub. L. 103-66).
    In fiscal year 2006 and thereafter, the MMA authorizes up to 
$200,000,000, reduced by the fees collected from MA organizations and 
PDP sponsors in that fiscal year (total amount is not indexed in any 
way). In each year, the total amount of collected user fees may not 
exceed the estimated costs in the fiscal year for carrying out the 
enrollment and dissemination of information activities in the MA and 
Part D prescription drug programs or the applicable portions (discussed 
below) of $200,000,000, whichever is less.
    Finally, these user fee provisions establish the applicable 
aggregate contribution portions for MA organizations and PDP sponsors. 
The applicable portion of the user fee for MA organizations would be 
based on the total proportion of expenditures for Medicare Part C as 
well as for payments under Part D that are made to MA organizations as 
a percent of Title XVIII expenditures. The PDP sponsor's applicable 
portion is the estimate of the total proportion of expenditures under 
Title XVIII that are attributable to expenditures made to PDP sponsors 
for prescription drugs under Part D. The fees charged to individual MA 
plans and PDP sponsors would continue to be determined by CMS. These 
fees are calculated by a percent of plan's revenue to avoid over-
burdening smaller plans.
    The remaining portion of the costs of the beneficiary education 
campaign is the fee-for-service beneficiaries' portion of the campaign. 
It represents the portion of costs of fee-for-service informational 
materials, designed to enable beneficiaries to make informed choices 
among health plans and Medicare fee-for-service. This amount is funded 
through CMS' appropriations.

[[Page 46873]]

Subpart B--Eligibility, Election and Enrollment

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart B--Eligibility, Election and Enrollment'' at the 
beginning of your comments.)
1. Eligibility To Elect an MA Plan (Sec.  422.50)
    The regulations contained in this subpart are largely the same as 
those now used in the M+C program. We have made the necessary 
terminology changes throughout subpart B to reflect the replacement of 
the M+C program with the MA program. Substantive changes are discussed 
below.
    Under Sec.  422.50 introductory text, we would clarify that, for 
this subpart, a reference to an ``MA plan'' should be read to include 
both MA local and MA regional plans, unless specifically noted 
otherwise in the text.
    In addition, based on our experience with the M+C program, we 
believe that it is important to provide additional optional mechanisms 
for elections that take advantage of modern technology, such as 
allowing an individual to enroll at a secure Web site or at a health 
plan's customer service center. Section 1851(c) of the Act allows the 
Secretary to designate other enrollment mechanisms. These options 
promote a more efficient and simplified election process for 
beneficiaries as well as partner organizations. Therefore, we would 
revise Sec.  422.50(a)(5) to allow other election methods as approved 
by us.
2. Eligibility To Elect a Special Needs MA Plan (Sec.  422.52)
    We would include a new Sec.  422.52 to describe the eligibility 
requirements for enrollment into specialized plans for special needs 
beneficiaries, which have been authorized under section 231 of MMA. 
Individuals would be eligible to enroll in these specialized plans if 
they are institutionalized, entitled to Medicaid (``dual eligible''), 
or have a severe and disabling condition and meet the requirements 
specified by CMS. We are considering including in this last category 
individuals with a disabling condition who are not in an institution 
but require a similar level of care. We invite comments on this 
approach. Specialized MA plans would be able to restrict enrollment 
solely to those individuals who are in one or more classes of special 
needs individuals.
    In general, we believe that the new requirements regarding special 
needs MA plans primarily are intended to encourage more choices for 
certain populations by allowing plans that specialize in the treatment 
of beneficiaries with particular needs by providing and coordinating 
services for these individuals and to limit plan enrollment to such 
individuals. This provision could encourage plans to develop new 
products in the market place by giving them the opportunity to develop 
expertise in efficiently serving such specialized populations. We also 
have the authority to waive section 1851(a)(3)(B) of the Act, which 
precludes beneficiaries with ESRD from enrolling in MA plans. This 
authority grants us the discretion to permit people with ESRD to enroll 
in a special needs MA plan. We also are considering whether 
beneficiaries with ESRD should be considered to meet the requirements 
for special need status and invite comments on this idea.
    We are permitted to apply to special needs plan enrollees a 
provision under section 1894(c)(4) of the Act that applies to enrollees 
in the Program of All Inclusive-Care for the Elderly (PACE). This 
provision provides for continued eligibility in certain situations. 
Specifically, this provision allows a PACE eligible individual to be 
deemed to continue to be enrolled even if the individual no longer 
meets the PACE eligibility requirements if, in absence of continued 
coverage under a PACE program, the individual reasonably would be 
expected to meet the requirements within the succeeding 6-month period. 
Similarly, we propose to allow special needs individuals who no longer 
meet the ``special needs'' criteria to remain enrolled in an MA special 
needs plan if it is reasonable to assume that, absent the continued 
special needs care available under the plan, they would again meet the 
eligibility criteria for that MA plan within the succeeding 6-month 
period.
    We note that a special needs plan is described as ``an MA plan that 
exclusively serves special needs individuals.'' We have considered the 
question of whether this means that the plan is exclusively offered to 
special needs individuals, and exclusively enrolls special needs 
individuals, or whether it means that it only provides care to special 
needs individuals, and has no enrollees who do not meet the definition 
of a special needs individual. In the latter case, if an existing plan 
were designated as a special needs plan, existing enrollees who did not 
meet the definition of a special needs individual would be required to 
terminate their enrollment.
    We do not think that this was intended by the Congress, and 
therefore have interpreted ``exclusively serves'' special needs 
individuals to mean that the plan is only offered to special needs 
individuals, and only enrolls such individuals. Existing enrollees of 
such a plan, however, would be ``grandfathered'' and could remain 
enrolled. Therefore, we are providing in proposed Sec.  422.52(e) that 
individuals who are enrolled in MA plans that are subsequently 
designated as ``special needs plans'' would be able to continue to be 
enrolled. Those individuals would be able to remain enrolled or choose 
to elect other MA plans during appropriate election periods provided to 
all MA eligible individuals.
    We invite comment on the above approach, and on the alternative 
approach under which only special needs individuals could be enrolled 
and receive services through the plan, and any non-special needs 
individual would have to terminate enrollment involuntarily if his or 
her plan wanted special needs plan status. To ensure that the non-
special needs individuals would be able to elect a new plan outside of 
an enrollment period, we intend to establish a special election period 
for these individuals. We have historically established SEPs for 
exceptional circumstances in our manual instructions rather than 
through regulation. Thus, we would establish such an SEP through that 
process.
    We would distinguish the situation of a ``grandfathered'' plan 
enrollee who enrolled in the plan before it had special needs status 
from a case in which a new special needs plan was created that was 
designed to provide services only to people in a special needs 
category. For example, if a special needs plan was established to 
exclusively provide services to institutionalized individuals, and had 
no capacity to provide care to individuals not in a contracting 
institution, we would not expect the plan to allow an individual to 
remain enrolled in the plan if he or she no longer required 
institutional care.
    In this case, unlike the grandfathered enrollees of an existing MA 
plan designated as a special needs plan, we would expect individuals to 
be informed before initial enrollment that they could only remain 
enrolled in this plan for so long as they remained institutionalized. 
If such a notice is given, we believe that a new special needs plan 
could require disenrollment when a person no longer had special needs 
status. Such a disenrollment would be pursuant to section 1851(e)(4)(B) 
of the Act, as the individual would ``no longer be eligible'' for that 
plan ``because of a change in * * * circumstances. * * *'' (This would 
also be the basis for disenrollment of grandfathered

[[Page 46874]]

enrollees if we were to adopt the alternative reading of the word 
``serves,'' under which grandfathered enrollees could not remain 
enrolled because the plan could only provide services to special needs 
individuals.)
    The statute also provides us with the authority to designate an MA 
plan to be a special needs plan if it ``disproportionately serve[s] 
special needs individuals.'' Under our current interpretation of the 
word ``serves,'' this would mean a plan that disproportionately enrolls 
special needs individuals. At a minimum, this would mean it enrolls 
special needs individuals in a proportion greater than such individuals 
exist in the area served by the plan. We invite comments on the 
question of whether this ``minimum'' definition would be appropriate, 
or whether there is another level of special needs enrollees (for 
example, 50 percent or more) that should be required in order to be 
considered a special needs plan under this ``disproportionately 
serves'' provision.
    We note that under this provision as we are interpreting it, the 
plan would remain exempt from the requirement to enroll all MA eligible 
individuals, but would nonetheless enroll some MA individuals who are 
not special needs individuals. Operationally, this could be 
accomplished in a number of ways. For example, the plan could impose a 
cap on the number of non-special needs individuals enrolled at any 
point in time, or cap the number of special needs individuals served. 
It also might enroll two special needs enrollees for every one enrollee 
who does not meet the definition.
    Other than the requirement that all MA eligible individuals be 
permitted to enroll, and--if we choose to waive it'the preclusion on 
enrolling individuals with ESRD, all other MA provisions would apply to 
specialized needs plans (for example, payment rules, appeal rights, 
quality assurance requirements, enrollment procedures).
3. Continuation of Enrollment for MA Local Plans (Sec.  422.54)
    Section 1851(b)(1) of the Act is amended by section 222(l)(3)(A)(i) 
of the MMA to limit the offering of MA plan continuation areas to MA 
local plans only. We would revise Sec.  422.54 to specify that this 
provision would apply only to local MA plans.
4. Enrollment in an MA MSA Plan (Sec.  422.56)
    Section 1851(b)(4)(A) of the Act is amended by section 233 of the 
MMA to eliminate the cap on the number of individuals that may enroll 
in MA MSA plans and to make the program permanent by removing the 
enrollment cut-off date. While unchanged by the MMA, section 1851(b)(2) 
of the Act states that individuals enrolled in health benefit plans in 
the Federal Employees Health Benefit Plan, the Veterans Administration, 
or the Department of Defense may not enroll in an MSA until or unless 
the Director of OPM adopts policies to ensure that the enrollment will 
not result in higher government spending under these programs. While 
the existing exclusion of enrollees of other Federal programs is 
reflected in current regulations at Sec.  422.56(b), the regulatory 
language does not provide for such individuals to be eligible following 
the adoption of new policies by OPM. We understand that the Office of 
Personnel Management's current policy is to encourage the creation of 
high deductible plans for Federal employees and retirees, and we will 
explore with OPM whether such a policy can now or in the future be 
certified to the Secretary. Therefore, we are revising the regulations 
to allow for that policy to be implemented in the future, as provided 
in the statute. We would revise Sec.  422.56 to reflect these changes.
5. Election Process (Sec.  422.60)
    We are proposing conforming changes throughout Sec.  422.60, as in 
Sec.  422.50(a)(5), to allow us to approve other election mechanisms in 
addition to paper forms. We are also streamlining Sec.  422.60(e) to 
allow for notice options for MA plans other than the traditional 
mailing of a written document.
    We are also proposing to clarify the regulation at Sec.  422.60(b) 
to provide that MA organizations may submit requests to restrict 
enrollment for capacity reasons at CMS at any time during the year. 
There are several reasons why MA organizations may need to restrict 
enrollment for capacity reasons, especially those that are clearly 
outside of the MA organization's control. For instance, we have allowed 
capacity limits for certain organizations when a large competitor, in 
the same service area, has non-renewed its contract. The remaining 
contractor may not have the capacity to enroll a large percentage of 
its competitor's enrollees. Another example is a case in which an MA 
organization loses its contract with a large hospital system or 
physician group and thus can no longer handle the potential number of 
enrollees it previously estimated it could.
6. Election of Coverage Under an MA Plan (Sec.  422.62)

a. Annual Coordinated Election Period

    Section 1851(e)(3)(B) of the Act is revised by sections 102(a)(2) 
and 102(a)(5) of the MMA to permanently establish the annual 
coordinated election period as November 15 through December 31 of each 
year. For 2006, the annual coordinated election period is extended 
through May 15, 2006.

b. Initial Coverage Election Period

    Section 1851(e)(1) of the Act is amended to provide that, ``if any 
portion of an individual's initial enrollment period under Part B 
occurs after the end of the annual, coordinated election period [for 
2006, from November 15, 2005 to May 15, 2006], the initial enrollment 
period under this part shall further extend through the end of the 
individual's initial enrollment period under Part B.''
    We believe that this provision is intended to allow an individual 
who still has time to decide whether to enroll in Medicare Part B upon 
becoming eligible for Medicare to be able to enroll in an MA plan upon 
deciding to enroll in Medicare Part B. In using the words ``further 
extend,'' we believe the Congress made clear that this new sentence was 
designed to expand upon the beneficiary's opportunity to choose to 
enroll in an MA plan by extending or lengthening the time the 
beneficiary has relative to the existing rules.
    Accordingly, we are interpreting this sentence to apply only to the 
extent that its application would result in an extension of an initial 
enrollment period for an MA compared with the period that would apply 
if the sentence had not been added. Under the alternative 
interpretation, in which an MA initial enrollment period would end when 
the Medicare Part B initial enrollment period ends, individuals who 
defer Medicare Part B enrollment, such as those who decline enrollment 
while continuing to work, would be adversely impacted. The initial 
enrollment period for Medicare Part B is directly associated with an 
individual's eligibility for Medicare Part B, not with an individual's 
actual enrollment in Medicare Part B.
    To ensure that an individual who is first eligible for MA has the 
full opportunity to elect an MA plan, we are interpreting the statute 
to provide for an initial coverage election period for MA that ends on 
the later of the day it would end under pre-MMA rules or the last day 
of the Medicare Part B initial enrollment period. The new sentence 
added to section 1851(e)(1) of the Act

[[Page 46875]]

accordingly would only extend an individual's MA initial election 
period, never reduce or eliminate it.

c. Open Enrollment Periods Through 2005

    Section 1851(e)(2)(A) of the Act is amended to extend the open 
enrollment and disenrollment period through 2005, providing unlimited 
opportunities for MA eligible beneficiaries to enroll in, disenroll 
from, and or change enrollment in an MA plan. We would revise Sec.  
422.62(a)(3) to reflect this extension.

d. Open Enrollment Periods During 2006

    Section 1851(e)(2)(B)(1) of the Act is revised to establish that 
the open enrollment period in 2006 will be the first 6 months of 2006. 
In addition, for individuals who first become eligible during 2006, an 
open enrollment period will be provided as the first 6 months the 
individual is MA eligible during 2006, but not to extend past December 
31, 2006. After December 31st, 2006, all individuals are provided the 
3-month open enrollment period from January through March, as provided 
in the next section.

e. Open Enrollment During 2007

    Section 1851(e)(2)(C)(i) of the Act is changed to establish that 
the open enrollment period for 2007 and subsequent years will be the 
first 3 months of each year. In addition, for individuals who first 
become MA eligible during 2007 and subsequent years, an open enrollment 
period will be provided as the first 3 months the individual is MA 
eligible during the year, but not to extend past December 31, 2006. 
Although this specific period does not extend past December 31, it is 
important to remember that all individuals will be provided a 3 month 
open enrollment period from January through March, as discussed in this 
section.
    A new clause is added to section 1851(e)(2)(C) of the Act that 
limits a change of election made during an open enrollment period in 
2006 and later years to the same type of plan the individual making the 
election is already enrolled in. Specifically, an individual in an MA 
plan that does not provide drug coverage may only change to another 
similar MA plan, or to original Medicare, but may not enroll in an MA 
plan that provides Part D coverage, or enroll in a Part D plan. An 
individual enrolled in an MA plan that includes Part D coverage 
similarly may only enroll in another MA plan with Part D coverage, or 
change to original Medicare coverage with an election of a Part D plan. 
(We note that section 1851(e)(2)(C)(iii)(I) of the Act states that an 
individual who is ``enrolled in an MA plan that does provide qualified 
prescription drug coverage,'' may only elect a plan that does not 
provide that coverage. A literal reading of this language would be in 
direct conflict with clause (II) of section 1851(e)(2)(C)(iii) of the 
Act, which says that an individual who is enrolled in an MA plan that 
provides qualified prescription drug coverage may not enroll in an MA 
plan that provides no Part D coverage.
    This contradiction, plus (1) the fact that section 
1851(e)(2)(C)(iii)(I) of the Act refers to a ``another'' MA plan that 
``does not'' provide Part D coverage, (2) the fact that clause (I) is 
contrasted with clause (II) with the word ``or'', and (3) committee 
report language, make it clear that the word ``not'' was inadvertently 
omitted from the first clause of section 1851(e)(2)(C)(iii) of the 
Act.) Although the MMA and conference agreement are clear, we think 
that there may be some concern that the policy set forth in section 
1851(e)(2)(C)(iii)(II) of the Act, as added by section 102(a)(6)(C) of 
the MMA, may be somehow inconsistent with the voluntary nature of the 
Part D program. Specifically, that policy would require a Medicare 
beneficiary who has changed their mind after initially electing Part D 
coverage through an MA plan to maintain drug coverage for the entire 
year, even if they decide during the open enrollment period that they 
do not want that coverage. (Of course, a Part D enrollee could always 
forego Part D coverage through a PDP by failing to pay premiums under 
the plan). We are soliciting comments from interested parties as to 
whether there is a way to interpret the statute, and whether it would 
be advisable, on a policy basis, to excuse the requirement that an 
enrollee who elects their option to disenroll from an MA-PD plan during 
an open enrollment period, enroll only in another MA plan with 
prescription drug coverage or enroll in fee-for-service Medicare with 
Part D coverage.
7. Coordination of Enrollment and Disenrollment Through MA 
Organizations (Sec.  422.66)
    We would revise Sec.  422.66 with conforming changes in keeping 
with our proposed clarification at Sec.  422.50(a)(5) regarding 
election mechanisms other than, and in addition to, forms. As proposed 
in Sec.  422.60(e), we are making similar changes in Sec.  422.66(b) to 
provide for other notice mechanisms, as well as a more efficient notice 
process. This includes removing the requirement for MA plans to send a 
copy of the individual's disenrollment request back to the individual.
    Section 1860D-21(b) provides the Secretary the authority to 
implement default enrollment rules at 1851(c)(3)(A)(ii) for the MA-PD 
program, which begins in 2006. If applied, these rules provide that an 
individual who is in a health benefits plan providing any prescription 
drug coverage will be deemed to make an election into an MA-PD offered 
by the same organization during the individual's initial election 
period surrounding Medicare entitlement. This statutory provision was 
originally created under The Balanced Budget Act of 1997 (BBA) for the 
Medicare+Choice (M+C) program. In developing regulations for the BBA, 
CMS decided not to default individuals to M+C plans offered by the same 
organization in which they were enrolled. Our rationale was that to 
implement such a process would require CMS to have access to 
information prior to the individual's initial coverage election period. 
Since we did not have access to the individual's information on health 
plans in which they were enrolled, we did not believe it would be 
feasible to implement a default process at that time.
    Rather than implement a default enrollment process for these 
individuals who are enrolled in a health plan, we require (at section 
422.66(d)(1) of our regulations) that an M+C plan offered by an M+C 
organization must accept any individual who is enrolled in a health 
plan offered by that M+C organization the month immediately preceding 
the month in which the individual becomes entitled to Part A and 
enrolled in Part B, as well as meeting the other M+C eligibility 
requirements. This requires an affirmative action by the individual; 
however it does not extend so far as to automatically enroll the 
individual (that is, ``default'') into the M+C plan.
    In addition to our previous concerns regarding this provision, we 
are also concerned that, beginning in 2006, an individual's ability to 
choose his/her health care coverage will be limited to certain periods. 
Within these specified periods, an individual is limited to one 
election (either enrollment or disenrollment). If an individual makes 
an election of any type (including one by ``default''), s/he is 
prohibited from making another choice until the next annual election 
period in November. Default enrollment may therefore limit an 
individual's choice by utilizing the individual's single election. In 
addition, automatically enrolling an individual assumes that the 
``default'' plan would

[[Page 46876]]

be the plan that the individual would have chosen absent such a default 
process. This may not be the case. Given the variety of potential 
options available to these individuals, and the implications of 
choosing those options (including penalties for late enrollment in Part 
D), we must carefully consider the consequences of implementing a 
default enrollment process.
    We must also carefully consider the implications a default 
enrollment process may have on individuals enrolled in employer groups. 
For example, such a process could conflict with the incentives that the 
MMA will provide to employers to encourage them to maintain creditable 
coverage for their employees. Such a provision could negatively impact 
married individuals enrolled in employer group plans if an individual 
has just become entitled to Medicare (and is enrolled in plan under 
default enrollment) while his or her spouse, who is already entitled to 
Medicare, receives coverage through the employer group in another 
health plan. On the other hand, we may learn from system processes we 
are establishing under the new Medicare-approved discount drug plan, 
such as data sharing with the States and other agencies. We could 
consider offering MA plans the option to establish a process with its 
employers to automatically enroll individuals, with an option for 
individuals to decline before enrollment. We recognize that any 
strategies to streamline and improve enrollment could lead to an 
overall reduction in costs. These are all important issues that must be 
carefully considered.
    Since the Secretary has the discretion to not implement the default 
enrollment provision, we would continue to require affirmative 
elections by the individual upon becoming entitled to Medicare as 
provided under Sec.  422.66. This ensures that individuals have the 
ability to remain with the organization that offers their health plan 
and protects beneficiary choice by requiring an individual to make an 
affirmative election. However, we encourage input from the public on 
this provision given the new Part D program, including the benefits, as 
well as the impact of implementing such a provision.
    We would implement new rules for continuing MA coverage for 
individuals enrolled in MA plans as of December 31, 2005. Under section 
1860D-21(b)(2), individuals enrolled in an MA plan that, as of December 
31, 2005, provides any prescription drug coverage, would be deemed to 
be enrolled in an MA-PD plan offered by that same organization as of 
January 1, 2006. If an individual is enrolled with an MA organization 
that offers more than one MA plan that includes drug coverage, and is 
enrolled in one of those plans as of December 31, 2005, the individual 
would be deemed to have elected to remain enrolled in that plan on 
January 1, 2006 if it becomes an MA-PD plan on that date. An individual 
enrolled in an MA-PD plan on December 31 of a year would be deemed to 
elect to remain enrolled in that plan on January 1 of the following 
year (that is, the next day). We would revise Sec.  422.66(e) to add 
language that incorporates these changes.
8. Effective Dates of Coverage and Change of Coverage (Sec.  422.68)
    To coordinate the effective date of elections with the new special 
annual coordinated election period, section 1851(f)(3) of the Act is 
amended by establishing that the effective date of elections for the 
annual coordinated election period do not apply during the 2006 special 
annual election period, when enrollment will be effective on the first 
day of the month following the month in which an election is made. We 
propose to revise Sec.  422.68(b) to provide for this coordination and 
make the effective date of elections in the annual coordinated election 
period for 2006 that are made in 2006 (that is, from January 1-May 15, 
2006) the first day of the calendar month following the month in which 
the election is made.
9. Disenrollment by the MA Organization (Sec.  422.74)
    We are clarifying the regulation at Sec.  422.74(d)(1) regarding 
disenrollment for nonpayment of premium to provide more flexibility to 
MA plans in developing rules for those individuals who fail to pay 
their basic and supplementary premiums. Under the current regulations 
at Sec.  422.74(d)(1), MA plans are required to provide, at minimum, a 
90-day grace period before disenrolling individuals for failure to pay 
the premium. Thus, MA plans must maintain enrollment for individuals 
who do not pay their premiums for more than 90 days. We propose to 
provide greater flexibility to MA organizations by replacing the 90-day 
grace period in Sec.  422.74(d)(1) with the approach taken in Sec.  
417.460(c)(1), which governs disenrollment from HMOs with cost 
contracts under section 1876. Cost HMOs must take certain actions 
before an individual may be disenrolled for nonpayment of premium, 
including demonstrating a reasonable effort was taken to collect the 
monies and providing the individual with written notice. While no 
specific timeframe dictates the process, certain steps must be taken. 
Generally, this process takes at least 30 days before a disenrollment 
is effective, given that disenrollments are effective the first of the 
month. Similarly, we propose to remove the mandatory timeframe before 
disenrollment would occur, focusing on the required and important steps 
that still must be taken. Such steps would continue to include 
requiring that proper notice be provided to individuals before that 
action is taken, and the MA organization would have to be able to 
demonstrate to us that it has made reasonable efforts to collect unpaid 
premium amounts. The notice would also inform the enrollee of his or 
her rights under the organization's grievance procedures. These 
revisions would not, however, preclude organizations from offering a 
more generous grace period than provided in the regulation, if they so 
choose.
    Current regulations at Sec.  422.74(d)(2) generally prevent an 
individual from being disenrolled from an MA plan if his or her 
behavior is related to ``diminished mental capacity.'' While we 
originally intended this provision to protect the rights of individuals 
with mental illness, the language requiring that the individual's 
behavior not be related to diminished mental capacity has proven to be 
overly broad. The unintended impact of the current regulations has been 
to prohibit disenrollment of individuals whose violent and threatening 
behavior put the health and safety of enrollees, staff, and the public 
at risk. Therefore, we are amending the regulation by revising Sec.  
422.74(d)(2) to ensure due process and beneficiary protections, while 
at the same time protecting the health and safety of that individual as 
well as others. The changes include redefining disruptive behavior as 
``disruptive or threatening,'' as well as retaining the ``unruly, 
abusive, or uncooperative'' language. The revised provision would also 
require that the behavior be by an individual with ``decision-making 
capacity,'' meaning someone with the ability to understand the 
consequences of his or her behavior. In addition, we are proposing 
limiting re-enrollment in the MA program he or she has been disenrolled 
from under this provisions, as well as a provision to provide for 
expedited disenrollment in cases where there is an immediate threat of 
health and safety to others.
    M+C organizations and providers also have expressed concern 
regarding nonpayment of cost sharing, including co-payments, for health 
plan services. The statute specifically permits individuals to be 
disenrolled for non-payment of premiums, but it does not

[[Page 46877]]

provide for disenrollment due to nonpayment of cost-sharing. This has 
proven increasingly problematic since M+C organizations and providers 
have no effective mechanism to deal with individuals who repeatedly 
refuse to meet their cost-sharing responsibilities, potentially 
resulting in disruptions to the plan's ability to maintain its provider 
network. Thus, we are considering new regulatory language that would 
include nonpayment of cost sharing as ``noncompliant'' behavior under 
the disruptive behavior provisions because it limits the health plan's 
ability to provide services both to the individual and potentially to 
other enrollees. Although we are not proposing specific regulatory 
language at this time, we invite comments on adopting an interpretation 
of nonpayment of cost sharing as ``disruptive behavior,'' as well as 
comments on the elements that we propose to include in language. As 
part of the regulation, we intend to require the policy be applied 
consistently, however, we would be clear that an exception would 
prohibit low-income individuals from being disenrolled under this 
provision. We would also indicate that the cost-sharing amount must 
represent a ``significant'' cumulative amount and that the MA plan 
would be expected to have an established threshold that would be 
approved by CMS. CMS envisions MA organizations would submit such 
thresholds at the time their annual payment rates are submitted to CMS 
for approval. In addition, we propose to include that the behavior must 
be based upon a repeated failure to pay cost sharing. Since the 
language for disenrollment for nonpayment of cost sharing would fall 
under the regulations for disruptive behavior, the process for 
disruptive behavior as provided in regulations and in manual 
instructions would be applied, including: required approval by CMS 
before such disenrollment is permitted and beneficiary notice 
requirements. This would also require plans to offer payment agreements 
with the beneficiary as part of the requirement under disruptive 
behavior to make a serious effort to work with the beneficiary. We may 
include guidance on this matter in a final regulation based upon 
comments received.
10. Approval of Marketing Materials and Election Forms (Sec.  422.80)
    We have in place a program that recognizes consistent compliance 
with marketing guidelines by providing for streamlined approval of 
marketing materials submitted by organizations that have demonstrated 
compliance. Called the ``File and Use'' program, organizations that 
have demonstrated to us that they continually meet a specified standard 
of performance will have certain types of marketing materials (such as 
advertising materials or other materials that do not describe plan 
benefits) deemed to be approved by us if they are not disapproved 
within 5 days of submission to us for prior approval. Thus, under these 
circumstances, organizations only need to submit material for our 
approval 5 days befor its distribution.
    The advantages of File & Use are that the organization can decrease 
the time it takes to begin using certain marketing materials and 
improve planning and budgeting for publication of these materials.
    In addition, we are making the time frames under Sec.  422.80(e)(5) 
consistent with those provided under Sec.  422.80(a)(1). Currently, 
under Sec.  422.80(a)(1), the review period for marketing materials is 
at least 45 days, unless using model materials provided by CMS, in 
which case the review period is decreased to no more than 10 days. 
However, the standards for M+C marketing under Sec.  422.80(e)(1)(v) 
refer only to the 45-day period. Hence, we will now add a reference to 
the 10 day period in this section to be consistent with Sec.  
422.80(a)(1).
    We are also making clarifying changes under those marketing 
activities the MA plans may not participate in, such as specifically 
using the term ``targeted marketing'' when discussing discriminatory 
activities and engaging in any marketing activity that CMS prohibits in 
its marketing guidance.
    Finally, while all entities in which CMS does business with are 
required to adhere to all Federal laws, with regard to marketing, it is 
important to refer here to section 1140 of the Act prohibiting the 
misuse of symbols, emblems, or names in reference to Social Security or 
Medicare. While we have not reiterated this provision in our proposed 
rule, we believe that it is important to highlight this reference in 
the discussion of marketing requirements.

Subpart C--Benefits and Beneficiary Protections

(If you choose to comment on issues in this section, please include the 
caption ``Subpart C--Benefits and Beneficiary Protections'' at the 
beginning of your comments.)

    In the areas of benefits and beneficiary protections, we are 
proposing regulatory reforms based on our program experience, as well 
as provisions implementing new requirements in the MMA. We have tried 
in these proposed rules to integrate new requirements in the MMA with 
existing regulations, while at the same time removing impediments in 
the existing rules that have tended to stifle innovation and, in some 
extreme cases, have caused Medicare+Choice organizations to nonrenew 
their contracts or reduce service areas in which they offer 
Medicare+Choice plans. We have done all this while keeping foremost in 
our consideration the paramount task of ensuring that beneficiaries 
continue to be fully informed and protected in their receipt of 
essential health care services under the Medicare program.
    The regulatory reforms we are proposing include: (1) New 
beneficiary protections in cases in which an MA organization offers an 
``in-network'' point-of-service (POS) option; (2) revisions to the 
rules limiting beneficiary cost sharing related to emergency episodes, 
(3) the elimination of administratively burdensome requirements on MA 
plans that are duplicative of activities already conducted by us, and 
(4) the elimination of a number of unnecessary, duplicative, or overly 
burdensome access to care provisions.
    We also are proposing new rules that would apply only to MA 
regional plans, which are created under the MMA. These rules would 
afford specific additional protections to Medicare beneficiaries that 
enroll in those plans. For instance, MA regional plans must provide for 
catastrophic limits, or stop-loss, on beneficiary out out-of-pocket 
cost-sharing amounts related to original Medicare benefits received in 
and out of the MA regional plan's network of providers.
    Finally, we propose regulations implementing incentives for MA 
regional plans to serve all areas. These incentives involve a new 
payment mechanism for ``essential hospitals.'' We also provide for 
special access to care rights for enrollees in MA regional plans 
related to out-of-network cost sharing.
1. General Requirements (Sec.  422.100)
    Section 233(c) of the MMA amended section 1852(k)(1) of the Act to 
include enrollees in MSA plans offered by an MA organization with MA 
coordinated care plans described in section 1851(a)(2)(A) of the Act as 
having protection from balance billing by non-contracting providers. A 
physician or other entity that does not have a contract with an MSA 
plan is now required to accept as payment in full,

[[Page 46878]]

for covered services provided to an MSA plan enrollee, the amount the 
physician or other entity could have collected had the individual not 
been enrolled in the MSA plan.
    This provision applies to physicians and other entities, but not to 
providers of services. For purposes of this portion of the preamble 
discussion, ``provider of services'' has the same meaning as ``provider 
of services'' defined in section 1861(u) of the Act. Providers of 
services are covered by section 1866(a)(1)(O) of the Act related to 
charges they can impose on a Medicare Advantage plan enrollee when the 
provider of services does not have a contract with the Medicare 
Advantage organization sponsoring the plan in which the beneficiary is 
enrolled.
    In cases in which participating physicians do not have an agreement 
in place governing the amount of payment, and treat beneficiaries 
enrolled in a coordinated care plan described in section 1851(a)(2)(A) 
of the Act or an MSA plan, they must accept the amount they would have 
received under fee-for-service Medicare as payment in full. Generally, 
the amount they would receive under fee-for-service Medicare is based 
on the participating physician fee schedule and includes both the 
amount paid by the Medicare carrier as well as the cost-sharing 
(generally 20 percent) due from the fee-for-service beneficiary or 
another source (that is, a Medigap plan).
    In cases in which non-participating physicians do not have an 
agreement in place governing the amount of payment, and treat 
beneficiaries enrolled in a coordinated care plan described in section 
1851(a)(2)(A) of the Act or an MSA plan, they also must accept the 
amount they would have received under fee-for-service Medicare as 
payment in full. Additionally, non-participating physicians are 
permitted to accept assignment on a case-by-case basis. If they do 
accept assignment on a claim, then the amount a non-participating 
physician must accept as payment in full is generally the non-
participating fee-schedule amount. Non-participating physicians that do 
not accept assignment on a claim can generally balance bill up to, but 
no more than, 115 percent of the non-participating physician fee 
schedule amount. This limit on charges is known as the ``limiting 
charge.''
    These fee-for-service billing limits have always applied to charges 
that providers and other entities could impose when providing covered 
services to enrollees in MA coordinated care plans where there is no 
agreement in place governing the payment amount. The MMA adds the same 
protections for MSA plan enrollees.
    MSAs are ``high deductible'' MA plans and are defined at section 
1859(b)(3) of the Act. Until the deductible is met, the MSA enrollee is 
generally responsible for payment of all covered services. Once the 
deductible is met, the MA organization offering the MSA plan is 
responsible for payment of 100 percent of the expenses related to 
covered services. In both cases, whether it is the enrollee or the MSA 
that assumes responsibility for payment, providers and other entities 
are required to accept the amount that fee-for-service would have paid 
as payment in full. We are also proposing to make conforming changes to 
Sec.  422.214 to account for this new beneficiary protection for MSA 
enrollees.
    To address this MMA requirement and other changes in the MMA and 
for purposes of administrative simplification and clarification, we 
propose the following provisions:
     We would delete the parenthetical ``(other than an M+C MSA 
plan)'' from the first sentence of Sec.  422.100(b)(2) and replace it 
with ``(and an MA MSA plan, after the annual deductible in Sec.  
422.103(d) has been met).''
     We would modify the reference to ``additional benefits'' 
in Sec.  422.100(c), as those benefits are no longer applicable to MA 
plans offered on or after January 1, 2006.
     We would remove Sec.  422.100(e), as it is duplicative of 
Sec.  422.111(b)(2), and we would accordingly redesignate paragraphs 
(f) through (j) as paragraphs (e) through (i), respectively.
     We would remove the reference to operational policy 
letters in Sec.  422.100(f), as instructions on benefit policy 
guidelines and requirements have been incorporated into the Medicare 
Managed Care Manual and other written instructions.
     We would add ``or encourage disenrollment'' to Sec.  
422.100(f)(2) after ``discourage enrollment,'' as one of the 
prohibitions on the design of benefit packages.
2. Requirements Relating to Basic Benefits (Sec.  422.101)
    Section 221 of the MMA adds a new section 1858 to the Act. Section 
1858(g) of the Act provides for a special rule related to the way local 
coverage determinations (for example, ``local medical review 
policies,'' or ``LMRPs'') will be applied by MA regional plans. MA 
regional plans are permitted to elect any one of the local coverage 
determinations that applies to original Medicare fee-for-service 
beneficiaries in any part of an MA region to apply to its enrollees in 
all parts of an MA region. Application of these local coverage 
determinations by an MA regional plan may be appealed under provisions 
of section 1869(f)(2) of the Act.
    We interpret section 1858(g) of the Act to mean that the MA 
regional plan, if it chooses to exercise this option, must elect a 
single fee-for-service contractor's local coverage determination that 
it will apply to all members of an MA regional plan. The MA 
organization offering an MA regional plan may not select local coverage 
policies from more than one fee-for-service contractor that it will 
apply to all members of the plan. We invite comment on this 
interpretation and our proposed policy related to it.
    We propose the following provisions:
     We would add a new Sec.  422.101(b)(4) related to election 
of a local coverage determination by MA regional plans to provide for 
new language in section 221 of the MMA.
     We would remove reference to operational policy letters 
(OPLs) in Sec.  422.101(b)(2), as all OPLs related to general coverage 
guidelines have been incorporated into the Medicare Managed Care Manual 
and other written instructions.
    The MMA provides for new cost-sharing requirements in the statute 
at section 1858(b) of the Act related to MA regional plans. There are 
three specific requirements:
    1. MA regional plans, to the extent they apply deductibles, are 
permitted to have only a single deductible related to combined Medicare 
Part A and Part B services. Applicability of the single deductible may 
be differential for specific in-network services and may also be waived 
for preventative services or other items and services.
    2. MA regional plans are required to have a catastrophic limit on 
beneficiary out-of-pocket expenditures for in-network benefits under 
the original fee-for-service program (Medicare Part A and Part B 
benefits).
    3. Regional MA plans are required to have an additional 
catastrophic limit on beneficiary out-of-pocket expenditures for in-
network and out-of-network benefits under the original fee-for-service 
program. This second out-of-pocket catastrophic limit, which would 
apply to both in-network and out-of-network benefits under original 
Medicare, could be higher than the in-network catastrophic limit, but 
may not increase the limit applicable to in-network services.
    We propose to make MA regional plans responsible for tracking these 
beneficiary out-of-pocket limits and for notifying members when they 
have been

[[Page 46879]]

met. We also propose to require MA regional plans to track and limit 
incurred rather than paid out-of-pocket expenses.
     We would add Sec.  422.101(d) to account for these new 
cost-sharing requirements.
    The MMA also adds new section 1859(b)(4) to the Act. MA regional 
plans are required to provide reimbursement for all covered benefits, 
regardless of whether the benefits are provided within or outside the 
network of contracted providers.
    MA regional plans are preferred provider organizations (PPOs) and 
are defined at section 1859(b)(4) of the Act. (However, it should be 
noted that the statute does not preclude HMOs and other entities from 
offering other MA plan types on a region-wide basis, nor does it 
preclude other entities from offering MA regional plans as long as 
these plans meet statutory and regulatory requirements related to MA 
regional plans including, but not limited to, sections 1859(b)(4), 
1851(a)(2)(A), and 1858(b) of the Act.) As PPOs, MA regional plans are 
permitted to impose differential cost sharing related to non-emergent 
services received from non-network providers. To the extent 
differential cost-sharing is part of the benefit package, the MA 
regional plan would generally be responsible for its portion of payment 
to a non-network provider and the enrollee would be responsible for the 
remainder--up to the limits discussed in item 2 and 3 of this part of 
the preamble.
    In applying the actuarially equivalent level of cost sharing with 
respect to MA bids related to benefits under the original Medicare 
program option set forth under Sec.  422.308, only the catastrophic 
limit on out-of-pocket expenses for in-network benefits (item 2 above) 
is to be taken into account.
    We would accommodate these requirements related to MA regional 
plans by adding a Sec.  422.101(e) to this section.
3. Supplemental Benefits (Sec.  422.102)
    An MA plan may reduce cost sharing below the actuarial value 
specified in section 1854(e)(4)(B) of the Act as a mandatory 
supplemental benefit. Beginning in 2006, an MA plan can reduce the cost 
sharing that applies to plan members below the value that would apply 
to these members if they remained enrolled in the original Medicare 
program. This reduction in cost sharing can be included as a mandatory 
supplemental benefit. We propose the following provisions:
     We would add Sec.  422.102(a)(4).
     We would remove the reference to ``additional benefits'' 
in Sec.  422.102(a)(1), as those benefits are no longer applicable to 
MA plans offered on or after January 1, 2006.
     We would remove the reference to operational policy 
letters (OPLs) in Sec.  422.102(a)(3), as guidelines related to 
benefits that had been contained in OPLs have been incorporated into 
regulation, into the Medicare Managed Care Manual, or into other 
instructions.
4. Benefits Under an MA MSA Plan (Sec.  422.103)
    We would remove the extraneous word ``under'' from the second 
sentence of paragraph (a).
5. Special Rules for Point of Service Option (Sec.  422.105)
    ``Point of Service'' (POS) is an option in some plans that allows 
enrollees to use providers who are not preferred, on a fee-for-service 
basis. To clarify an issue that has created confusion for both 
beneficiaries and MA organizations, we propose to include the following 
statement as introductory text to Sec.  422.105 of the regulation:
    ``If an MA organization does not offer a POS benefit to members of 
a plan, or if it offers a POS benefit as an optional supplemental 
benefit and the member has not selected that benefit, then when those 
members receive what is a covered item or service from contracted 
providers of that plan, the member cannot be financially liable for 
more than the normal in-plan cost sharing, if the member correctly 
identified himself or herself as a member of that plan to the 
contracted provider before receiving the covered item or service.''
    We believe that indemnifying the Medicare member in such a 
situation conforms with normal industry practice and also clarifies our 
long-standing policy that members cannot be held financially liable 
when contracting providers fail to follow or adhere to plan referral or 
pre-authorization policies before providing covered services. If a plan 
member insists on receiving what would otherwise be covered services 
from a contracted provider (but for the lack of a referral or pre-
authorization), then the contracted provider would be required to 
inform the member that those services will not be covered under the 
plan. The provider would also be required to document the medical 
record as to why the services are medically necessary but not available 
through the plan.
    In addition, an MA regional plan might choose to provide for a POS-
LIKE benefit where beneficiary cost sharing would be less than it would 
otherwise be for non-network provider services, but where it still 
might be greater than it would be for in-network provider services. We 
propose the following provisions:
     We would remove the extraneous word ``only'' from Sec.  
422.105(a)(1) and Sec.  422.105(a)(2), and we would modify Sec.  
422.105(a)(1) to account for the fact that beginning January 1, 2006, 
there will no longer be any additional benefits under the MA program.
     We propose to add Sec.  422.105(a)(4) to clarify that 
although an MA regional plan may offer a POS-LIKE benefit to members, 
it still may not deny reimbursement for any covered benefit, regardless 
of whether such benefit is provided within the network of contracted 
providers.
6. Coordination of Benefits With Employer Group Health Plans and 
Medicaid (Sec.  422.106)
    Section 222(j) of the MMA revised section 1857(i) of the Act in 
order to facilitate employer sponsorship of MA plans. Specifically, 
section 222(j)(1) of the MMA redesignated existing section 1857(i) of 
the Act as section 1857(i)(1) of the Act and adds a new sub-heading--
``Contracts with MA Organizations.'' Section 222(j)(2) of the MMA 
created a new section 1857(i)(2) of the Act with a sub-heading of 
``Employer Sponsored MA Plans.''
    Section 222(j)(2) of the MMA allows us to waive or modify 
requirements that hinder the design of, the offering of, or the 
enrollment in an MA plan offered by an employer, a labor organization, 
or the trustees of a fund established by one or more employers or labor 
organizations (or combination thereof) to furnish benefits to the 
entity's employees, former employees (or combination thereof), or 
members or former members (or combination thereof) of labor 
organizations. Section 222(j) of the MMA further states that the MA 
plan may restrict enrollment to individuals who are beneficiaries and 
participants in such a plan.
    We propose a new paragraph (d) to account for this new statutory 
authority, which is effective for plan years beginning on or after 
January 1, 2006. We would also revise the paragraph heading for 
existing paragraph (c) to ``Waiver or modification of contracts with MA 
Organizations.'' In addition, we make editorial corrections to the 
first sentence of paragraph (c)(2) and to remove the second sentence. 
We remove the second sentence of paragraph (c)(2) because we believe 
that instructions related to the specific manner in which ACRs or bids 
are to be filed and specific requirements related to the filings are

[[Page 46880]]

better suited to manual instructions and other written instruments.
     We would revise the paragraph (c) heading.
     We would make editorial corrections to paragraph (c)(2).
     We would add a new paragraph (d) to allow for employer 
sponsored MA plans effective January 1, 2006.
7. Medicare Secondary Payer (MSP) Procedures (Sec.  422.108)
    Section 232 amended section 1856(b)(3) of the Act to remove all 
ambiguity related to State authority over the MA program. Congressional 
intent is now unambiguous in prohibiting States from exercising 
authority over MA plans in any area other than State licensing laws and 
State laws relating to plan solvency. Therefore, we would amend 
paragraph (f) to remove language that suggests States can limit the 
amount an MA organization can recover from liable third parties under 
Medicare secondary payer procedures. Consistent with specific 
preemption authority now provided by section 1856(b)(3) of the Act, MAs 
are permitted by section 1852(a)(4) of the Act to fully recover from 
liable third parties according to section 1862(b)(2) of the Act.
    We would amend paragraph (f) of Sec.  422.108 to account for 
enhanced preemption authority provided by section 232 of the MMA.
8. Effect of National Coverage Determinations (NCDs) (Sec.  422.109)
    Section 1853(c)(7) of the Act requires us to ``adjust'' MA payments 
when a national coverage determination (NCD) or legislative change in 
benefits will result in a significant increase in costs to MAs. We have 
historically interpreted what constituted ``significant'' costs in 
regulation at Sec.  422.109, where the costs of a coverage change are 
considered ``significant'' if either the average cost of providing the 
service exceeds a specified threshold, or the total cost for providing 
the service exceeds an aggregate cost threshold.
    In a final rule published on August 22, 2003, at 68 FR 50839, we 
amended Sec.  422.109 to refine the definition of ``significant'' cost 
to include a new test. By adding a new paragraph at the end of Sec.  
422.109(a)(2), we provided that, for purposes of determining whether to 
make an additional payment adjustment under Sec.  422.256, the tests 
for reaching the ``significant'' cost threshold were to include the 
aggregate costs of all NCDs and legislative changes in benefits made in 
the prior contract year.
    Under this new test, the ``average cost'' of every NCD and 
legislative change in benefits for the contract year would have been 
added together. If the sum of all these average amounts exceeded the 
threshold under Sec.  422.109(a)(1), then an adjustment to payment 
would have been made in the following contract year under Sec.  422.256 
to reflect this ``significant'' cost. Alternatively, if the costs of 
the NCDs and legislative changes in benefits, in the aggregate, 
exceeded the level set forth in Sec.  422.109(a)(2), an adjustment to 
payment would also have been made under Sec.  422.256 on that basis.
    Among the reasons for the above change, as noted in the preamble to 
the August 22, 2003 final rule, was that even when the ``significant'' 
cost threshold had been met under the existing definition, the 
methodology then employed for making a payment adjustment under section 
1853(c)(7) of the Act did not result in an adjustment in the capitation 
rate in those counties with the ``minimum'' update rate (the so-called 
``2 percent minimum update'' counties paid under section 1853(c)(1)(C)) 
of the Act. In accordance with section 1853(c) of the Act, the CMS 
Office of the Actuary used the annual growth rate to update only the 
floor and blended rates, so the ``minimum'' 2 percent update rate, 
which was 102 percent of the prior year's rate, did not reflect the 
costs of new benefits effective in the middle of the previous payment 
year. Therefore, we decided that payments in counties in which payment 
was based on the ``minimum'' 2 percent update rate were not 
appropriately adjusted to reflect new coverage costs as required by 
section 1853(c)(7) of the Act.
    The MMA has changed the ``minimum'' percentage payment prong of the 
former M+C payment methodology by adding a new basis for a minimum 
update. The ``minimum'' percentage increase rate is changed, effective 
January 2004, as follows: Instead of being set at 102 percent of the 
prior year's rate, the minimum increase rate will now be the greater of 
102 percent of the prior year's rate, or the annual MA growth 
percentage. This means that under the MMA, the minimum percentage 
increase rate (the so-called ``minimum 2 percent rate'') will now 
reflect the cost of mid-year NCDs and legislative changes in benefits. 
These costs are now automatically built into the annual MA growth 
percentage and will no longer require an additional adjustment under 
Sec.  422.256.
    Therefore, we are proposing to revise the regulatory change 
established in the August 22, 2003 final rule, in order to implement 
this new MMA payment provision that became effective January 1, 2004. 
Specifically, the changes to Sec.  422.109 and Sec.  422.256, which 
established a new ``NCD adjustment factor'' effective CY 2004, which 
was to be added to the county rates in counties receiving the 
``minimum'' 2 percent update, will be eliminated. We propose the 
following provisions:
     We would remove the final paragraph of Sec.  
422.109(a)(2).
     We would amend Sec.  422.109(a)(2) to remove ``all'' from 
the first clause of the first sentence.
    The ``national standardized annual capitation rate'' described in 
Sec.  422.254(f) is already an average and does not need to be further 
``normalized'' by multiplication ``by the total number of Medicare 
beneficiaries for the applicable calendar year.''
     We would remove the portion the first sentence of Sec.  
422.109(a)(2) to remove all language after ``Sec.  422.254(f).''
     We would revise Sec.  422.109(c)(3) to read: ``Costs for 
significant cost NCD services or legislative changes in benefits for 
which our fiscal intermediaries and carriers will make payment are 
those Medicare costs not listed in paragraphs (c)(2)(i) through 
(c)(2)(iv) of this section.''
     We would remove paragraphs (c)(3)(i) and (c)(3)(ii).
9. Discrimination Against Beneficiaries Prohibited (Sec.  422.110)
    We would make the following correction to this section, to bring it 
into conformance with Sec.  422.50(a)(3)(ii). We would modify paragraph 
(b) to say that if an MA organization chose to apply the rule in Sec.  
422.50(a)(3)(ii) and allowed individuals who are enrolled in a health 
plan offered by the organization at the time of first entitlement to 
Medicare, but residing outside the MA plan's service area, to remain 
enrolled that such an allowance would also need to be applied to 
individuals with end-stage renal disease.
    The new paragraph (b) would read:
    (b) Exception. An MA organization may not enroll an individual who 
has been medically determined to have end-stage renal disease. However, 
an enrollee who develops end-stage renal disease while enrolled in a 
particular MA organization may not be disenrolled for that reason. An 
individual who is an enrollee of a particular MA organization, and who 
resides in the MA plan service area at the time he or she first becomes 
MA eligible, or, an individual enrolled by an MA organization that 
allows those who reside outside its MA service area to enroll in an MA 
plan as set forth at Sec.  422.50(a)(3)(ii), then that individual is 
considered to be ``enrolled'' in the MA

[[Page 46881]]

organization for purposes of the preceding sentence.
    We would remove paragraph (c), as it is duplicative of a 
requirement appearing in Sec.  422.502(h) of the current MA regulation. 
In the subpart K section of this preamble related to Sec.  422.502(h) 
(redesignated as Sec.  422.504(h)), we explain why we are proposing to 
modify the language currently found there.
10. Disclosure Requirements (Sec.  422.111)
    When the Balanced Budget Act of 1997 introduced the M+C program, 
the Annual Coordinated Election Period was established as the month of 
November. In subsequent legislation, the Annual Coordinated Election 
Period for years after 2001 was changed to November 15 through the end 
of December. We propose that rather than changing the date in Sec.  
422.111(d)(2) to a ``date certain,'' we would leave the date flexible--
should the Congress again decide to change the date on which the Annual 
Coordinated Election Period begins. Additionally, this proposed change 
is consistent with section 1851(d)(2)(A) of the Act, the authority for 
this regulatory requirement. The intent of section 1851(d)(2)(A) of the 
Act and Sec.  422.111(d)(2) of the regulation is simply to provide 
notice to plan members of impending changes to plan benefits, premiums, 
and copays in the coming year. That notice is to be provided at least 2 
weeks before the onset of the Annual Coordinated Election Period as a 
means of ensuring that plan members will be in the best possible 
position to make an informed choice on continued enrollment in or 
disenrollment from that plan.
    Section 422.111(d)(2) would be modified to say that plan members 
need to be notified of January 1 changes at least 15 days before the 
Annual Coordinated Election Period defined in section 1851(e)(3)(B) of 
the Act.
    Section 422.111(c)(1) states that an MA plan must disclose the 
information in Sec.  422.111(f) upon request to individuals eligible to 
elect an MA plan.
    We would remove Sec.  422.111(f)(4), as the requirement to provide 
information on Medigap and Medicare Select as a Secretarial 
responsibility under section 1851(d)(2)(A)(i) and (d)(3)(D) of the Act 
and is to occur as part of the ``open season notification'' required by 
section 1851(d)(2)(A) of the Act.
    In addition to an ``open season'' notification, information on 
Medigap and Medicare Select is available year-round from the Federally 
funded State Health Insurance Assistance Program (SHIP) and the 1-800 
MEDICARE telephone number. Both the local SHIP and the 1-800 MEDICARE 
telephone numbers are prominently displayed in MA plan literature. In 
addition, we will continue to require MA plans to publicize the 
availability of information on Medigap, Medicare Select, and other MA 
plans through appropriate CMS information channels. This will not only 
remove unnecessary administrative burden, but it will also ensure that 
reliable, accurate, and complete information is made available to those 
seeking it.
    Since the introduction of http://www.medicare.gov in 1998, we have 
substantially increased the amount of personalized information 
available to Medicare beneficiaries, making it one of the government's 
most comprehensive and customer-oriented sites available to the public. 
The web site hosts twelve separate database applications to help 
individuals make their own health care decisions. The most significant 
ones are: the Medicare Personal Plan Finder (which contains costs, 
benefits, quality, satisfaction and disenrollment measures), Nursing 
Home Compare (which contains basic characteristics, staffing 
information and inspection results), the Prescription Drug and Other 
Assistance Programs application (which contains the most extensive, 
nationally complete listing of the Medicare-approved discount drug 
cards, including price comparisons, as well as other government and 
private programs designed to help with prescription drug costs), and 
the Medicare Eligibility Tool (which assists users in determining when 
they are eligible, how to enroll and what they need to consider when 
joining Medicare). Other tools providing customized results include: 
the Participating Physician and Supplier Directories, Home Health and 
Dialysis Facility Compare, Your Medicare Coverage, Helpful Contacts, 
Publications, and Frequently Asked Questions. By updating all 
information on the web site at least once a month, the information 
provided to Medicare beneficiaries via http://www.medicare.gov is the 
most reliable and consistent information available.
    Much of the information available through http://www.medicare.gov 
is also available via the 1-800 MEDICARE helpline. 1-800 MEDICARE is a 
major information channel for providing the most personalized and 
reliable information to people with Medicare. As a result of the MMA, 
we are receiving the largest call volume ever for 1-800 MEDICARE. The 
beneficiary can call 1-800 MEDICARE to find out the most reliable 
information on public and private programs that offer discounted or 
free medication, programs that provide help with other health care 
costs, and Medicare health plans that include prescription coverage. 
The caller can always talk to a live person at 1-800 MEDICARE to get 
the facts they need. When a beneficiary calls 1-800 MEDICARE, we can 
send them a personalized brochure that allows them to look at discount 
cards based on their drug needs and their preferences about how to get 
their medicines, and their enrollment forms. We can also give the 
beneficiary personalized brochures containing information on their 
health plan choices, nursing homes and Medicare participating 
physicians in their area.
    1-800 MEDICARE is available 24 hours a day, 7 days a week, to 
provide the one-on-one service that our Medicare beneficiaries need to 
make appropriate health care decisions.
    We would also remove Sec.  422.111(f)(6), since this is also a 
Secretarial responsibility under section 1851(d)(2)(A)(ii) of the Act 
and is also to occur as part of the Secretarial ``open season 
notification.'' We propose the following provisions:
     We would redesignate paragraph (f)(5) as paragraph (f)(4), 
and we would redesignate paragraphs (f)(7) through (f)(11) as 
paragraphs (f)(5) through (f)(9).
     We would remove a portion of the existing paragraph 
(f)(7)(iv) and all of paragraph (f)(7)(v) (the new paragraphs 
(f)(5)(iv) and (f)(5)(v)) to remove the requirement that MAs and MSAs 
provide comparative information related to other MA plans. The new 
paragraph (f)(5)(iv) would read, in full: ``In the case of an MA MSA 
plan, the amount of the annual MSA deposit.'' The new paragraph 
(f)(5)(v) would be deleted. The existing paragraphs (f)(7)(vi) through 
(f)(7)(viii) would be redesignated as paragraphs (f)(5)(v) through 
(f)(5)(vii).
     We would change ``contracted is terminating'' to 
``contract is terminating'' in the second sentence, just before the 
comma, in Sec.  422.111(e).
    To prevent what might otherwise be the unreasonable result that MA 
regional or national plans would be required to provide comprehensive 
lists of contracting providers to all enrollees, we propose to modify 
paragraph (b)(3) in this section. We will, however, specifically 
require MA organizations to provide information on contracted providers 
in other geographic areas to enrollees who plan to travel (for 
instance) by adding a new paragraph (f)(10), requiring MA organizations 
to provide detailed information on contracted providers in other areas 
upon request.
     We would modify paragraph (b)(3) by inserting ``reasonably 
be expected to''

[[Page 46882]]

between ``may'' and ``obtain'' in the first sub-clause of the first 
full sentence, so it would read: ``The number, mix, and distribution 
(addresses) of providers from whom enrollees may reasonably be expected 
to obtain services;''
     We would add a new paragraph (f)(10), which would read: 
``The names, addresses, and phone numbers of providers from whom the 
enrollee may obtain in-network coverage in other areas.''
    Section 1851(d)(3)(F) of the Act, as modified by the MMA, would 
require MA regional plans to provide members an annual description (at 
the time of enrollment and annually thereafter) of the catastrophic 
stop-loss coverage and single deductible (if any) applicable under the 
plan. We would add a new paragraph (b)(11) to account for this.
     We would change the existing paragraph (f)(11) (the new 
paragraph (f)(9)) related to supplemental benefits to read: 
``Supplemental benefits. Whether the plan offers mandatory and optional 
supplemental benefits, including any reductions in cost sharing offered 
as a mandatory supplemental benefit as permitted under section 
1852(a)(3) of the Act (and implementing regulations at Sec.  422.102) 
and the terms, conditions, and premiums for those benefits.''
     In Sec.  422.111(c)(1), we would insert ``in'' between 
``required'' and ``paragraph.''
    The Internet has proven to be an inexpensive and widely available 
source of information on health plans. Almost all FEHB insurance plans, 
most large employer plans, and commercial HMOs maintain websites for 
the convenience of enrollees. Many MA organizations also currently 
provide information on the MA plans they offer on websites available 
through the Internet.
    We currently require MA plans to communicate with us via electronic 
media--Sec.  422.502(b) (redesignated as Sec.  422.504(b)). Finally, 
all MA coordinated care plans would be required to offer Part D drug 
benefits to the enrollees of at least one of their plans and as part of 
that offering will be required to maintain formulary and other 
information on an Internet Web site.
    Therefore, pursuant to our authority under section 1856(b) of the 
Act to establish standards by regulation, we are considering imposing a 
requirement that all MA plans set up an Internet Web site that will 
make basic MA plan information and materials available to interested 
Medicare beneficiaries and other parties. The basic information and 
materials could include the Evidence of Coverage, the Summary of 
Benefits, and information (names, addresses, phone numbers, specialty) 
on the network of contracted providers. Those Internet materials and 
information would duplicate materials already produced in print format 
and made available by MA organizations relative to the MA plans they 
offer. We are interested in receiving comments on whether or not such a 
requirement should become part of the MA regulation.
11. Access to Services (Sec.  422.112)
    There are no new access standards for MA regional plans, and 
existing MA standards will generally apply. An important provision 
(discussed below) will likely improve access to hospital services for 
MA regional plan enrollees. In attempting to create region-wide 
networks, MA regional plans will be forced to bargain with hospitals, 
that are, in effect, the only hospital (or the only hospital with a 
particular service or services) in a broad area. Such a hospital would 
have what some call ``monopoly power'' in negotiating with plans that 
are, in effect, forced to contract with it in order to secure an 
adequate network of contracted providers with which to serve 
anticipated Medicare enrollees. The MMA attempts to address this 
situation through a provision that would make limited funds available 
to supplement payments to such hospitals.
    While we reviewed our existing regulatory requirements related to 
network adequacy and propose to remove some that are either duplicative 
or, in our view, overly onerous without a resultant payoff in 
beneficiary protections, we have retained our core requirements. We 
expect competition to be the best method for ensuring network adequacy, 
as enrollees will favor and enroll in plans with more extensive 
networks and tend to avoid those without. Note that we will continue to 
require MA organizations to make a list of network providers available 
to prospective enrollees prior to enrollment. Finally, Medicare 
beneficiaries can simply choose to remain in the original Medicare fee-
for-service program, if they cannot find an MA plan that meets their 
needs.
    We note that the Office of Personnel Management does not mandate 
specific access standards while it serves nearly 2 million retirees who 
are located around the country in a manner similar to Medicare 
beneficiaries. Yet, ``An Analysis of the Availability of 
Medicare+Choice, Commercial HMO, and FEHBP Plans in Rural Areas: 
Implications for Medicare Reform'' by the Rural Policy Research 
Institute (at http://rupri.org/healthpolicy/) shows that 98 percent of 
rural counties demonstrate usage of three or more FEHB plans, which is 
in sharp contrast to the 16 percent of rural counties showing access to 
even a single M+C coordinated care plan. We expect the Medicare 
Advantage program to produce a pattern of plan availability more like 
the FEHB program than to the current M+C program.
    In order to encourage MA organizations to offer MA regional plans 
covering rural areas, we are considering one new requirement related to 
an exception process for enrollees in an area without a preferred 
provider for a specific medically-necessary service. We discuss this 
requirement and the exception process later in this section of the 
preamble. We welcome comment on this possible change and on any of the 
other changes we propose to make to our access to care standards.
    We propose to make three technical corrections to this section of 
the regulation. By removing unnecessary administrative burden, and in 
light of protections afforded by the MMA, which makes certain access 
requirements redundant, we hope to facilitate participation by MA 
organizations in the new Medicare program. We would remove or modify 
three current requirements from Sec.  422.112 of the regulation. None 
of these requirements are based on statutory authority, and many of 
them become unnecessary as they are replaced or superseded by 
requirements in the MMA.
    Effective January 1, 2006, the MMA--section 1852(e) of the Act--
requires all MA coordinated care plans to focus quality assurance 
activities on ``chronic care improvement programs.'' We note that MA 
private fee-for-service plans and MSA plans are already exempt from 
this requirement. We also note in section 1852(e)(3)(A)(iii) of the 
Act, that to the extent that MA local PPOs have a contracted network, 
they must also meet the same quality assurance requirements as do all 
other MA coordinated care plans. To the extent that all coordinated 
care plans will be required to focus on quality improvement activities 
on identifying and monitoring enrollees with multiple or severe chronic 
conditions, and also to measure and improve the health outcomes of 
those enrollees, it would be redundant and to a degree unnecessarily 
proscriptive to suggest a specific approach to those quality 
improvement activities in the context of and as a means of ensuring 
enrollee access to care. We would delete Sec.  422.112(a)(4)--serious 
and complex medical conditions.

[[Page 46883]]

    Written standards are simply one tool MA coordinated care plans can 
use to ensure adequate access to medically necessary health care items 
and services.
    The three items enumerated in Sec.  422.112(a)(7) are redundant of 
other parts of the regulation. Section 422.112(a)(7)(i), related to 
written standards for access to care, is duplicative of Sec.  
422.112(a)(1). Sections 422.112(a)(7)(ii) and (a)(7)(iii), related to 
written standards that allow for medical necessity determinations and 
patient input into treatment plans, are duplicative of Sec.  422.206--
Interference with health care professionals' advice to enrollees 
prohibited, Sec.  422.202(b) Participation procedures--Consultation, 
and Sec.  422.152(b)(3)(paragraph new (b)(2)). We would delete 
paragraph (a)(7)--written standards.
    Section 422.112(b) requires all MA organizations for all MA plans 
they offer to ensure continuity of care through integration of health 
care services. Additional requirements in Sec.  422.112(b)(1) through 
(b)(6) require specific methods by which MA organizations are to ensure 
an effective continuity and integration of health care services. While 
all of the enumerated services and processes are clearly desirable, it 
is not as clear that the responsibility for them is appropriately or 
reasonably placed on organizations whose business is primarily 
insurance coverage. While it may be reasonable to expect coordinated 
care plans to undertake these coordination, continuity, and integration 
requirements, it is less clear that MA private fee-for-service plans, 
MSAs, and (to a lesser extent) local PPO plans and MA regional plans 
(which will be offered as PPOs) should also be expected to. One might 
argue that continuity of care rules cannot apply in the same manner to 
MA plans in which the enrollee is free to choose his or her own 
providers without restraint--such as MSAs and private fee-for-service 
plans. We are therefore considering eliminating most of the 
requirements in Sec.  422.112(b) for MSAs and private fee-for-service 
plans. We are also considering eliminating or modifying many of the 
requirements in Sec.  422.112(b) for local PPOs and regional MA plans. 
Finally, we are considering the continued appropriateness of these 
continuity of care standards for all other coordinated care plans. We 
are seeking comment on this proposal. We would specifically welcome 
input on the extent to which requirements similar to those in Sec.  
422.112(b)(1) through (b)(6) are established for commercial health 
insurers offering HMOs, PPOs or indemnity plans.
    Special access requirements apply to MA regional plans beginning in 
2006 based on section 221(c) of the MMA, which created a new section 
1858 of the Act. Specifically, section 1858(h) of the Act creates 
special access rules for MA regional plans as a means of enabling MA 
organizations that offer MA regional plans to meet provider access 
requirements under section 1852 of the Act and thus under Sec.  422.112 
of the regulation.
    Beginning for benefits offered to MA enrollees of an MA regional 
plan for contract year 2006, if an MA organization certifies that it 
was unable to reach an agreement with an ``essential hospital'' paid 
under subsection (d) of section 1886 of the Act, under specific 
circumstances we are authorized to pay additional amounts to that 
hospital from the Federal Hospital Insurance Trust Fund. This 
additional payment to the ``essential hospital'' is in addition to and 
does not affect the normal monthly MA payment amount that we would make 
to the MA organization.
    An ``essential hospital,'' for purposes of this section, means a 
general acute care hospital as defined in section 1886(d) of the Act 
that we determine the MA regional plan must have under contract in 
order to meet our access requirements. The determination of ``essential 
hospital'' status is only conferred after application to us by an MA 
organization offering an MA regional plan. Additionally, as part of its 
application to establish the hospital as an ``essential hospital,'' the 
MA regional plan must also certify that it made a good faith effort to 
contract with the hospital. The MA organization must also provide 
assurances that it will make payment to the hospital for inpatient 
hospital services in an amount not less than the amount that would be 
payable under section 1886 of the Act. Finally, in order to qualify for 
the additional payment, the ``essential hospital'' must demonstrate to 
our satisfaction that the amounts normally payable under section 1886 
of the Act are less than the hospital's costs for providing services to 
MA regional plan enrollees.
    The intent of the additional payment to the section 1886(d) 
``essential hospital'' is to facilitate an MA regional plan's ability 
to meet network adequacy requirements across large geographic areas--an 
MA region. Such an ``essential hospital'' would become part of the 
contracted network of providers of the MA regional plan and in-network 
enrollee cost-sharing rules would apply.
    Payments under this new authority, however, are limited to a total 
of $25 million for 2006, and the prior year's amount updated by the 
market basket percentage increase under section 1886(b)(3)(B)(iii) of 
the Act for future years.
    We invite comment from the public as to how we can ensure that 
payments are limited to the amount specified. We also invite comment on 
how we can best ensure that a ``good faith effort'' to contract has 
actually occurred. For instance, should we require negotiations to 
occur before the admission of an MA regional plan patient? Or, in the 
case of an emergency admission, should we permit negotiations between 
the MA regional plan and the hospital to occur after admission, or 
perhaps even after discharge?
    Additionally, we invite comment on the best way to determine that a 
hospital's actual costs for services provided to an MA regional plan 
enrollee actually exceeded the amount that would normally be payable to 
that hospital under section 1886 of the Act with respect to those 
services. Total additional payments under this section are limited to 
$25 million in 2006 and in subsequent years, $25 million increased by 
the market basket percentage increase as specified in statute. In a 
specific case, the actual payment to an ``essential hospital'' from the 
Federal Hospital Insurance Trust Fund would be the sum of the 
difference between the amount that would have been paid to the hospital 
under section 1886 of the Act and the amount of payment that would have 
been paid for those services under fee-for-service Medicare had the 
``essential hospital'' been a critical access hospital. We would like 
input on how to best minimize the administrative burden associated with 
implementing this statutory provision, while still ensuring the 
accuracy and integrity of the process.
    We would add a new paragraph (c) to account for the special access 
requirements related to MA regional plans beginning in 2006 based on 
``essential hospitals.''
    Instead of always requiring comprehensive, contracted provider 
networks in all cases, we propose to require MA regional plans to offer 
beneficiaries reasonable access to in-network cost-sharing, even if 
there are no contracted providers of a specific type available in a 
geographic location within the service area. This is the exception 
process mentioned earlier in this section of the preamble. We also 
propose a new requirement related to this exception process, which is 
similar

[[Page 46884]]

to a United States Office of Personnel Management (OPM) requirement 
imposed on the FEHB Blue Cross and Blue Shield Basic Option plan to 
address similar circumstances.
    We propose to permit relaxation of comprehensive network adequacy 
requirements for MA regional plans, but only to the extent that 
beneficiaries are not put ``at risk'' for high cost sharing related to 
services received from non-network providers. This new tolerance that 
we propose to afford MA regional plans need not be applied on a plan-
wide basis, but rather can be applied in a county or portion of a 
region where, for example, the MA regional plan is unable to secure 
contracts with an adequate number of a specific type of provider or 
providers to satisfy our comprehensive network adequacy requirements.
    Such an exception process might require the MA regional plan 
enrollee to contact the sponsoring MA organization when seeking a 
specific service that is not otherwise available from a contracted 
provider. The MA organization, in such a case, could designate a non-
contracted provider from whom (or from which) the enrollee could obtain 
the service at in-plan cost sharing levels. Or, the MA organization 
could allow the enrollee to seek the service from any provider and 
guarantee that in-plan cost sharing limits would apply.
    In applying the above principle, we need to consider two forms of 
beneficiary cost sharing. One is the cost sharing related to a specific 
item or service--for instance, a hospital coinsurance charge. Another 
is the ``catastrophic limits'' that MA regional plans must apply to 
benefits under the original Medicare fee-for-service option. MA 
regional plans are required to provide reimbursement for all covered 
benefits regardless of whether those benefits are received from network 
providers--section 1859(b)(4)(B) of the Act and the new Sec.  
422.101(e)(1). MA regional plans are also required to apply a 
catastrophic out-of-pocket limit on beneficiary cost sharing for 
covered in-network services and another on all covered services (in and 
out of network)--section 1858(b)(2)(B) of the Act and the new Sec.  
422.101(d)(2) and (d)(3).
    We propose to permit MA regional plans with lower out-of-network 
cost sharing to have less robust networks of contracted providers. 
While we propose to permit MA regional plans with more robust networks 
of contracted providers to impose higher cost sharing charges on 
individuals going out-of-network. This is because if the plans' 
networks were robust, we would not expect beneficiary access to be 
unduly limited by higher cost-sharing requirements when they seek care 
from out-of-network providers. However, for plans with less robust 
networks, we propose to limit those plans' ability to impose higher 
cost-sharing requirements for out-of-network care. We believe that 
higher cost-sharing requirements imposed by plans with limited provider 
networks could unduly limit access and that more equitable cost-sharing 
requirements would serve as a safety valve to ensure that beneficiary 
access is not compromised. For instance, we could require MA regional 
plans that have less than 20, 50, or 70 percent of hospital beds in the 
service area (or portion of the service area) under contract to charge 
lower out-of-network cost sharing to individuals accessing non-network 
hospitals. In other words, in such a case, we would require the MA 
regional plan to charge lower coinsurance for out-of-network hospital 
care as a means of ensuring adequate access to hospital services.
    Similarly and related to the ``catastrophic limits'' on out-of-
pocket expenditures, to the extent that an MA regional plan had a less 
robust network of contracted providers, we would require a convergence 
in the cost sharing limits that apply to network and all (network and 
non-network) services. While for plans with more robust contracted 
networks, we would allow the ``catastrophic limits'' to diverge.
    We ask for comment on the measures we should adopt to assess the 
robustness of contracted provider networks. We also seek comment on the 
thresholds we should adopt relative to the cost-sharing limits (related 
to both individual services and the catastrophic limits on out-of-
pocket costs that regional MA plans must provide related to in-network 
and all services) that should apply to services when contracted 
provider networks are less than robust. For instance, would it be 
adequate to adopt fee-for-service cost sharing limits for individual 
services as a means of ensuring adequate access, or should a different 
standard apply, and why? We specifically ask for comments in this area. 
Finally, related to out-of-pocket cost-sharing limits for in-network 
and all services, is there a formula that we should apply that 
rationally expresses the maximum out-of-pocket cost sharing that we 
should permit? Is there a means of quantifying how the two out-of-
pocket cost-sharing limits should converge, or how much we should allow 
divergence, based on the robustness of the contracted provider network?
    The preceding discussion is from the perspective of an MA regional 
plan establishing compliance with our access requirements at the time 
of initial application or on a continuing basis. From a beneficiary 
perspective, the MA regional plan would always need to provide an 
accessible and available source of treatment at network cost sharing 
levels. Our normal access standards would apply. For instance, where 
community patterns of care call for travel of no more than 30 minutes 
or 30 miles to access hospital services, then MA regional plans would 
need to ensure comparable access to a contracted hospital. To the 
extent that an MA regional plan did not actually have a contracted 
hospital within 30 minutes or 30 miles, then the MA regional plan would 
need to designate a non-contracted hospital from which the member could 
receive care at network cost sharing levels. Such a requirement would 
be similar to a requirement imposed by OPM related to the Basic Option 
plan offered to Federal employees and annuitants under the FEHB program 
where normal OPM access standards are not met.
    We provide for this exception to the normal access requirements 
related to MA regional plans by proposing to add a new paragraph (ii) 
to Sec.  422.112(a)(1). We invite comment on the access standards we 
should establish for primary care, specialty, and institutional 
providers.
12. Special Rules For Ambulance Services, Emergency Services, and 
Urgently Needed Services, and Maintenance and Post-Stabilization Care 
Services (Sec.  422.113)
    Policies on enrollee cost-sharing for emergency care are 
historically a point of contention. Cost-sharing limits for emergency 
care are important to ensure that there is no disincentive to receive 
emergency care that is critical to a beneficiary's health.
    On the other hand, since the proposed M+C regulation was published 
in June 1998, when the cost-sharing limit of $50 on out-of-network 
emergency services was initially established, there have been 
unforeseen consequences that have tended to increase confusion rather 
than contribute to the goal of appropriate access. Additionally, the 
$50 emergency services cost-sharing limit has not increased since 1998, 
despite changing market conditions. For instance, in recent years, some 
M+C plans have established inpatient hospital copays of $200 per day 
and fee-for-service Medicare coverage has a per-hospital stay 
deductible of $840 in 2004. These hospital copays, combined with the

[[Page 46885]]

regulatory definition of ``emergency services'' that includes inpatient 
care ``until stabilized,'' requires a review of Sec.  422.113(b)(2)(v).
    Section 422.113(b)(2)(v) reads: ``[The M+C organization is 
financially responsible for emergency and urgently needed services--] 
With a limit on charges to enrollees for emergency services of $50 or 
what it would charge the enrollee if he or she obtained the services 
through the M+C organization, whichever is less.''
    The regulation states that emergency services continue until the 
enrollee is stabilized. Hence, a strict (and unintended) reading of the 
current regulation could require an assessment of the exact time that 
stabilization occurred in order to determine when the $50 ``emergency 
services'' cost-sharing limit ends and when inpatient ``post-
stabilization'' cost sharing can begin. A detailed review of the 
member's medical record is needed to make a stabilization assessment in 
order to assess cost-sharing liability. This review of the medical 
record is an administrative burden on plans as well as appeal review 
entities--our reconsideration contractor and Administrative Law Judges. 
All are required to spend considerable amounts of time determining when 
stabilization occurred for purposes of properly assigning enrollee cost 
sharing. This is contrary to medical practice, which does not generally 
identify when a patient is stabilized.
    We propose to modify the regulation to clarify that the $50 limit 
for ``emergency services'' at Sec.  422.113(b)(2)(v) applies only to 
the emergency department, and that while the limit on cost-sharing for 
``post-stabilization'' care at Sec.  422.113(c)(2)(iv) continues to 
apply, its application would always begin upon admission. Thus, 
emergency cost-sharing limits would shift from being tied to the type 
of service (emergency services) to being tied to the site of service 
(emergency department). Making this clarification would retain cost-
sharing limits for both emergency services and post-stabilization care, 
while eliminating the unanticipated complexities and administrative 
burden associated with this section of the regulation.
    We believe that final regulations published on September 9, 2003, 
and effective November 10, 2003 (68 FR 53222), provide support for this 
change. These regulations establish the rule that requirements related 
to the Emergency Medical Treatment and Labor Act (EMTALA) end at the 
time a patient is admitted. We recognize that EMTALA rules related to 
patients who present to hospitals with emergency medical conditions and 
our rules related to allowable cost sharing in the MA program are not a 
perfect fit; however we do believe that similar administrative 
difficulties warrant similar administrative solutions. In addition to 
the consonance this change would have with our EMTALA rules, we also 
believe that this clarification will allow the MA program to reflect 
current commercial practices. Finally, the clarification is consistent 
with our intent. We propose the following provisions:
    We propose to change ``emergency services'' to ``emergency 
department services'' in Sec.  422.113(b)(2)(v).
13. Access to Services Under an M+C Private Fee-For-Service Plan (Sec.  
422.114)
    Section 211(j) of the MMA allows MA private fee-for-service plans 
that have a contracted network of providers through which the plan 
entirely meets access and availability requirements (for a specific 
category of health care professional or provider) to provide for a 
higher beneficiary copayment in the case of health care professionals 
and providers of that category who do not have contracts with the plan. 
Generally, this would permit a private fee-for-service plan to charge 
higher co-pays to members who opt out of a private fee-for-service 
plan's contracted network. This provision does not apply to private 
fee-for-service plans that meet access requirements solely through 
``deemed'' networks as defined in Sec.  422.114(a)(2)(i). We proposed 
to add a new paragraph (c) to account for section 211(j) of the MMA.
14. Return to Home Skilled Nursing Facility (Sec.  422.133)
    Under our authority under section 1856 of the Act to establish MA 
standards by regulation, we are proposing to extend the provisions in 
Sec.  422.133 to SNF services provided in cases in which an MA 
organization elects, under Sec.  422.101(c), to provide Medicare 
covered SNF care in the absence of a prior qualifying hospital stay. 
Note that our policy to waive the 3-day hospital stay requirement for 
MA plans does not require MA plans to cover SNF stays without a 3-day 
hospitalization. The policy simply allows such SNF stays to be 
considered Medicare-covered if the MA plan chooses to cover them. In 
such an instance, we are proposing to require by regulation that an 
individual who would be eligible under section 1852(l) of the Act for 
admission to a ``home SNF'' upon discharge from a hospital stay, would 
nonetheless retain his or her right to receive ``home SNF'' benefits in 
the absence of such a stay. We propose to deem that a hospital 
discharge has occurred prior to an admission for SNF services, and 
provide the MA enrollee full rights to the ``home SNF'' benefit. For 
example, the reference in Sec.  422.133(b)(3) to the SNF ``in which the 
spouse of the enrollee is residing at the time of discharge from the 
hospital'' would be deemed to refer to the SNF in which the spouse of 
the enrollee is residing at the time covered extended care services are 
initiated. We propose to add a new paragraph (b)(4).

Subpart D--Quality Improvement Program

(If you choose to comment on issues in this section, please include the 
caption ``Subpart D--Quality Improvement Program'' at the beginning of 
your comments.)
1. Overview
    The MMA amended section 1852(e) of the Act in a number of 
significant ways. First the heading of the section was changed from 
quality assurance to quality improvement. It also deleted the sections 
of the Act that provided a list of ``elements'' that an MA plan's 
quality assurance program was required to address. These provisions 
were removed and replaced with several new provisions, including the 
following:
     Each MA plan (other than an MA private fee-for-service 
plan or an MSA plan) must have an ongoing quality improvement program.
     Each ongoing quality improvement program must have a 
chronic care improvement program.
     Each MA plan must provide for the collection, analysis, 
and reporting of data that permits the measurement of health outcomes 
and other indices of quality, such as HEDIS, CAHPS, and HOS, as 
discussed below. PPOs however, are only required to collect, analyze, 
and report data that are furnished by providers that have a contract 
with the PPO. The MMA also provides for the Secretary to establish 
separate rules for implementing this requirement with respect to MA 
regional plans. (See Sec.  422.152(e).)
    In response to these amendments, we would change the heading and 
all references in the section from ``quality assurance'' to ``quality 
improvement.'' In addition, we would modify many of the provisions in 
Sec.  422.152 that address quality assurance and performance 
improvement programs. We would also delete the provisions of Sec.  
422.154 that address external review, and add requirements related to 
MA-PD benefits to those that can be ``deemed'' to be met

[[Page 46886]]

based on accreditation under Sec.  422.156(b).
    The key provisions of this subpart form the cornerstone for a 
competition based program in quality of care. We already place 
information from these systems on the Medicare.gov web site, such as 
Health Plan Employer Data Information Survey (HEDIS), and Consumer 
Assessment of Health Plans (CAHPS). We will be exploring additional 
ways to enhance the use of quality of care systems as part of a 
competition based program.
2. Quality Improvement Program (Sec.  422.152)
    To reflect the congressional intent to refocus the section on 
quality improvement, rather than quality assurance, we would change the 
heading of Sec.  422.152 from ``quality assessment and performance 
improvement program'' to ``quality improvement program.'' The revised 
section 1852(e)(1) of the Act excludes MA private fee-for-service 
(PFFS) and MSA plans from the requirement to have an ongoing quality 
improvement program. This exclusion is, in part, because enrollees of 
MA PFFS and MSA are not restricted to seeking care from a network of 
providers. In addition, some believe MA PFFS and MSA plans lack the 
ability to influence the behavior of providers and enrollees. We would 
modify Sec.  422.152(a) to reflect that each plan (except MA private-
fee-for-service and MSA plans) offered by a MA organization must have 
an ongoing quality improvement program. As required under section 
1852(e)(2) of the Act, we would require MA plans to have a chronic care 
program in place as part of their quality improvement program. As 
discussed below, we are proposing that this program be required to meet 
requirements set forth in Sec.  422.152(c).
    Under our authority in section 1856(b)(1) of the Act to establish 
standards by regulation, we are proposing to require that the quality 
improvement program required under section 1852(e)(1) of the Act 
include quality improvement projects that could be expected to have a 
favorable effect on health outcomes and enrollee satisfaction, and that 
meet regulatory requirements set forth in proposed Sec.  422.152(d).
    We believe that the broad requirements in proposed Sec.  422.152(d) 
will not present an undue burden for MA organizations, which have years 
of experience in carrying out performance improvement projects under 
the current version of Sec.  422.152(d), which, as discussed below, is 
more prescriptive than the revised version we are proposing in this 
rule.
    In light of the substantially revised quality requirements under 
this proposed rule, we believe that it is reasonable to expect all MA 
plans, including regional and local PPOs, to meet the quality 
improvement project requirements in proposed Sec.  422.152(d). MSAs are 
excluded from this requirement altogether. We would also require an 
organization offering an MA plan to encourage its providers to 
participate in CMS and HHS quality improvement initiatives. Also, MA 
organizations are encouraged to seek technical assistance from the 
State quality improvement organization in designing and implementing 
quality improvement initiatives. By encouraging this participation, MA 
organizations are facilitating quality improvement in a variety of 
health care settings.
    Our previous quality improvement efforts for M+C coordinated care 
plans focused on requiring improvement in specific clinical topics and 
included specific performance measures to be improved. Thus, while we 
propose to retain regulatory requirements for quality improvement 
programs, we would revise the requirements in the current Sec.  
422.152(b) to enhance plans' ability to target quality improvement 
efforts to their enrollees' needs by deleting, modifying, and 
renumbering most of the requirements in this paragraph. Similar to the 
existing requirements, this paragraph would provide quality 
requirements for MA coordinated care plans, but would no longer refer 
to MSA plans. We would also address certain local PPO and all regional 
MA plan quality requirements in another paragraph--Sec.  422.152(e) of 
this section. We are interested in comments on whether or not we should 
require plans to use comparable measures across plans and making QI 
program size/scope proportionate to plan size.
    The requirements in the existing Sec.  422.152(b)(1) and Sec.  
422.152(b)(2) would be retained, as we believe these standards are 
integral to any plan's quality improvement program, and are consistent 
with the requirements of private accrediting organizations. Section 
Sec.  422.152(b)(1), for example, would require that in processing a 
request for initial or continued authorization of services, MA plans 
would need to follow written policies and procedures that reflect 
current standards of medical practice. Section 422.152(b)(2) would 
require MA plans to have mechanisms in place to detect both under 
utilization and over utilization of services.
    We are directed in section 1852(e)(3)(B)(i) of the Act to require 
the collection of only the types of data that we collected as of 
November 1, 2003. We address this requirement in Sec.  422.152(b)(3). 
We interpret section 1852(e)(3)(B)(i) of the Act to mean that we can 
continue to require MA coordinated care plans to collect, analyze, and 
report their performance by using the measurement systems that are 
currently required, such as HEDIS, Health Outcomes of Seniors (HOS), 
and CAHPS, as appropriate for the type of plan. We believe that, 
consistent with private sector practices, we would be allowed to add, 
delete, or modify measures within these systems. Changes to these 
measurement systems are generally reviewed and approved by a committee 
with representatives from managed care plans, beneficiary advocacy 
groups, private and public health care purchasers.
    We are interested in comments on the following options. There are 
two basic ways to go (1) use the same metrics across all plan types 
which allows consumers to compare all plans (both groups of plans (for 
a specific plan type), or specific plans (across or within plan types)) 
for a larger set of metrics, or (2) tailor the metrics to specific plan 
types, which limits the dimensions upon which consumers would be able 
to compare plans.
    If, in the future, we believe that a new measurement system should 
be used to assess MA plans' performance, we are required under section 
1852(e)(3)(B)(ii) of the Act to submit a report to Congress that is 
prepared in consultation with MA organizations and private accrediting 
organizations. Thus, we have proposed to remove the provisions in Sec.  
422.152(c) that address measuring and reporting performance. We also 
would remove all the requirements relating to minimum performance 
levels and requirements that address clinical and non-clinical areas.
    We will continue to look for cost-effective ways to measure quality 
for MA plans and will use a variety of procedures to get input from the 
public, MA organizations, private accrediting organizations, and seek 
Congressional review.
    Proposed Sec.  422.152(b)(3)(ii) would require MA plans to make 
available to us the information on quality and outcomes measures that 
will enable beneficiaries to compare health coverage options and select 
among them, as provided in Sec.  422.64(c)(10).
    Section 422.152(b)(4) would require MA local PPO plans that are 
offered by

[[Page 46887]]

an organization that is licensed or organized under State law as a 
health maintenance organization to follow the same quality improvement 
requirements as other MA coordinated care plans. Quality improvement 
requirements for local PPOs that meet the definition of a local PPO 
that is specified in Sec.  422.152(e)(1) (local PPOs that are not 
offered by organizations that are licensed or organized under State law 
as HMOs) are addressed in that paragraph.
3. Chronic Care Improvement Program Requirements (Sec.  422.152(c))
    We would replace the provisions in Sec.  422.152(c) with 
requirements for MA plans' chronic care improvement programs. As 
directed by MMA, we would require MA plans to develop criteria for 
participating in a chronic care improvement program. The criteria must 
include methods for identifying MA enrollees with multiple or 
sufficiently severe chronic conditions who would benefit from 
participating in a chronic care improvement program. The criteria must 
also provide mechanisms for monitoring MA enrollees that are 
participating in the chronic care improvement program. We invite 
comments on these requirements to help us provide additional guidance 
to MA plans on additional criteria and mechanisms that might be useful 
to help them identify and monitor MA enrollees that are participating 
in their chronic care improvement program. For example, are there data 
or approaches used to identify special needs individuals with severe or 
disabling chronic conditions who might benefit from enrollment in 
specialized MA plans that could also be used in the identification of 
MA enrollees who would benefit from participating in a chronic care 
improvement program because of their severe chronic conditions?
4. Quality Improvement Projects (Sec.  422.152(d))
    As noted above, we have proposed to delete many of the prescriptive 
requirements for quality improvement projects that appear in the 
current Sec.  422.152(d). While MMA has resulted in the deletion of a 
number of the more prescriptive requirements of quality improvement 
programs, it still retained the basic requirements of such projects. 
The MMA retained the requirements of the collection, analysis, and 
reporting of data that permits the measurement of health outcomes and 
other indices of quality, for example, HEDIS, HOS, and CAHPS. 
Furthermore, it added the chronic care improvement program. As 
mentioned, these aspects of the program provide the cornerstone for a 
competition based program in quality of care. We already place 
information from these systems on the Medicare.gov Web site. We will be 
exploring additional ways to enhance the use of quality of care systems 
as part of a competition based program. We propose deleting the list of 
clinical and non-clinical topic areas because it is our intention that 
MA plans select the topic area for a quality improvement project based 
on the needs of their enrolled population. It is our intention, 
however, that MA plans would select topic areas that are relevant to a 
Medicare population.
    We would delete the requirement of including the entire relevant 
population in the measurement because it has been proven that sampling 
is an approved method for assessing the performance of providing care 
and services to a population. Since MA plans conduct quality 
improvement projects for both the Medicare program and private 
accreditation organizations, we feel that it is appropriate for them to 
conduct projects that include both Medicare and non-Medicare enrollees. 
Thus, they would be allowed to conduct a study of persons with Coronary 
Artery Disease that includes enrollees that are both over and under 65. 
However, the sample of enrollees that are studied must be appropriately 
representative of Medicare beneficiaries. Since the MA plans would be 
selecting their own topics, it is not necessary for us to ensure that 
the entire spectrum of clinical and non-clinical areas are addressed by 
an MA plan. Similarly, we propose deleting the requirement that 
addresses national and statewide projects because MA plans would be 
selecting their quality improvement project topics by assessing the 
needs of their population. Thus, we would delete the following 
requirements:
     The lists of required clinical and non-clinical areas 
(Sec.  422.152(d)(4), Sec.  422.152(d)(5)).
     The requirement that an entire relevant population must be 
included in the measurement set (Sec.  422.152(d)(2)).
     The provision authorizing us to ensure that the entire 
spectrum of clinical and non-clinical areas are addressed by 
establishing the number and distribution of projects (Sec.  
422.152(d)(3)).
     The requirement for participation in national or site-wide 
projects (Sec.  422.152(d)(6)(ii))).
    In Sec.  422.152(d)(1), we would require that quality improvement 
projects be initiatives that include the entire organization and focus 
on clinical and non-clinical areas. The projects would need to follow 
the regular quality improvement process (measure, intervene, and then 
remeasure to determine if the intervention resulted in improvement). We 
have retained the provisions that quality improvement projects must 
measure performance, and the interventions must be system-wide and 
include the establishment or alteration of practice guidelines. In 
addition, the projects must focus on improving performance and involve 
systemic and periodic follow-up on the effect of the interventions.
    To ensure that the measures (or quality indicators) used in quality 
improvement projects are reliable and relevant for improving the health 
care and services furnished to MA enrollees, we would require in Sec.  
422.152(d)(2) that the quality indicators be objective, clearly and 
unambiguously defined, and based on current clinical knowledge or 
health services research. The measures must also be capable of 
measuring outcomes, such as changes in health status, functional 
status, and enrollee satisfaction, or valid proxies of those outcomes.
    Likewise, in Sec.  422.152(d)(3), we would require that the data 
used in an MA plan's quality improvement projects be valid and reliable 
and based on systemic ongoing collection and analysis of information. 
We would also require in Sec.  422.152(d)(4) that the interventions 
achieve measurable and sustained improvement. We would not define what 
constitutes measurable and sustained improvement in the regulation, but 
we mean some movement in the quality indicator in an upward or downward 
direction as appropriate.
    Finally, in Sec.  422.152(d)(5), we would retain the requirement 
that MA plans report the status and results of their projects when 
requested by us. At this time, we believe that because of the various 
changes just described, the reporting and review burden would be much 
less than the current process used in the M+C program. We are 
considering using a model similar to the one used by private 
accrediting organizations, where quality projects would be submitted 
before an onsite monitoring review. For plans selecting MA deeming, 
their quality improvement projects would be collected and evaluated by 
the accrediting organization that would be conducting the deeming 
review.
5. Requirements for MA Regional Plans and MA Local Plans That Are PPOs 
as Defined in Sec.  422.152(e)
    As noted above, section 1852(e)(3)(A)(ii) of the Act provides for 
us to establish separate regulatory

[[Page 46888]]

requirements for MA regional plans relating to the collection, 
analysis, and reporting of data that permit the measurement of health 
outcomes and other indices of quality for MA regional plans. Section 
1852(e)(3)(A)(ii) of the Act further provides that these requirements 
for MA regional plans could not exceed the requirements established for 
MA local plans that are PPO plans as defined in section 
1852(e)(3)(A)(iv) of the Act--local PPO plans that are offered by an 
organization that is not licensed or organized under State law as an 
HMO. We propose to apply these same principles in applying general 
quality requirements, beyond those relating to the collection, 
analysis, and reporting of data. Thus, as noted above, and as provided 
in the current regulations, we propose a separate set of requirements 
for these specific PPOs, which we would also apply to regional MA 
plans.
    In Sec.  422.152(e)(1), we would provide a definition for the term 
``local PPO plan'' as used in this section. The other requirements in 
this paragraph are the requirements that apply to PPOs under current 
regulations. We are aware that some organizations that offered PPO 
plans felt that some of the performance measures required of PPO plans 
in the M+C program were difficult to collect in a PPO environment. To 
address this concern, we will assess all the performance measurement 
and reporting requirements and make the necessary adjustments. We 
anticipate that PPOs will not be required to collect data such as 
medical records, because they have difficulty in obtaining such 
records. We will work with outside experts, the public, MA 
organizations, and private accrediting organizations on developing 
HEDIS measures appropriate to PPOs and welcome comments on these 
issues. We anticipate that in early 2005 that we will finalize the 
reporting requirements for PPOs.
    In Sec.  422.152(f), we retain the provisions that address health 
information systems, quality improvement program review, and remedial 
action. MA organizations would be required, for all the MA plans they 
offer, to maintain a health information system that collects, analyzes, 
and integrates the data necessary to implement their quality 
improvement program. The organization would also be required to ensure 
that the information it receives from providers of services is reliable 
and complete. In addition, for each plan, there would have to be in 
effect a process for formal evaluation, at least annually, of the 
impact and effectiveness of its quality improvement program.
    Finally, for each plan it offers, an MA organization would be 
required to correct all problems that come to its attention through 
internal surveillance, complaints, or other mechanisms.
    MMA removed the provision that each MA organization's quality 
assurance program include a separate focus on racial and ethnic 
minorities. Thus, we would remove the current Sec.  422.152(f)(4) 
addressing this issue. It should be noted that CMS specified that the 
2003 national projects for M+C plans be Clinical Health Care 
Disparities or Culturally and Linguistically Appropriate Services. 
Thus, this requirement has already been initiated by the plans.
    MMA removed the requirement that for each plan it operated the MA 
organization would have an agreement with an external quality review 
and improvement organization. Thus, we would remove the corresponding 
regulatory requirements in Sec.  422.154.
    MMA provided that all the part D (Voluntary Prescription Drug 
Benefit) requirements are to be included as among those that could be 
deemed to be met through accreditation, and we accordingly have added 
this provision to the list of deemable requirements in Sec.  
422.156(b).

Subpart E--Relationships With Providers (Sec.  422.210)

(If you choose to comment on issues in this section, please include the 
caption ``Subpart E--Relationships with Providers'' at the beginning of 
your comments.)

    MMA has not changed most existing MA program requirements 
concerning MA organization relationships with providers. Since these 
aspects of the program have worked well, we generally have proposed to 
keep the existing provisions of subpart E as they are. The only 
exceptions, which are discussed below, are modifications to the 
physician incentive plan requirements to reflect changes made by MMA to 
section 1852(j)(4) of the Act.
    Section 222(h) of MMA revised section 1852(j) of the Act to 
eliminate requirements that were set forth in section 
1852(j)(4)(A)(ii)(II) and (iii) of the Act and to require only that an 
MA organization ``provide assurances satisfactory to the Secretary'' 
that it meets certain stop loss protection requirements that were in 
what was section 1852(j)(4)(A)(ii)(I) of the Act, and that remain in 
the revised version of section 1852(j)(4) of the Act. Section 
1852(j)(4)(A)(ii)(II) of the Act had required that, where a physician 
incentive plan places physicians at substantial financial risk, MA 
organizations conduct ``periodic surveys of both individuals enrolled 
and individuals previously enrolled with the organization to determine 
the degree of access of such individuals to services provided by the 
organization and satisfaction with the quality of such services.'' This 
requirement was deleted. We have proposed to delete this requirement in 
Sec.  422.208(h). We are redesignating existing paragraph Sec.  
422.208(i) as Sec.  422.208(h).
    We note that the surveys that were previously required under this 
section were covered for the most part by our administration of the 
CAHPS survey, which will be continued.
    Section 1852(j)(4)(A)(iii) of the Act contained a requirement that 
descriptive information be provided to the Secretary to permit the 
Secretary to determine compliance with the requirements in section 
1852(j) of the Act. This requirement was also deleted by section 222(h) 
of MMA. We note that in a final rule published on August 22, 2003, at 
68 FR 50840 through 50859, we had deleted a regulatory provision that 
had previously implemented this reporting requirement by requiring 
routine reporting of data to us. This final rule proposed that the 
information only be made available to us upon request. Given the MMA 
amendment providing that the MA organization will now only be providing 
``assurances,'' the need to gather data to make an independent 
determination no longer exists. Moreover, the Congress repealed the 
statutory basis for requiring that the information be provided. We 
therefore propose to revise Sec.  422.210 to eliminate the requirement 
that information on physician incentive plans be disclosed to us.

Subpart F--Submission of Bids, Premiums, and Related Information and 
Plan Approval

(If you choose to comment on issues in this section, please include the 
caption ``Subpart F--Submission of Bids, Premiums, and Related 
Information and Plan Approval'' at the beginning of your comments.)

    Under the current MA regulations, subpart F addresses payments to 
MA organizations, and subpart G discusses beneficiary premiums and cost 
sharing. Given the substantial revisions that MMA makes to pricing and 
payment rules for MA organizations, we propose to replace these 
subparts with new subparts F and G. In doing so, we will reverse the 
order of provisions to reflect the chronology of events in the new MA

[[Page 46889]]

bidding system more accurately. In this proposed rule, provisions 
addressing bid submissions and CMS review of bids come first in subpart 
F, and a description of the methodology and process for CMS' payment to 
MA organizations follows in subpart G.
    The proposed rules in the new subpart F set forth the annual bid 
submission process for organizations intending to offer MA local and 
regional plans in the upcoming year. In particular, they address the 
basis for bids, what must be included in the bid, and other information 
MA organizations must submit by law for each plan, such as the 
actuarial bases for the bid. The proposed rules set forth general rules 
that apply to all MA organizations, and special rules for certain types 
of plans. They contain authority to review the submitted bids and the 
standards for reviewing those bids, including the actuarial analyses 
that are mandated by the MMA, and describe the negotiation process 
between MA organizations and us.
    After provisions addressing submission, review, and approval of 
bids, the proposed regulations address ``bid-to-benchmark'' 
comparisons, including how local and regional benchmark amounts are 
determined and how beneficiary premiums and savings are calculated. The 
rules also set forth how beneficiary savings are used for beneficiary 
rebates and Government savings, and distinguish between calculations 
for regional MA plans and local MA plans. The proposed rules also 
describe the various premium payment options available to 
beneficiaries, and require that beneficiary premiums and cost-sharing 
be uniform within a service area (or service area segment). Finally, 
the new subpart F describes the options for distributing the 
beneficiary portion of the rebate.
    We propose to replace the previous MA provisions from the old 
subpart G (now subpart F) almost in their entirety, with the exception 
of the following proposed provisions, which largely retain existing 
language:
    Sec.  422.262(d), monetary inducement prohibited, which precludes 
an MA organization from providing cash or other monetary rebates as an 
inducement for enrollment or for any other reason or purpose.
    Sec.  422.262(e), timing of payments, which gives beneficiaries the 
right to make premium payments on a monthly basis, and protects them 
from a termination of coverage for failure to make these payments 
except as provided in Sec.  422.74(b). The only change to this 
provision is the addition of the prescription drug premium to the list 
of beneficiary premiums.
    Sec.  422.270, incorrect collection of premiums and cost sharing, 
which addresses cases in which an MA organization collects more than 
the amount of beneficiary premium allowed. Under this provision, the 
organization is required to refund these over-collections through an 
adjustment to current and future premiums. This language is identical 
to the current MA regulation now in subpart G at Sec.  422.309.
1. Basis and Scope (Sec.  422.250)
    Proposed Sec.  422.250 sets forth the basis and scope of the 
revised subpart F, noting that it is based largely on section 1854 of 
the Act, but includes provisions from sections 1853 and 1858 of the 
Act. Section 422.250 notes that subpart F addresses the bidding 
methodology upon which MA payments will be based beginning in 2006 and 
provisions for CMS' negotiation and approval of organizations' bids.
2. Terminology (Sec.  422.252)
    There are several general terms defined in parts of section 1853 
and section 1854 of the Act that apply to both bidding rules (subpart 
F) and payment calculations (subpart G), so we define these terms in 
the regulatory text for this part. The proposed definitions throughout 
both subparts F and G are intended to reflect the statutory definitions 
they implement in a simplified manner. We will identify clearly those 
cases in which we propose independently to define a term that is not 
defined in the statute. In this preamble, we provide an overview of 
rate terms used in both subparts F and G.
    Mandatory and optional supplemental benefits are defined at Sec.  
422.102. In subparts F and G the phrase ``supplemental benefits'' 
refers to both mandatory and optional supplemental benefits. The terms 
``mandatory supplemental'' and ``optional supplemental'' are used when 
referring specifically to one these types of supplemental benefits.
    The MMA introduces regional MA plans, thus revising section 1853(d) 
of the Act to define two types of payment areas. For MA regional plans, 
the payment area is an MA region, and for MA local plans, the payment 
area is a county (called an ``MA local area'').
    Under the rate setting method for the previous M+C program, the 
general rule was that an annual capitation rate was the rate for a 
county, and an MA payment area was a county. Under the MMA, the 
``annual MA capitation rate'' continues to be the county rate. As set 
forth at section 1853(c)(1) of the Act, capitation rates are called 
``MA local area'' rates, and references throughout the MMA to 
capitation rates are to county rates (or in the case of ESRD enrollees, 
to State-level rates). Note, however, that section 1858 of the Act does 
require us to calculate a regional per capita rate, described in 
proposed Sec.  422.262(b)(3) as the ``statutory region-specific non-
drug amount.'' We chose to not define this term separately in proposed 
Sec.  422.252, however, because it is an intermediate product that we 
would use to arrive at the administrative pricing component of the 
region-specific benchmark amount (discussed below).
    Proposed Sec.  422.252 also includes a definition of ``MA-PD 
plan,'' which means an MA local or regional plan that offers 
prescription drug coverage under Part D. We would note that MSA plans 
are not allowed to offer Part D prescription drug coverage, and private 
fee-for-service plans may but do not have to offer Part D coverage.
    The following terms are also defined in proposed Sec.  422.252:
    ``Unadjusted MA statutory non-drug monthly bid amount'' is defined 
as the plan's estimate of its monthly required revenue for Part A and 
Part B original Medicare benefits.
    ``Monthly aggregate bid amount'' is defined as the total monthly 
plan bid for coverage of an MA eligible beneficiary with a nationally 
average risk profile. This bid is composed of: the unadjusted MA 
statutory non-drug monthly bid amount; an amount for coverage of basic 
prescription drug benefits under Part D (if applicable), and an amount 
for provision of supplemental benefits, if any.
    In the preambles to subparts F and G, the term ``basic A/B bid'' is 
used to refer to the unadjusted MA statutory non-drug monthly bid 
amount. The term ``bid'' refers to the aggregate monthly bid amount 
unless otherwise indicated.
    ``Plan basic cost sharing'' means cost sharing that would be 
charged by a plan for benefits under the original Medicare fee-for-
service program option before any reductions resulting from mandatory 
supplemental benefits.
    ``Unadjusted MA area-specific non-drug monthly benchmark amount'' 
is defined, for local MA plans serving one county, as the county 
capitation rate. For local MA plans serving multiple counties it is the 
weighted average of county rates in a plan's service area, where the 
weights are by the plan's projected enrollment per county.
    ``Unadjusted MA region-specific non-drug monthly benchmark amount'' 
is the sum of two components: the

[[Page 46890]]

statutory component (based on a weighted average of capitation rates in 
the region) and the plan bid component (based on a weighted average of 
plan bids in the region).
    ``MA monthly basic beneficiary premium'' is the amount that an MA 
plan (other than an MSA plan) charges an enrollee for original Medicare 
benefits if its bid is above the benchmark.
    ``MA monthly prescription drug beneficiary premium'' is the base 
beneficiary premium, adjusted to reflect differences between the plan 
bid and the national average bid, less the amount of rebate the MA-PD 
plan elects to apply toward a reduction of the base beneficiary 
premium, as described in proposed Sec.  422.266(b).
    ``MA monthly supplemental beneficiary premium'' is the portion of 
the plan bid attributable to mandatory and/or optional supplemental 
health care benefits described in Sec.  422.102, less any rebate 
applied to a mandatory supplemental benefit under Sec.  422.266(b)(2).
    ``MA monthly MSA premium'' is the amount of the plan premium for 
coverage of benefits under the original Medicare program through an MSA 
plan, as described in proposed Sec.  422.254(e).
3. Submission of Bids (Sec.  422.254)
    General rule. Section 1854 of the Act was amended by the MMA to 
replace the adjusted community rate (ACR) proposal system currently in 
effect under the MA program with a bid submission process. No later 
than the first Monday of June each year, beginning for contract year 
2006, MA organizations must submit bids for each plan that they intend 
to offer in the following year. Plan bids would be required to meet the 
requirements specified at proposed Sec.  422.254(b), and bid 
submissions would be required to include the information listed in 
proposed Sec.  422.254(c), discussed below.
    Section 1853(a)(1)(H) of the Act, as proposed in Sec.  
422.254(a)(2), gives us the authority to determine if ESRD MA enrollees 
should be included in the MMA bidding process. We propose that ESRD 
enrollees be fully incorporated into the plan's aggregate bid for 
contract year 2007 and succeeding years. However, for contract year 
2006, we are concerned that MA organizations would have to submit bids 
in June 2005, and at that time they would have very little experience 
with the impact on their payments of the new ESRD risk adjustment 
model, which is effective January 1, 2005. Therefore, we propose three 
options for handling the costs of ESRD enrollees in the June 2005 bid 
submission. We invite comment on these approaches.
    One option for contract year 2006 only is that MA organizations 
would not include costs for ESRD enrollees in their basic A/B bids and 
supplemental bids. We would pay MA organizations for ESRD enrollees 
using the MMA rate setting methodology, as discussed at proposed Sec.  
422.304(c)(1)(i). A second option for 2006 only is that MA 
organizations would not include costs for ESRD enrollees in their basic 
A/B bids, but would include costs for ESRD enrollees in the 
supplemental portion of the bid in order to determine the appropriate 
price of supplemental benefits other than Part B premium reductions. 
The third option would be that MA organizations fully incorporate ESRD 
enrollees in the pricing of both basic and supplemental benefits for 
contract year 2006 and succeeding years. That is, we would not delay 
full incorporation until 2007.
    Under all three options, ESRD enrollees would be included in plan 
estimates of the amount it would cost to provide qualified prescription 
drug coverage under Part D for 2006.
    Regardless of whether a plan's ESRD enrollees were excluded from 
the basic A/B bid or from both basic and supplemental bids for 2006, 
they would still be subject to the same premium and cost sharing as 
other plan enrollees under the uniformity of premiums provision in 
proposed Sec.  422.262(c). Accordingly, for any plan offering a Part B 
premium reduction to MA plan enrollees, we would adjust our payments 
for ESRD enrollees to reflect that part of the plan benefit package is 
payment of all or a portion of the enrollee's Part B premium. For 
further discussion of payments to MA organizations for ESRD enrollees, 
see the subpart G preamble discussion of Sec.  422.304(c)(1)(i).
    Bid requirements. Proposed Sec.  422.254(a) and (b) would implement 
section 1854(a)(1)(A) and section 1854(a)(6)(A) of the Act, which set 
forth requirements for plan bids. MA organizations must submit an 
aggregate monthly bid amount for each MA plan the organization intends 
to offer.
    Each bid submission for an MA plan represents the MA organization's 
estimate of its average monthly estimated required revenue to provide 
coverage in the service area of the plan for an MA eligible beneficiary 
with a nationally average risk profile for the risk adjustment factors 
(that is, the aggregate bid is a standardized bid). This aggregate bid 
is the sum of several amounts the plan estimates are its revenue 
requirements: (1) The ``unadjusted MA statutory non-drug monthly bid,'' 
to provide original Medicare benefits; (2) the amount to provide basic 
prescription drug coverage; and/or (3) the amount to provide 
supplemental coverage, if any.
    We state in proposed Sec.  422.254(b)(2) that each bid would be for 
a uniform benefit package for the service area (or service area 
segment, if applicable, for local plans). Plan premiums and all 
applicable cost sharing would also be uniform.
    We state in proposed Sec.  422.254(b)(3) that the bid submission 
would contain all estimated required revenue, including administrative 
costs and return on investment (profit, retained earnings). We state in 
proposed Sec.  422.254(b)(4) that the bid amount is for plan payments 
only but must be based on plan assumptions about the amount of 
estimated revenue required from enrollee cost sharing.
    When estimating required revenue, a plan would include adjustments 
for the effect that providing any non-Medicare benefit has on 
utilization. This method of pricing supplemental coverage would apply 
to both mandatory and optional supplemental benefits.
    To the extent that the provision of reductions in Part A, Part B, 
and/or Part D cost sharing results in higher utilization of these 
benefits, the additional expenditures attributable to the change in 
cost sharing structure are categorized as mandatory supplemental 
benefits. That is, when a plan offers a benefit package that includes 
reductions in cost sharing, the pricing of such a mandatory 
supplemental benefit would include not only the cost of ``buying down'' 
the cost sharing (that is, the estimated revenue needed to cover the 
amounts enrollees would have otherwise paid as cost sharing), but also 
the cost of financing the expenditures associated with the additional 
utilization resulting from offering the cost sharing benefits.
    The basic A/B bid should assume a utilization pattern consistent 
with Medicare cost-sharing. The portion of the aggregate bid related to 
the provision of basic prescription drug coverage should assume a 
utilization pattern consistent with defined standard cost sharing. 
Since the basic A/B bid is used to determine rebates and the portion of 
the bid related to Part D basic benefits is used to determine the 
monthly prescription drug beneficiary premium, these amounts cannot 
reflect the utilization effect of cost-sharing reductions provided 
through supplemental benefits.

[[Page 46891]]

    Plans would make an actuarial projection for their populations 
concerning the expected utilization of each supplemental benefit (both 
mandatory and optional supplemental benefits) and the appropriate 
pricing of such benefits. We would verify the reasonableness of these 
projections as part of the bid review process (in the same way that we 
would verify the reasonableness of plans' projections of enrollment 
numbers and enrollment mix for an optional supplemental product). A 
determination that supplemental benefits are appropriately priced is 
essential for the integrity of the bidding process. A plan could 
overstate its revenue needs for covered services with the intention of 
maximizing payments not subject to rebates while under-pricing 
supplemental benefits to make the offering attractive to enrollees. To 
prevent this kind of strategy, the accurate pricing of Part A, Part B, 
and Part D benefits and supplemental benefits have equal importance in 
the bidding process.
    We propose to exercise our authority under section 1856(b) of the 
Act (allowing CMS to establish MA standards by regulation) to establish 
a rule prohibiting MA organizations from offering, as optional 
supplemental benefits, reductions in Part A, Part B, and Part D cost 
sharing, or enhancements to Medicare Parts A and B benefits. Under such 
a rule, MA organizations would still be permitted to offer non-Medicare 
benefits such as dental and optical services as optional supplemental 
benefits. We are concerned about the effects of allowing a benefit that 
affects the level of cost-sharing and utilization of benefits to be 
offered at the enrollee's option. Allowing MA organizations to offer 
cost sharing-reductions and enhancements to Part A and Part B Medicare 
benefits as optional supplemental benefits arguably would be 
inconsistent with a multi-component bid, where one component is a bid 
amount for all of the supplemental benefits a plan intends to offer, 
both mandatory and optional. Costs for part of the supplemental bid 
amount would be carried by all enrollees, while costs for part would be 
carried by those who choose the benefit. Also, optional supplemental 
benefits do not exist under Part D. We are exploring the issue of 
whether allowing MA-PD plans to include drug coverage in an optional 
supplemental benefit would require a request for a waiver under section 
1860D-21(c)(1) of the Act.
    If we were to implement this restriction on optional supplemental 
benefits, MA organizations would still be able to provide choice by 
offering multiple plans within the same service area that have 
different mandatory supplemental benefits. We invite comments on this 
issue.
    The MMA does not alter the percentage of the amount paid to MA 
organizations in 2006 that is adjusted by the CMS-HCC risk adjustment 
model. As previously provided, 75 percent of the payment will be 
subject to risk adjustment, and the remaining 25 percent will be based 
on the demographic model. Since the statute requires us to combine 
different approaches to adjusting capitation rates in 2006, we believe 
this raises the issue of whether MA organizations should be required to 
submit one or two different bids for each plan in order for each 
portion of the payment to be based on an appropriately standardized 
bid.
    We propose that since we must make blended payments in 2006 for MA 
organizations, that MA organizations submit a blended bid for 2006, 
with one portion being based on a beneficiary with a nationally average 
risk profile (that is, the ``1.0 beneficiary'') and the second one 
being based on a beneficiary with a nationally average demographic 
profile. We invite comment on this approach or others that may be 
feasible. Note that some demonstrations have an alternative transition 
schedule to 100 percent risk adjusted payments, so these organizations 
would have to submit a blended bid for 2006 and 2007.
    Proposed Sec.  422.254(b)(4) would implement section 1854(a)(6) of 
the Act and would address an issue arising from section 1852(a)(1)(B) 
of the Act, which warrant a full discussion. Section 1854(a)(6) of the 
Act requires organizations to submit, for each MA plan, a bid 
consisting of three components, along with a statement of the actuarial 
basis for each of those components: (1) The original Medicare fee-for-
service benefit package; (2) basic prescription drug coverage; and (3) 
any coverage beyond the first two components (supplemental health care 
benefits).
    In the case of the first component, the health plan's basic A/B bid 
is the statement of the expected revenue the bidder requires to provide 
the Medicare-covered benefit package. This component of the aggregate 
bid may not include services not covered by Medicare. A simple example 
of what must be included as supplemental coverage rather than basic 
Medicare coverage would be routine physician services provided outside 
of the United States. The physician services would have to be included 
in the bid component referred to as ``the provision of supplemental 
health care benefits'' (section 1854(a)(6)(A)(ii)(III) of the Act), not 
in the component for the ``provision of benefits under the original 
Medicare fee-for-service program'' (section 1854(a)(6)(A)(ii)(I) of the 
Act). Medicare does not cover these services, but an MA plan may cover 
them as supplemental services.
    A more complicated example would be that the ``original Medicare'' 
component of the bid may not include any inpatient hospital days that a 
health plan covers where such services would not be covered under 
original Medicare solely because an individual has exhausted the 
Medicare lifetime reserve days. To the extent that the care is 
``bundled'' as part of a benefit package that a particular MA plan 
offers to Medicare enrollees, in order to use the plan cost and 
utilization data as the basis of its bid, the health plan must 
disaggregate the hospital benefit to determine costs (revenue needs) 
attributable to covered versus non-covered care. As part of the bid 
review process, we would ensure that only Medicare-covered services are 
included in a plan bid. (Note that under the prior M+C program we 
required ``unlimited hospital days'' to be shown on the Adjusted 
Community Rate Proposal as an additional benefit.)
    Requiring that the ``original Medicare'' bid component only include 
covered care enables a fair comparison to determine the extent to which 
a plan can save money (or will cost more) in relation to a benchmark 
that consists primarily of Medicare fee-for-service expenditures for 
covered services in a given area. With a correct bid for this 
component, rebate dollars can be correctly calculated. If a health plan 
includes non-covered care in the basic A/B bid and this bid amount is 
below the benchmark, dollars that should have been returned to 
beneficiaries as rebate dollars will not be available to finance 
rebates (and dollars that should have been returned to the Government 
will not be available). Instead, the health plan will use those funds 
received from the Government to finance benefits that should have been 
classified as mandatory supplemental (non-covered) benefits. Those non-
covered benefits included in the basic A/B bid would be financed at 100 
percent of their cost to the plan, rather than having only 75 percent 
of the rebate dollars available to finance the benefit as a mandatory 
supplemental benefit (for example). Another health plan in the exact 
same situation that had correctly classified the services as non-
covered services and had priced them as a mandatory supplemental 
benefit will appear more expensive to prospective enrollees

[[Page 46892]]

because 25 percent of the cost of the benefit becomes a ``cost'' to the 
beneficiary.
    Actuarial equivalence of cost sharing. In connection with the 
``original Medicare'' component of the bid, section 1852(a)(1)(B) of 
the Act states that ``the term `benefits under the original Medicare 
fee-for-service program option' means those items and services (other 
than hospice care) for which benefits are available under Medicare 
Parts A and B to individuals entitled to benefits under Medicare Part A 
and enrolled under Medicare Part B, with cost-sharing for those 
services as required under Parts A and B or an actuarially equivalent 
level of cost sharing as determined in this part''. The provision 
regarding cost sharing is necessary because it reflects a feature of 
the structure of the Medicare program which provides that a certain 
share of the cost of covered care is to be borne by beneficiaries (or 
third parties paying on behalf of beneficiaries). Those costs, in 
original Medicare fee-for-service, are not financed by Government 
funds, and the costs would not be financed by Government funds in the 
bidding system (unless rebate dollars are available).
    We have examined a number of ways to incorporate this Part A/B cost 
sharing provision in the bidding process, and in particular how to 
determine whether a bid incorporates cost sharing that would be 
considered actuarially equivalent to the cost sharing of original fee-
for-service Medicare. As a starting point, we discuss the concept of 
actuarially equivalent cost-sharing by describing a hypothetical plan 
with the original Medicare cost-sharing rules. We then discuss three 
methods of implementing the MMA provision for determining what level of 
plan cost sharing is actuarially equivalent to original Medicare: (1) 
The current method that defines original Medicare cost sharing as a 
national average per capita uniform dollar amount, and a possible 
variation on this approach, the localized uniform dollar amount; (2) 
the plan-specific approach; and (3) the proportional approach 
(including national, regional, or local proportions).
    One way in which a health plan could have a basic A/B bid for 
Medicare services that conforms to the provision in section 
1852(a)(1)(B) of the Act is to design a plan that covers only Medicare-
covered services and uses the same cost-sharing rules as Medicare (the 
hospital deductible, 20 percent coinsurance for outpatient services, 
etc.). For such a plan, there is no issue of actuarial equivalence 
since the plan has ``cost sharing as required under Parts A and B'' of 
Medicare, as specified in 1852(a)(1)(B) of the Act. For this 
hypothetical plan, the actual dollar amount of the basic A/B bid may be 
quite different from the local Medicare fee-for-service expenditures, 
and from the dollar amount of cost sharing beneficiaries face in fee-
for-service Medicare--for a number of possible reasons.
    Among the possible reasons for variation are that local fee-for-
service cost sharing amounts reflect a mix of types of supplemental 
coverage that Medicare beneficiaries may have. It is well known that 
beneficiaries with generous supplemental coverage (Medigap, Medicaid, 
some employment-based coverage) who do not directly face the expense of 
cost sharing have higher Medicare expenditures, and consequently higher 
cost sharing (though paid for by a third party). Individuals with only 
Medicare coverage have much lower expenditures and lower cost sharing. 
Expenditures of enrollees in the hypothetical plan with Medicare cost 
sharing may be closer to the level of expenditures for beneficiaries 
with no supplemental coverage. The private plan may also have lower 
expenditures overall because it has secured discounts below the 
Medicare rates from its network of providers, and the plan is likely to 
have utilization controls that reduce certain types of care or which 
shift care to a different setting or type of provider. This 
hypothetical plan's basic A/B bid for the coverage of Medicare 
services, and the associated cost sharing, would reflect the unique 
features of the private plan, and when expressed as a dollar amount 
there would most likely not be a match between the plan cost sharing 
amount and the amount in fee-for-service Medicare for the service area 
in which the plan is operating.
    In reality, it is unlikely that there would be any plan meeting the 
requirement in section 1852(a)(1)(B) of the Act by imposing exactly the 
cost-sharing structure that Medicare uses. Hence, the law permits the 
use of an actuarial equivalence approach to determine the appropriate 
cost-sharing component of a basic A/B bid that would actuarially equal 
the ``cost sharing as required under Parts A and B.'' Three methods of 
implementing the actuarial equivalence standard are discussed below: 
the uniform amount, plan-specific amount, and proportional methods.
    Uniform Amount Method. The new section 1852(a)(1)(B) of the Act is 
similar to a provision in the law that continues to apply to MA plans 
through 2005, dealing with the determination of ``excess amounts'' used 
to fund extra benefits. When Medicare payments exceed the revenue a 
plan needs for providing the Medicare benefit, the plan must ``return'' 
the excess amount to enrollees in the form of extra benefits (or cost 
sharing reductions). Section 1854(f)(1)(B) of the Act provides that:
    For purposes of this paragraph, the excess amount, for an 
organization for a plan, is the amount (if any) by which--
    (i) The average of the capitation payments made to the organization 
under section 1853 for the plan at the beginning of contract year, 
exceeds
    (ii) The actuarial value of the required benefits described in 
section 1852(a)(1)(A) under the plan for individuals under this part, 
as determined based upon an adjusted community rate described in 
paragraph (3) (as reduced for the actuarial value of the coinsurance, 
copayments, and deductibles under parts A and B). [Emphasis added.]
    The way in which this provision is currently implemented is through 
the determination of a uniform national dollar amount representing our 
projection of the monthly actuarial value of Medicare coinsurance and 
deductibles (that is, the amount, on average, of cost-sharing expenses 
beneficiaries incur in receiving Medicare services). All plans are 
required to use this national average amount as the ``the actuarial 
value of the coinsurance, copayments, and deductibles under parts A and 
B,'' to comply with section 1854(f)(1)(B) of the Act. There are a 
number of drawbacks with this uniform dollar approach, including the 
sources of variation in cost sharing noted above (as well as regional 
variation in cost sharing). In the context of a bidding system, this 
national uniform dollar approach does not adequately recognize 
differences among private health plans and differences between private 
plans and fee-for-service Medicare.
    The uniform amount approach could create distortions in the MA plan 
bids and have a negative impact on plans and on beneficiaries. In a 
situation in which the national dollar value of Medicare cost sharing 
(currently $113.07 per month for CY 2004) exceeds the appropriate 
amount for a particular health plan because the plan is very efficient 
and its expenditures are low in relation to those of Medicare, the plan 
bid would be depressed because of the assumption that $113 per month in 
revenue is collectible from enrollees. This would result in a greater 
difference between the plan bid and the benchmark, with 75 percent of 
that difference required to be rebated to

[[Page 46893]]

beneficiaries. Some or all of that rebate money can be used to fund the 
cost sharing that beneficiaries would face, which in this case the 
Government has deemed to be $113. This plan would be forced to fund a 
portion of the plan's own cost of providing the Medicare benefit with 
beneficiary dollars that otherwise would have been available for extra 
benefits.
    For example, a plan could determine that its total revenue needed 
for providing the Medicare benefit is $500 per person per month--
including $80 received as enrollee cost sharing revenue. Assume that 
the plan is operating in a county in which the benchmark is $600 
(exactly equal to local fee-for-service expenditures, and with cost 
sharing in the area at exactly the $113 national level). Rather than 
state that its estimated required revenue for the Medicare package, 
after cost sharing, is $420 ($500 less $80), the plan is obligated to 
state its bid as $387 ($500 less $113). This affords the plan 75 
percent of $213 (or $160) for rebates. In order to ``make itself 
whole'' the plan needs $33 to fully fund its Medicare benefits, yet it 
will receive only $25. This $33 amount would be identified under the 
uniform amount approach as a reduction in enrollee cost sharing (in 
relation to the $113 level), and a net amount of $127 will remain for 
other rebate financing. If the plan reduces cost sharing to 0, $47 is 
left for other benefits (because $80 is the actual cost sharing 
liability for enrollees that needs to be ``bought down''). Had the plan 
been allowed to correctly state its bid for its particular 
circumstances, the plan would have had 75 percent of $180 (or $135) for 
rebate purposes. If the plan reduces cost sharing to 0, a net of $55 is 
left for other benefits (or $8 per person per month more than under the 
uniform amount approach). (Distortions also occur when less efficient 
plans are required to understate their cost sharing level.)
    We believe the current uniform amount method creates distortion 
under the MA bidding system both in the bids and levels of savings 
returned to the enrollee and to the Government, and limits the 
flexibility of MA plans to provide competitive benefits and to pass on 
cost savings to beneficiaries.
    A more feasible version of the current national approach would be 
to use a localized uniform amount. Under this method, we would publish 
localized (for example, county-level or MSA-level) cost-sharing values 
to be used for purposes of actuarial equivalence. The values would be 
based on actual per-beneficiary FFS cost sharing, projected to the 
contract year and standardized to a 1.0 risk score.
    In addition to the localized uniform dollar amount approach, there 
are two other methods we are considering: the plan-specific amount and 
the proportional approach. The plan-specific method for determining the 
PMPM amount of beneficiary cost sharing is based on the MA 
organization's pricing and utilization estimates. The organization 
would also use these estimates to generate its basic A/B bid. In 
contrast, the proportional method is based on fee-for-service pricing 
and utilization experience, either national, regional, or local 
proportions.
    Plan-Specific Amount Method. A second approach eliminates the 
distortions caused by the uniform amount approach by allowing an MA 
organization to use actuarial assumptions and projections to determine 
the level of cost sharing that beneficiaries would face if the plan 
imposed the Medicare cost sharing structure or an actuarially 
equivalent structure. That is, whether an MA organization intends to 
offer a basic package or, through the use of mandatory supplemental 
benefits, intends to offer a plan with reduced cost-sharing, the 
organization would determine the basic A/B bid as if it were offering a 
plan that consists of Medicare-only benefits offered under Medicare 
cost sharing rules or an actuarially equivalent structure. A cost-
sharing structure would be actuarially equivalent if the projected 
average cost-sharing as percent of the sum of average cost-sharing and 
projected average plan payout equals the percentage using Medicare's 
cost sharing rules, based on the projected experience of the same group 
and using the same pricing assumptions.
    The average amount of cost-sharing and the average plan revenue 
requirements for the assumed basic A/B package would then be adjusted 
so as to reflect cost-sharing and plan requirements based on an 
enrollee with a national average risk profile. The adjusted plan 
revenue requirements would serve as the organization's basic A/B bid. 
Thus, under a plan specific approach, the cost-sharing estimate and the 
basic A/B bid would be the result of the same estimating process 
enabling the organization to factor in any discounts it receives from 
providers, any utilization controls that influence services received, 
and any other plan-specific factors that should be considered in 
determining a fair and accurate bid.
    To the extent that a plan does intend to use mandatory supplemental 
benefits, the question arises as to the relationship between the 
estimate of cost-sharing and plan revenue requirements for the assumed 
basic A/B package to the estimate of cost-sharing and revenue 
requirements under the integrated package that the plan intends to 
offer. Assume, for example, that the bidding organization, through the 
use of mandatory supplemental benefits intends to have no cost sharing 
at all in its plan and will rely on provider discounts and good 
utilization management to offer an efficient Medicare product. Because 
the basic A/B bid involves significant levels of cost sharing, 
utilization and hence plan revenue needs would increase from the 
estimate of plan revenue needed for basic A/B coverage to that for the 
planned integrated package (that is, basic A/B plus mandatory 
supplemental benefits). As previously discussed, this additional 
utilization resulting from reduced cost sharing would be included in 
the costs of mandatory supplemental coverage as part of the bid 
component for supplemental benefits. (Note that under the provisions of 
section 1854(a)(6)(A) of the Act, bids are for an ``enrollee with a 
national average risk profile.'' The actuarial determination of cost 
sharing would also be for an enrollee with a national average risk 
profile.)
    This method of determining the Medicare cost sharing amount is more 
complicated than the uniform amount method. However, we would not 
expect the calculation to be burdensome to MA organizations, since they 
would have to develop plan-specific estimates of cost sharing in order 
to price cost-sharing reductions provided as mandatory supplemental 
benefits. These kinds of actuarial estimates are necessary in 
connection with the design of any type of plan benefit package an MA 
organization offers or considers offering. While the Medicare cost 
sharing structure is complicated and varies by type of service 
provided, we would note that current MA plans have equally varied cost 
sharing applied to different services in the plans offered to Medicare 
enrollees. The plan-specific approach is also consistent with our 
position that additional utilization arising from reduced cost sharing 
must be priced as part of the mandatory supplemental component of the 
plan bid.
    Proportional Method. Another method of determining a Medicare level 
of cost sharing is to use a proportional approach. Actuarial 
equivalence under this approach would be met if the ratio of a plan's 
cost sharing amount for the

[[Page 46894]]

basic A/B bid to the total cost of plan benefits equals this proportion 
under original Medicare. For example, if the national average actuarial 
value of cost sharing under original Medicare in a year were 16.8 
percent of the total (value of cost sharing plus value of benefits, 
using the actual 1999 figure for Medicare), then an MA plan would have 
to offer a basic A/B bid based upon a plan basic cost-sharing amount 
that is 16.8 percent of total costs. We would announce the projected 
percentage of total expenditures that represent cost sharing in the 
same way that we currently announce the national average actuarial 
value of Medicare cost sharing as part of the rate announcement for 
private health plans.
    Using a fixed national proportion is a variation on the uniform 
national dollar method, but it recognizes variation in expenditures at 
the health plan level. However, even within fee-for-service Medicare, 
there is significant variation by area in the cost-sharing proportion, 
ranging from 13 percent in Maryland to 20 percent in Nebraska in 1999 
(compared to the national average of 16.8 percent). To address the 
issue of geographic variation in cost sharing, which also became a 
concern in the Medicare+Choice program, we are considering the 
development of regional or local cost-sharing proportions.
    Using a proportional approach, plan pricing assumptions are built 
into the total value of the benefit package. However, any utilization 
effect within the plan of a Medicare-like cost-sharing structure is not 
factored in. Another factor that is not recognized in a straight 
national or local proportional method is that the mix of services 
within a health plan, and the costs associated with each category of 
services, may be different from the mix in fee-for-service Medicare. 
For example, plans may tend to favor post-acute care over acute care, 
which, if fee-for-service Medicare were to do the same, would alter the 
total cost sharing and the distribution of the cost sharing in relation 
to the types of services from which cost-sharing revenue is derived.
    To refine the proportional method, and to attempt to be more 
consistent with the letter of the law (``cost sharing for * * * 
services as required under A and B''), we could develop service-
specific proportions of cost sharing applied to the different 
categories of expenditures health plans would have (for example, a 
proportion would be stated for inpatient hospital care, a proportion 
for physician services, etc.). In order to further refine this 
approach, we would also incorporate assumptions about how health plans 
generally use services. We would then announce the (local area) 
service-by-service proportions plans would use to determine their 
actuarial equivalent of Medicare cost sharing. Such a local, adjusted 
proportional approach would be relatively easy for plans to implement, 
but it would involve an additional burden on us to develop varying 
percentages by area and by service category. Assumptions made about the 
distribution of services provided by private plans may not be 
consistent with the experience and practices of individual plans.
    We invite comment on each of the alternatives we are considering to 
replace the national uniform amount method: localized uniform dollar 
amounts; plan-specific amounts; and proportions (national, regional, or 
local). We would have liked to provide a comparison of the effects on 
plan bids of these three methods for determining a level of beneficiary 
cost sharing that is actuarially equivalent to original Medicare. This 
is not possible at this time, however, because we have not fully 
developed these options. To specify impacts we would need to know 
exactly what data elements we would collect and what formulas we would 
use. We invite comment on the details of these alternatives methods and 
how best to implement them.
    PACE organizations and the MMA bidding methodology. We believe, 
based on conference report language, that the Congress intended to 
exempt PACE organizations from the Title II bidding process, so 
payments for PACE plans would be based on MA capitation rates. However, 
this exemption does not apply to PACE organizations intending to offer 
Part D drug coverage to PACE enrollees. We expect that PACE plans would 
be required to submit bids to provide Part D drug benefits under Title 
I of the MMA, addressed in a separate rulemaking.
    Information required. Sections 422.254(c) and (d) implement section 
1854(a)(6)(A) of the Act by setting out the information MA 
organizations must submit for coordinated care plans (including 
regional MA plans and specialized MA plans) and private fee-for-service 
plans. Proposed Sec.  422.254(e) specifies information that must be 
submitted for MSA plans.
    In addition to submitting an aggregate bid amount, MA organizations 
must submit the proportions of the aggregate bid attributable to 
coverage of Part A and Part B benefits, Part D basic benefits, and 
supplemental coverage. They must also identify the plan type, projected 
enrollment, and any capacity limits, the actuarial bases for 
determining the bid amounts and proportions, and information on the 
plan's cost sharing, including the actuarial values of deductibles, 
coinsurance, and co-payments. Additional information required on drug 
coverage is specified at section 1860D-11(b) of the Act.
    Under proposed Sec.  422.254, for MA organizations required to 
provide a monthly rebate because the plan bid is less than the plan 
benchmark, the organization must submit information to us about how 
this rebate would be allocated across the options specified by the 
statute for a mandatory supplemental benefit: (1) Provision of 
supplemental health benefits, including additional health care 
benefits, reduction of cost sharing for original Medicare benefits and/
or Part D benefits; and/or (2) reduction of the Part B, Part D, and/or 
mandatory supplemental benefit premium(s). For further discussion of 
requirements for rebates, see Sec.  422.266.
    Since MA regional plans may serve multiple regions, and each region 
is a separate service area, we will develop procedures to allow MA 
organizations to file consolidated bid information for multi-region MA 
plans (including national plans), in order to encourage the offering of 
regional plans, in accordance with section 1854(a)(1)(C) of the Act.
    In addition to the information cited above, in 2006 and/or 2007, MA 
organizations offering regional plans must submit as a part of the bid 
package sufficient information for us to calculate risk corridor 
amounts. This information includes projected allowable costs (see 
discussion of subpart J) and the portion of the allowable costs 
attributable to administrative expenses incurred in providing these 
benefits. In addition, the plan must provide the total projected costs 
for providing rebatable integrated benefits as well as the portion of 
rebatable integrated benefits that are attributable to administrative 
expenses.
    Finally, section 1854(a)(6)(A)(iii) of the Act gives us the 
authority to require information in addition to that listed above to 
allow us to verify the actuarial bases for plan bids. We have not yet 
determined the format for initial bid submission, and we will provide 
future guidance on these requirements.
    Special rules for MSA plans. Section 422.254(e)(2) implements 
section 1854(a)(3) and section 1854(b)(2)(D) of the Act by indicating 
that bids are not required for MA MSA plans. However, for MSA plans MA 
organizations must submit the enrollment capacity, the monthly MSA 
premium amount, which is the amount of revenue the plan

[[Page 46895]]

requires to offer original Medicare benefits, analogous to the basic A/
B bid for other MA plans. MA organizations must also submit the amount 
of the deductible, and the beneficiary supplemental premium, if any. 
MSAs are prohibited from offering Part D coverage (although MSA 
enrollees may choose to enroll in a prescription drug plan).
    A supplemental benefit for an MSA plan cannot cover the MSA 
deductible. Health insurance policies for benefits described in section 
1882(u)(2)(B) of the Act must not be treated as covering such a 
deductible.
    Our goal is to maximize the diversity of plans available in the MA 
program, and to this end we welcome any comments that would help us 
improve our payment methodology for MSA plans.
4. Negotiation and Approval of Bids (Sec.  422.256)
    Authority to review and negotiate bids. The provisions in proposed 
Sec.  422.256 implement section 1854(a)(6)(B) of the Act, which 
provides us with the authority to negotiate the monthly aggregate bid 
amount and the proportions of the aggregate bid attributable to basic 
benefits, supplemental benefits, and prescription drug benefits. The 
MMA grants us the authority to negotiate bids that is ``similar to'' 
the statutory authority given the Office of Personnel Management (OPM) 
to negotiate with health benefits plans under the FEHBP program. 
Chapter 89 of title 5 gives OPM broad discretion to negotiate prices 
and levels of benefits. We believe that the Congress used ``similar 
to'' in the statute to recognize the differences between the two 
programs. For example, the OPM authority applies to negotiating the 
level of plan benefits, while Medicare benefits under Parts A and B are 
defined in law. Also, the authority to negotiate payment rates would 
seem to be limited for the MA program by other provisions of the MMA 
(for example, statutory formulas for determining benchmarks, premium 
and rebate amounts, and payments to plans).
    However, plans are able to modify the cost sharing for Medicare 
Parts A and B benefits via supplemental benefits. We have the authority 
to negotiate the level of the supplemental benefits as part of ensuring 
that the bid is not discriminatory, as described in section 1852(b)(1) 
of the Act. Further, in situations where we have questions about the 
assumptions used for a plan bid, we will negotiate with the MA 
organization regarding the appropriate assumptions and the resulting 
rebate and/or supplemental premiums.
    As provided under Sec.  422.256(a)(2) and in accordance with 
section 1854(a)(6)(B)(iii) of the Act, we may not require: (1) Any MA 
organization to contract with a particular hospital, physician, or 
other entity or individual to furnish items and services under the Act; 
or (2) a particular price structure for payment under such a contract 
to the extent consistent with our authority. Also, as under current 
law, we do not have the authority to review or negotiate bids for 
private fee-for-service plans or any amounts submitted by MSA plans.
    Standards of bid review. Section 422.256(b) implements section 
1854(a)(6)(B)(ii) and (iii) and section 1854(e)(4) of the Act, which 
together establish three standards for our review of bids. First, the 
bid and proportions must be supported by the actuarial bases, which we 
determine based on information provided by the MA organization.
    Second, the bid amount and proportions must reasonably and 
equitably reflect the plan's revenue requirements for providing the 
benefit package, as the term revenue requirements is used in section 
1302(8) of the Public Health Service Act. We interpret this reference 
to mean that the Congress intends for a plan bid to reflect the plan's 
estimated required revenue in providing coverage, and not other factors 
such as the relative lack of competition in the plan's market area or 
the level of annual capitation rates and benchmarks in the service 
area.
    Third, proposed Sec.  422.256(b)(3) implements section 1854(e)(4) 
of the Act by providing for a limitation on applicable cost-sharing for 
coordinated care and private fee-for-service plans: the actuarial value 
of plan cost sharing ``applicable on average'' to plan enrollees cannot 
exceed the actuarial value of cost sharing ``applicable * * * on 
average'' under original Medicare.
    We are interpreting ``applicable'' to mean the level of cost-
sharing in effect after any reductions to the level of cost sharing 
that a plan can make by offering a mandatory supplemental benefit, as 
specified under section 1852(a)(1)(B) of the Act. That is, we apply 
this third standard of review, as specified under section 1854(e)(4) of 
the Act, in light of both the basic A/B bid and the application of any 
rebate toward reduced cost sharing of Medicare Parts A and B benefits 
included in the supplemental bid. Essentially, the requirement in 
section 1852 of the Act (discussed in connection with proposed Sec.  
422.254(b)(4)) that the actuarial value of MA plan cost sharing for 
Medicare Part A and Part B benefits assumed in constructing the basic 
A/B bid must equal the actuarial value of original Medicare cost 
sharing would affect how MA organizations develop their basic bids. 
Section 1854 of the Act places a cap on actual enrollee cost-sharing 
liability for Medicare Parts A and B benefits in relation to average 
cost sharing in fee-for-service Medicare in the service area as 
estimated by us. This means that if a plan's aggregate bid includes a 
mandatory supplemental benefit, the plan can have an actuarial value of 
cost sharing that is less than that under original Medicare because the 
plan rebate has been applied to a buy down plan cost sharing.
    There has been some confusion about whether an MA plan can 
substitute a premium for some portion of the cost sharing under 
original Medicare. Section 1854(b)(2)(A)(i) of the Act (which would be 
implemented at proposed Sec.  422.262(a)(1)) mandates that for plans 
with bids less than benchmarks, the premium for original Medicare 
benefits must be zero. Our understanding is that congressional intent 
was to have the basic A/B bid be for a standardized package. This means 
MA organizations able to offer plans with Medicare-covered benefits at 
a lower cost to the beneficiary than the benchmark will have a plan 
with zero premium for coverage of benefits under original Medicare.
    However, any MA organization can choose to structure the benefit 
package with a mandatory supplemental benefit that includes a reduction 
in Medicare Part A and B cost sharing. The premium for this 
supplemental package, as well as the Part D or Part B premium, can be 
offset by any rebates for which the plan is eligible. Thus, the 
aggregate bid would consist of: (1) A basic A/B bid amount for benefits 
available for either zero premium or a basic premium depending on 
whether the plan's bid is above or below the benchmark; (2) a mandatory 
supplemental bid amount for benefits available for a premium or no 
premium depending on the plan's use of rebates (and an optional 
supplemental benefit if offered); and (3) a drug bid amount for basic 
benefits, also available at a premium or no premium depending on use of 
rebates.
    Under the previous M+C program, we allowed M+C organizations to 
reduce beneficiary basic premium amounts as a part of the ACRP process, 
that is, they were allowed to take a negative adjustment on their 
additional revenues. Under the MMA, this type of adjustment is no 
longer permitted for the basic bid for benefits under the original 
Medicare

[[Page 46896]]

program. In accordance with section 1854(a)(6)(B)(ii) of the Act, plan 
bids must reasonably and equitably reflect plan expected revenue 
requirements. MA organizations cannot submit plan bids that understate 
their revenue requirements for the basic A/B bid. When the basic A/B 
bid amount exceeds the benchmark amount, the difference is required to 
be charged as a basic beneficiary premium. If an MA organization were 
able to waive the plan's basic beneficiary premium, this would suggest 
that the MA organization had overstated the plan's expected revenue 
requirements for basic benefits. In essence, we do not have the 
authority under the statute to allow MA organizations to waive basic 
beneficiary premiums for plans with basic A/B bids greater than 
benchmarks.
    Negotiation process. Section 422.256(a) implements section 
1854(a)(6)(B)(i) of the Act, which provides us the authority to 
negotiate with MA organizations. As mentioned above, we have the 
authority to negotiate to ensure that the bid is not discriminatory; 
and in situations where we have questions about the assumptions used 
for a plan bid, we will negotiate with the MA organization regarding 
the appropriate assumptions and the resulting rebate and/or 
supplemental premiums.
    At this time, we have not completed development of the bidding and 
approval process. We expect to revise the current Adjusted Community 
Rate Proposal tool (both the Plan Benefit Package and the ACR 
spreadsheet) to align with MMA provisions for bid submission. We expect 
that the process of bid negotiation between between CMS and an MA 
organization could result in an agreement to adjust the bid's pricing, 
utilization, and/or enrollment assumptions. The MA organization would 
resubmit the bid information for the plan.
    In addition, MA organizations may need to adjust the allocation of 
rebate dollars in a plan bid (see discussion below), so would also need 
to resubmit the bid.
    Rules for adjustment of rebate dollar allocation. As required by 
section 1860D-13(a)(4) of the Act, CMS must publish a national average 
monthly bid amount for Part D based on an average of plan bid amounts. 
This means MA organizations must submit their plan bids (including the 
estimated drug premium amount) before knowing the national average 
monthly bid amount for basic coverage. Since section 1854(b)(2)(A) of 
the Act requires that organizations with basic A/B bids below 
benchmarks charge a zero basic beneficiary premium, in their initial 
bid submission MA organizations will allocate rebate dollars to 
mandatory supplemental benefit packages (to ensure that all 
beneficiaries receive the full value of their rebate amount, which may 
include the provision of a Part D premium reduction. For example, a 
plan may have an estimated Part D monthly premium of $35, and offer a 
mandatory supplemental package that applies $35 of its rebate to ``buy 
down'' the Part D premium to zero.
    Given the preliminary nature of MA organizations' Part D premium 
submission, we expect that some rebate allocations to Part D premium 
reductions will be overestimated (excessive allocation) or 
underestimated (insufficient allocation). These misestimates will mean 
some portion of the beneficiary rebate has been credited where it is 
not needed or not enough has been credited to achieve the premium 
desired. For example, if a plan's monthly drug premium is determined to 
be $34, which is less than the projected premium of $35 in its initial 
bid submission, there was an excessive allocation of $1 of the rebate 
to fund the Part D premium reduction. We would require the MA 
organization to amend its bid submission to reallocate the excessive $1 
of rebate credit to other mandatory supplemental benefits. On the other 
hand, if the plan monthly drug premium is determined to be $36, which 
is greater than the projected monthly premium of $35 in the initial bid 
submission, there is an insufficient allocation of $1. We would give 
the MA organization the option of reallocating $1 of rebate from 
another mandatory supplemental benefit toward the Part D premium 
reduction in order to eliminate the $1.00 Part D premium and return to 
the zero premium in the initial bid submission.
    For this reason, we anticipate that some MA organizations will make 
minor technical adjustments to the benefit structures of their non-
prescription drug bids. The adjustments would consist of reallocation 
of beneficiary rebate dollars in the mandatory supplemental benefit 
among the different categories allowed by law: Additional benefits, 
reductions in Part A/B cost sharing, reduction to the mandatory 
supplemental premium, and reductions in Part B and Part D beneficiary 
premiums. Modifications to Part D cost sharing could not be made, 
however, given the implications that such modifications would have on 
projected reinsurance dollars which then impacts the pricing of the bid 
for basic Part D benefits. Changes to the basic Part D portion of the 
bid would have implications for the national average monthly bid amount 
and, hence, the basic beneficiary premium that we would have just 
previously calculated for the year.
    Note that the bid cannot be changed unless mutually agreed upon by 
CMS and the MA organization representatives as a result of our review 
and negotiation process. An example of an appropriate change would be 
if an MA organization elects to allocate rebate dollars to reduce its 
estimated Part D premium to zero in its initial June bid submission, 
and the outcome of the national average premium calculation is that the 
plan has an excessive allocation of rebate dollars so that the Part D 
premium has become a negative amount, such as -$3.25, this plan would 
have to reallocate $3.25 to other mandatory supplemental benefits to 
ensure enrollees receive the full amount of the rebate. Conversely, if 
another MA organization also elects to allocate rebate dollars to have 
a zero Part D premium, and the comparison with the national average 
drug premium results in an insufficient allocation of rebate dollars so 
that the Part D premium has become $1.42, this plan would have the 
option of reallocating the $1.42 of beneficiary rebate dollars to 
return to a zero premium, as submitted in the original June bid. (Bid 
amounts must be submitted no later than the first Monday of June each 
year, beginning for contract year 2006).
    We also recognize that the June bid submission for regional MA 
plans will be based on unknown benchmarks not only for the drug premium 
but also for Medicare Parts A and B benefits. As discussed in Sec.  
422.258(c), the region-specific benchmark amount is based, in part, on 
a weighted average of the plan bids for Medicare Part A and Part B 
benefits, which we cannot calculate until after the June bid 
submission. This means that the exact amount of a plan's rebate is 
unknown and will shift to the extent that the estimated benchmark a 
plan uses to create its June basic A/B bid amount differs from the 
region-specific non-drug benchmark we establish based on plan bids. 
Therefore, regional MA plans will also be allowed to modify cost 
sharing (that is, increase or decrease reductions in the initial June 
bid submission), other than for Part D benefits, and certain premiums 
to arrive at the supplemental, Part B, and Part D premiums originally 
submitted.
    We propose the following rules for the negotiation process 
concerning reallocation of rebate dollars due to excessive or 
insufficient allocation.
    (1) Local MA plans with overestimated allocations to Part D premium 
reduction must reallocate

[[Page 46897]]

beneficiary rebate dollars to other mandatory supplemental benefits and 
can do so only for the purpose of achieving the original Part D premium 
in their initial bid submission.
    (2) Local MA plans with underestimated allocations to Part D 
premium reduction have the option of reallocating beneficiary rebate 
dollars to other mandatory supplemental benefits. However, the plan 
could only reallocate rebate dollars for the purpose of achieving the 
Part D premium in the initial bid submission. In this circumstance, 
plans could choose to not adjust the new premium or reallocate the 
appropriate amount to achieve the initial premium submitted.
    (3) Regional MA plans may reallocate beneficiary rebate dollars to 
achieve the supplemental, Part B, and Part D premiums in their initial 
bid submission.
    (4) Local MA plans not offering Part D benefits (these would only 
be private fee-for-service plans who have elected this option) would 
have all the necessary information upon which to estimate their bid 
amounts for their initial June bid submission, and, therefore, the MA 
organizations would not be allowed to modify their plan benefit 
structures.
    We believe that it is appropriate for MA organizations to only make 
technical adjustments or modifications during the negotiation process 
initiated by CMS in order to create a bidding process with integrity, 
to ensure that bids are meaningful, and to avoid the endless cycle of 
CMS benchmark calculation-plan benefit adjustment-CMS benchmark 
calculation. We invite comments on this issue.
5. Calculation of Benchmarks (Sec.  422.258)
    Proposed Sec.  422.258 would implement the new section 1853(j) of 
the Act (added by the MMA) by providing a description of how benchmarks 
for local MA plans are calculated. We will calculate benchmarks for 
each county, that is, MA local area. For a service area that is 
entirely within an MA local area, the MA area-specific non-drug monthly 
benchmark amount is equal to the monthly MA capitation rate for the 
local area. For a service area that is in more than one MA local area, 
the benchmark amount is calculated as a weighted average of the local 
MA monthly capitation rates. The monthly capitation rate for each local 
area is multiplied by the plan's projection of the proportion of its 
enrollees that will reside in each local area. These enrollment 
projections would be based on information submitted by the local plans 
for bidding purposes, as mandated under section 1854(a)(6)(A)(iii) of 
the Act. These products would be summed to yield the local area 
benchmark amount for that MA plan.
    For all calculations that follow, CMS will determine the number of 
MA eligible individuals in each local area, in each region, and 
nationally as of the reference month, which is a month in the previous 
calendar year CMS identifies as the most recent month for which data is 
available.
    Proposed Sec.  422.258(b) and (c) would implement section 1858(f) 
of the Act by providing a description of how regional MA plan 
benchmarks are calculated. We would calculate benchmarks for the MA 
regional area. The benchmark amount for regional plans would be a blend 
of two components, the MA area-specific benchmark amounts and the plan 
bid amounts. The purpose of the blend would be to be more responsive to 
market conditions in the region by allowing plan bids to influence the 
final benchmark amount. This blending would allow a more accurate 
reflection of the actual revenue needs of the plans to be included in 
the bidding process.
    Proposed Sec.  422.258(b)(1) would implement section 1858(f)(2) of 
the Act by describing the two components of the MA regional benchmark, 
the statutory component and the plan bid component.
    The statutory component would be based on the local area capitation 
rates. For each local area, the capitation rate would be multiplied by 
the ratio of the number of MA eligibles (based on the reference month), 
residing in the area to the number of MA eligibles (based on the same 
reference month) residing in the region. These products would be summed 
across all local areas in the region to yield the statutory component.
    The plan-bid component would be based on the bids of all MA plans 
in the region. For each plan offered in a region, we will multiply the 
plan's unadjusted region-specific non-drug bid amount by the plan's 
share of enrollment (as determined under paragraph (c)(5)) and then sum 
these products across all plans offered in the region. We then multiply 
this by 1 minus the statutory market share to determine the plan-bid 
component of the regional benchmark.
    The weighted average of plan bids for a region would be determined 
based on the number of regional plans offered in the region in a given 
year and the number of regional plans offered in the reference month. 
Section 1858(f)(5) of the Act, which we would implement in proposed 
Sec.  422.258(c)(4) and (c)(5), addresses how to account for varying 
numbers of plans and different size plans in a region when determining 
the regional benchmark amount. If two or more regional plans were 
offered in the region in the reference month, the plan-bid component 
would be based on the weighted average of the plan bids, unadjusted for 
risk adjustment. Each plan's bid would be multiplied by the ratio of 
the number of MA eligibles in the reference month enrolled in the plan 
to the number of MA eligibles in the reference month enrolled in all 
the plans in the region. These products would be summed across all 
plans in the region to yield the plan-bid component.
    If only a single regional plan is offered in the region in a year, 
the plan-bid component would be this plan's bid. If there were no 
regional plans offered in the reference month, but two or more new 
regional plans are offered in the region in a year, we may give equal 
weight to each plan's bid in determining the plan-bid amount. 
Alternatively, we may weight the bids based on each plan's estimate of 
its projected enrollment, with the reasonableness of the projections 
subject to our approval.
    The MA regional benchmark would be the weighted average of the 
statutory component and the plan-bid component. The statutory component 
would be multiplied by the statutory national market share, which is 
the number of MA eligibles in the nation who were not enrolled in an MA 
plan during the reference month divided by the total number of MA 
eligibles in the nation. The plan-bid component would be multiplied by 
the non-statutory market share, which is the number of MA eligibles in 
the nation who were enrolled in an MA plan during the reference month 
divided by the total number of MA eligibles in the nation. These 
components would be added to yield the MA regional benchmark.
6. Beneficiary Premiums (Sec.  422.262)
    Proposed Sec.  422.262(a) would implement section 1854(b)(2)(A) of 
the Act, and would describe the new methodology for calculating the MA 
monthly basic beneficiary premium. This premium will now be determined 
by comparing the unadjusted plan bids to unadjusted benchmark amounts.
    (1) For an MA plan with an unadjusted statutory non-drug bid amount 
(basic A/B bid) that is less than the appropriate unadjusted non-drug 
benchmark amount, the basic beneficiary premium is zero.
    (2) For an MA plan with an unadjusted statutory non-drug bid amount 
(basic A/B bid) that is equal to or greater than the unadjusted non-
drug benchmark amount, the basic

[[Page 46898]]

beneficiary premium is the amount by which (if any) the bid amount 
exceeds the benchmark amount. All approved premiums must be charged--
that is, plans are not allowed to waive premiums.
    Proposed Sec.  422.262(b) would implement section 1854(d)(4) of the 
Act, which specifies that MA enrollees must be charged consolidated 
monthly premiums. As intended by the Congress and as a part of our 
efforts to simplify the process for beneficiaries, proposed Sec.  
422.262(b) states that an MA enrollee will pay a single premium 
consisting of the sum of all premiums a particular plan charges its 
enrollees, which will be one or more of the following: (1) The monthly 
basic beneficiary premium; (2) the monthly supplemental premium; and 
(3) the MA monthly prescription drug premium. In the case of an MSA 
plan, there are no basic beneficiary premiums since we instead make a 
deposit to the enrollee's MSA. MSA plans are high deductible insurance 
policies, not managed care plans. This means the only beneficiary 
premium for an MSA plan would be a supplemental premium.
    Uniformity of premiums and cost-sharing. The MMA continues current 
MA regulations now in subpart G at Sec.  422.304(b) regarding 
uniformity of beneficiary premiums and cost sharing within MA plans.
    MA organizations offering local MA plans within segments of service 
areas must submit separate bids for those segments that will have 
different premiums and cost sharing. Section 1858(a)(1) of the Act 
mandates that regional MA plans must provide uniform premiums and cost 
sharing within a region, specifying that section 1854(h) of the Act 
(allowing segmented service areas) does not apply to regional MA plans.
    Section 1854(d)(1) of the Act would be implemented in proposed 
Sec.  422.262(e), describing the rules on the timing of payments by MA 
enrollees of their beneficiary premiums.
    Proposed Sec.  422.262(f) would implement section 1854(d)(2) of the 
Act on beneficiary payment options. This provision gives enrollees the 
option, at their discretion, of paying their MA consolidated premium 
by: (1) Having it deducted directly from their Social Security benefits 
in the same manner that Part B premium reductions are handled; (2) 
setting up an electronic funds transfer; or (3) through other 
appropriate means we may identify. The Congress provided for other 
beneficiary payment options including payment by an employer. Under 
employment-based retiree coverage, payment could be made on behalf of 
an employee, a former employee, or a dependent. All premium payments 
deducted from Social Security benefits would be credited to the 
appropriate Trust Fund as we specify, and will be paid to the 
appropriate MA organization. We would consult with the Commissioner of 
Social Security and the Secretary of the Treasury to determine which 
Trust Funds are the appropriate ones to credit. The MA organization 
must not impose a charge for individuals electing to pay their premiums 
through a deduction from their Social Security payments.
    We would transmit the appropriate information (for example, name, 
social security number, consolidated monthly beneficiary premium owed 
by each beneficiary for each month in the year), and other information 
to the Commissioner of Social Security (SSA) as agreed to with SSA. We 
would consult with the Commissioner of Social Security about what 
information is appropriate to transmit. We would update this 
information, as necessary, during the year. We invite comments on the 
additional appropriate beneficiary payment options that we could 
institute as well as uses for and development of electronic funds 
transfer mechanisms to help beneficiaries pay their premiums.
7. Calculation of Savings (Sec.  422.264)
    Under section 1854(b)(3)(A)(iii) of the Act, in calculating the 
monthly savings as a step in determining beneficiary rebate amounts for 
MA local plans beginning in 2006, the Congress gave the Secretary the 
flexibility to determine whether the risk adjustment factors to be 
applied to the local benchmarks and bids are determined on a State-wide 
basis, a plan-specific basis, or some other basis.
    The advantage of applying a State-wide risk adjuster to benchmarks 
and basic A/B bids is that it ensures savings (and rebates) are uniform 
for beneficiaries in local plans in the same State. That is, plans with 
equal basic A/B bids (below the benchmark) within a State would have 
equal savings and rebates. This means that beneficiaries in equally 
efficient plans would not be either rewarded or penalized because they 
chose a plan with less healthy enrollees or a plan with healthier than 
average enrollees.
    However, equally efficient plans with less healthy populations (as 
compared to the State-wide average) would be disadvantaged by a State-
wide risk adjuster because it would be more costly for those plans to 
provide supplemental benefits with the same value as provided by 
healthier plans. The use of rebate dollars to reduce premiums (which is 
a dollar-for-dollar reduction in any kind of plan) is different than 
the use of rebate dollars to finance extra benefits, which cost more 
for a plan with less healthy enrollees. The cost difference for plans 
with a less healthy enrollee population is based on the assumption that 
enrollees in plans with a higher than average risk profile would use 
more services than enrollees in plans with lower risk profiles.
    An additional practical complication of applying a State-wide risk 
adjustment factor might arise in situations where plans serve health 
care markets that cross State lines, since enrollees in the same plan 
who live in different States would be subject to different risk 
adjustment factors.
    Section 1854(b)(3)(A)(iii) also provides the option of applying a 
plan-specific risk adjuster to the calculation of savings. This 
approach would address the above problem, in that among plans with 
equal basic A/B bids (below the benchmark), plans with less healthy 
enrollee populations would receive more rebate dollars and thus would 
be able to offer mandatory supplemental benefits that have close to the 
same value as plans with healthier enrollee populations. However, this 
would mean that plans operating at similar levels of efficiency, but 
with different risk profiles, would not have uniform beneficiary 
savings and rebates.
    We are reviewing options for this adjustment and request comments 
on these two approaches.
    In the case of States or other areas in which no local plans have 
been offered in the previous year, we may use average risk adjustment 
factors applied to comparable States or applied on a national basis.
    Under section 1854(b)(3)(B) of the Act, we would apply an average 
risk adjustment factor (State-wide or some other applicable risk 
adjustment factor) to determine the risk-adjusted basic A/B bid and 
benchmark amounts for each local plan offered.
    Section 1854(b)(3)(C) of the Act addresses how to determine the 
amount of savings for each local MA plan, if any, by calculating the 
amount by which the risk-adjusted benchmark amount exceeds the risk-
adjusted bid amount. This provision would be implemented in proposed 
Sec.  422.264(d).
    Under section 1854(b)(4)(A)(iii) of the Act, for regional MA plans, 
the Congress provided us the flexibility to determine the basis for the 
risk-adjustment factors to be applied to regional benchmarks and bids. 
These could include average risk factors calculated on a regional or 
other geographic area or on a plan-specific basis.

[[Page 46899]]

    Under section 1854(4)(B) of the Act, we would apply an average 
risk-adjustment factor (region-wide or some other applicable risk-
adjustment factor) to determine the risk-adjusted bid and regional 
benchmark amounts for each regional plan offered.
    Section 1854(b)(4)(C) of the Act addresses how to determine the 
amount of savings for each regional plan, if any, by calculating the 
amount by which the risk-adjusted benchmark amount exceeds the risk-
adjusted bid amount.
    The foregoing provisions would be implemented in Sec.  422.264(d) 
and (e).
8. Beneficiary Rebates (Sec.  422.266)
    Beneficiary rebate rule. Section 1854 (b)(1)(C) of the Act states 
that an MA plan with savings (because the basic A/B bid is less than 
the benchmark) must provide to the enrollee a monthly rebate equal to 
75 percent of the savings amount for that plan for the year. The 
remaining 25 percent of the savings would be retained by the Medicare 
Trust Funds. If the plan basic A/B bid is equal to or greater than the 
benchmark, the plan has no savings and, thus, no rebate.
    Proposed Sec.  422.266(b) would provide, as set forth in section 
1854(b)(1)(C)(ii) of the Act, that the beneficiary rebate could be 
provided in the following forms: Some part or all of the rebate can be 
credited toward the provision of supplemental health care benefits 
(including additional health benefits not covered under original 
Medicare, a reduction in cost sharing for Parts A, B, and D benefits, 
and/or a reduction in the premium for the mandatory supplemental 
benefits); or credited toward the prescription drug premium or Part B 
premium.
    Proposed 422.266(b)(1) provides that all rebate dollars must be 
applied to a mandatory supplemental benefit. We interpret the provision 
at section 1854(b)(1)(C)(i) of the Act that an MA plan must provide to 
enrollees a rebate equal to 75 percent of savings to mean that rebate 
dollars must be provided to all enrollees in a plan. Therefore, rebate 
dollars could not be used to fund optional supplemental benefits 
because this would not guarantee that the plan is providing every 
enrollee with the rebate dollars.
    Although rebate dollars can only be used to fund a mandatory 
supplemental benefit, a mandatory supplemental benefit may also be 
funded by beneficiary premium dollars. That is, a plan with a rebate 
may fund a mandatory supplemental benefit with rebate dollars only or 
with a mixture of rebate and premium dollars.
    The MA plan would be required to inform us about the form and 
amount of the rebate and/or the actuarial value of the supplemental 
health care benefits. Adjustments to the structure of the benefit 
package would occur during the process of negotiating and approving 
bids detailed in proposed Sec.  422.256.
    If an MA organization elects to provide a rebate in the form of a 
reduction in the beneficiary Part B premium for beneficiaries in a 
particular plan, we would work with the Commissioner of Social Security 
to provide the necessary information to the Commissioner to apply a 
credit (as provided for under section 1840 of the Act) to reduce the 
amount of the Part B premium to be charged under section 1839 of the 
Act for each enrollee in that MA plan.
    Under the previous M+C program, we permitted M+C organizations to 
offer new plans mid-year and to offer mid-year benefit enhancements to 
existing benefit packages. However, in order to maintain the integrity 
of the bidding process, we believe that it is no longer appropriate to 
allow MA organizations to enter the program with a new plan or to offer 
mid-year enhancements to an existing plan. Allowing an MA organization 
to offer a new plan after the June bidding cycle would not comply with 
section 1854(a)(1)(A) of the Act, which requires MA organizations to 
submit a bid for any plan it intends to offer in its service area (or 
segment of service area for local plans). Any mid-year benefit 
enhancements would be de facto adjustments to benefit packages for 
which bids were submitted earlier in the year based on their 
organization estimated revenue requirements. In essence, allowing mid-
year benefit enhancements by an organization for a plan for which it 
submitted a bid in the previous June could render the bid meaningless.
9. Incorrect Collection of Premiums and Cost-Sharing for All Years 
(Sec.  422.270)
    This section, which is identical to the previous language in the 
current MA regulations in subpart G at Sec.  422.309, sets out 
procedures for situations in which an MA organization collects more 
than the amount the plan is allowed to charge its enrollees. The MA 
organization is required to refund the over-collections, and if the 
amounts incorrectly collected were premiums or included premiums, the 
MA organization may refund the enrollees through an adjustment to 
future premiums for all MA plan enrollees or a combination of a premium 
adjustment and a lump sum payment. An MA organization that collects 
amounts in excess of those permitted is subject to intermediate 
sanctions and civil money penalties under subpart O.

Subpart G--Payments to Medicare Advantage Organizations

(If you choose to comment on issues in this section, please include the 
caption ``Subpart G--Payments to Medicare Advantage Organizations'' at 
the beginning of your comments.)

    As discussed above in connection with subpart F, we have proposed 
to revise subparts F and G in their entirety, and to reverse the order 
of the subjects addressed in these subparts. The current subpart F 
deals with payment rules while the current subpart G contains 
provisions relating to MA organizations' submission of benefit 
information and premium rules. Proposed subpart F addressed the 
provisions for MA organizations to submit bids for contract years after 
2005, as well as provisions governing beneficiary premiums. In proposed 
subpart G, we would implement new MMA provisions governing payments to 
MA organizations.
    The proposed regulations address how MA organizations continue to 
be paid on a monthly basis, but now based on the new methodology of 
plan bids established by the MMA. The proposed rules specifically 
provide that the specific amount of the payment for MA organizations 
(except MSA plans) depends upon the plan bid-to-benchmark comparison. 
The rules provide for an exception that payments for ESRD enrollees may 
be made outside of the MMA bidding methodology, but will be based on 
the new MMA capitation rates.
    Further, the proposed text sets forth the calculations for the 
annual capitation rates established by the MMA and details the 
adjustments that will be made to capitation rates, benchmarks, bids, 
and MA organization payments. The regulations in this subpart describe 
the risk adjustment methodology and data requirements that must be met 
in order to properly adjust payment and benchmark amounts for the 
health status of enrollees, and then include the new date for 
publication of annual capitation rates, regional benchmarks, and 
payment methodology changes. Finally, they set forth a variety of 
special rules, including payments for enrollees electing hospice, and 
rates for payments to Federally qualified health centers (FQHCs).
1. Basis and Scope (Sec.  422.300)
    Proposed Sec.  422.300 sets forth the basis and scope for the 
revised subpart G, stating that it is based on sections 1853,

[[Page 46900]]

1854, and 1858 of the Act. It also indicates that the regulations in 
this subpart set forth the requirements for making payments to Medicare 
Advantage (MA) organizations offering local and regional MA plans, 
including calculation of MA capitation rates and benchmarks, conditions 
under which payment is based on plan bids, adjustments to capitation 
rates (including risk adjustment), and other payment rules. Since we 
are only able to share risk with regional MA organizations, see subpart 
J, Sec.  422.458 for a description of risk corridors to be used by 
regional MA organizations in 2006 and 2007 only.
2. Monthly Payments (Sec.  422.304)
    Under the current MA program, as set forth at section 
1853(a)(1)(A)(i) of the Act, an MA organization is paid a fixed 
statutorily determined administrative amount each month, regardless of 
its actual revenue needs of providing services to the Medicare 
population enrolled in its plan(s). The MMA replaces this methodology 
beginning in 2006. We provide in proposed Sec.  422.304(a) that, with 
the exception of payments to MSA plans and payments for ESRD enrollees 
in all other plans (discussed below), we would make advance monthly 
payments to an MA organization for each enrollee for coverage of 
original fee-for-service benefits in the plan payment area for a month, 
using the new bidding methodology described here and in the proposed 
subpart G regulations text.
    The amount of our payment for an MA plan (except an MSA plan) 
depends on the relationship of the plan basic A/B bid to the benchmark 
amount. Section 422.304(a) describes two payment tracks. If the plan's 
risk-adjusted basic A/B bid is less than the risk-adjusted benchmark, 
the plan's average per capita monthly savings equals 100 percent of 
that difference, and the beneficiary is entitled to a rebate of 75 
percent of this plan savings amount. The other 25 percent of savings 
remains in the Trust Funds (except for regional MA amounts used for the 
regional plan stabilization fund). We pay plans that have beneficiary 
rebates the amount of their aggregate bid (adjusted both for risk using 
the appropriate enrollee risk factor determined under our risk 
adjustment model and for intra-area payments variations) and the amount 
of the rebate (less any reduction in the Part B premium.
    If the risk-adjusted plan basic A/B bid is equal to or greater than 
the risk-adjusted benchmark, the plan has no savings and thus no 
rebate, and we pay plans without rebates the benchmark for the 
geographic service area. This amount is adjusted for risk using the 
appropriate enrollee risk factor, for intra-area payment variations, 
and for the effects of risk adjustment on the enrollee basic premium. 
We apply a further adjustment to all plan payment amounts for 
variations among local payment rates
    Under section 1853(a)(1)(D) of the Act, which would be implemented 
in proposed Sec.  422.304(b), MA plans offering qualified prescription 
drug coverage also receive payments for the direct and reinsurance 
subsidy payments for basic prescription drug coverage and reimbursement 
for premium and cost sharing reductions for low-income individuals, 
described at sections 1860D-14 and 1860D-15 of the Act.

Special rules for enrollees with end-stage renal disease

    Proposed Sec.  422.304(c)(1)(i) would implement section 
1853(a)(1)(H) of the Act, which instructs us to continue using the ESRD 
methodology we applied before the enactment of the MMA, specifically to 
establish special rates that are actuarially equivalent to rates in 
effect before the enactment of the MMA. We believe the MMA provided us 
with flexibility for determining ESRD payments because the cost and 
utilization patterns for ESRD beneficiaries are distinct from aged and 
disabled beneficiaries. We propose to continue paying MA organizations 
for their ESRD MA enrollees based on the State ESRD capitation rates. 
We would use the State ESRD rates calculated under the MMA rate setting 
methodology set forth in proposed Sec.  422.306. We would continue to 
risk adjust the State payment rates, as provided at Sec.  422.308(c). 
We also would continue to reduce payments for ESRD enrollees for the 
ESRD network fee, as provided in Sec.  422.208(c)(4), as set forth at 
section 1881(b)(7) of the Act.
    However, the mandate to pay using pre-MMA payment rates raises a 
payment issue regarding ESRD enrollees. Under the previous M+C program, 
an M+C plan could offer as an additional benefit the reduction of some 
or all of the standard Part B premium. CMS reduced the monthly payment 
to the M+C organization, and 80 percent of this reduction was applied 
to reduce the enrollees' Part B premiums. Twenty percent of this 
payment reduction was savings to the M+C program. This 80-20 split, 
which was in effect before the MMA, applied to all M+C plan enrollees, 
including those with ESRD. It is analogous to the MMA requirement that 
25 percent of the difference between basic A/B bid and benchmark be 
returned to the government as savings.
    Therefore, one option is for CMS to pay the risk-adjusted State 
rate per enrollee, which would be analogous to paying the benchmark to 
all plans, even those with basic A/B bids below the benchmark. Since 
the concept of splitting a payment reduction into government savings 
and plan benefit existed prior to the MMA, 75 percent of any reduction 
in CMS's payments for a plan would be applied to the Part B premium for 
plan enrollees.
    Another option would be to consider the use of the State capitation 
rates in calculation of plan benchmarks as sufficient implementation of 
section 1853(a)(1)(H) of the Act. Accordingly, ESRD enrollees would be 
fully incorporated into the bid process, and payments for all enrollees 
would be either the risk adjusted aggregate bid plus rebate and other 
relevant adjustments discussed below or the risk adjusted benchmark. 
(Both bid and benchmark amounts would reflect the plan's relative 
weights of ESRD enrollees costs versus aged/disabled enrollee costs.) 
See the discussion in the Subpart F preamble on when to incorporate 
ESRD enrollees into the bid amount. We invite comments on these and 
other feasible payment approaches.
    Special rules for payments to MSA plans. Section 422.304(c)(2) 
would implement section 1853(a)(1)(B)(iii) of the Act, which contains 
the same rules for MSA plans that existed under the previous M+C 
program. The only MMA change in payment provisions is that MSA plans 
become local MA plans, and we would make payments to MA organizations 
for MSA enrollees based on the non-drug benchmark amount (instead of 
county rates), less \1/12\ of the annual lump sum amount (if any) we 
deposit to the enrollee's MA MSA, as determined under Sec.  422.314(c). 
This payment amount is adjusted for enrollee risk, as set forth at 
Sec.  422.308(c).
    Our goal is to maximize the diversity of plans available in the MA 
program, and to this end we welcome any comments that would help us 
improve our payment methodology for MSA plans.
    RFB plans. Section 422.304(c)(3) on special rules for religious and 
fraternal benefit (RFB) society plan enrollees is unchanged from the 
current MA regulation, now in subpart F at Sec.  422.250(a)(2)(iii), 
allowing us to make payment adjustment reflecting the actuarial 
characteristics and utilization patterns of enrollees.
    Payment areas. Proposed Sec.  422.304(d) would implement section 
1853(d) of the

[[Page 46901]]

Act, which changes the definition of payment area to account for the 
new MA regional plan program. Under the previous M+C program, a payment 
area was defined as a county or equivalent area defined by the 
Secretary (with the exception of ESRD enrollees, for whom the payment 
area was a State). The MMA establishes two general types of payment 
areas: (1) For MA local plans, the payment area is an MA local area 
(defined as a county or equivalent specified by CMS); and (2) for MA 
regional plans, the payment area is an MA region. The payment area for 
ESRD enrollees continues to be a State.
    Section 422.304(e) implements section 1853(d)(4) of the Act, which 
permits a State's chief executive to request that we use alternative 
payment areas. This provision retains the same language as the previous 
M+C provision, with the exception that the statute specifies this 
option applies only to local MA plans. No State has availed itself of 
this option since its enactment in 1998. (Note that the terminology 
used in the statute to refer to statistical areas is inconsistent with 
new definitions and designations of metropolitan areas published by the 
Office of Management and Budget in June of 2003. The terms 
``consolidated metropolitan statistical area'' and ``primary MSA'' are 
no longer used. There are now metropolitan statistical areas and 
metropolitan divisions of such areas, a change which is reflected in 
the text of the proposed rule.)
3. Annual MA Capitation Rates (Sec.  422.306)
    For years before 2004, payments to MA organizations were based on 
the highest of three amounts: (1) A ``blended rate'' based on a blend 
of national and local data on Medicare's costs for providing services 
to beneficiaries not enrolled in an MA plan, (2) a ``floor amount,'' 
based on an amount specified in statute, subject to an update factor, 
and (3) an amount representing the previous year's rate updated by a 
minimum percentage increase. The MMA replaces the ``highest of three 
rates'' methodology in several phases. For 2004, the MMA specified a 
transitional methodology, where the county and State rates were the 
``highest of four rates'': the floor amount rate, blend rate, minimum 
percentage increase rate (which was redefined to be the higher of 102 
percent of the previous year's rate or the previous year's rate 
increased by annual MA growth percentage), and the 100 percent of fee-
for-service (FFS) costs rate introduced by the MMA. For the next phase, 
the MMA specified that beginning with 2005, annual capitation rates 
will be minimum increase rates except for years when we rebase the FFS 
rate; in rebasing years, the rate is the higher of the minimum increase 
rate and the FFS rate. The MMA requires us to rebase the FFS rates no 
less than every 3 years; that is, at least every 3 years a ``higher of 
two rates'' methodology is in effect.
    Hence, proposed Sec.  422.306(a) would implement the revised 
version of section 1853(c)(1)(C) of the Act, which defines the minimum 
percentage increase rate. As noted above, the minimum percentage 
increase rate is modified to be the greater of 102 percent of the prior 
year's rate or the prior year's rate increased by the national per 
capita MA growth percentage.
    The MMA also provides that no less than every 3 years, we must 
assign 100 percent of local per capita FFS costs as the county rate in 
those counties where this amount is higher than the minimum percentage 
increase rate. The new FFS rate is defined as the adjusted average per 
capita cost (AAPCC) for the MA local area, as determined under section 
1876(a)(4) of the Act, based on 100 percent of FFS costs for 
individuals who are not enrolled in an MA plan for the year, with the 
following adjustments: (1) Standardized for the county risk profile 
relative to the nationally average beneficiary; (2) adjusted to exclude 
costs of direct graduate medical education; and (3) adjusted to include 
our estimate of costs for VA and DOD military facility services to 
Medicare-eligible beneficiaries.
    We must recalculate the AAPCC rate no less than once every 3 years. 
The statute gives us the authority to determine how often to ``rebase'' 
the rate book within this 3-year window. We intend to announce our 
intention annually in the 45-Day Advance Notice regarding whether we 
will rebase the rate book for the upcoming year.
4. Adjustments to Capitation Rates, Benchmarks, Bids, and Payments 
(Sec.  422.308)
    The annual capitation rates described above will be adjusted under 
provisions set forth in proposed Sec.  422.308.
    Language in proposed Sec.  422.308(a) remains the same as that 
currently in subpart F of the current regulations governing MA 
payments. Under section 1853(c)(1)(C) of the Act, the MMA makes only 
one change to how we must apply the national growth percentage each 
year to increase the minimum percentage increase rate. As we provide in 
proposed Sec.  422.308(b), no adjustment can be made for changes in 
prior years' estimates of the national growth percentage for years 
before 2004.
    Risk adjustment. Proposed Sec.  422.308(c) would implement section 
1853(a)(1)(C) of the Act, which requires us to adjust the payment 
amount for an MA plan to take into account the health status of the 
plan's enrollees. In order to ensure that MA organizations are paid 
appropriately for their plan enrollees (less or more healthy), we would 
apply these adjustment factors to all types of plans (with the 
exception of MA RFB plans, discussed at Sec.  422.304(c)(3)). In 2006, 
25 percent of our payment to MA organizations for aged and disabled 
enrollees will be based on current demographic factors, and 75 percent 
based on the CMS-HCC risk adjustment model. In 2007 and succeeding 
years, 100 percent of payment will be risk-adjusted. Note that for ESRD 
MA enrollees, payments to MA organizations are 100 percent risk 
adjusted under the CMS-HCC ESRD risk adjustment model, effective 
January 1, 2005. Also, for PACE organizations, the transition blends 
are one year behind that for MA organizations. Therefore, PACE 
organizations will receive 100 percent risk adjusted payments in 2008 
and succeeding years.
    The demographic adjustment factors for aged and disabled enrollees 
are age, sex, institutional status, Medicaid status, and working aged 
status. The demographic adjustment factors for ESRD enrollees are age 
and sex factors. Under the CMS-Hierarchical Condition Category (HCC) 
risk adjustment payment methodology, there are CMS-HCC models for three 
different populations: community-based, long-term institutionalized, 
and ESRD beneficiaries. Currently, the CMS-HCC factors in these models 
include age, sex, original reason for entitlement, Medicaid status, and 
disease factors. A plan-level working aged adjustment is applied to the 
risk-adjusted portion of the payment. The statute continues to provide 
us the authority to add to, modify, or substitute for risk adjustment 
factors if the changes will improve the determination of actuarial 
equivalence. Additional factors would enable us to pay more accurately 
for different types of beneficiaries, that is, the healthier and less 
healthy MA enrollees.
    Adjustment for intra-area variations. Proposed Sec.  422.308(d)(1) 
would implement section 1853(a)(1)(F)(i) of the Act, which requires us 
to adjust payments for local and regional MA plans to account for 
variations in ``local payment rates'' within each region the plan is 
serving.
    Proposed Sec.  422.308(d)(2) would implement section 
1853(a)(1)(F)(ii) of the Act, which requires us to adjust payments for 
a local MA plan serving

[[Page 46902]]

more than one county to account for variations in ``local payment 
rates'' within the plan's service area.
    This adjustment relating to risk adjustment recognizes that costs 
in some portions of a plan's service area could be higher than those in 
lower-cost areas covered by the plan. Plans serving both low-cost and 
high-cost areas will have bids and benchmarks reflecting costs averaged 
across these areas, since these are weighted by a plan's projected 
enrollment. Those plans whose actual enrollment reflects a greater 
proportion of residents in higher-cost areas than was projected for 
enrollment when calculating the plan bid may see payments coming in 
below cost projections.
    Although the statutory language referring to adjustments for intra-
area variations is similar for regional plans (section 1853(a)(1)(F)(i) 
of the Act) and local plans (section 1853(a)(1)(F)(ii) of the Act), we 
are interpreting the phrase ``variation in local payment rates'' to 
mean that there could be different reasons for the variation in payment 
rates in regional versus local plans. For example, regional MA plans 
could have significant variation in their payment areas because they 
are required to cover at least one State, thereby being compelled to 
include urban and rural areas in one region. These areas could have 
significantly different provider practice and beneficiary utilization 
patterns, wage indices, and other factors that affect the cost of 
providing services to plan enrollees.
    Therefore, we may apply different methodologies to regional and 
local plan payments to adjust for rate variations within a plan's 
service area. Also, we are assuming the statutory language would allow 
approaches other than adjusting back to county capitation rates.
    We are reviewing options for this adjustment other than making 
adjustments based on county rates. One option would be to apply an 
index based on local fee-for-service rates compared to the national 
fee-for-service average. Another possibility is an index that reflects 
input price differences, such as some indicator of local wage rates to 
a national average. We may apply separate adjustments to regional and 
local plans.
    In deciding how to proceed, we will review Medpac's upcoming study 
on MA payments, required by the MMA, which will include an analysis of 
the bases for variation in costs among different areas, including 
differences in input prices, utilization, and practice patterns. We 
also invite public comments on the best approach to this adjustment.
    Adjustment relating to risk adjustment. Proposed Sec.  422.308(e) 
would implement section 1853(a)(1)(G) of the Act, which requires us to 
adjust payments to plans with basic A/B bids above their benchmarks to 
ensure that plans are not advantaged or disadvantaged by the method of 
paying based on bid-to-benchmark comparisons. Under the bidding method, 
the beneficiary basic premium is the difference between unadjusted 
(``1.0 beneficiary'') bid and benchmark, yet the payment is the risk 
adjusted benchmark. If the MA organization received this premium and 
its risk adjusted payment from CMS, the combined payments would not 
match its revenue needs since the basic premium is not risk adjusted. 
Therefore, the impact that risk adjustment would have had on the basic 
premium will be incorporated into our payment to the organization. 
Without this adjustment, a plan with a higher-than-average risk score 
would receive a total payment (beneficiary premium plus Government 
contribution) that was less than the plan's bid, which represents the 
plan's estimated revenue requirements (in addition to member cost 
sharing). Conversely, a plan with a lower-than-average risk score would 
receive a total payment that exceeded its bid.
    Proposed Sec.  422.308(e)(1) specifies that for each regional plan, 
payments are adjusted so the sum of the monthly payment and any basic 
beneficiary premium equals the bid adjusted for enrollee risk factors 
and the adjustment for intra-area variations in payments in proposed 
Sec.  422.308(d)(1). Note that the formula as stated at section 
1853(a)(1)(G)(ii) of the Act also references the adjustment discussed 
in the previous paragraph--for intra-regional variations in local 
payment rates.
    Proposed Sec.  422.308(e)(2) specifies that for each local plan, 
payments are adjusted so the sum of the monthly payment and any basic 
beneficiary premium equals the bid adjusted for enrollee risk factors. 
We note that, in contrast to the language for regional plans at section 
1853(a)(1)(G)(ii) of the Act, the formula for local plans does not 
include a reference to the intra-area variation described in proposed 
Sec.  422.308(d)(1). We believe this is an unintended omission for 
local plans, since section 1853(a)(1)(F) of the Act mandates this 
adjustment for both regional and local plans serving more than one 
county.
    This adjustment must be applied after risk adjusting the payment 
for the individual MA enrollee's health status and after taking into 
account adjustments for intra-area variation in local payment rates 
under Sec.  422.304(d).
    Adjustment of payment to reflect the number of enrollees. Proposed 
Sec.  422.308(f) would implement section 1853(a)(2)(A) of the Act, 
which is unchanged by MMA. We therefore are proposing to retain the 
existing implementing regulatory language currently found in Subpart F. 
This provision requires us to make retroactive payment adjustments to 
account for any difference between the actual enrollees and the 
enrollees upon which we based advanced monthly payment.
    Adjustment for national coverage determination (NCD) services and 
legislative changes in benefits. Section 1853(c)(7) of the Act requires 
that when a national coverage determination (NCD) or legislative change 
in benefits is established and we project this will result in a 
significant increase in costs, we must appropriately adjust payments to 
reflect these new significant costs. In the final rule titled 
``Modifications to Managed Care Rules,'' published August 22, 2003 at 
68 FR 50840, we amended the MA regulations to refine the definition of 
``significant'' cost and interpret appropriate adjustment of payments 
to include a new ``NCD adjustment factor'' effective for CY 2004 that 
was to be added to the county rates in those counties receiving a 2 
percent minimum update rate.
    Since all capitation rates under the MMA now automatically build in 
the annual national MA growth percentage, there is no longer a need to 
implement the NCD adjustment factor. Therefore, we are proposing to 
reverse the regulatory change established by the August 22, 2003 final 
rule, to eliminate this adjustment factor. Proposed Sec.  422.308(g) 
reflects this change. See the preamble discussion for Sec.  422.109 for 
additional information on this issue.
    Section 1858(c) of the Act provides for temporary risk corridors 
for adjusting payments to regional plans, and proposed Sec.  422.308(h) 
specifies data submission requirements to implement risk corridor 
payments. At the end of contract year 2006 and/or 2007, and before a 
date we specify, MA organizations offering regional plans must submit 
sufficient information for us to calculate risk corridor amounts (see 
the discussion of regional plan risk corridors in proposed Sec.  
422.458 below).
    This information includes actual allowable costs for the relevant 
contract year and the portion of allowable costs that are attributable 
to administrative expenses incurred in providing these

[[Page 46903]]

benefits. In addition, the MA organization would be required to provide 
the total cost for providing rebatable integrated benefits, as well as 
the portion of rebatable integrated benefits costs that are 
attributable to administrative expenses.
5. Risk Adjustment Data (Sec.  422.310)
    Proposed Sec.  422.310 reflects changes we made in the methodology 
for risk adjusting MA payments, under which we moved from the 
collection of extensive encounter data to collecting targeted risk-
adjustment data. The risk-adjustment data that are referenced in this 
section are data that are used in the application of the current risk-
adjustment model. Originally enacted in the BBA, section 1853(a)(3)(B) 
of the Act provides us with the authority to collect traditional 
Medicare data in a standard format, but allows MA organizations to 
submit data in alternative formats. This data collection authority is 
retained in the MMA. In addition, under this same authority, we believe 
that we may also collect data regarding other enrollee characteristics 
such as functional limitations if the data are used in the risk 
adjustment model.
    The language in Sec.  422.310 is similar to that used in subpart F 
of the current MA regulations at Sec.  422.257. The following 
summarizes the highlights of those provisions. Under our data 
collection authority, Sec.  422.310 specifies that each MA organization 
must submit to us all data necessary (as stipulated under this section) 
to characterize the context and purpose of each service provided to a 
Medicare enrollee by a provider, supplier, physician, or other 
practitioner. The BBA gave us the authority to collect data regarding 
inpatient hospital services and other services as we deemed necessary. 
The BIPA affirmed the collection of ambulatory data. Under section 
1853(a)(1)(C) of the Act, beginning for payments in calendar year 2006, 
we will use these data to determine the risk adjustment factors to be 
applied to the basic A/B bid and the benchmark amounts upon which the 
payments and monthly savings for an organization are based. We may also 
use the data for other purposes, such as quality improvement studies 
and program integrity functions.
    We have implemented a streamlined process for MA organizations to 
submit risk-adjustment data. MA organizations may submit risk-
adjustment data that conform to the requirements for equivalent fee-
for-service data. Alternatively, organizations may submit data 
according to an abbreviated format as specified by us. The purpose of 
the abbreviated format is to reduce the data submission burden on MA 
organizations.
    In addition, our current practice is to collect a data, a sample of 
medical records, for conducting validation studies of the risk 
adjustment data CMS receives. MA organizations will still be required 
to submit a sample of medical records in a manner specified by CMS to 
support the validation studies. We do not use medical records data for 
any other purpose.
    The risk adjustment data must be submitted according to the 
timeframes specified by CMS. A reconciliation process will be allowed 
to account for late data submissions. Data that we receive after the 
final deadline for a payment year will not be accepted for purposes of 
the reconciliation.
6. Announcement of Annual Capitation Rates, Regional Benchmarks, and 
Methodology Changes (Sec.  422.312)
    Proposed Sec.  422.312 would implement section 1853(b) of the Act, 
which was revised by MMA to change the date for CMS' announcement of 
annual capitation rates to no later than the first Monday in April of 
each year. In addition, we must announce before the beginning of each 
annual, coordinated election period the non-drug benchmark amounts for 
each MA region and MA regional plan for which a bid is submitted. We 
must announce regional benchmarks after the plan bids are submitted in 
June, since per the new section 1858(f)(5) of the Act, the regional 
benchmark calculation includes a plan bid component based on regional 
plans that bid in June and also participated in the MA program in the 
previous year.
    The deadline for our release of the Advance Notice of 
Methodological Changes was similarly changed by MMA to no later than 45 
days before the first Monday in April.
7. Special Rules for Beneficiaries Enrolled in MA MSA Plans (Sec.  
422.314)
    Proposed Sec.  422.314 would implement section 1853(e)(2) and (3) 
of the Act, which sets forth special rules for how we should make 
payments to enrollees' medical savings accounts. The MMA did not amend 
the payment provisions in section 1853(e) of the Act, so these 
provisions are similar to the provisions at Sec.  422.262 in subpart F 
of the current MA regulations.
    In general, we deposit into the individual's MA MSA account at the 
beginning of a calendar year a lump sum equal to the annual difference 
between the monthly MSA premium (analogous to a plan bid) and the 
monthly benchmark amount. The premium filed by the organization 
offering the MA MSA plan is uniform for all enrollees enrolled in the 
MA MSA plan. This results in a uniform amount being deposited in 
enrollees' MSAs in a given service area, since the uniform premium 
amount will be subtracted from the uniform benchmark amount for every 
enrollee in the plan service area.
    While monthly premiums are uniform within a plan, the advance 
monthly payments we make to an MA organization for each enrollee in the 
plan are risk adjusted under Sec.  422.308(c), as discussed in 
connection with proposed Sec.  422.304(c)(2) on special rules for 
payments for MSA enrollees. As noted above, we invite comments on 
improved methods for making payments to MSA plans.
8. Special Payment Rule for Federally Qualified Health Centers (Sec.  
422.316)
    MMA added a new section 1853(a)(4) of the Act, which provides for a 
new payment methodology for FQHCs that contract with MA organizations. 
Under this methodology, the FQHCs will receive a ``wrap-around 
payment'' from us representing the difference (if any) between what 
they are paid by an MA organization, including beneficiary cost 
sharing, and 100 percent of their ``reasonable costs'' of providing 
care to patients served at the centers who are enrolled in an MA plan.
    Section 1857(e)(3) of the Act, also added by MMA, requires that MA 
organizations that contract with FQHCs pay the FQHCs an amount that is 
not less than the level and amount of payment they would make for the 
services if furnished by an entity providing similar services that was 
not an FQHC. This is designed to avoid an agreement between an MA 
organization and an FQHC to pay and agree to an artificially low rate, 
with the knowledge that the FQHC would receive supplemental payments 
from us resulting in a total of 100 percent cost reimbursement.
9. Special Rules for Coverage That Begins or Ends During an Inpatient 
Hospital Stay (Sec.  422.318)
    The MMA amended section 1853(g) of the Act, which puts forth 
special payment rules for situations where a beneficiary's coverage by 
an MA plan begins or ends while the beneficiary is a hospital 
inpatient. The MMA amendment expands the list of hospital facilities 
covered under this provision to include those that have come under a 
Medicare prospective payment system since the Balanced Budget Act. In 
addition to ``subsection (d)'' hospitals,

[[Page 46904]]

three other types of facilities are now included: rehabilitation 
hospitals, distinct part rehabilitation units, and long-term care 
hospitals. These changes are reflected in proposed Sec.  422.318, which 
otherwise retains existing language from subpart F applicable only to 
subsection (d) hospitals.
10. Special Rules for Hospice Care (Sec.  422.320)
    Proposed Sec.  422.320 revises the existing MA special rules for 
hospice care to reflect the new bidding and payment methodology in 
sections 1853 and 1854 of the Act, and the creation of a prescription 
drug benefit under Part D. Previously, no payment was made to an MA 
organization on behalf of a Medicare enrollee who had elected hospice 
care under Sec.  418.24 except for the portion of the payment 
applicable to the additional benefits. Now the MA organization will be 
paid the portion of the payment attributable to the beneficiary rebate 
for the MA plan plus the amount of the subsidies related to basic 
prescription drug coverage for plans that offer prescription drug 
coverage.
    Note that for PACE organizations, PACE enrollees must elect either 
their PACE plan or the hospice benefit as their provider of Medicare 
services. An enrollee who elects to enroll in hospice is thereby 
disenrolled from the PACE benefit. However, PACE plans do provide a 
service similar to hospice known as ``end-of-life-care.''
11. Source of Payment and Effect of MA Plan Election on Payment (Sec.  
422.322)
    With the exception of a new provision addressing payments for Part 
D benefits, proposed Sec.  422.322 is identical to Sec.  422.268 in 
subpart F of the current MA regulations at Sec.  422.268. Section 
422.322(a)(2) has been added to reflect the creation of subsidized 
prescription drug coverage under Part D. As required by section 1853(f) 
of the Act, subsidy payments to MA-PD organizations for basic drug 
coverage under this title are included in the payments described in 
Sec.  422.322(a)(2) (which are made from the Medicare Prescription Drug 
Account in the Federal Supplementary Medical Insurance Trust Fund).
12. Payments to MA Organizations for Graduate Medical Education Costs 
(Sec.  422.324)
    These provisions are identical to the current MA provisions in 
subpart F at Sec.  422.270, and require us to make payments to MA 
organizations for Direct Graduate Medical Education costs that MA 
organizations incur in dealings with non-hospital provider settings, 
under specified conditions.

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

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart I--Organization Compliance with State Law and 
Preemption by Federal Law'' at the beginning of your comments.)
    The MMA amended section 1856(b)(3) of the Act relating to Federal 
preemption of State law. Before this amendment, section 1856(b)(3) of 
the Act provided for two types of preemption, general and specific. 
Section 1856(b)(3)(A) of the Act provided that State laws that were 
inconsistent with M+C rules were preempted. Section 1856(b)(3)(B) of 
the Act provided that, even if a State law did not conflict with an M+C 
standard, it was preempted if it addressed one of four specified areas 
(benefit requirements, including cost-sharing rules; requirements 
relating to the inclusion or treatment of providers; requirements 
concerning coverage determinations and related appeals and grievance 
processes; and requirements relating to marketing materials and 
summaries and schedules of benefits concerning M+C plans).
    Thus, the presumption was that a State law was not preempted if it 
did not conflict with an M+C requirement, and did not fall into one of 
the four specified categories. MMA reversed this presumption, providing 
that State laws are presumed to be preempted unless they fall into two 
specified categories. Specifically, section 1856(b)(3) of the Act now 
states that ``the standards established under this section shall 
supersede any State law or regulation (other than State licensing laws 
or State laws relating to plan solvency).'' The reason for such broad 
preemption authority is that the Congress intended that the MA program, 
as a Federal program, operate under Federal rules. There has been some 
confusion in recent court cases with respect to the preemption of State 
laws. Therefore, this broad preemption would apply prospectively, that 
is, it would not affect previous and ongoing litigation related to 
preemption of State laws. Furthermore, we believe the Congress 
broadened this authority to facilitate the operation of regional PPOs, 
which may have service areas that cross State lines.
    We note that the Conference Report makes it clear that the Congress 
intended to broaden the scope of preemption through this change. Thus, 
we believe that the exception for State laws that relate to ``State 
licensing'' must be limited to State requirements for becoming State 
licensed, and would not extend to any requirement that the State might 
impose on licensed health plans that--absent Federal preemption--must 
be met as a condition for keeping a State license.
    If a State requirement could be considered to relate to State 
licensing simply because the State could revoke a health plan's license 
for a failure to meet the requirement, this would mean that States 
could impose virtually any requirement they wished to impose without 
the requirement being preempted. This would extend even to State laws 
that were specifically preempted under the pre-MMA version of section 
1856(b)(3) of the Act, such as benefit requirements, rules regarding 
the inclusion and treatment of providers, and rules regarding coverage 
decisions and related grievances and appeals. Because we believe that 
it is clear that the Congress intended to broaden the scope of Federal 
preemption, not to narrow it, we also believe that the exception for 
laws relating to State licensing must be limited to requirements for 
becoming State licensed (such as filing articles of incorporation with 
the appropriate State agency, or satisfying State governance 
requirements), and not extended to rules that apply to State licensed 
health plans.
    Upon review of this regulation, we do not believe that the language 
in existing paragraph (c) of Sec.  422.402 is necessary. Section 
422.402(c) currently states that nothing in this section may be 
construed to affect or modify ``any other law or regulation that 
imposes or preempts a specific State authority.'' We do not believe 
that this paragraph has any real effect, since the real issue would be 
whether the preemption in section 1856(b)(3) of the Act is controlling 
on the matter. This analysis would be unaffected by language in a 
regulation implementing section 1856(b)(3) of the Act. We therefore are 
proposing to remove the current Sec.  422.402(c).
    We therefore propose to revise Sec.  422.402 to clearly state that 
the MA standards supersede State law and regulation with the exception 
of licensing laws and laws relating to plan solvency. Accordingly, with 
the exceptions of State licensing laws or State laws related to plan 
solvency, State laws do not apply to MA plans offered by MA 
organizations.
    MMA also amended section 1854(g) of the Act, which prohibits States 
from imposing taxes on premiums paid to MA Organizations by us. Section 
232 of

[[Page 46905]]

the MMA amended section 1854(g) of the Act to provide that States are 
also expressly prohibited from imposing a premium tax, or similar type 
of tax, on premiums paid by beneficiaries or third parties on behalf of 
beneficiaries to MA organizations. We have incorporated this 
clarification at Sec.  422.404(a).

Subpart J--Special Rules for MA Regional Plans

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart J--Special Rules for MA Regional Plans'' at the 
beginning of your comments.)
    We are proposing a new Subpart J which would implement the 
provisions in the new section 1858 of the Act. Section 1858 of the Act 
sets forth the special rules that apply to new regional MA plans. We 
note that the regional MA plans would have many similarities with local 
MA plans. For example, both regional and local MA plans would be 
subject to the same process of bidding against a ``benchmark'' amount. 
In the case of regional plans, however, the benchmark amount would be 
region-wide, based on a weighted average of the benchmark amounts for 
the payment areas in the region in question, and (unlike local plans) 
including plan bids as a determinant of the benchmark. This methodology 
is set forth in sections 1853 and 1854 of the Act, and would be 
implemented in subparts F and G of part 422, as discussed in the 
discussions of those two subparts above.
    The Congress has also provided for a number of unique financial and 
administrative incentives designed to support the introduction of 
regional PPO plans. These incentives would assist plans as they enter 
this new line of business and learn the market dynamics of serving 
beneficiaries across larger geographic areas. We have placed many of 
the special regional PPO requirements and incentives in subpart J.
    However, there are certain provisions relevant to regional MA plans 
that are not located in subpart J that we also note below to assist the 
reader in identifying the unique features of MA regional plans, which 
are required to be structured as preferred provider organizations 
(PPOs).
    To encourage the formation of regional plans, a two-year moratorium 
is established on new local preferred provider plans from January 1, 
2006 until December 31, 2007. PPOs that exist prior to this date 
(including demonstration PPOs) can continue and expand enrollment in 
their existing service area (See Sec.  422.451). Regional MA PPO plans 
also would have certain mandatory features to encourage beneficiary 
enrollment. For example, MA regional plans, to the extent they use 
deductibles, would have a single deductible for all original Medicare 
fee-for-service benefits (Part A and Part B) received through providers 
in the plan's provider network (``preferred providers'').
    In addition, beneficiaries in regional plans would have an annual 
catastrophic cap on their out-of-pocket spending for both in-network 
and out-of-network costs of Part A and B benefits. (See section 1858(b) 
of the Act which is implemented in Sec.  422.112 of subpart C of this 
proposed rule.) Note that both the single deductible and the annual cap 
on out-of-pocket spending would be part of a cost sharing structure in 
which the aggregate actuarial value of the cost sharing across the 
enrolled population of the plan is equivalent to the aggregate level of 
Medicare FFS cost sharing. That is, on average enrollees in MA regional 
plans are paying the same level of cost sharing as they would if the 
plan's cost sharing structure were the same as Medicare's, but 
individual enrollees with higher than average health care costs may be 
paying less in actual cost sharing than they would under Medicare's 
cost sharing structure because of the catastrophic cap.
    A network adequacy fund would also be implemented that would assist 
regional plans in forming adequate networks, particularly in rural 
areas. This fund would provide enhanced payments for certain essential 
hospitals that accept enrollees in regional PPOs. (See section 1858(h) 
of the Act, which is implemented in Sec.  422.112 of subpart C of this 
proposed rule.)
    As discussed in more detail below, the new subpart J would contain 
regulations that address: (1) The provision in section 1858(a) of the 
Act for the establishment of MA regions, including the principal 
factors we must balance in selecting these regions; (2) the 
availability of a temporary waiver of the State licensure requirement; 
(3) the MA regional plan risk corridors; and (4) the availability of a 
stabilization fund for MA regional PPO plans.
1. Establishment of the MA regions (Sec.  422.455)
    In this proposed section we would implement section 1858(a) of the 
Act, which requires us to establish the regions that would constitute 
the service areas for the regional MA plans. Under the statutory 
requirements of section 1858(a) of the Act, MA regional plans would be 
required to serve an entire region. We would announce the MA regions by 
January 1, 2005. The regional plan would become operational on January 
1, 2006. The statute also specifies that the MA regions should maximize 
the availability of regional plans for Medicare beneficiaries, 
particularly those residing in rural areas, regardless of their health 
status. The statute also requires that we establish between 10 and 50 
regions within the 50 States and the District of Columbia. To assist us 
in developing the MA regions, we must conduct a market survey and 
analysis, including an examination of current insurance markets. We may 
periodically review MA regions and, based on the review, revise the 
regions. An MA regional plan may be offered in more than one region, 
including all regions.
    In the MMA Conference Agreement, the Congress has also provided 
some general suggestions for us in establishing the MA regions. To the 
extent possible, the conferees suggest that each region include at 
least one State, that the regions not divide States across regions, and 
include multi-State Metropolitan Statistical Areas in a single region.
    At this point, we would propose also to consider the following 
factors in selecting the MA regions:
     The number of eligible Medicare beneficiaries residing in 
each region.
     The regional payment rates would be reasonably similar.
     To the extent possible each region would contain a balance 
between rural and urban areas.
     Consideration would also be given to the inclusion of 
health care market areas within regions.
     To the extent possible, PPO regions should be the same as 
drug regions.
    Due to the requirement to conduct a market analysis, we are not 
proposing specific regions at this time. We are interested in receiving 
comments regarding how we can best address the considerations discussed 
above in selecting the regions in order to meet our goal of maximizing 
beneficiary access to MA regional PPO plans. We are also interested in 
comments related to other factors we should consider in defining 
regions. Our objective is to obtain broad public comment on the 
supporting information and analysis that will be used by us to inform 
our selection of the regions. We held a public meeting in Chicago, 
Illinois on July 21, 2004 to discuss options for PPO and PDP regions. 
The meeting materials containing preliminary regional PPO and PDP 
options may be found at http://www.cms.hhs.gov/medicarereform/mmaregions.

[[Page 46906]]

2. Risk Sharing (Sec.  422.458)
    Section 1858(c) of the Act provides that Medicare will share risk 
with MA regional plans for contract years 2006 and 2007 if plan costs 
are above or below a specific risk corridor. Risk sharing is intended 
to encourage plans to enter the regional market and to provide 
assistance to these plans during the start-up phase of their business.
    Section 1858(c) of the Act defines which plan costs (``allowable 
costs'') and plan revenues (``target amount'') we may consider to 
determine risk-sharing payments to regional MA plans. Under section 
1858(c)(1)(D) of the Act, a subset of supplemental benefits called 
``rebatable integrated benefits'' must be included on both the cost and 
revenue sides of risk corridor calculations. Proposed Sec.  422.258(a) 
defines rebatable integrated benefits as those non-drug supplemental 
benefits that are funded through beneficiary rebates (described at 
Sec.  422.266(b)(1)) and that we determine are: (1) Additional health 
benefits not covered under the original Medicare program option; and 
(2) benefits that require expenditures by the plan. We discuss in more 
detail below what supplemental benefits may be considered rebatable 
integrated benefits.
    Proposed Sec.  422.258(a) would implement section 1858(c)(1)(C) of 
the Act by defining allowable costs for an MA regional plan as the 
total amount of costs incurred in a year in providing benefits covered 
under the original Medicare fee-for-service program option for all 
enrollees and in providing rebatable integrated benefits as defined in 
this paragraph), reduced by the portion of those costs attributable to 
administrative expenses incurred in providing these benefits.
    Proposed Sec.  422.258(a) would implement section 1858(c)(2)(D) of 
the Act by defining the target amount for an MA regional plan as the 
total amount of payments made to the organization for enrollees in the 
plan for the year (which means payments attributable to the bid for 
benefits under the original Medicare fee-for-service program option as 
defined in Sec.  422.100(c)(1), the total of the MA monthly basic 
beneficiary premium collectable for those enrollees for the year, plus 
the total amount of rebatable integrated benefits), reduced by the 
amount of administrative expenses assumed in the portion of the bid 
attributable to benefits under original Medicare fee-for-service 
program option and rebatable integrated benefits.
    Proposed Sec.  422.258(b)(2) implements section 1858(c)(1)(B) of 
the Act by requiring that MA regional plans notify us, before that date 
in the succeeding year as we specify, of each plan's total allowable 
costs. As mentioned above, rebatable integrated benefits are the only 
supplemental benefits that can be included in a plan's allowable costs. 
We would have discretion to evaluate whether certain rebatable benefits 
should be included in allowable costs for risk corridor calculations. 
(Note that rebatable integrated benefits must be offered as mandatory 
supplemental benefits because, as discussed in subpart F, rebate 
dollars cannot be used to fund optional supplemental benefits.)
    Rebatable integrated benefits. Premium reductions funded by rebates 
(that is, reductions in the Part B, Part D, and/or supplemental 
premiums) would not be considered rebatable integrated benefits because 
premium reductions do not involve expenditures by the plan; they 
represent foregone revenue. However, any rebate-funded additional 
health benefits not covered by original Medicare would be considered 
rebatable integrated benefits.
    We invite comment on the issue of whether reductions in cost 
sharing funded by rebate dollars should be considered rebatable 
integrated benefits. One approach is to consider cost sharing 
reductions as an expense to the plan and thus not foregone revenue, 
that is, if the enrollee pays a smaller share of provider costs, the 
plan pays a larger share. The second approach is to define a 
supplemental benefit as a rebatable integrated benefit only if it would 
not have an impact on the utilization of basic benefits. This approach 
is parallel with the Part D prescription drug benefit, where CMS does 
not share risk beyond the basic benefit. Under this second approach, 
then, we would not share risk on non-Medicare benefits with utilization 
effects on Parts A, B, and D benefits. That is, cost sharing reductions 
would not be rebatable integrated benefits.
    If we take the first approach, an issue arises. For mandatory 
supplemental benefits that are non-Medicare benefits and require 
expenditures by the plan yet are only partly funded by rebate dollars, 
we would consider whether and how to include only the rebate-funded 
portion of the costs and revenues in the risk corridor calculation, as 
a rebatable integrated benefit. We invite comment on this issue, 
including any concerns about the burden of identifying the relevant 
portions of costs and payments.
    If we take the second approach, a different issue arises. Since the 
pricing of supplemental benefits includes the utilization effect of 
cost-sharing reductions on benefits under the original Medicare fee-
for-service program, the target amount would not reflect these costs. 
However, unless an adjustment is made, allowable costs would include 
the utilization effect of the supplemental benefits. Therefore, we 
would require that allowable costs be reduced by an estimate of the 
utilization effect of supplemental benefits. We would assume that any 
such adjustment would be consistent with the assumptions used in 
originally pricing the supplemental benefits.
    We invite comment on approaches for determining what supplemental 
benefits are considered to be rebatable integrated benefits.

Payment Adjustments

    Proposed Sec.  422.358(c) would implement section 1858(c)(2) of the 
Act relating to payment adjustments. There would be no payment 
adjustment if the allowable costs for the plan are at least 97 percent, 
but do not exceed 103 percent, of the target amount for the plan.
    If allowable costs for the plan are more than 103 percent but not 
greater than 108 percent of the target amount for the plan for the 
year, we would increase the total monthly payments made to the 
organization by 50 percent of the difference between allowable costs 
and 103 percent of the target amount. If allowable costs for the plan 
are greater than 108 percent of the target amount, we would increase 
the total monthly payments to the plan by an amount equal to the sum 
of: (1) 2.5 percent of the target amount; and (2) 80 percent of the 
difference between allowable costs and 108 percent of the target.
    Conversely, if the allowable costs for the plan are less than 97 
percent, but greater than or equal to 92 percent of the target amount, 
we would reduce the total monthly payment to the plan by 50 percent of 
the difference between 97 percent of the target amount and the 
allowable cost.
    If the allowable costs for the plan are below 92 percent of the 
target, we would reduce the total monthly payments to the organization 
by the sum of: (1) 2.5 percent of the target amount; and (2) 80 percent 
of the difference between 92 percent of the target and the allowable 
costs.

Disclosure of Information

    Proposed Sec.  422.358(d) would implement section 1858(c)(3) of the 
Act relating to disclosure of information. Each contracting MA plan 
must provide the information that we deem necessary to carry out this 
section. While we have the right to inspect and audit all books and 
records pertaining to information

[[Page 46907]]

provided under this section, the information disclosed or obtained for 
purposes of this section may only be used to carry out this section.
3. State Licensing Waiver
    Proposed Sec.  422.458(e) would implement section 1858(d), of the 
Act setting forth organizational and financial requirements, including 
the provision for a temporary waiver of the MA State licensing 
requirement. In order to facilitate the offering of MA plans in regions 
encompassing multiple States, we may temporarily waive State license 
requirements.
    MA organizations ordinarily must be State licensed to bear risk in 
each State within a region. However, if an MA organization offering an 
MA regional plan is organized and licensed under State law in at least 
one State in the region but has not met the licensing requirements in 
other States in the region, under section 1858(d) of the Act, we may 
temporarily waive the State licensing requirement in the other States. 
We would waive the State licensing requirement to allow sufficient time 
for the processing of the application by the State or States where an 
application is pending.
    This waiver can only be granted if the organization demonstrates to 
us that it has filed the necessary application to meet the other 
State's requirements. If an organization is granted a waiver, the 
organization would select the licensing rules of one State in the 
region and apply those rules to the States in which the organization 
did not have State licensure until the organization is licensed in all 
the States. In the event that the waivered MA organization's State 
licensure application is denied, we would extend the waiver until the 
end of the year or a shorter period as we determine is appropriate to 
provide for a transition for the enrollees in the plan or plans offered 
by the organization.
4. Stabilization Fund
    Proposed Sec.  422.438(f) would implement the provisions in section 
1858(e) of the Act providing for the creation of a Regional 
Stabilization Fund. During the past several years, a number of 
organizations have withdrawn from the Medicare+Choice program due to 
changing market conditions and an inflexible statutory payment formula. 
Plans' costs were rising at a faster rate than Medicare payment rates. 
We had no discretion under the law to respond quickly to these market 
changes, resulting in plan withdrawals that have affected millions of 
beneficiaries.
    The Congress has authorized an MA Regional Plan Stabilization Fund 
in order to promote greater stability in the regional program and 
provide us with a tool to respond to market fluctuations. The Fund can 
be used to provide incentives for plan entry in each region and plan 
retention in MA regions with below average MA penetration. Initially, 
$10 billion would be available for expenditures from the Fund beginning 
on January 1, 2007, and these start-up funds would only be available 
until December 31, 2013.
    Funds would be drawn from the Federal Hospital Insurance Trust Fund 
and the Federal Supplementary Medical Insurance Trust Fund in a 
proportion that reflects the relative weight that the benefits under 
Parts A and B represent of the actuarial value of the total benefit. 
Additional funds would be available in an amount equal to 12.5 percent 
of average per capita monthly savings from regional plans that bid 
below the benchmark. The additional funds would be deposited on a 
monthly basis into a special account in the Treasury. The Fund is 
designed to allow us to respond to market conditions on a temporary 
basis. If the Fund is used for either plan entry or retention for 2 
consecutive years, we would report to the Congress on the underlying 
market conditions in the regions. These reports would give the Congress 
time to respond to the market conditions through changes to the regions 
or the underlying payment system.
    The funds would be available in advance of appropriations to MA 
regional plans in accordance with specified funding limitations. The 
total amount projected to be expended from the Fund in any year may not 
exceed the amount available in the Fund as of the first day of that 
year. If the use of the stabilization fund results in increased 
expenditures under Title XVIII, the increased expenditures would be 
counted as expenditures from the Fund. We would only obligate funds if 
the Chief Actuary of CMS, and the appropriate budget officer, certify 
that there are sufficient funds at the beginning of the year to cover 
all the obligations for that year. We would take steps to ensure that 
sufficient funds are available to make the payments for the entire 
year, which may include computing lower payment amounts or limitations 
on enrollment in MA regional plans receiving the payments. Expenditures 
from the Fund would first be made from amounts made available from the 
initial funding.
5. Plan Entry Funding
    Plan entry incentives are available for either a one-year national 
bonus payment or multi-year adjustments in regional payments; however, 
in no case can there be a regional payment adjustment if there is a 
national bonus for that year. In order to encourage the offering of 
plans in all regions, the national bonus payment would be available to 
an MA organization that elects to offer a regional plan in each MA 
region in a year, but only if a national plan is not offered in the 
previous year.
    Funding is only available for a single year, but more than one 
organization can receive the incentive in the same year. The national 
bonus payment would: (1) Be available to an organization only if it 
offers plans in every MA region; (2) be available to all MA regional 
plans of the organization regardless of whether any other MA regional 
plan is offered in any region; and (3) be equal to 3 percent of the 
benchmark amount otherwise applicable for each MA regional plan offered 
by the organization, subject to funding limitations. If a national 
bonus payment is not made, a regional payment adjustment can be made. 
The regional payment adjustment is an increased payment for an MA 
regional plan offered in an MA region that did not have any MA regional 
plans offered in the previous year.
    We would determine the adjusted payment amount based solely on 
plans' bids in the region, and the adjusted payment amount would be 
available to all plans offered in the region. The amount can be based 
on the mean, mode, median or other measure of the bids and may vary 
from region to region, but the payment amount would not be determined 
through a method that limits the number of plans or bids in the region. 
We expect that such an adjustment would represent a fixed percentage of 
the relevant measure of plan bids in the region. Such a payment 
adjustment would be treated as a change to the benchmark amount in that 
region for purposes of calculating individual plan payments and 
beneficiary rebates.
6. Regional Payment Adjustment
    Subject to funding limitations, we would determine the period of 
time that funds are available for regional payment changes to encourage 
plan entry. If funding would be provided for a second consecutive year 
under this provision, we would submit a report to the Congress 
describing the underlying market dynamics in the region and 
recommending changes to the payment

[[Page 46908]]

methodology. Multi-year funding may be made available to all MA plans 
offered in a region. If this multi-year increased amount is made 
available to MA plans in a region, funding would not be available for 
plan retention in the region in the following year. Regional payment 
adjustments would not be taken into account when computing the 
underlying benchmark for the subsequent year.
7. Plan Retention Funding
    In addition to using the Fund to encourage plans to enter regions 
that might otherwise go unserved, we may also use the fund to encourage 
plans to remain in regions if market conditions are causing plan 
withdrawals. Incentives for plan retention could take the form of an 
increased payment to plans in regions that meet specific requirements. 
The requirements are: (1) One or more plans inform us that they are 
going to discontinue service in the region in the succeeding year; (2) 
we determine that if those plans were not offered, fewer than two MA 
organizations will be offering MA regional plans in the region in the 
year; (3) for the previous year, we determine that the proportion of 
beneficiaries enrolled in MA regional plans in the region is less than 
the national average of MA regional plan enrollment; (4) funds have not 
already been awarded for 2 consecutive years.
    Any additional payment amount would be treated as if it were an 
addition to the benchmark amount otherwise applicable, but would not be 
taken into account in the computation of the benchmark for any 
subsequent year.
    If plans receive funding under this part for a second year, we 
would submit a report to the Congress that describes the underlying 
market dynamics in the region and includes recommendations concerning 
changes in the payment methodology otherwise provided for MA regional 
plans.
    The incentive for plan retention payment would be an amount 
determined by the Secretary that does not exceed the greater of: (1) 3 
percent of the benchmark amount applicable in the region; or (2) an 
amount that, when added to the benchmark, results in a ratio such that 
the additional amount plus the benchmark for the region divided by the 
adjusted average per capita cost (AAPCC) equals the weighted average of 
benchmarks for all regions divided by the AAPCC.

Subpart K--Application Procedures and Contracts for Medicare Advantage 
Organizations

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart K--Application Procedures and Contracts for 
Medicare Advantage Organizations'' at the beginning of your comments.)
    Proposed changes to the existing MA provisions concerning 
applications and contracts are discussed below. We realize, however, 
that the programmatic changes contained in this proposed rule may 
require additional changes to existing MA contracting provisions that 
could reduce the administrative burden and increase the effectiveness 
of these provisions. We are studying this issue, requesting comments 
and will implement the appropriate changes in the final rule.
    We are proposing that the application requirements and evaluation 
and determination procedures from subpart A (Sec.  422.6 and Sec.  
422.8) be incorporated into subpart K. As a result, the subpart K title 
would be changed to ``Application Procedures and Contracts for Medicare 
Advantage Organizations.'' The application requirements from subpart A 
would be added as Sec.  422.501 and the evaluation and determination 
procedures would be included as Sec.  422.502, with mostly nomenclature 
changes. The one exception is a change to the compliance program 
requirements at Sec.  422.502(b)(3)(iv)(G). We believe that mandatory 
reporting of potential fraud by government contractors is critical, 
especially in light of the corporate fraud scandals that occurred over 
the past several years. It is also in keeping with the Sarbanes-Oxley 
Act of 2002, under which the Securities and Exchange Commission adopted 
new regulations designed to make corporate compliance and disclosure 
requirements stronger and more effective. In short, we believe that the 
self-reporting requirements included in this rule are keeping with the 
change in the legal, regulatory, and business climates since the 
compliance program requirements were first implemented. We propose 
adding the following text to Sec.  422.502(b)(3)(iv)(G): If the MA 
organization discovers from any source evidence of misconduct related 
to payment or delivery of health benefits under the contract, it must 
conduct a timely, reasonable inquiry into that misconduct. If, after 
reasonable inquiry, the MA organization has determined that the 
misconduct may violate criminal, civil, or administrative law, the MA 
organization must report the existence of the misconduct to the 
appropriate Government authority within a reasonable period, but not 
more than 60 days after the determination that a violation may have 
occurred. If the potential violation relates to Federal criminal law, 
the civil False Claims Act, Federal Anti-Kickback provisions, the civil 
monetary penalties authorities (primarily under section 1128A and 1857 
of the Social Security Act), or related statutes enforced by the HHS 
Office of Inspector General, the report must be made to that Office. 
The MA organization must conduct appropriate corrective actions (for 
example, repayment of overpayments, disciplinary actions against 
responsible employees, etc.) in response to the potential violation 
referenced above.
    The existing Sec.  422.501 would be redesignated as Sec.  422.503, 
the existing Sec.  422.502 would be redesignated as Sec.  422.504, and 
the existing Sec.  422.504 would be redesignated as Sec.  422.505.
    We also propose to add a new paragraph (1) To what would now be 
Sec.  422.503(b), clarifying that the completion of an application as 
described in Sec.  422.501 is a condition necessary to contract as an 
MA organization. The current paragraphs (1) through (5) would be re-
designated as paragraphs (2) through (6).
    We propose technical corrections to what would now be Sec.  
422.503(b)(4)(ii) and Sec.  422.503(b)(4)(vi)(F). In Sec.  
422.503(b)(4)(ii), we replaced the word ``plan'' with the word 
``implement.'' In Sec.  422.503(b)(4)(vi)(F), we replaced the word 
``provisions'' with the word ``procedures.'' We also propose technical 
corrections to newly redesignated Sec.  422.503(b)(6) and Sec.  
422.503(b)(6)(i). The current language states ``The M+C organization's 
contract must not have been terminated by CMS under Sec.  422.510 
within the past 2 years unless * * *.'' Section 1857(c)(4) of the Act, 
however, which is implemented in this provision, applies to plans that 
elect to non-renew their contracts, not plans terminated by us. We 
accordingly propose to revise the newly redesignated Sec.  
422.503(b)(6) introductory text to read ``The MA organization's 
contract must not have been non-renewed under Sec.  422.506 within the 
past 2 years unless * * *.'' Although newly redesignated Sec.  
422.503(b)(6)(i) already refers to the MA organization initiating the 
end of the contract, it uses the term ``terminated'' and we propose to 
change it to ``non-renew,'' which is the term used in the regulations. 
We would revise Sec.  422.503(b)(6)(i) accordingly.
    We are proposing several technical corrections to Sec.  422.504 
(formerly Sec.  422.502). The first corrections would be to proposed 
Sec.  422.504(e)(4). We

[[Page 46909]]

propose to clarify that paragraph (e)(4) introductory text provides 
that ``HHS, the Comptroller General, or their designee's right to 
inspect, evaluate, and audit extends through 6 years from the end of 
the final contract period * * *'' The previous language was not clear 
that this provision applied after CMS and the MA organization severs 
their relationship. In paragraph (e)(4)(ii) we propose to add 
``allegation of'' to clarify our use of the word fraud. In paragraph 
(e)(4)(iii) we propose to add ``or similar fault'' after the word 
``fraud.'' We propose to remove Sec.  422.504(f)(2)(vii) since MSAs are 
no longer demonstrations. Section 422.504(f)(2)(viii) would be 
redesignated as Sec.  422.504(f)(2)(vii). We propose to revise Sec.  
422.504(i)(3)(ii) by removing Sec.  422.504(i)(3)(ii)(A) ``The M+C 
organization oversees and is accountable to CMS for any functions or 
responsibilities that are described in these standards.'' It is not 
necessary for this provision to be included in contracts between MA 
organizations and providers. The MA organization is already held 
accountable for adhering to and otherwise fully complying with all 
terms and conditions of its contract with us through what would now be 
Sec.  422.504(i)(1), ``MA organization relationship with related 
entities, contractors, and subcontractors.'' In addition, there is no 
statutory requirement that this provision appear in contracts between 
MA organizations and downstream providers.
    Based on the bidding process and establishment of benchmarks, we 
propose to no longer allow an MA organization's contract to be 
effective at any time other than the first of the contract year.
    We are proposing to move the notification date for nonrenewal of 
contracts in Sec.  422.506(a)(2)(i) and Sec.  422.506(a)(3) to the 
first Monday in June to match the bid submission date. We are also 
proposing to move the notification date for nonrenewal of contracts in 
Sec.  422.506(a)(2)(i) and Sec.  422.506(a)(3) to the first Monday in 
June to match the bid submission date. We are also proposing a 
clarifying change to Sec.  422.506(a)(2)(ii) by adding ``prior to 
issuance'' after the existing ``CMS approval.''
    We are proposing to revise Sec.  422.510(a)(4) by adding the phrase 
``There is credible evidence'' in front of the existing language about 
an MA organization that committed or participated in fraudulent or 
abusive activities. We have also added the word ``false'' in front of 
``fraudulent.''
    We are proposing technical and clarifying changes to Sec.  422.520, 
``Prompt payment by MA organization.'' The phrase ``from non-contracted 
providers'' would be added to Sec.  422.520(a)(3) to clarify that this 
provision was intended to refer only to claims from non-contracted 
providers (versus contracted providers). Claims by contracted providers 
are addressed in Sec.  422.520(b). We also propose to add a new Sec.  
422.520(b)(2), providing that the MA organization is obligated to pay 
contracted providers according to the terms of the contract between the 
MA organization and the provider. Finally, we are proposing that a new 
paragraph (d) be added clarifying that a CMS decision not to conduct a 
hearing under paragraph (c) of Sec.  422.520 does not disturb any 
potential remedy under State law for the non-contracted provider, or 
affect the provider's rights to pursue payment as provided under 
section 1866(a)(1)(O) of the Act. Section 1866(a)(1)(o) of the Act 
establishes that Medicare participating providers who do not have a 
contract establishing payment amounts agree to accept, as payment in 
full for covered services provided to MA beneficiaries, an amount equal 
to the amount the provider would have collected under fee-for-service 
Medicare if the beneficiary was not enrolled in an MA plan.
    Finally, we are proposing a new Sec.  422.527, addressing payments 
to Federally Qualified Health Centers (FQHC). MMA added a new section 
1857(e)(3)(A) of the Act, which applies only to FQHCs and requires that 
the contract between CMS and MA organizations include a provision that 
any written arrangements between an MA organization and an FQHC include 
a level of payment that would be equal to what the MA organization 
would pay other providers for similar services. Under such a contract, 
the FQHC must accept this payment as payment in full, except for cost 
sharing allowed by the contract, and the supplemental Federal payment 
now provided for in section 1833(a)(3)(B) of the Act, which was added 
by MMA. We believe that the statute did not intend to require MA 
organizations to contract with FQHCs. The intent of the statute was to 
establish payment terms between MA organizations and FQHCs. If an MA 
organization chooses to contract with an FQHC, the payment terms would 
be as described in Sec.  422.527.

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

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart L--Effect of Change of Ownership or Leasing of 
Facilities During Term of Contract'' at the beginning of your 
comments.)
    We are studying the modification of existing change of ownership 
provisions in order to reduce the administrative burden of these 
requirements and to increase the effectiveness of these provisions. We 
request comments regarding how these provisions can be modified to 
accomplish these objectives. In particular, we seek comments regarding: 
the situations which constitute a change of ownership, how these 
provisions should be applied to large companies with multiple business 
units, the notification requirements related to a change of ownership, 
the novation agreement provisions, and the provision related to the 
leasing of facilities.

Subpart M--Grievances, Organization Determinations, and Appeals

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart M--Grievances, Organization Determinations, and 
Appeals'' at the beginning of your comments.)
1. Introduction
    The MMA did not make any revisions to the statutory requirements in 
sections 1852(f) and (g) of the Act regarding MA grievances and 
appeals. Thus, this proposed rule generally proposes to maintain the 
existing regulatory requirements in subpart M of part 422, which 
implement these statutory requirements. However, in addition to making 
the minor changes needed to conform these subpart regulations to MMA 
terminology and other provisions, we also have undertaken a review of 
the existing MA grievance and appeal requirements to identify needed 
refinements. Also, as discussed at the end of this section of the 
preamble, we are proposing changes to the part 417 regulations, which 
apply only to section 1876 cost contractors and section 1833 health 
care pre-payment plans (HCPPs), that would establish uniform grievance 
and appeal procedures for all Medicare managed care plans.
2. Background
    Section 1852(f) of the Act provides that an MA organization must 
provide meaningful procedures for hearing and resolving grievances 
between the organization (including any other entity or individual 
through which the organization provides health care services) and 
enrollees in its MA plans.
    Section 1852(g) of the Act addresses the procedural requirements 
concerning coverage (``organization'')

[[Page 46910]]

determinations and reconsiderations and other appeals for MA 
organizations. As discussed in detail below, only disputes concerning 
``organization determinations'' are subject to the reconsideration and 
other appeal requirements under section 1852(g) of the Act. In general, 
organization determinations involve whether an enrollee is entitled to 
receive a health service or the amount the enrollee is expected to pay 
for that service. All other disputes are subject to the grievance 
requirements under section 1852(f) of the Act. For purposes of this 
regulation, a reconsideration consists of a review of an adverse 
organization determination (a decision that is unfavorable to the MA 
enrollee, in whole or in part) by either the MA organization itself or 
an independent review entity. We use the term ``appeal'' to denote any 
of the procedures that deal with the review of organization 
determinations, including reconsiderations, hearings before 
administrative law judges (ALJs), reviews by the Medicare Appeals 
Council (MAC) and judicial review. For the grievance, organization 
determination, and appeal requirements, an MA organization must 
establish procedures that satisfy these requirements with respect to 
each MA plan that it offers. These requirements generally are the same 
for each type of plan--including coordinated care plans such as HMOs 
and PPOs, non-network MSA plans, and PFFS plans.
    Sections 1833(a)(1)(A) and 1876(a)(5)(B) of the Act reference 
reasonable cost reimbursement contracts for HCPPs and HMO/CMPs. Section 
1876(c)(5) of the Act sets forth the procedures HMO/CMP organizations 
must follow with regard to grievances, organization determinations, and 
appeals. Section 417.840 of our regulations requires HCPPs to apply the 
administrative review procedures set forth for HMO/CMPs. Section 1869 
of the Act provides the right to a hearing and to judicial review for 
any individual dissatisfied with a determination regarding his or her 
Medicare benefits.
3. General Provisions, Grievances, and Organization Determinations 
(Sec.  422.560 through Sec.  422.576)
    MMA amended section 1852(g)(5) of the Act to incorporate the 
provisions of section 1869(b)(1)(E)(iii) of the Act, which was added by 
MMA. This new clause provides for inflation adjustments to the ``amount 
in controversy'' required to pursue a hearing and judicial review. It 
makes these provisions applicable in determining the amount in 
controversy under section 1852(g)(5) of the Act ``in the same manner as 
they apply to the dollar amounts specified in section 
1869(b)(1)(E)(i).'' Although other provisions in section 1869 of the 
Act do not apply to MA appeals, the existing MA regulations incorporate 
regulations implementing section 1869 of the Act in implementing the 
appeals provisions in section 1852(g) of the Act. Specifically, the 
existing MA regulations incorporate 42 CFR part 405, subparts G and H, 
and 20 CFR part 404, subparts J and R. Since we will be implementing 
revisions to section 1869 of the Act in a separate rulemaking creating 
a new subpart I of part 405, we propose to revise the cross-references 
for MA appeals at Sec.  422.560(a)(3), Sec.  422.561, and Sec.  422.562 
accordingly. We note that when revisions are made to the section 1869 
regulations implementing the MMA changes in the way the amount in 
controversy is determined, these revised provisions will apply to MA 
appeals.
    As noted above, section 1852(g) of the Act requires an MA 
organization to establish procedures for hearing and resolving disputes 
between the organization and its Medicare enrollees concerning 
organization determinations.
    In accordance with section 1852(g)(1) of the Act, Sec.  422.566 
begins by specifying that an MA organization must have a procedure for 
making timely organization determinations regarding the benefits an 
enrollee is entitled to receive and the amount, if any, that an 
enrollee must pay for a health service. Section 422.566(b) lists 
actions that are organization determinations, and we are proposing to 
explicitly specify in that section that a reduction of services 
constitutes an organization determination that an enrollee may appeal. 
We fully recognize that reductions of care are a natural outcome of 
medical services, particularly when an enrollee is progressing along an 
expected care continuum. When this issue was raised in past rulemaking 
vehicles, commenters stated that routine notifications in reduction of 
care situations would confuse enrollees, perhaps causing them to 
believe that something was wrong in common situations where the 
discontinuation of services was fully planned and appropriate. We 
agreed to consider this issue in future rulemaking. The approach 
proposed here basically clarifies existing policy, under which 
reductions in service were always appealable issues. Notice 
requirements would apply whenever an enrollee disputes the reduction. 
Under those circumstances, MA organizations would consider the disputed 
discontinuation of service a new request for an organization 
determination under Sec.  422.566. A request for a new organization 
determination allows the enrollee to receive notice, appeal rights, and 
access to the MA appeals system under Sec.  422.570 and Sec.  422.584.

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

    The only substantive change we are proposing in Sec.  422.568 is 
the elimination of the practitioner's notice requirement currently set 
forth in Sec.  422.568(c). This section requires that at each patient 
encounter with an MA enrollee, a practitioner must notify the enrollee 
of his or her right to receive, upon request, a detailed written notice 
from the MA organization regarding any decision to deny services to an 
enrollee. This provision has proven problematic to implement and 
impossible to monitor. Instead of requiring practitioners to provide 
notices to enrollees at each patient encounter, we would propose 
instead to require MA organizations to provide specific information in 
the plan's Evidence of Coverage about enrollees' rights when they are 
denied services in physician office settings.
    We are also proposing to modify Sec.  422.570(d)(2)(ii) and Sec.  
422.572(b) to require that an MA organization must inform an enrollee 
of the right to file an ``expedited'' grievance if the enrollee 
disagrees with the MA organization's decision not to expedite a request 
for an expedited organization determination. This is a right that 
already was established under the grievance provision at Sec.  
422.564(d)(2); thus, we are merely making a conforming change.

Timeframe and notice requirements for expedited organization 
determinations.

    Section 422.572(c) now requires that if an MA organization first 
notifies an enrollee of its expedited determination orally, it must 
mail written confirmation to the enrollee within 3 calendar days of the 
oral notification. The regulations concerning determinations made 
within standard timeframes do not require a written follow-up for 
favorable determinations. We propose in this regulation to revise this 
provision to eliminate the requirement that oral notice be followed up 
with written confirmation in cases of fully favorable determinations. 
Notice would be required only for decisions that are fully or partly 
adverse to the enrollee.

[[Page 46911]]

4. Requests for Reconsiderations (Sec.  422.582)
    The only substantive change we are proposing regarding standard 
reconsiderations pertains to the manner in which a party to an 
organization determination would request an appeal. Proposed Sec.  
422.582(a)(1) would allow a party to request a standard reconsideration 
orally or in writing. We have received several requests to modify our 
policy on the basis that the appeals process would be more convenient 
and accessible for enrollees, and enable MA organizations to provide 
better customer service.
    Currently, Sec.  422.584(e) specifies that when an MA organization 
grants a request for an expedited reconsideration, it must give notice 
in accordance with Sec.  422.590(d). Proposed Sec.  422.584(e) would 
require an MA organization to give notice in accordance with the 
broader provision of Sec.  422.590 since there are notice requirements 
other than those contained in Sec.  422.590(d).
    As we proposed above for expedited organization determinations 
under Sec.  422.570(d)(2)(ii), proposed Sec.  422.590(a) and Sec.  
422.590(d)(2) would require an MA organization to inform an enrollee of 
the right to file an ``expedited'' grievance if the enrollee disagrees 
with the MA organization's decision not to expedite a request for an 
expedited reconsideration. This is a right that already was established 
under the grievance provision at Sec.  422.564(d)(2); thus, we are 
merely making a conforming change.
5. Administrative Law Judge (ALJ) Hearings, Appeals to the Medicare 
Appeals Council, and Judicial Review (Sec.  422.600 through Sec.  
422.612)
    If the independent reviewer's reconsidered determination is not 
fully favorable to the enrollee, any of the parties listed in Sec.  
422.574 have a right to request a hearing before an ALJ, assuming that 
the required minimum amount in controversy is met. (Note that the MA 
organization does not have a right to request a hearing before the 
ALJ.) If the ALJ hearing does not result in a favorable determination, 
any party (including the MA organization) may request that the Appeals 
Council review the ALJ decision. Following the administrative review 
process, any party (including the MA organization) is entitled to 
judicial review of the final determination if the amount remaining in 
controversy meets the required threshold. As mentioned above generally, 
the MMA made revisions to provisions in section 1869 of the Act that 
address the amount in controversy required for ALJ and judicial review. 
Specifically, these changes provide for an inflation adjustment to 
these amounts, based on changes to the Consumer Price Index. MMA also 
amended section 1852(g)(5) of the Act to provide that these revised 
provisions of section 1869 also apply for purposes of MA appeals. These 
changes will be set forth in an upcoming final rule in new subpart I of 
part 405. We propose to revise Sec.  422.600 to cross-reference these 
revised regulations, and make revisions to Sec.  422.612 to reflect the 
fact that the amount in controversy is now subject to change.
    The regulatory provisions at 42 CFR part 405, subparts G and H, and 
20 CFR part 404, subpart J, concerning reopenings of appeals and 
Departmental Appeals Board review also historically have been cross-
referenced in the managed care and M+C appeals regulations. Like other 
provisions of section 1869 of the Act that will be implemented in an 
upcoming final rule in a new subpart I of part 405, we propose to 
modify the cross-references for MA appeals at Sec.  422.608 and Sec.  
422.616(a).
6. Noncoverage of Inpatient Hospital Care--Notice and QIO Review (Sec.  
422.620 and Sec.  422.622)
    Under Sec.  422.620(a), when an MA organization has authorized 
coverage of the inpatient admission of an enrollee, either directly or 
by delegation (or the admission constitutes emergency or urgently 
needed care), the MA organization (or hospital that has been delegated 
the authority to make the discharge decision) must provide a written 
notice of noncoverage when the beneficiary disagrees with the discharge 
decision, or the MA organization (or the hospital that has been 
delegated the authority to make the discharge decision) is not 
discharging the individual but no longer intends to continue coverage 
of the inpatient stay.
    Section 422.620(b) now specifies that an MA organization (or, by 
delegation, the hospital) must obtain the concurrence of the physician 
responsible for the enrollee's in-patient care before issuing a notice 
of noncoverage to an enrollee. However, since publication of our April 
4, 2003 final rule that eliminated routine discharge notices in 
hospitals, an enrollee's right to receive a notice of noncoverage is 
linked to physician concurrence only to the extent that the physician 
must concur with the MA organization's decision to discharge the 
enrollee or change the enrollee's level of care. Under Sec.  
422.620(a), an MA organization must issue a notice of noncoverage when 
an enrollee disagrees with an MA organization's decision to discharge 
the enrollee or discontinue coverage of the inpatient stay. Under Sec.  
422.620(b) of that final rule, we inadvertently failed to include a 
corresponding change that physician concurrence is necessary for 
discharging the enrollee rather than for issuing the notice. Therefore, 
we propose to revise the regulations to clarify that an MA 
organization's obligation to provide a notice of noncoverage when an 
enrollee objects to being discharged is not contingent upon physician 
concurrence.
    We also are proposing to revise Sec.  422.620(c) to require that if 
an MA organization lowers the enrollee's level of care in an inpatient 
hospital setting, for example, from acute to skilled, but the enrollee 
is not discharged from the facility, the MA organization must specify 
the enrollee's new level of care in the notice. This change is 
consistent with Sec.  422.620(a)(1)(ii), which requires the MA 
organization to provide a notice to the enrollee when it is not 
discharging the enrollee, but no longer intends to continue coverage of 
the in-patient stay.
7. Advance Beneficiary Notices in the MA Program
    As Medicare choices have expanded, the relationships among 
providers, enrollees, and managed care organizations have evolved and 
become more complicated, often allowing for greater flexibility and 
choice in making decisions about care. Open access managed care 
arrangements, where enrollees seek services outside their provider 
network, or vary their provider choices through tiered cost-sharing 
arrangements, challenge the constraints of more traditional 
``gatekeeper oriented'' coordinated care models. Increasingly, MA 
organizations, providers, and enrollees have asked for clarification of 
Medicare appeal rules when disputes arise about care provided outside 
the traditional coordinated care model. We recognize that this is a 
complex issue, touching upon many other regulations that come into play 
during an appeal process. Those regulations might include, but are not 
limited to, prompt pay provisions, claims procedures, and post-
stabilization requirements. Frequently, an appeal dispute involves 
whether the enrollee understood that the services in question might not 
be authorized by the MA plan or covered by Medicare.
    In other cases, enrollees may wish to access services from a 
particular network provider, regardless of whether the plan would cover 
the care, leaving

[[Page 46912]]

the provider in an uncertain situation should the plan eventually deny 
approval for the care.
    Nevertheless, to address these types of issues, we are soliciting 
comments on whether to permit or require network and non-network 
providers to furnish a type of advance beneficiary notice (ABN) for use 
when managed care enrollees access non-Medicare covered services.
    We are also requesting public comments about whether managed care 
providers should be permitted or required to furnish an ABN-like 
document to alert MA enrollees to their possible liability for out of 
network services that would otherwise be payable by the MA plan if 
proper referral was obtained. Alternatively, we could require 
unaffiliated non-network providers to seek organization determinations 
from the enrollee's MA organization before providing Medicare covered 
services. Note that this would not include Medicare excluded services, 
but would include services that would be otherwise offered through the 
enrollee's managed care plan.
    We believe that ABN-like notices could serve a role in these 
situations, by clarifying potential liability issues. On the other 
hand, we are cognizant of the possible burden and potential confusion 
associated with such notices. Therefore, rather than propose to require 
any ABNs or other related notices at this time, we believe it is 
preferable to first assess whether commenters believe such an approach 
is warranted. Thus, we welcome comments on these issues, as well as 
alternative recommendations.
8. Appeal Procedures for Cost HMO/CMPs and HCPPs
    As discussed in detail above, the MMA specifies that, with respect 
to appeal and grievance procedures, the same statutory provisions that 
currently apply to the MA program will continue to apply to MA 
organizations in the future. These provisions, which have been in 
effect since 1998, were in turn largely based on the grievance and 
appeal requirements that had applied to managed care organizations that 
contract with us under section 1876 of the Act (as well as to health 
care prepayment plans that are paid under section 1833(a)(1)(A) of the 
Act). For example, the requirements under section 1852(g)(3) of the 
Act, concerning expedited organization determinations and 
reconsiderations essentially incorporated the expedited procedures that 
were issued in our April 30, 1997 final rule with comment (62 FR 
23368). (That final rule established expedited processes for 
organization and reconsidered determinations, and clarified that the 
definition of an organization determination included discontinuations 
of service.)
    However, because the BBA provided for the temporary continuation of 
these so-called ``cost plans,'' we chose not to eliminate or revise the 
part 417 appeals regulations that applied to these plans. Instead, we 
opted to leave these regulations, found in subpart Q of part 417, in 
place until the availability of cost-based contractors expired in 2002, 
as provided by the BBA. Since that time though, the BBRA subsequently 
extended the sunset of the cost plans through 2004, and the policy of 
parallel regulations has been the source of continuing confusion during 
the past 6 years, particularly in the complicated and evolving world of 
appeal policy.
    The regulations implementing the BBA provisions creating the M+C 
program, which were set forth in 1998 under new part 422, would now 
apply, as amended, to MA organizations under this proposed rule. Under 
the MMA, however, the conferees provided in section 234 for a 
potentially indefinite extension of reasonable cost contracts, thus 
eliminating any certainty regarding the previously scheduled sunset of 
these contractors. (Cost HMO and CMPs will be allowed to operate until 
2008, and could operate indefinitely after that date if there are not 
two MA plans of the same type, that is, two local or two regional non-
PFFS plans operating in the cost contract's service area.) Therefore, 
we believe it is appropriate to revisit the issue of whether these 
nonrisk plans should be required to comply with the part 422 grievance 
and appeal requirements.
    Note that on October 25, 2002, we solicited comments on whether 
HCPPs and the remaining cost HMOs/CMPs should follow the MA appeals and 
grievance procedures under subpart M of part 422. This proposal took 
into account that the MA appeals processes provide enhanced enrollee 
protections, such as shorter timeframes for appeals decision making and 
streamlined notice procedures. We received comments both supporting and 
opposing applying the part 422 regulations to cost HMO/CMP 
organizations. Since that time, based both on the comments we received 
and further study of the issue, we have concluded that it would be 
appropriate for organizations offering cost plans to follow the same 
procedures that would apply to MA organizations, as set forth in 
subpart M of this proposed rule. Again, this decision is also informed 
by the MMA's reliance on the existing statute's appeals procedures as 
the basis for the MA program, as well as the indefinite extended 
existence of these plans.
    Therefore, we are proposing under Sec.  417.600(b) that the same 
rights, procedures, and requirements relating to beneficiary appeals 
and grievances set forth in subpart M of part 422 of this chapter also 
apply to organizations offering Medicare cost plans. In proposing this 
change, we have taken into account that a key difference between cost 
plans and M+C plans is that virtually all organizations offering cost 
plans employ a billing option available under Sec.  417.532(c)(1) that 
reduces a cost plan's financial liability for certain Medicare-covered 
services. Under this billing methodology, hospitals and skilled nursing 
facilities (SNFs) that furnish services to cost plan members can obtain 
direct reimbursement from Medicare fiscal intermediaries for these 
services. For services paid for under this methodology, the claims 
appeal procedures available under original Medicare regulations 
(subpart I, part 405) would be the appropriate recourse when a Medicare 
fiscal intermediary denies a claim. However, for other services, 
including any service or payment denial resulting from an 
organizational determination under a cost plan, as defined in Sec.  
417.606, enrollees would appeal through the cost plan's appeal process. 
The plan appeal procedures would also apply in the rare situation when 
a fiscal intermediary approved a claim for hospital or SNF services, 
but the cost plan refused to pay the covered portion of enrollee cost 
sharing associated with the services. As discussed above, this process 
would follow the same rules that apply to other MA organizations, as 
set forth in subpart M of part 422.
    Although the appeals procedures set forth in part 417 and part 422 
are largely similar, it is important to note that there have been some 
recent changes to the part 422 regulations that would apply to cost 
plans for the first time under this proposal. These changes primarily 
involve Sec.  422.620, Sec.  422.624, and Sec.  422.626 of subpart M 
and were set forth in the April 4, 2003 final rule, ``Improvements to 
the Medicare+Choice Appeals and Grievance Procedures,'' also known as 
the Grijalva regulation. (See 68 FR 16652.) The changes set forth in 
that final rule established new notice and fast-track appeal procedures 
for enrollees when an MA organization decides to terminate coverage of 
its provider services. We are expecting to publish a final rule 
establishing parallel notice and appeal provisions for original 
Medicare beneficiaries.

[[Page 46913]]

    The effect of this proposed rule would be to ensure that all 
Medicare beneficiaries enjoy the same notice and appeal rights in cases 
of terminations of Medicare services furnished by hospitals, SNFs, home 
health agencies, and comprehensive outpatient rehabilitation 
facilities. Absent these proposed changes, the new notice and fast-
track review procedures would apply for all MA enrollees, and for all 
original Medicare beneficiaries, but would not apply to members of cost 
plans. This scenario would be confusing and unfair not only for 
beneficiaries, but also for the providers who are responsible for 
distributing the service termination notices. Thus, we believe that 
establishing a level playing field for all Medicare beneficiaries and 
providers is the only appropriate policy.
9. Federal Preemption of Grievances and Appeals
    Under preemption provisions in the BBA that applied to the M+C 
program, State laws or standards that were stricter than Federal M+C 
standards generally were not preempted unless they conflicted with, or 
otherwise precluded compliance with, Federal M+C requirements. However, 
as noted above in the discussion of subpart I, the BBA also provided 
for specific preemption of State standards in three specified areas: 
benefit requirements (rules regarding cost-sharing and rules regarding 
marketing materials describing benefits were later added to this 
category), rules regarding the inclusion or treatment of providers (for 
example, ``any willing provider laws''), and rules regarding coverage, 
along with related appeals and grievance mechanisms. In the M+C 
regulations, we interpreted the last category to preempt only appeals 
and grievance mechanisms that addressed the issue of whether services 
were covered. Thus, general ``grievance'' mechanisms addressing issues 
other than coverage were only preempted to the extent they were 
inconsistent with, and prevented compliance with, M+C requirements.
    As noted in our discussion of subpart I above, section 232(a) of 
the MMA changes the presumption from one in which State laws are not 
preempted unless they conflict with Federal laws or fall into specified 
categories to one in which State standards are presumed preempted 
unless they are licensing or solvency laws. In light of the 
comprehensive nature of the appeals process already established, we do 
not believe that the new preemption standard would have any effect on 
coverage appeals provisions. Because our regulations provide for doing 
so, we would continue to defer to State law on the issue of authorized 
representatives of enrollees in the appeals process. We do not believe 
that the Congress intended for the Secretary to regulate matters such 
as this that he is not equipped to address (for example, spousal 
rights, powers of attorney, or legal guardianship). Often, authorized 
representative matters are non-Federal issues.
    We are concerned, however, that with State grievance requirements 
now preempted, we may need to reexamine our Federal grievance 
requirements. Since 1997, we have engaged in a significant rulemaking 
activity concerning the extent to which the Secretary should regulate 
health plans' grievance procedures. (Issues not related to whether 
services are covered, or how much an enrollee has to pay for services.) 
We solicited comments on this issue in the M+C interim final rule on 
June 26, 1998 (63 FR 35030), as well as the M+C final rule on June 29, 
2000 (65 FR 40169). The preamble to the interim final rule alerted the 
public that we would establish a grievance procedure through proposed 
rulemaking, and sought comments on ways to make it meaningful. Until 
publication of that proposed rule, M+C organizations by default were 
subject only to the general Federal requirement that M+C organizations 
have grievance mechanisms in place, and any State requirements that 
applied to complaints unrelated to coverage determinations.
    On January 24, 2001, we developed a proposed rule that recommended 
establishing more specific grievance provisions (66 FR 7593). In the 
proposed rule, we proposed that M+C organizations would notify 
enrollees of their decisions as expeditiously as the case required, but 
no later than 30 calendar days after receiving a complaint. In 
conjunction with the time frame, we also proposed that the M+C 
organization be permitted to extend the time frame by up to 14 calendar 
days if the enrollee requested the extension, or if the organization 
justified a need for additional information and the delay was in the 
interest of the enrollee. We also proposed that grievances made orally 
would be responded to orally or in writing, unless the enrollee 
specifically requested a written response. If grievances were made in 
writing, then the response would need to be in writing. In addition, we 
proposed that M+C organizations would be required to describe the 
enrollee's right to seek a review by a Quality Improvement Organization 
(QIO) if the grievance involved a quality of care issue. For any 
complaint involving the QIO, the organization would be required to 
cooperate with the QIO in resolving the complaint. We further proposed 
a 72-hour expedited grievance process for complaints about certain 
procedural matters in the appeals process. The proposed grievance 
procedures concluded with the requirement that organizations would have 
a system to track and maintain records on all grievances.
    Taking into account the various comments that we received, we 
published a final rule on April 4, 2003 that only required an expedited 
grievance process for complaints involving appeals, and recordkeeping 
(68 FR 16652). We agreed with several commenters that the regulations 
did not need to be too prescriptive because ``many States have 
processes to address complaints that involve issues other than 
coverage, and State grievance procedures, unlike appeal procedures, are 
not specifically preempted by Federal rules'' (68 FR 16652 and 16661). 
We further reasoned that we should ``allow M+C organizations the 
flexibility needed to maintain current procedures that comply with 
State requirements.'' See id.
    In light of section 232(a) of the MMA, which provides that the 
standards established under the MA program supersede State law or 
regulation with respect to MA plans, we once again solicit comments on 
whether we should adopt the above provisions proposed in January 2001 
that did not make it into the April 2003 final rule. Such provisions 
would include the method for filing and the notification and time 
frames associated with grievances. We also solicit comments on whether 
we should impose, as a Federal MA requirement, that MA organizations 
meet State grievance requirements. Such a requirement would have the 
effect of restoring the status quo before the enactment of the MMA.
    We also have considered how the changes made by section 232(a) of 
the MMA apply, if at all, to State tort or contract law that could 
affect MA organizations. Our previous position under the M+C program 
was that State tort or contract remedies may be available to enrollees 
whose coverage determination disputes go through the Medicare appeals 
process. We continue to believe that generally applicable State tort, 
contract, or consumer protection law would not be preempted under 
section 232(a). First, we believe that section 232(a) was intended to 
preempt State standards governing health plans, not generally 
applicable State laws, such as labor laws, employment law, tax laws, 
etc. that incidentally could have

[[Page 46914]]

applicability to MA organizations. We believe that contract laws and 
tort laws fall in this category, as they do not apply to the 
organization based on its status as a health plan, but instead apply 
generally. Even specific types of tort laws, such as malpractice law, 
apply generally to all medical practitioners, not to health plans 
specifically.
    We also note that tort law, and often contract law, generally are 
developed based on case law precedents established by courts, rather 
than statutes enacted by legislators or regulations promulgated by 
State officials. We believe that the Congress intended to preempt only 
the latter type of State standards.
    Under principles of Federalism, and Executive Order 13132 on 
Federalism, which generally requires us to construe preemption 
narrowly, we believe that an enrollee should still have State remedies 
available in cases in which the legal issue before the court is 
independent of an issue related to the organization's status as a 
health plan or MA organization.
10. Employer Sponsored Benefits and Appeals
    When an employer, by contracting with an MA plan, provides health 
care benefits in addition to those covered under Part C of Title XVIII 
of the Social Security Act to their retirees, such employer may have 
established a group health plan governed by both title I of the 
Employee Retirement Income Security Act of 1974 (ERISA), as amended, 
and State law (to the extent such State law is not preempted by ERISA). 
In addition, when MA plans offer benefits covered under Part C, they 
also would fall under the requirements of part 422 of our proposed 
regulations, with respect to Part C benefits.
    In drafting these rules, we consulted with the Department of Labor 
(DOL), employer groups, and the health plan industry in trying to 
eliminate unnecessary Federal regulation of claims and appeals issues 
that impact matters within the jurisdiction of both DOL and DHHS. Based 
on our experience, we have reason to believe that some Medicare 
eligible individuals may receive integrated health care benefits, that 
is, Part C benefits through an MA plan and supplemental benefits 
through an ERISA-covered plan. For example, an employer-sponsored plan 
may pay the cost-sharing amount for a covered item or treatment offered 
by an MA plan. Clearly, if the enrollee had a dispute about Part C 
coverage, he or she could file an appeal with the MA plan. If the 
enrollee's dispute involved only the amount of cost sharing paid by the 
employer-sponsored plan, he or she would file an appeal in accordance 
with the procedures of the ERISA covered plan. In some cases, however, 
the dispute might involve independent coverage decisions under both 
Part C and the ERISA plan, possibly necessitating parallel appeal 
procedures on the same case. In this regard, we are soliciting comments 
on whether, and to what extent, the application of parallel procedures 
in this context might be a problem for plans, employers, and/or 
eligible individuals. We also are soliciting suggestions for addressing 
problems, if any, resulting from the application of parallel 
procedures.

Subpart O--Intermediate Sanctions

    (If you choose to comment on issues in this section, please include 
the caption ``Subpart O--Intermediate Sanctions'' at the beginning of 
your comments.)
    We are proposing a technical correction to Sec.  422.752(a)(8). 
``Entity'' was inadvertently left out of the regulation text. We are 
proposing that paragraph (a)(8) introductory text would read ``Employs 
or contracts with an individual or entity who is excluded from 
participation in Medicare under section 1128 or 1128A of the Act (or 
with an entity that employs or contracts with such an individual or 
entity) for the provision of any of the following.''

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether OMB should approve an information 
collection, section 3506(c)(2)(A) of the PRA requires that we solicit 
comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    The collection requirements referenced in sections one and two 
below are currently approved under OMB approval number 0938-0753 (CMS-
R-0267, Medicare Plus Choice Program Requirements Referenced in 42 CFR 
422.000 through 422.700), with a current expiration date of October 31, 
2005.
    Section one below outlines the collection requirements referenced 
in this regulation that have not been modified by the proposed 
regulatory changes. Section number two references requirements in this 
regulation that have been technically revised, but do not affect the 
currently approved burden estimates. Table three below references new 
collection requirements.
    It should be noted that all of the collection requirements 
summarized and discussed below are open for public comment and will be 
submitted to OMB for approval.

Section 1--Currently Approved Collection Requirements Not Affected by 
Proposed Regulation

Section 422.54 Continuation of Enrollment for MA Local Plans

    (b) The intent by an enrollee to no longer reside in an area and 
permanently live in another area must be verified by the plan through 
documentation that establishes residency, such as a driver's license, 
voter registration.
    (c)(2) The enrollee must make the choice of continuing enrollment 
in a manner specified by CMS. If no choice is made, the enrollee must 
be disenrolled from the plan.

Section 422.60 Election process

    (b)(1) MA organizations may submit information on enrollment 
capacity of plans.
    (c)(1) The plan election must be completed by the MA eligible 
individual (or the individual who will soon become eligible to elect an 
MA plan) and include authorization for disclosure and exchange of 
necessary information between the U.S. Department of Health and Human 
Services and its designees and the MA organization. Persons who assist 
beneficiaries in completing forms must sign the form, or through other 
approved mechanisms, indicate their relationship to the beneficiary.
    (e)(3) The MA organization must give the beneficiary prompt notice 
of acceptance or denial in a format specified by CMS.
    (e)(4) If the MA plan is enrolled to capacity, it must explain the 
procedures that will be followed when vacancies occur to the potential 
enrollee.
    (e)(5) Upon receipt of the election, or for an individual who was 
accepted for future enrollment from the date a vacancy occurs, the MA 
organization

[[Page 46915]]

transmits, within the timeframes specified by CMS, the information 
necessary for CMS to add the beneficiary to its records as an enrollee 
of the MA organization.
    (f)(3) Upon receipt of the election from the employer, the MA 
organization must submit the enrollment within timeframes specified by 
CMS.

Section 422.66 Coordination of Enrollment and Disenrollment Through MA 
Organizations

    (f)(2) Upon receipt of the election from the employer, the MA 
organization must submit a disenrollment notice to CMS within 
timeframes specified by CMS.

Section 422.506 Nonrenewal of Contract

    (a)(2)(ii) Each Medicare enrollee, at least 90 days before the date 
on which the nonrenewal is effective. This notice must include a 
written description of alternatives available for obtaining Medicare 
services within the service area, including alternative MA plans, 
Medigap options, and original Medicare and must receive CMS approval 
prior to issuance.

Section 422.568 Standard Timeframes and Notice Requirements for 
Organization Determinations

    (a) When a party has made a request for a service, the MA 
organization must notify the enrollee of its determination as 
expeditiously as the enrollee's health condition requires, but no later 
than 14 calendar days after the date the organization receives the 
request for a standard organization determination.
    (c) If an MA organization decides to deny service or payment in 
whole or in part, or if an enrollee disagrees with an MA organization's 
decision to discontinue or reduce the level of care for an ongoing 
course of treatment, the organization must give the enrollee written 
notice of the determination.

Section 422.590 Timeframes and Responsibility for Reconsiderations

    (d)(2) When the MA organization extends the timeframe, it must 
notify the enrollee in writing of the reasons for the delay, and inform 
the enrollee of the right to file an expedited grievance if he or she 
disagrees with the MA organization's decision to grant an extension. 
The MA organization must notify the enrollee of its determination as 
expeditiously as the enrollee's health condition requires but no later 
than upon expiration of the extension.

Section 422.600 Right to a Hearing

    (a) If the amount remaining in controversy after reconsideration 
meets the threshold requirement established annually by the Secretary, 
any party to the reconsideration (except the MA organization) who is 
dissatisfied with the reconsidered determination has a right to a 
hearing before an ALJ.

Section 422.608 Medicare Appeals Council (MAC) Review

    Any party to the hearing, including the MA organization, who is 
dissatisfied with the ALJ hearing decision, may request that the MAC 
review the ALJ's decision or dismissal.

Section 422.612 Judicial Review

    (b) Any party, including the MA organization, may request judicial 
review (upon notifying the other parties) of the MAC decision if it is 
the final decision of CMS and the amount in controversy meets the 
threshold established in paragraph (a)(2) of this section.
    (c) In order to request judicial review, a party must file a civil 
action in a district court of the United States in accordance with 
section 205(g) of the Act. See part 405, subpart I of this chapter for 
a description of the procedures to follow in requesting judicial 
review.

Section 2--Currently Approved Collection Requirements Technically 
Modified by Proposed Regulation: Not Affecting Burden

Section 422.50 Eligibility To Elect an MA Plan

    (a)(5) Completes and signs an election form or another CMS approved 
election method and gives information required for enrollment.

Section 422.66 Coordination of Enrollment and Disenrollment Through MA 
Organizations

    (b)(1)(i) Elect a different MA plan by filing the appropriate 
election with the MA organization.
    (b)(1)(ii) Submit a request for disenrollment to the MA 
organization in the form and manner prescribed by CMS or file the 
appropriate disenrollment request through other mechanisms as 
determined by CMS.
    (b)(3)(ii) Provide enrollee with notice of disenrollment in a 
format specified by CMS.
    (b)(3)(iii) In the case of a plan where lock-in applies, include in 
the notice a statement.
    (d)(5) The individual who is converting must complete an election 
as described in Sec.  422.60(c)(1).

Section 422.74 Disenrollment by the Medicare Advantage Organization

    (c)(1) A notice must be provided to the individual before 
submission of the disenrollment transaction to CMS.
    (d)(1)(i) The MA organization can demonstrate to CMS that it made 
reasonable efforts to collect the unpaid premium amount.
    (d)(1)(ii) The MA organization provides the enrollee with notice of 
disenrollment that meets the requirements set forth in paragraph (c) of 
this section.
    (d)(2)(ii) The beneficiary has a right to submit any information or 
explanation that he or she may wish to submit to the MA organization.
    (d)(3)(iii) The MA organization must document the enrollee's 
behavior, its own efforts to resolve any problems, as described in 
paragraphs (d)(2)(i) through (d)(2)(ii) of this section and any 
extenuating circumstances.

Section 422.111 Disclosure Requirements

    (d)(2) For changes that take effect on January 1, the plan must 
notify all enrollees 15 days before the beginning of the Annual 
Coordinated Election Period defined in section 1851(e)(3)(B) of the 
Act.
    (e) The MA organization must make a good faith effort to provide 
notice of a termination of a contracted provider at least 30 calendar 
days before the termination effective date to all enrollees who are 
patients seen on a regular basis by the provider whose contract is 
terminating, irrespective of whether the termination was for cause or 
without cause. When a contract termination involves a primary care 
professional, all enrollees who are patients of that primary care 
professional must be notified.

Section 422.112 Access to Services

    (a)(1)(i) Maintain and monitor a network of appropriate providers 
that is supported by written agreements and is sufficient to provide 
adequate access to covered services to meet the needs of the population 
served. These providers are typically used in the network as primary 
care providers (PCPs), specialists, hospitals, skilled nursing 
facilities, home health agencies, ambulatory clinics, and other 
providers.
    (a)(1)(ii) MA regional plans, upon CMS pre-approval, can use 
methods other than written agreements to establish that access 
requirements are met.

[[Page 46916]]

Section 422.152 Quality Improvement Program

    (b)(3)(i) Plans must measure performance using the measurement 
tools required by CMS, and report its performance to CMS. The standard 
measures may be specified in uniform data collection and reporting 
instruments required by CMS.
    (b)(3)(ii) Make available to CMS information on quality and 
outcomes measures that will enable beneficiaries to compare health 
coverage options and select among them, as provided in Sec.  
422.64(c)(10).
    (d)(5) The organization must report the status and results of each 
project to CMS as requested.
    (e)(2)(i) MA organizations offering an MA regional plan or local 
PPO plan as defined in this section must measure performance under the 
plan using standard measures required by CMS and report its performance 
to CMS. The standard measures may be specified in uniform data 
collection and reporting instruments required by CMS.
    (f)(i) and (iii) For all types of plans that it offers, an 
organization must maintain a health information system that collects, 
analyzes, and integrates the data necessary to implement its quality 
improvement program and make all collected information available to 
CMS.

Section 422.570 Expediting Certain Organization Determinations

    (d)(2)(ii) The plan must inform the enrollee of the right to file 
an expedited grievance if he or she disagrees with the MA 
organization's decision not to expedite.

Section 422.572 Timeframes and Notice Requirements for Expedited 
Organization Determinations

    (c) If the MA organization first notifies an enrollee of an adverse 
expedited determination orally, it must mail written confirmation to 
the enrollee within 3 calendar days of the oral notification.

Section 422.582 Request for a Standard Reconsideration

    (a) A party to an organization determination must ask for a 
reconsideration of the determination by making an oral or written 
request to the MA organization that made the organization determination 
or to an SSA office.
    (c)(2) If the 60-day period in which to file a request for 
reconsideration has expired, a party to the organization determination 
may file a request for reconsideration with the MA organization or the 
SSA.

Section 422.620 How Enrollees of MA Organizations Must Be Notified of 
Noncovered Inpatient Hospital Care

    (c) A written notice of non-coverage must be issued no later than 
the day before hospital coverage ends. The written notice must include 
the elements set forth in this section.
    As noted above, while the requirements in this section have been 
modified, the associated burden has not changed.

Section 3--New/Revised Collection Requirements Proposed in This 
Regulation: Affecting Burden

Section 422.80 Approval of Marketing Materials and Election Forms

    (a)(3) The MA plan meets the performance requirements established 
by CMS to allow the plan to file designated marketing materials with 
CMS 5 days before their distribution.
    The burden associated with this requirement is the time and effort 
necessary for the plan to submit the designated marketing materials to 
CMS five days prior to distribution.
    We estimate it will take 350 plans approximately 12 hours to 
provide the materials to CMS on an annual basis.

Section 422.101 Requirements Relating to Basic Benefits

    (d)(4) MA regional plans are required to track the deductible (if 
any) and catastrophic limits in paragraphs (d)(1) through (d)(3) of 
this section based on incurred out-of-pocket beneficiary costs for 
original Medicare covered services, and are also required to notify 
members when the deductible (if any) or a limit has been reached.
    The burden associated with this requirement is the time and effort 
necessary for the plan to notify members when the deductible (if any) 
or a limit has been reached. While this requirement is subject to the 
PRA, we believe this requirement meets the requirements of 5 CFR 
1320.3(b)(2), and as such, the burden associated with this requirement 
is exempt from the PRA.

Section 422.106 Coordination of Benefits With Employer Group Health 
Plans and Medicaid

    (d)(1) To facilitate the offering of MA plans by employers, labor 
organizations, or the trustees of a fund established by one or more 
employers or labor organizations (or combination thereof) to furnish 
benefits to the entity's employees, former employees (or combination 
thereof) or members or former members (or combination thereof), of the 
labor organizations, those MA plans may request, in writing, from CMS, 
a waiver or modification of those requirements in this part that hinder 
the design of, the offering of, or the enrollment in, those plans by 
those individuals.
    The burden associated with this requirement is the time and effort 
necessary for the plan to submit a waiver to CMS. We estimate that on 
an annual basis it will take plans 2 hours to submit the waiver to CMS. 
However, we do not anticipate more then nine waiver requests on an 
annual basis. As such, this requirement is not subject to the PRA as 
stipulated under 5 CFR 1320.3(c).

Section 422.111 Disclosure Requirements

    (f)(10) The names, addresses, and phone numbers of providers from 
whom the enrollee may obtain in-network coverage in other areas.
    The burden associated with this requirement is the time and effort 
necessary for the plan to notify member of the names, addresses, and 
phone numbers of providers from whom the enrollee may obtain in-network 
coverage in other areas. While this requirement is subject to the PRA, 
we believe this requirement meets the requirements of 5 CFR 
1320.3(b)(2), and as such, the burden associated with this requirement 
is exempt from the PRA.

Section 422.112 Access to Services

    (c) An MA regional plan may seek, upon application to CMS, to 
designate a hospital as an essential hospital as defined in section 
1858(h) of the Act that meets the conditions set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for the plan to submit the required materials to CMS. We 
estimate that on an annual basis it will take 100 plans 8 hours to 
submit the materials to CMS.

Section 422.254 Submission of Bids

    (a)(1) No later than the first Monday in June, each MA organization 
must submit to CMS an aggregate monthly bid amount for each MA plan 
(other than an MSA plan) the organization intends to offer in the 
upcoming year in the service area (or segment of such an area if 
permitted under Sec.  422.262(c)(2)) that meets the requirements in 
paragraph (b) of this section. With each bid submitted, the MA 
organization must provide the information required in paragraph (c) of 
this section.
    The burden associated with this requirement is the time and effort 
necessary for the plan to submit the required bid materials to CMS. 350 
MA

[[Page 46917]]

organizations offering 400 plans 100 hours per plan bid submission to 
CMS for a total annual burden of 40,000 hours.
    (b) For MSA plans, MA organizations must submit the following 
information: the monthly MSA premium, the plan deductible amount, and 
the beneficiary supplemental premium, if any. Since CMS does not review 
or approach MSA plan submissions, we estimate that the submission 
burden is half that for other MA plans. Under the M+C program, no MSA 
plans were offered. We estimate that under the MA program 5 
organizations will offer an MSA plan and require 50 hours for 
submission of the above information, for a total annual burden of 250 
hours.

Section 422.270 Incorrect Collections of Premiums and Cost-Sharing

    (b) An MA organization must agree to refund all amounts incorrectly 
collected from its Medicare enrollees, or from others on behalf of the 
enrollees, and to pay any other amounts due the enrollees or others on 
their behalf.
    The burden associated with this requirement is the time and effort 
necessary for the MA organization to provide written assurance to CMS 
that they will refund all amounts incorrectly collected from its 
Medicare enrollees or representatives. We estimate that on an annual 
basis it will take 350 MA organizations 30 minutes to submit a written 
agreement to CMS.

Section 422.304 Monthly Payments

    (e)(2) A State's chief executive may request, no later than 
February 1 of any year, a geographic adjustment of the State's payment 
areas, as outlined in this section, for MA local plans for the 
following calendar year.
    The burden associated with this requirement is the time and effort 
necessary for a State to provide a written request for geographic 
adjustment to CMS. Under the M+C program, we received inquiries from 2 
states and requests from none. Thus, we estimate that on an annual 
basis we may receive 2 State submissions. As such, this requirement is 
not subject to the PRA as stipulated under 5 CFR 1320.3(c).

Section 422.310 Risk Adjustment Data

    (b) Each MA organization must submit to CMS (in accordance with CMS 
instructions) all data necessary to characterize the context and 
purposes of each service provided to a Medicare enrollee by a provider, 
supplier, physician, or other practitioner. CMS may also collect data 
necessary to characterize the functional limitations of enrollees of 
each MA organization.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required risk adjustment data to 
CMS. We estimate that on an annual basis it will take 350 MA 
organizations 121 hours each to submit the required data to CMS.
    (d)(1) MA organizations must electronically submit data that 
conform to the requirements for equivalent data for Medicare fee-for-
service when appropriate, and to all relevant national standards. 
Alternatively, MA organizations may submit data according to an 
abbreviated format, as specified by CMS.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required risk adjustment data to 
CMS. The estimate for submission of the abbreviated format data is 
included in the above estimate.
    (e) MA organizations and their providers and practitioners will be 
required to submit medical records for the validation of risk 
adjustment data, as required by CMS.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required validation data to CMS. We 
estimate that on average 350 MA organizations will each submit 29 
medical records to CMS, requiring 1 hour per record, for a total annual 
burden of 9800 hours.

Section 422.314 Special Rules for Beneficiaries Enrolled in MA MSA 
Plans

    (b) An entity that acts as a trustee for an MA MSA must Register 
with CMS, certify that it is a licensed bank, insurance company, or 
other entity qualified, under sections 408(a)(2) or 408(h) of the IRS 
Code, agree to comply with the MA MSA provisions of section 138 of the 
IRS Code of 1986; and provide any other information that CMS may 
require.
    The burden associated with this requirement is the time and effort 
necessary for an entity to certify and submit the required materials to 
CMS as outlined in this section. We estimate 5 MA organizations will 
submit the required information on an annual basis. As such, this 
requirement is not subject to the PRA as stipulated under 5 CFR 
1320.3(c).

Section 422.320 Special Rules for Hospice Care

    (a) An MA organization that has a contract under subpart K of this 
part must inform each Medicare enrollee eligible to select hospice care 
under Sec.  418.24 about the availability of hospice care if a Medicare 
hospice program is located within the plan's service area, or it is 
common practice to refer patients to hospice programs outside that 
area.
    The burden associated with this requirement is the time and effort 
necessary for a plan to disclose to each Medicare enrollee about the 
availability of hospice care. We estimate that on an annual basis it 
will take 350 plans 1.14 hours to distribute the required materials to 
enrollees. While this estimate may appear low, we believe that this 
disclosure requirement will be standardized and incorporated into the 
plans marketing material routinely disseminated to enrollees.

Section 422.458 Risk Sharing With Regional MA Organizations for 2006 
and 2007

    (d)(1) Each MA organization offering an MA regional plan must 
provide CMS with information as CMS determines is necessary to 
implement this section.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required information to CMS. We 
estimate that on an annual basis it will take 30 to 100 plans, 40 hours 
to submit the required information to CMS.
    (d)(2) Pursuant to the existing Sec.  422.502(d)(1)(iii) (section 
1857(d)(2)(B) of the Act), CMS has the right to inspect and audit any 
books and records of the organization that pertain to the information 
regarding costs provided to CMS under paragraph (b)(2) of this section.
    This requirement is exempt from the PRA as stipulated under 5 CFR 
1320.4.

Section 422.501 Application Requirements

    (b)(1) In order to obtain a determination on whether it meets the 
requirements to become an MA organization and is qualified to provide a 
particular type of MA plan, an entity, or an individual authorized to 
act for the entity (the applicant) must complete and submit a certified 
application, in the form and manner required by CMS, that meets the 
requirements set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required application to CMS. We 
estimate that on an annual basis it will take 350 plans 40 hours to 
submit the required application to CMS.
    If you comment on these information collection and recordkeeping

[[Page 46918]]

requirements, please mail copies directly to the following:

Centers for Medicare and Medicaid Services Office of Strategic 
Operations and Regulatory Affairs, Attn: John Burke (CMS-4069-P), Room 
C5-13-28, 7500 Security Boulevard, Baltimore, MD 21244-1850;
 and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Christopher Martin, CMS Desk Officer, [CMS-4069-P], 
[email protected]. Fax (202) 395-6974.

IV. Response to Comments

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

V. Regulatory Impact 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 on Federalism.
    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 impact and equity). A regulatory impact analysis 
(RIA) must be prepared for any proposed rule with an effect on the 
economy of $100 million or more in any one year. While we do not 
believe that this proposed rule will have independent effects of this 
magnitude, the Medicare Advantage program taken as a whole will have 
effects that far exceed this threshold. Since this rule, once issued in 
final form, will be the most significant step in implementing the MA 
program, we are classifying it as an economically ``significant'' rule 
for purposes of E.O. 12866 and as a ``major'' rule for purposes of the 
Congressional Review Act (5 U.S.C., section 804(2)). Accordingly, we 
have prepared this RIA, combined with an Initial Regulatory Flexibility 
Analysis ((IRFA), pursuant to the Regulatory Flexibility Act), in which 
we analyze the overall effects of the Medicare Advantage program, 
including effects not addressed in this rulemaking (for example, rate 
increases that went into effect in March, 2004). Although the MMA is a 
highly detailed statute that delineates most important provisions of 
the MA program, there are alternatives available to us in implementing 
several important provisions of the statute. We analyze in detail those 
areas for which regulatory alternatives are available.
    Although we have included or summarized most of the required 
analysis in this section of the preamble, the explanation of the basis 
for the proposed rule and analysis of some regulatory options are 
presented elsewhere in the preamble. We note that the preamble to the 
companion rulemaking concerning the Part D drug benefit also contains 
an RIA and IRFA, and some effects of the legislation (for example, on 
Medigap plans) are analyzed in more detail in that preamble.
    The Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA) provides for increasing the role of private plans in providing 
Medicare benefits to beneficiaries. The statute made changes to the 
payment system that increase Medicare payment rates to private plans as 
of 2004, and for subsequent years. A new private plan option is 
introduced, the regional Medicare Advantage plan, structured as a 
preferred provider organization (PPO), which will be required to offer 
services over a wide geographic area. To encourage the formation of 
such plans, the MMA provides financial incentives above and beyond the 
payment rate increases applicable to all plans. There are other 
financial incentives discussed in what follows and elsewhere in the 
preamble. In addition to increased payments to plans, the MMA will 
provide benefits to beneficiaries and to entities (such as employers 
and States) that would otherwise be financially responsible for the 
cost of beneficiaries' medical care. The benefits to beneficiaries and 
plans are the result of transfer payments from the Federal Government 
which we project will total $24.8 billion in the period 2004 to 2009 
(as a result solely of the Title II provisions of the MMA), as 
described in more detail in what follows.
    The main purpose of this proposed rule is to implement the 
statutory provisions of Title II of the MMA, which deal with the 
Medicare Advantage program. Insofar as the proposed rule implements 
provisions of the law, we are providing a general discussion of the 
impact of the law and our basis for projections of the impact. These 
impact projections reflect the statutory scheme in its entirety, not 
just the relatively minor effects attributable to discretionary 
provisions in our proposed regulations. Although the statute prescribes 
Medicare Advantage rules and procedures in considerable detail, it 
specifically affords CMS discretion to make decisions on a number of 
issues regarding how the law will be implemented. The preamble and this 
impact analysis--particularly the section dealing with alternatives 
considered--discuss these types of issues in greater detail. The 
proposed rule also introduces changes to Medicare private health plan 
requirements which, in most cases, are intended to streamline the 
administration of the program and make contracting less burdensome for 
health plans while not impinging on the rights of enrollees. (Note that 
this analysis does not extend beyond the year 2009; that is, the 
Comparative Cost Adjustment (CCA) demonstration program of subtitle E 
of the MMA is not discussed. The CCA regulations will be proposed at a 
later date.)
1. Objectives of the Proposed Rule
    The primary goal of the MMA is to expand the health plan choices 
available to Medicare beneficiaries. There is also the expectation that 
private plan enrollment will increase. The expansion of health plan 
choice is envisioned as occurring at many levels: areas of the country 
that previously did not have private plans available should see new 
plans enter the market; areas where there are plans should see an 
increase in the number of competing plans; and beneficiary choice 
should be enhanced by the introduction of new types of plans, including 
specialized plans, and, most importantly, regional plans that are 
structured as preferred provider organizations. In keeping with the 
overall objectives of the law, the rule seeks to implement the law in 
ways that will promote plan participation (and, as a consequence, lead 
to increased enrollment in private plans). The introduction of regional 
plans and the choice of the PPO model for such plans are designed to 
lead to greater plan participation.
    Regional Plans. The introduction of regional plans, and the payment 
policies that apply to such plans, attempt to address both the payment 
issues affecting plan participation and the structural issues that have 
prevented greater access to plans. There were two

[[Page 46919]]

primary motivating factors in the decision to use a regional PPO 
approach as one of the means of achieving the MMA goals of increased 
plan participation and increased beneficiary enrollment in private 
plans. One factor is that the regional approach requires plans to serve 
extensive geographic areas specified by CMS. This is a departure from 
the practice of allowing private plans to pick and choose the counties 
in which to offer Medicare plans, which will continue to be the policy 
for local MA plans. The regional service area approach seeks to ensure 
that areas not heretofore served by private plans in Medicare--
particularly, rural counties--will have private, coordinated care plan 
options available (see the MMA conference report discussion of section 
201 at pp. 90-91).
    The PPO Model. The other motivating factor in choosing the regional 
approach relates to the choice of the PPO model as the structure for 
regional plans. The choice of this model is partly a consequence of the 
decision to require coverage of large geographic areas. Other types of 
health plans, such as plans that rely exclusively on networks of 
employed or contracted providers (for example, the more traditional 
health maintenance organization models) have had difficulty forming 
viable networks in rural areas. The cost of the infrastructure required 
in the operation of such a model has also acted as a barrier to serving 
areas in which enrollment levels would be too low to warrant the 
necessary level of investment. Another factor in choosing the PPO model 
reflects consumer preference as seen in the commercial sector, where 
the PPO model is the model of choice in the employment-based health 
care market. PPOs are preferred over HMOs by consumers because of their 
less restrictive provider access, and PPOs are preferred over indemnity 
FFS plans because they do employ managed care techniques and 
differential cost sharing to control costs, and there is quality 
assurance.
    Promoting Competition. One of the purposes of the MMA is to promote 
plan competition, which in turn is expected to lead to greater 
efficiency among plans and more benefits for enrollees. Certain 
features of the MMA that promote plan participation are of limited 
duration in the expectation that plan entry will occur: for example, 
though plan payments increased effective March of 2004, the provision 
by which the Government receives 25 percent of the savings that plans 
can achieve does not take effect until 2006. Similarly, many of the 
incentives provided to regional plans (such as risk sharing, and the 
entry and retention bonuses) are time-limited. In highly competitive 
markets where multiple plans are available to beneficiaries, there is 
strong evidence that competition among plans leads to improved benefits 
for enrollees and promotes greater plan efficiency. In an analysis of 
Medicare health plan benefit premiums and offerings, Pizer and Frakt 
found that ``the effects of competition are comparable in importance to 
the effects of payment rates. The finding that more intense competition 
increases benefits and reduces premiums, although predictable from a 
theoretical standpoint, empirically confirms that it is possible for 
the Medicare Program to increase benefits without increasing spending 
or shifting additional costs to beneficiaries. Conversely, reduced 
competition would have the reverse effect. We acknowledge that 
competition and spending are related by the fact that lower payments 
can be expected to induce plan exit, thereby undermining competition. 
Nevertheless, this research shows that the Federal Government has a 
strong institutional interest in safeguarding and promoting interplan 
competition in the M+C Program, independent of its policy on payment 
rates.'' (Steven D. Pizer, and Austin B. Frakt, ``Payment Policy and 
Competition in the Medicare+Choice Program,'' Health Care Financing 
Review, fall 2002, volume 24, number 1.)
    General Impact. In general, the law and regulations will have a 
positive impact on beneficiaries. Transfer payments from the Federal 
Government will go towards the provision of additional benefits to 
enrollees of health plans and reduced out-of-pocket costs, including 
reduced Part B and Part D premiums for these enrollees. The law will 
result in increased revenue for participating private plans for the 
provision of the basic Medicare benefit and the provision of additional 
benefits. This will help improve the availability of health plan 
choices for beneficiaries. We also anticipate a positive impact for 
employers and unions as sponsors of retiree coverage, as discussed in 
more detail below.
    There are revenue effects on States arising directly from the law 
(the prohibition on premium taxes) and arising indirectly as a result 
of beneficiary movement towards private plans and away from traditional 
fee-for-service Medicare with Medigap coverage. The latter effect is 
relevant to Medigap insurers. The effects on States and insurers are 
discussed more fully in what follows.
2. Provisions of the Law
    The MMA introduces major changes in the payment rules for private 
plans. These changes are discussed in detail in the preamble text for 
subparts F and G of these proposed regulations. For local plans, the 
MMA increased Medicare Advantage payment rates beginning in 2004, by 
using county fee-for-service rates (minus direct medical education 
payments) as a minimum payment level and rebasing the rates 
periodically, by removing a budget neutrality limitation on payment at 
a national/local blended rate, and by providing for higher yearly 
payment rate increases (while maintaining minimum payment rate 
increases).
    Payment to plans are risk adjusted for health status (in addition 
to risk adjustment for demographic factors such as age), with 30 
percent of payment being subject to health status risk adjustment in 
2004, 50 percent in 2005, 75 percent in 2006, and 100 percent in 2007 
and thereafter. Note that CMS is currently implementing health status 
risk adjustment in a ``budget-neutral'' manner and will continue to do 
so in 2005. The difference in payment between the total health status-
adjusted payment rates and the rates adjusted only by demographic 
factors continues to be paid to the health plan ``sector,'' but the 
funds are distributed among plans based on the relative health status 
of each plan's enrollees.
    Through 2005, there is no change to the payment rules related to 
how plans must use any excess funds (Medicare payments greater than the 
amount a health plan requires to provide the Medicare benefit). 
Currently such funds must be returned to enrollees in the form of 
reduced cost sharing, or the provision of extra (non-Medicare) 
benefits. Plans also have the option of using the excess funds to 
reduce all or a portion of an enrollee's Part B premium, but in that 
case, the Government retains 20 percent of the reduction in plan 
payments while reducing the Part B premium that is usually collected 
through a beneficiary's Social Security payment. Another option for the 
disposition of excess funds is to make deposits to a ``stabilization 
fund'' to be used in a subsequent contract year for reductions in cost 
sharing or for financing of extra benefits--an option that the MMA 
eliminates as of the end of the 2005 contract year.
    Currently and through 2005, the determination of whether there are 
excess funds is done through the ``adjusted community rate'' approval 
process (a CMS review of proposed

[[Page 46920]]

benefits and premiums and the revenue required to provide the benefit 
package). The MMA does away with the ACR review process and instead 
institutes a bidding process. As of 2006, plans will present bids that 
are to be compared against benchmarks to determine whether enrollees 
will receive rebates or be required to pay a premium to the health 
plan. For local plans, the benchmark is based on what today are county 
payment rates. For regional plans, the benchmark represents a weighting 
of these same county rates and the actual plan bids. CMS will evaluate 
the bids for reasonableness and actuarial soundness, and can negotiate 
over the bid amounts and proposed supplemental benefits. In 2006 and 
thereafter, to the extent that the bid is less than the benchmark, that 
difference (comparable to the current ``excess funds'') determines plan 
rebates. The Government retains 25 percent of this difference, and the 
remaining 75 percent is to be used for beneficiary ``rebates,'' which 
can take the form of extra benefits, reduced cost sharing, reduced 
health plan premiums for supplemental benefits, or reduced Part B and/
or Part D premiums. To the extent that the plan bid is greater than the 
benchmark, that difference becomes the premium the plan must charge 
enrollees for ``basic'' benefits.
    The limitation on cost sharing for Medicare services that 
previously existed is modified in the MMA. Prior to the MMA, for 
coordinated care plans, the combination of the actuarial value of cost 
sharing for Medicare-covered services, plus any premium or portion of a 
premium representing a charge in lieu of Medicare cost sharing, could 
not exceed the average level of cost sharing that beneficiaries face in 
fee-for-service Medicare. As of 2006, premium amounts that are in lieu 
of cost sharing are not counted in determining whether the limit is 
exceeded (which is the rule as it is currently applied to private fee-
for-service plans). In addition, the comparison is made to local values 
of cost-sharing in fee-for-service Medicare rather than to the current 
use of national values.
    The MMA also makes structural changes in the Medicare private plan 
contracting program. The most important of these statutory changes is 
the introduction of regional MA plans that will be structured as PPOs, 
and which would first become available in 2006. While local plans may 
choose the counties in which they wish to operate as Medicare Advantage 
plans, regional plans must cover an entire region. Regions will be 
designated by CMS after a market analysis (as discussed later and in 
the preamble text for subpart J). To facilitate the ability of regional 
plans to operate in multiple States, plans can meet Federal solvency 
and licensure requirements for a period of time pending an 
organization's meeting such requirements for each State (see the 
preamble text for subpart J). In the first two years of formation of 
regional plans, there is a moratorium imposed on the formation or 
expansion of local plans that operate as PPOs.
    Regional plans have various incentives to participate, including:
     Sharing risk with the Government in 2006 and 2007,
     Access, beginning in 2007 through the end of 2013, to a 
``stabilization fund'' of $10 billion (plus half of the 25 percent of 
regional plan rebate dollars that would otherwise go to the 
Government). The stabilization will be used to encourage plan entry 
(including a bonus for plans operating in the entire Nation) or to 
prevent plans from discontinuing contracts;
     Inclusion of plan bids in determining benchmark amounts 
(as opposed to the benchmarks for local plans, which are comprised only 
of the local MA payment rates); and
     Access to additional funding payable to ``essential'' 
hospitals (as described in the subpart G preamble text).
    Other structural changes affecting Medicare health plans include 
provisions for plans that can exclusively serve special needs 
individuals, special treatment of enrollees with end-stage renal 
disease (paid outside of the bidding system--see subpart G), authority 
for direct contracting between CMS and employers or unions for coverage 
of retirees--see Sec.  422.106), and removal of certain limitations 
that had been imposed on medical savings account plans. There are also 
provisions calling for the termination of cost-reimbursed contracts 
with health plans if certain conditions are met (subpart J).
    In the following section we list those areas in which CMS will 
exercise discretion through this rulemaking, either because the law 
entails a choice of options or because we have elected to exercise 
regulatory discretion.
3. Regulation Required in the Law
    Designation of Regions. The most important feature of the MA 
program that the statute leaves to the discretion of CMS is to 
determine the boundaries for the regions in which regional MA plans 
will operate. Following a market analysis, CMS will designate between 
10 and 50 regions, using certain guidelines stated in the MMA (as 
discussed in the preamble text for subpart J). Some of the issues 
relating to the configuration of regions are discussed later in the 
section on alternatives considered. The impact of the configuration of 
regions cannot be fully evaluated until the regions are designated. The 
estimates contained in this analysis (shown in Table 2, for example) 
are for illustrative purposes and are based on the assumption that 
there would be 15 regions.
    Statewide Versus Plan-Specific Risk Adjustment. CMS is given the 
authority to use a statewide, area-wide, or a plan-specific, risk 
adjustment methodology for determining rebates. The effects of each and 
the factors to consider in choosing one or the other approach are 
discussed in the alternatives considered section below.
4. CMS Regulatory Discretion
    The statute spells out in detail most major and many minor 
parameters of Medicare reform. However, in certain matters, the statute 
describes a structure or uses terminology that is open to 
interpretation but which is a necessary component of the statutory 
scheme. There are also other areas where we believe further 
interpretation is needed, or where there appear to be internal 
inconsistencies in the statute that need to be resolved. The following 
issues are of this nature, and each is noted here briefly, with some of 
the issues discussed in further detail in the section on alternatives 
considered.
    Actuarial Value of Medicare Cost Sharing. When plans present bids 
for Medicare-covered services the bid may include only Medicare-covered 
services and must reflect cost sharing at Medicare levels or with 
``actuarially equivalent'' cost sharing. The options for defining 
``actuarially equivalent'' in this context are discussed in detail in 
the preamble text of subsection F (where the uniform, plan-specific, 
and proportional amount methods of determining actuarial equivalence 
are discussed).
    Treatment of Induced Demand as a Supplemental Cost. To the extent 
that CMS decides to use the ``plan-specific'' approach to determining 
cost sharing that is actuarially equivalent to that of traditional 
Medicare, an additional issue arises. If a plan proposes, through a 
supplemental benefit, to lower cost sharing included in the base 
package (the portion of the bid which is used to determine whether 
rebates or a basic premium apply), we propose that the additional 
expenditures arising from the induced demand caused by the cost sharing 
reduction be included in the cost of the supplemental benefits rather 
than in the cost of the base package.

[[Page 46921]]

That is, because cost sharing reduces utilization of services, and plan 
bids for the basic package are determined using the cost sharing 
structure of fee-for-service Medicare, if cost sharing is reduced below 
Medicare levels, the result is higher utilization of services, and 
higher expenditures. We believe these expenditures should not be 
included as part of the bid for the basic Medicare package. The 
additional expenditures would not have arisen if the cost sharing were 
at Medicare levels or at an actuarially equivalent level. In other 
words, the additional expenditures do not comprise a part of the bid 
for the basic benefit package as it is defined in the statute. We 
propose that the portion of utilization expenditures that result from 
the reduced cost sharing would be ``paid for'' entirely as a 
supplemental benefit. This requirement, consistent with a parallel 
requirement for Part D drug coverage, assures that the determination of 
whether rebates or a premium is applicable is based on an ``apples-to-
apples'' comparison of a specific set of benefits reflecting a specific 
cost sharing structure.
    Prohibiting Use of Rebate Dollars for the Purchase of Optional 
Supplemental Benefits. As stated in the preamble text for subpart F, a 
bidding system in which there is the possibility of rebate funds that 
must be spread over the entire enrolled population of a plan is 
difficult to implement if the rebates can be used to finance optional 
supplemental benefits that enrollees may decline. Because each enrollee 
should receive the same level of rebate value as any other enrollee of 
the same plan, enrollees would have to be offered a menu of options to 
fashion a combination of rebate possibilities to arrive at the dollar 
amount of rebate that the enrollee is entitled to. (This issue is 
discussed more fully in the preamble and the ``alternatives 
considered'' section of this impact analysis.)
    Intra-Area Geographic Adjustment to Payments. The statute specifies 
that ``if applicable'' (1853(a)(1)(B)(i)), CMS ``shall adjust'' 
payments ``in a manner to take into account variations in MA local 
payment rates'' (1853(a)(1)(F) for regional plans and for local plans 
operating in more than one local payment area. CMS is requesting 
comment on the ways in which such adjustments can be made. (This issue 
is also discussed in the ``alternatives considered'' section.)
5. Provisions of the Proposed Rules Not Based on Specific MMA Changes
    As discussed throughout the preamble, we have made a concerted 
effort to improve, and wherever possible simplify and reduce the burden 
of, existing regulations. In general, as previously noted, these 
provisions reduce the burden on health plans while enhancing 
beneficiary protections or not adversely affecting the rights of 
enrollees. Among the changes that are being made that are not a result 
of the MMA statutory provisions are (a) New beneficiary protections 
related to coverage of services when network providers can see patients 
on a ``point-of-service'' basis (Sec.  422.105); (b) revisions to the 
rules limiting beneficiary cost sharing related to emergency episodes 
(Sec.  422.113); (c) the elimination of requirements on MA plans that 
are duplicative of activities already conducted by CMS regarding 
information about beneficiary health care coverage options (elimination 
of Sec.  422.111(f)(4) and (f)(6), and portions of (f)(7)); (d) the 
elimination of certain access to care provisions (changes made at Sec.  
422.112); (e) use of alternative election mechanisms other than forms 
(Sec.  422.50(a)(5)), and alternative notice options (Sec.  422.60(e)); 
(f) allowing MA organizations to submit requests to restrict enrollment 
for capacity reasons at any time during the year (Sec.  422.60(b)); (g) 
providing more flexibility in the procedures for disenrolling 
beneficiaries for failure to pay premiums (Sec.  422.74(d)(1)) and 
rules related to disenrollment due to disruptive behavior (Sec.  
422.74(d)(2)); (h) formal adoption of a ``file and use'' approach to 
approval of marketing materials (Sec.  422.80) for contractors that 
have demonstrated a record of compliance with marketing rules; (i) 
changes in requirements regarding information plans provide to 
enrollees about participating providers (Sec.  422.111(b)(3), for 
example); and, in Sec.  422.133 , extending the right under section 
1852(l) of the Act for admission to a ``home skilled nursing facility'' 
in the event that a health plan admits an enrollee to a skilled nursing 
facility without a prior qualifying hospital stay. In addition, various 
changes are made in subpart D that are consistent with a ``quality 
improvement'' approach to quality standards.

B. Basis for Estimating Impacts

    The extent of the impact of the MMA will depend on whether the 
goals of the law are realized. We believe that the payment changes and 
structural changes of the MMA will lead to higher levels of plan 
participation, and, as a consequence, enrollment in private plans will 
increase over the next several years. We expect the absolute level of 
private plan enrollment to increase because of the greater availability 
of plans, and we expect the rate of enrollment in private plans 
(``penetration'') to increase because plans will be able to offer plan 
designs that will meet the needs of Medicare beneficiaries, and MA 
organizations will be able to offer generous benefit packages that 
Medicare beneficiaries will find attractive. However, there is a great 
deal of uncertainty involved in making projections of plan 
participation and beneficiary enrollment levels. The factors 
contributing to uncertainty include uncertainty about market decisions 
made by health plans might make, how changes in health care markets and 
costs will affect plan participation and beneficiary enrollment, 
whether MA plan offerings will satisfy the enrollment preferences of 
Medicare beneficiaries, how MA plans will fare in competition with the 
new PDP plans, and other factors. For the MMA, the designation of MA 
regions and how the marketplace will react to the regional designations 
is also a factor contributing to uncertainty.
    The uncertainty inherent in attempting to make projections of what 
might transpire in the health care marketplace is illustrated by the 
projections that were made for earlier legislation that brought about a 
major reform of Medicare health plan contracting, the Balanced Budget 
Act of 1997 (BBA). The BBA sought to expand the availability of private 
plans throughout the United States (particularly to rural areas), with 
the expectation that the generous benefit packages that Medicare plans 
had been offering would continue to be offered and would be available 
to more beneficiaries. It was also assumed that the new types of plans 
introduced in the BBA--such as provider-sponsored health plans--would 
proliferate. For example, in the impact analysis for the regulations 
implementing the Medicare+Choice program enacted in the BBA (Federal 
Register, vol. 63, no. 123, June 26, 1998), it was noted the 
Congressional Budget Office had projected that by 2002 there would be 
125 provider-sponsored organizations enrolling one million Medicare 
beneficiaries, and that in particular ``a significant portion of the 
enrollment [would] be in rural areas.'' The actual outcome was that 
only a handful of PSOs were formed, and, with regard to projections of 
increased enrollment because of the BBA, what actually occurred was a 
decline in enrollment due in part to payment changes made by the BBA 
and also due to changes in the

[[Page 46922]]

overall health care marketplace that affected Medicare health plans.
    Recent Plan Participation and Enrollment Trends. As of June 2004 
about 11 percent of beneficiaries are enrollees of Medicare risk-
bearing private plans. This figure compares to a historical high of 
about 16 percent ``penetration'' (percent enrolled) achieved in 1999. 
The reduced penetration is partly a function of reduced access to 
plans. As of January 2004, about 61 percent of Medicare beneficiaries 
had access to a private coordinated care plan (and 75 percent had 
access to a private plan if private fee-for-service plans are included 
among the types of available plans). In 1998 (the year in which the 
highest access level was attained), 74 percent of beneficiaries had 
access to at least one Medicare+Choice plan (there were no private fee-
for-service plans in 1998).
    Although the national access figure is 61 percent in 2004, 75 
percent of Medicare beneficiaries residing in metropolitan counties 
have access to at least one MA coordinated care plan, but only 14 
percent of the residents of non-metropolitan counties--where about 23 
percent of all Medicare beneficiaries reside--have access to a 
coordinated care plan. In terms of plan participation, at the end of 
1998, there were 346 Medicare risk contracts, a number that has 
declined to 145 coordinated care plan contracts as of March 2004 
(though some of the decline is attributable to consolidations within a 
State). Because in 1999 seventy-two percent of beneficiaries resided in 
a county in which there was at least one M+C coordinated care plan, the 
penetration rate in areas in which plans were available was an 
effective rate of 22 percent (with the ``effective'' penetration being 
the penetration only among those beneficiaries residing in areas in 
which there were operating plans). As of 2004, the effective 
penetration rate is 17 percent, with 4.6 million enrollees and a 61 
percent level of availability of plans. This decline in ``effective 
penetration'' is partly the result of a decline in generosity of plan 
benefit offerings as statutorily set payments did not keep pace with 
plan costs. For example, while in 1999, 61 percent of the Medicare 
population (85 percent of those with access) lived in a county in which 
there was a Medicare+Choice plan with no plan premium, by 2003 the 
figure declined to 29 percent of beneficiaries living in a county with 
a zero premium plan (50 percent of those with access). (On the decline 
in benefits and rise in cost sharing in private plans, see, for 
example, Marsha Gold and Lori Achman, ``Average Out-of-Pocket Health 
Care Costs for Medicare+Choice Enrollees Increase 10 Percent in 2003,'' 
Commonwealth Fund Issue Brief number 667, August 2003, available at 
http://www.cmwf.org, as well earlier studies of a similar nature cited 
therein).
    Issues in Predicting Beneficiary Behavior. At the individual 
beneficiary level, there are a number of reasons why Medicare 
beneficiaries choose to enroll in private plans. Generally MA plans 
have significantly lower cost sharing compared to traditional fee-for-
service Medicare, and private plans have been able to offer additional 
benefits not covered by Medicare (in particular, outpatient drugs). 
Hence, private plans have proven to be very attractive to certain 
lower-income and minority individuals (see, for example, Maggie 
Murgolo, ``Comparison of Medicare Risk HMO and FFS Enrollees,'' Health 
Care Financing Review, fall 2002, volume 24, number 1; and Kenneth E. 
Thorpe and Adam Atherly, ``Medicare+Choice: Current Role And Near-Term 
Prospects,'' Health Affairs web exclusive, July 17, 2002). The cost of 
Medigap policies in a particular area also appear to influence 
Medicare+Choice enrollment (Catherine G. McLaughlin, Michael Chernew, 
Erin Fries Taylor, ``Medigap Premiums and Medicare HMO Enrollment,'' 
Health Services Research, December, 2002). The relationship between 
beneficiary income levels and the tendency to enroll in MA plans is 
shown in Figure 1, which illustrates how lower-income individuals are 
more likely to enroll in MA plans. (The lowest income groups include 
beneficiaries eligible for Medicaid, who face certain difficulties in 
enrolling in MA plans (see Edith G. Walsh and William D. Clark, 
``Managed Care and Dually Eligible Beneficiaries: Challenges in 
Coordination,'' Health Care Financing Review, fall 2002, volume 24, 
number 1), and who would not have the same incentives to join MA plans 
as beneficiaries with no Medicaid coverage.) Thus, to the extent that 
the MMA increases beneficiary choices by making MA plans available in 
geographic areas where there are currently no plans, we would expect to 
see lower-income beneficiaries in such areas elect to enroll in plans 
that would offer benefit packages that reduce their out-of-pocket 
expenses substantially and provide them with extra benefits that they 
would otherwise not receive or would have to pay for out-of-pocket. On 
average, prior to the MA reforms, beneficiaries enrolled in M+C plans 
had yearly out-of-pocket medical expenses in 2003 that were $667 lower 
than expenses for beneficiaries in fee-for-service Medicare (with no 
coverage supplementing Medicare, such as subsidized retiree coverage or 
Medigap coverage). (See Gold and Achman, previously cited, figure 5, 
page 6). The MA reforms are expected to increase the opportunities for 
lower cost-sharing and improved benefits for such beneficiaries. 
Beneficiaries in poorer health, in particular, would find MA plans to 
be an attractive option: in May 2004, such beneficiaries enrolled in MA 
plans had annual out-of-pocket costs that were estimated to be $1900 
less than beneficiaries in poor health covered by fee-for-service 
Medicare with no supplemental coverage (based on unpublished CMS data 
on out-of-pocket costs).
BILLING CODE 4120-01-P

[[Page 46923]]

[GRAPHIC] [TIFF OMITTED] TP03AU04.001

BILLING CODE 4120-01-C
    One population group that has disproportionately lower rates of 
enrollment in Medicare private plans are disabled Medicare 
beneficiaries. Table 1 illustrates that while the disabled, a growing 
segment of the Medicare population, comprised 14 percent of the 
Medicare population in areas with Medicare+Choice plans in 2002, only 
seven percent of M+C plan enrollees were disabled (based on Medicare 
Current Beneficiary Survey Data for 2002). However, the M+C private 
fee-for-service plan option attracts a higher proportion of the 
disabled, with 17 percent of private fee-for-service (PFFS) plan 
enrollees being under 65 as of March 2004. This relatively high rate of 
enrollment of the disabled in PFFS likely reflects a demand for 
supplemental coverage in the face of less availability of Medigap 
coverage for Medicare beneficiaries under age 65. According to a 
September 2002 study, only 14 percent of disabled Medicare 
beneficiaries reside in States in which there is Medigap open 
enrollment for the disabled (Becky Briesacher, Bruce Stuart, Jalpa 
Doshi, and Sachin Kamal-Bahl, Medicare's Disabled Beneficiaries: The 
Forgotten Population In The Debate Over Drug Benefits, Commonwealth 
Fund and Henry J. Kaiser Family Foundation, publication 573, 
September 2002). The enrollment level of the disabled in PFFS plans 
would also appear to indicate that the disabled are willing to enroll 
in private plans when there are not restrictions on the providers they 
can use, even without the inducement of extra benefits or reduced 
premiums (which are generally not a feature of private fee-for-service 
plans). If a preference for broader networks is the reason for the 
willingness to enroll in PFFS plans, then the regional PPOs that the 
MMA seeks to promote may be an attractive option for disabled Medicare 
beneficiaries in that enrollees will have out-of-plan coverage and, in 
addition, are likely to have extra benefits available. The MMA 
authority for specialized plans for special needs individuals may also 
facilitate the enrollment of a higher proportion of the disabled in 
private plans. (On the disabled and their experience with access to 
care in Medicare HMOs, see Marsha Gold, Lyle Nelson, Randall Brown, 
Anne Ciemnecki, Anna Aizer, and Elizabeth Docteur ``Disabled Medicare 
Beneficiaries In HMOs,'' Health Affairs, September/October 1997, 
particularly pages 155-157).
    With regard to minorities and their enrollment in private plans, in 
2002 Hispanics were more likely to choose Medicare+Choice enrollment 
(as compared to non-Hispanic African-Americans and non-Hispanic whites, 
as illustrated in Table 1). Any changes to the program that would 
increase the rate of private plan enrollment among the disabled would 
be likely also to result in higher minority enrollment levels in MA 
plans. This is because minorities make up a far greater percent of the 
disabled as compared to their distribution among the aged, as shown in 
Table 1. Thus, the overall high M+C enrollment rates in 2002 for 
Hispanics reflects the very high enrollment rates among aged Hispanics. 
The situation is reversed for the disabled: among Medicare 
beneficiaries under 65 (entitled to Medicare because of

[[Page 46924]]

disability), for the three different racial or ethnic groups (white, 
black, Hispanic), Hispanics were the least likely to be enrollees of 
M+C coordinated care plans. Similarly, for blacks, while over one in 
five aged black enrollees was enrolled in an M+C plan, fewer than one 
in ten disabled African-American beneficiaries were enrollees of M+C 
plans.

                 Table 1.--Composition of Medicare Enrollment by Age, Race and Ethnicity in Areas With Medicare+Choice Plans, Year 2002
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Composition within        Percent of group      Composition within FFS     Composition in M+C
                                                        total population in        enrolled in M+C              in area
                                                          areas with plans        (``penetration'')
-----------------------------------------------------
Aged/Disabled Distribution:
    Aged (Age 65 or Over)...........................                    86.4%                    21.3%                    84.9%                    92.9%
    Entitled to Medicare Because of Disability                          13.6%                    10.5%                    15.1%                     7.1%
     (Under Age 65).................................
Racial/Ethnic Distribution:
    Black Non-Hispanic..............................                    10.5%                    18.9%                    10.7%                    10.0%
    Hispanic........................................                    10.3%                    23.8%                     9.8%                    12.3%
    White Non-Hispanic..............................                    79.2%                    19.5%                    79.6%                    77.7%
-----------------------------------------------------
                                                         Composition within       Percent of racial/      Composition of aged      Composition of aged
                                                       total aged population     ethnic group in area      within FFS in area           within M+C
                                                        in areas with plans        enrolled in M+C
Aged by Race/Ethnicity:
    Black Non-Hispanic Aged.........................                     9.0%                    22.1%                     8.9%                     9.3%
-----------------------------------------------------
    Hispanic Aged...................................                     9.4%                    27.7%                     8.7%                    12.2%
    White Non-Hispanic Aged.........................                    81.6%                    20.5%                    82.4%                    78.4%
-----------------------------------------------------
                                                         Composition within       Percent of racial/      Composition of aged      Composition of aged
                                                           total disabled        ethnic group in area      within FFX in area           within M+C
                                                        population in areas        enrolled in M+C
                                                             with plans
-----------------------------------------------------
Disabled by Race/Ethnicity:
        Black Non-Hispanic Disabled.................                    20.3%                     9.6%                    20.5%                    18.7%
    Hispanic Disabled...............................                    15.7%                     8.8%                    16.0%                    13.1%
    White Non-Hispanic Disabled.....................                    64.0%                    11.2%                    63.5%                   68.2%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Unpublished CMS Data from the Medicare Current Beneficiary Survey, 2002. Note: Excludes racial/ethnic category ``other.''

    Another factor that influences beneficiary decisions to enroll in 
M+C is the use of M+C plans as the means of providing retiree health 
benefits. A substantial number of enrollees (about 18 percent of 
enrollment) are enrolled as retirees or dependents of retirees of firms 
that offer retiree coverage through M+C plans. These types of enrollees 
receive more generous benefits than individual Medicare enrollees of 
such plans (see Geoffrey R. Hileman, Kerry E. Moroz, C. William 
Wrightson, and Suhn K. Kim, ``Medicare+Choice Individual and Group 
Enrollment: 2001 and 2002,'' Health Care Financing Review, fall 2002, 
volume 24, number 1).
    A current feature of private Medicare plans that makes them 
attractive to beneficiaries is the coverage of outpatient drugs. 
Private drug-only plans will be available to beneficiaries in 
traditional fee-for-service Medicare as of 2006. There is no direct 
evidence that we can rely on to assume that beneficiaries will be less 
likely to enroll in MA plans if drug coverage is available in 
traditional fee-for-service Medicare (other than pointing out that 18 
percent of current enrollees in non-employer-sponsored MA plans are 
enrolled in plans with no drug coverage, and therefore there is a 
segment of the population that chooses MA coverage even without drug 
coverage.) However, for a variety of reasons, we believe the 
availability of drugs under Part D will only have a marginal impact on 
private MA plan enrollment. We believe that beneficiaries will view the 
private MA plans' benefit package integrating drugs and other services 
as attractive; MA plans will be able to offer drug benefits for a lower 
premium than PDP plans at a lower cost; and they will continue to be 
able to offer other extra benefits, including additional drug coverage. 
Such extra benefits were important in attracting enrollees to private 
plans in the period of greatest enrollment growth. Another advantageous 
feature that will continue to be unique to private MA plans is that, 
unlike PDP plans, they will have the ability to reduce Part B and Part 
D premiums through the rebates available from Medicare for plans with 
bids below the applicable benchmark. (Although there are only 
preliminary results from the experience of Medicare+Choice plans that 
have offered Part B premium rebates, plans and beneficiaries have had 
mixed experiences with this relatively new option (see ``Sub-Zero 
Premium'' (BIPA 606) M+C Plan Evaluation, final report submitted by 
Bearing Point to CMS, September 30, 2003, contract number 500-95-0057, 
task order 6, available at http://www.cms.hhs.gov/researchers/demos/subzeroevaluation.asp). However, we believe that in combination with 
other advantages of MA enrollment, and as beneficiaries and plans 
become more familiar with the premium rebate option, premium reductions 
will be a significant inducement for beneficiaries to enroll in MA 
plans. There is also the issue of whether the number of plan 
withdrawals in recent years and the publicity surrounding the 
withdrawals may deter beneficiaries from enrolling in MA plans. Again, 
we believe that the generous benefit packages and financial advantages 
of MA membership will outweigh such considerations.)

[[Page 46925]]

    Issues in Predicting Plan Behavior. With respect to plan behavior, 
whether plans have been available in a particular community (and 
whether Medicare beneficiaries have chosen to enroll in such plans) is 
often a function of local market factors. Brown and Gold found that 
``the capitation rate strongly influences whether and how quickly 
Medicare managed care develops and grows in an area, but other factors 
often outweigh the significance of the payment level'' (Randy Brown and 
Marsha Gold, ``What Drives Medicare Managed Care's Growth?'' Health 
Affairs (Nov/Dec 1999). Among other factors that they cite as 
influencing increased Medicare private plan enrollment were factors 
such as the regulatory environment, whether or not employers and unions 
are offering supplemental coverage other than through Medicare health 
plans, and perhaps most importantly whether beneficiaries have greater 
familiarity with managed care in areas where plans have had a long-
standing presence and acceptance in the commercial marketplace and 
among providers--as in the case of Portland, Oregon, which had, and 
continues to have, among the highest rates of Medicare private plan 
penetration even though the benefits available in Oregon have usually 
been less generous than in other areas with lower penetration levels.
    In the case of Oregon, where penetration is near the 50 percent 
level in urban counties, one factor is that Medicare private plan 
enrollment includes a much higher percentage of employer-sponsored 
enrollees (about one-third) than the national average (18 percent) 
(based on unpublished 2002 CMS data). By way of contrast, in another 
high-penetration area--Miami-Dade County, Florida--employer-sponsored 
enrollment is under 5 percent, but the extremely generous benefit 
packages have attracted about 50 percent of the county's Medicare 
beneficiaries, who have been able to obtain such benefits as unlimited 
generic and brand drug coverage, and currently can obtain a full rebate 
of their Part B premium.
    The Medicare regional plans present a market opportunity for 
insurers to participate in Medicare at less risk, with potentially 
higher payment levels than local plans in certain areas. With the 
financial incentives for PPO formation in the MMA, we believe that 
health plans will view the Medicare regional plan option as a good 
market opportunity to cover an insured population whose numbers will 
rise over the coming years, and we believe that many organizations that 
are already licensed as health insurers in multiple States (and in many 
cases, licensed in all States) will participate as both local and 
regional plans.
    A major goal in introducing regional plans is to extend health plan 
access to rural areas through regional MA organizations that will cover 
relatively large geographic areas (at least the size of a State). There 
is an extensive literature on the subject of the limited participation 
of Medicare health plans in rural areas even after the BBA raised 
payments significantly in rural areas. For example, in testimony to the 
Congress, the chairman of the Medicare Payment Advisory Commission 
summed up the reasons for limited availability of Medicare HMOs in 
rural areas and suggested what remedy there might be: ``Even though the 
floor under payments has been increased substantially (to $475 
monthly), coordinated care Medicare+Choice plans offering generous 
benefit packages at little or no cost have not entered rural areas. We 
see three reasons for this. First, coordinated care plans rely on 
provider networks, which are difficult to establish in rural areas. 
This difficulty arises because rural providers who face little 
competition have no incentive to accept reduced payments and because 
there are fewer so-called intermediate entities, such as independent 
practice associations, willing to accept financial risk. Second, the 
small populations in many rural areas provide too small an enrollment 
base over which to spread fixed costs. Third, because relatively few 
rural areas consume large amounts of health care, there is less scope 
to achieve efficiency gains * * * What should policymakers do? The 
efficiency gains and provider discounts that Medicare HMOs in urban 
areas use to fund additional benefits are unlikely to be achievable in 
rural areas. Although other alternatives to the current system should 
be explored--such as risk sharing through partial capitation or split 
capitation--rural beneficiaries are unlikely to see more generous 
benefits without an explicit or implicit subsidy.'' (``Report to the 
Congress: Medicare in Rural America,'' Statement of Glenn M. Hackbarth, 
J.D., chairman, Medicare Payment Advisory Commission, before the 
Subcommittee on Health Committee on Ways and Means, U.S. House of 
Representatives, June 12, 2001.)
    As previously noted, the use of the PPO model for regional plans, 
which are to cover wide areas, is intended to address the structural 
issues that have prevented Medicare plans from operating in rural 
areas. The payment issues are addressed through the incentives for the 
formation and continued participation of regional plans. However, the 
historical reluctance of Medicare plans to participate in rural areas 
is also a matter of uncertainty in projecting the extent of plan 
participation. The designation of regions would also be a factor 
affecting which rural areas may have plans participating.
    There is one further area of uncertainty, and that is related to 
the issue of medical savings account (MSA) plans. The MMA changed the 
MSA provisions of the BBA with a view towards facilitating the offering 
of such plans. However, we are unable to determine whether the MMA 
provisions will result in such plans being introduced and the extent to 
which beneficiaries might enroll in such plans.
    Projections Provided in the Impact Analysis. The methodology used 
to project the impact of the law and regulations is partially explained 
in the section on effects on beneficiaries. The projections are based 
on the assumption, for illustrative purposes, that there would be 15 
regions with at least three regional plans in each region. However, we 
do not know at this time how many regions will be designated, and there 
is no limit on the number of regional plans. With regard to the number 
of MA local plans, the projections of enrollment did not involve 
assumptions about any specific number of local plans. Instead a certain 
level of enrollment was assumed for local plans based on the benefits 
they are expected to offer; and it was assumed that there would be 
sufficient capacity among local plans to enroll all beneficiaries that 
are expected to join regional plans. The estimates of plan bids are 
based on the proprietary information submitted to CMS by current 
Medicare Advantage plans (coordinated care plans as well as 
demonstration PPO plans). Beneficiary behavior is modeled with utility 
functions that predict the choices they will make among available 
health plan options. As previously mentioned, we recognize the high 
degree of uncertainty entailed in such projections. The projections 
represent our best estimate of the impact given the assumptions stated.

C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies identify any Federal mandates resulting from 
proposed rules that may result in the expenditure by State, local, and 
tribal governments of $100 million or more (adjusted for inflation and 
currently

[[Page 46926]]

about $110 million). If this threshold is met, a detailed analysis is 
required. This proposed rule does not contain any ``mandate'' as such, 
and other direct effects on State, local, and tribal governments will 
be minimal. There will, however, be an indirect effect on State premium 
tax revenues due to the increased enrollment in MA plans and reduced 
enrollment in certain Medigap policies. These indirect effects, 
however, are not the result of these proposed rules, but of increased 
plan payments and prohibitions on sale of those Medigap policies 
implemented independently of these regulations.
    Title II of the MMA contains several provisions that have a direct 
impact on States. Section 232(a) of the MMA amends section 1856(b)(3) 
to preempt all State standards other than licensure and solvency as 
they apply to MA plans. Section 232(b) of MMA amends section 1854(g) to 
expand a prohibition on State taxes for MA plans to apply to both CMS' 
payments to MA plans and to enrollee premium payments to MA plans. In 
addition, section 221(c) of MMA allows for temporary waiver of State 
licensure in States covered by regional MA plans where those plans 
cover a multi-State area.
    Medicare law prohibiting State taxes on section 1853 payments to 
M+C organizations, that is, payments made by CMS to health plans 
contracting with Medicare, was established by the Balanced Budget Act 
1997. That prohibition did not apply to enrollee premium payments made 
to M+C plans.
    Section 232(b) of the MMA has expanded the prohibition on State 
taxes for MA plans, addressed in statute at section 1854(g), to apply 
to both section 1853 payments to MA plans and to section 1854 enrollee 
premium payments to MA plans. This provision was effective on the date 
of enactment of the MMA and is, therefore, not subject to the 
Regulatory Accountability provisions of the UMRA, which apply only to 
effects resulting from promulgation of rules. Section 422.404(a) is 
revised to reflect this change. We do not anticipate that the added 
prohibition on taxation of enrollee premiums to have a significant cost 
impact on States. Enrollee premiums to Medicare health plans are a 
small proportion of total payments to health insurers. Thus, State loss 
of tax revenue from Medicare enrollee premiums would also be small. 
Therefore, even if it were subject to UMRA, the prohibition of taxation 
by States of Medicare enrollee premiums would not approach the UMRA 
threshold.
    We also recognize, however, that there is an indirect effect of the 
MMA law because of the expected enrollment shift from taxable Medigap 
insurance, and employer-sponsored private supplemental coverage, to 
non-taxable MA plans. This indirect effect would vary by State and 
would be dependent on a variety of factors, including the State's tax 
rate on health insurance premiums, the extent of Medigap enrollment in 
a State, the extent that Medigap enrollees choose to shift to MA plans 
in that State, as well as other resulting factors such as changes in 
Medigap premiums that could result from enrollment shifts. Due to these 
factors, estimates of the indirect effect of enrollment shifts away 
from taxable Medigap and employer-sponsored supplemental plans combined 
with the prohibition on State taxation of Medicare enrollee premiums 
would involve great uncertainty and would necessarily be speculative.

D. Federalism

    MMA provisions may have qualitative impacts on how States regulate 
and interrelate with health insurers serving Medicare enrollees due to 
the expanded preemption of State laws and possible temporary waiver of 
State licensure for multi-State MA regional plans. Law relating to 
Federal preemption of State standards for Medicare-contracting health 
plans has undergone several revisions in recent years. While Federal 
preemption of State standards was initially established into Medicare 
law by the Balanced Budget Act of 1997, a general preemption authority 
existed under Executive Order prior to that time. Federal preemption of 
State standards for Medicare-contracting health plans was expanded by 
Congress in 2000 and expanded again by Congress in 2003.
    Prior to 1997, Federal law did not contain specific preemption 
requirements for Medicare-contracting health plans. However, section 
1876 Federal requirements could preempt a State law or standard if 
State provisions were inconsistent with Federal standards based on 
general constitutional Federal preemption principles, consistent with 
the provisions of Executive Order 12612 on Federalism, since superseded 
by Executive Order 13132. Section 1876 requirements did not preempt a 
State law or standard unless the State law or standard was in direct 
conflict with Federal law. See the June 26, 1998, Federal Register 
notice at page 35012 for further discussion on the history of general 
Federal preemption of State law prior to the Balanced Budget Act of 
1997.
    The Balanced Budget Act of 1997 established for the Medicare+Choice 
program at section 1856(b)(3) a general preemption authority in which 
State laws or standards would be preempted when they were inconsistent 
with M+C standards in the same manner that the previous Executive Order 
applied, and this law also established a specific preemption of State 
laws and standards in three areas: benefit requirements, requirements 
relating to inclusion or treatment of providers, and coverage 
determinations (including related appeals and grievance procedures). 
This meant that a general preemption applied if State laws, 
regulations, or other standards were inconsistent with Federal 
standards and, furthermore, in the specifically preempted areas, meant 
that State standards were preempted regardless of whether or not those 
standards were inconsistent with Federal standards.
    In 2000, section 614 of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA) maintained the general 
preemption authority and expanded specific preemption requirements by 
amending benefit requirements to include cost-sharing requirements and 
by adding a fourth specific preemption for requirements relating to 
marketing materials and summaries and schedule of benefits regarding a 
M+C plan. Thus, the list of areas of specific preemption effective 
since 2001 were: benefit requirements (including cost-sharing 
requirements), requirements relating to inclusion or treatment of 
providers, coverage determinations (including related appeals and 
grievance procedures), and requirements relating to marketing materials 
and summaries and schedule of benefits.
    In 2003, section 232(a) of the MMA amended section 1856 for 
Medicare Advantage plans by eliminating the general and specific 
preemption distinctions from section 1856 and broadened Federal 
preemption of State standards to broadly apply preemption to all State 
law or regulation (other than State licensing laws or State laws 
relating to plan solvency). Sec.  422.402 of regulation is thus 
revised. Note that State laws on secondary payer are also preempted by 
Federal law and a change is made in regulation at Sec.  422.108(f) to 
reflect that States are prohibited from limiting the amount that MA 
organizations can recover from liable third parties under Medicare 
Secondary Payer provisions. Congress indicated its intention to fully 
preempt State laws in the Conference Report for the MMA

[[Page 46927]]

emphasizing that Medicare is a Federal program and that State laws 
should not apply. Section 232(a) of MMA was effective on enactment.
    We do not perceive that there will be a significant cost impact on 
States from section 232(a) of MMA to broaden Federal preemption 
authority to preempt all State law and regulation (other than State 
licensing laws or State laws relating to plan solvency). The specific 
preemptions already in effect were broad areas where States were most 
likely to have enacted laws or developed other regulations or standards 
for health insurance. Apart from those specific preemptions, general 
preemption already applied where State provisions were inconsistent 
with Federal standards such that other State standards in conflict with 
Federal standards were also already preempted.
    Areas of State law that will newly be preempted by full preemption 
of State laws (other than licensing and solvency) do exist, however, 
and will affect State residents who are Medicare beneficiaries. State 
governments will be affected in that State governments will no longer 
be responsible for enforcing preempted laws, which will likely reduce 
costs to States. A discussion of the diverse types of State laws that 
previously fell under general preemption is addressed in some detail in 
the response to public comments in the preamble to a June 29, 2000, 
final rule implementing the Balanced Budget Act of 1997's preemption 
law. (See pages 35012-35014 of the June 29, 2000, Federal Register for 
a further discussion of the types of State laws that may be affected, 
which includes grievances and quality complaint reviews conducted by 
State governments.)
    In reality, determinations of which State laws have been subject to 
general preemption often has not been made unless specific questions or 
disputes have arisen that resulted in a court review of applicability 
of law to specific cases. The MMA revision relieves uncertainty of 
which State laws are preempted by ``preempting the field'' of State 
laws other than State laws on licensing and solvency.
    As required by Executive Order 13132, because of the implications 
for the States of the Federal preemption of State laws enacted in the 
MMA, we will consult with the States regarding the effect of the 
preemption provision on the role the States will play with respect to 
the regulation of Medicare plans, and the effect the preemption will 
have on State agencies and on beneficiaries enrolled in Medicare health 
plans. We will discuss the results of this consultation when this rule 
is published as a final rule.
    We also request public comment on the effect of the preemption 
provisions included in this proposed rule.

E. Effect on Beneficiaries

    The MMA increases the value of benefits that enrollees of MA plans 
have and will increase the availability of such benefits. When MA plans 
can bid at levels below the relevant benchmark, they can offer Medicare 
enrollees coverage of benefits beyond what Medicare covers (such as 
eyeglasses and hearing aids, as well as additional drug coverage), 
reduction in out-of-pocket expenditures for covered services (either as 
reduced cost sharing, on average, compared to fee-for-service Medicare, 
or reduced premium expenditures compared to Medigap, for example), and 
reductions in expenditures for the Medicare Part B and Part D premiums. 
As a result of the MMA provisions, we project that in the period 2004 
through 2009, Medicare beneficiaries enrolling in MA plans will see 
benefits beyond basic Medicare A and B coverage valued at $1.4 billion. 
For 2005, the expected dollar value of benefits for beneficiaries will 
include approximately $256 million in remaining contributions to plan 
stabilization funds that plans must use by the end of 2005. (Effective 
for years after 2005, the MMA eliminated the ``stabilization fund'' 
option that was used by some plans to deposit Medicare payments for use 
in a later contract year to finance the cost of additional benefits or 
premium reductions. These funds will have to be used in the 2005 
contract year. There is also a potential spillover effect of increased 
provision of benefits that competing plans in the same area would have 
to offer to remain competitive with plans using the stabilization fund 
dollars.) The estimate of benefits for beneficiaries is shown in Table 
2.
    The data in Table 2 (and in Table 4) reflect projections we have 
made about the number of plans participating, their bids and 
(consequently) their level of benefits, and the level of expected 
beneficiary enrollment. These projections are based on (a) What we know 
about the expected benchmarks in each area; (b) the current premium and 
benefit packages of MA plans and PPO demonstration plans, and their 
costs for the packages as submitted to CMS; and (c) the current 
patterns of enrollment in health plans in Medicare and the commercial 
sector. As previously noted, we assume that there will be at least 
three regional plans in each region (in our illustrative case that 
assumes that there are 15 regions), and that there will be a sufficient 
number of local plans to meet beneficiary demand for enrollment in 
local plans. In general, in terms of the proportion of funds used to 
provide extra benefits to enrollees, we expect local MA plans to be 
able to have significantly more revenue available than regional PPO 
plans for the provision of extra benefits and reduced out-of-pocket 
expenditures. However, we would also expect that in many areas, there 
will only be regional plans available, and no local MA coordinated care 
plans. As noted elsewhere, areas where there are only regional plan 
options and no coordinated care MA plans are likely to have higher 
benchmarks that are a vestige of the ``floor'' payment status of such 
counties. Although PPO plans may face higher costs in operating in such 
areas, the higher benchmarks will enable them to offer enriched benefit 
packages (compared to traditional fee-for-service Medicare). The 
projections of Tables 2 and 4 show the distribution of dollars among 
all plans. The distribution is subject to regional variation (as is 
currently the case), so that in some areas, for example, beneficiaries 
will have more offerings and better benefit packages available to them 
as a result of plans using more funds to provide extra benefits, 
reduced cost sharing, and lower premiums. Some plans may offer very few 
extra benefits but would still be attractive to enrollees, as noted 
elsewhere, and would be viewed by beneficiaries as more advantageous 
than FFS Medicare with Medigap coverage, for example.
    The dollar figures shown in Tables 2 and 4 reflect the projected 
additional Medicare Part A and B expenditures incurred solely as a 
result of the MMA provisions. That is, the expenditures are the 
incremental program expenditures that are incurred because of the MMA 
provisions, including any difference in expenditures that result when 
beneficiaries enroll in a private plan rather than receiving care in 
fee-for-service Medicare.

[[Page 46928]]



 Table 2.--Projected Benefits to MA Enrollees Resulting From Title II Provisions of the MMA, Years 2004 to 2009,
in Millions (Amounts Above Amounts in Absence of MMA Title II Provisions); Projected Total Plan Enrollment, 2004
                                              to 2009, in Millions
----------------------------------------------------------------------------------------------------------------
                                              Year     Year     Year     Year     Year     Year    Total, Years
                                              2004     2005     2006     2007     2008     2009      2004-2009
----------------------------------------------------------------------------------------------------------------
Enrollment Projection, Local Plans........    4.662    5.088    6.449    6.547    6.685    6.825  ..............
Enrollment Projection, Regional Plans.....  .......  .......    3.064    4.665    5.534    6.815  ..............
Total Value of Transfer Payments Used for       134      201      220      177      148      121            1001
 Extra Benefits and/or Premium and Cost
 Sharing Reductions, Local Plans..........
Total Value of Transfer Payments Used for   .......  .......       48      118      117      117             400
 Extra Benefits and/or Premium and Cost
 Sharing Reductions, Regional Plans.......
Total Value of Transfer Payments Used for       134      201      268      295      265      238           1,401
 Extra Benefits and/or Premium and Cost
 Sharing Reductions, Both Types of Plans..
----------------------------------------------------------------------------------------------------------------

    Because of the MMA payment increases effective March 2004, 
beneficiaries enrolled in private plans have already seen reduced 
expenditures and increased benefits.
    The March payment increases varied by geographic area. For example, 
because of the MMA provision that made fee-for-service payment rates 
one of the ``prongs'' of payment, New Jersey counties had an average 
24.3 percent payment rate increase on an enrollment-weighted basis (all 
counties in New Jersey had 86 or more enrollees and have MA plans 
available). As a result, in New Jersey, the average monthly M+C 
coordinated care plan premium across all counties declined from $56 to 
$15. In all 21 of New Jersey's counties coordinated care plans have 
added a drug benefit. Previously, a drug benefit was available from an 
M+C coordinated care plan in only one county for 2004 before the MMA 
changes (though the two PPO demonstration projects operating in New 
Jersey did offer drug coverage). As of December 2003, only seven 
percent of New Jersey Medicare beneficiaries were enrolled in M+C plans 
or PPO demonstration plans. In July 1999, sixteen percent of New Jersey 
beneficiaries were enrolled in M+C plans. We would expect enrollment in 
New Jersey to rise because of the availability of better benefits. (In 
addition, a Medicare contracting plan in New Jersey recently announced 
that it would expand its Medicare service to include eight more 
counties.)
    There are notable geographic differences in the benefit offerings 
of MA plans. In addition to the access differences between rural and 
urban counties that have already been discussed, the generosity of 
benefits has been lower in rural areas than urban areas. In 1999, for 
example, while the enrollment weighted premium for all enrollees of M+C 
plans was $5 per month, for the three percent of enrollees residing in 
rural counties and enrolled in M+C plans, the enrollment-weighted 
premium was $14 per month. In 1999, when 84 percent of the universe of 
M+C enrollees had drug coverage in a basic plan (zero premium or 
mandatory premium), 57 percent of rural enrollees had this level of 
drug coverage. For the March 2004 benefit offerings, this difference 
between rural and urban areas persists. Zero premium plans are 
available to 68 percent of urban beneficiaries in counties where there 
are plans, but only 30 percent of the beneficiaries who live in a non-
MSA county in which there is an operating MA coordinated care plan or 
demonstration PPO have access to a zero premium plan. In rural areas, 
72 percent of those with access to a plan can obtain drug coverage 
through a private plan, while in urban counties with plans available, 
95 percent of beneficiaries have access to a drug coverage plan.
    This difference between urban and rural areas may persist among MA 
local plans, which can vary benefits by county. With MA regional plans, 
there is a requirement that benefits must be uniform throughout the 
entire region. Hence, regional plans cannot offer different benefits in 
rural and urban counties, which will eliminate the disparity between 
such counties in the regional plan arena. However, there may be 
differences between regions in the generosity of benefits regional MA 
plans offer, and the degree of disparity would depend in part on the 
make-up of the regions, which CMS will determine at a later date.
    Table 3 illustrates the variation that exists in current 
coordinated care plan offerings across States. The table lists the 
types of MA benefit packages available in the counties of each State in 
which plans are available (coordinated care plans and PPO demonstration 
plans). The counties are categorized by the most generous benefit 
package being offered by at least one plan in each county. The table 
indicates whether the State has any counties in which there are (a) 
zero premium plans with drug coverage included in the zero premium 
plan, (b) plans with zero premium but no drug coverage, (c) plans that 
include drug coverage in a benefit offering for which there is a 
premium, and (d) counties in which plans charge a premium but no drug 
coverage plan is offered. This kind of benefit variation at the State 
level will not occur with regional plans because of the uniform benefit 
requirement, as noted above, and because Medicare will now include a 
drug benefit.
BILLING CODE 4120-01-P

[[Page 46929]]

[GRAPHIC] [TIFF OMITTED] TP03AU04.002

BILLING CODE 4120-01-C
    High penetration in MA plans may affect the Medigap market. To the 
extent that Medicare beneficiaries will be leaving Medigap plans to 
join MA plans,

[[Page 46930]]

or will join MA plans on becoming eligible for Medicare rather than 
choosing fee-for-service Medicare with Medigap coverage, there is a 
potential effect on the cost of Medigap premiums in some markets. If 
fewer new enrollees enroll in Medigap plans, and if MA continues to 
enroll disproportionately younger beneficiaries, premiums will rise as 
Medigap subscribers age and use more services. As premiums rise, the 
premium rate may cause some subscribers to discontinue Medigap coverage 
(in favor of MA enrollment, or fee-for-service coverage without a 
supplement), causing a further increase in Medigap premiums as only the 
subscribers with the greatest perceived health care expenditures 
maintain their Medigap coverage. If MA plans continue to attract 
younger or healthier beneficiaries, and relatively older or sicker 
beneficiaries remain in fee-for-service Medicare, there is a further 
potential Medigap effect leading to rising premiums. The Medigap 
effects can potentially have a greater impact on rural areas in a State 
(where Medigap is a more common form of supplemental coverage than in 
non-rural areas). Because most Medigap plans are rated on a statewide 
basis, if the movement away from Medigap to MA plans is the result of 
the ability of urban local plans to offer extremely generous benefits 
that regional plans are unable to match, the market changes in the 
urban area(s) could cause Medigap premium rates to rise for all the 
State's beneficiaries, even for those beneficiaries that may not have 
the range of choices available to urban areas. With regard to any 
Medigap effect, however, it should be noted that the most recent trends 
in the data from the Medicare Current Beneficiary Survey for 2001 show 
a significant rise in the number of beneficiaries with Medigap 
coverage, possibly due to the decline in the availability of employer-
sponsored retiree coverage.

F. Effect on Health Plans and Insurers

    Health plans will see significant benefits as a result of the MMA 
through the transfer payments from the Federal Government to 
participating plans. Plan payments will increase significantly, 
allowing plan revenues and profits to rise as enrollment increases with 
the offering of better benefits. Organizations that currently contract 
with Medicare will have new market opportunities as regional plans and 
opportunities to expand their participation as local plans (other than 
as PPOs at a local level, which are prohibited from being newly formed 
for an interim transition period, 2006 to 2007). Organizations that are 
not currently participating in Medicare will have a more favorable 
market environment for participating as local or regional plans.
    The Federal Government transfer payments to health plans over and 
above what would have been paid in the absence of the law, as a result 
of the Title II provisions of the MMA, are expected to total $23.4 
billion. Of this amount, plan administrative costs (which include 
profits and retained earnings) are expected to total $1.2 billion (over 
and above amounts that otherwise would have been paid). The remaining 
amounts will finance the provision of health care benefits (together 
with other revenue the plan has, such as member premiums). The benefits 
to health plans will vary geographically, depending on benchmarks and 
the cost of doing business for the plans. The administrative cost 
figure cited here for the plans includes projected start-up costs for 
new organizations becoming Medicare contractors. The estimates of 
benefits related to MA plans for 2004 through 2009 are shown in Table 
4. (The basis for these projections is discussed in the section on 
effects on beneficiaries, in the discussion of Table 2.)

 Table 4.--Projected Benefits to MA Plans Resulting From Title II Provisions of the MMA, Years 2004 to 2009, in
Millions (Amounts Above Amounts in Absence of MMA Title II Provisions); Projected Total Plan Enrollment, 2004 to
                                                2009, in Millions
----------------------------------------------------------------------------------------------------------------
                                              Year     Year     Year     Year     Year     Year    Total, years
                                              2004     2005     2006     2007     2008     2009      2004-2009
----------------------------------------------------------------------------------------------------------------
Enrollment Projection, Local Plans........    4.662    5.088    6.449    6.547    6.685    6.825  ..............
Enrollment Projection, Regional Plans.....  .......  .......    3.064    4.665    5.534    6.815  ..............
Total Value of Transfer Payments Used for     1,430    2,155    2,356    1,894    1,590    1,299          10,724
 the Provision of Medicare A and B
 Benefits, Local Plans....................
Total Value of Transfer Payments Used for   .......  .......    1,225    2,990    2,978    2,966          10,159
 the Provision of Medicare A and B
 Benefits, Regional Plans.................
Total Value of Transfer Payments--Plan          174      262      286      230      193      158           1,303
 Administrative Costs (Including Profit),
 Local Plans..............................
Total Value of Transfer Payments--Plan      .......  .......      142      345      344      343           1,174
 Administrative Costs (Including Profit)
 Regional Plans...........................
Total Value of Transfer Payments to Plans,    1,604    2,417    4,009    5,459    5,105    4,766          23,360
 Both Types of Plans......................
----------------------------------------------------------------------------------------------------------------

    As between regional and local plans, and the choice that an 
organization can make, regional plans, as described elsewhere, have a 
number of financial incentives. Local plans have the advantage of being 
able to selectively market to Medicare beneficiaries in that they can 
make decisions on a county basis. Local MA plans can choose whether or 
not to serve a particular county, and they can also vary benefits and 
premiums by county under one contract by segmenting larger service 
areas to as small a unit as a single county. The uniform benefit 
requirement applies to local plans at the service area or segment 
level, while regional MA plans, as previously noted, must have a 
uniform benefit in the entire region (for each of the plans that an MA 
regional organization offers in a region, each of which must be offered 
on a region-wide basis). One organization may offer both local and 
regional plans. The possible consequences of these differences in 
service area configurations are discussed further in the section on 
alternatives considered.
    Although we have emphasized the additional benefits that we expect 
plans to be able to offer, by having eliminated the adjusted community 
rate process and its requirement that permissible plan profit levels 
must be the same as for a plan's commercial product, and having 
eliminated the limit on premiums related to cost sharing for Medicare-
covered benefits, plans can potentially increase their profit levels, 
as their competitive situation permits.

[[Page 46931]]

Plans with bids exceeding the benchmark can also be assured of having 
adequate revenue to operate as Medicare plans. These provisions may 
lend stability to the program in allowing plans to make adjustments to 
revenue needs from one year to the next without facing statutorily 
imposed limits on their ability to generate needed revenue.
    There are a number of statutory and regulatory provisions which 
reduce burden on Medicare plans, including the statutory changes that 
eliminated the reporting requirements relating to physician incentive 
plans, and the major changes in the quality assurance standards for 
plans. As discussed elsewhere, this proposed rule also has several 
administrative changes that will reduce plan burden, including the 
file-and-use approach to marketing material review, elimination of plan 
disclosure requirements that are redundant, and provisions that 
streamline the appeals procedure as regards notices to beneficiaries.
    In terms of estimating the impact of these changes, the physician 
incentive plan (PIP) burden reduction was previously codified in 
regulation CMS-4041-F on August 22, 2003 and effective September 22, 
2003. In the regulatory impact statement of that rule (pages 50,853 and 
50,854 of the Federal Register) we said: ``We find that overall the 
economic impact of this final rule is positive, due to * * * the 
reductions in regulatory burden due to * * * the reduction of the 
physician incentive reporting requirements * * * The data available do 
not allow us to determine the distributional effects * * * We have not 
considered alternatives to lessen the economic impact or regulatory 
burden of this final rule because the regulatory burden is reduced * * 
* '' We have no new data at this time that would alter the analysis and 
conclusions drawn in the prior rule.
    With regard to the ``file and use'' policy, we are codifying in 
regulation a previously existing program tolerance. The ``burden 
reduction'' actually associated with ``File and Use'' is minimal for 
two reasons. The first is that it represents a ``tolerance'' already in 
use; so additional burden reduction is non-existent. Second, File and 
Use is simply permission to publish (or use) certain marketing 
materials prior to CMS review and approval. To the extent that MA plans 
``earn'' (or qualify for) File and Use status, the only advantage 
gained and the only burden reduction available to them is that MA plans 
qualifying for File and Use will not need to wait for CMS approval 
prior to using specific marketing materials. Finally, CMS does not 
currently collect data nor does it have information on the 
distributional impact of the currently existing Use and File program, 
so it is impossible to project the precise impact that File and Use 
will have on organizations qualifying for it.
    We remove certain plan disclosure requirements from Sec.  
422.111(f). These disclosure requirements all are information that MA 
organizations must provide ``upon request.'' We have no data that would 
help us quantify the actual level of burden reduction. We note that CMS 
initiated this burden reduction. To the extent that MA organizations 
did not bring the burden associated with these disclosure requirements 
to our attention as part of the regulatory reform initiative, they 
probably also have not actually been called upon to so disclose through 
actual requests for such information. Therefore, the level of 
administrative burden mitigation is likely negligible.
    As stated in the preamble, we request suggestions for other burden-
reducing reforms or innovations that will improve the ability of plans 
to participate in the program without compromising quality or services. 
We are particularly interested in comments on whether, within the 
statutory construct, there are structural or administrative 
requirements in the MA program that would act either as a barrier to 
plan entry into the MA market or would adversely impact plan 
participation, and consequently, beneficiary choice.
    Other Effects. Although most Medicare health plans and 
organizations that can participate as MA plans stand to benefit from 
the MA provisions, as previously noted Medigap insurers may face price 
pressures and see declining enrollment if MA enrollment increases to 
the level that CMS projects, and if fewer individuals in fee-for-
service Medicare buy Medigap, though there is the mitigating factor 
previously discussed regarding the trend of an increase in the number 
of Medicare beneficiaries with Medigap policies. It should be noted 
that many of the insurers that offer Medigap coverage are companies 
that also operate health plans and are already, or can become, local or 
regional MA plans.
    Medicare Advantage private fee-for-service plans are another class 
of insurer that may see changes in the competitive environment. To 
date, such plans have operated primarily in ``floor'' counties 
(counties in which, because of the BBA and BIPA payment rules, health 
plan payment rates are higher than estimated fee-for-service Medicare 
costs). Private fee-for-service plans generally have not competed 
directly against coordinated care plans. Private fee-for-service plans 
offer less generous benefit packages than MA coordinated care plans, 
but they do offer some level of supplemental coverage for individuals 
(including, in the case of two organization, drug coverage), and they 
offer an advantage that some beneficiaries prefer, which is that there 
is not a limited network of providers that must be used to obtain 
covered care. As a consequence of the MMA, where there are regional MA 
plans, regional plans would have a competitive advantage over Medicare 
private fee-for-service plans that had usually targeted areas in which 
there were no MA local plans. MA regional plans can offer coverage for 
out-of-network care, and they are likely to be able to offer a 
significant level of extra benefits because of the financial incentives 
in the MMA. (As stated elsewhere in the preamble, regional MA plans may 
not be private fee-for-service plans; regional plans must operate as a 
PPO model. All but one of the current private fee-for-service plans is 
sponsored by an organization that is part of a firm that has local MA 
plan contracts--though the one exception is the largest PFFS plan.)

G. Effects on States

    States may see benefits from Title II of the MMA if more Medicaid 
beneficiaries who are also entitled to Medicare A and B coverage (the 
dual eligible population) enroll in private Medicare plans. Because MA 
enrollees are likely to receive non-Medicare-covered benefits (such as 
vision care), dual eligible enrollees would receive benefits that the 
States would otherwise have had to pay for. States may benefit from 
reduction of the Part B premium which the State would otherwise pay for 
dual eligibles. It should be noted that to date, the enrollment level 
of dual eligibles in Medicare plans is not as high as it could be (see 
Edith G. Walsh and William D. Clark, ``Managed Care and Dually Eligible 
Beneficiaries: Challenges in Coordination,'' Health Care Financing 
Review, fall 2002, volume 24, number 1). A number of factors could 
contribute to greater enrollment of dual eligibles in MA plans: the 
extension of plan availability across an entire State (as part of a 
regional plan), the likelihood of Part B premium rebates (which the 
State would be entitled to), and the designation in the law of dual 
eligibles as a category for purposes of determining whether an MA plan 
is a specialized plan. As also noted previously, dual eligible 
individuals do not have the same incentives to enroll in MA plans as 
other low-income

[[Page 46932]]

Medicare beneficiaries. In certain circumstances, a State may require 
the enrollment of dual eligibles in MA plans (if, for example, the plan 
is also a Medicaid health plan and the State has a waiver permitting 
mandatory health plan enrollment for Medicaid beneficiaries).
    The direct effect on the States of the expansion of the premium tax 
prohibition is discussed in the section on unfunded mandates. The MMA 
changed the law to exempt from State premium taxes the premiums paid by 
beneficiaries, as well as Federal payments to plans (which the law 
already exempted). This provision by itself has a relatively minor 
effect on State revenues, given the prevalence of zero-premium MA plans 
and given the expected trend in MA benefit packages towards more zero-
premium products. However, an indirect effect of the premium tax 
prohibition is that, to the extent that there are reductions in the 
number of beneficiaries who hold Medigap policies, States may lose 
premium tax revenue that would have been derived from Medigap policies 
(the entire premium of which is generally taxed). As previously 
discussed, it is unclear what the impact will be if there is such an 
effect, given the trend of greater numbers of beneficiaries with 
Medigap coverage.

H. Effect on Employers and Unions as Sponsors of Retiree Coverage

    Historically, Medicare-contracting health plans that contracted 
with employer or union groups to provide benefits had to comply with 
the same Medicare regulatory requirements that apply to all Medicare-
contacting health plans. In 2000, section 617 of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) added a new authority at section 1857(i), effective 2001, that 
provided CMS broad authority to waive or modify requirements that 
hinder the design of, the offering of, or the enrollment in M+C plans 
under contracts between M+C organizations and employers, labor 
organizations, or the trustees of a fund established to furnish 
benefits to an employer's current or former employees or to a labor 
organization's current or former members.
    Three types of waivers have been approved under the BIPA authority 
which are discussed in a August 22, 2003, Federal Register notice on p. 
50845. The three types of waivers are: (1) M+C organizations are 
allowed to offer employer-only plans that are not open to individuals 
and plan marketing materials do not have to be submitted for CMS review 
and approval; (2) M+C organizations are allowed to ``swap'' benefits 
not covered by Medicare of approximately equal value when an employer 
asks for a benefit package different from what is offered on the 
individual market; and (3) M+C organizations are allowed to raise the 
co-payments for certain benefits but to provide a higher benefit level 
or a modification to the premium charged as long as projected 
beneficiary liability is actuarially equivalent. These waiver 
authorities also will continue for MA organizations.
    Section 222(j) of the MMA adds another authority for employer or 
union sponsored plans, effective 2006, at section 1857(i)(2) of the Act 
for CMS to waive or modify requirements that hinder the design of, the 
offering of, or the enrollment in an MA plan offered directly by an 
employer, a labor organization, or the trustees of a fund established 
by employers or labor organizations to furnish benefits to current or 
former employees or to current or former members of labor 
organizations. This authority is added in the proposed rule at Sec.  
422.106(d). We do not know to what extent employers or labor 
organizations may be interested in pursuing waivers under this new 
authority. For an employer or union to contract in this manner may 
require that the employer or union obtain State licensure as a risk-
bearing entity and meet any licensure and solvency standards imposed by 
the State for health plans. To the extent that such licensure would be 
required, there may, however, be a few entities that already offer 
health insurance for their own employees or offer insurance on the 
market that may be interested.
    However, we do believe that there is likely to be a significant 
increase in the number of retirees whose employer or union provides 
retiree coverage through an MA plan because of the additional payments 
MA plans will receive (so that benefits that otherwise would have been 
financed by the employer or union can be financed by Medicare 
payments), and because regional plans will be available that can cover 
wider geographic areas and meet the needs of employers with retirees 
residing throughout a large geographic area, or dispersed across many 
geographic areas.
    As of January 2002, about 18 percent of enrollees in 
Medicare+Choice plans were employer- or union-sponsored retirees (see 
Hileman et al., previously cited). There are 1.1 million beneficiaries 
residing in counties in which only employer-sponsored retirees or 
dependents may enroll in MA plans operating in those counties. This 
particular market segment is attractive to MA plans for a number of 
reasons, including the ease of marketing to a large group, their status 
as previously insured individuals, and the ability to offer seamless 
continuation of coverage between active worker status as a plan 
enrollee and retiree status. The regional PPO model may also facilitate 
the ability of plans to serve this population to the extent that 
retirees no longer reside near their place of work.
    According to a 2003 Hewitt-Kaiser Family Foundation survey of large 
employers, 21 percent of employers with 1000 or more employees require 
new Medicare-eligible retirees to pay 100 percent of the plan premium. 
The survey also found that, with regard to future trends, ``Serious 
consideration is also being given to only providing access to health 
benefits and asking retirees to pay 100 percent of costs; 26 percent of 
firms said that they are very or somewhat likely to make such a 
change.'' (Frank B. McArdle, et al., ``Large Firms'' Retiree Health 
Benefits Before Medicare Reform: 2003 Survey Results.'' Health Affairs, 
web exclusive, January 14, 2004.) MA plans are a likely vehicle for 
employers to offer health plans under these circumstances.

I. Effect on the Federal Government

    The benefits to beneficiaries and private health plans are the 
result of transfer payments from the Federal Government to plans, or, 
in the case of reductions in the Part B and Part D premiums, transfer 
payments directly to beneficiaries. For the period 2004 through 2009, 
the total amount of such transferred funds is projected to be $23.4 
billion above what would otherwise have been incurred in the absence of 
the Title II provisions of the law. The total expenditure figure 
assumes that $5.2 billion of the stabilization fund dollars for 
regional MA plans are used in the period 2004 through 2009. The 
preceding figure assumes a private plan penetration rate, for 
illustrative purposes, of 33 percent by 2009. We have not separately 
projected an administrative cost to the Government for the 
administration of Title II of the MMA separate from administration of 
all portions of the MMA taken together.
    The section on alternatives considered examines the impact on 
expenditures in choosing between statewide and plan-specific risk 
adjustment to determine rebate amounts. Another issue that has an 
effect on expenditures is the payment adjustment relating to risk 
adjustment for bids that exceed the benchmark. Proposed Sec.  
422.308(e), discussed in

[[Page 46933]]

subpart G of the preamble, would implement section 1853(a)(1)(G) of the 
Act, which requires CMS to make certain plan payment adjustments to 
take into account the health status of a plan's enrollees. For plans 
bidding above the benchmark, this provision would ensure that the total 
revenue a plan receives for its actual enrollees matches the plan's 
required revenue. The 1853(a)(1)(G) provision requires CMS to adjust 
plan payments in recognition of the amount that a health plan receives 
as a basic premium from its enrollees. The basic member premium that 
plans actually will charge is the premium for a ``1.0'' beneficiary--
that is, it is determined based on the revenue needs for a person with 
average health status. For a plan with a risk score above 1.0 (that is, 
the plan has enrollees that are sicker than average and utilize more 
services), there would be an additional payment from Medicare to 
provide the plan with revenue that covers the shortfall between the 
basic premium determined for a 1.0 enrollee, and the actual revenue 
necessary from member premiums. (Under the current system, and through 
2005, in such a case enrollees would be charged a higher plan premium 
to cover the needed revenue that matches their enrollees' actual 
utilization patterns.)
    A similar adjustment would be made for plans with risk scores below 
1.0. A plan with a risk score below 1.0 would have determined its basic 
premium for a 1.0 person, and enrollees will be charged that level of 
premium. This provides the plan with more revenue than it needs. 
Consequently, the section 1853(a)(1)(G) provision would call for a 
reduction in Medicare's payment to the plan in recognition of the 
additional revenue that comes from member premiums that are determined 
for a 1.0 beneficiary.
    The budgetary impact of this provision depends on the number of 
plans that would have bids above the benchmark, and the health status 
of enrollees in such plans. One would assume that the majority of 
organizations deciding to enter the Medicare market would like to be 
able to offer extra benefits at no cost, or at little cost, to 
prospective enrollees. Therefore there may be few plans that bid above 
the benchmark, and those that do so would try to limit the basic 
premium to an amount that would attract a sufficient number of 
beneficiaries. However, bids above the benchmark may arise (a) in 
certain areas--for example, in areas where there may be only one or two 
plans, or (b) in certain competitive situations--for example, when the 
reason for a bid above the benchmark is that the plan offers coverage 
that is expensive but has features that appeal to beneficiaries (such 
as a wide network of providers, particular ``marquee'' providers in the 
network, or generous out-of-network coverage).
    With respect to the risk profile of plans that may be bidding above 
the benchmark, currently private plan enrollees are healthier on 
average than Medicare beneficiaries in traditional fee-for-service. If 
plans bidding above the benchmark have healthier-than-average 
enrollees, the budgetary impact of the 1853(a)(1)(G) provision would 
actually be net program savings as beneficiaries bear some extra cost 
in their plan premium. If today's patterns of enrollment continue, 
there may be such program savings: looking at the subset of plans that 
currently charge a premium for Medicare-covered services compared to 
plans that have no premium charge for Medicare-covered services (a 
rough type of proxy for determining whether a bid will be above the 
benchmark), the risk status of enrollees of plans in which there is no 
premium is below 1.0 but closer to 1.0 than among plans charging a 
premium. The latter group of plans have risk scores that are also below 
1.0, but the risk scores are about 10 percent lower--that is, risk 
scores show that enrollees are healthier--than the risk scores of plans 
that have no premium charge for Medicare-covered services.
    In summary, the 1853(a)(1)(G) risk adjustment provision, which may 
have limited applicability if few plans bid above the benchmark, may 
result in program savings. There is also an impact on beneficiaries, 
who will have higher premiums in plans with bids over the benchmark 
with healthier-than-average enrollees, and lower premiums in such plans 
with sicker-than-average enrollees, as compared to a system in which 
the plan premium is risk adjusted.

J. Administrative Costs

    The administrative cost estimates for MA plans included in the 
section on effects on health plans and insurers are based on the 
administrative costs currently incurred by Medicare Advantage plans. 
The administrative cost figures shown in Table 4--at 10 percent of 
revenue--include both costs to administer the program and the profit or 
retained earnings of health plans. Administrative costs for local plans 
and regional plans are considered to be roughly the same based on the 
reported administrative costs of current MA plans that are PPOs and 
HMOs (weighted by enrollment).

K. Analysis of Effects on Small Entities

    The Regulatory Flexibility Act (RFA) requires us to determine 
whether a proposed rule will have a ``significant economic impact on a 
substantial number of small entities.'' If so, the RFA requires that an 
Initial Regulatory Flexibility Analysis (IRFA) be prepared. Under the 
RFA, a ``small entity'' is defined as either a small business (as 
defined by the size standards of the Small Business Administration, or 
SBA), a non-profit entity of any size that is not dominant in its 
field, or a small governmental jurisdiction. The SBA size standard for 
``small entity'' health insurance plans is annual revenue of $6 million 
or less.
    The direct effects of Medicare Advantage fall primarily on 
insurance firms and on individual enrollees. The competitive market 
created by Medicare Advantage is likely to have long run indirect 
effects on health care providers, such as hospitals, physicians, and 
pharmacies, depending on the extent to which MA plans attract 
enrollees. However, those effects will result from the workings of 
market choices made by enrollees, plans, and providers, not from 
specific provisions of these proposed rules. (There is an MMA provision 
for paying certain ``essential hospitals'' higher rates for 
participation in the MA program; which we analyze below.) Therefore, we 
primarily analyze effects on the insurance industry (including HMOs as 
insurers) in this IRFA. We welcome comments on this approach and on 
whether we have missed some important category of effect or impact.
    We do not believe that these proposed rules will create a 
significant economic impact on a substantial number of small entities.
    However, we have prepared a voluntary IRFA. Under longstanding HHS 
policy we prepare an IRFA if significant impacts of a proposed rule on 
small entities are positive rather than negative. We also prepare an 
IRFA if we cannot be certain of a conclusion of no ``significant 
impact'' on less than a ``substantial number.'' In this case, the 
statutory reform is so major and the number of regulatory changes so 
large that we cannot be certain of our conclusion. Finally, we 
generally prepare an IRFA if there is likely to be substantial interest 
on the part of small entities. Essentially all of the insurance firms 
affected by the statute and our proposed rules exceed size standards 
for ``small entities'' within the meaning of the RFA and implementing 
SBA guidelines, which state that an insurance firm is ``small'' only if 
its revenues are below $6 million annually.

[[Page 46934]]

We note that under prior law (continued unchanged for Medicare 
Advantage), no health insurance plan is normally eligible to 
participate in Medicare Advantage unless it already serves at least 
5,000 enrollees, or 1,500 enrollees if it primarily serves rural areas. 
At the 5,000-enrollee level, no plan would fall below the SBA revenue 
cutoff assuming, very conservatively, a $2,000 per enrollee cost. While 
a very small rural plan could fall below the threshold, we do not 
believe that there are more than a handful of such plans. In the 
InterStudy Competitive Edge HMO Directory for 2000, discussed below, we 
found only one rural HMO with a continuing enrollment level below 
1,500. Therefore, the statutory limits generally prevent any insurance 
firm defined as ``small'' pursuant to the RFA's size standards from 
participating in the program. However, a substantial fraction of the 
insurance firms affected by these proposed rules are ``small entities'' 
by virtue of their non-profit status. The analysis in this section, 
taken together with the other regulatory impact sections, and the 
preamble as a whole, constitute our IRFA for the Medicare Advantage 
provisions of Title II of the MMA. We note that there is a related IRFA 
in the companion proposed rule on the Part D Drug Program of Title I of 
the MMA.
1. The Health Insurance Industry
    The 1997 Economic Census: Finance and Insurance (the latest 
available edition) states that there were 944 firms classified as 
``Health and Medical Insurance Carriers'' under the North American 
Industry Classification System. Of these, 851 firms operated the entire 
year. Using Census data, these firms had total revenue of $203 billion, 
operated through about 3,200 establishments, and had about 328,000 
employees. Of the 851 firms that operated the entire year, 342 had 
revenues of less than $5 million. Taking into account subsequent 
inflation, this corresponds closely to the $6 million threshold 
established by the SBA as the current cutoff for small businesses in 
this insurance category. Thus, approximately 40 percent of the industry 
as counted by the Census is ``small'' using the SBA definition. These 
small firms had total revenue of about $440 million, rather less than 
one half of one percent of total health insurance revenue. As discussed 
below, we do not believe that any of these small firms underwrite 
comprehensive health insurance policies, or are actual or potential 
competitors in the Medicare Advantage market.
    In contrast, the Census found that the largest 50 firms, or 6 
percent, accounted for 75 percent of all health insurance revenue. 
While these data cannot be reconciled directly with other statistics on 
numbers and size of health insurance companies, they clearly indicate 
that the market for comprehensive health insurance policies, covering 
the lives of about 200 million Americans, is dominated by several 
hundred companies, few of which, and most likely none of which, are 
``small'' by SBA revenue standards.
    Another source of industry data, much richer in detail, is found in 
the InterStudy Competitive Edge. This annual report covers only HMOs. 
The discussion that follows uses the 2000 edition as reflecting most of 
the changes of the 1990s, but still close enough in time to the Census 
information to be roughly comparable. In 2000, there were 560 HMOs. 
While these were all separately incorporated, many were subsidiaries of 
larger corporations. For example, the report lists 40 United HealthCare 
plans, 22 Aetna and 32 Prudential plans (all owned by Aetna), 31 Cigna 
plans, 10 Humana plans, and 9 Kaiser plans. Ninety-seven of these HMOs 
enrolled 200,000 or more people (enrollment is a standard industry 
measure of size). The InterStudy data, using an enrollment cutoff of 
3,000 to correspond roughly to the SBA $6 million threshold, shows that 
only 5 HMOs were continually operating entities (not entering or 
exiting the industry) with revenues below the SBA small entity 
threshold.
    Of the approximately 200 contracts under the current M+C program 
(this figure excludes demonstration contracts), only a handful have 
enrollment of fewer than one thousand or annual Medicare revenue of 
under $6 million assuming, conservatively, revenues of $6,000 per 
enrollee (Medicare enrollees cost, and are reimbursed, more than double 
working age persons). Of course, these plans have other revenues from 
non-Medicare clients, and we are unaware of any current M+C 
organizations with revenues below the SBA threshold. (Note that the 
number of M+C contracts includes separate Medicare contracts held by a 
single firm in different parts of the country'as in the case of 
PacifiCare, for example, which has ten contracts in eight States.)
    These data show that few, if any, health insurance firms with 
revenues of $6 million or less underwrite comprehensive insurance in 
the national insurance market. Furthermore, discussions with Bureau of 
the Census staff indicate many and probably most of the smallfirms 
classified as insurers do not underwrite health care costs (that is, 
provide comprehensive health insurance), but are firms offering dental 
or medical discounts through small provider networks or offering 
indemnity-type policies paying, for example, a few hundred dollars a 
day for each day spent in a hospital. They would not even be licensed 
by States to offer comprehensive or group insurance policies. 
Therefore, we have no reason to believe that the creation of the 
Medicare Advantage program will have any positive or negative effect on 
``small'' insurance firms, with the possible exception of Medigap 
insurers.
    Some of these small firms may be Medigap insurers. For this limited 
group, the MMA has major consequences. Specifically, existing 
categories of Medigap policy that cover prescription drugs will become 
illegal to sell to new enrollees, and several new Medigap categories 
will be created. (These changes, however, are specified in the statute 
and are not subject to regulatory discretion). Furthermore, Medigap 
insurance is a unique type of product that does not involve accepting 
insurance risk for the full cost of health benefits, since Medicare 
itself remains the primary insurer. Therefore, it is unlikely that any 
consequential number of firms operating solely in the Medigap market 
would expect to operate in the Medicare Advantage market. Effects of 
the MMA on Medigap are discussed in more detail the economic effects 
analysis in the companion Title I proposed rule.
    Despite these conclusions, it is possible that there is some 
potentially burdensome effect on insurance firms we have failed to 
anticipate. We request comments on whether any provisions of these 
rules may inadvertently create problems or burdens for any ``small'' 
firms in the health insurance industry with annual revenues below $6 
million.
    The definition of small entities under the RFA also encompasses 
not-for-profit organizations that are not ``dominant'' in their field. 
(HHS interprets ``dominant'' to mean national dominance). There are 
many large HMO companies that are non-profit. As of 2000, about 37 
percent of HMO enrollment was in non-profit firms, and 152 of 558 HMOs, 
or 27 percent, were non-profit (InterStudy Competitive Edge HMO 
Industry Report for 2000). None of these firms is nationally 
``dominant'' in the health insurance industry although many firms 
achieve large market share in particular health care markets.
    About half of these firms already compete in the Medicare M+C 
market, and most are potential entrants or

[[Page 46935]]

reentrants as local Medicare Advantage plans. According to the 
InterStudy data, about one third of HMOs currently participating in M+C 
are non-profit. Some HMOs, profit or non-profit, may be potential 
entrants in the new regional MA markets. This may depend, in part, on 
how we later define regional boundaries. It will certainly depend on 
how rapidly the non-profit firms grow by merger or make other market 
adaptations, such as adding PPO networks. However, relatively few HMO 
plans (in contrast to parent company or linked HMOs), operating through 
local HMO networks, are likely to be able to compete in a region 
encompassing large areas or several States and multiple health care 
markets.
2. The Local Medicare Advantage Market and Small Entities
    Under Medicare Advantage, there are two distinct (though 
overlapping) markets: local and regional. All existing M+C HMO plans 
participate on a local area basis, typically covering the several 
counties encompassed in a metropolitan area. Because HMOs are most 
common in metropolitan areas, and especially in the largest 
metropolitan areas, existing plan availability and enrollment is 
concentrated in these. As discussed previously in this analysis, only 
about one fifth of U.S. counties, though over 60 percent of the 
eligible population, have an M+C HMO plan available. The MMA makes one 
major change for local plans by significantly improving payment rates. 
This statutory change is already in effect and is not addressed in 
these proposed rules. These rules will have beneficial effects on local 
plans, by reducing some administrative burdens, but the changes we 
propose, singly and collectively, do not rise to the level of 
``significant economic impact'' on local HMOs.
    The other major changes of Medicare Advantage include the creation 
of a new regional plan structure to become operational in 2006, 
designed for and limited to PPO plans. The regional structure is 
intended to ensure that the entire beneficiary population, not just 
those residing in major urban centers, has access to alternative plans. 
As discussed elsewhere in this analysis, we assume that as a result of 
these changes private plans may attract as much as one-third of all 
Medicare enrollment by 2009.
    Starting in 2006, local HMOs will face two new sources of 
competition. First, they will find themselves seeking to attract 
enrollees from a pool of eligible applicants who will now have Part D 
drug benefits as enrollees in FFS Medicare. Second, they will be 
competing against regional MA plans serving their areas. Regional plans 
will have some advantages specified in the statute, including access to 
the stabilization fund and, temporarily, to risk sharing with the 
government. It is possible that some existing local plans will lose 
some enrollment. The local HMOs will, however, have important assets 
including integrated benefit packages (as compared to free-standing 
PDPs), quite likely drug benefits at premiums lower than PDP premiums, 
and extra benefits (including rebates of the Parts B and D premiums) 
not available in FFS and possibly more generous than those available in 
regional MA plans. The local plans will have an existing customer base 
and pre-existing networks in the areas where most beneficiaries live. 
Most compete in major metropolitan areas where Medicare payment rates 
are higher than in other areas that a region would encompass. Finally, 
many and perhaps most local plans are subsidiaries of large insurance 
firms that offer multiple product lines. These firms retain the ability 
to ``mix and match'' their product offerings to best advantage. 
Regardless, whether and how much any given plan loses or gains will 
primarily depend on its overall attractiveness (benefits, services, 
provider panels, out of network benefits, and premiums) compared to its 
competitors. Nothing in these proposed rules, as such, either favors or 
disfavors local plans when competing against regional plans.
    While it is impossible to predict the precise situations that these 
HMOs will face, or their responses, there are some lessons available 
from the FEHB Program experience. In that program, about 200 local HMOs 
co-exist in competition with about a dozen national PPO plans. Most 
HMOs compete in big city markets against 15 or 20 plans, both PPO and 
HMO. While HMO enrollment in the program has declined slightly in 
recent years, and almost half of all HMOs have left the program since 
their peak participation in the early 1990s (reflecting mainly industry 
consolidations), HMOs currently enroll about 35 percent of all Federal 
employees, and 9 percent of retirees, down only slightly from the peak 
levels of 39 percent and 10 percent, respectively, a decade ago.
3. The Regional Medicare Advantage Market and Small Entities
    Starting in 2006, health insurance firms both profit and non-profit 
(and hence ``small entities'' under the RFA) will be able to compete as 
regional plans. As discussed elsewhere in this Preamble, we cannot yet 
predict how many regions there will be, or how their boundaries will be 
drawn. That decision is not a subject of these proposed rules, but will 
be announced administratively at a later time.
    A firm may compete in as many regions as it chooses, up to and 
including the entire nation. The chief constraint is that a plan must 
demonstrate that it has a region-wide network of providers. Elsewhere 
in this Preamble we ask for comments on some aspects of defining 
networks and network adequacy, but the alternatives under consideration 
would all allow normally operated PPOs reasonably feasible methods of 
building their networks.
    We know of one group of potential regional competitors who may be 
affected by regional boundary decisions. In recent years many Blue 
Cross/Blue Shield plans have merged within and across State lines. 
However, there still remain several dozen of these plans that operate 
on a state-delineated basis. While no decision we make on regional 
boundaries are not likely to adversely affect current plan operations 
or revenues, if these plans were not able to compete effectively in 
multi-State regions they might forego an important business 
opportunity. We request comments on whether these or any other types of 
plans face potential disadvantage and, if so, what steps could be taken 
by us to reduce such problems. However, we note that there are many 
ways by which health plans can compete on a regional or national basis, 
and that the Blue Cross plans themselves have a history of national 
cooperation in the FEHB program. Therefore, we are interested in 
suggestions not only for steps we might take, but that plans might 
take, to ameliorate any problems created by the regional structure. 
Additionally, a local plan may encompass all or most of a State, and/or 
operate in more than one State if it so chooses. Of course, regional 
plans have some advantages, but local plans have others. In other 
words, it is not clear whether, and, if so, the extent to which, 
regional boundary decisions potentially constrain plan participation in 
Medicare Advantage in any important way, and we request comments on 
this. We will also provide additional opportunities at a later time to 
comment on possible regional boundaries, as discussed previously in 
this Preamble.
    Another potential problem facing regional plans is the requirement, 
in the statute, that they apply for licensure in each State in which 
they operate. Since the statute preempts State standards for benefits, 
coverage, and provider networks, leaving effectively only

[[Page 46936]]

solvency standards as State-imposed requirements, we anticipate no 
important problems for plans. However, we request comments on any 
problem that the statute may create. In this regard, we note that at 
present some insurance carriers operate in multiple States, either 
directly or through subsidiaries, under the far more burdensome legal 
requirement of meeting every standard in each of those States.
    There is another problem that could be important to a plan far 
larger than the SBA size standard but nonetheless smaller than the 
plans serving hundreds of thousands or millions of enrollees. 
Organizing the full resources needed to compete effectively in the 
Medicare context will require substantial investments in acquiring and 
maintaining actuarial expertise, legal expertise, effective marketing, 
network building, benefit design, cost-control, disease management, 
formulary design, claims processing, financing, etc. There are 
economies of scale in health insurance (like many other businesses), 
and these presumably favor larger firms, all other things equal, up to 
some point. We are not aware of any industry studies that seek to 
measure the minimum size necessary for health insurance firms to 
compete effectively in local, regional, or national markets and request 
information on this question. However, to the best of our understanding 
any such barriers to entry or cost competitiveness are likely to fall 
well within the size of most firms competing today in such large 
systems as M+C, the FEHB Program, or the private employer market. 
However, if there are any statutory or regulatory requirements that 
impose unnecessary burdens on smaller firms otherwise able to compete 
effectively, we request comments and suggestions on these.
    In summary, the Medicare Advantage program, by having both a 
regional and local model, provides opportunity for health insurance 
entities of all types and most sizes (but probably not below the 
``small'' insurance entity cutoff level defined by the SBA, which is 
lower than appears viable for a comprehensive, risk-bearing insurance 
plan), and offering many different kinds of plans, to participate. That 
participation is more likely to take the form of local plans in the 
case of smaller and non-profit entities. However, the overriding 
objective of the regional plan model is to give beneficiaries access to 
and choice among integrated private plans that can offer comprehensive 
health insurance encompassing Medicare parts A, B, and D. This model is 
dictated in almost all its important details in the statute. We do have 
discretion on regional boundaries. If we later decide to design regions 
that make it harder for some non-profit entities to compete regionally, 
this will reflect a decision that the objectives of beneficiary access 
and choice take precedence. However, it is not clear that there is any 
real conflict, because an organization seemingly disadvantaged as a 
regional plan may be advantaged as a local plan. In fact, the local 
plan model provides significant flexibility in terms of letting plans 
define their own market and service areas, without having to meet the 
network adequacy and other requirements of the MA regional market area.
    Throughout this preamble we have identified regulatory alternatives 
that may lessen burden on entities of any size. We are particularly 
interested in comments on those that may differentially affect smaller 
insurance firms, and on identification of ways to alleviate unnecessary 
burden, consistent with the underlying purposes of the Medicare 
Advantage program.
4. Hospitals
    An additional program under Medicare Advantage directly affects 
hospitals. HHS has long taken the approach of treating all hospitals as 
presumptive ``small entities'' within the meaning of the RFA, mainly 
because of the dominance of the non-profit model in the hospital 
industry (about 80 percent) and also because most of the rest have 
revenues under the $29 million SBA size threshold for hospitals.
    The MMA facilitates the inclusion of hospitals in regional networks 
in cases in which a plan and a hospital cannot reach an agreement on 
payment levels. As described in more detail under the Subpart C 
preamble section, if we find the hospital's participation ``essential'' 
to meeting a plan's network adequacy requirement, and the hospital can 
demonstrate to us that its costs are higher than the normal Part A 
payment it receives, then the MA plan can pay the normal amount and the 
network adequacy fund will pay the difference. The total amount 
available nationally for this purpose is $25 million in 2006 (rising 
annually at the hospital market basket rate).
    This provision will most likely to occur in small towns and rural 
areas, particularly if such areas are served by only one hospital. It 
is impossible at this time to predict the frequency with which this 
situation will arise, since that depends on future bargaining among 
plans and hospitals, and on hospitals' ability to demonstrate excess 
costs. Since the hospitals benefiting would otherwise serve Medicare 
enrollees at Medicare rates, the financial effects of this program on 
hospitals are positive. Likewise, by allowing regional plans to meet 
their network requirements at a reasonable cost the effects on them are 
positive. We note that over 700 rural hospitals are already paid at 
rates somewhat higher than would otherwise be applicable under 
Medicare's hospital payment rules. Some of these would be candidates 
for ``essential'' hospital payments (although the eligibility criteria 
are different). However, despite the large number involved (about one 
in seven hospitals participate), these are small hospitals in sparsely 
inhabited rural areas and account for only about one percent of 
Medicare hospital payments. The pattern under the essential hospital 
program is likely to be similar.
    We are not aware of any consequential burden on hospitals in our 
regulatory proposals for this program, but welcome comments.
5. Medical Savings Accounts
    These regulations also change the rules for Medical Savings 
Accounts (MSAs), which are high deductible plans. This provides new 
opportunities for insurance firms to participate in Medicare Advantage. 
High deductible plans are increasingly being offered in the under age 
65 market by large insurance firms. As discussed previously in this 
Preamble, we are implementing the statutorily defined changes (at 
section 233 of the MMA), which are intended to make MSAs a viable 
option for beneficiaries. We are also proposing to amend the existing 
rules in several places to remove requirements that would be 
inappropriate if applied to MSAs. Nothing we propose adds burden; we 
welcome comments on any remaining barriers to the sponsorship of MSA 
plans.
6. Employer Sponsored Plans
    The MMA adds new authority for employers and unions to sponsor 
plans for their employees and former employees, or members. Previously 
they could sponsor plans through an M+C plan; the statute gives them 
the flexibility to sponsor plans directly. The statute and the proposed 
regulation provide for waivers of any Medicare Advantage requirement 
that would unduly impede employer or union-sponsored plans. We request 
comments on any potential barriers affecting employers of any size that 
we should address more directly.

[[Page 46937]]

7. Other Requirements in the Regulatory Flexibility Act
    The RFA lists five general requirements for an IRFA and four 
categories of burden reducing alternative to be considered. It also 
defines as a small entity a ``small governmental jurisdiction'' whose 
area has a population of less than fifty thousand. We anticipate no 
consequential effects of these regulations on small governmental 
jurisdictions. We know of no relevant Federal rules that duplicate, 
overlap, or conflict with the proposed rule (which in any event amends 
an existing rule that is not duplicated or overlapped by other rules). 
The analysis above, taken together with the rest of this preamble, 
addresses all these general requirements.
    We have not, however, addressed the various categories of burden 
reducing alternatives listed in the RFA as appropriate in IRFAs. These 
alternatives, such as an exemption from coverage of the rule for small 
entities, establishment of less onerous requirements for small 
entities, or use of performance rather than design standards, simply do 
not apply to a situation in which a program beneficial to entities both 
large and small is being created, and in which the regulations do not 
create economically ``significant'' burdens. Furthermore, the consumer 
choice-driven Medicare Advantage program is overwhelmingly a 
``performance'' system rewarding plans that operate at lower costs, 
provide better service, or provide better benefits as evaluated by 
enrollees and potential enrollees. CMS operates in a stewardship role, 
not as the promulgator of detailed design standards (except in a few 
areas, such as procedural protections for enrollees). However, 
throughout this Preamble we identify issues and options for attention 
by affected entities, including a number of proposed changes that would 
lessen the burden of the existing M+C rule. We welcome comments on 
these and suggestions for additional steps we can take, consistent with 
the underlying statute, to minimize any unnecessary burdens on current 
or potential Medicare Advantage plans or other affected entities.

L. Alternatives Considered

    In this section we discuss a decision that CMS has made that 
prohibits plans from applying rebate dollars to optional supplemental 
packages. The remaining issues discussed in this section address the 
major areas in which CMS is seeking comment to determine which option 
to choose among the options offered in the preamble. As part of the 
impact analysis, we are providing supplemental information that will 
help readers of this proposed rule understand some of the issues that 
need to be considered in evaluating the options, or in suggesting 
alternatives that CMS should consider as options.
1. Designation of Regions
    A number of considerations need to be balanced in designating the 
regions for the regional Medicare Advantage plans. The statute and the 
conference report for the MMA provide some guidance about what the 
Congress considers important factors in delineating regions, as has 
been discussed in the preamble. The designation of regions will be made 
after the market study required by the MMA. The law provides for a 
minimum of ten, and a maximum of 50, regions. There are provisions in 
the law that favor the development of multi-State regions (for example, 
the use of Federal licensure and solvency standards pending State 
licensure), or that favor the development of a national plan (the bonus 
for a national plan). As noted previously, one of the primary reasons 
for using the regional plan approach is to provide access to health 
plans for areas in which ``local'' plans are less likely to be offered.
    The major goal is to maximize access to a choice of private health 
plans in as many areas as possible. Therefore, an important question is 
what type of regional configuration, or method of configuring regions, 
has the greatest likelihood of extending private plan options to areas 
with no plans or to underserved areas. In terms of public comment, 
perhaps the greatest benefit for CMS would be to hear from plans and 
potential plans regarding the factors they would consider important in 
promoting plan participation. Similarly, other interested parties 
(beneficiaries, beneficiary advocates, providers), would also have 
opinions on how the regions should be delineated. We recognize that 
there are a number of factors that would affect any decision on the 
designation of regions, including State licensure issues for insurers 
and size and capital requirements for plans, as well as other potential 
barriers to initial or subsequent market entry; issues relating to the 
ability to form provider networks over a wide area; the nature of 
existing health care market areas for commercial and Medicare plans; 
the number of competitors that operate in an area or are likely to 
operate in an area; and the goal of initiating and sustaining 
competition.
    One obvious question is whether the regions should be comprised of 
the largest possible number (the 50 States, or a close approximation), 
or a configuration consisting of much larger geographic areas. 
Designating a relatively small number of large regions may be viewed as 
providing an undue advantage to larger companies (for example, the 
several insurance companies already licensed in virtually every State). 
A larger number of regions may promote the use of local or regional 
firms that may be better able to form networks because of their current 
operations in a given State, while an insurer that is new to the market 
may have more difficulty in network formation. On the other hand, to 
the extent that participation as a regional plan can involve a 
relatively high level of risk as a business venture, larger companies 
may be more willing, and better able, to take such risk. Economies of 
scale may only be possible if the regions are relatively large and are 
designed in such a way that a relatively high level of enrollment can 
be expected. A regional configuration that emphasizes large regions and 
results in a smaller number of large plans may permit participating 
plans to have greater leverage in securing provider contracts as 
compared to a situation in which there are many competitors in an area. 
Another factor that we are uncertain about is whether it is feasible to 
assume that, if there are multi-State regions, individual insurance 
companies would be willing to form consortiums with insurers from other 
States in order to cover a wider area.
    One possibility for the designation of regions is to have the 50 
regions consist essentially of the 50 States. Such a configuration may 
not be the best way to ensure that the designation of regions 
contributes to the overall goal of maximizing the availability of 
health plan choices. New Jersey, for example, currently has plans 
available in every county in the State, including at least one MA 
coordinated care plan and one demonstration PPO plan in each county. 
There are nine counties in which only one organization is offering 
plans, but in all 21 New Jersey counties, there is a zero premium plan 
available with drug coverage. Making New Jersey a region, if a regional 
plan were to participate, would bring more competition to the State. 
However, including New Jersey as one State within a multi-State region 
might allow Medicare to capitalize on the presumed ability of the 
highly competitive New Jersey plans to extend their reach beyond New 
Jersey, and, as discussed previously, help to achieve

[[Page 46938]]

the objective of expanding access to private plan choices.
    Using Florida as a different kind of example, if Florida by itself 
were designated as a region, and Florida had only regional plans, all 
beneficiaries in each Florida county would have the same kinds of 
benefit offerings. Looking at the current offerings of Florida MA plans 
as shown in Table 3, there is a range of benefit offerings in the State 
from county to county, but in all counties in which there are MA plans, 
drug coverage is available. Some Florida residents must pay a premium 
to obtain the drug coverage. With a regional plan, there would be a 
uniform benefit across the State, and the 19 percent of the population 
(560,000 beneficiaries) that currently does not have access to a 
private plan could enroll in a plan.
    The preamble discusses the kinds of State characteristics that we 
are looking to balance in the formation of regions. The statute 
emphasizes extending plans to rural areas. As shown in Table 5, the 
States with the smallest Medicare populations tend to have the highest 
proportion of rural beneficiaries as a percent of their Medicare 
population and also are more likely to be contiguous with each other. 
Could such States stand alone as individual regions? Would there be a 
sufficient market to support regional plans in each of these States, or 
do such small populations require multi-State regions? If it is assumed 
that multi-State regions must be comprised of States that are 
contiguous, is there a possible configuration of these smaller States 
that would create a region in which participation as a regional plan is 
a viable option for a health insurer? (Note that these States generally 
are among those with the lowest per capita expenditures. Although this 
might indicate that there may not be much opportunity for health plans 
to achieve savings in health care utilization or discounts from 
providers, it is also true these States are generally the areas in 
which the fee-for-service component of the benchmarks will be based on 
floor payments rather than Medicare fee-for-service payments, thereby 
resulting in potentially higher plan payments and possible higher 
rebates for enrollees.)
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BILLING CODE 4120-01-C
    At the other end of the scale are the most populous States, shown 
in Table 6. Potentially, each of these States could be designated a 
region (notwithstanding

[[Page 46940]]

the preceding discussion of the case of New Jersey). Although the rural 
issue is generally thought of in the context of States such as the 
Mountain States that are sparsely populated, if access were extended 
throughout each of these 15 primarily urban States, access will have 
been extended to 50 percent of all rural Medicare beneficiaries 
(defining ``rural'' as Medicare beneficiaries who reside in counties 
that are not within an MSA). This would triple the percent of rural 
beneficiaries with access to coordinated care plans (which stands at 
about 15 percent currently).
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[[Page 46942]]

    The conference report for the MMA contains two suggestions relating 
to the designation of regions that are difficult to reconcile: ``The 
Secretary could not divide states so that portions of the state were in 
different regions'' and ``[t]o the extent possible, the Secretary would 
include multi-state metropolitan statistical areas (MSAs) in a single 
region, except that he or she could divide an MSA where necessary to 
establish a region of such size and geography to maximize the 
participation of PPOs.'' There are 44 multi-State MSAs, with 37 States 
having at least one multi-State MSA. Looking at the location of these 
MSAs across the country, it would be necessary in many cases to divide 
MSAs between regions or to create very large regions. To divide MSAs, 
CMS would look to the analysis of health care markets and how they are 
configured, but we would also invite comment on other factors that we 
should consider when it appears necessary to divide an MSA so that a 
part, or parts of, the MSA fall within different regional boundaries.
    As discussed in the preamble, we will be conducting a market survey 
and providing additional opportunity for public input during the course 
of that work. We welcome comments in response to this proposed rule 
regarding the many considerations related to the designation of the 
regions for the MA program as well as for the PDPs and the potential 
for establishing the same or at least similar regional configurations.
2. Statewide or Region-Wide Versus Plan-Specific Risk Adjustment To 
Determine Savings
    The issue of statewide or region-wide versus plan-specific risk 
adjustment is discussed in the section dealing with ``Calculation of 
Savings'' (Sec.  422.264) in the text and preamble of the proposed 
rule. The statute and the proposed rule state that, for local plans, 
CMS may use either a statewide average risk adjuster, a risk adjuster 
for a geographic area different from a State (for example, a 
metropolitan statistical area), or a plan-specific risk adjuster, to 
determine the average per capita savings that exist when there are bids 
below the benchmark. Similarly, for regional plans, CMS may use a 
region-wide adjuster, an adjuster for a different geographic area, or a 
plan-specific risk adjuster in determining average per capita savings.
    There are two reasons for applying risk adjustment to determine 
savings (which in turn determine the dollar value of available enrollee 
rebates). One is that if the savings computation were not subject to 
risk adjustment, plan enrollees overall would receive higher rebates 
than are appropriate because current enrollees in Medicare Advantage 
plans are on the whole healthier than beneficiaries with fee-for-
service Medicare coverage (and, in the future if the situation is 
reversed, or if in a given area enrollees of health plans are sicker 
than those in fee-for-service Medicare, rebates would be lower than 
they should be). In other words, risk adjustment ensures that plans are 
paid appropriately for their enrolled population. The other reason for 
applying risk adjustment to the savings computation is that a 
comparison of the ability of health plans to achieve savings should be 
based on a comparison that takes into account the relative health 
status of each plan's enrollees in evaluating whether one plan is more 
``efficient'' than another. To do otherwise would make two plans that 
are equally efficient look as though one plan (a plan with healthier 
enrollees) was more efficient than another plan (a plan with sicker 
enrollees) merely because on a per capita basis the enrollees of the 
latter plan are more costly than enrollees of the plan with healthier 
enrollees. If each of the plans is equally efficient, a risk adjustment 
system would reveal each plan's per capita costs to be the same 
(assuming beneficiary characteristics other than health status are 
equal between the two plans). If, under a standard of relative 
efficiency, two plans are equally efficient, in principle their cost to 
an enrollee should be the same. If one plan is more efficient than 
another, beneficiaries would be rewarded for choosing the more 
efficient plan.
    The process called for in the statute for determining a statewide 
risk adjustment to compute savings for local plans is to compare a 
risk-adjusted benchmark against risk-adjusted bids. The benchmark, and 
all plan bids, would be adjusted by the average risk factor for 
enrollees in all local MA plans in a given State (an enrollment-
weighted average that is projected and announced at the time CMS 
publishes MA rates for a forthcoming year). That is, there is an 
``apples-to-apples'' comparison of bids to the benchmark, and an 
``apples-to-apples'' comparison to other plans. The two numbers that 
are being adjusted, the benchmark and a plan bid, are numbers for an 
``average'' beneficiary--a beneficiary with demographic and health 
status characteristics that represent an average across the entire 
Medicare population in the United States. That is, the benchmark and 
plan bids that are being adjusted, for purposes of determining the 
appropriate level of savings, are risk-neutral. (The plan bid that 
represents a bid for an average, or ``1.0'' beneficiary, is referred to 
in the statute as the ``unadjusted MA statutory non-drug monthly bid 
amount.'')
    In terms of the total dollars that will be available as rebate 
dollars, there is no difference, among equally efficient plans, between 
a statewide approach versus any other geographic area approach, or a 
plan-specific approach, to determining an appropriately risk-adjusted 
savings. In terms of how one plan compares to another in 
``efficiency,'' a statewide risk adjustment system for rebates treats 
all equally efficient plans the same with respect to the dollar amount 
of rebates that are available for enrollees, regardless of the health 
status of the enrollees. Under a statewide system of determining 
savings, the adjustment is applied at an area-wide level when the 
savings computation is subject to risk adjustment. That is, the 
benchmark, and all bids for the State, are adjusted by the average risk 
factor across all plans. If, for example, the enrollment-weighted 
average risk factor across all plans is 1.1 (110 percent of the risk 
factor for an average beneficiary), both the benchmark and all plan 
bids are adjusted by this factor to determine the dollar difference 
between the benchmark and each bid. In essence, this removes relative 
differences in risk among plans as a factor in determining how one 
plan's bid compares to another. The only difference that remains among 
plans is any difference in bids that reflects the relative efficiency 
of one plan versus another. If all plans are equally efficient--that 
is, if, for example, all plans are able to provide the Medicare benefit 
at 80 percent of the benchmark level--all plans will have the same 
rebate dollar amount available per enrollee (representing 20 percent of 
the statewide or region-wide benchmark, adjusted by the statewide or 
region-wide average risk factor). A plan-specific approach would 
incorporate into the savings computation a risk adjustment factor that 
can vary from plan to plan, yielding different dollar savings per 
person at the plan level but resulting in the same total dollar rebates 
when all plans are equally efficient because the statewide or region-
wide method uses a weighted average risk factor across all plans. 
Assuming that all rebate dollars are used by all plans to reduce the 
Part B premium, and assuming the risk-adjusted average per capita 
savings had been computed as $25 per person per month, if an individual 
joins Plan X, with sicker

[[Page 46943]]

beneficiaries, the person receives a $25 reduction in his or her Part B 
premium, which is the same amount he or she would receive on joining 
Plan Y, with healthier beneficiaries. This $25 rebate would represent 
the same value to each beneficiary enrolled in either of the two plans 
because all beneficiaries across the Nation are faced with the same 
cost of paying the Part B premium, regardless of their health status or 
the State or county in which they live. However, if rebate dollars are 
used for other purposes, the value of the rebate in terms of its 
``buying power,'' would vary from plan to plan based on the risk 
profile of the individual plan. Any plan feature that is more expensive 
if there is higher utilization--for example, the buy-out of cost 
sharing, or reductions in premiums for supplemental benefits offered by 
a plan--would have a different value in a plan with a healthier 
enrollment mix as compared to a plan with sicker enrollees. That is, it 
costs a plan more to ``buy down'' cost sharing for a sicker population 
than for a healthier population. Enrollees will see that difference as 
a difference in their out-of-pocket costs, which will be higher in a 
``sicker'' plan. (For example, if plans have as their starting point an 
intent to have a $200 copayment for each hospital inpatient admission, 
and a plan wishes to reduce the copayment to $100 per admission by 
paying the provider an additional $100 per admission, the total revenue 
needed to finance this copayment reduction would be higher for a plan 
with higher rates of hospital admissions than a plan with lower 
admission rates. If plans have the same level of rebate dollars per 
capita, the ``healthier'' plan can afford enrollees a greater reduction 
in the hospital copayment (to $50, for example) because the average 
number of people to whom the copayment applies is lower than in a 
``sicker'' plan.)
    The relatively higher cost of obtaining benefits through a 
``sicker'' plan can be mitigated by having a plan-specific risk 
adjustment for the determination of savings. Plans with less healthy 
enrollees would have rebate amounts higher than other plans that are 
equally efficient but have healthier enrollees. In terms of what the 
benefits look like from an enrollee's point of view, a plan-specific 
adjustment can help achieve parity between ``sicker'' and ``healthier'' 
plans. However, as just discussed, a plan-specific approach, if used 
for a dollar reduction in the Part B premium that makes the ``sicker'' 
plan appear cheaper than the ``healthier'' plan defeats the purpose of 
a rebate, the value of which should only be based on relative 
efficiency. (As previously discussed, it should also be noted that plan 
features other than the premium are likely to show a ``sicker'' plan as 
a higher cost plan in terms of cost sharing that enrollees must pay or 
in terms of the level of extra benefits the plan is able to offer in 
comparison to a ``healthier'' plan. Because of this, the plan-specific 
approach may be the more desirable approach if the goal is to achieve 
some type of parity between equally efficient plans.)
    As a possible basis for preferring the statewide approach, there is 
the argument that it is a normal insurance principle that one would 
expect enrollees of an insurance plan with a relatively sicker covered 
group to have to pay more than enrollees in a plan with a relatively 
healthier covered group. As for the plan-specific approach, it is also 
true that the differences in risk status among plans may even out over 
time if a plan-specific adjustment is used. More enrollees will be 
drawn to the less expensive plan (the plan with the higher rebate, 
which may be less expensive for healthier enrollees, if, for example, 
extra benefits are the same as in other plans but cost sharing is 
higher). If beneficiaries make such enrollment choices, the risk 
profile of the ``sicker'' plan will change towards being closer to an 
average risk profile. Similarly, if a plan that has an apparent 
advantage in rebates because of selection (enrolling healthier 
enrollees) rather than because of efficiency, the plan's relative 
inefficiency will be revealed in subsequent years to the extent that 
sicker beneficiaries choose to enroll in a plan offering better 
benefits or lower cost-sharing and premiums.
    The preceding discussion deals with plans that are equally 
efficient and the effects of plan-specific versus statewide risk 
adjustment in determining rebates. Additional issues arise if there is 
variation in efficiency among plans and variation in plan risk 
``profiles'' (the makeup of the plan enrollment by health status). 
Using a statewide risk adjuster to determine rebates will result in 
higher program payments if efficient plans have relatively healthier 
enrollees. Using a plan-specific risk adjustment system will result in 
higher program payments if efficient plans have relatively sicker 
enrollees. In general, the lowest program expenditures will occur when 
the plans with the greatest savings are subject to the lowest possible 
risk adjustment of those savings--whether it is the plan-specific 
approach or a statewide or other regional approach. The different 
effects are illustrated in the hypothetical examples shown in Tables 7, 
8, and 9. Tables 10 and 11 show a feature of the law that also affects 
the outcome, which is that plans in which there are no savings are also 
taken into consideration in determining the risk adjustment when a 
statewide or other region-wide method is used.
    Table 7 shows that when plans are equally efficient (that is, the 
savings for a 1.0 beneficiary is the same among plans), either risk 
adjustment method results in the same level of program payments, 
regardless of the relative risk profiles of each plan's enrollees. 
Table 8 shows that if the more efficient of the two plans (in this 
case, a far more efficient plan) has sicker enrollees, the plan-
specific method yields higher rebates and greater program spending. 
Table 9 shows the situation in which the only difference, compared to 
the Table 8 scenario, is a reversal of the plan risk scores, with the 
more efficient plan having healthier enrollees. In such a case, the 
statewide approach yields higher rebates for plan enrollees and higher 
program spending. Tables 8 and 9 illustrate that even though it is only 
the hypothetical Plan ABC that is efficient and has any appreciable 
savings, how these savings are translated into rebates is very much 
dependent on the characteristics of competing plans when the statewide 
or region-wide risk adjustment method is used. Similarly, Tables 10 and 
11 illustrate the same circumstances with regard to the effect of plans 
with no savings. Wide swings in the level of rebate dollars are 
possible under either method, but we cannot quantify the effect at this 
time without knowing the risk distribution of enrollees for 2006 and 
the respective bids of the health plans.

        Table 7.--Savings and Rebates for Equally Efficient Plans
------------------------------------------------------------------------
                                     Plan ABC     Plan XYZ      Totals
------------------------------------------------------------------------
Benchmark........................         $700         $700  ...........
Bid (for ``1.0,'' average risk            $600         $600  ...........
 individual)--Both plans equally
 efficient.......................
Enrollees........................         1000         1000        2,000

[[Page 46944]]

 
Risk At Plan Level in Relation to          1.4          0.8  ...........
 1.0--ABC Plan has sicker
 enrollees.......................
Enrollment-Weighted Statewide             0.70         0.40         1.10
 Average Risk Computation........
----------------------------------
  Savings With Statewide Method: Adjust Bid and Benchmark by Statewide
                           Average Risk Factor
------------------------------------------------------------------------
Adjust Benchmark.................         $770         $770  ...........
Adjust Bid.......................         $660         $660  ...........
Per Capita Savings with Statewide         $110         $110  ...........
 Method..........................
                                  --------------
      Total Savings..............     $110,000     $110,000     $220,000
----------------------------------
  Savings With Plan-Specific Method: Adjust Bid and Benchmark by Plan-
                          Specific Risk Factor
------------------------------------------------------------------------
Adjust Benchmark.................         $980         $560  ...........
Adjust Bid.......................         $840         $480  ...........
Per Capita Savings with Plan-             $140          $80  ...........
 Specific Method.................
                                  --------------
Total Savings....................     $140,000      $80,000     $220,000
----------------------------------
     Computation of Total Medicare Payment to Plans and on Behalf of
                                Enrollees
------------------------------------------------------------------------
Statewide--
    Plan's Risk-Adjusted Bid x        $840,000     $480,000   $1,320,000
     Enrollment..................
    Statewide Rebate x Enrollment      $82,500      $82,500     $165,000
     x .75.......................
                                  --------------
      Total Payment to Plans.....     $922,500     $562,500   $1,485,000
Per Enrollee Rebate..............       $82.50       $82.50  ...........
Plan-Specific--
    Plan's Risk-Adjusted Bid x        $840,000     $480,000   $1,320,000
     Enrollment..................
    Plan-Specific Rebate x            $105,000      $60,000     $165,000
     Enrollment x .75............
                                  --------------
      Total Payment to Plans.....     $945,000     $540,000   $1,485,000
Per Enrollee Rebate..............         $105          $60  ...........
----------------------------------
    Net Effect: Each Method Results in the Same Level of
                      Program Payments
------------------------------------------------------------------------


 Table 8.--Savings and Rebates When Efficient Plan Has Sicker Enrollees
------------------------------------------------------------------------
                                     Plan ABC     Plan XYZ      Totals
------------------------------------------------------------------------
Benchmark........................         $700         $700
Bid (for ``1.0,'' average risk            $600         $699
 individual)--ABC Plan far more
 efficient.......................
Enrollees........................         1000         1000        2,000
Risk At Plan Level in Relation to          1.4          0.8
 1.0--ABC Plan has sicker
 enrollees.......................
Enrollment-Weighted Statewide             0.70         0.40         1.10
 Average Risk Computation........
----------------------------------
  Savings With Statewide Method: Adjust Bid and Benchmark by Statewide
                           Average Risk Factor
------------------------------------------------------------------------
Adjust Benchmark.................         $770         $770
Adjust Bid.......................         $660      $769.99
Per Capita Savings with Statewide         $110        $0.01
 Method..........................
                                  --------------
      Total $$ of Savings........    $ 110,000          $11     $110,011
----------------------------------
  Savings With Plan-Specific Method: Adjust Bid and Benchmark by Plan-
                          Specific Risk Factor
------------------------------------------------------------------------
Adjust Benchmark.................         $980         $560
Adjust Bid.......................         $840      $559.99
Savings with Plan-Specific Method         $140        $0.01
                                  --------------
      Total Savings..............     $140,000           $8     $140,008
----------------------------------
     Computation of Total Medicare Payment to Plans and on Behalf of
                                Enrollees
------------------------------------------------------------------------
Statewide--
    Plan's Risk-Adjusted Bid x        $840,000     $559,992   $1,399,992
     Enrollment..................
    Statewide Rebate x Enrollment      $82,500        $8.25   $82,508.25
     x .75.......................
                                  --------------
      Total Payment to Plans.....     $922,500  $560,000.25   $1,482,500
Per Enrollee Rebate:.............       $82.50        $0.01
Plan-Specific--
    Plan's Risk-Adjusted Bid x       $ 840,000     $559,992   $1,399,992
     Enrollment..................

[[Page 46945]]

 
    Plan-Specific Rebate x            $105,000           $6     $105,006
     Enrollment x .75............
                                  --------------
      Total Payment to Plans.....     $945,000     $559,998   $1,504,998
Per Enrollee Rebate:.............         $105        $0.01  ...........
----------------------------------
     Net Effect: Plan-Specific Method Yields Higher Program Payments
                            Totaling: $22,498
------------------------------------------------------------------------


     Table 9.--Savings and Rebates When Efficient Plan Has Healthier
                                Enrollees
------------------------------------------------------------------------
                                     Plan ABC     Plan XYZ      Totals
------------------------------------------------------------------------
Benchmark........................         $700         $700  ...........
Bid (for ``1.0,'' average risk            $600         $699  ...........
 individual)--ABC Plan far more
 efficient.......................
Enrollees........................         1000         1000        2,000
Risk At Plan Level in Relation to           .8          1.4  ...........
 1.0--XYZ Plan has sicker
 enrollees.......................
Enrollment-Weighted Statewide             0.40         0.70         1.10
 Average Risk Computation........
----------------------------------
  Savings With Statewide Method: Adjust Bid and Benchmark by Statewide
                           Average Risk Factor
------------------------------------------------------------------------
Adjust Benchmark.................         $770         $770  ...........
Adjust Bid.......................         $660      $769.99  ...........
Per Capita Savings with Statewide         $110        $0.01  ...........
 Method..........................
      Total $$ of Savings........     $110,000          $11     $110,011
----------------------------------
  Savings With Plan-Specific Method: Adjust Bid And Benchmark by Plan-
                          Specific Risk Factor
------------------------------------------------------------------------
Adjust Benchmark.................         $560         $980
Adjust Bid.......................         $480      $979.99  ...........
Savings with Plan-Specific Method          $80        $0.01  ...........
                                  --------------
      Total Savings..............      $80,000          $14      $80,014
----------------------------------
     Computation of Total Medicare Payment to Plans and on Behalf of
                                Enrollees
------------------------------------------------------------------------
Statewide
    Plan's Risk-Adjusted Bid x        $480,000     $979,986   $1,459,986
     Enrollment..................
    Statewide Rebate x Enrollment      $82,500        $8.25   $82,508.25
     x .75.......................
                                  --------------
      Total Payment to Plans.....     $562,500  $979,994.25   $1,542,494
Per Enrollee Rebate..............       $82.50        $0.01  ...........
Plan-Specific
    Plan's Risk-Adjusted Bid x        $480,000     $979,986   $1,459,986
     Enrollment..................
    Plan-Specific Rebate x             $60,000       $10.50   $60,010.50
     Enrollment x .75............
                                  --------------
      Total Payment to Plans.....     $540,000  $979,996.50   $1,519,997
Per Enrollee Rebate..............          $60        $0.01  ...........
----------------------------------
  Net Effect: Statewide Method Yields Higher Program Payments Totaling:
                                 $22,498
------------------------------------------------------------------------

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[[Page 46947]]


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[[Page 46948]]


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[[Page 46949]]


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BILLING CODE 4120-01-P
    There is another issue, which is that within a State, local plans 
may not be competing directly against each other. That is, in a large 
State, health plans in

[[Page 46950]]

one section of the State may not be competing against health plans in 
another section of the State, or the State could be served by 
individual plans in individual counties (to use an extreme example), 
each of which operates in non-overlapping service areas where there is 
only one plan option available to beneficiaries. In the latter case of 
single non-competing plans, using a statewide risk adjuster would seem 
to be unfair to plans and enrollees. In such a situation, it would seem 
that the fairest approach is to employ a plan-specific risk adjuster. 
Similarly, if there are discrete market areas smaller than a State in 
which health plans compete, then--as implied in the statutory 
language--the appropriate course might be to use a Metropolitan 
Statistical Area as the geographic area in which a multi-plan risk 
adjustment system will be used to determine the rebate computation (if 
CMS decides against the general application of the plan-specific 
option). In that way, savings that health plans in a particular MSA can 
achieve would be used for enrollees in that MSA rather than being 
applicable to a wider geographic area.
    The statewide approach to determining rebates differs from the 
current method of determining savings, which is essentially done on a 
plan-specific basis (and therefore using the statewide method may 
result in a different competitive dynamic among plans). The current 
system for computing extra benefits that enrollees may be entitled to--
which will continue through 2005--uses the ``adjusted community rate 
proposal'' process. Under this process for determining whether there is 
excess revenue, there are actual and implicit adjustments at the plan-
specific level to account for the risk profile of a plan's enrollees. 
The excess revenue determination (that is, the savings computation) is 
based on a comparison of a plan's stated ``average payment rate'' from 
CMS (a projection of what CMS will pay the plan--which is a risk-
adjusted payment) compared to the plan's ``adjusted community rate'' (a 
Medicare term) for its projected Medicare enrollment. This ``community 
rate'' is implicitly adjusted for the risk status of projected Medicare 
enrollees because the ``adjusted'' aspect of the Medicare ``adjusted 
community rate'' is the adjustment that a plan makes to reflect the 
relatively higher utilization of Medicare enrollees as compared to 
other enrollees to whom a community rate applies. That is, under a 
strict community rating system, each group seeking to buy health care 
coverage from a community-rated plan will receive the same quoted 
community rate as any other group that is buying coverage (for the same 
benefit package) from the health plan, regardless of the expected costs 
and health status of the particular group seeking coverage. For 
Medicare, plans are allowed to adjust the rate to reflect the 
utilization and higher expenditures associated with Medicare enrollees. 
The adjustment is made on the basis of the plan's own history with 
respect to the relative costs of its Medicare enrollees. Hence, there 
is an implicit risk adjustment of the ``community rate'' as it would 
apply to this segment of a health plan's enrollment. The amount that, 
under the current system, a Medicare plan must return to beneficiaries 
as extra benefits when there is excess revenue is the difference 
between the ``adjusted community rate''--implicitly adjusted for risk, 
as just described--and Medicare's average payment rate, which is 
explicitly risk adjusted, using CMS risk adjustment factors, at the 
plan level. The analogue of the current practice would be the plan-
specific approach to determining the calculation of savings (rather 
than what is essentially a type of pooling of savings across multiple 
plans if the statewide method were to be used).
    As noted in the preamble, we welcome comments on the issues related 
to statewide versus plan-specific (or other geographic area) risk 
adjustment for the purpose of determining the distribution of rebates 
among plan enrollees.
3. Prohibiting Use of Rebate Dollars for the Purchase of Optional 
Supplemental Benefits
    The MMA retains a provision from pre-existing law that allows 
health plans to have optional supplemental benefits that Medicare 
enrollees can choose to purchase for an additional premium (section 
1852(a)(3)(B)). Such optional supplemental packages are financed 
entirely by enrollee premiums (as is also currently true of mandatory 
supplemental packages that all beneficiaries are required to purchase 
from an MA plan, if the mandatory supplement is approved by CMS). Once 
the bidding system begins in 2006, the concept of an optional 
supplemental offering seems inconsistent with the new design of the MA 
program in two ways: with regard to the question of whether an optional 
supplemental package can have its price reduced by a rebate (which, as 
explained below, appears not be administratively feasible); and also 
with regard to the question of how to deal with an optional 
supplemental package that, because of its features, would have an 
effect on a plan's bid for coverage of Part A and B services (for 
example, an optional supplement that buys down cost sharing for A and B 
services). As noted in the preamble we are prohibiting plans from 
applying rebate dollars to optional supplemental premiums, and we are 
asking for comment on the issue of whether optional supplemental plans 
may include benefits that affect the utilization of A and B services. 
(The latter issue is discussed in the preamble.)
    Under the current adjusted community rate process (the process by 
which plans submit premium and benefit proposals to CMS for approval), 
what in 2006 will become rebate dollars are termed ``excess revenue.'' 
Excess revenue amounts have to be ``returned'' to beneficiaries in the 
form of extra benefits, reduced cost sharing, or reduced premiums for 
basic or mandatory supplemental benefits--that is, a benefit spread 
over the entire enrolled population. Excess revenue cannot be used to 
reduce an optional supplemental premium that beneficiaries can decline 
to pay. Although the statute governing the use of savings beginning in 
2006 states that each enrollee is entitled to a rebate of 75 percent of 
savings (1854(b)(1)(C)), which can be applied as a credit ``toward an 
MA monthly supplemental beneficiary premium (if any),'' the statute is 
silent on the question of whether in 2006 rebates may be applied to 
optional supplemental packages. One could infer that such a use of 
rebate dollars is permitted because there is no specific statutory 
prohibition.
    As explained in the preamble, we do not believe that applying a 
rebate to an optional supplemental benefit is consistent with the 
requirement that each beneficiary enrolled in a plan is entitled to the 
same dollar value of the rebate (``the MA plan shall provide to the 
enrollee a monthly rebate equal to 75 percent of the average per capita 
savings'' (1854(b)(1)(C)). (There could be an administratively 
cumbersome way of permitting the use of rebate dollars to optional 
supplemental premiums. Because enrollees can decline an optional 
package, enrollees would have to have an alternative option, or a menu 
of options to choose from, to fully allocate the individual rebate. For 
example, if the rebate amount was $50 per month, and an optional 
supplement was offered at $25, enrollees choosing the supplement would 
have to dispose of $25 (for example, by a reduction in the Part B 
premium), and those who decline would have to dispose of $50 (for 
example, by a $50 reduction in the

[[Page 46951]]

Part B premium). We believe, however, that this would present overly 
burdensome administrative problems for health plans as well as for CMS 
and the Social Security Administration if there were variable Part B 
premium rates at the sub-plan level. Rather than relying on the plan 
identifier to determine the appropriate premium reduction amount, each 
person's record would have to carry the premium reduction information.)
4. Intra-Area Geographic Adjustment to Payments
    In addition to the discussion in the preamble of the adjustment for 
intra-area variation, which the statute says ``shall'' be applied to 
bids and benchmarks, we would note that the statute and the conference 
report refer only to adjustments to reflect ``variations in MA local 
payment rates,'' for both local and regional plans. A literal 
interpretation of the language would entail using only the MA payment 
rates as the basis for making adjustments to bids and benchmarks. 
Clearly, although for local plans it may be appropriate to use a 
benchmark adjustment based on variation in local MA payment rates, for 
a regional plan such an adjustment to the benchmark is problematic 
because the benchmarks for regional plans include plan bids as a 
component of the benchmark. Hence, we believe a strictly literal 
interpretation is not consistent with the Medicare Advantage bidding 
and payment process.
    The initial bid for a multi-county local plan or for a regional 
plan assumes a certain mix of enrollees from different parts of the 
geographic area. The plan presents a single average bid that covers its 
revenue needs for the population that it assumes will enroll in the 
plan. If the plan's enrollment mix is from a different geographic area 
with substantially different costs, the plan's initial bid will either 
be higher or lower than its actual revenue needs. The plan's costs may 
not bear a direct relation to Medicare payment rates in a county--
particularly if the county rate is historically a ``floor'' rate (and 
even when the county rate is based on Medicare fee-for-service rates 
the payment rate may not represent plan costs, as is clear from the 
present pattern of extra benefits available to enrollees in MA plans).
    The preamble mentions possible ways to ensure that there is an 
appropriate intra-area adjustment, and seeks public comment on the 
different options. The suggested approaches seek to establish a 
relative relationship among the counties in the areas in question, 
though each is an imprecise measure for purposes of adjusting the bid. 
For example, in the same way that local Medicare fee-for-service 
expenditures may not reflect plan revenue needs in a given county, 
using the relationship between a county's Medicare fee-for-service 
expenditures and national expenditures, as the preamble suggests, may 
also not accurately reflect the variation that health plans see in 
their costs. Using only input prices, as is also suggested, of course 
ignores utilization differences (practice patterns, beneficiary 
preferences, the mix of services) that may appropriately be a component 
of the costs that plans face in a given county.
    Another option that we had considered is to have plans themselves 
provide CMS with the plan's statement of the relationship among 
counties (or broader geographic area) with regard to the relative 
revenue needs for each area. CMS would then use the plan's statement of 
relative costs to make intra-area adjustments. This approach may also 
be somewhat imprecise in that a plan's revenue needs in a given county 
may vary with the size of enrollment (for example, a large enrollment 
base in a county may enable a plan to secure more favorable contracting 
arrangements from providers, thereby lowering plan costs).

M. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 12 we have 
prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of Title II of the MMA that 
are the subject of this regulation. All expenditures are classified as 
transfers to either beneficiaries or health plans. The table provides 
our best estimate of the dollar amount of these transfers, expressed in 
2001 dollars, at three percent and seven percent discount rates.

  Table 12.--Accounting Statement: Classification of Expenditures, 2004
                              Through 2009
         [Dollars in millions, discounted to 2001 present value]
------------------------------------------------------------------------
                 Transfers
------------------------------------------------------------------------
    Three Percent Annual Discount Rate.
-------------------------------------------
Annualized Monetized Transfers: ``On        19,083.
 Budget''.
-------------------------------------------
From Whom To Whom?........................  Federal Government To
                                             Private Plans.
Annualized Monetized Transfers: ``On        1,659.
 Budget''.
From Whom To Whom?........................  Federal Government To
                                             Medicare Beneficiaries.
-------------------------------------------
    Seven Percent Annual Discount Rate.
-------------------------------------------
Annualized Monetized Transfers: ``On        15,232.
 Budget''.
-------------------------------------------
From Whom To Whom?........................  Federal Government To
                                             Private Plans
Annualized Monetized Transfers: ``On        1,325.
 Budget''.
From Whom To Whom?........................  Federal Government To
                                             Medicare Beneficiaries.
------------------------------------------------------------------------

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

List of Subjects

42 CFR Part 417

    Administrative practice and procedure, Grant programs-health, 
Health care, Health insurance, Health maintenance organizations (HMO), 
Loan programs-health, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 422

    Administrative practice and procedure, Health facilities, Health 
maintenance organizations (HMO), Medicare, Penalties, Privacy, 
Reporting and recordkeeping requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth 
below:

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

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

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

[[Page 46952]]

Subpart J--Qualifying Conditions for Medicare Contracts

    2. Amend Sec.  417.402 by--
    A. Revising paragraph (b).
    B. Adding paragraph (c).
    The revision and addition read as follows:


Sec.  417.402  Effective date of initial regulations.

* * * * *
    (b) No new cost contracts are accepted by CMS. CMS will, however, 
accept and approve applications to modify cost contracts in order to 
expand service areas, provided they are submitted on or before 
September 1, 2006, and CMS determines that the organization continues 
to meet regulatory requirements and the requirements in its cost 
contract. Section 1876 cost contracts will not be extended or renewed 
beyond December 31, 2007, where conditions in paragraph (c) of this 
section are present.
    (c) Mandatory HMO or CMP service area reduction and contract non-
renewal. CMS will non-renew all or a portion of an HMO's or CMP's 
service area using procedures in Sec.  417.492(b) for any period 
beginning on or after January 1, 2008, where--
    (1) There were two or more coordinated care plan-model MA regional 
plans in the same service area or portion of a service area for the 
entire previous year meeting one of the conditions in paragraph (c)(3) 
of this section; or
    (2) There were two or more coordinated care plan-model MA local 
plans in the same service area or portion of a service area for the 
entire previous year meeting one of the conditions in paragraph (c)(3) 
of this section.
    (3) Minimum enrollment requirements. (i) With respect to any 
service area or portion of a service area that is within a Metropolitan 
Statistical Area with a population of more than 250,000 and counties 
contiguous to the Metropolitan Statistical Area, 5,000 enrolled 
individuals.
    (ii) With respect to any service area or portion of a service area 
that is not within a Metropolitan Statistical Area described in 
paragraph (c)(3)(i) of this section, 1,500 individuals.

Subpart Q--Beneficiary Appeals

    3. Section 417.600 is revised to read as follows:


Sec.  417.600  Basis and scope.

    (a) Statutory basis. (1) Section 1869 of the Act provides the right 
to a redetermination, reconsideration, hearing, and judicial review for 
individuals dissatisfied with a determination regarding their Medicare 
benefits.
    (2) Section 1876 of the Act provides for Medicare payments to HMOs 
and CMPs that contract with CMS to enroll Medicare beneficiaries and 
furnish Medicare-covered health care services to them.
    (3) Section 234 of the MMA requires section 1876 contractors to 
operate under the same provisions as MA plans where two plans of the 
same type enter the cost contract's service area.
    (b) Applicability. (1) The rights, procedures, and requirements 
relating to beneficiary appeals and grievances set forth in subpart M 
of part 422 of this chapter also apply to Medicare contracts with HMOs 
and CMPs under section 1876 of the Act.
    (2) In applying those provisions, references to section 1852 of the 
Act must be read as references to section 1876 of the Act, and 
references to MA organizations as references to HMOs and CMPs.


Sec.  417.602 through Sec.  417.638  [Removed]

    4. Sections 417.602 through 417.638 are removed.

Subpart U--Health Care Prepayment Plans

    5. Section 417.840 is revised to read as follows:


Sec.  417.840  Administrative review procedures.

    The HCPP must apply Sec.  422.568 through Sec.  422.619 of this 
chapter to organization determinations that affect its Medicare 
enrollees, and to reconsiderations, hearings, Medicare Appeals Council 
review, and judicial review of those organization determinations.

PART 422--MEDICARE ADVANTAGE PROGRAM

    6. The authority citation for part 422 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).
    7. Revise the heading of Part 422 to read as set forth above.

Subpart A--General Provisions

    8. Amend Sec.  422.1(a) by adding the following statutory basis in 
numerical order:


Sec.  422.1  Basis and scope.

    (a) * * *
    1858--Special rules for MA Regional Plans.
* * * * *
    9. Amend Sec.  422.2 by--
    A. Removing the definitions of ``ACR,'' ``Additional benefits,'' 
``Adjusted community rate,'' and ``M+C.''
    B. Revising the definitions of ``Basic benefits,'' ``Benefits,'' 
``Mandatory supplemental benefits,'' and ``Service area.''
    C. Adding the definitions of ``Institutionalized,'' ``MA,'' ``MA 
local area,'' ``MA local plan,'' ``MA-Prescription Drug Plan,'' ``MA 
regional plan,'' ``Prescription drug plan (PDP),'' ``Prescription drug 
plan (PDP) sponsor,'' ``Special needs individual,'' and ``Specialized 
MA plans.''
    D. Nomenclature change: In the definitions of ``M+C eligible 
individual,'' ``M+C organization,'' ``M+C plan,'' and ``M+C plan 
enrollee,'' every occurrence of ``M+C'' is removed and ``MA'' is added 
in its place.
    The revisions and additions read as follows:


Sec.  422.2  Definitions.

* * * * *
    Basic benefits means all Medicare-covered benefits (except hospice 
services).
    Benefits means health care services that are intended to maintain 
or improve the health status of enrollees, for which the MA 
organization incurs a cost or liability under an MA plan (not solely an 
administrative processing cost). Benefits are submitted and approved 
through the annual bidding process.
* * * * *
    Institutionalized means for the purpose of defining a special needs 
individual, an MA eligible individual who continuously resides in a 
long-term care facility for 90 days or longer, as determined by the 
presence of a 90-day assessment in the Minimum Data Set (MDS).
* * * * *
    MA stands for Medicare Advantage.
    MA local area is defined in Sec.  422.252.
    MA local plan means an MA plan that is not an MA regional plan.
    MA-Prescription Drug (PD) Plan means an MA plan that provides 
qualified prescription drug coverage under Part D of the Social 
Security Act.
    MA regional plan means a coordinated care plan structured as a 
preferred provider organization (PPO) that serves one or more entire 
regions. An MA regional plan must have a network of contracting 
providers that have agreed to a specific reimbursement for the plan's 
covered services and must pay for all covered services whether provided 
in or out of the network.
* * * * *

[[Page 46953]]

    Mandatory supplemental benefits means health care services not 
covered by Medicare that an MA enrollee must purchase as part of an MA 
plan. The benefits may include reductions in cost-sharing for benefits 
under the original Medicare fee-for-service program and are paid for in 
the form of premiums and cost-sharing, or by an application of the 
beneficiary rebate rule in section 1854(b)(1)(C)(ii)(I) of the Act, or 
both.
* * * * *
    Prescription drug plan (PDP) means approved prescription drug 
coverage that is offered under a policy, contract, or plan that has 
been approved as meeting the requirements specified in part 423 of this 
chapter and that is offered by a MA organization that has a contract 
with CMS that meets the contract requirements under part 423 of this 
chapter and does not include a fallback plan unless specifically 
identified as a prescription drug plan.
    Prescription drug plan (PDP) sponsor means a nongovernmental entity 
that is certified under part 423 of this chapter as meeting the 
requirements and standards of that part for that sponsor.
* * * * *
    Service area means a geographic area that for local MA plans is a 
county or multiple counties, and for MA regional plans is a region 
approved by CMS within which an MA-eligible individual may enroll in a 
particular MA plan offered by an MA organization. Each MA plan must be 
available to all MA-eligible individuals within the plan's service 
area. In deciding whether to approve an MA plan's proposed service 
area, CMS considers the following criteria:
    (1) For local MA plans:
    (i) Whether the area meets the ``county integrity rule'' that a 
service area generally consists of a full county or counties. However, 
CMS may approve a service area that includes only a portion of a county 
if it determines that the ``partial county'' area is necessary, 
nondiscriminatory, and in the best interests of the beneficiaries.
    (ii) The extent to which the proposed services area mirrors service 
areas of existing commercial health care plans or MA plans offered by 
the organization.
    (iii) For MA coordinated care plans and network MA MSA plans, 
whether the contracting provider network meets the access and 
availability standards set forth in Sec.  422.112. Although not all 
contracting providers must be located within the plan's service area, 
CMS must determine that all services covered under the plan are 
accessible from the service area.
    (iv) For non-network MA MSA plans, CMS may approve single county 
non-network MA MSA plans even if the MA organization's commercial plans 
have multiple county service areas.
    (2) For MA regional plans, whether the service area consists of the 
entire region.
    Special needs individual means an MA eligible individual who is 
institutionalized, as defined above, is entitled for Medicaid under 
title XIX, or has severe or disabling chronic condition(s) and would 
benefit from enrollment in a specialized MA based on criteria 
established by CMS.
    Specialized MA Plans means any type of MA coordinated care plan 
that exclusively enrolls special needs individuals.
    10. Amend Sec.  422.4 by--
    A. Revising the section heading.
    B. Revising paragraph (a)(1)(iii).
    C. Redesignating paragraph (a)(1)(iv) as paragraph (a)(1)(v).
    D. Adding a new paragraph (a)(1)(iv).
    E. Revising newly redesignated paragraph (a)(1)(v).
    F. Removing paragraph (a)(2)(ii).
    G. Redesignating paragraph (a)(2)(iii) as paragraph (a)(2)(ii).
    The revisions and additions read as follows:


Sec.  422.4  Types of MA plans.

    (a) General rule. * * *
    (1) A coordinated care plan. * * *
    (iii) Coordinated care plans include plans offered by health 
maintenance organizations (HMOs), provider-sponsored organizations 
(PSOs), regional or local preferred provider organizations (PPOs) as 
specified in paragraph (a)(1)(v) of this section, RFBs, and other 
network plans (except network MSA and PFFS plans).
    (iv) A specialized MA plan includes any type of coordinated care 
plan that exclusively enrolls special needs individuals as defined in 
Sec.  422.2.
    (v) A PPO plan is a plan that has a network of providers that have 
agreed to a contractually specified reimbursement for covered benefits 
with the organization offering the plan; provides for reimbursement for 
all covered benefits regardless of whether the benefits are provided 
within the network of providers; and, only for purposes of quality 
assurance requirements in Sec.  422.152(e), is offered by an 
organization that is not licensed or organized under State law as an 
HMO.
* * * * *


Sec.  422.6  [Removed]

    11. Remove Sec.  422.6.


Sec.  422.8  [Removed]

    12. Remove Sec.  422.8.


Sec.  422.10  [Redesignated and Amended]

    13. Redesignate Sec.  422.10 as Sec.  422.6 and amend newly 
redesignated Sec.  422.6 by--
    a. Revising the section heading.
    b. Revising paragraph (a).
    c. Revising paragraph (b).
    d. Revising paragraph (d)(2)(ii).
    e. Revising paragraph (e).
    f. Revising paragraph (f)(1).
    g. Revising paragraph (f)(2)
    h. Revising paragraph (f)(3).
    The revisions read as set forth below:


Sec.  422.6  Cost-sharing in enrollment-related costs (MA user fee).

    (a) Basis and scope. This section implements that portion of 
section 1857 of the Act that pertains to cost-sharing in enrollment-
related costs. It sets forth the procedures that CMS follows to 
determine the aggregate annual ``user fee'' to be contributed by MA 
organizations and PDP sponsors under Medicare Part D and to assess the 
required user fees for each MA plan offered by MA organizations and PDP 
sponsors.
    (b) Purpose of assessment. Section 1857(e)(2) of the Act authorizes 
CMS to charge and collect from each MA plan offered by an MA 
organization its pro rata share of fees for administering section 1851 
of the Act (relating to dissemination of enrollment information), and 
section 4360 of the Omnibus Budget Reconciliation Act of 1990 (relating 
to the health insurance counseling and assistance program) and section 
1860D-1(c) of the Act (relating to dissemination of enrollment 
information for the drug benefit).
* * * * *
    (d) Collection of fees. * * *
    (2) Amount to be collected. * * *
    (ii) For fiscal year 2006 and each succeeding year, $200 million, 
the applicable portion (as defined in paragraph (e) of this section) of 
$200 million.
    (e) Applicable portion. In this section, the term ``applicable 
portion'' with respect to an MA plan means, for a fiscal year, CMS' 
estimate of Medicare Part C and D expenditures for those MA 
organizations as a percentage of all expenditures under title XVIII and 
with respect to PDP sponsors, the applicable portion is CMS' estimate 
of Medicare Part D prescription drug expenditures for those PDP 
sponsors as a percentage of all expenditures under title XVIII.
    (f) Assessment methodology. (1) The amount of the applicable 
portion of the user fee each MA organization and PDP sponsor must pay 
is assessed as a percentage of the total Medicare payments to each 
organization. CMS determines the annual assessment

[[Page 46954]]

percentage rate separately for MA organizations and for PDPs using the 
following formula:
    (i) The assessment formula for MA organizations (including MA-PD 
plans):

    C divided by A times B where--
    A is the total estimated January payments to all MA 
organizations subject to the assessment;
    B is the 9-month (January through September) assessment period; 
and
    C is the total fiscal year MA organization user fee assessment 
amount determined in accordance with paragraph (d)(2) of this 
section.

    (ii) The assessment formula for PDPs:

    A is the total estimated January payments to all PDP sponsors 
subject to the assessment;
    B is the 9-month (January through September) assessment period; 
and
    C is the total fiscal year PDP sponsor's user fee assessment 
amount determined in accordance with paragraph (d)(2) of this 
section.

    (2) CMS determines each MA organization's and PDP sponsor's pro 
rata share of the annual fee on the basis of the organization's 
calculated monthly payment amount during the 9 consecutive months 
beginning with January. CMS calculates each organization's monthly pro 
rata share by multiplying the established percentage rate by the total 
monthly calculated Medicare payment amount to the organization as 
recorded in CMS' payment system on the first day of the month.
    (3) CMS deducts the organization's fee from the amount of Federal 
funds otherwise payable to the MA organization or PDP sponsor for that 
month.
* * * * *

Subpart B--Eligibility, Election, and Enrollment

    14. Amend Sec.  422.50 by--
    A. Revising the section heading.
    B. Adding an introductory text.
    C. Revising paragraph (a)(5).
    The revisions and addition read as follows:


Sec.  422.50  Eligibility to elect an MA plan.

    For this subpart, all references to an MA plan include MA-PD and 
both MA local and MA regional plans, as defined in Sec.  422.4 unless 
specifically noted otherwise.
    (a) * * *
    (5) Completes and signs an election form or another CMS approved 
election method and gives information required for enrollment; and
* * * * *
    15. Add Sec.  422.52 to read as follows:


Sec.  422.52  Eligibility to elect an MA plan for special needs 
individuals.

    (a) General rule. To elect an MA plan for special needs 
individuals, an individual must meet eligibility requirements specified 
in this section.
    (b) Basic eligibility requirements. To be eligible to elect a 
special needs MA plan, an individual must meet the eligibility 
requirements for that plan, as well as MA as described in Sec.  422.50. 
Further, the individual must--
    (1) Be institutionalized in a Medicare or Medicaid certified 
institution as defined by CMS; or
    (2) Be entitled to medical assistance under a State plan under 
title XIX of the Act; or
    (3) Meet other eligibility requirements established by CMS to 
identify individuals who would benefit from enrollment in such a 
specialized MA plan.
    (c) CMS may waive Sec.  422.50(a)(2) that excludes persons with 
ESRD.
    (d) Deeming continued eligibility. If a special needs MA plan 
determines that the enrollee no longer meets the eligibility criteria, 
but it is reasonable to expect that, in the absence of continued 
coverage under the MA plan, the individual would meet the special needs 
criteria of the plan within a certain period of time, as specified by 
CMS, the enrollee may be deemed to continue to be eligible for the MA 
plan.
    (e) Exceptions. As specified in Sec.  422.4, CMS may designate 
certain MA plans that disproportionately serve special needs 
beneficiaries as ``specialized'' MA plans for special needs 
individuals. If CMS provides the designation:
    (1) Individuals already enrolled in an MA plan that CMS 
subsequently designates as a special needs MA plan may continue to be 
enrolled in the plan.
    (2) The MA plan may restrict future enrollment to only certain 
specialized needs individuals, as established under Sec.  422.4.
    16. Amend Sec.  422.54 by--
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b).
    D. Revising paragraph (c)(1)(ii).
    E. Revising paragraph (c)(2).
    F. Revising paragraph (d)(3).
    The revisions read as follows:


Sec.  422.54  Continuation of enrollment for MA local plans.

    (a) Definition. Continuation area means an additional area (outside 
the service area) within which the MA organization offering a local 
plan furnishes or arranges to furnish services to its continuation-of-
enrollment enrollees. Enrollees must reside in a continuation area on a 
permanent basis. A continuation area does not expand the service area 
of any MA local plan.
    (b) Basic rule. An MA organization may offer a continuation of 
enrollment option to MA local plan enrollees when they no longer reside 
in the service area of a plan and permanently move into the geographic 
area designated by the MA organization as a continuation area. The 
intent to no longer reside in an area and permanently live in another 
area is verified through documentation that establishes residency, such 
as a driver's license or voter registration card.
    (c) * * *
    (1) * * *
    (ii) Describe the option(s) in the member materials it offers and 
make the option available to all MA local plan enrollees residing in 
the continuation area.
    (2) An enrollee who moves out of the service area and into the 
geographic area designated as the continuation area has the choice of 
continuing enrollment or disenrolling from the MA local plan. The 
enrollee must make the choice of continuing enrollment in a manner 
specified by CMS. If no choice is made, the enrollee must be 
disenrolled from the plan.
    (d) * * *
    (3) Reasonable cost sharing. For services furnished in the 
continuation area, an enrollee's cost-sharing liability is limited to 
the cost-sharing amounts required in the MA local plan's service area 
(in which the enrollee no longer resides).
* * * * *
    17. Amend Sec.  422.56 by--
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b).
    The revisions read as follows:


Sec.  422.56  Enrollment in an MA MSA plan.

    (a) General. An individual is not eligible to elect an MA MSA plan 
unless the individual provides assurances that are satisfactory to CMS 
that he or she will reside in the United States for at least 183 days 
during the year for which the election is effective.
    (b) Individuals eligible for or covered under other health benefits 
program. Unless otherwise provided by the Secretary, an individual who 
is enrolled in a Federal Employee Health Benefit plan under 5 U.S.C. 
chapter 89, or is eligible for health care benefits through the 
Veteran's Administration under 10 U.S.C. chapter 55 or the Department 
of Defense under 38 U.S.C. chapter 17, may not enroll in an MA MSA 
plan.
* * * * *
    18. Amend Sec.  422.60 by--

[[Page 46955]]

    A. Revising paragraph (b)(1).
    B. Revising paragraph (b)(3).
    C. Revising the heading of paragraph (c).
    D. Revising paragraph (c)(1).
    E. Revising paragraph (d).
    F. Revising paragraph (e).
    G. Revising paragraph (f)(1).
    H. Revising paragraph (f)(3).
    The revisions read as follows:


Sec.  422.60  Election process.

* * * * *
    (b) Capacity to accept new enrollees. (1) MA organizations may 
submit information on enrollment capacity of plans.
* * * * *
    (3) CMS considers enrollment limit requests for an MA plan service 
area, or a portion of the plan service area, only if the health and 
safety of beneficiaries is at risk, such as if the provider network is 
not available to serve the enrollees in all or a portion of the service 
area.
    (c) Election forms and other election mechanisms. (1) The election 
must comply with CMS instructions regarding content and format and have 
been approved by CMS as described in Sec.  422.80. The election must be 
completed by the MA eligible individual (or the individual who will 
soon become eligible to elect an MA plan) and include authorization for 
disclosure and exchange of necessary information between the U.S. 
Department of Health and Human Services and its designees and the MA 
organization. Persons who assist beneficiaries in completing forms must 
sign the form, or through other approved mechanisms, indicate their 
relationship to the beneficiary.
* * * * *
    (d) When an election is considered to have been made. An election 
in an MA plan is considered to have been made on the date the completed 
election is received by the MA organization.
    (e) Handling of elections. The MA organization must have an 
effective system for receiving, controlling, and processing elections. 
The system must meet the following conditions and requirements:
    (1) Each election is dated as of the day it is received in a manner 
acceptable to CMS.
    (2) Elections are processed in chronological order, by date of 
receipt.
    (3) The MA organization gives the beneficiary prompt notice of 
acceptance or denial in a format specified by CMS.
    (4) If the MA plan is enrolled to capacity, it explains the 
procedures that will be followed when vacancies occur.
    (5) Upon receipt of the election, or for an individual who was 
accepted for future enrollment from the date a vacancy occurs, the MA 
organization transmits, within the timeframes specified by CMS, the 
information necessary for CMS to add the beneficiary to its records as 
an enrollee of the MA organization.
    (f) Exception for employer group health plans. (1) In cases in 
which an MA organization has both a Medicare contract and a contract 
with an employer group health plan, and in which the MA organization 
arranges for the employer to process elections for Medicare-entitled 
group members who wish to enroll under the Medicare contract, the 
effective date of the election may be retroactive. Consistent with 
Sec.  422.250(b), payment adjustments based on a retroactive effective 
date may be made for up to a 90-day period.
* * * * *
    (3) Upon receipt of the election from the employer, the MA 
organization must submit the enrollment within timeframes specified by 
CMS.


Sec.  422.62  [Amended]

    19. Amend Sec.  422.62 by--
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b) introductory text.
    D. Revising the heading of paragraph (d).
    E. Revising paragraph (d)(1).
    F. Removing paragraph (d)(2)(i)(A).
    G. Redesignating paragraph (d)(2)(i)(B) as paragraph (d)(2)(i)(A).
    H. Redesignating paragraph (d)(2)(i)(C) as paragraph (d)(2)(i)(B).
    The revisions and addition read as follows:


Sec.  422.62  Election of coverage under an MA plan.

    (a) General: Coverage election periods--(1) Initial coverage 
election period for MA. The initial coverage election period is the 
period during which a newly MA-eligible individual may make an initial 
election. This period begins 3 months before the month the individual 
is first entitled to both Part A and Part B and ends on the later of--
    (i) The last day of the month preceding the month of entitlement; 
or
    (ii) If after May 15, 2006, the last day of the individual's Part B 
initial enrollment period.
    (2) Annual coordinated election period. (i) Beginning with 2002, 
the annual coordinated election period for the following calendar year 
is November 15th through December 31st, except for 2006.
    (ii) For 2006, the annual coordinated election period begins on 
November 15, 2005 and ends on May 15, 2006.
    (iii) During the annual coordinated election period, an individual 
eligible to enroll in an MA plan may change his or her election from an 
MA plan to original Medicare or to a different MA plan, or from 
original Medicare to an MA plan. If an individual changes his or her 
election to original Medicare, he or she may also elect a PDP.
    (3) Open enrollment and disenrollment opportunities through 2005. 
Through 2005, the number of elections or changes that an MA eligible 
individual may make is not limited (except as provided for in paragraph 
(d) of this section for MA MSA plans). Subject to the MA plan being 
open to enrollees as provided under Sec.  422.60(a)(2), an individual 
eligible to elect an MA plan may change his or her election from an MA 
plan to original Medicare or to a different MA plan, or from original 
Medicare to an MA plan.
    (4) Open enrollment and disenrollment during 2006. (i) Except as 
provided in paragraphs (a)(4)(ii), (a)(4)(iii), and (a)(6) of this 
section, an individual who is not enrolled in an MA plan, but who is 
eligible to elect an MA plan in 2006, may elect an MA plan only once 
during the first 6 months of the year.
    (A) An individual who is enrolled in an MA-PD plan may elect 
another MA-PD plan or original Medicare and coverage under a PDP. Such 
an individual may not elect an MA plan that does not provide qualified 
prescription drug coverage.
    (B) An individual who is enrolled in an MA plan that does not 
provide qualified prescription drug coverage may elect another MA plan 
that does not provide that coverage or original Medicare. Such an 
individual may not elect an MA-PD plan or coverage under a PDP.
    (ii) Newly eligible MA individual. An individual who becomes MA 
eligible during 2006 may elect an MA plan or change his or her election 
once during the period that begins the month the individual is entitled 
to both Part A and Part B and ends on the last day of the 6th month of 
the entitlement, or on December 31, whichever is earlier, subject to 
the limitations in paragraphs (a)(4)(i)(A) and (a)(4)(i)(B) of this 
section.
    (5) Open enrollment and disenrollment beginning in 2007. (i) For 
2007 and subsequent years, except as provided in paragraphs (a)(5)(ii), 
(a)(5)(iii), and (a)(6) of this section, an individual who is not 
enrolled in an MA plan but is eligible to elect an MA plan

[[Page 46956]]

may make an election into an MA plan once during the first 3 months of 
the year.
    (A) An individual who is enrolled in an MA-PD plan may elect 
another MA-PD plan or original Medicare and coverage under a PDP. Such 
an individual may not elect an MA plan that does not provide qualified 
prescription drug coverage.
    (B) An individual who is enrolled in an MA plan that does not 
provide qualified prescription drug coverage may elect another MA plan 
that does not provide that coverage or original Medicare. Such an 
individual may not elect an MA-PD plan or coverage under a PDP.
    (ii) Newly eligible MA individual. An individual who becomes MA 
eligible during 2007 or later may elect an MA plan or change his or her 
election once during the period that begins the month the individual is 
entitled to both Part A and Part B and ends on the last day of the 3rd 
month of the entitlement, or on December 31, whichever is earlier 
subject to the limitations in paragraphs (a)(5)(i)(A) and (a)(5)(i)(B) 
of this section.
    (6) Open enrollment period for institutionalized individuals. After 
2005, an individual who is eligible to elect an MA plan and who is 
institutionalized, as defined by CMS, is not limited (except as 
provided for in paragraph (d) of this section for MA MSA plans) in the 
number of elections or changes he or she may make. Subject to the MA 
plan being open to enrollees as provided under Sec.  422.60(a)(2), an 
MA eligible institutionalized individual may at any time elect an MA 
plan or change his or her election from an MA plan to original 
Medicare, to a different MA plan, or from original Medicare to an MA 
plan.
    (b) Special election periods. An individual may at any time (that 
is, not limited to the annual election period) discontinue the election 
of an MA plan offered by an MA organization and change his or her 
election, in the form and manner specified by CMS, from an MA plan to 
original Medicare or to a different MA plan under any of the following 
circumstances:
* * * * *
    (d) Special rules for MA MSA plans--(1) Enrollment. An individual 
may enroll in an MA MSA plan only during an initial or annual election 
period described in paragraphs (a)(1) and (a)(2) of this section.
* * * * *
    20. Amend Sec.  422.66 by--
    A. Revising the section heading.
    B. Revising paragraph (b)(1)(i).
    C. Revising paragraph (b)(1)(ii).
    D. Revising paragraph (b)(3)(ii).
    E. Revising paragraph (b)(3)(iii) introductory text.
    F. Revising paragraph (d)(5).
    G. Revising paragraph (e).
    H. Revising paragraph (f)(2).
    The revisions and additions read as follows:


Sec.  422.66  Coordination of enrollment and disenrollment through MA 
organizations.

* * * * *
    (b) * * *
    (1) * * *
    (i) Elect a different MA plan by filing the appropriate election 
with the MA organization.
    (ii) Submit a request for disenrollment to the MA organization in 
the form and manner prescribed by CMS or file the appropriate 
disenrollment request through other mechanisms as determined by CMS.
* * * * *
    (3) * * *
    (ii) Provide enrollee with notice of disenrollment in a format 
specified by CMS; and
    (iii) In the case of a plan where lock-in applies, include in the 
notice a statement explaining that he or she--
* * * * *
    (d) * * *
    (5) Election. The individual who is converting must complete an 
election as described in Sec.  422.60(c)(1).
* * * * *
    (e) Maintenance of enrollment. (1) An individual who has made an 
election under this section is considered to have continued to have 
made that election until either of the following, which ever occurs 
first:
    (i) The individual changes the election under this section.
    (ii) The elected MA plan is discontinued or no longer serves the 
area in which the individual resides, the organization does not offer, 
or the individual does not elect, the option of continuing enrollment, 
as provided under Sec.  422.54(b)(3)(ii).
    (2) An individual who has elected an MA plan that does not provide 
prescription drug coverage will not be deemed to have elected an MA-PD 
plan.
    (3) An individual enrolled in an MA plan that, as of December 31, 
2005, offers any prescription drug coverage will be deemed to have 
elected an MA-PD plan offered by the same organization as of January 1, 
2006.
    (4) If an individual is enrolled with an MA organization that in 
2005 offers more than one MA plan that includes drug coverage; the MA 
plan in which the individual is enrolled as of December 31, 2005 
includes drug coverage; and that MA plan becomes an MA-PD plan on 
January 1, 2006, the individual will be deemed to have elected to 
enroll in that MA-PD plan.
    (5) An individual enrolled in an MA-PD plan as of December 31 of a 
year is deemed to have elected to remain enrolled in that plan on 
January 1 of the following year.
    (f) * * *
    (2) Upon receipt of the election from the employer, the MA 
organization must submit a disenrollment notice to CMS within 
timeframes specified by CMS.
    21. Amend Sec.  422.68 by revising paragraph (b) to read as 
follows:


Sec.  422.68  Effective dates of coverage and change of coverage.

* * * * *
    (b) Annual election periods. For an election or change of election 
made during an annual election period as described in Sec.  
422.62(a)(2), coverage is effective as of the first day of the 
following calendar year except that for the special annual election 
period described in Sec.  422.62(a)(2)(ii), elections made after 
December 31, 2005 through May 15, 2006 are effective as of the first 
day of the first calendar month following the month in which the 
election is made.
* * * * *
    22. Amend Sec.  422.74 by--
    A. Revising the section heading.
    B. Revising paragraph (b)(1)(ii).
    C. Revising paragraph (c)(1).
    D. Revising paragraph (d)(1).
    E. Revising paragraph (d)(2).
    The revisions read as follows:


Sec.  422.74  Disenrollment by the Medicare Advantage Organization.

* * * * *
    (b) * * *
    (1) * * *
    (ii) The individual has engaged in disruptive or threatening 
behaviors specified at paragraph (d)(2) of this section.
* * * * *
    (c) * * *
    (1) Be provided to the individual before submission of the 
disenrollment transaction to CMS; and
* * * * *
    (d) Process for disenrollment--(1) Monthly basic and supplementary 
premiums are not paid timely. An MA organization may disenroll an 
individual from the MA plan for failure to pay basic and supplementary 
premiums under the following circumstances:
    (i) The MA organization can demonstrate to CMS that it made 
reasonable efforts to collect the unpaid premium amount.

[[Page 46957]]

    (ii) The MA organization provides the enrollee with notice of 
disenrollment that meets the requirements set forth in paragraph (c) of 
this section.
    (iii) If the enrollee fails to pay the premium for optional 
supplemental benefits but pays the basic premium and any mandatory 
supplemental premium, the MA organization has the option to discontinue 
the optional supplemental benefits and retain the individual as an MA 
enrollee.
    (2) Disruptive or threatening behavior--(i) Basis for 
disenrollment. An MA organization may disenroll an individual from the 
MA plan if the individual's behavior is disruptive, unruly, abusive, 
uncooperative, or threatening. Disruptive behavior may not be based 
upon the use of medical services or noncompliance with medical advice. 
An individual who engages in disruptive or threatening behavior refers 
to an individual who exhibits any of the following:
    (A) An individual whose behavior jeopardizes his or her health or 
safety, or the safety of others;
    (B) An individual whose behavior impairs the MA's ability to 
furnish services to either the individual or other individuals enrolled 
in the plan; or
    (C) An individual with decision-making capacity who refuses to 
comply with the terms of the enrollment agreement.
    (ii) Effort to resolve the problem. The MA organization must make a 
serious effort to resolve the problems presented by the individual, 
including the use (or attempted use) of the MA organization's grievance 
procedures. The beneficiary has a right to submit any information or 
explanation that he or she may wish to submit to the MA organization.
    (iii) Documentation. The MA organization must document the 
enrollee's behavior, its own efforts to resolve any problems, as 
described in paragraphs (d)(2)(i) through (d)(2)(ii) of this section 
and any extenuating circumstances.
    (iv) CMS review of the proposed disenrollment. CMS will decide 
after reviewing the documentation submitted by the MA organization and 
any information submitted by the beneficiary (which the MA organization 
must forward to CMS) whether the MA organization has met the criteria 
for disenrollment for disruptive or threatening behavior. CMS will make 
the decision within 20 working days after receipt of the documentation 
and will notify the MA organization within 5 working days after making 
its decision.
    (v) Effective date of disenrollment. If CMS permits an MA 
organization to disenroll an individual for disruptive behavior, the 
termination is effective the first day of the calendar month after the 
month in which the MA organization gives the individual notice of the 
disenrollment that meets the requirements set forth in paragraph (c) of 
this section.
    (vi) Reenrollment in the MA organization. Once an individual is 
disenrolled from the MA organization for disruptive behavior, the MA 
organization has the option to decline future enrollment by the 
individual for a period of time specified by CMS.
    (vii) Expedited process. In the event that an individual's 
disruptive or threatening behavior is so extreme as to have caused harm 
to others or prevented the MA plan from providing services, CMS may 
consider allowing an expedited disenrollment process.
* * * * *
    23. Amend Sec.  422.80 by--
    A. Revising paragraph (a)(2).
    B. Adding paragraph (a)(3).
    C. Revising paragraph (e)(1)(ii).
    D. Revising paragraph (e)(1)(iii).
    E. Revising paragraph (e)(1)(iv).
    F. Revising paragraph (e)(1)(v).
    G. Adding paragraph (e)(1)(ix).
    The revisions and additions read as follows:


Sec.  422.80  Approval of marketing materials and election forms.

    (a) * * *
    (1) * * *
    (2) CMS does not disapprove the distribution of new material or 
form; or
    (3) If the MA plan is deemed by CMS to meet certain performance 
requirements established by CMS, the MA plan may distribute designated 
marketing materials 5 days following their submission to CMS.
* * * * *
    (e) * * *
    (1) * * *
    (ii) Engage in any discriminatory activity, including targeted 
marketing to Medicare beneficiaries from higher income areas without 
making comparable efforts to enroll Medicare beneficiaries from lower 
income areas.
    (iii) Solicit Medicare beneficiaries door-to-door.
    (iv) Engage in activities that could mislead or confuse Medicare 
beneficiaries, or misrepresent the MA organization. The MA organization 
may not claim it is recommended or endorsed by CMS or Medicare or the 
Department of Health and Human Services or that CMS or Medicare or the 
Department of Health and Human Services recommends that the beneficiary 
enroll in the MA plan. It may, however, explain that the organization 
is approved for participation in Medicare.
    (v) Distribute marketing materials for which, before expiration of 
the 45-day period (or 10 days as provided in paragraph (a)(1) of this 
section), the MA organization receives from CMS written notice of 
disapproval because it is inaccurate or misleading, or misrepresents 
the MA organization, its marketing representatives, or CMS.
* * * * *
    (ix) Engage in any other marketing activity prohibited by CMS in 
its marketing guidance.
* * * * *

Subpart C--Benefits and Beneficiary Protections


Sec.  422.100  [Amended]

    24. Amend Sec.  422.100 by--
    A. Revising paragraph (b)(2).
    B. Revising paragraph (c)(1).
    C. Removing paragraph (e).
    D. Redesignating paragraph (f) as paragraph (e).
    E. Redesignating paragraph (g) as paragraph (f).
    F. Redesignating paragraph (h) as paragraph (g).
    G. Redesignating paragraph (i) as paragraph (h).
    H. Redesignating paragraph (j) as paragraph (i).
    I. Revising the heading of newly redesignated paragraph (f).
    J. Revising newly redesignated paragraph (f) introductory text.
    K. Revising newly redesignated paragraph (f)(2).
    The revisions read as follows:

Subpart C--Benefits and Beneficiary Protections


Sec.  422.100  General requirements.

* * * * *
    (b) * * *
    (2) An MA plan (and an MA MSA plan, after the annual deductible in 
Sec.  422.103(d) has been met) offered by an MA organization satisfies 
paragraph (a) of this section with respect to benefits for services 
furnished by noncontracting provider if that MA plan provides payment 
in an amount the provider would have received under original Medicare 
(including balance billing permitted under Medicare Part A and Part B).
* * * * *
    (c) * * *
    (1) Basic benefits are all Medicare-covered services, expect 
hospice services.
* * * * *
    (f) CMS review and approval of MA benefits. CMS reviews and 
approves MA

[[Page 46958]]

benefits using written policy guidelines and requirements in this part 
and other CMS instructions to ensure that--
* * * * *
    (2) MA organizations are not designing benefits to discriminate 
against beneficiaries, promote discrimination, discourage enrollment or 
encourage disenrollment, steer subsets of Medicare beneficiaries to 
particular MA plans, or inhibit access to services; and
* * * * *
    25. Amend Sec.  422.101 by--
    A. Revising paragraph (b)(2).
    B. Adding paragraph (b)(4).
    C. Adding paragraph (d).
    D. Adding paragraph (e).
    The revision and additions read as follows:


Sec.  422.101  Requirements relating to basic benefits.

* * * * *
    (b) * * *
    (2) General coverage guidelines included in original Medicare 
manuals and instructions unless superseded by regulations in this part 
or related instructions; and
* * * * *
    (4) Instead of applying rules in paragraph (b)(3) of this section, 
an organization offering an MA regional plan may elect to have any 
local coverage determination that applies in any part of an MA region 
apply to all parts of that same MA region. The election is at the 
discretion of the MA regional plan and is not subject to CMS pre-
approval.
* * * * *
    (d) Special cost-sharing rules for MA regional plans. In addition 
to the requirements in paragraph (a) through paragraph (c) of this 
section, MA regional plans must provide for the following:
    (1) Single deductible. MA regional plans, to the extent they apply 
a deductible, are permitted to have only a single deductible related to 
combined Medicare Part A and Part B services. Applicability of the 
single deductible may be differential for specific in-network services 
and may also be waived for preventative services or other items and 
services.
    (2) Catastrophic limit. MA regional plans are required to provide 
for a catastrophic limit on beneficiary out-of-pocket expenditures for 
in-network benefits under the original Medicare fee-for-service program 
(Part A and Part B benefits).
    (3) Additional catastrophic limit. MA regional plans are required 
to provide an additional catastrophic limit on beneficiary out-of-
pocket expenditures for in-network and out-of-network benefits under 
the original Medicare fee-for-service program. This second out-of-
pocket catastrophic limit, which would apply to both in-network and 
out-of-network benefits under original Medicare, may be higher than the 
in-network catastrophic limit in paragraph (d)(2) of this section, but 
may not increase the limit described in paragraph (d)(2) of this 
section.
    (4) Tracking of deductible and catastrophic limits and 
notification. MA regional plans are required to track the deductible 
(if any) and catastrophic limits in paragraphs (d)(1) through (d)(3) of 
this section based on incurred out-of-pocket beneficiary costs for 
original Medicare covered services, and are also required to notify 
members when the deductible (if any) or a limit has been reached.
    (e) Other rules for MA regional plans. (1) MA regional plans are 
required to provide reimbursement for all covered benefits, regardless 
of whether those benefits are provided within or outside of the network 
of contracted providers.
    (2) In applying the actuarially equivalent level of cost-sharing 
with respect to MA bids related to benefits under the original Medicare 
program option as set forth at Sec.  422.308, only the catastrophic 
limit on out-of-pocket expenses for in-network benefits in paragraph 
(d)(2) of this section will be taken into account.
    26. Amend Sec.  422.102 by--
    A. Revising paragraph (a)(1).
    B. Revising paragraph (a)(3).
    C. Adding paragraph (a)(4).
    The revisions and addition read as follows:


Sec.  422.102  Supplemental benefits.

    (a) * * *
    (1) Subject to CMS approval, an MA organization may require 
Medicare enrollees of an MA plan (other than an MSA plan) to accept or 
pay for services in addition to Medicare-covered services described in 
Sec.  422.101.
* * * * *
    (3) CMS approves mandatory supplemental benefits if the benefits 
are designed in accordance with CMS' guidelines and requirements as 
stated in this part and other written instructions.
    (4) Beginning in 2006, an MA plan may reduce cost sharing below the 
actuarial value specified in section 1854(e)(4)(B) of the Act as a 
mandatory supplemental benefit.
* * * * *
    27. Amend Sec.  422.103 by--
    A. Revising the section heading.
    B. Revising paragraph (a).
    The revisions read as follows:


Sec.  422.103  Benefits under an MA MSA plan.

    (a) General rule. An MA organization offering an MA MSA plan must 
make available to an enrollee, or provide reimbursement for, at least 
the services described in Sec.  422.101 after the enrollee incurs 
countable expenses equal to the amount of the plan's annual deductible.
* * * * *
    28. Amend 422.105 by revising paragraph (a) to read as follows:


Sec.  422.105  Special rules for point of service option.

    (a) If an MA organization does not offer a POS benefit to members 
of a plan, or if it offers a POS benefit as an optional supplemental 
benefit and the member has not selected that benefit, then when those 
members receive what is a covered item or service from contracted 
providers of that plan, the member cannot be financially liable for 
more than the normal in-plan cost sharing, if the member correctly 
identified himself or herself as a member of that plan to the 
contracted provider before receiving the covered item or service. As a 
general rule, a POS benefit is an option that an MA organization may 
offer in an MA coordinated care plan to provide enrollees with 
additional choice in obtaining specified health care services. The 
organization may offer A POS option--
    (1) Before January 1, 2006, under a coordinated care plan as an 
additional benefit as described in Sec.  422.312;
    (2) Under a coordinated care plan as a mandatory supplemental 
benefit as described in Sec.  422.102(a); or
    (3) Under a coordinated care plan as an optional supplemental 
benefit as described in Sec.  422.102(b).
    (4) An MA regional plan is permitted to offer a POS-LIKE benefit as 
described in paragraphs (a)(2) or (a)(3) of this section as a 
supplemental benefit. An MA regional plan may offer a POS-LIKE option 
as a supplemental benefit where cost sharing for out-of-network 
services is reduced, in a limited manner, for services obtained from 
out-of-network providers. Offering a POS-LIKE supplemental benefit does 
not affect the MA regional plan's responsibility to provide 
reimbursement for all covered benefits, regardless of whether those 
benefits are provided within the network of contracted providers.
* * * * *
    29. Amend Sec.  422.106 by--
    A. Revising the paragraph (c) heading.
    B. Revising paragraph (c)(2).
    C. Adding paragraph (d).

[[Page 46959]]

    The revisions and addition read as follows:


Sec.  422.106  Coordination of benefits with employer or union group 
health plans and Medicaid.

* * * * *
    (c) Waiver or modification of contracts with MA organizations. * * 
*
* * * * *
    (2) Approved waivers or modifications under this paragraph granted 
to any MA organization may be used by any other MA organization in 
developing its bid.
    (d) Employer sponsored MA plans for plan years beginning on or 
after January 1, 2006. (1) To facilitate the offering of MA plans by 
employers, labor organizations, or the trustees of a fund established 
by one or more employers or labor organizations (or combination 
thereof) to furnish benefits to the entity's employees, former 
employees (or combination thereof) or members or former members (or 
combination thereof), of the labor organizations, those MA plans may 
request, in writing, from CMS, a waiver or modification of those 
requirements in this part that hinder the design of, the offering of, 
or the enrollment in, those plans by those individuals.
    (2) An MA plan described in this paragraph may restrict the 
enrollment of individuals in that plan to individuals who are 
beneficiaries and participants in that plan.
    (3) Approved waivers or modifications under this paragraph granted 
to any MA plan may be used by any other similarly situated MA plan in 
developing its bid.
    30. Amend Sec.  422.108 by revising paragraph (f) to read as 
follows:


Sec.  422.108  Medicare secondary payer (MSP) procedures.

* * * * *
    (f) MSP rules and State laws. Consistent with Sec.  422.402 
concerning the Federal preemption of State law, the rules established 
under this section supersede any State laws, regulations, contract 
requirements, or other standards that would otherwise apply to MA 
plans. A State cannot take away an MA organization's right under 
Federal law and the MSP regulations to bill, or to authorize providers 
and suppliers to bill, for services for which Medicare is not the 
primary payer. The MA organization will exercise the same rights to 
recover from a primary plan, entity, or individual that the Secretary 
exercises under the MSP regulations in subparts B through D of part 411 
of this chapter.
    30. Amend Sec.  422.109 by--
    A. Revising paragraph (a)(2).
    B. Revising paragraph (c)(2)(iv).
    C. Revising paragraph (c)(3).
    The revisions read as follows:


Sec.  422.109  Effect of national coverage determinations (NCDs) and 
legislative changes in benefits.

    (a) * * *
    (2) The estimated cost of Medicare services furnished as a result 
of a particular NCD or legislative change in benefits represents at 
least 0.1 percent of the national average per capita costs.
* * * * *
    (c) * * *
    (2) * * *
    (iv) Any services, including the costs of the NCD service or 
legislative change in benefits, to the extent the MA organization is 
already obligated to cover it as a supplemental benefit under Sec.  
422.102.
    (3) Costs for significant cost NCD services or legislative changes 
in benefits for which CMS fiscal intermediaries and carriers will make 
payment are those Medicare costs not listed in paragraphs (c)(2)(i) 
through (c)(2)(iv) of this section.
* * * * *
    32. Amend Sec.  422.110 by--
    A. Revising paragraph (b).
    B. Removing paragraph (c).
    The revision reads as follows:


Sec.  422.110  Discrimination against beneficiaries prohibited.

* * * * *
    (b) Exception. An MA organization may not enroll an individual who 
has been medically determined to have end-stage renal disease. However, 
an enrollee who develops end-stage renal disease while enrolled in a 
particular MA organization may not be disenrolled for that reason. An 
individual who is an enrollee of a particular MA organization, and who 
resides in the MA plan service area at the time he or she first becomes 
MA eligible, or, an individual enrolled by an MA organization that 
allows those who reside outside its MA service area to enroll in an MA 
plan as set forth at Sec.  422.50(a)(3)(ii), then that individual is 
considered to be ``enrolled'' in the MA organization for purposes of 
the preceding sentence.


Sec.  422.111  [Amended]

    33. Amend Sec.  422.111 by--
    A. Revising paragraph (b)(3).
    B. Revising paragraph (c)(1).
    C. Revising paragraph (d)(2).
    D. Revising paragraph (e).
    E. Removing paragraph (f)(4).
    C. Removing paragraph (f)(6).
    D. Redesignating paragraph (f)(5) as paragraph (f)(4).
    E. Redesignating paragraph (f)(7) as paragraph (f)(5).
    F. Redesignating paragraph (f)(8) as paragraph (f)(6).
    G. Redesignating paragraph (f)(9) as paragraph (f)(7).
    H. Redesignating paragraph (f)(10) as paragraph (f)(8).
    I. Redesignating paragraph (f)(11) as paragraph (f)(9).
    J. Revising newly redesignated paragraph (f)(5)(iv).
    K. Removing newly redesignated paragraph (f)(5)(v).
    L. Redesignating paragraph (f)(5)(vi) as paragraph (f)(5)(v).
    M. Redesignating paragraph (f)(5)(vii) as paragraph (f)(5)(vi).
    N. Redesignating paragraph (f)(5)(viii) as paragraph (f)(5)(vii).
    O. Revising newly redesignated paragraph (f)(9).
    P. Adding new paragraph (f)(10).
    The revisions and addition read as follows:


Sec.  422.111  Disclosure requirements.

* * * * *
    (b) * * *
    (3) Access. The number, mix, and distribution (addresses) of 
providers from whom enrollees may reasonably be expected obtain 
services; any out-of network coverage; any point-of-service option, 
including the supplemental premium for that option; and how the MA 
organization meets the requirements of Sec.  422.112 and Sec.  422.114 
for access to services offered under the plan.
* * * * *
    (c) * * *
    (1) The information required in paragraph (f) of this section.
* * * * *
    (d) * * *
    (2) For changes that take effect on January 1, notify all enrollees 
at least 15 days before the beginning of the Annual Coordinated 
Election Period defined in section 1851(e)(3)(B) of the Act.
* * * * *
    (e) Changes to provider network. The MA organization must make a 
good faith effort to provide notice of a termination of a contracted 
provider at least 30 calendar days before the termination effective 
date to all enrollees who are patients seen on a regular basis by the 
provider whose contract is terminating, irrespective of whether the 
termination was for cause or without cause. When a contract termination 
involves a primary care professional, all enrollees who are patients of 
that primary care professional must be notified.
    (f) * * *
    (5) * * *

[[Page 46960]]

    (iv) In the case of an MA MSA plan, the amount of the annual MSA 
deposit.
* * * * *
    (9) Supplemental benefits. Whether the plan offers mandatory and 
optional supplemental benefits, including any reductions in cost 
sharing offered as a mandatory supplemental benefit as permitted under 
section 1852(a)(3) of the Act (and implementing regulations at Sec.  
422.102) and the terms, conditions, and premiums for those benefits.
    (10) The names, addresses, and phone numbers of providers from whom 
the enrollee may obtain in-network coverage in other areas.


Sec.  422.112  [Amended]

    34. Amend Sec.  422.112 by--
    A. Revising paragraph (a)(1).
    B. Removing paragraph (a)(4).
    C. Removing paragraph (a)(7).
    D. Redesignating paragraph (a)(5) as paragraph (a)(4).
    E. Redesignating paragraph (a)(6) as paragraph (a)(5).
    F. Redesignating paragraphs (a)(8) as paragraph (a)(6).
    G. Redesignating paragraph (a)(9) as paragraph (a)(7).
    H. Redesignating paragraph (a)(10) as paragraph (a)(8).
    I. Removing paragraph (b)(4)(i).
    J. Redesignating paragraph (b)(4)(ii) as paragraph (b)(4)(i).
    K. Redesignating paragraph (b)(4)(iii) as paragraph (b)(4)(ii).
    L. Adding paragraph (c).
    The revisions and addition read as follows:


Sec.  422.112  Access to services.

    (a) Rules for coordinated care plans. * * *
    (1) Provider network. (i) Maintain and monitor a network of 
appropriate providers that is supported by written agreements and is 
sufficient to provide adequate access to covered services to meet the 
needs of the population served. These providers are typically used in 
the network as primary care providers (PCPs), specialists, hospitals, 
skilled nursing facilities, home health agencies, ambulatory clinics, 
and other providers.
    (ii) Exception: MA regional plans, upon CMS pre-approval, can use 
methods other than written agreements to establish that access 
requirements are met.
* * * * *
    (c) Essential hospital. An MA regional plan may seek, upon 
application to CMS, to designate a hospital as an essential hospital as 
defined in section 1858(h) of the Act under the following conditions:
    (1) The hospital that the MA regional plan seeks to designate as 
essential is a general acute care hospital as defined in section 
1886(d) of the Act.
    (2) The MA regional plan provides convincing evidence to CMS that 
the MA regional plan needs to contract with the hospital as a condition 
of meeting access requirements under this section.
    (3) The MA regional plan must establish that it made a ``good 
faith'' effort to contract with the hospital to be designated as an 
essential hospital.
    (4) The hospital that is to be designated as an essential hospital 
provides convincing evidence to CMS that the amounts normally payable 
under section 1886 of the Act (and which the MA regional plan has 
agreed to pay) will be less than the hospital's actual costs of 
providing care to the MA regional plan's enrollees.
    (5) If CMS determines the requirements in paragraphs (c)(1) through 
(c)(4) of this section have been met, it will make payment to the 
essential hospital in accordance with section 1858(h)(2) of the Act, as 
limited by the amounts specified in section 1858(h)(3) of the Act.
    35. Amend Sec.  422.113 by--
    A. Revising paragraph (b)(2)(v).
    B. Revising paragraph (c)(2)(iv).
    The revisions read as follows:


Sec.  422.113  Special rules for ambulance services, emergency and 
urgently needed services, and maintenance and post-stabilization care 
services.

* * * * *
    (b) * * *
    (2) * * *
    (v) With a limit on charges to enrollees for emergency department 
services of $50 or what it would charge the enrollee if he or she 
obtained the services through the MA organization, whichever is less.
* * * * *
    (c) * * *
    (2) * * *
    (iv) Must limit charges to enrollees for post-stabilization care 
services to an amount no greater than what the organization would 
charge the enrollee if he or she had obtained the services through the 
MA organization. For purposes of cost sharing, post-stabilization care 
services begin upon admission.
* * * * *
    36. Amend Sec.  422.114 by--
    A. Revising the section heading to read as set forth below.
    B. Adding paragraph (c) to read as follows:


Sec.  422.114  Access to services under an MA private fee-for-service 
plan.

* * * * *
    (c) Private fee-for-service plans that meet network adequacy 
requirements for a category of health care professional or provider by 
meeting the requirements in paragraph (a)(2)(ii) of this section may 
provide for a higher beneficiary copayment in the case of health care 
professionals or providers of that same category who do not have 
contracts or agreements to provide covered services under the terms of 
the plan.
    37. Amend Sec.  422.133 by adding paragraph (b)(4) to read as 
follows:


Sec.  422.133  Return to home skilled nursing facility.

* * * * *
    (b) * * *
    (4) If an MA organization elects to furnish SNF care in the absence 
of a prior qualifying hospital stay under Sec.  422.101(c), then that 
SNF care is also subject to the home skilled nursing facility rules in 
this section. In applying the provisions of this section to coverage 
under this paragraph, references to a hospitalization, or discharge 
from a hospital, are deemed to refer to wherever the enrollee resides 
immediately before admission for extended care services.
* * * * *

Subpart D--Quality Improvement

    38. In subpart D, remove ``quality assurance'' wherever it appears 
and add in its place ``quality improvement.''
    39. Revise Sec.  422.152 to read as follows:


Sec.  422.152  Quality improvement program.

    (a) General rule. Each MA organization (other than MA private-fee-
for-service and MSA plans) that offers one or more MA plans must have, 
for each of those plans, an ongoing quality improvement program that 
meets the applicable requirements of this section for the services it 
furnishes to its MA enrollees. As part of its ongoing quality 
improvement program, a plan must--
    (1) Have a chronic care improvement program that meets the 
requirements of paragraph (c) of this section concerning elements of a 
chronic care program;
    (2) Conduct quality improvement projects that can be expected to 
have a favorable effect on health outcomes and enrollee satisfaction, 
and meet the requirements of paragraph (d) of this section; and
    (3) Encourage its providers to participate in CMS and HHS quality 
improvement initiatives.
    (b) Requirements for MA coordinated care plans (except for regional 
MA plans) and including local PPO plans that are offered by 
organizations that are licensed or organized under State law as HMOs. 
An MA coordinated care plan's (except for regional PPO plans

[[Page 46961]]

and local PPO plans as defined in Sec.  422.152(e)) quality improvement 
program must--
    (1) In processing requests for initial or continued authorization 
of services, follow written policies and procedures that reflect 
current standards of medical practice.
    (2) Have in effect mechanisms to detect both underutilization and 
overutilization of services.
    (3) Measure and report performance. The organization offering the 
plan must do the following:
    (i) Measure performance under the plan, using the measurement tools 
required by CMS, and report its performance to CMS. The standard 
measures may be specified in uniform data collection and reporting 
instruments required by CMS.
    (ii) Make available to CMS information on quality and outcome 
measures that will enable beneficiaries to compare health coverage 
options and select among them, as provided in Sec.  422.64(c)(10).
    (4) Special rule for MA local PPO-type plans that are offered by an 
organization that is licensed or organized under State law as a health 
maintenance organization must meet the requirements specified in 
paragraphs (b)(1) through (b)(3) of this section.
    (c) Chronic care improvement program requirements. Develop criteria 
for participating in a chronic care improvement program. These criteria 
must include--
    (1) Methods for identifying MA enrollees with multiple or 
sufficiently severe chronic conditions that would benefit from 
participating in a chronic care improvement program; and
    (2) Mechanisms for monitoring MA enrollees that are participating 
in the chronic care improvement program.
    (d) Quality improvement projects. (1) Quality improvement projects 
are an organization's initiatives that focus on specified clinical and 
nonclinical areas and that involve the following:
    (i) Measurement of performance.
    (ii) System interventions, including the establishment or 
alteration of practice guidelines.
    (iii) Improving performance.
    (iv) Systematic and periodic follow-up on the effect of the 
interventions.
    (2) For each project, the organization must assess performance 
under the plan using quality indicators that are--
    (i) Objective, clearly and unambiguously defined, and based on 
current clinical knowledge or health services research; and
    (ii) Capable of measuring outcomes such as changes in health 
status, functional status and enrollee satisfaction, or valid proxies 
of those outcomes.
    (3) Performance assessment on the selected indicators must be based 
on systematic ongoing collection and analysis of valid and reliable 
data.
    (4) Interventions must achieve demonstrable improvement.
    (5) The organization must report the status and results of each 
project to CMS as requested.
    (e) Requirements for MA regional plans and MA local plans that are 
PPO plans as defined in this section--(1) Definition of local preferred 
provider organization plan. For purposes of this section, the term 
local preferred provider organization (PPO) plan means an MA plan 
that--
    (i) Has a network of providers that have agreed to a contractually 
specified reimbursement for covered benefits with the organization 
offering the plan;
    (ii) Provides for reimbursement for all covered benefits regardless 
of whether the benefits are provided within the network of providers; 
and
    (iii) Is offered by an organization that is not licensed or 
organized under State law as a health maintenance organization.
    (2) MA organizations offering an MA regional plan or local PPO plan 
as defined in this section must:
    (i) Measure performance under the plan using standard measures 
required by CMS and report its performance to CMS. The standard 
measures may be specified in uniform data collection and reporting 
instruments required by CMS.
    (ii) Evaluate the continuity and coordination of care furnished to 
enrollees.
    (iii) If the organization uses written protocols for utilization 
review, the organization must--
    (A) Base those protocols on current standards of medical practice; 
and
    (B) Have mechanisms to evaluate utilization of services and to 
inform enrollees and providers of services of the results of the 
evaluation.
    (f) Requirements for all types of plans--(1) Health information. 
For all types of plans that it offers, an organization must--
    (i) Maintain a health information system that collects, analyzes, 
and integrates the data necessary to implement its quality improvement 
program;
    (ii) Ensure that the information it receives from providers of 
services is reliable and complete; and
    (iii) Make all collected information available to CMS.
    (2) Program review. For each plan, there must be in effect a 
process for formal evaluation, at least annually, of the impact and 
effectiveness of its quality improvement program.
    (3) Remedial action. For each plan, the organization must correct 
all problems that come to its attention through internal surveillance, 
complaints, or other mechanisms.


Sec.  422.154  [Removed]

    40. Remove Sec.  422.154.
    41. Amend Sec.  422.156 by adding paragraph (b)(7) to read as 
follows:


Sec.  422.156  Compliance deemed on the basis of accreditation.

* * * * *
    (b) * * *
    (7) Part D prescription drug benefit programs that are offered by 
MA programs.
* * * * *

Subpart E--Relationships With Providers


Sec.  422.208  [Amended]

    42. In Sec.  422.208, the following changes are made:
    A. Paragraph (c)(2) is revised.
    B. Paragraph (h) is removed.
    C. Paragraph (i) is redesignated as paragraph (h).
    The revision reads as follows:


Sec.  422.208  Physician incentive plans: Requirements and limitations.

* * * * *
    (c) * * *
    (2) If the physician incentive plan places a physician or physician 
group at substantial financial risk (as determined under paragraph (d) 
of this section) for services that the physician or physician group 
does not furnish itself, the MA organization must assure that all 
physicians and physician groups at substantial financial risk have 
either aggregate or per-patient stop-loss protection in accordance with 
paragraph (f) of this section and conduct periodic surveys in 
accordance with paragraph (h) of this section.
* * * * *
    45. Section 422.210 is revised to read as follows:


Sec.  422.210  Assurances to CMS.

    Each organization will provide assurance satisfactory to the 
Secretary that the requirements of Sec.  422.208 are met.
    46. In 422.214, the following changes are made:
    A. Paragraph (a)(1) is revised.
    B. Paragraph (b) is revised.
    The revisions read as follows:


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

    (a) * * *

[[Page 46962]]

    (1) Any provider (other than a provider of services as defined in 
section 1861(u) of the Act) that does not have in effect a contract 
establishing payment amounts for services furnished to a beneficiary 
enrolled in an MA coordinated care plan, an MSA plan, or an MA private 
fee-for-service plan must accept, as payment in full, the amounts that 
the provider could collect if the beneficiary were enrolled in original 
Medicare.
* * * * *
    (b) Services furnished by section 1861(u) providers of service. Any 
provider of services as defined in section 1861(u) of the Act that does 
not have in effect a contract establishing payment amounts for services 
furnished to a beneficiary enrolled in an MA coordinated care plan, an 
MSA plan, or an MA private fee-for-service plan must accept, as payment 
in full, the amounts (less any payments under Sec.  412.105(g) and 
Sec.  413.86(d) of this chapter) that it could collect if the 
beneficiary were enrolled in original Medicare. (Section 412.105(g) 
concerns indirect medical education payment to hospitals for managed 
care enrollees. Section 413.86(d) concerns calculating payment for 
direct medical education costs.)
    43. Subpart F is removed.
    44. New subpart F is added to read as follows:
Subpart F--Submission of Bids, Premiums, and Related Information and 
Plan Approval
Secs.
422.250 Basis and scope.
422.252 Terminology.
422.254 Submission of bids.
422.256 Review, negotiation, and approval of bids.
422.258 Calculation of benchmarks.
422.262 Beneficiary premiums.
422.264 Calculation of savings.
422.266 Beneficiary rebates.
422.270 Incorrect collections of premiums and cost sharing.

Subpart F--Submission of Bids, Premiums, and Related Information 
and Plan Approval


Sec.  422.250  Basis and scope.

    This subpart is based largely on section 1854 of the Act, but also 
includes provisions from section 1853 and section 1858 of the Act. It 
sets forth the requirements for the Medicare Advantage bidding payment 
methodology, including CMS' calculation of benchmarks, submission of 
plan bids by Medicare Advantage (MA) organizations, establishment of 
beneficiary premiums and rebates through comparison of plan bids and 
benchmarks, and negotiation and approval of bids by CMS.


Sec.  422.252  Terminology.

    Annual MA capitation rate means a county payment rate for an MA 
local area (county) for a calendar year. The terms ``per capita rate'' 
and ``capitation rate'' are used interchangeably to refer to the annual 
MA capitation rate.
    MA local area means a payment area consisting of county or 
equivalent area specified by CMS. Payments to MA local plans are based 
on the payment amount for each MA local area in the local plan's 
service area.
    MA monthly basic beneficiary premium means the premium amount an MA 
plan (except an MSA plan) charges an enrollee for benefits under the 
original Medicare fee-for-service program option (if any), and is 
calculated as described at Sec.  422.262.
    MA monthly MSA premium means the amount of the plan premium for 
coverage of benefits under the original Medicare program through an MSA 
plan, as set forth at Sec.  422.254(e).
    MA monthly prescription drug beneficiary premium is the MA-PD plan 
base beneficiary premium, defined at section 1860D-13(a)(2) of the Act, 
as adjusted to reflect the difference between the plan's bid and the 
national average bid (as described in Sec.  422.256(c)) less the amount 
of rebate the MA-PD plan elects to apply, as described at Sec.  
422.266(b)(2).
    MA monthly supplemental beneficiary premium is the portion of the 
plan bid attributable to mandatory and/or optional supplemental health 
care benefits described under Sec.  422.102, less the amount of 
beneficiary rebate the plan elects to apply to a mandatory supplemental 
benefit, as described at Sec.  422.266(b)(2)(i).
    MA-PD plan means an MA local or regional plan that provides 
prescription drug coverage under Part D of the Social Security Act.
    Monthly aggregate bid amount means the total monthly plan bid 
amount for coverage of an MA eligible beneficiary with a nationally 
average risk profile for the factors described in Sec.  422.308(c), and 
this amount is comprised of the following:
    (1) The unadjusted MA statutory non-drug monthly bid amount for 
coverage of original Medicare benefits;
    (2) The amount for coverage of basic prescription drug benefits 
under Part D (if any); and
    (3) The amount for provision of supplemental health care benefits 
(if any).
    Plan basic cost sharing means cost sharing that would be charged by 
a plan for benefits under the original Medicare fee-for-service program 
option before any reductions resulting from mandatory supplemental 
benefits.
    Unadjusted MA area-specific non-drug monthly benchmark amount 
means, for local MA plans serving one county, the county capitation 
rate CMS publishes annually, and for local MA plans serving multiple 
counties it is the weighted average of county rates in a plan's service 
area, weighted by the plan's projected enrollment per county.
    Unadjusted MA region-specific non-drug monthly benchmark amount 
means, for MA regional plans, the amount described at Sec.  422.258(b).
    Unadjusted MA statutory non-drug monthly bid amount means a plan's 
estimate of its average monthly required revenue to provide coverage of 
original Medicare benefits to an MA eligible beneficiary with a 
nationally average risk profile for the risk factors CMS applies to 
payment calculations as set forth at Sec.  422.308(c).


Sec.  422.254  Submission of bids.

    (a) General rules. (1) No later than the first Monday in June, each 
MA organization must submit to CMS an aggregate monthly bid amount for 
each MA plan (other than an MSA plan) the organization intends to offer 
in the upcoming year in the service area (or segment of such an area if 
permitted under Sec.  422.262(c)(2)) that meets the requirements in 
paragraph (b) of this section. With each bid submitted, the MA 
organization must provide the information required in paragraph (c) of 
this section.
    (2) CMS has the authority to determine whether and when it is 
appropriate to apply the bidding methodology described in this section 
to ESRD MA enrollees.
    (b) Bid requirements. (1) The monthly aggregate bid amount 
submitted by an MA organization for each plan is the organization's 
estimate of the revenue required for the following categories for 
providing coverage to an MA eligible beneficiary with a national 
average risk profile for the factors described in Sec.  422.308(c):
    (i) The statutory non-drug bid amount, which is the MA plan's 
estimated average monthly required revenue for providing benefits under 
the original Medicare fee-for-service program option (as defined in 
Sec.  422.252).
    (ii) The amount to provide basic prescription drug coverage, if any 
(defined at section 1860D-2(a)(3) of the Act).
    (iii) The amount to provide supplemental health care benefits, if 
any.

[[Page 46963]]

    (2) Each bid is for a uniform benefit package for the service area.
    (3) Each bid submission must contain all estimated revenue required 
by the plan, including administrative costs and return on investment. 
Plan assumptions about revenue requirements must include adjustments 
for the effect that providing reductions in Part C and/or Part D cost 
sharing has on utilization.
    (4) The bid amount is for plan payments only but must be based on 
plan assumptions about the amount of revenue required from enrollee 
cost-sharing. The estimate of plan basic cost-sharing for plan basic 
benefits must reflect the requirement that the level of cost sharing MA 
plans charge to enrollees must be actuarially equivalent to the level 
of cost sharing (deductible, copayments, or coinsurance) charged to 
beneficiaries under the original Medicare program option.
    (c) Information required for coordinated care plans and MA private 
fee-for-service plans. MA organizations' submission of bids for 
coordinated care plans, including regional MA plans and specialized MA 
plans for special needs beneficiaries (described at Sec.  
422.4(a)(1)(iv)), and for MA private fee-for-service plans must include 
the following information:
    (1) The plan type for each plan.
    (2) The monthly aggregate bid amount for the provision of all items 
and services under the plan, as defined in Sec.  422.252 and discussed 
in paragraph (a) of this section.
    (3) The proportions of the bid amount attributable to--
    (i) The provision of benefits under the original Medicare fee-for-
service program option (as defined at Sec.  422.100(c));
    (ii) The provision of basic prescription drug coverage (as defined 
at section 1860D-2(a)(3) of the Act; and
    (iii) The provision of supplemental health care benefits (as 
defined Sec.  422.102).
    (4) The projected number of enrollees in each MA local area used in 
calculation of the bid amount, and the enrollment capacity, if any, for 
the plan.
    (5) The actuarial basis for determining the amount under paragraph 
(c)(2) of this section and the proportions under paragraph (c)(3) of 
this section, and additional information as CMS may require to verify 
actuarial bases and the projected number of enrollees.
    (6) A description of deductibles, coinsurance, and copayments 
applicable under the plan and the actuarial value of the deductibles, 
coinsurance, and copayments.
    (7) For qualified prescription drug coverage, the information 
required under section 1860D-11(b) of the Act with respect to coverage.
    (8) For the purposes of calculation of risk corridors under Sec.  
422.458, MA organizations offering regional MA plans in 2006 and/or 
2007 must submit the following information developed using the 
appropriate actuarial bases.
    (i) Projected allowable costs (defined in Sec.  422.458(a)).
    (ii) The portion of projected allowable costs attributable to 
administrative expenses incurred in providing these benefits.
    (iii) The total projected costs for providing rebatable integrated 
benefits (as defined in Sec.  422.458(a)) and the portion of costs that 
is attributable to administrative expenses.
    (d) Beneficiary rebate information. In the case of a plan required 
to provide a monthly rebate under Sec.  422.266 for a year, the MA 
organization offering the plan must inform CMS how the plan will 
distribute the beneficiary rebate among the options described at Sec.  
422.266(b).
    (e) Information required for MSA plans. MA organizations intending 
to offer MA MSA plans must submit--
    (1) The enrollment capacity (if any) for the plan;
    (2) The amount of the MSA monthly premium for basic benefits under 
the original Medicare fee-for-service program option; and
    (3) The amount of the plan deductible;
    (4) The amount of the beneficiary supplemental premium, if any.
    (f) For plans with Part B only enrollees, MA organizations must 
submit separate bids for their Part A and Part B enrolled members and 
their Part B only members.


Sec.  422.256  Review, negotiation, and approval of bids.

    (a) Authority. Subject to paragraphs (a)(2), (d), and (e) of this 
section, CMS has the authority to review the aggregate bid amounts 
submitted under Sec.  422.252 and conduct negotiations with MA 
organizations regarding these bids (including the supplemental 
benefits) and the proportions of the aggregate bid attributable to 
basic benefits, supplemental benefits, and prescription drug benefits.
    (1) When negotiating bid amounts and proportions, CMS has authority 
similar to that provided the Director of the Office of Personnel 
Management for negotiating health benefits plans under 5 U.S.C. chapter 
89.
    (2) Noninterference. (i) In carrying out Parts C and D under this 
title, CMS may not require any MA organization to contract with a 
particular hospital, physician, or other entity or individual to 
furnish items and services.
    (ii) CMS may not require a particular price structure for payment 
under such a contract, with the exception of payments to Federally 
qualified health centers as set forth at Sec.  422.316.
    (b) Standards of review. Subject to paragraphs (d) and (e) of this 
section, CMS can only accept bid amounts or proportions described in 
paragraph (a) of this section if CMS determines the following standards 
have been met:
    (1) The bid amount and proportions are supported by the actuarial 
bases provided by MA organizations under Sec.  422.254.
    (2) The bid amount and proportions should reflect the plan's 
estimated revenue requirements for providing the benefit package, as 
the term revenue requirements is used in section 1302(8) of the Public 
Health Service Act.
    (3) Limitation on enrollee cost sharing. For coordinated care plans 
(including regional MA plans and specialized MA plans) and private fee-
for-service plans (other than MSA plans):
    (i) The actuarial value of plan basic cost sharing, reduced by any 
supplemental benefits, may not exceed--
    (ii) The actuarial value of deductibles, coinsurance, and 
copayments that would be applicable for the benefits to individuals 
entitled to benefits under Part A and enrolled under Part B in the 
plan's service area with a national average risk profile for the 
factors described in Sec.  422.308(c) if they were not members of an MA 
organization for the year.
    (c) Negotiation process. The negotiation process may include the 
resubmission of information to allow MA organizations to modify their 
initial bid submissions to account for the outcome of CMS' regional 
benchmark calculations required under Sec.  422.258(b) and the outcome 
of CMS' calculation of the national average monthly bid amount required 
under section 1860D-13(a)(4) of the Act.
    (d) Exception for private fee-for-service plans. For private fee-
for-service plans defined at Sec.  422.4(a)(3), CMS will not review, 
negotiate, or approve the bid amount, proportions of the bid, or the 
amounts of the basic beneficiary premium and supplemental premium.
    (e) Exception for MSA plans. CMS does not review, negotiate, or 
approve amounts submitted with respect to MA MSA plans, except to 
determine that the deductible does not exceed the statutory maximum, 
defined at Sec.  422.103(d).

[[Page 46964]]

Sec.  422.258  Calculation of benchmarks.

    (a) The term ``MA area-specific non-drug monthly benchmark amount'' 
means, for a month in a year:
    (1) For MA local plans with service areas entirely within a single 
MA local area, 1/12th of the annual MA capitation rate (described at 
Sec.  422.306) for the area, adjusted as appropriate for the purpose of 
risk adjustment.
    (2) For MA local plans with service areas including more than one 
MA local area, an amount equal to the weighted average of annual 
capitation rates for each local area (county) in the plan's service 
area, using as weights the projected number of enrollees in each MA 
local area that the plan used to calculate the bid amount, and adjusted 
as appropriate for the purpose of risk adjustment.
    (b) For MA regional plans, the term MA region-specific non-drug 
monthly benchmark amount is:
    (1) The sum of two components: the statutory component (based on a 
weighted average of local benchmarks in the region, as described in 
paragraph (b)(3) of this section; and the plan bid component (based on 
a weighted average of plan bids in the region as described in paragraph 
(b)(5) of this section).
    (2) Announced before November 15 of each year, but after CMS has 
received the plan bids.
    (c) Calculation of MA regional non-drug benchmark amounts. CMS 
calculates the monthly regional non-drug benchmark amounts as follows:
    (1) Reference month. For all calculations that follow, CMS will 
determine the number of MA eligible individuals in each local area, in 
each region, and nationally as of the reference month, which is a month 
in the previous calendar year CMS identifies.
    (2) Statutory market share. CMS will determine the statutory 
national market share percentage as the proportion of the MA eligible 
individuals nationally who were not enrolled in an MA plan.
    (3) Statutory component of the region-specific benchmark. (i) CMS 
calculates the unadjusted region-specific non-drug amount by 
multiplying the county capitation rate by the county's share of the MA 
eligible individuals residing in the region (the number of MA eligible 
individuals in the county divided by the number of MA eligible 
individuals in the region), and then adding all the enrollment-weighted 
county rates to a sum for the region.
    (ii) CMS then multiplies the unadjusted region-specific non-drug 
amount from paragraph (c)(3)(i) of this section by the statutory market 
share to determine the statutory component of the regional benchmark.
    (4) Plan-bid component of the region-specific benchmark. For each 
plan offered in a region, CMS will multiply the plan's unadjusted 
region-specific non-drug bid amount by the plan's share of enrollment 
(as determined under paragraph (c)(5) of this section) and then sum 
these products across all plans offered in the region. CMS then 
multiples this by 1 minus the statutory market share to determine the 
plan-bid component of the regional benchmark.
    (5) Plan's share of enrollment. CMS will calculate the plan's share 
of MA enrollment in the region as follows:
    (i) In the first year, any MA regional plan is being offered, and 
more than one MA plan is being offered: CMS will determine each plan's 
share of enrollment based on one of two possible approaches. CMS may 
base this on equal division among plans, so that each plan's share will 
be 1 divided by the number of plans offered. Alternatively, CMS may 
base this on each plan's estimate of projected enrollment. In that 
case, each plan's share will be the plan's projected enrollment divided 
by the total projected enrollment among all plans being offered in the 
region. Plan enrollment projections are subject to review and 
adjustment by CMS to assure reasonableness.
    (ii) If two or more regional plans are offered in a region and were 
offered in the reference month: The plan's share of enrollment will be 
the number of MA eligible individuals enrolled in the plan divided by 
the number of MA eligible individuals enrolled in all of the plans in 
the region, as of the reference month.
    (iii) If a single regional plan is being offered in the region: The 
plan's share of enrollment is equal to 1.


Sec.  422.262  Beneficiary premiums.

    (a) Determination of MA monthly basic beneficiary premium. (1) For 
an MA plan with an unadjusted statutory non-drug bid amount that is 
less than the relevant unadjusted non-drug benchmark amount, the basic 
beneficiary premium is zero.
    (2) For an MA plan with an unadjusted statutory non-drug bid amount 
that is equal to or greater than the relevant unadjusted non-drug 
benchmark amount, the basic beneficiary premium is the amount by which 
(if any) the bid amount exceeds the benchmark amount. All approved 
basic premiums must be charged; they cannot be waived.
    (b) Consolidated monthly premiums. Except as specified in paragraph 
(b)(2) of this section, MA organizations must charge enrollees a 
consolidated monthly MA premium.
    (1) The consolidated monthly premium for an MA plan (other than a 
MSA plan) is the sum of the MA monthly basic beneficiary premium (if 
any), the MA monthly supplementary beneficiary premium (if any), and 
the MA monthly prescription drug beneficiary premium (if any).
    (2) Special rule for MSA plans. For an individual enrolled in an 
MSA plan offered by an MA organization, the monthly beneficiary premium 
is the supplemental premium (if any).
    (c) Uniformity of premiums--(1) General rule. Except as permitted 
under Sec.  422.106(d), for MA contracts with employers and labor 
organizations, the MA monthly bid amount submitted under Sec.  422.254, 
the MA monthly basic beneficiary premium, the MA monthly supplemental 
beneficiary premium, the MA monthly prescription drug premium, and the 
monthly MSA premium of an MA organization may not vary among 
individuals enrolled in an MA plan (or segment of the plan as provided 
for local MA plans under paragraph (b)(2) of this section). In 
addition, the MA organization cannot vary the level of cost-sharing 
charged for basic benefits or supplemental benefits (if any) among 
individuals enrolled in an MA plan (or segment of the plan).
    (2) Segmented service area option. An MA organization may apply the 
uniformity requirements in paragraph (b)(1) of this section to segments 
of an MA local plan service area (rather than to the entire service 
area) as long as such a segment is composed of one or more MA payment 
areas. The information specified under Sec.  422.256 is submitted 
separately for each segment. This provision does not apply to MA 
regional plans.
    (d) Monetary inducement prohibited. An MA organization may not 
provide for cash or other monetary rebates as an inducement for 
enrollment or for any other reason or purpose.
    (e) Timing of payments. The MA organization must permit payments of 
MA monthly basic and supplemental beneficiary premiums and monthly 
prescription drug beneficiary premiums on a monthly basis and may not 
terminate coverage for failure to make timely payments except as 
provided in Sec.  422.74(b)(1).
    (f) Beneficiary payment options. An MA organization must permit 
each enrollee, at the enrollee's option, to make payment of premiums 
(if any) under this part to the organization through--
    (1) Withholding from the enrollee's Social Security benefit 
payments, in the

[[Page 46965]]

manner that the Part B premium is withheld;
    (2) An electronic funds transfer mechanism (such as automatic 
charges of an account at a financial institution or a credit or debit 
card account);
    (3) Payment by an employer or under employment-based retiree health 
coverage on behalf of an employee, former employee (or dependent), or 
by other third parties such as a State; or
    (4) According to additional CMS guidelines.
    (5) Regarding the option in paragraph (f)(1) of this section, MA 
organizations may not impose a charge on beneficiaries for the election 
of this option.


Sec.  422.264  Calculation of savings.

    (a) Computation of risk adjusted bids and benchmarks--(1) The risk 
adjusted MA statutory non-drug monthly bid amount is the unadjusted 
plan bid amount for coverage of original Medicare benefits (defined at 
Sec.  422.254), adjusted using the factors described in paragraph (c) 
of this section for local plans and paragraph (e) for regional plans.
    (2) The risk adjusted MA area-specific non-drug monthly benchmark 
amount is the unadjusted benchmark amount for coverage of original 
Medicare benefits by a local MA plan (defined at Sec.  422.258), 
adjusted using the factors described in paragraph (c) of this section.
    (3) The risk adjusted MA region-specific non-drug monthly benchmark 
amount is the unadjusted benchmark for coverage of original Medicare 
benefits amount by a regional MA plan (defined at Sec.  422.258) 
adjusted using the factors described in paragraph (e) of this section.
    (b) Computation of savings for MA local plans. The average per 
capita monthly savings for an MA local plan is 100 percent of the 
difference between the plan's risk-adjusted statutory non-drug monthly 
bid amount (described in paragraph (a)(1) of this section) and the 
plan's risk-adjusted area-specific non-drug monthly benchmark amount 
(described in paragraph (a)(2) of this section). Plans with bids equal 
to or greater than plan benchmarks will have zero savings.
    (c) Risk adjustment factors for determination of savings for local 
plans. CMS will publish the first Monday in April before the upcoming 
calendar year the risk adjustment factors described in paragraph 
(c)(1), (c)(2), or (c)(3) of this section determined for the purpose of 
calculating savings amounts for MA local plans.
    (1) Statewide average risk adjustment factors. The statewide factor 
for each State is the average of the risk factors calculated under 
Sec.  422.308(c), based on all enrollees in MA local plans in that 
State in the previous year.
    (2) In the case of a State in which no local MA plan was offered in 
the previous year, CMS will estimate an average and may base this 
average on average risk adjustment factors applied to comparable States 
or applied on a national basis.
    (3) For the purpose of calculating savings for MA local plans CMS 
has the authority to apply risk adjustment factors determined on a 
basis other than States, including a plan-specific basis.
    (d) Computation of savings for MA regional plans. The average per 
capita monthly savings for an MA local plan and year is 100 percent of 
the difference between the plan's risk-adjusted statutory non-drug 
monthly bid amount (described in paragraph (a)(1) of this section) and 
the plan's risk-adjusted region-specific non-drug monthly benchmark 
amount (described in paragraph (a)(3) of this section), using the risk 
adjustment factors described in paragraph (e) of this section. Plans 
with bids equal to or greater than plan benchmarks will have zero 
savings.
    (e) Risk adjustment factors for determination of savings for 
regional plans. CMS will publish the first Monday in April before the 
upcoming calendar year the risk adjustment factors described in 
paragraph (e)(1), (e)(2), or (e)(3) of this section determined for the 
purpose of calculating savings amounts for MA regional plans.
    (1) Region-wide average risk adjustment factors. The region-wide 
factor for each MA region is the average of the risk factors calculated 
under Sec.  422.308(c), based on all enrollees in MA regional plans in 
that region in the previous year.
    (2) In the case of a region in which no regional plan was offered 
in the previous year, CMS will estimate an average and may base this 
average on average risk adjustment factors applied to comparable 
regions or applied on a national basis.
    (3) For the purpose of calculating savings for MA regional plans, 
CMS has the authority to apply risk adjustment factors determined on a 
basis other than MA regions, including a plan-specific basis.


Sec.  422.266  Beneficiary rebates.

    (a) General rule. An MA organization must provide to the enrollee a 
monthly rebate equal to 75 percent of the average per capita savings 
(if any) described in Sec.  422.264(b) for MA local plans and Sec.  
422.264(d) for MA regional plans.
    (b) Form of rebate. The rebate required under this paragraph must 
be provided by crediting the rebate amount to one or more of the 
following:
    (1) Supplemental health care benefits. MA organizations may apply 
all or some portion of the rebate toward supplemental health care 
benefits for enrollees as described in Sec.  422.102, which may include 
the reduction of cost sharing and additional health care benefits that 
are not benefits under original Medicare. MA organizations may also 
credit some part, or all, of the rebate, toward an MA monthly 
supplemental beneficiary premium (if any). The rebate, or portion of 
rebate, applied toward supplemental benefits may only be applied to a 
mandatory supplemental benefit, and cannot be used to fund an optional 
supplemental benefit.
    (2) Payment of premium for prescription drug coverage. MA 
organizations that offer a prescription drug benefit may credit some or 
all of the rebate toward reduction of the MA monthly prescription drug 
beneficiary premium.
    (3) Payment toward Part B premium. MA organizations that offer a 
prescription drug benefit may credit some or all of the rebate toward 
reduction of the Medicare Part B premium (determined without regard to 
the application of subsections (b), (h), and (i) of section 1839 of the 
Act).
    (c) Disclosure relating to rebates. MA organizations must disclose 
to CMS information on the amount of the rebate provided, as required at 
Sec.  422.254(d).


Sec.  422.270  Incorrect collections of premiums and cost-sharing.

    (a) Definitions. As used in this section--
    (1) Amounts incorrectly collected--
    (i) Means amounts that--
    (A) Exceed the limits approved under Sec.  422.262;
    (B) In the case of an MA private fee-for-service plan, exceed the 
MA monthly basic beneficiary premium or the MA monthly supplemental 
premium submitted under Sec.  422.262; and
    (C) In the case of an MA MSA plan, exceed the MA monthly 
beneficiary supplemental premium submitted under Sec.  422.262, or 
exceed permissible cost sharing amounts after the deductible has been 
met per Sec.  422.103; and
    (ii) Includes amounts collected from an enrollee who was believed 
to be entitled to Medicare benefits but was later found not to be 
entitled.
    (2) Other amounts due are amounts due for services that were--

[[Page 46966]]

    (i) Emergency, urgently needed services, or other services obtained 
outside the MA plan; or
    (ii) Initially denied but, upon appeal, found to be services the 
enrollee was entitled to have furnished by the MA organization.
    (b) Basic commitments. An MA organization must agree to refund all 
amounts incorrectly collected from its Medicare enrollees, or from 
others on behalf of the enrollees, and to pay any other amounts due the 
enrollees or others on their behalf.
    (c) Refund methods--(1) Lump-sum payment. The MA organization must 
use lump-sum payments for the following:
    (i) Amounts incorrectly collected that were not collected as 
premiums.
    (ii) Other amounts due.
    (iii) All amounts due if the MA organization is going out of 
business or terminating its MA contract for an MA plan(s).
    (2) Premium adjustment or lump-sum payment, or both. If the amounts 
incorrectly collected were in the form of premiums, or included 
premiums as well as other charges, the MA organization may refund by 
adjustment of future premiums or by a combination of premium adjustment 
and lump-sum payments.
    (3) Refund when enrollee has died or cannot be located. If an 
enrollee has died or cannot be located after reasonable effort, the MA 
organization must make the refund in accordance with State law.
    (d) Reduction by CMS. If the MA organization does not make the 
refund required under this section by the end of the contract period 
following the contract period during which an amount was determined to 
be due to an enrollee, CMS will reduce the premium the MA organization 
is allowed to charge an MA plan enrollee by the amounts incorrectly 
collected or otherwise due. In addition, the MA organization would be 
subject to sanction under subpart O of this part for failure to refund 
amounts incorrectly collected from MA plan enrollees.
    47. Subpart G is removed.
    48. New subpart G is added to read as follows:
Subpart G--Payments to Medicare Advantage Organizations
Sec.
422.300 Basis and scope.
422.304 Monthly payments.
422.306 Annual MA capitation rates.
422.308 Adjustments to capitation rates, benchmarks, bids, and 
payments.
422.310 Risk adjustment data.
422.312 Announcement of annual capitation rate, benchmarks, and 
methodology changes.
422.314 Special rules for beneficiaries enrolled in MA MSA plans.
422.316 Special rules for payments to Federally qualified health 
centers.
422.318 Special rules for coverage that begins or ends during an 
inpatient hospital stay.
422.320 Special rules for hospice care.
422.322 Source of payment and effect of MA plan election on payment.
422.324 Payments to MA organizations for graduate medical education 
costs.

Subpart G--Payments to Medicare Advantage Organizations


Sec.  422.300  Basis and scope.

    This subpart is based on sections 1853, 1854, and 1858 of the Act. 
It sets forth the rules for making payments to Medicare Advantage (MA) 
organizations offering local and regional MA plans, including 
calculation of MA capitation rates and benchmarks, conditions under 
which payment is based on plan bids, adjustments to capitation rates 
(including risk adjustment), and other payment rules.
    See Sec.  422.458 in subpart J for rules on risk sharing payments 
to MA regional organizations.


Sec.  422.304  Monthly payments.

    (a) General rules. Except as provided in paragraph (b) of this 
section, CMS makes advance monthly payments of the amounts determined 
under paragraphs (a)(1) and (a)(2) of this section for coverage of 
original fee-for-service benefits for an individual in an MA payment 
area for a month.
    (1) Payment of bid for plans with bids below benchmark. For MA 
plans that have average per capita monthly savings (as described at 
Sec.  422.264(b) for local plans and Sec.  422.264(d) for regional 
plans), CMS pays:
    (i) The unadjusted MA statutory non-drug monthly bid amount defined 
in Sec.  422.252, risk-adjusted as described at Sec.  422.308(c) and 
adjusted (if applicable) for variations in rates within the plan's 
service area (described at Sec.  422.258(a)(2)) and for the effects of 
risk adjustment on beneficiary premiums (described at Sec.  422.262); 
and
    (ii) The amount (if any) of the rebate described in paragraph 
(a)(3) of this section.
    (2) Payment of benchmark for plans with bids at or above benchmark. 
For MA plans that do not have average per capita monthly savings (as 
described at Sec.  422.264(b) for local plans and Sec.  422.264(d) for 
regional plans), CMS pays the unadjusted MA area-specific non-drug 
monthly benchmark amount specified at Sec.  422.258, risk-adjusted as 
described at Sec.  422.308(c) and adjusted (if applicable) for 
variations in rates within the plan's service area (described at Sec.  
422.258(a)(2)) and for the effects of risk adjustment on beneficiary 
premiums (described at Sec.  422.262).
    (3) Payment of rebate for plans with bids below benchmarks. The 
rebate amount under paragraph (a)(1)(ii) of this section is the amount 
of the monthly rebate computed under Sec.  422.266(a) for that plan, 
less the amount (if any) applied to reduce the Part B premium, as 
provided under Sec.  422.266(b)(3)).
    (b) Separate payment for Federal drug subsidies. In the case of an 
enrollee in an MA-PD plan, defined at Sec.  422.252, the MA 
organization offering such a plan also receives--
    (1) Direct and reinsurance subsidy payments for qualified 
prescription drug coverage, described at section 1860D-15(a) and (b) of 
the Act (other than payments for fallback prescription drug plans 
described at section 1860D-11(g)(5) of the Act); and
    (2) Reimbursement for premium and cost sharing reductions for low-
income individuals, described at section 1860D-14 of the Act.
    (c) Special rules--(1) Enrollees with end-stage renal disease. (i) 
For enrollees determined to have end-stage renal disease (ESRD), CMS 
establishes special rates that are actuarially equivalent to rates in 
effect before the enactment of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003.
    (ii) CMS publishes annual changes in these capitation rates no 
later than the first Monday in April each year, as provided in Sec.  
422.312.
    (iii) CMS applies appropriate adjustments when establishing the 
rates, including risk adjustment factors.
    (iv) CMS reduces the payment rate for each renal dialysis treatment 
by the same amount that CMS is authorized to reduce the amount of each 
composite rate payment for each treatment as set forth in section 
1881(b)(7) of the Act. These funds are to be used to help pay for the 
ESRD network program in the same manner as similar reductions are used 
in original Medicare.
    (2) MSA enrollees. In the case of an MSA plan, CMS pays the 
unadjusted MA area-specific non-drug monthly benchmark amount for the 
service area less \1/12\ of the annual lump sum amount (if any) CMS 
deposits to the enrollee's MA MSA, determined in accordance with Sec.  
422.314(c), risk adjustment as set forth at Sec.  422.308(c).
    (3) RFB plan enrollees. For RFB plan enrollees, CMS adjusts the 
capitation payments otherwise determined under this subpart to ensure 
that the payment level is appropriate for the actuarial characteristics 
and experience of these

[[Page 46967]]

enrollees. That adjustment can be made on an individual or organization 
basis.
    (d) Payment areas--(1) General rule. Except as provided in 
paragraph (e) of this section--
    (i) An MA payment area for an MA local plan is an MA local area 
defined at Sec.  422.252.
    (ii) An MA payment area for an MA regional plan is an MA region, 
defined at Sec.  422.455(b)(1).
    (2) Special rule for ESRD enrollees. For ESRD enrollees, the MA 
payment area is a State or other geographic area specified by CMS.
    (e) Geographic adjustment of payment areas for MA local plans--(1) 
Terminology. ``Metropolitan Statistical Area'' and ``Metropolitan 
Division'' mean any areas so designated by the Office of Management and 
Budget in the Executive Office of the President.
    (2) State request. A State's chief executive may request, no later 
than February 1 of any year, a geographic adjustment of the State's 
payment areas for MA local plans for the following calendar year. The 
chief executive may request any of the following adjustments to the 
payment area specified in paragraph (c)(1)(i) of this section:
    (i) A single statewide MA payment area.
    (ii) A metropolitan-based system in which all non-metropolitan 
areas within the State constitute a single payment area and any of the 
following constitutes a separate MA payment area:
    (A) All portions of each single Metropolitan Statistical Area 
within the State.
    (B) All portions of each Metropolitan Statistical Area within each 
Metropolitan Division within the State.
    (iii) A consolidation of noncontiguous counties.
    (3) CMS response. In response to the request, CMS makes the payment 
adjustment requested by the chief executive. This adjustment cannot be 
requested or made for payments to regional MA plans.
    (4) Budget neutrality adjustment for geographically adjusted 
payment areas. If CMS adjusts a State's payment areas in accordance 
with paragraph (d)(2) of this section, CMS at that time, and each year 
thereafter, adjusts the capitation rates so that the aggregate Medicare 
payments do not exceed the aggregate Medicare payments that would have 
been made to all the State's payments areas, absent the geographic 
adjustment.


Sec.  422.306  Annual MA capitation rates.

    Subject to adjustments at Sec.  422.308(b) and Sec.  422.308(g), 
the annual capitation rate for each MA local area is determined under 
paragraph (a) of this section for 2005 and each succeeding year, except 
for years when CMS announces under Sec.  422.312(b) that the annual 
capitation rates will be determined under paragraph (b) of this 
section.
    (a) Minimum percentage increase rate. The annual capitation rate 
for each MA local area is equal to the minimum percentage increase 
rate, which is the greater of--
    (1) 102 percent of the annual capitation rate for the preceding 
year; or
    (2) The annual capitation rate for the area for the preceding year 
increased by the national per capita MA growth percentage (defined at 
Sec.  422.308(a)) for the year, but not taking into account any 
adjustment under Sec.  422.308(b) for a year before 2004.
    (b) Greater of the minimum percentage increase rate or local area 
fee-for-service costs. The annual capitation rate for each MA local 
area is the greater of--
    (1) The minimum percentage increase rate under paragraph (a) of 
this section; or
    (2) The amount determined, no less frequently than every 3 years, 
to be the adjusted average per capita cost for the MA local area, as 
determined under section 1876(a)(4) of the Act, based on 100 percent of 
fee-for-service costs for individuals who are not enrolled in an MA 
plan for the year, with the following adjustments:
    (i) Adjusted as appropriate for the purpose of risk adjustment;
    (ii) Adjusted to exclude costs attributable to payments under 
section 1886(h) of the Act for the costs of direct graduate medical 
education; and
    (iii) Adjusted to include CMS' estimate of the amount of additional 
per capita payments that would have been made in the MA local area if 
individuals entitled to benefits under this title had not received 
services from facilities of the Department of Defense or the Department 
of Veterans Affairs.


Sec.  422.308  Adjustments to capitation rates, benchmarks, bids, and 
payments.

    CMS performs the following calculations and adjustments to 
determine rates and payments:
    (a) National per capita growth percentage. The national per capita 
growth percentage for a year, applied under Sec.  422.306, is CMS' 
estimate of the rate of growth in per capita expenditures under this 
title for an individual entitled to benefits under Part A and enrolled 
under Part B. CMS may make separate estimates for aged enrollees, 
disabled enrollees, and enrollees who have ESRD.
    (b) Adjustment for over or under projection of national per capita 
growth percentages. CMS will adjust the minimum percentage increase 
rate at Sec.  422.306(a)(2) and the adjusted average per capita cost 
rate at Sec.  422.306(b)(2) for the previous year to reflect any 
differences between the projected national per capita growth 
percentages for that year and previous years, and the current estimates 
of those percentages for those years. CMS will not make this adjustment 
for years before 2004.
    (c) Risk adjustment--(1) General rule. CMS will adjust the payment 
amounts under Sec.  422.304(a)(1), (a)(2), and (a)(3) for age, gender, 
disability status, institutional status, and other factors CMS 
determines to be appropriate, including health status, in order to 
ensure actuarial equivalence. CMS may add to, modify, or substitute for 
risk adjustment factors if those changes will improve the determination 
of actuarial equivalence.
    (2) Risk adjustment: Health status--(i) Data collection. To adjust 
for health status, CMS applies a risk factor based on data obtained in 
accordance with Sec.  422.310.
    (ii) Implementation. CMS applies a risk factor that incorporates 
inpatient hospital and ambulatory risk adjustment data. This factor is 
phased as follows:
    (A) 100 percent of payments for ESRD MA enrollees in 2005 and 
succeeding years.
    (B) 75 percent of payments for aged and disabled enrollees in 2006.
    (C) 100 percent of payments for aged and disabled enrollees in 2007 
and succeeding years.
    (3) Uniform application. Except as provided for MA RFB plans under 
Sec.  422.304(b)(3), CMS applies this adjustment factor to all types of 
plans.
    (d) Adjustment for intra-area variations. CMS makes the following 
adjustments to payments.
    (1) Intra-regional variations. For payments to MA regional plans, 
CMS will adjust the payment amounts specified at Sec.  422.304(a)(1) 
and (a)(2) to take into account variations in local payments rates 
among the different MA local areas included in the region.
    (2) Intra-service area variations. For payments to MA local plans 
with service areas covering more than one MA local area (county), CMS 
will adjust the payment amounts specified in Sec.  422.304(a)(1) and 
(a)(2) to take into account variations in local payment rates among the 
different MA local areas included in the plan's service area.
    (e) Adjustment relating to risk adjustment and beneficiary 
premiums. CMS will adjust payments to an MA plan as necessary to ensure 
that the sum of CMS' monthly payment made under Sec.  422.304(a) and 
the plan's monthly

[[Page 46968]]

basic beneficiary premium equals the unadjusted MA statutory non-drug 
bid amount adjusted for risk and for intra-area or intra-regional 
payment variation.
    (f) Adjustment of payments to reflect number of Medicare 
enrollees--(1) General rule. CMS adjusts payments retroactively to take 
into account any difference between the actual number of Medicare 
enrollees and the number on which it based an advance monthly payment.
    (2) Special rules for certain enrollees. (i) Subject to paragraph 
(f)(2)(ii) of this section, CMS may make adjustments, for a period (not 
to exceed 90 days) that begins when a beneficiary elects a group health 
plan (as defined in Sec.  411.1010) offered by an MA organization, and 
ends when the beneficiary is enrolled in an MA plan offered by the MA 
organization.
    (ii) CMS does not make an adjustment unless the beneficiary 
certifies that, at the time of enrollment under the MA plan, he or she 
received from the organization the disclosure statement specified in 
Sec.  422.111.
    (g) Adjustment for national coverage determination (NCD) services 
and legislative changes in benefits. If CMS determines that the cost of 
furnishing an NCD service or legislative change in benefits is 
significant, as defined in Sec.  422.109, CMS will adjust capitation 
rates, or make other payment adjustments, to account for the cost of 
the service or legislative change in benefits. Until the new capitation 
rates are in effect, the MA organization will be paid for the 
significant cost NCD service or legislative change in benefits on a 
fee-for-service basis as provided under Sec.  422.109(b).
    (h) Adjustments to payments to regional MA plans for purposes of 
risk corridor payments. For the purpose of calculation of risk 
corridors under Sec.  422.458, MA organizations offering regional MA 
plans in 2006 and/or 2007 must submit, after the end of a contract year 
and before a date CMS specifies, the following information:
    (1) Actual allowable costs (defined in Sec.  422.458(a)) for the 
previous contract year.
    (2) The portion of the costs attributable to administrative 
expenses incurred in providing these benefits.
    (3) The total costs for providing rebatable integrated benefits (as 
defined in Sec.  422.458(a)) and the portion of the costs that is 
attributable to administrative expenses in addition to the 
administrative expenses described in paragraph (h)(2) of this section.


Sec.  422.310  Risk adjustment data.

    (a) Definition of risk adjustment data. Risk adjustment data are 
all data that are used in the application of a risk adjustment payment 
model.
    (b) Data collection: Basic rule. Each MA organization must submit 
to CMS (in accordance with CMS instructions) the data necessary to 
characterize the context and purposes of each service provided to a 
Medicare enrollee by a provider, supplier, physician, or other 
practitioner. CMS may also collect data necessary to characterize the 
functional limitations of enrollees of each MA organization.
    (c) Sources and extent of data. (1) To the extent required by CMS, 
risk adjustment data must account for the following:
    (i) Services covered under the original Medicare program.
    (ii) Medicare covered services for which Medicare is not the 
primary payer.
    (iii) Other additional or supplemental benefits that the MA 
organization may provide.
    (2) The data must account separately for each provider, supplier, 
physician, or other practitioner that would be permitted to bill 
separately under the original Medicare program, even if they 
participate jointly in the same service.
    (d) Other data requirements. (1) MA organizations must submit data 
that conform to the requirements for equivalent data for Medicare fee-
for-service when appropriate, and to all relevant national standards. 
Alternatively, MA organizations may submit data according to an 
abbreviated format, as specified by CMS.
    (2) The data must be submitted electronically to the appropriate 
CMS contractor.
    (3) MA organizations must obtain the risk adjustment data required 
by CMS from the provider, supplier, physician, or other practitioner 
that furnished the services.
    (4) MA organizations may include in their contracts with providers, 
suppliers, physicians, and other practitioners, provisions that require 
submission of complete and accurate risk adjustment data as required by 
CMS. These provisions may include financial penalties for failure to 
submit complete data.
    (e) Validation of risk adjustment data. MA organizations and their 
providers and practitioners will be required to submit a sample of 
medical records for the validation of risk adjustment data, as required 
by CMS.
    (f) Use of data. CMS uses the data obtained under this section to 
determine the risk adjustment factor used to adjust payments, as 
required under Sec.  422.304(a)(1), (a)(2), and (a)(3). CMS may also 
use the data for other purposes except for medical records data.
    (g) Deadlines for submission of risk adjustment data. Risk 
adjustment factors for each payment year are based on risk adjustment 
data submitted for services furnished during the 12-month period before 
the payment year that is specified by CMS. As determined by CMS, this 
12-month period may include a 6-month data lag that may be changed or 
eliminated as appropriate. (For example, the interim risk adjustment 
factors for CY 2004 were based on data for services furnished during 
the period July 1, 2002 through June 30, 2003, and the final risk 
adjustment factors for CY 2004 were based on data for services 
furnished during the period January 1, 2003 through December 31, 2003.)
    (1) The annual deadline for risk adjustment data submission is the 
first Friday in September for risk adjustment data reflecting services 
furnished during the 12-month period ending the prior June 30, and the 
first Friday in March for data reflecting services furnished during the 
12-month period ending the prior December 31. (For example, the 
deadline for submission of data for the period July 1, 2002 through 
June 30, 2003 was September 5, 2003, and the deadline for the period 
January 1, 2003 through December 31, 2003 was March 5, 2004.)
    (2) CMS allows a reconciliation process to account for late data 
submissions. CMS continues to accept risk adjustment data submitted 
after the September and March deadlines until June 30 and December 31 
of the payment year, respectively. (For example, until June 30, 2004 
for data from the period July 1, 2002 through June 30, 2003; and, until 
December 31, 2004 for data from the period January 1, 2003 through 
December 31, 2003.) After the payment year is completed, CMS 
recalculates the risk factors for affected individuals to determine if 
adjustments to payments are necessary. Risk adjustment data that are 
received after the annual December 31 late data submission deadline 
will not be accepted for the purposes of the reconciliation.


Sec.  422.312  Announcement of annual capitation rate, benchmarks, and 
methodology changes.

    (a) Capitation rates--(1) Initial announcement. Not later than the 
first Monday in April each year, CMS announces to MA organizations and 
other interested parties the following information for each MA payment 
area for the following calendar year:

[[Page 46969]]

    (i) The annual MA capitation rate.
    (ii) The risk and other factors to be used in adjusting those rates 
under Sec.  422.308 for payments for months in that year.
    (2) CMS includes in the announcement an explanation of assumptions 
used and a description of the risk and other factors.
    (3) Regional benchmark announcement. Before the beginning of each 
annual, coordinated election period under Sec.  422.62(a)(2), CMS will 
announce to MA organizations and other interested parties the MA 
region-specific non-drug monthly benchmark amount for the year involved 
for each MA region and each MA regional plan for which a bid was 
submitted under Sec.  422.256.
    (b) Advance notice of changes in methodology. (1) No later than 45 
days before making the announcement under paragraph (a)(1) of this 
section, CMS notifies MA organizations of changes it proposes to make 
in the factors and the methodology it used in the previous 
determination of capitation rates.
    (2) The MA organizations have 15 days to comment on the proposed 
changes.


Sec.  422.314  Special rules for beneficiaries enrolled in MA MSA 
plans.

    (a) Establishment and designation of medical savings account (MSA). 
A beneficiary who elects coverage under an MA MSA plan--
    (1) Must establish an MA MSA with a trustee that meets the 
requirements of paragraph (b) of this section; and
    (2) If he or she has more than one MA MSA, designate the particular 
account to which payments under the MA MSA plan are to be made.
    (b) Requirements for MSA trustees. An entity that acts as a trustee 
for an MA MSA must--
    (1) Register with CMS;
    (2) Certify that it is a licensed bank, insurance company, or other 
entity qualified, under sections 408(a)(2) or 408(h) of the IRS Code, 
to act as a trustee of individual retirement accounts;
    (3) Agree to comply with the MA MSA provisions of section 138 of 
the IRS Code of 1986; and
    (4) Provide any other information that CMS may require.
    (c) Deposit in the MA MSA. (1) The payment is calculated as 
follows:
    (i) The monthly MA MSA premium is compared with \1/12\ of the 
benchmark amount for the area determined under Sec.  422.306.
    (ii) If the monthly MA MSA premium is less than \1/12\ of the 
annual capitation rate, the difference is the amount to be deposited in 
the MA MSA for each month for which the beneficiary is enrolled in the 
MSA plan.
    (2) CMS deposits the full amount to which a beneficiary is entitled 
under paragraph (c)(1)(ii) of this section for the calendar year, 
beginning with the month in which MA MSA coverage begins.
    (3) If the beneficiary's coverage under the MA MSA plan ends before 
the end of the calendar year, CMS recovers the amount that corresponds 
to the remaining months of that year.


Sec.  422.316  Special rules for payments to federally qualified health 
centers.

    If an enrollee in an MA plan receives a service from a federally 
qualified health center (FQHC) that has a written agreement with the MA 
organization offering the plan concerning the provision of this service 
(including the agreement required under section 1857(e)(3) of the Act 
and as codified in Sec.  422.527)--
    (a) CMS will pay the amount determined under section 1833(a)(3)(B) 
of the Act directly to the FQHC at a minimum on a quarterly basis; and
    (b) CMS will not reduce the amount of the monthly payments under 
this section as a result of the application of paragraph (a) of this 
section.


Sec.  422.318  Special rules for coverage that begins or ends during an 
inpatient hospital stay.

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


Sec.  422.320  Special rules for hospice care.

    (a) Information. An MA organization that has a contract under 
subpart K of this part must inform each Medicare enrollee eligible to 
select hospice care under Sec.  418.24 of this chapter about the 
availability of hospice care (in a manner that objectively presents all 
available hospice providers, including a statement of any ownership 
interest in a hospice held by the MA organization or a related entity) 
if--
    (1) A Medicare hospice program is located within the plan's service 
area; or
    (2) It is common practice to refer patients to hospice programs 
outside that area.
    (b) Enrollment status. Unless the enrollee disenrolls from the MA 
plan, a beneficiary electing hospice continues his or her enrollment in 
the MA plan and is entitled to receive, through the MA plan, any 
benefits other than those that are the responsibility of the Medicare 
hospice.
    (c) Payment. (1) No payment is made to an MA organization on behalf 
of a Medicare enrollee who has elected hospice care under Sec.  418.24 
of this chapter, except for the portion of the payment attributable to 
the beneficiary rebate for the MA plan, described in Sec.  
422.266(b)(1) plus the amount of the monthly prescription drug 
beneficiary premium (described at Sec.  422.252). This no-payment rule 
is effective from the first day of the month following the month of 
election to receive hospice care, until the first day of the month 
following the month in which the election is terminated.
    (2) During the time the hospice election is in effect, CMS' monthly 
capitation payment to the MA organization is reduced to the sum of--
    (i) An amount equal to the beneficiary rebate for the MA plan, as 
described in Sec.  422.304(a)(3) or to zero for plans with

[[Page 46970]]

no beneficiary rebate, described at Sec.  422.304(a)(2); and
    (ii) The amount of the monthly prescription drug beneficiary 
premium (if any).
    (3) In addition, CMS pays through the original Medicare program 
(subject to the usual rules of payment)--
    (i) The hospice program for hospice care furnished to the Medicare 
enrollee; and
    (ii) The MA organization, provider, or supplier for other Medicare-
covered services to the enrollee.


Sec.  422.322  Source of payment and effect of MA plan election on 
payment.

    (a) Source of payments. (1) Payments under this subpart for 
original fee-for-service benefits to MA organizations or MA MSAs are 
made from the Federal Hospital Insurance Trust Fund or the 
Supplementary Medical Insurance Trust Fund. CMS determines the 
proportions to reflect the relative weight that benefits under Part A, 
and benefits under Part B represents of the actuarial value of the 
total benefits under title XVIII of the Act.
    (2) Payments to MA-PD organizations for statutory drug benefits 
provided under this title are made from the Medicare Prescription Drug 
Account in the Federal Supplementary Medical Insurance Trust Fund.
    (b) Payments to the MA organization. Subject to Sec.  412.105(g) 
and Sec.  413.86(d) of this chapter and Sec.  422.109, Sec.  422.264, 
and Sec.  422.266, CMS' payments under a contract with an MA 
organization (described in Sec.  422.304) with respect to an individual 
electing an MA plan offered by the organization are instead of the 
amounts which (in the absence of the contract) would otherwise be 
payable under original Medicare for items and services furnished to the 
individual.
    (c) Only the MA organization entitled to payment. Subject to Sec.  
422.314, Sec.  422.318, Sec.  422.320, and Sec.  422.520 and sections 
1886(d)(11) and 1886(h)(3)(D) of the Act, only the MA organization is 
entitled to receive payment from CMS under title XVIII of the Act for 
items and services furnished to the individual.


Sec.  422.324  Payments to MA organizations for graduate medical 
education costs.

    (a) MA organizations may receive direct graduate medical education 
payments for the time that residents spend in non-hospital provider 
settings such as freestanding clinics, nursing homes, and physicians' 
offices in connection with approved programs.
    (b) MA organizations may receive direct graduate medical education 
payments if all of the following conditions are met:
    (1) The resident spends his or her time assigned to patient care 
activities.
    (2) The MA organization incurs ``all or substantially all'' of the 
costs for the training program in the non-hospital setting as defined 
in Sec.  413.86(b) of this chapter.
    (3) There is a written agreement between the MA organization and 
the non-hospital site that indicates the MA organization will incur the 
costs of the resident's salary and fringe benefits and provide 
reasonable compensation to the non-hospital site for teaching 
activities.
    (c) An MA organization's allowable direct graduate medical 
education costs, subject to the redistribution and community support 
principles specified in Sec.  413.85(c) of this chapter, consist of--
    (1) Residents' salaries and fringe benefits (including travel and 
lodging where applicable); and
    (2) Reasonable compensation to the non-hospital site for teaching 
activities related to the training of medical residents.
    (d) The direct graduate medical education payment is equal to the 
product of--
    (1) The lower of--
    (i) The MA organization's allowable costs per resident as defined 
in paragraph (c) of this section; or
    (ii) The national average per resident amount; and
    (2) Medicare's share, which is equal to the ratio of the number of 
Medicare beneficiaries enrolled to the total number of individuals 
enrolled in the MA organization.
    (e) Direct graduate medical education payments made to MA 
organizations under this section are made from the Federal 
Supplementary Medical Insurance Trust Fund.

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


  

    49. Section 422.402 is revised to read as follows:


Sec.  422.402  Federal preemption of State law.

    The standards established under this part supersede any State law 
or regulation (other than State licensing laws or State laws relating 
to plan solvency) with respect to the MA plans that are offered by MA 
organizations.
    50. Amend Sec.  422.404 by revising paragraph (a) to read as 
follows:


Sec.  422.404  State premium taxes prohibited.

    (a) Basic rule. No premium tax, fee, or other similar assessment 
may be imposed by any State, the District of Columbia, the Commonwealth 
of Puerto Rico, the Virgin Islands, Guam, and American Samoa, or any of 
their political subdivisions or other governmental authorities with 
respect to any payment CMS makes on behalf of MA enrollees under 
subpart G of this part, or with respect to any payment made to MA plans 
by beneficiaries, or payment to MA plans by a third party on a 
beneficiary's behalf.
* * * * *
    51. A new subpart J is added to read as follows:

Subpart J--Special Rules for MA Plans

Sec.
422.451 Moratorium on new local preferred provider organization 
plans.
422.455 Special rules for MA plans.
422.458 Risk sharing with regional MA organizations for 2006 and 
2007.

Subpart J--Special Rules for MA Plans


Sec.  422.451  Moratorium on new local preferred provider organization 
plans.

    CMS will not approve the offering of a local preferred provider 
organization plan during 2006 or 2007 in a service area unless the plan 
was offered before December 31, 2005.


Sec.  422.455  Special rules for MA plans.

    (a) Coverage of entire MA region. The service area for an MA 
regional plan will consist of an entire MA region established under 
paragraph (b) this section, and an MA region may not be segmented as 
described in Sec.  422.262(c)(2).
    (b) Establishment of MA regions--(1) MA region. The term ``MA 
region'' means a region within the 50 States and the District of 
Columbia as established by CMS under this section.
    (2) Establishment--(i) Initial establishment. By January 1, 2005, 
CMS will establish and publish the MA regions.
    (ii) Periodic review and revision of service areas. CMS may 
periodically review MA regions and may revise the regions if it 
determines the revision to be appropriate.
    (3) Requirements for MA regions. CMS will establish, and may 
revise, MA regions in a manner consistent with the following:
    (i) Number of regions. There will be no fewer than 10 regions, and 
no more than 50 regions.
    (ii) Maximizing availability of plans. The main purpose of the 
regions is to maximize the availability of MA regional plans to all MA 
eligible individuals without regard to health status, or geographic 
location, especially those residing in rural areas.
    (4) Market survey and analysis. Before establishing MA regions, CMS 
will

[[Page 46971]]

conduct a market survey and analysis, including an examination of 
current insurance markets, to assist CMS in determining how the regions 
should be established.
    (c) National plan. An MA regional plan can be offered in more than 
one MA region (including all regions).


Sec.  422.458  Risk sharing with regional MA organizations for 2006 and 
2007.

    (a) Terminology. For purposes of this section--
    Allowable costs means, with respect to an MA regional plan offered 
by an organization for a year, the total amount of costs that the 
organization incurred in providing benefits covered under the original 
Medicare fee-for-service program option for all enrollees under the 
plan in the region in the year and in providing rebatable integrated 
benefits, as defined in this paragraph, reduced by the portion of those 
costs attributable to administrative expenses incurred in providing 
these benefits.
    Rebatable integrated benefits means those non-drug supplemental 
benefits that are funded through beneficiary rebates (described at 
Sec.  422.266(b)(1)) and that CMS determines are: additional health 
benefits not covered under the original Medicare program option; and 
benefits that require expenditures by the plan. For purposes of the 
calculation of risk corridors, these are the only supplemental benefits 
that count towards allowable costs.
    Target amount means, with respect to an MA regional plan offered by 
an organization in a year, the total amount of payments made to the 
organization for enrollees in the plan for the year (which includes 
payments attributable to benefits under the original Medicare fee-for-
service program option as defined in Sec.  422.100(c)(1), the total of 
the MA monthly basic beneficiary premium collectable for those 
enrollees for the year, and the total amount of rebatable integrated 
benefits), reduced by the amount of administrative expenses assumed in 
the portion of the bid attributable to benefits under original Medicare 
fee-for-service program option and rebatable integrated benefits.
    (b) Application of risk corridors for benefits covered under 
original fee-for-service Medicare--(1) General rule. This section will 
only apply to MA regional plans offered during 2006 or 2007.
    (2) Notification of allowable costs under the plan. In the case of 
an MA organization that offers an MA regional plan in an MA region in 
2006 or 2007, the organization must notify CMS, before that date in the 
succeeding year as CMS specifies, of--
    (i) Its total amount of costs that the organization incurred in 
providing benefits covered under the original Medicare fee-for-service 
program option for all enrollees under the plan (as described in 
paragraph (a) of this section).
    (ii) Its total amount of costs that the organization incurred in 
providing rebatable integrated benefits for all enrollees under the 
plan (as described in paragraph (a) of this section), and, with respect 
to those benefits, the portion of those costs that is attributable to 
administrative expenses that is in addition to the administrative 
expense incurred in provision of benefits under the original Medicare 
fee-for-service program option.
    (c) Adjustment of payment--(1) No adjustment if allowable costs 
within 3 percent of target amount. If the allowable costs for the plan 
for the year are at least 97 percent, but do not exceed 103 percent of 
the target amount for the plan and year, there will be no payment 
adjustment under this section for the plan and year.
    (2) Increase in payment if allowable costs above 103 percent of 
target amount--(i) Costs between 103 and 108 percent of target amount. 
If the allowable costs for the plan for the year are greater than 103 
percent, but not greater than 108 percent of the target amount for the 
plan and year, CMS will increase the total of the monthly payments made 
to the organization offering the plan for the year under Sec.  
422.302(a) (section 1853(a) of the Act) by an amount equal to 50 
percent of the difference between those allowable costs and 103 percent 
of that target amount.
    (ii) Costs above 108 percent of target amount. If the allowable 
costs for the plan for the year are greater than 108 percent of the 
target amount for the plan and year, CMS will increase the total of the 
monthly payments made to the organization offering the plan for the 
year under section 1853(a) of the Act by an amount equal to the sum 
of--
    (A) 2.5 percent of that target amount; and
    (B) 80 percent of the difference between those allowable costs and 
108 percent of that target amount.
    (3) Reduction in payment if allowable costs below 97 percent of 
target amount--(i) Costs between 92 and 97 percent of target amount. If 
the allowable costs for the plan for the year are less than 97 percent, 
but greater than or equal to 92 percent, of the target amount for the 
plan and year, CMS will reduce the total of the monthly payments made 
to the organization offering the plan for the year under Sec.  
422.302(a) (section 1853(a) of the Act) by an amount (or otherwise 
recover from the plan an amount) equal to 50 percent of the difference 
between 97 percent of the target amount and those allowable costs.
    (ii) Costs below 92 percent of target amount. If the allowable 
costs for the plan for the year are less than 92 percent of the target 
amount for the plan and year, CMS will reduce the total of the monthly 
payments made to the organization offering the plan for the year under 
Sec.  422.302(a) (section 1853(a) of the Act) by an amount (or 
otherwise recover from the plan an amount) equal to the sum of--
    (A) 2.5 percent of that target amount; and
    (B) 80 percent of the difference between 92 percent of that target 
amount and those allowable costs.
    (d) Disclosure of information--(1) General rule. Each MA 
organization offering an MA regional plan must provide CMS with 
information as CMS determines is necessary to implement this section; 
and
    (2) According to existing Sec.  422.502(d)(1)(iii) (section 
1857(d)(2)(B) of the Act), CMS has the right to inspect and audit any 
books and records of the organization that pertain to the information 
regarding costs provided to CMS under paragraph (b)(2) of this section.
    (3) Restriction on use of information. Information disclosed or 
obtained for the purposes of this section may be used by officers, 
employees, and contractors of DHHS only for the purposes of, and to the 
extent necessary, in implementing this section.
    (e) Organizational and financial requirements--(1) General rule. In 
the case of an MA organization that is offering an MA regional plan in 
an MA region, the following rules apply:
    (i) The MA organization must be licensed to bear risk in at least 
one State of the region.
    (ii) For the other States in a region in which the organization is 
not licensed to bear risk, if it demonstrates to CMS that it has filed 
the necessary application to meet those requirements, CMS may 
temporarily waive the licensing requirement with respect to each State 
for a period of time as CMS determines appropriate for the timely 
processing of the application by the State or States.
    (iii) If the State licensing application or applications are 
denied, CMS may extend the licensing waiver through the end of the plan 
year or as CMS determines appropriate to provide for a transition.

[[Page 46972]]

    (2) Selection of appropriate State. In the case of an MA 
organization to which CMS grants a waiver and that is licensed in more 
than one State in a region, the MA organization will select one of the 
States and CMS will apply its licensing rules in States where the 
organization is not licensed for the period of the waiver.
    (f) Regional stabilization fund--(1) Establishment. The MA Regional 
Plan Stabilization Fund (referred to in this paragraph as the ``Fund'') 
is available beginning in 2007 for two purposes:
    (i) Plan entry. To provide incentives to have MA regional plans 
offered in each MA region under paragraph (f)(4) of this section.
    (ii) Plan retention. To provide incentives to retain MA regional 
plans in certain MA regions with below-national-average MA market 
penetration under paragraph (f)(5) of this section.
    (2) Availability of funding from savings. Funds made available 
under section 1853(f) of the Act are transferred into a special account 
in the Treasury from the Federal Hospital Insurance Trust Fund and the 
Federal Supplementary Medical Insurance Trust Fund in the proportion 
specified in section 1853(f) of the Act, ``payments From Trust Funds,'' 
on a monthly basis.
    (3) Funding limitation--(i) General rule. The total amount expended 
from the Fund as a result of the application of this section through 
the end of a calendar year may not exceed the amount available to the 
Fund as of the first day of that year. For purposes of this section, 
amounts that are expended under this title insofar as those amounts 
would not have been expended but for the application of this section 
will be counted as amounts expended as a result of that application.
    (ii) Application of limitation. CMS will obligate funds from the 
Fund for a year only if the Chief Actuary of CMS and the appropriate 
budget officer certify that there are available in the Fund at the 
beginning of the year sufficient amounts to cover all of those 
obligations incurred during the year consistent with paragraph 
(f)(3)(i) of this section. CMS will take those steps, in connection 
with computing additional payment amounts under paragraphs (f)(4) and 
(f)(5) of this section and including limitations on enrollment in MA 
regional plans receiving those payments, to ensure that sufficient 
funds are available to make those payments for the entire year.
    (4) Plan entry funding--(i) General rule. Funding is available 
under this paragraph for a year in the following situations:
    (A) National plan. For a national bonus payment described in 
paragraph (f)(4)(ii) of this section, when a single MA organization 
offers an MA regional plan in each MA region in the year, but only if 
there was not a national plan offered in each region in the previous 
year. Funding under this paragraph is only available with respect to 
any individual MA organization for a single year, but may be made 
available to more than one such organization in the same year.
    (B) Regional plans. Subject to paragraph (f)(4)(i)(C) of this 
section, for an increased amount under paragraph (f)(4)(iv) of this 
section for an MA regional plan offered in an MA region that did not 
have any MA regional plan offered in the prior year.
    (C) Limitation on regional plan funding in case of national plan. 
There will be no payment adjustment under paragraph (f)(4)(iii) of this 
section for a year for which a national bonus payment is made under 
paragraph (f)(4)(ii) of this section.
    (ii) National bonus payment. The national bonus payment under this 
paragraph will--
    (A) Be available to an MA organization only if the organization 
offers MA regional plans in every MA region;
    (B) Be available for all MA regional plans of the organization 
regardless of whether any other MA regional plan is offered in any 
region; and
    (C) Be subject to amounts available under paragraph (f)(3) of this 
section for a year and be equal to 3 percent of the benchmark amount 
otherwise applicable for each MA regional plan offered by the 
organization.
    (iii) Regional payment adjustment--(A) General rule. The increased 
amount under this paragraph for an MA regional plan in an MA region for 
a year must be an amount, determined by CMS, based on the bid submitted 
for that plan (or plans) and will be available to all MA regional plans 
offered in that region and year. That amount may be based on the mean, 
mode, or median or other measure of those bids and may vary from region 
to region. CMS will not limit the number of plans or bids in a region.
    (B) Multi-year funding. Subject to amounts available under 
paragraph (f)(3) of this section, funding will be available for a 
period determined by CMS.
    (C) Application to all plans in a region. Funding under this 
paragraph for an MA region will be made available for all MA regional 
plans offered in the region.
    (D) Limitation on availability of plan retention funding in next 
year. If plans receive plan entry funding in a year, plans in that 
region are prohibited from receiving plan retention funding in the 
following year.
    (iv) Application. Any additional payment under this section 
provided for an MA regional plan for a year will be treated as if it 
were an addition to the benchmark amount otherwise applicable to that 
plan and year, but will not be taken into account in the computation of 
any benchmark amount for any subsequent year.
    (5) Plan retention funding--(i) General rule. Funding is available 
under this paragraph for a year with respect to MA regional plans 
offered in an MA region for the increased amount specified in paragraph 
(f)(5)(ii) of this section but only if the region meets the 
requirements of paragraphs (f)(5)(iii)(A), (f)(5)(iii)(B), 
(f)(5)(iii)(C) and (f)(5)(iii)(E) of this section.
    (ii) Payment increase. The increased amount under this paragraph 
for an MA regional plan in an MA region for a year will be an amount, 
determined by CMS, that does not exceed the greater of--
    (A) 3 percent of the benchmark amount applicable in the region; or
    (B) The amount as (when added to the benchmark amount applicable to 
the region) will result in the ratio of--
    (1) That additional amount plus the benchmark amount computed under 
section 1854(b)(4)(B)(i) of the Act, ``the risk-adjusted benchmark 
amount'' for the region and year, to the adjusted average per capita 
cost for the region and year, as estimated by CMS under section 
1876(a)(4) of the Act and adjusted as appropriate for the purpose of 
risk adjustment; being equal to--
    (2) The weighted average of those benchmark amounts for all the 
regions and that year, to the average per capita cost for the United 
States and that year, as estimated by CMS under section 1876(a)(4) of 
the Act and adjusted as appropriate for the purpose of risk adjustment.
    (iii) Regional requirements. The requirements of this paragraph for 
an MA region for a year are as follows:
    (A) Notification of plan exit. CMS has received notice (as 
specified by CMS) before a new contract year, that one or more MA 
regional plans that were offered in the region in the previous year 
will not be offered in the succeeding year.
    (B) Regional plans available from fewer than two MA organizations 
in the region. CMS determines that if the plans referred to in 
paragraph (f)(5)(ii)(A) of this section are not offered in the year, 
fewer than two MA organizations will

[[Page 46973]]

be offering MA regional plans in the region in the year involved.
    (C) Percentage enrollment in MA regional plans below national 
average. For the previous year, CMS determines that the average 
percentage of MA eligible individuals residing in the region who are 
enrolled in MA regional plans is less than the average percentage of 
those individuals in the United States enrolled in those plans.
    (D) Application. Any additional payment under this paragraph 
provided for an MA regional plan for a year will be treated as if it 
were an addition to the benchmark amount otherwise applicable to that 
plan and year, but will not be taken into account in the computation of 
any benchmark amount for any subsequent year.
    (E) 2-consecutive-year limitation. In no case will plan retention 
funding be available under this paragraph in an MA region for more than 
2 consecutive years.

Subpart K--Contracts With Medicare Advantage Organizations


Sec.  422.501, Sec.  422.502, and Sec.  422.504  [Redesignated]

    52. Redesignate Sec.  422.501, Sec.  422.502, and Sec.  422.504 as 
Sec.  422.503, Sec.  422.504, and Sec.  422.505 respectively.
    53. Add new Sec.  422.501 to read as follows:


Sec.  422.501  Application requirements.

    (a) Scope. This section sets forth application requirements for 
entities that seek a contract as an MA organization offering an MA 
plan.
    (b) Completion of an application. (1) In order to obtain a 
determination on whether it meets the requirements to become an MA 
organization and is qualified to provide a particular type of MA plan, 
an entity, or an individual authorized to act for the entity (the 
applicant) must complete a certified application, in the form and 
manner required by CMS, including the following:
    (i) Documentation of appropriate State licensure or State 
certification that the entity is able to offer health insurance or 
health benefits coverage that meets State-specified standards 
applicable to MA plans, and is authorized by the State to accept 
prepaid capitation for providing, arranging, or paying for the 
comprehensive health care services to be offered under the MA contract; 
or
    (ii) For regional plans, documentation of application for State 
licensure in any State in the region that the organization is not 
already licensed.
    (2) The authorized individual must thoroughly describe how the 
entity and MA plan meet, or will meet, the requirements described in 
this part.
    (c) Responsibility for making determinations. CMS is responsible 
for determining whether an entity qualifies as an MA organization and 
whether proposed MA plans meet the requirements of this part.
    (d) Resubmittal of application. An application that has been denied 
by CMS may not be resubmitted for 4 months after the date of the notice 
from CMS denying the application.
    (e) Disclosure of application information under the Freedom of 
Information Act. An applicant submitting material that he or she 
believes is protected from disclosure under 5 U.S.C. 552, the Freedom 
of Information Act, or because of exceptions provided in 45 CFR part 5 
(the Department's regulations providing exceptions to disclosure), 
should label the material ``privileged'' and include an explanation of 
the applicability of an exception described in 45 CFR part 5.
    54. Add new Sec.  422.502 to read as follows:


Sec.  422.502  Evaluation and determination procedures.

    (a) Basis for evaluation and determination. (1) CMS evaluates an 
application for an MA contract on the basis of information contained in 
the application itself and any additional information that CMS obtains 
through other means such as on-site visits, public hearings, and any 
other appropriate procedures.
    (2) If the application is incomplete, CMS notifies the contract 
applicant and allows 30 days from the date of the notice for the 
contract applicant to furnish the missing information.
    (3) After evaluating all relevant information, CMS determines 
whether the contract applicant's application meets the applicable 
requirements of Sec.  422.501.
    (b) Use of information from a prior contracting period. If an MA 
organization has failed to comply with the terms of a previous contract 
with CMS under title XVIII of the Act, or has failed to complete a 
corrective action plan during the term of the contract, CMS may deny an 
application from a contract applicant based on the contract applicant's 
failure to comply with that prior contract with CMS even if the 
contract applicant meets all of the current requirements.
    (c) Notice of determination. Within timeframes determined by CMS, 
it notifies each applicant that applies for an MA contract under this 
part of its determination and the basis for the determination. The 
determination may be approval, intent to deny, or denial.
    (d) Approval of application. If CMS approves the application, it 
gives written notice to the contract applicant, indicating that it 
meets the requirements for an MA contract.
    (e) Intent to deny. (1) If CMS finds that the contract applicant 
does not appear to be able to meet the requirements for an MA 
organization within 60 days, CMS gives the contract applicant notice of 
intent to deny the application for an MA contract and a summary of the 
basis for this preliminary finding.
    (2) Within 60 days from the date of the intent to deny notice, the 
contract applicant may respond in writing to the issues or other 
matters that were the basis for CMS' preliminary finding and may revise 
its application to remedy any defects CMS identified.
    (f) Denial of application. If CMS denies the application, it gives 
written notice to the contract applicant indicating--
    (1) That the contract applicant does not meet the contract 
requirements under Part C of title XVIII of the Act;
    (2) The reasons why the contract applicant does not meet the 
contract requirements; and
    (3) The contract applicant's right to request reconsideration in 
accordance with the procedures specified in subpart N of this part.
    (g) Oversight of continuing compliance. (1) CMS oversees an MA 
organization's continued compliance with the requirements for an MA 
organization.
    (2) If an MA organization no longer meets those requirements, CMS 
terminates the contract in accordance with Sec.  422.510.


Sec.  422.503  [Amended]

    55. Amend newly redesignated Sec.  422.503 by--
    A. Redesignating paragraphs (b)(1) through (b)(5) as paragraphs 
(b)(2) through (b)(6) respectively.
    B. Adding new paragraph (b)(1).
    C. Revising newly redesignated paragraph (b)(4)(ii).
    D. Revising newly redesignated paragraph (b)(4)(vi)(F).
    E. Adding new paragraphs (b)(4)(vi)(G)(1), (2), and (3).
    F. Revising newly redesignated paragraph (b)(6) introductory text.
    G. Revising newly redesignated paragraph (b)(6)(i).
    The revisions read as follows:


Sec.  422.503  General provisions.

* * * * *
    (b) * * *

[[Page 46974]]

    (1) Complete an application as described in Sec.  422.501.
* * * * *
    (4) * * *
    (ii) Personnel and systems sufficient for the M+C organization to 
organize, implement, control, and evaluate financial and marketing 
activities, the furnishing of services, the quality assurance program, 
and the administrative and management aspects of the organization.
* * * * *
    (vi) * * *
    (F) Procedures for internal monitoring and auditing.
    (G) * * *
    (1) If the MA organization discovers from any source evidence of 
misconduct related to payment or delivery of health benefits under the 
contract, it must conduct a timely, reasonable inquiry into that 
misconduct.
    (2) If, after reasonable inquiry, the MA organization has 
determined that the misconduct may violate criminal, civil or 
administrative law, the sponsor must report the existence of the 
misconduct to the appropriate Government authority within a reasonable 
period, but not more than 60 days after the determination that a 
violation may have occurred. If the potential violation relates to 
Federal criminal law, the civil False Claims Act, Federal Anti-Kickback 
provisions, the civil monetary penalties authorities (primarily under 
section 1128A and 1857 of the Social Security Act), or related statutes 
enforced by the HHS Office of Inspector General, the report must be 
made to that Office.
    (3) The PDP sponsor must conduct appropriate corrective actions 
(for example, repayment of overpayments, disciplinary actions against 
responsible employees, etc.) in response to the potential violation 
referenced above.
* * * * *
    (6) The MA organization's contract must not have been non-renewed 
under Sec.  422.506 within the past 2 years unless--
    (i) During the 6-month period beginning on the date the 
organization notified CMS of the intention to non-renew the most recent 
previous contract, there was a change in the statute or regulations 
that had the effect of increasing MA payments in the payment area or 
areas at issue; or
* * * * *


Sec.  422.504  [Amended]

    56. Amend newly redesignated Sec.  422.504 by--
    A. Revising paragraph (e)(4) introductory text.
    B. Revising paragraph (e)(4)(ii)
    C. Revising paragraph (e)(4)(iii).
    D. Removing paragraph (f)(2)(vii).
    E. Redesignating paragraph (f)(2)(viii) as paragraph (f)(2)(vii).
    F. Revising paragraph (i)(3)(ii).
    The revisions read as follows:


Sec.  422.504  Contract provisions.

* * * * *
    (e) * * *
    (4) HHS, the Comptroller General, or their designee's right to 
inspect, evaluate, and audit extends through 6 years from the end of 
the final contract period or completion of audit, whichever is later 
unless--
* * * * *
    (ii) There has been a termination, dispute, or allegation of fraud 
or similar fault by the MA organization, in which case the retention 
may be extended to 6 years from the date of any resulting final 
resolution of the termination, dispute, fraud, or similar fault; or
    (iii) CMS determines that there is a reasonable possibility of 
fraud or similar fault, in which case CMS may inspect, evaluate, and 
audit the MA organization at any time.
* * * * *
    (i) * * *
    (3) * * *
    (ii) Accountability provisions that indicate that the MA 
organization may only delegate activities or functions to a provider, 
related entity, contractor, or subcontractor in a manner consistent 
with the requirements set forth at paragraph (i)(4)of this section.
* * * * *
    57. Amend Sec.  422.506 by--
    A. Revising paragraph (a)(2)(i).
    B. Revising paragraph (a)(2)(ii).
    C. Revising paragraph (a)(3) introductory text.
    The revisions read as follows:


Sec.  422.506  Nonrenewal of contract.

    (a) * * *
    (2) * * *
    (i) CMS in writing, by the first Monday in June of the year in 
which the contract would end;
    (ii) Each Medicare enrollee, at least 90 days before the date on 
which the nonrenewal is effective. This notice must include a written 
description of alternatives available for obtaining Medicare services 
within the service area, including alternative MA plans, Medigap 
options, and original Medicare and must receive CMS approval prior to 
issuance.
* * * * *
    (3) CMS may accept a nonrenewal notice submitted after the first 
Monday in June if--
* * * * *
    58. Amend Sec.  422.510 by revising paragraph (a)(4) to read as 
follows:


Sec.  422.510  Termination of Contract by CMS.

    (a) * * *
    (4) There is credible evidence that the PDP sponsor committed or 
participated in false, fraudulent, or abusive activities affecting the 
Medicare program, including submission of false or fraudulent data.
* * * * *


Sec.  422.520  [Amended]

    59. Amend Sec.  422.520 by--
    A. Revising the section heading.
    B. Revising paragraph (a)(3).
    C. Redesignating paragraph (b) introductory text as paragraph 
(b)(1).
    D. Adding new paragraph (b)(2).
    E. Adding new paragraph (d).
    The revisions and additions read as follows:


Sec.  422.520  Prompt payment by MA organization.

    (a) * * *
    (3) All other claims from non-contracted providers must be paid or 
denied within 60 calendar days from the date of the request.
    (b) * * *
    (2) The MA organization is obligated to pay contracted providers 
under the terms of the contract between the MA organization and the 
provider.
* * * * *
    (d) A CMS decision to not conduct a hearing under paragraph (c) of 
this section does not disturb any potential remedy under State law for 
1866(a)(1)(O) of the Act.
    60. Add new Sec.  422.527 at the end of subpart K to read as 
follows:


Sec.  422.527  Agreements with federally qualified health centers.

    The contract between the MA organization and CMS must contain the 
following provisions:
    (a) The MA organization must pay a federally qualified health 
center (FQHC) a similar amount to what it pays other providers for 
similar services.
    (b) Under such a contract, the FQHC must accept this payment as 
payment in full, except for allowable cost sharing which it may 
collect.

Subpart M--Grievances, Organization Determinations and Appeals


  

    61. Amend Sec.  422.560 by adding paragraph (a)(3) to read as 
follows:


Sec.  422.560  Basis and scope.

    (a) * * *
    (3) Section 1869 of the Act specifies the amount in controversy 
needed to pursue a hearing and judicial review and authorizes 
representatives to act on

[[Page 46975]]

behalf of individuals that seek appeals. These provisions are 
incorporated for MA appeals by section 1852(g)(5) of the Act.
* * * * *
    62. Amend Sec.  422.561 by revising the definition of ``Authorized 
representative'' to read as follows:


Sec.  422.561  Definitions.

* * * * *
    Authorized representative means an individual authorized by an 
enrollee, or under State law, to act on his or her behalf in obtaining 
an organization determination or in dealing with any of the levels of 
the appeal process, subject to the rules described in part 405, subpart 
I of this chapter, unless otherwise stated in this subpart.
* * * * *
    63. Amend Sec.  422.562 by--
    A. Revising paragraph (b)(4)(iv).
    B. Revising paragraph (b)(4)(vi).
    C. Revising paragraph (c)(1)(ii).
    D. Revising paragraph (d).
    The revisions read as follows:


Sec.  422.562  General provisions.

* * * * *
    (b) * * *
    (4) * * *
    (iv) The right to an ALJ hearing if the amount in controversy is 
met, as provided in Sec.  422.600.
* * * * *
    (vi) The right to judicial review of the hearing decision if the 
amount in controversy is met, as provided in Sec.  422.612.
    (c) * * *
    (1) * * *
    (ii) The QIO review decision is subject only to the appeal 
procedures set forth in part 478 of this chapter.
* * * * *
    (d) When other regulations apply. Unless this subpart provides 
otherwise, the regulations in part 405, subpart I of this chapter 
(concerning the administrative review and hearing processes and 
representation of parties under titles II and XVIII of the Act), apply 
under this subpart to the extent they are appropriate.
    64. Amend Sec.  422.566 by revising paragraph (b)(4) to read as 
follows:


Sec.  422.566  Organization determinations.

* * * * *
    (b) * * *
    (4) Discontinuation or reduction of a service if the enrollee 
believes that continuation of the services is medically necessary.
* * * * *


Sec.  422.568  [Amended]

    65. Amend Sec.  422.568 by--
    A. Revising paragraph (a).
    B. Removing paragraph (c).
    C. Redesignating paragraph (d) as paragraph (c).
    D. Redesignating paragraph (e) as paragraph (d).
    E. Redesignating paragraph (f) as paragraph (e).
    F. Revising newly redesignated paragraph (c).
    The revisions read as follows:


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

    (a) Timeframe for requests for service. When a party has made a 
request for a service, the MA organization must notify the enrollee of 
its determination as expeditiously as the enrollee's health condition 
requires, but no later than 14 calendar days after the date the 
organization receives the request for a standard organization 
determination. The MA organization may extend the timeframe by up to 14 
calendar days if the enrollee requests the extension or if the 
organization justifies a need for additional information and how the 
delay is in the interest of the enrollee (for example, the receipt of 
additional medical evidence from noncontract providers may change an MA 
organization's decision to deny). When the MA organization extends the 
timeframe, it must notify the enrollee in writing of the reasons for 
the delay, and inform the enrollee of the right to file an expedited 
grievance if he or she disagrees with the MA organization's decision to 
grant an extension.
* * * * *
    (c) Written notice for MA organization denials. If an MA 
organization decides to deny service or payment in whole or in part, or 
if an enrollee disagrees with an MA organization's decision to 
discontinue or reduce the level of care for an ongoing course of 
treatment, the organization must give the enrollee written notice of 
the determination.
* * * * *
    66. Amend Sec.  422.570 by revising paragraph (d)(2)(ii) to read as 
follows:


Sec.  422.570  Expediting certain organization determinations.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Informs the enrollee of the right to file an expedited 
grievance if he or she disagrees with the MA organization's decision 
not to expedite; and
* * * * *
    67. Amend Sec.  422.572 by revising paragraph (c) to read as 
follows:


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

* * * * *
    (c) Confirmation of oral notice. If the MA organization first 
notifies an enrollee of an adverse expedited determination orally, it 
must mail written confirmation to the enrollee within 3 calendar days 
of the oral notification.
* * * * *


Sec.  422.582  [Amended]

    68. Amend Sec.  422.582 by--
    A. Revising paragraph (a).
    B. Revising paragraph (b).
    C. Revising paragraph (c)(2).
    The revisions read as follows:


Sec.  422.582  Request for a standard reconsideration.

    (a) Method and place for filing a request. A party to an 
organization determination must ask for a reconsideration of the 
determination by making an oral or written request to--
    (1) The MA organization that made the organization determination; 
or
    (2) An SSA office.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, a party must file a request for reconsideration 
within 60 calendar days from the date of the notice of the organization 
determination. If the SSA receives a request, it forwards the request 
to the MA organization for its reconsideration. The timeframe within 
which the organization must conduct its review begins when it receives 
the request.
    (c) * * *
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for reconsideration has expired, a party to 
the organization determination may file a request for reconsideration 
with the MA organization or the SSA. If the SSA receives a request, it 
forwards the request to the MA organization for its reconsideration. 
The request for reconsideration and to extend the timeframe must--
    (i) Be in writing; and
    (ii) State why the request for reconsideration was not filed on 
time.
* * * * *
    69. Amend Sec.  422.584 by revising paragraph (e) to read as 
follows:


Sec.  422.584  Expediting certain reconsiderations.

* * * * *
    (e) Action following acceptance of a request. If an MA organization 
grants a request for expedited reconsideration, it must conduct the 
reconsideration and

[[Page 46976]]

give notice in accordance with Sec.  422.590.
* * * * *
    70. Amend Sec.  422.590 by revising paragraph (d)(2) to read as 
follows:


Sec.  422.590  Timeframes and responsibility for reconsiderations.

* * * * *
    (d) * * *
    (2) Extensions. The MA organization may extend the 72-hour deadline 
by up to 14 calendar days if the enrollee requests the extension or if 
the organization justifies a need for additional information and how 
the delay is in the interest of the enrollee (for example, the receipt 
of additional medical evidence from noncontract providers may change an 
MA organization's decision to deny). When the MA organization extends 
the timeframe, it must notify the enrollee in writing of the reasons 
for the delay, and inform the enrollee of the right to file an 
expedited grievance if he or she disagrees with the MA organization's 
decision to grant an extension. The MA organization must notify the 
enrollee of its determination as expeditiously as the enrollee's health 
condition requires but no later than upon expiration of the extension.
* * * * *
    71. Amend Sec.  422.600 by--
    A. Revising paragraph (a).
    B. Revising paragraph (b).
    The revisions read as follows:


Sec.  422.600  Right to a hearing.

    (a) If the amount remaining in controversy after reconsideration 
meets the threshold requirement established annually by the Secretary, 
any party to the reconsideration (except the MA organization) who is 
dissatisfied with the reconsidered determination has a right to a 
hearing before an ALJ.
    (b) The amount remaining in controversy, which can include any 
combination of Part A and Part B services, is computed in accordance 
with part 405, subpart I of this chapter.
* * * * *
    72. Amend Sec.  422.602 by revising paragraph (d) to read as 
follows:


Sec.  422.602  Request for an ALJ hearing.

* * * * *
    (d) Insufficient amount in controversy. (1) If a request for a 
hearing clearly shows that the amount in controversy is less than that 
required under Sec.  422.600, the ALJ dismisses the request.
    (2) If, after a hearing is initiated, the ALJ finds that the amount 
in controversy is less than the amount required under Sec.  422.600, 
the ALJ discontinues the hearing and does not rule on the substantive 
issues raised in the appeal.
    73. Revise Sec.  422.608 to read as follows:


Sec.  422.608  Medicare Appeals Council (MAC) review.

    Any party to the hearing, including the MA organization, who is 
dissatisfied with the ALJ hearing decision, may request that the MAC 
review the ALJ's decision or dismissal. The regulations under part 405, 
subpart I of this chapter regarding MAC review apply to matters 
addressed by this subpart.
    74. Amend Sec.  422.612 by--
    A. Revising paragraph (a)(2).
    B. Revising paragraph (b).
    C. Revising paragraph (c).
    The revisions read as follows:


Sec.  422.612  Judicial review.

    (a) Review of ALJ's decision. * * *
    (2) The amount in controversy meets the threshold requirement 
established annually by the Secretary.
    (b) Review of MAC decision. Any party, including the MA 
organization, may request judicial review (upon notifying the other 
parties) of the MAC decision if it is the final decision of CMS and the 
amount in controversy meets the threshold established in paragraph 
(a)(2) of this section.
    (c) How to request judicial review. In order to request judicial 
review, a party must file a civil action in a district court of the 
United States in accordance with section 205(g) of the Act. See part 
405, subpart I of this chapter for a description of the procedures to 
follow in requesting judicial review.
    75. Amend Sec.  422.616 by revising paragraph (a) to read as 
follows:


Sec.  422.616  Reopening and revising determinations and decisions.

    (a) An organization or reconsidered determination made by an MA 
organization, a reconsidered determination made by the independent 
entity described in Sec.  422.592, or the decision of an ALJ or the MAC 
that is otherwise final and binding may be reopened and revised by the 
entity that made the determination or decision, under the rules in part 
405, subpart I of this chapter.
* * * * *
    76. Amend Sec.  422.620 by--
    A. Revising the section heading.
    B. Revising paragraph (b).
    C. Revising paragraph (c).
    The revisions read as follows:


Sec.  422.620  How enrollees of MA organizations must be notified of 
noncovered inpatient hospital care.

* * * * *
    (b) Physician concurrence required. Before discharging an 
individual or changing the level of care in an inpatient hospital 
setting, the MA organization must obtain the concurrence of the 
physician who is responsible for the enrollee's inpatient care.
    (c) Notice to the enrollee. The written notice of non-coverage must 
be issued no later than the day before hospital coverage ends. The 
written notice must include the following elements:
    (1) The reason why inpatient hospital care is no longer needed or 
covered;
    (2) The effective date and time of the enrollee's liability for 
continued inpatient care;
    (3) The enrollee's appeal rights;
    (4) If applicable, the new lower level of care being covered in the 
hospital setting; and
    (5) Any additional information specified by CMS.
    77. Amend Sec.  422.622 by revising paragraph (b)(1)(i) to read as 
follows:


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

* * * * *
    (b) * * *
    (1) * * *
    (i) To the QIO that has an agreement with the hospital under part 
475, subpart C of this chapter;
* * * * *

Subpart O--Intermediate Sanctions


  

    78. Amend Sec.  422.752 by revising paragraph (a)(8) introductory 
text to read as follows:


Sec.  422.752  Basis for imposing sanctions.

    (a) * * *
    (8) Employs or contracts with an individual or entity who is 
excluded from participation in Medicare under section 11128 or 1128A of 
the Act (or with an entity that employs or contracts with such an 
individual or entity) for the provision of any of the following:
* * * * *

Nomenclature Changes

    79. In part 422, remove ``Departmental Appeals Board'' wherever it 
appears and add in its place ``Medicare Appeals Council''.
    80. In part 422, remove ``DAB'' wherever it appears and add in its 
place ``MAC''.
    81. In part 422, remove ``Medicare+Choice'' wherever it appears and 
add in its place ``Medicare Advantage''.
    82. In part 422, remove ``M+C'' wherever it appears and add in its 
place ``MA''.


[[Page 46977]]


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

    Dated: May 26, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: June 28, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-17228 Filed 7-26-04; 12:01 pm]
BILLING CODE 4120-01-P